Subject: m/v PACIFIC VIRGO
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked]
Date: Thu, 3 Aug 2000 03:58:00 -0700 (PDT)

Alan and Richard, FYI re the FGPC/ECT contract.  John Lockey is a barrister 
(an actual trial advocate) that David asked to help him given the urgency and 
complexity of this dispute.  Deborah, please print out and file.

     B.K.D.
----- Forwarded by Britt Davis/Corp/Enron on 08/03/2000 10:54 AM -----

	[email-masked]
	08/03/2000 10:20 AM
		 
		 To: [email-masked]
		 cc: [email-masked], [email-masked]
		 Subject: m/v PACIFIC VIRGO

From David Best.

Following our telephone conference this morning, the following advice can be
given.  Please treat this advice as the joint advice of myself and Counsel 
John
Lockey.  We give it in bullet form for the purposes of clarity.

1.   The terms of the ASTM D3605 do support the view that it is inappropriate 
to
apply D3605 to condensate.  The fact remains, however, that the contract 
defines
the contractual specification by reference to D3605.  On the face of it, Enron
has promised a specification in accordance with test method D3605 and has 
agreed
to assume the risk tht the condensate does not satisfy the specification when
tested in accordance with D3605.

2.   The terms of Appendix 1 to the 1997 Fuel Supply Plan seem to us to make 
it
much more difficult to argue that the reference in Appendix B of the contract 
fo
D3605 means only that D3605 applies to condensate to the extent that it is
appropriate to use D3605 for condensate.  The fact that Enron reported test
results for condensate in Appendix 1 to the 1997 Fuel Supply Plan by reference
simply to test method D3605 makes it very difficult to argue that when the
parties concluded the contract, they would have had in mind that D3605 applies
only to gasoil and would not apply (or would only apply with modifications) to
condensate.

3.   The terms of the Fuel Supply Plan,and of Appendix 1, make it even more
difficult to argue that the impossibility of finding a seller who is willing 
to
sell condensate applying test method D3605 satisfies the test of using
reasonable commercial efforts.  Even though Enron is not contractually 
committed
to the terms of the Fuel Supply Contract, the fact is that Enron put forward
typical specifications for condensate by reference to D3605.  The Fuel Supply
Plan re-emphasises the importance to the buyer of being provided with 
condensate
in preference to naptha or gasoil.

4.   Our understanding of SGS' advice to Enron is that D3605 does not envisage
ashing, and that it would be wrong to report a result by reference to test
method D3605 if the sample had been ashed before testing.

5.   Should SGS provide a test certificate certifying a specification which is
outside contractual specification applying D3605with a notation that 
condensate
falls outside the scope of D3605, (as they suggest), the buyers will still be
able to reject because any verification is final, conclusive and binding on 
the
parties, provided there is no manifest error.

6.   If it is the case that applying D3605 (without any modifications to the
ASTM methodology) to portions of the sample condensate provided to the
independent inspector would (or may well) produce different results (in ppm) 
for
the same sample because of the volatility of condensate, it seems to us to be
strongly arguable that the independent inspector (aware that his certification
of non-compliance will be binding under the contract) should simply refuse to
certify a test result by reference to D3605.  It seems to us to be difficult 
in
those circumstances for the inspector to conclude that a particular test 
result
is reliable.  (Furthermore, if it is the case that it is not practically
possible to certify quantities of elements below 0.5ppm using D3605 on
condensate, then again the independent inspector should refuse to certify at
those levels).

7.   If the independent inspector refuses to certify by reference to D3605, 
the
buyer will have to decide whether to reject and take his chances of
demonstrating that in fact the condensate was off-spec by reference to D3605.
(The absence of a certificate of compliance with specification does not seem 
to
us to justify rejection).  If the buyer decides to reject, an arbitrator would
have to decide on all the evidence whether the cargo was off-spec as measured 
by
D3605.  The buyer would be running the risk that he could not justify the
rejection, with a potential exposure to Enron's costs.  It would be prudent in
those circumstances for Enron to have commissioned a number of tests using 
D3605
methodology in order to present an average (and hopefully on-spec) result to
counteract the test results produced by the buyer.  It would also be prudent 
in
those circumstances for Enron to have commissioned a number of tests using 
SGS'
preferred method of testing condensate, as these results could be used by 
Enron
to require the buyer to take a rejected cargo in mitigation of the buyer's 
loss
or to submit to the arbitrators that the buyer should have mitigated by
accepting re-tender of the rejected cargo when accompanied by an independent
inspector's certification that the specs were met by reference to the much 
more
appropriate methods for testing.

8.   Contractually, it is almost certainly not open to Enron to refuse to 
agree
on the appointment of an independent inspector, or to insist that the
independent inspector should not test the sample of condensate using method
D3605 unless there are modifications to that method when applied to 
condensate.
However, there does not appear to be any objection to Enron advising in 
advance
that because the independent inspector's certificate is intended to be binding
under the contract, the independent inspector should not provide a result by
reference to D3605 unless satisfied that that result is truly representative 
of
the qualities of the sample.

9.   Turning to Enron's exposure to a tax liability on the nomination and
shipment of gasoil we repeat our advice given in our e mail of 2nd August that
it is not possible for Enron to argue with any realistic prospect of success
that the apparent impossibility of finding a seller who is willing to sell
condensate applying test method D3605 satisfies the test of using reasonable
commercial efforts to justify zero tax.  It seems to us that this provision is
designed to deal with problems of obtaining condensate cargoes due to force
majeure related reasons after the contract has been entered into.  The onus is
on Enron to demonstrate that it has used reasonable commercial efforts.  It is
likely in our view that FGCP will set off against price a sum equivalent to 
the
tax liability so that Enron is out of pocket with the regard to the nominated
gasoil.

10.  Unless Enron wishes to manage the contract by risking a rejection dispute
each time condensate is delivered (assuming SGS do not certify) Enron may want
try to renegotiate the contract.  It may be that the point we have raised in 7
concerning the risk of an unlawful rejection by the buyer may be helpful in 
any
such renegotiation.

Regards

David Best

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