1. The oilery party arbitrarily mixed the oil stored by the depositor with that owned by themselves but mortgaged to others, causing it difficult to be distinguished, constitutes blending in Civil Law;

2. Both the depositor and the mortgagee shall jointly shoulder the responsibility when the remaining oil in the depot is not enough to return to the depositor and realize the mortgage right and when there is gross negligence by the depositor and the mortgagee bringing the commercial risks of delivery and compensation failure.

3. The mortgagee shall not in good faith obtain the mortgage right of the oil occupied by the obligor (the oilery party) but owned by the depositor when there is gross negligence by the mortgagee on the storage and the ownership inspection of the oil as collateral.
     【Case Index】

First trial: Judgement of Ningbo Maritime Court (2014)  Y.H.F.S.C.Zi No.723 [1] (March 6, 2015)

Second trial: Judgement of  Higher People’s Court of Zhejiang Province (2015)  Z.H.Z.Zi No.98[2]  (August 5, 2015)

【Details of the Case】

The Plaintiff (Appellant): CNOOC Marketing Zhejiang Co., Ltd. (hereinafter referred to as “CNOOC”)

The Defendant (Respondent): Ningbo Dongxing Petroleum Co., Ltd. (hereinafter referred to as “Dongxing Company”)

The Third party (Petitioner): Ping An Bank Co., Ltd., Ningbo Branch (hereinafter referred to as “Ping An Bank”)

Ningbo Maritime Court has identified the following findings by the hearing: CNOOC and Dongxing Company signed Contract of Warehousing on Dec 20, 2013 and stipulated that Dongxing Company shall provide oil tanks for CNOOC to store the fuel oil, the oil shall be measured according to the number of tanks for delivery when the oil to be loaded to or unloaded from ships, and if a third party is entrusted to undertake commodity inspection, the samples and measurement of commodity inspection shall prevail, all the oil with CNOOC as the consignee or to be received by Dongxing Company noticed by CNOOC shall belong to CNOOC while reaching the dock of Dongxing Company, Dongxing Company shall issue a storage list to CNOOC within two days after the oil has been put into the storage stating the quantity and nature of the oil, and the faxed copy of the storage list shall bear the same validity as the original copy, during the process of storage, Dongxing Company shall notice CNOOC and obtain permission in advance before merging oil in different tanks and transferring from one tank to the other to prevent the quantity and quality from changing, Dongxing Company shall provide CNOOC with the most updated records of tanks monthly, and conduct stock count, complete monthly stock sheet and send the singed and stamped original copy to CNOOC, all oil can only be released from the warehouse unless confirmed by CNOOC through telephone and delivery notice issued and stamped by CNOOC has been presented, the ownership of the oil shall be deemed transferred to the pick-up party when valid bill of lading is presented, Dongxing Company shall bear the responsibility of shortage and quality change caused by its own fault during the process of storage, loading and unloading, and shall compensate according to market price, and Dongxing Company shall compensate CNOOC for damages if blending oil against the contract. The validity period of the contract is from Jan 1, 2014 to Dec 31 of the same year, and both parties have made agreements on other issues such as the collection and payment of warehousing charges. On Jan 27, 2014, CNOOC purchased Property All Risks Insurance for the oil stored in Dongxing Company.

On Jan 7, 2014, CNOOC purchased 1,035.002 tons of ordinary fuel oil from Jinhai Hongye Binhai Petrochemical Co., Ltd of. From Jan 9 to April 9 in 2014, CNOOC purchased 8,579.005 tons of No.1 low-sulphur industrial fuel oil from CNOOC Daxie Company. On June 16 of the same year, CNOOC purchased 932.718 tons of first-line fuel oil from PetroChina Fuel Co., Ltd, East-China Marketing Branch. The above-mentioned oil was shipped to the warehouse of Dongxing Company under the arrangement of CNOOC, correspondingly Dongxing issued storage lists stating the names, specifications, quantities of the oil, but the tank number was not recorded. From Jan 10, 2014 to August 12 of that year, CNOOC purchased 33,500 tons of ordinary fuel oil from Ningbo Yuanhui Petrochemical Co., Ltd. (hereinafter referred to as Yuanhui Company) and agreed that CNOOC shall pick up the goods from the warehouse of Dongxing Company by its own. CNOOC made payment and accepted the VAT invoice as agreed, and Dongxing Company issued the notice of storage stating that the consignor was Yuanhui Company and it is for domestic trade. During 2014, CNOOC sold part of No.1 low-sulphur industrial fuel oil and ordinary fuel oil to Ningbo Yuanli Fuel Oil Co., Ltd. (hereinafter referred to as Yuanli Company) by the way of transferring the title of goods. By September 11, 2014, CNOOC has stored the following oil products in Dongxing Company: 932.718 tons of first-line fuel oil, 2,870.057 tons of No.1 low-sulphur industrial fuel oil and 9,607 tons of ordinary fuel oil. During the trial, both parties confirmed that Dongxing Company not only mixed the fuel oil stored by CNOOC with that purchased by themselves, but also mixed them with other different kinds of oil such as diesel, making it unable to be distinguished.

On July 2, 2014, Ping An Bank and Dongxing Company signed the 2014 General Credit Limit Contract and Maximum Amount Mortgage Contract which stipulated that Ping An Bank shall confer a general credit line of RMB 250 million  on Dongxing Company from July 2, 2014 to July 1, 2015, and that Dongxing Company shall provide all oil products such as fuel oil and diesel currently stored and to be stored in its warehouse amounting to RMB 114.3 million as floating charge to secure the RMB 80 million pinciple and its interests, both parties have also agreed on other issues. On the same day, Dongxing Company, Ping An Bank and Nanchu Management Group Zhejiang Branch (hereinafter referred to as Nanchu Company)  signed the 2014 Movable Property Regulatory Agreement and Warehouse Lease Contract, under which Nanchu Company, entrusted by Ping An Bank, shall supervise the stock of oil products from time to time, and Dongxing Company shall provide enough materials to verify the ownership and quantity of the products under supervision (including but not limited to sale & purchase contract, VAT invoice, customs declaration form, waybill, certificate of quality, certificate of inspection, etc),  Dongxing shall lease all its 15 oil tanks to Nanchu Company to stored the oil products mortgaged to Ping An Bank with the rental fee of  1 yuan per month to be  paid in lump sum upon expiration, whereas the taxes and bills for water and electricity during the lease shall be paid by Dongxing Company. On the same day, Ping An Bank, Nanchu Company and Wang Caisheng signed the 2014 Goods Store and Regulatory Agreement which stipulated that the regulated oil tanks shall only be used to store the regualted oil products, and shall not be used to store any non-regulated or third party’s oil products, Dongxing shall provide the regulators with corresponding sale & purchase contract, VAT invoice for review in terms of the regulated oil product obtained through sale & purchase activities. On July 3, 2014, Dongxing Company and Ping An Bank applied for the registration of chattel mortgage to the administrative authority of industry and commerce specifying that the principal of the debt secured was RMB 80 million. In July 2014,  Ping An Bank successively loaned RMB 27 million to Dongxing Company and discounted RMB 24 million of commercial draft issued and accepted by Dongxing Company, who then used all the above funds to pay off Yuanli Company for purchasing oil. Though RMB 4 million was paid back, Dongxing Company still owes Ping An Bank RMB 47 million of the principal and its corresponding interests. In addition, on July 30, 2013, Dongxing Company singed the 2013 General Credit Limit Contract and Maximum Amount Mortgage Contract with Ping An Bank and the Movable Property Regulatory Agreement, Warehouse Lease Contract and Goods Store and Regulatory Agreement with Nanchu Company under which the contract clauses are basically the same as those signed in 2014 and completed the chattel mortgage registration process. On August 27, 2014, CNOOC tried to pick up first-line fuel oil and ordinary fuel oil from Dongxing Company but failed. On September 4, 2014, Dongxing Company voluntarily provided 15 steel oil tanks and all supporting facilities to assume the responsibility of mortgage within the scope of compensation liability of RMB 95 million of the storage contract, and the expiration date was December 31, 2014 with the registration of chattel mortgage completed. By September 11, 2014, there are 9,456 tons of oil stored in the warehouse of Dongxing Company.

Additionally, it is affirmed that Dongxing Company was established on November 18, 2002, whose licensed business scope includes the retail of diesel and general business scope includes the retail and the wholesale of fuel oil (dangerous chemical products excluded), coal tar, asphalt, and lubricant, and the storage of fuel oil (dangerous chemical products excluded) and ordinary oil products. In addition, Ping An Bank filed a lawsuit against Dongxing Company and Dai Yuanguang for financial loan contract dispute in People’s Court of Yinzhou District, Ningbo City, claiming Dongxing Company to repay RMB 47 million principal and 36,986 yuan interests (interests shall be paid as agreed by the contract after September 1, 2014), 1,100,700 yuan of expenses in realizing the creditor’s rights, and the action was accepted by the Court on September 2, 2014.

Then, CNOOC brought a lawsuit against Dongxing Company to Ningbo Maritine Court on September 9, 2014, claiming the following: 1. The Defendant shall immediately deliver 2870.057 tons of No.1 low-sulphur industrial fuel oil, 932.718 tons of first-line fuel oil, and 9,607 tons of ordinary fuel oil stored in its warehouse to the Plaintiff, 2. If delivery can’t be made, the Defendant shall compensate the Plaintiff 96,550,606.62 yuan and corresponding interests (since the day the lawsuit is brought and according to PBC loan interest of the same period), 3. The Plaintiff, in terms of the above claims, shall successively have the mortgage right on the 15 oil tanks and its supporting facilities according to the mortgage registration; 4. The Defendant shall bear the costs of the legal action and security expenses. Ping An Bank apply for participating in the trial as a third person who enjoys independent claim power to the Court, which is accepted by the Court, and the Bank alleged that all the requests of the Plaintiff shall be denied by the Court and asked for the court to confirm its mortgage right over the remaining oil in the Defendant’s warehouse.

    Dongxing Company argued that CNOOC’s claims of the quantity of the oil stored in the warehouse and the damages are true, but the actual oil products delivered to the warehouse by CNOOC were only 4800 tons, the rest 8000 tons were transferred from Dongxing Company’s associated companies such as Yuanhui Company and Yuanli Company through the method of trade financing and title transferring, so there is no actual delivery of oil. The dispute is due to the financial problems of the defendent,so would like to resolve the dispute through friendly negotiation with the Plaintiff and the Third party.

     【The Trial】

After the hearing, Ningbo Maritime Court holds that this is a  port cargo custody contract dispute. According to the claims and defenses of all parties , the issues in  disputes of the case are as follows:

1. The legal relationship between CNOOC and Dongxing Company

CNOOC and Dongxing Company hold different opinions with regard to whether there is real warehouse contract relationship between each other. Through investigation, Ningbo Maritime Court holds that “a warehouse contract is a contract whereby the safekeeping party stores the goods delivered by the depositor, and the depositor pays the warehouse fee” according to Article 381 of PRC Contract Law. CNOOC shipped part of the purchased oil to the warehouse of Dongxing Company, and purchased ordinary fuel oil from Yuanhui Company by the way of title transferring, Yunhui Company issued the VAT invoice. As a warehouse safekeeping party, who has the legal qualifications of the storage of fuel oil, Dongxing Company issued the notice letter of storage with regard to all the oil products CNOOC stored, stating the consignor, the warehouse name, the time of entering the warehouse, and the name and quantity of oil products concerned for many times. Dongxing agreed that the party who would take delivery of the cargoes shall shoulder the warehousing fee, which is not contrary to the law. The original warehousing contract relationship between CNOOC and Dongxing is not necessarily to be overturned, although the purchase and sale of oil between CNOOC and Yuanhui, CNOOC and Yuanli were trade financing which were different legal relations. On the aforementioned grounds, the warehousing contract relationship between CNOOC and Dongxing Company is real and legitimate. Though Ping An Bank argued that the oil purchased by CNOOC has been entrusted to Dongxing for sale, through which Dongxing had the ownership and control power of all the oil products. However it was not acknowleded by CNOOC, and Ping An Bank failed provide any evidence to prove that, so the Bank’s argument was inadmissible.

2. Ownership of remaining oil products in Dongxing’s warehouse

CNOOC alleged that the oil stored in  Dongxing is more than the remaing, first-line fuel oil products were never transported out of the depot, that Dongxing’s arbitrarily mixed the oil do not change its ownership, CNOOC purchased ordinary fuel oil products through title transferring does not affect the interests of any third party or voilate the law, however they paid reasonably and obtained VAT invoice, Dongxing had checked the quantity of oil stored many times and confirmed, so the remaining oil products in Dongxing’s warehouse shall belong to CNOOC. Ping An Bank alleged that it shall belongs to Dongxing considering the financing loan relationship with other companies, the ownership of the oil products concerned has been transferred to Yuanli Company or Dongxing company at the time the oil products were stored into Dongxing. CNOOC held that some oil products have been sold by Dongxing and the remaining were mixed by Dongxing, and the original oil products can't be retrieved, so CNOOC can only require Dongxing to compensate for losses.

Ningbo Maritime Court held that Dongxing Company not only mixed the fuel oil stored by CNOOC with that purchased by themselves, but also mixed them with other different kinds of oil such as diesel, making it difficult to be distinguished. The root cause of the dispute is that Dongxing Company, as a safekeeping party under the warehousing contract and an obligor who provides collateral under the loan contract, failed to truthfully perform its contractual obligations that CNOOC’s oil products shall be stored in special tanks, but arbitrarily mixed the oil for sale. However, CNOOC and Ping An Bank were also at fault. Firstly, Dongxing Company holds qualifications of sale and warehousing different varieties of oil and conducts the above businesses at the same time, the oil products concerned are homogenous goods with high degree of liquidity, CNOOC and Ping An Bank have cooperated with Dongxing Company for years, therefore should pay more attention on it. Secondly, CNOOC purchased the ordinary fuel oil from Yuanhui Company by the way of title transferring and stored them into the depot of Dongxing Company, and shall make on-the-spot investigations of the ownership and the quantity of the oil, Ping An Bank was aware that the corresponding loans were used to pay for the oil purchased by Dongxing Company by the way of title transferring to Yuanli Company, thus shall bear more rigorous obligation to examine the ownership of the oil in the depot. Thirdly, all the oil storage lists simply recorded that the oil was fuel oil without stating the specific nature of oil, the tank number was left blank, but CNOOC did not raise any objections after receiving these lists, some of the monthly stock sheet were missing. By far, Ping An Bank and the regulator have not provided the oil transport documents, oil purchase contracts in addition to those signed between Dongxing and Yuanli, and the payment documents, and it is difficult to recognize the relevance between some of the VAT invoices and the oil stored,  there is flaws on the regulatory records, as such both CNOOC and Ping An Bank shall respectively take relevant commercial risks due to negligency of examing the stock and ownership of the oil products concerned. Considering that the remaing indistinguishable oil products are from the blending of oil owned by CNOOC and that owned by Dongxing, and by referring to the remaining quantity stored by CNOOC, the claims Ping An Bank made, and the quantity calculated from the unit price Ping An Bank acknowledged and the respective proportions, it is determined that with regard to the remaining 9,456 tons of oil in the depot of Dongxing, 6195 tons shall be owned by CNOOC, and the rest 3,261 tons shall be purchased by Dongxing itself.

3. Whether Ping An Bank have the mortgage right over the remaing oil?

Through the examination and the trial, Ningbo Maritime Court holds that the General Credit Limit Contract and Maximum Amount  Mortgage Contract signed between Dongxing Company and Ping An Bank reflect both parties true intentions, thus shall be legitimate and valid. Dongxing Company voluntarily provided the fuel oil and diesels currently owned and to be owned by itself in the future as collateral for the debts within the limitation of RMB 80 million and its interests, and have completed the registration of chattel mortgage, which are in line with the law thus shall be confirmed, however Dongxing may only use the 3,261 tons of oil owned by itself as collateral and the debts guaranteed shall not exceed the RMB 80 million principle. Though the oil products concerned are possessed by Dongxing, the remaining oil products have been mixed with all that owned by CNOOC, and Ping An Bank was negligent in examing of the stock of the ownership of the oil, thus may not obtain the mortgage right over CNOOC’s oil in good faith. CNOOC denied the mortgage right of Ping An Bank on the grounds that the ownership of the oil in Dongxing’s depot was unidentified, and the oil products were not within the scope of floating charge and have already been sold out, but  CNOOC did not provide any legitimate or valid evidence and its above arguments had not sound legal basis thus shall be inadmissible.

Therefore, the warehousing contract signed between CNOOC and Dongxing Company was authentic and valid and both parties shall perform it according to the agreements. The storage term was not stipulated by the two parties so CNOOC shall be entitled to require Dongxing Company to deliver all the remaining 6,195 tons of oil. Dongxing arbitrarily mixed and sold the stored oil, resulting in delivery failure of all the stored oil to CNOOC according to the stipulations, thus Dongxing shall compensate CNOOC for corresponding losses. CNOOC claimed to distinguish the 6,195 tons of oil owned by them according to the total quantity of various oil products and the remaining oil quantity, which confirmed that the oil products that failed to be delivered by Dongxing were respectively 501.718 tons of first-line fuel oil, 1544.057 tons of No.1 low-sulphur industrial fuel oil, and 5,169 tons of ordinary fuel oil. The price claimed by CNOOC to compensate for losses was reasonable and equivalent to the market price when the company failed to pick up the product, and it was confirmed that Dongxing Company and Ping An Bank raised no objections. On these grounds, CNOOC’s loss was 51,946,560 yuan due to Dongxing’s failure to deliver the remaining oil products. If it fails to deliver the existing 6,195 tons of oil to CNOOC, Dongxing shall additionally compensate CNOOC 44,604,046 yuan. CNOOC claimed the interests according to the mortgage rate of the People’s Bank of China over the same period, which is basically reasonable and shall be supported. Dongxing voluntarily provided 15 oil tanks and all supporting facilities to guarantee the liability for compensation of non-deivery under the warehousing contract and went through the registration of mortgage, which were legitimate and valid, and Dongxing and Ping An Bank raised no objections, thus shall be confirmed.

In conclusion, the claims of CNOOC and Ping An Bank are partly verified and shall be protected. According to Article 107, 381, 391 and Article 394 section 1 of the PRC Contract Law, Article 181 and 203 of the PRC Real Rights Law and Article 64 section 1 of the PRC Civil Procedure Law, the court hereby make the following decisions: Firstly, Dongxing shall deliver the 6,195 tons of oil to CNOOC within ten days since the day this Verdict takes effect.If it fails to deliver the oil, Dongxing shall compensate CNOOC 44,604,046 yuan. Secondly, Dongxing shall compensate CNOOC 51,946,560 yuan and its corresponding interests within ten days since the day this Verdict takes effect. Thirdly, it shall be confirmed that CNOOC shall have the prior compensation right over the above creditor’s rights on the 15 tanks and the supporting facilities owned by Dongxing Company within the limitation of maximum 95 million yuan according to the registration sequence. Fourthly, it shall be confirmed that Ping An Bank shall have the mortgage right over the existing 3,261 tons of oil owned by Dongxing within the limitation of maximum 80 million yuan according to the registration sequence. Fifthly, CNOOC’s other claims shall be dismissed. Sixth, Ping An Bank ’s other claims shall be dismissed.

 CNOOC and Ping An Bank were not satisfied with the judgement of the first trail and respectively appealed to Higher People’s Court of Zhejiang Province, which  upheld the judgement of the first trail.   

    【Comment】

Ningbo Maritime court has tried and concluded 21 cases[3] with regards to  port cargo custody contract disputes, these disputes are raising mainly for reasons such as damages occured to cargoes during the custody period, failure of delivering cargoes due to bankruptcy of warehousing enterprises or the pick up party is not regarded as the owner of the cargoes, failure of paying off storage fee on time, etc, and the conflicts between all parties[4] are really intense. In this case, the essential reasons of non-delivery are the business expansion of the warehousing party and the decrease of oil price which cause the financial chain rupture in its operation. Recently, similar situations occured in Zhoushan and Ningbo to different extents. We hope that the handling of this case can provide some references for similar cases in the future.

I. Identification of validity of warehousing contract

As a contract to stipulate commercial issues[5], the main features of a warehousing contract are the professionalism and the profitability of the safekeeping party, which means the safekeeping party shall make preparations to perform the contract and make certain payments. If it is regarded as a practice contract and once the depositor changes his willingness and does not deliver the cargoes to the safekeeping party before delivery, the safekeeping party may only claim the liability for wrongs in conclusion of contract towards the other party instead of compensation responsibility of breach of contract, which doesn't provide the safekeeping party with proper protection. Similarly, the depositor’s interests[6] will be damaged if the storage application is refused by the safekeeping party when the depositor delivers the cargoes for storage. In contrast, a custody contract, based on the principle of free of charge, is mainly manifested by the mutual aid among all parties. The above different features give rise to the different establishment and effective date of a warehousing contract and a custody contract. The former “become effective since its formation” shall be a consensual contract, while the later “a safekeeping contract is formed upon delivery of the deposit, except otherwise agreed by the parties” shall be a practice contract. Therefore, Ping An Bank argued that the warehousing contract was not established as to 8000 tons of oils since they were not actually delivered, which was insufficient.

II. The identification of performance validity of warehousing contract

Ping An Bank claimed that CNOOC, Yuanli and Yuanhui Company were associated enterprises, and CNOOC purchased oil products from Yuanhui and provided funds for Dongxing Company. After that, CNOOC sold the oil to Yuanli Company and recalled the funds from Dongxing, which was financing trade but a loan in essence, so the warehousing contract was not performed in reality.

There is no exact definition now on the so-called financing trade whose core mode of operation is that all parties sign the trade contract for funds by the way of “issuing the confirmation documents of delivery but without actual delivery.” As to why this mode of operation occurs, there are mainly two reasons: Firstly, it is the financing difficulties in private enterprises. If the enterprise approaches the bank for a loan, it may have some negative records in the unified credit reporting system of the bank once fails to repay debts within the deadline, or even be blacklisted, affecting borrowing money from other banks. Secondly, it is the result of the pressure of performance. In order to achieve the aim of increasing the value of output and completing the business tasks, most of the state-owned enterprises employ this mode, and meanwhile, they use idle funds for certain interests.

The Supreme People’s Court has different identifications now over the effectiveness of financing trade contract comparing with their past viewpoint. In the early days, the Supreme People's Court held that it was loan contract in essence in the name of purchase & sales contract and that such contract shall be invalid[7]. Since the financing difficulty of enterprises has captured more attention of the central government, the social and judicial environment provides more liberal ways for the validity identification of business loans, and Supreme People's Court also changed their minds on the validity identification of financing trade contract and holds that the established buyer-seller relationship[8] in law shall not be denied only based on the reason that the buyer takes no actual delivery of cargoes under the condition that both parties have signed the contract and established the buyer-seller relationship, that the purchaser have issued the certificate of receipt to make it clear that the cargoes under the Contract concerned have been picked up, and that the seller party has issued the VAT invoices according to the agreements, regardless of the existing fact of trading approach of “issuing the confirmation documents of delivery but without actual delivery”. In this case, the so-called “transferring the title of cargoes” claimed by Ping An Bank is actually indication delivery regulated by Article 26[9] of the PRC Real Rights Law. Yuanhui Company indicated the safekeeping party, Dongxing Company, to issue a Storage List of Oil to him of the oil sold to CNOOC, to confirm that the oil purchased by CNOOC from Yuanhui has been put into the depot. The approach of delivery, which was legitimate and valid, did not violate the relevant prohibited issues imposed by the existing law and administrative rules of our country, and was in line with the principle of Party Autonomy, thus the Court can assume that the warehousing contract has been performed in reality.

III. The ownership identification of the existing oil

In this case, Dongxing is involved with many lawsuits. The existing oil of the warehousing party is far from sufficient to meet the interests of the depositor and the mortgagee, and the existing properties is far from meet the creditor’s rights of all parties. In such occasions, the ownership identification of the existing oil will have great influences on all parties.

       (1) Analyses of legal foundations

     The word “blending” is defined as a hybrid state of substances, the mixed movables possessed by different owners, that is impossible to be recognized or separated, for example, the blending of solid substances such as rice, ore, and sand grains, and the blending of liquid substances such as alcohol and gasoline[10]. In this case, The oilery party not only arbitrarily mixed the oil stored by the depositor with that purchased by themselves, but also mixed the fuel oil with many other kinds of oil such as diesel and make it difficult to be distinguished, constituting the blending in Civil Law. There are two points to emphasize with regarding to the ownership of the mixed movables: Firstly, if the value of each party’s property is equivalent to each other, both parties can obtain the common ownership of the mixture, or one party exclusively obtains the ownership but compensates for the other party’s damages. Secondly, the party, who owns the original property that is more valuable than the other party’s, shall obtain the ownership of the mixture and compensate for the other party’s damages.

     (2) Analyses of commercial risks

      Both the depositor and the mortgagee know that the owner of the depot has both the qualifications of sale and storage of oil and meanwhile carries out the above businesses, but both of them fail to perform the obligation of a higher level of attention, so both of them are at fault. CNOOC also has the following mistakes except for failing to challenge many defects recorded by the oil stock sheet and missing part of the stock count sheets. According to the Article 388 of PRC Contract Law , the depositor shall have the right to inspect the goods or take samples therefrom. Though inventories were carried out for many times over the quantity of the oil concerned, CNOOC did not make on-the-spot check on the quality of the stored oil products, and raised no objections over the various kinds of oil products that were not stored in isolation, especially that under the condition that part of the oil products were delivered by indication, CNOOC still failed to make on-the-spot check on the quantity and ownership of the oil products that actually stored in the depot. The faults of  Ping An Bank are mainly as follows: 1. The regulatory records are incomplete and inaccurate. The staff member on duty claimed that “the exact reasons were unclear” with 190 tons of oil missing from the Chronicle on-duty Table under the condition that there was no oil delivered out of the depot,part of the Entry Sheets of the Collateral are missing, and there are discrepancies of the records of the names of the ships and the oil quantity in & out of the warehousing between the Chronicle on-duty Table and Entry Sheet of the Collateral,the Bank failed to provide oil transportation document, complete purchase & sale contracts under the Entry Sheet of the Collateral, certificate of payment and VAT invoices. 2. The Bank’s examination and check over the materials proving the ownership and the quantity of the regulatory oil is not rigorous, and only formality checks were made against part of the purchase & sale contracts and VAT invoices with the integrity and the relevance of the materials unchecked. The regulatory company, entrusted by Ping An Bank, regulates the oil involved with the case. Therefore, the adverse consequences arising from regulatory negligence shall be borne by the consigner,  Ping An Bank.

The dispute was essentially caused by the depot owner’s arbitrarily blending and selling of the oil, but the depositor and the mortgagee both had their faults for this, and therefore, both parties shall share the commercial risks[11] when the existing oil was insufficient to satisfy the interests of all parties, it is also resolves the ownership identification issues caused by blending.Therefore it is fair and reasonable to divide the oil products in proportion according to CNOOC and Ping An Bank’s claims of the quantity of the cargoes stored and the creditor’s right offset. Ping An Bank was at fault in terms of the storage and the examination of the ownership of the existing oil, so it shall not in good faith obtain the mortgage right of the oil occupied by Dongxing but owned by CNOOC.

IV. Two Suggestions

     The disputes of this case could have been avoided. Apart from the depot party, who should have honored the obligations regulated by the Contract to use special tanks exclusively for special cargoes and not to blend the oil and sell it out, the depositor and the mortgagee, under the condition that the depot party has both the qualifications of sale and storage of oil and meanwhile carries out the above businesses, shall be more obliged to take the following precautions:

      Firstly, suggestions to the depositor. When putting the oil into the depot, the depositor, with the owner of the depot, shall jointly check and confirm the quantity and the quality of the stored oil and record the following important information in the Notice Sheet of Warehousing and Warehouse Warrant such as the name of the depositor, the category of the oil, quantity, standard density, tank number, the issuer and the date of the issuance.During the period of storage, the depositor shall check the quantity, quality and the ownership of the stored oil regularly and actively, so as to avoid the blending of oil stored with others’ , especially when the oil is obtained by indication delivery.

Secondly, suggestions to the regulator of oil. As to those mortgaged oil under the inventory custody mode of dynamic check: Firstly, strict scrutiny must be carried out to check such information as the materials provided by the mortgagor[12] to prove the ownership and the quantity of the oil under custody (including but not limited to purchase and sale contract, VAT invoice, customs declaration form, waybill, certificate of quality, certificate of inspection, etc), especially the integrity and the relevance of the materials, so as to avoid mistakenly registering that owned by others as that owned by the mortgagor. Secondly, the operator in charge of custody shall record materials as the Chronicle on-duty Table and Entry Sheet of the Collateral in an accurate, precise, and complete way, and establish account. In this case, over 10 staff members of the custody company in Zhoushan, Ningbo, and Hanghzou were present at the trial in the hope of avoiding similar disputes considering the potential mistakes during the regulation process.