Cities Service Co., Inc. v. Derby & Co., Inc.
| Decision Date | 20 February 1987 |
| Docket Number | No. 82 Civ. 0682 (SWK).,82 Civ. 0682 (SWK). |
| Parties | CITIES SERVICE COMPANY, INC., Plaintiff, v. DERBY & CO., INC., Defendant. |
| Court | U.S. District Court — Southern District of New York |
Hill, Betts & Nash by Allan J. Graf, New York City, for plaintiff.
Windels, Marx, Davies & Ives by Robert J. Lynch, New York City, for defendant.
The above-captioned matter was tried by the Court without a jury. The Court's findings of fact and conclusions of law are set forth below.
Subject matter jurisdiction in this contract action is founded on diversity of citizenship under 28 U.S.C. § 1332. Plaintiff seeks to recover judgment in the amount of $374,225.76 by reason of defendant's alleged failure to pay for 9,474.07 barrels of crude oil delivered by plaintiff to defendant pursuant to a January 30, 1981 contract, together with pre-judgment interest.
Plaintiff Cities Service Company, Inc. ("Cities") and defendant Derby & Co., Inc. ("Derby") entered into a contract on January 30, 1981 for a barrel-for-barrel exchange of crude oil by which Cities was to deliver to Derby Libyan Amna crude oil in exchange for Derby's delivery to Cities of Nigerian Forcados crude oil.
The contract contains a choice of law clause under which it is to be "construed and governed by the laws of the State of New York." The contract provides that, in the event that the delivered quantities of oil are not identical, such imbalance will be purchased from the overdelivering party. The value of each barrel of Forcados crude was fixed at $40.25 per barrel for the first 5,000 barrels and $39.50 per barrel thereafter. The value of the Amna crude was fixed at $39.50 per barrel.
The quantity of crude oil delivered was on the basis of net barrels discharged into shore tanks as determined by an independent inspector mutually agreed upon by Cities and Derby. With regard to the independent inspection, the contract provides:
Derby, in turn, contracted to sell the crude oil which it purchased from Cities to Seaview Petroleum Company, Inc. ("Seaview") in a "back-to-back" transaction. Accordingly, Derby used the Amna crude oil to be delivered by Cities to meet its obligation to deliver Amna crude oil to Seaview. And, at Derby's instruction, Cities actually delivered the Amna crude oil which it had sold to Derby to Seaview's shoreside storage tanks in New Jersey.
Cities purchased the Libyan Amna crude oil from Occidental Petroleum Company ("Occidental") and arranged for delivery by chartering the tanker HELLESPONT PRIDE from the Marathon Oil Company ("Marathon").
Caleb Brett & Son, Ltd. ("Caleb Brett"), an independent petroleum inspection company, was designated jointly by Cities, Occidental and Marathon as the inspection company to attend the HELLESPONT PRIDE at the loading of the cargo at the Mobil loading terminal at Ras Lanuf, Libya. Pursuant to their contract, Cities and Derby originally had discussed the appointment of Caleb Brett as the independent inspector to attend the delivery of the cargo. After Derby decided to use the Amna crude oil being delivered by Cities to fulfill its obligations under Derby's contract with Seaview, Derby requested Seaview to agree to the appointment of Caleb Brett as the independent inspector. Seaview refused to accept Caleb Brett and insisted upon the appointment of E.W. Saybolt & Company ("Saybolt"), another independent petroleum inspection company. Cities agreed to accept Saybolt as the jointly appointed inspection company but retained Caleb Brett for its own account to inspect the cargo at discharge. Seaview retained Herman Runne ("Runne") as a surveyor and inspector for its own account.
Cargoes of crude oil typically contain a quantity of water, which is deducted from the overall volume of the cargo, to arrive at the net quantity of crude oil delivered. The water in cargoes of crude oil exists either as "free water", i.e., water which has precipitated out of the crude oil and is readily identifiable as water separate from the oil, or as "sediment and water" ("S & W"), i.e., emulsified water which is dispersed as a colloidal suspension within the oil. To determine the quantity of S & W in the oil, a proper representative sample of the cargo must be taken by the independent petroleum inspector and subjected to laboratory analysis. The amount of water in suspension is then represented as a percentage of the overall volume of the cargo and deducted therefrom, together with the amount of free water, to determine the net quantity of crude oil delivered. The representative sample taken by the inspector is also used to make a laboratory analysis of the other basic characteristics of the oil, such as gravity, sulfur content and mineral content.
The dispute in this case involves the amounts which Saybolt deducted from the cargo as water, both free water and S & W, in certifying the net quantity of crude oil delivered by the HELLESPONT PRIDE. Cities asserts that Saybolt miscalculated and overstated the amount of water in the cargo, and thereby permitted Derby, and ultimately Seaview, to receive an amount of crude oil without having to pay for it.
The HELLESPONT PRIDE loaded the cargo of Amna crude oil at Ras Lanuf, Libya at the loading terminal operated by Mobil on February 2, 1981. Prior to the loading of the cargo, Caleb Brett inspected the cargo tanks and the designated slop tanks of the HELLESPONT PRIDE and reported that (1) the two slop tanks contained 998 barrels of "slops", which consisted of 732 barrels of oil and 266 barrels of free water; (2) Port Tanks 1 and 3, Starboard Tanks 1 and 3, and Center Tank 5 contained a total of 714 barrels of sediments and residues from previous cargoes; and (3) Center Tank 4 contained 62 centimeters of water prior to loading.
The loadport terminal at Ras Lanuf reported that 420,973 barrels of Amna crude oil had been loaded by the terminal onto the HELLESPONT PRIDE, and the bill of lading that was issued indicated 420,973 barrels as the loaded quantity. The reported API gravity of the cargo was 36.0. The ullages of the HELLESPONT PRIDE on sailing from Ras Lanuf were calculated to be 421,872.3 barrels, which represented the total volume of liquid on board at sailing.
Caleb Brett conducted a final inspection of the vessel's tanks after complation of loading and prior to sailing and found a total of 243 barrels of free water in Port Tanks 1, 2 and 3 and Starboard Tanks 1 and 3. A note of protest was issued to the loadport terminal protesting the presence of free water in the cargo. Caleb Brett also took water samples of the free water found in the cargo from Port Tank 2, of the seawater from the loading terminal berth, and of the vessel's water from Center Tank 4, and retained them for laboratory analysis.
The HELLESPONT PRIDE berthed at the Mantua Terminal in New Jersey on February 28, 1981. Shortly after, Saybolt, Caleb Brett and Runne boarded the vessel and commenced inspection and sampling of the cargo. Also present during the inspection was an official from the United States Customs Service.
Saybolt, Caleb Brett and Runne jointly inspected all 15 of the tanks of the HELLESPONT PRIDE before the discharge of the cargo began. Saybolt, Caleb Brett and Runne jointly took ullages of the tanks containing cargo. Based on the ullages, the gross volume (corrected for temperature) of liquids loaded on the HELLESPONT PRIDE was determined to be 421,980 barrels by Saybolt, 422,151 barrels by Runne and 422,198 barrels by Caleb Brett.
After the ullages were taken, Saybolt, Caleb Brett and Runne jointly measured the free water content of each tank containing cargo by gauging the tanks with a free water paste. Saybolt, Caleb Brett and Runne jointly found 9,336.1 barrels of free water. At loadport, only 243 barrels...
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