Trasimex Holding SA Of Panama v Addax BV Of Geneva [1997] EWCA Civ 2096

Monday July 14th, 1997


Royal Courts of Justice
London WC2A 2LL
Tuesday 14 July 1997
B e f o r e:
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(Computer Aided Transcript of the Palantype Notes of
Smith Bernal Reporting Limited, 180 Fleet Street,
London EC4A 2HD
Tel: 0171 421 4040
Official Shorthand Writers to the Court)
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MR R SIBERRY QC and MR S BRYAN (Instructed by Messrs Lloyds & Co, EC3N 4AA) appeared on behalf of the Appellants.
MR N HAMBLEN QC (Instructed by Messrs Stephenson Harwood, London EC4M 8SH) appeared on behalf of the Respondents.
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(As approved by the Court)
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©Crown Copyright
Tuesday 14 July 1998
LORD JUSTICE HOBHOUSE: The parties to this litigation are Trasimex Holding SA of Panama, who were the CIF sellers of goods and plaintiffs in the action, and Addax BV of Geneva, who were the respective buyers and defendants. The contract out of which this dispute arose was a contract for the sale of jet fuel on terms CIF Dakar. It was made on 4 and 5 August 1994 and it was for a quantity of 22,500 – 25,000 metric tons of jet fuel at sellers option.
On 6 and 7 August 24,310.997 tons were shipped at Ras Lanuf for the purpose of this contract. The contract contained a description of the goods which were to be shipped and sold in a clause headed “Product/Quality/Origin”:
ASA 3 or Stadis 450 are what is known as static dissipator additives. Their function is to provide electrical conductivity to jet oil and similar hydrocarbons which do not of themselves have any conductivity of electricity.
The sellers put on board, pursuant to the second sentence of that clause, nine drums of ASA 3. During the course of the voyage the members of the crew of the vessel mixed the contents of all nine drums with the cargo. The voyage was to Dakar in West Africa as per the contract. On arrival at Dakar, the jet fuel was found to be off specification. It had a conductivity in excess of 1000. The WSIM indicator specification, which was a measure of missibility with water, was 53 below the required level. It was clear that additive had been added to the jet fuel in excess of any specification limit. The specification limit of a first addition of additive was one milligram per litre. The contents of only one of the barrels would have sufficed for the whole consignment.
When the cargo arrived at Dakar and its state was discovered, the buyers initially rejected it and declined to pay the price. Subsequently it appears that they did accept the cargo but they made a deduction from the price. They deducted a figure of $243,000 from the price that would have been payable. Therefore they accepted the cargo and paid the reduced price. Hence the action by the sellers for the unpaid balance. There also appears to have been a demurrage dispute at Dakar which may be related to the primary dispute but is something with which we are not concerned.
The parties submitted certain questions to the judge to be tried as preliminary issues. The court accepted them despite the fact that they read like examination questions rather than preliminary issues. But the judge answered the critical question, whether or not the goods on loading complied with the description in the negative. He therefore decided that point in favour of the buyers, the defendants. It is under those circumstances that the plaintiff/sellers come to appeal to this court.
We have been assisted, as no doubt the judge was, by extensive skeleton arguments and by the argument of Mr Siberry who also appeared before the judge. No citation of authority has been necessary, it is simply a question of the construction of the contract and its application to the facts of this case. The relevant primary facts were all agreed. The judge heard expert evidence to provide him with the surrounding circumstances relating to the contract.
It must be commented at the outset that the need for this litigation and the problems of construction, such as they are, are entirely of the parties own making. The points which have been argued before the judge and before us arise from a clause which describes what was required of the goods to be sold, but does so in terms which have given rise to argument which could easily have been avoided had the parties used more specific terms. It is a brief clause. It can be observed that it was put in the contract in substitution for a clause which, on any view, was less open to argument.
This case illustrates a point which Lord Mustill made in the course of a lecture last year that too much litigation of this character is caused by parties not paying attention to the words which they have chosen to use in their contracts. Litigation is expensive; it is time consuming. The way to avoid it is to take more care in the drafting and agreement of contracts and other comparable documents.
This contract has to be construed, as do all contracts, in the light of the surrounding circumstances and in the commercial context in which it was made. This is for the purposes of establishing the objective meaning of the words and clauses that form the agreement. It is not an investigation into the subjective intent: it is to put the contract in its context so that it may be properly construed in the objective sense to which I have referred.
In the present case no special surrounding circumstances were pleaded or relied upon by either side. The general surrounding circumstances were to be derived from the expert evidence which was largely uncontroversial. That evidence was led before the judge on both sides and was subject to certain limited cross-examination. This was primarily directed to what were the purposes of these static dissipator additives. On this subject the judge referred to various parts of the evidence. It is not controversial, and I will confine myself to reading limited passages. The judge’s very full judgment is now reported at [1997] 1 Lloyds LR 610, and I quote from that report. At 613 the judge said:
“All petroleum products are prone to such phenomena especially when flowing through pipework but in the case of jet fuel the probability of charge generation is increased because it is pumped at high speed through very fine filters (such efficient filtration is rarely necessary for the other distillate fuels) and narrow pipework which are all conducive to the development [of a] significant electrical charge. In addition, aircraft operators require the shortest possible turn around times so the faster the fuel can be pumped the better. Therefore the SDA confers sufficient conductivity to jet fuel consistent with high speed pumping and safety. The effect of SDA may diminish over time such that it may be necessary to inject sufficient SDA to bring electrical conductivity sufficiently above 50 pico Siemens per metre (50 pS/m) to ensure that it will meet that value at a later stage. In the absence of SDA, flow velocity must be reduced so that electric charge will have sufficient time in order to leak away (or dissipate) naturally ie relatively slowly. SDA is not added to safeguard the aircraft and/or engines in flight but rather to enhance the safety of personnel and materials within the distribution system which of course would include the aircraft, frequently with passengers aboard, during refuelling operations because even at the ultimate point of the distribution system the accidental ignition of fuel because of static electric discharge cannot be ruled out.”
At page 618 he said:
“I would add that, although the function of SDA as an inhibitor of a dangerous electrical discharge is most needed at the point of the loading of the fuel onto the aircraft – both because that is when there is the greatest need of fine filtering at high speed, and also because of the potential danger to life, since loading may be performed when passengers are on board – even so SDA may perform a useful function at each stage of the distribution system, such as when loading into ocean going vessels, or into road or rail tankers, or into storage tanks. At those times too, velocities may have to be reduced or other procedures adopted in the absence of an SDA treated fuel, to prevent the build up of electrical charges.”
The judge referred to the handling of jet fuel in international commerce. He then turned to the refining, which is the making of the fuel. At page 619 he said:
“Although there is no universal practice as to the timing of the addition of SDA, generally it is introduced at the refinery, immediately following manufacture and prior to commencement of loading. No doubt it is convenient to do so. Refineries may therefore produce jet fuel both for the US market (without SDA) and for the market based on the DERD specification. Refineries therefore carry major stocks of SDA. In some cases, but they are the exception rather than the rule, the refinery does not add SDA. Those cases include the Ras Lanuf refinery which was the source of the fuel under the contract in question, but there are other refineries which adopt the same position, such as the Isab refinery at Priolo, the Shell refinery at Berre, the Esso refinery at Lavera, and the Saras refinery. In such cases SDA is frequently introduced on board the ocean going vessel. This may happen in two ways: either SDA is added after loading, by means of drums placed on board which is what happened in the instant case; or the additive is introduced during the loading operation itself. Mr Boks described the latter system as follows: loading is initiated at a slow rate until all splashing and turbulence has ceased (such splashing and turbulence can create an explosive mist); loading is then stopped, and after a 30 minute pause during which nothing should be lowered into the ship’s tanks (that could generate an electrical discharge), first foot samples are drawn; the SDA is then added, after which loading is resumed. This description emphasises the special precautions which must be taken even at this stage in the absence of SDA.”
The practice in North America was different and the judge referred to that. He then turned to the general position and said on the same page:
“It appears indeed to be (with few exceptions) the almost invariable practice that the fuel will contain SDA before it arrives at the airport’s storage tanks.”
At page 620 he says:
“The experts seem agreed that where SDA is present in fuel, then it has to be within the DERD limits of 50/450 pS/m, and that this is so even though the conductivity may be expected to fall before the fuel comes to be used in an aircraft. Indeed, tests have shown that ocean transport causes a loss of conductivity of up to 60 per cent, with an average of 30 per cent. Conductivity will also fall with falls in temperature. Even so, Mr Adams [another expert] said, and I accept, that refineries know how much additive to use so as to achieve an acceptable level of conductivity both on shipment and on arrival. The maximum dosage is in any event controlled by the specification.
If SDA is present (and on the evidence that will generally be the case), it will be tested for electrical conductivity (indeed, even if it is not present, electrical conductivity will be tested and shown as 0 pS/m, as in the case of the refinery samples in the present case). It also appears to be common ground that there will always be a test for SDA immediately prior to aircraft fuelling.”
That set the scene against which the contract fell to be construed. The documents that were referred to in the relevant contract clause were, first, the DERD, version 10. DERD is a specification which is issued by the procurement executive of the Ministry of Defence of this country. It exists in a number of successive editions. It was drafted in order to provide a specification by reference to which our government agencies would purchase such fuel. It is now extensively used throughout the world as a convenient and appropriate specification for jet fuel.
In clause 1 it describes its scope and suitability.
“1.1 This specification governs one grade of kerosene type aviation turbine fuel intended for general use in aviation gas turbines.
1.2 Fuel provided to this specification shall possess satisfactory performance and properties when used in appropriate aircraft or engines operated by the Crown, or for which the Civil Aviation Authority is the certificating agency.”
It is, therefore, directed to providing a specification for use of jet fuel in aircraft.
With regard to composition, and specifically additives, it makes certain provision. For static dissipator additive it sets out its requirement in clause 4.2.2:
“An SDA of a type and at a concentration detailed in APPENDIX A shall be added to the fuel to impart electrical conductivity in accordance with Serial 20 of Table 1.”
Table 1 is the test requirements which effectively are the specification. Item 20 is electrical conductivity and it gives a minimum and maximum limit of 50 and 450 pS/m respectively. It cross refers to note 11 which reads as a matter of instruction:
“The limits apply at the point, time, and temperature of delivery to the user.
Monitoring the supply will usually suffice to ensure compliance.”
Appendix A lists the permitted additives. In respect of static dissipator additives it names two products, one of which is ASA 3 and the other is Stadis 450. It provides concentrations in which they may be used. On first doping, the concentration for ASA 3 is one milligram per litre maximum and then overall, after successive dopings, it is described to be 2 milligrams per litre maximum. These are described as the concentration and re-doping limits where what has happened previously is not fully known then subsequent re-dopings are to be limited to one milligram per litre.
Another requirement of the specification which needs to be referred to is that for the water separation index modified (“WSIM”). That has a minimum level of 85, which is why the figures to which I referred earlier were not within the relevant parameter. There is an interaction between the use of additives of electrical conductivity and the water separation reading in that the additive can reduce the extent of the water separation. There is a note that the 85 limit is specified for fuel which does not contain additive.
“It is recognised that some manufacturing circumstances preclude the sampling of a fuel batch prior to the incorporation of certain additives. In such circumstances it will suffice that the supplier shall demonstrate (by means acceptable to purchase or his QC authority) that the component fuel would have met the limit.
In the event of either SDA [or other additives] being present singly, a WSIM of 70 or better is consistent with 85 for the untreated product.”
It is clear from this that it is contemplated that there are circumstances where certain of the tests will be carried out before the static dissipator additives, or other additives, have been added to the fuel.
The other document that is referred to is the “joint fuelling system check list”. The judge summarised the purpose of this document in general practice as relating to the situation where fuel is mixed in tanks at intermediate depots or airports. He said at 618:
“Where there is a joint venture and fuel is received from different supply sources and commingled, whether that be at intermediate depots or at airports themselves, it is of course essential that all of the fuel meets an agreed specification, viz the check list.”
That therefore may be described as a protocol rather than a check list. It is a protocol with which fuel supplied into a communal storage, or communal supply, is to comply. It contains a similar list of requirements. As regards conductivity it is “min 50, max 450″, and under remarks it says:
“Applies at point, time and temperature of delivery to the user.”
In respect of additives it refers to SDA, describes it as mandatory and applies a maximum of 1 mg/l on the first doping for SDA. It includes an addendum which contains similar information to that to which I have referred. The check list therefore contains a similar reference to the point, time and temperature at which the parameters for conductivity must be met, namely at delivery to the user. This reference to the user in the DERD document was introduced in the 10th edition in substitution for use of the word “purchaser” in the 9th edition. That is a point to which I will have to return.
This was a CIF contract. It was therefore a contract for the sale of goods to be performed by the delivery of documents. It was on terms CIF Dakar, the goods were, by their description, contemplated to be loaded, as was the case, at Ras Lanuf, which is a terminal connected with the refinery in Libya. The obligation under a CIF contract is that the goods which are shipped shall conform to the contractual description. There is a right under the CIF contract for the buyer to reject non-conforming documents or non-conforming goods. He has a right to reject the goods, even though he may earlier have accepted documents, unless that acceptance amounts to some waiver of his rights. Therefore, if the buyers’ contentions are correct, they did have a right of rejection when they discovered, as they submit, that the goods at the time of shipment did not conform to the contract description. It also meant that they had a right to elect not to reject the goods and sue in respect of breach of warranty for failure to comply with the contract description or abate the price, which is what occurred in this case.
This case does not presently concern any question of risk as to what may or may not have occurred during the voyage. It is concerned solely with the situation at the time of shipment. It is clear that there are going to be, or may be, disputes between the parties as to responsibility for what happened during the voyage. Those are not matters with which we are concerned, nor was the judge on the trial of these preliminary issues.
The agreed facts set out the relevant terms of the contract and the fact that cargo was shipped. They specifically included the agreed facts at the time of shipment the electrical conductivity of the product was nil pS/m, at 22 degrees centigrade; the WSIM rating of the product was greater than 85; and no SDA had been added to the product. Therefore it is submitted on behalf of the buyers that the electrical conductivity did not conform to the specification, nor did the fuel conform to the specification because it did not contain what was a mandatory additive.
The relevant questions among those set for the judge which bite on this point, were (1) “Was there a contractual description of the goods?” (2) “If so what was that description?” and (3) “If there was any contractual description of the goods, did the goods comply with that description?” The first two questions were non controversial. The judge, when answering the second question, referred to the first sentence of the product quality origin clause. It is submitted that he should also have referred to the second sentence. As regards the third question, he answered that in the negative. He gave as his reason the fact that no SDA had been added before shipment. That answer encapsulates both the question of conductivity and the absence of the additive. The conductivity can only be provided if some additive is introduced into the fuel so that the two matters effectively amount to the same thing.
Four arguments have been advanced before us as to why the judge’s answer to the third of those questions was wrong. The first argument, put in a number of ways, is that there was, on the proper construction of the DERD specification and the check list, no obligation to add any additive before delivery to the end user. The judge referred to this argument towards the end of his judgment. He said:
“The result therefore is that at the time of a relevant transfer to which the specification relates the fuel must include such an addition of SDA, within the dosage concentrations laid down, as is likely to impart to it an electrical conductivity within 50/450 pS/m at the time of delivery to an airline.”
It is submitted that he is wrong as a matter of construction. In my judgment, this argument does not sustain the conclusion for which the appellant/sellers contend. The argument seeks to gain force from the change from the ninth version to the tenth version of the DERD specification and the substitution of the word “user” for the word “purchaser”. It is submitted that there is no requirement of the specification that any additive should be added before delivery to the final user, which is the airline, nor is there any requirement that conductivity shall have been imparted to the fuel before that time.
That is a construction which, in my judgment, is not correct. The question is whether or not the fuel complies with the specification. If the measurement is made at an earlier time, then the requirement is that there shall be sufficient additive or sufficient conductivity to meet that requirement at the time of the delivery to the airline.
The wording is:
“The limits apply at the point, time and temperature of the delivery to the user.”
Therefore, if fuel is to comply with the specification, it must have the characteristics which will mean that it is within those limits at the time of delivery to the user. It is not, as a matter of construction, correct to say that those words remove any need for the fuel to contain additive at any earlier time or to meet a requirement of conductivity at any earlier time.
The expert evidence was consistent with what I have said and, in so far as there was evidence about how the change from version (9) to version (10) came about, it supported the view which I have expressed because it was said by the experts that the purpose of making the change was to ensure that earlier deliveries would have a sufficient margin above the minimum requirement for conductivity to ensure that the fuel at a later time would still meet the requirements of the specification.
The second argument was not dissimilar. It depended upon the wording of clause 4.2.2 which I have already read out. An SDA of a type and concentration detailed shall be added to the fuel to impart electrical conductivity in accordance with serial 20 of the table. It is submitted therefore that there is no obligation to add the additive because it is not necessary to do so until the later time in order to impart the electrical conductivity at the later time, that is delivery to the end user.
The judge construed this wording as containing two obligations. One is to add SDA, the other is to impart electrical conductivity. That approach has been criticised, in my judgment with some justice. It is effectively a single, rolled up obligation to add the mandatory additive so as to achieve a certain level of electrical conductivity. That does not advance the appellant’s argument. It still leaves them in the same position as they were in before. There is an obligation to add the additive. They must do so in a way which achieves a conductivity within the stated limits at the time of delivery to the end user. As a matter of construction, this argument rebounds on them and it confirms the view of the judge.
The third argument must be carefully considered, as it was by the judge. It is that, in so far as one is looking to the future and what will be the conductivity of the fuel at a later stage (that is the time of delivery to the end user) the judge’s construction leads to uncertainty. It is submitted that, particularly in questions of description which may justify the rejection of the goods and which require strict conformity to a description, certainty is an essential part of a contractual provision. It is said, therefore, that, when the judge used the words “likely to achieve” the required result at the time of the delivery to the end user, he was placing an interpretation on this clause which is simply unworkable both legally and commercially. However, that submission has to be read against the expert evidence to which I have already referred and which was recited by the judge.
There is a practice which exists of doping this fuel at the time of manufacture. It is extensive and the judge described the exceptions to it. Therefore, it is not something which gives rise to difficulties in practice. It is easy to see why that is so. There is a margin of 450 to 50 within which the conductivity may comply and, therefore, there is an ample margin above the minimum level of 50 to accommodate any margin which is necessary. Secondly, and perhaps more forcibly (and this is also referred to in the expert evidence from which I have read), there is the provision for the maximum amount of the first dose. If that is the amount that is added, it is clearly going to raise the conductivity above the minimum by a reasonable margin. As a matter of construction of contracts, provided the first dose has been delivered and added to the fuel, then it would be curious if any complaint could be made. If it was going to be contended by a buyer that something more than the first dose ought to be added, that would be a self-contradictory submission because it would involve some contradiction of the requirements of the specification. The specification must be read as a whole, including that part of it.
The judge rejected this argument in words which referred to what he described as “the real world”. I read from page 623:
“That real world is the world in which parties have to operate; it provides the context for both the specification and for contracts which incorporate it. The fact is that it appears to be almost invariably the case that SDA is added before it reaches the airlines. Most refineries add it before shipment. A handful do not, but then it is frequently added on board the ocean vessel either during or after shipment. It is added at such times, perhaps long before use, despite the apparent inefficiency of adding it when redoping may in due course be necessary because the safety of its carriage is enhanced by its presence and because in its absence other precautions, perhaps as or more costly, would have to be adopted.”
Therefore the impracticalities or the uncertainties which the appellants contend will exist, and for which they criticise the judge, do not in practice exist. It is possible to give a viable construction to this contract in accordance with the submissions of the buyers, not accepting the submissions of the sellers.
The fourth and final argument, which is used in conjunction with the previous arguments, augments relies the second sentence of the clause:
“Seller will make best endeavours to have ASA 3 or Stadis 450 placed on board the vessel in drums.”
It is submitted, and perfectly properly submitted, that the clause must be read as a whole. Any construction which may be placed upon the first sentence must take into account the presence of the second sentence as well. Alternatively, it is submitted that the second sentence qualifies what is in the first sentence and makes it clear that the result of this clause, taken as a whole, is as the sellers contend not as the buyers contend.
The judge’s response to this submission was relatively short. Having recited the relevant arguments he said:
“It seems to me that Mr Hamblen is right to submit that the second sentence as it finally stands makes sufficient sense as providing for the opportunity, if the drums can be provided, for the buyers to carry away with them the means of redoping the fuel, if necessary, at destination.”
That is a conclusion to which I consider the judge was entitled to arrive on the expert evidence. It is clear from the expert evidence that, notwithstanding the original doping of the product, it may be necessary to redope it, particularly after it has undergone a sea carriage. Therefore it is perfectly coherent that the reference to putting drums on board can be for that purpose. The clause, as I previously said, has to be read as a whole, having taken into account what I consider to be the clear meaning of the first part of the clause in conjunction with the surrounding circumstances and the documents to which it refers. The second sentence is inadequate to alter that conclusion.
It must again be commented that if it was truly the intention of the parties to achieve a result such as that contended for by the sellers, nothing would be easier than to have a second sentence in this clause which made that clear. Indeed this was one of the arguments that impressed the judge, because in his view with which I agree, the contract as originally agreed, in his view with which I agree, contained just such a wording. That wording was changed by the parties so that the contract reads as I have already quoted.
The original wording is legally irrelevant. If the amended wording had the same meaning as before there is no significance in change. If it has a different meaning, the fact that there were earlier words which had another meaning does not carry the argument any further. The task of the court is always to construe the words which are in the contract as finally agreed between the parties, not as existed at some earlier stage or during their negotiations. The point that can be, and is, made is that the existence of this earlier wording illustrates the ease with which wording could have been adopted if the parties had so chosen, which would have had the result for which the sellers contend.
The clause as it stands has given rise to protracted and expensive argument. One can understand why that is so. But it arises simply from the choice of the parties to use these words rather than the words which would exclude any possibility for argument. Having considered the wording which they had used, my conclusion is that the specification does require a minimum figure for conductivity of 50, and it does require, in mandatory terms, that there shall be an additive added to the fuel. In saying the minimum figure of 50, I do not need to discriminate between figures at that level and higher figures that might be required on one view. On any view this cargo, at the time it was shipped, did not conform to the specification. In my judgment the arguments which have been advanced do not displace the conclusion which I was prepared to draw simply on the reading of the wording and comparing it to the agreed facts.
I would dismiss this appeal.
LORD WOOLF, MR: I also agree.
Order: Appeal dismissed with costs.

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