Syafinaz Vani explains a recent case involving the standard terms of a PORAM contract.
 
The High Court in the case of Alami Vegetable Oil Products Sdn Bhd v Sime Darby Futures Trading Sdn Bhd (unreported) interpreted several provisions of the standard form contract issued by the Palm Oil Refiners Association of Malaysia (“PORAM terms”) for the sale and purchase of crude palm oil (“CPO”) and refined, bleached and deodorised palm oil (“RBD palm oil”).
 
THE FACTS
 
The Plaintiff’s Claim (CPO Contracts)
 
Alami Vegetable Oil Products Sdn Bhd (“Plaintiff”) made a claim against Sime Darby Futures Trading Sdn Bhd (“Defendant”) in respect of the sale and purchase of Crude Palm Oil (“CPO Contracts”) based on the PORAM terms. One of the PORAM terms in question states that contracts are to be delivered/collected on a ‘first in, first out’ basis.
 
The Plaintiff had entered into separate contracts to sell CPO to Golden Jomalina Food Industries Sdn Bhd (“Golden Jomalina”) and the Defendant. Prior to 27 November 2007, Golden Jomalina was unrelated to the Defendant. On 27 November 2007, via a merger exercise, the Defendant and Golden Jomalina became part of the Sime Darby Berhad Group of Companies and were wholly-owned subsidiaries of Sime Darby Plantation Sdn Bhd.
 
The same group of traders from Sime Darby Plantation Sdn Bhd had been executing CPO Contracts with the Plaintiff in continuity. The CPO Contracts were first signed in the name of Golden Jomalina and, later on, in the name of the Defendant. All CPO purchased from the Plaintiff were to be delivered to Golden Jomalina’s refinery (“Refinery”) as the Defendant did not have its own refinery.
 
The Plaintiff and Golden Jomalina had entered into seven CPO Contracts between 9 November 2007 and 9 January 2008 (“Earlier CPO Contracts”). The Plaintiff failed to make full delivery towards fulfilment of the Earlier CPO Contracts. In the months of April and May 2008, the Plaintiff delivered some CPO to the Refinery.
 
In line with the ‘first in, first out’ provision, the CPO which was delivered to the Refinery was received by Golden Jomalina towards partial fulfilment of one of the Earlier CPO Contracts wherein the purchase price was RM2,985.00 per metric ton.
 
Subsequent to Golden Jomalina’s receipt of this quantity of CPO, the Plaintiff issued invoices quoting a later contract (“Later CPO Contract”) signed in the Defendant’s name, wherein the purchase price was substantially higher, i.e. RM3,280.00 per metric ton. Upon receipt of these invoices, the Defendant promptly notified the Plaintiff by letters that the invoices were wrongly issued as the CPO had been received towards an Earlier CPO Contract. However, the Plaintiff initially maintained that the CPO delivery was for the Later CPO Contract.
 
The Plaintiff’s claim was subsequently settled without admission of liability by Golden Jomalina for a sum of RM2,414,268.00, being the amount due under an Earlier CPO Contract. The trial proceeded only on the Defendant’s counterclaim against the Plaintiff.
 
The Defendant’s Counterclaim (RBD Contracts)
 
Between 7 April 2008 and 9 April 2008, the Plaintiff and Defendant had entered into several contracts whereby the Defendant agreed to sell to the Plaintiff certain quantities of RBD palm oil (“RBD Contracts”).
 
The payment term stated in the RBD Contracts was “Payment Before Delivery”. In other words, the Plaintiff was required to make payment before the Defendant delivered the RBD palm oil to it. The RBD Contracts also expressly stated that the parties were to be bound by the PORAM terms.
 
The Defendant sent notices to the Plaintiff requesting for payment for the RBD palm oil. The Plaintiff was expressly notified that if it failed to comply with the extension of time given to make payment, the RBD palm oil would be sold in the open market and the Plaintiff would be held responsible for all costs, price differences, expenses and damages that resulted from such sale.
 
As the Plaintiff failed to make payment by the final extended deadline on 15 August 2008, the Defendant sold the RBD palm oil concerned in the open market on the next working day, 18 August 2008. The market price for the RBD palm oil on both 15 August 2008 and 18 August 2008 was the same.
 
The sale of the RBD palm oil resulted in the Defendant suffering losses of RM3,270,000.00, being the difference between the market price of the RBD palm oil on 18 August 2008 and the price at which the Plaintiff contracted to buy the RBD palm oil under the RBD Contracts. The Defendant filed a counterclaim against the Plaintiff for this sum based on the terms of the RBD Contracts and the PORAM terms.
 
The Plaintiff’s defence against the counterclaim was that it had requested the Defendant to set-off the sum of RM2,652,864.00 allegedly owing by the Defendant to the Plaintiff under the Later CPO Contract against the amounts payable by the Plaintiff to the Defendant under the RBD Contracts, and that since the Defendant refused to do so and did not deliver the RBD palm oil, the Defendant had committed a fundamental breach and repudiated the RBD Contracts.
 
The Defendant contended that it was not obliged to agree to the set-off as the Plaintiff had not complied with Clause 4 of the PORAM terms and had invoiced the Defendant based on the Later CPO Contract when the Earlier CPO Contracts remained unfulfilled.
 
The Plaintiff also contended that the RBD Contracts had lapsed as there was no extension of the delivery date for the RBD Contracts under Clause 5 of the PORAM terms. The Defendant, on the other hand, contended that it had granted indulgence to the Plaintiff beyond the contract period due to the long-standing relationship between the parties and the market practice in the palm oil industry where one party would not hold the other party in default immediately upon the expiry of the contract period.
 
The parties were also at variance as to the day on which the default occurred in respect of the RBD Contracts. The Plaintiff contended that the default date was the day immediately following the expiry of contract periods for the respective RBD Contracts. On the other hand, the Defendant argued that the default date was 15 August 2008, the day on which the Defendant put the Plaintiff on default of the RBD Contracts.
 
The Plaintiff also contended that the sale of RBD palm oil by the Defendant to Golden Jomalina, both being subsidiaries of the Sime Darby Berhad, was not an open market sale and that it was a sale by the right hand to the left hand which only resulted in a paper loss.
 
DECISION OF THE HIGH COURT
 
The High Court was required to interpret several provisions of the PORAM terms in order to decide on the Defendant's counterclaim.
 
The ‘first in, first out’ principle
 
Clause 4 of the PORAM terms reads –
 
“When there is more than one contract for similar oil between the parties for the same delivery/collection period, the delivery/collection shall follow the dates of the respective contracts on a first in first out basis.”
 
The Court held that the ‘first in, first out’ basis meant that so long as there is more than one CPO contract between the parties, the delivery must be made to the earliest contract. According to the learned Judge, the key words in Clause 4 were that "delivery shall follow the date of the contract in its sequence". Her Ladyship added that Clause 4 gave no option to the Plaintiff as the seller.
 
According to the Court, the ‘first in, first out’ basis provided a logical solution that has been accepted amongst the market players in the palm oil industry when there is more than one similar contract. As this was the industry practice, the judge added that the purchaser was entitled to assume that the seller understood the ‘first in, first out’ mechanism.
 
The Court was satisfied that Clause 4 of the PORAM terms applied as there were similar contracts with Golden Jomalina which were earlier in time that remained unfulfilled by the Plaintiff. By reason of the 'first in, first out' basis, the CPO that was purportedly delivered under the Later CPO Contract was in fact meant to be delivery for the Earlier CPO Contract. As the sum of RM2,414,968.00 had been paid by Golden Jomalina, the Court held that the Defendant's refusal to set-off the sum of RM2,652,864.00 was justified because they did not owe this sum to the Plaintiff.
 
Had the RBD Contracts lapsed?
 
When the Plaintiff failed to make advance payment for the earliest RBD Contract at the end of May 2008, the Plaintiff did not seek an extension of time to make payment, or request the Defendant not to produce the CPO, or to cancel the contract. Instead, the Plaintiff kept quiet. The Defendant also did not insist on payment. The Plaintiff therefore contended that the RBD Contracts had lapsed in May 2008 as there was no extension agreed on those contracts.
 
In deciding on this point the Court considered Clause 5 of the PORAM terms which, inter alia, reads –
 
“Collection/Delivery shall be completed within the contract period. However, the time for collection/delivery may be extended by Seller/Buyer to a period (hereinafter referred to as extended period) not exceeding 14 calendar days provided a written notice be given at least 3 business days prior to expiry of contract period … However subject to mutual agreement in writing, the time for collection/delivery may be extended to a further period.”
 
The Court held that whether or not the RBD Contracts had lapsed must be looked at from the surrounding circumstances of the case, including the industry practice. As the parties had remained silent, the Court inferred that they had no intention to follow Clause 5 of the PORAM terms strictly.
 
The Court held that there is nothing in law to preclude the Defendant from giving an extension of time beyond the 14 days mentioned in Clause 5 of the PORAM terms and that, furthermore, due to the long-standing relationship between the parties, the Defendant had given indulgence to the Plaintiff beyond the time limit specified in Clause 5. Therefore the Court rejected the Plaintiff’s contention that the RBD Contracts had lapsed.
 
The court took into account the contemporaneous documents which showed that neither the Plaintiff nor the Defendant had ever insisted on any prior notice of extension before a contract was carried over to be performed at a later date. In particular, the Plaintiff had issued a letter to the Defendant on 17 July 2008 (after the alleged lapse of RBD Contracts in May 2008) wherein it reminded the Defendant of the outstanding deliveries and requested the Defendant to deliver the RBD palm oil on or before 31 July 2008. This letter clearly indicated that the Plaintiff had regarded the RBD Contracts as still subsisting after May 2008.
 
The date of default
 
Since the RBD Contracts have not lapsed, the Court next considered the date on which default occurred in respect of the RBD Contracts. This date was critical as the price of RBD palm oil had crashed after the expiry of the respective contract periods of the RBD Contracts. As a result, the losses suffered by the Defendant would be significantly less if the default had occurred immediately after the expiry of the contract period of the RBD Contracts as compared to the losses that the Defendant would suffer if the default had occurred on 15 August 2008.
 
In determining the date of default to assess the amount of damages that the Defendant was entitled, the Court looked at Clause 9 of the PORAM terms which reads –
 
“In default of fulfilment of this contract by either party, the other party at his discretion shall, after giving notice, have the right either to cancel the contract or the right to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase. … The damages awarded against the defaulter shall be limited to the differences between the contract price and the market price on the day of the default ..."
 
The Court agreed with the Defendant's contention and held that the default date was 15 August 2008, that is, the date on which the Defendant notified the Plaintiff that it would treat the Plaintiff as the defaulting party. The Court held that the Plaintiff’s argument that there were different dates of default, one for each of the five RBD Contracts, was devoid of logic. As the payment for all five RBD Contracts had become overdue by 15 August 2008, the Court held that the issue of a single notice of default for all five RBD Contracts was sufficient to comply with Clause 9 of the PORAM terms.
 
Paper loss?
 
The Court held that there is nothing in law which prohibited the Defendant from selling the RBD palm oil to Golden Jomalina as the only condition imposed by Clause 9 of the PORAM terms was for the sale to be made at the market price. The Defendant was at liberty to sell to a ready buyer who was willing to buy the palm oil at the market price.
 
Based on the evidence, the Court was satisfied that the price at which the Defendant had sold the RBD palm oil was the best market price available on 18 August 2008. The Court also held that the sale was carried out in a transparent manner as it was registered with the Malaysian Palm Oil Board.
 
The Court found that the Defendant had established that the Plaintiff had breached the RBD Contracts and this breach had given the Defendant a right to claim for damages in accordance with Clause 9 of the PORAM terms. The Court therefore allowed the Defendant’s counterclaim against the Plaintiff for losses in the sum of RM3,270,000.00, being the difference between the market price at which the RBD palm oil was sold on 18 August 2008 and the price at which the Plaintiff had contracted to purchase the RBD palm oil under the RBD Contracts.  
 
CONCLUSION
 
This decision of the High Court is noteworthy as there are no reported cases so far which involves the interpretation of the PORAM terms. This case provides guidance as to how the Court will construe the PORAM terms, taking into account the dealings between the parties, the market practice in the palm oil industry as well as the nature of the relationship between the trading parties.
 
The Plaintiff has filed an appeal to the Court of Appeal against the decision of the High Court.