Cargo delivered late – assessing damages

A recent High Court ruling in a late delivery of cargo case puts the spotlight once again on the assessment of damages in international sale contract disputes. Here, I review some of the arguments put forward on liability and quantum, and the court’s decision to favour those reflecting the commercial realities of the oil trade. I also consider the broader implications for commodity buyers and sellers.

Background

The claimant oil trader, Galaxy Energy International Ltd (Galaxy), claimed damages for late delivery by the defendant oil refiner, Murco Petroleum Ltd (Murco), of 35,000mts of fuel oil, sold on an FOB basis (‘free on board’ means the seller is only responsible for costs up to loading the cargo on the vessel – the buyer arranges and pays for shipping and insurance in addition to the sale price).

The parties had an ongoing commercial relationship and were familiar with each other’s business. Over 3-4 January 2012, their brokers discussed this deal for the sale of fuel oil, agreeing on the loading period of 15-17 January and otherwise same terms as their previous deals. However, Murco’s recap email of 4 January contained some slightly different terms including a proposed ‘flexible delivery provision’. This provision sought to allow Murco, as seller, contractual flexibility on delivery time.

After 4 January, the parties took some steps to perform the contract. It was not until 11 January that Galaxy confirmed the flexible delivery provision should be deleted. As it transpired, Murco missed the delivery period due to a delay in berthing the vessel. Loading of the cargo did not commence until 20 January. The vessel sailed on 21 January. These facts were largely not in dispute.

The dispute

Time is critical in the oil trade. A matter of days can have a significant impact on outcomes, especially in chain sales. This was the case here.

Before loading, the trader (Galaxy) had already sold the oil on to a sub-buyer. In that sub-sale, there was also a term that the oil would be loaded by 17 January. By virtue of Murco’s late loading, Galaxy was put in breach of the sale contract with the sub-buyer. Galaxy brought a claim against Murco for breach of the delivery time obligation.

There were two key contentious issues in the claim: liability – whether the ‘flexible delivery provision’ formed part of the contract; and quantum – should the market price be assessed on a single day or across a spread of days. Galaxy succeeded on liability and Murco succeeded on quantum.

Liability – contract terms

Murco conceded that if the flexible delivery provision was not part of the contract, they were in breach. However, they did not call any witness evidence to support their position on liability, relying solely on the construction of documents and events.

Save for Murco’s email containing the flexible delivery provision, there was nothing to suggest that an extension of the delivery period had been discussed between the parties. Further, both parties knew such a clause had been repeatedly rejected by Galaxy in negotiations on previous deals.

Murco’s main argument was that Galaxy’s conduct after 4 January amounted to an acceptance of the flexible delivery provision. The court decided against Murco, finding that the sale contract had been agreed in the discussions on 4 January. Galaxy’s conduct after 4 January was consistent with that contract and ‘a world away from accepting the new provision by conduct’. The court said that Murco knew at once that the flexible delivery provision was not accepted. Murco’s internal notes did not support them.

The court also dismissed Murco’s fallback argument that the delivery provision was in fact a laytime provision concerned only with the arrival time of the vessel. The authority Murco relied upon (The Luxmar) could be distinguished primarily because there was no need to narrow the time for delivery in this case. The parties clearly agreed to a three-day delivery period.

Quantum – assessment of damages

One of the reasons time is critical in this trade is because the sale price is often based on a market index price at some future date linked to delivery. This commercial reliance on time is not only reflected by the strict delivery obligations as seen above, but also in the method for assessment of damages for breach of those obligations.

The measure of damages for breach of a sale contract can be simply put as the difference between the contract value of the cargo and the market value of that cargo at the time of breach. At the heart of this dispute was a debate about how the court should determine the market value for this deal:

(i) Murco argued that the market price should be determined by taking the mean price across a spread of days. The company argued that this is the method used by oil traders when pricing their deals. As such, the assessment of damages should be based on a similar method.

(ii) Galaxy argued that damages should be assessed on the date of breach. There is a market price index, Platts, referred to in the contract. This index gives daily prices. The company argued that it is possible and appropriate to use the Platts price on the relevant day of breach to assess the market value.

It will not come as a surprise that the market price spiked on the date of breach and the mean price across a few days was lower.

The court was assisted by experts retained by each party. However, whilst the expert evidence was useful in understanding how traders priced their deals, the decision did not turn on expert evidence.

The court preferred Murco’s suggested method for ascertaining the true market price. Platts is not a market or an exchange, although it may well be the best evidence of the market. Nonetheless, traders in the market are much more likely to price their deals on a spread of days, rather than a quoted figure on any one-off day. In this deal, Galaxy and Murco had used a spread of three days. That was deemed an appropriate measure for this case. In short, the court adopted the assessment that reflected the commercial reality.

Murco was not allowed to introduce new quantum arguments at trial, without having amended its pleadings. It seemed that the court was not convinced by the no-loss and hedging argument presented in any event.

The upshot of this decision is that the court preferred the commercial approach to assessing the market value of the cargo, rather than any overly legalistic or artificial approach. This will be welcomed by the trade. It also has wider implications than the oil trade, as commodity traders in other fields will take note that a court’s assessment of damages in default cases can be based on the peculiarities of pricing cargo in respective fields.

Having said this, in essence, the key test remains: what is the actual market value?

Luke Zadkovich is an associate at Holman Fenwick Willan