Fal Oil Co Ltd & Anor v Petronas Trading Corporation SDN BHD

A party asserting that cargo was contaminated at contractual handover must prove that fact on the balance of probabilities. Rejecting the opposing party’s positive explanation does not itself establish the asserted state of affairs. A court may conclude that the evidence leaves the matter unknown, and exclusion of alternatives does not make a speculative possibility probable. In a C&F sale, laytime and demurrage provisions are construed without any presumption that they create an indemnity or an independent liability. A reference to a charterparty may incorporate only its rate, leaving an independent contractual code where the wording and context support that construction.

Fal Oil and Credit Agricole brought proceedings against Petronas concerning the price of fuel oil delivered following a ship-to-ship transfer. After a five-day trial, Morison J held that Petronas had not proved that the cargo exceeded the contractual water-and-sediment limit when transferred, but construed the sale contract’s demurrage provision as an indemnity: [2003] EWHC 2225 (Comm).

Petronas appealed on the contamination issue. Fal Oil appealed on the nature of the demurrage liability. The Court of Appeal had to determine whether the additional water was proved to have been present at the transfer point and whether the sale contract created an independent demurrage obligation or merely indemnified liability under a charterparty.

Disposition. The first appeal was dismissed unanimously. The second appeal was allowed by a majority comprising Mance LJ and Judge LJ; Buxton LJ dissented on demurrage.

1. Contamination and burden of proof. Petronas bore the burden of proving, on the balance of probabilities, that approximately 1,500 tonnes of additional water were present when the cargo passed to the Devon. A prima facie inference from the cargo’s condition on discharge could place an evidential onus on Fal Oil to adduce contrary evidence, but the court had to assess the complete history of the cargo.
2. The rejection of Fal Oil’s positive theory of contamination on the Devon did not establish Petronas’s case. The court could conclude that it did not know what had happened. That conclusion, although unusual, was recognised in The Popi M [1985] AC 948. Excluding some possible explanations did not make the remaining speculative explanation probable. The evidence concerning Yanbu, the Centaur and the ship-to-ship transfer created suspicion but did not prove that the water was loaded onto the Devon by or at the transfer.
3. Demurrage. Sale-contract provisions for laytime and demurrage are matters of construction. They must be approached without a presumption that they operate either as an indemnity or independently. The commercial rationale that a seller may incur charterparty liability is consistent with either construction.
4. The present sale contract contained its own 36-hour laytime code. Clause 11, providing for demurrage as per charterparty per day pro rata, referred to the charterparty rate and no more. Read with the contract’s wording and structure, it created an independent demurrage obligation. The clause represented an agreed approximation or pre-estimate of the seller’s likely exposure, subject to the law of penalties. The reasoning in Houlder Bros. [1908] AC 276 and the distinction from Suzuki (1921) 9 Ll.L.R. 171 (CA) supported that conclusion.
5. The demurrage claim was remitted to the Commercial Court for further argument on outstanding issues, including any amendment to Petronas’s defence. Petronas was ordered to pay Fal Oil’s appeal costs, subject to a separate order concerning costs of the scope-of-appeal issue. The costs order below was unchanged.

• Court of Appeal (Civil Division): The first appeal was dismissed and the second appeal was allowed: [2004] EWCA Civ 822.
• Queen’s Bench Division (Commercial Court): Morison J held that Petronas had not proved contamination at the ship-to-ship transfer, but construed the demurrage provision as an indemnity: [2003] EWHC 2225 (Comm).