Implications Of LNG Non-Compliance With Impurity Specifications In LNG FOB Sale Transactions
The LNG cargo delivered on board the buyer`s ship in FOB sale transactions must comply with the maximum limits for impurities stipulated in the Transaction Confirmation Notice and be free from any other harmful contaminants which might cause damage to the carrying ship and receiving terminal. The specifications for impurities in FOB sale transactions are based on the specifications published by the receiving terminal in respect of LNG content of sulphur compounds (i.e. Hydrogen Sulphide, total sulphur, Mercaptan sulphur), carbon dioxide, water vapour and Mercury traces.
If the analysis of gaseous sample taken from the LNG cargo at the time of loading evidences that the LNG delivered on board the buyer`s ship does not conform with the maximum limits stipulated for the impurities, the LNG cargo shall be considered off-specification.
The failure to detect and remove contaminants such as sulphur and mercury from the gas before liquefaction may have as consequence the corrosion or contamination of the ship`s cargo tanks and damage to the receiving facilities. In such case, the buyer`s remedy will be in function of whether the buyer or the operator of receiving terminal shall be able or not to treat the LNG cargo in order to meet the quality specifications for impurities.
GIIGNL and BP FOB LNG Sale Agreement templates provide that if the buyer will be able to treat the LNG cargo and remove the impurities in order to meet the quality specifications, the seller shall have to reimburse the buyer all documented direct costs and expenses incurred by the buyer for the treatment of such LNG cargo (or any other LNG contaminated by it) and for remedying any damage caused to the carrying ship and/or to the buyer`s receiving facilities1.
If the buyer is unable to treat the LNG cargo in order to meet the quality specifications, the seller shall be deemed to have failed to deliver the LNG cargo and shall have to pay to the buyer the amount of liquidated damages the buyer is entitled to receive in case the seller fails to deliver the nominal quantity specified in the Transaction Confirmation Notice and in addition to that the seller shall have to reimburse all documented direct costs and expenses for disposing of the off-specification LNG and for remedying any damage caused to the carrying ship and/or to the buyer`s receiving facilities2.
A difficult issue in LNG FOB sale transactions is the question of whether the FOB sellers could be held liable in the event that the LNG cargo found to be on specification at the time of loading turns out to be off-specification upon delivery to the buyer`s receiving facilities.
Master LNG FOB Sale Agreement templates published by GIIGNL, Trafigura and BP provide that the LNG sold must comply with the quality specifications at the time of delivery to the buyer at the Delivery Point3, when converted into a gaseous state4, that is, provided that the sample analysis evidences that the LNG delivered on board the buyer`s ship is within the contract quality specifications at the time and place of loading, the buyer cannot subsequently claim that the LNG delivered is off-specification.
This matter was explained by the English Court of Appeal in KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG5. In that case a cargo of gasoil sold on FOB terms was found to be within specification at the time of loading, but after arrival at discharge port it was found to be off-specification.
The FOB buyer brought a claim against the seller contending that:
- there was an implied term into the FOB sale contract under section 14(2) of the Sale of Goods Act of the United Kingdom that the cargo had to be of satisfactory quality not only when it was delivered on board the vessel but also for a reasonable time thereafter;
- there was an implied term at common law that the cargo had to be of satisfactory quality for a reasonable time after delivery on board the vessel and that the cargo had to remain in accordance with the contractual specifications for a reasonable time after delivery on board the vessel.
The English Court of Appeal held that if an alleged vice of the commodity is something for which the contract quality specifications and quality determination clauses provide and the commodity is found to be on specification at the time of delivery, the FOB buyers cannot subsequently claim a breach of the statutory implied term as to satisfactory quality or any similar term to be implied at common law. In a sale contract providing that the quality specifications have to be met at the time of delivery, the statutory implied condition of satisfactory quality stated in section 14(2) of the Sale of Goods Act of the United Kingdom applies only at the time of delivery. If the goods are of satisfactory quality at the time of delivery, the implied condition of satisfactory quality is fulfilled.
But if the alleged vice of the commodity could not have been picked up by the cargo surveyors with the tests required in the contract quality specifications, then the surveyors` determination of the cargo characteristics is not conclusive and the buyers may claim in such a case a breach of an implied term of satisfactory quality in the event of cargo deterioration due to the alleged vice.
In order to avoid the liability for breach of the statutory implied conditions, the FOB sellers can insert in the LNG FOB Sale Agreement an exclusion clause in which to state clearly that the liability for breach of the statutory implied conditions is excluded. An example of such clause is the Sub-Clause 5.4.2 of Trafigura Master LNG Sale and Purchase Agreement which has the following provisions:
"Seller makes no representation or warranty as to the quality of the LNG delivered to Buyer other than as to the Specifications provided in the Confirmation Notice. All guarantees, undertakings, representations, conditions, warranties or other terms, express or implied (whether by statute, common law or otherwise), including without limitation those relating to the quality, merchantability, fitness or suitability of the LNG for any particular purpose or otherwise, are excluded to the fullest extent permissible by law."
Such an exclusion clause could preclude the implication of statutory conditions.
The FOB sellers should draft carefully the provisions of the exclusion clause taking into consideration the rules adopted by the Courts in this regard. For instance, the drafters of GIIGNL Master FOB LNG Sales Agreement template did not seem to be aware of these rules when they wrote the provisions of Sub-Clause 17(11) which stipulates that:
"the Parties make no representation or warranty, written or oral, express or implied, including but not limited to, any representation or warranty that the LNG will be fit for a particular purpose, or will be of merchantable quality, and all such representations and warranties are expressly excluded to the fullest extent permitted by law."
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG6 the sellers relied on a similar clause and both the English High Court and English Court of Appeal held that such provisions were inadequate and the clause was ineffective to exclude the conditions implied under the section 14 of the Sale of Goods Act of the United Kingdom.
The statutory and common law conditions are not excluded by this clause because it refers to "warranties" and not to "conditions". The statutory and common law implied conditions cannot be excluded by reference to warranties but only by provisions which expressly refer to conditions.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Gas Trade Review Edition No. 1.
Endnotes:
1. See Sub-Clause 4(3)(a) of GIIGNL Master FOB LNG Sales Agreement and Sub-Clause 6.6(a) of BP Master FOB LNG Sale and Purchase Agreement.
2. See Sub-Clause 4(3)(b) of GIIGNL Master FOB LNG Sales Agreement and Sub-Clause 6.6(b) of BP Master FOB LNG Sale and Purchase Agreement.
3. Delivery Point is defined in BP Master FOB LNG Sale and Purchase Agreement as the point where the outlet flanges of the loading lines of the Seller`s Facilities connect with the inlet flanges of the loading lines of the LNG ship.
4. In order to determine the average composition of LNG cargo, the sample taken from the loading line is converted from its initial state, liquid at low temperature (-163ºC), to gaseous state at ambient temperature.
5. [2010] EWCA Civ. 1145
6. [2010] EWCA Civ. 1145