Mercuria Energy Trading SA v Onex DMCC

Contractual “typicals” do not become warranties merely because specially agreed terms describe goods as being “in line with” them. The contract must be construed as a whole, including incorporated standard terms. A typical may remain non-binding where the contract distinguishes it from guaranteed specifications and the standard terms define its effect.

For sale by description, a defect or admixture does not establish breach merely because it reduces value. The question is whether the goods have lost their commercial identity and become goods of a different kind. The prima facie damages measure under section 53(3) of the Sale of Goods Act 1979 is fact-sensitive and may yield to another measure where necessary to reflect the compensatory principle.

Onex sold Mercuria a cargo of Iraqi SOMO Basrah pipeline high-sulphur straight-run fuel oil on CIF terms for delivery in the US Gulf Coast. The cargo contained approximately 16ppm of Organic Chlorides. Mercuria alleged that Onex had breached contractual obligations concerning a stated typical Organic Chloride level, the cargo’s Iraqi SOMO origin, and its description as high-sulphur straight-run fuel oil.

The principal issues were whether the contractual typical constituted a warranty, whether contamination caused the cargo to cease being the described product, and, alternatively, what damages and mitigation principles would apply. The claim was decided at first instance in the Commercial Court.

1. Liability. The claim was dismissed. The incorporated BP General Terms and Conditions had to be read with the specially agreed terms. Applying the practical construction approach in Septo Trading Inc v Tintrade Ltd [2021] EWCA Civ 718, the court asked whether the terms could fairly and sensibly operate together, and whether the printed terms deprived the special terms of effect.

2. The contract distinguished the table of “Typicals” from the table of “Guaranteed Specifications”. Under sections 57.1.61 and 59.1.1 of the BP terms, typicals were given without guarantee and did not form part of the product’s description, quality or fitness for purpose. The words “in line with” did not elevate the Organic Chloride typical into a warranty. There was no relevant inconsistency between the special terms and the printed terms.

3. The requirement for “100% SOMO IRAQI HSSR” concerned origin, not quality. It required delivery of SOMO-supplied high-sulphur straight-run fuel oil of Iraqi origin. It did not guarantee the absence of Organic Chlorides.

4. The cargo remained the described product. For a sale by description, the question was whether the goods had lost their commercial identity and become goods of a different kind, applying Ashington Piggeries v Christopher Hill [1972] AC 441 and Gill & Duffus v Berger [1981] 2 Lloyd’s Rep. 233. The contamination reduced value and affected refinery use, but did not make the cargo cease to be Iraqi SRFO.

5. Quantum and mitigation. These issues did not arise because liability failed. Alternatively, the court found that Mercuria had acted reasonably in investigating heating, purging, blending and resale options. The appropriate assessment would have compared the value at breach with the value when the cargo was sold. The court would have awarded US$26,033,735.