UK: Unstable Gasoil Cargo Held To Be Of Unsatisfactory Quality And Unfit For Purpose

Bominflot Bunkergesellschaft fur Mineralole mbH & Co v. Petroplus Marketing AG (Mercini Lady) [2012] EWHC 3009

The parties in this case were in dispute over the quality and fitness for purpose of a cargo of gasoil. The Commercial Court, and subsequently the Court of Appeal on appeal by the sellers, were asked to decide a number of preliminary issues between the parties (see our Legal Updates of February 2010 and March 2011), the outcome of which we summarise briefly below by way of background. We then go on to consider the recent judgment of Mr Justice Hamblen in the Commercial Court on the substantive issues.

The background facts and the preliminary issues

The cargo of gasoil in question was certified as on-spec prior to loading, including as to sediment content, but found to be off-spec as to sediment at the discharge port, after a voyage of just four days. As a result, the buyers' original on-sale contracts fell through and they were obliged to find alternative buyers. They sought to claim their losses from the sellers.

One of the preliminary issues put to the court was whether the sale contract incorporated the implied term contained in S.14(2) of the Sale of Goods Act 1979, as amended (the "SGA"), namely that the gasoil would be of satisfactory quality ("the implied term"). The court held that it did and that one aspect of the implied term was that the gasoil would remain of satisfactory quality for a reasonable period after delivery. The court also found in the buyers' favour on another preliminary issue, namely that the contractual exclusion clause was not sufficiently wide as to exclude the implied term.

The main issues for consideration by the judge at the trial (at which the sellers, having gone into foreign insolvency proceedings, were unrepresented) were as follows:

1. Were the high sediment levels found in the cargo at the discharge port due to contamination during the voyage?

2. If not, was the increase in sediment levels due to the gasoil being unstable on shipment/delivery?

3. If the gasoil was unstable on shipment/delivery, was it consequently not of satisfactory quality?

4. If the gasoil was not of satisfactory quality, what was the correct measure of damages recoverable by the buyers?

The Commercial Court decision

Liability

The expert evidence adduced by the buyers, and accepted by the court, found that the increase in the sediment level was not the result of contamination on board the vessel. Rather, this was due to the instability of the cargo on shipment. The judge accepted the expert evidence and concluded that an unstable gasoil cargo would not be of satisfactory quality and would not be fit for purpose, fitness for purpose meaning for all the uses for which gasoil of this description was commonly used.

The sellers had, prior to their insolvency, sought to argue that the issue of instability was covered by the express specifications of the sale contract, given that the amount of sediment was expressly referred to in the contractual specifications, and that the implied term was limited to characteristics of the cargo that were not covered directly or indirectly by the contractual specifications. Accordingly, said the sellers, the buyers were bound by the certificate of quality issued at the load port which was conclusive, subject to manifest fraud or error. They argued that this was the case regardless of the fact that instability had not been tested for at the load port and was not covered by that certificate.

The judge rejected this argument, holding that instability was not a characteristic of the cargo that was directly covered by the specifications, rather the specifications were silent as to stability. Nor was instability indirectly covered merely because instability resulted in an increase in sediment. He concluded that instability was an entirely separate characteristic of the cargo from the sediment level.

Quantum

S.53 of the SGA states that the usual measure of loss in cases of this kind will be the difference between the sound and unsound market value of the goods at the time of delivery. In this case, however, the judge accepted the buyers' argument that the starting point should be the date when the latent defect in the cargo was discovered by them. He further agreed that, given they were unable immediately to sell the unsound cargo, the relevant date should be the date of the eventual resale. The judge concluded that the resale date should be used for the assessment of both sound and unsound values, so as to compare like with like.

Comment

This case provides a useful reminder that just because a cargo meets the contractual specifications does not necessarily mean that the buyer has no recourse against the seller if the cargo is in some way defective and unfit for purpose. Of course, it is usual in the oil and gas trading world to exclude all the terms implied by the SGA – which would have been the situation in this case had the relevant exclusion clause been drafted effectively. In contracts where such an exclusion is properly drafted, it is important from the buyer's perspective to ensure that the contractual specifications are comprehensive enough to cover every aspect of the quality/condition of the cargo that is of importance to the buyer.

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.