The Evidentiary Value Of The Quality Certificate In The Chain Of Commodity Sale Contracts

In English contract law, the case Toepfer v. Continental Grain Co.¹ set the rule that if the sale contract states that the quality certificate shall be final and binding on both seller and buyer, no other evidence in relation to the matters certified may be relied on by the buyers to challenge the evidentiary value of the quality certificate.
In AIC Ltd. v. ITS Testing Services (UK) Ltd. (The "Kriti Palm")², Lord Justice Rix said that:

"In a typical case, a cargo might be tested at destination and found to have a different quality from that certified, or even to be out of specification. The contract contemplates that, if a query is raised, then further testing will be done by mutual agreement upon the formally sealed and retained samples, and probably by an independent referee. It may be concluded that the certificate is arguably or probably inaccurate, and possibly even negligently so. Nevertheless the certificate will bind, where it is expressed to be final and binding, in the absence of fraud or manifest error."

The evidentiary value of the quality certificate in commodity trade is subject to exceptions of fraud and manifest error.
The fraud committed by the inspector would vitiate the quality determination irrespective of whether it affected the result. As regards the error, the English Courts distinguish the immaterial error from the material error.

What errors made by inspectors are considered to be an immaterial error?

A mistake made in the quality certificate by the inspector who certifies the results of cargo sample analysis is considered an immaterial error.
In Veba Oil Supply & Trading GmbH v. Petrotrade Inc.³ the English Court of Appeal held that an immaterial error on the face of the quality certificate does not vitiate the quality determination and therefore, it has no effect on the finality of the quality certificate.
In Toepfer v. Continental Grain Co.⁴ the inspector mistakenly described the durum wheat grade as "No. 3 hard amber" instead of "No. 3 amber". Lord Denning held that such a mistake does not invalidate the quality certificate even if the certifier admitted that he has made a mistake.
A mistake made by an inspector in the quality certificate will not provide grounds for questioning the quality determination if the sale contract clause referring to the quality determination provides that such quality determination shall be final and binding and the seller has performed his contractual obligations. The quality certificate remains binding as between the seller and buyer and all down the chain of sellers and buyers, notwithstanding the mistake.
Another example of immaterial error is when the inspection company committed an immaterial departure from the instructions of the contracting parties that could not even potentially affect the scientific process of quality determination. Simon Brown LJ said that such error would be irrelevant.

What errors made by inspectors are considered to be material error?

When appointing the inspectors to determine the quality of commodity cargoes, the sellers and buyers give instructions to inspectors as to the quality characteristics required to be analyzed and the test methods to be used for the laboratory analyisis of cargo samples. The instructions include also the requirement that the inspectors retain the cargo sample for the period stipulated by sellers and buyers in contract.
The inspectors must comply with the instructions given by sellers and buyers. In case of the inspectors` failure to apply the test method they were instructed to apply and/or failure to retain the cargo sample, the quality determination and quality certificate will not be binding on the buyers.
In Veba Oil Supply & Trading GmbH v. Petrotrade Inc.<sup>5</sup> a contract for the supply of a cargo of gas oil required the determination of gas oil density using the test method D1298. The inspectors used a different test method than the test method D1298. Upon the vessel`s arrival at the port of discharge, the gas oil density was tested with the method D1298 and found to be off-specification.
The buyers contended that the quality determination made at loading port was not final and binding because the inspectors did not use the test method specified in the sale contract.
The English Court of Appeal held that the inspectors` error in using the wrong test method rendered the quality certificate uncontractual, invalid and ineffective.
In case of a material breach of instructions, the quality certificate is not binding on the contracting parties because the inspector had not done what he was instructed to do. The fact that the use of the wrong test method cannot have affected the "ultimate result" did not save the quality determination.
Simon Brown LJ held that:

"Once a material departure from instructions is established, the Court is not concerned with its effect on the result. … [T]he determination in those circumstances is simply not binding on the parties."

A material departure from instructions vitiates the quality determination irrespective of whether or not it affects the result. This kind of error is considered a "manifest error".
In Veba Oil Supply & Trading GmbH v. Petrotrade Inc.⁶ the English Court of Appeal defined the "manifest errors" as "oversights and blunders so obvious and obviously capable of affecting the determination as to admit no difference of opinion."
In Galaxy Energy International Ltd. (BVI) v. Eurobunker S.p.A.⁷, Thomas J. said that:

"The manifest error must relate to the [quality] certificate or the procedure that led to the making of the certificate; for example, it would be a manifest error if a plain and obvious mistake of transcription had been made or a plain and obvious error had been made in testing or in sampling or in mixing the samples."
 
Therefore, an obvious error committed by the inspectors when determining the quality of cargo will vitiate the quality determination.
A case similar to Veba Oil Supply & Trading GmbH v. Petrotrade Inc.⁸ was AIC Ltd. v. ITS Testing Services (UK) Ltd. (The "Kriti Palm")⁹. In that case a cargo of gasoline was sold to an US company. One of the quality characteristics of gasoline – Reid Vapour Pressure (RVP) should have been maximum 9 PSI by the test method D5191.
The sale contract specified the test method D5191 because only that test method could satisfy the conformity with the Colonial Pipeline Specification which has to be met in USA by gasoline for the purpose of transport through the pipelines.
The inspectors used a different test method than the test method D5191 stated in the sale contract and instructions received from the contracting parties.
Upon the vessel`s arrival in USA, the analysis of cargo samples revealed that RVP was higher than 9 PSI.
The FOB buyers brought a claim against the inspection company contending that if the cargo samples had been originally tested using the test method D5191, it would have been shown to be off-specification.
The English Court of Appeal held that the use of the wrong test method was a material error because the gasoline conformity with CPS was an US law requirement for the importation of cargo in USA as gasoline. The use of the wrong test method amounted to manifest error and therefore, the quality certificate was invalid and not binding on the FOB buyers.
If the quality certificate is invalid, the buyer is entitled to reject the shipping documents and the goods.

What if the inspectors fail to retain the cargo samples?

In Exxonmobil Sales and Supply Corporation v. Texaco Ltd.¹⁰, one of the clauses of the sale contract required the retention of cargo samples tested by inspectors at loading port for a period of 90 days after the completion of loading.
The buyers contended that the inspectors` quality determination was not final and binding because the inspectors failed to retain the cargo samples and therefore, they have not followed the contractual procedure for determining the quality of cargo.
The English Commercial Court held that:

"where the retention of a portion of the tested oil can fairly be described as part of the agreed procedure to be followed by the independent expert, albeit the final step and one to be taken after the oil has been tested and its quality determined, and the inspector does not take that final step, the party seeking to rely upon the inspector`s determination cannot say that the agreed procedure has been followed. In those circumstances, assuming that the departure cannot be said to be trivial or de minimis, it seems to me seriously arguable that the other party has not agreed to be bound by the inspector`s determination, notwithstanding that the result of the determination would not have been affected."

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Biofuels Trade Review Edition No. 1.


Endnotes:

1. [1974] 1 Lloyd`s Rep. 11
2. [2006] EWCA Civ. 1601; [2007] 1 Lloyd`s Rep. 555.
3. [2001] EWCA Civ. 1832; [2002] 1 Lloyd`s Rep. 295.
4. [1974] 1 Lloyd`s Rep. 11
5. [2001] EWCA Civ. 1832; [2002] 1 Lloyd`s Rep. 295.
6. [2001] EWCA Civ. 1832; [2002] 1 Lloyd`s Rep. 295.
7. [2001] 2 Lloyd`s Rep. 725
8. [2001] EWCA Civ. 1832; [2002] 1 Lloyd`s Rep. 295.
9. [2006] EWCA Civ. 1601; [2007] 1 Lloyd`s Rep. 555.
10. [2003] 2 Lloyd`s Rep 686, [2003] EWHC 1964 (Comm).