341. Fal Oil Co. Ltd and Another v Petronas Trading Corporation SDN BHD (the “Devon”) [2004] 1 Lloyd’s Rep 9; [2004] 2 Lloyd’s Rep 282

C & F sale – demurrage provision construed as an independent obligation and not an indemnity.

The facts

Four cargoes of 80 000 metric tonnes (10% plus minus in sellers’ option) of cracked fuel oil were sold ex Yanbu, C & F , ½ safe port(s) Singapore / Pasir Gudang Range.  The fuel oil was required to have  no more than 1% water and sediment.

In respect of the first cargo, it was agreed that a ship to ship transfer would take place to another vessel off Port Sudan.

 The cargo was duly loaded at Yanbu and a ship to ship transfer took place a day later.  The voyage took 3 weeks.

On discharge it was found that 1700 tonnes of fuel oil had been replaced by an equal volume of sea water.

The discovery led to considerable delay and ultimately a refusal on the part of the buyers to accept delivery.

Two preliminary issues were tried in the Commercial Court : (1) whether the water was present in the cargo when the ship to ship transfer took place and whether buyers’ obligation to pay demurrage was a contract of indemnity in favour of the sellers or a free-standing provision.

Findings

Morison J found that the buyers had been unable to discharge the onus on them to prove the first issue and that the demurrage provision was an indemnity.  The Court of Appeal (Mance, Judge and Buxton LJJ) found in favour of the sellers on the first point.

On the second point a majority found that the demurrage provision was not an indemnity.  Buxton LJ dissented.

 There was no direct evidence of the composition of the cargo immediately after the ship to ship transfer. The conclusion sought by buyers had to be an inference drawn from other facts.

Morison J held that he was unable to decide at what point the water had been deliberately introduced (accidental contamination was ruled out on reliable evidence) and accordingly held that the buyers had been unable to discharge their onus.  Mance LJ compared this outcome to that in the Popi M (1985).

On the second point and after an exhaustive analysis of the authorities, Mance LJ (with the concurrence of Judge LJ) found that the demurrage provision was an independent obligation.

Probably the most important factor taken into account was that the lay time provisions in the contract of sale and the charterparty were different: the charter party provided for separate periods of lay time at the ports of loading and discharge whereas the lay time was aggregated for the purposes of the charterparty.

Commentary

Mance LJ tempered his conclusion that the demurrage obligation was independent (despite the fact that demurrage is primarily an obligation of the charterer to the ship owner, not involving the buyer) with the observation that the law of penalties would protect a buyer from having to pay demurrage where the sum involved was not commensurate with that which the sellers / charterers were obliged to pay to the ship owner.

The simple fact of the matter is that in many of the decided cases, the demurrage provisions, including the lay time regime, in contracts of sale, differed from those in the charterparty.  This difference could only lead to the conclusion of an independent obligation.

Buxton LJ was mistaken in his judgment when he said that the lay time provisions here “tracked” those in the charterparty.

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