Buyer`s Remedies For Delivery Of Contaminated Coal

Coal cargoes must be delivered free from any detrimental foreign materials such as earth, stones, wood or mine blasting materials and any organic contaminants which may be mixed with coal during storage at the loading terminal.
One such contaminant could be considered the petroleum coke, commonly referred to as "petcoke".
The petroleum coke is a solid waste by-product of heavy crude oil and tar sands refining process that resembles coal in appearance. The petroleum coke is sometimes added by US shippers to the thermal coal cargoes in proportions ranging from 10% to 30% in order to meet the quality specifications in respect of Gross Calorific Value. The petroleum coke has a higher energy content and a lower cost than thermal coal, but it has a lower Volatile Matter than thermal coal, which makes it difficult to ignite in boilers. It is thought that by blending the petroleum coke with thermal coal, the burning coal will ignite the petroleum coke and keep it burning.
Not all power plant operators are willing to burn in their boilers coal blends with petroleum coke.
Besides the problem with ignition, the petroleum coke emits more carbon dioxide than thermal coal and has a higher sulphur and heavy metals (notably Vanadium) content, thereby generating higher toxic emissions of sulphur dioxide and heavy metals. These disadvantages make the petroleum coke an undesirable fuel for most power plant operators.
The power plant operators who are not willing to accept coal blends with petroleum coke should stipulate this matter clearly in their procurement contracts in the form of a warranty that the supplier shall not add any petroleum coke to the coal cargo(es) to be delivered under such contracts.
The procurement contracts should also provide remedies in case of breach of this warranty and of the warranty in respect of foreign materials.
In the procurement contracts requiring delivery of coal cargoes on CFR or CIF basis, the contractual remedies should include the supplier`s obligation to reimburse the buyer for all expenses incurred by the buyer in screening and disposing of the foreign materials and/or petroleum coke from the coal cargo and the buyer`s right to deduct from the contract price (price invoiced by the supplier for the contaminated cargo) the amount invoiced for the quantity of foreign materials and/or petroleum coke.
The buyer`s failure to stipulate these matters in the procurement contract can leave the buyer exposed to legal disputes with the supplier. An example of such legal dispute was the US law case Carbontek Trading Co. Ltd. v. Phibro Energy, Inc.<sup>1</sup>. In that case the Danish power plant operator, Elkraft Power Company sought to procure a cargo of approximately 70,000 MT of thermal coal from the commodity trading company Phibro Energy.
The procurement contract concluded by Elkraft Power Company with Phibro Energy stipulated a price of US$ 32 per MT and provided that New York law applied to disputes arising under the contract.
Phibro Energy bought the coal cargo on FOB terms from an US supplier called Carbontek Trading Co. at a price of US $ 25 per MT. For the carriage of coal cargo from US loading port to Denmark, Phibro Energy chartered the vessel "Seneca".
Phibro Energy and Elkraft Power Company appointed local surveyors to inspect the coal piles intended for loading on board the vessel "Seneca". During inspection, the surveyors discovered that the coal piles contained petroleum coke and informed the buyers, but by the time Phibro Energy notified the supplier Carbontek of their intention to reject the cargo for the fact that it contained petroleum coke, Carbontek Trading already commenced loading the cargo.
Then Phibro Energy asked Carbontek Trading to discharge the cargo loaded and replace it with non-contaminated coal, but Carbontek Trading continued to load the coal/petcoke blend and upon the completion of loading commenced a legal action in US Courts in an attempt to force Phibro Energy to pay the full contract price for the cargo. Phibro Energy counterclaimed damages as compensation for the contamination of coal cargo with petroleum coke, pursuant to the provisions of Article 2 section 2 – 714 of New York Uniform Commercial Code.
Upon the inspection of cargo in Denmark, it was discovered that the cargo of 70,000 MT contained a quantity of 6,500 MT of petroleum coke, of which 500 MT were so mixed in with coal in one hold of the ship that it did not significantly affect the quality of that part of the cargo. Elkraft Power Company agreed to accept delivery of the cargo subject to a deduction of US$ 192,000 as compensation for the contamination of coal cargo with petroleum coke, the amount of US$ 192,000 representing the price that would have been paid for the quantity of 6,000 MT of petroleum coke (US$ 32 x 6,000 MT). In turn, Phibro Energy paid Carbontek the contract price less a deduction for the amount that would have been paid for the quantity of petroleum coke (US$ 25 x 6,000 MT) and demurrage charges for the time spent on demurage by the carrying vessel at loading port due to the dispute over the addition of petroleum coke to the coal cargo.
The US Court of Appeals for the Fifth Circuit held that Phibro Energy (FOB buyer) was entitled to reject the cargo at the time of shipment after discovery of the contamination with petroleum coke and that the subsequent acceptance of cargo was subject to Phibro Energy`s right to deduct damages from the contract price, pursuant to Article 2 section 2 – 717 of New York Uniform Commercial Code², for the quantity of petroleum coke added to the coal cargo.
As regards the amount deducted by Phibro Energy from the contract price (FOB price invoiced by Carbontek, i.e. US$ 150,000 (US$ 25 x 6,000 MT), this was calculated in accordance with the provisions of Article 2 section 2 – 714 paragraph 2 of New York Uniform Commercial Code which stipulates that:

"The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount."

US$ 150,000 deduction for the quantity of 6,000 MT of petroleum coke was intended to represent the difference between the value of the goods if they had been as warranted and the value of the goods accepted based on the price settlement agreement between Phibro Energy and Elkraft Power Company.
In Carbontek Trading Co. Ltd. v. Phibro Energy, Inc., the buyers were able to base their claim on the statutory provisions of New York Uniform Commercial Code, which provided remedies for breach of warranty in respect of accepted goods. The power plant operators from Far East provide in their coal procurement contracts that their national law applies to disputes arising under the contracts. In order to avoid legal disputes with the coal suppliers, the power plant operators should stipulate in their procurement contracts remedies in addition to those provided in the national statutes for breach of contractual warranties.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Coal Trade Review Edition No. 4.

Endnotes:

1. 910 F. 2d 302 (5th Cir. 1990)
2. Article 2 section 2 – 717 of New York Uniform Commercial Code stipulates that: "The buyer on notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract."