Review Of FOSFA Contract No. 4, Edition 2018
The FOSFA Contract No. 4 is a contract form issued by FOSFA to be used for the FOB sales of oilseeds in bulk from any origin.
Price Settlement For Quantity Tolerance
In case of sales of parcels, a margin up to 2% more or less of the contract quantity can be granted to buyers at contract price.
In case of a sale of a full cargo, a margin up to 10% more or less of the contract quantity can be granted to buyers, of which a margin up to 2% of the contract quantity shall be settled at the contract price and any excess over 2% shall be settled at the FOB market price on the last Bill of Lading date.
If the contract covers multiple shipments, the margin on the mean contract quantity that can be granted to buyers shall not be affected thereby, that is, the margin/tolerance shall apply on the unshipped balance only.
Ship Nomination
The pre-advice period for the nomination of ship is minimum 15 days prior to the expected date of ship readiness to load.
In case of re-sales (i.e. FOB back-to-back contracts), the ship`s nomination notice must be sent by the last FOB buyer not later than 10:00 hours on a business day. The ship`s nomination notice must be confirmed by any means of rapid written communication on the same day, if received not later than 17:00 hours or not later than 10:00 hours on the next business day, if received after 17:00 hours or a non-business day.
The FOSFA Contract No. 4 does not stipulate any requirements to be complied with by the ship to be nominated by the buyers.
There is no contractual time limit nor any reference to the Master`s obligation to submit the ship`s loading plan to the seller`s port operators.
Conditions For The Vessel Substitution
In the FOB sale contracts, the vessel substitution is usually allowed subject to the compliance with the contract requirements in respect of the vessel`s size, de-ballasting capacity and expected readiness date.
The substitute vessel must be a vessel of similar size and with similar de-ballasting rates as the originally nominated vessel to be able to load the cargo quantity nominated by the buyers within the contractual time allowed for loading. In this regard, the Clause 6 of FOSFA Contract No.4 provides that the substitute ship must be able to load "approximately the same quantity" as the originally nominated ship. The sellers should also stipulate in their sale contracts that the substitute ship must comply with the contract requirements in respect of the de-ballasting capacity.
As regards the vessel`s time of arrival, this should not be earlier than the expected readiness date of the originally nominated vessel and not later than the contractual time limit. It should not be earlier than the expected readiness date of the originally nominated vessel because the sellers` obligation to commence loading and therefore, the commencement of laytime are in function of this date. The sellers must have the goods ready for loading as from the expected readiness date of the originally nominated vessel, not sooner.
In the FOB sales of oilseeds based on the terms of the FOSFA Contract No.4, the buyers may substitute the originally nominated vessel provided that they give the vessel substitution notice no later than two business days before the expected readiness date of the originally nominated vessel and the expected readiness date of the substitute vessel will not be earlier than the expected readiness date of the originally nominated vessel and not later than 10 consecutive days.
The FOB sale contracts incorporating the terms of the FOSFA Contract No.4 should stipulate that if the substitute vessel presents for loading earlier than the expected readiness date of the originally nominated vessel, the substitute vessel`s NOR shall not become effective and the time will not count as laytime prior to such date. The sellers should also stipulate what will happen if the substitute ship does not present ready for loading within the 10 days` time limit after the expected readiness date of the originally nominated ship.
Ship Presentation For Loading
The Clause 7 of FOSFA Contract No.4 stipulates that the ship must be presented at loading port in "readiness to load" not later than 14:00 hours on the business day preceding the last working day of the contract delivery period.
In the English law case Soufflet Negoce S.A. v. Bunge S.A.1, there was a dispute as to the meaning of the words "readiness to load" used in the Clause 6 of GAFTA Contract No.49.
The buyers` vessel presented for loading on the last day of the contract delivery period but failed to pass the holds` inspection on the ground that the holds and hatches contained residues of coal. Nonetheless, the buyers called upon the sellers to load the barley cargo based on the provisions of Clause 6 of GAFTA Contract No.49 incorporated into the sale contract which oblige the sellers to complete loading even after the contract delivery period, if necessary.
The sellers refused to load the goods. The sellers` refusal to load the goods was treated as repudiatory by the buyers who brought a claim in arbitration for damages for the sellers` failure to load the goods.
The question in dispute was whether the Clause 6 of GAFTA Contract No.49 imposes an obligation on the FOB buyers to present the vessel ready in all respects for loading, as it would be necessary for the tender of a valid NOR or whether the FOB buyers are only required to present a vessel for loading.
The sellers contended that the degree of readiness of the vessel should be that required for the tender of a valid NOR, i.e. vessel`s readiness in all respects to load.
The buyers contended that the degree of readiness required was such that it was physically and legally for the sellers to load even if the circumstances did not justify the shipowner giving the NOR.
David Steel J. held that the phrase "the vessel is presented at the loading port in readiness to load within the delivery period" means that the vessel must arrive at the loading port, be moored at a suitable berth for loading and "there are no legal or physical restrictions on the Sellers preventing them from obeying the Buyers orders". There is no requirement for the tender of a valid NOR.
The English Court of Appeal held that:
"The phrase "in readiness to load" does not expressly say that a Notice of Readiness must have been (or at least be capable of being) given. If that was the intention the form would have said so and not left it to implication."
"The fact that the holds may have needed some cleaning on arrival does not mean that the Sellers can throw up the sale contract on the basis that no vessel has arrived during the period fixed for delivery."
"If the state of cleanliness of the holds were to be a legitimate concern of the Sellers, it would probably be necessary to have some provision entitling the Sellers to inspect the holds2 in addition to whatever rights the Buyers might have under the charter but no such provision appears in this contract."
The problem with the Court decision in Soufflet Negoce S.A. v. Bunge S.A. is that in the major grain exporting countries the state of cleanliness of the holds is a legal requirement. The port authorities require the inspection of holds after berthing and in some countries even before berthing. The port authorities` permit for the vessel to start loading will be subject to the approval of holds by the surveyors and/or government inspectors so that even if the buyers call upon the sellers to load the port authorities will not allow them to do that.
To avoid disputes like in Soufflet Negoce S.A. v. Bunge S.A., the FOB sale contracts should define the meaning of the words "readiness to load" and stipulate that if the buyers` vessel fails to pass the inspection of holds and hatch covers, then the vessel shall not be considered ready for loading. An example of such provisions can be found in the GTA Voyage Charter – AusGrain 2015 which stipulates that:
"the Vessel will not be ready if the result of any survey or inspection […] is that the Vessel is not ready and available for immediate loading."
In the FOB sale contracts incorporating the terms of FOSFA Contract No.4, the sellers should stipulate that the buyers must present the vessel ready in all respects in all the holds required for loading under the contract and that the buyers` vessel must tender valid NOR at loading port not later than 14:00 hours on the business day preceding the last working day of the contract delivery period.
NOR And Commencement Of Laytime
The Clause 9 of FOSFA Contract No.4 provides two options for tendering the ship`s NOR and two options for the commencement of laytime to please both sides of Atlantic.
The first option for NOR tendering is probably intended to be used for the incorporation into the contracts for sale of Argentine oilseeds, wherein the buyers` ship is considered to be an "arrived ship" for the purpose of commencement of laytime only after the ship has berthed. In these contracts, the NOR can be given only after the ship has berthed.
The second option for NOR tendering can be used for the incorporation into the contracts for sale of oilseeds from any other origin than Argentina. In the second option, the NOR can be given whether in berth or not, whether in port or not, whether in free pratique or not.
The first option for the commencement of laytime is intended to be used for the incorporation into the contracts for sale of US, Canadian, Brazilian and Argentine oilseeds. In the first option, the laytime shall start to count at 08:00 hours on the next business day after the day when the NOR has been tendered. This provision matches the corresponding provisions of NORGRAIN and NORGRAIN – SOUTH charterparties.
The second option for the commencement of laytime is intended to be used for the incorporation into the contracts for sale of European oilseeds. In the second option, the laytime shall start to count on the day when the NOR is tendered at 14:00 hours, if the NOR is validly tendered before noon (12:00 hours) or on the next business day at 08:00 hours, if the NOR is validly tendered after noon. This provision matches the corresponding provisions of SYNACOMEX grain charter party.
Both options stipulate that the laytime will not commence to count before the expiry of the pre-advice period, unless the sellers agree to commence loading sooner in which case the laytime shall start to count from the commencement of loading.
Ship`s Turn To Load
The ships are scheduled for loading in function of their expected readiness date to load and the time when the ships tender valid NOR. Once the ship tenders valid NOR, it is entered in the line-up of ships waiting for their turn to load.
The "proper rotation" is when the ships are loaded in the order in which they tendered valid NOR. If the buyers` ship is not loaded in the proper rotation but it is bypassed by other ships which had tendered valid NOR after the buyers` ship due to the sellers` failure to have the goods ready for loading, the Clause 7 of FOSFA Contract No.4 stipulates that "the Sellers shall be liable for any extra expenses incurred", that is, the sellers will have to reimburse to buyers "all extra expenses" incurred by the buyers under the charter party for the time lost by the ship while waiting her turn to load, either as demurrage charges or as damages for detention3.
If the load rotation is changed by the port operators to give priority to ships loading a perishable commodity such as soya beans, the time lost by the buyers` ship due to such change will not count. This is the meaning of the words "unless rotation ordered by the Port Authorities".
Extension Of The Delivery Period
The buyers have the right to request extension of the contract delivery period with maximum 15 days "in which to provide suitable freight".
The buyers must give notice to sellers requesting extension of the delivery period not later than the last day of the contract delivery period.
If the buyers nominate the ship within the extension period, the pre-advice period for the nomination of ship is minimum 5 days before the expected date of ship readiness to load.
If the buyers` vessel tenders valid NOR at loading port within the extended period, the sellers shall be obliged to load the goods even if it shall be necessary to complete loading after the expiry of the 15 days` extension period.
If the buyers` vessel fails to tender valid NOR at loading port within the extended period, the buyers shall be in default.
Extension Of The Delivery Period In Case Of Force Majeure Event
In case of contracts for sale of US or Canadian oilseeds, the sellers shall be entitled from the date of cessation of force majeure event to as much time as was left for delivery under the contract delivery period prior to the occurrence of force majeure event. If the time that was left for delivery under the contract is 14 days or less, a period of 14 consecutive days shall be allowed after the termination of force majeure event.
In case of contracts for sale of oilseeds from other origins and ports than US and Canada, in case of force majeure event the contract delivery period shall be extended by 60 days. If the force majeure event ends less than 21 days before the end of the extended delivery period, then a further 21 days shall be allowed after the termination of the force majeure event.
Extension Of The Delivery Period In Case Of Prohibition Or Partial Restriction Of Exports
In case of prohibition or partial restriction of exports, the contract delivery period shall be extended with 21 days beyond the termination of the prohibition, unless the prohibition continues for more than 30 days in which case the sale contract shall be cancelled.
Conclusive Determination Of Cargo`s Quality And Condition
The oilseeds are perishable commodities and have been subject to claims for deterioration during the sea carriage due to their condition at the time of shipment4.
The Clause 3 has been modified in the 2018 Edition of FOSFA Contract No. 4 to stipulate expressly that the goods must be of good merchantable quality and comply with the contractual description and quality specifications at the time of delivery at loading port when the risks and title passes to the buyer.
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG5, the English Court of Appeal held that in a sale contract providing that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence, the statutory implied condition of satisfactory quality stated in section 14(2) of the Sale of Goods Act of the United Kingdom applies only at the time of delivery. If the goods are of satisfactory quality at the time of delivery, the implied condition of satisfactory quality is fulfilled.
In KG Bominflot Bunkergesellschaft Für Mineralöle mbh & Co Kg v. Petroplus Marketing AG the question in dispute was whether, in addition to the statutory implied term of satisfactory quality that applies only at the time of delivery, there is to be implied a further term at common law extending the contract requirement that the cargo`s characteristics comply with the quality specifications also upon arrival at the destination. The English Court of Appeal held that the alleged implied term at common law which would put the seller in breach in the event of subsequent deterioration of the goods during the sea carriage cannot be implied into a contract providing that the quality specifications have to be met at the time of delivery and that the quality determined at the time and place of delivery shall be conclusive evidence.
Settlement Of Disputes
Disputes arising out of the sale contracts incorporating the FOSFA Contract No. 4 shall be referred to arbitration in accordance with the FOSFA Rules of Arbitration and Appeal.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 4.
Endnotes:
1. [2010] EWCA Civ 1102
2. For an example of such provisions, see the Clause 8 of SYNACOMEX 2000 grain charterparty which stipulates that: "At loading port Shippers/ Charterers or their Agents have the privilege to inspect Vessel`s holds and reject the notice [of readiness] when holds are not clean, dry, odourless and in all respects ready to receive the cargo."
3. For similar provisions see Clause 20(c) of NAEGA FOB Export Contract and Clause 4 paragraph 2 of Addendum No.1.
4. See Priminds Shipping (HK) Co Ltd v. Noble Chartering Inc, [2020] EWHC 127 (Comm)
5. [2010] EWCA Civ 1145