Binding contracts in the oil industry

This case concerned a dispute over whether a contract had been formed during oil trading and the legal consequences of the oil cargo failing to meet its contractual specification.

On 14 June 2012, the claimant sellers Proton sent an email with a ‘firm offer’ to sell 25,000 metric tons - plus or minus 10% at sellers’ option - of a crude oil blend (the Cargo). The offer stated that all other contractual terms were subject to Proton’s standard CIF contract, but that terms not indicated would be mutually agreed after negotiation. The Cargo’s specification was attached to the offer. On the same day, the defendant buyers Orlen replied: ‘confirmed ’.

Proton voyage chartered a vessel to carry the cargo from Couronne, France to Orlen’s terminal at Butinge, Lithuania. Orlen accepted the vessel and the two parties also agreed to a delivery window of 10 to 15 July. On 20 June, Proton sent a draft written contract to Orlen, which resulted in further email exchanges and a revised draft being sent on 27 June.

However following a misunderstanding about meetings, Orlen sent a letter to Proton purporting to terminate the negotiations on 29 June. Proton claimed that Orlen was in repudiatory breach for failing to open a letter of credit or to take delivery of the Cargo. Furthermore, testing of the loaded Cargo showed that it was materially different from its contractual specification.

In light of the Supreme Court’s decision in RTS Flexible Systems Ltd -v- Molkerei Alois Muller GmbH & Co [2010], the first question for the court was whether on 14 June the parties had agreed on all the terms that they objectively regarded as essential for the formation of legally binding relations between them. The court found that on the factual evidence both parties regarded themselves as committed to the contract, albeit that some details were still to be agreed. In the court’s view: ‘This was a classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later… overall, the picture is clear. The language is that of commitment .’

The court refused to imply a term requiring Orlen to be satisfied as to the origin and tax status of the Cargo before it could be bound to the contract. A term could only be implied if it was necessary for the contract to work and there was no such necessity in this case. Therefore the court concluded that a contract had been formed on 14 June. Orlen argued that even if there was a contract, it was entitled to reject the Cargo for misdescription and misrepresentation. Neither argument succeeded.

Notably on the issue of misdescription, the court concluded that the specification did not form part of a sale by description. The key to description was identity. In principle, description and quality were different concepts - although the distinction between the two may sometimes be blurred and they may overlap where, for example, a word of description identified the quality of the product. However, the two concepts were sufficiently distinct in the present case: ‘The contract document starts by confirming a sale of Oil Blend. Clause 3 headed "Product", describes it as "Oil Blend … CN 2710". That is the description of the product. Clause 4 headed ‘Quality"-, sets out the details of the SGS Report of the analysis at the loadport. That is the quality of the product.' The court’s perception of the contractual document was consistent with the commercial reality that test results at the end of a voyage might differ from those at the outset. If the specification had been a sale by description, Proton would have had to comply with it in every respect as a condition of the deal.

The parties were always free to make quality a condition of the deal but, unlike description, it was not implied by statute.

The court also held that if Orlen had accepted the cargo, it would have been able to claim any losses arising from the failure to meet the specification. Such a claim would have been ‘risk free’, but rejecting the cargo was ‘bold and risky’.

Finally, although Proton succeeded in its claim against Orlen for repudiatory breach of contract, its damages were reduced by the difference in value between the product promised to Orlen and that which would have been delivered.