Proton Energy Group SA ("Proton") v. Public Company Orlen Lietuva ("Orlen") [2013] EWHC 2872 (Comm) (the "Proton case")

The Proton Case was first brought to the attention of the Commercial Court in February 2013, when an application for summary judgment was sought by the Claimant, Proton. The summary issue to be determined was whether a legally binding contract had been concluded, and furthermore, whether expert evidence could be adduced to assist the Court in deciding whether a binding contract had been formed1

Interestingly, the Court allowed Orlen to adduce evidence from a market expert to provide industry background regarding expectation as to when a contract would be deemed legally binding. The Court dismissed Proton’s application for summary judgment holding that there was a real issue to be tried. The above decision follows the Court’s assessment as to whether the parties were agreed on all the terms that were objectively regarded as essential for the formation of a legally binding contract. The case highlights the importance of ensuring any communications made during negotiations are clearly drafted and truly reflect a parties intentions.

Background

Proton, a Swiss trader of oil and gasoline products and Orlen, a petroleum refining company incorporated in Lithuania (together “the Parties”), exchanged e-mails regarding the sale and purchase of a crude oil mix. The following exchanges took place between the parties: 

  • 14 June 2012 - Proton emailed Orlen a “firm offer” to sell 25,000 mt +/- 10% in Proton’s option of crude oil mix of European Origin as per an attached specification on CIF, Butinge, Lithuania terms. The delivery period was 10-15 July 2012 and the price was based upon five quotations obtained after the bill of lading date. The offer expressly stated that it was valid till close of business that day. Emails continued to be exchanged during the course of the day, the final one word email from Orlen stating “confirmed”. After receiving such confirmation, Proton entered into a contract (by an unsigned email recap) to buy the Butinge from their supplier, Trafigura.  
  • 20 June 2012 - Proton sent Orlen a detailed draft contract for the sale. (Trafigura, the suppliers of the cargo,  chartered the MT Apostolos A to carry the product from Couronne, France to Orlen’s terminal at Butinge, Lithuania).  
  • 20 June to 27 June 2012 - the parties exchanged emails regarding the terms of the contract.   
  • 27 June 2012 - Proton sent Orlen a revised draft contract. One of the issues which was yet to be determined was the documents that Proton would be required to provide in order to obtain payment under a documentary letter of credit.   
  • 29 June 2012 - Orlen wrote to Proton explaining that they were withdrawing from the negotiations and that they had not opened any letter of credit and did not accept the cargo.   
  • 2 July 2012 - Proton wrote to Orlen explaining that they were terminating the sale contract due to Orlen’s repudiatory breaches of contract (i.e. due to Orlen failing to open a letter of credit and accept the cargo).

Was a legally binding contract formed?2

Judge Mackie QC referred to the relevant principles of contract law as outlined in the decision of the Supreme Court in RTS1, which stated as follows;

The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.”

It is clear that the test is an objective one, taking into account the communications and conduct of the parties to assess whether they intended to create a contract and had agreed upon all the terms which are required by law to create a legally binding agreement.

The Court held that a contract had been concluded on 14 June as the parties had struck a deal on the main terms and would consider the detail at a later date. The Court considered that the urgency of the offer, in that a firm offer was communicated with an express deadline and that the language used, in this case, “firm offer” and “confirmed” was the language of commitment and was typical of a classic spot deal. 

Interestingly, during the summary judgment, expert evidence was adduced from Mr Traver (the expert instructed by Orlen) to assist the Court in deciding whether a legally binding contract has been formed.

Mr Traver suggested that Proton’s “firm offer” on 14 June was known in the international oil and gas industry as a Recap. In the present case, the expert suggested that the Recap dated 14 June and Orlen’s subsequent confirmation would not have been understood by reasonable market participants as creating a binding contract, instead the confirmation would have been understood as “subject to contract” or equivalent. Judge Mackie QC noted that Mr Traver had never concluded trade for crude oil mix or indeed any products and averred that his evidence was of little assistance.

Mr Sepkes (the expert instructed by Proton) identified that in the industry a recap is a summary or recapitulation of a deal once it has concluded, which generally occurs over the telephone or by email.

In the substantive proceedings, the Court held that Mr Sepkes’ evidence was more aligned to the experience and logic of the Court.  However, the Court specifically outlined that they had not drawn any conclusions from the expert evidence and had only referred to the expert evidence due to the reliance on the evidence during the summary hearing.

Conclusion

The Court’s aim is not to interpretate a contract in order to achieve business common sense, and instead, the  language used in any contract will be given its normal meaning.

Terms will not be implied by the Court unless absolutely necessary. Parties should ensure terms within contracts are clearly drafted, even if such terms are being negotiated and agreed upon via email. A party should also make certain that they say what they mean and mean what they say when negotiating any contract.

Practice tips

  • Commercial parties need strong protocols for agreement of contracts, especially where such contracts are generally concluded by email.   
  • During negotiations, reference to an additional formal agreement being necessary, such as a signed charterparty, may not be sufficient to class those negotiations as non-binding, if the main terms have otherwise been agreed.   
  • Always ensure that any negotiations in which you do not intend to become legally bound are specified as “subject to contract”, which creates a strong presumption of an intention not to be legally bound.    
  • Ensure clear language, for example, a party should not respond to any negotiations  by simply stating “confirmed”, if the party does not intend to be legally bound. Instead, the party should specify exactly what they are confirming.   
  • If a party does not agree to a proposed term, they should specifically say so and ensure that they do not act in a way which could imply their agreement.