MAMIDOIL-JETOIL GREEK PETROLEUM CO. S.A. v. OKTA CRUDE OIL REFINERY AD [2001] EWCA Civ 406

An existing long-term commercial contract is not unenforceable merely because its price or fee is fixed only for an initial period. Where the contract is silent as to the later fee, rather than making it an essential matter to be agreed, the court may imply a reasonable fee and related pricing terms so as to give effect to the agreed duration.

Construction depends on the contractual language in its commercial setting. Language by which one party agrees that another will handle the quantities it will buy for its own account may impose an exclusive obligation to route all such purchases through that handler, rather than confer an option to use its facilities.

Jetoil and the Refinery made a 1993 agreement for Jetoil to receive, store and load crude oil bought by the Refinery for its own account. Clause 7 stated that the agreement was valid for ten years, but clause 3 fixed the handling fee only until the end of 1994. The parties subsequently agreed extensions of the fee until the end of 1999.

Thomas J, whose judgment was reported at [2000] 1 Lloyd's Rep 554, held that clause 1 required the Refinery to use Jetoil for its own-account crude oil, but that the ten-year term was only a maximum and depended on future agreement as to price.

Jetoil appealed on duration and price. The Refinery cross-appealed on exclusivity. The central issues were whether the contract continued after 1999 and whether clause 1 imposed an obligation or merely conferred an option.

1. Appeal allowed; cross-appeal dismissed. Rix LJ gave the judgment, with which Schiemann LJ and Sir Ronald Waterhouse agreed. The 1993 agreement was binding for a minimum term of ten years. Clause 1 obliged the Refinery to put all of its own-account purchases of non-heated crude oil through Jetoil.
2. On the cross-appeal, the natural meaning of clause 1 was that Jetoil agreed to handle the totality of the crude oil which the Refinery would buy and process for its own account. In context, the words “The Refinery wants” followed an introductory statement that the parties had agreed the following. They expressed agreement, not a mere recital. An option would have required different language. The surrounding circumstances did not justify departing from that meaning. The court reached that conclusion without relying on subjective intention or post-contractual conduct.
3. On the appeal, clause 7 stated in strong terms that this agreement was valid for ten years. The annex described that period as the initial contract term and contemplated a further extension. Clause 3 did not expressly provide that the later fee was to be agreed. It was silent after 1994.
4. The distinction drawn in May and Butcher v. The King [1934] 2 KB 17 did not assist the Refinery. That case concerned the absence of an initial contract and an express reservation of essential matters for agreement. Here there was an existing long-term commercial contract which the parties had performed for years. The commercial approach in Hillas and Co Limited v. Arcos Limited [1932] 147 LT 503 supported an implication that preserves, rather than destroys, such a bargain where reasonable terms can be determined.
5. A term was therefore implied that, failing agreement, a reasonable handling fee would be fixed after 1 January 2000. That included a reasonable discount for annual throughput over 500,000 tonnes and a reasonable period for the price regime. The absence of a stated market price or pricing mechanism did not prevent that implication. The arbitration clause, commercial history and prior pricing arrangements supported the conclusion.

• Court of Appeal (Civil Division) — Allowed Jetoil's appeal and dismissed the Refinery's cross-appeal: [2001] EWCA Civ 406.
• Commercial Court (Thomas J) — Held that clause 1 was exclusive in Jetoil's favour, but held that the stated ten-year period was only a maximum and that continuation after 1994 depended upon agreement of the fee: [2000] 1 Lloyd's Rep 554. That latter ruling was reversed.