Oil & Gas: Oral contract – which court may hear the case? 

England and Wales

In Addax Energy SA v Petro Trade Inc [2022] EWHC 237 (Comm), the Commercial Court considered an application concerning whether an alleged oral contract for the supply of petroleum products contained an English jurisdiction clause. The Court determined that the claimant had a good arguable case that an English jurisdiction clause was incorporated into the alleged contract by way of a previous course of dealing, such that the jurisdictional challenge failed. In reaching its conclusion, the Court held that a course of dealing does not need to be extensive or entirely consistent, so long as the course of dealing has a plausible evidential basis in light of all of the facts.

Facts

The claimant, Addax Energy SA (“Addax”) is a Swiss petroleum supplier. The defendant Petro Trade Inc (“Petro Trade”) is a major Liberian petroleum importer. Addax and Petro Trade entered into a written secured distribution agreement pursuant to which Addax would deliver petroleum to third party tanks in Monrovia, Liberia from which Petro Trade could then obtain that petroleum (the “SDA”). The SDA was not a contract for the sale of goods between the parties. The SDA envisaged that Addax and Petro Trade would enter into subsequent sale contracts.

As contemplated by the SDA, Addax and Petro Trade subsequently entered into 15 supply and spot agreements, which were agreed informally by telephone. The parties would agree the product, quantity, price and delivery of the petroleum. Addax usually, but not always, recorded the essential terms in a recap email which was sent to Petro Trade. The recap emails did not themselves contain any provision as to jurisdiction; however, Petro Trade often responded to Addax’s recap emails accepting those essential terms. Occasionally, after Addax sent the recap emails, it also sent a ‘spot contract’ which contained more extensive written terms including an English governing law clause and an English jurisdiction clause.

It was common ground between the parties that on or around 3 January 2018, the parties held a telephone call regarding the conclusion of a long-term contract for the sale of petroleum covering multiple shipments (the “Term Agreement”). The parties disagreed about whether a contract was formed at all on the call; Addax claimed it was and Petro Trade claimed it was not and that it merely asked Addax to provide draft terms that could form the basis of negotiations. It was common ground between the parties that there was never any discussion about which court would have jurisdiction.

A dispute subsequently arose between the parties pursuant to which Addax brought two claims against Petro Trade:

  • A claim for US$532,506.86 plus interest under a contract allegedly concluded on 25 August 2016 (the “Gas Oil Contract”); and

  • a claim for US$2,228,901.92 plus interest under the alleged Term Agreement.

Addax served Petro Trade in Liberia, without permission, relying on CPR rule 6.33(2B)(b), which enables a claimant to serve a claim form on a defendant outside of the jurisdiction without the court’s permission if there is an English jurisdiction clause in the contract.

>Petro Trade took no issue on jurisdiction in relation to the Gas Oil Contract but challenged Addax’s entitlement to serve outside of the jurisdiction in relation to the Term Agreement. It did so on the basis that it claimed that Addax had no good arguable case that the alleged Term Agreement contained an English jurisdiction clause. The case before the Court was essentially whether it went without saying that at the time of the parties’ January conversation, an English jurisdiction clause was incorporated because of a previous course of dealings.

Decision

It was common ground between the parties that the claimant must show that there is a good arguable case that the contract being sued upon has in it a term to the effect that the court shall have jurisdiction to determine the claim in respect of the contract (Marubeni Hong Kong v Mongolian Government [2002] 2 AE (Comm) 873 at [15] by Aikens J). In determining whether there is a ‘good arguable case’ the Commercial Court referred to the Court of Appeal case of Kaefer Aislamientos SA de CV v AMS Drilling Mexico SA [2019] 1 WLR 3514 at [70], which quoted Lord Sumption JSC in Goldman Sachs International v Novo Banco [2018] 1 WLR 3683. Lord Sumption JSC held that the test for determining an issue about jurisdiction was that the claimant must supply a plausible evidential basis for the application of a relevant jurisdictional gateway.

>On that basis, the Commercial Court confirmed that the key issue between the parties related to whether Addax was able to supply a plausible evidential basis for the application of the relevant jurisdictional gateway, i.e. whether Addax’s terms in its written spot contract document had, by 2018, become the standard terms on which Addax and Petro Trade traded because of a previous course of dealings. 

The Commercial Court determined that Petro Trade’s jurisdictional challenge must fail.

In making its decision the Court referred to the test in Chitty in relation to a course of dealings (at paragraph 15-015) which states:

Conditions will not necessarily be incorporated into a contract by reason of the fact that the parties have, on previous occasions, dealt with each other subject to those conditions, but they may be incorporated by a course of dealing between the parties where each party has led the other reasonably to believe that they intended that their rights and liabilities should be ascertained by reference to the terms of a document which had been consistently used by them in previous transactions”.

In addition, the Commercial Court referred to a number of authorities including, Transformers & Rectifiers Ltd v Needs Ltd [2015] 159 ConLR 33 and Circle Freight International (T/A Mogul Air) v Medeast Gulf Exports Limited (T/A Gulf Export) [1988] 2 Lloyd's Rep 427, confirming that it was clear from those authorities that the course of dealings need not be extensive or consistent but what matters is whether there is sufficient consistency. The Commercial Court emphasised the importance of stepping back and reviewing the facts of the case against the type of relationship and the type of transaction which is occurring. In taking this step, the Commercial Court noted that the alleged oral Term Agreement arose in the context of a series of contracts occurring within the petroleum industry where, as anyone familiar with the industry would be aware, parties often agree supply contracts informally. In the case before it, the Commercial Court reiterated that it was common ground that throughout the parties traded informally, substantially over the telephone, talking about commercial essentials only, with confirmations of agreed trades following in the form of written recaps sometimes accompanied by spot contracts.

The Commercial Court determined that it was perfectly plausible that a term agreement was reached and that the question before it was in relation to the course of dealing. Taking into account the background between the parties, the Commercial Court held that there was a plausible evidential basis that there was a course of dealing between the parties such that there existed a jurisdiction clause within the Term Agreement. In making its determination the Commercial Court, amongst other things, held that: (a) there were numerous contracts on terms which contained the English jurisdiction clause; (b) the terms of the spot contract (which were key in that they contained the jurisdiction clause) were terms effectively contemplated between the parties when they negotiated their long-term SDA and there was no suggestion of any other competing set of terms between the parties; (c) although there was a lull in the degree of consistency in sending the spot contact terms there was no suggestion between the parties that when terms were not sent anybody argued that there was no contract; and (d) Petro Trade never questioned why recap emails had not been sent by Addax.

Comment

Documenting the Agreement:

From a practical perspective, this case serves as a useful reminder as to the benefits of: (i) a legally binding ‘framework agreement’ (or ‘master agreement’) for hydrocarbon transactions to be subsequently carried out between traders; (ii) that such ‘framework agreement’ (or ‘master agreement’) contain a governing law and jurisdiction/arbitration provision (as appropriate) to ensure that there is a clearly applicable legal test for whether a binding obligation to sell and purchase is subsequently entered into and that the jurisdiction for enforcement of rights is clear; and, (iii) possibly, the provision in such ‘framework agreement’ (or ‘master agreement’) for formalities by which an oral trade/recap becomes a legally binding obligation.

Taking such steps shall not only reduce the issues which the parties found themselves disputing in this case, but shall also reduce the risk of satellite ligation, which for all parties involved is highly undesirable. In respect of LNG trades, the AIPN provides a model master sales agreement. There is less of a common market practice in respect of oil producers and crude oil trades.

Boilerplate Clauses are Important!

The case is notable for addressing a point which might have been considered to be outside the main commercial deal, i.e. the jurisdiction for disputes. Provisions concerning how an agreement works and which address legal matters common to many commercial transactions (“boilerplate clauses”) will, for understandable reasons, rarely receive as much attention as the commercially sensitive items. But this case serves as a reminder that such provisions are important and perhaps, at the very least, parties should be clear as to the jurisdiction and the governing law for disputes, both of which can have a significant impact on the interpretation and effect of the ‘commercial’ terms.

Evidence for Course of Dealing:

This case highlights the relatively low threshold required to be met for the purpose of determining an issue about jurisdiction; all that the claimant must supply is a ‘plausible evidential basis’ as set out in Goldman Sachs.

In respect of what is necessary to show the incorporation of written commercial terms by a course of dealing, the Commercial Court was able to distinguish a number of authorities raised by Petro Trade on the basis that they were limited to different situations (such as battle of the forms including transmission by fax or issuance of invoices which referred to terms but did not send them) and that parallels could not be drawn. On the facts of this case, the Commercial Court was able to establish that the documents did contain standard terms and that there was a clear course of dealing that did not need to be extensive or entirely consistent.

Of particular interest to those in the oil and gas industry, the Commercial Court referred to the decision of the Technology and Construction Court in Transformers, which explains that where trade or industry standard forms exist for the type of transaction in question, it will usually be easier for a party contending for those conditions to persuade the court that they should be incorporated. This case demonstrates though that the threshold for incorporation of terms is also relatively low when considering a party’s standard terms applied in previous dealings. In either case, reasonable notice of the application of the terms should be given by one party to the other (see also Circle Freight).