OCEANBULK SHIPPING & TRADING SA V TMT ASIA LTD

[2010] UKSC 44, Supreme Court, Lord Phillips, Lord Rodger, Lord Walker, Lord Brown, Lord Mance, Lord Clarke and Sir John Dyson SCJ, 27 October 2010

Shipping - Forward freight agreements - Settlement contract - Whether without prejudice negotiations admissible as aid to construction of settlement contract

The parties entered into a series of forward freight agreements in the form of swaps. Each consisted of a bet on the settlement rate on the relevant day would be higher or lower than the contract rate, the seller betting that the market rate on the settlement dates would be lower than the contract rate and the buyer betting that it would be higher. As at the end of May 2008 TMI owed Oceanbulk US$40 million for that month and were likely to owe a further US$30 million for the following month. TMT failed to pay the May 2008 instalment and sought an extension of time. The parties then entered into "without prejudice" settlement negotiations, including two lengthy meetings on 19 and 20 June 2008. The parties entered into a written settlement agreement dated 20 June. There was an issue as to the construction of one of the terms in the agreement, and the question was whether it was permissible to refer to anything written or said in the course of the without prejudice negotiations: TMT wished to rely upon alleged representations made by Oceanbulk. The Supreme Court held that the general rule that, in construing a contract, all matters which form a part of the factual matrix and which to the knowledge of the parties have a bearing on the meaning of the words used are admissible, extends also to without prejudice negotiations. Such negotiations are thus admissible as an aid to construction. However, the exception is limited to evidence which is admissible in order to explain the factual matrix or surrounding circumstances to the court, and it does not affect the inadmissibility of evidence of pre-contractual negotiations.