Today international oil trading industry has been characterized by the dominant position of Multinationals, major traders and NOCs. In return, they all received a stream of income through oil trading under enforceable contracts. Our focus is not only on the mechanism of oil trading market but has to be the words and the parties’ conception of the sales contract to be signed.
We ask what the parties’ intention at the negotiation process and what the words in a preliminary written agreement would mean for Judges. The answers necessitate that promises in negotiation should manifest an intent to be bound and meeting of minds for a potential transaction should be clearly understood through the view of the 3rd party.
1. What is Physical Oil Trading?
Oil trading is mostly categorized into two groups: Physical oil trading & Paper trading. Considering the aim of this article, physical oil trading is purely transferring the title and risk of crude oil from one party to the other at a specified time and location under a variety of contract type including ‘spot’ transactions or ‘term’ contracts[1].
Physical oil trading is the lifeblood of world economy and equally important, of political strategy. That’s the reason why oil trading includes globally competitive and highly liquid deals. Before entering a deal, making a good decision in crude market, depending on some key factors, i.e. security of supply, price speculations, price volatility, transportation of oil, etc., is based on knowledge, experience and insight. When looking at the big picture, the vital issue, however, is not to make a decision but to make a solid and binding contract. What has motivated me to undertake this subject is that I was relatively high up in physical oil trading business at various petroleum companies in Turkey and in the mood for uncertainty, volatility and insecurity in energy market after the collapse of crude prices, one of the core requirement for Turkey is to break the resource-poor State perception and overturn its potential to become a regional midstream[2] player with the help of locational leverage. That concern shapes our quest: Shall we be ready to response effectively when confronting an ordinary contract dispute under the general practices of oil industry? or Shall we know how to react legally in the absence of judicial consciousness and educated professionals?
Let’s closely look into the trading business. In trading business, energy commodities are comprised of crude oil and oil products, natural gas and coal. Physical oil trading, however is relatively a difficult part of that business. Daniel Jaeggi, Vice President of Geneva-based oil trader Mercuria, simply replied what the trading is question that the physical oil trading is bringing the oil from a place where the people do not need them to a place where they are needed[3].
What concern us here is that we have to visualize the physical oil trading cycle in spot sales before getting deeper understanding of crude oil sales contract. Typically there are three major players, participated in crude deals. Producers such as International and National Oil Companies (IOCs & NOCs) are on the Seller side of deals. Conversely, Refiners are on the Buyer side. Lastly, Oil Trading Houses together with IOCs and NOCs are in a position to be both Seller and Buyer. How to be on both sides in general? Under a fluctuated change in fundamentals in oil markets, these players adopted their structures by vertical integration. The words of other, they have owned not only production fields but also refineries and other related facilities between them. Unlike the integrated companies, Trading Houses offtake oil from producers of all sizes and manage its trading, storing, financing and supply to refineries. In short, they have started to buy and sell crude oil in physical and derivative market in order to maximize their profits and live longer.
Another important point is that up to 90% of World oil trade is seaborne and about 70% of the vessels carry commodities that includes oil tankers and bulk carriers. Important oil trading hubs are located in Asia, Europe and North America. For example, Rotterdam is the Europe’s largest trading port. In this respect, if you are a producer and do not have a logistic, then you should sell your crude cargo on a FOB basis that means title and risk of oil pass to the buyer or trader once delivered on board to ship by seller because physical oil trading involves freight transport mostly by ship. That clearly shows us the major activities of trading houses involves buying crude oil, shipping it from loading terminal to discharging terminal at higher price in order to cover their costs and make a profit[4].
Ultimately, transactions between oil traders and buyers end up either long term crude supply contracts, generating the majority of refinery contracts or one-off deals on the spot market[5]. Extensively, one-off deals for immediate delivery are rare. Instead, the parties choose to agree on the price at the time of contract, in which case the one-off deals becomes closer to a “forward contract”. More specifically, the pricing of a cargo is mutually linked to the time of loading[6] and then, sale contract has transformed to an intertemporal attitude that parties agree today to exchange trade promises later[7].
2. Contract Formation Based on English Contract Law
The law of contract is about the enforcement of set of promises[8], the breach of which the law gives a remedy. To make the promises enforceable, judges consider the contract as a whole with all surrounding facts of the particular deal and seek the presence of certain elements. These elements essential to form a contract are to be found both the negotiation correspondences and in the contract itself[9].
At any transaction, the “What evidence of objective intention does the law require?” question has an intense dimension in commercial deals as contracts are based on substantial negotiation related to exchange of cash for goods and spells out the duties and responsibilities of each contractual party. So, the process begins with an offer. An offer is a proposal by the “offeror” to enter into a contract. That is to say, it must be made with the intention to become binding upon acceptance. When considering the status of commodity supply tenders, company selling the goods sends an Invitation to Tender (ITT), the people willing to buy them makes the offer. Still controversial, an ITT for a definite quantity of goods to be sold or delivered at a specified time is either held to be an offer or an invitation for offers to be submitted. Clearly the latter’s acceptance does not create a binding contract. Then, Acceptance occurs when the “offeree” accepted the offer by conduct or by words. Objective intention can clearly be seen in the response giving an assent to offer in terms of offer precisely. Note that, a contract is formed by unconditional acceptance to the precise terms of offer. This is called ‘Mirror Image Rule’. Where the offeree accepts something more than promised in the offer, a counter-offer, qualified expression of assent, does not constitute a binding acceptance[10] but causes a position reversal. The original offer is effectively terminated and the counter-offer itself become an offer. If it is not rejecting the original offer, then the offeree can bargain for different terms.
An offer continues to exist until it expires. Therefore, the offeree must accept it within the specific time. If no such time is mentioned, duration of offer will expire within a reasonable time[11] objectively understood by a reasonable person. Equally important, consideration[12], which turns a gratuitous promise to a prompt commitment, is essential to restrict the offeror from revoking the offer. However, as an exception “firm offer” as defined at UCC §2-205 is an offer that cannot be revoked for a certain period of time stated in the written offer[13].
It is also particularly important to determine when the contract is formed if the parties interact for negotiation via e-mail. It is a general rule that an acceptance is effective as soon as the offeree dispatches it for communicating to the offeror. Under contract law for determining the time at which an offer is accepted, the ‘Mailbox rule’ states that an offer is considered accepted at the time when it is placed in the mailbox[14].
Ultimately, for an agreement to be a contract, it must be required to settle on the terms of the contract. Contract terms can be categorized into express terms and implied terms. Express terms are those agreed between the parties themselves in the contract. So, the court easily finds out the parties’ intensions in the document itself. Indeed, “ordinary and natural meaning” of the words, as a solid rule, will be found as they are written down[15]. If an express term is not fulfilled, the innocent party may bring an action for breach of contract. However, things are not that simple in practice as can be seen later sections since defining a contract to be formed even if all express terms were agreed before can be controversial issue for contractual parties. Conversely, implied terms are secondary terms which are not expressly stated but which are implied. The parties show their assent by conduct rather than by clear words. In particular trades or industry, court will apparently recognize the implied terms into the contract as of its reflection of the particular industry’s standard practice[16].
In contract law, some concepts such as offer, acceptance, mutual assent and intent should be considered within contract’s entirety under the doctrine of ‘consent’. In other words, mutual assent to a contract is maintained when a party makes an offer and the other is accepted under an intention to be bound by contract terms. Courts have to rely on observable evidence to ascertain whether parties consented. But in reality, parties either could have intended to enter into contract and signed the contract and yet there might not be actual “consent” or could not have kept their intention despite giving consent to transaction. In event of any dispute arising out of the contract, courts should find out the elements of mutual assent forming the contract. In the absence of contract, neither party will be bound to the conditional promises they have made.
Necessarily, “Consent” doctrines have been developed by courts to assist contractual parties in a dispute. Objective approach has been adopted to make sure the certainty of contracts and other party’s reliance on the promisor’s manifestation. This approach provides the court to assess the expression of Parties’ intent. For assessing whether a party has consented, courts focus on evidence such as contract signature, spoken words or written correspondences, or other actions related to transactions. However, it is important to bear in mind that continued reliance on “Consent” will create a deeper disconnect between contract law and market realities[17]. Therefore, it is perhaps understandable to consider the special features of market of the time of contracting when trying to resolve particular uncertainties arising out of the contract.
Contract law also contains a number of doctrines tend to support the written contract considered to be the best evidence of parties’ consent. For example, “Four corners doctrine” advocate that the judges must stay within the four corner of the contract when interpreting a written contract to be sure the parties’ intention[18]. Likewise, “Plain meaning rule” focuses on contract’s plain meaning if the terms of the contract are obvious and enough clarity[19]. The classic doctrines ignore the subjective intent of the contracting parties and advocate textualist approach to determine what was agreed upon. But whatever one’s opinion on the subject matter, the focus is not on the language-based approach but rather contractual parties’ intentions under meeting of minds as a final expression.
3. Express Terms of Oil Sales Contract
Oil Sales contracts are sui generis contracts including the details of special operations and technical terminology that requires a unique interpretation. Because of the very nature of what is being supplied, contractual parties are aware that the subject matter of the contract (i.e. crude oil) may well be discharged and processed in refinery in whole or in part before payment is due. This is important because the contract enforces certain obligations that must be satisfied before the seller demand the payment.
In volatile oil markets, buyer have a chance to make a spot purchase (a simultaneous exchange of cash for oil cargo) or an enforceable contract for future delivery. In order to make a contract first thing has to make a tender. A to-do list for oil sales starting with Invitation to Tender (ITT), seller is sending an offer of a specific spot cargo with the intention of becoming binding upon acceptance and asking a price differential as a premium or a discount. To form a contract, there must be an acceptance of the offer by words or conduct. By the very nature of the oil market that have frequently fluctuating prices, the offer is to expire within a relatively short time period such as hours or a day. If buyer, in theory, send an acceptance, it can be an amicable consensus on needed terms that would form the contract. In many cases, buyer generally reply back a counter-offer consisting of a required price differential with new negotiable terms. That’s not an ‘Acceptance’. Under tender rules, seller finally send a confirmation to winning offerer in accordance with mutually negotiated offer[20].
Ultimately, parties agree on an email recap setting out the terms. Recap is a common practice relating to formation of the contracts in oil trade business. It is an obvious recognition that key terms of the contract, set out in that recap, are concluded. This process ends up seller’s sending the sales contract that should be arranged in accordance with the agreed recap terms. As is common for such contracts of sale of goods when a conflict can lead to a contractual dispute, the judge will directly look at the express terms, forming the recap content.
Terms or clauses are the contents of a contract. It is quite routine for oil trading to have a standard form written terms which cannot be quite lengthy. The reason is that General Terms & Conditions for Sales & Purchases of Crude Oil (GTCs), providing a commonly known, commercially neutral set of terms are usually incorporated into all sales contracts with the Seller. Of course, contractual parties may use it on a voluntarily basis for reducing negotiation time in each individual deals.
Let’s look briefly to GTCs. GTCs are a set of standardized contract terms that can reflect the changes periodically in market practices. It can be either for crude oil or for petroleum products. In Oil GTCs, separate parts have been introduced as subsections under free on board (FOB), cost, insurance and freight (CIF), cost and freight (CFR) and delivered ex-ship (DES) deliveries[21]. The scope contains key terms such as operational procedures, payment, events of default, termination, dispute resolution and time limit for claims. Needless to say, in the event of any inconsistency between the GTCs and the terms of sales contract, the terms of the contract shall always prevail[22].
In line with above explanations, Crude oil sales contract should also include various significant terms that forms the subject matter of the sales contract. In a typical crude oil sales contract, the following terms, given in detail shall define the specified crude cargo of the Seller.
In ‘Quantity & Quality and Determination of Quality’ clause, cargo will be defined as a “Nominal Volume” (e.g. 600,000 barrels or 80,000 Mtons, etc.) plus or minus 5% in Seller’s or Buyer’s operational tolerance of 195 major crude streams or blends of the quality available at the loading terminal at the time of loading. The operational tolerance shall be arranged with respect to the crude level in loading terminal, Seller’s lifting entitlement, Buyer’s requirement and/or cargo intake capacity of vessel. Contractual specifications, dealing with the oil’s quality not its description, frequently vary from the final delivered specifications in crude blends. In Quality clause, parties, therefore shall agree on an Independent Inspector to sample and test the crude to define typical specification. Quality should reference to this sample as a final and binding test result. Unlike products, typical specs, not much wider in variety, are the API gravity, water, sediment and Sulphur content. However for any brand new crudes or unstable quality crudes, the Seller shall give warranty to supply the same quality crude as appreciably no worse than the specifications, tested by independent inspectors and attached to sales contract[23].
According to ‘Delivery & Laytime’ clause, delivery type (e.g. FOB, CIF, etc.) shall be identified under INCOTERMS rules. In this respect, seller undertakes to deliver and buyer undertakes to receive one separate full cargo lot delivered agreed delivery type at one safe and always accessible port or berth during the agreed delivery dates. Moreover, the declared laycan[24] by Buyer or Loading terminal shall be included. It is important to note that Seller should provide the ‘Berthing restrictions’ either in ITT document or in contract. Seller shall be allowed laytime, a period of time agreed between parties during which the owner will keep the Vessel available for loading or discharging without payment[25]. If the vessel exceeds the agreed laytime, buyer has an independent obligation to pay for demmurage incurred at the loading port after deduction of laytime allowed.
In Payment & financial security clauses, payment should generally be done 30 days from the Bill of Lading (B/L) issuing date pursuant to the industry practice. However, payment date should be negotiated to shorten for earlier cash flow. Generally, irrevocable documentary or stand-by letter of credit (L/C) is required of the Buyer. Two-point call for special attention: To meet the Seller’s requirement it should be both in a form acceptable to Seller and issued by the Buyer no later than 3 or 5 days prior to the first day of the agreed loading window. If buyer’s L/C is not opened until the loading dates, seller has right to reject the commencement of loading crude oil to vessel even berthing at the terminal. Needless to say, the buyer shall indemnify seller for any losses, damages and especially costs imposed by loading terminal. After loading operation finished, payment would be made against the presentation of certain documents including copy of the signed & stamped invoice evidencing the value of the crude cargo delivered and an original certified B/L documents[26].
Of course, in each and every oil sales contract there have been several differences in accordance with the risk attributable to the transaction and operation.
4. Disputes Raised From Contract Formation
Resolving an oil deal dispute depends on the nature of the parties involved. When it comes to dispute between companies, there are two likely routes for resolution: Arbitration and Court litigation. Choice of forum depends upon several factors; Nature of transaction, Parties’ intention, Power of enforcement, etc. The selection, however are often influenced by, frequently, unfavorable experiences in either forum. Arbitration or litigation, whichever is drafted, oil sales contracts are ordinarily signed under English law as it is widely regarded as customary market standard for global petroleum business.
Further to the significance of this issue, it needs to be known that emerging market countries like Turkey, which may have weaker judicial infrastructure, have not enforce their judicial system as a dispute resolution option into the contract. Due to the procedural reasons, Turkey experienced the international crude players’ rejection of imposition proposal for Law of Turkey as applicable law during the first commencement of oil marketing that clearly shows us the prudent petroleum industry practice on the subject of ‘Applicable Law’.
By its very nature, the most frequent disputes occur during negotiations and immediately afterwards of the contract formation between the Seller and the potential Buyer. So, our aim may shed light on the understanding as of how the judges in the leading cases have formulated and refined the relevant principles of law by interpreting actual cases.
4.1 Vitol S.A. v Conoil PLC
First decision was given by the English Commercial Court, Vitol S.A. v Conoil PLC (22 May 2009), considered an important issue whether a sales contract is formed[27]. The case was about the requested damages caused by Defendant’s breaches under a contract whereby Defendant agreed to buy 60,000 Mtons of oil product +/- 10 % at seller’s option for delivery ex-ship in four lots on various dates between 15 August and 14 September. The contract had been signed between the Claimant as seller and the Defendant as buyer and partly performed by issuing L/C and taking the delivery of half of the amount as one lot. Immediately after the first physical delivery, second contract for the same amount and same standard oil sales terms[28] as before was concluded by phone and its contract hand delivered to Defendant. That gave an evidence that the deal had been concluded and second contract had been entered into effect.
In English Law, court tries to find the “ordinary & natural meaning” of the words as they are written down and objective approach should be used to determine the meaning of words in question. First evidence that mostly satisfied the court was the plain text from the e-mail dated 3 September, showing us the Defendant recognized to be bound by the terms of the first and the second contract. The e-mail said that it intended to lift the 30,000 Mtons under the second contract but asked the Claimant “to outrightly cancel the 30,000 Mtons” under the first contract “at no cost or damage claims to Conoil”[29]. Although it is sometimes said a “meeting of minds” was required for contract formation, objective assent of Defendant, partly performed the first contract is also enough to satisfy the contract formation. There was not sufficient evidence to depart from the traditional analysis in this case. Above circumstances totally satisfied Mr. Justice Teare that all of the context surrounding the agreement was agreed and the contract was formed[30].
However, the Defendant did neither nominate the daughter vessel and failed to lift any cargo to be agreed nor open letters of credit for the balance of the oil to be bought under the first contract. Clause 10 of the contract provided inter alia as follows:
“Payment to be secured … irrevocable documentary letter of credit … … seller shall not be required to discharge the mother vessel prior to receipt of such L/C … In case the L/C is not made operational to sellers satisfaction … at seller’s option, seller has the right to (1) terminate the contract and claim damages …”
Above clause confirm that Claimant was not obliged to discharge till L/C had been issued and could terminate the contract if it had not been issued by a particular date. In respect of Claimant’s seeking damages, Defendant argued that the L/C was the ‘final binding document’ between parties and until the issuing of L/C, no contract entered into force between them and Claimant. When interpreting a written sale contract, Mr. Justice Teare iterated that there was nothing in those contracts to suggest that issuing a L/C was a prerequisite condition to the contract becoming enforceable[31]. By then, the court held that by failing to lift the cargo, Defendant was in ‘repudiatory breach’[32] of those contracts and Claimant was entitled to damages.
4.2 Proton Energy Group SA v Orlen Lietuva
The background to the second dispute is an email dated 14 June 2012 whereby the Claimant, Proton Energy Group SA, sent a ‘firm offer’ to sell the Defendant, Orlen Lietuva, 25,000 Mtons of Crude Oil Mix (+/- 10% @ Seller’s option) for delivery CIF Lithuania. The cargo was European origin as per the T2L document, essential for intra-EU transfers and had a technical distillation data attached to offer with a laycan at discharge port during 10-15 July which shall be narrowed to 3 days and at a price based on 5 quotations after B/L date. Other terms included “UK law; London Courts”; “All other terms & conditions as per seller’s standard CIF contract”; and “This offer is valid till 14 June 2012 COB and we would appreciate your kind reply in respect of timing”. Thereafter, the correspondence between parties stated that[33]
- 3 days laycan was acceptable by Defendant and agreed by Claimant,
- Laycan would be narrowed by 1 July 2012, though Defendant requested final confirmation between the dates of 10-15 June and agreed by Claimant,
- L/C was acceptable by Defendant provided that the text would be accepted by Defendant’s finance department,
- The discount request resulted in the acceptance of fixed price as per the confirmed offer,
- All other contractual terms not indicated into the offer shall be discussed and mutually agreed upon contract negotiations.
On the same day the Defendant’s mail finalized the deal by stating ‘Confirmed’. In this respect, Claimant recognized the contract done. The Defendant, however disagreed.
A question of whether a contract was concluded call for special attention. In RTS Flexible[34]Clarke L.J. stated that the decision of a binding contract formation depends upon both parties’ subjective meeting of minds and magnitude of communication between them by words and attitude. In order to be regarded as a legally binding relationship under law, the former facts lead objectively to a conclusion presenting parties’ intend to be bound and agreed upon all terms.
In practice, we have experienced ‘subject to contract’ case many times that the parties mutually agreed on all terms of proposed contract, nonetheless the contract shall come into force till some formalities or further conditions have been fulfilled. The words of other, to resolve practically whether a contract has been formed, first mutual correspondences should carefully be reviewed. In interpreting the correspondences as a whole, the starting point is the existing agreed terms so called ‘Recap’ in international oil industry. Even each case turns on its own fact; Recap is often accepted a tool for confirming deals. As evidence, consider the speed and the dynamics of oil market that requires parties’ prompt consent on main terms and leaves the remaining ‘to be discussed and agreed’ later. If this seems not enough, here is the connection; no trader would deny that a deal has done over telephone or via Y! Messenger or e-mail. Then, all the subsequent negotiations were turned out a set of terms called Recap. At the end of the day, confirming a recap is admitted as a solid and binding contract. Secondly, we should find out whether parties recognized themselves to agree on objectively enough statements that amount to terms of the contract when the contract is regarded to be effective and legally enforceable.
In present case, first evidence is the ‘firm offer’ phrase, showing us a binding commitment of Claimant, required a Defendant’s precise acceptance or rejection in reply. Other indication in offer was expressed sharpening and limiting of the time by stating ‘valid till 14.06.2012 COB’. The judge considered that ‘time-limited firm offer’ could not admit laziness but need to immediate negotiation and urgent commitment. Finally, Defendant replied to the firm offer with some amendments but accepted other terms including ‘All other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contract negotiations’. This settlement should be construed on the basis that the parties have a solid intention to be bound right away against further terms to be agreed.
Suffice it to say that the contract came into existence on 14 June when the Claimant accepted the counteroffer and replied as ‘Confirmed’.
4.3 Glencore Energy UK Ltd v Cirrus Oil Services Ltd
The issue is a topical one because, as we pointed out in the former cases of this article, there has been an increase amount of dispute in relation to contractual formation in oil supply and trading business. This was an application by the claimant (“Glencore”) for seeking damages from the defendant (“Cirrus Oil”) in connection with the alleged contract, made on 4th April 2012. Firm offer in question were done between parties for the sale of 630,000 barrels (plus or minus 5% at Glencore’s option) of Ebok[35] crude oil at a price of DTD +$0.15 per barrel CFR Tema/Ghana.
Sequentially, the first email, stating, “Cirrus Oil Services, one of our clients in Ghana, is looking for crude proposal for TOR (Tema Oil Refinery) for 600,000 barrels March 15-20 delivery. Kindly revert on grade and premium over Dtd Brent” was sent by Glencore’s consultant to the crude trader of Glencore. After further correspondences regarding Glencore’s offers for different grades of crude, an email recap, sent by Glencore on 30th March, was forwarded to Cirrus Oil by the consultant under the heading “Ebok FIRM offer”. It was offering to sell 630,000 bbl + 5% Seller’s option of Ebok grade CFR Tema. The offer warranted the Ebok to be “Normal export quality” with relevant assays attached. The offer began with the sentence:
“As discussed in an effort to get this wrapped up today as our 1st crude oil deal with Cirrus, we are willing to offer the following firm (until 6pm this evening) which should now be doable with TOR.”
Email acceptance under the heading “Re: Ebok FIRM offer”, sent by Cirrus trader, read as follows:
“… Good news! TOR has agreed to the June cargo. Will revert on the fine tuning of the contract terms so that it’s back to back with ours …”
However, when the refinery with whom Cirrus made a deal would not accept the cargo in consequence of Ebok’s blended nature, Cirrus Oil refused the cargo that Glencore purchased the related cargo from SOCAR.
Firstly, the dispute under the Cirrus Oil argument was about whether there had been a concluded contract between Glencore and Cirrus Oil. In that case, there is no doubt that such expressions as “our first crude deal with Cirrus” and “wrapped up today” here mean “seller’s intention to perform the deal with a binding contract”. The “firm until 6 pm that evening” means lapse of time till which the buyer was imposed for acceptance. Equally important, the “good news” mail from Cirrus side was a clear acceptance of the Glencore’s firm offer. Secondly, Cirrus Oil’s argument that no contract had been formed derived from the justification that the email recap excluded the key terms of deal confirmed. It is however, common ground what the underlying message in “fine tuning of contract terms” expression is to the affirmation of express terms set out in the firm offer and the expectation of adjustments in detailed terms. In the Judge’s view, Glencore’s recap terms were quite comprehensive in the firm offer in which all the expressed terms were clearly set out and the detailed terms of 2007 BP CFR GTCs were integrated. Some support for this view can be found in RTS Flexible v Molkerei [2010] Lord Clarke said at paragraph 45 that despite several missing terms regarding financial and/or other related issues, the words or behavior of Parties’ under objective appraisal pointed out that they did not want to make such terms as a pre-condition of a concluded and legally binding agreement.
What was the minimum content would depend on the circumstances of the individual contract in question. Unlike commercial common sense and the surrounding circumstances, it is succinctly the contractual parties’ decision and control when considering them whether important or unimportant.
5. CONCLUSION
Contracts are ‘off the record’ set of terms and conditions to which the parties have consented. In this respect, contractual parties should choose the rules that regulate commercial transactions according to the criteria of welfare maximization and dispute minimization.
Oil sales contract has an intertemporal aspect: Parties agree today to deliver the cargo and to make the payment a month later. It is especially important for buyer’s in ‘thick’ markets[36] to make an enforceable contract after completion of negotiation for future delivery. When finding the answer of whether there was an enforceable contract, one can only take into account all surrounding facts of particular deal and the presence of certain elements.
First and foremost, facts or circumstances of each crude deal that existed for both parties at the time of the negotiation have to be known or logically available to both parties. The circumstances known only to one of the parties cannot be considered. The past transactions concluded successfully are a good example to define actual facts between parties in the context of crude oil and product purchases. The words of other, the Courts can be expected to interpret the repetitive conducts of Parties as ‘Trustable Facts’, if the Parties’ reciprocal act in respect of same subject matter become an implied consent. To make our evaluation more concrete, suppose all the prior transactions in which both parties involved were about Gasoline cargo. When there has been an email discussion on the terms of deal, mutual verbal agreement on the actual cargo is a clear evidence of the smooth running of the instant deal. After Buyer’s acceptance of this gasoline cargo offer, refusal to accept the cargo due to inability to find any end users of gasoline should be treated as deception against the trustable fact that is essentially borne out by the circumstances of the previous transactions.
Second and relatedly, major elements necessary to form an enforceable contract are the objective assent and subjective meeting of minds. Accordingly, the court should give effect to parties’ intention if it is clear that the parties would have intended to be bound. On this assumption, the Judge primarily must count on the magnitude and content of the communication in the course of negotiations to find out their subjective frame of mind. As is common in oil trading, the transaction is succinctly concluded by email recap on express terms of a deal agreed in principle. If agreement is likely to reach on Recap, it may reflect the common intention of parties to be bound. A more detailed contract, signed several days later is just a formality to be fulfilled. Actually, firm offer, including volume, grade, price, loading dates, laytime, pricing, payment, GTC preference, inspection and law terms of the particular cargo is the foundation of the recap. Acceptance by words or conduct would legitimize the buyer’s assent to the seller’s terms. As mentioned earlier, acceptance with new terms is a counter-offer and after the last counter-offer, final acceptance should be required to conclude the binding recap. These are usual practices to create a sale contract in the oil trade.
Conversely, in accordance with the ‘Subject to Contract’ nature of the negotiations parties shall not enter into a binding commitment until some further conditions has been fulfilled even if they have mutually agreed on all terms of the proposed contract. That is the expression of willingness to bind with certain terms. Unlike the former case, unless the enforceable formal contract is duly signed by both party, there cannot be objective assent to satisfy the contract formation, so the deal remained ‘subject to contract’.
In approaching a case of this kind, it is appropriate to bear in mind that seller and buyer are ‘the masters of their contractual fate’. Therefore, message stating that ‘Confirmed’ or a duly signed contract whichever is done by the buyer under the market realities, Judge should collect and examine the evidences of commitment of parties behind their acts or behaviors to reach the concluded binding contract.
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[1] Petroleumonline, 2015.
[2] “Midstream (petroleum Industry) sector involves the transportation (by pipeline, rail, barge, oil tanker or truck), storage, and wholesale marketing of crude or refined petroleum products. Pipelines and other transport systems can be used to move crude oil from production sites to refineries and deliver the various refined products to downstream distributors” (Wikipedia, 2015)
[3] Commodities, p.20.
[4] Ibid., p.48.
[5] Favennec, pp.79-82; Kajiwara, p.1; The Structure of Global Oil Markets, p.2.
[6] Fattouh, p.7; Kajiwara, ibid, p.3.
[7] Intertemporal attitude concerns the problem of allocating resources across time.
[8] Macmillan and Stone, p.14.
[9] “Consideration of the facts and circumstances surrounding the execution of a contract, however, is simply an aid in the construction of the contract’s language” [Sun Oil Co. V Madeley, 626 S.W.2d at [731]].
[10] Allen & Overy, pp.1-2; Macmillan and Stone, pp.15-18.
[11] The reasonable time, depending on the nature of the offer itself, is to be decided on a case-by-case basis.
[12] Traditional definition of consideration was given in Currie v Misa (1875): A valuable consideration, in the sense of the law, may consist either in some right, interest, profit or benefit accruing to the one party, or some forbearance, detriment, loss of responsibility given, suffered or undertaken by the other.
[13] For further information, see Mather Henry, “Firm Offers under the UCC and the CISG”, Dickinson Law Review, (Fall 2000), 31-56.
[14] Macmillan & Stone, p.19; See the decision in Allianz Insurance Co-Egypt v Aigaion Insurance Co SA [2008] EWCA Civ 1455.
[15] ‘When the plain, common and ordinary meaning of the words lends itself to only one reasonable interpretation, that interpretation controls the litigation’ [Convergent Wealth Advisors LLC v Lydian Holding Co. [2012] WL 2148221 S.D.N.Y.]; See also Glencore Ltd. V Degussa L.P. [2012] WL 223240 S.D.N.Y..
[16] Allen & Overy, pp.4-6; QuickGuides, pp.1-3; ‘A party who seeks to use trade usage to define language or annex a term to a contract must show … or that the usage was so notorious in the industry that a person of ordinary prudence in the exercise of reasonable care would be aware of it’ [Matter of Reuters Ltd. v Dow Jones Telerate, Inc., 231 AD2d 337, 662 NYS2d 450, (1st Dept 1997)].
[17] Leonard, pp.64-71.
[18] Corral v Outer Marker LLC, [2012] WL 243318, E.D.N.Y.
[19] Leonard, pp.75-76; Orsinger, pp.13-14.
[20] Allen & Overy, pp.2-3; Macmillan and Stone, pp.15-20.
[21] For further information for the delivery terms; Carr, pp.49-51.
[22] Major International Oil Companies have its own GTCs for both their crude transactions and common usage. The most famous one of them is the BP GTCs. There has been regularly revised such as 2000, 2007 and latest edition was published 2015. There are also some others like Shell GTCs, Statoil GTCs, Totsa GTCs, etc. Official websites of these IOCs have include electronic document formats.
[23] Crude oil handbook, D-12-16.
[24] “Laycan” is a period of time which Rix LJ defined in Tidebrook Maritime Corporation v Vitol SA of Geneva (The Front Commander) [2006] EWCA Civ 944 at para 38 as:
(a) the earliest day upon which an owner can expect his charterer to load and
(b) the latest day upon which the vessel can arrive at its appointed loading place without being at risk of being cancelled.
[25] Laytime Definitions For Charter Parties 2013, (2013).
[26] Crude oil handbook, D-14; Swotbooks v Royal Bank [2011] EWHC 2025 (QB) by Fox & Shour.
[27] Vitol S.A. v Conoil PLC [2009] EWHC 1144 (Comm).
[28] It was stated on the Judgement “Delivery was to be ex-ship in 4 lots on various dates between 15 August and 14 September off Cotonou via Ship-to-Ship (STS) operation from a mother vessel to a daughter vessel nominated by the Buyer.” (Vitol (n 32) para.7).
[29] Vitol (n 32) para.10.
[30] Vitol (n 32) para.14.
[31] Vitol (n 32) para.16.
[32] “If a breach is repudiatory the innocent party usually has two options. It can either accept the repudiation and treat the contract as at an end or affirm the contract and insist on performance. Deciding whether a breach is sufficiently serious can be difficult where there is neither an outright refusal to perform in future nor a breach of “condition” but where the innocent party considers the breach or threatened breach to have significant commercial consequences.” Repudiatory Breach of Contract.
[33] Proton Energy Group SA v Orlen Lietuva [2013] EWHC 2872 (Comm), para.17.
[34] RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14.
[35] Ebok crude oil is produced and sold as a blend of oil from various wells or reservoirs within the Ebok fields.
[36] A thick market exists when there are many sellers and buyers trading a roughly homogeneous product (Schwartz and Scott, p.23). The definition of thick market is quite suitable for crude market.