Oil & Gas: Implied contract for demurrage outside BP Terms

International

In Glencore Energy UK Ltd v OMV Supply & Trading Ltd [2018] EWHC 895 (Comm) the Commercial Court decided that an exchange of emails between parties to an existing crude oil sales agreement was capable of giving rise to a separate implied contract. The result of that implied contract was that the seller was entitled to payment of additional sums for demurrage that were not catered for in the crude oil sales contract. As the crude oil sales contract incorporated the BP Oil International Limited's General Terms and Conditions for Sales and Purchases of Crude Oil it will be of wider interest. 

Facts

Glencore, the seller of a shipment of crude oil (the “Seller”), claimed compensation from OMV (the “Buyer”), for time spent by the vessel waiting offshore for a berth to become available at the discharge port.

The parties had entered into a contract for the sale and purchase of the oil, which was to be loaded in Novorossiysk, Russia and discharged in Trieste, Italy (the “Contract”). The Contract incorporated the 2007 BP Oil International Limited's General Terms and Conditions for Sales and Purchases of Crude Oil (the “BP Terms”). Delivery was to be on a cost and freight (CFR) basis. There was express provision for laytime and demurrage:

Laytime: ‘Laytime allowed at disport shall be 36 hours, commencing 6 hours after tendering of notice of readiness or upon commencement of discharge, whichever occurs first…’

 

Demurrage: ‘…for all time exceeding the allowed laytime, Buyer shall pay demurrage to Seller in accordance with the actual charterparty rate. Any claim for demurrage to be received latest 90 days from completion of discharge otherwise it will be deemed to have been waived…’

 

The oil was carried on a vessel chartered by the Seller. The charterparty was based on the BPVOY4 form, as modified and contained a time limit for demurrage claims. The Buyer informed the Seller, through two emails, that there was congestion in Trieste and asked the Seller to hold the vessel offshore to await further instructions. The Buyer asked the Seller to have the master tender a notice of readiness upon arrival at the waiting area, and then again on arrival at Trieste, and that the notices should indicate the on-board vessel quantity survey of bunkers used during the waiting period, together with details of the demurrage rate agreed with the vessel owner.

The vessel arrived at the waiting area and remained there for 24 days before discharging its cargo at Trieste. More than 90 days later, the Seller claimed the vessel’s waiting time as detention calculated at the contractual demurrage rate, plus the cost of the bunkers used during the waiting period. The Buyer rejected the claim on the basis that it was a demurrage claim under the Contract and was time-barred.

Arguments of the Parties

The Buyer argued:

  1. the waiting time fell to be treated as part of the laytime and demurrage calculation under the Contract; and
  2. alternatively, the Seller’s agreement to hold the vessel offshore impliedly varied the Contract so as to make laytime run from the notice of readiness issued on arrival at the waiting area, with demurrage following automatically.

The Seller argued that the demurrage clause did not apply, but what applied instead was an implied contract, which came into being as a result of the Seller accepting the Buyer’s request in its two emails that the vessel wait for a berth at Trieste. It was a term of that implied contract that such waiting time be paid at the demurrage rate, as well as for the cost of bunkers consumed.

Decision

The Commercial Court decided that the Seller was entitled to compensation for the services it provided to the Buyer at the demurrage rate for the days the vessel spent at the waiting area, and for the bunkers consumed during that period.

Sir Ross Cranston’s judgment analysed the application of the Contract and the arguments as to implication.

Scope of the Contract

The terms of the Contract did not apply to what happened:

  1. It would be “wrong to regard the extra contractual services as though they had been performed to any extent under the contract, for the simple reason they were not”.
  2. The only provision that expressly addressed waiting time was contained in the BPVOY4 form, which was not part of the Contract (it was a part of the charterparty and thus irrelevant), and, in any event, that clause did not refer to the service of a notice of readiness.
  3. Under the BP Terms, the Contract defined laytime as the time allowed for loading and unloading (‘at disport’), and therefore did not contemplate that laytime could run in the middle of the carrying voyage. (No discharging operations were performed at the waiting position and so Glencore’s claim was for detention and not demurrage.)
  4. The notice of readiness issued on arrival at the waiting area did not bring the demurrage provisions into effect. The BP Terms defined a notice of readiness as a notice to load or discharge given by the master to the Seller at the loading terminal, or to the Buyer at the discharge port. The definition did not apply to a waiting period in which there was neither loading nor unloading.
  5. Under the BP Terms, the 36 hour period for the discharge of the oil began six hours after the tender of a notice of readiness, or on commencement of discharge, whichever was the earlier. The notice issued upon arrival at the waiting area could therefore not be a notice of readiness under the Contract.
  6. The Buyer could not explain how time was stopped when the vessel left the waiting area and then commenced again on arrival at Trieste. Nor could it explain how a new notice could be issued on arrival at Trieste when the Contract contemplated one notice (it did not provide for a second notice).

Implied Variation

The Buyer’s argument that there was an implied variation to the Contract involved the substantial re-writing of the laytime and demurrage clauses in the Contract (and the BP Terms). Such significant amendments were not necessary to give business reality to the parties’ agreement, and it was “unlikely that someone in [the Seller’s] position would have agreed to some of the variations consequent on [the Buyer’s] analysis”.

Implied Contract

The Seller’s agreement to the Buyer’s requests that the vessel be held offshore created an implied contract for ‘delay by agreement’, arising when the vessel arrived at the waiting area. It was unrealistic to treat the delay as a breach of contract and the Contract did not apply to the facts. An implied contract was necessary to give business reality to the transaction because, without it, the Seller would not be paid for the waiting time.

The implied contract provided that the vessel would wait in the waiting area for further instructions, and the Seller would be compensated for holding it there. The Buyer’s request for details about the demurrage rate and the Seller’s provision of those details led to that rate becoming the implied quantification of the Seller’s claim. It was a fair commercial rate and met the standard of reasonableness.

Furthermore, the Buyer’s request that the master record the bunkers used during the wait evidenced a further implied term that it would pay for those bunkers. In Sir Ross Cranston’s words: “Why else should [the Buyer] request that bunker records be kept, except that a reasonable person knowledgeable about this trade would expect that a claim for bunkers would follow the request for the vessel to wait?

The Seller was therefore entitled to compensation for holding the vessel in the waiting area, calculated at the demurrage rate, plus the cost of the bunkers used during that period.

Comment

The decision of the Commercial Court can be contrasted with the recent decision of the Commercial Court in Lukoil Asia Pacific Pty Ltd v Ocean Tankers (Pte) Limited (Ocean Neptune) [2018] EWHC 163 (Comm), where it was held that a claim by a vessel owner concerning time “waiting on orders” was a claim for “demurrage” and contractually time barred (see our Law Now here). In this connection, it is significant that the BP Terms reviewed by the Commercial Court governed the sale of crude oil (between oil companies), whereas the terms reviewed by the Commercial Court in Lukoil v Ocean Tankers were from the Exxonvoy 2005 standard (as amended) which, like the BPVOY4 standard, govern charterparties (between and oil company and a vessel owner), and so contain more detailed provisions on the application of demurrage.

The case joins a growing list of authority that payment for detention is typically paid at the demurrage rate (but that this does not constitute payment as demurrage).

It would seem that English law remains reticent to find that a commercial party has implicitly provided services for free outside its contractual obligations to do so; it is not what commercial parties would expect. The Buyer had sought to counter the Seller’s implied contract argument on the basis that the courts only imply a contract when it is necessary to do so (Baird Textile Holdings Ltd v Marks & Spencer plc [2001] EWCA Civ 274, para [17]-[21]), and will not find one to remunerate a party if the situation is already covered by an express contract (Steven v Bromley [1919] 2 KB 722, 727).

However, this argument was rejected by the court. The key point was that without an implied contract, the Seller would not have been paid for its services since the express provisions of the Contract for remuneration by demurrage did not apply, nor was there any agreement to vary the Contract’s terms.

Sir Ross Cranston’s judgment also demonstrates that the words and conduct of parties to existing contractual relationships are capable of giving rise to express or implied contracts. This is particularly where a party has acted upon what was agreed to its financial detriment. Care must be taken when commercial parties reach an alternative arrangement during the course of contractual performance. The Buyer’s two emails requesting that the vessel wait outside Trieste were very short. The fact that such an arrangement was reached via the familiar medium of emails (as opposed to a formally agreed document negotiated by lawyers) did not, in and of itself, detract from its status as a separate and enforceable English law contract.