Unstable gasoil cargo, meaning of “unsatisfactory”, S14 (2) of the Sale of Goods Act 1979, rejection, avoiding “final and binding” certificates – Bominflot GmbH v Petroplus Marketing AG (“The Mercini Lady”) [October 2012]

The Facts

B agreed to purchase a consignment of gasoil from P on FOB terms to be shipped and delivered to B at Antwerp on the vessel Mercini Lady. B had sold the gasoil to its sister company Bo who in turn had sold it to the Spanish Ministry of Defence on CIF El Ferrol / Cartagena terms. The contract specification (“back to back” in all the contracts) provided that the sediment content of the gasoil should not exceed 10 mg/litres. The specification made no reference to the gasoil’s stability.

Following delivery, “binding” quality certificates were issued recording that the sediment content was within the specification. Even though the actual test method used was noncontractual, B accepted that the sediment quantity in the gasoil was within the specification.

Four days after shipment (and found to be a reasonable time after shipment) the gasoil arrived at El Ferrol where the sediment content was found to exceed the specification. The gasoil was rejected by all the buyers and by B who claimed that P was in breach of the term implied into the contract by S14 (2) of the Sale of Goods Act 1979 (“SGA”) by delivering gasoil that was of unsatisfactory quality. B argued alternatively that this implied term continued to apply for a reasonable time after shipment.

Preliminary Issues

In earlier reported decisions of the English court of first instance and the Court of Appeal, a series of preliminary findings were made in response to attempts by P to shut out B’s claims. The effects of those decisions were:

  1. There was an implied term under S.14(2) of the SGA that the gasoil would be of a satisfactory quality and that it would remain of a satisfactory quality for a reasonable period after delivery;
  2. There was no implied term that the gasoil would remain on specification for a reasonable time after delivery. If the parties wished to provide for this they could have done so expressly and this was incompatible with the fact that B and P provided for a “binding” quality certificates at the load port; and
  3. The implied term under S 14(2) of the SGA 1979 was not excluded by the exclusion clause at cl 18. This was on the basis that S14(2) SGA is described in the SGA as a “condition” and cl 18 did not expressly refer to “conditions” as being excluded.

The consequence was that any claim by B based upon the sediment content itself was bound to fail because of the “binding” quality certificate. Consequently, B pursued its claim based upon an alleged breach of S14 (2) SGA arguing that the gasoil was inherently unstable at shipment, the consequence of which led to an increase in sediment during the voyage.

The decision

Was the gasoil unstable?

Yes. Based upon the technical evidence produced at the trial, the gasoil was unstable at shipment. The resulting increased sediment was not caused by the carrying vessel, but by the instability which in turn led to the formation and increase in sediments over the voyage to El Ferrol.

Did the instability of the gasoil make it of unsatisfactory quality?

Yes, and it was so at the time of shipment. B did not need to pursue the alternative argument that S14 (2) SGA ought to apply within a reasonable time after shipment. The Court made no comment on it and therefore the decision made on this point at the preliminary issues stage remains.

The instability of gasoil was found to be different from the presence of sediment; the former being tested differently, having different causes, and involving different procedures.

The Court found that gasoil had varying uses; power generation, trains, buses, automobiles, construction, and agricultural equipment, ocean going vessels main and auxiliary equipment. The fact that the actual end use by the Spanish Ministry of Defence was for military purposes was irrelevant. The gasoil was not sold for intended military use and, in any event, instability was a special problem for all uses. Such instability would make it of an unsatisfactory quality and unmarketable for use as a finished product in a way normally accepted for end users of gasoil.

Under S14(2)(B) SGA, one aspect of the quality of gasoil relevant to deciding whether it was of satisfactory quality was whether it was fit for the purpose gasoil was commonly supplied. Based upon the understood uses of gasoil, the instability made the gasoil unfit for the purposes for which it was commonly supplied. P were therefore in breach of S.14(2) of the SGA.

The scope of the implied term under S14(2) SGA.

P argued that if the instability was linked to sediment and that quality was itself covered by the specification, there could be no basis for implying a term to address the issue where the specification already sought to do so.

This was rejected. The instability was latent and an inherent vice so that it fell outside any ability to test through the specification. Further, the instability was not a characteristic of the gasoil which was covered by the specification.

Damages

A number of heads of damages were claimed.

Of particular interest was the date for assessing the market value of the gasoil. S.53(3) SGA provides that normally the measure of loss would be the difference between the sound and unsound market values of the gasoil at the date of shipment being the date of delivery.

However, because the instability was a latent defect and only discovered at discharge, the starting date to assess the market values of the sound and unsound gasoil was when B discovered the problem. The date for assessing the values would therefore be the date of the gasoil’s actual sale by mitigation.

The Court refused a claim by B for its legal costs in defending proceedings brought by the vessel owners for demurrage and freight prior to B determining that the cause was more likely to be that of P rather than the owners. The Court disallowed this expense because the costs were the consequence of B deciding to defend a claim by owners which was too remote or detached from the breach by P.

Comments

The case is an example of where a buyer can avoid the consequences of a final and binding certificate. Here, the breach was proven to be in respect of something falling outside specification (and therefore the ambit of the quality certificate), the deficiency was latent and not caused by the carrying vessel.

A point to bear in mind is that any buyer’s instinctive and natural reaction would be to arrest the vessel and claim against it. Here, such a course was adopted in terms of defending a claim by the vessel, but where the legal costs of so doing were found not to be recoverable as against the sellers.