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How would the court interpret an expressly agreed term which conflicts with a general printed term in a bunker supply contract?

2021-07-29

Introduction

In the recent English case Septo Trading Inc v Tintrade Ltd [2021] EWCA Civ 718, the English Court of Appeal (the “Court”) considered whether there is inconsistency between a printed general term and a specifically agreed term and the effect of an inconsistent term. The Court reiterated that in determining whether such inconsistency exists, the test lies as to whether the two provisions can be fairly and sensibly read together and it is necessary to ascertain the intention of the parties in the commercial setting.

How would the court interpret an expressly agreed term which  conflicts with a general printed term in a bunker supply contract?


Background

The seller Tintrade Ltd (the “Seller”) and the buyer Septo Trading Inc (the “Buyer”) entered into a contract whereby the Seller agreed to sell and the Buyer agreed to purchase 36,000 to 42,000 mt (in Buyer’s option) of high-sulphur fuel oil, which is evidenced by the Recap dated 20 June 2018 which recorded the terms agreed (the “Recap”). The Recap stipulated, among other things, that a quality certificate issued by a mutually acceptable first class independent inspector would be binding on the parties in the absence of fraud or manifest error (the “Relevant Recap Term”). Simultaneously, it also provided that the BP 2007 General Terms and Conditions for FOB Sales (the “BP General Terms”) would apply “where not in conflict with the above”. The BP General Terms provides that the quality certificate will be conclusive and binding “for invoicing purposes”, but without prejudice to the Buyer’s right to bring a quality claim (the “Relevant BP Term”).


On 26 June 2018, the parties jointly instructed SGS Latvija Ltd (“SGS”) to perform quantity and quality determinations of the fuel oil to be shipped. The quality certificate issued by SGS certified that the fuel oil was in accordance with the contractual specification at the loading port. Upon subsequent analysis of samples drawn from the cargo, it was revealed that the fuel oil was indeed not in compliance.


As such, the Buyer claimed damages on the ground that the product was not in accordance with the contractual specification. The Seller relied on the binding nature of the SGS quality certificate as set out in the Recap. In response, the Buyer argued that pursuant to the Relevant BP Term, the quality certificate was binding only for invoicing purposes and hence, did not preclude it from lodging a claim based on quality of product.


At the English Commercial Court, Mr Justice Teare found, as a matter of fact that the fuel oil failed to comply with the contractual specification. He also held that the Relevant BP Term qualified the Relevant Recap Term, which, if it had stood alone, would have excluded the buyer’s quality claim. Nonetheless, there was no conflict between these terms which could be read together so as to give effect to both of them. Accordingly, the Buyer’s claim succeeded and damages assessed in the sum of US $3,058,801 was awarded to the Buyer.


The Seller appealed, contending that the Relevant BP Term was in conflict with the Relevant Recap Term providing for the determination of quality by the independent inspector to be binding on the parties.



The Law

The law in relation to inconsistency between specially agreed terms and the printed standard terms of the contract is set out in the leading case, Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565. In Pagnan, Lord Justice Dillon defined inconsistency of clauses as those that cannot sensibly be read together. This is distinguished from cases where a clause in a document qualifies another clause. Examples of such include a force majeure clause, or a strike and lock out clause, which almost invariably does qualify the apparently absolute obligations undertaken by the parties under other clauses in the contract.


Pagnan has been followed in many other cases, including Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, [2017] 1 All ER 942, where the court further underlined the distinction between a printed term which qualifies or supplements a specially agreed term and one which transforms or negates it. The court in Alexander further elaborated that in order to decide on which side of this line any particular term falls, the question is whether the two clauses can be read together fairly and sensibly so as to give effect to both. This question must be approached practically, having regard to business common sense, and is not a literal or mechanical exercise. It will be relevant to consider whether the printed term effectively deprives the special term of any effect. If so, the two clauses are likely to be inconsistent.


Further, it will also be relevant to consider whether the specially agreed term is part of the main purpose of the contract or whether it forms a central feature of the contractual scheme. If so, a printed term which detracts from that scheme is likely to be inconsistent with it. Ultimately, the object is to ascertain the intention of the parties as it appears from the language in its commercial setting.



Decision

As a starting point for considering the issue of inconsistency, the Court first turned to the provisions of the Recap. In this regard, the Relevant Recap Term stated that the quality certificate should be binding on parties, so that the Buyer cannot thereafter bring a claim on non-compliance of quality of product with the contract specification. Provision for such certifications to be binding formed a central feature of many international sales contract.


The Court next considered the effect of the printed term and held that the Relevant BP Term would effectively mean that the [quality?] certificate was not binding at all.


Finally, the Court reached a firm conclusion that the Relevant BP Term was in conflict with the Relevant Recap Term and the two provisions cannot fairly and sensibly be read together. The Court reached its conclusion for the following reasons:

  1. the Relevant Recap Term provided for the quality certificate to be binding for all purposes, so as to preclude a claim for damages for breach of quality, while the Relevant BP Term stated that the binding nature of the certificate was for a very limited purpose (i.e. “for invoicing purposes”) only;
  2. a regime in which a certificate of quality is binding is fundamentally different from one in which it is not;
  3. the provision in the Recap for the quality certificate to be binding was a central feature of the contractual scheme; and
  4. considering the intention of the parties as practical business people operating in the real world, it was not commercially reasonable to interpret that the parties in this case had chosen a contractual scheme in which the quality certificate is not binding but is merely evidence.

Accordingly, the Court allowed the Seller’s appeal and ruled that the quality certificate issued by SGS would be binding with the consequence that the Buyer was precluded from bringing its claim.



Takeaways

The present case serves as a reminder of the importance of clear and consistent drafting of sale contracts, particularly in international sale contract of maritime trade where multiple contracts and/or agreements, as well as standard terms and conditions are usually involved. In construing the true intention of parties to the agreements, it is discernible that the court will usually take into consideration the commercial setting of the factual background.


 


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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers© 2021


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