Inconsistencies between contractual terms – June 2021

June 28, 2021

Inconsistencies Between Terms: Septo Trading Inc. v Tintrade Limited [2021] EWCA Civ 718

Background

‘… [T]his appeal raises once again the court’s approach to the incorporation into a contract of general terms which are alleged to conflict or to be inconsistent with a term expressly agreed between the parties in a “main terms” document…’ (Septo Trading Inc. v Tintrade Limited [2021] EWCA Civ 718, per Males LJ at [4]).

The appellant seller appealed against a finding that there was no conflict between two contract terms so that the respondent buyer’s claim for damages succeeded. In this case, the parties had contracted for the sale of fuel oil and its terms were recorded in an email confirmation, known as ‘the Recap’. The Recap term provided that a quality certificate issued by an independent inspector at the load port was binding for all purposes on the parties. However, it also provided for the BP 2007 General Terms and Conditions for FOB sales to apply ‘where not in conflict with the above’. Such BP terms said that the quality certificate was conclusive and binding ‘for invoicing purposes’, but without prejudice to the buyer’s right to bring a quality claim. The quality certificate issued declared that the fuel oil met the contractual specification, however a further analysis indicated it did not. The buyer therefore claimed damages pursuant to the BP terms, saying that it was not precluded from bringing a quality claim and that the quality certificate issued was only binding ‘for invoicing purposes.’ The seller submitted that the BP terms conflicted with the Recap term, the latter should be preferred and therefore preclude such a quality claim.

In the High Court, it was held that the BP terms merely qualified the Recap term and so they could be read together, giving judgment to the buyer.

On appeal, per Males LJ, the Court referred to the leading case of Pagnan SpA v Tradax Ocean Transportation SA [1937] 3 All ER 565, which set out that one should ‘approach the documents in a cool and objective spirit to see whether there is inconsistency or not’ and ‘it is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses’, with the conclusion to be tested ‘against the touchstone of commercial common sense.’

As noted by the Court of Appeal, the Pagnan case has been followed by many others and after a review of Alexander v West Bromwich Mortgage Co Ltd [2016] EWCA Civ 496, it was noted that ‘there is a distinction between a printed term which qualifies or supplements a specially agreed term and one which transforms or negates it’ (Males LJ at [28]). To decide on which side of this line a term falls, one must see if the two clauses can be fairly and sensibly read together so as to give effect to both, which is to be determined by having regard to business common sense.

Decision

Per Males LJ at [35]-[45], the Court of Appeal held that:

  1. The correct approach was to start with the meaning of the specially agreed term, the Recap term, so that a provisional view of its meaning could be formed and then tested against other clauses. The High Court was right to conclude that the effect of the Recap term on its own was that the quality certificate was binding on both parties for all purposes and so would have precluded the buyer from bringing a quality claim.

 

  1. The next step is to consider the effect of the printed term, the BP terms. This provided that the quality certificate was to be ‘conclusive and binding on both parties for invoicing purposes’ and was without prejudice to a quality claim. This was not the same as Navigas Ltd v Enron Liquid Fuels Inc [1997] 2 Lloyd’s Rep 759, where the contract stipulated a deduction from the price in the event of a failure to conform to the contractual specification. The Court considered that the BP terms in this case of a documentary sale was redundant, as the seller must present its documents to the buyer’s bank under the letter of credit with the quality certificate anyway.

 

  1. Then the question of consistency between the two terms is to be addressed. The printed BP terms did not ‘merely qualify or supplement the Recap term, but rather deprive[d] it of all practical effect’ (Males LJ at [41]). Four reasons were given for this. The first is that being binding for all purposes and being binding only for invoicing purposes, are at odds with eachother and, as explained above, the purpose of the BP term seemed redundant anyway. Secondly, as per Navigas v Enron, a regime in which a certificate of quality is binding is fundamentally different from one in which it is not. Thirdly, the binding nature of the Recap term for the quality certificate is a central feature of this kind of contractual scheme and so it is unlikely that the parties would have wished to substantially detract from this by the printed BP terms. Finally, considering the intention of the parties as practical business people operating in the real world, a commercially reasonable interpretation must be undertaken. It would be strange if the parties intended to provide that the quality certificate was not binding in any real sense, by first saying that a specifically drafted term would be binding and then providing for something different in the printed terms that nullified it.

 

Commentary

  1. Whilst this case relates to a shipping matter, it is more broadly relevant to commercial practitioners and particularly those that work in areas where standard forms are more frequently used, such as construction. Although it does not change the law, it clarifies the approach the Court will take in dealing with inconsistencies between specially agreed terms and printed standard terms of a contract.

 

  1. This case is another reminder for practitioners of the importance of being alive to the risk of drafting commercial terms that are inconsistent with each other and that the Court will seemingly take a practical approach, having regard to business common sense, rather than a literal one.

 

  1. Indeed, when drafting commercial contracts in which questions of consistency are arising, it would also be prudent for practitioners to bear in mind the central features of the contractual scheme at hand and consider if such features would render terms meaningless. In this case, as part of the Court’s reasoning, the BP terms were considered redundant as it was a documentary sale and the seller had to present its documents to the buyer’s bank under the letter of credit with the quality certificate anyway.

 

Edward Bates

June 2021

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Commercial, Employment, Family, General Civil, Insolvency, Property and Planning, Town and Village Greens, Will Disputes