Proton Energy Group v Orlen Lietuva

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DMC/SandT/14/13

England

Proton Energy Group SA v Orlen Lietuva

English Queen’s Bench Division (Commercial Court): HH Judge Mackie QC: [2013] EWHC 2872 (Comm)

Chirag Karia QC and Tom Bird, instructed by Holman Fenwick & Willan, for the Claimant Sellers

Christopher Harris and Ian Higgins, instructed by White & Case LLP, for the Defendant Buyers

CONTRACT: CONTRACT FOR SALE OF OIL BLEND: EXISTENCE OF BINDING CONTRACT: PARTIES REGARDED THEMSELVES AS BEING BOUND AFTER DEAL WAS CONFIRMED: SPECIFICATION OF OIL BLEND NOT FORMING PART OF SALE BY DESCRIPTION

Summary

The Court held that the present case involved a classic spot deal where the speed of the market required the parties to agree on the main terms and leave the details, some of which may be important, to be discussed and agreed later. Although the parties had not agreed on the documents which the claimant seller would be required to present for payment under a proposed documentary letter of credit, there was a binding contract between the parties for the sale of oil blend as both parties regarded themselves as being committed to the transaction as soon as this deal was confirmed

This note has been contributed by Ken T.C. Lee, LLB(Hons), PCLL (University of Hong Kong), BCL(Oxon) and barrister-at-law in Hong Kong.

Background

The Claimant, Proton Energy Group SA (“Proton”), was a company engaged in the business of international trading of oil and gasoline related products. The Defendant, Orlen Lietuva (“Orlen”), was a petroleum refining company incorporated in Lithuania. This was a dispute about whether dealings between the parties gave rise to a contract, if it did what the terms were and, if it was broken, what if any damages were to be paid.

On 14 June 2012, Proton sent a “FIRM OFFER” to Orlen offering to sell CIF Butinge, Lithuania , 25,000 MT +/- 10 per cent at Proton’s option of an oil blend described as the Product, attaching the specifications and the Q88 for the carrying vessel, M/T “HIOTISSA”/sub. The Offer warranted the Product to be “European origin” and set out a number of other terms, including “All other terms and conditions as per seller’s standard CIF contract” and “This offer is valid till 14.06.2012 COB and we would appreciate your kind reply in respect of this timing”.

Mr Armalis, Procurement Manager of Orlen, replied at 13:00hrs that day and proposed some changes to the terms. Proton agreed to some of the changes in an e-mail at 13:36hrs and stated that, “4. Contractual price is fixed as per the confirmed offer. All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations.” Mr Armalis replied at 13:42: “Confirmed”.

At 11:06 on 19th June 2012, Proton requested Orlen's technical acceptance of MT “APOSTOLOS A” as the carrying vessel under the Contract. On 20th June 2012, Orlen provided that acceptance and agreed the delivery window of 10th – 15th July 2012. Orlen prepared a “MEMORANDUM REGARDING MT APOSTOLOS A ACCEPTANCE IN BUTINGE TERMINAL” signed by, amongst others, its General Director. This was sent to Proton on 22 June 2012.

On 20 and again on 22 June 2012, Proton sent to Orlen a draft detailed written contract for the sale. Further email exchanges followed and ultimately a draft was sent to Orlen on 27 June 2012. Each draft began with the sentence, “WE ARE PLEASED TO CONFIRM OUR SALE OF OIL BLEND CONCLUDED ON 14TH JUNE 2012 ON THE BELOW TERMS AND CONDITION OF CONTRACT”. There were, however, two points on which the parties not agreed; whether the quantity of 25,000MT was net or gross of water and sediment and the precise terms of the letter of credit by which payment was to be effected.

Relations between the parties then deteriorated to the point that, on 29 June 2012, Orlen informed Proton that it was withdrawing from the negotiations. Orlen did not open any letter of credit and it did not accept the goods.

On 2 July 2012, Proton notified Orlen that it was accepting Orlen’s conduct as repudiatory breach of the contract, thereby bringing the sale contract to an end. Proton claimed that a contract with Orlen came into existence on 14 June 2012 and that it suffered a loss of at least US$1,363,255.59 as a result of Orlen’s breach of contract. Orlen argued that there was no contract; and that even if there was a contract, Proton suffered no loss as Orlen was entitled to reject the goods for misdescription on the basis that the product which would have been supplied was materially different from its description.

Judgment

The Court gave judgment in favour of Proton.

The Court accepted the general principles laid down by the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co [2010] 1 WLR 753 that in deciding whether there was a binding contract between the parties, the Court would consider what was communicated between them by words or conduct, and whether that led objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. This did not depend upon their subjective state of mind. Even if certain terms of economic or other significance to the parties had not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement.

The Court held that a contract came into existence on 14 June 2012. The present case involved a classic spot deal where the speed of the market required the parties to agree on the main terms and leave the details, some of which may be important, to be discussed and agreed later. As soon as this deal was confirmed, Proton committed itself to its supplier in order to obtain oil blend for sale to Orlen. Orlen also saw itself as committed as firm terms were used to describe the transaction.

Orlen also argued that, even if there were a contract, Proton would have suffered no damages from Orlen’s breach of it; Orlen would have been entitled to reject the cargo for misdescription as the product which Proton would have supplied was materially different from its description in the contract.

But the judge rejected this defence. He noted that, In principle, description and quality are different notions. The key to description is identity, as per Lord Diplock in Ashington Piggeries v Christopher Hill Ltd [1972] AC 441 at 503. The cases showed, however, that the distinction between the concepts of description and quality was sometimes blurred and that they might overlap where, for example, a word of description identified the quality of the product. But the judge saw no such blur or overlap in this case. The contract document started by confirming a sale of Oil Blend. Clause 3 headed “Product” described it as “Oil Blend… CN 2710”. That was the description of the product. Clause 4 headed “Quality” set out the details of the SGS Report of the analysis at the loadport. That was the quality of the product. The document and the Judge’s perception of it were consistent with the commercial reality that test results at the end of a voyage might differ from those at the outset. Further if the specification had been a sale by description, Proton would have had to comply with it in every respect as a condition of the deal. Further, Orlen might not have rejected the goods delivered by Proton as they would have caused no problem at the refinery. Rejection would have been bold and risky and Orlen could have sued instead for any losses arising from the failure to meet that specification.

Accordingly, Proton was entitled to recover damages from Orlen, subject to a deduction of US$133,214.62 being damages payable to Orlen for shortfall in quality and short delivery of goods delivered. This sum was arrived at by considering the profits which Orlen would otherwise be earned at its refinery. As the goods were a tailored product and there was no market price for the blend, the prima facie measure of damages set out in ss.51(2) (fn.1), 53(2) and (3) (fn.2) of the Sales of Goods Act 1979 was not applicable.

Comment

This case demonstrates that, barring any custom or practice in any industry, in deciding whether a course of conduct between two parties gives rise to a legally binding contract, English courts are willing to look at all the circumstances (including the commercial reality) and will not be restricted by any hard and fast rules. The answer to this question is highly fact-sensitive. The Court rejected the evidence of Orlen’s expert that different regimes governed whether or not there was a binding contract, depending on the type of oil trade in question. Parties should be careful about their conduct and the language they use. Any signs of commitment by both parties may be taken as an indication of the existence of a legally binding contract. If one does not wish to be legally bound until certain key terms have been agreed, he should communicate those intentions to his counterpart clearly.

Fn.1 Section 52

“(2) The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the seller's breach of contract.

Fn.2 Section 53

“(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty.”