How The Oil Traders May Preserve The Right To Claim Damages In FOB, CFR And CIF Sale Contracts In The Event Of Cargo`s Non-Compliance With The Contract Quality Specifications

In the English contract law, the case Toepfer v. Continental Grain Co.¹ set the rule that if the sale contract provides that the quality certificate issued at loading port shall be final and binding on both seller and buyer, no other subsequent evidence in relation to the matters certified may be relied on by the buyers to challenge the evidentiary value of the quality certificate.
This rule is relevant in FOB, CFR and CIF sale contracts where the quality has to be determined at loading port and it means that even if the cargo is tested at discharge port and found to be off-specification and the quality certificate issued at loading port is arguably inaccurate, as in Exxonmobil Sales and Supply Corporation v. Texaco Ltd.², KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG³ and Septo Trading Inc v. Tintrade Ltd⁴, the quality determined at loading port will bind, in the absence of fraud or manifest error, if the sale contract provides that the quality certificate issued at loading port shall be final and binding⁵.
This means that the buyers cannot reject the cargo nor claim damages for the breach of contractual specifications if the quality certificate issued at loading port evidenced that the cargo was on-specification.
This is the reason why in FOB, CFR and CIF sale transactions the sellers seek to impose a quality determination clause providing that the quality certificate issued at loading port shall be final and binding for all purposes on the contracting parties.
The buyers should avoid clauses with such provisions and rely instead on BP or Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil and Petroleum Products which provide that the quality determined at loading port shall constitute evidence of quality for invoicing and payment purposes only. BP and Shell Terms limiting the effect of the quality certificate issued at loading port to invoicing and payment purposes oblige the buyer to pay the contract price based on the documents provided by the seller, including the quality certificate, but it also give the buyer the right to claim damages in the event that the cargo is subsequently found off-specification.
In case of quality disputes, the English Courts will take into consideration BP/Shell provisions limiting the effect of the quality certificate issued at loading port only if they are not inconsistent with what the contracting parties expressly agreed in the sale terms recap or in any subsequent agreement⁶. Therefore, the buyers should avoid clauses with final certificate provisions whether in sale terms recap or in any subsequent agreement.
An example of how the buyers can avoid such clauses is provided in the English law case BP Oil International Ltd v. Glencore Energy UK Ltd⁷. The case was a claim for the breach of a contract quality specification under a contract for the sale of a cargo of Russian Export Blend Crude Oil.
The sale contract was evidenced by the sale transaction recap (buyer`s email confirmation of the parties` transaction) which provided that BP General Terms and Conditions for Sales and Purchases of Crude Oil were expressly incorporated.
One question in dispute was whether the original sale terms evidenced in the sale transaction recap were varied by the additional clauses subsequently proposed by the seller.
After the sale transaction was agreed, the seller (Glencore) sent its contractual clauses (Glencore Sales Contract) to buyer (BP Oil International Ltd.).
The buyer refused to accept some of the clauses proposed by the seller including a quality determination clause with final certificate provisions.
The seller`s failure to reach an agreement with the buyer over the additional clauses meant that the sale contract remained that evidenced by the sale terms recap including BP General Terms and Conditions for Sales and Purchases of Crude Oil.
The English Commercial Court held that unless and until the negotiations for concluding a formal sales contract have reached the parties` agreement on the terms proposed by the seller, it cannot be said that a formal sales contract is concluded. A stalemate situation in reaching an agreement on the additional clauses proposed by the seller meant that the contract was that evidenced by the sale terms recap including BP General Terms and Conditions for Sales and Purchases of Crude Oil.
This enabled the buyer (BP Oil International Ltd.) to rely on BP Terms limiting the effect of the quality certificate issued at loading port and challenge the evidentiary value of the quality certificate issued at loading port in respect of the level of organic chlorides in the cargo based on the results of subsequent analysis of cargo samples.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Oil Trade Review Edition No. 5.

Endnotes:

1. [1974] 1 Lloyd`s Rep. 11
2. [2003] EWHC 1964 (Comm)
3. [2010] EWCA Civ 1145
4. [2021] EWCA Civ 718
5. See AIC Ltd. v. ITS Testing Services (UK) Ltd. (The "Kriti Palm"), [2006] EWCA Civ. 1601; [2007] 1 Lloyd`s Rep. 555.
6. Septo Trading Inc. v. Tintrade Ltd., [2021] EWCA Civ 718
7. [2022] EWHC 499 (Comm)