Mabanaft wins damages for LPG contract default
Singapore, 10 October (Argus) — A US judge has ruled in favor of trading firm Mabanaft's request seeking damages from a Chinese buyer who defaulted on a US LPG export contract.
Mabanaft filed a lawsuit in the Harris County District Court in Texas last November after China-based Oriental Energy defaulted on a six-year term propane contract signed in October 2013, which was scheduled to begin at the start of 2017.
Mabanaft alleged Oriental Energy breached the contract for purchase of propane at the Houston Ship Channel when the Chinese firm failed to supply a letter of credit — as required under that agreement — and failed to nominate and lift propane shipments from Mabanaft. Oriental Energy said the letter of credit required was illegal under Chinese law and gave it cause to walk away from the deal.
The six-year term contract was for a minimum of 83,600t and up to a maximum of 92,400t of propane to be loaded each month between January 2017 and December 2022. The contract, set on a Mont Belvieu number plus a terminaling fee, was entered into at a time when the US arbitrage to Asia stood at approximately $300/t. By January 2017, when OE was required to buy the cargoes, that arbitrage had shrunk to $120/t.
Mabanaft issued two invoices to the Chinese firm in early February 2017 seeking approximately $550mn in liquidated damages after the breach of the 2013 agreement, according to a videotaped deposition on an official at Oriental Energy.
Oriental Energy filed a counterclaim in August 2017 to excuse itself from the agreement, calling its performance as "impossible" and that it "should be excused under the doctrine of commercial impracticability." It added that the liquidated damages language used was ambiguous and an invalid penalty.
But the court concluded the term contract between both firms was valid and enforceable and the breaches made by Oriental Energy material.
"It is not surprising that one party or another comes to realize that it made a bad bet and begins looking for a way out of the obligation," Judge Jeff Shadwick wrote. "Where the subject matter of the agreement is a bet about the future, liquidated damages made perfect sense, and OE China's breach cannot be immaterial where it is used as an excuse to escape the downside of its bet." A monetary judgment in the case will be made at a later date. Whether or not the trader will be able to collect the money from the China-based company is unclear.
The disagreement comes as higher US propane prices closed the arbitrage from the US Gulf coast to Asia-Pacific for much of last year, resulting in a number of cancelled and delayed cargoes from US terminals from June 2016.
Term buyers that signed contracts for US propane supplies in 2013 — when US prices were at an average discount of $327/t to values in Asia-Pacific — are now turning to the spot market to secure cheaper cargoes.
Nevertheless, most Asia-Pacific term buyers of US LPG continue to load cargoes in spite of the closing of the outright price arbitrage between the two regions. US exports to Asia-Pacific rose by 33pc year-on-year to 8.43mn t in the first six month of this year, EIA data showed.