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You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> South Caribbean Trading Ltd v Trafigura Beheer BV [2004] EWHC 2676 (Comm) (22 November 2004) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2004/2676.html Cite as: [2005] 1 Lloyd's Rep 128, [2004] EWHC 2676 (Comm) |
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QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
____________________
| South Caribbean Trading Ltd ("SCT") |
Claimant |
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| - and - |
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| Trafigura Beheer BV ("Trafigura") |
Defendant |
____________________
Mr Andrew Baker (instructed by Messrs Waterson Hicks) for the Defendants
Hearing dates: 14-20 and 29 July 2004
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Crown Copyright ©
Introduction
"(1) whether SCT was entitled and obliged to deliver under contract 5536 fuel oil created only from products delivered to SCT under contract 5508-2 or whether it was also entitled to deliver under contract 5536(i) fuel oil created from a mixture of products delivered under contract 5508-2 and other product (ii) fuel oil bought in and not created using the products delivered under contract 5508-2 at all (assuming in each case that the fuel oil otherwise conformed in quality and quantity to contract 5536);
(2) whether the last date for delivery under contract 5536 was varied to become 30 June or 30 April 2001, or whether Trafigura is estopped from asserting that the last date for delivery was 31 March 2001 and/or from denying that the last date for delivery was 30 June or 30 April 2001;
(3) whether the last date for delivery under contract 5536 was extended (and if so until when) under clause 7 or clause 13 of the contract;
(4) (subject and without prejudice to any question whether SCT could have performed contract 5536, if relevant) whether (a) Trafigura wrongfully repudiated contract 5536 and if so (b) whether that repudiation was accepted by SCT."
The buyer was described as Trafigura Beheer BV (Amsterdam) with a Branch Office address at Lucerne, Switzerland. The seller was described as South Caribbean Trading Ltd with an address in The Bahamas. All the relevant negotiations relating to this contract were conducted from Trafigura's London office by Mr Mark Loveland, who has given evidence in the course of this trial, and by Mr Fernando Marquez in The Bahamas who owns and controls SCT who has also given evidence.
"PRODUCT MUST NOT CONTAIN PETROCHEMICAL RESIDUES OR SPENT CHEMICALS INCUDING BUT NOT LIMITED TO CAUSTICS AND ACIDS.
GOODS MUST BE OF MERCHANTABLE QUALITY, HOMOGENOUS AND FIT FOR INTENDED PURPOSE.
QUALITY SHALL BE DETERMINED BY INDEPENDENT INSPECTORS DRAWING A FULLY REPRESENTATIVE COMPOSITE SAMPLE OF EACH TANK (TANKS 8026, 8036, AND/OR ANY OTHER DEEMED TANKS), RESULTS TO BE FINAL AND BINDING SAVE FRAUD AND MANIFEST ERROR.
IN THE EVENT THAT BOTH PARTIES MUTUALLY AGREE TO ALTERNATIVE BLEND QUANTITIES AND QUALITIES AS DESCRIBED IN CONTRACT 5508-2 RESULTING IN DIFFERING QUALITY TO THOSE DESCRIBED ABOVE THEN CLAUSE 10 OF THIS CONTRACT TO APPLY."
"5.QUANTITY:
484,000 US BARRELS PLUS OR MINUS 5(FIVE) PER CENT OPERATIONAL TOLERANCE NET OF WATER AND SEDIMENT ABOVE 0.50% AT 50 DEG FAHRENHEIT. QUANTITY IS TO BE NET OF ANY TANK HEELS AND/OR NON-PUMPABLE PRODUCT AS PER BORCO'S ASSESSMENT AND CONFIRMED BY INDEPENDENT INSPECTOR.
6. DELIVERY:
BY IN TANK TRANSFER AT BORCO TERMINAL, FREEPORT, BAHAMAS TO BE DELIVERED NO LATER THAN MARCH 31, 2001.
EXACT NARROWED DATES TO BE MUTUALLY AGREED.
SELLER (SCT) IS TO CONFIRM TO BUYER (TRAFIGURA) BY LATEST 15 DECEMBER, 2000 THAT THE FUEL OIL IS CONFIRMED ON SCHEDULE TO BE DELIVERED BY NO LATER THAN 31 MARCH, 2001.
7. LIFTING/STORAGE
MATERIAL DELIVERED VIA IN-TANK TRANSFER TO BE FULLY SEGREGATED AND FOR THE SOLE ACCOUNT OF BUYER. SELLER TO PAY FOR STORAGE.
IF BUYER DOES NOT REMOVE OR TRANSFER THE PRODUCT PURCHASED UNDER THIS CONTRACT IN A TIMELY MANNER, OR OTHERWISE IMPEDES SELLER IN THE PERFORMANCE OF SELLER'S BLENDING PROGRAM, THEN SUCH DELAY WILL AUTOMATICALLY EXTEND THE TIME ALLOWED FOR THE SELLER TO COMPLETE ITS BLENDING, AND NO CLAIM WILL BE PERMITTED AGAINST THE PERFORMANCE BOND (CONTRACT 5508-1, CLAUSE 10) AS A RESULT OF SAID DELAYS. IF THE BORCO FACILITY EXPERIENCES EQUIPMENT PROBLEMS, INCLUDING BUT NOT LIMITED TO PUMPS, TANKS OR BOILERS, WHICH DELAY SELLER'S ABILITY TO BLEND, SUCH TIME DELAYS WILL ALSO AUTOMATICALLY EXTEND THE TIME ALLOWED FOR THE SELLER TO COMPLETE ITS BLENDING AND NO CLAIM WILL BE PERMITTED AGAINST THE PERFORMANCE BOND (CONTRACT 5508-2, CLAUSE 10) AS A RESULT OF SAID DELAYS.
IN THE EVENT OF SUCH DELAY OR EQUIPMENT PROBLEMS, SELLER (SCT) TO PROVIDE FULL DOCUMENTARY EVIDENCE OF SUCH DELAY OR EQUIPMENT PROBLEMS."
8. PRICE:
THE PRICE IN US DOLLARS BY IN TANK TRANSFER AT BORCO SHALL BE DETERMINED BY THE RATIO OF FUEL OIL BLENDSTOCK TO CUTTER AS FOLLOWS:
BBLS OF CUTTER X CUTTER PRICE + BBLS OF FUEL OIL BLENDSTOCK X USD 12.75/(CUTTER BBLS + FUEL OIL BLENDSTOCK BBLS)
THE INVOICING QUANTITY SHALL BE BASED ON A BORCO ENTITLEMENT EXCHANGE OF THE NOMINATED TANKS NET OF TANK HEELS AND/OR NON-PUMPABLE PRODUCT WHICH IS TO BE CONSISTENT WITH THE GAUGING OF SAME BY AN INDEPENDENT INSPECTOR SAVE MANIFEST FRAUD AND ERROR.
IN THE EVENT OF ANY VARIATION IN THE BLEND RATIOS AS STIPULATED IN CONTRACT 5508-2, ADJUSTMENTS ARE TO BE MADE WITH REFERENCE TO CLAUSE 10."
"BUYER (TRAFIGURA) IS TO OPEN LETTER OF CREDIT TO SELLER (SCT) IN FORMAT ACCEPTABLE TO SELLER (SCT) BY 8 NOVEMBER 2000 (WORDING TO FOLLOW). BUYERS (TRAFIGURA) LETTER OF CREDIT TO REMAIN INOPERATIVE UNTIL SELLER (SCT) HAS OPENED LETTER OF CREDIT AS PER CONTRACT NO. 5508-2. UPON ISSUANCE OF LETTER OF CREDIT ACCEPTABLE TO SELLER (TRAFIGURA) UNDER CONTRACT NO. 5508-2, THE LETTER OF CREDIT ISSUED IN ACCORDANCE WITH THIS CONTRACT SHALL BECOME AUTOMATICALLY OPERATIVE.
"COPY OF SELLERS WRITTEN INSTRUCTION TO BORCO EVIDENCING SELLER'S REQUEST TO TRANSFER TITLE OF THE FUEL OIL TO [ISSUING BANK] FOR ACCOUNT OF TRAFIGURA BEHEER BV AMSTERDAM"
"IN THE EVENT THAT BOTH PARTIES MUTUALLY AGREE TO AN ALTERNATIVE QUALITY AND QUANTITY OF FUEL OIL TO BE PROVIDED BY THE SELLER SUCH AGREEMENT IS TO TAKE THE FORM OF AN ADDENDUM TO THIS CONTRACT WHICH WILL DESCRIBE THE RELEVANT ADJUSTMENT IN PRICE, QUANTITY AND QUALITY."
TITLE TO AND RISK OF LOSS OF THE PRODUCT DELIVERED HEREUNDER SHALL PASS FROM SELLER TO BUYER UPON ISSUANCE OF BORCO ENTITLEMENT EXCHANGE CERTIFICATE DETAILING QUANTITY OF PRODUCT AND DATE OF TRANSFER OF RISK AND TITLE FROM SELLER TO BUYER."
"14. CROSS DEFAULT
IT IS A CONDITION OF THIS CONTRACT THAT IF EITHER PARTY IS IN BREACH OF THEIR CONTRACTUAL OBLIGATIONS (HEREINAFTER REFERRED TO AS 'THE DEFAULTING PARTY') UNDER CONTRACT NOS. 5508-1 AND 5508-2. THEN THE OTHER PARTY (HEREINAFTER REFERRED TO AS THE 'NON-DEFAULTING PARTY') SHALL HAVE THE RIGHT BUT NOT THE OBLIGATION TO CANCEL THIS CONTRACT, UPON WRITTEN NOTICE BY THE NON-DEFAULTING PARTY TO THE DEFAULTING PARTY. FURTHERMORE THE NON-DEFAULTING PARTY SHALL HAVE NO FURTHER OBLIGATIONS HEREUNDER EXCEPT FOR THE OBLIGATION TO PAY ANY AMOUNTS DUE OR WITH WHICH THE PASSAGE OF TIME WOULD BECOME DUE TO THE DEFAULTING PARTY.
IN THE EVENT THAT FOR WHATEVER REASON SELLER FAILS IN HIS CONTRACTUAL OBLIGATIONS UNDER THIS CONTRACT AND OR CONTRACT NOS. 5508-1 AND 5508-2 SELLER IS OBLIGED TO PROVIDE BUYER WITH THE OPTION TO HAVE ASSIGNED TO THEM SELLER'S PROCESSING AGREEMENT WITH BORCO INCLUDING ALL RELEVANT AGREEMENTS AND CONTRACTS, INCLUDING BUT NOT LIMITED TO STORAGE AGREEMENTS WITH BORCO. BUYER HAS THE RIGHT BUT NOT THE OBLIGATION TO EXERCISE SAID OPTION. IN THE EVENT THAT BUYER DOES EXERCISE SAID OPTION, FOR THE AVOIDANCE OF DOUBT SUCH ASSIGNMENT OF CONTRACT(S) AND ALL TERMS THEREIN WILL BE EXACTLY THE SAME IN ALL REGARDS AS THOSE THAT SELLER HAS CURRENTLY WITH BORCO. SAID AGREEMENT TO ONLY APPLY FOR ANY BALANCE PRODUCT LEFT UNDER CONTRACT 5508-1 AND/OR OFF-SPEC PRODUCT UNDER THIS CONTRACT. FOR THE AVOIDANCE OF DOUBT THIS DOES NOT PRECLUDE BUYER FROM CLAIMING UNDER THE PERFORMANCE BOND AS DETAILED IN CLAUSE 10 OF CONTRACT 5508-1"
Issue (1) - Was SCT entitled to deliver bought-in Fuel Oil under Contract 5536?
"IT IS A CONDITION OF THIS CONTRACT THAT IF EITHER PARTY IS IN BREACH OF THEIR CONTRACTUAL OBLIGATIONS (HEREINAFTER REFERRED TO AS 'THE DEFAULTING PARTY') UNDER CONTRACT NOS. 3053B AND 3055-2 THEN THE OTHER PARTY (HEREINAFTER REFERRED TO AS THE 'NON-DEFAULTING PARTY') SHALL HAVE THE RIGHT BUT NOT THE OBLIGATION TO CANCEL THIS CONTRACT, UPON WRITTEN NOTICE BY THE NON-DEFAULTING PARTY TO THE DEFAULTING PARTY. FURTHERMORE THE NON-DEFAULTIN G PARTY SHALL HAVE NO FURTHER OBLIGATIONS HEREUNDER EXCEPT FOR THE OBLIGATION TO PAY ANY AMOUNTS DUE OR WITH WHICH THE PASSAGE OF TIME WOULD BECOME DUE TO THE DEFAULTING PARTY."
a. Although, the November 2000 transaction was entered into on the mutual assumption that the finished product delivered under 5536 would be derived from the same WFOBS as had been sold to Trafigura under Contract 5508-1 and purchased from them under 5508-2, there was no term of any of the contracts, and particularly of Contract 5536, which provided for this by imposing on SCT an obligation to this effect. There were three distinct and separate contracts all entered into on 3 November 2000 and until that time there was no binding contract.
At no stage was there a single contract divided into three inseparable parts as suggested by Trafigura.
b. The Cross Default clause expressly provided that if either party was in breach of its contractual obligations under contracts 5508-1 or 5508-2 the other non-defaulting party had "the right but not the obligation to cancel" Contract 5536. Accordingly, even if Trafigura defaulted by, for example, failing to effect delivery of either or both of the whole or part of WFOBS or cutter under 5508-2, SCT would in effect have an option whether to perform 5536 and, that contract would not automatically terminate. In that case, if SCT had not exercised its option to cancel 5536, it could perform that contract by producing finished product derived at least in part from WFOBS or cutter acquired otherwise than under 5508-2, provided that the finished product met the specifications as to quality set out in clause 4.
c. The argument on behalf of Trafigura that the Cross Default clause could not apply if there were non-delivery under 5508-2 because of the impossibility of calculating the price of the finished product was mistaken. In that event the equation in clause 8 would be operated by applying to the input components the prices of US$12.75 for the WFOBS and the cutter price defined in clause 7 of 5508-2 - "the December Merc heating oil settlement on deemed dates to be agreed less a discount of US cents 5 per gallon". If the Cross Default clause did not apply to breaches by failure to deliver it would have identified the scope of its application, but it did not do so. Further, the absence of any provision dealing with the automatic termination of Contract 5536 in the event of non-delivery under 5508-2 strongly pointed to the entitlement of the non-defaulting party to continue with the performance of 5536 if it chose to do so.
d. Clause 6 and clause 7 of 5536, when read together, did not provide that the finished product could only be derived from blending the WFOBS and cutter delivered under 5508-2.
e. Under clause 9 the letter of credit, which was the means of payment by Trafigura under 5536, was to be opened by 8 November 2000. Under 5508-2 SCT was to open its letter of credit by the same date. The date for delivery under 5508-2 was two days later – 10 November – and the date for delivery under 5536 was 31 March 2001. Thus the irrevocable letter of credit for payment under 5536 would already be opened before the date for delivery under 5508-2, yet there was no provision for what was to happen to that letter of credit on the assumption that 5536 automatically fell away if Trafigura failed to deliver under 5508-2.
f. With regard to the final sentence of clause 4 and clause 10 dealing with what was to happen if the parties agreed to blend quantities and qualities which differ from those described in Contract 5508-2, namely an addendum to the contract describing the relevant adjustments, although the assumption underlying this and other provisions of the contract is that the WFOBS and cutter purchased by SCT would be the only components of the finished product delivered under 5536, this was not a contractually agreed constraint.
g. These provisions simply meant that if there were any agreed quantitive or qualitive variance from that equivalent to the provisions of Contract 5508-2, that agreement would be formalised in an addendum, a provision entirely consistent with clause 16 – the entire agreement term.
a. As background circumstances relevant to construction of the agreements the following features were material.
i. The trading relationship between SCT and Trafigura was much closer than that of arms length seller and purchaser as shown by Trafigura's close interest in buying into the blending techniques of SCT as a "partner at ground level" and, as Mr Marquez put it in cross-examination, SCT was "happy to deal with Trafigura as its blending partner".
ii. The New York contracts were in substance a single transaction for the purchase and processing of WFOBS, but they were documented as three separate but interlinked contracts under which WFOBS was to be blended by SCT with cutter purchased from Trafigura and the finished product sold to Trafigura.
iii. Under the New York contract the finished product delivered to Trafigura was to be derived exclusively from the WFOBS "sold" by SCT to Trafigura and then resold by Trafigura to SCT together with the cutter "purchased" by SCT from Trafigura. The substitution of different WFOBS by reason of the technical blending problems encountered in the course of 2000 with the content of tanks 8005 and 8013 at the BORCO Terminal (see paragraph (28) above) was effected with Trafigura's consent to the reversal of the transfer of the WFOBS back to Trafigura.
iv. Performance of the New York contracts up to November 2000 was by means of five separate batches, one following soon after the other.
v. That the relationship between SCT and Trafigura was in essence a blending partnership was demonstrated by Trafigura's willingness to accept the third and fourth batches, under contract 3053b although known to be off-spec by 3 November 2000 when the transaction in this case was entered into. Trafigura had never suggested that SCT should keep it and buy in on-spec fuel oil in order to perform its contract.
vi. The substance of the 3 November 2000 transaction as agreed between Mr Marquez and Mr Long of Trafigura in October 2000 was "as per" the New York transaction (as Mr Marquez described it to UBS) save that delivery was to be in one batch and not in five consecutive batches. It was as if a sixth batch had been agreed under the New York transaction. The only other substantial change was that SCT's processing fee was built into the WFOBS blending price rather than being paid separately.
vii. The conduct of SCT and Trafigura in relation to batch 5 under the New York contract after 3 November 2000 suggested that the fuel oil to be delivered to Trafigura under 3053b could not be bought in and had to be the product of blending the WFOBS transferred under 3055-1 and 3055-2 with the cutter purchased under 3055-2 unless Trafigura consented to the substitution of other components. I interpose that this submission deploys evidence of the parties' understanding of the New York contract at a time when they had already entered into the 3 November 2000 contracts. As such that is not evidence of the factual matrix of the latter but of their subsequent understanding of an analogous transaction. It is, therefore, irrelevant and inadmissible.
b. As to the express terms of Contract 5536, the existing business relationship between the parties at the time when the contract was negotiated would lead to a mutual understanding that by "Fuel Oil" in clause 3 they intended to refer to end product the result of SCT's blend operations.
c. The last sentence of clause 4 of 5536 showed that the fuel oil was to be derived from blending only the components supplied under Contract 5508-2. If there were an agreed change in the blend quantities or qualities as described in 5508-2 and that resulted in a different quality of end product to that specified in clause 4, then by application of clause 10 there was to be an addendum to Contract 5536, as if the parties had agreed to an alternative quality and quantity, which would describe the adjustment in price, quantity and quality.
d. The provision of "typical" quality characteristics in addition to the guaranteed quality characteristics in clause 4 was a clear indication that the source of the fuel oil was to be the blending of the WFOBS and the cutter derived from Contract 5508-2. The insertion of the typicals meant that the contract was limited as to source/origin and the only applicable source/origin here was Contract 5508-2. This point was linked to a submission by Trafigura that typicals could affect the price of petroleum products sold subject to quantity and quality characteristics and was sought to be supported by a passage in the witness statement of Mark Loveland, paragraph 36, in which he stated that, when Mr Marquez indicated in March 2001 that SCT would deliver low metric 380 cst fuel oil and not product resulting from blending WFOBS, this was not acceptable to Trafigura because the blended product would have a higher API gravity and low sulphur than normal USGL 3 per cent and as such might have a higher market value depending on the market.
e. I interpose that it is as I understand it, common ground that it would not be a breach of contract for a seller to deliver fuel which complied with the guaranteed quality characteristics but varied from the typical characteristics. That is clearly correct as a matter of construction. If that is so, the fact that the product having the typical AST gravity and sulphur characteristics set out in clause 4 might be potentially more valuable to Trafigura than fuel oil which complied with the guaranteed characteristics but had lower gravity and higher sulphur content than the clause 4 typicals does not contribute anything to resolving the issue of construction under Issue 1. It is merely consistent with the mutual assumption, which SCT accept, that what was to be delivered under 5536 would be derived from the components delivered under 5508-2, but it does not support the proposition that this was mandatory. Had it been logically material to take into account evidence that the market price of fuel oil could be affected by typicals attributable to a particular origin, I should have declined to permit such evidence to be adduced. It was objected to by SCT on the grounds that this was essentially technical market evidence of an expert nature. The point was never pleaded and did not emerge until it was touched upon in Mr Loveland's witness statement exchanged a few weeks before the trial. There had been no order for expert evidence and when it was put in cross-examination to Mr di Mauro, a very experienced oil trader, he did not accept it, even if Mr Marquez did. In my judgment this area of evidence cannot fairly be introduced into the trial at such a late stage. If it were to be justly and fairly dealt with it should have been pleaded or otherwise notified to SCT early enough for there to be proper consideration whether there should be an application to call expert evidence.
f. Clause 4 in contracts 5508-1 and 5508-2 showed that the WFOBS component to be delivered under the latter contract was to be from the WFOBS acquired by SCT in tanks 8013 and 8005 at BORCO and supplied under 5508-1. The guaranteed quality characteristics as to sulphur and water under 5508-2 matched those under 5508-1.
g. Under clause 5 of Contract 5536 the quantity of finished product to be delivered was 484,000 barrels plus or minus 5% operational tolerance. This total represented the aggregate of the quantities of WFOBS and cutter to be supplied under Contract 5508-2. That was a clear indication that the only components to be incorporated into the finished product were those supplied under Contract 5508-2.
h. Under the last sentence of clause 6 SCT was to confirm to Trafigura by the latest, 15 December 2000 "that the fuel oil is confirmed on schedule to be delivered by no later than 31 March 2001". It is submitted that the only possible purpose of this provision was to indicate the progress of the blending operations on the component materials delivered under Contract 5508-2; particularly against the background of the delays experienced in blending the components delivered under the New York contracts.
i. It was further submitted that clause 7 clearly showed that the performance of Contract 5536 was inextricably linked to the blending operations of SCT, the substance being that if Trafigura's failure to remove or transfer the finished product or other conduct were to impede the blending operation, time for completion of blending would be automatically extended and SCT's performance bond could not be drawn down due to such delays and similarly with BORCO equipment problems. This is said to demonstrate not only that it was jointly anticipated that the finished product would be derived from blending the Contract 5508-2 components but that it could only be so derived. The "time allowed for the seller to complete its blending" could mean only that time of delivery was related to blending time.
j. With regard to clause 8 the price under Contract 5536 was calculated by reference to the quantities and prices prescribed by Contract 5508-2. Thus, if there were a failure of Trafigura to deliver to SCT the whole or part of the Contract 5508-2 components, there would be no provision of a pricing mechanism for Contract 5536. The reference to clause 10 did not provide an alternative method of calculation unless the parties agreed on one.
k. It is also argued that clause 9 shows that there had to be a contractual basis of a fixed price for the structure of the letters of credit to work. If there were no price established under clause 8 the letters of credit could not work.
l. Because a total default by Trafigura in delivery of components under Contract 5508-2 would result in there being no automatic price calculation method for fuel oil delivered by SCT under 5536 and therefore a contract inoperable if the parties did not refix the price, the effect of clause 14 must be to refer to breaches other than non-delivery under Contract 5508-2. It was argued that the main purpose of that clause was to protect SCT from liability if, for example, Trafigura delivered off-spec cutter under 5508-2. In that event, SCT would incur no liability if it declined to make delivery under 5536 – a clear indication that it would otherwise be obliged to use the components delivered under 5508-2 and could not deliver fuel oil derived from other components. If there were no such underlying blending obligation, such protection would be unnecessary.
m. Reliance was also placed on clause 10 of Contract 5508-1. This provided as follows:
"SELLER'S BANK TO OPEN A STANDBY L/C (WORDING TO FOLLOW) BY 8 NOVEMBER 2000 TO COVER USD 1.50 PER BARREL OF INVOICED QUANTITY, STANDBY L/C TO BE REDUCED BY THE PURCHASED QUANTITY OF FUEL OIL BLEND STOCK BOUGHT BY BUYER UNDER CONTRACT NO. 5508-2 ON A BARREL FOR BARREL BASIS.
FOR THE AVOIDANCE OF DOUBT THIS QUANTITY IS NOT THE QUANTITY OF THE FINALISED BLEND BUT RATHER THE COMPONENT OF THE OIL PURCHASED UNDER THIS CONTRACT USED IN THE BLEND, IE THE FUEL OIL BLENDSTOCK. IN THE EVENT THAT SOUTH CARIBBEAN TRADING LTD (SELLER) DOES NOT PERFORM HIS CONTRACTUAL OBLIGATIONS UNDER CONTRACT NO. 5508-2, BUYER HAS THE RIGHT TO CLAIM THE REMAINING AMOUNT OF FUNDS UNDER THE STANDBY L/C
IN THE EVENT THAT BUYER CLAIMS UNDER THIS PERFORMANCE BOND, BUYER HAS THE RIGHT TO CANCEL ALL OUTSTANDING L/C'S UNDER THIS CONTRACT AND 5536."
n. It is said that the second paragraph is inexplicable except on the basis that that which is being purchased under that contract will be repurchased under Contract 5508-2 and then used in the blending operation.
Issue 1 – Discussion
8. "PRICE:
THE PRICE IN US DOLLARS BY IN TANK TRANSFER AT BORCO SHALL BE DETERMINED BY THE RATIO OF FUEL OIL BLENDSTOCK TO CUTTER AS FOLLOWS:
BBLS OF CUTTER x CUTTER PRICE + BBLS OF FUEL OIL BLENDSTOCK x USD 12.75/(CUTTER BBLS + UEL OIL BLENDSTOCK BBLS)
THE INVOICING QUANTITY SHALL BE BASED ON A BORCO ENTITLEMENT EXCHANGE OF THE NOMINATED TANKS NET OF TANK HEELS AND/OR NON-PUMPABLE PRODUCT WHICH IS TO BE CONSISTENT WITH THE GAUGING OF SAME BY AN INDEPENDENT INSPECTOR SAVE MANIFEST FRAUD AND ERROR.
IN THE EVENT OF ANY VARIATION IN THE BLEND RATIOS AS STIPULATED IN CONTRACT 5508-2, ADJUSTMENTS ARE TO BE MADE WITH REFERENCE TO CLAUSE 10."
"5. QUANTITY:
GRADE (A) 134,000 BBLS PLUS OR MINUS (FIVE) PERCENT OPERATIONAL TOLERANCE
GRADE (B) 350,000 BBLS NET OF WATER UP TO 0.5% AT 60 DEG FAHRENHEIT PLUS OR MINUS 5 (FIVE) PER CENT OPERATIONAL TOLERANCE
6. DELIVERY:
EXTANK AT BORCO TERMINAL, FREEPORT BAHAMAS AS FOLLOWS:
GRADE (A) IN TWO LOTS, THE FIRST LOT OF APPROX 110,000 BBLS BY 10 NOVEMBER 2000 AND THE BALANCE OF APPROX 24,000 BBLS WHEN THE CUTTER TANK (F-7) ULLAGE PERMITS RESUPPLY AS THE FIRST 110,000 BBLS IS DRAWN DOWN FOR PROCESSING
GRADE (B) IN THE ONE LOT BY 10 NOVEMBER 2000
EXACT NARROWED DATES OF DELIVERIES TO BE MUTUALLY AGREED BETWEEN PARTIES.
IN THE EVENT THAT BOTH PARTIES MUTUALLY AGREE TO A DIFFERENT RATIO OF PRODUCTS TO BE DELIVERED IN ANY ONE BATCH SUCH AGREEMENT WILL TAKE THE FORM OF AN ADDENDUM TO THIS CONTRACT.
7. PRICE
THE PRICE IN US DOLLARS EX TANK BORCO SHALL BE AS FOLLOWS
GRADE (A) TO BE THE DECEMBER MERC HEATING OIL SETTLEMENT ON DEEMED DATES TO BE AGREED LESS A DISCOUNT OF US CENTS 5 PER GALLON
GRADE (B) 12.75 US DOLLARS PER US BARREL FIXED AND FLAT NET OF WATER UP TO 0.5% AT 60 DEG FAHRENHEIT."
Issue 2: Was there an agreed Variation as to the Time for Delivery under Contract 5536 or an Estoppel as to Time for Delivery?
"We will move our hedges back a month. Do you think that will give you sufficient time to drop the rest of the water from the current 4%."
"I also need from you to change the delivery and expiration date of the L/C 101308 to Deliver May 30, Expiration July 30."
"As I recall, it was after receiving this message that I discussed the position with Crandall about the ongoing delays with delivery of batch 5 and the fact that the new batch would not be delivered within 31 March as required by the contract. Crandall and I agreed that I should advise Marquez that we would extend the letter of credit but only on the basis that the pricing clause was changed from a fixed price to a floating price based on Platt's quotations.
Following this discussion, I advised Fernando that we would only extend the letter of credit if he agreed to a change in the pricing clause to a market related price. Fernando indicated that he could not do a marked related price. I do not recall mentioning at that time whether this would be based on a discount or premium to Platt's. I doubt that I would have done so as it was not clear at this time when he was going to deliver. However, I made it quite clear that this was the only basis upon which an extension would be granted because we could not extend without knowing the actual delivery date and he had not managed to deliver any of the finished fuel oil on time. By extending the delivery date market related, SCT could choose the actual delivery day during a time when the market price suited their economics and since we are buying "at market" it would have no impact on us. Fernando said he would think about it."
"Please also be advised that the delivery date under the new contract needs to be extended to May-June as well as changing the financial documents accordingly."
"Can I see the outgoing message for the amendment to the L/C for the new deal?"
"Yes, as soon as they have it. What is the problem?"
"He told me everything was coming. He said that the new batch L/C would be extended as I had requested with delivery by end of June and expiry July. He said nothing at all about any amendment to the purchase price formula. He just said let's get this vessel loaded and out. He said he had instructed his finance group to amend the L/C for the old batch with payment at sight. I said something like "OK, Mark, I am going to let the vessel load on your word that the L/Cs are being amended." I considered this to be a binding commitment by him on Trafigura's behalf and I relied on it."
"Fernando - To confirm yes, I have requested our Finance Dept to extend the L/C for the new batch. Finance has been in direct phone contact with UBS - Mr Steiger."
"Fernando -
We are today in the process of extending the L/C as you have been requesting. It is noted you have also requested that we extend the delivery period to May-June 2001. As you know our agreement for this deal calls for delivery to be made no later than March 31, 2001 basis a fixed price of $12.75 for the wet fuel oil plus cutter. From experience we all now know that the delivery timing and intended quality (water spec) has been impossible to predict. In fact, not one delivery has been on spec as originally guaranteed nor has the delivery timing been as agreed. Because of these uncertainties our ability to make prior arrangements, including hedging, is virtually impossible. Despite these facts, which have been beyond our control. Trafigura has continued to lift your product.
At this stage we are willing to accept your request for Trafigura to extend the L/C to June 30, 2001 with the proviso that Trafigura will pay for the finished oil on the basis of bill of lading quantity at the mean of Platt's published "US Gulf Coast Waterbourne No 63%", fuel oil less $0.50 per barrel pricing 5 days after bill of lading (B/L day zero). We will expect the product to meet contractual specification but again, if it does not, we will work with you to reach a mutually agreeable price differential failing which you are fee to sell the cargo to a third party.
We trust you understand our position and await your confirmation."
"PLEASE DELETE PRICE CLAUSE IN ITS ENTIRETY AND REPLACE WITH THE FOLLOWING:
PRICE:
THE PRICE IN US DOLLARS BY IN TANK TRANSFER AT BORCO SHALL BE THE MEAN OF PLATT'S QUOTATIONS FIVE DAYS AFTER BILL OF LADING DATE (B/L = DAY 0) PUBLISHED US GULF COAST WATERBORNE NO. 6 3 PCT FUEL OIL LESS USD 0.50 PER BARREL."
"In response to your first sentence, you have been in the process of extending the L/C validity for over a week. A multitude of excuses has been the only thing that South Caribbean has actually received. I released the entitlement to the 15.50 $/bbl oil to you on the basis of your personal promise to extend (without other amendments) the validity of the second L/C to July 30, 2001. We now insist that the L/C be extended as per your personal pledge."
"Yesterday in our correspondence to you we requested that you conform to your word and the extension provisions of the referenced contract by extending the validity of the letter of credit associated with the contract. Since you will not extend this validity, South Caribbean Trading will comply with your insistence on conformity to the contract. We herein nominate the delivery of 470,000 bbls of fuel oil to your account via entitlement transfer at Borco.
Please indicate the inspectors you wish to survey these tanks."
a. Whether on 7 March 2001 Mr Loveland told Mr Marquez that Trafigura would only extend the letter of credit under Contract 5536 on condition that there was a variation of the price clause to provide for the application of the market price at the time of shipment instead of the pricing formula in clause 8 of that contract which was in substance a fixed price.
b. Whether in the course of the communications in the period from 7 March up to and including Trafigura's email dated 15 March 2001, 1453 local time, the parties unconditionally agreed to vary the delivery date to 30 June 2001.
a. The market price of fuel oil, even with about 3 per cent water content, in February/March 2001 was substantially higher than the fixed price payable by Trafigura to SCT under Contract 3053b. Accordingly, a substantial profit would be made by whichever party then sold it in the market.
b. Trafigura was therefore very keen throughout February/March to obtain delivery of the contents of tank 8036 notwithstanding that the contractual date for delivery had long since passed and in spite of the fact that the blending operation had proved to be not wholly successful in dehydration of the product.
c. The price payable by Trafigura under Contract 5536 was going to be about US$20.91 per bbl, calculated in accordance with clause 8 but by 19 March 2001 the market price of fuel oil had dropped well below that. Consequently, if that product were delivered by 31 March, Trafigura would almost certainly be taking delivery at a significant loss.
d. It was the belief of Trafigura, notably Mr Crandall and Mr Loveland, that SCT was obliged to deliver the product under Contract 5536 by 31 March 2001 and that it would not be entitled to any contractual extension of time.
e. If the time for delivery under Contract 5536 remained unchanged, it would be physically impossible as at 7 March for the blending operation to be completed by SCT in time to perform Contract 5536 by making delivery in full by 31 March.
f. Trafigura knew at all material times that SCT needed access to tank 8036 to enable it to conduct the blending operation to produce product for delivery under Contract 5536 and they also knew that it was in reality likely to be impossible in practical terms for SCT to acquire additional suitable tank capacity from BORCO for this purpose. Consequently, Trafigura knew that, unless and until they took delivery under Contract 3053b and so vacated tank 8036, blending of the new batch for Contract 5536 could not begin.
g. Trafigura also knew that SCT were exposed to UBS as the provider of credit to enable SCT to carry the cost to it of the acquisition of the components, namely cutter and WFOBS, required for the blending operation and the cost of the BORCO tank capacity. Thus, UBS would obviously be relying on the value of the finished product as collateral for whatever credit it had provided to SCT. If the price of the finished product payable by Trafigura under Contract 5536 were to be subject to market fluctuation instead of being fixed as it was, that would be a matter of great concern both to SCT and to UBS, particularly given that the market price of fuel oil was in March 2001 already below the contract price. Were the price payable under that contract to be reduced significantly, that might well prejudice UBS's security.
h. Trafigura, primarily by Mr Loveland, but with the support of Mr Crandall, were therefore anxious to avoid a situation arising where SCT made delivery of the product under Contract 3053b conditional upon Trafigura irrevocably committing themselves to an extension of the time for delivery under Contract 5536. I find that this was an underlying consideration in the manner in which those at Trafigura dealt with SCT.
i. Mr Marquez was well aware that Trafigura wanted to take delivery of the contents of tank 8036 because he realised that they held a substantial profit for Trafigura.
j. It was therefore Mr Marquez's strategy to ensure that before he released control over that product Trafigura had not only procured an amended letter of credit from ING under Contract 3053b but also an amended letter of credit extending the time for delivery under Contract 5536.
a. Mr Loveland's reaction to Mr Marquez's first request for an extension of time under the letter of credit on 28 February 2001 (see paragraph (65) above) was to comment in an internal message to Patricia Reilly at Trafigura: "Here comes trouble". I have no doubt that he at once foresaw that Trafigura might not be willing to grant an extension and that, if there were a refusal, Mr Marquez might refuse to release the product under Contract 3053b.
b. The second request for an extension of time by SCT was made on 7 March. Although there were two further emails from Mr Loveland to Mr Marquez that day, neither of them referred to any telephone conversation about Contract 5536. Both were concerned with the Contract 3053b product. Indeed, the telephone conversation on 7 March and the requirement by Mr Loveland that any extension of time was to be conditional on the price clause being replaced by a Platts-related market price was referred to by Trafigura for the first time in its Defence.
c. Mr Marquez's evidence was not that there had been no conversation about a time extension on 7 March but that he could not remember one. If this evidence is to be believed, it must presumably be that he had no such recollection in January 2003 (some 22 months later) when Trafigura's Defence was served. Had the price variation point been raised at that stage it is hard to believe, given its absolutely fundamental importance that the conversation would not still have been in his mind. Accordingly, his lack of recollection may be due either to the fact that no such conversation took place or that he is concealing it. However, Mr Marquez does not appear to have contacted Mr di Mauro or UBS about a proposed change to a floating price. Such a change could not be agreed without their consent because of the risk it would create to the collateral security which was in effect provided by the Trafigura letter of credit. If the letter of credit were amended its immediate value would drop due to the market price of fuel oil being $3-$4 below the fixed contract price. No doubt it was for this reason that Mr Marquez consulted Mr di Mauro after receiving Trafigura's message of 19 March specifically indicating that extension of time was to be conditional on variation of the price clause.
d. In the Defence and in Mr Loveland's statement it was said that there was a single conversation about extending the letter of credit. In the Defence it was said that Mr Marquez reacted by saying that changing the price would be difficult as he could not afford the price risk and the conversation ended without agreement. In Mr Loveland's witness statement he stated that Mr Marquez had finished by saying that he would think about it. In his oral evidence, however, Mr Loveland said that on 7 March Mr Marquez had telephoned him about the extension and Mr Loveland had said "let me get back to you on that". He had then discussed the position with Mr Crandall and then in a second telephone conversation he had proposed the condition of a price variation.
e. It is to be observed that, according to Mr Loveland, the proposed price variation was stated in that 7 March conversation in general terms with the sense that, although it referred to Platts as the basis, it contained no indication of whether this was subject to a discount or premium and if so, how much. The proposal advanced by Trafigura in their email of 19 March did include very specific references to "the mean of Platt's published US Gulf Coast Waterbourne No.6 3% fuel oil less $0.50 per barrel".
f. Trafigura did not engender any internal document referring to the conversation on 7 March.
g. Following this conversation nothing further transpired about extending time for some five days. In particular, there was no message from Mr Marquez stating that a price variation was unacceptable. He simply repeated the request to extend time by his message of 12 March which made no mention of Trafigura's proposed condition: see para (71) above. Nor did he request more details of the proposed amendment.
h. Mr Loveland gave evidence that he believed that by this 12 March message Mr Marquez had agreed to the variation in the price. Mr Crandall's evidence was that this is what Mr Loveland told him, although there is no mention of this in his witness statement.
i. Mr Marquez's next request for an extension on 13 March specifically tied the extension of the letter of credit to delivery of the oil in tank 8036, but simply referred to it as an issue to be addressed, again with no reference to any change of price.
j. On 14 March Mr Loveland sent a message to Mr Crandall referring to that request from Mr Marquez in the following terms:
"Subject: FW: Issues to resolve.
Need a little help here but my inclination is to tell him
1) the point is we need to move the oil in tank asap and this deal is tied to no other deal so we'll address the new batch once we get the old batch out."
k. This message is on the face of it inconsistent with any belief on the part of Mr Loveland that Mr Marquez had already agreed to a price variation and is entirely consistent with a concern that there should be no commitment by Trafigura to take delivery under Contract 5536 until there had been delivery under contract 3035b. Mr Crandall's evidence was to the effect that the issue of an extension remained to be discussed further with Mr Marquez.
l. The reply sent later that day stated:
"I think we both agree getting the old batch out is actually the most important issue but yes the L/C for new batch is with Finance and they are preparing an extension."
m. Its wording had been agreed between Mr Loveland and Mr Crandall. The finance department of Trafigura was responsible for preparing the text of letters of credit and dealing with the bank. The only possible meaning that this message could convey to Mr Marquez was that the task of preparing a wording for an amended letter of credit had been passed to the finance department. The effect of Mr Loveland's and Mr Crandall's oral evidence was that this wording was prepared with a view to placating Mr Marquez in the hope that he would release for delivery the fuel oil in tank 8036.
n. The exchange of messages on 14 March quoted above at paragraph (74) amounted to a request by Mr Marquez to see Trafigura's instructions to its bank to amend the letter of credit. However, at that stage, if there had been the telephone discussion on 7 March described by Mr Loveland, the detailed features of the amendment of the price clause had not been finalised with Mr Marquez, particularly whether there was to be a discount on the Platt's price. Obviously, the existence and size of any such discount would be a potential problem for SCT, so they would have to know about it before it could be assumed that a price variation was acceptable. Moreover, if the price amendment was to be made, it would have to be incorporated in the letter of credit. Consequently, the wording could present SCT with very much of a problem. It is thus implicit in this response that the wording would contain nothing like this, but would simply cater for the extension of time. When asked by the court whether the instructions to the bank would have included an amendment of the price, Mr Loveland said it would. He said that Mr Marquez had already agreed to that but he also said that he believed that the reason Mr Marquez asked to see the wording was that he wanted to be sure that Trafigura would extend the time for delivery. "At that time I was assuming he was giving the go ahead to do something". He was unable to explain in cross-examination how it could come about that Trafigura could instruct the bank to amend the price to incorporate a discount in Platt's which he accepted had never been agreed with Mr Marquez.
o. According to the evidence of both Mr Loveland and Mr Marquez as to their telephone conversation on the evening of 14 March, there was no mention by either of them of any variation of the price in the letter of credit, although Mr Loveland expressly stated that time would be extended. He appears to have told Mr Marquez that he was about to instruct the finance department to instruct the bank to extend the letter of credit. In the message sent by Mr Loveland on the morning of 15 March he stated that he had already done this.
p. In his message sent on the morning of 16 March, Mr Marquez asked when he was going to get "the amendment agreed upon". This suggests either that he believed that there was nothing left to agree upon or that he was, at the lowest, hoping that this was so.
q. In response to that message Mr Loveland emailed the following:
"Fernando – To confirm yes, I have requested our Finance Dept to extend the L/C for the new batch. Finance has been in direct phone contact with UBS – Mr Steiger."
r. The statement that the letter of credit proposal was with Finance suggested that the text of the amended letter of credit had already been given to the Finance Department to prepare it for transmission to the bank and that the Finance Department had informed UBS of the proposed amendment. Further, in the course of a telephone conversation late on that afternoon Mr Loveland repeated that the extension under the letter of credit was being done.
s. The email sent by Trafigura on 19 March (see para (85) above) was drafted in formal terms. It was put as an offer to accept SCT's request to extend the letter of credit to 30 June 2001 but subject to the proviso as to market price less a 50 per cent per bbl discount. It made no reference to any previous mention of price variation or to any previous agreement to that effect. In the course of his cross-examination Mr Loveland said:
"Q. It is the sort of thing, this, that one does setting out a formal position if one is sending what is likely to be an unpleasant surprise, is it not?
A. No, this is for information, people in fact - the genesis of this particular email was that the finance people had not seen the specific wording, and if there was going to be a premium or discount - and in fact, as far as the premium or discount, we had not had that discussion based on the location of the oil.
Q. The main reason for this email was because the finance people had not seen it; is that what you are saying?
A. What I am saying is that the wording of US Gulf Coast Waterborne number 3, where it is put in parenthesis, this was - I was trying to spell it out in such a way that the finance people could effectively lift it and use it in the context of the L/C that they were preparing."
t. In substance, this evidence indicates that the wording was formulated by Trafigura for the first time on 19 March and had not previously been passed to the Finance Department. As appears from the witness statement of Patricia Reilly, she first received instructions to send a request for the amendment to the bank on 19 March. It follows that the statements which Mr Loveland made to Mr Marquez on 15 and 16 March which suggested that he had instructed the finance department to prepare amendments to the letter of credit were completely untrue. I infer that they were made to extract from Mr Marquez the continuance of the loading of the ASPHALT GLORY which he had permitted following the assurance of the extension of time under the letter of credit given by Mr Loveland in the 14 March telephone conversation. In this connection, I have no doubt in finding that Trafigura entirely appreciated that Mr Marquez would immediately have attempted to halt loading if, on 15 March he had been sent the text of the amendments which he received on 19 March, although this might not have been possible in view of the prior issue by BORCO of certificates of entitlement to the product.
u. When Mr Marquez received the text of the amendments on 19 March, he first sent a message to Patricia Reilly at the finance department of Trafigura saying that SCT did not accept the amendment to the price and later that day he sent to Mr Loveland the message set out at para (90) above. They represented an express allegation that Mr Loveland had gone back on his personal promise to extend the letter of credit "without other amendments". No message was sent by Trafigura refuting this allegation or referring to the fact that ever since 7 March any extension agreed to would be conditional on variation of the price clause or that Mr Marquez by pressing for an extension in the face of that conversation had impliedly accepted that condition.
Issue 4
"In response to your first sentence, you have been in the process of extending the L/C validity for over a week. A multitude of excuses has been the only thing that South Caribbean has actually received. I released the entitlement to the 15.50 $/Bbl oil to you on the basis of you personal promise to extend (without other amendments) the validity of the second L/C to July 30, 2001. We now insist that the L/C be extended as per your personal pledge.
We call your attention to paragraph 7 of the above referenced contract which states that in the event of equipment problems, the time allowed for delivery will automatically be extended. As we have told you in different occasions, BORCO was unable because of boiler, heat exchanger, etc problems to complete the contemplated blend. South Caribbean will provide documentary evidence of such problems. In view that we purchased 43 $/Bbl cutter from you, you cannot unilaterally abrogate this agreement.
In view of the above, Trafigura should immediately extend the L/C validity. We require a reply to the above by noon New York 03/20/001"
"During the past two years there has been a constant routine whereby SCT guarantees to provide oil during a specific time frame meeting a defined specification which never ever happens … We are now at another stage where, once again, SCT is unable to perform and wants Trafigura to make an exception to the contract. Frankly, we are just not prepared to agree to your request."
"Thank you very much for your note … I have made arrangements at great personal cost to get the product you require under our contract. We have on test product for you and expect that you perform under this contract with you. Please confirm to me that you will take the 472,000 barrels … meeting all contractual specifications … prior to March 31, 2001."
"Now with respect to contract 5536, it is clear under the contract that you are to deliver blended fuel oil, but that alternative delivery arrangements may be agreed between the parties … it is clear under the contract that alternative delivery arrangements need to be mutually agreed, and in this case, given your recent failures in performance and the losses we have incurred, we will not agree to this alternative delivery."
"Our financers require that you confirm in writing that you will take the title of the oil by Monday, March 26th, 2001. Should you not confirm to us by 10.00am New York time, then we will be forced to sell the entire position at market prices for this type of product. We therefore shall hold you liable for all losses and damages."
"To confirm our previous discussions we have failed to reach agreement on an alternative delivery mechanism for Contract 5536. Your last note acknowledges this fact and informs us that you therefore intend to sell your inventory to a third party and claim damages against us. We take this as your notice that you are terminating the contract and confirm receipt of such notice of termination.
It is obvious to us that because the termination has been advised by you, and because the underlying reason for the termination is your failure to perform, that you are therefore in repudiatory breach of our contract. This being the case we would obviously reject any claim by you for damages."
"Due to your unwillingness to allow us additional time to blend the material in question (being time which we were contractually allowed under our agreement with you) we have gone to substantial expense and trouble to obtain product which conforms to the contractually agreed specifications and we are at this time ready, able and willing to deliver the product to you. It is clear from the correspondence to date that you are unwilling to accept the product not because of the conforming delivery we have arranged but because of alleged failures of performance and losses you have incurred unrelated to the present transaction. Your position in this regard cannot be supported in law or in business. If indeed you have suffered losses on other transactions (which we deny) you have an obligation to mitigate such losses. Your position with regard to this transaction will not mitigate your losses. It will only increase them. Since you have expressed no legally supportable position for your repudiation of our agreement, we urge you to reconsider your position. If we have not received notice of your intent to perform under our agreement by Saturday, March 24th, 2001 10.00am New York time, we shall have no alternative but to dispose of the product elsewhere in order to mitigate our damages and shall hold you liable for all costs, losses and damages which we may incur from your bad faith repudiation of contract 5536."