Proton Energy Group Sa v Orlen Lietuva

Hearing dates: 8 to 11 July 2013

Judge Mackie QC:

The Claimant, Proton, is a company incorporated in Switzerland engaged in the business of international trading of oil and gasoline related products. The Defendant, Orlen, is a petroleum refining company incorporated in Lithuania. This is a dispute about whether dealings between the parties gave rise to a contract, if it did what the terms were and, if it was broken, what if any damages should be paid.

The Claimant was unsuccessful in an application for summary judgment before Mr Gavin Kealey QC. The Deputy Judge helpfully summarised the facts as follows:

"by an email sent on 14th June 2012, Proton made what was described as a "firm offer" to sell to Orlen CIF Butinge, Lithuania 25,000 metric tons +/-10% in the Seller's option of Crude Oil Mix CN27090090, European origin as per the specifications attached, with delivery period at the discharge port during 10-15 July 2012 and at a price based on five quotations after the bill of lading date. Email correspondence continued between the parties on the same day, culminating in a one-word email from Orlen stating "Confirmed". On 20th June 2012, Proton sent Orlen a draft detailed written contract for the sale. The draft terms of this written contract provoked further email exchanges and ultimately a revised draft which Proton sent to Orlen on 27th June 2012. By this stage, there was at least one issue on which the parties had not agreed: namely, the documents which Proton would be required to present for payment under a proposed documentary letter of credit. On 29th June 2012, Orlen wrote to Proton to say that it was withdrawing from the negotiations. It did not open any letter of credit and it did not accept the cargo. On 2nd July 2012, Proton notified Orlen that it was accepting Orlen's failures to open a letter of credit or to take delivery of the cargo as repudiatory breaches of contract and was thereby bringing the sale contract to an end."

The Deputy Judge concluded that the issue of whether a contract had been entered into required a trial so that evidence was available from those involved in the transactions. He also ordered expert evidence on "the question of whether a contract was concluded"

At the trial the Court had nineteen bundles of documents and evidence from the following witnesses. Mr Roberto Castro, a part time consultant who acts as Proton's Finance Officer, and Ms Elena Isaieva, a trader, gave evidence for the Claimant. Mr Tomas Armalis, Procurement Manager at Orlen gave evidence for the Defendant. Mr Roger Sepkes, director and principal of Asdem, an oil and oil trading consultancy gave evidence as expert for the Claimant and Mr Stuart Traver, a Principal at Gaffney Cline, the international oil and gas advisory firm, for the Defendant.

In order to keep this judgment to a reasonable length I do not refer below to some points made in the detailed closing arguments which seem to me to be irrelevant or very minor.

Has a contract been entered into?-the law

The relevant principles are common ground following the recent decision of The Supreme Court in RTS Flexible Systems Ltd. v Molkerei Alois Müller GmbH & Co. [2010] 1 WLR 753. Lord Clarke, delivering the judgment of the Court, said at paragraph 45:

" The general principles are not in doubt. Whether there is a binding contract between the parties and, if so, upon what terms depends upon what they have agreed. It depends not upon their subjective state of mind, but upon a consideration of what was communicated between them by words or conduct, and whether that leads objectively to a conclusion that they intended to create legal relations and had agreed upon all the terms which they regarded or the law requires as essential for the formation of legally binding relations. Even if certain terms of economic or other significance to the parties have not been finalised, an objective appraisal of their words and conduct may lead to the conclusion that they did not intend agreement of such terms to be a precondition to a concluded and legally binding agreement."

Lord Clarke (at para 49) also approved the following statements of principle set out in the judgment of Lloyd L.J. in Pagnan SpA v Feed Products Ltd [1987] 2 Lloyd's Rep 601 at 619:

"(1) In order to determine whether a contract has been concluded in the course of correspondence, one must first look to the correspondence as a whole … (2) Even if the parties have reached agreement on all the terms of the proposed contract, nevertheless they may intend that the contract shall not become binding until some further condition has been fulfilled. That is the ordinary 'subject to contract' case. (3) Alternatively, they may intend that the contract shall not become binding until some further term or terms have been agreed … (4) Conversely, the parties may intend to be bound forthwith even though there are further terms still to be agreed or some further formality to be fulfilled … (5) If the parties fail to reach agreement on such further terms, the existing contract is not invalidated unless the failure to reach agreement on such further terms renders the contract as a whole unworkable or void for uncertainty. …. It is for the parties to decide whether they wish to be bound and if so, by what terms, whether important or unimportant. It is the parties who are, in the memorable phrase coined by the judge [at p 611] 'the masters of their contractual fate'. Of course the more important the term is the less likely it is that the parties will have left it for future decision. But there is no legal obstacle which stands in the way of the parties agreeing to be bound now while deferring important matters to be agreed later. It happens every day when parties enter into so-called 'heads of agreement' ."

The question therefore is this. Did the parties agree on all the terms that they objectively regarded as essential for the formation of legally binding relations between them on the date when a contract is claimed to have come into existence? The relevant date is 14th June 2012 as, by the end of the trial, the pleaded alternatives, 22 ^nd and 27 ^th June had been dropped. The answer depends on an evaluation of what the parties communicated to each other to which I shall now turn.

The witnesses of fact

Before reviewing the email and other correspondence it is important to be aware of the position of those involved.

Mr Castro, although the Finance Officer, is a part—time consultant to Proton and his personal involvement in the events giving rise to the dispute was limited. Thus he had no contact with Orlen or Trafigura. His evidence was more concerned with aspects of damages and mitigation which in the end were not very controversial.

Ms Isaieva, the trader, was Proton's main witness. She became a trader in 2010 after experience as a brand manager in the tobacco and perfume industries. As a result her trading experience by June 2012 was limited. Ms Isaieva has very good but not perfect command of English and, as with Mr Armalis, it would be unfair to expect precision in her choice of English words in the correspondence and to scrutinise her use of language too closely. Ms Isaieva was an honest but inexperienced witness who at times seemed to be looking for the convenient rather than the accurate answer. She did not dispel a concern that Proton had been less than candid with Orlen when seeking to blur the distinction between net and gross when discussing the Bill of Lading and related matters.

Mr Armalis was Orlen's witness. He had business training and since 2000 has been in the oil industry in various roles but until he joined Orlen his trading experience was limited to deals, mainly requiring delivery by rail or trucks between Lithuania and Eastern European countries. His command of English was similar to that of Ms Isaieva. Mr Armalis was commendably frank and straightforward in his evidence.

There was no significant conflict between Ms Isaieva's account and that of Mr Armalis. The main significance of the live evidence of the witnesses to the question of when, if at all, a contract came into existence was that their reactions to events were not necessarily those of experienced oil traders and account should be taken of the fact that neither was corresponding in their first language.

The documents recording the dealings between the parties

On 11 June 2012 at 15:31, Proton sent an " INDICATIVE OFFER" to Orlen for the sale of some 25,000 metric tonnes of an oil blend described as the Product, attaching the specifications and the Q88 for the carrying vessel, M/T "HIOTISSA"/sub, and specifying, " All other terms and conditions as per seller's standard CIF contract" and " This offer is valid till 12.06.2012 COB." Although described as "Oil blend", the nature (and value) of the feedstock could only be determined from the technical distillation data attached to the email, which explained how much of the cargo would condense at different temperatures. The same technical data was attached to every subsequent proposal and draft contract sent by Proton.

Based on this data, Mr Armalis asked Orlen's Supply Chain Management Department to analyse the anticipated increased profit which Orlen would stand to make if it bought this product (as opposed to its regular feedstock of Russian Export-Blend Crude Oil). In the light of the advice he received, Mr Armalis...