Quality is of the essence
The quality of goods is a critically important matter in any sale contract, regardless of the specific type of goods being supplied.
However, when it comes to the delivery of various types of agricultural products, quality takes on additional significance, as such cargo is usually perishable and may often lose its contractual quality specifications during storage or directly in the course of transportation.
From the perspective of English law, in sale contracts, quality is always considered a fundamental term, the breach of which entitles the other party to terminate the contract.
In view of this, market participants must clearly understand how to best regulate quality control in the contract in order to avoid potential risks during its performance.
Below, we will examine aspects relating to the procedure for sampling, the involvement of surveyors, the issuance of quality certificates, and so on.
Quality, not description
To begin with, it is necessary to clarify the distinction between the terms “quality” and “description.” Both refer to the characteristics of the goods required under the contract. However, “description” relates to the physical properties of the goods, such as shape, colour, smell, size, and so on.
At the same time, “quality” refers to the chemical properties (conditions) of the goods – for example, moisture content, protein content, oil content, sediment level, etc.
Nonetheless, there are exceptions to this logic. For instance, the presence of ambrosia in grain cargoes is considered a matter of “quality,” although it physically contaminates the cargo with its seeds, which are determined by visual inspection.
In any case, when concluding a contract, the parties should clearly specify which quality indicators are considered fundamental, and these must be determined during quality inspection and the issuance of the final certificate.
Certificate final at …
The final certificate of quality is a key document confirming that the delivered goods comply with the contractual requirements, and therefore, in terms of quality, the Seller has duly fulfilled their obligations.
The final certificate is usually issued either at the port of loading or at the port of discharge. The choice between these options typically depends on the delivery basis applied in the contract.
In the case of CIF, where the main part of the transportation is arranged by the Seller, the final certificate is usually issued at the port of discharge. This option is more favourable for the Buyer, as the final quality inspection is carried out at the point when the goods have already been physically delivered to the destination.
At the same time, if the contract is concluded on an FOB basis, the final certificate is generally issued at the port of loading. From the Buyer's perspective, issuing the final certificate at the port of loading is a less favourable option, as under the sale contract, the Seller bears no responsibility if the quality of the goods deteriorates during the course of transportation.
A crucial importance of certificate final clause is illustrated well in Alfred C. Toepfer v Continental Grain Co [1974] 1 Lloyd's Rep 11.
In that case, the CIF seller was required to supply wheat of specific quality. Although the wheat was of inferior quality, the surveyor mistakenly issued a certificate stating that it met the contractual specification. The defect was discovered only upon discharge, but the court nevertheless held that the Buyer was bound to pay in full, as the certificate at loading was final and binding under the contract terms.
The parties to the contract should explicitly specify the time and place of issuance of the final certificate of quality in order to avoid any ambiguity in its interpretation. In the event of a dispute, the final certificate will play a decisive role in determining whether the Seller has fulfilled their obligations regarding the delivery of goods of contractual quality.
Who is supposed to issue the final certificate, and who actually does?
The process of issuing the final certificate of quality in practice consists of two stages:
- Sampling, based on which the quality analysis will be carried out;
- Conducting the quality analysis and issuing the corresponding certificate.
The parties should clearly specify in the contract which persons (organisations) are authorised to carry out both of these actions.
The point is that if the sampling is performed by a surveyor whose involvement is not provided for in the contract, the final certificate issued on the basis of such samples will be deemed invalid. Moreover, the procedure for sampling itself should be expressly stipulated – namely, whether it is to be conducted jointly by two surveyors nominated by each party, or by a surveyor nominated by one of the parties.
The same applies to the issuance of the final certificate. If it is issued by an unauthorised surveyor, such a certificate cannot be used as evidence of non-contractual quality of the delivered goods.
At the same time, it is also essential to expressly provide for the procedure of re-assessment of quality in the event that one of the parties disagrees with the results set out in the final certificate.
Although such procedure is usually set out in the GAFTA / FOSFA pro forma contracts, the Buyer may attempt to argue that the final certificate is conclusive and its results are not subject to review.
For example, in one of Fortior’s recent cases, the Buyer under a CIF contract attempted to reduce the price of the delivered goods, arguing that the final certificate confirmed non-contractual quality. However, the final certificate was issued based on samples of the goods taken solely by a surveyor nominated by the Buyer.
Since the contract did not explicitly provide for a procedure of re-testing the quality, the Buyer simply ignored all of the Seller’s attempts to initiate such re-testing and insisted on the conclusiveness and finality of their own certificate.
What was the method?
Another important aspect of quality assessment is the methods used by surveyors in the process of quality analysis.
The point is that GAFTA / FOSFA pro forma contracts often require that quality analysis be conducted in accordance with their own specified methods. However, these methods do not cover all types of analyses that may be necessary within the framework of a particular contract.
At the same time, if the method used by the surveyor is not expressly provided for by the mentioned methodologies, this gives the Buyer an opportunity to argue that the analysis was not conducted in accordance with the contractual requirements. Consequently, the quality certificate issued based on such an analysis would be considered invalid.
This issue was central in the case of Veba Oil Supply and Trading GmbH v Petrotrade Inc. [2002] 1 Lloyd's Rep 295, where the buyer challenged the validity of sampling and analysis conducted using a method other than that specified in the contract. The court held that if the parties had agreed that a determination using method A would be binding, then a determination using method B — even if technically sound — would not be binding unless expressly agreed. The decision reinforced that contractual certainty over testing methodology prevails, especially in the context of chain contracts.
To avoid such situations, it can be provided in the contract that certain quality indicators may be assessed by surveyors, for example, in accordance with their own methodologies or based on generally accepted standards.
In this context, it is also worth mentioning the existence of the "de minimis" rule, which allows minor deviations from contractual quality specifications not to be treated as a breach.
However, the permissible extent of such minor deviation is not determined automatically and depends on the particular goods and the pro forma contract used.
In view of this, the contract should expressly specify the permissible deviations for specific indicators if the parties intend to include such a provision. Otherwise, it should be expressly provided that no deviations from the specified indicators are permitted and that any deviation entitles the Buyer to terminate the contract.
Recommendations
To minimise negative scenarios, traders should clearly provide for the following matters in the contract:
- The time and place of issuance of the final certificate of quality;
- The names of the surveyors authorised to take samples and/or carry out the final quality assessment and issue the corresponding certificate;
- The procedure for re-testing the quality of the goods. If you wish to depart from the standard procedure, the alternative must be described as clearly and in as much detail as possible;
- The non-application of quality assessment methods provided for in the contract pro formas to certain indicators.
These recommendations will help minimise risks. Particular attention to detail and strict compliance with established standards are the key to successful performance under the contract.
