Case No: 2004 Folio 575

Neutral Citation Number: [2005] EWHC 1694 (Comm)

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice

Strand, London, WC2A 2LL

Date: 28th July 2005

Before :

MRS JUSTICE GLOSTER, DBE

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Between :

Canmer International Inc Claimant

- and -
UK Mutual Steamship Assurance Association Defendant
(Bermuda) Limited

MV “Rays”

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Mr Chirag Karia (instructed by Messrs Jackson Parton) for the Claimant

Ms Anna Gotts (instructed by Messrs Richards Butler) for the Defendant

Hearing dates: 12th & 13th April 2005

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JudgmentMrs Justice Gloster, DBE:

Factual Background

1. In this action the Claimant, Canmer International Inc (“Canmer” or “the Claimant”),
charterer of the vessel M/V “RAYS” (“the Vessel”) claims payment under a Letter of
Undertaking dated 16 May 2003 (“the LOU”) issued by the Defendant, United Kingdom
Mutual Steamship Assurance Association (Bermuda) Limited (“the UK Club”), on
behalf of the Vessel’s owner, Seatex Shipping Company Ltd (“Seatex”). The Claimant
was the time charterer of the Vessel under a time charter on the amended New York
 Produce Exchange form dated 18 August 2000 (“the Time Charter”) between it and
Seatex. The UK Club was and is Seatex’s P&I Club.

2. The Claimant had sub-chartered the Vessel under a voyage charterparty on an amended
Baltimore Berth Grain Form C dated 30 August 2000 (“the Voyage Charter”) to
ConAgra Grain of Canada (“ConAgra Canada”).

3. In September 2000, the Vessel loaded a cargo of wheat for carriage from Canada to
Italian ports. Seatex issued six bills of lading (“the Bills of Lading”) at Duluth, Superior,
Canada on 14 September 2000 in respect of cargo carried pursuant to the performance of
the Voyage Charter. The Bills of Lading named Seatex as the carrier and ConAgra SRL
of Naples (“ConAgra Naples”) as the notify party.

4. During discharge, some of the cargo was found to be damaged. Claims were presented
and separate arbitration references were commenced as follows:

The Bills of Lading Reference

i) ConAgra Naples claimed damages from Seatex in the sum of US$321,636.94,

arising from loss of and damage to the cargo carried on board the Vessel. This
claim was made pursuant to the terms of the Bills of Lading.

The Voyage Charter Reference

ii) ConAgra Canada claimed damages from the Claimant in the sum of
US$321,636.94 under the Voyage Charter for the same loss of, and damage to,
the cargo. The Claimant counterclaimed for freight and demurrage.

The Time Charter Reference

iii) The Claimants claimed, inter alia, an indemnity from Seatex in respect of any
liability they may have to ConAgra Canada under the Voyage Charter. This
claim was made pursuant to the terms of the Time Charter.

5. In or about March/April 2001, all three disputes were referred to arbitration. Conagra
Naples and Conagra Canada were represented by Holman Fenwick Willan, solicitors
(“HFW”), the person responsible at HFW being Mr Chris Swart. The Claimant was
represented by Jackson Parton, solicitors, the persons responsible being Mr James
Roberts and, whilst he was away, Mr Brian Roberts. Seatex was represented by Rayfield
Mills, solicitors, the persons responsible being Mr Richard Rayfield. Because the three
references raised common issues of fact and law, the Tribunals directed that they be
 heard concurrently pursuant to paragraph 15(b) of the LMAA terms (1997). Each party
was afforded the opportunity to cross-examine the witnesses of the other parties and the
reasons given for all three awards were common to all three references (“the Reasons”).
The arbitrators in the Bills of Lading Reference were Messrs David Farrington, Richard
Faint, and Alan Oakley; the arbitrators in the Voyage Charter Reference were Messrs
Farrington, Faint and Timothy Rayment and the arbitrators in the Time Charter
Reference were Messrs Farrington, Oakley and Rayment.

6. By an award dated 9 April 2003 issued in the Bills of Lading Reference between
ConAgra Naples and Seatex (“the Bills of Lading Award”), the tribunal held that
ConAgra Naples’ claim against Seatex for damages arising from loss of and damage to
the cargo carried on board the Vessel succeeded in the sum of US$284,194.74. It
awarded and adjudged that Seatex “must immediately pay to [ConAgra Naples] the sum
of US$284,194.74” plus interest.

7. By an award dated 9 April 2003 and issued in the Voyage Charter Reference between
ConAgra Canada and Canmer (“the Voyage Charter Award”), the tribunal held that
ConAgra Canada succeeded in its claim against Canmer for damages in the sum of
US$284,194.74 arising from loss of and damage to the cargo carried on board the Vessel
but that Canmer was entitled to demurrage from ConAgra Canada in the sum of
US$54,595.67.

8. By an award dated 9 April 2003 issued in the Time Charter Reference between Canmer
and Seatex (“the Time Charter Award”), the tribunal held and declared that Seatex “must
indemnify [Canmer] under the Interclub Agreement and clause 73 of the Time Charter”.
Further, it awarded and adjudged that Seatex “must immediately pay to [Canmer] the
sum of US$284,194.74” plus interest.

9. Mr Faint dissented from the Reasons given by the other members of the respective
tribunals for reasons that are not relevant to this judgment.

10. Each of the Awards attached the Reasons and each of the Awards expressly stated that
those Reasons formed part of the Awards. The Reasons included inter alia as follows:

“At the hearing the Owners … maintained as an issue [ConAgra

Canada’s] title to sue. … The decision in the Sanix Ace [1987] 1
Lloyd’s Rep 465 is authority for the proposition that [ConAgra
Canada] had title to sue for damage occurring during their
ownership even though the risk may have passed. We agree with
the submission made by Counsel for [ConAgra Canada] that
insofar as the goods were not at [ConAgra Canada’s] risk they are
entitled to an award but would hold any net sums actually
recovered for the party at whose risks the goods were (in these
references, [ConAgra Naples])”. (Paragraphs 26 to 28).
 “Although both [ConAgra Canada] and [ConAgra Naples] are
entitled to their separate Awards, it is clear that both cannot
receive and retain the full amounts awarded to them. The
maximum total amount, exclusive of interest, to be paid by
[Seatex] and/or Canmer is $284,194.74. It is, of course, for the
parties to resolve between themselves the mechanics of how
funds in payment of the Awards are to be treated, including the
means of accounting between [ConAgra Canada] and [ConAgra
Naples]. At this stage, therefore, we make no decision and leave
it to the parties to use their good sense. However, if the parties
are not able to agree payments and necessary accounting details,
then we reserve to ourselves the power to make Awards in that
regard.” (Paragraph 113).

11. Seatex did not, and has not, paid the sum awarded to the Claimant under the Time
Charter Award, nor indeed any sum, to the Claimant.

12. On 9 May 2003, ConAgra Canada demanded payment from Canmer under the Voyage
Charter Award. On the same date ConAgra Naples demanded payment from Seatex
under the Bills of Lading Award. In both cases HFW stated that it would be
communicating shortly in respect of the costs to which its clients were entitled. In mid-
May 2003 Canmer arrested the Vessel in Lome, Togo in order to obtain security for the
sums due to it from Seatex both in respect of the Time Charter Award itself and
Canmer’s ongoing exposure to Conagra Canada for the costs incurred by HFW in the
arbitrations.

13. Following the arrest, Rayfield Mills (solicitors for Seatex and the UK Club) and Jackson
Parton (solicitors for Canmer) entered into negotiations for the release of the Vessel. It is
common ground that those negotiations culminated in the UK Club’s provision to
Canmer of the LOU and a side letter also dated 16 May 2003, (“the Side Letter”) in
order to obtain the release of the Vessel from arrest. The UK Club also undertook to pay,
and did pay, the Claimants’ costs of the Time Charter arbitration in the agreed sum of
US$ 75,000. The Vessel was duly released from arrest.

14. The LOU provided inter alia as follows:

“RAYS at Manfredonia on 20th October 2000

Time charter dated 18th August 2000/ 6 bills of lading dated

Duluth/Superior 14th September 2000 in particular in respect
of costs incurred in 3 arbitration awards dated 9th April 2003

In consideration of your releasing and/or refraining from arresting

or otherwise detaining the M/V RAYS or any other vessel or
 property in the same or associated ownership, management,
possession or control for the purpose of obtaining security in
respect of your claim under the above charter including legal
costs incurred in connection with the matters which became the
subject of 3 arbitration awards dated 9th April 2003 which may
now or hereafter become due to you in respect thereof, we hereby
undertake to pay you on demand such sum as may be due to you
from owners of the M/V RAYS, Seatex Shipping Company Ltd,
Nicosia, Cyprus, in respect of your said claim and legal costs
against owners by agreement between the parties or upon first
and any subsequent written demand pursuant to the final
arbitration award of Messrs Farrington, Rayment and Faint dated
9th April 2003 and/or upon first and any subsequent written
demand following any further final award of a competent
arbitration tribunal or following an appeal therefrom by a final
judgement of the High Court in London against the owners
provided always that our liability hereunder inclusive of interest
and costs shall not exceed the sum of US$525,000 (US Dollars
Five Hundred and Twenty Five Thousand)”.

The undertaking was expressly stated to be governed by English law and any dispute
was subjected to the exclusive jurisdiction of the English High Court.

15. The Side Letter provided inter alia as follows:

“RAYS at Manfredonia on 20th October 2000

Time charter dated 18th August 2000

We confirm that we agree to settle and pay your clients’ costs in

the head charter arbitration in the sum of US$75,000 which
amount we are forthwith instructing our accounts department to
pay as soon as possible.

We also confirm that we are remitting to HFW the sum of

US$315,000 in respect of the principal and interest under their
award but in the event that this remittance is not actually made
(for reasons unforeseen and which we cannot conceive would
occur) we will increase the security to your clients by the same
amount.”

16. As envisaged by paragraph 1 of the side letter, the UK Club remitted to Canmer the sum
of US$75,000. As envisaged by paragraph 2 of the side letter, on 20 May 2003 the UK
Club also remitted to HFW, as solicitors for Conagra Naples, and for the benefit of
ConAgra Naples, the sum of US$315,000. The letter informing HFW of the payment
 stated as follows:

“In response to your demand dated 9th May 2003 and in part
satisfaction of the [UK Club’s] obligations under its letter of
undertaking provided by the UK Club dated 6th November 2000,
we have remitted to your nominated bank account the sum of
US$ 315,000.”

17. That sum comprised the sum of US$284,194.74, due under the Bills of Lading Award
together with interest thereon. The letter of undertaking referred to had been issued by
the UK Club on 6 November 2000 in favour of Conagra Naples (“the November 2000
LOU”). However, HFW, on behalf of Conagra Naples, refused, and consistently
continues to refuse, to accept that sum as payment under the November 2000 LOU. In
its letter of reply to the UK Club’s agents dated 22 May 2003 HFW stated as follows:

“MV “RAYS” – Arbitration Award 9th April 2003

We confirm that we have found in our client account the sum of

US$315,000 directly remitted by yourselves.

Our Clients are only prepared to accept this remittance as a

payment on behalf of Owners in satisfaction of the demand letter
dated 9 May 2003 and not as a payment pursuant to the
Association’s letter of undertaking dated 6 November 2000,
under which as you know our clients have not as yet made any
demand. We reserve all our Clients’ rights in this respect.

We made our Clients’ position in relation to payment clear to

Owners’ Solicitors on Friday 16 May 2003. We enclose a copy of
our letter to Messrs Rayfield Mills of 16 May. On the
understanding that the Association would not seek to resile from
this our Clients refrained from executing against the vessel in
Togo.

We do not accept the money on any other basis. On the

assumption that this is acceptable to you and to the Owners we
will retain the money, but if this is not acceptable to you and to
the Owners we will hold it to your order pending all outstanding
matters being resolved and without prejudice to the Association’s
letter of Undertaking dated 6 November 2003 which remains as
yet uncalled. Should this not be acceptable to you and Owners it
will be open to you to seek recovery of it.”

18. As that letter makes clear, Conagra Naples would not accept the sum on the terms
tendered; it maintains the position that HFW will hold those funds to the UK Club’s
order unless the UK Club agrees to the withdrawal of its terms. The UK Club has not
agreed to withdraw those terms. Canmer contends that the alleged payment was never
 effective, and that HFW presently hold that sum to the UK Club’s order.

19. On 7 May 2004, Jackson Parton, on behalf of Canmer, called upon the UK Club,
pursuant to the terms of the LOU, to pay to Canmer the sum of US$284,194.74, together
with interest, as awarded in the Time Charter Award. In the same letter, Jackson Parton
acknowledged that Seatex “had already settled the cargo claim by honouring the Award
published in the Bills of Lading reference”. Nevertheless, it gave two reasons for
seeking to compel Seatex to pay that sum for a second time, namely: first, in order that
Canmer might recover from Seatex the costs for which it is liable under the Voyage
Charter Award; and second, in order that Canmer might recover the demurrage due to it
from ConAgra Canada under the Voyage Charter Award.

20. The UK Club has refused to pay the sum demanded or any sum to the Claimants. It
contends that Canmer is not entitled to the sum claimed or any sum under the LOU.

The issues between the parties

21. The UK Club has pleaded a number of defences to Canmer’s claim for payment under
the LOU. These can be summarised as follows:

i) Construction

that the LOU, on its proper construction, does not cover the Time Charter Award
but is, in fact, restricted to the Voyage Charter costs only;

ii) Estoppel

that Canmer is estopped by convention and/or acquiescence and/or representation

from making its claim; the common assumption, as formulated by Miss Anna
Gotts on behalf of the UK Club in the course of her submissions, being that the
LOU would not respond to a demand for payment of principal and/or that no sum
could be due to Canmer within the meaning of the LOU, save in circumstances
where the US$ 315,000 had not been remitted to HFW and application had been
made to increase the security of Canmer’s claim in that amount;

iii) Collateral oral contract

that Jackson Parton, on behalf of Canmer, entered into a concluded oral contract,
an implied, if not express, term of which was a promise by Canmer that it would
make no demand under the LOU for the principal and interest and would not
pursue any claim against the UK Club for the same, the basis of which was the
UK Club’s agreement to settle Canmer’s costs in the Time Charter reference and
 the UK Club’s undertaking to increase the security provided to Canmer in the
event that the principal sum was not remitted to ConAgra Naples by the UK
Club;

iv) Rectification

that if, contrary to the UK Club’s primary submissions, the LOU responds to
Canmer’s claim for principal, then it does not reflect the parties’ common
intentions and accordingly should be rectified; and

v) No sums due

that, on its true construction, the LOU only covers sums actually “due to”
Canmer from Seatex and no such sums are actually due, because of the
remittance by the UK Club to HFW.

Construction

22. It was common ground that the well-known principles of construction governing
contracts in general, such as those enunciated by Lord Hoffmann in Investors
Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at
912-913 and in Bank of Credit and Commerce International S.A. v Ali and Others
[2002] 1 AC 251 equally apply to letters of undertaking. It was thus common ground
that the LOU must be construed in the context in which it was issued so as to reflect
what may fairly be inferred to have been the parties’ real intention and understanding, as
expressed by them in writing, and so as to give effect to that intention rather than not to
do so. Those principles require the Court to construe the words used by the parties in
such a way as to deduce the meaning the document would convey to a reasonable person
having all the background knowledge which would reasonably have been available to
the parties at the time the LOU was concluded. Thus the Court must have regard to the
commercial purpose of the relevant contract and the circumstances in which it was
made. The fact that a document may appear to have a clear meaning on its face will not
excuse the Court from looking at the factual background. On the contrary, the Court of
Appeal has recently confirmed that the Court is obliged to construe a contract in light of
the factual background within which it was concluded: see Static Control Components
(Europe) Ltd v Egan [2004] 2 Lloyd’s Rep. 429 at 435, per Arden LJ:

“Thus, in principle, all contracts must be construed in light of

their factual background, that background being ascertained on an
objective basis. Accordingly, the fact that a document appears to
have a clear meaning on the face of it does not prevent, or indeed
excuse, the Court from looking at the background”.
23. As Miss Gotts submitted, in construing the LOU, the Court is not bound to make the
unreal assumption that the parties expressed themselves with accuracy or precision; in
the case of a commercial contract made under pressure of time by business people, it is
perfectly likely that they may have failed to do so. The Court must instead look to the
common aim or intention of the parties in reducing their agreement to writing. In
addition, the Court must not construe the LOU so as to produce an absurdity or so as to
impose upon the UK Club a responsibility which it could not reasonably be supposed it
meant to assume. As stated in The Antaios [1985] AC 191 at 200 at 201 per Lord
Diplock:

“If detailed semantic and syntactical analysis of words in a

commercial contract is going to lead to a conclusion that flouts
business commonsense, it must be made to yield to business
commonsense”.

24. Miss Gotts further submitted that, in the light of these authorities, the Court, having
considered the factual background against which the LOU was agreed, would be entitled
to conclude that the parties had made an “obvious mistake”, that they had “failed to
express themselves accurately” or that “something [has] gone wrong with the wording”
of the contract; see Static Control and ICS v West Bromwich supra.

25. Her principal submissions on the construction issue can be summarised as follows:

i) On its proper construction, in the context in which it was issued, the LOU
confers upon Canmer an entitlement to make demand only in respect of costs and
not in respect of principal.

ii) It is common ground that, by the express terms of the LOU, the UK Club has
undertaken to pay to Canmer on demand such sum as may be due to it from
Seatex in respect of its claim under the Time Charter and legal costs against
Seatex.

iii) However, the phrase “your said claim and legal costs against owners” must not
be construed in isolation. The LOU must be construed as a whole and the
heading of the LOU makes absolutely plain the common intention of the parties
to limit its application to demands made by Canmer in respect of costs incurred
in the three references.

iv) In addition, the LOU as a document must not be construed in isolation. It forms
part of a wider transaction between the parties of which the side letter, at least,
was part. In the event that the UK Club failed to remit the principal and interest
to ConAgra Naples, the side letter imposed upon the UK Club a corresponding
obligation to increase the security provided to Canmer in like amount.
Accordingly, to uphold the construction of the LOU advanced by Canmer would
 be to treat the UK Club’s printed LOU as though it stood alone, requiring the
strictness of construction appropriate to commercial documents of a standard
form. It would be to render paragraph 2 of the side letter, an intrinsic part of the
overall transaction, entirely meaningless.

v) In the circumstances, the phrase “your said claim” is properly to be construed as

referring to Canmer’s claim for an indemnity in respect of the costs it has
incurred and/or for which it was held liable under the Voyage Charter Award.
The phrase “legal costs against owners”, by contrast, is properly to be construed
as referring to those costs which Canmer will incur in pursuing the “said claim”.

vi) The reasonable person would therefore conclude, that the LOU confers an
entitlement upon Canmer to demand and/or imposes an obligation upon the UK
Club to make payment in respect of costs alone.

vii) Alternatively, and even if the construction contended for by Canmer could be
“inferred”, the reasonable person would – in light of the factual background -
conclude that something had gone wrong with the wording of the LOU. This is
because the reasonable person would know:

a) that, on 6 November 2000, the UK Club provided ConAgra Naples with

an LOU in the sum of US$440,000 as security for the cargo claim under
the Bills of Lading;

b) that paragraph 113 of the Arbitrators’ Reasons stipulates that the

maximum total amount to be paid by Seatex and/or Canmer in respect of
the principal and exclusive of interest is US$284,194.74 and that those
Reasons form part of the Time Charter Award;

c) that the LOU was intended to provide Canmer with sufficient security to
cover the amount of its potential claims against Seatex;

d) that, in a telephone conversation between Mr Roberts (of Jackson Parton

for Canmer) and Mr Mills (of Rayfield Mills for the UK Club) on 16
May 2003, Mr Mills represented that the UK Club was willing both to
settle Canmer’s costs in the Time Charter reference in the sum of
US$75,000 and to remit to ConAgra Naples the sum of US$315,000 in
satisfaction of the Bills of Lading Award;

e) that the effect of such payments would be to limit the scope of Canmer’s
potential claims against Seatex to claims for the costs it incurred and/or
for which it would be liable in the Voyage Charter reference;
 f) that the effect of such payments would therefore also be to reduce the
amount of security required by Canmer since security would not be
required in respect of the cargo claim itself;

g) that, in a later telephone conversation between Mr Roberts and Mr Mills

on 16 May 2003, Mr Roberts accordingly proposed that the UK Club
provide security to Canmer in the sum of US$650,000, which sum
represented Canmer’s potential remaining exposure to ConAgra Canada
in respect of the costs incurred by it in the Voyage Charter reference;

h) that in a subsequent e-mail dated 16 May 2003, Mr Mills proposed that

security be provided in the lesser sum of US$525,000, which figure was
calculated simply by deducting the amount of ConAgra Naples’ residual
security from the figure of US$650,000 proposed by Mr Roberts;

i) that Mr Roberts agreed to the provision of security in the sum of

US$525,000 on the condition that, if the payment to ConAgra Naples was
withheld, the UK Club would agree to increase the security provided so
as to cover Canmer’s revived liability to ConAgra Canada in respect of
the principal sum.

viii) She submitted that, possessed with that knowledge, the reasonable person could
be in no doubt as to the scope of the LOU. He would appreciate that the
construction contended for by Canmer would flout business commonsense. He
would appreciate that such a construction would expose the UK Club to paying
twice for the same claim and would be contrary to the Reasons for the Awards.
He would appreciate therefore that the parties had made an obvious mistake in
recording their agreement. Accordingly, the UK Club is not obliged to make the
payment sought.

26. Whilst I accept Miss Gotts’ submissions as to the law (which were not in contention so
far as Mr Chirag Karia, counsel on behalf of Canmer, was concerned), I cannot accept
her submissions as to the construction of the LOU. In my judgment the LOU, construed
in its commercial context, clearly covers payment of the Time Charter Award itself. Its
heading specifically refers to the “Time charter dated 18th August 2000”, which is the
Time Charter between the Claimants and Seatex. The body of the LOU states that the
consideration for the LOU is the Claimants’ release of the arrest, or refraining from any
further arrest, of the Vessel “for the purpose of obtaining security in respect of your
claim under the above charter [which is clearly a reference to the Time Charter]
including legal costs incurred in connection with the matters which became the subject
of 3 arbitration awards dated 9th April 2003”. There is an express undertaking by the
UK Club to pay to the Claimants “on demand such sum as may be due to you from
owners of the M/V RAYS, Seatex Shipping Co. Ltd., Nicosia, Cyprus, in respect of
your said claim and legal costs against owners”; and a further undertaking to pay “upon
 first and any subsequent written demand pursuant to the final arbitration award of
Messrs Farrington, Rayment and Faint dated 9th April 2003”. It is common ground that
this is an express reference to the Time Charter Award, Mr Roberts having, by oversight,
omitted to correct the names of the arbitrators when he replaced the reference to the
Voyage Charter in the first draft with the Time Charter in the amended draft. The only
liability arising under the Time Charter Award is for the cargo claim (i.e. principal and
interest). There is no liability under the Time Charter Award for costs.

27. Accordingly, I agree with Mr Karia’s submission that the clear and express intent of the
LOU is that it will respond to both: (i) the Time Charter Award; and (ii) the legal costs
“incurred in connection with the matters which became the subject of 3 arbitration
awards”. Moreover, there is nothing in the factual matrix that requires the Court to give
the words in the LOU any meaning other than their natural and ordinary meaning. I
cannot accept Miss Gotts’ submission, based upon inadmissible evidence given by Mr
Mills as to his alleged subjective intentions, that the words “in particular” in the heading
should be construed as “exclusively”. There is nothing to suggest that the LOU was
negotiated by business people under pressure of time. It is clear that, on the contrary, it
was negotiated between two highly qualified and experienced shipping solicitors, both
partners in their respective firms. There was no particular pressure of time, and certainly
nothing out of the ordinary for a busy and highly successful solicitor such as Mr Mills.
The arrest took place during early May 2003. Discussions between Rayfield Mills and
Jackson Parton began on Monday, 12 May and continued at a fairly leisurely pace during
that week. Final documentation was agreed on Friday 16 May. The first draft of the
LOU was sent to Mr Mills at 10:48am on that day. The virtually final version was sent
to him at 11:25am. Over one and a half hours later, at 1:00pm, Mr Mills told Jackson
Parton that he was happy with the wording of the LOU. That was ample time to review
a one page document. Indeed, Mr Mills had at least a further five hours to consider that
document, as it was not until around about 6pm that evening that the LOU was finally
sent by fax to Jackson Parton by the UK Club.

28. As Lord Mustill (with whose speech Lords Goff, Griffiths and Browne-Wilkinson all
expressly agreed) explained in Charter Reinsurance v. Fagan [1997] AC 313, at 388 B-
D:

“There comes a point at which the court should remind itself that
the task is to discover what the parties meant from what they have
said, and that to force upon the words a meaning which they
cannot fairly bear is to substitute for the bargain actually made
one which the court believes could better have been made. This
is an illegitimate role for a court. Particularly in the field of
commerce, where the parties need to know what they must do
and what they can insist on not doing, it is essential for them to be
confident that they can rely on the court to enforce their contract
according to its terms. Certainly, if in the present case the result
of finding a condition precedent would be anomalous there would
be good reason for the court to look twice, and more than twice,
 at the words used to see whether they might bear some other
meaning. In the end, however, the parties must be held to their
bargain.”

29. I respectfully agree. The Court must construe the words of the LOU that the parties have
in fact agreed. Unless there has been some obvious mistake, or the surrounding facts
justify rectification, or some collateral contract is proved, the Court cannot read in terms
that are not there (i.e. a term excluding the cargo claim) and that contradict the express
terms that are there (i.e. the express coverage for the Time Charter Award/cargo claim).
There is no such obvious mistake here. Moreover having heard the evidence of both Mr
Mills and Mr Roberts as to the negotiation of the terms of the LOU, I am satisfied that
there are no facts emerging from the commercial context of the LOU that could justify
such an interpretation. It was certainly conceivable, under the multi-partite relationships
arising as a result of the three Awards, that the Conagra parties might prefer to recover
payment from Canmer as opposed to from Seatex, as indeed transpired to be the case.

30. Accordingly it is to the defences of estoppel, oral collateral contract and rectification that
I now turn.

Estoppel, oral collateral contract and rectification

31. It is convenient to deal with these three defences together, because the alleged factual
basis relied upon by Miss Gotts to support them was very similar. Her contentions were
based upon her analysis of the correspondence and the evidence relating to the oral
discussions between Mr Mills of Rayfield Mills (representing Seatex and the UK Club)
and Mr Roberts of Jackson Parton (representing Canmer) in the negotiations leading up
to the conclusion of the LOU on 16 May 2004. The result, the UK Club submits, is that
Canmer is now estopped or otherwise prevented from claiming in respect of the
principal sum.

32. The UK Club relies principally on estoppel by convention, but it also alleges estoppel
by representation and/or acquiescence. There was no dispute that estoppel by
convention arises where both parties to a transaction “act on an assumed state of facts or
law, the assumption being either shared by both or acquiesced in by the other”; see The
Indian Endurance (No 2) [1998] AC 878 at 913; also Amalgamated Property Co v Texas
Bank [1982] QB 84 at 122; The Vistafjord [1988] 2 Lloyd’s Rep. 343 at 349-353.

33. She also submitted that Jackson Parton, on behalf of Canmer, impliedly (if not
expressly) agreed that it would make no demand under the LOU for the principal and
interest and would not pursue any claim against the Club for the same. She accepted that
if the LOU were construed in isolation and if the LOU therefore has the meaning for
which Canmer contends, the alleged agreement would directly contradict the express
terms of that LOU. However, she contended that the LOU, the UK Club’s agreement to
settle Canmer’s costs in the Time Charter reference and the UK Club’s undertaking to
 increase the security provided to Canmer in the event that the principal sum was not
remitted to ConAgra Naples, formed part of a much wider transaction. The printed form
of the LOU cannot therefore be construed in isolation. It formed part of a group of
agreements, mutually dependent upon each other – effectively collateral contracts

34. In argument, the way in which Miss Gotts articulated her case in estoppel (and, indeed in
collateral contract) was that there was a common assumption (or agreement) that the
LOU would not respond to a demand for principal and/or that no sum could be due to
Canmer within the meaning of the LOU save where the $315,000 had not been remitted
and an application was made by Canmer to increase the security. The underlying facts
upon which the UK Club relies were, in summary, that on 13 May 2003, Mr Rayfield
advised Jackson Parton in writing that, if Seatex were first to pay ConAgra Naples the
principal and interest awarded in the Bills of Lading reference, Seatex’s remaining
potential liability to Canmer would be for costs alone. In the same communication, Mr
Rayfield also drew the attention of Jackson Parton to paragraph 113 of the Reasons. She
submitted that at no point did Jackson Parton indicate that they disagreed with such an
analysis. She relied upon various telephone conversations on 16 May 2003, where Mr
Roberts advised Mr Mills that, if Seatex were first to pay ConAgra Naples the principal
and interest awarded in the Bills of Lading reference, Canmer would require security in
the sum of US$650,000, a figure which reflected Canmer’s potential exposure to
ConAgra Canada in respect of the costs incurred in the Voyage Charter reference. She
also relied upon a subsequent e-mail of the same date, in which Mr Mills proposed that
security be provided in the lesser sum of US$525,000 and explained the basis upon
which this figure had been calculated, namely that it represented Canmer’s potential
remaining costs exposure of US$650,000 less ConAgra Naples’ residual security of
US$125,000. She therefore submitted that what was therefore represented to the UK
Club, impliedly from everything that was said, if not expressly, was that there could be
and would be no claim by Canmer under the LOU for the principal sum. Further, she
submitted, it was self-evidently assumed by both parties, as the shared convention upon
which the LOU was concluded, that the LOU would only respond in respect of a
demand for payment of costs. She also submitted that from the date that the LOU was
concluded and payment of the principal sum made to ConAgra Naples, Canmer
expressed the view in open correspondence and in its submissions to the Tribunal both
that its liability to ConAgra Canada had been discharged and that the LOU would
respond only to a demand in respect of costs. In particular she relied upon the following
correspondence:

35. On 19 May 2003, Jackson Parton wrote to HFW in the following terms:

“… In view of the arbitrators’ comments in the Reasons for their

awards, we trust you will agree that the payment of $315,000
discharges any liability that our clients may have to remit
$284,194.74 to your clients …”

36. On 3 June 2003, Jackson Parton wrote to the Tribunal in the Voyage Charter reference as
 follows:

“… The security obtained by Canmer is essentially in respect of

Canmer’s exposure to ConAgra’s legal costs and, as we believe
Holmans are aware, the level of security was reduced to take
account of the $315,000 remittance…”

37. She also, in the context of her estoppel arguments, criticised Mr Roberts. She
contended:

i) that he failed to object to the fact that payment should be made to ConAgra
Canada; that he never suggested that demurrage should be retained;

ii) that he suggested that security should be in the sum of $525,000 (i.e. the costs);

iii) that it was he who suggested the side letter, from which the only reasonable
inference to be drawn is that the LOU was not intended to respond to principal;

iv) that at opportune moments in the course of the correspondence, Mr Roberts

failed to make the position clear that there might be an objection by the Conagra
parties to payment on a conditional basis;

v) that he should have specifically referred to the possibility of non-acceptance of

any remittance by the Conagra parties if he was concerned about the matter.

38. Having heard the evidence of both Mr Roberts and Mr Mills, I reject all these arguments.
Nor do I accept Miss Gotts’ analysis of the correspondence or her criticisms of Mr
Roberts. Both he and Mr Mills (as one would expect) were honest and straightforward
witnesses.

39. Mr Roberts gave clear evidence to the effect that Canmer never agreed not to make a
demand under the LOU for the Time Charter Award/cargo claim; that he never agreed
that the LOU would be confined to the costs due to Conagra Canada; and that such an
agreement was never even discussed. Mr Roberts certainly understood that the
US$315,000 figure was arrived at based on the principal and interest under the Bills of
Lading Award. But neither he nor Mr Mills was concerned at that time with allocation
of monies. Instead, they were concerned with the much more pressing matter of
calculating the amount of security the Claimants needed to cover their maximum
possible exposure so that the Vessel could be released from arrest. He said (and I accept)
that the relevance of the UK Club’s stated intention to transmit US$315,000 to HFW
was that it reduced the Claimants’ maximum possible exposure, and hence the amount of
security they needed, by that amount. What Mr Roberts was concerned about was to
ensure that the Claimants were adequately secured in the event that HFW decided to get
 their money from Seatex/the UK Club indirectly via the Claimants. Moreover, Mr Mills
accepted in cross-examination that:

i) a prudent solicitor would always record the terms of any settlement or release of
an arrest in writing;

ii) that was certainly his practice;

iii) he had not recorded the alleged terms of the collateral agreement in any letter
sent to Jackson Parton;

iv) nor had he recorded it in any letter sent to his clients, the UK Club;

v) nor was it recorded in any contemporaneous note of his;

vi) neither he nor Mr Roberts ever articulated the terms allegedly agreed;

vii) those terms represented his legal view of the situation, and he believed that Mr
Roberts shared it but Mr Roberts at no time said that he did.

40. In fact, a disagreement between Jackson Parton and Rayfield Mills on this very issue had
already crystallised by 13 May, as the correspondence makes clear. Mr Mills’ evidence,
and a proper analysis of the correspondence, in my judgment clearly establishes that
there was no representation, agreed course of dealing or convention, or agreement along
the lines alleged by the UK Club. Indeed, as recently as 27 August 2004, Rayfield Mills
had made no mention of this alleged agreement when setting out the agreement reached
on 16 May 2003 for the tribunal. Nor do the communications to the Tribunal relied upon
by Miss Gotts provide any basis for the asserted estoppel or agreement.

41. Accordingly, in my judgment, no representation, let alone the unequivocal type of

representation that is needed to establish an estoppel, to the effect that the Claimants
would not claim under the LOU for the Time Charter Award, was ever made by Mr
Roberts. Furthermore, in my judgment, it is impossible to regard the evidence as
showing that both parties laboured under that common assumption. Even if Mr Mills
took the view that the UK Club’s remittance to Conagra Naples under the Bills of
Lading Award would discharge the Claimants’ liability to Conagra Canada under the
Voyage Charter Award, that cannot unilaterally ground an estoppel. Jackson Parton had
already expressly disagreed with that view as had HFW. Moreover, Mr Mills knew that
neither Mr Roberts nor HFW agreed with his erroneous view. Finally, there is no
injustice or unconscionability in the present case; as for the need for such a requirement,
see The August Leonhardt [1985] 2 Lloyd’s Rep. at 35. The Conagra parties will only
get from the UK Club the sums to which they are entitled under the terms of the Awards.
 Given that Conagra is entitled to recover its costs from the Club/Seatex and those costs
have been estimated at US$650,000, there is no realistic prospect of the UK Club
overpaying as a result of its payment of approximately US$315,000 to the Claimants
under the LOU. In any event, if the payment under the LOU were to result in the
Conagra parties being over compensated, the UK Club/Seatex will be able to recover the
overpayment (if any) in restitution.

42. For similar reasons, it follows that the UK Club’s claim to rectification of the LOU fails.
On the basis of my findings of fact, there is no evidential basis to support the argument
that the LOU and the Side Letter do not reflect the common intentions of the parties.

No sums due

43. I turn now to consider the UK Club’s final defence, namely that, on its true construction,
the LOU only covers sums actually “due to” Canmer from Seatex and that no such sums
are actually due, because of the remittance by the UK Club to HFW.

44. The first issue that arises under this head is whether, as a matter of construction of the
LOU:

i) it imposes an independent, autonomous obligation on the UK Club to pay

Canmer on any demand stated to be based upon:

a) any agreement between the parties;

b) the Time Charter Award; and/or

c) any further award or High Court judgment

(as Canmer contends); or, alternatively,

ii) it imposes a secondary, pre-condition to payment, in addition to a demand,

namely the requirement that Canmer has to prove that the sum demanded is
actually due from Seatex to Canmer at the time of the demand (as the UK Club
contends)

45. In support of his submissions that the LOU imposed an autonomous obligation on the
UK Club to pay on a demand based on the Time Charter Award, Mr Karia contended
that the LOU should be construed as having three limbs; the first limb was the UK
Club’s undertaking to pay the Claimants “on demand such sum as may be due to you
 from owners of the M/V RAYS, Seatex Shipping Co. Ltd., Nicosia, Cyprus, in respect
of your said claim and legal costs against owners by agreement between the parties”; the
second limb was the undertaking to pay “upon first and any subsequent written
demand pursuant to the final arbitration award . . dated 9 April 2003.”; and the third
limb was the undertaking to pay “upon first and any subsequent written demand
following any further final award of a competent arbitration tribunal or following an
appeal therefrom by a final judgement of the High Court in London against the owners.”
(emphasis added).

46. He submitted that, even in relation to the first limb, (and, so far as the words applied at
all thereto, certainly in relation to the second and third limbs), the words “such sum as
may be due to you from owners” were merely descriptive and thus did no more than

“identify the contractual events which trigger the right to call the
refund guarantees in the same way as the bond in Esal referred to
the underlying liability.”

as the Court of Appeal stated in Gold Coast v. Caja de Ahorros [2002] 1 Lloyd’s Rep.
617 at paragraphs 21 – 26. In support of this submission that the LOU imposed primary,
autonomous liability upon the UK Club, he referred to Esal (Commodities) Ltd v.
Oriental Credit Ltd [1985] 2 Lloyd’s Rep. 546 (CA). In that case, the guarantor bank
had “undertake[n] to pay the said amount on your written demand in the event that the
supplier fails to execute the contract in perfect performance .…” The Court of Appeal
held that, absent clear evidence of known fraud, the guarantor was bound to pay upon
any demand stated to be based on the supplier’s failure/breach. Provided that a breach
was alleged in the demand, the guarantor could not avoid paying by proving that the
supplier had not in fact failed/committed a breach as alleged in the demand; see [1985]
2 Lloyd’s Rep. at 549 col. 1 – 550. He also relied upon Gold Coast v. Caja de Ahorros
supra, where the guarantors had irrevocably and unconditionally undertaken to pay upon
the beneficiary buyer’s “first written demand ... if and when the instalment becomes
refundable from the Builder under and pursuant to the terms and conditions of the
Shipbuilding Contract.” The Court of Appeal, following Esal, held that the Builder’s
underlying liability was irrelevant to the guarantor’s autonomous obligation to pay
according to the demand made by the beneficiary. It explained that the reference to
instalments becoming refundable under the Shipbuilding Contract did no more than
identify the contractual events which triggered the right to call the refund guarantees.
The Court of Appeal also expressly approved the statement in Jack, Malek and Quest,
Documentary Credits (3rd Ed. 2001) that

“a (demand) guarantee will not be construed as payable only if a

particular event has occurred, simply because the guarantee sets
out, without more, the event or events following the happening of
which it is intended that a demand may be made.”

47. He sought to distinguish cases such as The London Lion [1980] 2 Lloyd’s Rep. 456
(CA), BOC Group v. Centeon LLC [1999] 1 All ER (Comm) 53 (Rix J), and Marubeni v.
 Government of Mongolia [2004] 2 Lloyd’s Rep. 198 (Cresswell J) and [2005] EWCA
Civ 395 (CA), which were relied upon by Miss Gotts in her submissions to support her
argument that the UK Club’s liability was a secondary liability dependent upon Canmer
proving that sums were indeed due. (The decision of the Court of Appeal in Marubeni
was delivered after the end of oral submissions in this case and was the subject of further
post-hearing written submissions by both counsel.)

48. Further he submitted that the second limb of the LOU, pursuant to which the demand
was in fact made in this case, was, in any event, not qualified by the words “such sum as
may be due to you from owners”. He submitted that all that is required is that the
demand be made pursuant to the Time Charter Award. Therefore, he submitted,
whatever the position in relation to the first limb, the second and third limbs do create a
primary, autonomous demand covenant, or guarantee, in favour of Canmer. He
contended that there is an obvious reason why the parties should have drawn a
distinction between claims that have been definitely proven and established by arbitral
award or court judgment (i.e. the second and third limbs) differently from bare,
unadjudicated claims in respect of unproven and unquantified liabilities (the first limb).
On the other hand, Seatex’s liability in respect of the second limb had already been
established by the Time Charter Award. He submitted that qualifying words, such as
those relied upon by the Court of Appeal in paragraphs 31 and 32 if its judgment in
Marubeni to conclude that merely a secondary liability was imposed in that case, were
absent in the second and third limbs of the LOU.

49. I do not accept Mr Karia’s submissions, either as to the construction of the second and
third limbs of the LOU or as to the characterisation of the obligation imposed on the UK
Club. The starting point here is the construction of the wording of the LOU, or, put
another way, the ordinary reading of the words. In my judgment, it is clear, on that
wording, that the phrase “such sum as may be due to you from owners” is as much part
of the second and third limbs of the operative part of the undertaking, as it is part of the
first limb. A grammatical analysis, as well as the ordinary reading, of the words, shows
that the operative undertaking by the UK Club, articulated in the main clause of the
LOU, is to pay Canmer on demand such sum as may be due to Canmer from Seatex in
respect of Canmer’s claim under the Time Charter and its legal costs incurred in the
three arbitrations referred to in the title. The object of the undertaking to pay is clearly,
in all three cases, “such sum”. Likewise, in all three cases “such sum” is defined by the
sub-clause “as may be due to you from owners”. The quantification of the amount of
that “sum” is either arrived at by agreement between the parties (the first limb), or
simply by a written demand pursuant to the final arbitration award under the Time
Charter (it being common ground that the reference to Mr Faint as opposed to Mr
Oakley in the LOU was an error) (the second limb), or a subsequent award (the third
limb).

50. So far as characterisation of the obligation is concerned, I see no reason why the
principles applicable to performance bonds (i.e. the imposition of a primary liability)
should not apply to letters of undertaking issued by P&I Clubs, in circumstances such as
these, if, and only if, the language of the particular letter in question justifies such a
 construction. Obviously Clubs are not banks, but a claimant, which is agreeing to
release a vessel from arrest, might well wish to obtain the certainty that a covenant of a
Club, as insurer, will respond to a demand without having to prove any underlying
liability on the part of the owner. The fact that Canmer has not identified any authority
in which such undertakings have been so characterised, does not persuade me that the
characterisation of a covenant as giving rise to primary liability is necessarily
inconsistent with the function of a Club in these circumstances. But in this case, in my
judgment, the wording makes clear that no such liability is imposed. The LOU does not
describe itself in terms appropriate to a demand bond or similar instrument imposing
primary liability. There is nothing in the language to rebut the presumption (see
paragraphs 30 and 31 of Marubeni) that, outside the banking context, and in the absence
of clear words applicable to a performance bond, such an undertaking is not regarded as
imposing primary liability. Mr Karia sought to rely upon the fact that payment had to be
made “upon first and any subsequent written demand pursuant to the final arbitration
award”, at a time when the quantum of liability, at least in respect of principal, would be
ascertained. But in my judgment that does not change the character of the obligation nor
obviate the need for Canmer to establish that the sum claimed is indeed due from Seatex
as owner to Canmer, pursuant to the Time Charter Award. Accordingly, it follows that I
accept Miss Gotts’ submissions on this aspect of the case.

51. The next issue, which arises under this head, is whether the sum claimed by Canmer is,
in fact, due to it under the Time Charter Award, as stated in the Claimant’s demand of 7
May 2004.

52. In paragraphs 19(2)(d) & 19(2)(e) of its Defence, and in its submissions at trial, the UK
Club argued that its remittance to Conagra Naples under the Bills of Lading Award
discharged the Claimants’ separate liability to Conagra Canada (a different legal person)
under the Voyage Charter Award and that, accordingly, there is no sum due by Seatex to
Canmer under the Time Charter Award. In my judgment this defence fails. My reasons
for this conclusion, which broadly reflect the submissions made by Mr Karia in relation
to this point, may be summarised as follows.

53. As I have already stated, Conagra Naples, by its solicitors HFW, has refused (and
continues to refuse) to accept the sum remitted in respect of the Bill of Lading Award on
the terms upon which it was tendered. Those funds remain in HFW’s client account,
held to the UK Club’s order. Although HFW’s letter dated 22 May 2003 is perhaps
somewhat ambiguous about the circumstances in which the sum will be repaid, it is clear
that Conagra Naples has not accepted the sum as payment. Payment is a consensual act
and thus requires the accord of both creditor and debtor. Even if a tender by a debtor to
his creditor complies fully with the terms of the contract, and the creditor’s refusal to
accept the payment thus constitutes a breach of contract, the tender does not discharge
the debtor’s obligation, although the creditor may be prevented thereafter from claiming
any interest or damages for late payment or for claiming damages for breach of the
payment obligation; see R.M. Goode, Payment Obligations in Commercial and
Financial Transactions (1983), at pages 14 –16; Chitty on Contracts, 29th Edition,
 paragraph 21-084. It is not therefore necessary for me to consider whether the UK
Club’s tender, and its attachment of certain conditions thereto, was or was not in
conformity with Seatex’s obligations under the Bills of Lading Award. A creditor
accepts payment either by expressly declaring its unconditional assent to the payment, or
by acceptance or by treating the money as its own (e.g. by intermingling it with its own
money or lending it out, etc.); see e.g. TSB Bank of Scotland v. Welwyn Hatfield District
Council [1993] 2 Bank LR 267, 272-273 (Hobhouse J). That has clearly not happened
here. It is therefore clear that no payment sufficient to discharge Seatex’s liability under
the Bills of Lading Award has yet been made by the UK Club, because its remittance has
not been accepted by Conagra Naples. Therefore it cannot be said that no sum is owing
to Canmer from Seatex, because Canmer will have no liability to Conagra Canada under
the under the Voyage Charter Award.

54. Secondly, even if I were wrong in the above view, and payment under the Bill of Lading
Award had been made by Seatex to Conagra Naples, such payment cannot discharge the
liability of a third party (Canmer) under a separate award (the Voyage Charter Award) in
favour of a different claimant (Conagra Canada). I accept Mr Karia’s submissions that
the mutual rights and liabilities of Canmer and Seatex, Canmer and ConAgra Canada,
and Seatex and ConAgra Naples are governed by the Time Charter Award, the Voyage
Charter Award and the Bills of Lading Award, respectively. Those three Awards are
separate and independent. Liability under one Award cannot be “discharged” by the
alleged or even actual satisfaction of a different Award. Each Award replaced the
underlying causes of action upon which it was based and created new rights between the
parties thereto superseding their previous rights: see Merkin, Arbitration Law, (2004)
para 18.128, p. 787; The Sargasso [1994] 1 Lloyd’s Rep 412, 415 col. 2 (Clarke J).

55. Miss Gotts accepted that there was a logical difficulty in her argument because it was
inherent in the three Awards that the Bills of Lading and Time Charter Awards impose
upon Seatex an obligation to make immediate payment of US$284,194.74 to ConAgra
Naples and Canmer respectively, and the Voyage Charter Award imposes upon Canmer
an obligation to make immediate payment of US$229,603.07 to ConAgra Canada.
However she contended that the Tribunals’ Reasons for making all three of those Awards
expressly state that the sum of US$284,194.74 should only be paid once. She submitted
that the Tribunals regarded the three Awards as intrinsically related. She relied upon
paragraph 28 of the Reasons where the Tribunals held that, whilst ConAgra Canada had
title to sue Canmer under the Voyage Charter, it would hold any net sums actually
recovered for ConAgra Naples. She further relied upon paragraph 113, where they
recognised that, although both ConAgra Canada and ConAgra Naples were entitled to
their separate Awards, both could not receive and retain the full amounts awarded to
them, and the fact that the only matter the Tribunals left unresolved was “the mechanics
of how funds in payment of the Awards [were] to be treated”. She further submitted that,
by leaving the mechanics of payment to the parties’ good sense, the Tribunals were
simply recognising that there were various ways in which the Awards could properly be
satisfied; that the particular way in which Seatex chose to satisfy the Awards was to
remit the principal sum to ConAgra Naples (a course of action of which Canmer was
fully aware and to which it agreed); and that, having done so, Canmer’s liability to
 ConAgra Canada in respect of the principal and interest awarded in the Voyage Charter
reference was discharged and Seatex could have no liability to Canmer for the same.
Finally she submitted in this context, based on paragraphs 19(2)(f) of the Defence, that
there is an implied term in the Time Charter Award to the effect that the Award against
Seatex “immediately to pay to Canmer the sum of US$284,194.74” plus interest does
not mean what it says and that payment does not need to be made, if funds have been
remitted to Conagra Naples . She argued that such a term must be implied “as a matter
of law and/or pursuant to the intentions of the tribunal as evidenced in the Reasons for
the Awards”.

56. In my judgment these arguments must also be rejected. The Tribunals expressly stated
in paragraph 113 of the Reasons that they were making “no decision” as to the
mechanics of payment or accounting. In those circumstances I do not see how Miss
Gotts can derive any assistance from that paragraph for her submissions. Moreover it is
impossible from that paragraph, or indeed the Reasons as a whole, to imply any term to
the effect that the Time Charter Award, on its face, is not to be effective if a remittance
has been made, even if it has not been accepted.

Conclusion

57. Accordingly I find in favour of Canmer on its claim. I will hear further argument, if
necessary, as to the form of any order.

58. Finally I should express my thanks to counsel for their helpful written and oral
submissions. The fact that I have not in this judgment addressed all the points which
they respectively made does not mean that such points have not been considered in
coming to my conclusion.