The Buyer`s Remedies For Late Delivery Of Oil Cargoes In FOB Sale Contracts
The commodity buyers will incur financial losses in case of late delivery of commodities because the pricing period is based on the contract delivery period.
The remedies awarded to FOB buyers in claims involving late delivery of oil cargoes turned on the question of whether or not it was a condition of contract that the oil cargo be delivered by the end of the contract delivery period.
If the buyers wish sellers to complete loading by the end of the contract delivery period, they should stipulate this matter clearly in the sale contract and not leave this matter to implication.
The sale contract should also stipulate a time limit for the buyers to present the nominated vessel ready in all respects for loading and tender valid NOR taking into consideration the time necessary to load the cargo quantity at the contractual loading rate before the end of the contract delivery period. The vessel`s laycan at loading port should allow to sellers sufficient time for the completion of loading between the next day following the last day of laycan (i.e. cancelling day) and 23:59 hours on the last day of the contract delivery period. Therefore, the buyers must nominate a vessel with a laycan that will allow to sellers a sufficient time to load the goods in the days following the cancelling day until the end of the contract delivery period.
In Galaxy Energy International Ltd v. Murco Petroleum Ltd.1, the contract delivery period for a FOB sale of fuel oil was 15 - 17 January 2012. The buyers nominated a vessel with a laycan 14 – 15 January 2012, thereby giving sellers sufficient time for the shipment of cargo by the end of the last day of the delivery period. Therefore, it was a condition of contract that the fuel oil cargo had to be delivered by 23:59 hours on 17 January 2012.
The vessel arrived and tendered NOR at loading port on 13 January but the sellers were not able to provide a free berth for loading the cargo until 20 January and the cargo was loaded in the days of 20 and 21 January.
The buyers claimed the payment of demurrage charge for the time lost by the vessel waiting for berth and damages for the late delivery of cargo, for the breach of condition that the cargo be delivered during the contract delivery period. The claim for damages for late delivery of cargo was for the difference between the market price on the last contractual date for delivery, i.e. 17 January 2012, and the market price on the actual date of delivery, i.e. 21 January 2012.
The English Commercial Court upheld the buyers` claim and awarded damages based on the difference between the market prices.
In ERG Raffinerie Mediterranee SPA v. Chevron USA Inc.2, the contract delivery period for a FOB sale of gasoline was 27 - 30 May 2004. The time allowed for loading was 36 hours with a 6 hours` Notice period.
The buyers nominated a vessel with a laycan 29/30 May 2004.
The vessel arrived and tendered NOR at loading port on 28th May but the sellers were not able to deliver the cargo of gasoline at the time of vessel`s arrival on 28th May due to technical problems occurred at the refinery. On the following days the sellers informed the buyers that the vessel will be called at berth on 4th June.
When the market price of gasoline had started to fall on 31 May, the buyers asked sellers to agree with a new pricing period. The original pricing period was 25 May – 1 June.
Failing to obtain the sellers` consent over a new pricing period, the buyers terminated the contract on 3 June and ordered the vessel`s Master to leave the loading port.
The sellers contended that the buyers were not entitled to terminate the contract and claimed damages for wrongful termination of contract.
The buyers contended that the delivery period was a condition of the contract and claimed damages for late delivery and payment of demurrage charge for the time lost by the vessel waiting for the cargo.
The English Court of Appeal distinguished between the traditional FOB contracts and non-traditional FOB contracts.
In a traditional FOB contract, the time of shipment is of the essence of the contract. The sellers must ship the goods by the end of the contract delivery period.
If it is a condition of the contract that the contract goods be shipped on board the vessel by the end of the contract delivery period, it is also a condition of contract the requirement that the buyers present the vessel ready in all respects for loading in sufficient time to allow the sellers to complete loading of the goods by the end of the contract delivery period.
Had the buyers nominated a vessel with a laycan in 27/28 May range, the vessel`s arrival on 28 May would have left to the sellers sufficient time for the completion of loading by the end of 30 May, the last day of the delivery period. In such case, it would have been an implied condition of contract that the cargo be shipped by the end of the delivery period. However, by nominating a vessel with a laycan in the last two days of the contract delivery period, the buyers turned the contract delivery period into a period for the presentation of vessel in which the vessel could arrive and tender NOR at any time up to 24:00 hours on the last day of the delivery period.
The English Court of Appeal held that if the buyers nominate a vessel with a laycan close to the end of the contract delivery period, the consequence is that if the vessel presents towards the end of the contract delivery period, the loading of cargo cannot be completed before the end of the contract delivery period. In such case, “it cannot have been the parties` intention that there would be a breach of condition if the goods have not been shipped by the end of that delivery period”.
Therefore, the English Court of Appeal upheld the sellers` claim holding that:
“In the context of the present contract with an entitlement on the part of the buyer to present a vessel at any time up to the last moment for contractual delivery, it cannot […] be right to hold that the words “DELIVERY … 27 – 30/05/2004” constitute a condition of the contract.
…
The use of a laydays/cancelling provision in the contract (particularly a provision entitling a vessel to present at any moment up to the end of the delivery period) makes the contract a non-traditional FOB contract in that time of delivery has become an obligation which is not of the essence of the contract.”
If the vessel could serve NOR at any time up to 24:00 hours on 30th May, it could not be a condition of the contract that loading had to be completed by that time, whenever it was that NOR given.
Even if the buyers` vessel arrived at loading port on 28th May, in sufficient time to allow the sellers to deliver the cargo, the sellers were not contractually obliged to complete loading by 24:00 hours on 30th May.
The English Court of Appeal held that the laycan provision gave the FOB buyers the right to present the vessel at any time up to 24:00 hours on the last day of laycan, 30th May and to the FOB sellers the right to terminate the contract in case of buyers` failure to present the vessel ready in all respects for loading by 24:00 hours on 30th May.
In case of such contract terms, the FOB buyers do not have the right to terminate the sale contract in case of sellers` failure to deliver the goods within the contract delivery period because such period is a period for presentation of vessel for loading and not a shipment period, like in CFR or CIF contracts or in the traditional FOB contracts.
In the non-traditional FOB contracts, the sellers` obligation is to commence and complete loading “as soon as reasonably practicable” after the receipt of valid NOR and expiry of 6 hours` Notice time, “even if this means that loading is effected or completed outside the Laydays or outside any other period specified in the Special Provisions”3.
The English Court of Appeal held that in the non-traditional FOB contracts in case of late delivery of cargo the buyers cannot claim anything else than demurrage for the time lost by the vessel waiting for the cargo.
In this regard BP and Shell FOB Sale Terms provide that in the event of any delay arising from the scheduling of the vessel`s turn to load, the provision of a berth for the vessel, berthing or loading of the vessel, “any rights of the Buyer against the Seller … shall be limited to a claim for the payment of demurrage”4. Furthermore, Sub-Clause 7.5.1 of BP Sale Terms stipulates that:
“The Seller shall not be liable (other than for demurrage as aforesaid) for any loss or damage, direct or indirect, which the Buyer may suffer as a result of the Crude Oil or Product not being loaded within the time allowed ...”
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Oil Trade Review Edition No. 1.
Endnotes:
1. [2013] EWHC 3720 (Comm)
2. [2007] 2 Lloyd`s Rep. 542; [2007] EWCA Civ. 494.
3. See Sub-Clause 6.2.2 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition; See also Sub-Clause 6.2.2 of the Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition.
4. See Sub-Clause 7.1 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition; See also Sub-Clause 7.3 of the Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition.