KG Bominflot Bunkergesellschaft fur Mineraloele mbH & Co v Petroplus Marketing AG (The Mercini Lady)

This appeal raises two short points of some importance in the area of sale of goods law. The first questions the judge’s implication of what even the respondent accepts is a novel term. The second questions long-established and high authority to the effect that if a seller wishes to exclude Sale of Goods Act conditions, he must do so by express exclusion of “conditions”.

By a contract dated 9 January 2007 Petroplus Marketing AG of Zug, Switzerland, (the “seller”) sold to KG Bominflot of Hamburg, Germany, (the “buyer”) 38,500 mt gasoil 10% +/- in buyer’s option FOB Antwerp free destination, for shipment during 13/15 January 2007, at a price to be determined by IPE February 2007 gasoil less a stipulated discount (the “contract”). The contract was governed by English law. The buyer is the claimant in these proceedings and in this court the respondent. The seller is the defendant and here the appellant.

There was a specification clause (clause 4), headed “Quality”, which governed a dozen or so properties of the gasoil, including “Total sediment”. That was to have a maximum of 10 mg/litre as tested by a specified test, viz D-2709/88. Quality and quantity were to be determined by independent inspection at loading which was to be final and binding for both parties, save for fraud or manifest error (clause 12). Risk and title were to pass on loading (clause 15). Clause 18 (“Other Conditions”) contained a number of terms but also an exclusion clause which is central to the issues before us, as follows:

“There are no guarantees, warranties or representations, express or implied, or [sic, sc of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise which extend beyond the description of the oil set forth in this agreement.”

This appeal arises out of preliminary issues and so there are no findings of fact. I take the following matters from the buyer’s particulars of claim.

Loading of the gasoil on the Mercini Lady (the “vessel”) was completed on 17 January 2007 and the vessel arrived at her first destination of El Ferrol in Spain, four days later. The voyage proceeded without incident: it was a normal voyage of the sort reasonably contemplated by the parties. Most of the gasoil was to have been discharged at El Ferrol, and the balance at Cartagena. However, in the circumstances set out below the vessel never proceeded to Cartagena.

The gasoil was inspected at Antwerp prior to loading by an inspector from SGS. A composite sample was made up from the five shoretanks from which the gasoil was taken. The results were recorded in a Certificate of Analysis. The sediment was recorded at 6.4 mg/litre according to test method EN 12662. That was not the contractual test method. Although the particulars of claim do not say so, the loading determination found the gasoil to be within specification.

Following arrival at El Ferrol the cargo was sampled and tested on various occasions. On each occasion it was found to be off-specification as to sediment. The same test method was used as at loading, but no details of the results are given. There was then a re-testing of the retained loading samples, this time by test method ASTM D5452. This also appears to have been an uncontractual test method. The calculated arithmetic mean of the sediment was 39.6 mg/litre. A further test using a composite sample made up of different samples from the individual shoretanks, tested again by ASTM D5452, was found to have a sediment content of 55 mg/litre. Yet further tests on the preloading blend stocks from the shoretanks in question (on a different test method ASTM D5304) rendered results of 41 mg/litre, 35 mg/litre and 41mg/litre.

The goods were rejected by the receivers as being off-specification.

The claim is for over US$ 3 million, made up of damages for the difference in value of the cargo, freight, demurrage and other consequential losses.

The defence referred to the final and binding certification of SGS at loading and clause 4 of the contract so as to submit that any other and later tests were irrelevant. It also pleaded that the loading test was the best evidence of the condition of the cargo on loading.

In its reply the buyer admitted that the fact that the cargo was off-spec as to sediment when tested for the purposes of its on-sale at El Ferrol did not establish that the cargo was off-spec when the cargo was shipped at Antwerp; and also specifically stated that it “does not allege that the cargo was off-spec for the purposes of the Sale Contract when the cargo was shipped on board the Vessel.” Rather, its case was “as set out in paragraph 13” of its particulars of claim, viz that there was a breach of implied terms that the goods were “capable of remaining” during the voyage and for a reasonable time thereafter of satisfactory quality and/or on-spec.

Thus the buyer admits that the gasoil was delivered on-specification, but alleges that it thereafter changed its quality and specification by arrival in Spain. It was therefore to be inferred that the gasoil was not “capable of remaining” of satisfactory quality, and the seller was therefore in breach of the alleged implied terms.

It seems to me therefore that in the light of the buyer’s admission as to the gasoil’s compliance with specification at the time of loading, all factual questions relating to the loading port inspection and certification appear to be irrelevant. That is in all probability why the buyer has not sought to rely on the clause 4 exception of fraud or manifest error (I do not mean to suggest that there has been either), and why it has not gone out of its way, for instance in its reply, to rely on the fact that, the wrong test method for sediment having been used, the inspection certificate could not in any event have been binding: see Veba Oil Supply and Trading GmbH v. Petrograde Inc [2002] 1 Lloyd’s Rep 295 (CA).

What are the implied terms relied on by the buyer? As pleaded they are as follows: (1) the implied term of satisfactory quality under section 14(2) of the Sale of Goods Act 1979 (the 1979 Act”), one aspect of which was the gasoil’s durability (section 14(2B)(e)); (2) the implied term under section 14(3) of the 1979 Act that the gasoil would be reasonably fit for the purpose of remaining, during its time on the vessel and for a reasonable time thereafter, within the contract specifications; and (3) an implied term at common law that the gasoil would be capable of enduring a reasonable voyage and for a reasonable time thereafter so that it would still then be of satisfactory quality and/or in accordance with contractual specification.

Therefore the express terms of the contract are relied on by the buyer only in so far as the specification as to sediment is brought into any of those implied terms as reflecting satisfactory quality, fitness for purpose or what I might call the capability of the gasoil of meeting its specification into the future.

It is not easy to see how a cargo of gasoil which is admitted to be within contractual specification on loading and delivery at the time when risk and title passes, that admission being made irrespective of the evidential quality (which can be conclusive) of the loading certificate, can nevertheless be delivered in breach of contract in a matter going to its specification. I can understand that the subsequent condition of a cargo can be evidence of its seller’s failure to deliver it within specification, but when it is admitted that the cargo was delivered within specification, it is hard to see how later events can render its delivery a breach of contract in a matter defined by that same specification (at any rate as long as that specification does not test durability: as to which see, in any event, Benjamin’s Sale of Goods, 8^th ed, 2010, at para 18 - 297 footnote 2228).

The factual premises of these elusive submissions are nowhere made apparent. The suggestion is that even such a product as gasoil may be unstable such that it may be within specification as to sediment at one moment and out of specification at the next. That, however, is not what is expressly said in the buyer’s particulars of claim. On the contrary, the various tests, after shipment, on both the cargo on arrival in Spain and on retained loading samples, which are pleaded in the particulars of claim, all suggest that the buyer’s complaint is as to the specification condition of the cargo on loading.

On behalf of the buyer, Mr Philip Edey QC has moreover made it completely clear to us that he does not rely on his implied terms as amounting to continuing warranties as to the quality, fitness, or specification of the gasoil. He acknowledges that any such term has to be what he described as a “fixed point” warranty, ie a warranty that is to be tested only at the fixed point of delivery (on loading). Where durability is concerned, the distinction might be put in terms of the difference between a continuing and a prospective warranty. A continuing warranty extends into the future and would guarantee the condition of goods after delivery. I suppose an example of such a warranty is the typical warranty originating with a manufacturer or a dealer provided on the sale of consumer goods, which promises repair or replacement if the goods are found to be defective at any time within a stated period after purchase. What matters is the manifestation of a later defect (subject to exceptions relating to the buyer’s misuse) within the stated period, not the condition of the goods on delivery. A prospective warranty however relates only to the time of delivery, but looks prospectively into the future and asks whether the goods, as at the time of delivery, were in the condition which the buyer was entitled to expect under his contract. Typical warranties of such a kind are the implied statutory conditions of satisfactory quality and reasonable fitness for purpose. The former used to be called a condition of merchantable quality.

In Mash & Murrell Ltd v. Joseph I Emmanuel Ltd [1961] 1 WLR 862 Diplock J held that in a cif or c&f contract for the international sale of perishable goods, such statutory conditions required the goods “to be capable of standing a normal voyage to Liverpool and to be of merchantable quality at the time of arrival” (at 872). So expressed, the warranty plainly attached at the time of shipment (there from Limassol): the warranty related to the goods’ then capability (in the terms of the modern statute, durability).

There has been some controversy as to whether Diplock J was speaking of a continuing warranty, and it is true that some formulations in his judgment are potentially ambiguous, as for instance at 870: “these goods being bought c. & f. Liverpool, the warranty as to merchantability was a warranty that they should remain merchantable for a reasonable time, the time reasonable in the circumstances, which means a time for the normal transit to the destination, and for disposal after.” Similarly, in Ollett v. Jordan [1918] 2 KB 41, cited by Diplock J at 868, Atkin J had said at 47:

“…the condition that the goods must be merchantable means that they must be in that condition when appropriated to the contract and that they will continue so for a reasonable time.”

In the present case, it is agreed by both parties that the implied condition of satisfactory quality applies only at the time of delivery, and is a fixed point or prospective warranty only, and not a continuing one, and that that is how Mash & Murrell is to be understood. They are agreed, and for these purposes what is particularly important is that Mr Edey on behalf of the buyer agrees, that to the extent that the judge below, Field J, may have suggested in his judgment by any of his formulations that the relevant implied warranty is a continuing one, he is not to be so understood. On this basis, Mr Nigel Jacobs QC, on behalf of the seller, is content to accept that the implied statutory condition of satisfactory quality under what is now section 14(2) of the 1979 Act would ordinarily require the capability of the gasoil delivered at Antwerp to withstand a normal voyage of reasonable duration such as that to Spain with its satisfactory quality intact. But for the exception in clause 18, therefore, Mr Jacobs would have accepted the section 14(2) implication of satisfactory quality as requiring some concept of durable quality, such that evidence of unsatisfactory quality on arrival in Spain could be used as evidence from which to attempt to draw the inference that the goods were not of satisfactory quality upon loading.

In these circumstances it has been unnecessary to delve into any of the controversies which surround Mash & Murrell and the extent to which its doctrine extends to FOB voyages (see Navigas Ltd v. Enron Liquid Fuels Ltd (unreported, 22 May 1998, Colman J) or beyond perishable goods. For the same reason it has become unnecessary to visit much of the analysis of Field J. Indeed, neither counsel before us has cited Mash & Murrell to us at the hearing (save, incidentally, on the issue 2 at paras 46ff below).

What remains are two issues. The first issue is whether, in addition to the statutory implied term of satisfactory quality, as so accepted, there is to be implied a further term, at common law, extending the quality clause 4, containing the gasoil’s specification, beyond the point of loading so as to reach prospectively into the future. The former implied term has been called the “basic” statutory implied term; the latter has been called the “special” or “additional” common law implied term. The expression of that latter term nevertheless remains elusive. As expressed in the particulars of claim it is that –

“the goods would, on delivery under the sale contract, be capable of enduring a normal voyage (of the sort contemplated by the parties including, here, a voyage to an EU country) such that upon arrival at their destination following such a normal journey (and for a reasonable time thereafter) they would still be…in accordance with the contractual specification.”

As expressed by the judge, accepting that submission on the part of the buyer, the term is that –

“if the seller has bound himself to supply goods of a particular specification, I think it plain that in the absence of any inconsistent term he is to be taken to have agreed that the goods should remain on specification for a reasonable time after delivery.”

I have called the term elusive, for, although Mr Edey expressly eschews any continuing warranty, the effect of his clause is stated to be that there will be a breach of contract (and not merely evidence of a possible breach of contract) where the gasoil is not still in specification upon arrival at destination and for a reasonable time thereafter. That indeed is a necessary corollary of his pleading, emphasised at the hearing, that the buyer does not allege that the gasoil was out of specification at the time of loading. The gasoil was, or may have been, merely unsatisfactory in that it was unstable and might therefore become, and in the event was, out of specification at the time of arrival. This is again the inference to be derived from a section of Mr Edey’s skeleton for this appeal, where he explains the significance of this point as follows:

“The significance of the additional implied term is therefore that, first, even on the Respondent’s case, it would provide the Respondent with a shortcut by avoiding the need for a debate about whether the sediment levels found at El Ferrol rendered the cargo of unsatisfactory quality; second, it would provide the Respondent with a claim even if, contrary to the Respondent’s case, the cargo was not rendered of generally unsatisfactory quality by virtue of it being as badly off-spec as to sediment as it was found to be at El Ferrol.”

This passage suggests that the additional implied term would, on the tests made on arrival, be decisive of the result of the buyer’s claim. But in that case, the term is sought in effect to be used as a continuing warranty, even while the buyer eschews that ambition.

I am therefore sceptical of Mr Edey’s analysis, and he has admitted that such a special, non-statutory implied term as he seeks, is novel. Although, because the wrong test was used, the SGS certificate is not final and binding as to sediment quality, Mr Edey nevertheless accepts, as though he had such a final and binding certificate against him, that the gasoil was within specification at loading. Such an admission goes even beyond the force of a certificate. Nevertheless, he appears to want the buyer to be entitled to its damages claim by virtue alone (his “short-cut”) of the cargo being out of specification on arrival.

Be that as it may, I will examine the argument further, in accordance with the submissions made to the court.

The first issue argued in this court therefore was whether the judge was right to hold that the so-called specific or additional implied term was part of the contract. The second issue was whether either the basic or the specific implied term could withstand the exclusion to be found within clause 18. Before I return to these issues it will be necessary to set out the relevant terms of the contract, some parts of the 1979 Act, and the preliminary issues ordered.

The contract provided as follows:

“3.

PRODUCT Gasoil, 1 pct gasoil

Ex BRC Antwerp, EU qualified

4.

QUALITY Following quality to apply:

…

Total sediment mg/l D-2709/88…

7.

SHIPMENT FOB one safe port/berth BRC Antwerp…

8.

DESTINATION Free destination…

If destination is EU, buyer will communicate to seller his VAT registration number…

12.

QUANTITY/QUALITY

Quality and quantity, basis shoretank, to be determined by a mutually agreed independent inspector at the loading installation, in the manner customary at such installation. Such determination shall be final and binding for both parties, except in case of fraud or manifest error...

15.

RISK AND TITLE FOB Antwerp

Each delivery shall be completed and title shall vest absolutely in buyer when the product passes the vessel’s permanent hose connection at the port of loading at which time buyer assumes all risks pertaining thereto.

18.

OTHER CONDITIONS

INCO Terms 2000 plus latest amendments…

There are no guarantees, warranties or misrepresentations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise which extend beyond the description of the oil set forth in this agreement.

The buyers warrant that…

Buyers further warrant that…

The buyer warrants that…

Buyer guarantees that…

Buyers guarantee that…

Buyers warrant, represent and undertake that…

It is a condition of this agreement that buyer complies with its obligations under this clause. In the event that buyer is in breach of any of the provisions of this clause in whole or part, seller shall be entitled to terminate this agreement immediately…”

The 1979 Act provides:

“11.

When condition to be treated as a warranty.

...

(3)

Whether a stipulation in a contract is a condition, the breach of which may give rise to a right to treat the contract as repudiated, or a warranty, the breach of which may give rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated, depends in each case on the construction of the contract; and a stipulation may be a condition, though called a warranty in the contract…

On 23 October 2008 by consent the following four preliminary issues were ordered to be tried:

The judge answered these four preliminary questions as follows: (1) No, but there was an obligation on the seller under s. 14(2) of the 1979 Act and at common law to deliver gasoil that was of satisfactory quality not only when the cargo was delivered on to the vessel but also for a reasonable time thereafter. In addition, under the term implied at common law, the gasoil had to remain in accordance with the contractual specification after delivery on the vessel for a reasonable period. (2) No. (3) No. (4) Clause 18 does not preclude the implication of the terms identified in the answer to (1).

Thus the judge essentially answered question (1) Yes, but put his answer in the way he did because he wished to be cautious, in the context of an FOB sale with a free destination, about phrasing the implied term by reference to a “normal voyage”. For present purposes that does not matter. It is not suggested that the relatively short voyage to Spain was other than completed within a reasonable time of delivery at Antwerp. The judge’s answer to question (1) covered both the section 14(2) basic term and the common law additional special term relating to the contractual specification. His ultimate formulation of the special term (“had to remain in accordance with the contractual specification after delivery on the vessel for a reasonable period”) is not relied on by the buyer as going beyond a prospective, fixed point, warranty. This answer to question (1) is therefore the subject-matter of the seller’s first ground of appeal: but the seller only appeals against the special common law term, not (subject to clause 18) the basic statutory implied term or the meaning, as stipulated between the parties in this court, to be ascribed to it.

The judge’s answer to question (2) does not concern us. There is no cross-appeal on question (2).

The judge’s answers to questions (3) and (4) have to be considered together. The answer that the seller would give to both is “Yes”, and that is because of clause 18. But for clause 18, however, the seller would accept that the section 14(2) implied term went beyond compliance with the contractual specification under clause 4 of the contract.

The buyer on the other hand would seek to uphold the judge’s answers to questions (1), (3) and (4).

By a respondent’s notice the buyer also submits that, even if the contract only contained the basic section 14(2) implied term, that would be enough at trial to answer the case conclusively in its favour (“its claim must succeed”), inter alia because that term would require the gasoil to meet the contractual specification on arrival, which it did not. We did not hear much about the respondent’s notice on the appeal hearing. It seems to me that such a submission could not succeed. It would take evidence to show that the section 14(2) implied term (a) required a maximum sediment content of 10 mg/litre on the specified test (which as far as I can see has never been used); or (b) was broken by reason of a sediment content as found on arrival; and (c) in either event that the reason for the sediment content on arrival was the inherent instability of the cargo on loading. None of these propositions are self-evident. The fact that the buyer seeks to present them as though they are reinforces my concern that the buyer’s claim is an attempt to make a question of legal analysis do duty for a finding which depends on evidence.

The judge seems to have derived this additional implied term simply as an extension of the statutory implied term of satisfactory quality as interpreted in Mash & Murrell (in relation to the predecessor implied term of merchantable quality). As quoted above (at para 23) the judge asserted that the common law implied term was “plain” in the absence of any inconsistent term. As to the question of inconsistency, he rejected any inconsistency derived from clause 18 (but that is the subject matter of issue 2), but also as derived from clause 12. As to clause 12, he said that the “specification does not require the gasoil to be otherwise than on spec at the point of delivery” (at para 44). I would have thought that that prima facie was an inconsistency.

On behalf of the seller, Mr Jacobs submitted that the implied term was (i) inconsistent with the express terms of the contract, in particular clauses 4 and/or 12 and 15, and (ii) unnecessary in the light of the basic statutory implied condition. On behalf of the buyer, Mr Edey submitted to the opposite effect.

In my judgment, there is nothing to suggest, let alone require the alleged implication. It is accepted by the buyer that the express terms of the contract do not assist, and that the term therefore has to be implied. It is also accepted that the term is novel. Unlike the statutory implication, on which it is modelled, the additional implied term is not a mere interpretation of the meaning and effect of an implied term which exists (subject to exclusion) and exists as a matter of law and statute, but is a total addition to the contract. The analogy with the section 14(2) implication would be to find that the express provisions about the specification mean that the specification has to be met not only at delivery but also for a “reasonable” but uncertain period after delivery. However, there is no legitimate support for such an interpretation, and none for the implication of a term to supply the want of such a meaning.

On the contrary, the contract makes it clear that the specification has to be met at the time of delivery, that the intention is that the gasoil should be inspected by an independent inspector prior to loading, “basis shoretank” (ie not even on the basis of the gasoil in the ship’s tanks), and that the inspector’s determination should be conclusive (ie final and binding in the absence of fraud or manifest error). It is accepted that, even though the gasoil’s sediment was measured by the wrong test, nevertheless the sediment was within specification limits at the time of loading and delivery. Therefore gasoil of the correct specification was delivered. The buyer’s acceptance of that fact supplants the want of a valid inspector’s certificate. Moreover, the intention of the contract remains, that specification should be determined conclusively at loading. Therefore it matters not that things may change thereafter, or even, if a conclusive determination has once been made, that things may not change but that a new test may show a different result which is outside specification limits. After delivery the buyer “assumes all risks pertaining thereto” (clause 12). All risks are all risks. They include the risk of transport, and they include the risk of cargo instability – unless that risk has already been taken by the seller under a term of the contract which relates to the condition of the cargo pre-delivery. But a clause for conclusive inspection and determination on loading replaces or redefines the implied terms as to quality pro tanto. A fortiori it prevents any further implication that it is legitimate to take account of changes in the cargo’s specification after delivery.

The question might therefore arise hereafter as to the extent to which clauses 4 and 12 might impinge even with respect to the basic statutory term to be found in section 14(2). Thus a matter of latent inherent vice which could not have been picked up by the quality inspection mandated by clauses 4 and/or 12 may possibly stand outside those clauses so as to give cause to find a breach of an implied term of satisfactory quality. If, however, the alleged vice is in truth something for which the specification and conclusive determination clauses provide, such as here sediment, there may be no room for a separate allegation of breach by reference to the statutory implied term of what is now satisfactory quality or any similar term to be implied at common law. That is I believe, generally speaking, the learning of the jurisprudence on conclusive certification clauses, albeit they have not been cited for the purposes of this appeal, and I speak therefore with all appropriate caution.

It would follow that it is impossible, without knowing at least something more about the circumstances in which it is alleged that the sediment specification of the gasoil changed, to say whether the statutory section 14(2) implication, which, subject to the second issue, the seller would accept, would assist the buyer. If the truth is that there was just an error in testing for sediment, and there has been no change in the nature of the gasoil, then, on the structure of the argument as it exists at present, the buyer could not succeed. The gasoil may have been out of specification at loading, but the buyer has accepted that it was in specification. If the gasoil was within specification at the time of loading, but there has been a subsequent build-up of sediment during the voyage, it would be necessary to know why. The voyage may have been without incident, but the additional sediment may have nevertheless come from the vessel rather than the cargo. Intuitively, and without the assistance of expert evidence, it is possible to see that sediment may have been missed in the making of a test, but it is not easy to understand how sediment may have been created afresh and increased, from within the oil itself, within a short period of four days. If, however, expert testimony were to show that gasoil may suffer the inherent vice of instability such that it can, within a few days, change the content of its sediment substantially, then the question would arise whether the nature of the test for sediment and/or any other of the specification tests, was intended finally to determine the question of such possible instability, or whether this was a truly latent and separate vice which the specification tests would leave untouched and undiscovered. In such a case, and if the statutory implied term survived the second issue, it might be concluded that it would still be open to show that the instability and/or the sediment which it would produce (so far the buyer has only complained in its pleadings about the sediment level and not of any instability – the latter is at present only an advocate’s suggestion on the part of Mr Edey) made the gasoil as at delivery of unsatisfactory quality. That allegation, however, would necessarily be different from saying that the gasoil had become off-spec. And if the only consequence of the oil’s surmised instability was its effect on sediment, it may still be the case that the true effect of the contract was to make the determination of the sediment at the time of loading (now a matter of admission rather than independent determination) conclusive, to the exclusion of an implied condition as to quality.

Mash & Murrell itself is a warning about inferring from deterioration of even perishable goods during a voyage a conclusion about breach of the statutory implied condition of (then) merchantable quality. Diplock J held that there had been a breach of the implied term. On appeal, however, this court held that the cause of the deterioration was lack of proper ventilation during the voyage: [1962] 1 WLR 16 (CA).

In the circumstances it would be superfluous to discuss whether or not the additional implied term was necessary or not in the light of the acceptance of the section 14(2) term. It could certainly go further than the statutory term, which is not focussed on this contract’s specification in particular, but more generally on the considerations set out in section 14(2A) and (2B). Therefore, contrary to the submission of Mr Jacobs, the presence of the statutory implied term would not render the additional implied term redundant (at any rate in theory). On the other hand, for the reasons stated above the additional implied term was simply not part of the intention of the parties to this contract and would not have been understood by reasonable merchants to have been part of its meaning (see Attorney General of Belize v. Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988, and Mediterranean Salvage & Towage Ltd v. Seamar Trading & Commerce Inc (The “Reborn”) [2009] EWCA Civ 531, [2009] 2 Lloyd’s Rep 639). If it had been otherwise, the whole point of a final and binding determination by an independent inspector on loading would be rendered pointless, for the buyer could always say that although the goods were within specification on loading, and had been conclusively determined so to be, they had nevertheless fallen out of specification during the contemplated voyage or within a reasonable time. All certainty in international sale of goods, which such inspection clauses are designed to provide (see Alfred C Toepfer v. Continental Grain Co [1974] 1 Lloyd’s Rep 11 (CA)) would be utterly broken. Such clauses, plain and express as they are, would simply be a snare and a delusion, because they would always have to make way for the special additional term, even though it was merely implied and not express.

Finally, although it was not a point made at the hearing, it is hard to see how the alleged additional term can survive section 14(1) of the 1979 Act. That provision, which limits the implication of terms about quality or fitness to the statutory terms contained in the 1979 Act, thus retains, in the background, the most fundamental rule of all so far as quality is concerned, namely that, despite the huge inroads made by first the common law and then statute, the underlying principle is still caveat emptor, let the buyer beware.

For the sake of convenience, I repeat the relevant part (it is a small part) of clause 18:

“There are no guarantees, warranties or representations, express or implied, [of] merchantability, fitness or suitability of the oil for any particular purpose or otherwise, which extend beyond the description of the oil set forth in this agreement.”

On behalf of the buyer, Mr Edey, supported by the decision of the judge, relied on a well-known line of cases which state in effect that the Sale of Goods Act implied conditions cannot be excluded without express reference to the exclusion of “conditions”. Exclusion of guarantees, warranties or representations do not suffice. On behalf of the seller, Mr Jacobs, however, submitted that time has moved on since those cases were decided and that the attitude to the construction of exception clauses, particularly as between commercial parties, has become more realistic and less formulaic. The reference to “guarantees, warranties or representations” was intended to be a reference to all contractual terms or pre-contractual representations of whatsoever kind.

The well-known cases are as follows. The leading decision is that of the House of Lords in Wallis, Son & Wells v. Pratt & Haynes [1911] AC 394. The House there approved the dissenting judgment of Fletcher Moulton LJ in this court, [1910] 2 KB 1003. The case concerned the sale of common English sainfoin. The clause there stated: “Sellers give no warranty express or implied as to growth, description or any other matters…” The goods delivered were not common English sainfoin but giant sainfoin, a different and inferior kind of seed. The breach was only discovered after the seed had been sold on and planted and the crop had materialised. Therefore there was no claim for rejection for breach of condition, but only for damages for breach of warranty. The case concerned however a breach of the express term of the description of the goods. If the exclusion had been held to operate in favour of the sellers, there could have been no breach of contract even though the sellers had delivered a different article from that which they had agreed to sell. It is not entirely clear whether such an exclusion can thus remove the foundation of a contract (see Pinnock Bros v. Lewis and Peat [1923] 1 KB 690 and the discussion in Chitty on Contracts, 30^th ed, 2008, Vol I, at para 14-027), but in any event it was the perfect case in which to consider scrupulously whether the exclusion clause could be narrowed. For the sellers it was argued that the words “no warranty” included every term in the contract (see at 1011 in the majority judgment of Vaughan Williams LJ, where that argument is accepted) and that in any event the subject matter of the claim had become a breach of warranty and not of condition. For the buyers it was argued that a disavowal of warranties was not a disavowal of conditions, the difference between them being so well-known in the Sale of Goods Act, then of 1893. The buyers’ argument was defeated by a majority in this court, but prevailed in the House of Lords.

Fletcher Moulton LJ said (at 1016):

“It is admitted that the language of the contract creates the obligation to deliver common English sainfoin and that this has the status of a condition. It cannot therefore be affected or limited by a clause which only negatives the existence of warranties…”

In the House of Lords, Fletcher Moulton LJ’s judgment was approved. Lord Loreburn LC said (at 395/6):

“…the buyer…may treat the breach of a condition as if it were a breach of warranty…That does not mean that it was really a breach of warranty…But if it is desired by a seller to throw the risk of any honest mistake on the buyer, then he must use apt language, and I should have thought the clearer he tries to make the language the better.”

Lord Alverstone CJ said (at 398/9):

“…it is quite impossible to suggest that in the year 1906, when these parties made a contract whereby they required that the goods should be common English sainfoin, and the sellers put in a stipulation that they would not give any warranty, express or implied, it was intended that it was always to be understood that they were not making themselves liable in regard to any condition as to the goods or for the consequences of a breach of the condition…Within the four corners of this statute applicable to this contract we see this plain distinction between “condition” and “warranty”…”

Lord Shaw of Dunfermline said (at 399/400):

“My Lords, I do not think that these two commercial men meant “warranty” in a sense of any greater refinement than the breadth if the definition in the Sale of Goods Act…it is as plain as language can make it that there are two things that are dealt with under different categories. The one is “warranty” and the other is “condition”…”

In Baldry v. Marshall [1925] 1 KB 260 (CA) the sale was of a “Bugatti car” on terms that “Guarantee the same as received by us from the manufacturers”. The manufacturers’ guarantee guaranteed against defects for twelve months but “expressly excludes any other guarantee or warranty, statutory or otherwise”. The buyer complained that the car was uncomfortable and unsuited for touring and that this amounted to a breach of the statutory fitness for purpose implied condition. It was held, applying Wallis v. Pratt, that the exclusion did not oust conditions. It was submitted that “any other guarantee” included conditions. Atkin LJ, unsuccessful leading counsel in Wallis v. Pratt in the House of Lords, rejected that argument. He said (at 269):

“It said nothing about “conditions,” and I do not think that the words “any other guarantee” can be read as meaning “any other condition,” merely because they are used in addition to the word “warranty”. In those circumstances the reasoning of the House of Lords in Wallis v. Pratt applies to the present case.”

In Cammell Laird and Company, Limited v. The Manganese Bronze and Brass Company, Limited [1934] AC 402 (HL) the sale was of two ship’s propellers, which, although made to specification and design drawings, were unfit for their purpose. The guarantee clause merely stated “To be guaranteed against defective material and workmanship for a period of six calendar months”, that is to say it contained no exclusion of any kind. The sellers submitted, hopelessly, that that clause excluded the statutory implied condition of fitness for purpose. Lord Wright applied Wallis v. Pratt in these terms (at 431):

“in which case it was held that though the statutory conditions may be excluded or varied by the express agreement of the parties, yet such a clause as this, in which the word condition is not used, is ineffective to exclude the conditions implied under the Act. The same principle was applied in Baldry v. Marshall. The principle of these authorities is that though a condition is deemed to be and can be treated as a warranty, if it is not availed of to reject the goods, still it remains a condition; once a condition always a condition: hence apt and precise words must be used to exclude it: the words guarantee or warranty are not sufficiently clear.”

Thus by the time of Cammell Laird the question of construction had become a “principle”. Moreover in Henry Kendall & Sons v. William Lillico & Sons [1969] 2 AC 31, that principle was applied to a clause which was closer to the language of our clause 18, in that it referred explicitly to the statutory concept of merchantability, thus: “not warranted free from defect, rendering same unmerchantable, which would not be apparent on reasonable examination, any statute or rule of law to the contrary notwithstanding”. Lord Morris, citing the above authorities, said (at 96A): “The words in clause 10 are wholly inapt to exclude a condition of the contract. They do not refer to a condition. You do not exclude a condition by excluding or purporting to exclude a warranty.” To similar effect were Lord Guest (at 107D) and Lord Pearce (at 114C/E).

Nevertheless, Mr Jacobs submits that attitudes to construction have now changed. He relies on the decisive move against the strained construction of exclusion clauses to be found in Photo Production v. Securicor Transport Ltd [1980] AC 827, for instance in the speech of Lord Diplock at 851B/C; on the insistence on common sense principles and the reasonable understanding of persons in the position and with the knowledge of the parties, together with the discarding of “all the old intellectual baggage”, to be found in Investors Compensation Scheme Ltd v. West Bromwich Building Society [1998] AC 896, for instance in the speech of Lord Hoffmann at 912/913; and on the modern disavowal of literalism, to be found for example in the speech of Lord Steyn in Sirius International Insurance Co(Publ) v. FAI General Insurance Ltd [2004] UKHL 54, [2004] 1 WLR 3251 at para 19. It is true that I have not been able to find an instance of the application of what I might call the Wallis v. Pratt line of jurisprudence into the modern era – but that might be happenstance.

Descending from general principle to the wording of clause 18 itself, Mr Jacobs submits that the reference in it to “merchantability, fitness or suitability of the oil for any particular purpose” is a clear, if so far as merchantability is concerned old-fashioned, reference to the statutory Sale of Goods Act implied terms; that the word “guarantees” is a strong and emphatic word, indicative even if not conclusively so of terms which may amount to conditions themselves (see BS & N Ltd (BVI) v. Micado Shipping ltd (Malta) (The “Seaflower”) [2001] 1 Lloyd’s Rep 341 at paras 54, 61 and 102(6)); that clause 18 itself uses “condition” in two senses: first in the sense of merely any “terms” as in the title to clause 18 “Other conditions”, and secondly in the sense of a fundamental term breach of which entitles the innocent party to bring the contract to an end, as where in the last paragraph of clause 18 it is said to be “a condition of this agreement that buyer complies with its obligations under this clause”, so that, especially in a clause which refers to many of those buyer’s obligations in terms of what the buyer “warrants” or “guarantees”, it is mere pedantry to demand that the general reference to “no guarantees, warranties or representations” must also include a reference to “conditions” in order to exclude the 1979 Act’s implied conditions; and that section 14 itself describes the implications by the expression “implied term” (albeit section 14(6) also says the “terms” are “conditions” in England). It may be observed that even Lord Diplock has referred to the Mash & Murrell implication, which on my understanding, is part of the meaning to be attached to what is now the section 14(2) implied condition, as a “warranty” (at 870). He similarly used the expression “warranty” to describe Sale of Goods Act conditions in Lambert v. Lewis [1982] AC 225 at 273, 276.

Mr Edey on the other hand relies on the jurisprudence, which he submits is long-standing, of the highest authority, and formulated as a matter of principle; on the fact that one or other of the cases in that jurisprudence has rejected a reference to either warranties or guarantees as a sufficiently clear exclusion; on the ultimate failure in Wallis v. Pratt of the submission, albeit accepted by the majority in this court, that a reference to “no warranty” included every term in the contract; on the use of the word “condition” in the last paragraph of clause 18 in the technical Sale of Goods Act sense and yet its absence from the exclusion within the same clause; on the fact that section 14(6) still spoke of the implied terms as conditions; and on the fact that section 14(4) allowed for the implication of a term “about quality or fitness” to be annexed by usage in circumstances where such a term was not covered by section 14(6) and thus was not rendered a condition. The consequence of the section 14(4) point, he submitted, was that the exclusion clause could sensibly speak in terms of warranties of quality and fitness without reaching as far as conditions.

The judge accepted Mr Edey’s submissions, as relating both to the basic statutory and also the additional common law implied terms. He regarded the latter as also a condition of the contract.

In a recent case comment on the judge’s decision (Of FOB sales, seller’s obligations and disclaimers [2009] LMCLQ 417 at 420) Professor Andrew Tettenborn has suggested that Wallis v. Pratt is now dated and that “English commercial law would, it is suggested, benefit greatly” if the new trend for the interpretation of exclusion clauses ushered in by Photo Production v. Securicor were taken to heart. I note that Benjamin’s Sale of Goods, 8^th ed, 2010 refers to the jurisprudence as “very strict” (at para 13 – 025).

It is not easy to choose between these submissions. On the one hand a principle has been established, on the highest authority, that Sale of Goods Act implied conditions cannot be excluded by reference to guarantees or warranties and require clearer language extending to “conditions” themselves. Those authorities go beyond the relatively simple clause and stark facts of Wallis v. Pratt itself, where there was a breach of an express clause as to the product to be supplied, or the case of Cammell Laird, where there was no exclusion at all, and extend to Baldry v. Marshall, where the clause spoke expressly of the exclusion of “any other guarantee or warranty, statutory or otherwise”, and above all to Kendall v. Lillico, where the clause was similar to ours in dealing expressly with the concept of merchantability and went on to refer expressly to “any statute or rule of law to the contrary notwithstanding” (emphasis added).

On the other hand, it is extremely difficult to read our exclusion clause as not being intended to cover the exclusion of the statutory implications of satisfactory quality (the new merchantable quality) and fitness for purpose. Mr Edey’s reference to the little known or exemplified section 14(4) cannot realistically be considered as the exclusive subject matter of the clause’s language about “merchantability, fitness or suitability of the oil for any particular purpose or otherwise”. Moreover, what other implied terms about quality or fitness for purpose, other than the statutory implications are permitted in the light of section 14(1)? If an implied warranty of quality or fitness of purpose is excluded, why not an implied condition, since only the statute can supply any such term and the statute refers to such terms as conditions? This may be thought to be especially the case in an international sale of goods contract where quality is defined by reference to an express specification and that specification has to be determined once and for all on shipment by a final and binding inspection certificate. The clause 18 exception says “no guarantees…which extend beyond the description of the oil set forth in this agreement”. What is that “description”? The word is not used (as far as has been brought to our attention) elsewhere in the contract. Strictly speaking the description may be thought to be found in clause 3, headed “Product”. However, it is unrealistic and uncommercial to think that for the purpose of this contract “description” does not also embrace clause 4, albeit it is headed “Quality”, especially since clause 18 refers to merchantability, an aspect of quality.

If therefore I were construing this clause untrammelled by past authority, or if such authority was plainly limited, in the way that so many decisions on the construction of individual clauses are limited, by considerations of the precise language and context of those particular clauses, I would feel it open, in the modern world, to give to clause 18 the construction which I believe that it realistically bears: that is to say, that “guarantees” and “warranties” are intended to cover all terms, both those which entitle the innocent party in the case of breach to treat the contract as repudiated and those which sound only in damages. As section 11(3) of the 1979 Act itself records, “a stipulation may be a condition, though called a warranty in the contract”: and clause 18 itself demonstrates that buyer’s warranties there set out are treated by the contract as conditions. It might be said that what is good enough for Lord Diplock (see at para 55 above) is good enough for commercial traders. However, I am not so free. The jurisprudence extends beyond individual decisions and has become expressive of a principle, and what is more the principle also encompasses clauses very similar to clause 18. I must consider that the parties to this English law contract, foreign as both of them are and quite possibly ignorant of the consequences of their choice of language, intended to contract by reference to what English law had to say about the language which they have adopted. As Lord Diplock said in Photo Production v. Securicor itself (at 850G/851A):

“Since the presumption is that the parties by entering into the contract intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend upon the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court’s view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another, is a relevant consideration in deciding what meaning the words were intended by the parties to bear. But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only.”

In the present case, it is not a question of whether the exclusion is unreasonable or not. Either submission of the parties would be perfectly acceptable as long as the position was clear. It is, however, a case where the implied obligations which it is said on behalf of the seller have been excluded are not only fundamental obligations of English law, long enshrined in our Sale of Goods Acts, but there has also been a judicial consensus that such obligations can only be excluded by language which expressly (or perhaps one may add which must necessarily be taken to) refer to conditions: and that such language as has been used in our case falls within that consensus and principle. Lord Diplock was speaking of a judicial consensus which creates implied obligations: but there may also be a judicial consensus which preserves such implied obligations in the face of inadequate exclusions. In such circumstances, there is an importance in the certainty of our commercial law which goes beyond the answer that may be given in a particular case. I cannot say, against the background of the jurisprudence, that the parties’ language is fairly susceptible of only one meaning. Whereas I have sympathy for Professor Tennenborn’s position, and for the submissions of Mr Jacobs, I do not think that it is open to this court to depart from that long established consensus.

In sum: (i) the alleged special or additional common law implied term which would put the seller in breach where goods of the contractual specification have been delivered but where there is subsequently (for an unspecified reason) a change such that the goods fall outside specification cannot be implied in this contract, even if the reason for that change were to be that the goods were not capable of maintaining their specification; (ii) the accepted implication of the statutory section 14(2) condition as to satisfactory quality may or may not assist the buyer on the facts, and may or may not even be engaged in the light of clauses 4 and 12 in the particular circumstances in which it may ultimately be suggested that the quality of the oil so far as sediment is concerned fell outside specification; but (iii) if the section 14(2) implied condition is legitimately in play, it has not been excluded by section 18 of the contract.

In terms of the preliminary issues ordered, I would answer them therefore as follows:

I am on the whole doubtful that these preliminary issues have been a successful venture. Without a proper understanding of the nature of the buyer’s complaint about the oil, the argument, at any rate on issue 1, has become unsatisfactorily speculative and theoretical. It may be, however, that the buyer’s real purpose was to establish whether it could, by legal argument on these preliminary issues alone, achieve a position where a factual trial was unnecessary. As Mr Edey said in his skeleton, he sought a “shortcut”. If so, the shortcut is not there.

I agree.

I also agree