The Review Of NAEGA FOB Export Contract No.2, Edition 2018 And US And Canadian Shipping Regulations For The Export Of Grain And Oilseeds In Bulk

The NAEGA FOB Export Contract No. 2 is a contract form issued by the North American Export Grain Association (NAEGA) to be used for the FOB sales of grain in bulk by the US and Canadian grain exporters.

Settlement Of Price For The Contract Quantity Tolerance
A tolerance of 5% more or less of the mean contract quantity can be granted to the buyer at the market price in the country of origin of the commodity on the last date of loading, if such date is a business day, otherwise the market price on the previous business day.
In the event that the seller and buyer do not agree on the market value by the time the shipping documents are ready to be transmitted to the buyer, the seller shall invoice the entire shipment provisionally at the contract price. Thereafter, the final invoice for the difference between the contract price and market value shall be presented as soon as possible and payment shall be made immediately.
If the sale is for a quantity between minimum and maximum limits, there will be no margin in excess of the maximum limit.
If the contract covers multiple shipments to be loaded by more than one vessel, the loading tolerance of 5% shall apply on the difference between the mean contract quantity and the quantity that has been delivered on the previous vessels, that is, the loading tolerance shall apply on the unshipped balance only.

Weight Determination
The contract form does not state how the weight of cargo is to be ascertained and by whom.
At US ports, the weighing of bulk grain shipments is made in the terminal elevator scales under the supervision of the GIPSA`s Federal Grain Inspection Service. The weight figure determined ashore is verified by the vessel`s draft surveys conducted by the National Cargo Bureau surveyors. The weight figure ascertained and certified at the time and place of loading by the GIPSA`s Federal Grain Inspection Service shall be final.
At Canadian ports, the weighing of bulk grain shipments is made in the terminal elevator scales under the supervision of the Canadian Grain Commission`s inspectors. The weight figure ascertained and certified at the time and place of loading by the Canadian Grain Commission`s inspectors shall be final.

Conclusive Inspection And Determination Of Cargo`s Quality And Condition
The quality and condition of the goods ascertained at the time and place of loading by the FGIS for the US grain shipments, respectively by the Canadian Grain Commission`s inspectors for the Canadian grain shipments shall be final, that is, provided that the official inspection certificates evidence that the grain shipment is within the contract quality specifications, no claim can be made by the buyer for subsequent deterioration. Furthermore, the Clause 7 of the NAEGA FOB Export Contract No. 2 contains an exclusion clause with the following provisions:

"The commodity is not warranted free from defect, rendering same unmerchantable, which would not be apparent on reasonable examination, any statute or rule of law to the contrary notwithstanding."

If the purpose of this clause is to protect the sellers of soyabeans against claims for subsequent deterioration, then these provisions are inappropriate.
This clause is an old-fashioned clause originally included in the Edition 1938 of the London Corn Trade Association contracts and the London Cattle Food Trade Association Contract Form No. 6 and currently is still used in the FOSFA Contract No. 23 (Contract For South American Soyabeans In Bulk – CIFFO terms), FOSFA Contract No. 24 (Contract For Canadian/USA Soyabeans – CIF terms), FOSFA Contract No. 25 (Contract For Soyabeans In Bulk – CIF Delivered Weight) and FOSFA Contract No. 36 (Contract For Canadian Rapeseed – CIF/C&F terms).
In the English law case Henry Kendall Ltd. v. William Lillico Ltd.¹, Lord Pearce held that this clause does not protect the sellers in case of a breach of the implied condition as to merchantability of goods, because the exclusions of warranty are not sufficient to exclude conditions of contract. In the same case, Lord Morris said that the words used in the clause “are wholly inapt to exclude a condition of the contract. They do not refer to a condition. You do not exclude a condition by excluding or purporting to exclude a warranty.” This rule was upheld by the English Court of Appeal in KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co KG v. Petroplus Marketing AG², where Lord Justice Rix said that the statutory implied conditions cannot be excluded by reference to warranties but only by provisions which expressly refer to conditions.
Even though the NAEGA FOB Export Contract No. 2 is subject to New York law, that Court decision would still be applicable. Therefore, the FOB sellers using NAEGA FOB Export Contract No. 2 should consider the necessity of including in their sale contracts a clause excluding the seller`s liability for breach of conditions implied by statute and/or common law³.

Delivery Terms And Vessel Requirements
The Clause 8 of NAEGA FOB Export Contract No. 2 provides that delivery shall be made at the discharge end of the loading spout, i.e. FOB Spout Trimmed, because the US terminal elevators assume responsibility for grain only until it leaves the loading spout.
The Clause 8 of NAEGA FOB Export Contract No. 2 stipulates also that delivery shall be subject to the elevator tariff to the extent that the elevator tariff does not conflict with the terms of the contract. What the contract does not say it is that the loading charge published in the elevator tariff is subject to the condition that delivery shall be made at the discharge end of the loading spout to one self-trimming bulk carrier. The FOB Spout Trimmed delivery is possible only if the buyer nominates and provides a vessel suitable for spout trimming, i.e. a self-trimming bulk carrier. The only helpful provisions are in Addendum No.1 which stipulates that the loading rate guaranty applies provided that lifting under the contract is by one self-trimming bulk carrier only.
If the buyer does not present for loading a self-trimming bulk carrier, Addendum No.1 Clause 8 stipulates that any trimming costs and overtime costs for performing trimming shall be for the buyer`s account. The loading charge will be higher if the buyer nominates and presents for loading a non-self-trimming bulk carrier due to the additional costs and time spent for performing the trimming. The loading charge will be even higher if the buyer nominates and presents for loading a tween-deck general cargo vessel for which the grain elevator operators charge the highest price for loading.

Vessel Nomination
The buyer must give the seller the pre-advice of the expected date of vessel readiness to load, i.e. the date on which the shipowners and buyers expect the vessel to arrive at loading port and be ready for loading, in the number of days to be agreed upon by the seller and buyer at the time of concluding the contract and declare the quantity required to be loaded.

Conditions For The Vessel Substitution
The nomination of the substitute vessel shall be subject to the same pre-advice requirements as for the originally nominated vessel, UNLESS the substitute vessel is expected to be ready for action on the same date as the originally nominated vessel. In other words, in cases where the substitute vessel is expected to be ready for loading on the same date as the originally nominated vessel, the substitute vessel`s nomination notice can be served with a shorter pre-advice than the pre-advice period required in the sale contract for the nomination of the original vessel.

Conditions For The Vessel Presentation For Loading
The Clause 8 of NAEGA FOB Export Contract No. 2 provides that buyer must present the vessel at loading port "in readiness to load" within the contract delivery period and the buyer`s vessel must "file" before the end of the contract delivery period. The Clause 18 of NAEGA FOB Export Contract No. 2 stipulates that:

"If vessel fails to file before the end of the delivery period, buyer shall be in breach of contract and seller shall carry the grain for buyer`s account and risk ..."

The Clause 8 of NAEGA FOB Export Contract No. 2 defines the meaning of the words "file" and "readiness to load" as follows:

"For the purposes of this contract a vessel shall be considered filed when it
(a) has tendered valid notice of readiness to load to the charterer or its agent, at the port of loading,
(b) has given written advice of such tender to the loading elevator, complete with all customarily required documents, such advice having been presented between the hours of 09:00 and 16:00 local time on a business day or between the hours of 09:00 and 12:00 noon on Saturday (provided not a holiday) and
(c) is ready to receive grain in the compartments required for loading under this contract."

The shipping terms and conditions of NAEGA FOB Export Contract Edition No. 2 are based on the US and Canadian Shipping Regulations for the export of grain and oilseeds in bulk.

Conditions For The Vessel Presentation For Loading Bulk Grain Cargoes At The US Ports
The vessels arriving to load grain at US ports must first pass the National Cargo Bureau and FGIS inspections before obtaining the permission to berth.
The vessel shall be considered physically ready to load when it is ready in every respect to receive grain in all compartments necessary for loading the quantity required to be loaded. The vessel`s NOR shall not be effective and laytime shall not commence to run until all holds necessary for loading the quantity required to be loaded have passed the inspection.
The National Cargo Bureau surveyor will inspect the vessel`s holds and hatch covers to verify their watertightness, but he will also verify the vessel`s documents, i.e. the document of authorisation for the carriage of grain in bulk and grain stability booklet, to see whether the vessel complies with the stability requirements and it is structurally safe to load grain in bulk.
The Federal Grain Inspection Service surveyors inspect the vessel`s holds to see whether they comply with the standards of fitness stated in the FGIS Directive 9180.48/4/08/09. The FGIS Directive stipulates that the vessel`s holds must be clean, free of any residue of previous cargoes, dry, free of infestation, free of rodents and toxic substances and free of foreign odour.
Only after the vessel has passed the National Cargo Bureau and Federal Grain Inspection Service inspections, it can tender NOR to the charterer`s agent. The vessel`s NOR must be accompanied by the Certificate of Readiness to Load issued by the National Cargo Bureau surveyor and the Official Stowage Examination Certificate issued by the FGIS surveyors.
Upon the receipt of the vessel`s NOR, Certificate of Readiness to Load and Official Stowage Examination Certificate, the charterer`s agent must file a berth application to the grain elevator operator for obtaining the permission to berth.
The berth application must be accompanied by the following documents:
- a copy of the vessel`s NOR signed by the charterer`s agent;
- a copy of the Certificate of Readiness to Load issued by the National Cargo Bureau surveyor;
- a copy of the Official Stowage Examination Certificate issued by the FGIS surveyors stating that the vessel is ready to load in all compartments required for loading the grain cargo;
- evidence that the vessel has been entered at the US Customs House;
- a copy of the vessel`s International Tonnage Certificate;
- Master`s proposed stowage plan.
If the vessel is an OBO (Ore/Bulk/Oil) Combination Carrier which has previously carried petroleum products, the vessel`s NOR must be accompanied by a Gas Free Certificate issued by a local marine chemist who must certify that the vessel`s holds are gas-free.
These are the "customarily required documents" referred to in the Clause 8(b) in case of vessels presenting for loading US grain or oilseeds.
Once the berth application is accepted by the grain elevator operator, the vessel is entered in the line-up of vessels waiting for their turn to be called at berth for loading. Therefore, what the nominated vessel must "file" before the end of the contract delivery period is the berth application accompanied by the NOR and the "customarily required documents" mentioned above.

Conditions For The Vessel Presentation For Loading Bulk Grain Cargoes At Canadian Ports
At the Canadian ports, the fitness of the holds for loading and carriage of grain and oilseeds is verified by the Minister of Transport, respectively by the Port Warden in the Port of Quebec, and the Canadian Food Inspection Agency.
The vessel shall be considered physically ready to load when it is ready in every respect to receive grain in all compartments necessary for loading the quantity required to be loaded. The vessel`s NOR shall not be effective and laytime shall not commence to run until all holds necessary for loading the quantity required to be loaded have passed the inspection.
The Minister of Transport, respectively by the Port Warden in the Port of Quebec, will inspect the vessel`s holds and hatch covers to verify their watertightness, but it will also verify the vessel`s documents, i.e. the document of authorisation for the carriage of grain in bulk and grain stability booklet, to see whether the vessel complies with the stability requirements and it is structurally safe to load grain in bulk.
The Canadian Food Inspection Agency inspectors verify the compliance with the cleanliness and phytosanitary requirements.
Only after the vessel has passed the Minister of Transport/Port Warden and Canadian Food Inspection Agency inspections, it can tender NOR to the charterer`s agent. The vessel`s NOR must be accompanied by the Certificate of Readiness to Load issued by the Minister of Transport/Port Warden and the Ship Inspection Approval For Loading form (CFIA/ACIA 1281) issued by the Canadian Food Inspection Agency.
Upon the receipt of the vessel`s NOR, Certificate of Readiness to Load and Ship Inspection Approval For Loading form (CFIA/ACIA 1281), the charterer`s agent must file a berth application to the grain elevator operator for obtaining the permission to berth. Once the berth application is accepted by the grain elevator operator, the vessel is entered in the line-up of vessels waiting for their turn to be called at berth for loading.
Like in case of vessels presenting for loading grain in bulk at US ports, the vessels presenting for loading grain in bulk at Canadian ports must "file" the berth application accompanied by the NOR and the "customarily required documents" before the end of the contract delivery period.

Extension Of The Delivery Period
If the buyers` vessel fails to file a berth application and thereby, the buyers fail to present a vessel ready in all respects to load before the end of the delivery period, that is, before 16:00 hours of the last day of the contract delivery period, the buyers shall be deemed in breach of contract.
The NAEGA FOB Export Contract No. 2 does not give the buyers a right to request extension of the delivery period. The extension of the delivery period is subject to a subsequent agreement between the sellers and buyers as to the buyers` liability for the cargo carrying charges that will accrue from the day following the expiration of the original delivery period until the day that the full cargo is loaded (Bill of Lading date). The FOB buyers should ensure that there are provisions in charter party which give them the possibility to recover the cargo carrying charges paid to sellers from the shipowners or require the shipowners to settle the cargo carrying charges directly with the shippers.
In a voyage charter party, the charterers will agree the extension of laycan subject to the shipowners` accepting the liability for the cargo carrying charges accrued after the laycan<sup>4</sup>, but in a time charter party, in the absence of specific provisions the cargo carrying charges will be considered too remote to be recoverable.
In a charter party dispute brought to a tribunal of the London Maritime Arbitrators Association (LMAA)<sup>5</sup>, a FOB buyer, who had to pay cargo carrying charges due to the vessel`s failure to pass the inspection of hatch covers and holds within the contract delivery period, sought to recover the amount of carrying charges from the shipowners as damages for the breach of charter party. The LMAA tribunal rejected the claim on the grounds that there were no provisions in charter party referring to the liability for the cargo carrying charges in case of the vessel`s failure to pass the inspection of hatch covers and holds and the shipowners could not reasonably have foreseen that additional storage charges were likely to be incurred.
The Clause 18 of the NAEGA FOB Export Contract No. 2 provides that if the sellers and buyers agree to extend the delivery period, then the buyers will have 35 days from the last day of the original delivery period to present a vessel ready in all respects to load. If the buyers` vessel fails to file a berth application before 16:00 hours of the 35th day following the last day of the original delivery period, the seller has three options:
- to continue to carry the commodity for the buyer`s account and risk;
- to declare the buyer in default;
- to tender to the buyer warehouse receipts for a quantity equal to the mean contract quantity, in exchange for which the buyer shall pay the FOB contract price plus the accrued carrying charges, but less the loading charges, weighing and inspection charges.

Seller`s Timing Obligations And Commencement Of Laytime
The port operators schedule the grain shipments in function of the vessel`s laycan and expected readiness date at the loading port. Therefore, the commencement of laytime will depend not only upon the time when the vessel is in all respects ready to load and tenders valid NOR, but also on whether the NOR is tendered within the laycan (delivery period) and after the expiry of the ETA pre-advice period, because the seller`s timing obligations to provide a free berth and commence loading are set in function of the expected date of vessel readiness to load pre-advised by the buyer.
The seller must have the goods ready for loading as from the vessel`s expected readiness date originally notified by the buyer in the vessel`s nomination notice and not sooner.
If the buyer`s vessel tenders valid NOR within the laycan (delivery period) after the expiry of the ETA pre-advice period, the laytime shall commence to run at 07:00 hours on the next working day following the day of tendering valid NOR and filling the berth application.
If the buyer`s vessel arrives at loading port before the first layday, the seller/port operators will allow the vessel to tender NOR and file the berth application, but the seller/port operators shall not be obliged to commence loading before the first layday. In such case, the laytime shall start to count at 00:00 hours on the first layday (first working day of the laycan/delivery period), unless the seller manages to have the goods ready for loading before the first layday and agrees to load earlier in which case the time used for loading before 00:00 hours of the first layday shall count.
If the buyer`s vessel arrives at loading port before the expiry of the ETA pre-advice period, the seller/port operators will allow the vessel to tender NOR and file the berth application, but the seller/port operators shall not be obliged to commence loading and the NOR shall not become effective before the expiry of the ETA pre-advice period. In such case, the laytime shall start to count at 07:00 hours on the next working day following the expiry of the ETA pre-advice period, unless the seller manages to have the goods ready for loading earlier in which case the laytime shall commence to count from the time of commencement of loading.

The Laytime Implications Of The Vessel`s Failure To Pass The Holds` Inspection
The vessel shall be considered physically ready to load when it is ready in every respect to receive grain in all compartments necessary for loading the quantity required to be loaded. The vessel`s NOR shall not be effective and laytime shall not commence to run until all holds necessary for loading the quantity required to be loaded have passed the inspection.
After passing the holds` inspection and tendering the Notice of Readiness, the buyer`s vessel must maintain a ready to load condition to retain her turn to loading.
Upon the vessel`s berthing, the vessel`s holds are re-inspected by the FGIS/CFIA surveyors. If the vessel fails the re-inspection at the loading berth, the laytime shall cease to count from the time the holds fail the re-inspection until the vessel passes⁶.
The usual reason why the vessels fail the re-inspection of holds at the berth is due to insects that entered into the holds after the initial inspection. Typically, the number of holds that fail the re-inspection is less than the number of holds required to be loaded. The NAEGA FOB Export Contract does not say how the time shall count in such case. The sale contracts incorporating the terms of NAEGA FOB Export Contract should stipulate that in the event that the number of holds that fail the re-inspection is less than the number of holds required to be loaded, the laytime shall be suspended pro rata for the rejected holds from the time they are rejected until they are re-passed. The rejection of two of the five holds required to be loaded would not normally affect the loading of the approved holds and thereby, the time counting in respect of those holds.

Time Counting In Case Of Multiple Loading Ports
The laytime for the second and/or subsequent port(s) shall commence to count upon the vessel`s arrival at that port(s), except when the vessel fails the holds` inspection at such port(s), in which case the laytime shall cease to count until the holds pass the inspection.

Settlement Of Demurrage Claims
The contractual time limit for the settlement of demurrage claims is 40 days from the "date of mailing of properly documented claim".

Force Majeure
If the delivery of the grain is prevented or delayed at the terminal elevator due to any of the following causes:
- riots, strikes, lockouts, interruptions in or stoppages of the normal course of labour;
- embargoes or exceptional impediments to inland transportation;
- Action by Federal, State or local government or authority;
and the seller sends notice to buyer no later than 2 business days after the date of commencement of the causes or no later than 2 business days after the first day of the delivery period, whichever occurs later, and at buyer`s request, provides a certificate issued by NAEGA certifying the existence and the duration of the causes, the seller`s obligation to deliver the goods shall be suspended while the causes are in effect until the termination of the causes and/or the resumption of work after the termination of the causes, whichever is the later.
If the cause preventing or delaying the delivery of grain cargo commences before or during the delivery period and terminates during or after the delivery period, then the delivery period shall be deemed to be extended by a number of days equivalent to the period starting with the commencement of the causes or the commencement of the delivery period, whichever is the later and ending with the termination of the causes and/or the resumption of work after the termination of the causes, whichever is later, but such additional period shall not exceed 30 days.
The force majeure provisions of Clause 20 may also be invoked in situations where the buyer`s vessel has filed the berth application during the delivery period but the cause preventing or delaying the delivery of grain cargo commences after the end of the delivery period. This means that if the buyer`s vessel files the berth application before the end of the delivery period and is entered in the line-up of vessels waiting for their turn to be called at berth for loading, but the seller cannot commence loading or commences loading and then it has to suspend it due to the occurrence of a force majeure event after the end of the delivery period, the seller may invoke the provisions of Clause 20.
If after the resumption of work, the buyer`s vessel is not loaded in the order in which it filled the berth application but it is bypassed by other vessel(s) which have filed the berth application at a later date, the seller will pay to buyer damages at demurrage rate for the time lost by the buyer`s vessel while waiting its turn to loading.

Passing Of Risk
The seller is responsible for delivering the grain ex elevator spout, i.e. at the discharge end of the shiploader spout. The seller`s liability shall be limited to his actions in delivering the grain at the discharge end of the shiploader spout.
The risk of loss shall pass to buyer upon delivery of grain at the discharge end of the shiploader spout. The buyer assumes all risks once the grain leaves the discharge end of the shiploader spout. Therefore, the buyer must obtain insurance cover extending from the time the grain leaves the shiploader spout for the purpose of loading.
The buyer has the obligation to provide evidence of insurance cover on the terms stipulated in the  NAEGA FOB Export Contract No. 2, i.e. insurance covering marine and war risks, plus strikes, riots, civil commotions and mine risks, at least 5 days prior to the expected date of vessel readiness to load. If the buyer fails to provide such evidence to seller at least 5 days prior to the expected date of vessel readiness to load, the seller shall have the right to obtain such insurance cover for the buyer`s account.

by Vlad Cioarec, International Trade Consultant

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


Endnotes:

1. [1968] UKHL 3, [1969] 2 AC 31
2. [2010] EWCA Civ. 1145
3. For an example of such provisions see the Sub-Clause 28.1.2 of Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition, and the Sub-Clause 59.1.1 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition which stipulate that: "[S]ave to the extent that exclusion thereof is not permitted or is ineffective by operation of law, all statutory or other conditions or warranties, express or implied, with respect to the description or satisfactory quality of the Crude Oil or Product or its fitness for any particular purpose or otherwise are hereby excluded."
4. The grain traders using "NIPPONGRAIN" Charter Party form should pay attention to the Clause 12 (b) which provides that: "The Owners shall not be responsible for any charges and/or expenses whatsoever incurred to the Charterers which may result from the Vessel`s missing the cancelling date."
5. See London Arbitration 12/03, (2003) 620 LMLN 2(2)
6. See Clause 7 of Addendum No.1 to NAEGA FOB Export Contract.