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Enron Mail |
Richard, here's the latest thinking on the FGPC/ECT liquid fuel agreement
conflict. In brief, it looks like we have an argument, but it is too early to tell whether we have the better argument. B.K.D. ----- Forwarded by Britt Davis/Corp/Enron on 08/02/2000 03:31 PM ----- Helen.Godel@clyde.co.uk 08/02/2000 12:53 PM To: Matthias.lee@enron.com cc: britt.davis@enron.com, ngregson@wfw.com Subject: m/v PACIFIC VIRGO From David Best. You asked for a preliminary opinion following our telephone conference this morning on Enron?s contractual remedies and exposures on the FGPC contract. I am afraid the matter is complex and there is no straightforward answer. First, we should start with the contract which I have now read. I am assuming the NDC date has passed, but not the conversion date. Article 4.3 is an acknowledgment by the seller that the buyer?s preference is for condensate because of favourable tax considerations. There is however an unfettered option given by Article 4.4. to Enron to deliver alternative liquid fuel in the form of gasoil or naphtha meeting the quality specifications. The quality specifications for liquid fuel are set out in Appendix A. Article 8.1 under the abbreviation T provides for a liquid fuel tax differential which is a price burden falling on Enron as part of the price formulation. However, ?in the event seller is unable to deliver condensate using reasonable commercial efforts, but supplies another type of liquid fuel instead, T shall be deemed to be zero for the first 600,000 barrels (in the aggregate) of such other types of liquid fuel delivered in a contract year.? Other relevant Articles are 10.2 (buyer?s right to secure alternative supplies), the whole of Article 10 (seller?s default), the whole of Article 13 (determination of quantity and quality), 12.4 (mitigation of losses), and 13.3(a) (?buyer shall be under no obligation to accept delivery of any quantity of liquid fuel which fails to meet the quality specifications ??). No doubt there are other relevant Articles, but the above seem the important ones to me. The facts have been summarised already in numerous e-mails and correspondence and I certainly will not repeat them, except to say that I think it is correct that: (1) It is simply not possible to buy condensate applying test method D3605 for condensate. For this reason, for example, your contract with Phillips Brothers for the ?PACIFIC VIRGO? did not include this test method. (2) SGS consider D3605 is wholly inappropriate for condensate and have said that modifying D3605 with ?ashing? is the preferred method to achieve higher reproduceability. Indeed, the previous two cargoes of condensate supplied to FGPC have been tested using ?ashing?. (3) The gasoil has been nominated for August to replace the contaminated Elang arguably because of the lack of lead time to find suitable cargo of condensate, but more probably because the trader in question understandably is concerned that a substitute condensate cargo may fail if the plain D3605 test method is used. (4) FGCP have said in a recent e-mail dated 27th July that ?FGCP will not hesitate to reject any cargo which fails to meet the guaranteed specification and which offers any possibility of invalidating any guarantees or warranties given by Siemens?. They are therefore not prepared to entertain any amendment to the contract. Following our telephone conference, and having read the contract, I saw problems for Enron and decided to share my thoughts with John Lockey of Essex Court Chambers. He is the barrister specialising in such problems, often used by me and the firm for second opinions, and obviously helpful on a case such as this. We debated the subject at length and came to the following tentative conclusions which I shall put in bullet form. He and I are available for discussion at 08.30 a.m. tomorrow at my office and I propose to call you at that time to hear your comments and to deal with any questions you may have on the following: 1. We think 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 for the first 600,000 barrels of other types of liquid fuel in any contract year. 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 and is not designed to provide effectively a let-out because the contract simply cannot be complied with at all from its start. FGPC will simply argue with some prospect of success, that they entered into the contract and agreed its terms regarding pricing, etc. on the basis that Enron was able to supply condensate applying D3605. This squares with what they have said in their recent which I have quoted above. The same e-mail goes on to say: ?The allowance for 600,000 barrels was built into the LFPC to act as a ?safety valve? only to be used should circumstances demand it.? 2. If we are right about what we say above, this means that Enron are in the invidious position of having to source condensate (to avoid the tax), not knowing whether it is going to meet D3605. If SGS test using D3605 and fail the cargo, the contract supposedly gives FGPC an entitlement to reject. Their cover costs could include gasoil with its additional tax as a ?cost? since there is no available condensate for sale on the market applying D3605, assuming we are right about this assumption in (1) above. 3. It occurs to us that it may be possible to argue with some merit that Appendix B has to be construed to imply a term that D3605 only applies to condensate if it is truly applicable to that grade. You will note that Appendix B sets out a test method in one column and three grades gasoil, naphtha and condensate in other columns. If SGS are right that the test method is inappropriate, they should not be testing against D3605 for condensate. Putting it another way, the condensate could be on spec applying the appropriate ?ashing? method, and the test method set out in Appendix B will not necessarily determine this. As you say, it is hit and miss. Objectively, the intention of the parties must be to apply the appropriate test method, or not to apply a test method if it is not capable of determining the contractual specification. Applying this reasoning, it means that Enron are not in breach by supplying a cargo of condensate in circumstances where the D3605 test is simply not carried out because contractually it cannot apply. 4. As we say above, we think SGS should not be carrying out this test at all if it is entirely inappropriate. Indeed, SGS, who are jointly appointed, should be instructed by Enron not to carry out the test. There is some force for this in Article 13.1(a) which says that measurement of quantities and taking of samples for the purposes of determining the quality of liquid fuel in each shipment should be carried out ?in accordance with international standard practice at the time of the shipment in question?. It is not completely on point since the clause does not deal specifically with testing. In the event that SGS confirm it is inappropriate to carry out the test and they simply do not test, the buyer will be left without any test certificate that shows the cargo has failed to meet the quality specifications. Should subsequently the buyer test on his own under D3605 and it fails, whilst SGS independently apply the ?ashing? method and it passes, we believe the buyers will be in difficulties in maintaining a lawful rejection. 5. Before this angle is pursued, we think SGS should be contacted to confirm the test method is inappropriate. We also think it is important that you and we have sight of the exact wording of the test method to see whether on its face it is inappropriate for condensate. This would help to reinforce the contention that it is inapplicable to condensate in Appendix B. 6. Finally, I should like to have sight of the Appendix 1 ?Typical laboratory condensate analyses? that is attached to the fuel supply plan that you faxed yesterday. We look forward to speaking to you at 08.30 a.m. tomorrow. 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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