Energy – punitive interest where there is “Significant Connection with England”

Summary

The Late Payment of Commercial Debts (Interest) Act 1998 implies a term in English law contracts for the supply of goods and/or services in the event of late payment by the purchaser. This ‘statutory interest’ is currently set at 8% above the Bank of England Base Rate and will apply where there is a “significant connection” between the contract and England.

In Vitol SA v Genser Energy Ghana Ltd [2022] EWHC 1812 (Comm), the Commercial Court held that a propane sales contract had a “significant connection” with England, where the payments were made in England and where major decisions in relation to the contract were made in England.

This is despite the fact that neither party was incorporated in the U.K. and the propane was to be delivered to the buyer in Ghana. The judgment highlights the potential breadth of application of statutory interest and comes as a warning to parties to consider expressly addressing the issue of remedies for late payment under English law governed contracts.

Background

Vitol SA (“Vitol”) agreed to sell propane to Genser Energy Ghana Ltd (“Genser”) under a trading agreement (the “SPA”).

The SPA was governed by English law and was amended numerous times.

One of the amendments provided for the right of either party to terminate the SPA for breach by the other party, and for the party in breach to pay a “Settlement Amount” to the non-breaching party, calculable by the non-breaching party in a “commercially reasonable manor”. Vitol brough a claim for a Settlement Sum around USD 3.5 million. Genser challenged the Settlement Amount claim on various grounds, which failed.

Another amendment – the “Seventh Addendum” – purported to introduce a late payment interest provision of 8% above LIBOR. Vitol sought to claim interest on the Settlement Amount of around USD 20,000. However, the Seventh Addendum was never signed and the court held that, on the facts, that it was not agreed, nor did the court consider that “any general agreement to pay interest on late payments” had been made. As a result, Genser was not obliged to pay the interest invoice.

However, the issue then arose as to whether Genser was liable to pay interest under the Late Payment of Commercial Debts (Interest) Act 1998 (the “1998 Act”). Article 4 of the Late Payment of Commercial Debts (Rate of Interest) (No 3 Order 2002 (SI 2002/1675) provided for a rate of 8% over the Bank of England base rate.

Genser argued that it was not liable, as section 12 of the 1998 Act provided that:

“This Act does not have effect in relation a contract governed by a law of a part of the United Kingdom by choice of the parties if:

(a) there is no significant connection between the contract and that part of the United Kingdom; and

(b) but for that choice, the applicable law would be a foreign law”

The issue for determination was whether the SPA had a “significant connection with England”.

Decision

Purpose of the 1998 Act

The Commercial Court first examined the purposes of the 1998 Act. It was considered that the statutory interest rate was not intended to be compensatory as it exceeded the rate at which most commercial creditors would be likely to have to borrow whilst being kept out of their money.

Rather it was properly to be regarded as a penal rate which was intended to act as a deterrent and to promote: (i) the need to protect commercial suppliers whose financial position made them particularly vulnerable if their debts were paid late; (ii) the general deterrence of late payment of commercial debts; and (iii) domestic socio-economic policy in seeking to promote the benefit of prompt payment of debts on the economic life of the United Kingdom.

A Significant Connection

The Commercial Court then considered that a “significant connection” was one which connected the substantive transaction itself to England. Whether connections provide a significant connection, singly or cumulatively, was a question of fact and degree in each case, but they had to be of a kind and a significance which made them capable of justifying the application of a domestic policy of imposing penal rates of interest on a party to an international commercial contract.

A disputes clause providing for English jurisdiction could not be a relevant connecting factor because that did not in itself connect the substantive transaction itself to England and because choice of forum governs procedural rights and remedies, not the substantive obligations.

Case Law

Finally, the Commercial Court turned to the relevant case law guidance in the judgment of Popplewell J in Martrade Shipping & Transport GmbH v United Enterprises Corpn [2014] EWHC 1884 (Comm), including his list of “non-exhaustive factors”:

“(1) Where the place of performance of obligations under the contract is in England. This will especially be so where the relevant debt falls to be paid in England. But it may also be where other obligations fall to be performed in England or other rights exercised in England…

(2) Where the nationality of the parties or one of them is English...

(3) Where the parties are carrying on some relevant part of their business in England. It may be thought that persons or companies who carry on business in England should be encouraged to pay their debts on time and not use delayed payment as a business tool even in relation to transactions which fall to be performed elsewhere... The policy of the 1998 Act may be engaged in the protection of suppliers carrying on business in England, whether financially vulnerable or not, even where the particular debts in question fall to be paid by a foreign national abroad.

(4) Where the economic consequences of a delay in payment of debts may be felt in the United Kingdom. This may engage consideration of related contracts, related parties, insurance arrangements or the tax consequences of transactions”.

[Emphasis added]

Application to the Facts

Vitol argued that there was a significant connection, as: (i) invoices were payable to Vitol in London; and (ii) critical decisions in relation to the SPA were taken in, and the key decision makers were based in, London.

Genser argued that the SPA itself did not require payment to be made to Vitol in London and that the invoices were not a permissible aid to the construction of the payment obligation. In any event, the invoice was said to be payable to a New York bank account:

TO : JPMORGAN CHASE BANK NEW YORK (SWIFT: CHASU33)

IN FAVOUR OF : JPMORGANCHASE BANK LONDON (SWIFT:CHASGB2L)

There was also a provision in the SPA that the “Payment Due Date” was to be determined by reference to New York Federal Reserve banking days, which, Genser argued, meant that the proper construction was that the payment obligation was in the USA.

The Commercial Court rapidly came to the conclusion that the ultimate beneficiary of the payments was Vitol in London and, as such, “Vitol is right to point to: (a) the ultimate payment obligation being payment of the debts in England and (b) the fact that Vitol was carrying on relevant parts of the commercial business in London as conferring a sufficient connection between the UK and the SPA for the purposes of the 1998 Act.”

Comment

In a wide-ranging, and detailed judgment, the decision on “significant connection” was only a small part, which may explain the relatively brief analysis given by the Commercial Court. The decision may come as a surprise to a number of participants in the energy sector.

The decision raises a number of issues:

1. Connecting Factors: many ‘international’ contracts in the energy sector, including product sales contracts, have little to do with England other than the choice of governing law, the payment into London bank accounts and the physical location of managerial staff making decisions in relation to the contract – such a ‘typical’ set of circumstances could now be said to trigger the possibility of statutory interest, even if a reasonable commercial bystander might have said: “this contract has nothing to do with England”.
2. Location of Payment Obligation: where a contract is silent on invoicing instructions, the default position is that the debtor must seek out the creditor (in this case, the Vitol entity was incorporated in Switzerland) – i.e. the act of performing payment would be conducted in the creditor’s territory – it might now be argued that this ‘default’ position can be ousted by invoicing instructions within the invoice itself.
3. How to Oust Statutory Interest:

• As noted in the judgment, Section 12 recognises that subjecting parties to a penal rate of interest on debts might be a discouragement to those who would otherwise choose English law to govern contracts arising in the course of international trade, and accordingly does not make such consequences automatic.
• Although parties cannot agree to waive statutory interest, under Section 8 statutory interest can be ‘ousted’, provided that the contract in question provides a “substantial remedy” for late payment of the debt. Where the parties agree a contractual remedy for late payment of the debt that is a substantial remedy, statutory interest is not carried by the debt.
• Any contractual remedy can be a “substantial remedy”, unless it is: (a) not sufficient the either to compensate the seller for late payment or to deter a late payment; and (b) unreasonable to allow the remedy to be used to circumvent statutory interest.
• As a result, the inclusion of a reasonable interest provision for late payment of sums due will almost certainly mean that penal interest under the 1998 Act cannot be claimed.

The judgment highlights the potential breadth of application of statutory interest and comes as a warning to parties to consider expressly addressing the issue of remedies for late payment under English law governed contracts.