In Septo Trading and Tintrade Limited^[1], the Court of Appeal provided guidance on the approach taken by the courts in a case dealing with inconsistent terms between specially agreed terms and standard form terms. In doing so, the Court of Appeal allowed the Sellers’ appeal and reversed the decision at first instance.  Joehunt Jinnah, Trainee at CJC's Singapore Office provides the details.

The Facts

Septo Trading (the “Buyers”) bought a cargo of high-sulphur fuel oil from Tintrade Limited (the “Sellers”). The HSFO sold was to be as per ISO 8217:2010 specifications.

The sales contract was contained in an e-mail confirmation (the “Recap”) which incorporated the BP 2007 General Terms and Conditions for FOB Sales (the “BP Terms”).  The Recap provided, inter alia, that quality and quantity were to be determined by a first-class independent inspector whose results were binding on the parties, save for fraud or manifest error. While the BP Terms were incorporated, they were to apply, “where not in conflict with the above” (referring to the Recap).^[2]

The incorporated BP Terms provided at section 1.2 that the certificate of quality was only binding for invoicing purposes and did not preclude the buyer’s right to make a quality claim. Section 1.3 stated that the Seller was obliged, under certain conditions, to provide the same quality of the cargo at the vessel’s permanent hose connection in accordance with the quality certificate issued.

Ventspils, Latvia was nominated as the port of loading. Surveyors were jointly retained to perform the quantity and quality inspection and were presented with agreed instructions to, inter alia, obtain representative composite samples from the shore tanks.  After sampling, the analysis done recorded the Total Sediment Potential (the “TSP”) as 0.04%, well below the ISO maximum limit of 0.1%. A then issued a quality certificate in this regard.

The Buyers then sold the cargo on to another buyer who found that the TSP was 0.37%, exceeding the maximum value permitted by ISO 8217:2010. Further analyses were done on the samples collected by the surveyors and a mixture of on-spec and off-spec results were obtained.

The Buyers then made a quality claim against the Sellers. The Sellers claimed that the Recap expressly stated that the surveyors’ quality certificate was to be binding on parties. The Buyers argued that the BP Terms did not preclude a claim for damages.

At first instance, the Judge found no inconsistency between the Recap and BP Terms. As such, the Buyers’ claim for damages was not precluded. Additionally, the Judge found that the cause of the off-spec cargo was of shore origin and that the product loaded was “fundamentally incompatible”. Further, the samples taken were unrepresentative of what was loaded. Therefore, judgment was for the Buyers.^[3]

The Sellers appealed. They contended that the Judge had erred by giving no effect to the Recap term, effectively deleting it from the contract.

The Buyers, by a respondent’s notice, further relied on Section 1.3 of the BP Terms to support their position, submitting that it was a condition of the contract that the cargo received at the vessel’s permanent hose connection would be as per the quality certificate issued by the surveyors.

Court of Appeal Judgment

Lord Justice Males gave the Judgment of the Court (with whom Phillips and Moylan L.JJ agreed).

Males LJ stated that the law regarding inconsistencies or conflicts in documents is well settled.

The starting point is Pagnan SpA v Tradax Ocean Transportation SA [1987] 3 All ER 565 where the Court of Appeal set out the proper approach.^[4] At the outset, a Court should approach the construction of the contract without any pre-conceived assumptions and should not endeavour to avoid nor find an inconsistency. Instead, it should approach the documents in a “cool and objective spirit to see whether there is inconsistency or not”: per Bingham LJ (as he then was). The Court of Appeal then stated that for terms to be inconsistent, they needed to contradict or conflict with one another so much so, “that effect cannot fairly be given to both clauses.”^[5] In that case, the Court held that there was no inconsistency. The parties had agreed that the special terms were to prevail if they were inconsistent with the standard form terms.

Pagnan was followed in the subsequent Court of Appeal case Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496 where the term in question however had the effect of completely transforming or negating the other and was therefore inconsistent.^[6]

Males LJ then set out the need to distinguish between a term that qualifies another and one that transforms or negates it completely.^[7] To ascertain where the present case stood, it was necessary to determine whether the clauses could be read together to give effect to both. A practical approach bearing in mind business common sense was required. The ultimate object was to determine the intention of the parties from the language used in the relevant commercial setting.^[8]

In his judgment, Males LJ found that the Recap clause meant that parties agreed that the quality certificate was intended to be binding for all purposes. However, when read against Section 1.2 of the BP Terms, the latter had the result of depriving the Recap term of “all practical effect.”^[9]. The two terms could therefore not be fairly and sensibly read together and were in conflict. The Court gave the following reasons:

1. Firstly, the particular BP Term had the effect of depriving the Recap Term of all effect;^[10]
2. Secondly, a regime that provides for a certificate of quality to be binding is distinct from one that is not;^[11]
3. Thirdly, the Recap term providing the certificate of quality to be binding is a central feature of the contract and it is unlikely that parties wanted to derogate from this through the printed terms (i.e., the BP Terms);^[12] and
4. Lastly, a finding that parties meant a contractual scheme to which the certificate of quality was not binding but merely evidence cannot be a “commercially reasonable interpretation of what they have done in this case.”^[13]

Likewise, and for similar reasons, the Court held that Section 1.3 too had no application as it provided for a different regime altogether from that set out in the Recap which essentially deprives the latter term of practical effect.

The Seller’s appeal was therefore allowed.

Commentary

This case provides a useful guide the interpretation of inconsistent or conflicting terms which we frequently encounter in “battle of the forms” disputes. Courts will look at the terms in question in an objective manner and will not, at the outset, endeavour to avoid or find an inconsistency. The courts will then ascertain, taking a practical approach which considers business common sense, whether effect could be fairly given to both clauses (i.e., whether one clause qualifies the other or negates it completely).  The courts’ ultimate objective is to identify the intention of the parties basis the language used and the relevant commercial setting.

From a commercial point of view, the case also serves as a caution to parties incorporating standard terms into their bespoke agreements, especially in commodities and shipping sectors where amended standard forms are widely used. Contracts should be drafted carefully to ensure that clauses do not conflict or give doubt to one another as this may lead to costly and extensive litigation. Parties should ensure that due attention is given (i) to both bespoke terms and (ii) standard terms but also to (iii) the way they interact. Clauses which determine the hierarchy of different sets of contractual terms can help provide clarity.

The full judgment can be read here.