Galaxy Energy International Ltd v Murco Petroleum Ltd

The Claimant oil trader (“Galaxy”) claims US$271,396.80 from the Defendant oil refiner (“Murco”) for alleged late delivery by Murco of 35,000 MT of fuel oil, sold on FOB terms to “be delivered…in one lot…during period 15/17 January 2012”. It is common ground that the fuel oil was not delivered by 17 January 2012. Murco contends that the contract contained a term extending delivery and alternatively contests the construction of the contract. Murco, if it is found liable, also disputes the damages claimed.

Galaxy is registered in the British Virgin Islands but is based in Monaco.

Murco is part of the Murphy Oil group, based in El Dorado Arkansas, and owns a refinery in Milford Haven. The parties had traded amicably on previous deals in 2011.

I had seven bundles of documents and heard the following evidence. Galaxy called Mr Baronti, the trader who agreed the deal on its behalf and his boss Mr Chimenti, the company’s Products Trading Manager. Murco, remarkably at a trial where it relies on what was said in a disputed telephone conversation, called no evidence of fact. Experts on market price and hedging, Ms Jago for Galaxy and Mr Daly for Murco produced a useful joint report and gave helpful evidence.

On 3 and 4 January 2012, Mr Warner of Tullett Prebon, brokers acting for Murco, communicated by Instant Messenger with Mr Baronti about a cargo of fuel oil being offered by Murco for 15-17 January loading. Mr Baronti said that he spoke with Mr Warner on the telephone and that they agreed terms for the sale as recorded in his internal recap. “delivery fob milford 15-17 jan” and otherwise “as previous deal”. In evidence he confirmed his statement that “We did not discuss anything other than what I put in my internal recap” and I accept that, there being no evidence to the contrary. However, Mr Tomes of Murco (not Mr Warner of its brokers) then sent a confirmation email containing some slightly different terms including at the end of that delivery provision in the Contract: “PLUS SUCH EXTENSION TO THAT PERIOD AS IS REQUIRED BY THE SELLER TO EFFECT OR COMPLETE DELIVERY” (“the additional delivery wording”). Mr Baronti responded that C would revert with comments “in due time”.

Galaxy considered this internally and proposed some deletions but these were not communicated to Murco until 11 January 2012 when Mr Dron of Galaxy responded to the effect that the additional delivery wording should be deleted. This fax concluded “PLEASE CONFIRM YOUR AGREEMENT TO THE ABOVE. IF YOU DO NOT DO SO YOU WILL BE TAKEN TO HAVE AGREED WITH THE TERMS SET OUT IN ANY EVENT”. It appears from Murco’s disclosure that these proposed changes were reviewed and agreed internally the following day but Murco did not communicate this to Galaxy. Murco did however proceed with the deal.

Meanwhile, the Seacrown (“the Vessel”) was nominated for the lifting by Galaxy on 6 January 2012 and accepted on 9 January 2012. The laycan was 14-15 January 2012. The Vessel arrived at the Milford Haven anchorage at 1018hrs LT on 13 January 2012 and tendered NOR.

By the afternoon of 17 January 2012, the local agent was estimating that the Vessel would berth at about 0700hrs on 20 January 2012 and then be ready to sail by 1300hrs on 21 January 2012. Galaxy sent an email to Murco to complain about this delay stating that it expected to receive a claim from its receivers and had no alternative but to hold Murco responsible for the costs and consequences of the delay. Murco responded on 18 January saying that they had received the message “regards being outside laycan” and that this was “confirmed and understood”. There were communications between the parties on 19 January 2012 through Mr Warner, the broker. Galaxy said that the delay in berthing was making them late with their end receivers and sought a revised price mechanism to compensate them for the delay. The Vessel in fact berthed at about 1000hrs on 20 January 2012 and sailed at 1420hrs on 21 January 2012.

Discussions did not bear fruit and on 26 January 2012 Galaxy indicated that it would be referring the matter to its external legal advisers. Ince & Co sent a letter before action on 23 February 2012 to which Murco responded on 17 March 2012, accepting that Galaxy could have cancelled the Contract, but stating that it had chosen to accept delivery so its rights were limited to a claim for demurrage.

Mr Baronti described in evidence and, for the most part the contemporaneous documents confirm, what happened on each of the four previous deals, the purchase of 30-35kt of fuel oil agreed on 10 August 2011, of 30-35kt of fuel oil agreed on 19 August 2011, of 30-35kt of fuel oil agreed via Mr Warner of Tullett Prebon on 27 October 2011 and of 30-35kt of fuel oil agreed via another broker, PVM, on 7 December 2011.

In each case Murco responded to notification of the terms with a confirmation referring to an extended delivery period which in turn Galaxy rejected. In no case did Murco object to this course and on at least two of the deals clearly accepted it internally. The pattern is clear but its legal relevance is disputed.

I will shorten my summary of the competing submissions about when the contract was made and what its terms were by first making some points that might seem obvious.

Mr Baronti gave clear and credible evidence consistent with the documents and commercial probabilities. I believe him. Murco’s attempt to challenge his evidence about the discussion of 4 January was based on extrapolation from the documents and not even on instructions from Mr Warner who is, as far as the Court is aware, alive and well and capable of giving evidence. This was a hopeless and unattractive position for Murco to adopt.

The additional delivery wording is obviously a standard provision that Murco, as seller, seeks to introduce into deals, repeatedly so as the evidence in this case shows. There is nothing to suggest that an extension was ever discussed and both parties knew it had been repeatedly rejected by Galaxy in the past.

Subject to Mr Happe’s submissions about course of dealing which I will come to, it is obvious that a contract in terms which did not include the additional delivery wording came into existence either as a result of the telephone call on 4 January or following the 11 January message, the latter unchallenged by Murco.

Murco points to what happened between 4 and 11 January. On 6 January Galaxy nominated the vessel to Murco. On 9 January Murco accepted the nomination. On the same day, Mr Warner, clearly passing on the enquiry from Galaxy, had asked if there was any possibility "that the vessel might load a day earlier", than the proposed laycan of 15/17 January. He passed on to Galaxy Mr Tomes's response. On 10 January Galaxy confirmed the Vessel and gave instructions to Murco as to the quantity to be loaded. On 11 January, before its message of the same day, Galaxy gave Murco "Documentary Instructions" "regarding the issuance and the distribution of the documents we require". These documents were to include, to accompany one set of bills, an E-aad showing the receiver as the EAC.

Galaxy also took all the operational steps that would be expected in order to perform the contract, fixing and lifting subs on a performing Vessel, arranging the attendance of agents at the loadport andinstructing the Vessel to load the preferred quantity.

All this was done, Mr Happe submits, as must have been apparent to anyone in Galaxy’s position, in direct response to Murco’s own email of 4 January. If there was no agreement in the conversations of 4 January, then Murco’s 4 January email represented a proposal to enter a contract on the terms set out. If there was some partial form of agreement in the conversations, Murco's 4 January email represented a proposal to supplement that agreement and conclude the contract on the terms there set out. On that basis, the conduct of Galaxy on 6, 9, 10 and (it may be) 11 January was only referable to accepting such terms; and a party in the position of Murco could only be taken to have understood that Galaxy were acting on and agreeing to the terms set out in Murco’s 4 January email. The contract was then concluded on the basis of Murco's 4 January email, before Galaxy's 11 January counter ever entered the picture.

Mr Happe cites well known authority on acceptance by conduct such as Brogden v Metropolitan Railway(1877) 2 AC 666 at 686 for the proposition that a course of dealing and conduct, construed objectively, can amount to acceptance, in contractual terms of an offer made by a party.

Mr O’Sullivan points out that his opponent’s narrative overlooks the fact that Mr Baronti responded promptly to the email from Mr Tomes to make clear that Galaxy “will revert in due time with our comments”, thereby putting Murco on notice that Galaxy would respond and that a brief period of silence should not be taken as acceptance. He asks how it can be said that Galaxy’s “failure” to respond to the 4 January 2012 email for 7 days results in it being deemed to have accepted those terms, but Murco’s failure (ever) to respond to the message of 11 January 2012 (except by performing the Contract, loading the cargo and accepting payment) is of no relevance?

Further, he says, while it is right that an offer can be accepted by conduct, acceptance needs to be communicated to the other party. It is doubtful whether Murco can rely upon Galaxy’s conduct as supposedly making clear that Galaxy intended to be bound by the terms of the 4 January 2012 email, given that Murco did not (subjectively) understand Galaxy’s conduct in that way. The version of the 11 January 2012 message disclosed by Murco shows signs of an internal approval process (including a tick against the deletion of the additional delivery wording and the manuscript words “Reviewed & agreed 12/1/12”). If Murco had thought it already had a deal on different terms which were more favourable to it, why would it be reviewing and agreeing these alterations by Galaxy?

As I see it the position is clear. There was an agreement if not a final concluded contract in the 4 January conversation. Murco tried to introduce the extension wording but knew at once that it was not yet accepted but was being considered. Galaxy’s conduct was consistent with the 4 January agreement or understanding and a world away from accepting the new provision by conduct. Murco’s position is plainly wrong as well as unattractive given what Murco recorded internally on 12 January. The contract which came into existence on 4 January, alternatively 11 January did not include the additional delivery wording.

Murco argues that if it is wrong about the extension clause, the provision for delivery was a laytime provision and did not provide for the latest date of delivery. The period set out in the delivery provision ("during 15/17 January") operated not as a period for shipment but rather as a laycan- see, for example, The "Luxmar" [2007] 2 Lloyd’s Rep 542 where the contract provided for delivery "... In the period 27-30/05/2004. Buyer will narrow such period with two day laycan latest by 21/05/2004". In that case, it was crucial that the buyer could set a laycan spread that would have permitted them to tender the vessel at any time up to 2400 hrs on the last day for delivery. The Court of Appeal decided that that made it absurd to argue that the seller must have completed loading by that time. In the present case, the commencement of laytime is linked to the "delivery period" in Clauses 7 and 8 of Murco’s General Terms and Conditions. Nor was there any need for a further narrowing of the three-day period that had already been agreed. Thus Galaxy’s entitlement was limited to Murco loading the cargo within the laytime, failing which they would have a claim to demurrage.

Galaxy responds that the argument relies on Clause 7 which deals with a situation in which the date range in the parties’ agreement needs to be narrowed to a three day period, stipulating for the date when that nomination should be made and the effect of that nomination on the arrival time of the Vessel. None of that is relevant in the present context. The parties had agreed a three day delivery period. No narrowing of that period was necessary and none occurred. Clause 7 is a standard term which is concerned with a different type of date range. No doubt if the Contract had taken a different form, providing for an extended delivery period in which a specific three day laycan needed to be mutually agreed, clause 7 would be relevant. But that is not the present case.

Mr O’Sullivan has back up points but his primary submission is in my judgment correct. The clauses, and the case Murco relies upon, address a situation where narrowing is required. But there was no such requirement in this case. So I reject Murco’s submission and its suggestion that the Delivery provision was concerned only with time of arrival of Galaxy’s nominated vessel.

Galaxy quantifies its loss conventionally, seeking the difference between the market price on the last contractual date for delivery and the market price on the actual date of delivery. See Benjamin paragraphs 17-038 to 17-046. In the Defence Murco does not dispute this measure- see sub paragraphs 3 and 5 of Paragraph 16 and also the List of Issues. Despite this Murco, without even attempting to amend its pleading, raised at the trial and argued in Paragraphs 27 to 37 of its written closing submissions that Galaxy had suffered no loss because the cargo was not going to be sold on the market and the sub-sale led to no claims against it. Quite apart from the legal difficulties presented by this contention it faces a more basic difficulty. This case is in the Commercial Court but it is for a sum at the lower end of a case in the Mercantile Court. It is even more important in the smaller cases than in larger ones, given the need for proportionality over costs, that the parties should know what issues they have to face and not be met with surprises. I decline to allow this unpleaded issue into the case or to decide it.

Murco’s Defence contends that Galaxy ought to have mitigated its loss “by making suitable forward or hedging arrangements”. This defence was not pursued at trial. However Murco has argued (but not pleaded) instead, in detail in its trial skeleton but more briefly in its closing, that Galaxy in fact specifically hedged the Murco transaction and has tried to conceal this from the Court. As it happens there is a comprehensive answer from Galaxy but, for the same reasons as I gave for the sub-sale point, I decline to allow this unpleaded issue into the case or to decide it.

The submissions of Counsel on this issue were informed by the expert evidence. The experts were admirably detached, fair minded and well informed. Ms Jago is a consultant with 30 years experience who, while much engaged in giving expert evidence, keeps up with the market and herself traded fuel oil through her company until 2010. Mr Daly has 45 years experience of the industry, particularly of broking, and is also a consultant. Since 1987 he has been Chairman of Channoil Broking

Damages are to be assessed on the basis of market value but there is a disagreement between the experts as to how the market value is to be determined for the purposes of the comparison between value if delivered on 17 January 2012 and value if delivered on 21 January 2012. The experts agree that when, as in this case (21 January was a Saturday), the relevant date falls over a weekend “A cargo loading on a Saturday is valued at the market price of the previous day, and a cargo loading on a Sunday is valued at the market price of the following day”. They agree that the relevant Platt’s quotation is “1% Fuel oil cargoes fob NWE”. As there is no reason to think that the applicable premium changed between 17 and 21 January 2012, that issue is irrelevant for this exercise. The experts agree that when trading companies reconcile their books (“mark to market”) they use the Platts’ values for that particular day.

The main relevant disagreement between the experts is whether, to determine the market price on a given day, one uses the Platt’s quotation for that particular day, or some combination of prior and/or future quotations. Ms Jago says that market value is the Platt’s price on the day, Mr Daly says that it is a spread of days. In a sense they are both right because it depends what you mean by market value and that involves legal as well as market considerations.

Mr Happé argues that the correct way to evaluate the market price, or value, is by reference to the way any such late delivered cargo would have been dealt with in the market. He says that this would be by reference to a spread of dates, and not on a spot and single date. Determining the value of the goods in the market requires the court to assess what price a willing buyer and seller would have reached for the cargo. That may be a theoretical exercise. But it is a theoretical exercise that must be performed by reference to the way that the cargo would have been treated in the real world, in the market. To use a single date’s price would give a distorted idea of any market value. This is true not only because that is not the way the cargo would have been dealt with, but because to choose any single Platt’s price is unsafe.

Platt's derives its prices from the market; it does not set them for the market. It naturally reflects market activity, but at a remove. It is not an exchange or a bourse. It is a market reference for contract pricing. Mr Happé relies on points made about the limitations of Platt’s by his expert Mr Daly.

Mr Happé argues that the task the court is engaged in is determining at what price a willing buyer and seller would have bought and sold the cargo. That also reduces volatility and the quirks of Platt’s pricing. Both experts as well as Mr Baronti agree that the usual way of pricing in this market is over a spread of dates. Thus when Galaxy became aware that the cargo would (as it saw it) be delivered late, Mr Baronti sought a price adjustment, not by reference to any single price, but by pricing over a spread, taking into account the period of delay, from 12 - 25 January 2012.

The Platt’s price for 20 January is inapt because the cargo was only loaded on Saturday, 21 January and numerous anomalies spring from that. By contrast, a single day’s price does not reflect market practice and is not justified by the individual prices assessed by Platt’s.

The market measure in sales of goods cases is intended to provide certainty and enable parties to know where they are. It will not achieve that goal if the measure is operated in an artificial manner, converting notional sales/purchases into distressed buyer/seller scenarios. The fact is that the Platt’s’ figure for 20 January 2012 (US$664/mt) represents the best available assessment of the market value for a cargo of LSFO on that date. There is no competing figure for that date.

Ms Jago used the Platt’s’ quotations for the specific days for which the market price is required. In support of this approach, she explained the Platt’s’ methodology, which involves using all available information to arrive at a market level at close of market on the particular date. She made clear that there is no difficulty with buying or selling fuel oil at a fixed price (i.e. a specified price per tonne, rather than a price fixed by reference to an index). She said that where a sale is to be agreed using a “floating” price, there is no “usual” way of doing this for cargoes of fuel oil: it could be the average of 1 day, 3 days, 5 days, 7 days, 10 days, 15 days, or using the month of loading or discharge.

Although in cross-examination, Ms Jago agreed that pricing mechanisms as agreed by traders are usually based on a spread of dates in the future, Mr O’Sullivan argues that that is a different point and risks confusing the mechanism which a trader might want to use to price a cargo being sold or purchased for delivery in the future with the way in which such a cargo would be valued on a particular day.

Mr Daly provides several different figures, based on an average of Platt’s quotations for 3 or 5 days around or after the bill of lading date. Mr O’Sullivan pointed out that Mr Daly conceded that it only made sense to use floating prices (e.g. 3 days around bill of lading) for dates in the future and that what you were doing when you fixed a price in that way was using the market price in the future, not the market price today. Counsel says that Mr Daly struggled to explain how his insistence on pricing around the bill of lading worked if one imagined valuing today two identical cargoes in ships berthed next to one another, but with different dates on their bills of lading. As I see it, if Mr Daly did struggle it was because of the skill of cross examination not the soundness of the point being put.

The best guide to the market value for delivery on a particular day is the Platt’s market value for that particular day, not a mean of the market value on days surrounding or following that day.

Mr Happé points out that in Glencore Energy v. Transworld [2010] EWHC 141 (Comm), Blair J., determining a dispute on the pleaded case, would have assessed the market value (in that case of crude oil) by reference to the way that the commodity was traded (which, analogously, was by use of a spread of dates, not a single date). He would have used an average of 5 Platt’s quotations following the date of the bill of lading. Mr O’Sullivan points out that that was a case in which it had been held that there was no ready market for the specific crude oil cargo. It was concerned with a different exercise, in which it was relevant to ask whether there is a “typical” way to price crude oil (not fuel oil).

That case merits a closer look. The court looked at the next best evidence because there was not a ready market in the special crude in question [67]. The issue was the difference between the price and the value of the crude on a particular day. The only dispute was whether that value should be based on a single day’s Platt’s price or on an average of the 5 days quotations following the date of the bill of lading. The judge would have taken the value to be that based on the 5 days but in the event the case was not decided on that point. I do not read the judge to be saying that when you look at market value when there is a ready market you would take a single day’s Platt’s but when there is no such market you take five days.

In Glencore there was a March pricing period but a June delivery date. The approach to that rather different problem was the analysis which the then Christopher Clarke J was agreeing with in Choil Trading v. Sahara Energy [2010] EWHC 374 (Comm). This case was also concerned with a slightly different exercise in valuation (sound value vs. arrived value for a damaged cargo of an oil product, not crude oil). Mr O’Sullivan points out that the judge used a single Platt’s figure to arrive at the sound value for the relevant date (at [148]). That is true but he did that in a context where there was no evidential competition on that date between a single and a multi-day Platt’s.

These decisions are not legal precedents but useful examples of how judges approach similar issues in different cases on particular evidence.

The Court is required to determine the market price at the date of the seller’s breach. The focus in the cases in the extracts from Benjamin referred to above is on the market value at the date (or even hour) of breach but it is on the market value.

Platt’s is a famous reporter of information, particularly benchmark prices, in oil and other industries. It makes price assessments. Its prices are very widely used for pricing deals in contracts worldwide. It is the market leader. While Platt’s has the imperfections of any such agency and may have additional ones on particular days or in particular circumstances it is the best measure currently available. It is therefore not useful for me to examine particular shortcomings of the kind identified by Mr Daly. Platt’s is not necessarily going to be pre-eminent for all time but at present is the best source available.

Platt’s is not however a market or exchange on which a sale or purchase can be made in trading hours. When looking at market price, unlike a commodities exchange, Platt’s is not itself the market. The experts agree that it is common indeed usual for prices in oil deals to be based on a spread of Platt’s days. That is the case in the contract which is the subject of this action, it was in the mind of Galaxy when sensibly making an offer in January 2012 to resolve this dispute. The reasons for a spread are many but may include the fact that Platt’s is not a literal market price and the inevitable limitations in the tasks it sets itself.

A further imperfection is the convention that both experts accept (and therefore so do I) that the price on a Saturday will be the same as that on Friday. But that is not a reason to introduce even more artificiality.

Mr O’Sullivan reasonably distinguishes between a price mechanism which prudent traders may agree for the future and one to arrive at a price for a particular date that has already passed. It is true that the exercise is a notional one in that it does not involve looking at what actually happened to this cargo. But one thing that is clear from the evidence is that trades in the market on the relevant day would be much more likely to be priced on a spread of Platt’s than on the quoted figure for that day. That spread of prices is closer to the market value for real deals on the day than the single days’ Platt’s figure, which, I repeat, is not the quoted price on an exchange. The fact that it is easier to reach a value by using a single day’s Platt’s is not a reason to prefer this approach to a more complex but fairer one.

I therefore prefer between two viable cases, on the evidence available, the approach of Murco to that of Galaxy on this issue.

Mr O’Sullivan suggests that if one were to use a spread of dates, the modern approach to pricing is to use one from the bill of lading date (i.e. 21, 23, 24 January for B/L dated 21 January). Mr Happé is more cautious and says that the spread should be based on the bill of lading date and a three day spread would be suitable. But, he says, it is for the Court to decide exactly what spread most fairly and accurately reflects the value. This does not seem to reveal much difference between the parties. I invite them to agree details of the spread failing which I will decide it at the hand down of this judgment.

The Claimant succeeds and will recover damages based on a spread of days of Platt’s prices.

I shall be grateful if Counsel will, not less than 48 hours before hand down of this judgment, submit a draft order and list of corrections of the usual kind, both preferably agreed, together with a note of any matters which they wish to raise at the hearing.