How to approach inconsistency between standard and bespoke terms

How do the Courts reconcile inconsistent provisions between standard and bespoke terms?

This is one of ten questions answered in the 6^th Edition of our Energy and Natural Resources Case Law Update, which discusses significant English Court decisions relevant to businesses in the ENR sector handed down in the period July 2020 to July 2021. The full Update will be published on Monday, 8 November 2021.

Read on for a summary of Septo Trading Inc v Tintrade Limited¹ and the key takeaways for businesses operating in the ENR sector arising out of the judgment.

How to approach inconsistency between standard and bespoke terms

In Septo Trading Inc v Tintrade Limited the Court of Appeal outlined the approach to be followed in circumstances where there is divergence between the standard and bespoke terms agreed between contracting parties. The case provides useful guidance to businesses operating in the energy sector, as well as any other sectors (for example, construction) where such conflicts can often arise.

Key takeaways

Parties entering into contractual relationships which are based on a combination of bespoke and standard terms should consider at the outset how to resolve any potential conflicts arising between the two. Steps may include setting out a list of the priority of each agreement relative to the others, or referring to particular general terms within a bespoke term where the two address the same issues and making clear that the bespoke term is intended to override, supplement or qualify the general term.

Facts

Septo Trading Inc (Buyer) and Tintrade Limited (Seller) entered into an agreement for the sale of high sulphur fuel oil, the terms of which were recorded via email confirmation of the transaction (Recap). The Recap provided that:

• the quality certificate issued by an independent inspector at the load port would be binding on the parties in the absence of fraud or manifest error; and
• “Where not in conflict with [the above], BP 2007 General Terms and Conditions for FOB Sales (BP Terms) to apply”.

Section 1.2.1 of the BP Terms states that certificates of quantity and quality “shall, except in cases of manifest error or fraud, be conclusive and binding on both parties for invoicing purposes,” (emphasis added), but without prejudice to a buyer’s right to bring a quality claim. The quality certificate issued by the inspector certified that the fuel oil conformed with the contractual specification. At first instance, Mr Justice Teare made a finding of fact that the fuel oil did not conform and that section 1.2.1 of the BP Terms qualified the more general provision contained in the Recap such that the certificate was only binding as to quality for invoicing purposes. He therefore awarded the Buyer damages in excess of USD3 million. (He also held that if there had been an error in the initial inspection, it did not constitute a manifest error.)

The Seller appealed the judgment, arguing that the BP Terms were in conflict with the Recap on this point and that the Recap took priority. The issue to be considered on appeal was whether a quality certificate issued by the independent inspector at the load port was intended to be (i) conclusive evidence as to the quality of the fuel oil supplied, and therefore binding on the parties in all respects, or (ii) only binding for invoicing purposes. There was no cross-appeal with regards to whether there had been a manifest error in the initial inspection.

Court of Appeal’s decision

The Court of Appeal considered various cases where there had been inconsistency between specially agreed terms and standard terms, acknowledging that the law was well settled in this area.

Pagnan SpA v Tradax Ocean Transportation SA² was the leading case, which had been followed in others. The judgment drew a distinction between a general term which qualifies or supplements a specially agreed term, and one which transforms or negates it - emphasising the importance of approaching documents in a cool and objective spirit to assess whether there is inconsistency. In applying the relevant case law, the Court of Appeal adopted a practical approach, stating the question was whether two clauses can sensibly be read together so as to give effect to both. This is not a literal or mechanical exercise, and if the standard term were to deprive a special term of any effect, the clauses are likely to be inconsistent. It is also relevant to consider whether the special term is central to the contractual scheme. If it is, a standard term which detracts from it is likely to be inconsistent. Finally, the intention of the parties is key, and the commercial setting in which the contract was concluded must be considered as part of any contractual analysis.

The Court of Appeal started by considering the Recap, and in particular looked to form a provisional view of what the relevant term meant in isolation. It decided that the first instance Judge was right to conclude that, on its own, the effect of the Recap term was that the quality certificate was intended to be binding on both parties for all purposes in the absence of fraud or manifest error, not just for invoicing purposes (i.e. precluding a claim for damages for breach of quality in the absence of fraud or manifest error). It was acknowledged that the binding nature of such certificates forms a central feature of many international sales contracts.

The next step was to consider the effect of the BP Terms on that provision. The Court decided that the terms were in conflict as they could not be read "fairly and sensibly" together. The BP Terms effectively provided that the certificate issued was not binding as to quality (i.e. other than for invoicing purposes). This would deprive the Recap of all practical effect.

The Court of Appeal added that a regime where a certificate of quality is binding is fundamentally different from one where it is not. The Recap provision that the quality certificate would be binding was a central feature of the contractual scheme, which provided an important measure of certainty, and defined the Seller’s obligations.

Finally, it was important to stand back and consider the intention of the parties as practical business people in the real world, and question whether it would be a commercially reasonable interpretation to view the quality certificate as holding evidential value only. The Court of Appeal took the view that this interpretation could lead to some odd outcomes, and cannot have been what was intended by the parties.

The appeal was allowed, concluding that the contract provided that the quality certificate issued at the load port would be binding in all circumstances, given there had been no finding of fraud or manifest error, which therefore precluded the Buyer's claim. The first instance judgment was therefore overturned.

Comment

Although the law is settled in this area, this judgment provides a useful step by step outline as to how a Court will address any potential conflict between bespoke and standard terms. A practical and commercial approach will be taken, with consideration given to: (i) the parties’ intentions at the point of entering into the contract, (ii) the contract’s broader commercial context, and (iii) whether a term can sensibly be read alongside another without depriving it of its practical effect.