{"id":244,"date":"2021-05-11T22:05:36","date_gmt":"2021-05-12T02:05:36","guid":{"rendered":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/?p=244"},"modified":"2021-05-11T22:53:12","modified_gmt":"2021-05-12T02:53:12","slug":"to-hedge-or-not-to-hedge-that-is-the-mitigatory-question","status":"publish","type":"post","link":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/2021\/05\/11\/to-hedge-or-not-to-hedge-that-is-the-mitigatory-question\/","title":{"rendered":"To Hedge or not to Hedge? That is the (mitigatory) question."},"content":{"rendered":"

Hedging contracts are well established in the Oil & Gas industry.\u00a0 It is a common risk management measure used to reduce a party\u2019s exposure to the constantly fluctuating oil prices.\u00a0 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.\u00a0 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<\/em> [2020] SGHC 138.\u00a0 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. \u00a0We successfully acted for Apex Energy in proving that a hedging arrangement is a reasonable mitigation measure.<\/p>\n

<\/p>\n

Facts<\/strong><\/p>\n

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 (\u201cLCO<\/strong>\u201d).\u00a0 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.\u00a0 Wanxiang would subsequently sell the LCO to a potential buyer.\u00a0 The agreement was made via email, text-messages and WhatsApp conversations.\u00a0\u00a0 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.\u00a0 However, shortly after the deal recap was sent from Apex to Wanxiang, Wanxiang\u2019s buyer backed out of the deal.\u00a0 Wanxiang then contended that there was no legally binding contract between the parties.<\/p>\n

To cut its losses, Apex entered into a sale contract with a third party (\u201cAlternative Sale<\/strong>\u201d).\u00a0 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.\u00a0 As this exposed\u00a0 Apex to the risk of price fluctuations between December 2017 and January 2018, Apex entered into a gasoil hedging arrangement with the Intercontinental Exchange (\u201cHedging Arrangement<\/strong>\u201d).\u00a0 The effect of this Hedging Arrangement was to guarantee a loss of USD 0.40 per barrel of gasoil hedged, but completely remove Apex\u2019s exposure to any <\/em>price movements (positive or negative) for the hedged quantities of gasoil.\u00a0 Apex then commenced proceedings against Wanxiang to recover its losses.<\/p>\n

Amongst other contentions (i.e. whether a valid contract was made, and whether Wanxiang breached the contract), Wanxiang contended that Apex\u2019s attempt to mitigate its losses by way of the Alternative Sale and the Hedging Arrangement was unreasonable.\u00a0\u00a0 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.<\/p>\n

Court\u2019s decision<\/strong><\/p>\n

The High Court and the Court of Appeal were not convinced by Wanxiang\u2019s contention.<\/p>\n

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.\u00a0 Ultimately, the reasonableness of mitigation is one that is assessed objectively whilst taking into account subjective circumstances, and reflects commercial and fact-sensitive fairness.\u00a0 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.\u00a0 This is especially so in Apex\u2019s case as Apex is a trader of commodities, plays an intermediate role, and thus has unexpected inventory.\u00a0 Thus, Apex was reasonable to enter into the Alternative Sale, albeit at the lower price.<\/p>\n

Secondly, the Court found that the Hedging Arrangement was reasonable.\u00a0 The Court did not accept Wanxiang\u2019s contention that Apex had sought to speculate in the market by hedging gasoil.\u00a0 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.\u00a0 It agreed that there was no element of profit in Apex\u2019s side of the Hedging Arrangement and that there is no conceivable way in which Apex\u2019s actions could be characterised as speculation. The Court firmly stated that Apex had acted out of an abundance of caution.<\/p>\n

The Court\u2019s conclusion on the reasonableness of the mitigation is a welcome judgment.\u00a0 This decision, if anything, shows that the Court is sensitive to the commercial realities of transactions and industry practice.\u00a0 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.\u00a0 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.<\/p>\n

To Hedge or not to Hedge?\u00a0 If it is reasonable, by all means, hedge away.<\/p>\n

For More Information<\/strong><\/p>\n

If you have any questions about this\u00a0Alert<\/em>, please contact Sarbjit Singh Chopra<\/a>, Niranjanaa Ram<\/a>, any of the attorneys in our Singapore office or the attorney in the firm with whom you are in regular contact.<\/p>\n

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\u2019s full disclaimer.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Hedging contracts are well established in the Oil & Gas industry.\u00a0 It is a common risk management measure used to reduce a party\u2019s exposure to the constantly fluctuating oil prices.\u00a0 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 … <\/p>\n

Continue reading “To Hedge or not to Hedge? That is the (mitigatory) question.”<\/span><\/a><\/p>\n","protected":false},"author":435,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[138],"tags":[142,139,8,141,140],"ppma_author":[79],"class_list":["post-244","post","type-post","status-publish","format-standard","hentry","category-litigation","tag-agreements","tag-commodities","tag-contracts","tag-oil-gas","tag-trade-finance"],"authors":[{"term_id":79,"user_id":435,"is_guest":0,"slug":"duanemorrisselvam","display_name":"Duane Morris and Selvam","avatar_url":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-content\/uploads\/sites\/51\/2020\/10\/dmlogo.jpg","0":null,"1":"","2":"","3":"","4":"","5":"","6":"","7":"","8":""}],"_links":{"self":[{"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/posts\/244","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/users\/435"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/comments?post=244"}],"version-history":[{"count":0,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/posts\/244\/revisions"}],"wp:attachment":[{"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/media?parent=244"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/categories?post=244"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/tags?post=244"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/blogs.duanemorris.com\/duanemorrisandselvam\/wp-json\/wp\/v2\/ppma_author?post=244"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}