Can you contract with yourself?
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A voyage delayed
Rhine entered into an agreement—a voyage charter of a crude tanker, the Dijilah—with Vitol. During the voyage, the vessel was delayed. Rhine had a claim against Vitol for unpaid demurrage (liquidated damages for delay) the sum for which was agreed between the parties. The delay also caused Vitol to pay an increased price to the seller of the cargo. The dispute was about how much should be set-off against the demurrage claim for Vitol’s counterclaim for the price increase.
Rhine argued when calculating Vitol’s loss, the court should take account of Vitol’s internal hedging system, known as Vista. If it did so Vitol’s loss would be reduced.
A risk management process
The Vista system allowed Vitol to understand the overall risk presented by groups of transactions. Sales and purchases of cargo were entered on the system. Vitol’s brokers sought seek to “match” these entries and group them together as portfolios within the Vista system. Vitol also entered into “swaps” between portfolios to hedge against potential price increases caused by any delays. Crucially, all these transactions were not with external counterparties, but were always internal to Vitol.
There is case law saying that if a party enters into an external hedge to mitigate its losses, the profit made by those hedges will reduce the recoverable loss. But did this apply to internal hedging?
A contract with itself?
Rhine argued that even if the swaps were internal, there was no reason why a legal person cannot contract with itself and that internal contract can still have a real binding effect. It relied on a case from the 1980s where the Court of Appeal had found that, as against the background of a particular recognised practice where one office of a company had sometimes “traded” with another, it was right to describe one of the offices as a “subsequent seller” for the purposes of the GAFTA rules.
However the Court of Appeal had emphasised that the arrangements between those offices were not contracts of sale, stating “just as an individual cannot make a contract with himself which could have any conceivable legal effect, so also different branches of the same corporate legal entity, not themselves separate legal entities, cannot make contracts with one another. That would be precisely the same, in legal analysis, as an individual purporting to contract with himself,…”
Accordingly the High Court in this case held that the the internal swaps were not legally recognised as binding contracts. They were internal arrangements within Vitol, and they did not affect Vitol’s profit or loss.
Judgment: Rhine v Vitol