Fal Oil Co Ltd. & Ors v Petronas Trading Corporation SDN BHD

A party alleging that goods were contaminated must prove, on the balance of probabilities, that the contamination occurred at the relevant contractual stage. Where the evidence leaves two plausible sources and the court cannot determine which is more probable, the burden is not discharged merely because one source appears possible.

A contractual demurrage clause referring to the charterparty rate may create an indemnity obligation rather than an independent obligation to discharge within a specified period, particularly where the sale contract imposes no separate discharge-time obligation.

The claimants sought damages for alleged contamination of a cargo of fuel oil transferred by ship-to-ship operation from the CENTAUR to the DEVON. They alleged that the defendant buyer had received cargo containing more water than the contractual limit and also claimed demurrage arising from delay in discharge.

The defendant disputed responsibility for the contamination. The court considered expert evidence, sampling reliability, the possible movement of oil and water, and whether the evidence established when or on which vessel the substitution occurred. It also considered whether the sale contract made the buyer independently liable for demurrage.

1. Contamination. The defendant bore the burden of proving on the balance of probabilities that, when the cargo was pumped into the DEVON, it contained water above the permitted contractual proportion. The fact that contamination must have occurred either before or after the ship-to-ship transfer did not remove that burden.

2. The evidence established that approximately 1,500 tonnes of seawater had replaced oil by the time of discharge, but it did not establish whether the substitution occurred on the CENTAUR, on the DEVON, or before, during or after the transfer. The court could not exclude the possibility that the substitution occurred while the cargo was on the DEVON. Each explanation remained possible, and possibility was insufficient to satisfy the balance of probabilities.

3. The court accepted the reliability of the Yanbu and Caltex measurements, while recognising the difficulty of detecting water in viscous fuel oil through ordinary tank sampling. It rejected the suggestion that the cargo examiner had acted dishonestly or in collusion with the claimants. The defendant therefore failed to establish that the cargo was contaminated beyond specification when transferred.

4. Demurrage. The sale contract allowed 36 hours’ laytime and provided for demurrage at the charterparty rate. Because the contract imposed no independent obligation on the buyer to discharge within a specified period, the demurrage provision was construed as an indemnity rather than an independent liability. The conclusion was consistent with Ets Soules v Intradex [1991] 1 Lloyd’s Reports 378 and Mallozzi v Carapelli [1975] 1 Lloyd’s reports 229.

5. The defendant’s contamination case failed. The parties were invited to draw up an order reflecting the judgment.