In Galtrade Limited v BP Oil International Limited¹, a recent decision of the English Commercial Court which will be of significant interest to oil and commodities traders, a defendant seller successfully argued that a claimant buyer had no right to reject a cargo of off-specification fuel oil feedstock as the contractual specifications were intermediate terms rather than conditions. It was also held that the extent of the defendant’s breach did not substantially deprive the claimant of the whole benefit of the contract and, therefore, could not be said to be repudiatory. Instead, the wrongful rejection by the claimant was repudiatory. The decision also contains a full analysis of each party’s claim to damages arising from their respective breaches.
In October 2018, the defendant, an oil trader, contracted with the claimant, also an oil trader, to sell, FOB, four parcels of low-sulphur straight run fuel oil (“SRFO”), the residual fuel oil which emerges from the primary refining of crude oil. SRFO is used as a feedstock for secondary refining processes and individual parcels may be blended with others for efficient shipment or to fit refinery requirements.
The contract contained several specifications which the first two parcels failed to meet, though the parties were able to resolve their differences (including by agreeing a discount for the second parcel). The claimant used this second parcel as part of the blend to fulfil a forward contract, though it became concerned about the quality of future parcels.
One significant fact in this dispute was that, owing to a fall in market prices, a specification compliant third parcel on delivery would have been worth substantially less than the contract price which the buyer had agreed to pay.
On 9 February 2019, the defendant received non-contractual test results on the third parcel, the sulphur content being 1.47% against a guaranteed maximum of 1.30%. The defendant informed the claimant of the results and both parties explored the possibility of a discount in the likely event that the cargo was off-specification. Following several exchanges between the parties, the parcel was loaded at the contractual delivery port onto the claimant buyer’s vessel which proceeded to Malta with the claimant still reserving its right to reject the cargo.
On 12 February 2019, the first of the contractually required ship’s sample test results indicated that the third parcel was indeed off-specification, the sulphur content being 1.53% against the same guaranteed maximum of 1.30%. Based on this, the claimant rejected the cargo by email that day. Two days later, the full report confirmed that the third parcel was also off-specification for vanadium and P-value. Following the vessel’s arrival at Malta, the defendant agreed to take back the cargo, which it blended and sold in the US.