Who Bears The Risks For Blending On Board In DAP 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. The oil traders require the mixing of blend components on board the carrying vessels due to the geographical distance between the locations of blend components and lack of storage facilities for blends 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.
Mixing the blend components on board the carrying vessel has the risk that the cargo may not be fully homogenized by the time of the vessel`s arrival at the port of discharge, with the blend components forming strata in the vessel`s tanks.
An example of such case was presented in the English law case Mena Energy DMCC v. Hascol Petroleum Ltd.1. 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) on CFR outturn quality terms (i.e. the quality of cargo had to be determined at the discharge port).
The cargo had to be delivered in Pakistan at the port of Karachi within a date range of 5 – 10 November 2014.
The cargo was loaded at the port of Fujairah.
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, 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. The results of the laboratory analysis performed by the discharge port authority, the Hydrocarbon Development Institute of Pakistan (HDIP), on the composite sample drawn from the vessel`s tanks at the discharge port were to be final and binding on the contracting parties with regard to the quality of cargo.
When the vessel carrying the blended cargo arrived at the port of Karachi on 15 November 2014, spot samples2 were drawn from the vessel`s cargo tanks through the vessel`s closed sampling system in the presence of SGS and HDIP representatives. The laboratory analysis of the cargo sample showed that the cargo had a viscosity of 192.92 cSt and therefore, did not comply with the contract viscosity specification. On receipt of these results, the buyer Hascol Petroleum Ltd. rejected the cargo.
The analysis of the spot samples also showed that in all but three tanks the cargo was stratified, with a viscosity ranged between 230 cSt and 286 cSt at the upper levels of the tanks. Therefore, the cargo was not homogenous.
On 21/22 November 2014, the contracting parties agreed for the vessel to return to the port of Fujairah to discharge there the cargo for further blending in the shore tanks and then reload the blended cargo and sail back to Karachi for a new analysis.
The buyer`s consent to that arrangement was subject to the condition that the carrying vessel would return to Karachi by 26 November 2014 in order to enable the buyer to deliver the cargo to its customers in Pakistan by 30 November 2014.
The vessel returned to Fujairah on 25 November 2014. When the vessel arrived at Fujairah, new samples, both spot and running samples, were drawn from the vessel`s cargo tanks prior to the discharge of cargo in the shore tanks for blending. The analysis of the composite sample obtained from the spot samples indicated a viscosity of 159.1 cSt, while the analysis of the running samples showed a viscosity of 159.3 cSt.
After the blending of cargo in the shore tanks, the analysis of cargo sample indicated a viscosity of 95.25 cSt.
After the reloading of cargo on board the vessel, a new sample was taken from the cargo. This time the analysis of cargo sample showed a viscosity of 92.8 cSt.
On 26 November 2014, the vessel sailed back to Karachi where it arrived on 30 November 2014. This time the cargo was found to have a viscosity of 82.47 cSt.
Hascol Petroleum claimed damages for the late delivery of the fuel oil cargo contending that:
- the viscosity specification formed part of the description of the commodity in the sale contract;
- the cargo was required to comply with the commodity description in the sale contract "HSFO 125 cSt";
- the seller had the obligation to deliver a homogenous cargo and a cargo which was non-homogenous and stratified as shown by the samples drawn on 17 November 2014 could not properly be described as "HSFO 125 cSt".
The English High Court held that 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.
All the trouble could have been avoided if the seller would have blended the three oil parcels in shore tanks from the very beginning in the early days of November 2014. The fact that the blend components had been loaded in the correct proportions did not necessarily mean that the cargo would have certainly complied with the commodity description and quality specifications from the sale contract.
If the sellers in DAP contracts or sellers in CFR/CIF contracts with outturn quality terms choose to blend different oil grades on board the carrying vessels rather than in shore tanks before loading, they are the ones who would bear the risks and costs arising therefrom until the blended cargo is certified as meeting the contract quality specifications3.
As regards the buyer`s contention that the fuel oil cargo had to be homogenous at the time of delivery at discharge port in order to comply with the commodity description in the sale contract, the Court held that there was no such provision in the sale contract. However, the fuel oil blends should be homogenous at the time of delivery at discharge port in order to obtain a representative sample. Therefore, in the contracts for procurement of fuel oil cargoes on DAP or CFR/CIF Outturn Quality terms the cargo homogeneity should be an express requirement4.
In Mena Energy DMCC v. Hascol Petroleum Ltd., the sale contract was drafted by the seller with no such provision, but it does not mean that it was not necessary for the cargo to be homogenous at the time of the vessel`s arrival at the discharge port. As stated in SGS analysis report, the cargo had to be homogenous in order to obtain a representative sample.
The seller`s failure to deliver a homogenous cargo within the date range of 5 – 10 November 2014 caused a financial loss to the buyer which had to deliver the fuel oil cargo to its customers in Pakistan by 30 November 2014 to avoid a financial loss. Therefore, the buyer`s claim for late delivery was justified and should have been upheld.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Oil Trade Review Edition No. 5.
1.  EWHC 262 (Comm)
2. The spot samples are taken from specified heights in each cargo tank – upper, middle and lower spots.
3. See Qatar International Petroleum Marketing Company Ltd. (TASWEEQ) QJSC General Terms and Conditions For CFR/CIF Sales and Purchases of Bulk Oils.
4. In the US law case Westport Petroleum Inc. v. M/V OSHIMA SPIRIT, 111 F. Supp. 2d 427 (S.D.N.Y., Sept. 5, 2000), a contract for the procurement of a fuel oil cargo on CFR terms stipulated that it was permissible for the cargo to be a blend of different oil products provided that at the time of delivery at the discharge port the cargo was a homogenous mixture conforming to the contract quality specifications.