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Inconsistent terms and the binding nature of quality certificates6 September 2021

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In a judgment which will be of interest to all those involved in the sale and purchase of crude oil and oil products and commodities contracts generally, Septo Trading Inc v Tintrade Ltd¹, the English Court of Appeal examined whether a quality certificate was intended to be conclusive evidence of the quality of a consignment of fuel oil supplied under an international sale contract. In doing so it has provided a useful reminder of the English court’s approach to the incorporation into contracts of general terms which are alleged to conflict or to be inconsistent with a term expressly agreed between the parties.

Background

Septo and Tintrade had entered into a contract for the sale of a cargo of fuel oil (the “Recap”). As well as setting out various express terms, the Recap specifically provided that “where not in conflict with the [terms of the Recap], BP 2007 General Terms and Conditions for FOB sales (the “BP Terms”) to apply”.

The Recap specified that a quality certificate issued at the load port by an independent inspector would be binding on the parties in the absence of fraud or manifest error. However, the BP Terms provided that the quality certificate would only be conclusive and binding “for invoicing purposes” without prejudice to the buyer’s right to bring a quality claim.

Although a quality certificate was issued which certified that the fuel oil was in accordance with the contractual specification, Septo subsequently brought a claim contending otherwise, and a question arose as to whether the quality certificate was binding upon the parties.

The judge at first instance (Mr Justice Teare) found that, although if it had stood alone, the quality certificate provision in the Recap would have barred any quality claim by Septo, the BP Terms qualified the provisions of the Recap and meant that the binding nature of the quality certificate was limited to questions of invoicing, and so Septo was entitled to bring a claim for breach of contract. The judge went on to award Septo US$3m in damages. Tintrade appealed.

The Issue

As Lord Justice Males noted in the Court of Appeal, provision for a quality certificate forms a central feature of many international sales contracts and serves a valuable and important purpose in minimising disputes long after the goods have been delivered and can no longer be tested:

“The quality certificate issued by the mutually acceptable independent inspector is binding on the parties, so that (assuming always that the certificate shows the product to be on-spec) the buyer cannot thereafter bring a claim on the ground that the quality of the product is not in accordance with the contract.”

The question in this case was whether, having incorporated the BP Terms, the parties had agreed that the quality certificate would have a different effect.

Decision

Lord Justice Males reviewed the judgments in Pagnan SpA v Tradax Ocean Transportation SA² and Alexander v West Bromwich Mortgage Co Ltd³ in reaching his decision and noted that the law which applies to cases of alleged conflicts or inconsistencies between standard forms and specially agreed terms of a contract is well settled.

"When presented with potentially inconsistent or conflicting terms, the court will assess the question of inconsistency practically, with regard to business common sense."

When presented with potentially inconsistent or conflicting terms, the court will assess the question of inconsistency practically, with regard to business common sense. It will not be enough for a term to modify another. To be inconsistent, a term must contradict another such that effect cannot be given to both. It will be relevant for the court to consider whether the agreed term is part of the main purpose of the contract – if so, a printed term which detracts from that purpose is likely to be inconsistent. Ultimately, the intention of the parties will be ascertained from the language in the contract in its commercial setting.

Applying these principles to the facts of the case in Septo, the Court of Appeal held that the two terms could not fairly and sensibly be read together. The Recap term provided for the quality certificate to be binding for all purposes, to stop all claims for damages for breach of quality; however, the BP Terms provided that the binding nature of the certificate was for a very limited purpose, “for invoicing purposes” only, allowing claims in the event of breach of quality. Practically speaking the BP Terms deprived the Recap term of all effect.

The judge also noted that the provision in the Recap term for the quality certificate to be binding was an assurance of the quality of the product and a central feature of the contractual scheme. A regime in which a certificate of quality was binding was fundamentally different from one which was not. He added that while it was perfectly reasonable for parties to choose a contractual scheme in which a quality certificate is not binding but is merely evidential, in this case it was not a commercially reasonable interpretation of what the parties had done.

As such, it was held that there was an inconsistency between the terms and thus the Recap should prevail and the quality certificate would be binding. The appeal was allowed.

Comment

"Parties should be aware when important terms agreed in a Recap or similar document might be inconsistent with any incorporated standard terms."

This case serves as a valuable reminder of the English courts’ approach to the incorporation into a contract of general terms alleged to conflict or to be inconsistent with a term expressly agreed between the parties. The court approached the question pragmatically, having regard to the intention of the parties as it appeared from the language of the contract, general commercial and business sense, whether the specially agreed term went to the main purpose of the contract, and whether the general term undermined that purpose or supported it.

This decision is in line with the generally accepted approach within the oil and gas market, and will no doubt be welcomed for the confirmation that it provides. Nevertheless, the fact that the original decision in this case had to be appealed shows that there is often scope for argument in these cases. Parties should be aware when important terms agreed in a Recap or similar document might be inconsistent with any incorporated standard terms. At least this awareness will provide the relevant party with the choice between relying on the conflict or inconsistent terms boilerplate or expressly overriding the inconsistent provision in the standard terms if there is any doubt.

[1] [2021] EWCA Civ 718
[2] [1987] 3 All ER 565
[3] [2016] EWCA Civ 496, [2017] 1 All ER 942

Trainee Alice Halpin also contributed to this article.

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