Lloyd's Law Reports
[1999] Vol. 1
LLOYD'S LAW REPORTS
QUEEN’S BENCH DIVISION
(COMMERCIAL COURT)
854
The terms of the adjustment clause were not
such as to compensate Petrogal for this difference
in yields between Leona with a density of 25.1 API
July 3; 16, 1998
and a density significantly greater and the mistake
as to the calculation of yields made Petrogal’s
____________________
position worse.
During the course of the contract Petrogal
PETROLEOS DE PORTUGAL
realized the mistake made in the calculations and
AND PETROGAL S.A.
asked BP to agree a modification of the contractual
v.
yields. BP refused. Petrogal then rejected the sixth
BP OIL INTERNATIONAL LTD.
cargo tendered and claimed the loss they had
suffered in processing the first five consignments.
Before Mr. Justice THOMAS
BP counterclaimed for the loss they had suffered
when the sixth cargo was rejected.
Arbitration - Award - Remission - Procedural
mishap - Contracts for processing of crude The dispute was referred to arbitration. The
oil - Dispute referred to arbitration -
arbitrators held inter alia that the claim for a
Arbitrators found in favour of defendants -modification of the yields failed. They further held
Whether arbitrators had misunderstood orat par. 58 that mischaracterized issue - Whether award
should be remitted for procedural mishap. . . .Petrogal suggested in argument that while the
adjustment clause might deal with divergencies
An oil trading division of BP sought refineries
from reference densities it did not deal with the
willing to process crude nominated from a basket consequences of those divergencies. This could be
of crudes including Leona crude in which they
dealt with under Note 5. In short it argued that the
wished to trade.
changes in yields consequent on the difference in
density. . .fell to be dealt with under the Note. But
The plaintiffs (Petrogal) expressed an interest
as pointed out the whole purpose of the
and set about calculating yields of products that adjustment clause was to adjust yields. The fact it
could be derived from each crude listed by BP.
did so inadequately did not enable Petrogal to pray
They did this by reference to an assay of each
in aid Note 5.
crude which Petrogal already had or obtained. The
figures calculated represented what Petrogal
The arbitrators held that Petrogal’s claim failed and
thought they would be able to produce from a
found in favour of BP’s counterclaim.
crude of specified density when it was mixed in the
ordinary course of refining with other crude
Petrogal applied for the award to be remitted on
products. In relation to the Leona crude Petrogal the ground of procedural mishap in that in par. 58
used a 1982 assay but made a mistake in the
the arbitrators had mischaraterized and
calculations of the yield to be devised from that
misunderstood this very important part of
crude.
Petrogal’s case.
BP and Petrogal entered into the contracts under-Held, by Q.B. (Com. Ct.) (THOMAS, J.), that (1) on
which BP would deliver quantities of crude to
the evidence the argument now sought to be
Petrogal which Petrogal would refine and then
raised was never put to the arbitrators; the
deliver quantities of the products to BP. The
plaintiffs’ argument before the Court that changes
contracts were used by BP as part of their oil
in characteristics of the oil had to be considered
trading operations. The mistake which Petrogal
together under Note 5 without regard to the
made with respect to the yields from Leona crude adjustment clause because changes in the API
distorted the pricing structure of the contract withmight or might not have anything to do with
respect to that contract. The contracts provided
changes in characteristics which affected the yield;
inter alia:
it was at the heart of the argument that there was
a separation between the density of the oil as
measured in API and the other characteristics such
Note 5
as sulphur or viscosity that might affect yield; it
was quite clear in the argument before the
In case of any significant changes in the sulphurarbitration that that distinction was not drawn; nor
content and/or other characteristics of the crude was the argument put forward in a way that could
oils and in case these changes in the refiner’s
be discerned as the most important part of
judgment mean significant changes in the yields Petrogal’s case (see p. 860, col. 2);
and/or the quality of the products, the parties shall
agree on a justifiable modification of the
contractual conditions.
(2) the evidence before the Court showed that
there was a close connection between the
characteristic of crude that delineated the yield
The contract also contained an adjustment clause which would be obtained and the density of the
which provided inter alia:
Should the crude oil actually delivered by BP be
crude as measured in API (see p. 861, col. 1);
(3) the lucid and succinct reasoning set out in
more than six. . .tenths of 1 degree above or belowpars. 50-58 of the award and the specific matters
the reference API gravity used by Petrogal in the to which the Court’s attention was directed clearly
crude oil yield assessment. . .then the. . .yields willdemonstrated that even if the submissions made
be duly adjusted . . .
by the plaintiffs had been advanced to the
arbitrators they were misconceived and doomed to
The contract specified a density of 25.1 API
failure; there was no basis for remitting the award
degrees for Leona crude but each of the Leona
or suggesting that any injustice would follow from
cargoes was denser than specified.
a refusal to remit the award (see p. 861, cols. 1
and 2).
____________________
[1999] Vol. 1
Q.B. (Com. Ct.)
LLOYD'S LAW REPORTS
Petrogal v. BP
The following cases were referred to in the
judgment:
855
THOMAS, J.
the arbitration lasted some nine days, Petrogal
was represented by very experienced leading
Counsel, that the arbitration tribunal was
Breakbulk Marine Services v. Dateline Navigation,comprised of two very distinguished lawyers
Mar. 19, 1992, unreported;
and a well recognized expert in the petroleum
industry, the application on its face was
Indian Oil Corporation v. Coastal (Bermuda) Ltd.,somewhat startling.
[1990] 2 Lloyd’s Rep. 407;
The principles applicable were largely common
King v. Thomas McKenna Ltd., [1991] 2 Q.B. 480;ground. They can be derived from King v.
Thomas McKenna Ltd., Indian Oil Corporation v.
Nova Petroleum International Establishment v.
Coastal (Bermuda) Ltd., [1990] 2 Lloyd’s Rep.
Tricom Trading Ltd., [1989] 1 Lloyd’s Rep. 312;407, Nova Petroleum International
Establishment v. Tricom Trading Ltd., [1989] 1
Portaga Commercio Internacional S.A. v. RepublicLloyd’s Rep. 312, Secretary of State for the
of Brazil, Feb. 5, 1998, unreported;
Environment v. Reed International Plc, [1994] 1
E.G.L.R. 22, Portaga Commercio Internacional
Secretary of State for the Environment v. Reed
International Plc, [1994] 1 E.G.L.R. 22.
S.A. v. Republic of Brazil (unreported, Feb. 5,
1998) and summarized as follows:
____________________
(1) The Court has an unrestricted power to
remit to avoid injustice where there has been
some unfairness or a deviation (whether due to
This was an application under s. 22 of the
mishap or misunderstanding) from the route
Arbitration Act, 1950 to remit an interim award that the reference should have taken to the
dated Apr. 7, 1998 made by three arbitrators inaward (as opposed to an error of fact or law in
relation to a dispute arising out of contracts
the award)
made between the plaintiffs Petroleos de
Portugal and Petrogal S.A. and the defendants
(2) However, the Court will require clear
BP Oil International Ltd. on the ground of
evidence that there has been some unfairness
procedural mishap.
or a deviation from the route that the reference
should have taken and that, as a result, a party
Mr. Iain Milligan, Q.C. (instructed by Messrs. has suffered injustice. It will "not be astute to
Clyde & Co.) for the plaintiffs; Mr. Charles
detect misconduct".
Hollander (instructed by Messrs. Morgan Bruce)
for the defendants.
(3) Where the arbitral tribunal is likely to
reach the same decision if the award is remitted,
The further facts are stated in the judgment ofit will generally be inappropriate to remit the
Mr. Justice Thomas.
award.
Judgment was reserved.
(4) As the parties have chosen arbitration
rather than the Court as the tribunal to
determine their disputes, the Court will have
Thursday July 16, 1998
regard to their intention that there should be
finality.
____________________
In an international commercial arbitration,
this last factor is of great importance. In the
Department of Trade Consultation Document on
JUDGMENT
the draft bill which was published in February,
1994 and which led to the enactment of the
Mr. Justice THOMAS:
1996 Act, it is recorded at p. III/14 that the
Departmental Advisory Committee on
Introduction
Arbitration Law (then chaired by Lord Justice
Steyn) had advised that the decisions in Indian
There is before the Court an application underOil, King and Breakbulk Marine Services v.
s. 22 of the Arbitration Act, 1950 to remit an
Dateline Navigation (Mar. 19, 1992,
interim reward dated Apr. 7, 1998 made by
unreported):
three arbitrators, Lord Mustill, Mr. Ian Glick,
Q.C. and Mr. Peter Ellis Jones, in relation to a . . .constituted a retrograde step which
dispute arising out of contracts made between unjustifiably militates against the finality of
the plaintiffs (Petrogal) and the defendants (BP)arbitration awards under English law. Moreover
in 1992.
the [Departmental Advisory Committee]
advised that despite the Court of Appeal
Petrogal contended that there had been a
decision, the law cannot be regarded as settled.
procedural mishap or misunderstanding within
the principles set out in King v. Thomas
Although the decision of the Court of Appeal is
McKenna Ltd., [1991] 2 Q.B. 480. That mishap plainly binding on me, the principles set out in
or misunderstanding had resulted from the
the authorities to which I have referred require
failure by the arbitrators to deal with what
that applications of this kind in international
Petrogal’s Counsel, Mr. Milligan, Q.C.,
arbitrations require close scrutiny so that the
characterized before the Court as the most
finality that the
important part of Petrogal’s case. Considering
that
[1999] Vol. 1
Q.B. (Com. Ct.)
LLOYD'S LAW REPORTS
Petrogal v. BP
856
THOMAS, J.
parties have chosen through arbitration is not crude oils and in case these changes in refiner’s
defeated.
judgment mean significant change in the yields
and/or the quality of the products, the parties
The factual background
shall agree on a justifiable modification of
contractual conditions.
It is only necessary for me to summarize the
facts very briefly:
The adjustment clause read:
An oil trading division of BP sought refineries
willing to process crude nominated from a
Should the crude oil actually delivered by BP
be more than six (6) tenths of 1 degree above or
basket of crudes in which they wished to trade;below the reference API gravity used by
the crudes, which were among the less
Petrogal in the crude oil yield assessment
common, included Leona crude.
specified hereabove (see clause 3), then the
above yields will be duly adjusted, taking into
Petrogal expressed an interest and set about
account the procedure stated in items 4.3 and
calculating yields of products that could be
4.4. of "Standard Contractual Conditions for Oil
derived from each crude listed by BP. They did Processing Operations".
this by reference to an assay of each crude
which Petrogal already had or obtained. The
Under the contract five cargoes of Leona crude
figures calculated represented what Petrogal
oil were delivered and processed.
thought they would be able to produce from a
crude of a specified density (expressed in
The contract specified a density of 25.1 API
American Petroleum Institute (API) degrees)
degrees for Leona crude; each of the Leona
when it was mixed in the ordinary course of
cargoes was in fact denser than 25.1 API
refining with other crude products.
degrees (and therefore had a lower API) and
was therefore denser than Petrogal anticipated.
In relation to Leona crude, Petrogal used a 1982With respect to the first of those cargoes, the
assay, but made a mistake in the calculations offact that it was denser than 25.1 had nothing to
the yields to be derived from that crude.
do with BP. In relation to all the other cargoes,
the API was as BP in fact specified to their
BP and Petrogal then entered into the contractssuppliers and the fact they were denser was
under which BP agreed to deliver quantities of therefore due to the action of BP.
crude oil to Petrogal which Petrogal would refine
at their refinery and then deliver quantities of The operation of adjustment clause
products to BP or, if they retained certain
products, pay BP for them. The contracts were
then used by BP as part of their oil trading
The density of each cargo in API degrees was
known to Petrogal on or after the arrival of each
operations and the contracts therefore formed consignment of crude. In accordance with the
part of a very complex trading pattern in oil.
adjustment clause, they carried out an
adjustment and sent a telex to BP setting out
The mistake that Petrogal made with respect tothe different yields thereby derived.
the yields from Leona crude distorted the pricing
structure of the contract with respect to that
crude.
However, the terms of the adjustment clause
were not such as to compensate Petrogal for the
true differences in yields between Leona with a
Each contract contained a cl. 3 which was
density of 25.1 API and a density significantly
entitled "Quality of crude oil/processing yields togreater even if the yields in the contracts had
apply". It set out a matrix of columns, each
been properly calculated. The mistake as to the
headed with the name of a crude, the figures
calculation of yields in the contract made
being labelled successively API, and then the
Petrogal’s position significantly worse.
products delivered LPG, Naphtha, Jet A-1, Gas
Oil, Fuel Oil; the final figure was R.F. + Losses: Taken together, these two factors produced
production losses. The clause then went on to very considerable losses for Petrogal.
provide that the acceptance of certain types of
crude would be at the refinery’s option. The
The dispute
clause concluded with a provision labelled "Note
5" and with an unnumbered provision which was During the course of the contract, Petrogal
referred to by the arbitrators as the "adjustmentrealized the mistake made in the calculations.
clause".
The arbitrators found as follows:
Note 5 read as follows:
Its consequence was that if the yield figures
were regarded as representing the actual
In case of any significant changes in the
outcome of a processing operation carried out
sulphur content and/or other characteristics of on Leona crude alone they were impossible in
the
[1999] Vol. 1
Q.B. (Com. Ct.)
practice to
LLOYD'S LAW REPORTS
Petrogal v. BP
achieve. Whereas if they were taken simply as
857
THOMAS, J.
(6) The oral closing submission.
being contractual commitments to deliver or
pay for various proportions of product (in
This rolling and ever changing formulation of
accordance with the buy-back provisions of the Petrogal’s case made the task of the arbitrators
contract) they inevitably involved Petrogal in a much more difficult than if the case had been
serious loss.
properly formulated before the hearing began.
Petrogal asked BP to agree to a modification of The decision of the arbitrators
the contractual yields. BP refused as BP had
used the contract, as I have stated, as part of its(1) Rectification
complex oil trading positions. Upon BP’s refusal
to agree a modification, Petrogal rejected the
The claim failed. No argument was made that
sixth cargo tendered. Petrogal complained
the award on this issue should be remitted.
thereafter of the loss they had suffered in
processing the first five consignments and BP (2) Claims founded on the contract
counterclaimed for the loss they had suffered
when the sixth cargo was rejected.
The claims founded on the contract fell under
two headings:
The claims made by Petrogal
(a) Claims for breach of contract
Petrogal made the following claims in its
The arbitrators found that the claims for
"substituted points of claim" served in
breach of contract failed. Again no argument
November, 1996:
was advanced that the award should be
remitted in respect of this decision.
(1) Rectification.
(b) Claims under Note 5 and/or the adjustment
(2) A declaration that the stipulated figures forclause
product yields were void for mistake.
The arbitrators held that the claim for a
modification of the yields and other contract
(3) Damages for breach of contract for failing terms which had been put forward in various
to deliver crude from which it was possible to
ways failed.
achieve the desired yield.
They first held that deficiencies in the
(4) Damages for breach of contract in
adjustment clause could not be remedied by a
delivering a cargo with a density in API degreesmodification of the contractual conditions and in
falling short of 25.1.
particular the yield under the terms of Note 5.
They held that the adjustment clause was not
The arbitrators observed at par. 31 of their
award:
limited to a specified departure from the density
figures but applied to any departure from those
density figures. The adjustment clause
Petrogal’s claims have undergone many
therefore operated to compensate for
mutations in the course of the arbitration. On differences in yield between the specified API of
the way a number of contentions have been
25.1 degrees for Leona crude and the actual API
expressly or tacitly dropped. We do not deal
of any shipment of Leona crude delivered. They
with these, but think it right to say that we are held that there could not simultaneously be an
wholly satisfied that none of them could have adjustment of yields under the terms of the
been successful.
adjustment clause and a modification of the
terms of the contract under Note 5 to
Petrogal’s solicitor, Mr. John Blacker of Clyde & accommodate precisely the same circumstance.
Co., made it clear in an affidavit sworn on their Petrogal accepted that the arbitrators in this
behalf that Petrogal’s claims were not restrictedinstance dealt with and rejected one of their
to the way in which they were pleaded in the
arguments.
substituted points of claim. That document had
been served in November, 1996 over 12 monthsThe arbitrators then held at par. 58 as follows:
before the arbitration which was heard between
Mar. 9-19, 1998. It was not amended, but the
By way of alternative, Petrogal suggested in
case was developed by Petrogal as the hearing argument that whilst the adjustment clause
proceeded; that was done in six stages in the might deal with divergencies from reference
course of the arbitration:
densities, it did not deal with the consequences
of those divergencies. This could be dealt with
(1) The opening skeleton.
under Note 5. In short, it argued that the
changes in yields consequent upon the
(2) The discussion on the first day.
difference in density between 25.1 degrees API
and the density of the cargoes actually landed
(3) The statement of remedies sought by
Petrogal.
fell to be dealt with under the Note. But as
pointed out above, the
(4) The quantification of the claims agreed by
the experts.
(5) The closing skeleton.
[1999] Vol. 1
Q.B. (Com. Ct.)
LLOYD'S LAW REPORTS
Petrogal v. BP
whole purpose of the adjustment clause is to
858
THOMAS, J.
(5) If the parties failed to agree on a justifiable
adjust yields. The fact it does so inadequately modification of the contract under the provisions
does not enable Petrogal to pray in aid Note 5. of Note 5, then (as was common ground) the
arbitrators had power to impose the
It was the principle submission of Petrogal in modification they considered proper.
the application before the Court that in this
paragraph of the award, the arbitrators had
(6) The adjustment clause did not operate,
failed to address what was characterized beforebecause changes in yield were not consequent
the Court as "the most important part of
upon the difference in density but upon the
Petrogal’s case". As this was the sole foundationdifference in the other characteristics of the
of Petrogal’s argument for remission, I shall
crude.
consider this in detail below, but it is first
convenient to summarize the remaining part of
the decision of the arbitrators.
Mr. Milligan submitted that in par. 58 of the
award the arbitrators had mischaracterized and
misunderstood this very important part of
The arbitrators then went on to deal with the
Petrogal’s case. If the arbitrators had in fact
contention that cl. 3, read with art. 4.1 requiredunderstood and considered this argument, then
BP to deliver crudes from which it was possible par. 58 should have stated their argument thus:
to achieve the specified yields. They rejected
that contention. No complaint is made in this
By way of alternative, Petrogal suggested in
application about that.
argument that whilst the adjustment clause
might deal with divergencies from reference
The arbitrators then addressed Petrogal’s
densities, it did not deal with significant changes
argument on s. 4 of the Supply of Goods and
in the characteristics of crude oil that changed
Services Act, 1992. Again that argument did notthe yield or the quality of the products. Such
feature in this application.
changes could only be dealt with under Note 5.
In short, if there had been a significant change
The arbitrators held, therefore, that the claimsin the characteristics, then yields and the API
founded on the contracts failed.
were to be modified under Note 5 to reflect that
change in characteristics.
(3) The counterclaim
When the arbitrators had stated that
Having reached that conclusion in respect of Petrogal’s arguments related to changes in yield
Petrogal’s claim, they found in favour of BP’s
consequent upon the difference in density, they
counterclaim.
had "put the cart before the horse", as changes
in yield might or might not be consequent on
Petrogal’s contention on the application changes in density, but were consequent upon
changes in characteristics.
Petrogal’s contention that the award should be
remitted because there had been a procedural
Mr. Milligan illustrated the argument for the
mishap was developed before me with
use of Note 5 to modify the contracts in two
considerable skill by Mr. Milligan. He
different situations - first where a change in
summarized the argument which had been
characteristics was announced and there was a
made to the arbitrators but which he contendedneed to modify the contract prospectively and
they had failed to deal with as follows:
secondly where it was discovered that crude
which had been delivered was of a different
(1) Differing characteristics or differences in composition, and a retrospective change was
the chemical composition of the crude oil is whatneeded.
gives rise to differing yields or differences in the
quality of the products.
If a prospective change was announced then,
it was easy to operate the contract. Note 5
(2) A significant change in the characteristics would be used to modify the yields and the API.
or chemical composition of crude might well giveBoth modified terms then applied to subsequent
rise to a significant change in yields or the
deliveries; if a cargo was delivered with an API
quality of the products, but at the same time
that varied from the modified API, then the
might or might not lead to a change in density asadjustment clause would operate.
measured in API degrees.
As to retrospective changes, Mr. Milligan first
(3) Therefore it was first necessary to
relied upon the fact that the arbitrators
consider, without reference to density, whetheraccepted, that Note 5 could be operated
there was a significant change in the
retrospectively to apply to cargoes already
characteristics of the crude and how that
delivered. He then submitted that there were
affected the yield.
two circumstances in which retrospective
changes might be required: (1) If there was a
(4) If there was a significant change, then thesingle cargo which was off specification, then
provisions of Note 5 operated.
Note 5 could be applied to modify the yields and
the API; in those circumstances the adjustment
clause would not operate because, ex
hypothesi, the
[1999] Vol. 1
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LLOYD'S LAW REPORTS
Petrogal v. BP
single cargo which was delivered would be on
859
THOMAS, J.
(1) The substituted points of claim. It is quite
specification as a result of the modifications. (2)clear that the argument advanced before the
If it was discerned after the delivery of several Court was not advanced in the substituted
cargoes (as had happened in this case) that
points of claim; the issue raised at pars. 24 and
there had been a change in the quality of crude,25 was a general claim for modification.
then, taking into account all the shipments,
Note 5 could be operated to bring about a
(2) Petrogal’s opening submissions. It was
modification of the yields and the API. There
contended that at pars. 39-41 of the opening
would then be scope to apply the adjustment
submissions, the argument was put forward. I
clause to each of the specific cargoes by
have again read those paragraphs carefully, but
reference to the modified API.
I can find no trace of the argument.
He submitted that the argument that the
(3) The opening oral submissions. It appears
arbitrators has failed to address was that Note 5from the transcript of the opening submission
was intended to operate irrespective of changesthat one of the arbitrators, Mr. Glick, Q.C.,
in API; that was because the arbitrators had
pointed out that it appeared from the
wrongly assumed that Petrogal had said the
documents submitted prior to the arbitration
changes in the characteristics in the crude oil
that the principal claim put forward by Petrogal
was simply a manifestation of changes in API. was a claim related to the mistake that had been
That was not the position because changes in made in the initial calculations; however there
the characteristics of the crude might or might appeared to be a significant claim based upon
not be reflected in the API.
the differences in API, quite apart from the
effect of the mis-calculation mistake. There was
The true analysis, he submitted, was what thethen a discussion centred on two aspects of the
experts had done in the course of the arbitrationclaim - the losses suffered as a result of the
and set out at pp. 3 and 4 of the quantification ofmis-calculation and the losses suffered as a
the claim they had agreed. The experts had
result of the difference in API. Following on that
agreed on modified yields that could be taken asdiscussion, the experts were asked to produce a
representative of the five cargoes actually
summary which showed: (1) the financial effect
delivered. These were based on an assay of theof the mistaken initial calculations, (2) the
cargo shipped on the "New Fortuner". Based onfinancial effect of the difference in API. It is clear
the characteristics, (including but not limited toto me that in that discussion the way in which
the API) they had calculated yields for LPG,
Petrogal sought to advance the claim did not
naphtha, jet oil, gas oil and fuel oil which were include the argument which is the subject of this
significantly different to the yields which had
request for remission.
been based on the assay used for the contract.
(4) The statement of remedies and the
He therefore submitted that the yields based quantification agreed by the experts. Again
on the "New Fortuner" assay were the yields
there is no trace of the argument. The figures
that should be applied to the contract under
were clearly prepared to reflect the differing
Note 5 and, on that basis, Petrogal were entitledeffects of the mistaken initial calculations and
to recover U.S.$3.115 m. The arbitrators has
the effect of the differences in API.
wholly failed to address this most important part
of Petrogal’s case.
(5) The closing skeleton. At pars. 28 and 29 of
the skeleton, Petrogal put forward the following
The argument before the arbitrators
It was accepted by Mr. Milligan that it was an
submissions:
28. The characteristics of the Leona delivered,
essential pre-condition of his application that heas reflected in the BP New Fortuner assay,
could show that argument which I have
differed significantly from those reflected in the
attempted to outline was actually made to the assay for an API of 25.1, viz.:
arbitrators. An application for remission cannot
be used to raise an available argument not
canvassed during the arbitration.
(1) the API was 23.2, as opposed to 25.1,
which itself may reflect significant differences in
characteristics (Minton day 6/20/11-21/10)
There was a transcript of the hearing, in
addition to the written submissions. It was
(2) the viscosity of the atmospheric residue
therefore possible to examine what was put
was 5,900 cS, as opposed to 2,700 cS (3A/37
before the arbitrators and to consider whether para 11.1 and see 4C/785) which had a huge
the argument was raised during the
impact on the yield (Minton 3A/24 para 11.2 and
development of Petrogal’s case as it progressedMurray day 5/49/6-16); and
before the arbitrators in the stages to which I
have made reference.
(3) the sulphur content was 1.69%, as
opposed to 1.38% (3A/23 para 11.1), which in
itself was significant (Minton day 6/25/5-19).
29. Clause 3 should therefore be modified to
reflect the BP New Fortuner assay. On the first
[1999] Vol. 1
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Petrogal v. BP
860
THOMAS, J.
basis the modification should be from the
That is a very good question, if I may say so. I
contract specification to the BP New Fortuner
started with the point that API is only concerned
specification, as set out in MTD 3. On the
with density and therefore I illustrated it by a
second, alternative, basis, the modification
change in density. On no view, with respect to
should be from the yields correctly derived fromMr Hollander, can one say that it applies to
the assay for API of 25.1 to the yields derived anything other than density. If, therefore, there
from the BP New Fortuner assay, as set out in has been a change in the characteristics of the
MTD 2.
crude, one aspect of which is reflected in the
change in API, fair enough. If you are against
In the light in the way in which the arbitrationme on the narrow point, where a density
had proceeded at the earlier stages, again it is changes you have to deal with it only under the
difficult to discern in these submissions the
API adjustment clause, it is only the density.
argument which is said to be the most importantHowever, any other characteristic, which for
part of Petrogal’s case and which it is contendedexample gave rise to the change in density, can
the arbitrators failed to address. It is quite clearbe readily accommodated under note 5.
that the focus of the argument was on API and
not on the other characteristics of the crude
Mr. ELLIS JONES: Thank you.
independent of API.
Mr. MILLIGAN: Indeed, that sort of brings me to
(6) The closing oral submissions. On the
eighth day of the hearing, Mar. 19, 1998,
the next point, which is suppose I am wrong and
the API adjustment clause, so far as density is
Petrogal advanced their arguments on Note 5 concerned, is exclusive so far as modifications
and the adjustment clause. In the course of thatare concerned on density points, how then does
argument, the following submission was made note 5 fall to be applied? My answer, which I
by Mr. Milligan:
have just given, is well any other characteristic,
provided it crosses the significance threshold,
We suggest it really would be absurd,
falls to be dealt with under note 5.
commercially, that you cannot then make an
adjustment under note 5, i.e. you take it at face In his submissions before the Court, Mr.
value and say that there is another
Milligan relied heavily upon this passage.
characteristic, namely API, which has had a
significant impact on the yields, and therefore
This plainly was the high water mark of the
you adjust or modify. I.e., by contrast, the API contention that the argument which it was said
adjustment clause is concerned with the
the arbitrators had failed to address had actually
relatively insignificant off-target crudes - i.e.,
been made to the arbitrators. However, in my
the run-of-the-mill problem - and it is when youjudgment, it is very difficult to see how in the
go significantly off-target that you find yourself context of the hearing the argument which I
in note 5. It would follow, therefore, that if you have tried to outline can be said to have been
made, on that example, a modification for the made to the arbitrators. It was at the core of Mr.
future, and say, "Well, for this particular crude Milligan’s argument before the Court that
we now know it is going to be exported with a changes in characteristics of the oil had to be
five degree difference. We will agree figures forconsidered together under Note 5, without
five degrees different and have a new set put regard to the adjustment clause, because
into the contract", and you then apply the API changes in the API might or might not have
adjustment clause, crude by crude, as they are anything to do with changes in characteristics
delivered by reference to that new clause, it all which affect the yield; it was at the heart of the
fits together perfectly sensibly.
argument that there was a separation between
the density of the oil as measured in API and the
In that passage, it is clear that the argument other characteristics, such as sulphur or
was addressed solely to significant changes in viscosity that might affect the yield. However, in
API, an argument plainly rejected at pars. 54
the passage in the argument which I have set
and 55 of the award.
out above, it is quite clear that that distinction
was not drawn. Nor was the argument, which I
However, Mr. Ellis Jones, the petroleum experthave endeavoured to summarize, put forward in
on the arbitral panel, then asked a question as a way that could be discerned, let alone
to whether Note 5 was triggered by a change indiscerned as "the most important part of
the specification of the crude.
Petrogal’s case".
Would it be because the API has changed, or
Therefore, in my judgment, this application
would it be that as part of the change in the APImust fail in limine as the argument that Mr.
there has been some other characteristic of oneMilligan seeks now to raise was never put before
of the components that has changed.
the arbitrators.
To that the response was made by Mr. Milligan:
[1999] Vol. 1
Q.B. (Com. Ct.)
LLOYD'S LAW REPORTS
Petrogal v. BP
861
THOMAS, J.
matters to which my attention was directed
clearly demonstrate that even if the submissions
The fallacy in the argument that
made by Mr. Milligan to the Court had been
Petrogal sought to advance by means ofadvanced to the arbitrators, they were
remission
misconceived and doomed to failure.
In any event, the argument that Mr. Milligan Conclusion
seeks to bring before the Court by means of this
application, is one that would have been
In my judgment, there is therefore no basis for
doomed to failure. As Mr. Hollander, who
remitting the award or suggesting that any
appeared for BP, explained in his careful
injustice would follow from a refusal to remit the
submissions to the Court, the evidence before award.
the arbitrators showed that there was a close
correlation between the characteristics of crude I would add this observation. It could be
that delineated the yield which would be
suggested, particularly from the decision in
obtained and the density of the crude as
Indian Oil Corporation v. Coastal, that it may not
measured in API; indeed at one stage of the
be a significant factor in considering whether to
argument before the Court, Mr. Milligan
remit an award that the reason for the
accepted that changes in the API would be a
application has only resulted from a fault
reflection of changes in the characteristics. Twoattributable to the representatives of the party
characteristics were specifically relied on by
seeking remission. In the light of the conclusion
Petrogal - the viscosity of the oil and the sulphurwhich I have reached, it is not necessary to
content.
consider this point. However, parties must
appreciate that when they decide to refer their
A graph before the arbitrators clearly
case to an arbitral tribunal, it is their paramount
demonstrated a linear correlation between
duty to prepare the arbitration thoroughly and
viscosity and density measured in degrees API. make clear, when opening the case, the precise
As there was that close correlation, then the
basis on which they make their claims. It may
argument advanced by Mr. Milligan before the well be a powerful consideration in deciding
Court was doomed, as it was entirely covered bywhether the jurisdiction to remit should be
the reasoning of the arbitrators set out in pars. exercised, that a party has had a proper
51-58 of the award. In essence, the parties hadopportunity of putting his case and has failed to
agreed that contractual yields be adjusted by
avail himself of it. Remission in such
reference to API under the adjustment clause circumstances strongly militates against the
and there was no basis to infer or find scope forfinality of arbitral proceedings.
a different adjustment or modification.
Applications of the kind made in this case
As to sulphur, although there was no linear
should not be used in place of proper, clear and
correlation, there was nonetheless some
thorough presentation of the case to arbitrators.
correlation. Furthermore, there was only
If there has not been that thorough preparation
information about the sulphur content of one ofand presentation, then it is not open to a party
the cargoes and that was well within the
to come to the Court to seek remission.
specifications for the yield characteristics of the
product.
____________________
In my view, the lucid and succinct reasoning
set out in pars. 50-58 of the award and the
specific
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Arbitration Law
20 CHALLENGING THE PROCEEDINGS AND THE AWARD
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Lloyd's Law Reports
INDIAN OIL CORPORATION LTD. v. COASTAL (BERMUDA) LTD.