Buyer`s Rights In The Event Of Cargo`s Non-Compliance With The Contract Quality Specifications
The English Courts make a distinction between the situation when the goods supplied do not correspond with the description in the sale contract and the situation when there is only a difference in quality.
If the goods supplied do not correspond with the contractual description, the buyer shall be entitled to reject them. In the commodity sale contracts concluded subject to English law there is a condition implied under the Sale of Goods Act 1979 that the goods must correspond with the contractual description1. Therefore, in the event that the seller delivers a different grade of oil than that stipulated in the sale contract, the buyer shall be entitled to reject the cargo.
In the event of a breach of the contract quality specifications, the buyer`s rights will depend on the contract terms, the severity of the breach (i.e. the extent of deviation from the quality specifications), the commodity sold and the possibility to upgrade the cargo characteristics within larger blends.
If a quality specification is part of the description of goods in a sale by description, the goods` compliance with that specification is an express condition of contract.
An example of such case was the English law case Mena Energy DMCC v. Hascol Petroleum Ltd.2. The case was a dispute under a contract for the sale of a cargo of "HSFO 125 cSt" (high viscosity fuel oil with a maximum viscosity of 125 centistokes) that to be delivered at the port of Karachi in Pakistan on CFR terms and outturn quality basis within a date range of 5 – 10 November 2014.
The seller Mena Energy shipped separately on board the carrying vessel three oil parcels: a parcel of fuel oil with a viscosity of 280 cSt, a parcel of gas oil and a parcel of cutter stock and instructed the Master to blend them on board the vessel after the completion of loading.
Before loading, the samples drawn in correct proportions from each of the three parcels were blended by hand and the analysis of the hand-blend sample indicated that the cargo had a viscosity of 101.6 cSt, that was below the contractual specification of 125 cSt. No other sample was drawn from the cargo for further analysis after the blending of the three oil parcels on board the vessel.
The sale contract provided that the cargo`s compliance with the contract quality specifications was to be determined by the laboratory analysis of the composite sample obtained from the samples to be drawn from the vessel`s cargo tanks at the port of discharge prior to the commencement of discharge.
Upon the arrival of the vessel carrying the cargo at the discharge port, the cargo was sampled and the laboratory analysis showed that the cargo had a viscosity of 192.92 cSt that was much higher than the contract viscosity specification. On receipt of these results, the buyer Hascol Petroleum Ltd. rejected the cargo arguing that the viscosity specification formed part of the description of the commodity in the sale contract and therefore, the fuel oil cargo was required to comply with the commodity description in the sale contract, i.e. "HSFO 125 cSt".
The English High Court held that the buyer had the right to reject the cargo because the viscosity specification was not only a quality specification but also part of the description of the commodity in the sale contract and the fuel oil cargo was required to comply with the commodity description in the sale contract.
Extent Of Deviation From The Contractual Quality Specifications
If there is a significant difference between the cargo quality characteristics and the contractual quality specifications that amounts to a non-compliance with the contract description of goods, the buyer would be entitled to reject the goods. If there is only a minor breach of contract quality specifications, the buyer would only be entitled to claim damages.
Case Study: Choil Trading S.A. v. Sahara Energy Resources Ltd.3
The case was a dispute under a contract for the sale of a cargo of naphtha delivered FOB basis from the Port Harcourt in Nigeria. The cargo was on-sold by FOB buyer on CFR terms.
The contractual quality was stated as "PHRC naphtha quality"/"Naphtha of normal running production as produced by Port Harcourt Refining Company (PHRC)" based on the specifications determined at the loading port following the analysis of samples drawn from the shore tanks at the time of concluding the contract.
The respective analysis results showed that the quality characteristics of the naphtha cargo were within the normal range of naphtha produced by Port Harcourt Refining Company.
However, the analysis results of the composite samples drawn a month later from the shore tanks before loading and subsequently from the ship`s tanks after loading revealed that the cargo was off-specification in respect of colour and that it contained an abnormally high quantity of Methyl Tertiair Buthyl Ether (MTBE), a man made substance which is not a by-product of the production of naphtha and therefore, it could not have originated from Port Harcourt Refinery.
It was later found out that the high levels of MTBE were the result of contamination of cargo in the shore tanks from a previous cargo of gasoline.
As a result of the contamination, the cargo could no longer be used as a petrochemical feedstock in a refinery, which was the purpose for which was bought. Consequently, upon receiving the analysis results the end buyer (CFR buyer) rejected the cargo due to the excessive MTBE content. In turn, the FOB buyer reserved its right to reject the cargo. It eventually made a salvage sale and subsequently brought a claim in the English Commercial Court to recover the financial losses incurred due to the FOB seller`s failure to deliver a cargo conforming with the contractual description.
In the Court proceedings the question in dispute was whether there was any contractual warranty as to the quality of the naphtha cargo.
The FOB seller contended that the contractual quality term "PHRC naphtha quality" or "Naphtha of normal running production as produced by Port Harcourt Refining Company” should be interpreted as meaning a sale without any warranty as to quality at all.
The Court held that although the FOB sales of Nigerian naphtha were often made without warranty (warranted specifications), the term "Quality: PHRC naphtha quality" should not have been interpreted as if it said or meant that there was literally no term as to quality of any kind. The inclusion of a "Quality" term was inconsistent with this.
The relevant paragraphs of the Court decision are quoted below:
"Choil was, bound to accept naphtha, whatever its characteristics, provided it was "PHRC naphtha quality". But it was not that obliged to accept a cargo which was heavily contaminated by a substance which was not the result of naphtha production and which is not normally present in naphtha produced by PHRC. [...]
The naphtha supplied did not conform to the contractual standard. MTBE is not a by product of naphtha production (either by PHRC or anyone else) and MTBE on this scale (between 650 ppm and 2300 ppm) was grossly abnormal. 50 ppm is the maximum that is tolerated.
In providing this naphtha Sahara was in breach of the implied condition that the cargo would comply with its description viz "PHRC naphtha quality"/"Naphtha of normal running production as produced by Port Harcourt Refining Company" and of the implied term that it should be of satisfactory quality."
In the event of a breach of the contract quality specifications, the buyer`s rights will also depend on the commodity sold and the possibility to upgrade the cargo characteristics within larger blends.
An example of such case was the English law case Galtrade Limited v. BP Oil International Limited4. The case was a dispute under a contract for the sale of four cargoes of low sulphur straight run fuel oil (SRFO). The fuel oil cargoes had to be delivered on FOB terms at the port of Taman on the Black Sea coast.
Pursuant to the sale contract terms, the quality determination was made based on the ship`s composite sample taken after loading and thus the sample analysis results were not available until after the ship carrying the cargo sailed away from the port of loading.
The first cargo was off-specification for viscosity (415.6 cSt against a specification of 400 cSt) and sulphur (1.39% against a specification of 1.30%). Accordingly, the seller agreed to buy back the cargo for delivery at its refinery in Castellon.
The second cargo was also off-specification this time for sulphur (1.48% against the guarantee of 1.30%) and vanadium (56 mg/kg against the guarantee of 50 mg/kg). The seller offered a price discount and the buyer agreed to accept the cargo on the new price terms.
The third cargo was again off-specification in respect of sulphur (1.53% against a specification of maximum 1.30%). This time the FOB buyer rejected the cargo upon receiving the analysis results on the grounds that "this is a huge difference from the contractual specification that makes this cargo drastically different from what Galtrade contracted for."
The seller was not the end supplier of fuel oil cargoes and sought initially to negotiate a price discount of about USD 10.50 MT. When the buyer refused to pay for the cargo, the seller agreed to take back the cargo by ship to ship transfer off Malta.
The buyer brought a claim in the English Commercial Court to recover the financial losses incurred due to the seller`s failure to deliver a cargo conforming with the contract quality specifications, including the freight for the carriage of cargo from the port of Taman to Malta, the vessel demurrage incurred after loading pending an agreement between the buyer and seller over the cargo loaded on board the vessel. The buyer contended that it was entitled to reject the cargo because the SRFO with a sulphur level of 1.53% was a different product than the SRFO with a sulphur level of 1.30%.
The seller argued that the excess in sulphur content was not drastically different from the sulphur specification in the sale contract and that the fuel oil cargo remained marketable as a blendstock at an appropriate price. The industry accepted specification for sulphur level is 1% in low sulphur fuel oil and 3.5% for high sulphur fuel oil. Therefore 1.30% sulphur level is viewed as an intermediate sulphur level, just as 1.53% sulphur level, rather than as a low sulphur level.
As regards the financial losses claimed by the buyer, the seller contended that they were caused by the buyer`s wrongful rejection.
The English Commercial Court rejected the buyer`s claim and held that the breach of sulphur specification was not so serious to entitle the buyer to reject the cargo. Since the difference between 1.30% sulphur level and 1.53% sulphur level was considered marginal, SRFO with 1.53% sulphur level was not a substantively different product than SRFO with 1.30% sulphur level.
SRFO is used by oil refineries as a feedstock for secondary refining processes. The greater the level of sulphur and other pollutants, the less desirable or valuable is the SRFO as a feedstock to oil refineries. But a fuel oil parcel with a higher level of sulphur may be blended with oil parcels with lower sulphur concentrations in order to meet the quality specifications of the oil refineries. The upgrading and downgrading of fuel oil parcels within larger blends is a common part of the oil traders` business. In this regard the judge said that:
"the market in which the parties operate can accommodate product of different specifications, whether directly into refineries, for blending or for consumption. At the very least, this shows that it could never be said with certainty that every deviation from specification would cause any, let alone substantial prejudice, to the buyer."
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Oil Trade Review Edition No. 5.
1. See the Section 13(1) of the Sale of Goods Act 1979
2.  EWHC 262 (Comm)
3.  EWHC 374 (Comm)
4.  EWHC 1796 (Comm)