DMC Category Rating: Developed

The material in this case note relating to the proceedings at first instance is based in large part on an Article in the February 2006 Edition of the ‘Marine Bulletin’, published by the Marine team at the international firm of lawyers, DLA Piper. DLA Piper is an International Contributor to this website. The Editor has contributed the remainder of the note.

Background
In March 1996, AIC purchased from Mobil Sales and Supply Corporation a mixed cargo of regular and premium unleaded gasoline on terms FOB Coryton Mobil Refinery Installation. The contract provided that the cargo was to comply with Colonial Pipeline Specifications ("CPS"). Quantity and quality were to be determined at load port by mutually acceptable independent inspectors appointed by Mobil and costs of the inspection were to be shared 50/50. The results of the inspection would be "final and binding for both parties save for fraud or manifest error".

Mobil appointed ITS to inspect the cargo prior to loading. Mobil's instructions to ITS included a description of what was to be tested and a copy of CPS, which prescribed a maximum RVP ("Reid Vapour Pressure") of 9.0 psi as arrived at by test method ASTM D5191.

The regular unleaded gasoline was loaded in four parcels. ITS tested samples from shore tanks and issued certificates of quality on 30 March and 2 April 1996, each stating "tested by ASTM D323". In its final report to AIC, ITS stated that the final tank for the regular parcel was found to be outside the required specifications but that, after re-testing with a volumetric composite of all four tanks, the results were acceptable.

By contract dated 2 April 1996, AIC sold the cargo to Galaxy Energy ex ship New York. The quality clause in the AIC/Galaxy sub sale provided: "Quality: (A) M 2 meeting statutory baseline [i.e. CPS] with the following guarantees … RVP 9.0 psi … determination of quality: As ascertained at a load port and confirmed by Caleb Brett".

The vessel arrived at New York on 14 April 1996 and began discharging the following day. But discharge was suspended because, Galaxy claimed, the cargo was off-specification. In particular, the vapour pressure of the regular unleaded gasoline was higher that the 9.0 psi permitted under CPS. AIC maintained Galaxy was bound by ITS' certification that the cargo met specification and – after inter-locutory proceedings in the Swiss courts - AIC was paid for the cargo under the letter of credit established by Galaxy and Galaxy took delivery of the cargo.

The issue went to court in Switzerland, where, on appeal, AIC was ordered to pay Galaxy over USD1.16m, plus interest, for delivering a cargo that did not meet the contract specifications. A further appeal to the Swiss Supreme Court failed in December 2003.

In May 2002, AIC issued these proceedings against ITS, claiming damages for breach of contract, deceit, breach of duty and, alternatively, contribution under the Civil Liability (Contribution) Act 1978 in respect of its liability to Galaxy.

The re-tests
The instructions ITS received from Mobil included a copy of CPS. CPS specified a maximum RVP of 9.0 psi to be arrived at by test method ASTM D5191. ITS had, however used a different method - ASTM D393. This method was the one stated on the Certificates.

On 16 April, following Galaxy's complaints, ITS arranged for residues of the load port shore tank samples to be sent for re-testing, this time using the ASTM D5191 method. The results of the re-tests showed higher RVP in three of the four samples and an overall average for the four tanks of 9.33 psi. Neither Mobil nor AIC were informed of the re-tests, nor of the results.

On 17 April, during a telephone conversation with AIC, when AIC referred to the certificate of quality ITS had issued, a representative of ITS stated, "we will be standing by that certificate". ITS by this time (so the Judge at first instance found) knew the results of the re-tests but said nothing about them.

AIC now alleged ITS was in breach of its contractual duties, which included a duty to use reasonable skill and care, a duty to seek permission before using samples and a duty to inform its client of the results of any tests. In addition, ITS owed duties in tort to correct or qualify representations it had made in certificates and/or to inform AIC of the re-tests and the results. By continuing to represent that the results of the original tests were reliable, ITS misrepresented the true situation and by deliberately choosing not to reveal anything about the re-tests, it was guilty of deceit.

Judgment at First Instance
Duties of an inspection company
In this case, ITS was jointly instructed by Mobil and AIC. The judge held that the contract between Mobil/AIC and ITS required ITS to take reasonable care to ensure any certificate it issued was accurate. In accepting those instructions, ITS assumed responsibility to anyone it should have had in contemplation as most likely to be affected by any error, and this included Galaxy as sub-buyer.

Drawing on International Standards in place at the material time (NAMAS Accreditation M10) which were reflected in ITS' own quality control manual, the judge drew up a summary of what was comprised in ITS's duty to take reasonable care. This contained nine separate headings, the most important of which for the purposes of the present case were the last two which read:

• where a complaint or other circumstance raised doubt concerning the quality of the tests, to ensure that the relevant work/tests were promptly audited and reviewed;
• where the audit/review findings cast doubt on the correctness of the test results so as to necessitate a supplemental certificate, to write to Mobil and AIC immediately, enclosing the Supplement with a statement to the effect it should be passed on to any person to whom the original certificate had been provided.

Duty to correct a certificate
ITS argued that, once an inspection company has published its certificate, its task is complete. A statement of opinion carries with it a statement that the opinion is honestly held at the time when the statement is made. But, provided that is the case, any subsequent change of mind is irrelevant.

The judge did not agree. On or about 16 or 17 April, when complaints had raised doubts about the original tests, ITS should have sent Mobil and AIC a Supplement withdrawing all those certificates that stated "fuel meets specification". It should also have recognised that what remained of the samples represented important evidence which should have been held to the order of Mobil and AIC. It was also quite unacceptable, once further tests had been carried out, that the results were not disclosed.

Deceit
The tort of deceit involves a false representation by a person who knows it is untrue or who has no belief in its truth. If that person intends that the recipient should rely on that representation and the recipient in fact does so, he will be liable in deceit for the damage caused.

On the evidence, the judge was satisfied that during the telephone conversation on 17 April 1996, ITS had represented that the original certificate, which stated "fuel meets specification" was and remained good and valid, that it had no belief in the truth of that representation but that it intended AIC to rely on it. ITS had made a deliberate decision not to disclose the results of the re-tests to AIC and Mobil, even though it knew it was under a duty to do so.

The requirements for the tort of deceit had therefore been made out.

Limitation
These proceedings were not issued until May 2002. ITS, therefore, argued that the claims were time-barred.

Under Section 5 of the Limitation Act 1980, a claim in contract must be brought within 6 years of the date the cause of action accrued (usually when the breach takes place). An action in negligence must be brought within 6 years of the date when the claimant first suffered loss. Under section 32, however, the limitation period is postponed in cases of fraud, concealment or mistake. Time does not begin to run until the plaintiff has discovered the fraud, concealment or mistake or could with reasonable diligence have discovered it.

The judge concluded that AIC could not have found out about the re-tests and their results before 17 May 1996. Consequently, the action was brought within the time limit and AIC was entitled to damages in respect of its liability to Galaxy, expenses arising from Galaxy's refusal to accept the cargo and legal fees and costs incurred in the Swiss proceedings.

The Appeal
The appeal focused on two issues: were ITS liable in deceit and was AIC’s action for damages time-barred under the Limitation Act 1980?

On the first issue, the Court of Appeal, after an exhaustive analysis of the history of the case and the proceedings at first instance, concluded unanimously that the essential grounds for the tort of deceit had not been made out. The crucial representation made by the representative of ITS in his telephone conversation of 17 April 1996 with the representative of AIC – to the effect that ITS would be "standing by that certificate" – did not mean, in the context of that telephone conversation as a whole and of the contemporaneous communications between the parties exchanged immediately after it, that ITS maintained that the certificate was good and reliable, in the sense that the actual values for the cargo given in the certificate were correct. It meant only that the certificate was an historical record, which could not be tampered with.

As regards the second issue, the relevant section of the Limitation Act was s.32, which provided:

(1) …where in the case of any action for which a period of limitation is prescribed in this Act, either
(a) the action is based upon the fraud of the defendant; or
(b) any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant..
the period of limitation shall not begin to run until the plaintiff has discovered the fraud [or] concealment…(as the case may be) or could with reasonable diligence have discovered it.
(2) For the purpose of subsection (1) above, deliberate commission of a breach of duty in circumstance in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

Here the court, found by a majority, Rix LJ dissenting, that ITS did indeed have a duty to disclose the fact and results of the re-tests. The leading judgement on this point was that of Buxton LJ. who said in this regard: "Not only was a duty to disclose the ..re-tests acknowledged by ITS, but also the existence of such a duty is a matter of commonsense… Not only as a matter of law, but also commercially, it really challenges reality to think that a certifier, armed with tests that suggested that the tests used to complete the certificate had or might have produced incorrect results, could nonetheless simply do nothing about it; and in particular could properly say nothing about those tests to those who had employed him to certify…
That obligation, of not sitting on material of one’s own creation that is known to be inconsistent with the certificate, does not lead to the endless uncertainty that Rix LJ fears…It is for the holder of the certificate to decide what he does with the information once he receives it. What I cannot accept is that considerations of certainty empower the certifier to take that decision for the holder by withholding relevant information from him. Nor does such a duty create a continuing duty of review and disclosure under every conceivable kind of contract…. This is the specific case of a certificate, where the certifier was in possession of material of his own creation that cast doubt on the certificate that he had given. To hold, as I would, that he was under duty in Limitation Act terms to reveal that material does not open any floodgate in any other sort of relationship."

He then proceeded to consider whether the decision to conceal that information amounted to "deliberate concealment" under the Act. He pointed out that, on the basis of earlier authorities, the phrase was not limited to the common law torts of fraud or deceit at common law; nor was it necessary to show any degree of ‘moral turpitude’. On this basis, he had no difficulty in agreeing with the judge at first instance that, for the purposes of s.32, ITS had deliberately concealed the existence and the results of the re-tests. "The contention (of counsel for ITS) that, if it were to be acquitted of deceit, it was most unlikely that it could have engaged in deliberate concealment… was wrong, both as a matter of general principle and on the facts of this case."

On the third point also, Buxton LJ had no difficulty in finding that the deliberate concealment of the re-tests was "a fact relevant to the plaintiff’s right of action" under s.32(1)(b) of the Act. "Scales fell from the eyes only with the revelation of the… re-tests, which enabled AIC to plead for the first time not the competent use of a non-comparable test but the incompetent use of a comparable test".

It is also notable that the Court of Appeal specifically did not approve the list of the eight duties of an inspection company set out in the judgment at first instance, which formed the ground upon which the judge gave leave for appeal. Indeed, Rix LJ, in referring to this list said: "Moreover, the judge did not derive his implied obligations by the traditional method of asking whether they were necessary. I will content myself for the moment with saying that the judge’s implied obligations read rather like legislation."