Oil & Gas: Give me my money back!

What happens when a seller terminates an oil sale agreement for buyer default after the buyer has made payment, but before lifting? Is the buyer entitled to its money back, or does the buyers default relieve the seller of any obligation? The Commercial Court considered this issue in BP Oil International Ltd v Vega Petroleum Ltd & Anor [2021] EWHC 1364 (Comm). The Commercial Courts decision will be of general interest to parties to crude oil and oil products sale and purchase agreements.

1. Background

BP Oil International Ltd (“BPOI”) is part of the BP Group, and operates as a trading entity within that group. Dover Investments Limited (“Dover”) had acquired interests in the Gebel El Zeit Concession in Egypt in the late 1990s, and subsequently sold part of those interests to Vega Petroleum Limited (“Vega”) in October 2012. Over many years, BPOI contracted to purchase crude oil from Dover and Vega (and their predecessors) in a series of contracts (the “Contracts”) which were, broadly speaking, on similar terms. From 2010 onwards the Contracts incorporated BPs General Terms and Conditions (“GTCs”). The Contracts had broadly similar delivery terms, such as:

“6. DELIVERY

Delivery shall be given and taken FOB RAS SHUKHEIR TERMINAL.

At the Buyer's option delivery can be given and taken FIP at the inlet flange of the SUMED system in AIN SUKHNA REGION EGYPT. However such option shall be mutually agreed between Buyer and the Seller, provided that such option shall not result in any additional expense or delay in payment to the Seller”

The delivery clause therefore offered BPOI two options: Classic FOB delivery at Ras Shukheir, or an option to take delivery FIP into the SUMED pipe system at Ain Sukhna.

Over time a number of obstacles prevented BPOI from arranging to uplift the crude oil from the terminal – for example, it was necessary to wait until several months’ production had accumulated before there was sufficient quantity to lift, a vessel then had to be arranged and various approvals and authorisations were also required.

In the event, BPOI was unable to lift in full the quantity of crude oil for which it had paid and, after a period of abortive attempts to negotiate a resolution, BPOI raised proceedings for repayment of US$17,235,448 that it had paid to Dover and Vega for the purchase of a total of 211,837 barrels of Gulf of Suez Mix crude oil (“GOSM”).

BPOI’s primary claim was for restitution based on unjust enrichment, seeking return of the amount paid for GOSM that it had not received. The main issue before the Court was whether the payments BPOI made entitled it to delivery of the GOSM in such a way that, if those were not delivered, BPOI was entitled it to its money back; or whether the payments made were in fact to acquire a right to lift certain quantities of oil and as such were unconditional payments, so that BPOI had no claim for recovery of payments made even if BPOI chose never to lift the relevant quantity of oil in full.

2. Unjust Enrichment

A claim for unjust enrichment is an equitable remedy in restitution that sits outside the terms of a contract – it does not serve to imply terms into a contract and, indeed, does not rely upon the existence of any contractual relationship. It serves to restore to an innocent party a gain which someone else has obtained from them. It is most commonly claimed where a payment has been made or transferred to someone else by mistake and, in essence, applies where a party can demonstrate that:

1. The party (“B”) against whom the claim is made has been enriched;
2. they have been enriched at the expense of the party making the claim (“A”); and
3. it is unjust for B to retain the enrichment.

BPOI asserted that, in order to succeed, it required simply to demonstrate that:

• There had been a total failure of consideration; and
• the Contracts had terminated.

Dover and Vega challenged the claim on a wide range of grounds, which required the Court to consider in some detail the proper approach to construction of the Contracts as well as issues arising from the claimed factual matrix.

3. Judgement

The case came before Cockrill J, and the key issues relevant to the unjust enrichment claim which the Court required to address were:

1. Questions of construction as to the true nature of the Contracts; and
2. whether any of the various grounds on which the Defendants relied were made out, including

a) whether there was a total failure of the basis for BPOI’s payments to Vega and Dover under the Contracts, or whether these only provided an option to lift; and
b) whether BPOI was estopped from contending that Vega failed to deliver the GOSM.

3.1 The true nature of the Contracts

BPOI contended that the Contracts were simply contracts for sale and purchase FOB of crude oil; in contrast, Dover and Vega argued that they were modern commercial contracts with (i) substantial duration and detailed provisions and (ii) various features that were inconsistent with BPOI having a right to demand repayment. As such, Dover and Vega asserted that both BPOI and the Defendants understood the payments to be unconditional, such that BPOI had no option to recover those payments once made.

The Court considered that Contracts plainly on their face provide for FOB delivery. Furthermore, that FOB designation is effectively multi-layered, reflected through not just the Contract but via the documents to which it referred. Thus:

a. There were two explicit and matching mentions of FOB conditions in the Contracts. Clause 5 provided “The quantity of Oil to be sold and delivered by the Sellers FOB to Buyer”, Clause 6 provides “Delivery shall be given and taken FOB RAS SHUKHEIR TERMINAL”.

b. There was also the reference in clause 9 stating the Seller’s share of the Cargo in the shipping documents. Further changes were made over the years to some of the terms consistent only with FOB sales – such as the references to demurrage.

c. The section of the BP GTCs concerning FOB trades provides “the risk and property in the crude oil delivered under the Agreement shall pass to the Buyer as the crude oil passes the Vessel's permanent connection at the Loading Terminal” (section 2.1).

d. Incoterm A4 required the Defendants to deliver the GOSM “on board the vessel nominated by” BPOI with risk in the GOSM passing when it “passed the ship's rail at the named port of shipment”.

The term FOB is one which is thoroughly well known to and understood by everyone who operates in the world of contracts for the international sale and carriage of goods. It is a term which can be seen to have been in use since the nineteenth century. It is useful to merchants to know what that means. The obligations of an FOB seller are trite law:

a. Benjamin's Sale of Goods (11th ed) explains at §20-30: “It is the duty of an f.o.b seller to put the goods on board a ship nominated or designated by the buyer…The place at which the goods are thus delivered is considered to be the place of performance under an f.o.b contract”.

b. Bridge, The International Sale of Goods (4th ed.) at §3.04: “Since delivery occurs when the goods are placed free on board ship, the seller is bound to ensure the shipment of the goods”.

The Court then moved to test that initial view against the factual matrix (making in the process some criticism of the Defendants, as they had not properly pled a factual matrix on which to base the points they made). The Court concluded that, when considered more closely, the Defendants had ‘oversold’ the true position in their submissions and had ignored various genuine factual matrix points that operated in BPOI’s favour. Summarising the conclusions of the analysis he had conducted, Cockerill J explained:

“[173] There is therefore in my judgment essentially nothing in the aggregate which pulls against the natural reading of the words in any way. But in addition, even if there were more ‘heft’ to the factual matrix evidence it is not enough that such evidence creates some sort of tension with the plain reading of the contract. There must – as the authorities make crystal clear – be a route to the construction contended for. The authorities are also clear that if the words are unambiguous the court must honour them. The Defendants would need to show first that their factual matrix creates the necessary ambiguity and then demonstrate a way of arriving at the reading of the contract for which they contend based on the composite of the wording and the factual matrix – presumably by some sort of implied term. This is because at the end of the day what the Court is doing is not optimising the contract with the benefit of hindsight but saying how the reasonable person in the parties’ shows would read that contract in the light of the documents and the other relevant facts…

[178] I conclude without any hesitation that the Defendants’ case on construction must fail. As BPOI submitted, it appears convoluted and extremely uncommercial to the eye of a commodities lawyer; but even putting that to the side and road testing it against first principles, it proves to be simply impossible to reach the pleaded construction in any acceptable way.”

3.2 Total failure of the basis for BPOI’s payments

BPOI’s claim in unjust enrichment was based on the assertion that it had received no consideration whatsoever – a remedy expressly preserved in Section 54 of the Sale of Goods Act 1979 which provides:

“Nothing in this Act affects the right of the buyer…to recover money paid where the consideration for the payment of it has failed.”

Benjamin[1] confirms that the remedy of restitution is available in the case of a failure to deliver:

“Where, after the buyer has paid the price (or part of it) to the seller, the seller fails to deliver the goods…he may either sue for damages, or for restitution of the money paid to the seller…If he sues for restitution, he can avoid the rules of damages, since his claim is for return of the precise sum of money which he paid to the seller, but he must terminate the contract.”

It was common ground between the parties that the Defendants had neither delivered the GOSM nor repaid any amount to BPOI.

However, the Defendants argued that there was not a complete failure on the basis that:

1. the Defendants were required in terms of the Contracts to undertake extensive actions before BPOI was to lift, or could lift, any oil - for example, they had to inform BPOI of the estimated volume available for lifting, give an initial best estimate and to agree with GUPCO actual monthly volumes to which BPOI became entitled; and
2. BPOI received significant benefit in the entitlement which accrued to it to lift the relevant amounts.

However, the Court was not persuaded on either ground: Cockrill J. considered that all of the terms on which the Defendants relied were merely administrative provisions rather than speaking to the substance of the Contracts; the assertion that the accrual of an entitlement to lift was a benefit was simply a re-working of the Defendants’ (failed) arguments on the nature and true construction of the Contracts, and so also unpersuasive. An ‘entitlement to lift’ was worthless if it could never be realised and so did not represent the intended consideration, i.e. actual delivery.

The Court had, however, agreed with the Defendants that BPOI had wrongfully terminated the Contracts - it found that BPOI raising proceedings was a repudiatory breach which the Defendants had then accepted as terminating the Contracts. The Defendants asserted that it would be wrong as a matter of principle to allow BPOI to rely on its own repudiatory breach of contract to find a claim in unjust enrichment based on a total failure of consideration in the circumstances of this case. However, that argument was also unsuccessful, with Cockrill J pointing to the reasoning in cases such as Dies v British and International Mining and Finance Corporation Limited [1939] 1 KB 724, where it was found that a party which repudiates a contract of sale by refusing to accept goods may nonetheless recover the price paid in unjust enrichment.

(The Defendants had also alleged that BPOI was estopped by convention from arguing that the Defendants had not delivered the product. This was dismissed due in no small part to the no oral agreement provision in the BP GTCs and the Supreme Court’s decision supporting such provisions in WB Business Exchange Centres Ltd v Rock Advertising Ltd [2019] AC 119.)

With these defences all rejected, BPOI’s claim for restitution was allowed in full.

4. Conclusion

The Commercial Court’s decision affirms some useful points for those involved in the trading, drafting and administration of crude oil and oil products sale and purchase agreements:

1. Where a contract is expressly stated to be FOB it is trite law that it is the duty of the seller is to put the goods on board a ship nominated or designated by the buyer. Further, the place at which the goods are delivered is considered to be the place of performance under an FOB contract.
2. Where the buyer is given an express contractual alternative to the FOB delivery, exercisable at its option, it should not usually convert the contract into non-FOB delivery whereby the buyer is deemed to have received consideration (by way of an alternative right to mode of lifting) absent FOB delivery by the seller.
3. Further, where the seller is required to carry out certain administrative acts prior to delivery, unless expressly stated otherwise, these will rarely be considered to be a condition to its obligation to deliver such as to render the payment unconditional but the delivery of oil conditional.
4. If the express contractual terms are clearly expressed to be FOB (or, to use Cockerill J’s characterisation: “an FOB shaped transaction”), it is unlikely that any extraneous evidence will change this position to a non-FOB contract.
5. If delivery is not made when the contract is terminated, the buyer will have suffered a total failure of consideration and be entitled to repayment of the contract price.
6. The above includes circumstances where the buyer has committed a repudiatory or renunciatory breach, and it is the seller who has brought the contract to an end.

In relation to the final point – sellers beware !

[1] Benjamin's Sale of Goods (11th ed)