AIC v. ITS Testing Services

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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

AIC Ltd v ITS Testing Services (UK) Ltd
English High Court, Commercial Court: Cresswell J.: [2005] EWCA Comm. 2122: 7 December 2005
N Hamblen QC and M Ashcroft, instructed by Holman Fenwick & Willan, for AIC
D Mildon QC and Jessica Mance, instructed by Hill Taylor Dickinson, for ITS
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

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 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.

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.

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.

Duties of an inspection company
Inspection companies are trusted to exercise independent judgment. It is inherent in the nature of their task that they assume responsibility to the buyer and/or sub-buyer for what is stated in the certificate (Niru Battery Manufacturing Co v Milestone Trading Ltd [2003] EWCA Civ 1446).

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:

  • to determine whether Mobil had performed its contract with AIC in the relevant respects, applying the test methods specified in the instructions given;
  • to exercise independent and impartial judgment and to act as an independent and impartial inspection company at all material times;
  • to report the results of tests independently, accurately, clearly, unambiguously and objectively;
  • to include in any certificate all information relevant to the validity and application of the test results and all information required by the test method and procedure used;
  • to make it clear whether the results reported refer to tests carried out on a single item or a batch of items, including where relevant details of any sampling carried out;
  • to include in any certificate:
    • any departures from standard condition;
    • reference to the test method and procedure used;
    • any standard or other specification relevant to the test method or procedure; and
    • deviations, additions to or exclusions from the specification concerned;
  • to issue material amendments to any certificate in the form of a further document by way of a Supplement, with a statement to the effect that the same should be passed on to any person to whom the original certificate had been provided;
  • 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.

Departing from instructions
An inspector instructed to determine the quantity and quality of cargo must abide by his instructions. If he departs from those instructions in a material respect (such as by using a different test method), his determination will be rendered invalid on the grounds of manifest error, simply because the parties had not agreed to be bound by a determination carried out in any other way than that specified.

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 [2001] 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
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. 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.

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.

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.

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.

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