OMV Petrom SA v Glencore International AG

Factual and Procedural Background

This case concerns a fraud committed many years ago by the Defendant, formerly known as Company A (which became Company B in 1994 and to which the court refers as "Glencore"), upon the Claimant, referred to as "Petrom". Petrom is a Romanian oil company, successor in title to two other Romanian state-owned oil companies, SC Rafirom SA ("Rafirom") and SC Compania Romana de Petrol SA ("CRP"). Rafirom and then CRP were responsible for the import and refining of crude oil and export of petrochemical products in Romania. In 2004, the merged company was privatised and became Petrom.

Prior to 1999, crude oil importation was organised by another state-owned company, Petrolexportimport SA ("Petex"), which acted as commission agent for Rafirom/CRP under Foreign Trade Agreements. Contracts for crude oil supply were made by Petex as principal but payments were made by Rafirom/CRP. The crude oil was imported pursuant to government programmes and discharged at Constantza into storage tanks, then piped to four main Romanian refineries. During 1993 to 1996, the crude oil supplied was mainly Iranian Heavy, Gulf of Suez Mix ("GOSM"), and Urals. About 25% of crude oil was supplied by Glencore, which had a longstanding trading relationship with Petex.

Between 1993 and 1996, Glencore made about 80 shipments to Petex, with 32 shipments involving crude oil that was not the contracted grade (Iranian Heavy or GOSM) but bespoke blends created by the Eilat Ashkelon Pipeline Company ("EAPC") in Israel. These blends were designed to resemble the contracted grades but were cheaper to produce, allowing Glencore to make greater profits. Glencore created and procured false documents, including bills of lading, certificates of conformity, and commercial invoices, falsely representing the cargoes as the contracted grades. These false documents were relied upon by Petex, Rafirom, and banks issuing letters of credit to pay for the shipments.

Petex was unaware of the fraud until about May 2002 when informed by a whistleblower, a former Glencore trader. Petex commenced arbitration proceedings against Glencore in 2003 but did not disclose the fraud or arbitration to Petrom. After the arbitration tribunal's award in 2006, Petex informed Petrom, which then commenced its own arbitration and subsequent proceedings against Glencore. The claim is framed in deceit and conspiracy, alleging that Glencore and certain employees falsely represented the nature of the crude oil supplied, inducing Rafirom/CRP to accept and pay for the cargoes believed to be genuine Iranian Heavy or GOSM.

Legal Issues Presented

1. Whether Glencore committed the tort of deceit by knowingly making false representations that the crude oil cargoes supplied were Iranian Heavy or GOSM when they were bespoke blends.
2. Whether Petrom, as successor in title to Rafirom/CRP, is entitled to damages for deceit under English and Romanian law.
3. The applicability of the double actionability rule and the Private International Law (Miscellaneous Provisions) Act 1995 concerning the applicable law to the claim cargoes.
4. Whether the representations were intended to be relied upon solely by Petex or also by Rafirom and the banks, and the legal effect of such reliance.
5. The appropriate measure of damages for deceit in this case, including the valuation of bespoke blends and the application of discounts.
6. The relevance and viability of the alternative claim in conspiracy.

Arguments of the Parties

Appellant's Arguments (Petrom)

• There is a presumption of reliance and inducement by Rafirom/CRP, which Glencore cannot rebut.
• Petex, acting as agent for Rafirom, checked the shipping documents and was deceived into believing the cargoes conformed to the contract; had the true position been disclosed, Rafirom would have rejected or renegotiated the price.
• The banks issuing letters of credit relied on Glencore's false representations in commercial invoices and letters of indemnity and would not have paid had the true nature of the cargoes been known.
• Romanian law applies to the claim, and under it Petrom has a valid claim in tort (delict) despite the commission agency relationship.
• Damages should be assessed as the full price paid less the actual market value of the bespoke blends, with appropriate discounts reflecting uncertainty and risks.

Defendant's Arguments (Glencore)

• Petex was aware that the cargoes were bespoke blends and thus there was no deceit of Petex.
• The representations were made only to Petex and not intended to be relied upon by Rafirom, making the representations "spent" after Petex's reliance.
• Rafirom did not rely on the shipping documents but only on Petex's recommendation, and actions of Rafirom predated receipt of shipping documents.
• The claim in conspiracy adds nothing beyond the claim in deceit and should fail if the deceit claim fails.
• Romanian law precludes Rafirom from bringing a claim in tort due to the commission agency relationship and contractual limitations.
• Damages should be assessed by reference to the difference in Gross Product Worth (GPW) between the blends and the contractual grades, reflecting actual refining losses rather than price differences.
• Financial difficulties and urgency in Romania justified acceptance of blends.

Table of Precedents Cited

Court's Reasoning and Analysis

The court carefully analysed the factual and documentary evidence, concluding that Glencore knowingly supplied bespoke blends of crude oil while falsely representing them as Iranian Heavy or GOSM. The false documents were intended to and did deceive Petex, Rafirom, and the banks issuing letters of credit. The court rejected Glencore's argument that Petex knew of the fraud or that the representations were only intended for Petex and "spent" thereafter, holding that the representations were repeated and relied upon by Rafirom and the banks, establishing actionable deceit.

The court considered the applicable law, applying the double actionability rule and the Private International Law (Miscellaneous Provisions) Act 1995, concluding that Romanian law governs the tort claims and that under Romanian law, Rafirom has a valid claim in delict (tort) despite being the principal of the commission agent Petex. The court preferred the opinion of Petrom's Romanian law expert over Glencore's.

On the issue of reliance and inducement, the court found that Rafirom, through Petex and the banks, relied on the false representations and was induced to pay for the cargoes. The court rejected the defence based on the agent's (Petex's) alleged knowledge, holding that knowledge of an agent not acquired in the course of employment is not imputable to the principal, and that the deceit against Rafirom remains actionable.

The court addressed the measure of damages, applying the principles from Smith New Court Securities Limited v Citibank NA and related authorities. It held that damages for deceit are to compensate for the full loss directly flowing from the transaction, calculated as the full price paid less the actual value of the bespoke blends delivered. The court rejected Glencore's alternative measure based on difference in Gross Product Worth (GPW), finding it legally and factually inappropriate as it ignores the contractual and tortious principles governing damages for deceit.

Regarding the appropriate discount to apply to the CIF price of the blends, the court accepted expert evidence that a discount is warranted to reflect uncertainties about the blends' composition, refinery setup, and performance risks. The court found the discount of US$1.25 per barrel proposed by Petrom's expert to be somewhat high and adjusted it down to an average of US$1 per barrel, reflecting a balanced assessment of risks and market conditions.

The court further rejected Glencore's submissions relying on contract law principles and cases concerning sub-sales, noting that these are not applicable to deceit claims where the overriding compensatory principle demands full reparation for loss caused by fraud.

The court found Glencore's witnesses to be evasive and uncredible, and accepted the evidence of Petrom's witnesses and experts. It noted the absence of any documentary evidence supporting Glencore's claim that Petex knew of or acquiesced in the fraud, concluding that the fraud was perpetrated by Glencore on both Petex and Rafirom.

Holding and Implications

Glencore is liable for deceit in respect of the 32 claim cargoes, and Petrom is entitled to damages.

The court held that the tort of deceit was established against Glencore, that Rafirom (and thus Petrom as successor) relied upon the false representations, and that the applicable law includes Romanian tort law. The measure of damages is the full price paid by Rafirom less the actual value of the bespoke blends delivered, with a discount of approximately US$1 per barrel applied to reflect risks and uncertainties. The total damages awarded amount to approximately US$40 million.

The court declined to award exemplary damages, noting that such awards would be nominal and would not meaningfully express the court's disapproval of Glencore's conduct.

No new legal precedent was established beyond the application of existing principles of deceit, agency, and damages. The decision primarily resolves the factual dispute and applies settled law to the circumstances of the case, affirming that fraudulent misrepresentations in shipping documents intended to deceive principals and banks are actionable and compensable.