News / 10-03-2023 / London

Glencore Energy UK Ltd v. NIS J.S.C. Novi Sad (Ottoman Equity) [2023] EWHC 370 (Comm)

This dispute related to a sale contract for a cargo of crude oil. It was accepted by the parties that the cargo was contaminated. The issue, however, was whether and the extent to which the settlement agreement they subsequently entered into limited the buyer’s right to claim reimbursement for storage fees it incurred to the terminal operator in respect of the contaminated cargo.

The Court was required to construe the terms of the settlement agreement in their commercial context, to consider the scope of the parties’ contractual duty to discuss and agree level of reimbursement in good faith and to determine the prevailing market rate for storage fees based on expert and other available evidence.

The background facts

On 24 January 2019, the parties entered into a sale contract for a cargo of KBT crude oil for delivery at Omisalj, Croatia. KBT crude oil comes from Iraq and is exported via the Kirkuk-Ceyhan oil pipeline and is loaded into tankers at Ceyhan, Turkey. The cargo was to be delivered at Omisalj either DES (ex-ship) or ITT (transfer from tank at Omisalj under seller’s control).

Pursuant to the sale contract, the seller procured a performance bond of up to US$20 million to secure performance of its obligations under the sale contract.

The cargo was loaded on board the vessel at Ceyhan and arrived at Omisalj in late December 2019. It was discharged into two tanks belonging to the terminal operator, Janaf, at Omisalj and nearby Sisak. When the cargo was tested, it was found to have unacceptably high levels of chloride. This fell foul of Janaf’s terms and conditions because it could adversely affect other cargoes being transported or damage Janaf’s installations.

The parties discussed how to resolve the situation. In the meantime, some of the cargo had already been transported to the buyer’s refinery. The seller had also managed to persuade its supplier to take back some of the contaminated cargo. Janaf submitted a statement of claim for damage caused by the contamination as well as for “ad hocstorage”. This was passed on to the seller.

The vessel that was to lift the cargo going back to the supplier had to do so by no later than 19 March 2020. Therefore, given the time constraints, the parties concluded a settlement agreement on that day.

The settlement agreement

Clauses 33 to 36 of the settlement agreement were the focus of the parties’ subsequent dispute over storage fees. Clauses 33 to 34 limited the scope for the buyer to pass on any claims from Janaf, subject to the buyer being able to seek an indemnity/reimbursement for claims made by Janaf for storage fees “to the extent that such liability accurately reflects (i) the actual loss suffered by Janaf and (ii) prevailing market rates during the period when the Cargo was stored in the Janaf system.” Further, the parties would discuss in good faith with a view to agreeing the level of reimbursement.

Clause 35 stated that the agreement was in full and final settlement of all claims save, among other things, any claims by Janaf for storage to the extent that the liability reflected actual loss and the prevailing market rates for storage.

Clause 36 stated that any and all claims between the parties would be presented and dealt with in accordance with the 2019 sale contract.

The dispute

The buyer made a demand for US$2,094,000 under the performance bond. The seller sought repayment of this sum. The dispute was over whether and to what extent the buyer could claim reimbursement in respect of storage charges incurred to Janaf.

The seller contended that the buyer could only recover storage charges that it paid to Janaf if and to the extent that those charges reflected: (i) an actual loss suffered by Janaf; and (ii) prevailing market rates for storage. The buyer contended that the parties were required to discuss in good faith the storage claims but, in the absence of any agreement, the buyer was entitled to claim those costs under the sale contract without the settlement agreement limiting the claim in any way.

The seller also submitted that "actual loss" meant a loss suffered because Janaf was prevented from renting out the relevant tanks which were being used to store contaminated cargo and that, if Janaf was not financially worse off as a result of storing the cargo, the seller had no liability. It argued further that the "prevailing market rates for storage during the period when the Cargo was stored in the Janaf system" meant typical rates for planned, "take or pay" storage of uncontaminated crude at comparable terminals, including but not limited to Omisalj.

The buyer, on the other hand, submitted that, if Janaf's tanks were being used for storage, Janaf suffered an "actual loss". It maintained that the market rates had to be for storage in the circumstances encountered here, namely the emergency and ad hoc storage of this quantity of contaminated crude oil at Omisalj.

The Commercial Court decision

Construction of the settlement agreement

The Court cited the decision in Lukoil Asia Pacific Pte Ltd v. Ocean Tankers (Pte) Ltd (Ocean Neptune) [2018] EWHC 163 (Comm) on the correct approach to construing contracts. The Court must ascertain the objective meaning of the language that the parties have chosen in which to express their agreement and consider what a reasonable person in possession of all the relevant and available background knowledge available to the parties at the time of contracting would have understood the parties to have meant.

The Court thought that the basic structure of clauses 33 to 36 was easy to understand. Clause 33 required the buyer to procure that Janaf give up, and prevented the buyer passing on to the seller, any claim arising out of the cargo, save as specifically provided in clause 34.Clause 34 then:

• acknowledged that Janaf could make a claim against the buyer for storage fees in relation to the balance portion of the cargo not delivered to the buyer (and hence that the buyer was not obliged to procure that Janaf give up that claim);
• agreed that the buyer had an entitlement to seek compensation from the buyer for any liability it incurred to Janaf in that regard;
• identified the extent to which the seller would reimburse the buyer; and
• provided for the parties to discuss in good faith "with a view to agreeing the level of reimbursement".

Clause 35 compromised all claims between the parties "arising out of and/or in connection with the delivery of the Cargo", but preserved five specific claims (defined as the "Outstanding Claims"). These included the storage fees.

The Court was not persuaded by the submission that clauses 34 and 35 did not settle anything in respect of Janaf’s storage fees because the parties had agreed that the buyer’s right to make a claim under the sale contract was preserved if the discussion in good faith was unsuccessful. Rather, it thought that these provisions made the seller liable to reimburse the buyer for storage costs up to a fixed limit. The “actual loss” ingredient meant any uplift to the storage fees which was charged to reflect the fact that Janaf was suffering an actual loss due to the contamination of the cargo or due to the emergency nature of the storage. The “prevailing market rates” for storage were to be for storage at Omisalj and Sisak of approximately the volume used for the period in question, on a “spot” basis.

Good faith

The Court also dismissed the allegation that the seller failed to enter into good faith discussions. The Court did not think that the seller’s conduct was commercially unacceptable and found there was no evidence that the seller had deliberately delayed discussions and been dilatory in its responses in order to allow the performance bond to expire.

Market rates

As to prevailing market rate, the Court found that the Janaf "default" rate did not reveal the "prevailing market rates for storage". If it was a market rate for storage at all, it was not the type of market rate which was envisaged by the settlement agreement. It was an emergency rate, fixed in the context of the transportation of oil, mostly as a disincentive to delay.

An important part of the justification for the "default" rate was that Janaf might be inconvenienced by unexpected or unplanned delays in the transportation process, namely by tanks which were intended to be used as part of the process of transporting oil being blocked up. But, if that had actually happened, Janaf would have suffered an actual loss, which could then have been included in addition to the market rate for the purposes of arriving at Janaf's storage fees. No evidence of such actual losses had, however, been provided.

The Court concluded that the rate that the seller had negotiated with Janaf in March 2020 (and which Janaf had offered in December 2019) provided a genuinely negotiated storage rate for Omisalj and treated this rate as good evidence for the market rate for longer term storage for the relevant period. On that basis, the buyer was only entitled to reimbursement in the amount of US$1,062,000 for storage fees and was obliged to return US$1,032,000 from the amount it received under the performance bond.

Comment

Storage rates are often kept secret and there is consequently little publicly available information about this market. The Court, therefore, had very few comparables to work with and recognised the limitations of the material with which it was working. It acknowledged that it could not make as precise an assessment of the relevant market rate as might be possible in the context of a different market. Nonetheless, the outcome seems to be a sensible one.