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Enron Mail |
Alan and Richard, FYI re the FGPC/ECT contract. John Lockey is a barrister
(an actual trial advocate) that David asked to help him given the urgency and complexity of this dispute. Deborah, please print out and file. B.K.D. ----- Forwarded by Britt Davis/Corp/Enron on 08/03/2000 10:54 AM ----- Julie.Bertschin@clyde.co.uk 08/03/2000 10:20 AM To: Matthias.lee@enron.com cc: britt.davis@enron.com, ngregson@wfw.com Subject: m/v PACIFIC VIRGO From David Best. Following our telephone conference this morning, the following advice can be given. Please treat this advice as the joint advice of myself and Counsel John Lockey. We give it in bullet form for the purposes of clarity. 1. The terms of the ASTM D3605 do support the view that it is inappropriate to apply D3605 to condensate. The fact remains, however, that the contract defines the contractual specification by reference to D3605. On the face of it, Enron has promised a specification in accordance with test method D3605 and has agreed to assume the risk tht the condensate does not satisfy the specification when tested in accordance with D3605. 2. The terms of Appendix 1 to the 1997 Fuel Supply Plan seem to us to make it much more difficult to argue that the reference in Appendix B of the contract fo D3605 means only that D3605 applies to condensate to the extent that it is appropriate to use D3605 for condensate. The fact that Enron reported test results for condensate in Appendix 1 to the 1997 Fuel Supply Plan by reference simply to test method D3605 makes it very difficult to argue that when the parties concluded the contract, they would have had in mind that D3605 applies only to gasoil and would not apply (or would only apply with modifications) to condensate. 3. The terms of the Fuel Supply Plan,and of Appendix 1, make it even more difficult to argue that the impossibility of finding a seller who is willing to sell condensate applying test method D3605 satisfies the test of using reasonable commercial efforts. Even though Enron is not contractually committed to the terms of the Fuel Supply Contract, the fact is that Enron put forward typical specifications for condensate by reference to D3605. The Fuel Supply Plan re-emphasises the importance to the buyer of being provided with condensate in preference to naptha or gasoil. 4. Our understanding of SGS' advice to Enron is that D3605 does not envisage ashing, and that it would be wrong to report a result by reference to test method D3605 if the sample had been ashed before testing. 5. Should SGS provide a test certificate certifying a specification which is outside contractual specification applying D3605with a notation that condensate falls outside the scope of D3605, (as they suggest), the buyers will still be able to reject because any verification is final, conclusive and binding on the parties, provided there is no manifest error. 6. If it is the case that applying D3605 (without any modifications to the ASTM methodology) to portions of the sample condensate provided to the independent inspector would (or may well) produce different results (in ppm) for the same sample because of the volatility of condensate, it seems to us to be strongly arguable that the independent inspector (aware that his certification of non-compliance will be binding under the contract) should simply refuse to certify a test result by reference to D3605. It seems to us to be difficult in those circumstances for the inspector to conclude that a particular test result is reliable. (Furthermore, if it is the case that it is not practically possible to certify quantities of elements below 0.5ppm using D3605 on condensate, then again the independent inspector should refuse to certify at those levels). 7. If the independent inspector refuses to certify by reference to D3605, the buyer will have to decide whether to reject and take his chances of demonstrating that in fact the condensate was off-spec by reference to D3605. (The absence of a certificate of compliance with specification does not seem to us to justify rejection). If the buyer decides to reject, an arbitrator would have to decide on all the evidence whether the cargo was off-spec as measured by D3605. The buyer would be running the risk that he could not justify the rejection, with a potential exposure to Enron's costs. It would be prudent in those circumstances for Enron to have commissioned a number of tests using D3605 methodology in order to present an average (and hopefully on-spec) result to counteract the test results produced by the buyer. It would also be prudent in those circumstances for Enron to have commissioned a number of tests using SGS' preferred method of testing condensate, as these results could be used by Enron to require the buyer to take a rejected cargo in mitigation of the buyer's loss or to submit to the arbitrators that the buyer should have mitigated by accepting re-tender of the rejected cargo when accompanied by an independent inspector's certification that the specs were met by reference to the much more appropriate methods for testing. 8. Contractually, it is almost certainly not open to Enron to refuse to agree on the appointment of an independent inspector, or to insist that the independent inspector should not test the sample of condensate using method D3605 unless there are modifications to that method when applied to condensate. However, there does not appear to be any objection to Enron advising in advance that because the independent inspector's certificate is intended to be binding under the contract, the independent inspector should not provide a result by reference to D3605 unless satisfied that that result is truly representative of the qualities of the sample. 9. Turning to Enron's exposure to a tax liability on the nomination and shipment of gasoil we repeat our advice given in our e mail of 2nd August that it is not possible for Enron to argue with any realistic prospect of success that the apparent impossibility of finding a seller who is willing to sell condensate applying test method D3605 satisfies the test of using reasonable commercial efforts to justify zero tax. It seems to us that this provision is designed to deal with problems of obtaining condensate cargoes due to force majeure related reasons after the contract has been entered into. The onus is on Enron to demonstrate that it has used reasonable commercial efforts. It is likely in our view that FGCP will set off against price a sum equivalent to the tax liability so that Enron is out of pocket with the regard to the nominated gasoil. 10. Unless Enron wishes to manage the contract by risking a rejection dispute each time condensate is delivered (assuming SGS do not certify) Enron may want try to renegotiate the contract. It may be that the point we have raised in 7 concerning the risk of an unlawful rejection by the buyer may be helpful in any such renegotiation. Regards David Best PLEASE REPLY TO: david.best@clyde.co.uk __________________________ This e-mail and any files transmitted with it are confidential and intended solely for the use of the individual or entity to whom they are addressed. Any views or opinions expressed within this e-mail are those of the author and do not necessarily represent those of Clyde & Co. If you have received this e-mail in error, please contact Clyde & Co. Clyde & Co. 51 Eastcheap, London, EC3M 1JP Tel: +44 (020) 7623 1244, Fax: +44 (020) 7623 5427 Clyde & Co. Guildford Beaufort House, Chertsey Street, Guildford GU1 4HA Tel: +44 1483 555 555, Fax: +44 1483 567 330 E-Mail: postmaster@clyde.co.uk, Internet: http://www.clydeco.com
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