AIC v. ITS Testing Services
Note: the Court of Appeal judgment in this case was delivered on 28 November 2006. It upheld the decision of the trial judge that the suit was not time-barred under the Limitation Act 1980 but reversed his decision on the issue of deceit. To access the note on the Court of Appeal judgment, click here
This case provides a useful summary of the duties owed by inspection companies to their clients in domestic and international trade. The inspection company in this case used a different test method on a cargo of gasoline, in breach of its instructions, and then secretly re-tested the samples and concealed the results from seller and buyer. The court held it liable for breach of duty and deceit
DMC Category Rating: Developed
This case note is based 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 Rudnick Gray Cary. DLA Piper is an International Contributor to this website
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 but Galaxy refused to take delivery or pay.
The issue went to court in Switzerland, where, on appeal, AIC was ordered to pay Galaxy over USD1.16m plus interest.
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.
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 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.
In this case, ITS was jointly instructed by Mobil and AIC. 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. ITS was under an implied obligation to Mobil and AIC:
Departing from instructions
This is the case even if the different tests would have given similar results. Virtually any departure from instructions will be seen as material, unless it is so trivial that it would have been obvious to the parties that it could make no possible difference (Veba Oil Supply and Trading GmbH v Petrotrade Inc  1 Lloyd's Rep 259).
In this case, the original tests carried out by ITS were not in accordance with the stated test procedures. AIC was relatively inexperienced in the purchase and sale of gasoline and it would not have been easy for it to know whether any departure by ITS from instructions was trivial or not.
The judge was satisfied on the balance of probabilities that the regular cargo would have been off-specification had it been tested in accordance with ASTM D5191. In addition, ITS was negligent in failing to have a proper system for checking certificates before they were issued.
Duty to correct a certificate
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. The samples themselves were the joint property of Mobil and AIC and re-tests should not have been carried out unless pursuant to their joint instructions. It was also quite unacceptable, once further tests had been carried out, that the results were not disclosed.
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.
AIC was relatively inexperienced in the purchase and sale of gasoline and, quite reasonably, looked to ITS as an independent inspection company for an answer one way or the other as to whether it was standing by its original certificate. AIC clearly relied on ITS' assurance that it was, and this played a real and substantial part in AIC's decision-making process.
Had a supplemental certificate been issued correcting the original certificate, it was much more likely that an early commercial solution would have been arrived at between AIC and Mobil/Galaxy.
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.
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