Interpretation of Quality Clause in Naphtha Contract, Damages for Breach and Hedging Issues

Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm)

Background Facts

S was the seller and C the buyer under an FOB Port Harcourt sale of naphtha. The contract provided "Quality: PHRC naphtha quality" and the specs referred to in the quality clause were taken from an analysis of a sample provided by S's seller, Port Harcourt Refinery Company ("PHRC"). In pre-contract exchanges between the parties, the contractual significance of which was disputed, S stated that the product was to be sold "as is".

C then on-sold the cargo to P. The contract between C and P provided as part of the specification "Mtbe mg/kg 50ppm max". MTBE is Methyl Tertiair Buthyl Ether, a man-made substance which is not a by-product of the production of naphtha. That on-sale was on terms that if the cargo did not meet the specification, P could renegotiate the price and C had no obligation if the cargo was off spec.

According to reports subsequently produced by SGS from composite samples both from the ship's tanks and from the shore tank, the MBTE content was considerably higher than the limit in the contract between P and C. As a result, P rejected the cargo. In mitigation of its losses, C then sold the cargo to B and commenced proceedings against S to recover its losses, including its hedging losses.

Commercial Court Decision

Liability

Mr Justice Christopher Clarke held that the exchange which referred to the product being sold on an "as is" basis formed part of the contract but disagreed with S's argument that this meant there was no warranty as to quality at all. Rather, he held that the quality provision ("PHRC naphtha quality") was inconsistent with such an interpretation and that "as is" meant that the naphtha received would have whatever characteristics a cargo supplied ex PHRC should have. Therefore, since such a cargo would not normally contain such quantities of MTBE, the naphtha did not comply with the contractual standard and the judge concluded that S was in breach of the implied condition that the cargo would comply with its description and of the implied term that it should be of satisfactory quality.

Damages

The starting point for the calculation of damages is S.53(3) of the Sale of Goods Act 1979 which provides:

"In the case of breach of a warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered the warranty".

S...