Review Of GAFTA Contract No. 38, Edition 2020
The GAFTA Contract No. 38 is a FOB contract form issued by GAFTA to be used for the FOB sales of Argentinian grain in bulk.
Unit Price
The unit price is stated to be basis delivery FOB buyers` vessel in bulk, but the Clause 8 stipulates that there will be extra charges for loading non-self-trimming bulk carriers and tween deck general cargo vessels due to the additional cost and time spent for performing the trimming. Therefore, the Argentine grain exporters should stipulate clearly in the price quotation and sale contract the type of vessel required to be nominated and presented for loading by the buyers to avoid the situation where the exporters will incur additional charges due to the presentation for loading of an unsuitable vessel.
Furthermore, there will be extra charges for loading grain in any other space than the main holds, e.g. upper wing tanks, deep tanks, if required by the vessel`s Master. If the vessel`s Master requests loading of grain cargo through the upper wing tanks, this will increase the cost of loading because the terminal operators require payment of an additional charge for doing this.
Quality and Condition
The quality and condition of the goods ascertained at the time and place of loading by the superintendents shall be final, that is, provided that the samples` analysis certificate evidences that the cargo is within the contract quality specifications, no claim can be made by the buyer for subsequent deterioration. The buyers would only be entitled to reject the parcels found to be defective by the superintendents at the time and place of loading.
Weight Determination
The cargo weight figure shall be determined and certified by GAFTA registered superintendents based on shore scales1.
The cargo weight figure determined based on the shore scales shall be stated in the superintendents` certificate of weight and Bills of Lading and shall be the basis for the calculation of price and issuance of commercial invoice, irrespective of any other weight figure resulted from the vessel`s draft survey2. However, in 2013 the Argentine Customs Officers have been empowered to decide upon the method to be used for the determination of the weight figure: i.e. shore scales or vessel`s draft survey performed by the Customs Officers. If the difference between the shore scale weight figures and vessel`s draft survey results is less than 0.6%, then the shippers will have the option to issue the mate`s receipts based on the shore scale figures. If the difference between the shore scale weight figures and vessel`s draft survey results exceeds 0.6%, the mate`s receipts and Bills of Lading shall be issued with the weight figure determined based on the shore scales.
Vessel Nomination
The FOB buyers must nominate the vessel with minimum 10 days` pre-advice of the vessel`s expected time of arrival. The 10 days` pre-advice period will also apply during the extension period.
The vessel`s nomination notice must mention the vessel`s expected arrival date and the estimated quantity of cargo required to be loaded.
Vessel Substitution
GAFTA Contract No. 38 does not provide expressly that the FOB buyers have the right to substitute the originally nominated vessel, but the Clause 6 stipulates that if the originally nominated vessel is unable to proceed to the loading port due to an event outside the buyers` control, the initial nomination can be withdrawn which implies that the FOB buyers can nominate a substitute vessel, provided that the original delivery period and any extension shall not be affected thereby, that is, the substitute vessel must present at loading port "fit and ready in all respects to receive the cargo" within the contract delivery period or in case of late nomination, within the extension period.
It does not say whether the nomination of substitute vessel will be subject to the same pre-advice requirements as the original nomination, but in the English law case Ramburs Inc. v. Agrifert SA3, the English Commercial Court held that in the absence of express provisions in the sale contract, the pre-advice requirements for the vessel`s nomination would equally apply to the nomination of any substitute vessel. This means that if the FOB buyers will have to nominate a substitute vessel they must comply with the same pre-advice requirements as for the nomination of the original vessel. The sellers will consider the vessel substitution notice as a new nomination and will start counting a new pre-advice period.
Conditions For The Vessel Presentation For Loading
The vessel shall be considered an "arrived ship" once she is alongside the nominated berth. The port authorities` permit for the vessel to start loading will be subject to the approval of holds by the marine surveyors and SENASA4 inspectors. The buyer must present the nominated vessel fit and ready in all respects to receive the grain cargo. The vessel`s holds must be "clean, dry and fit to receive the cargo".
Sellers` Timing Obligations and Time Counting
The bulk of Argentinian grain cargoes is shipped at the ports on the Parana River (e.g. Port of Santa Fe, Port of Diamante, Port of San Martin, Port of San Lorenzo, Port of Rosario, Port of San Nicolas) due to the proximity to the production areas.
Due to the limited space available for vessels waiting for berth, the vessels are sometimes instructed to wait at the Recalada Pilot Station (at Montevideo joint point) or at Zona Comun at La Plata roads.
The trick with the Clause 8 of GAFTA Contract No. 38 is that it gives the Argentine grain exporters the same advantage as to voyage charterers in berth charterparties. The buyers` vessel shall be considered an "arrived ship" for the purpose of commencement of laytime only after the vessel has entered at the berth nominated by the sellers. The sellers must have the goods ready for loading as from the vessel`s expected berthing date pre-advised by the buyers provided that the buyers` vessel has berthed at the nominated berth and has passed the holds` inspection.
By making the sellers` loading obligation and thereby the commencement of laytime subject to the vessel berthing and approval of the vessel`s holds, the GAFTA Contract No.38 protects the Argentine grain exporters against the potential liability for demurrage in case of time lost by the vessel waiting for berth due to congestion at the port of loading.
Since the commencement of laytime is conditional upon the vessel berthing, the time lost prior to berthing due to the sellers` failure to have the goods ready for loading or to provide the cargo readiness documents to the port operators in due time shall fall outside the scope of laytime, but the buyers shall be entitled to claim damages for detention of vessel prior to berthing5 because the FOB sellers have an implied obligation not to prevent the buyers` vessel from becoming an "arrived ship"6.
However, by stipulating a low rate of loading – the minimum average loading rate in GAFTA Contract No.38 is 1,500 MT per weather working day in conditions in which the port operators at Up-River ports are able to load the grain cargoes at an average rate of 2,000 MT per hour – the GAFTA Contract No.38 gives the Argentine grain exporters a lengthy laytime and thereby protects them against the potential liability for detention of vessel prior to berthing or for demurrage after berthing in case the vessels have to wait for the goods due to a supply chain disruption or sellers` failure to have the cargo readiness documents in order in due time.
Case study: Kurt A. Becher GmbH & Co. K.G. v. Roplak Enterprises S.A. (The "World Navigator"), [1991] 2 Lloyd`s Rep. 23
The case was a dispute under a contract for the sale of a cargo of 30,000 MT of maize basis FOB Rosario, Argentina in three instalments. One of the instalments was due for shipment in June 1985.
The sale contract incorporated the terms of GAFTA Contract No. 64 and Argentine Centro terms. The relevant Centro clause had the following provisions:
"Loading Rate. Once vessel is berthed alongside berth suitable to sellers and ready to load this parcel, sellers guarantee, provided that the vessel is able to receive, a minimum average loading rate of 500 tonnes per weather working day, Sundays, Holidays and Saturday afternoons excluded, according Centrocon, but sellers shall not be responsible for any time lost due to act of God, strikes, lockouts, riots, civil commotions, labour stoppages, breakdown of machinery and/or winches, failure of power, fire or any other cause of Force Majeure. No despatch is due by buyers to sellers."
The sale contract required the buyers to give the sellers minimum 15 days` pre-advice of the expected date of vessel readiness to load. On 24 May 1985, the buyers nominated the vessel "World Navigator".
The vessel arrived at Zona Comun on 13th June 1985 but because of congestion in Rosario roads was instructed to wait there. The vessel`s Master gave NOR from Zona Comun.
If the vessel had kept her turn in the line-up, it would have berthed on 25 June 1985. But the vessel lost her turn to berth due to the sellers` failure to provide the cargo readiness documents in order in due time. The vessel was eventually called to berth on 18 July and between 18 and 22 July the vessel loaded a total of 24,000 MT of maize including the 12,000 MT of maize that was due to be shipped in June.
The buyers had to pay demurrage to shipowners for the time lost between 25 June, when the vessel should have berthed and 18 July, when the vessel berthed. The buyers sought to recover the sums paid to shipowners from the sellers through a claim for damages.
The buyers claimed damages for detention of vessel prior to berthing for the sellers` breach of the obligation to have the goods ready for loading at the time the vessel was ready to load after the expiry of the pre-advice period.
The buyers contended that if the vessel had berthed on 25 June, loading would have been completed some 23 days earlier than 22 July and that the laytime should be regarded as having begun on 26 June as if the vessel had berthed on 25 June.
The buyers based their claim on the provisions of the Clause 7 of the GAFTA Contract No.64 which stipulated that:
"Vessel to load in accordance with the custom at port of loading unless otherwise stipulated."
The fact was that the Centro clause did otherwise stipulate.
The buyers contended that if the custom of the port of loading would involve a method of loading which would produce a faster loading rate, then the sellers would be obliged to comply with it, notwithstanding that it would put upon them a higher obligation than that specified in the Centro clause.
Phillips J. in the English Commercial Court and then the English Court of Appeal held that there was an implied obligation on the sellers to have the cargo ready for loading and to do all that was necessary to enable the vessel to berth on the expiry of the 15 days` pre-advice period. As regards the effect of the sellers` breach of that obligation, Parker LJ (English Court of Appeal) held that:
"One must however, consider what are the consequences to the plaintiff [i.e. buyers] of that breach and what is required to put him in the same position as if the breach had not occurred. In that event laytime would have begun to run on June 26. That being so the sellers` obligation would have been to load in the number of counting days arrived at by the application of the Centro terms but no more."
The rule in English contract law is that where a person breached a contract, the damages will have to be assessed based on the minimum which he has contracted to give to the plaintiff. The amount of damages recoverable depend on the extent of the wrongdoer`s obligation under the contract. The wrongdoer cannot be held liable for not doing something he is not bound to do.
Although in the 4 days used for loading between 18 July and 22 July the actual rate of loading the cargo of 24,000 MT was about 6,000 MT per day, the Argentinian sellers would not have been in breach if they maintained an average loading rate of minimum 500 MT per day, because that was their minimum obligation under the sale contract. Sir David Croom – Johnson (English Court of Appeal) said that:
"The obligation of the sellers (and the corresponding right of the buyers) was for loading to be at that rate and was in no way dependent on the contingency that loading might be quicker."
The sellers were not bound to load at a faster rate. Parker LJ (English Court of Appeal) said that:
"To accept the buyers` contention would in my judgment be making the sellers pay damages for failing to do that which they were not obliged to do."
Both the GAFTA Board of Appeal and English Court of Appeal held that the sellers were entitled to calculate the laytime on the basis of the loading rate stated in the Centro clause. That is, loading of the cargo of 12,000 MT of maize at an average daily rate of 500 MT would have required 24 consecutive days. That was the contractual time allowed for loading, i.e. the laytime.
Therefore, even if the vessel had berthed on 25 June and laytime would have begun to run on 26 June, the sellers were entitled – once the vessel was in berth – to take up to 24 counting days to load the cargo of 12,000 MT of maize.
The English Court of Appeal held that the damages for detention of vessel prior to berthing would have been recoverable if loading had taken longer than the 24 days allowed for loading by the sale contract, counted from 26 June.
By loading at a higher rate and completing the loading on 22 July, the sellers used less than 18 days of the 24 days allowed for loading and thereby, escaped from liability to pay damages for detention of vessel prior to berthing.
The only consequence of the sellers` breach of contract was that the vessel began loading the cargo of maize later than would otherwise have been the case.
In the decision of the English Court of Appeal, Staughton LJ confirmed that the buyers` vessel shall be considered an "arrived ship" for the purpose of commencement of laytime only after the vessel has entered at the berth nominated by sellers. Staughton LJ said that:
"The Centro terms make it clear that the time allowed for loading commences only "once vessel is berthed"."
As regards the effect of the vessel`s NOR tendered at Zona Comun, in Glencore Grain Ltd. v. Goldbeam Shipping Inc.7 Moore-Bick J (English Commercial Court) explained that:
"The function of the notice of readiness [tendered by the vessel`s Master from Zona Comun in The "World Navigator" case] was to enable the seller to make the necessary arrangements for the goods to be loaded, not to inform him that the ship was then at his immediate disposal. That is reflected in the fact that the buyer had to give at least 15 days` notice of the vessel`s readiness and in the fact that it was unnecessary for the vessel to have reached any specific point on her approach voyage before such a notice could be given. The seller`s obligation under the Centro terms to load the cargo at a minimum daily rate arose only when the vessel had entered berth and was not linked to the giving of notice of readiness to load."
Given that the Clause 8 of GAFTA Contract No. 38 is with minor modifications the former Centro Loading Clause, the decisions of GAFTA Board of Appeal and English Court of Appeal in The "World Navigator" case are equally applicable to the Clause 8 of GAFTA Contract No. 38.
Time Counting In Case Of Two Loading Ports
Although it is economical to ship the grain cargoes at the ports on the Parana River due to the proximity to the production areas, the depth of Parana River does not exceed 10 metres. Therefore, only the Handysize Bulk Carriers can load full cargoes. The vessels with a deadweight in excess of 40,000 tonnes, i.e. Supramax Bulk Carriers which have a draft in the range of 12 – 13 meters and Panamax Bulk Carriers which have a draft of 14 meters cannot load full cargoes and must be topped off at the Argentine Sea port of Bahia Blanca.
Therefore, the FOB contracts for sale of Argentine grain cargoes incorporating the terms of GAFTA Contract No. 38 should address the question of time counting at each port and the question of time used for shifting between the Up-River port and Bahia Blanca.
Contractual Time Limit For The Presentation Of The Vessel Ready For Loading
In case of FOB shipments at sea ports, the buyers must present the nominated vessel "in all respects fit and ready to receive the cargo" before the expiry of the contract delivery period.
In case of FOB shipments at the Up-River ports (i.e. ports on the Parana River), the buyers must present the nominated vessel "in all respects fit and ready to receive the cargo" with minimum 24 hours before the expiry of the contract delivery period. In case of congestion at the Up-River ports, the buyers` vessel shall be considered an "arrived ship" provided that she has arrived at the place where she has been instructed to wait for orders by the Argentine Port Authorities, e.g. Recalada Pilot Station or Zona Comun in Rio de la Plata, with minimum 24 hours before the expiry of the contract delivery period.
Conditions For Extension Of The Delivery Period
The Clause 9 of the GAFTA Contract No. 38 stipulates that if the buyers will not be able to present the nominated vessel(s) in "readiness to load", i.e. in all respects fit and ready to receive the cargo, within the contract delivery period, they can claim extension of the delivery period with additional 30 days by notice served to sellers not later than 16:00 hours on the next business day following the last day of the contract delivery period.
The extension of the delivery period shall also be deemed to have been claimed in case of the late nomination of vessel. If the buyers nominate the vessel in less than 11 days before the expiry of the contract delivery period, the extension shall be deemed to have been claimed and the buyers will have to reimburse to sellers the cargo carrying charges accrued from the first working day after the expiry of the delivery period until the Bill of Lading date, even if the vessel arrives before the expiry of the delivery period, because the sellers must have the goods ready for loading on the 11th day after the vessel nomination date (i.e. after the expiry of the 10 days` pre-advice period), not sooner.
Contractual Time Limit For Giving Documentary Instructions
The buyer must send to seller the confirmation of insurance cover together with the documentary instructions not later than 5 working days prior to the expected date of the vessel readiness to load.
GAFTA Prevention Of Delivery Clause
1. Deadline For Giving Notice Of Force Majeure
In case of an event of force majeure such as
- the prohibition of export or other executive or legislative act done by or on behalf of the government of the country of origin restricting export; or
- blockade, acts of terrorism or hostilities; or
- strikes, lockout, riot or civil commotion; or
- breakdown of loading installation, fire or Act of God; or
- unforeseeable and unavoidable impediments to [inland] transportation or navigation;
that prevents the sellers` performance of their contractual obligations, the sellers must serve notice to the buyers within 7 consecutive days of the occurrence or not later than 21 consecutive days before the commencement of the contract delivery period, whichever is the later.
In such case, the sale contract shall be suspended for the duration of the force majeure event, initially up to 21 consecutive days after the end of the contract delivery period.
2. Deadline For Giving Notice Of Cancellation
If the force majeure event continues for 21 days after the end of the contract delivery period, the buyers may cancel the contract by serving a notice on the sellers not later than the first business day after the end of the 21 day period.
If the buyers do not cancel the contract, the contract shall remain in force for an additional period of 14 days. After this 14 day period, the contract shall be automatically cancelled if the force majeure event continues to prevent the sellers` performance of contract.
3. Notice Of Cessation Of Force Majeure Event
If the force majeure event ceases before the contract can be cancelled (i.e. that is before the expiry of 21 day period after the end of contract delivery period or if the contract is not cancelled by the buyer after the 21 days` period, before the expiry of 35 (21+14) days` period after the end of the contract delivery period), the sellers must notify the buyers that the force majeure event has ceased.
4. Time Allowed For Delivery After The Cessation Of Force Majeure Event
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 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 for the delivery of goods.
Settlement Of Disputes
Disputes arising out of or under the GAFTA Contract No. 38 shall be referred to arbitration in accordance with the GAFTA Arbitration Rules.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Grain Trade Review Edition No. 4.
Endnotes:
1. See Sub-Clause 15(a).
2. See Sub-Clause 11(d)(v).
3. [2015] EWHC 3548 (Comm)
4. Servicio Nacional de Sanidad y Calidad Agroalimentaria, i.e. National Health and Agrifood Quality Service.
5. Calculated by reference to demurrage rate.
6. See the English law case Sociedad Financiera de Bienes Raices v. Agrimpex (The "Aello"), [1960] 1 Lloyd`s Rep. 623.
7. [2002] EWHC 27 (Comm)