On 28 February 2019, the High Court of England and Wales granted summary judgment in favour of Cargill International Trading PTE Limited for its final claims against Uttam Galva Steels Limited, one of the largest steel manufacturers in India. This means that, under the terms of two contracts, Uttam must pay default compensation to Cargill at a rate of one-month LIBOR plus 12%. When combined with other orders made by the English court, Uttam owes Cargill over US$85.7 million to date. In the proceedings, four English judges, including three in the High Court and one in the Court of Appeal, have decided in favour of Cargill and against Uttam. This is one of the first cases to apply the UK Supreme Court’s seminal commercial decision in Cavendish Square v Makdessi [2015] UKSC 67 (judgment here), which has redefined English law as to when contractual obligations are an unenforceable penalty. The Cavendish decision was of such commercial significance that, unusually, it was decided by seven Supreme Court Justices. There has been extensive debate among academics and legal practitioners as to how the new, fact-dependant test laid down will be applied in practice.

Background

In 2015, Cargill and Uttam had entered into two contracts, under which Cargill could make advance payments to Uttam. Uttam was then required either to sell steel to Cargill in the amount advanced or to repay the advance. Uttam drew down the full amount of the advance facilities, totalling US$61.8 million but defaulted in 2016. Uttam has failed to make any repayment of the defaulted amounts to Cargill.

In August 2017, Cargill issued a claim in the High Court of England of Wales for the debt owed by Uttam, including both the principal amount and the default compensation Uttam is required to pay under the contracts.

The judgment

A hearing on 28 February 2019 dealt with Cargill’s claim for default compensation which in favour of Cargill, and in an important judgment expected to be of interest to commercial parties generally, Mr Justice Bryan rejected Uttam’s three defences.

First, the Judge found that the default compensation rate was enforceable and not a penalty as a matter of English law. Cargill had a legitimate interest in repayment of the debt. The contractual rate was commercially justifiable. Mr Justice Bryan said:

The evidence before me is that this rate was the commercial norm for Indian companies comparable to Uttam ... There has not been contrary evidence to that evidence, notwithstanding Uttam having had every opportunity to adduce similar evidence as to market rates, and notwithstanding the fact that no less than four witness statements have been served, including two outside the mandated time and once the point was fully in play.

In any event I consider the rate speaks for itself … it appears to be an entirely normal commercial rate set against the backdrop of unsecured lending in circumstances where by this stage the recipient of the loan is … in default and as such a considerably greater credit risk.

Second, the default compensation clause had been validly incorporated into the contracts, which were stamped and signed on every page by Uttam. As a matter of law, Uttam was bound even if it had not read the terms. Mr Justice Bryan said:

There is no documentary evidence before me to support the assertion that these were standard form contracts of Cargill, still less that the terms were imposed upon Uttam ...

In this regard the associated witness evidence on behalf of Uttam is entirely lacking in any contemporary documentary support, which one would have expected Uttam to be able to produce if there had been any substance in the argument advanced, and its new argument lies uneasily with the description of the relationship in the existing Defence supported, as I say, with a Statement of Truth (a description which also appeared in one of the earlier witness statements lodged on behalf of Uttam).

Third, Mr Justice Bryan concluded that the default compensation clause was not illegal under Indian law. The Indian regulations relied upon by Uttam did not, by their ordinary and natural meaning, apply to the default compensation rate.

It is not known whether Uttam will seek to appeal the judgment.

Cargill's team

Tom Snelling (partner) and Victor Tong (associate) of Freshfields Bruckhaus Deringer LLP acted for Cargill, a long-standing client of the firm. Freshfields instructed a barrister team from Essex Court Chambers that has consisted of David Foxton QC, Jackie McArthur and Helen Morton.