It has been usual for commodity traders to consider managing the risk of movement in the market price of the commodity which they are buying and selling by taking out a derivative contract which more or less cancels out possible movement in the price (“external hedging”). Where there is market price movement associated with a breach of contract, should a trader’s hedging profits and losses be taken into account? Or should they be ignored as being collateral to the breach of the contract? Should the position be different if instead of taking out derivative contracts with external parties, the trader matches off price risks internally (“internal hedging”)?
Although issues concerning the relevance of hedges to the assessment of damages arise often in practice, there are few reported cases.
The first instance and Court of Appeal judgments in Rhine Shipping v Vitol have grappled with some of the questions arising and, in particular, the relevance of internal hedging to the assessment of damages.
This seminar will consider whether the Court’s judgments in Rhine Shipping v Vitol provide clear legal guidance or have they muddied the waters? From an industry perspective, should internal hedging be treated the same as external hedging and taken into account when determining quantum in commodity or shipping cases involving market movement the price risk of which can be managed by derivatives? If so, should this work both for and against parties?
Specific issues for discussion will include:
• What is Hedging?
• What is Internal Hedging?
• The state of the law before Rhine Shipping v Vitol
• What was decided in Rhine Shipping v Vitol?