Fal Oil v. Petronas

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Note: In a judgment dated 7 July 2004, the Court of Appeal upheld the judgment at first instance on the issue of contamination but reversed it on the issue of demurrage, holding that in this case, the sale contract provisions represented an independent code. For a note of the Court of Appeal's judgment, click here

Fal Oil Co Ltd and Credit Agricole Indosuez (Suisse) SA v Petronas Trading Corp SDN BHD (the Devon
English Commercial Court: Morison J.: 10 October 2003: [2003] EWHC 2225 (Comm)
R. Millett QC (instructed by Ince & Co) for Fal Oil (Claimant)
Lawrence Akka (instructed by Holman Fenwick & Willan) for Petronas (Defendant)
Sale contract: c & F sale of oil: Delivery by ship-to-ship transfer: alleged short delivery: water content in excess of permitted level: conflict of expert evidence: burden of proof: standard of proof: balance of probabilities: liability for demurrage: indemnity or independent obligation

When the Devon completed discharge of a cargo of oil at Singapore and Malaysia 1500mt of oil was found to have been replaced by seawater. The first issue was whether the defendant Petronas (Petco) had established, on a balance of probabilities, that the cargo contained more than the permitted proportion of water when it was received on board from the cargo tanks of the Centaur by ship-to-ship transfer. The second issue was the nature of Petco's liability for demurrage under the sale contract, in circumstances where Fal Oil had not paid demurrage under the relevant charterparty.

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Case note contributed by Ann Moore, Law Correspondent for Fairplay International Shipping Weekly and contributor to this website

This case concerned a claim by the seller (Fal Oil) against the buyer (Petronas) of a cargo of oil, for the payment of a) the purchase price and b) discharging port demurrage, due under a c&f sale contract. As regards the purchase price, the buyer took the position that the cargo was off-specification, in that its water content was too high. The buyer had taken delivery of the cargo into its vessel Devon by ship-to-ship ("STS") transfer from the seller's vessel Centaur off the Yemeni port of Port Sudan. The excessive water content was confirmed only on arrival of the Devon at her ports of discharge namely Singapore and Feoto in Malaysia. There was a conflict of expert evidence as to what methods of measurement were acceptable, and whether the inspections had been properly conducted. The
evidence pointed to a deliberate substitution of oil for water at some stage between the original loading of the cargo at Yanbu, Saudi Arabia and its final discharge. The principal issue in the case was the time at which this substitution occurred.

A second issue was whether Fal Oil, as shipper of the cargo, could claim demurrage under the sale contract, in circumstances where no demurrage was due from Fal Oil under the charterparty. The relevant provision in the sale contract simply specified that demurrage was to be paid "As per Charter party per day pro rata" at the rate of US$18,000 per day. Fal Oil claimed demurrage of just over US$500,000. It said Petco was in breach of contract, either by failing to discharge the Devon within the permitted laydays, or by failing to take the necessary steps to avoid delay, and/or causing the vessel to be prevented from discharging at Singapore/Malaysia without delay.

1. The contamination issue
Mr Justice Morison said the burden of proof on Petco was to persuade him, on a balance of probabilities, that when the cargo was pumped into the Devon it contained more than the permitted proportion of water. If there was no possibility that the contamination occurred after the ship-to-ship transfer, he must conclude it occurred before, even if he was unsure about some of the circumstances. But if it was possible that water was substituted for oil while on board the Devon he must assess the probabilities of whether this happened before, or after, the transfer. Alternatively, if he found that either event was equally probable, then Fal Oil must succeed in its claim.

The evidence was that 1500mt of seawater was substituted for oil at some stage before or during discharge at Singapore/Feoto. The judge found that it was not known how this was done, but the oil could not have been discharged into the sea without serious pollution. He found that the measurements and sampling at Yanbu, the port of loading, and at the Caltex terminal in Singapore were reliable, which meant the substitution had occurred before the Caltex sampling point.

Morison J found the substitution "must have been done knowingly". The possibility of accidental contamination was excluded by the evidence, and would not, in any case, account for the missing oil. This meant he could not rule out the possibility that the substitution occurred aboard the Devon, but how and when was as much a mystery as with the Centaur. However the House of Lords had decided in The Popi M that the discharge of a burden of proof requires more than the Sherlock Holmes principle that if the impossible is eliminated, "whatever remains, however improbable, must be the truth".

The judge concluded that there was "probably" a deliberate switch of seawater for cargo oil, which "probably" occurred either on the Centaur or the Devon, "before, on or after the STS" - all possibilities which he could not exclude. This left him in the unsatisfactory position of being unable to say whether Centaur "probably" discharged a contaminated cargo into Devon or whether the contamination "probably" occurred after transfer. He held that either was possible, but that was not sufficient to discharge the burden of proof. Petco had not, therefore, made out its case.

2. The demurrage issue
The judge said no demurrage was due from Fal Oil as shipper under the charterparty, so the question was whether the Petco was liable under the sale contract. It was a c & f contract, said Morison J, which did not require discharge "in any particular time". He therefore held, in accordance with the authorities (Ets Soules v Intradex [1991] 1 Lloyd's Rep 378; Mallozzi v Carapelli [1975] 1 Lloyd's Rep 229), and the commercial reality of the transaction, that the demurrage obligation was "in the nature of an indemnity rather than an independent obligation".

On that basis, Fal Oil could not claim from Petronas demurrage that it had not itself had to pay to the shipowner.


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