News / 21-03-2022 / London

BP Oil International Ltd v. Glencore Energy UK Ltd [2022] EWHC 499 (Comm)

This dispute, arising out of the sale and purchase of a quantity of crude oil, involved a number of contractual issues that  commonly arise in commodities cases. Among other things, the Court considered what the terms of the sale contract were, whether there was a breach of the quality provisions and what was the appropriate measure of damages. Interestingly, the Court decided that this was not a “battle of the forms” scenario so the “last shot” doctrine did not apply in determining when the agreement was concluded and on what terms.

The background facts

In April 2019, Glencore offered to sell and BPOI agreed to buy100,000 MT +/- 10% of Russian Export Blend Crude Oil ("REBCO"), to be loaded between 13 and 18 April 2019, delivered CIF Rotterdam, and at a price of "Dated Brent + 0.53 USD" per barrel.  BPOI re-sold the cargo of REBCO to an affiliated company, BPESE, for delivery CIF Wilhelmshaven. BPESE intended to process the cargo at its Gelsenkirchen refinery.The sub-sale was agreed on materially back-to-back terms to those in the contract of sale, save that the purchase price was "Dated Brent plus a premium of 0.43 US dollars per US barrel". However, the contract for the sub-sale made no reference to the purchase from Glencore and merely provided for a quantity of 100,000 MT of REBCO (plus/-10%) loaded at Ust-Luga between 13 – 18 April 2019.

On or around 10 April 2019, the parties appointed independent load port inspectors, CIG. On 16 April 2019, the cargo was loaded on board the Alexia and arrived and was discharged at Wilhelmshaven on 22 April 2019. Two certificates of quality had been delivered to BPOI on 17 April 2019, neither of which mentioned organic chlorides. A further certificate of quality was sent by CIG to Glencore on 25 April and then sent on to BPOI on 8 May 2019, following an inquiry as to whether the cargo had been tested for organic chlorides. BPOI contended that upon sampling tests being carried out, the cargo was contaminated by organic chlorides.

In consequence, by a contract dated 20 June 2019, the cargo was re-sold by BPESE to BPOI for a purchase price of Dated Brent minus US$8 per barrel, with delivery ex ship Castellon.By a further contract dated 20 June 2019, the cargo was then re-sold by BPOI to BPOESA for Dated Brent minus US$8 per barrel, with delivery ex ship Castellon. The intention was for the contaminated oil to be diluted, blended and processed by BPOESA at its Castellon refinery. The oil was discharged in three tranches and then processed at that refinery. BPOI sought damages from Glencore for its resulting losses.

The Commercial Court decision

Terms of contract

When BPOI advanced a claim in respect of the organic chloride contamination, the first issue for the Court to address was what were the terms of the contract, an issue on which the parties disagreed.  This was because one of the disagreements related to the  contract terms dealing with the quality of the cargo.

There had been various exchanges between Glencore and BPOI  between 1 April 2019 to 8 April 2019 in relation to the contract terms. Glencore had sent a recap to BPOI on 1 April 2019 including the BP GT&Cs. On 2 April, BPOI had confirmed the deal, and sent an email with a confirmation (referring to a different edition of the BP GT&Cs)  and invited Glencore to send a contract. Glencore responded on the same day with a contract (“the Glencore Sales Contract”) and subsequent exchanges took place between the parties based on those terms.  As at 8 April 2019, Glencore made it clear that there were still “clauses in dispute” on which they said they would not engage further. However, thereafter documentary instructions were given by BPOI  on 9 April and the cargo and shipping documents were subsequently delivered. 

Various formulations of the contract terms were argued in court by each side. BPOI contended that the contract had been concluded on 2 April 2019 pursuant to the ordinary principles of offer and acceptance and based on Glencore’s recap of 1 April 2019 including the BP GT&Cs, which BPOI had accepted on 2 April 2019. Glencore put forward various competing alternatives, which revolved around arguments that their subsequent correspondence proposing amendments to the terms amounted to counter-offers. The Court ultimately concluded that a binding contract was concluded on 2 April 2019 by the exchanges of 1 and 2 April 2019. Among other interesting observations the Court made was that while the general rule was that the traditional offer and acceptance analysis applied in "battle of the forms" cases, this assumed that there was a "battle of the forms" and, even if that was the case, the analysis depended on an assessment of what the parties must objectively be taken to have intended. In the Court’s view, this was not a battle of the forms. The parties were not in dispute as to whether or not the BP GT&Cs or the Glencore terms should apply; both parties had accepted when the recap was agreed that the GT&Cs applied and the parties were in negotiation as to whether the contract already agreed should be varied to reflect the terms of the Glencore Sales Contract. The Court did not think that any negotiation of any contract which gave rise to a dispute could be said to amount to a "battle of the forms" merely because one party sent a draft contract to the other and there was then a back and forth in writing in the course of the negotiations. Therefore, this was not a case where the “last shot” principle applied.

The Court also gave particular significance to the following wording used by BPOI in its 4 April email, which it said could not have been clearer: "only terms which have been expressly agreed by both parties, at the time of trade or subsequently, shall be binding for the agreement. We hereby reject any proposed amendments unless expressly agreed by us in writing. Neither failure or delay in responding, nor performance of the agreement, shall constitute acceptance to any terms which have not been expressly agreed between the parties." In the Court’s view, BPOI had made clear by its email of 4 April that it would not be bound by the disputed clauses by a failure to respond or by performance. Glencore's response was not to reject this provision but to state that in relation to the clauses in dispute "nothing shall be deemed or constitute acceptance or consent" of such clauses”.The wordings used by the parties in their exchanges confirmed the Court in its view that their subsequent correspondence did not amount to any variation of the contractual terms agreed on 2 April 2019.

The Court accepted that its conclusion was not what the parties originally intended but this was nevertheless the result based on the exchanges in question. It stated that in effect, BPOI had achieved a stalemate after 2 April 2019 which resulted in a contract on the terms of the recap including the GT&Cs (whilst noting that, in such “stalemate” cases, the normal outcome was usually no contract at all).

Breach of quality provisions

As to quality, in the recap, Glencore agreed to supply REBCO of "Quality: Urals ex Primorsk / UL in Seller's option".Section 59.1 of the BP GT&Cs, provided that:

"59.1 Quality

59.1.1 Unless otherwise stated in the Special Provisions, the quality of: (i) the Crude Oil delivered hereunder shall be the quality of such Crude Oil as usually made available at the time and delivery point as specified in the Special Provisions; and (ii) Product delivered hereunder shall not be inferior to the specification (if any) set out in the Special Provisions…".

There were two potential meanings of the phrase "the quality shall be…the quality of such Crude Oil as usually made available at the time and delivery point" advanced by the parties.BPOI gave precedence to the term "usually" and the commercial consequence or absurdity of allowing a seller to deliver contaminated oil if that was the only oil available.Glencore submitted that the Court should give effect to the words "at the time" within the phrase, and so the cargo only needed to be of the quality then available at the loading point. Glencore submitted that this just reflected the allocation of risk between the parties and that it had been agreed that the buyer should bear the risk of uncertainty about the quality of the oil. However, the Court found that the natural meaning of the word "usually" made available connoted what typically or normally happened. It did not, therefore, mean the oil which was available at the particular time (as in effect Glencore contended) since that would give no meaning to the term "usually".Glencore's commercial justification for their contrary interpretation removed most, if not all, the protection for the buyer in relation to the quality of the oil to be delivered. Further, the Court should have regard to the other provisions of the contract and the factual background. It was agreed that the oil would be tested and it was to be inferred that the testing was to ensure that the oil was indeed of the usual quality. Therefore, Glencore was obliged to deliver REBCO that was of the usual quality at the time it was loaded and this did not permit Glencore to deliver oil with elevated levels of organic chlorides which would not have been "usual" quality within the meaning of section 59.1.1.

The Court then considered section 9 of the GT&Cs dealing with measurement and sampling, as well as certificates of quantity and quality. Specifically:

"…the taking of samples and analysis thereof for the purposes of determining the compliance of the Crude Oil or Product with the quality and quantity provisions of the Special Provisions shall be carried out in the following manner… by the Loading Terminal's own qualified inspector(s) in accordance with the good standard practice at the Loading Terminal at the time of shipment…"

“9.1.1 Measurement of the quantities and the taking of samples and analysis thereof for the purposes of determining the compliance of the Crude Oil or Product with the quality and quantity provisions of the Special Provisions shall be carried out in the following manner:

(a) where the Loading Terminal is operated by the Seller or the Seller's Affiliate, …

(b) where the Loading Terminal is not operated by the Seller or the Seller's Affiliate and if jointly agreed upon by the Buyer and Seller, by an independent inspector …

(c) should the parties fail to agree upon an independent inspector, or should the Loading Terminal refuse access to any independent inspector appointed by the parties, then by the Loading Terminal's own qualified inspector(s) in accordance with the good standard practice at the Loading Terminal at the time of shipment…”

“9.2.1 Provided always that certificates of quantity and quality… of the Crude Oil or Product comprising the cargo are issued in accordance with Sections 9.1 and 9.2.2 then they shall, except in cases of manifest error or fraud, be used for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 63 but without prejudice to the rights of either party to make any claim pursuant to Section 59.”

There was nothing in the language which provided expressly that the taking of samples and analysis by the Loading Terminal's inspectors should be conclusive and that as a result the parties were precluded from challenging any such determination by reference to any other evidence.If, however, there was any ambiguity in the words "for the purposes of determining the compliance of the Crude Oil …with the quality provisions", the natural meaning of the language had to be considered in the context of the contract as a whole.The structure of section 9 was that, having stated the procedure which would be adopted in order to take samples and analyse the crude oil, it then provided for certificates to be issued which it was to be inferred would reflect the result of that sampling and analysis. However, section 9.2.1 expressly stated that such certificates:"…shall, except in cases of manifest error or fraud, be used for invoicing purposes … but without prejudice to the rights of either party to make any claim pursuant to Section 59." In other words, section 9.2.1 did not say that the certificate was final and binding so far as quality claims were concerned.Further, when the language of section 9.1 was considered in the context of section 9 as a whole, it was clear that section 9.1 provided a procedure for testing and analysis but it did not provide for that testing and analysis to be conclusive. The Court concluded that section 9.1.1 did not have the effect of excluding all other evidence as to whether the cargo complied with the contractual specification. The Court further found, on the evidence, that the oil was contaminated by organic chlorides and there was a breach of the contractual quality clauses.

Damages

The delivery of a contaminated cargo in breach of contract amounted to a breach of warranty of quality. The measure of damages for such a breach was set out at sections 53(2) and 53(3) of the Sale of Goods Act 1979:

"(2) The measure of damages for breach of warranty is the estimated loss directly and naturally arising, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of a warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered the warranty of quality."

The issue between the parties was whether the prima facie measure in section 53(3) applied or whether if section 53(2) applied, BPOI's loss was (i) its liability to BPESE; or (ii) the cost of cure; or (iii) a “quasi” s53(3) measure. The latter measure meant that even where s.53(3) did not strictly apply, nevertheless it might still be appropriate to assess the buyer's loss by reference to the difference in value but excluding the temporal element (i.e. without taking the market value of the contaminated cargo at the place and time of delivery under the contract).

The Court found that while initially there was no available market for the contaminated oil, this did not mean that the prima facie measure was necessarily displaced. This was a commodity, there was a market price for goods of the contractual description and quality of the cargo, and there was evidence by which the market value of the defective goods could be ascertained. It was, therefore, reasonable to assess damages on the assumption that the cargo would be sold. However, the sub-sale measure was not appropriate here because the parties did not contemplate that the particular goods supplied to the buyer, BPESE, would be used by BPESE for the purposes of satisfying a particular sub-contract nor were the goods purchased for the purpose of being used to make a particular product. The Court added that the cost of cure was not the appropriate measure here because BPOI was a trading company with no ability to “cure” the defect. BPOESA, who ultimately treated the contaminated oil, were neither the buyer nor the sub-buyer.

The Court, therefore, held that the appropriate measure of damages was not BPOI's liability to BPESE or the cost of cure but was the difference between the market value of sound crude oil and the value of the contaminated crude oil at the date of delivery, but that to the extent that the value of the contaminated oil could not be determined at the date of delivery such that its value was ascertained at a later date (by reference to the price at which BPOI repurchased the oil from BPESE and sold it to BPOESA), it was a "quasi" s53(3) measure. In the event that the Court was wrong on this, the alternative measure of loss would be BPOI’s liability to BPESE under the sub-sale. In determining the value of the contaminated cargo, the Court had regard to the price at which BPOI, as the buyer, had been able to resell the goods to BPOESA, as the sub-buyer who had knowledge of their defective condition, describing this as an independent data point and a compelling piece of evidence . Therefore, the value of the contaminated oil was Dated Brent minus US$8/bbl.

Comment

The Court’s approach to what is a regular feature of many commodities trades – where the parties confirm a deal and then correspond back and forth in relation to formal contract terms – is instructive. An objective analysis is undertaken which may result, as this decision does, in the Court enforcing a contract which had been concluded in a manner unintended by the parties. The decision highlights the importance for parties negotiating such contracts to think carefully about what they are in fact agreeing to in their correspondence. The dispute also demonstrates how tricky it can sometimes be to ascertain the appropriate measure of damages.