UK: Commodities Bulletin - June 2009

Last Updated: 1 July 2009
Article by Sarah Taylor

WHEN IS A CERTIFICATE FINAL NOT FINAL?

In KG Bominflot Bunkergesellschaft mbh & Co KG v Petroplus Marketing AG ("The Mercini Lady") (22 May 2009) the High Court has again considered "final and binding" clauses in the context of an FOB sale contract.

The defendant sellers sold a cargo of gasoil FOB Antwerp on terms which included the following clause:

"Quality and quantity, basis shoretank, to be determined by a mutually agreed independent inspector at the loading installation, in the manner customary at such installation. Such determination shall be final and binding for both parties, except in case of fraud or manifest error".

The contract further provided:

"There are no guarantees, warranties or representations, express or implied, or (sic) merchantability, fitness or suitability of the oil for any particular purpose or otherwise, which extend beyond the description of the oil set forth in this agreement".

The loadport analysis showed the cargo to be on specification. However, the claimant buyers alleged that when the gasoil arrived after an incident-free voyage at El Ferrol, it did not conform to the contract specifications, particularly as to sediment, and brought proceedings against the sellers. The buyers made their claims on three alternative grounds as follows:

  1. That the sellers were in breach of an implied term that the cargo would be of satisfactory quality following a normal voyage pursuant to s. 14(2) of the Sale of Goods Act 1979;
  2. That the sellers were in breach of an implied term that the goods would be reasonably fit for their purpose following a normal voyage pursuant to s.14(3) of the Sale of Goods Act 1979;
  3. That the sellers were in breach of a term to be implied at common law that the gasoil would be of satisfactory quality and/or in accordance with the contractual specification following a normal voyage and for a reasonable time thereafter.

The defendant sellers relied on the exclusion clause in the contract.

In a judgment which some may find surprising, Field J found that a term should be implied that the gasoil would be of satisfactory quality, not only when the cargo was delivered onto the vessel, but also for a reasonable time thereafter. Such a term could be implied both under s.14(2) of the Sale of Goods Act 1979 and at common law. The implied terms were not inconsistent with the explicit terms of the sale contract, particularly where the exclusion clause did not refer to "conditions", which could not be covered by the use of the words "guarantees, warranties and representations".

As this was a trial of a preliminary issue of contractual construction, there is no factual finding as to whether the gasoil complied with the terms which the court has implied into the contract. It is perhaps uncontroversial that a cargo which is on-spec at a loadport should remain so during any normal length incidentfree voyage. However, the nature of the judgment leaves the status of the "final and binding" certificate unanswered.

In any event, until there is further clarification in the form of an appeal or full trial in The Mercini Lady it would be wise practice to state explicitly in any exclusion clause that implied "conditions" in addition to "guarantees, warranties, and representations" are excluded from the contract.



HIGH COURT UNDERLINES BUYERS' PERFORMANCE OBLIGATIONS

In Vitol SA v Conoil plc (22 May 2009) the High Court was required to revisit issues relating to the connection between sale contracts and letters of credit. It took the opportunity briefly to restate the English courts' approach in this area.

Vitol brought a claim against Conoil seeking damages for failure to perform four contracts under which Vitol were to deliver several cargoes of gasoil to Conoil on DES terms by ship-to-ship transfer off Cotonou, Benin. Conoil failed to take delivery, complaining that they had been unable to sell product held in shore storage tanks, leaving them with insufficient capacity to receive cargo from Vitol. Eventually Vitol treated Conoil's conduct as placing them in repudiatory breach, terminated all four contracts and sued Conoil for damages in the High Court.

Conoil did not participate in the High Court proceedings, but instead commenced proceedings in Nigeria in breach of an exclusive jurisdiction clause in all four sale contracts under which disputes were to be determined by the High Court in London. Vitol obtained an injunction restraining Conoil from continuing with the Nigerian proceedings, but Conoil appear to have ignored the injunction.

Conoil had argued before the Nigerian courts that the four contracts had not become effective because no letters of credit had been issued pursuant to them. Their contention appears to have been that the provision of letters of credit was a condition precedent to the contracts becoming enforceable. This argument was put to the High Court in Conoil's absence, and was rejected out of hand.

Teare J reiterated the well known proposition that the opening of a valid letter of credit is typically a condition precedent to a seller's obligation to make delivery under international sale of goods contracts, but found nothing in any of the sale contracts to support the suggestion that the contracts were to remain in abeyance and ineffective until letters of credit were opened.

Strictly speaking, this was a decision on the interpretation of contract terms. There is nothing in English law to prevent parties to a sale of goods contract making all performance obligations subject to the provision of a letter of credit, or, conversely, requiring the seller to make delivery notwithstanding a delay in opening the letter of credit. However, such agreements do not represent standard industry practice, and the Vitol v Conoil decision demonstrates the determination of the High Court to enforce standard contract terms without qualification.

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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