Commercial Court Holds That “Typicals” Are Not Guaranteed Specifications in a Contract for the Sale of Oil Governed by the BP GTCs

Cargoes of oil are frequently sold by reference to a set of “guaranteed specifications” and “typicals“. Such terms are a means of ensuring that oil supplied meets certain quality standards and expectations. Until now, there has been no authority on the contractual effect of promises to supply cargoes “in line with typicals.“

In the recent case of Mercuria Energy Trading SA (Mercuria) v Onex DMCC (Onex)¹, the Commercial Court was asked to decide whether a seller was bound to supply oil that complied with typicals set out in a sale contract which incorporated the BP General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products 2015 v 1.2 (the BP GTCs).

Background

A cargo of oil was sold by Onex to Mercuria on CIF US Gulf Coast terms. Parcels of cargo were loaded at Khir Al Zubair, Iraq and Fujairah. The cargo was on-sold to receivers, Valero, on terms that were not back-to-back.

The sale contract was based on a sales recap and additional terms (the specially agreed terms), which incorporated the BP GTCs.

The sale contract description of the cargo was “SOMO Basrah pipeline high-sulphur straight-run fuel oil (SRFO) in line with the following typicals…” The description clause included a table of agreed typicals, which referred to a maximum limit of 5 ppm for organic chlorides (OCs). The contract also included a guarantee that the cargo would be 100% SOMO IRAQI High Sulphur Straight Run (HSSR).

Following testing, the cargo was found to contain OC levels above 5ppm. Increased levels of OCs are harmful in refinery processing and Valero rejected the cargo.

The claim

Mercuria brought a claim for damages of around USD 26 million against Onex for breach of contract. Mercuria’s claim was advanced on three principal grounds.

The first ground was that the min/max parameter for OCs set out in the table of typicals constituted a guarantee that the cargo would contain OCs of no higher than 5 ppm.

Mercuria claimed that there was an inconsistency or conflict between the specially agreed terms which, it argued, contained a promise as to the maximum level of OCs and the BP GTCs. The BP GTCs define typicals at Section 57.1.61 as being “a quality or characteristic often attributable to… Product from a particular source, given without guarantee and not amounting to a representation or warranty that such typical quality or attribute will be present in the… Product supplied…”. The BP GTCs further provide at Section 59.1.1 that “whether set out in these General Terms and Conditions or in the Special Provisions, neither typicals nor any stipulation as to time of delivery shall form part of the… Product’s description, quality or fitness for purpose”. Mercuria argued that the specially agreed terms must prevail in case of an inconsistency.

The second ground was that the presence of OCs meant that “the cargo contained material of non-SR origin” and therefore constituted a breach of the guarantee that the cargo would be 100% Iraqi origin HSSR.

The third ground was that the OC levels were so high that the cargo no longer met its product description of “Somo Basrah pipeline high sulphur straight-run fuel oil” because it had lost its commercial identity as a result of the contamination.

The decision

In dismissing Mercuria’s claim in full, the Court found that there was no contractual obligation regarding the levels of OCs.

What is the meaning of “in line with the Typicals?”

The Court construed the meaning of the word “typicals” by reference to the express provisions of the BP GTCs: a characteristic given without guarantee or promise. The words in “line with” were not sufficient by themselves to elevate a “typical” characteristic into a warranty. By contrast, the words “Guaranteed Specifications” in quality clauses means what it says: these are specifications as to quality that a seller is prepared to guarantee. A breach of these specifications would give rise to a claim for damages.

The Court found there was no inconsistency or conflict between the recap and specially agreed terms and the BP GTCs. The contractual documents could be read together, with the BP GTCs defining or explaining the specially agreed terms, such that the “typicals” identified were non-binding.

Was there a breach of the guarantee to supply 100% SOMO Iraqi HSSR?

The Court found that the wording of the guarantee related to origin, not quality in the sense contended for by Mercuria, and that the cargo was of SOMO Iraqi origin. In any case, the Court found that some OCs would be naturally present in HSSR even if it was in line with the “typicals”.

Did the cargo match its contractual description of Somo Basrah Pipeline High-Sulphur SRFO?

The Court held that there was no breach of the description clause because the cargo remained marketable as SRFO and indeed it was onsold by Mercuria as Iraqi SRFO in mitigation. The contamination did not mean that the cargo had lost its commercial identity.

Quantum

Mercuria’s claim was dismissed in full on the basis that Onex was not in breach of contract. However, the Court went on to consider the quantum of Mercuria’s claim on the basis that it had been argued extensively by both parties. Onex argued that if Mercuria was entitled to the difference in value between sound cargo and the defective cargo, then this should be assessed by reference to prices on the same day. Mercuria argued that Section 53 of the Sale of Goods Act 1979 is not prescriptive in this regard and that it should be entitled to claim difference between sound value at the time of rejection and defective value at the time of actual resale, even if market price for sound value had since changed.

The Court agreed with Mercuria and found that had there been a breach, damages would have been awarded to Mercuria in full. This was on the basis that Mercuria acted reasonably throughout in attempting mitigation. The Court commented that previous case law “should not be taken as setting out any rules pursuant to which section 53 must be applied in a particular case” because each case must be considered carefully on its facts.

Comments

As always, each case will turn on its own facts. However, where the BP GTCs have been incorporated, it is now clear that a buyer will have significant difficulty in establishing a breach of contact where there has been a deviation from the parameters of typicals. Counterparties are reminded to consider carefully which quality parameters should fall within guaranteed specifications and which can safely remain as non-binding typicals. They should also ensure, where possible, that important terms such as those related to cargo description and quality are back-to-back.