Buyer`s Remedy In Case Of Seller`s Failure To Comply With His Timing Obligations In LNG FOB Sale Transactions

Remedy For Delays In Berthing And Commencement Of Loading

The buyer`s obligation in LNG FOB sale transactions is to present the nominated ship with the cargo tanks in cool and ready to load condition within the scheduled arrival window specified in the Transaction Confirmation Notice.
The Master FOB LNG Sales Agreements published by GIIGNL, Trafigura and BP do not stipulate a time limit for the seller to berth the LNG ship and commence loading. The deadline for berthing the LNG ship should be the end of the scheduled arrival window provided that the LNG ship arrives and tenders NOR at the PBS of the loading port within the scheduled arrival window.
The LNG ship should retain sufficient LNG heel from previous cargo to be able to maintain the cargo tanks at the required temperature during the ballast voyage, the Notice time and time allowed for loading. If the buyer`s ship is delayed in berthing and/or in the commencement of loading due to the fault of the seller or seller`s facilities and thereby the time spent by the buyer`s ship at loading port exceeds the contractual time limit during which the ship should maintain the cargo tanks at the required temperature¹, the costs of LNG needed to cool down the ship`s cargo tanks shall be for the seller`s account².
The Master FOB LNG Sale Agreement templates published by GIIGNL in 2011 and BP in 2019 provide that if the buyer`s ship is delayed in berthing and/or in the commencement of loading due to the fault of the seller or seller`s facilities beyond the contractual time limit stipulated in the sale agreement, the buyer shall be entitled to recover from the seller the amount due for excess boil-off.
The Sub-Clause 6(13) of GIIGNL Master FOB LNG Sales Agreement stipulates that:

"If a cool and ready to load LNG Vessel is delayed in berthing and/or commencement of loading (for reasons attributable to the Seller or the Seller`s operator) and if as a result thereof the commencement of loading is delayed beyond twenty four (24) hours after the earlier of (A) six (6) hours from the time that Notice of Readiness has been given, or (B) 6:00 a.m. local time on the first day of the relevant Loading Date (provided the LNG Vessel arrives on or prior to such date), then, as from this time and until commencement of loading, the Seller shall pay the Buyer an amount, on account of excess boil-off, equal to the LNG Price for the relevant LNG Cargo multiplied by the MMBtus of excess boil-off. The MMBtus of excess boil-off shall be calculated by multiplying the Nominal Quantity for the relevant LNG Cargo by the deemed daily boil-off rate set forth in the applicable Confirmation Notice by the number of days between the commencement of loading and the time when excess boil-off commenced to count as set for in this Sub-clause 6(13)."

The Sub-Clause 7.18 of BP Master FOB LNG Sale and Purchase Agreement stipulates that the seller shall be liable to buyer for excess boil-off only if the used laytime exceeds the allowed laytime and that the amount payable by the seller in respect of excess boil-off has to be equal to the product of: (i) 0.15%; (ii) the Nominal Quantity of the LNG Cargo sold; (iii) the applicable price in respect of such LNG Cargo; and (iv) the number of days, and pro rata for every hour of any partial day, by which the used laytime exceeds the allowed laytime.

Remedy For The Seller`s Failure To Deliver The LNG Cargo Within The Contractual Delivery Window

The seller`s obligation in LNG FOB sale transactions is to deliver the LNG cargo (i.e. all the Nominated Quantity specified in the Transaction Confirmation Notice) within the contractual time limit.
GIIGNL Master FOB LNG Sales Agreement, Edition 2011, stipulates that the contractual time limit for delivery of LNG cargo should be set in function of the date when the buyer`s ship must arrive at the loading port and when loading of LNG cargo is scheduled to commence (the Loading Date).
In line with the provisions of GIIGNL Master FOB LNG Sales Agreement, BP Master FOB LNG Sale and Purchase Agreement stipulates that the contractual time limit for the delivery of LNG cargo is 72 hours after the end of the Arrival Period (defined as the range of time within which the buyer`s LNG ship must arrive at the PBS of the loading port), provided that the buyer`s ship has tendered a valid NOR prior to the end of the Arrival Period. If the seller fails to deliver all the LNG cargo (quantity of LNG in MMBTUs specified in the Transaction Confirmation Notice) within 72 hours after the end of the Arrival Period for any other reason than a force majeure event, reasons attributable to buyer or buyer`s ship including the ship`s failure to tender a valid NOR prior to the expiry of the ship`s Arrival Period or adverse weather, and the seller and buyer are unable to agree on a revised delivery date or if, having agreed on a revised delivery date, the seller fails to deliver the LNG cargo by the agreed revised delivery date, it shall be considered a "Failure to Deliver". In such case the buyer shall be entitled to recover as liquidated damages an amount equal to the product of: (i) 40%; (ii) the quantity of LNG in MMBTUs which the seller failed to deliver; and (iii) the applicable price in respect of the relevant LNG cargo<sup>3</sup>. The Sub-Clause 5.8 of BP Master FOB LNG Sale and Purchase Agreement stipulates that the payment by the seller of such amount, in addition to demurrage, shall be the buyer`s sole and exclusive remedy for any delay or failure by the seller to deliver the LNG cargo specified in the Transaction Confirmation Notice and the seller shall not be obliged to deliver any replacement quantity of LNG to buyer.
It should have also mentioned that if the used laytime exceeds the allowed laytime, the seller shall have to pay, in addition to the amount of liquidated damages and the amount due for demurrage, the amount due for excess boil-off.
Trafigura Master LNG Sale and Purchase Agreement stipulates that the FOB seller must deliver the LNG cargo by the expiry of the allowed laytime⁴ provided in the Transaction Confirmation Notice.
If the FOB seller fails to deliver the LNG cargo by the expiry of the allowed laytime for any other reason than a force majeure event, reasons attributable to buyer or buyer`s ship including the ship`s failure to tender valid NOR prior to the expiry of the ship`s Arrival Window or adverse weather, it shall be considered a "Failure to Deliver"<sup>5</sup>.
In the event of a Failure to Deliver there shall be a further 48 hours period following the expiry of the allowed laytime<sup>6</sup> during which the seller may reschedule the delivery of LNG cargo subject to the seller`s obligation to reimburse documented costs incurred by the buyer as a result of such rescheduling, i.e. the amount due for demurrage and the amount due for excess boil-off⁷. If the seller will be unable to reschedule the LNG cargo during the 48 hours` period, this shall be treated as a "Deemed Failure to Deliver".
In Trafigura Master LNG Sale and Purchase Agreement, like in GIIGNL Master FOB LNG Sales Agreement, there is a distinction between the situation when the buyer is able to procure a replacement LNG cargo or natural gas quantity and the situation when the buyer is not able to procure a replacement LNG cargo or natural gas quantity.
If the buyer is able to procure a replacement LNG cargo or natural gas quantity, the buyer shall be entitled to recover the amount by which the buyer`s cost to procure the replacement LNG cargo or natural gas quantity, plus the additional transportation and logistics costs, including demurrage charges and legal fees incurred by the buyer due to the seller`s Failure to Deliver, exceeds the product of the quantity of LNG (MMBTU content) which the seller failed to deliver and the contract price of such LNG cargo<sup>8</sup>.
If the buyer is not able to procure a replacement LNG cargo or natural gas quantity, the buyer shall be entitled an amount equal to the buyer`s direct costs incurred, such as charges, losses, damages, expenses, fees (including reasonable legal fees) and liabilities incurred that could not reasonably be avoided⁹. The maximum amount recoverable by the buyer for seller`s Failure to Deliver shall not exceed an amount equal to 100% of the contract price multiplied by the MMBTU content of LNG quantity which the seller failed to deliver¹⁰.

by Vlad Cioarec, International Trade Consultant

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


Endnotes:

1. The reference temperature for loading a membrane type LNG ship is -130ºC. The reference temperature for loading a Moss type LNG ship is in the range between -110ºC and -130ºC. See Sub-section 2.6.2. "Cooling down operations" of GIIGNL – LNG Custody Transfer Handbook – Fifth Edition (2017).
2. See Sub-Clause 7.25 of BP Master FOB LNG Sale and Purchase Agreement and Sub-Clause 6(12) of GIIGNL Master FOB LNG Sales Agreement.
3. See Sub-Clause 5.7 of BP Master FOB LNG Sale and Purchase Agreement.
4. See Sub-Clause 6.3.1 of Trafigura Master LNG Sale and Purchase Agreement.
5. See Sub-Clause 6.3.1 of Trafigura Master LNG Sale and Purchase Agreement.
6. See Sub-Clause 5.3 of Schedule C to Trafigura Master LNG Sale and Purchase Agreement.
7. See Sub-Clause 6.3.2 of Trafigura Master LNG Sale and Purchase Agreement.
8. See Sub-Clause 6.3.4.1 of Trafigura Master LNG Sale and Purchase Agreement.
9. See Sub-Clause 6.3.4.2 of Trafigura Master LNG Sale and Purchase Agreement.
10. See Sub-Clause 6.3.5 of Trafigura Master LNG Sale and Purchase Agreement.