UK: The Relevance Of Market Expert Evidence In Determining Whether A Deal Has Been Done

Last Updated: 26 March 2013
Article by Stuart Shepherd and Jane Fitzgerald

Proton Energy Group SA v. Public Company Orlen Lietuva [2013] EWHC 334 (Comm)

In this case, in the context of an application for summary judgment, the Commercial Court considered whether or not there was a real issue to be tried as to whether a binding contract had been concluded between the parties, based on a review of their negotiations.

THE BACKGROUND FACTS

Proton Energy Group SA ("Proton"), a Swiss trader of oil and gasoline related products, and Public Company Orlen Lietuva ("Orlen"), a petroleum refining company incorporated in Lithuania, exchanged e-mails regarding the sale and purchase of crude oil mix. The parties accepted that the following exchanges had occurred:

14 June 2012

  • Proton e-mailed Orlen a "firm offer" to sell CIF Butinge, Lithuania 25,000mt +/- 10% in Seller's option of crude oil mix CN27090090, European origin as per the specifications attached, with delivery period at the discharge port during 10-15 July 2012 and at a price based on five quotations after the bill of lading date.
  • E-mail correspondence continued between the parties on the same day, culminating in a one-word e-mail from Orlen stating "Confirmed".

20 June 2012

  • Proton sent Orlen a detailed draft contract for the sale.

20 – 27 June 2012

  • The parties exchanged various e-mails regarding the terms of the contract.

27 June 2012

  • Proton sent Orlen a revised draft contract. By this time, there was at least one issue on which the parties had not agreed: namely, the documents which Proton would be required to present for payment under a proposed documentary letter of credit.

29 June 2012

  • Orlen wrote to Proton to say that it was withdrawing from the negotiations. It did not open any letter of credit and it did not accept the cargo.

2 July 2012

  • Proton notified Orlen that it was accepting Orlen's failures to open a letter of credit or to take delivery of the cargo as repudiatory breaches of contract and was thereby bringing the sale contract to an end.

Proton applied for summary judgment in relation to their claim that a contract had been concluded, such that Orlen were in breach by not opening a letter of credit or taking delivery of the cargo. Summary judgment is a judgment available where the defendant "(a) has no prospect of successfully defending the claim or issue; and (b) there is no other compelling reason why the claim or issue should be disposed of at a trial". Accordingly, the issue for determination by the Commercial Court was whether there was a real (as opposed to a merely fanciful or imaginary) prospect of Orlen successfully defending Proton's claim that the parties had entered into a binding agreement.

THE COMMERCIAL COURT DECISION

The Judge identified the legal principles applicable to the contract formation question before him by reference to the following passage from Lord Clarke's judgment in the Supreme Court in RTS Flexible Systems Ltd. V. Molkerei Alois Müller GmbH & Co. [2010] 1 WLR 753

  • "The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement."

Taking the position as at 14 June 2012 first, the Judge considered the evidence and, in particular, the "firm offer" and subsequent e-mail from Proton which concluded "4. Contractual price is fixed per the confirmed offer. All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations" and Orlen's one word response to that e-mail "Confirmed".

The Judge noted that it was clearly the case that the parties understood at this stage that not all contractual terms had been agreed. As a matter of English law, that would not be fatal since a contract will be binding on the parties where it is the parties' intention to enter into contractual relations and they have agreed on the essential terms, even if they leave certain less significant provisions open for future agreement. What matters is the objectively ascertainable intentions; did they intend to be bound even though there were further terms to be agreed?

In assessing the evidence, the Judge took into account the language of the offer (firm and serious); the apparent urgency in the e-mail exchanges (indicating an intention to be bound) in support of the argument that a binding deal had been reached, with the detailed contractual form to follow. He also considered the conduct of the parties subsequent to the alleged "deal" on 14 June, which could be read either as indicating that the parties were merely negotiating the detailed terms of the deal already concluded or that no binding contract had yet come into existence.

Of particular interest in this case was the submission by Orlen of an expert report in relation to the contract formation issue. Orlen engaged an expert, an oil and gas industry participant with experience in the technical, commercial and contractual aspects of the industry, who produced a report opining on whether reasonable participants in the market for crude oil mix would understand that a legally binding contract was concluded between the parties on 14 June 2012 (or by 27 June).

Proton objected to the admission of the expert report, arguing that the evidence was not properly admissible and would not genuinely assist the trial judge (those being the two factors necessary to fulfil the requirements of CPR 35.1 as explained by Aikens J. in JP Morgan Chase Bank and others v. Springwell Navigation Corp. [2007] 1 All ER (Comm) 549, at 553, paragraph 19).

The expert report addressed matters such as the industry expectations as to the effect of the confirmation of a recap in different categories of trades (OTC vs physical trades) between different categories of counterparty (refineries owned by international oil companies, national oil companies and independents). In particular, the expert asserted that, in the market, confirmation of a recap offer is often considered:

  • binding in over the counter paper transactions where no physical delivery is contemplated.
  • binding in contracts for physical delivery where the seller has a long-term mandate to supply a refinery with feedstock.
  • not binding in cases involving sales to a national oil company.
  • not binding when a transaction for the sale and delivery of crude oil mix to a refinery is viewed as a "once-off" event: i.e. as a one-off transaction and not part of a prior course of dealing between the parties.

The expert concluded therefore that Proton's recap dated 14th June 2012 and Orlen's confirmation would not have been understood by reasonable market participants as creating a binding contract because they would have understood Orlen's confirmation to have been subject to contract, without it needing to be said.

The Judge decided that the expert report was properly admissible. He did so on the basis that, in assessing the parties' objective intentions as expressed to each other, their conduct and communications should be considered in light of the relevant background, which may include evidence as to the practices prevailing in that market at the relevant time, if it could be inferred that the parties' intentions were or may have been informed by those practices. He also thought that the evidence would genuinely assist the trial judge in deciding the issue.

The Judge relied heavily (although not solely) on the expert report in coming to his decision that it was clear that there was a real issue to be tried as to whether a legally binding contract was concluded between the parties on 14th June 2012. The Judge dismissed Proton's summary judgment application accordingly.

COMMENT

This judgment is interesting in respect of the Judge's approach to the question of whether a contract had been concluded by the parties at any particular point in time; in particular, his willingness to permit Orlen to adduce evidence to the effect that participants in the relevant industry would have certain expectations as to when a binding contract would be concluded.

The courts have already shown willing to recognise the industry practice of commodity contracts being concluded on main terms, with the parties intending to iron out the finer points of the deal thereafter. This case suggests that the courts are also inclined to hear evidence from industry experts as to the nuances of industry expectations. Whilst theoretically this might appear sensible, establishing a certain market practice through expert evidence is notoriously difficult particularly where, as is often the case, you have two "market" experts saying the complete opposite about such practice.

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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