The Implications Of The Buyers` Non-Compliance With The Obligation To Provide A L/C Conforming With The Contract Requirements Within The Contractual Time Limit

In the English law case Kronos Worldwide Ltd. v. Sempra Oil Trading SARL¹ the sale contract required the FOB buyers to secure the payment through a letter of credit "to be opened promptly through a first class bank".
The contract delivery period was 25 – 30 June 2001.
The buyers` vessel arrived at loading port and tendered NOR on 28th June but the L/C was opened and advised only on 6 July.
The sellers commenced loading on 9th July and completed loading on 11th July.
The buyers contended that the laytime commenced on 28th June and expired on 30th June after which the vessel was on demurrage for 11 days 1 hour and 16 minutes.
The sellers contended that the laytime did not commence until a reasonable time after the provision of L/C and not before 9 July when loading commenced. Since the cargo was loaded within the permitted laytime, there was no demurrage due.
In the absence of the sellers` waiver on the buyers` obligation to provide the L/C (prior to the vessel`s arrival at loading port on 28th June), the provision of L/C was an implied condition precedent to the sellers` obligation to load the oil cargo and therefore, the laytime cannot have begun to run until a reasonable time after the contractual L/C was advised.
The English Court of Appeal held that if the provision of L/C is a condition precedent to the sellers` performance of their obligations to provide a free berth and load the cargo, the consequence is that the laytime does not begin to run under the sale contract until after the L/C had been opened. Therefore, no demurrage was due to buyers.
Until the contractual L/C is provided, the sellers are not obliged to perform any of their contractual obligations.
One question raised before the Court was what is the time limit by which the FOB buyers are bound to provide a contractual L/C when the contract requires the buyers to provide a L/C "promptly".
The English Court of Appeal referred to the English law case Ian Stack Ltd. v. Baker Bosley Ltd.².
In that case, Diplock J. held that in the absence of express provisions in the sale contract, the FOB buyers have the obligation to open a L/C conforming with the contract requirements at the latest by the earliest date of the contractually agreed shipment period.
In Glencore Grain Rotterdam B.V. v. Lebanese Organisation For International Commerce³, the buyers provided a L/C that did not conform with the contract terms and when the sellers asked the buyers to amend the L/C to make it compliant with the contract terms, the buyers refused.
In turn, the sellers refused to load the cargo contending that the L/C did not conform with the contract terms and the buyers had the obligation to provide a L/C conforming with the contract terms before the first day of the contractual shipment period.
The buyers claimed damages for the sellers` refusal and failure to ship the contract goods.
The English Court of Appeal held that the buyers were obliged to provide a L/C conforming with the contract requirements at the latest by the earliest date of the contract shipment period. By failing to provide a L/C conforming with the contract requirements within the contractual time limit, the buyers were in breach of contract. The sellers could rely on that breach to justify their own refusal and failure to ship the contract goods.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Oil Trade Review Edition No. 1.

Endnotes:

1. [2004] EWCA Civ. 3, [2004] 1 Lloyd`s Rep. 260
2. [1958] 2 QB 130
3. [1997] EWCA Civ. 1958