UK: Issues Of Contractual Commitment And Determining When The Specification Of Goods Is Part Of Their Description

Last Updated: 9 October 2013
Article by Stuart Shepherd and Jane Fitzgerald

Proton Energy Group SA v. Orlen Lietuva [2013] EWHC 2872 (Comm)

We previously reported on the earlier incarnation of this case (in our April 2013 Legal Update: "The relevance of market expert evidence in determining whether a deal has been done"), in which the Claimant was unsuccessful in an application for summary judgment. This latest decision of the Commercial Court follows the full trial of the case on the question of whether a binding contract had been concluded between the parties. The trial judge also addressed the parties' various arguments in relation to the terms of the contract and the judgment contains an interesting passage on the often thorny question of whether the contract specification forms part of the description of the cargo or is simply dealing with quality.

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 on 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. The offer was expressly stated to be "valid till 14.06.12 COB".
  • E-mail correspondence continued between the parties on the same day, culminating in a one-word e-mail from Orlen at 13:42 stating "Confirmed".
  • At 15:55, Proton entered into a contract (by an unsigned email recap) to buy the product from its supplier, Trafigura.

Orlen did not open any letter of credit and it did not accept the cargo. Proton notified Orlen that it was accepting Orlen's failures to open a letter of credit and/or to take delivery of the cargo as repudiatory breaches of contract and was thereby bringing the sale contract to an end.

Proton's position was that the "confirmed" email at 13:42 was the point at which a contract came into existence. Orlen disagreed.

The Commercial Court decision

Was there a contract?

The Judge approached the question of whether there was a contract by first setting out the relevant legal principles by reference to Lord Clarke's judgment in the Supreme Court in RTS Flexible Systems Ltd. V. Molkerei Alois Müller GmbH & Co. [2010] 1 WLR 753 (in which Lord Clarke approved the statements of principle set out in the judgment of Lloyd LJ in Pagnan SpA v. Feed Products Ltd [1987] 2 Lloyd's Rep 601). On the basis of those authorities, the Judge stated that the question he was to consider was "Did the parties agree on all the terms that they objectively regarded as essential for the formation of legally binding relations between them on [14 June 2012] when a contract is claimed to have come into existence?".

The Judge proceeded to evaluate that question by conducting an objective appraisal of what the parties communicated to each other.

Language - The email exchanges on 14 June 2012 constituted a "firm offer" from Proton, followed by a further email from Proton that 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 considered that the language of these exchanges was the language of commitment.

Urgency - The firm offer, subject to an express expiry deadline, was swiftly followed by an email indicating some urgency ("Confirmation on coordination of conditions is needed urgently, and lets move towards the contract"). The fact that performance of the deal itself was due to commence in short order, with Proton required to find and nominate a vessel by 23 June and Orlen to narrow the laycan by 1 July, was also a factor that indicated that there was a level of urgency to the offer that necessitated an immediate binding commitment in response.

Expert evidence - As mentioned in our previous report on this litigation, the Judge hearing the earlier summary judgement application permitted, on Orlen's application, the parties to adduce expert evidence on the question of whether the participants in the relevant industry would have certain expectations as to when a binding contract would be concluded. The expert reports 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). The Judge held that there was no basis for separating the market into these different categories. Ultimately, he drew "no relevant conclusions from the expert evidence" and considered that it added nothing to the analysis of whether a contract had come into existence or not.

Further terms – It was common ground that not all terms had been agreed as at 14 June 2013. As a matter of English law, 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. Proton's offer made express reference to the later negotiation of further terms: "All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations". Orlen argued that a third party observer would understand that wording to mean that no contract had been concluded at this time, as the "contract negotiations" were still to come. Proton, on the other hand, considered those words indicated that the parties intended to be bound at that moment, even though there were further terms to be agreed. The Judge reviewed the parties' subsequent conduct and considered that both parties had proceeded as if they were committed from the moment of the one word "Confirmed" email; Proton had immediately entered into the supply contract with Trafigura and Orlen's description and progression of the deal internally also indicated that it saw itself as committed.

The Judge therefore concluded that a contract had come into existence on 14 June 2012. He described the scenario as a "classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later".

Was the specification part of a sale by description?

Having established that a contract had come into existence on 14 June, the Judge went on to address the various consequential matters raised by the parties arising out of the detailed contract wording. One such matter was Orlen's argument that the product that Proton would have delivered under the contract was materially different from its description. If correct, this would affect the level of damages Orlen was liable for as a result of its failure to perform the contract. Proton had attached a specification of the product to all of its offers and drafts. The detailed contract wording itself stated at Clause 3, headed "Product", that the product being sold was "Oil Blend...CN 2710" and at Clause 4, headed "Quality", incorporated the specification. It was submitted on behalf of Orlen that there are a wide variety of products that could be described as "Crude Oil Mix" and, as such, as a matter of ordinary language and sense, the specification was a matter of description. Orlen sought to argue that it was therefore a sale by description and, as such, it was an implied condition of the contract that the product supplied should match the specification (by virtue of Section 13 of the Sale of Goods Act 1979), breach of which would have entitled them to reject the goods. Proton, on the other hand, argued that the specification was not a matter of description but rather quality. Compliance with the specification was not, therefore, a condition of the contract permitting rejection of the goods.

The Judge noted that description and quality are different notions. He was referred to the judgment of Lord Diplock in Ashington Piggeries v. Christopher Hill Ltd [1972] AC 441 at 503, in which Lord Diplock stated:

"The 'description' by which unascertained goods are sold is, in my view, confined to those words in the contract which were intended by the parties to identify the kind of goods which were to be supplied ... Ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to him on the ground that their failure to correspond with that part of what was said about them in the contract makes them goods of a different kind from those he had agreed to buy. The key to s.13 is identification."

The Judge accepted that statement and that the key to description is identity. He also acknowledged that the distinction between description and quality is not always clear cut. However, in this particular case, he saw no ambiguity. The Judge was satisfied that Clause 3 contained the description of the product and Clause 4 dealt with the quality of the product, such that the specification was not part of the description of the goods.

Comment

On the question of whether there was a contract, the Judge's approach followed the principles set out in Lord Clarke's judgment in the Supreme Court in RTS. In applying those principles, however, the Judge recognised that, in practice, parties do not always operate in a manner that fits neatly into the conventions of English contract law. The Judge accepted that this was an industry in which the speed of the market has an impact on the way that agreements are reached and was, therefore, willing to find that the parties were content to strike a deal on the main terms first and address the detail later.

The Judge's treatment of the argument in relation to whether the specification was part of the description of the goods to be delivered is also of interest. The point to take away is essentially that description will usually be limited to the identification of the product. However, as the Judge pointed out, the parties are free to make the quality of the product a condition of the deal, although this is seldom done. If you have particular concerns as to quality, it is therefore worth addressing those expressly in your contracts.

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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