The Implications Of The Buyers` Non-Compliance With The Pre-Advice Requirements In The Grain FOB Sale Contracts

In the grain FOB sale contracts, the purpose of the pre-advice period for the nomination of vessel is to give the sellers the necessary time to procure and/or bring the required quantity of goods to the loading port and have them ready for loading on the expected date of vessel readiness to load pre-advised in the vessel`s nomination notice.
If the buyers nominate an unsuitable vessel or a suitable vessel but in less than the required numder of days stipulated in the sale contract, the sellers will be entitled to reject the nomination. If there is sufficient time left until the end of the contract delivery period, the buyers can make a new nomination subject to the compliance with the contract pre-advice requirements. If there is not sufficient time left until the end of the contract delivery period, the buyers can request extension of the contract delivery period.
The GAFTA Contract No.38 provides that if the 10 days` pre-advice period expires after the contract delivery period, the extension shall be deemed to have been claimed and the cargo carrying charges will accrue from the first day after the expiry of the contract delivery period until the Bill of Lading date. Therefore, if the buyer nominates the vessel in less than 11 days before the expiry of the contract delivery period, he shall bear the cargo carrying charges accrued after the expiry of the contract delivery period. There are similar provisions in the ANEC FOB Sale Contract form No. 43.
The ANEC FOB Sale Contract form No. 43 stipulates that the buyers must send the vessel`s nomination notice with minimum 15 days before the vessel`s ETA at loading port. If the buyer nominates the vessel in less than 16 days before the expiry of the contract delivery period, he shall bear the cargo carrying charges accrued after the expiry of the contract delivery period until the date of completion of loading, even if the vessel arrives and tenders valid NOR by 17:00 hours of the last day of the contract delivery period. The seller`s obligation to commence loading will be on the 16th day, at 08:00 hours, after the vessel`s nomination date, not sooner.
If the buyer requests extension of the delivery period but fails to nominate a suitable vessel in due time, i.e. with the minimum pre-advice required in the contract before the last day of the extension period, the seller shall be entitled to terminate the contract.
The same rule applies in case of FOB contracts with no extension period. If the buyer fails to nominate a suitable vessel in due time, i.e. with the minimum pre-advice required in the contract before the last day of the delivery period, the seller shall be entitled to terminate the contract.

Case study: Bunge Corporation (New York) v. Tradax Export S.A. (Panama), [1981] UKHL 11

The case was a dispute related to a contract for the sale of 15,000 long tons +/-5% of US soya bean meal basis FOB one United States Gulf port at seller`s option, to be delivered in three instalment shipments of 5,000 long tons in May, June and July 1975. The sale contract incorporated the terms and conditions of GAFTA Contract No.119.
The GAFTA Contract No.119 Edition in force at that time allowed the extension of the delivery period with one calendar month. The buyer claimed one month extension so that the shipment that had to be delivered in May 1975 was to be delivered during June 1975.
The sale contract required the buyer to give at least 15 consecutive days` notice of the expected date of vessel readiness to load. On 17 June 1975, that is, in less than 15 consecutive days before the end of the extended delivery period, the buyers nominated the vessel "Sankograin" with ETA in US Gulf 23/25 June 1975. The late nomination of vessel was due to the late nomination of vessel by on-buyers in the string.
On 20 June, the sellers replied that the vessel`s nomination notice was late and thereby terminated the contract, declaring the buyers in default.
The FOB contract price was USD 199,50 per metric ton. By the time of the buyer`s default the market price had fallen by over USD 60 per metric ton. The seller claimed damages for the difference.
The question raised in appeal to the House of Lords was whether the FOB buyer`s obligation under the sale contract to give at least 15 consecutive days` notice of the expected date of vessel readiness for loading was a condition of contract or not. The House of Lords held that the minimum 15 days` pre-advice requirement was a condition of contract so that the FOB seller was entitle to terminate the contract. Lord Wilberforce said that the question had to be "whether this delay [vessel`s late nomination] would have left time for the seller to provide the goods". Lord Wilberforce said that:

"It would make it, at the time, at least difficult, and sometimes impossible, for the supplier to know whether he could do so."

The buyer`s performance of the obligation to nominate the vessel in due time was the necessary condition for the performance by the seller of his obligation to nominate the loading port and have the goods ready for loading on the expected date of vessel readiness for loading.
Lord Roskill provided the following arguments:

"in a mercantile contract when a term has to be performed by one party as a condition precedent to the ability of the other party to perform another term, especially an essential term such as the nomination of a single loading port, the term as to time for the performance of the former obligation will in general fall to be treated as a condition.
Until the 15 consecutive days` notice had been given, the [sellers] could not know for certain which loading port they should nominate so as to ensure that the contract goods would be available for loading on the ship`s arrival at that port before the end of the shipment period."

Case study: Ramburs Inc. v. Agrifert SA, [2015] EWHC 3548 (Comm)

The case was a dispute related to a contract for the sale of a cargo of 25,000 metric tonnes of maize basis delivery FOB Stowed/Trimmed/Fumigated one safe berth/one safe Panamax suitable port in Ukraine to be declared by the sellers upon the vessel`s nomination.
The pre-advice clause of the sale contract required the FOB buyer to serve the vessel`s nomination notice to the seller not later than 10 days before the vessel`s ETA date at loading port.
The sale contract incorporated the terms and conditions of GAFTA Contract No. 49, Edition 2012.
The contract delivery period was 15 – 31 March 2013, without the possibility of extension.
On 20 March 2013, the FOB buyer served a notice nominating the vessel M/V "Puffin" giving an ETA at loading port of 26/27 March 2013, that is, less than 10 days before the vessel`s ETA at loading port.
On 26 March 2013, the FOB buyer sent another notice nominating the vessel M/V "Sea Way" in place of the vessel M/V "Puffin", giving an ETA date of 28 March. Later that day the seller rejected both nominations for the buyers` failure to comply with the contract pre-advice requirements.
The dispute went to arbitration.
Referring to the first nomination notice, the GAFTA Board of Appeal held that the vessel`s late nomination meant only that the sellers were not obliged to commence loading before the expiry of the 10 days` pre-advice period. As regards the nomination of substitute vessel, the GAFTA Board of Appeal held that since the Clause 6 of GAFTA Contract No.49 stipulated that the sellers had to have the goods "ready to be delivered to the Buyers at any time within the contract period of delivery" and that the buyers had the right to substitute the nominated vessel provided the contract delivery period shall not be affected thereby, it would be "bizarre" for the right to substitute the nominated vessel to be subject to the same pre-advice requirements as the original nomination.
The English High Court did not accept these reasons. The Court held that it would be more "bizarre" to give the Clause 6 of the GAFTA Contract No.49 the interpretation that the FOB buyers are only required to give a pre-advice about a vessel that would not ultimately be used for loading. Since the Clause 6 of the GAFTA Contract No.49, Edition 2012 did not stipulate a time limit for the submission of the vessel substitution notice, then the pre-advice requirements for the nomination of vessel would equally apply to the nomination of any substitute vessel.
The implications of the English High Court`s decision were that whenever the FOB buyers would have nominated a substitute vessel pursuant to the provisions of the Clause 6 of GAFTA Contract No.49, they had to comply with the same pre-advice requirements as for the nomination of the original vessel. The sellers would have considered the vessel substitution notice as a new nomination and would have started counting a new pre-advice period.
In the FOB commodity contracts, the vessel substitution is usually allowed subject to the compliance with the contract requirements in respect of the vessel`s type, size, de-ballasting capacity and the estimated time of arrival (ETA).
The ETA of the substitute vessel should not be earlier than the ETA of the originally nominated vessel because the sellers` obligation to commence loading and therefore, the commencement of laytime are in function of the ETA of the originally nominated vessel. The FOB sellers must have the goods ready for loading as from the ETA of the originally nominated vessel, not sooner.
The most commodity contracts stipulate that the vessel substitution notice can be served with a shorter pre-advice than the pre-advice period stipulated in the sale contract for the nomination of the original vessel provided that the ETA of the substitute vessel is not earlier than the ETA of the originally nominated vessel.
For instance, the Clause 8 of the NAEGA FOB Export Contract No. 2 provides that:

"The nomination of the substituting vessel shall be subject to the preadvice requirements of this clause, regardless of any preadvice previously given, unless the estimated time of arrival of the substituting vessel is the same as the estimated time of arrival of the original vessel when nominated."

Another example is the Clause 6 of the FOSFA Contract No. 4A which stipulates that:

"Buyers are allowed to substitute the nominated ship/s provided that the substitute ship is expected to load approximately the same quantity no earlier than the original ship and not more than 5 consecutive days later unless otherwise agreed by Sellers. Buyers shall notify their Sellers of such substitution as soon as possible but not later than 2 business days before the expected arrival of the original ship/s."

Following the English High Court`s decision in Ramburs Inc. v. Agrifert SA, in September 2017 GAFTA included similar provisions in the Clause 6 of the GAFTA Contract No.49 and the GAFTA Contracts No. 64 and 119. The revised Clause 6 stipulates now that the nomination of any substitute vessel will not be subject to the pre-advice requirements for the originally nominated vessel provided that the substitute vessel does not arrive earlier than the ETA of the originally nominated vessel and the vessel substitution notice is given not later than one business day before the ETA of the originally nominated vessel.

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Grain Trade Review Edition No. 3.