Company loses $3m because of conflicting contract terms

A company has lost $3m dollars because it had agreed to contradictory contract terms when entering into a purchase agreement.

Sam Lyon Head of Corporate & Commercial reports on this recent case.

The case involved Septo Trading Inc, which contracted to import fuel oil supplied by Tintrade Ltd.

The terms were recorded in an email confirmation (the Recap).

A clause in the Recap stated that a quality certificate issued by an independent inspector at the load port was binding, but it also provided for the BP 2007 General Terms and Conditions for FOB Sales to apply “where not in conflict with the above”.

The BP terms stated that the quality certificate was conclusive and binding “for invoicing purposes” but without prejudice to Septo’s right to bring a quality claim.

The quality certificate issued by the inspector certified that the fuel oil was in accordance with the contractual specification at the load port, but a subsequent analysis showed that it was not.

Septo claimed $3m damages on the ground that the product was not in accordance with the contractual specification and, in accordance with the BP terms, the certificate was only binding for invoicing purposes and did not preclude it from bringing a claim for damages based on the quality of the product.

The judge found in favour of Septo on the basis that the BP terms qualified the Recap term which, if it had stood alone, would have excluded Septo’s quality claim, but that there was no conflict between the terms which could be read together to give effect to both.

The Court of Appeal has overturned that decision.

It held that the two provisions could not fairly and sensibly be read together.

The Recap term provided for the quality certificate to be binding for all purposes while the BP term provided for the binding nature of the certificate to be for a very limited purpose.

It was necessary to stand back and consider the parties’ intention as practical business people operating in the real world.

While it was perfectly reasonable for parties to choose a contractual scheme in which the quality certificate was not binding but was merely evidence, that was not a commercially reasonable interpretation of what they had done.

The contract, on its true construction, provided that the quality certificate issued at the load port would be binding, with the consequence that Septo was precluded from bringing its $3m claim.

If you would like more information about the issues raised in this article or any aspect of contract law please contact Sam on 01228 516634 or click here to send him an email.