On 1 April 2011 Gloster J handed down judgment in one of a number of cases currently going through the courts concerning the proper construction of forward freight agreements (“FFAs”) concluded on the terms of the 1992 ISDA Master Agreement.
The Claimant’s claim was for about US$26 million said to be owed by the Defendant under 18 FFAs which had been entered into between the parties. The first 14 of the FFAs were concluded on the 2005 FFABA Terms (the market-standard form for FFA transactions), and the remaining 4 FFAs were concluded on the 2007 FFABA Terms. In about December 2009, the Claimant went into liquidation. The Claimant contended that the effect it going into liquidation was that all of the FFAs between the parties became subject to Automatic Early Termination under s.6(a) of the ISDA Master Agreement, with the result that, pursuant to s.6(e) of the Master Agreement, the Defendant was obliged to calculate its “Loss” under the FFAs. The Claimant contended that the Defendant’s “Loss” was in fact a gain of about US$26 million, and that the result was that the Defendant was obliged to pay to the Claimant that sum by way of close out of the FFAs.
Two broad questions were raised for determination by the Court. The first question was whether the Automatic Early Termination procedure applied at all to the FFAs in question, or at least to those concluded on the 2005 FFABA Terms. The difficulty arose because while the 2007 FFABA Terms elected Automatic Early Termination as applying, the 2005 FFABA Terms did not. It was held by Gloster J that the effect of the 2007 FFABA Terms was to supersede the 2005 Terms, and ensure that all of the FFAs concluded by the parties were subject to Automatic Early Termination.
The second question related to the approach to be taken to calculating the Defendant’s “Loss” under the FFAs. In particular, by virtue of s.2(a)(iii) of the ISDA Master Agreement, it is a condition precedent to a party’s right to receive payments that it is not affected by an Event of Default. The Defendant argued that the Claimant had been affected by an Event of Default since about October 2008, and would have continued to be affected by an Event of Default at all times thereafter, and it followed that, had the FFAs not been automatically terminated, it would never have had to make any further payments to the Claimant. On this basis, the Defendant contended that its “Loss” under the transactions was ‘nil’ (the “Nil Loss Argument”).
Gloster J rejected the Nil Loss Argument, and concluded that, on a proper construction of the “Loss” definition, the Defendant was required to assume, both in respect of contract months prior to and following the date of Automatic Early Termination, that the Claimant had satisfied all conditions precedent. In this regard, Gloster J reached the same conclusion as had Flaux J in the case of Britannia Bulk v Pioneer Navigation  EWHC 692 (Comm), which was decided on 25 March 2011.
Charles Kimmins QC and Luke Pearce appeared for the Claimant, instructed by Holman Fenwick Willan LLP.