Septo Trading v. Tintrade: a look at liability and quantum in liquid cargo sale contract disputes

The High Court has recently handed down its judgment in the case of Septo Trading Inc. v Tintrade Limited [2020] EWHC 1795 (Comm), providing helpful, up to date guidance on the Court’s approach to:

1. the construction of sale contracts where standard terms are incorporated
2. clauses in contracts that provide for loadport quality certificates to be binding on the parties
3. quantifying claims for off-spec liquid cargoes.

Background and contractual terms

The claim arose from a contract for the sale of 36,000 – 42,000MT of high sulphur fuel oil on FOB terms, for loading on board the M/T NOUNOU between 1-3 July 2018.

The contract was evidenced by a recap dated 20 June 2018, which included the following clause for determining quality and quantity:

”As ascertained at loadport by mutually acceptable first class independent inspector, or as ascertained by loadport authorities and witnessed by first class independent inspector (as per local practice at time of loading).

Such result to be binding on parties save fraud or manifest error.

Inspection costs to be shared 50/50 between Buyer/Seller.”

The recap also provided for the application of the BP 2007 General Terms and Conditions for sales (BPT&Cs) to apply, where not in conflict with “the above” (i.e. certain terms of the recap, including the clause set out above.) The BPT&Cs contained the following relevant clause:

1.2 Certificates of Quantity and Quality

1.2.1 Provided always the certificates of quantity and quality …. of the Product comprising the shipment are issued in accordance with sections 1.2.2 or 1.2.3 below then they shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 30.1 but without prejudice to the rights of either party to make any claim pursuant to Section 26.

On 25 June 2018, the defendant seller, Tintrade Ltd nominated Ventspils as the load port. The claimant buyer, Septo Trading Inc. instructed a survey company, SGS, to perform quality and quantity determinations on the cargo at the load port. These instructions were approved by Tintrade in accordance with the requirements of the sale contract. 41,335MT of cargo was loaded on board the carrying vessel.

SGS subsequently issued a certificate dated 2 July 2018, confirming that the cargo met the contractual specification.

The cargo then became the subject of a further onward sale to Macoil International SA Macoil. A further analysis of the cargo was carried out in conjunction with that sale, which this time showed the cargo to be off-spec.

Further analysis of samples retained from the loadport was then undertaken and this showed some of those samples to be off-spec as well.

At the time the cargo was found to be off-spec, Septo had paid Tintrade for the goods but had not been paid by Macoil. Macoil had also sold a 10,000MT parcel of the cargo to a further buyer.

Septo took back delivery of the remaining 31,000MT of cargo from Macoil and re-blended it for sale on the Singaporean market.

Septo then bought a claim for damages for US$7,785,478 in respect of the loss it suffered in relation to the entire cargo.

The issues and the findings of the Court

The two experts appointed on behalf of the parties were in agreement that the cargo loaded on board the vessel was off-spec and that the cause of this was “shore origin”. There was no suggestion of any fault arising on the part of the vessel or indeed the equipment provided by the terminal. The on-spec finding by SGS was a result of the testing of samples that did not represent the cargo as a whole.

However, Tintrade argued that Septo’s claim should fail on a number of bases, which we discuss below.

1. The loadport quality certificate and interpreting contractual clauses

The first argument taken by Tintrade in defence of the claim was that on a proper construction of the sale contract as a whole, the parties were bound by the finding in the loadport quality certificate that the cargo was on-spec. Tintrade said that clause 1.2.1 from the BPT&Cs (which provided for certificates of quality to be binding for invoicing purposes only) conflicted with the term in the recap that provided for these certificates to be generally binding, save in cases of fraud or manifest error.

Septo on the other hand said that the two clauses should be read together and that the purposes of clause 1.2.1 was to clarify the parties’ intention in relation to the binding nature of the quality certificates. It was argued that the parties intended these clauses to have the effect of a “pay now sue later” provision, placing the onus on the buyer to pay and pursue a claim later on if a problem arose.

Mr Justice Teare set out his analysis of the correct approach to contract construction in these circumstances at paragraphs 28 to 34 of his judgment, citing in detail the judgment of Bingham LJ in Pagnan v. Tradax [1987].

In summary, the approach taken by Teare J is that the two clauses in question are part of the same contract and it would be wrong to approach this question looking for inconsistency. Equally, it would be wrong to approach it on the assumption that there is no inconsistency. A “cool and objective” spirit is required to see whether there is an inconsistency or not.

Teare J went on to say that, “it is a commonplace of documentary construction that an apparently wide and absolute provision is subject to limitation, modification or qualification by other provisions. It does not make the later provisions inconsistent or repugnant…it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another or be in conflict with it, such that effect cannot fairly be given to both clauses.”

Finally, any construction so arrived at must be “tested against the touchstone of common sense.”

Applying these principles, the Judge held that clause 1.2.1 of the BPT&Cs had a qualifying effect on the provision in the recap and was not inconsistent or repugnant to the clause in question, as contended by Tintrade. On this basis, Septo’s claim overcame this initial hurdle and was not “stopped in its tracks” by the quality certificate at the loadport.

It is however worth noting that the Judge also made a finding that, “The clause in the Recap entitled “Determination of Quality and Quantity”, had it stood alone, would have had the effect contended for by the Seller, that is, that in any claim for breach of contract the determination of the independent inspector would be binding as to quality.” This emphasises that where the words on the page have only one clear meaning, the Courts will give effect to that meaning, even where apparently unintended or “unfair” results arise.

2. The sampling operations and “manifest error”

Various other arguments were also adopted by Septo in support of its position that the certificate of quality should not be accepted as binding or determinative in any event. These centred around an alleged departure by SGS from the instructions provided by the parties and the contractual requirements for the sampling. These points were largely of secondary relevance in view of the finding on the construction of the contract set out above and were mostly rejected by the Judge.

However, Teare J provided some helpful commentary at paragraphs 54 to 58 of the judgment on the meaning of a “manifest error” in clauses such as those in this case, in relation to the non-representative samples taken by SGS at the loadport. The Judge approved the statement of the law in this respect as set out in The Interpretation of Contracts (6th ed.) by Lewison LJ. at paragraph 14.07:

“A determination in a certificate cannot be set aside merely because the certifier has made a mistake. The parties have agreed to be bound by the determination even if the expert has made a mistake. But where the contract provides that the contract does not bind in the case of a “manifest error” it can be set aside. “Manifest” refers to “oversights and blunders so obvious and obviously capable of affecting the determination as to admit of no difference of opinion” or “one that is obvious or easily demonstrable without extensive investigation”. Where a certificate is said not to be conclusive in the case of a “manifest error” that cannot entitle a party to a “full blown trial in order to investigate the accuracy of the certificate.”

Applying this to the present case, Teare J held that there was no suggestion that SGS had made “an obvious blunder”. It was acknowledged by the experts that there were certain difficulties associated with taking representative samples of the cargo and that SGS drew samples to the best of their ability. It follows that the Judge did not accept Septo’s argument that there was a manifest error in the drawing of the samples that would have had the effect of rendering the certificate of quality as non-binding.

3. The measure of loss

Having established that Tintrade breached the sale contract by supplying an off-spec cargo and that, based on the correct construction of the contract, they were not entitled to rely on the loadport quality certificate as being a binding determination of the quality of cargo loaded, the next question that fell for the Court to decide was the amount in damages that Septo was entitled to recover.

The parties were in agreement that the market value of the fuel oil in an on-spec condition was US$424/MT. However, there was a dispute as to the actual value of the cargo in its off-spec condition.

Septo argued that there was no market for the cargo in its off-spec condition and that it was necessary to re-blend the cargo in order for it to be sold. It was suggested that determining the notional cost of a blending operation to make the cargo on-spec and then selling it enabled the actual value of the cargo to be assessed at US$253.73/MT, giving rise to a claim value of US$7,782,168.

Tintrade argued that there was a market for the cargo in its off-spec condition and that it had a value of US$404/MT, giving rise to a much smaller loss of US$1,818,446.

Having considered the expert and factual evidence, the Judge concluded that there was a market for the cargo in its off-spec condition, which included traders and blenders who purchased off-spec cargo such as the one in question for blending and on-sale.

In terms of the actual value of the off-spec cargo, the Judge was not impressed by the evidence of either side. The figure advanced by Tintrade of US$404/MT, whilst based on the Platts pricing index for barges FOB Rotterdam, was inadequately explained; whilst Septo advanced a claim based on the “notional cost of cure”, calculated by their appointed expert as the cost of re-blending the cargo. The Judge found a number of problems with this approach in circumstances where it was possible to quantify Septo’s actual loss by reference to the re-blending and selling of around 75% of the cargo in Singapore.

In circumstances where no claim for Septo’s actual loss had been advanced, the Judge concluded that the best evidence of the actual value of the off-spec cargo was found in negotiations between Septo and Macoil where Septo sought (ultimately unsuccessfully) to negotiate a price for the off-spec cargo. This led to the conclusion that the relevant value was in fact US$350/MT, giving rise to a recoverable loss of US$3,058,801. This figure was substantially lower than the claim amount and indeed lower than the claim would have been based on Septo’s actual loss calculated with reference to the sale in Singapore.

In summary, the approach that the Judge took in relation to quantum was:

1. The starting point should be the actual loss suffered by the Claimant.
2. The relevant equation is to deduct the value of the off-spec cargo from the market value of the on-spec cargo.
3. The exercise of determining the value of the off-spec cargo will depend on whether there is a market for it:
   • If there is a market, a value can be determined for sale in that market.
   • If there is no market, then it may be necessary to consider the cost of blending the off-spec cargo into a saleable product in order to determine the “net-back” value of the off-spec product.
4. Whilst analysis of the markets and hypothetical processes may be relevant and necessary, evidence of steps actually taken by the parties in relation to the cargo will also be relevant and should not be ignored.

Conclusion

This judgment serves as a helpful point of reference to those involved in commodities sale and purchase contracts, illustrating the practical and purposive approach that the Court will adopt when interpreting contractual terms and the quantification of loss in cases involving liquid cargoes. The principles set out above are also likely to have wider application, particularly in relation to the Courts’ approach to the incorporation of standard terms and conditions in contract