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In a recent case1 involving a contract for sale of fuel oil, the question before the court was whether a bespoke clause (related to product quality certificate) was supplemented or negated by a clause of the standard British Petroleum (BP) conditions that were incorporated into the contract. The cardinal question was, could have the two clauses been fairly and sensibly read together so as to give effect to both of them?

It is a usual practice for the parties in commodity trade to recap (recapitulate with concise summary) the agreed main commercial terms in e-mail or facsimile and then incorporate widely used industry standard terms to produce a contract agreement. Often, the recap will include a provision stating that if a conflict exists between the recap and the standard terms, the terms of the recap will apply. This reflects the established principle that specifically negotiated terms (bespoke terms) will usually prevail over standard terms.2

Septo Trading Inc. (buyer) and Tintrade Limited (seller) entered into a contract for supply of high sulphur fuel oil on FOB3 terms. Pursuant to the contract, the buyer and the seller jointly instructed an independent inspector at the load port to determine the quality and quantity of the fuel oil.

The inspection certificate confirmed that the cargo conformed to the contractual specifications. However, upon further quality test of the cargo pursuant to its resale by the buyer to a third party, the cargo was found to be off-spec.

After having failed to persuade the seller to buy back the cargo and failing to agree a reduced price with the third party, the buyer decided to blend the off-spec cargo with a larger quantity of compatible product in order to produce an on-spec cargo and sell the blended product into the Singapore market. The buyer subsequently sued the seller seeking US$7,785,478 in damages for having sold off-spec product.

CONTRACT CLAUSES

The contract was evidenced by a formal Recap (via e-mail), which included the following clause for determining quality and quantity:

As ascertained at loadport by mutually acceptable first-class independent inspector, or as ascertained by loadport authorities and witnessed by first class independent inspector (as per local practice at time of loading).

Such result to be binding on parties save fraud or manifest error.

Inspection costs to be shared 50/50 between Buyer/Seller.

The Recap included application of BP 2007 General Terms and Conditions for sales (BP terms) where not in conflict with the specially negotiated terms which includes the above clause.

The BP terms contained the following clause which later became the subject matter of the dispute:

1.2 Certificates of Quantity and Quality

1.2.1 Provided always the certificates of quantity and quality (or such other equivalent documents as may be issued at the Loading Terminal) of the Product comprising the shipment are issued in accordance with sections 1.2.2 or 1.2.3 below then they shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes and the Buyer shall be obliged to make payment in full in accordance with Section 30.1 but without prejudice to the rights of either party to make any claim pursuant to Section 26.

QUESTION BEFORE THE COURT OF FIRST INSTANCE

Among others, the crucial question before the court was whether the certificate of quality issued by the independent inspector at the load port:

  1. was final and binding on the seller and the buyer, and therefore the certificate prevented the buyer from claiming (subsequently, upon re-analysis of the quality of the cargo based on later samples) that the cargo did not conform to the contractual specifications, or
  2. was binding on the seller and buyer for invoicing purposes only. In other words, was it a “pay now, sue later” provision that obliged the buyer to pay the seller’s invoice based on the certificate of quality, the certificate however not being the final determinant of the quality, so that the buyer still had the right to bring a claim against the seller on the basis that the cargo did not meet the contractual specifications.4

The buyer argued that the effect of section 1.2.1 of the BP terms was to clarify the purposes for which the certificate of quality was binding and that was for invoicing and payment. This effectively meant that the certificate was binding only for the purpose of payment and was not final. The buyer also argued that the effect of clause 1.2.1 was consistent with the Recap which stated that the certificate was “binding” but did not state it was “final”. In other words, clause 1.2.1 specified that the certificate was binding only for price and payment. The seller countered that clause 1.2.1 conflicted with the Recap and therefore did not apply, and so did not form part of the contract.

The court concluded that clause 1.2.1 of the BP terms was not in conflict with the Recap, and in fact, it had the effect of

“……qualifying the otherwise general effect of the Recap by saying that the binding nature of the determination of the independent inspector is limited to questions of invoicing, without prejudice to any later claim for breach of contract. In that way both clauses can be read together, and effect can be given to both of them. Thus clause 1.2.1 is not in conflict with the Recap. It qualifies or explains the Recap” [at para 29].5

The Court held that the buyer was entitled to claim that the cargo did not comply with the contractual specification and awarded damages.6 The seller appealed relying on the binding nature of the quality certificate, as set out in the Recap. It submitted that the clauses could not fairly and sensibly be read together, there was a fundamental conflict between them, the judge's conclusion gave no effect to the Recap term, but effectively deleted it from the contract.

COURT OF APPEAL REFERS TO THE LEADING CASES

The Court of Appeal observed that the law was well settled to deal with cases involving contracts containing inconsistency clause and wherein inconsistencies between specially agreed terms and printed terms were alleged, the leading case being Pagnan SpA v Tradax OceanTransportation SA.7

In Pagnan, the Court of Appeal dealt with an alleged inconsistency between a specially negotiated term and the standard conditions of GAFTA contract form 119 that were incorporated into the contract that also had a clause to deal with the potential inconsistency between the printed form of GAFTA 119 and specially agreed terms.

A specially agreed term of the contract provided that the sellers would have to provide export certificate for the goods being sold, whereas the GAFTA contract form 119 included a (prohibition clause) stating that in the event of prohibition of export or in the case of any executive or legislative act by the government of the country of origin restricting export, any unfulfilled portion of the contract would be cancelled. This effectively meant that the sellers would be relieved of their obligation to provide an export certificate for the extent of the contract affected (i.e. cancelled) by the prohibition. The contract also contained a clause dealing with the potential for inconsistencies between the standard form and the specially agreed terms, as follows:

“Special terms and conditions contained herein and/or attached hereto shall be treated as if written on such contract form and shall prevail in so far as they may be inconsistent with the printed clauses of such Contract Form.

The Court concluded that the special condition imposed an absolute obligation on the seller to obtain an export certificate, however it was subject to other clauses of the contract which might modify the obligation and relieve the seller from fulfilling it. The Court then addressed the alleged inconsistency between that absolute obligation and the GAFTA prohibition clause which could excuse a seller’s failure to procure an export certificate for reasons stated in that prohibition clause. The following excerpts of Bingham LJ’s judgment in Pagan explains whether or not the clauses were inconsistent:

“It would in my judgment be quite wrong to approach this question of construction with any predisposition to find inconsistency between the special condition and clause 19 [i.e. the prohibition clause]. They are all part of the same contract, and the parties expressly chose to make their contract subject to the terms of GAFTA Form 119. …

On the other hand, it is wrong to approach the contract on the assumption that there is no inconsistency. By including the inconsistency clause, the parties have acknowledged that there may be. One should, therefore, approach the documents in a cool and objective spirit to see whether there is inconsistency or not.

The learned judge found the arguments on this issue finely balanced but concluded that there was no inconsistency as submitted by the buyers. I agree with his conclusion, but I have less hesitation in reaching it. It is a commonplace of documentary construction that an apparently wide and absolute provision is subject to limitation, modification or qualification by other provisions. That does not make the later provisions inconsistent or repugnant.

It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses”

……In my judgment the first task is to see if the clauses can sensibly be read together. If they cannot, there is inconsistency, and the special condition is to prevail over the other clause in the printed form. But, if they can be read together, they should be and there is no inconsistency.”

In Pagnan, the Court of Appeal ruled that no inconsistency existed between the clauses; the standard prohibition clause of GAFTA form 119 qualified the requirement of the specially agreed term concerning the export certificate but did not deprive it of effect. The natural meaning of the two clauses sensibly read together was that the sellers were obliged to provide for the export certificate, but in case of prohibition of export or any executive or legislative act restricting export, sellers’ obligation would cease.

Further, the Court of Appeal, referring to the principle set out in Alexander v West Bromwich Mortgage Co Ltd.8 which also dealt with a similar question whether the standard printed mortgage conditions qualified or negated the conditions of a mortgage offer, summarized the following principle:

To distinguish whether a printed term supplemented or negated a specially agreed term, it must be ascertained whether the two clauses could be read together fairly and sensibly to give effect to both. If the printed term effectively deprived the special term of any effect, the two clauses were likely to be inconsistent. It would also be relevant to consider whether the specially agreed term was part of the main purpose of the contract and formed a central feature of the contractual scheme. If so, a printed term which detracted from that scheme was likely to be inconsistent with it. Ultimately, the object was to ascertain the intention of the parties as it appeared from the language in its commercial setting.

Applying these principles, the Court of Appeal held that inconsistency existed between the terms concerning quality certificates for the fuel oil. The terms could not fairly and sensibly be read together; the standard BP term did not merely qualify or supplement the Recap term, but rather deprived the Recap term of all practical effect. Further, commercial common sense required that effect be given to the Recap instead of applying the standard term. In circumstances where the parties had agreed to a clear and specifically drafted term in the Recap and the term dealt with a centrally important question (such as the binding status of a quality certificate), it was unlikely for the parties to have intended that the quality certificate should only be binding for invoice purposes as provided for in the BP terms.9

CONCLUSION

The courts are unlikely to accept that two clauses are mutually inconsistent if there is any way of reading them together fairly and sensibly to give effect to both against the touchstone of commercial common sense. In all likelihood, inconsistency would be considered to exist where one clause deprives another almost entirely of any effect. However, that said, court’s approach to determine inconsistency would be objective and without any pre-conceived assumptions that inconsistency did or did not exist. Where one of two inconsistent clauses is a standard term and the other is specially agreed for the deal (bespoke), the bespoke clause is likely to be given more weight provided that it reflects the true intentions of the contracting parties and forms a central feature of the contractual scheme. The general or standard conditions and deal-specific special conditions are intended to be mutually explanatory. Special conditions or bespoke terms must be carefully drafted to avoid potential conflict with the standard terms. Though inconsistency between contract terms is undesired, its shadow existence as a ticking time bomb cannot be ruled out, and when you realize it is there, it may be too late to defuse.

ABOUT THE AUTHOR

Pallab Mukherjee, a Chartered Mechanical Engineer and also having a master’s degree in Construction law & Arbitration, is a commercial management expert having more than 30 years of diverse experience across Middle East and India in various industry sectors including Oil & Gas and Petrochemicals; had played pivotal roles in commercial management transformation projects. He actively promotes the profession of contract management and authors essays on contract law. He is a public speaker, mentor and coach.

The opinions and views represented in this article are the authors alone, and do not constitute legal advice

END NOTES

1.         Septo Trading Inc v Tintrade Limited [2021] EWCA Civ 718

2.         Court finds inspector’s certificate final and binding for limited purposes only (Ince, 13 July 2020)

3.         Free on Board (INCOTERMS 2010)

4.         Final and binding or just binding? Term in trade recap stating that a certificate of quality is binding is qualified by the BP GTCs 2007: Septo Trading Inc. v Tintrade Limited [2020] EWHC 1795 (Comm), Queen’s Bench Division, Commercial Court, Mr. Justice Teare, 8 July 2020 (Nick Moon, Ship Law Log, 23 July 2020)

5.         Septo Trading Inc. v Tintrade Limited [2020] EWHC 1795 (Comm)

6.         See Lexology commentary, Hill Dickinson LLP titled Septo Trading Inc. v Tintrade Limited [2020] EWHC 1795 (Comm), 2020 WL 03804342

7.         Pagnan SpA v Tradax OceanTransportation SA [1987] 3 All ER 565

8.         Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, [2017] 1 All ER 942

9.         Case Note on Septo Trading Inc v Tintrade Limited: Interpretation of alleged inconsistencies between bespoke terms and standard forms, (Lexology, 27 May 2021)

REFERENCES

  1. BP General terms and conditions for sale and purchase of Petroleum Products (2007) @ BP 2007 Products (yumpu.com)
  2. GENERAL CONTRACT FOR FEEDINGSTUFFS IN BAGS OR BULK FOB TERMS (THE GRAIN AND FEED TRADE ASSOCIATION) Form 19 @ GAFTA Contract No. 119 (owlaw.de)

Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.

Pallab Mukherjee, Head of Compliance & Corporate Governance, Bahrain National Gas Company (B.S.C)


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