Britannia Bulk Plc v Pioneer Navigation Ltd & Anor

Under the 1992 ISDA Master Agreement, where the Second Method and Loss apply following Automatic Early Termination, the Non-defaulting Party must account for a gain arising from the termination of future obligations. The calculation proceeds on the basis that the Bankruptcy Event of Default and consequent termination had not occurred. It is impermissible to assume that the default continued throughout the remaining contractual period, because that assumption is inconsistent with Automatic Early Termination. The Second Method is a close-out mechanism and is not equivalent to the common-law measure of damages. The Loss and Market Quotation measures are intended to produce broadly similar results.

Britannia Bulk plc, in liquidation, brought two actions concerning forward freight agreements incorporating the 2007 FFABA Terms and the 1992 ISDA Master Agreement. Administrators were appointed over Britannia Bulk on 31 October 2008, triggering Automatic Early Termination. The defendants contended that their Loss was nil because, absent termination, the condition precedent concerning Britannia Bulk’s insolvency would have prevented further payments. The claimant contended that the defendants had gained the value of payments which would otherwise have been made over the remaining contractual term. The court tried the nil-loss issue as a preliminary issue in both actions.

1. The preliminary issue was resolved in favour of Britannia Bulk. The nil-loss argument failed on the proper construction of the Master Agreement.
2. Automatic Early Termination occurred immediately upon the specified Bankruptcy Event of Default. It was therefore impossible to construct a counterfactual in which the Bankruptcy Event of Default continued while the contracts remained on foot. The Loss calculation had to proceed on the basis that there was no continuing Bankruptcy Event of Default and no consequent Automatic Early Termination.
3. The Second Method required payment in either direction. A negative calculation represented a gain for the Non-defaulting Party and required payment to the Defaulting Party. The Second Method was a close-out mechanism and could not be equated with the common-law measure of damages or a breach-based claim.
4. The defendants’ gain included the payments which, on the proper counterfactual basis, they would have been required to make over the remaining term of the FFAs. The absence of express words requiring satisfaction of all conditions precedent in the first sentence of the Loss definition did not alter that conclusion.
5. The second sentence of the Loss definition covered payments withheld under the condition precedent in section 2(a)(iii)(1), because it used the contractual assumption of satisfaction of each applicable condition precedent. The Loss and Market Quotation measures were intended to produce broadly similar close-out results.
6. The analyses in Australia and New Zealand Banking Group Ltd v Societe Generale [2000] CLC 833 and Peregrine Fixed Income Ltd (In Liquidation) v Robinson Department Store Plc [2000] CLC 1328 supported that construction. The court independently reached the same conclusion and would in any event have followed the decision in Peregrine for consistency and certainty in Commercial Court decisions.

The judgment was a first-instance determination of a preliminary issue in two Commercial Court actions. Earlier orders directed that the nil-loss issue in each action be tried together.