Bominflot Bunkergesellschaft fur Mineralole mbH & Co v Petroplus Marketing AG

If the gasoil was on specification when loaded and the vessel was not the cause of the increased sediment levels found a few days later at El Ferrol, the only other possibility that has even been raised is that the cargo was unstable on delivery. Not only is that, inferentially, the only alternative conclusion but the evidence positively points to the same conclusion.

Mr Revell of MTD explained what instability means in this context and how it leads to the formation of sediment which is not present at the outset in his report at para.4.6.1 and 4.6.2:

“4.6.1

During transportation, storage and/or use the distillate fuel (i.e. Gas Oil) will come into contact with air, which contains oxygen. If the distillate fuel contains unstable components, such as cracked refinery distillate fractions, they can oxidise when in contact with the air (oxygen) and this oxidation in turn produces gums and sediments. If the Gas Oil blend/cargo is unstable the oxidation will continue until all the unstable components present in the Gas Oil have been oxidised, which means the levels of sediment continue to increase over a period of time.

4.6.2

It is known that phenalenes and phenalenones are not present in stable straight run distillate fuels but are present in cracked fuels. Trials have also shown that over a period of time the phenalenes content diminishes whilst the phenalenones content increases. The chemistry of the sediment formation in cracked distillate fuels is complex and is thought to proceed by the following steps:-

(i)

Phenalenes are oxidised to phenalenones

(ii)

Phenalenones react with Indoles to form Indolyphenalenes and Indolyphenalenones, which are sediment precursors.

(iii)

These precursors then react with acids to form sediment.”

It was the evidence of Mr. Revell, which I accept, that the gasoil was unstable on delivery at Antwerp and that such instability led to the formation of and resulting increase in sediments over the short voyage to El Ferrol.

The main bases for that conclusion are as follows:

Further, it is to be noted that that conclusion is also supported by the opinions expressed in the report prepared by CWA for the Seller following the joint analysis: at paras.3.4.6, 3.5.3, 3.5.4, 4.4.5, 4.4.6, 4.4.11, 4.4.12, 4.4.13, 4.6 and 4.8 (where the author’s overall conclusions are set out).

As Mr. Revell explained in his report at para. (4.1.2):

“Gas Oils can be used for various uses such as power generation on land of trains, buses, trucks, automobiles, construction and agricultural equipment. In addition Gas Oils are often used at sea to provide power to vessel’s main propulsion and to run its auxiliary equipment”.

In those circumstances, the amount of total sediment in the Gas Oil is important since high levels “can cause filter plugging, combustion chamber deposit formation and gumming or lacquering of injection system components with resultant sticking and wear, which makes it unsuitable for use” (para. 4.2.1.).

On that basis, it was Mr. Revell’s evidence that an unstable gasoil cargo is not of satisfactory quality and therefore this gasoil cargo was not of satisfactory quality on delivery (paras.4.6.3 and 12.5) because:

“A Gas Oil that was unstable would, in my opinion, be unmarketable for use as a finished product and could not be used for any of the normal end-uses of a Gas Oil for the following reasons:-

(i)

The unstable Gas Oil would produce sediment over a period of time. The rate of sediment production could not be predicted as it would depend upon how unstable the cargo was, storage conditions, temperature, mixing and the amount of oxygen coming into contact with the fuel.

(ii)

As the stability testing is only predictive any potential end user of an unstable Gas Oil would not know what the sediment levels would be likely to be after a few days, one week, one month or six months. Therefore the user would not know when the sediment levels would become high enough to cause operational problems in the equipment being powered by the Gas Oil, such as those discussed in 4.2.1.”

Mr Revell’s approach accords with that of Ms. Jago (from a trader’s perspective). As she stated at para.4.19 of her report:

“An on specification, finished grade cargo of gasoil, such as that sold by Petroplus to Bominflot, can be used for a variety of purposes such as power generation of vehicles of various sorts including shipping. However, if the gasoil is unstable then my understanding as a trader is that it cannot be put to those uses and therefore has to be sold into a very different market involving different players who are able to deal with instability before selling the material as a finished grade”.

The evidence therefore established that instability is a different quality issue to the mere presence of sediment. In particular: it is subject to a different test; it is a serious problem regardless of whether or not sediment has yet been formed; it has particular causes and dealing with it is likely to involve different procedures.

Under s.14(2B) of the SGA, one aspect of the quality of goods relevant to determining whether they are of satisfactory quality is their “fitness for all the purposes for which goods of the kind in question are commonly supplied”.

On the basis of Mr. Revell’s evidence the gasoil was not fit for any of the purposes for which it is commonly supplied and in the light of all the evidence before the court I conclude that the gasoil was not of satisfactory quality for the purposes of the implied term under s.14(2) of the SGA on which the Buyer relies.

It was the Seller’s pleaded case that the purpose for which gasoil of this nature and with these contractual specs is commonly supplied is for use as automotive diesel or heating fuel and not for a military specification for marine gas turbines and high performance diesel engines (ADef, paras.3(iii) and 11(i)(d)). As to that:

The Buyer did not press this alternative way of putting its case and I express no views upon it.

It is the Seller’s pleaded case that even if the Court upheld the Buyer’s case on Issues (1) and (2), the Buyer’s case must nonetheless fail because the implied term on which the Buyer relies is “limited to characteristics of the cargo which were not covered directly or indirectly by the contractual specifications” (ADef at para.3(i)).

The origins of this point appear to lie in the observations of Rix LJ at the end of paragraph 42 of his judgment where, after acknowledging that it was “impossible without knowing at least something more about the circumstances in which it is alleged that the gasoil changed, to say whether the statutory section 14(2) implication… would assist the buyer” and going on to set out how the claim might work depending on the expert evidence, he added this:

“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… conclusive, to the exclusion of an implied condition as to quality”

The basis for that reservation appears to lie in the fact that the contract contains a spec as to sediment (Cl.4) and that compliance with that specification was to be (conclusively, subject to fraud or manifest error) determined at the loadport (Cl.12): see paras.41 and 63.

At the original trial of the preliminary issues before Field J, the Seller ran the argument that Cl.4 and Cl.12 meant that there should be no implied term under s.14(2) of the SGA at all: see the judgment of Field J at para.44. Field J rejected that argument. The Seller did not appeal on that point or suggest, on the appeal (or at the trial), that the unappealed implied term should be limited in the way now contended for.

Rix LJ’s reservations were first aired in his judgment, in relation to an implied term found by Field J and in respect of which there was no appeal. They were therefore expressed without the benefit of hearing argument from either party. It may be that these reservations were influenced by an apparent scepticism about the factual premise of the Buyer’s case and uncertainty about how the Buyer would put its case.

Notwithstanding his reservations Rix LJ recognised that instability might mean that the cargo was of unsatisfactory quality if it was “a truly latent and separate vice which the specification tests would leave untouched and undiscovered”. I find that the instability of the gasoil was such a vice on the facts as I find them to be, as borne out by the expert evidence.

I further find that instability was not a characteristic of the cargo which was covered directly by the specifications. The specs are silent as to stability. Stability is a matter which can be tested for but no provision to do so was made.

As to whether it was “indirectly” covered by the specifications, it is unclear what this means. If instability was in truth no more than a way of saying that on delivery the gasoil already contained sediment which exceeded the specifications, but which was not detected on delivery then it may be that it would be “indirectly” covered by the specifications. Equally, if the way of testing for stability was the same as that for sediment so that a gasoil which was on specification for sediment would be regarded as being stable then again it may be that it would be “indirectly” covered. In both cases it would be a quality characteristic which, although not specified, would or should be demonstrated by contractual specification test procedures.

I would not, however, accept that the mere fact that instability results in an increase in sediment means that it is “indirectly” covered. There is nothing on the face of the contract which limits the ambit of the statutorily implied term and in particular removes from its ambit instability, if that would otherwise render the gasoil not of satisfactory quality, simply because the instability will lead to an increase in sediment which is the subject of a contractual specification.

Further, if the mere fact that the unsatisfactory quality later manifests itself in something covered by the specifications means that it is “indirectly” covered thereby then the statutorily implied term would be largely deprived of meaningful content: it is not easy to think of things which could be inherently but latently wrong with the cargo such that it was not of satisfactory quality, which are not the subject of the specifications, but which would later manifest themselves in a manner which would not affect something covered by the specifications.

Standing back, once it is accepted that the s.14(2) implied term is otherwise to be implied, it is hard to see why, even under a contract containing Cl.4 and Cl.12, the Buyer should be held to take the risk of an inherent vice such as instability which is not tested at the loadport and would therefore not be revealed at the loadport, but which means in and of itself that the cargo which he has bought cannot be used for any of the purposes for which it would usually be used and is therefore not of satisfactory quality.

Even if it be assumed that the implied term is subject to the limitations contended for by the Seller, I accordingly find that instability was not a characteristic of the cargo which was covered directly or indirectly by the contractual specifications.

For all these reasons I conclude that if, as I have found, the cargo delivered was unstable and therefore not, at that point, of satisfactory quality for the purposes of the statutorily implied term, the Seller was in breach of that term, and the fact that the result of the instability would be (and in fact was) the later formation of sediment does not alter that.

The Buyer’s case is that as a result of the Seller’s breach of the implied term, the Buyer suffered various losses as set out in their Amended Particulars of Claim (“APOC”) at para.13.

The Seller has never advanced a positive case on the pleadings in relation to quantum (save in relation to the legal costs and mitigation issues). Rather it has simply denied that the Buyer suffered any loss and damage by reason of any breach of contract (ADef, para.13) and put the Buyer to “strict proof” of its alleged loss and damage (ADef, para.14).

As a result of the instability of the gasoil (and therefore the Seller’s breach of contract), the sediment levels in the gasoil increased to a point where the gasoil was not on-specification as to sediment under the Buyer’s on-sale contract with Bominflot SA or Bominflot SA’s contract with the Spanish Ministry of Defence. Bominflot SA and the Spanish Ministry of Defence were therefore entitled to reject the gasoil and did so.

In those circumstances, the Buyer had to find an alternative sub-buyer of the gasoil. Independent brokers (PVM Oil Associates – “PVM”) were instructed to see if they could find a buyer willing to take the gasoil and re-refine it or use it as a cutter stock (i.e. for blending with a fuel oil), but had real difficulties doing so, not least because of the size of the parcel.

Eventually, on 5 February 2007, BV Mabanaft (“Mabanaft”) agreed:

The Buyer claims damages for the loss in value of the gasoil calculated as follows:

The sum so calculated and claimed has never been the subject of any positive contrary plea by the Seller and the Buyer submits that it represents the actual loss directly and naturally suffered by it as a result of the Seller’s breach and that it should therefore be recoverable – see s.53(2) of the SGA.

The Buyer recognises that under s.53(3) of the SGA, prima facie the measure of loss for the purposes of s.53(2) is the difference between the sound and unsound market value of the goods at the time of delivery. However, the Buyer contends that in a case such as this where the defect is latent and only later discovered, the starting point should be the date on which the Buyer discovered the problem. Moreover, where, as here, the Buyer was unable (despite its efforts) to sell the unsound cargo immediately on discovering the problem, the relevant date should be the date of the eventual sale (in order to give full effect to s.53(2)). In this connection it relies on Benjamin on Sale of Goods (8^th ed.) at para. 17-054 and the cases there referred to.

I accept and find that this is a case where the defect did not become patent until later and that, on discovery of the defect, the Buyer at all times acted reasonably in seeking to minimise its losses in terms of the loss in value of the cargo

In those circumstances I accept and find that the loss directly and naturally resulting is that which results from their actual resale of the gasoil and that the relevant date for calculation of the diminution in value of the goods is the date of that resale. The best evidence of the value of the gasoil at that time is the price reasonably achieved on the resale of the unsound gasoil to Mabanaft.

I also accept that it follows that that is also the date at which the value of sound gasoil should be assessed. If it were otherwise one would not be comparing like with like and market distortions would be introduced (which could increase or decrease the loss). In principle the same date should be taken for the assessment of both sound and unsound values.

Benjamin at 17-54 proceeds on the basis that there will be just one date for assessment of both sound and unsound values: see the heading “relevant time for ascertaining values” (emphasis added). Para.20-124 also proceeds on the same basis drawing no distinction between the date for the purposes of assessing the sound and the unsound value of the cargo. Further, in cases where the time at which to assess the unsound value of the goods has been postponed to a date after the date of delivery, the sound value has also been assessed as at that same later date – see, for example, Van den Hurk v R Martens [1920] 1 KB 850; Obaseki v Reif [1952] 2 Lloyd’s Rep.346; Choil Trading SA v Sahara Energy [2010] EWHC 374 (Comm).

The best evidence of the value of sound gasoil at the time of the resale is the price reasonably achieved on the purchase of the substitute cargo from Mabanaft on that date.

I accordingly accept that damages for diminution in value have been properly calculated and claimed.

By way of cross-check, the Buyer adduced expert evidence from Ms Jago as to the difference between the sound and unsound market value of the gasoil. She concluded that at the date of arrival at El Ferrol, the difference between the sound and unsound market values of the gasoil was $2,169,707.23 (i.e. a little more than is actually claimed under this head by the Buyer).

I accordingly find the Buyer’s recoverable damages under this head to be $2,108,226.70.

As a result of the Seller’s breach, the Buyer had to incur the further cost of the freight back to Antwerp (in order to deliver it to Mabanaft). The Buyer therefore claimed $649,350.65 in respect of such freight. Benjamin at 17-062 recognises the recoverability of foreseeable expenses reasonably incurred as a result of a seller’s breach, of which freight on a return voyage is given as an example. I find that this freight was foreseeably and reasonably incurred and is recoverable in damages.

The total demurrage for which the Buyer was liable and paid under the charterparty was $442,245.70. The vast majority of the time for which the Buyer was liable in demurrage was spent (at El Ferrol, Bilbao and back at Antwerp) as a result of the discovery that the gasoil’s sediment had deteriorated (requiring samples to be taken and tests to be carried out; leading to the rejection of the gasoil and the need to find a new buyer; and then the return to Antwerp) and was therefore the result of the Seller’s breach. Benjamin at 20-125 recognises the recoverability in damages of consequential loss such as demurrage.

In his third witness statement Mr Roeper explained how much time/demurrage would have been incurred had there been no breach. I accept that evidence and find that the Buyer is entitled to damages for demurrage foreseeably incurred in the net amount of $374,386.

The Buyer had to pay a commission of $9,998.19 to PVM (the broker who found the buyer, Mabanaft) on the sale of the unsound gasoil which it would not have incurred but for the Seller’s breach. I find that it is entitled to recover damages for that foreseeable consequential loss.

As a result of the Seller’s breach, the Buyer incurred:

I find that the Buyer is entitled to recover damages in respect of these foreseeable consequential costs.

Initially, the Buyer believed that the cause of the deterioration in the gasoil’s sediment levels must have been caused by the vessel and defended proceedings brought by her owners for demurrage and freight on that basis and counterclaimed for the Buyer’s losses.

However, following the joint testing in June 2007 which showed that the vessel was not the cause of the increase in the gasoil’s sediment levels (but rather that such was caused by the instability of the gasoil), those proceedings were settled on terms that the Buyer paid the demurrage and the owners’ costs of £67,624.45 and €10,073.74.

The Buyer contended that the cause of the Buyer initially resisting owners’ claim and thereby ultimately being liable to owners for their costs was Seller’s breach which resulted in the increase of sediment during the voyage which it is said naturally suggested that the vessel was to blame.

The Buyer further submitted that the resulting losses are not too remote but were the reasonably foreseeable result of a breach of this sort: the natural first instinct on facts such as those here is that the vessel must be at fault (and indeed the Seller says as much in the ADef).

The premise of the Buyer’s damages claim is the Seller’s breach of contract and one is concerned with the foreseeable consequences of that breach. Under this head the Buyer is claiming damages for costs incurred on the premise that the Seller was not in breach and that the loss was caused by a breach of contract by a third party. I do not accept that damages premised on the Seller not being in breach are a foreseeable consequence of the Seller’s breach. Further or alternatively, the costs were the consequence of the Buyer’s choice to fight the owners’ claim, which is a sufficiently independent matter to mean that I am not satisfied that it was caused by the Seller’s breach. I accordingly reject this head of damages.

This has been dealt with above.

The Seller is precluded from running its recent plea of failure to mitigate (ADef, para.13A) by the Order of Field J. However, in any event I find that:

I accordingly find that the Seller was in breach of contract and that it is liable to pay damages in respect of the losses suffered as a result by the Buyer in the amounts set out above, together with interest thereon.