Who Bears The Risks For Blending On Board In FOB Sale Contracts

The fuel oil blends (i.e. the blend components and their ratio in the blend product) are designed by the oil traders by mathematical calculation.
The blend components can be mixed in the shore tanks or on board the carrying vessels at loading ports. When the blend components are mixed on board the carrying vessels at loading ports, they are delivered to the carrying vessels from different shore tanks. Samples of blend components are taken from the shore tanks prior to the delivery of these components on board the vessel and then they are proportionally blended in a composite sample which is then analysed at a loading port laboratory.
However, the laboratory tests of the hand-blended samples cannot always be relied on to predict the characteristics of the product resulting from blending on board the components.
The shippers expect that the mixing of the blend components on board the vessel will result in a cargo conforming with the cargo description and quality specifications in the sale contract. This is not always the case. It may happen that the blend components are not compatible making the blended cargo unstable with the consequence that the blended cargo does not comply with the contract quality specifications or does not even correspond with the cargo description in the sale contract.
An example of such case was presented in the English law case Septo Trading Inc. v. Tintrade Ltd.¹. The case was a dispute under a contract for the sale of a fuel oil cargo delivered on FOB terms from the port of Ventspils.
The seller shipped separately on board the carrying vessel seven oil parcels of different grades that were afterwards blended in vessel`s tanks. The seller expected that by blending on board the different oil grades the resulting product will meet the contractual quality specifications.
The oil parcels were stored separately before loading. SGS inspectors nominated to determine the quantity and quality of the cargo took separate samples from each shore tank where the individual oil parcels were stored before loading and the samples were proportionally blended by hand. Then SGS performed the laboratory analysis of the hand-blend sample and issued a quality certificate showing that the cargo was within the contractual quality specifications.
The cargo was transported from Ventspils to Gibraltar where it was found off-specification.
The cargo samples taken from the shore tanks at Ventspils by the SGS inspectors were subsequently analysed by another inspection company that found them off-specification.
It was later determined by experts that the reason why the fuel oil blend was off-specification was that the blend components were "fundamentally incompatible". The fuel oil cargoes need to be homogenous in order to obtain a representative sample. If SGS inspector had checked the homogeneity of the individual cargo components, he would have discovered that they were not homogenous as required in the quality specifications. Thus the composite sample prepared by the SGS inspectors prior to loading was not representative for the product resulting from blending on board the seven oil parcels.
The buyer claimed damages for breach of contract specifications contending that:
- blending on board operation was a breach of sale contract because the seller had the obligation to deliver "a homogenous blend" at the ship`s manifold, i.e. the point where the risks passed from the seller to buyer; and
- it could not be bound by the SGS determination of quality given that SGS inspectors had failed to take and test a representative composite sample.
The sale contract provided that all risks were to pass from the seller to buyer at the loading port at the time when the oil product passed the flange connection between the loading hoses and the vessel`s permanent hoses.
When the seven oil parcels passed the ship`s manifold they were incompatible with each other and as a consequence their subsequent blending on board the ship led to an off-specification cargo. This was sufficient to establish during the Court trial that when the cargo passed the ship`s manifold, and before that, was not compliant with the contractual specifications.
Nonetheless, the English Court of Appeal rejected the buyer`s claim on the grounds that:
- the quality determination clause agreed in the sale terms recap provided that the quality certificate issued by a mutually acceptable independent inspector at the loading port was to be binding on the contracting parties in the absence of fraud or manifest error;
- the failure by SGS inspectors to take and test a representative sample was not a case of "manifest error";
- since the quality certificate showed that the cargo was on-specification, the buyer was precluded to bring a claim for breach of quality specifications.

The FOB buyers should avoid the quality determination clauses with final certificate provisions because as shown in Septo Trading Inc. v. Tintrade Ltd. and KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG² such provisions protect the sellers in the event that the fuel oil blend components are not compatible and the blend turns out to be unstable later. BP and Shell Sale Terms limiting the effect of the quality certificate for invoicing and payment purposes would enable the FOB buyers to recover the financial loss incurred in the event that the fuel oil blend is subsequently found off-specification or does not correspond with the contractual description.

by Vlad Cioarec, International Trade Consultant

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

Endnotes:

1. [2021] EWCA Civ. 718
2. [2010] EWCA Civ. 1145