Galaxy Energy International Limited v Bayoil SA

Where a contract makes payment conditional on an amount being recoverable from a third party, wording such as “can be recovered” does not mean that actual recovery must have occurred. It means that recovery must be possible with the exercise of due diligence.

That due diligence requirement is measured objectively and may, depending on the circumstances, require proceedings against the third party. It is not necessarily confined to presenting a claim and demanding payment. If due diligence is not exercised, the payer cannot rely on the contractual proviso protecting it from liability. Demurrage is then payable from the date it accrued, with interest assessed accordingly.

Galaxy sold gasoil to Bayoil under a contract providing for demurrage as under the charterparty, but recoverable only to the extent that it could be recovered from the Banias terminal. Bayoil resold the cargo to Mahroukat, which did not pay the demurrage.

The trial judge held that Bayoil was required to exercise due diligence to recover the sum from Mahroukat and had failed to do so by not commencing proceedings. Judgment was entered for Galaxy. Bayoil appealed on the construction of the contractual proviso. Galaxy cross-appealed on the date from which interest was payable. The central issues were the meaning of “can be recovered”, the content of any due diligence requirement, and the appropriate interest date.

1. Appeal dismissed. The Court of Appeal unanimously held that “can be recovered” did not mean “is recovered”. The phrase referred to what could be recovered with the exercise of due diligence.
2. The proviso was not properly analysed as imposing a separate contractual obligation sounding in damages. Rather, due diligence formed part of the meaning and operation of the proviso. Bayoil could not rely on the fact that it had made no actual recovery if, through lack of due diligence, recovery had not been achieved.
3. The due diligence standard had an objective and commercially workable content. It was not legally limited to presenting a claim and demanding payment. Depending on the circumstances, it could require commencing and prosecuting proceedings against the third party. The trial judge was entitled to find that Bayoil’s failure to commence proceedings after June 1994 amounted to a failure of due diligence.
4. The court declined to treat the different wording and context in Socap International Ltd v Marc Rich & Co AG [1990] 2 Lloyd's Rep 175 as controlling. Any suggestion that that decision established a separate contractual obligation to exercise due diligence was not accepted.
5. Cross-appeal allowed. The trial judge had overlooked Galaxy’s primary submission on interest and the Court of Appeal therefore exercised the discretion afresh. Once Bayoil could not rely on the proviso, its liability for demurrage ran in principle from the date the demurrage accrued. Interest was ordered on US$130,155.90 from 30 August 1993. Costs were subject to detailed assessment.

• Central London County Court Business List: His Honour Judge Knight, QC held that Bayoil had failed to exercise due diligence to recover demurrage from Mahroukat and ordered payment of the demurrage, but awarded interest from a later date.
• Court of Appeal (Civil Division): The appeal was dismissed and the cross-appeal allowed. Interest was ordered from 30 August 1993.