Factual and Procedural Background
This appeal concerns the effect of 'internal hedging' in the context of a charterparty dispute between a large oil trading company (the Respondent) and the disponent owner of a vessel (the Appellant). The Respondent chartered the vessel to carry crude oil cargoes from West Africa to China. The trial judge held the Appellant liable for breach of the charterparty due to a six-day delay in the vessel reaching and completing loading at the second loading port, which caused an increase in the purchase price payable by the Respondent under its purchase contract. This increase was linked to a rise in the Brent Dated prices published by the Platts index between the date the bill of lading would have been issued but for the delay and the actual bill of lading date. The Appellant appeals only on the ground that the judge erred in not taking into account the Respondent's internal hedging arrangements in reducing damages.
The charterparty was dated 27 March 2020 for carriage of crude oil from West Africa to the Far East. The vessel was detained at Takoradi anchorage due to a court arrest related to third-party claims, causing delay to loading at the second port, Djeno. The judge found the Appellant liable for this delay, which postponed the bill of lading date from 6 May to 12 May 2020. The Respondent had purchase and sale contracts for the Djeno cargo, with purchase price determined by reference to Brent Dated prices published after the bill of lading date, and sale price linked to ICE Brent Futures prices on fixed dates unaffected by the delay.
The Respondent used an internal risk management system known as Vista to manage price risk. The system recorded physical trades and matched purchase and sale contracts into "Vista hedges," which are groups of transactions managed internally. The Respondent entered into internal swaps within Vista to hedge the pricing risk on the purchase contract, transferring risk between portfolios within the company rather than with external counterparties. These internal swaps were rolled to reflect the delayed loading dates, generating a notional gain in one portfolio offset by a loss in another, but no external hedging occurred specifically for this transaction.
The judge accepted the evidence that such internal hedging was common in the oil trading industry and that the internal swaps merely transferred risk within the company without creating an external benefit. The Appellant's argument at trial was that the internal hedge should be treated as if it were an external hedge and reduce damages accordingly. The judge rejected this, holding that a company cannot contract with itself and that only external hedges or mitigation steps taken with third parties can reduce recoverable loss.
Legal Issues Presented
- Whether internal hedging transactions within a single company (the Respondent) can be taken into account to reduce damages for breach of contract, in the same way as external hedges with third parties.
- Whether the benefit from internal hedging, which transfers risk between portfolios within the company, constitutes a collateral benefit that should reduce damages.
- Whether a new argument based on avoided external book hedging, not advanced at trial, should be permitted on appeal.
- The application of principles concerning mitigation of loss and the collateral benefit doctrine (res inter alios acta) to internal hedging and avoided loss scenarios.
Arguments of the Parties
Appellant's Arguments
- The internal hedging arrangements between different portfolios within the Respondent’s Vista system should be treated as equivalent to external hedges for the purpose of reducing damages.
- Relying on case law (Bremer Handelsgesellschaft mbH v Toepfer), the Appellant argued that different divisions within a company can be treated as separate entities for hedging purposes despite lacking separate legal personality.
- On appeal, the Appellant advanced a new argument that the avoided cost of an external "book hedge" on the Respondent’s net risk, which would have existed absent breach, should be taken into account as a benefit reducing damages.
- This new argument posited that the internal rolled swaps are a valid proxy for the avoided external hedge and associated loss, and that the judge erred in considering only the internal swaps themselves.
Respondent's Arguments
- The judge correctly held that internal hedging transactions merely transfer risk within the company and do not constitute an external benefit reducing loss.
- The internal swaps do not represent contracts with separate legal entities and thus cannot be treated as external hedges for mitigation or avoided loss purposes.
- The new argument on avoided book hedging was not raised at trial, involves new factual and legal issues, and requires findings of fact not made by the trial judge.
- There is no evidence that the Respondent would have externally hedged the oppositional pricing risk in the counterfactual scenario, and the internal Vista system’s workings do not support the Appellant’s assumptions.
- The new argument should not be permitted on appeal due to fairness, procedural, and evidential considerations, including the need for further evidence that might affect the outcome.
- Application of the collateral benefit doctrine (res inter alios acta) bars taking into account avoided loss from hypothetical external hedging not caused by the breach.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Bremer Handelsgesellschaft mbH v Toepfer [1978] 1 Lloyd's Rep 643; [1980] 2 Lloyd's Rep 43 |
Establishes that a company cannot contract with itself and that internal transactions between divisions are not equivalent to contracts with third parties. |
The court relied on this precedent to reject the Appellant’s argument that internal hedges between portfolios could be treated as external hedges reducing damages. |
| Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm) |
Benefit from external hedging taken as mitigation of loss caused by breach. |
The judge accepted that had the hedge been external, the benefit would reduce damages, a conclusion not challenged on appeal. |
| Glencore Energy UK Ltd v Transworld Oil Ltd [2010] EWHC 141 (Comm) [2010] 1 CLC 284 |
Mitigation principle: benefits from reasonable mitigation reduce damages. |
Supported the principle that external hedging benefits are relevant to loss assessment. |
| Swynson Ltd v Lowick Rose LLP (in liquidation) [2017] UKSC 32 [2018] AC 313 |
Collateral benefit doctrine (res inter alios acta): benefits not caused by breach or mitigation may be excluded from damage calculations. |
The court applied this principle to exclude benefits from internal hedging and offsetting transactions unrelated to the breach or mitigation. |
| Hussey v Eels [1990] 2 QB 227 |
Distinguishes avoided loss and credit for mitigation benefits; both relate to causation issues. |
Referenced to illustrate that both principles lead to the same factual and legal conclusions about damages. |
| Singh v Dass [2019] EWCA Civ 360 |
Guidance on raising new points on appeal, including fairness and efficiency considerations. |
The court applied these principles to refuse permission to advance a new argument on appeal requiring new evidence and findings. |
| Jones v MBNA [2000] EWCA Civ 514 (unreported) |
Parties must present their full case at trial; new grounds on appeal are generally disallowed to ensure finality and fairness. |
Supported refusal to permit the new argument on appeal as it was not raised at trial and would prejudice the Respondent. |
| Notting Hill Finance Ltd v Sheikh [2019] EWCA Civ 1337 [2019] 4 WLR 146 |
No absolute rule against new points on appeal but factors of fairness and procedural propriety are key. |
Considered in weighing whether to allow the new argument on appeal. |
| Pittalis v Grant [1989] QB 605 |
New points not raised at trial requiring new evidence will generally be disallowed. |
Applied to bar the new argument due to lack of trial evidence and findings. |
| Clements-Siddall v Dunbobbin Hotels Ltd [2023] EWCA Civ 1300 [2024] PIQR P4 |
Scope of a party’s case is defined by pleadings and trial documents; late new points may be disallowed if prejudicial. |
Supported the conclusion that the new point was outside the scope of the pleaded case and trial arguments. |
| Globalia Business Travel SAU v Fulton Shipping Inc (The New Flamenco) [2017] UKSC 43 [2017] 1 WLR 2581 |
Complex causation principles apply to mitigation benefits and collateral benefits in damages assessment. |
Referenced to illustrate the complexity of causation in mitigation and collateral benefit contexts. |
Court's Reasoning and Analysis
The court began by affirming the settled principle that benefits from external hedging taken as reasonable mitigation of loss caused by breach must be accounted for in damages. This principle was not disputed. However, the court carefully distinguished internal hedging transactions, which merely transfer risk within a single legal entity, from external hedges involving contracts with third parties. The judge’s rejection of the Appellant’s argument that internal hedges between portfolios could reduce damages was upheld on the basis that a company cannot contract with itself, and internal transfers do not constitute mitigation steps or confer real benefits to the company as a whole.
The court further examined the Appellant’s alternative argument that the internal risk transferred to one portfolio was offset by other unrelated physical trades within the company, which had the effect of reducing the Respondent’s overall loss. The court held that such offsetting benefits were not caused by the breach or mitigation steps and were therefore collateral benefits (res inter alios acta) that do not reduce damages.
The Appellant’s new argument on appeal, proposing that the avoided external book hedge and its associated loss should reduce damages, was analyzed in detail. The court applied established principles governing the admission of new points on appeal, emphasizing fairness, procedural propriety, and the need for evidential foundation. The new argument was rejected because it was not raised at trial, involved novel factual and legal issues, and required findings of fact not made by the trial judge. The court noted that the evidence was insufficient to establish the nature, timing, and terms of any hypothetical avoided hedge, or to demonstrate that the Respondent would have externally hedged the oppositional pricing risk in the counterfactual scenario.
The court also considered the collateral benefit doctrine and mitigation principles, concluding that the hypothetical avoided loss posited by the new argument could not be regarded as a step taken in mitigation of loss caused by the breach. The absence of a decision to hedge in the counterfactual scenario and the lack of causation between the breach and the hypothetical hedge rendered the argument legally unsound.
Accordingly, the court dismissed the appeal, finding the trial judge’s reasoning unimpeachable and the new argument inadmissible.
Holding and Implications
The court’s final decision is to DISMISS THE APPEAL.
The holding confirms that internal hedging transactions within a single legal entity do not constitute external mitigation steps and cannot reduce damages for breach of contract. Only benefits arising from external hedging or mitigation with third parties are relevant to damage calculations. The court also reinforces the principle that new arguments not raised at trial, especially those requiring new evidence and factual findings, will generally not be permitted on appeal to ensure fairness and procedural efficiency.
This decision directly affects the parties by affirming the trial judge’s damage assessment without reduction for internal hedging. It does not establish new precedent but clarifies the application of existing principles to internal risk management systems and the limits of raising new points on appeal.