#5219 - Glencore International V. Metro Trading - Conflict of Laws BCL

Glencore v. Metro

Facts

Until early February, 1998 MTI was engaged in the business of buying, blending and selling fuel oil. It bought fuel oil of various grades and other oil products from a variety of sources which it stored temporarily and then re-sold, after carrying out any necessary blending, either to vessels as bunker fuel for their own consumption or to traders on the international oil market as cargoes or part-cargoes of fuel oil. These activities were carried on in Fujairah itself and in the water off Fujairah using four large vessels, Metrotank, Nafkratis, Athenian Splendour and Sea Giant as floating storage tanks.

Glencore International A.G. ("Glencore"), Caltex Trading Pte. Ltd. ("Caltex"), Mobil Export Corporation ("Mobil") and Arexco International Ltd. ("Arexco") all entered into agreements at one time or another with MTI under which they delivered oil products to MTI for storage.

Metro Oil Corporation ("MOC"), an associated company of MTI, operated a refinery and oil storage facilities in Fujairah. In February, 1995 Texaco International Trader Inc. ("Texaco") entered into a processing agreement with MOC for the processing of crude oil. Under that agreement Texaco was to deliver certain quantities of crude oil to MOC and was to receive in return stipulated quantities of refined products.

In February, 1998 it became clear that MTI was insolvent and could not continue its operations. An inventory taken in early March that year showed that there remained in the possession of MTI about 750,000 tonnes of fuel oil, far less than the depositors calculated that it should have been holding. For example, Glencore alleges that MTI should have been holding over 2.5 m. tonnes of oil products to its order. Glencore, Caltex, Mobil, Texaco and Arexco (the "oil claimants") have all asserted proprietary claims to the remaining oil held by MTI.

During January and February, 1998 MTI sold various parcels of fuel oil to third parties in the form of bunkers and whole-cargo parcels. The receivers were authorized to get in the amounts due in respect of the sale of these goods. These amounts, which have become known as "the receivables", are subject to competing claims from MTI, the banks and the oil claimants who assert that the proceeds of sale now represent the oil sold by MTI which was their property.

Since MTI is insolvent, the litigation largely revolves around the question of title to the oil which remained in MTI's possession at the time the receivership order was made and to the oil and receivables which had been intercepted in the hands of the purchasers. The oil itself was delivered to and disposed of by MTI in Fujairah, but it was not suggested that any of the contracts under which that took place were governed by the law of Fujairah. The oil claimants disputed that, relying on the terms of the contracts between themselves and MTI and upon a different understanding of the effect of the law of Fujairah.

Questions

(a) What system of law governs the transfer of title to oil delivered by the oil claimants to MTI and by MTI to the purchasers and any non-contractual liabilities which MTI and the purchasers may have incurred to the oil claimants?

Issue A.1 - Whether, as a matter of English conflict of law principles, questions as to who, as between MTI and the respective oil claimant, acquired and/or retained and/or lost title to the relevant oil (upon and after the arrival of the oil within Fujairah territorial waters) are governed by English law (as the proper law of the relevant contracts) or Fujairah/UAE law (as the lex situs of the oil).

Holding

The General Rule

Mr. Schaff, Q.C. on behalf of Glencore recognized that the general rule in English law is that the passing of property in movables is governed by the lex situs. The position is summarized in Dicey & Morris, The Conflict of Laws, (13th ed.) at p. 963 as follows:

Rule 116 - The validity of a transfer of a tangible movable and its effect on the proprietary rights of the parties thereto and of those claiming under them in respect thereof are governed by the law of the country where the movable is at the time of the transfer (lex situs).

Does this rule apply as between immediate parties to a contract? Or does the proper law of the contract override this principle in that case?

Argument: He submitted, however, that some limits to this principle have already been recognized and that a further exception ought to be recognized where goods are transferred by one person to another under a contract. In matters of contract English law gives effect to the proper law of the contract and through it to the parties' intentions as expressed in the contract. Mr. Schaff submitted that when issues relating to the passing of property arise as between the immediate parties to the contract English law ought to resolve any conflict between the terms of the contract and the lex situs by recognizing and giving effect to the contract in accordance with its proper law in preference to the lex situs.

Rejected: Both the authorities and the commentators, therefore, clearly support the adoption of the lex situs rule as a rule of general application. However, in the absence of direct authority I think it right to examine the basis of the rule and to consider whether as a matter of principle Mr. Schaff is right in saying that there are grounds for adopting a proper law rule in cases which concern only the immediate parties to the transaction. The lex situs rule has been justified on two main grounds. The first is that it accords with the natural expectations of reasonable men and facilitates business. In Re Anziani Mr. Justice Maugham pithily observed that "business could not be carried on if that were not so". This reflects the natural expectation that a transaction which is effective to transfer title to goods by the law of the country in which they are situated will vest a good title in the transferee which will be recognized generally.

The second main ground is that it reflects the practical realities of control over movables. Mr. Schaff's answer to these points was that where property is disposed of by contract, as between the parties to the transaction the natural expectation of reasonable men is that property will pass in accordance with the contract, and that where no third party interests are involved practical control over the goods is of relatively little importance because contractual remedies will usually be sufficient to ensure that the goods are delivered or title is perfected.

Rejected: These arguments have their attractions, but ultimately I do not find them persuasive. In the first place, I do not think that questions of title to movables can properly be considered simply by reference to the positions of the parties to the transaction under which they are intended to be transferred. Consistency of principle requires that the same rule should apply whether or not third party interests are involved. In a situation of the kind posed by Lord Justice Diplock in Hardwick Game Farm it would be highly anomalous if questions of title to the goods were to be governed by English law as the proper law of the contract if the seller had not purported to re-sell the goods to a third party, but by German law as the lex situs if he had. Questions of title are most likely to be of importance when one party to the transaction is insolvent. The interests of third parties in the form of a general body of creditors may clearly be affected in such a case, but it would be equally anomalous if the law governing the passing of property depended on considerations of this kind. The reason for this difficulty is not hard to find: the very nature of title to movables is that it gives the person in whom it is vested rights which can be maintained against all other parties.

Secondly, I think Mr. Schaff's argument fails to pay sufficient regard to the practical considerations of control over movables. It assumes that the transaction has given rise to rights in personam which the Courts can and will...