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A distinction with a difference: Court of Appeal finds conflict between contractual terms

Insights / / Dubai, London

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Septo Trading Inc v. Tintrade Ltd  [2021] EWCA Civ 718

When reporting last year on the Commercial Court judgment in this case, we commented that it is common in commodity contracts for the parties to agree their main commercial terms in a recap and then to refer to and incorporate industry standard terms in order to complete the contractual arrangements. The challenge then is how to interpret the resulting contract.

At first instance, the Court held that two terms relating to cargo quality certificates in a sales contract for fuel oil did not conflict, but rather that the industry standard terms incorporated by reference could be read together with and qualified the specially negotiated terms. Consequently, the Buyers could pursue a claim relating to cargo quality, which would not have been the case if the standard terms had not been incorporated.

The Sellers appealed, arguing that on a proper construction of the contract the two terms were inconsistent and that the specially negotiated terms should prevail. The Court of Appeal has allowed the appeal.

The background facts

The Buyers bought a cargo of “high-sulphur fuel oil RMG 380 as per ISO 8217:2010” loaded in Ventspils from the Sellers and subsequently alleged that the cargo was off-specification. The load port surveyor had issued a certificate of quality which showed the cargo as being within specification.

The contract between the parties consisted of an email confirmation recap. This Recap included a clause entitled “Determination of Quality and Quantity” which stated:

“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.”

The contract also incorporated the BP 2007 General Terms and Conditions (BP GTCs) with a clause in the Recap which provided:

“Where not in conflict with the above, BP 2007 General Terms and Conditions for fob sales to apply.”

The BP GTCs included a provision that the certificate of quality:

shall, except in the 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… but without prejudice to the rights of either party to make any claim…”.

At first instance, the Court had found that, as a matter of fact, the cargo was off-specification at the load port. It, therefore, held in favour of the Buyers, having found that the load port certificate of quality was only binding for invoicing purposes. 

The Court of Appeal decision

The Court of Appeal has unanimously held that the established principles set out in cases such as Pagnan SpA v. Tradax Ocean Transportation SA [1987] 3 All ER 565,  led to a different conclusion than that arrived at by the first instance judge.   

The reasoning at first instance was, in summary, as follows:

  1. If the Recap had stood alone, it would have barred the Buyers’ quality claim.
  2. However, the BP GTCs could be read as qualifying the Recap by limiting the binding nature of the determination to questions of invoicing without prejudice to any claims for breach of contract at a later date.
  3. This construction, therefore, gave effect to both clauses.

For the Court of Appeal, applying the Pagnan approach (which requires the Court “toapproach the documents in a cool and objective spirit to see whether there is inconsistency or not”), the important consideration was whether the two clauses could be read together fairly and sensibly, so as to give effect to them both. This should be approached in a practical manner, having regard to business common sense, and it was relevant to consider whether: (i) the printed term effectively deprived the special term of any effect - as this would point to the terms being inconsistent; and whether (ii) the specially agreed term formed a central feature of the contractual scheme.

Starting with the meaning of the quality clause in the Recap, the Court of Appeal agreed with the judge that its effect was that the quality certificate was intended to be binding on both parties. Looking at the provision for a quality certificate in the BP GTCs, a clause which provided for the certificate to be binding for a limited circumstance – invoicing purposes - was entirely different from a clause which provided for a certificate of quality to be binding for all purposes.

As a result, the quality clause in the Recap and the provision in the BP GTCs conflicted and could not sensibly be read together. The BP clause was not a qualification or supplement to the Recap term but instead deprived it of all practical effect, bearing in mind also that in a documentary sale a reference to “invoicing purposes” was essentially redundant.  Since the Recap was the central feature of the parties’ agreement, this meant that the parties were less likely to have intended to depart from its terms by virtue of the standard industry clauses incorporated by reference.

The Court of Appeal therefore held that, on its true construction, the parties intended that the quality certificate would be binding with the result that the Buyers were precluded from bringing their quality claim.

Comment

The Court of Appeal has in this case given weight to specially negotiated terms over standard terms in approaching the interpretation of the contract, in a case in which both courts sought to apply the principles set out in the Pagnan decision. This shows the difficulties which are often encountered in seeking to interpret clauses in cases of conflict and/or inconsistency. It serves as a useful reminder to parties to check their bespoke terms carefully against any standard terms incorporated and to be aware that general provisions designed to assist interpretation may not always avoid a dispute.

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