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||Neutral Citation Number:  EWHC 2872 (Comm)
||Case No: 2012 FOLIO 939
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
HIS HONOUR JUDGE MACKIE QC
|| PROTON ENERGY GROUP SA
||- and -
Chirag Karia QC and Tom Bird (instructed by Holman Fenwick & Willan) for the Claimant
Christopher Harris and Ian Higgins (instructed by White & Case LLP) for the Defendant
Hearing dates: 8 to 11 July 2013
HTML VERSION OF JUDGMENT
Crown Copyright ©
Judge Mackie QC :
- The Claimant, Proton, is a company incorporated in Switzerland engaged in the business of international trading of oil and gasoline related products. The Defendant, Orlen, is a petroleum refining company incorporated in Lithuania. This is 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 should be paid.
- The Claimant was unsuccessful in an application for summary judgment before Mr Gavin Kealey QC. The Deputy Judge helpfully summarised the facts as follows:
"by an email sent on 14th June 2012, Proton made what was described as a "firm offer" to sell to Orlen CIF Butinge, Lithuania 25,000 metric tons +/- 10% in the Seller's option of Crude Oil Mix CN27090090, European origin as per the specifications attached, with delivery period at the discharge port during 10-15 July 2012 and at a price based on five quotations after the bill of lading date. Email correspondence continued between the parties on the same day, culminating in a one-word email from Orlen stating "Confirmed". On 20th June 2012, Proton sent Orlen a draft detailed written contract for the sale. The draft terms of this written contract provoked further email exchanges and ultimately a revised draft which Proton sent to Orlen on 27th June 2012. By this stage, there was at least one issue on which the parties had not agreed: namely, the documents which Proton would be required to present for payment under a proposed documentary letter of credit. On 29th June 2012, Orlen wrote to Proton to say that it was withdrawing from the negotiations. It did not open any letter of credit and it did not accept the cargo. On 2nd July 2012, Proton notified Orlen that it was accepting Orlen's failures to open a letter of credit or to take delivery of the cargo as repudiatory breaches of contract and was thereby bringing the sale contract to an end."
- The Deputy Judge concluded that the issue of whether a contract had been entered into required a trial so that evidence was available from those involved in the transactions. He also ordered expert evidence on "the question of whether a contract was concluded"
- At the trial the Court had nineteen bundles of documents and evidence from the following witnesses. Mr Roberto Castro, a part time consultant who acts as Proton's Finance Officer, and Ms Elena Isaieva, a trader, gave evidence for the Claimant. Mr Tomas Armalis, Procurement Manager at Orlen gave evidence for the Defendant. Mr Roger Sepkes, director and principal of Asdem, an oil and oil trading consultancy gave evidence as expert for the Claimant and Mr Stuart Traver, a Principal at Gaffney Cline, the international oil and gas advisory firm, for the Defendant.
- In order to keep this judgment to a reasonable length I do not refer below to some points made in the detailed closing arguments which seem to me to be irrelevant or very minor.
Has a contract been entered into?-the law
- The relevant principles are common ground following the recent decision of The Supreme Court in RTS Flexible Systems Ltd. v Molkerei Alois Müller GmbH & Co.  1 WLR 753. Lord Clarke, delivering the judgment of the Court, said at paragraph 45:
"The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads 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. Even if certain terms of economic or other significance to the parties have 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."
Lord Clarke (at para 49) also approved the following statements of principle set out in the judgment of Lloyd L.J. in Pagnan SpA v Feed Products Ltd  2 Lloyd's Rep 601 at 619:
"(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole ... (2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary 'subject to contract' case. (3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed ... (4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled ... (5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty. .... It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the judge [at p 611] 'the masters of their contractual fate'. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called 'heads of agreement'."
- The question therefore is this. Did the parties agree on all the terms that they objectively regarded as essential for the formation of legally binding relations between them on the date when a contract is claimed to have come into existence? The relevant date is 14th June 2012 as, by the end of the trial, the pleaded alternatives, 22nd and 27th June had been dropped. The answer depends on an evaluation of what the parties communicated to each other to which I shall now turn.
The witnesses of fact
- Before reviewing the email and other correspondence it is important to be aware of the position of those involved.
- Mr Castro, although the Finance Officer, is a part- time consultant to Proton and his personal involvement in the events giving rise to the dispute was limited. Thus he had no contact with Orlen or Trafigura. His evidence was more concerned with aspects of damages and mitigation which in the end were not very controversial.
- Ms Isaieva, the trader, was Proton's main witness. She became a trader in 2010 after experience as a brand manager in the tobacco and perfume industries. As a result her trading experience by June 2012 was limited. Ms Isaieva has very good but not perfect command of English and, as with Mr Armalis , it would be unfair to expect precision in her choice of English words in the correspondence and to scrutinise her use of language too closely. Ms Isaieva was an honest but inexperienced witness who at times seemed to be looking for the convenient rather than the accurate answer. She did not dispel a concern that Proton had been less than candid with Orlen when seeking to blur the distinction between net and gross when discussing the Bill of Lading and related matters.
- Mr Armalis was Orlen's witness. He had business training and since 2000 has been in the oil industry in various roles but until he joined Orlen his trading experience was limited to deals, mainly requiring delivery by rail or trucks between Lithuania and Eastern European countries. His command of English was similar to that of Ms Isaieva. Mr Armalis was commendably frank and straightforward in his evidence.
- There was no significant conflict between Ms Isaieva's account and that of Mr Armalis. The main significance of the live evidence of the witnesses to the question of when, if at all, a contract came into existence was that their reactions to events were not necessarily those of experienced oil traders and account should be taken of the fact that neither was corresponding in their first language.
The documents recording the dealings between the parties
- On 11 June 2012 at 15:31, Proton sent an "INDICATIVE OFFER" to Orlen for the sale of some 25,000 metric tonnes of an oil blend described as the Product, attaching the specifications and the Q88 for the carrying vessel, M/T "HIOTISSA"/sub, and specifying, "All other terms and conditions as per seller's standard CIF contract" and "This offer is valid till 12.06.2012 COB." Although described as "Oil blend", the nature (and value) of the feedstock could only be determined from the technical distillation data attached to the email, which explained how much of the cargo would condense at different temperatures. The same technical data was attached to every subsequent proposal and draft contract sent by Proton.
- Based on this data, Mr Armalis asked Orlen's Supply Chain Management Department to analyse the anticipated increased profit which Orlen would stand to make if it bought this product (as opposed to its regular feedstock of Russian Export-Blend Crude Oil). In the light of the advice he received, Mr Armalis responded to Ms Isaieva indicating that Orlen would consider purchasing the cargo at the quoted price for Urals crude at Rotterdam, without premium or discount. When Proton forwarded additional documents for the carrying vessel, Orlen responded on 12 June stating, "Unfortunately, this vessel cannot be accepted by Butinge (the Orlen terminal). Thanks for your offer anyway".
- On 14th June, Mr. Armalis asked for the Product's country of origin, stating "Europe is not enough". Ms. Isaieva replied that "Country of origin is France".
- By an email sent at 11:06 on 14th June 2012 Ms Isaieva sent a 3-page "FIRM OFFER ON DELIVERY OF ABT 25KT OF CRUDE OIL MIX" ("the Offer") to Orlen offering to sell 25,000 MT +/- 10 per cent at Proton's option of the Product CIF Butinge, Lithuania. The Offer warranted the Product to be "European origin" and set out a number of other terms including "UK law; London Courts" and "All other terms and conditions as per seller's standard CIF contract". "This offer is valid till 14.06.2012 COB and we would appreciate your kind reply in respect of this timing" .
- Mr. Armalis replied at 13:00 that day stating that: (1) 3 days laycan was acceptable; (2) the exact laycan would be confirmed by 01 July 2012, but Orlen's intention was to confirm between the 10 June 2012 and 15 June 2012; (3) a documentary letter of credit ("DLC") was acceptable but the text should be accepted by Orlen's treasury department; and (4) there might be small changes in the discount depending on the final Contract conditions and on 1-3 above. In an e-mail of 14th June 2012 at 13:36, Proton agreed to the first three of those four changes proposed by Orlen and responded on the fourth issue as follows:
"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"
- Proton says that at this point a contract came into existence. Orlen disagrees.
- If there was a contract prompt action was needed. Proton was required to find and nominate a vessel technically acceptable to Orlen by 23rd June, Orlen was required to narrow the laycan by 1st July and delivery at the discharge port was estimated to take place during 10th – 15th July 2012. At 15:55 that day, 14th June, Proton entered into a contract (by an unsigned email recap) to buy the Product from its supplier, Trafigura. In turn on 20th June, Trafigura voyage chartered the MT "APOSTOLOS A" to carry the Product from Couronne, France to Orlen's terminal at Butinge, Lithuania. At 17:09 on 14th June, Ms. Isaieva wrote to Mr. Armalis, thanking him for "the deal" and providing him with Ms. Ben-Hasid's contact details as she was responsible for Operations and would be taking the transaction forward.
- At 11:06 on 19th June, Proton requested Orlen's technical acceptance of MT "APOSTOLOS A" as the carrying vessel under the Contract. On 20th June, 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 it's Director of Pipelines and Offshore Terminals (Linas Bauzys), its Deputy General Director for Logistics (Danielia Kreloyska), and its General Director, Ireneusz Fafara, granting the MT "APOSTOLOS A" special dispensation to discharge the Product at Butinge Terminal even though her deadweight was only 46,000 mts and the minimum summer deadweight allowed at the Terminal was 80,000 mts. That Memorandum recorded that Orlen had "procured around 25,000 tons of blend crude oil … to be shipped to Butinge."
- On 22nd June, Orlen sent the Memorandum, signed by all the relevant officials of Orlen, including the General Director, Mr. Fafara, to Proton. Each draft of the detailed contract terms sent by Proton to Orlen (on 20th, 22nd and 27th June) 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". Each draft until 26 June 2012, referred to the contractual quantity as 25,000 MT +/- 10% at Proton's option (i.e. a range of 22,500-27,500 MT).
- On 21st June Mr Armalis proposed that payment should be made in US dollars based on the net quantity of Product in the Bill of Lading. That was agreed with the result that the contractual volume would need to be reduced by 2.5% to 24,375 MT +/- 10%. (The agreement that the quantity should be net had followed exchanges in which Mr Armalis had complained that Proton had improperly suggested that the Bill of Lading should not record the fact that the shipment was gross. The issue is not directly relevant. However I prefer the recollection of Mr Armalis to that of Ms Isaieva about this issue, (the other person involved, Mr Moiseev, did not give evidence), but there remains the possibility that there was a linguistic misunderstanding).
- On 26 June Proton was informed by Trafigura that only around 21,500 MT of Product would be available. Without disclosing this to Orlen Ms Isaieva instead wrote:
"Furthermore, we would like to advise you that due to our acceptance of your first comment regarding net quantity of deduction of water, contractual quantity shall be read as 20,000 to 25,000 metric tonnes and will be changed in the contract accordingly."
- While the net/gross distinction accounted for part of the change that would only justify a change to 24,375 +/- 10%. Mr Armalis responded by email at 14:25 that day. He made a number of comments in relation to the VAT clause, a T2L and the need for payment against original documents, but did not comment on the proposed amendment to the quantity. He continued, "If our comments are acceptable then we prepare contract and DLC for signing." In an email on 27th June at 18:09 Ms. Isaieva sent Mr. Armalis a new version of the Contract which incorporated the amendments that had been discussed, including the amendment to clause 5 as to quantity.
- Relations between the parties became bad following a misunderstanding about meetings over the weekend of 23 and 24 June. Mr Armalis considered that Proton, in the form of Ms Isaieva's superior Mr Moiseev, had acted inappropriately.
- Orlen did not open a letter of credit as required by the Contract on 26 June 2012. On 29 June 2012, Orlen sent Proton a letter terminating negotiations.
- The evidence of Mr Traver was highly material, if not decisive, at the summary judgment application. His evidence as summarised by the Deputy Judge and developed for the trial was that:
"a) Oil trading can be divided into several market segments: exchange based, and "over the counter", "paper" and "physical", speculation and refinery supply. If crude oil transactions take place directly between companies, they are known as "over the counter" transactions. Contracts that contemplate physical delivery of product are known as physical trades. Crude oil transactions that are entered into for the purpose of supplying refineries with feedstock are, self-evidently, refinery supply transactions.
b) Refineries are owned by international oil companies ("IOCs"), national oil companies ("NOCs") and regional independent refining/marketing companies. (It is common ground between the parties in this case that Orlen is, or is the equivalent of, an NOC.)
c) Proton's firm Offer of 14th June 2012 was in short form and known in the international oil and gas industry as a "Recap". It set out the key commercial terms of the proposed transaction.
d) The confirmation of a Recap offer is often considered binding in over the counter paper transactions where no physical delivery is contemplated. This is because the parties to the transaction are speculators and, as the prices of oil products are in constant motion, the seller must lock the buyer in.
e) In contracts for physical delivery, the confirmation of a Recap offer is often considered binding where the seller has a long-term mandate to supply a refinery with feedstock. This is because the detailed general contractual terms and conditions will already have been agreed between the parties either in a framework agreement or through consistent application. For this reason, the parties need only agree the key commercial terms for a binding contract to be created between them.
f) A Recap is not considered binding in the market in cases involving sales to an NOC. This is because NOCs typically have set supply contracts which suppliers must accept before an oil trade is bound. The supply agreement is only considered binding once both parties to the transaction have signed.
g) A Recap is not considered binding by participants in the oil trading industry when a transaction for the sale and delivery of crude oil mix to a refinery is viewed as a "once-off" event: i.e. as a one-off transaction and not part of a prior course of dealing between the parties.
h) Proton's Recap dated 14th June 2012 and Orlen's confirmation of it (after agreed revisions) would not have been understood by reasonable market participants as creating a binding contract. On the contrary, they would have understood Orlen's confirmation to have been subject to contract or equivalent. It was not necessary for Orlen to have expressed its confirmation in those or similar terms because the reasonable market participant would have understood that to have been the case from the nature and circumstances of the transaction proposed."
- Mr Traver was a good witness in that he was honest, highly qualified in the oil industry in general and detached and straightforward in his answers. He has however never concluded a trade for crude oil mix – or for any products. His experience has been as a consultant to the oil and gas industry, advising on strategic corporate decisions and acquisitions of oil field properties. He has never worked for a trading company. He accepted in cross-examination that he was not able to say whether a trading company would share his opinions on his market principles and that his views were confined to the experience in major companies. His evidence drew mainly on his view of how traders at Cononco, the company of which he has the most experience, would have seen things. It was hypothetical and involved taking a view on contractual interpretation in a context where there is no claim of custom and usage. In truth Mr Traver's principles were a set of impressions, not based on firm evidence or solid experience, which he then applied to the facts of this case to reach conclusions. It was no fault of Mr Traver that his evidence was of such little assistance. What he had to say of relevance was within the experience of most Commercial judges.
- Mr Sepkes was also straightforward and honest but also forthright. Much of his cross examination related to his independence as an expert given his relationship with Mr Davies, the partner in the Defendant's solicitors dealing with this matter. He has known Mr Davies for 18 years. For 12 years Mr Davies has been involved in commercial conferences and seminars, which Mr Sepkes' company puts on for profit. Mr Davies and Mr Sepkes refer to their connection with one another on their websites. Mr Davies has been paid by Mr Sepkes' company for some of his workshops. This was not the worst of failures to disclose an interest. Solicitors firms repeatedly choose the same firms of forensic accountants and, in another area of litigation, doctors, to act as experts and from time to time work with one another on the lecture and conference circuit and no doubt entertain each other. But this connection, which included money, was a closer one than usual and should have led Holman Fenwick to choose another expert or at least make full disclosure of the link. Nonetheless Mr Sepkes' assessment did seem more consistent with the realities of oil and gas trading than that of Mr Traver.
- Mr Sepkes said that the view that a binding English law contract would not be created until a formal written contract has been signed by both parties "is not only wrong but quite contrary to what is the usual case in oil trading. In the overwhelming number of cases, oil deals are concluded over the telephone or, more often these days, by Yahoo or email." He said that deals "are binding at that time, regardless of signature or negotiation of other terms"."There is no special rule relating to refining companies" or NOCs and no distinction between paper and physical deals. Based on Mr. Sepkes' experience, "it is nonsense to pretend that different rules apply within different parts of the industry. They do not. How would the participants know what rules applied when? He also said "In the oil industry, a Recap is a summary or recapitulation of a deal once it has concluded, which generally occurs over the telephone or via Yahoo or email. Confirming a Recap is explicit recognition that a contract in the terms set out in that Recap has been concluded."
- As I have said Mr Traver's principles are not made out by supporting evidence and are his general impression from his experience with Conoco. There is no basis for separating the market into segments, each apparently with its own conventional contractual regime. The oil industry covers a vast range and contracts involve parties and situations of every kind and an infinite number of variables. Mr Sepkes' views, despite his dismissive tone and the limits on his independence, are more consistent with logic and the experience of the Court. Trading often involves immediate commitment so that parties cannot withdraw from deals when the market moves. Of course many trading markets, most obviously the organised exchanges, provide a formal contractual framework for this. Other markets are less formal. Experience suggests that the word Recap is often used to confirm a deal, a contract, but each case turns on its own facts. In this case I draw no relevant conclusions from the expert evidence and would have referred to it less had the Defendant's reliance on it not been crucial to the summary judgment application.
Was there a contract? – Submissions of the parties
- Mr Karia QC and Mr Bird for the Claimant submit that "An objective appraisal of their words and conduct" (RTS, para 45) demonstrates that the parties here intended to be bound immediately after "confirmed" at 13.42 on 14th June 2012, leaving the more detailed terms to be negotiated later. First the offer was expressly stated to be a "firm offer". That is language requesting a binding commitment – a definite acceptance or rejection – in reply. Secondly the offer was expressly stated to be "valid till 14.06.2012 COB" (i.e. close of business the same day). That made it clear that Proton needed to know, at least as regards that particular offer, before close of business whether it had a binding contract of sale or not. This "firm," time-limited offer "did not admit of languid negotiation" according to the Deputy Judge but demanded an immediate, binding commitment. Thirdly this was spot business requiring an urgent commitment from Orlen. This was reiterated in the email sent by Proton's Mr. Judzentis to Orlen's Mr. Armalis only a few minutes after the "Firm Offer" in which he explained that "Confirmation on coordination of conditions is needed urgently, and then let's move towards the contract". Fourthly the urgency was further highlighted by the fact that there was very little time until performance of the deal. Proton was required to find and nominate a vessel technically acceptable to Orlen by 23rd June, Orlen was required to narrow the laycan by 1st July and delivery at the discharge port was estimated to take place during 10th – 15th July 2013.
- Furthermore, the Offer made express provision for the negotiation of further, more detailed terms, providing that "All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations" The parties thereby agreed "to be bound forthwith even though there [were] further terms still to be agreed" (RTS, para 49).
- Mr Karia also relies on later conduct to show the existence of the contract, such as Proton contracting at once with Trafigura, passing the matter to the operations person and seeking and obtaining acceptance of the vessel from Orlen. He also points to the Memorandum prepared by Orlen itself and then sent, signed, to Proton.
- Mr Harris and Mr Higgins for Orlen submit that the language of Ms Isaieva's communication on 14 June 2012 would cause a third party observer to understand that while the price and specification of the product offered were set, "contract negotiations" would follow. Terms would have to be "discussed and mutually agreed" during those "contract negotiations". So no contract had been concluded at that time.
- The approvals given within Orlen were internal, a matter of intra-group politics so that it was clear Orlen Lietuva was acting consistently with the wishes of its parent company. This is reinforced by Mr Traver's expert evidence as to the understanding in the market in relation to such transactions. This understanding is reinforced by the parties' two prior transactions. The first in May 2011 involved a detailed written contract signed by Proton and no fewer than four signatories from Orlen, including the General Director. The second was also a detailed written contract signed on Orlen's side by three signatories, again including the General Director. This was not a case in which there were pre-agreed general terms and conditions, which could simply apply. Proton did not simply send out the old contract but included both terms that were deal specific and also those reflecting the draft from Trafigura.
- At least two essential matters had not been agreed between the parties on 14 June 2012.The parties had not agreed whether the quantity of 25,000MT was net or gross of water and sediment. Additionally, while the principle of payment by documentary letter of credit had been accepted, it was clear that Orlen reserved to itself the right to accept or decline the text of the documentary letter of credit. It was not merely silent on the point. Proton's argument that a contract must have been concluded because the offer was urgent, since much had to be done in the following month cannot stand in the light of Ms Isaieva's frank admission that she was not considering the question of timing.
- Finally, the parties' subsequent conduct indicates that a contract had not been entered into on 14 June 2012. Thus, as the Deputy Judge noted, on 19 June 2012, Mr Armalis emailed Ms Isaieva and asked her who would be preparing the draft contract. On 21 June 2012, Mr Armalis sent an email to Proton regarding the draft, indicating requirements in peremptory terms demonstrating that Orlen did not consider that it was bound.
Was there a contract?-Decision
- As I see it a contract came into existence on 14 June for substantially the reasons given by Mr Karia. This was a classic spot deal where the speed of the market requires that the parties agree the main terms and leave the details, some of which may be important, to be discussed and agreed later. Lay business people from different jurisdictions will not always conduct all aspects of their dealings to fit the conventions of English contract law and Orlen, with whose reasons for cancelling I sympathise, have some points in their favour. But overall the picture is clear. The language is that of commitment. One side, Proton, committed to Trafigura contractually as soon as this deal had been confirmed. This shows that it regarded itself as committed to Orlen but does not mean that it was- particularly where the trader was inexperienced. But the fact that Orlen also saw itself as committed means that both sides did. There may well have been internal politics within Orlen but that is no reason to doubt the truth of the firm terms in which the deal was described and progressed within the company. Mr Armalis may have expressed himself in subsequent negotiations in terms which did not seem consistent with a binding commitment being in place but that is often the case when the details are being negotiated. The expert evidence, which could not be evaluated at the application for summary judgment and which influenced the Deputy Judge, adds nothing. From now on I shall refer to this transaction as the "Contract".
- Orlen submits that it was an implied term of any contract that it would only be bound if it was reasonably satisfied, by 26 June at the latest, as to the origin and tax status of the product. Proton disagrees.
- Orlen says that the condition precedent should be implied because in June 2012, the purchase of Iranian oil products had recently been banned in the EU (Council Regulation (EU) 267/2012). Orlen was aware that the true origin of cargoes can be hidden. Even after being told by Proton that the origin of the cargo was France, Orlen was concerned about the ultimate origin of the oil (i.e. where it came out of the ground) because France is not a significant producer of crude oil, and it is unusual for French refineries to produce part-refined products. A "T2L" is an EU customs document which is necessary for intra-EU transfers. It provides assurance that the goods have been either (i) produced within the EU, or (ii) already imported and any duties paid. Mr Armalis understood that without a T2L, Orlen could have been responsible if the cargo had been Iranian. On the 26th June Orlen would otherwise come under an obligation to open a letter of credit, thereby incurring cost. It is not enough that Orlen would have been entitled to reject the Product if the cargo was in fact Iranian – the problem was that Orlen did not know whether the cargo was Iranian (and might well still not know having received the product, processed it and sold the resulting refined products) nor would Orlen's consequent rights against Proton for damages be sufficient. Orlen knew that Proton is a small company which might not have been able to pay damages.
- Proton says that there was "not a whisper" of this alleged condition precedent in contractual correspondence. The Contract specified the origin as part of the Product's description. Origin was expressly provided for so there is no room to imply a term. Orlen's suggestion that at or around 14th June 2012 there might be lots of cargoes which people would be trying to trade before the sanctions kicked in is wrong. Council Regulation (EU) No 267/2012, which contained the sanctions, entered into force on 24th March 2012, the day of its publication in the Official Journal of the European Union. Further Orlen only became suspicious about the origin of the cargo after 14th June. Orlen was reasonably satisfied as to the Product's origin at the time of the Contract's conclusion, which is apparent from the contemporaneous internal correspondence between Mr. Armalis and his superior Mr. Fafara. ("We got confirmation that this product from France. So there is no questions pending"). Furthermore the condition precedent for which Orlen contends found no expression in the parties' discussions.
- There was, as I see it, no implied term. Orlen had some concerns about origin and properly so. They raised them with Proton, answers were given and the matter remained live in the discussion about the T2L. There is no hint in the correspondence (particularly before the Contract was entered into) to justify an implication in the form alleged. Terms are not implied because it would be reasonable or useful to do so, necessity is still required – see, as cited by Mr Karia, the remarks of Lord Clarke MR in The Reborn  2 Lloyd's Rep 639 at para 15:
"… as I read Lord Hoffmann's analysis [in Attorney General of Belize v Belize Telecom Ltd  1 WLR 1988], although he is emphasising that the process of construction of the contract, he is not in any way resiling from the often stated proposition that it must be necessary to imply the proposed term. It is never sufficient that it should be reasonable. This point is clear, for example, from the well-known speech of Lord Wilberforce in Liverpool City Council v Irwin  AC 239, where he rejected at page 253H to 254A the approach of Lord Denning, which was to permit the implication of reasonable terms."
- There was no such necessity and the claim to an implied term fails.
Did Proton repudiate the Contract?
- Orlen argues that Ms Isaieva's email of 26 June was a repudiation. The test for repudiation is whether Proton had evinced an intention not to perform its obligations in some essential respect. I repeat the text of that email:
"Furthermore, we would like to advise you that due to our acceptance of your first comment regarding net quantity of deduction of water, contractual quantity shall be read as 20,000 to 25,000 metric tonnes and will be changed in the contract accordingly."
- Orlen says this was plainly misleading. While the net/gross distinction accounted for part of the change that would only justify a change to 24,375 +/- 10%. Orlen also says this was not a proposed amendment. It was cloaked by reference to the net/gross distinction which had been agreed. Asked whether Ms Isaieva was "offering to amend the quality" she replied:" I am informing him this email."
- Orlen argues that it accepted this repudiation and that the Contract accordingly came to an end. Orlen allowed the business day of 26 June 2012 to end without opening a letter of credit. Subsequently, on 29 June 2012, Orlen sent Proton a letter terminating negotiations.
- Proton argues that Orlen accepted its offer which was not, in any event, a breach. It points to the context of the email and to Mr Armalis' response on 26 June commenting on a number of points but not disagreeing with the proposed change in quantity. Mr Karia submits that Ms. Isaieva was not imposing the change on Mr. Armalis. Her email was intended to form a basis for further discussion, if necessary. In evidence she said "Supposing, then, that… Mr. Armalis has any objections on this comment, he may revert. Always, if he has some objections he can revert saying: no, it's acceptable". However the Court is not at this point concerned with subjective intention.
- As I see it, against the background of the message from Trafigura and the language limitations of the traders on each side, the email from Ms Isaieva was not, and was not seen by Mr Armalis as, a unilateral imposition of a change in terms. "Shall be" and "will be" should not, as I see it, be read literally. For similar reasons Mr Armalis's silence on the point cannot be taken as consent and as agreement to a variation. The terms of the Contract were unchanged by the discussions on 26 June.
- Proton claims damages amounting to "at least" US$ 1,363,255.59. Orlen claims that Proton suffered no loss and also raises several issues about the amounts claimed.
Did Proton suffer any loss?
- Orlen argues that even if there were a contract and a breach Proton suffered no loss for two alternative reasons, misdescription and misrepresentation.
- First Orlen says that it 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 determining whether to buy a non-standard oil product, refineries need to know the composition of the product. Proton attached a specification of the product to all its offers and drafts. Orlen used that specification to determine the products which could be made from the cargo and therefore the amount it would be willing to pay to make sufficient additional profit (when compared to its regular feedstock) for the deal to be worthwhile.
- The cargo loaded was tested by independent inspectors Intertek and was appreciably different from specification, described by Proton itself to Trafigura on 30 June 2012, as:
"…there is a sharp deviation in a several parameters which are guaranteed in our Contract..."
- Had Orlen known of this and run the actual specifications through its model, it would have learned that instead of making a relative profit of US$0.84 per barrel as expected, it would only have achieved US$0.14 per barrel. Orlen says that it would have rejected the cargo as Mr Armalis confirmed in evidence. He made clear that the benefit of the Product in cleaning paraffin from the pipes was incidental and they have declined to purchase unprofitable cargoes since notwithstanding that they would have cleaned the pipes. Further by this stage Orlen did not want to do the deal. The suggestion that Orlen would not have been willing to risk a lawsuit by rejecting is belied by the evidence. Orlen has risked a lawsuit, and is in one. Orlen says that the cargo would have led to a relative loss, compared with usual feedstock of US$9,334.92, not the profit of US$22,000 contended for by Proton.
- Proton responds that in reality, as Mr. Armalis conceded in cross examination, rejection was unlikely. He had never rejected a product which had been delivered to Orlen, he did not know of the possibility of rejecting the Product on the basis that it failed to comply with its specification and would have been unlikely to reject a cargo that he had worked hard to fix.
- Both parties debate this issue at some length in their closing submissions. It is not necessary for me to make a finding about this hypothetical because, as I see it, the specification was not part of a sale by description. While Mr Armalis was an excellent witness his view that he would have rejected the cargo, which I find to be truthful subject to the extent to which he qualified it in cross examination, might well have changed if he had taken advice and thought the matter through. If it had taken the cargo Orlen would have been free to claim any losses arising from the failure to meet the specification and the product would have caused no problems at the refinery. That claim would have been risk free. Rejection would have been bold and risky.
Was the specification part of a sale by description?
- Mr Harris submits that the specification of the product was a matter of description. He cites Benjamin on the Sale of Goods (8th edn):
"A buyer can refuse to receive something which is not what he promised to buy. The description of goods may be strictly interpreted with the result that a slight discrepancy may be treated as making the goods not what was stipulated for. Where goods are not what was stipulated for, they can be rejected." 11-004.
He also refers to Ashington Piggeries v Christopher Hill Ltd  AC 441 at 503, where Lord Diplock said:
"The 'description' by which unascertained goods are sold is, in my view, confined to those words in the contract which were intended by the parties to identify the kind of goods which were to be supplied … Ultimately the test is whether the buyer could fairly and reasonably refuse to accept the physical goods proffered to him on the ground that their failure to correspond with that part of what was said about them in the contract makes them goods of a different kind from those he had agreed to buy. The key to s.13 is identification."
- Mr Harris submits that as a matter of ordinary language and sense, the specification was a matter of description. It was a condition that the product supplied should match the specification given, and not merely a warranty. He sets out, in his written closing, a number of factors. As a non-standard product, it does not have a "name" like petrol or diesel. Ms Isaieva had to give a "description" of the product in order to gauge the market interest. Ms Isiaeva explains that there were such delays in selling the product because the other refineries wanted more details of the nature of the product. No refinery would purchase a cargo without knowing the specification. Mr Armalis explains that there are a wide variety of products which could be described as "Crude Oil Mix", which are all very different. Ms Isaieva accepted that describing the product as "oil blend": "doesn't tell the buyer very much" and that a buyer cannot work out how much it should pay for the product based on that information. Indeed, Proton asked Orlen whether calling the product "Crude Oil Mix" was acceptable for it. This illustrates that the name applied to the product was a label of convenience, not something of fundamental importance.
- Mr Karia disagrees. He submits that compliance with the specification is not an express condition of the Contract and is not implied either. It would have been uncommercial for the parties to have agreed that since it is well known in the market that contractual specifications frequently vary from the final delivered specifications in a crude oil blend for mixing, as Mr Castro confirmed in evidence. Nor did the Contract contain an implied condition to that effect. The condition implied by s. 13 of the Sale of Goods Act 1979 relates only to the "description" of the goods, not their quality. In contrast, the specification dealt only with the Product's quality, not its description. That specification was incorporated into the Contract's "Quality" clause, which as the name suggests dealt with quality. It was not incorporated into the "Product" clause. Accordingly, the delivery of a product matching that specification was not a condition of the Contract (see Ashington, per Lord Diplock at 503 – 504).
- As I see it the specification was not part of a sale by description. As Benjamin points out, in principle description and quality are different notions. The key to description is identity, as Mr Harris himself emphasises in his citation from Ashington. The cases show that the distinction between the concepts is sometimes blurred and that they may overlap where, for example, a word of description identifies the quality of the product- see Benjamin generally between 11-011 and 11-017. I see no such blur or overlap in this case. The contract document starts by confirming a sale of Oil Blend. Clause 3 headed "Product" describes it as "Oil Blend… CN 2710". That is the description of the product. Clause 4 headed "Quality" sets out the details of the SGS Report of the analysis at the loadport. That is the quality of the product. The document and my perception of it are consistent with the commercial reality that test results at the end of a voyage may 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. Of course in another deal those considerations might have been addressed in the terms of the contract but they do point to the specification being the specified quality of the oil blend CN2710 and not part of its description. Further the fact that a buyer would not purchase without knowing the specification is as much an indication of concern about quality as it is about description. The parties are always free to make the quality a condition of the deal but, unlike description, it is not implied by statute.
- It follows that I am not at this point concerned with the debate between the parties about Clause 4 of the draft contract.
- Orlen's contention that it would also have been entitled to reject the Product for an inevitable shortfall in quantity is incorrect. Proton's case is that it was required to deliver a minimum of only 20,000 MT of product because Orlen had agreed to amend the quantity under the Contract to 20,000 to 25,000 MT net in seller's option. I have rejected that argument above. However Proton argues that it had the ability to source the required additional 5,000 MT of a similar product, to make up the alleged shortfall in quantity, had Orlen indicated that it did not agree to the amendment. Proton had offered 5,000 MT of a similar product to Orlen by email on 21st June at 14:58. Even if that parcel had been sold to another buyer (of which there is no evidence), Ms. Isaieva explained in cross examination that Proton would have been able to find some feedstock at Le Havre. I have no reason to doubt that and it is no answer for Orlen to say that the additional product would also have differed from the precise specification.
- Orlen argues that Ms Isaieva represented that there was a specific cargo of the specification provided available to her. It says that this was a misrepresentation which induced Orlen to enter into the contract and that as a result Proton would have been entitled to rescission.
- The misrepresentation case is put forward on a similar factual basis to that for misdescription so I do not repeat it. Proton's response is in the same groove. The discussions relied on preceded and led to the Contract. The alleged representation was as to the specification which was incorporated into the Contract as a warranty. In reality Ms Isaieva was warranting the specification, not making representations as to the facts. She was making a contractual offer in the same way as countless others do in commerce every day without being seen to make potentially actionable representations. Orlen was entering into the Contract in reliance on its terms not on the pre contractual statements. Moreover even if a claim in misrepresentation could otherwise be erected the discretionary remedy of rescission would not normally be used to convert an agreed warranty into, in effect, a condition.
Orlen's potential damages claim against Proton
- Orlen argues that even if had no right to reject the cargo it would have been entitled to claim damages for the difference in value between the product promised and that which would have been delivered. It follows that any damages payable to Proton must be reduced accordingly. In principle that is correct but its application gives rise to further disputes.
- Orlen quantifies those damages as US$124,465.60 in respect of the shortfall in quality, or US$133,214.62 if short delivery is included. Mr Armalis gave detailed evidence about, and exhibited the basis for the calculations, and the output data from the PIMS model used to determine the profit and productivity at the refinery. The PIMS model analysis is effectively unchallenged. Ms Isaieva explained that she had not analysed it, and was not in a position to do so.
- There is a dispute about the legal basis for calculating these notional damages. It surrounds Sections 51 and 53 of the Sale of Goods Act. Section 51 (2), dealing with non delivery provides "(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. (3) Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract price and the market or current price of the goods at the time or times when they ought to have been delivered or (if no time was fixed) at the time of the refusal to deliver. "
- Under Section 53(2) of the Sale of Goods Act 1979 "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." Under Section 53(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."
- Proton contends that Orlen has adopted the wrong measure of damages, since the correct measure for both quality and short delivery depends on market value. Proton says that Orlen has claimed damages based only on its anticipated profits using its own internal model, not the market value. No evidence of the market value has been produced and the alleged loss is irrecoverable as being too remote.
- Proton's argument is unattractive. Its own evidence is that there is no market price for this blend. Mr Castro said "It is a tailored Product, rather than a standard Product that refineries buy on the market. Hence there is no standard market price available for such a cargo. Because the Product is a Crude Oil Blend, each refinery evaluates it in accordance with their own economic formula and the possible impact its addition might have on their equipment." The measure of damages as described in Section 53(2) and the rule in 53(3) is a prima facie one. Proton would have been well aware that Orlen were entering the deal to make a profit and Ms Isaieva accepted in evidence that she knew that the loss which would be suffered by any refinery would depend on its particular characteristics. Calculations based on the Model seem to me to be a just and accurate measure of the loss. Similar considerations apply to Section 51 and short delivery.
- Proton also argues that even if such loss of profits had been recoverable in principle this is precluded by Clause 23 of the Standard Terms to which the Contract was to be subject, which provides that "in no event shall the seller have any liability for any . . . loss of profit . . . or any type of special indirect or consequential loss". Orlen responds that in circumstances where there is no available market price, it cannot have been the parties' intention that loss of profits should be excluded by Clause 23 so as to debar any recovery whatsoever. Properly construed, Clause 23 excludes liability for loss of profit where it is a "special indirect or consequential loss", not where it is the ordinary and entirely foreseeable consequence of supplying a different specification of refinery feedstock.
- Assuming that Clause 23 applies at all, it recognises at the outset that damages may be payable for breach of contract- there is a limitation in the amount to the price of the Product. If the later words relied on by Proton are taken literally there would be no right to damages at all for breach of the warranty of quality or in respect of short delivery because the loss will always be almost entirely that of profit. I therefore prefer the approach of Orlen.
- Under the Contract Proton was required to deliver a minimum of 22,500MT. The contractual quantity, by Clause 12, was to be determined by reference to the Bill of Lading which records 20,883MT as being loaded onto the vessel. Orlen would therefore, subject to any other terms of the Contract, have been entitled to damages for short delivery of the same product. I have found that Orlen did not consent to any proposed change in the quantity. Ms Isaieva accepted in evidence that Orlen would not be able to provide more product of the same quality as set out in the specification.
- Proton contends that Orlen has failed to take account of the higher VGO content in the actual product which would have added value to the product, and slight variations in the product quality would not have affected the value of the product as alleged or at all. But Mr Armalis's evidence is that the VGO issue was taken into account. There is no evidence from Proton about that. So I reject that submission.
- Finally, Proton claims that had the product been delivered, Orlen would actually have received an additional 905 barrels when compared to the Bill of Lading quantity. Since it would only have paid for the Bill of Lading quantity, it would have received 905 barrels for free, so any damages reduction must itself be reduced by US$91,583.74. Ms Isaieva stated that the out-turn inspector's report was the best evidence of what was actually delivered. Orlen says that she failed to note that the net and gross figures were the same, and that around 1,000 barrels of water just disappeared. If Proton wished to pursue this technical issue it should have produced a witness qualified to express views about it. Ms Isaieva's experience was very limited and her evidence speculative. I did not have confidence in the views she expressed about the issue. Her evidence did not displace that of Orlen who have established that, on balance, their claim to deduct US$133,214.62 from any damages is justified.
Mitigation, inspection costs, additional freight, bunkers and miscellaneous
- By the end of the trial Orlen no longer contended that Proton had failed to mitigate its damage or that these other items were not recoverable.
- A dispute about a claim for demurrage had reduced to $17,000 by the end of the trial. The matter was addressed only briefly in oral submissions and Mr Karia did not reply on that aspect of the issue. If the claim is pursued I will hear argument about it when I hand down this judgment.
Legal costs of defending action in Lithuania
- Proton claims CHF 14,614.79 for Orlen's failure to nominate an address in England for service and commencement of proceedings in Lithuania in breach of Clause 20 of the Contract. Of course there was no Clause 20 in the Contract on 14 June so the matter is put on the basis that this is what the Contract would have said but for the repudiation.
- In July 2012, when this action was brought, Orlen failed to appoint London lawyers so the claim had to be served in Lithuania. Orlen commenced proceedings in Lithuania against the Claimant and Proton Energy Baltic, the Claimant's Lithuanian agents.
- Orlen accepts in principle, that if a contract was concluded including Clause 20 it was obliged to provide an English address for service and to bring claims exclusively in England. It accepts that, in those circumstances, it would be liable if Proton suffered losses as a result. However Orlen says that the Contract concluded on 14 June 2012 included no language of exclusivity, and none should be implied. But as I see it Clause 20 would have been a term but for Orlen's repudiation.
- Orlen then argues that Proton Baltic is not a party to the Contract so its costs are not recoverable by Proton. That leads in turn to a potentially complex issue about agency followed by detailed points on the costs which, in the interests of proportionality, I decline to decide. I will award CHF 5,000 to Proton for this aspect of its claim looking at the matter broadly as one would on the small claims track in the County Court where this item, if taken alone, would belong. If this broad approach is unacceptable to either party it may apply to have the issue determined in detail- but on risk that it may have to pay the indemnity costs of disproportionate litigation.
- The Claim succeeds. There was a contract between the parties which Orlen repudiated. Orlen will pay damages to Proton to reflect the decisions recorded above. If the precise sums cannot be agreed I will decide them at the hand down of this judgment.
- I thank Counsel and solicitors on both sides for the admirable preparation and presentation of this case.
- This judgment was circulated in draft on 6th August. As it is now 24th September I refuse the Defendant's request for a relisting of the hand down but agree to postpone argument about consequential matters for a short period.
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