Roger Sepkes, Managing Director of Asdem Ltd, was engaged as the expert witness on behalf of Proton, a oil trading company, in the recent High Court case of Proton Energy Group SA v. Orlen Lietuva [2013] EWHC 2872 (Comm). Orlen own a refinery in Lithuania to whom Proton claimed to have sold a cargo of Crude Oil mix. Orlen, however, considered that a binding contract had never been concluded.
Proton had offered to sell the cargo CIF Butinge, Lithuania. After considerable negotiations, Proton sent a recap of the proposed deal adding "The contractual price is fixed as per confirmed offer. All other contractual terms not indicated into the offer shall be discussed and mutually agreed between the parties upon contract negotiations". Orlen gave a one word reply: "Confirmed."
Further negotiations continued for the next two weeks over details such as the precise origin of the cargo, whether the quantity was net of water and the wording of the letter of credit to be opened by Orlen. Contracts were twice drawn up to cover various amendments and additions to the original recap. However, Orlen then withdrew from further negotiations and failed to open their letter of credit. Proton accepted Orlen's failure to take the cargo as a repudiatory breach of the contract and subsequently sued for damages in excess of USD 1.3 million.
Orlen argued that a binding contract in English law would not come into existence until both parties had signed a formal written contract. Roger Sepkes contended that this "is not only wrong but quite the contrary to what is usual 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". The judge agreed and concluded that a contract had come into existence when Orlen had confirmed the recap. He said that "this was a classic spot deal where the speed of the market requires that the parties agree on the main terms and leave the details, some of which may be important, to be discussed and agreed later".
Traders and operators should be aware that deals agreed over the phone, by email or instant messaging are likely to be considered binding even though many details may still need to be agreed. If there is no agreement forthcoming on these other details, the court will imply any terms which are considered essential to the performance of the contract. This will not include any terms which might simply be considered desirable. If traders do not wish to be bound by a contract they need to make it very clear that the contract is subject to the agreement of certain specific terms.
If a trader does not want to commit to loading a vessel within guaranteed delivery dates, he should avoid selling on standard FOB terms. This was highlighted by the recent case of Galaxy Energy International Ltd v. Murco Petroleum Ltd (The "Sea Crown") 2013 EWHC 3720 (Comm). Murco had agreed to sell 35,000 mt of fuel oil to Galaxy for delivery FOB Milford Haven during the period 15-17 January 2012. Galaxy's nominated vessel arrived on 13 January, but due to berth congestion loading only commenced on 20 January and was completed on 21 January. As a result of this delay, Galaxy was late in delivering the cargo and faced a claim from their buyers. They therefore claimed damages in compensation.
During the sale negotiations Murco had sought to introduce a clause to extend the delivery period by adding the wording "such extension to that period as is required by the seller to effect or complete delivery". However, the court found that this amendment had not been accepted by Galaxy, who had rejected it on previous occasions when negotiating to purchase cargoes from Murco. The judge agreed that Galaxy was entitled to damages and the only complicated question was which market quotations should be used to calculate them.
If traders wish to avoid the obligations of FOB terms so that, as sellers, they are not committed to load within specific delivery dates they should refer to the delivery dates in their contract as a "laycan". They will then be only liable to pay demurrage if there is a delay in loading their buyer's ship. For a good example of how this works in practice and the potential cost of not being aware of the difference between "delivery dates" and "laycan", see ERG Raffinerie Mediterranee SpA v. Chevron USA Inc. (The "Luxmar") [2006] in Asdem's Newsletter No. 32 and Newsletter No 35.
Article from Andrew Wilding - Managing Director, Asdem Asia Pte. Ltd.
In the first matter time was lost clarifying the orders received to load two different grades of fuel oil, which due to the ship's configuration, had to be segregated by single valves. The charterer contended that sufficient information was provided in their instructions and loading was a matter for owners and at their risk. The Master contended that the charterer's orders were deficient and refused to load until he had all the information he felt was necessary. Eventually surveyors had to be appointed.
We were asked to evaluate responsibility for time lost and came to the view that whilst segregation of the different types of cargo of fuel oil on a tanker by single valves admits a possibility of liquid contamination, the ship is responsible for maintaining the cargo's quality using a sound loading procedure: (Albacore S.R.L. v. Westcott & Laurence Line [1966] and Pyrene Co. v. Scindia Navigation Co., [1954]). The actual level of risk depends on the number and the reliability of the valves used in the cargo system and the preparations and precautions the ship takes in making the pumps, valves and lines ready for cargo operations. There is also the question of the compatibility of the separate grades and the number of valves for each segregation. The Master is obliged to prepare the loading/discharging plan accordingly. Modern oil voyage charter parties expressly state that the owner must comply with such obligations. However, the owner is dependent on sufficient information being provided by the charterer. The charterer's orders do not need to give detailed instructions as to the actual loading plan but they must provide information, such as the compatibility of the products/grades, which are required for the loading plan to be prepared correctly.
We concluded that the voyage instructions were insufficient and the time lost clarifying the orders was for charterer's account. There is no direct English case law on the subject of voyage orders but the Australian Commonwealth decision in Caltex Refining Co. Pty Ltd. v. BHP Transport Ltd. (The "Iron Gippsland") [1993] applied a similar line of reasoning.
Article from Andrew Wilding - Managing Director, Asdem Asia Pte. Ltd.
A second long running dispute involved the operational time taken to measure the loaded quantity of crude oil shipped from a terminal in South East Asia. The charter party contained a number of clauses that dealt with quantity, the bill of lading and indemnities for quantity issues. After completion of loading, the terminal presented the bills of lading for the Master's signature with the loaded quantity taken from the shore meters. The Master's own on-board measurements indicated that there was a difference between his figures and the terminal's which indicated a shortage of more than 0.5% and also the presence of water. In accordance with the terms of the charter party, the master took the view that the bills of lading required clausing (i.e. the addition to the bill of lading of his remarks about the condition of the cargo). The charterers disagreed.
The relevant charter party clauses were dependent on the quantity on board the vessel and were difficult to apply when the quantity itself was disputed. Faced with measurement issues, the ship disconnected the terminal hoses and went to a waiting anchorage whilst the question of what quantity to put on the bills of lading was debated. After waiting for five days at anchor, the bills of lading were eventually issued and the ship left for the discharge port. Upon discharge no protests were received over the water content and the outturn quantity actually exceeded the bill of lading figures.
After a careful analysis, we came to the view that even with the assistance of conversion factors, because of the number of different methods being used to calculate the quantity on board by various cargo interests, including the charterers, head charterers and owners, no definitive load port figure was available. Both parties were equally and inextricably responsible for the loss of time taken to measure the cargo and a settlement was agreed with both parties sharing the operational time required to agree the final bill of lading figure.
Our opinion was that the master and owners should be allowed a reasonable amount of time in such circumstances to verify the ship's figures. The allowance should include time to consult advisors, such as the P&I Club, to confirm that correct measurement techniques had been used. The allowance was calculated bearing in mind that such verification should be performed with dispatch. After deducting the allowance, we allocated responsibility between the parties for the remaining time the vessel had waited at anchor and the matter was settled on this basis.
Article provided by Phil Stalley, HubSE Ltd.
Those of you who attended last year's Asdem Demurrage Conference and heard Simon Rickwood from BP Oil International give his paper on Virtual Arrival were probably eagerly waiting for BIMCO to issue their Virtual Arrival clause. OK, maybe you weren't that keen, but I was waiting to see if it was going to solve some of the issues that Simon raised.
If you missed BIMCO's clause you can find it here: Virtual Arrival Clause. And if you missed it, don't worry, you didn't miss much. I found it very disappointing and considering how long we have been waiting, it is no better than BP' clause that has been around for a few years. In fact BP's Clause is much better.
What don't I like about this clause? There are a number of issues such as:
"Experts". The clause says that any extra time taken to perform the voyage in the event the vessel is ordered to slow down will be calculated on the basis of all relevant information such as "weather data, wave and speed projections and other relevant technical or meteorological data" which is fine. Where it gets more difficult is that if there is a dispute between the Owner and the Charterer, a mutually agreed independent "Expert" will be appointed to settle the dispute – again this is fine. However, if the parties cannot mutually agree on an "Expert" then each side will appoint their own expert and the average of the two calculations will be binding. That to my mind is a fudge which means that the final result can never be right!
Who is an Expert? "Expert" is not defined in this clause and I have to wonder where the industry will find such experts. I believe the closest thing to Virtual Arrival calculations are found as Time Charter Performance claims and I have a feeling that there are not too many people in the industry with a full understanding of performance claims, let alone Virtual Arrival, and I will be surprised if we do not see more disputes hitting the courts.
Compensation. The killer in this clause is how the benefits of slow steaming are carved up and this is where I think BIMCO have missed the point altogether. The impetus for introducing Virtual Arrival has been the saving of bunkers and emissions and this trend has been fed by the relentless rise in the cost of bunkers. The bunker price used for Worldscale calculations peaked at US$686 for 2013 flat rates, whereas in 2008 the price used was US$328.75. BIMCO's clause ignores bunkers but suggests that the extra time used to perform the voyage is shared between Charterers and Owners on a 50/50 basis. This seems somewhat bizarre.
To illustrate the point, let's take a VLCC which has been slowed down from 15 knots to 13.5 knots on a voyage of 9,720 miles. At 15 knots the voyage would take 27 days and at 100mt/day burn 2,700mt bunkers. At 13.5 knots it would take 30 days and at 75mt/day burn 2,250mt bunkers. Assuming a demurrage rate of US$30,000/day, the time element would cost US$90,000 more by slowing the vessel down. However, the bunker saving of 450mt at a cost of UK$600/mt would yield US$270,000.
Under the BIMCO clause, the Owner would share the cost of the US$90,000 but keep the benefit of the bunker saving of US$ 270,000. Under the BP clause the Owner is kept whole on time and essentially keeps the US$90,000, but the bunker savings of US$270,000 is shared on a 50/50 basis – a much more equitable result. I can't see many Charterers agreeing to BIMCO's clause when the risk/reward ratio is so skewed.
What do you think of this clause? Have you been involved in Virtual Arrival? Has it gone smoothly or have you run into disputes? Why not add your views, comments and share your experiences on my blog at www.hubse.com.
Article provided by Phil Stalley, HubSE Ltd.
Towards the end of last year the newspapers reported on research with the headline that almost 40% of 18-24 year olds were nervous of using the telephone. To read more on this survey click here.
The article reveals that it's not just youngsters. Over a quarter of the workforce prefers to use email rather than telephone. This comes as no surprise to me as we are now encouraged by modern technology to use email, text messages and other social media and our mobile phones support all these modes and we can forget the art of conversation.
In the demurrage world we rely almost exclusively on email to conduct our negotiations and for 95% of the time this works well. We like the format of email where we can craft and set out our arguments in a logical and thoughtful way. When we receive a reply we have time to consider and investigate the arguments put forward by the other side. Where it gets tricky is when we reach a deadlock in an argument and neither side is willing to budge. The email exchanges often become a case of merely repeating the same argument in different ways over and over again.
Sometimes disputes arise because we use email. I say this because whilst English is normally the language used in this business, it is not the first language of many users. Even native speakers like me can often choose the wrong words or phrases which fail to get the intended message across. The big thing missing from email is any sense of the tone of the message. To illustrate the point, try telling a joke on email. Emails cannot covey the emotion of the sender unlike face-to-face meetings or telephone conversations.
This business is about the relationships we have with people. Meetings and phone calls are the best way to start building relationships and this will show through in your negotiations. The global nature of this business means that we don't get to meet the people we are negotiating with very often so the next best thing is to speak to them on the telephone.
If you are heading for a dispute, pick up the phone and talk to your counterparty. It is surprising how the misunderstandings created by emails can be clarified and the dispute resolved. A couple of points to remember:
I'm sure the statistics quoted above are not as high for this business, but if you are reluctant to use the phone give it a try and see how it goes. The first few calls may not work out how you intended them to, but as you get more experienced it will get easier.
Have you got any good or bad experiences of email and phone negotiations? Do you have other observations on this subject? Please share them on my blog at www.hubse.com.