Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_05-cv-03406/USCOURTS-cand-3_05-cv-03406-15/pdf.json

Nature of Suit Code: 120
Nature of Suit: Marine Contract Actions
Cause of Action: 28:1331 Fed. Question

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United States District Court

For the Northern District of California

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UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

ARMADA BULK CARRIERS, a Foreign

Corporation,

Plaintiff,

v.

CONOCOPHILLIPS COMPANY, INC., a

Delaware Corporation, FOSS MARITIME

COMPANY, INC., a Washington

Corporation, and FOSS MARITIME

BARGE 185 P3, in rem,

Defendants. 

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No. C-05-3406 SC

FINDINGS OF FACT AND

CONCLUSIONS OF LAW

I. INTRODUCTION

On August 22, 2005, Plaintiff Armada Bulk Carriers

("Plaintiff" or "Armada") filed a Complaint against Defendants

ConocoPhillips Company, Inc. ("Defendant" or "CP"), Foss Maritime

Company, Inc., and the Foss Maritime Barge 185 P3 (the "Barge"). 

See Docket No. 1. On November 13, 2006, Plaintiff filed its

Second Amended Complaint, which contained causes of action for

breach of contract, breach of warranty, and negligence against CP

for delivering allegedly off-specification fuel oil (the "Fuel

Oil"). See Docket No. 36. On December 21, 2006, CP answered the

Second Amended Complaint and asserted its counterclaim against

Armada for breach of contract to recover the sale price of the

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Fuel Oil. See Docket No. 46. Just prior to trial, on May 3,

2007, the Court approved the parties' stipulated dismissal of Foss

Maritime and the Foss Maritime Barge, the boat that transported

the Fuel Oil from CP to Armada. See Docket No. 121. As a result,

the only parties remaining at trial were Armada and CP.

On May 7-11 and 21-22, 2007, a bench trial was held before

this Court. Having considered the evidence presented by Armada

and CP, the Court hereby FINDS in favor of CP and against Armada

in the amount of $189,906.73 plus prejudgment interest. CP should

submit a motion and proposed order detailing calculations for

interest, fees, and expenses, as provided under the parties'

contract. 

II. PRELIMINARY FINDINGS

1. Defendant CP is engaged in various petroleum-related

businesses worldwide including refining, transporting,

storing, blending, and sales. In this case, CP was acting as

the seller of marine fuel oil from a terminal it owns and

operates in Richmond, California (the "Richmond Terminal"). 

2. Plaintiff Armada entered into a time charter of the M/V Spar

II (the "Vessel"), a 623-foot bulk carrier owned by Spar

Shipholding AS. At the time, the Vessel was under a longterm time charter to Bulkhandling Handysize AS, which in turn

sub-chartered the Vessel to Armada.

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3. As the sub-charterer, Armada owed a contractual duty to resupply the Vessel with fuel oil at the conclusion of its

charter. It was during the re-supply operations that the

present dispute arose.

4. On June 14, 2005, via a broker from Trans-Tec/World Fuel

Services, Armada and CP entered into a contract for CP to

sell Armada between 550 and 600 metric tons of oil, which was

to meet IFO 180 / RME 25 specifications excluding the level

of vanadium. The IFO 180 / RME 25 specifications are

equivalent to the ISO 8217 specifications referenced in the

parties' contract. 

5. The relevant requirements for IFO 180 oil are: combined

aluminum and silicon content cannot exceed 80 parts per

million ("ppm"), water cannot exceed 1.0%, and total ash

content cannot exceed 0.10%.

6. The broker confirmed the understanding of the parties for the

quantity and specifications of the Fuel Oil. Pl. Ex. 2.

7. On June 14, 2005, the parties entered into a Spot Sale

Agreement for CP to deliver 550 metric tons of IFO 180 fuel

oil to the Vessel in the San Francisco Bay. Def. Ex. 501.

8. The Spot Sale Agreement expressly incorporated the Products

Purchase/Sale Agreements General Terms and Conditions dated

April 1, 2004 ("General Terms and Conditions" or "GT&C"). 

Def. Ex. 501, 2; Pl. Ex. 131.

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9. As applicable, the GT&C incorporates the Marine Fuels

Purchase/Sale Addendum ("Marine Fuels Addendum") and the

Marine Provisions. Def. Ex. 131, 13; Pl. Ex. 132-33.

10. Per an email between Owen Stillings at CP, the company's

commercial representative and scheduler responsible for the

San Francisco Bay Area, and the Trans-Tec broker, CP agreed

to deliver both heavy oil and cutter, which when mixed

together would bring the viscosity of the Fuel Oil down to

approximately 180 centistokes. Pl. Ex. 1. Evidence at trial

showed that the oil in shore tank 3927 already met the

viscosity requirements for IFO 180 oil.

11. The heavy oil was stored in CP's Richmond Terminal shore tank

3927; the cutter was stored in shore tank 3944.

12. To deliver oil of the quantity and viscosity requested by

Armada, CP advised the broker that it would mix barrels of

heavy oil with barrels of cutter stock in a 95%/5% ratio. 

13. On June 20, 2005, CP began pumping the Fuel Oil from its

Richmond Terminal to the Barge.

14. CP first loaded the heavy oil from shore tank 3927 and then

loaded the cutter stock from shore tank 3944. 

15. CP informed the broker that because CP had no shore-side

blending capabilities, the Fuel Oil would have to blend

aboard the barge during loading and transport to the Vessel;

the broker agreed on Armada's behalf. Pl. Ex 1. Armada

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never objected to this blending method prior to delivery.

16. On June 20, 2005, Mr. Hussain Nassir of Columbia Inspection

tested CP's 3927 and 3944 shore tanks. The samples were

combined in the laboratory in a 95%/5% composite ratio to

reflect the composition of the delivery. 

17. On June 29, 2005, the shore tank composite sample tested 0.3%

for water and 26 ppm for silicon and aluminum, meaning it met

contract specifications. Pl. Ex. 117.

18. At night on June 20, 2005, Mr. Nassir boarded the Barge and

prepared additional samples of the Fuel Oil. Mr. Nassir took

one sample from each of the four Barge compartments to create

a "Barge composite sample." He also took two additional

Barge samples, of which one was delivered to the Chief

Engineer of the Vessel and one retained by the Barge

("retained Barge sample"). Trial Transcript ("TT") 185, 194.

19. Testing on the Barge composite sample performed by Columbia

Inspection indicated that the Fuel Oil met contract

specifications. The results showed 0.3% water and 17 ppm

combined aluminum and silicon. Pl. Ex. 118.

20. On July 7, 2005, BSI Inspectorate tested the retained Barge

sample collected by Mr. Nassir. Consistent with the other

shore tank and Barge samples, it met contract specifications. 

The results showed 0.4% water, 0.052% ash, and 25 ppm

combined aluminum and silicon. Pl. Ex. 92.

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21. After the Fuel Oil was loaded onto the Barge, the Barge

crossed the Bay to dock alongside the Vessel and complete the

delivery. 

22. While the Fuel Oil was being pumped onto the Vessel, the

Vessel's Chief Engineer, Mr. Jesia, arranged the collection

of a "drip sample" from the manifold of the ship. The drip

sample was collected in a 15-Liter bucket, which captured a

continuous drip of oil throughout the entire loading process.

23. Mr. Jesia separated the drip sample into several containers,

one of which was sent to Fobas / Caleb Brett ("Fobas") for

testing.

24. The Fobas test results on the drip sample showed levels of

contamination far outside the contract specifications. The

results showed 4.8% water, 0.192% ash, and 304 ppm combined

aluminum and silicon. Pl. Ex. 85, 2.

25. On June 27, 2005, Armada informed CP of the Fobas test

results and refused to pay for the Fuel Oil, which remained

in the Vessel's 1C tank.

III. RELEVANT CONTRACT PROVISIONS

The parties agree on two documents which apply to this

transaction: the ConocoPhillips General Terms and Conditions

("GT&C") and the Marine Fuels Addendum. 

//

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1

 The original text of the Marine Fuels Addendum was all 

 upper case and has been modified for ease of reading.

7

The relevant portions of the GT&C, Pl. Ex. 131, provide:

2.2 FOB Delivery: Delivery shall be deemed complete and

title and risk of loss shall pass from Seller to Buyer . . .

in the case of vessel deliveries as Product passes the

vessel's permanent manifold flange at the load port.

4.3 Interest: Any amount payable for any cargo of Product

or otherwise payable by Buyer to Seller hereunder shall, if

not paid when due, bear interest from the due date until the

date payment is received by the Seller at an annual rate

(based on a 360-day year) equal to the rate of two (2)

percentage points above the prime rate of interest . . . . 

The relevant portions of the Marine Fuels Addendum,1 Pl. Ex.

133, provide:

3. Grades 

A. The marine fuels supplied hereunder shall be Seller's

commercial grades offered to customers generally at the time

and delivery port from time to time. Seller's fuel grades

will conform to ISO 8217 specifications. Other minimum and

maximum quality specifications shall be as set forth in the

Sales Confirmation.

6. Sampling and Quality

A. Unless a mutually acceptable independent inspector is

appointed to take samples . . . Seller shall take not less

than two (2) identical samples in accordance with its normal

sampling procedures at the delivery port.

Buyer has a right to have a representative witness such

sampling.

B. Buyer waives any objections to the sampling procedures

actually employed unless Buyer had a representative witness

sampling and at the time of delivery gave Seller a written

protest about the procedures.

The samples shall be sealed and labeled by either the barge

company representative, Seller's representative or

independent inspector, as the case may be. The Chief

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Engineer will acknowledge receipt of the sample delivered to

the vessel by signing and dating either a receipt or the

sample label. 

C. One sample will be given to the Vessel at the time of

delivery. Not less than one (1) sample shall be retained by

Seller for at least 60 days, or longer if Buyer has made a

quality claim against Seller during that period.

7. Claims

B. Any claim by Buyer for quality deficiency or

nonconformity must be received by Seller in writing and

accompanied by all then available supporting documents within

thirty (30) days of delivery. It is a pre-condition of

Seller's consideration of a quality claim that at the time

Buyer gives Seller notice, that Buyer has retained its sealed

retain [sic] sample provided by Seller. Buyer's notice must

contain full details including: the quantities and locations

of all bunkers on board the Vessel; the rate and quantity of

consumption since delivery; the location immediately prior to

consumption of bunkers consumed; for each of the three (3)

preceding deliveries to the vessel, the quantity, quality and

specification of product supplied, the place and date of

supply and the name of the supplier; and the information

concerning the whereabouts of Buyer's sealed retain [sic]

sample. 

D. In the event of a quality claim, the parties agree to

have the sample retained by Seller analyzed by a mutually

agreed, qualified and independent laboratory. The costs of

the analysis shall be borne equally by Seller and Buyer. 

Buyer may cause the testing of the sample provided to the

vessel at its sole cost and expense; however, dispositive

determination of quality of product delivered shall be based

upon test results of an independent laboratory in the port of

bunkering of the sealed and marked samples retained by Seller

from the delivery.

The parties disagree as to whether the GT&C incorporates the

Marine Provisions, Pl. Ex. 132, and in particular, the "fraud and

manifest error standard" in Marine Provisions ¶ X.1. Armada

asserts that the Marine Provisions apply because GT&C ¶ 18.1

states: "If delivery is to be made by water-borne transportation,

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the attached ConocoPhillips Company's Marine Provisions shall

apply." Pl. Ex. 131. CP asserts that the Marine Provisions only

apply to situations in which the fuel is cargo, not when the fuel

is used by a vessel for propulsion. However, the inclusion or

exclusion of the Marine Provisions does not change the parameters

of this fuel quality dispute because language indicating that the

Seller's sample will not be binding in cases of "fraud or manifest

error" appears in both the Marine Provisions, Pl. Ex. 132 at ¶

X.1, and the GT&C, Pl. Ex. 131 at ¶ 3.2. 

Also relevant to this quality dispute is language in the

Marine Fuels Addendum stating that samples must be taken "in

accordance with [Seller's] normal sampling procedures at the

delivery port." Pl. Ex. 133 at ¶ 6.A. According to the Marine

Fuels Addendum, the Buyer had a right to have a representative

witness the sampling and "Buyer waives any objections to the

sampling procedures actually employed unless Buyer had a

representative witness sampling and at the time of delivery gave

Seller a written protest about the procedures." Id. at ¶ 6.B.

IV. APPLICABLE LAW

This case falls within the Court's admiralty jurisdiction

under 28 U.S.C. § 1333(1) because it involves a maritime

transaction for the sale of potentially contaminated fuel

delivered to a vessel and a counterclaim to recover the unpaid

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contract price for the fuel. See Exxon Corp. v. Cent. Gulf Lines,

Inc., 500 U.S. 603, 612 (1991) ("[L]ower courts should look to the

subject matter of the agency contract and determine whether the

services performed under the contract are maritime in nature."). 

"In maritime commercial transactions, the Uniform Commercial Code

is taken as indicative of the federal common law of admiralty." 

Interpool Ltd. v. Char Yigh Marine (Panama) S.A.,

890 F.2d 1453, 1459 (9th Cir. 1989), (citing G. Gilmore and C.

Black, The Law of Admiralty, 718-22). 

In this case, Plaintiff asks the Court to find that it

properly rejected the Fuel Oil within a reasonable time after

delivery or tender. In the alternative, if the Court finds that

Plaintiff accepted the Fuel Oil, Plaintiff asks the Court to find

that it properly revoked acceptance of the Fuel Oil. According to

Plaintiff, if it satisfied either of these two situations, the

burden of proof would fall on Defendant CP to show that the Fuel

Oil met contract specifications. The Uniform Commercial Code, §

2-602 allows a buyer to reject goods "within a reasonable time

after their delivery or tender." If the goods have been properly

rejected, the Seller retains the burden of proof to establish that

the goods were delivered in conformance with the contract

specifications. See Miron v. Yonkers Raceway, Inc., 400 F.2d 112,

119 (2d Cir. 1968). 

Here, despite the fact that the Seller's samples were deemed

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binding under the contract, Armada notified CP on June 27, 2005

that the results of the Vessel's manifold drip sample showed that

the Fuel Oil did not meet IFO 180 specifications and that Armada

wished to reject the delivery. CP refused to remove and replace

the Fuel Oil. Relying on the pre-delivery samples collected by

Columbia Inspection showing that the Fuel Oil met contract

specifications, CP asserted that those samples were a binding

indication of product quality. 

The Court will place the burden of proof on CP to establish

that the goods met contract specifications because Armada

attempted to reject the Fuel Oil upon learning the results of the

manifold drip sample.

V. FINAL FINDINGS OF FACT AND CONCLUSIONS OF LAW

1. Mr. Stillings of CP testified that CP's "normal sampling

procedures" are "to rely on a certified company to conduct

sampling pursuant to normal industry practices." TT 497:10-

13. This testimony describes what CP was obligated to do

under Marine Fuels Addendum ¶ 6.A, a part of the contract.

a. The Court finds that CP satisfied the first part of its

obligation by hiring Columbia Inspection, a certified

company, to sample the Fuel Oil. 

b. The second part of CP's obligation involves Columbia

Inspection conducting the sampling pursuant to normal

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industry practices.

i. The Court finds that under the contract, the

Seller's sample is binding unless there is evidence

of "fraud or manifest error" in the sampling or

testing.

c. Armada's expert, Mr. Max Grossey, testified that normal

sampling procedures in the industry dictate following

the API standards for sampling and ASTM standards for

laboratory testing. TT 675:1-20.

d. Having reviewed the written standards (including Pl. Ex.

110) and heard testimony from both parties, the Court

finds that the written standards are more illustrative

than proscriptive for this industry. Even though

Armada's expert stated that Columbia Inspection did not

properly conduct the sampling, the Court finds that none

of Plaintiff's individual criticisms amount to manifest

error. In addition, viewing the sampling in totality,

CP has shown that there was no manifest error in the

collection of its Barge or shore tank samples.

e. Armada asserts that the Barge samples taken by Mr.

Nassir are the relevant samples under the contract, so

the Court will discuss those samples. 

i. In reference to the number of samples taken from

the Barge, because the compartments were seven feet

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high, Mr. Grossey testified that the industry

standards only require the inspector to draw one

sample from each Barge compartment. TT 682: 2-11.

(1) Mr. Nassir from Columbia Inspection satisfied

this standard by drawing one sample from each

Barge compartment. TT 185.

(2) Though he may have taken the sample from near

the bottom of the tanks as opposed to the

middle, this does not rise to the level of

fraud or manifest error. Moreover, according

to industry guidelines, sampling near the

bottom would be more likely to detect

impurities in the Fuel Oil. 

(a) Thus, CP met the contract and industry

standards with respect to the number of

samples taken aboard the Barge.

ii. In reference to the location of samples taken from

the Barge, Mr. Nassir testified that he took a

sample from each of the four Barge compartments to

make a composite sample.

(1) Thus, CP met the contract and industry

standards with respect to the location of

samples taken aboard the Barge.

iii. In reference to the equipment used, CP also met the

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contract and industry standards. Mr. Grossey

testified that a zone sampler, the equipment used

by Mr. Nassir on the Barge, was acceptable

equipment for taking spot samples. TT 680-82. 

Industry standards and practice allow the use of

spot samples for oil quality determination.

iv. The Court also finds that the seals used by Mr.

Nassir were sufficient under the contract and no

contamination resulted from his use of a seal not

to Plaintiff's liking.

2. CP has established by a preponderance of the evidence that

both CP and the independent inspection firm, Columbia

Inspection, followed their normal procedures in obtaining and

testing shore tank and barge compartment samples in

connection with the sale and delivery of the Fuel Oil to

Armada on June 20-21, 2005. When analyzed by independent

laboratories, all of the samples taken by Columbia Inspection

met contract and ISO 8217 specifications, including those for

water, combined aluminum and silicon, and ash.

a. Armada is thus bound by these samples and laboratory

analyses.

3. In the days between forming the contract and loading the Fuel

Oil, the Court finds that Armada had ample opportunity to

sample the Fuel Oil but failed to take advantage of that

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opportunity. Armada certainly knew when the delivery would

be made via the Barge and should have sent a representative

to observe Mr. Nassir's work. Under the contract, Armada had

a right to have a representative witness the sampling and

"Buyer waives any objections to the sampling procedures

actually employed unless buyer had a representative witness

sampling and at the time of delivery gave seller a written

protest about the procedures." Marine Fuels Addendum, Pl.

Ex. 133 at ¶ 6.B.

a. The Court finds that Armada suffered no prejudice in

failing to attend and witness the sampling activities or

in failing to take its own samples because, under all

the facts and circumstances presented, Columbia

Inspection followed normal, commercially reasonable, and

industry-accepted practices in obtaining, maintaining,

and testing fuel oil samples taken in connection with

this sale.

b. Armada also failed to ensure the safe-keeping of the

sealed Barge sample provided to the Vessel's Chief

Engineer upon delivery, which was later removed from the

Vessel and discarded by Thomas Hansen, who was employed

by the SGS North America inspection firm. TT 1018. 

Armada was unable to produce this sample for testing

when it was requested by CP. Armada's failure to

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produce this sample weakens its fuel quality claim.

c. Armada also failed to fully account for the three

preceding fuel deliveries to the Vessel, including

contaminated oil acquired in Vietnam.

d. In addition, the Court finds Armada's contamination

theory insufficient to refute CP's evidence that CP met

the terms of the contract. Armada failed to offer

admissible, non-speculative evidence sufficient to show 

that water and contaminants, rather than cutter stock,

were delivered out of shore tank 3944. While the

relatively consistent viscosity readings of the various

samples lend some credence to Armada's theory, the

viscosity readings are not enough to overcome Armada's

contractual and evidentiary burdens.

i. CP presented credible evidence to refute Armada's

viscosity theory including: testimony from Mr.

Gloeckner, the supervisor of the Richmond Terminal,

that the bottom of tank 3944 is "virtually flat",

TT 1113:20, that the drainage pipe used to deliver

oil is six inches in diameter with a lower edge

eight to ten inches from the bottom of the tank, TT

1114:18-21, and that no water resided at the bottom

of tank 3944, a tank designed to prevent water

accumulation, TT 1105.

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4. Armada asks the Court to rely on the results of the manifold

drip sample collected on June 21, 2005, as the Fuel Oil was

being loaded onto the Vessel. 

a. The Court finds that the results of the manifold drip 

sample are not binding in this dispute because CP's

samples are binding under the contract.

b. Armada's argument that the manifold drip sample complied

with MARPOL Annex VI (the International Convention for

the Prevention of Pollution from Ships) is not relevant

to this fuel quality dispute. See 33 U.S.C. § 1901.

i. MARPOL Annex VI seeks to prevent air pollution from

ships. The MARPOL guidelines state: "[T]his sample

is to be used solely for determination of

compliance with Annex VI of MARPOL 73/78." Thus,

according to MARPOL and the parties' contract in

this case, Armada's sample is not binding.

5. In addition, Armada points to other tests taken after the

Fuel Oil had been loaded onto the Vessel as further

indications that the Fuel Oil did not meet contract

specifications at the time of delivery.

a. The Court finds that these additional samples are

neither binding nor relevant. All of the additional

samples were taken once the Fuel Oil had already mixed

with 23 cubic meters of other material in the tank. In

Case 3:05-cv-03406-SC Document 152 Filed 06/22/07 Page 17 of 18
United States District Court

For the Northern District of California

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addition, the Vessel was already carrying a bunker of

contaminated oil from Vietnam. 

b. Armada failed to rule out the strong likelihood that the

Fuel Oil had mixed with other materials after loading.

VI. CONCLUSION

For the reasons discussed herein, the Court FINDS in favor of

Defendant CP and against Plaintiff Armada in the amount of

$189,906.73 plus prejudgment interest. CP should submit a motion

and proposed order detailing calculations for interest, fees, and

expenses, as provided under the parties' contract.

IT IS SO ORDERED.

Dated: June 22, 2007.

 

UNITED STATES DISTRICT JUDGE

Case 3:05-cv-03406-SC Document 152 Filed 06/22/07 Page 18 of 18