UK: Court Of Appeal Decision on Implied Terms as to Quality In FOB Sale Contract - 'The Mercini Lady'

Last Updated: 1 November 2010
Article by Ted Graham and Scarlett Henwood

KG Bominflot Bunkergesellschaft fűr Mineraloele mbH & Co v Petroplus Marketing AG (The Mercini Lady) [2010] EWCA Civ 1145

The Dispute

KG Bominflot were the FOB Buyers of a cargo of gas oil from Petroplus. Although the load port inspector found that the "Total sediment" specification was within the contractual limits at the load port, the Buyers were more than a little put out when four days later, following an unremarkable voyage, the cargo failed the sediment test and was rejected by Bominflot's receivers. Bominflot claimed in excess of US$ 3m from its Sellers, Petroplus, for the difference in the value of the cargo, freight and other consequential losses.

Commercial Court Decision

The parties agreed that it may save them both time and costs to have the Commercial Court decide various questions by way of preliminary issue as opposed to having a full trial. As often happens, this best of intentions has probably had quite the opposite effect. Nevertheless, as we reported in our February International Trade Update, this did result in Field J being posed some interesting questions. In a nutshell, at first instance the Judge decided that terms should be implied into the original FOB contract that the goods would be of satisfactory quality, not only when delivered onto the vessel but also for a reasonable time thereafter. The Judge found that it was appropriate for terms to be implied both at common law and under Section 14 of the Sale of Goods Act 1979 and that the absence of a reference to "conditions" in the express exclusion clause failed to stop such terms being incorporated. The Sellers appealed.

Court of Appeal Decision

Lord Justice Rix gave the judgment of the Court. Running through the judgment, there appears to be a slight expression of frustration on the Judge's part that the case came to Court as an appeal on preliminary issues rather than following a trial and with an explanation as to how the sediment in a cargo of gas oil could change from within specification to off specification after an unremarkable four day voyage. It was common ground between the parties that the load port inspection was not invalid as a result of "fraud or manifest error" (both of which would have prevented its finding being final and binding) and no point was taken in this case by the Buyers about the fact that the load port inspectors did not use the contractual test method. Further, the Buyers made it clear that they did not allege that the cargo was off spec at the time of delivery. The Buyers had however succeeded in persuading Field J that their contract contained an implied term that the goods should have been "capable of remaining" within specification and/or of satisfactory quality during the voyage and for a reasonable time thereafter. Both Courts recognised the difficulties this posed, particularly in FOB sales, where frequently the Seller has no idea how long the intended voyage for the cargo is.

Ultimately, however, in view of the Appeal Court's finding, this difficult question became irrelevant. Rix LJ found it impossible to see how a cargo of gas oil which was admitted to be within specification on loading and delivery could nevertheless be delivered in breach of contract in a matter going to its specification. He found that the implied statutory condition of satisfactory quality arising from Section 14 of the 1979 Act applied only at the time of delivery and not thereafter although it may well be that whether or not the goods have a reasonable "durability" is part and parcel of determining whether or not they are of satisfactory quality.

Rix LJ disagreed with Field J that a further term should be applied into the contract at common law to the effect that the goods should "remain on specification for a reasonable time after delivery". As his Lordship pointed out, to find otherwise would effectively remove any certainty enjoyed by a seller who has agreed a final and binding inspection clause with his buyer. In making this finding, however, he recognised that there may be cases where a cargo has a latent inherent vice which could not have been picked up by the quality inspection. Here, however, the load port inspection would not, in any event, be conclusive. Field J had, for his part, also recognised that the load port inspection was only final and binding as to matters actually found, and there was nothing in the Court of Appeal judgment to suggest that this was wrong.

In considering the second question as to whether or not the contractual exclusion clause to the effect that the contract contained "no guarantees, warranties or misrepresentations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise..." applied to exclude the implied terms in this case, Rix LJ clearly had some sympathy with the Sellers' argument that most people reading this would assume that the parties had intended to exclude implied terms regarding "merchantability, fitness or suitability". Nevertheless, in one of those "hard cases" decided for the benefit of certainty of English law, he agreed that he was bound by the same long line of authority as Field J. Since the exclusion clause does not specifically exclude "conditions" and since the implied terms of the Sale of Goods Act are conditions, the clause did not operate so as to exclude the Act. Equally, there was nothing in the specification clause and the inspection clause which was inconsistent with implication of the statutory conditions.

Conclusions

As well as being another reminder to think long and hard before inviting the Court to decide a case by preliminary issues, the Court of Appeal judgment is a reminder to traders of the crucial importance of drafting exclusion clauses. It has also shut the door that was opened by the first instance decision on possible arguments that cargoes delivered "on spec" but arriving "off spec" may have breached an implied term that they would remain on spec for a "reasonable period" (however long that might be).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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