UK: "CHEMSTRANS RHINE" - Sampling Dispute Underlines Need For Clarity In Contracts

Last Updated: 3 May 2017
Article by Jamie Cao

In Mena Energy DMCC v Hascol Petroleum Ltd (The "CHEMSTRANS RHINE") (2017), the Court was asked to examine a dispute over the quality of a cargo of fuel oil in a matter where the sampling procedure became a central issue.

The Facts

Hascol, a Pakistan-based importer, entered into a contract for the sale and purchase of a shipment of fuel oil, described as "HSFO 125 cSt", from Mena, a UAE based trader of crude oil and petroleum products.

By way of background, HSFO with a viscosity of maximum 125 cSt is not available as a finished product in the region; the product coming out of the refineries generally has a viscosity of over 180 cSt. The common practice to get to a product of viscosity of 125 cSt or lower is by the blending of the higher viscosity HSFO with other components such as gasoil and cutter stock.

The blending can either be done on board the vessel or in shore tanks before loading. Blending in shore tanks is more efficient for producing a homogenous product compared to blending on board (using the ship's heating and circulation system), as the different components may not be fully blended by the time of the vessel's arrival at the discharge port.

However, this would usually not be a problem as the cargo would be thoroughly blended during the discharge process, as discharge would be carried out under pressure. This could be a problem if the contract requires the product to be homogenous in the ship's tanks as opposed to being homogenous in the shore tanks after discharge.

In the present case, the different components were not pre-blended in the shore tanks before they were loaded onto the vessel at Fujairah.

Upon the vessel's arrival at Karachi, spot samples were drawn from the vessel's tanks. This was done in the presence of personnel from the Hydrocarbon Development Institute of Pakistan (HDIP) as well as SGS.

Two common methods of sampling are used in the industry – spot sampling or running sampling. Spot sampling takes samples of the cargo from specified heights in the tank, e.g. upper, middle and lower or top, middle and bottom. Running sampling draws a container through the full height of a column, thus obtaining a sample which is representative of the cargo at all depths. If the cargo is not homogenous or stratified, spot samples would not give an accurate picture of the overall cargo quality.

Further, sampling can be done in a closed or open system, i.e. with hatches closed or open. In this particular instance, the samples were drawn with the hatches closed. It is common knowledge that this is prone to producing less accurate results than if the hatches are open.

The spot samples taken from the vessel were mixed to form a composite sample as required by the contract. The composite sample showed a viscosity of 192.92 cSt as tested by HDIP and 184.9 cSt as tested by SGS. Both exceeded the contractual specification of 125 cSt. HDIP, therefore, refused to give its approval for the discharge of the cargo in Pakistan.

On the next day, Mena instructed SGS to take running (as opposed to spot) samples from each of the vessel's tanks with the hatches open. The results showed an overall viscosity of 113.6 cSt which was in accordance with the contractual specification.

On the day after, the cargo was re-circulated in the ship's tanks. Further sampling was carried out – this time both spot and running samples were taken. Both sets of samples returned test results with viscosity under 125 cSt. However, in the spot samples, it was noted that the cargo was stratified in all but three of the tanks, with the upper layers showing a viscosity between 230 and 286 cSt.

Hascol wrote to HDIP on 18 November requesting HDIP to carry out further sampling of the cargo, stating that Hascol believed that the cargo was on-spec after re-circulation. HDIP, however, refused to re-sample the cargo. The refusal was maintained despite Hascol's attempt to persuade the Ministry of Petroleum and Natural Resources to instruct HDIP to do so. Parties were therefore at an impasse because without HDIP's approval, the product could not be discharged in Pakistan.

In order to resolve the impasse, it was subsequently agreed that the vessel would go to the nearest port for further blending. After that was done, the cargo would be re-loaded onto the vessel and brought back to Karachi for discharge.

The terms on which this was to be done were in dispute (e.g. whether Hascol was to share the costs of the operation and whether it agreed to pay more for the cargo) and these were eventually determined on the basis of witness evidence – with the Judge preferring Mena's witnesses' account of the events over Hascol's.

Whether the cargo was on-spec on its initial arrival at the discharge port

Although it was not strictly necessary to determine the point (as the Judge found that the parties had eventually reached a compromise), the Judge set out a useful discussion of whether the cargo was on-spec on its initial arrival at Karachi.

The Judge found, first of all, that the contract did not require the cargo to be homogenous, as contended by Mena. The Judge reached the conclusion based on the following:

  1. The contract provided no criteria for determining whether a stratified or non-homogenous cargo was acceptable. These are matters which parties could easily provide for but they chose not to do so. This suggests that parties were content to accept the analysis result based on the composite sample which does not show whether the cargo was homogenous or stratified; and
  2. The Judge considered both parties understood that the cargo would be thoroughly blended during the discharge process. As long as the ship's composite sample showed a viscosity of 125 cSt, this would have been sufficient for Hascol's purposes.

The Judge went on to discuss whether the cargo was compliant at the discharge port. According to clause 12, HDIP's analysis results would be final and binding but Mena had the right to request a re-sampling of the cargo. The Judge had to decide what the position would be if, despite a request by Mena, no re-sampling was carried out because HDIP refused to do so.

The Judge rejected Mena's submission that the clause imposed an obligation on Hascol to obtain any approvals necessary for re-sampling of the cargo. However, the fact that Hascol was not obliged to do so did not mean that the initial HDIP certificate remained final and binding. In fact, once Mena exercised its right to request re-sampling (armed with evidence that something had gone wrong with the HDIP analysis), the HDIP certificate would no longer be final and binding.

In the circumstances, whether the cargo was on-spec would be determined by expert evidence as to what was the most reliable method of sampling. Since what mattered was the overall composition of the cargo (and not whether it was homogenous), the Judge held that (for reasons explained above) the most reliable samples were the running samples drawn with open hatches by SGS on 16 November, after the initial sampling carried out by HDIP but before the cargo was re-circulated on board. These SGS samples were reflective of the state of the cargo on arrival.

Comment

The claim at the heart of this matter illustrates the important role played by the sampling procedure in ensuring a smooth and successful shipment of cargo. It is open to parties to provide in the contract a detailed sampling regime which must be followed strictly before the results become final and binding on the parties in order to minimise the potential for disputes.

"CHEMSTRANS RHINE" - Sampling Dispute Underlines Need For Clarity In Contracts

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