Binding contracts for the sale of oil

This was a claim by claimant sellers for damages from the defendant buyers for repudiation of a contract for the sale of Ebok crude oil. Arguments included whether there was a binding contract and the appropriate measure of damages.

Was there a binding contract?

The court was asked to consider whether sellers and buyers had concluded a binding contract.

In reaching his decision the judge noted the principles set out in the Supreme Court’s decision in RTS Flexible Systems Ltd -v- Molkerei Alois Muller GmbH &Co [2010]:

‘...Whether there is a binding contract between the parties and, if so, upon what terms depends opon 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 the agreement of such terms to be a pre-condition to a concluded and legally binding agreement.’

Reference was also made to the principles cited by the Court of Appeal in Pagnan SpA -v- Feed Products Ltd [1987], including:

‘… there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later ... If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty.’

The judge then turned to the evidence before him, notably an email of 3 April referred to as the sellers’ ‘firm offer’, a ‘good news’ email in response from the buyers on 4 April and detailed background on the history of the parties’/their representatives’ previous relationship.

The judge had no hesitation in concluding that acceptance of the ‘firm offer’ email could result in a binding contract. The email described itself as a ‘firm offer’ and it included all the main terms necessary for a concluded contract. It further included general trading terms and conditions (the 2007 BP General Terms and Conditions for CFR sales).

Similarly, the judge had no doubt in finding that the buyers’ ‘good news’ email equated to an acceptance of that ‘firm offer’. Buyers had replied before the offer’s deadline to note that their sub-buyers agreed to the cargo and buyers would revert on the ‘fine tuning’ of the contract terms so that the contracts were back to back. Despite that fine tuning, the judge found that the obvious conclusion of the email was that buyers accepted the main terms set out in sellers’ ‘firm offer’. It was clear from all the evidence that the parties intended to conclude a binding contract. He rejected any suggestion that the reference to fine tuning meant that buyers’ acceptance was subject to final agreement with their sub-buyers: ‘There could be no going back on the main terms which, in a spot contract of this kind, were clearly and sufficiently set out and agreed.’

The judge was similarly dismissive of buyers’ arguments that there was no binding contract because buyers were not fully identified in the ‘firm offer’. The judge held ‘… the parties are "masters of their contractual fate" if they are capable of being identified, even if the identity is not clearly spelt out’. It did not matter therefore that sellers’ ‘firm offer’ referred to buyers as ‘Cirrus… (Full trading name)’. He considered the identity of buyers to be sufficiently clear in the context of the parties’ discussions and exchanges, and their previous transactions.

The level of damages

Sellers sought the difference between the contract price and the market price at the time when the Ebok crude oil ought to have been delivered.

The judge thus had to determine the price that would be paid by a ‘willing buyer to a willing seller’ for this cargo for delivery in Ghana during the contractual delivery period. He commented that ‘… it is accepted that the best evidence of market value is constituted by arm’s length deals actually made in the market. The last transaction effected effectively sets the benchmark’. But this exercise was particularly complex due to the lack of publicly available figures for deals in Ebok crude oil, a relatively new field.

The judge reviewed the evidence adduced by the parties and their experts, and ‘doing the best [he] can’ he estimated an appropriate market price. Buyers were liable to sellers for the difference between that figure and the contract price.

Clause 32.1 of the BP General Terms and Conditions

The contract incorporated the 2007 BP General Terms and Conditions for CFR Sales, of which clause 32.1 provides:

‘… in no event [...] shall either party be liable to the other […] in respect of any indirect or consequential losses or expenses, […] whether or not foreseeable.’

Buyers argued that this clause thereby excluded all liability for loss of anticipated profits, regardless of whether they were indirect or consequential losses or expenses. They further argued that the sellers’ claim for the difference between the contract price and the market price (as per s50 of the Sale of Goods Act 1979) included a profit element, particularly where sellers had not even taken delivery of the cargo from their suppliers or been held liable to their suppliers.

The judge dismissed buyers’ arguments: ‘The contract price/market price differential is not a computation of lost profit. Lost profit is the difference between the total net cost to the seller of acquiring the goods and bringing them to market on the one hand and the net sale price that would have been achieved on the other.’ The effect of the Sale of Goods Act 1979 (ss50(2)-(3)) is ‘… to compensate the seller for the loss of the bargain with the buyer by computing how much worse off the seller would be, if at the time of the breach, he had sold the goods to a substitute buyer. The measure constitutes both a ceiling and a floor to the loss claim on the assumption that the seller had gone out into the market and sold at the date of breach. Movement in the market thereafter is then excluded from the calculation on the basis that any change in the figures affected thereby is the result of the seller’s own decision to play the market’

Accordingly, clause 32.1 of the BP Terms did not exclude the loss claimed by sellers.