To Hedge or not to Hedge? That is the (mitigatory) question.

Hedging contracts are well established in the Oil & Gas industry.  It is a common risk management measure used to reduce a party’s exposure to the constantly fluctuating oil prices.  Essentially, under a hedging contract, companies can establish their prices at a fixed price through a commodity swap or option. Hedging contracts are second nature to the industry, and most traders would not give a second thought as to whether such arrangements are reasonable.  However, it was this very issue that was put forth before both the High Court and the Court of Appeal in Apex Energy International Pte Ltd v Wanxiang Resources (Singapore) Pte Ltd [2020] SGHC 138.  The Singapore Courts had to determine whether, following a breach of contract of sale, whether a hedging arrangement was a reasonable mitigation in the quantification of the aggrieved parties losses.  We successfully acted for Apex Energy in proving that a hedging arrangement is a reasonable mitigation measure.


Apex, a Singapore incorporated company, was participating in an anticipated tender by S-Oil, a major South Korean oil refinery for the sale of Light Cycle Oil (“LCO”).  To participate in the tender, Apex entered into an arrangement with Wanxiang, where the intention was for Apex to purchase LCO from S-Oil, and subsequently sell the LCO to Wanxiang at a profit of USD 0.10 per barrel.  Wanxiang would subsequently sell the LCO to a potential buyer.  The agreement was made via email, text-messages and WhatsApp conversations.   A key component of the agreement was that the price of per barrel of LCO consisted of a fixed (and non-negotiable) component, set at the month average of the MOPS GO 500p price index in December 2017, and a price premium of USD 11.90 per barrel.  However, shortly after the deal recap was sent from Apex to Wanxiang, Wanxiang’s buyer backed out of the deal.  Wanxiang then contended that there was no legally binding contract between the parties.

To cut its losses, Apex entered into a sale contract with a third party (“Alternative Sale”).  Under this contract, the sale price was the month average of the MOPS Go 500p price index in January 2018, with a price premium of USD 9 per barrel.  As this exposed  Apex to the risk of price fluctuations between December 2017 and January 2018, Apex entered into a gasoil hedging arrangement with the Intercontinental Exchange (“Hedging Arrangement”).  The effect of this Hedging Arrangement was to guarantee a loss of USD 0.40 per barrel of gasoil hedged, but completely remove Apex’s exposure to any price movements (positive or negative) for the hedged quantities of gasoil.  Apex then commenced proceedings against Wanxiang to recover its losses.

Amongst other contentions (i.e. whether a valid contract was made, and whether Wanxiang breached the contract), Wanxiang contended that Apex’s attempt to mitigate its losses by way of the Alternative Sale and the Hedging Arrangement was unreasonable.   Importantly, Wanxiang stated that if Apex had not entered into the Hedging Arrangement, Apex would have made a profit from the Alternative Sale, and that in any event, the Alternative Sale was unreasonable as the price premium of USD 9 per barrel was unreasonably low.

Court’s decision

The High Court and the Court of Appeal were not convinced by Wanxiang’s contention.

Firstly, with respect to the sale price of the Alternative Sale, the High Court stated, and the Court of Appeal affirmed, that Apex was under no obligation to make any effort to obtain the best price available when mitigating its losses. The Court emphasized that it is not open to a party in breach of contract to be astute in criticising the adequacy of mitigating steps taken by the innocent party.  Ultimately, the reasonableness of mitigation is one that is assessed objectively whilst taking into account subjective circumstances, and reflects commercial and fact-sensitive fairness.  The Court found that there are many factors that affect the price which may be obtained for goods, and that it is not unreasonable for potential buyers to drive a hard bargain and extract lower prices.  This is especially so in Apex’s case as Apex is a trader of commodities, plays an intermediate role, and thus has unexpected inventory.  Thus, Apex was reasonable to enter into the Alternative Sale, albeit at the lower price.

Secondly, the Court found that the Hedging Arrangement was reasonable.  The Court did not accept Wanxiang’s contention that Apex had sought to speculate in the market by hedging gasoil.  The Court instead found that the only benefit under the Hedging Arrangement that Apex could have derived was the guaranteeing of a fixed loss of US$0.40 per barrel of gasoil hedged in exchange for avoiding the possibility of sustaining an even larger loss.  It agreed that there was no element of profit in Apex’s side of the Hedging Arrangement and that there is no conceivable way in which Apex’s actions could be characterised as speculation. The Court firmly stated that Apex had acted out of an abundance of caution.

The Court’s conclusion on the reasonableness of the mitigation is a welcome judgment.  This decision, if anything, shows that the Court is sensitive to the commercial realities of transactions and industry practice.  The Court is alive to the fact that such hedging arrangements are a dime a dozen in the Oil & Gas industry, and that for an aggrieved party, a hedging arrangement provides a sense of security against the possibility of future losses.  Rest assured, hedging contracts are reasonable sources of mitigation, but be forewarned, the reasonableness of your actions depends on the circumstances surrounding your mitigatory actions.

To Hedge or not to Hedge?  If it is reasonable, by all means, hedge away.

For More Information

If you have any questions about this Alert, please contact Sarbjit Singh Chopra, Niranjanaa Ram, any of the attorneys in our Singapore office or the attorney in the firm with whom you are in regular contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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