Contracting with independent oil storage companies: the reality

by Reed Smith
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Introduction

Storage space is a necessity for the owner of any physical commodity. Stockpiling in storage facilities permits greater flexibility and continuity of supply in the event of supply disruptions, increases in consumption or simply to give the storage user an opportunity to take a strategic position against anticipated price changes. As a result, storage space is always in demand, particularly for oil and petroleum products.

There are frequent press reports of plans to build new oil storage facilities around the world – the most recent being in India and Scotland. Earlier in the year, a new oil storage facility in South Korea was reported to have started operations and was drawing strong interest. Storage companies are keen to take advantage of not only the ever-growing storage needs, but also of the ever-increasing demands for storage facilities to provide a variety of services, including refining and blending.

When negotiating a storage contract, generally storage users have very little scope to influence the terms on which their products are stored. This may expose them to significant risks. It is therefore essential that, if the storage user has any scope to negotiate the terms of the storage agreement, it focuses its negotiating efforts on the most prejudicial clauses.

This Client Alert draws attention to the key contractual and non-contractual issues which should be of primary importance to any storage user when entering into an oil storage agreement, the so-called “red flag” issues. While we have concentrated on oil in this Alert, many of the issues are similar for bulk storage of dry goods such as grains.

Key non-contractual considerations

  • Title – if an issue relating to title arises between the storage company, its creditors, the storage user and/or its creditors, as to title to the goods, this is likely to be determined by local law (irrespective of the governing law of the storage agreement). Legal due diligence should therefore be undertaken to identify the steps that need to be performed under local law in order to retain and evidence title to the goods, not only whilst the goods are in storage but also while the goods are in transit to and from the storage facility (e.g. are there any registration obligations?).
  • Co-mingling – English law recognises rights of ownership of co-mingled goods, but the position under local law may vary and will need investigation. Risks associated with shortages and contamination will need to be considered. Difficulties may be encountered when trying to obtain financing or insurance in respect of the co-mingled goods.
  • The storage company – commercial due diligence should be undertaken to investigate the location, condition and security of the storage facility and the professional reputation of the storage company. As said above, companies are increasingly trying to enter the profitable storage market. Title to the goods stored can be easily lost and it is therefore important that the storage company performs its obligations as agreed in the storage agreement, in accordance with its internal procedures and local law, and that it is a company of good standing with appropriate insurance.

Key contractual considerations

Provision

 

Issues

 

Preferred Approach – The Storage User’s Perspective

 

Storage facility

 

 

  • Goods should be stored in exclusive tanks/ units unless co-mingling is unavoidable.

     

  • Can the storage facility be inspected prior to goods being stored? Is there a deemed acceptance of the suitability of the storage tanks/ units if the storage user fails to inspect prior to the goods being stored?

     

  • Check the times the facility is able to operate are suitable. Are there provisions relating to overtime outside the "normal" operating hours?

 

  • Where storage in a particular tank/ unit is to be exclusive, ensure the storage agreement specifies the designated tanks/ unit.

     

  • Ensure the storage company has an obligation to find suitable alternative storage tank/ unit should the designated storage tanks/ units become unfit for purpose by reason of force majeure or otherwise.

Services

 

 

  • What services are required by the storage user – storage only or also handling service e.g. transhipment, blending?

     

  • Is there a reference to a standard of care to which the storage company should be performing the services including in relation to pre-cleaning of tanks and lines?

 

  • Consider negotiating the standard of care of the storage company to be that of a "reasonable and prudent operator". However, consider the effect of such wording under the governing law of the storage agreement and under local law.

     

  • It is important that it is made clear that the storage company will take responsibility for contamination of the user’s product.

Price & payment

 

 

  • Is there a requirement for the storage user to provide evidence of money in accounts and/or guarantees and/or payments in advance?

     

  • How long are the stated tariffs valid for? Can the storage company vary the tariffs simply by notice?

 

  • All variations to tariffs should be by mutual agreement.

Risk

 

 

  • Is there an express reference to risk? If not, does the storage company "take control" of the goods whilst in storage?

     

  • Note the interplay with environmental obligations – see below.

     

  • What warranties does the user give as to the nature, safety and properties of his product being stored?

 

  • Generally, ensure that risk passes to the storage company while the goods are in storage.

     

  • In any event, avoid being liable for losses arising from the nature, type, quality or properties of the goods stored – these are risks inherent in the goods themselves and the storage user will have no control over such risks.

Tax, customs & excise

 

 

  • Who is to pay taxes and duties in the first instance? If the storage company, how quickly must it be indemnified?

     

  • Is there a separate monetary cap on the storage company’s liability as regards tax or customs and excise?

 

  • Check the indemnification provisions relating to tax. These may be more cumbersome than other indemnification provisions in the agreement.

     

  • Ensure that liability in respect of fines, costs or penalties payable as a result of a fault of the storage company is carved out of any liability cap.

Limitations & Exclusions

 

 

  • Are any types of losses excluded?

     

  • Is there a cap on either the storage user’s or storage company’s liability? Are there different caps for different categories of losses? Is the cap in respect of each event, per annum or by unit of weight?

     

  • Who is liable for negative stock-taking deviations?

     

  • Is there a contractual time limit for notification of a claim or for commencing legal or arbitral proceedings?

 

  • Seek to exclude indirect and consequential losses, but note this may mean that any claim against the storage user by a third party for consequential or indirect losses following a breach of the storage agreement by the storage company may not be recoverable from the storage company.

     

  • Where the storage company’s monetary liability is capped, attempt to agree that such caps be made mutual.

     

  • If the contract is governed by English law, be aware of the provisions of the Unfair Contract Terms Act 1977.

Indemnities

 

 

  • Are there indemnities demanded of the storage user associated with actions of third parties attending the storage facility on behalf of the storage user or for damages caused to the berth/ facility by vessels or vehicles?

 

  • Seek to exclude onerous indemnities and/or ensure they are covered by the appropriate limitation clauses.

Insurance

 

 

  • Who procures insurance in respect of the goods and the storage facility?

 

  • Check that the storage company is obliged to obtain insurance in respect of the storage facility.

     

  • Insert provisions allowing the user to check insurance is in fact in place.

Environment

 

 

  • Agreements are often silent on environmental issues.

     

  • The "polluter pays" rule generally applies, so it is likely that liability will attach to storage company, but note that liability may still attach to owner of the goods under certain circumstances, such as when owner retains some control of the goods in storage or of storage operations

     

  • REACH compliance in respect of storage in EEA

 

  • Ensure there is a clear identification of the environmental risk transfer point.

     

  • Ensure that the storage company expressly warrants that the storage facility holds all necessary licences, approvals, consents and/or permits.

     

  • Consider both legal and reputational issues when deciding how much inspection/control of storage facilities to carry out.

     

  • Local law should be considered as liability may vary.

     

  • Ensure exclusions/limitations of liability are reasonable.

Other contractual terms

 

 

  • Are general terms and conditions ("GTCs") incorporated into the agreement?

     

  • Have the incorporated GTCs been amended?

 

  • Request a copy of the GTCs to be incorporated into the storage agreement before entering into the storage agreement (they will often contain the most storage company friendly terms).

Conclusion

As said above, this Alert only seeks to highlight the “red flag” negotiation areas. There will be other terms where amendments will be considered “nice to haves” but the ability to negotiate these will depend on the power of the storage user and in our experience few companies will have this leverage.

Storage contracts are usually relatively long-term and so, especially when considering the high value of the product being stored, it is obviously crucial that negotiations eliminate risks where possible before the contract is entered into.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Reed Smith | Attorney Advertising

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