The Court of Appeal heard and dismissed an argument made on behalf of Rhine Shipping DMCC that the Commercial Court had erred in holding that the effect of internal hedging arrangements on the losses claimed by a commodities trader were irrelevant in mitigation. Henry Setiono, Senior Associate, CJC Singapore, reviews Rhine Shipping DMCC v Vitol S.A. [2024] EWCA Civ 580.

In a revisit to Rhine Shipping DMCC v Vitol S.A., the Court of Appeal considered the effect of internal hedging arrangements on the losses claimed by a commodities trader, after the High Court had refused to take such arrangements into account.

Background

In 2023, the Commercial Court in Rhine Shipping DMCC v Vitol SA [2023] EWHC 1265 (see here for brief facts of the case and our commentary) found that gains or losses derived from internal hedges/swaps, which were entered into as part of Vitol’s risk management strategy of identifying its overall net exposure across the company, cannot be included as mitigation when assessing damages.

Rhine appealed the decision on the ground that the High Court had erred in holding that the internal swaps were irrelevant in mitigation. Rhine also made a new (and alternative) argument that Vitol had avoided the cost of a “book hedge” on Vitol’s net book risk which would, absent Rhine’s breach, have been required to hedge the risks which were in fact met by the oppositional rolling of the swaps (the “New Argument”).

The Court of Appeal (“CA”) heard the appeal in May 2024 and dismissed it. The CA agreed with the High Court’s reasoning on the issues that were determined in the first hearing. Perhaps more interestingly, the CA refused to permit the New Argument on procedural grounds – determining the New Argument would require further factual findings, not made by the trial Judge, on which it is likely that further evidence which might affect the outcome could and would have been adduced at trial by Vitol. In short, if Rhine had wanted to pursue it, the New Argument should have been made at the original trial.

Rhine’s New Argument

Rhine’s New Argument may be summarised as follows:

1. The price for which Vitol was to buy the subject cargo of 920,000bbls of Brent crude (the “Cargo”) was determined by the date the bill of lading (“B/L”) was issued. Rhine’s breach caused the delay in issuing the B/L, resulting in an increase (of some USD 3.6m) to the purchase price of the Cargo.
2. Rhine’s breach exposed Vitol to a directional price risk, of a rise in the market price of the Cargo. This pricing risk was added to Vitol’s overall net position and would not have existed but for the breach. This risk was then automatically matched somewhere within Vitol’s Vista system by an opposite directional price risk, of a fall in the market price for the Cargo.
3. In the absence of Rhine’s breach, that oppositional risk of a fall in the market would have existed within Vitol’s book, but without the matching market increase risk that was created by Rhine’s breach. Vitol’s policy was to hedge risk wherever possible; and the inference from the Judge’s findings and/or the evidence from the witnesses, was that Vitol would not have retained such oppositional risk for it to run speculatively.
4. Accordingly, in the absence of breach, Vitol would have bought an external hedge of the oppositional risk of a decrease in price equivalent to the Cargo, which would have created a loss. However, because of Rhine’s breach, that loss was now avoided. Although the precise terms of that hedge and that loss are impossible to assess precisely, it is inferable from the evidence that it would have been the same as the internal hedges / swaps.
5. In this regard, Rhine argues that the Judge’s analysis erred in principle because it considered only the effect of the internal swaps themselves, but not also the net effect of the rolling on Vitol’s hedging policy and overall net hedging needs.

Rhine attempted to rely on the trial evidence to support their New Argument. The CA held that they could not because the evidence was simply not there, was insufficient, or was taken in a different context that could not apply to the New Argument. In other words, without specific factual findings from the High Court, the CA could not itself decide on whether the claim had merit or not. Therefore, Rhine would not be allowed to pursue the argument.

Commentary

Following the CA’s decision, the position remains as set out in the High Court. As we observed following the High Court decision, while on its face the decision may be considered to be favourable for a commodity trader, in that Vitol did not have to account for a notional ‘profit’ on its internal swaps, presumably the reverse would also be the case; had Vitol suffered a loss on its internal swaps, it would not have been able to claim this loss either.

Otherwise, the case is a reminder that it is the High Court (or arbitration tribunal, where applicable) which is responsible for making findings of fact. If a party wants to run a new argument on appeal for which there is no basis in the factual findings below, they will likely face difficulty.