O.W. Supply & Trading A/S’ derivative agreements
One of the reasons why the OW Bunker Group collapsed back in 2014 was the many derivative agreements the group had entered into with various counter parties. The derivative agreements were mainly handled through the entity O.W. Supply & Trading A/S based in Aalborg, Denmark (hereinafter “OW Bunker”).
The majority of these derivative agreements were either based on the standard ISDA Master Agreement or governed by OW Bunker’s own standard terms and conditions for derivative trading, which contained almost identical terms as the ISDA Master Agreement.
Both OW Bunker’s own standard terms and conditions for derivative trading and the ISDA Master Agreement are governed by English law and have an exclusive English jurisdiction clause and contain a specific provision which suspends payment obligations in case of a party’s insolvency.
As established in the case Lomas v JFB Firth Rixson Inc, such “no payment clauses” can be upheld according to English law.
The Danish Trading and Securities Act
In March 2015, the Estate of OW Bunker filed more than 25 law suits in Denmark against a its former derivative trading partners where the estate was “in the money”. The Estate of OW Bunker argued that both the English law clause and jurisdiction clauses should be set aside.
The Estate of OW Bunker pleaded to invoke section 58 H, second sentence of the Danish Trading and Securities Act, which states that in case of insolvency, the trustee can:
“demand that the close-out netting shall be carried out in such a manner that the conditions applicable to the parties are the same as they would have been if close-out netting had been effected without undue delay after the time when the non-defaulting party knew, or should have known, that the defaulting party was made subject to insolvency proceedings.”
Jurisdiction and applicable law
In the Danish law suits, the former derivative partners have pleaded for the courts to dismiss the cases because of the violation of the English law and jurisdiction clauses.
The cases raise a number of questions.
- What does it take to overrule the English law and jurisdictions clause?
- If the English jurisdiction clause can be overruled is there otherwise jurisdiction to hear the cases in Denmark?
- If the English law clause can be overruled does section 58H of the Danish Trading and Securities Act apply to the merits?
In all the cases that these authors are aware of the question of jurisdiction was carved out and heard separately.
According to Danish law, the test applied when trying to override a jurisdiction clause in such a situation is whether the underlying matter is to be considered as hardcore bankruptcy. If that is the case, then it is possible to override the jurisdiction clause in the derivative agreement. If, on the contrary, the underlying matter relates to general contract interpretation, the jurisdiction clause will be upheld and the payment obligations thus suspended as we saw in the LOMAS case.
Danish case law
The majority of the cases between the Estate of OW Bunker and its former derivative trading partners have been settled, however one case has been heard by the Danish Eastern High Court and three have been heard in the District Court of Aalborg.
In all cases the estate had two substantial pleadings, namely that 1) the defendants should admit that the Estate of OW Bunker had the right to invoke section 58 H, second sentence of the Danish Trading and Securities Act, and 2) that the “no payment clause” was invalid under Danish law.
In the High Court case, the Estate of OW Bunker had filed suit against a Danish shipping company, and thus to begin with only had to lift the burden of proof that the jurisdiction clause could be derogated from.
In its decision from 9 March 2017 the High Court stated that the entire case had an amount of bankruptcy related issues making it possible to derogate from the jurisdiction clause.
The three cases in the District Court of Aalborg were identical to the one in the High Court with one important difference: None of the three defendants were domiciled in Denmark or had any assets in Denmark. Thus, in addition to proving that the matter related to hardcore bankruptcy issues and thus setting aside the jurisdiction clause, the Estate of OW Bunker also had to provide grounds for Danish jurisdiction.
As the question of whether the matter concerned bankruptcy had already been decided by the High Court, the Estate of OW Bunker argued for Danish jurisdiction based on section 242 of the Danish Administration of Justice Act.
According to this specific provision, legal proceedings concerning contractual relationships may be instituted in the court for the judicial district in which the obligation giving rise to the claim has been performed or is to be performed. However, and very important, this does not apply to money claims.
The Estate of OW Bunker tried to argue that the matter did not relate to a money claim as the Estate of OW Bunker had specifically not initiated a money action but a declaratory action simply wanting a judgment stating that they had the right to invoke section 58 H, second sentence of the Danish Trading and Securities Act. The Estate stated that if such right was awarded it would not collect under the judgment but would have to initiate new actions to collect. The Estate of OW Bunker also argued that the payment under a derivative contract was not a performance in itself but the result of the true performance which was to calculate the fluctuation of the oil price and produce the invoices and that such performance was carried out in Denmark.
On the other side of the table, the defendants argued that despite the smoke screen orchestrated by the Estate of OW Bunker, the claims were nothing but money claims in disguise.
The District Court agreed with the defendants and dismissed the three cases on 21 August 2017 as it found that the claims had to be characterized as money claims and thus could not give rise to Danish jurisdiction.
The conclusion is a little bizarre. A Danish ship owner who wants to hedge his bunker costs and does so via a derivative agreement with a Danish trader who goes bankrupt must tolerate that Danish bankruptcy law will likely override the law and jurisdiction clause and take away the ship owners right under the contract whereas a non-Danish ship owner does not face the same challenge.