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Court finds inspector’s certificate final and binding for limited purposes only

Insights / 13-07-2020

Septo Trading Inc v. Tintrade Limited (Nounou) [2020] EWHC 1795 (Comm)

It is common in commodity sale contracts for the parties to agree main commercial terms in a recap, and then incorporate widely used industry standard terms to fill in the gaps. Often, the recap will include a provision to the effect that if there is a conflict, the terms of the recap will apply. This accords with the established principle that specifically negotiated terms will usually prevail over standard terms. Where possible, however, the Court will aim to read such provisions together rather than concluding that they conflict.

In this case, the Court found that two different terms relating to cargo quality certificates in a sale contract for high sulphur fuel oil did not conflict. Rather, the standard term qualified the bespoke term in the recap with the consequence that the Buyers’ damages claim for off-spec cargo was not prevented by the certificate of quality issued at the loadport.

The background facts

Septo Trading Limited were the fob buyers (“Buyers”) and Tintrade Limited were the sellers (“Sellers”) of 41,335 mt HSFO described in the contract as “high-sulphur fuel oil RMG 380 as per ISO 8217:2010” loaded on board the vessel in Ventspils, Latvia in July 2018. The sale contract was contained in a recap setting out various main terms, and further providing that “Where not in conflict with the above, BP 2007 General Terms and Conditions for fob sales to apply” (the “BP Terms”).

The fuel oil was loaded from seven different shore tanks, and blended on board the vessel. The maximum permissible TSP (total sediment potential) for the cargo in accordance with ISO 8217:2010 was 0.1%. A composite pre-loading sample of the cargo was tested by SGS, and the TSP was found to be 0.04% - well within the specification. The cargo was then transported to Gibraltar, where it was transferred to two other vessels for on-sale to Macoil International SA (“Macoil”).

Samples of cargo were taken from one of these vessels, and the TSP was found to be 0.37% - significantly higher than the permitted level. Samples taken by SGS from the shore tanks prior to loading at Ventspils were then tested, and it was discovered that some were off-spec. Although Macoil had already sold approximately 10 KT of cargo to other buyers, it refused to take delivery of the balance. The Buyers were unable to negotiate a resolution with either Macoil or the Sellers and, therefore, re-blended the remaining c. 31 KT of cargo. They then sought to claim damages from the Sellers.

The Commercial Court decision

The Court found that the fuel oil contained in the seven different shore tanks from which the vessel was loaded was fundamentally incompatible and that this incompatibility accounted for the cargo being found to be off-spec for TSP after loading. The composite pre-loading sample tested by SGS had been found to be on-spec simply because the samples used were not representative of the cargo actually loaded.

However, despite the fact that the Court found as a matter of fact that the cargo was loaded off-spec, the Sellers argued that the actual state of the cargo was irrelevant. There were a number of provisions within the contract relating to the testing of the cargo before loading, but in particular:

1) The recap provided that the quality and quantity of the cargo should be:

As ascertained at loadport by mutually acceptable first class independent inspector, or as ascertained by loadport authorities and witnessed by first class independent inspector (as per local practice at time of loading).

Such result to be binding on parties save fraud or manifest error”; whereas

2) The BP Terms provided that:

Provided always the certificates of quantity and quality ……. of the Product comprising the shipment are issued in accordance with sections 1.2.2 or 1.2.3 below then they shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 30.1 but without prejudice to the rights of either party to make any claim pursuant to Section 26.

In other words, the recap provided simply that the determination of quality by the loadport inspector was binding on the parties; the BP Terms provided that certificates presented by such inspectors should be conclusive and binding for invoicing purposes only – described by the Court as a “pay now, sue later” provision.

The Sellers accordingly argued that as the SGS quality certificate had found the cargo to be on-spec, in the absence of fraud or manifest error that result was final and binding as between the parties. To the extent that the BP Terms provided otherwise, there was a conflict between the recap and the BP Terms, and the recap should prevail. 

The Court disagreed, and held that the BP Terms did not conflict with the terms of the recap, but instead qualified those terms. The two sets of clauses could be read together, and the effect of doing so was that the loadport inspector’s determination was binding only in relation to invoicing. As such, even though the loadport inspector had found the cargo to be on-spec, the Buyers were not precluded from bringing a claim on the basis that the cargo was off-spec.

On quantum, having heard expert evidence on both sides, the Court concluded that there was a market in 2018 for such off-spec fuel oil. The market for fuel oil was large and diverse. That market included traders and blenders who purchased high TSP fuel oil for blending and on-sale. Therefore, the Court had to assess the actual value of the off-spec fuel oil in the market. This was difficult because there was no published data for sales of fuel oil with a high TSP. Further, the Court was not persuaded by either of the expert’s opinions on this issue. Instead, it relied on the contemporaneous correspondence relating to the on-sale and concluded that the best evidence of the actual value of the off-spec cargo loaded onboard the vessel was US$350/mt. Based on this figure, the Buyers were awarded damages of US$ 3,058,801.

Comment

The Court noted that if the BP Terms had not been incorporated into the contract, the outcome of the case would have been entirely different. The statement in the recap that the loadport inspection was to be binding save in the case of fraud or manifest error would have meant that the SGS certificate of quality was a binding determination of the quality of the cargo loaded that the Buyers could not challenge. The Buyers would, therefore, have been precluded from claiming any damages.

This dispute serves as a reminder to parties incorporating industry standard terms and conditions into their contracts to check carefully that such terms do not potentially conflict with the bespoke terms such that it leads to unintended consequences.

Carl Walker

Carl Walker Partner

David Owens

David Owens Managing Associate

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Maritime