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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: February 20, 2020

Third-Party Assessment of Product’s Quality Provided by Contract Binding Even Where Assessment Do Not Cover All Quality Requirements

On February 3, 2020, Justice Cohen of the New York County Commercial Division issued a decision in Curacao Oil N.V. v. Trafigura Pte. Ltd., 2020 NY Slip Op. 30254(U), holding that a contract provision providing for a third-party’s binding assessment of the quality of a product was binding even where that assessment did not cover all product quality requirement, explaining:

The contract mechanism at work here – where a third party makes a final and binding determination about some aspect of a transaction – is commonly enforced by New York courts. Indeed, these types of provisions are seen as a way to prevent the very type of litigation that Curoil has initiated.

Curoil’s contract claim challenges the quality of the fuel oil it purchased, insofar as the fuel oil allegedly failed to comply with ISO 8217 specifications that were incorporated by reference into the definition of fuel oil quality set out in Section 4 of the Sales Contract. The ISO 8217 specifications, like the rest of Section 4, were subject to the Quality Determination Clause in Section 12. Under the plain terms of the Quality Determination Clause, Intertek shall determine the quality of the product, and Intertek’s determination shall be final and binding on the parties for all purposes save for fraud or manifest error. As noted, Curoil has not alleged fraud or manifest error. As a result, Intertek’ s determination is final and binding as to fuel oil quality, full stop.

The First Department’s decision in Sempra Energy Trading Corp. v. BP Prod. N Am., Inc., which also centered on a disputed fuel oil transaction, is directly on point. There, the court held that a pre-discharge report showing compliance with agreed-on parameters barred, as a matter of law, the plaintiff’s breach of contract claim based on the results of its own subsequent testing. As in this case, the parties in Sempra agreed that the quality and quantity of the fuel would be determined and certified prior to discharge by a mutually acceptable inspector, and that the predischarge report was binding on the parties except in the event of fraud or manifest error. And as in this case, the pre-discharge report showed the fuel oil to be in compliance with the parties’ agreement, while post-discharge testing allegedly revealed the opposite. The First Department affirmed the trial court’s dismissal of the plaintiffs contract claim, concluding that it was refuted by the predischarge inspection report showing that the delivered fuel oil was in compliance with contract specifications. The post-discharge report was, in the First Department’s estimation, not material under the parties’ agreement. The holding in Sempra applies here: the Intertek Report constituted a final and binding determination about the fuel oil’s quality under the Sales Contract, and the results of Curoil’s own subsequent testing are not material under the parties’ agreement.

Curoil seeks to distinguish Sempra on the ground that the inspection in that case, unlike this one, measured the specific characteristic of the fuel oil that was at issue in the litigation. Seizing on that factual difference, Curoil argues that while the Intertek Report may be final and binding for all purposes of the requirements that were actually tested, it would be illogical to conclude that the Intertek Report was also final and binding with respect to requirements that were not actually tested. While there is some logical appeal to that argument, it simply cannot be squared with the unambiguous terms of the Sales Contract.

As a bedrock principle, it is the Court’s task to enforce a clear and complete written agreement according to the plain meaning of its terms, especially when that contract is the negotiated product of sophisticated parties who entered into a complex multimillion dollar business transaction. The Sales Contract does not limit Intertek’s quality determination to the parameters listed in the Intertek Report. It provides, instead, that Intertek would make a determination about the quality of the product as a whole. While Intertek’s testing was limited to the parameters in the Intertek Report, a fact that was plain to both parties on the face of the Report, the quality determination under Section 12 was not. To be sure, the contractual definition of quality references all of ISO 8217. But that entire definition is, in turn, subject to the Quality Determination Clause, which is final and binding for all purposes. Where the parties wished to carve out an exception to the Clause, they knew how to do so in clear terms: Section 12 states that the Certificate of Quality would not be final and binding in cases of fraud or manifest error, which is not alleged here. No exception was made for situations, like this one, where the final and binding pre-discharge quality determination is later challenged on the basis of ISO parameters not initially tested by the independent inspector. In context, Curoil’s argument impermissibly would read final and binding out of the agreement.

That reading of the agreement is not, as Curoil complains, illogical. It simply reflects commercial reality and common practice in the industry and, more importantly, the clear language of the agreement. Curoil acknowledges that it is not practical to test at the point of delivery for all potential fuel contaminants and compliance with all provisions of ISO 8217; that standard industry practice is not to engage in this more detailed analysis when fuel is delivered; and that the company is very familiar with ISO 8217, which states that determining the harmful level of a material or substance is not straightforward, and it is, therefore, not practical to require detailed chemical analysis for each delivery of fuels beyond the requirements listed in this International Standard. And the Intertek Report did test those requirements listed in the ISO – specifically, the characteristics listed in Table 2, such as kinematic viscosity, density, and so on..

Of course, Curoil could have tried to negotiate different terms. The parties could have agreed that Intertek’s quality determination was subject to Curoil’s post-discharge testing, or that the quality determination confirmed only the parameters initially tested, or that the pre-discharge testing must be more comprehensive and time-consuming than the industry standard. These protections presumably would have come at some cost to Curoil, or would have been rejected outright, since they would add risk and cost to Trafigura’s operations. In any event, that is not what the parties agreed.

Under the existing Sales Contract, once Intertek issued its positive report, the Pearl could sail away with assurance to all parties that the quality of the product had been confirmed. Now consider the Sales Contract as Curoil would have it: the Pearl puts out to sea from Curacao laden with additional risk, because Curoil can set aside Intertek’s quality determination days, weeks, or months later on the basis of contaminants undetected – indeed, undetectable – by initial testing. Enlarging the scope of Trafigura’s liability in that way requires a rewriting of the Sales Contract; as a post hoc interpretation, it is untenable.

Therefore, Curoil’s breach of contract claim is dismissed.

(Internal quotations and citations omitted).

One reason that commercial parties all over the world choose to have their contracts governed by New York law is that the general rule in New York–as shown here–is if the contract is unambiguous, it is enforced as written despite what someone might later argue in a lawsuit. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client face a situation where you are unsure how to enforce rights you believe you have under a contract.

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Posted in Commercial, Contracts
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