Rhine V Vitol: Commercial Court Decision On The Relevance Of Internal 'hedges' To The Assessment Of Damages For Breach Of Contract - Paul Toms

• Published date: 14 June 2023
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Transport, Energy and Natural Resources, Contracts and Commercial Law, Energy Law, Oil, Gas & Electricity, Marine/ Shipping, Trials & Appeals & Compensation
• Law Firm: Quadrant Chambers
• Author: Paul Toms

The Commercial Court handed down judgment on 26th May in Rhine Shipping DMCC v Vitol SA [2023] EWHC 1265 (Comm), a case which concerns the relevance of internal 'hedges' to the assessment of damages for breach of contract.

The dispute arose under a voyage charterparty concluded between Rhine Shipping DMCC ("Owners") and Vitol SA ("Vitol") in respect of the vessel the M/T Dijilah. Vitol had chartered the Vessel in part for the purpose of taking delivery of a cargo of crude oil at Djeno, Congo, pursuant to a sale contract. The price payable under the sale contract was determined by reference to the date of the Bill of Lading. The Vessel was detained at the first loadport by reason of an arrest of property on board in support of a London arbitration pursued by third parties against the bareboat charterer of the Vessel. By reason of that detention, the price payable under the sale contract significantly increased as compared to the position as it would have been had there been no detention. Vitol claimed the difference in price caused by the delay.

Issues

The Court had to consider, firstly, whether Owners were obliged to pay for that loss either as damages for breach of a warranty or under an indemnity in the charterparty.

If so, there were two main quantum questions. The first was whether that loss was reduced by Vitol's internal risk management processes, which Owners alleged had the same effect as external hedging. These processes involved recording a notional internal "swap" in respect of each of the pricing dates that would have been used to price the cargo, and then 'rolling' those internal "swaps" to later dates once the Vessel was delayed. There was no external counterparty for the internal "swaps", which were grouped together with other internal "swaps" derived from unconnected physical transactions concluded in the ordinary course of trading.

The second main quantum question was: if the loss had not been reduced by Vitol's internal risk management processes, was the loss too remote, or not something for which Owners had assumed responsibility applying The Achilleas [2009] 1 AC 61. Specifically was Vitol only entitled to recover what it would have lost if it had concluded swaps which had been effective to reduce its...