Although this case involved GAFTA contracts, the case highlights the importance to traders of any FOB contract of taking care when deciding whether failure by an FOB buyer to comply with a time specific requirement will always amount to repudiation of the contract. The same care needs to be taken when considering what conduct by an FOB seller might amount to repudiation of the contract where it is unable to provide a cargo and also, for the purposes of assessing damages, at what date damages are to be assessed.

Background

The case involved two GAFTA contracts on FOB terms for the sale of rice. At the time of the intended shipments rice prices were rising. Broadly, under the terms of both contracts Buyers were required to give:

  • "....Exact quantity (of cargo) to be declared on Buyer's nomination of vessel..."
  • "....minimum 7 (seven) working days written pre-advise [sic] of vessel's ETA"; and
  • "..(NOR) tenderable in writing between the normal business hours..."

Under both contracts Buyers provided a vessel nomination and ETA in the same notice, but the notice was given less than seven working days before the ETA. The vessel nominations provided all the required information under the contracts. The Sellers' response to the notices was to inform the Buyers that they could not accept the nominations because they did not have cargo and printed bags available.

The Buyers treated those messages as anticipatory repudiations of the contracts, which they elected to treat as discharged and claimed damages. Sellers raised various arguments. The main argument was that because Buyers had served an invalid notice (being less than seven working days) and had not confirmed the quantity to be loaded, Sellers were entitled to reject the notice and were not obliged to provide a cargo for loading. This was based on the principle that rejection of the invalid notices could not be repudiation of the contracts.

The GAFTA Board of Appeal found in favour of the Buyers, stating that the ETA notices were valid and the Sellers could not use the alleged invalidity as a reason to reject the nomination. It further held that the messages from the Sellers did amount to an anticipatory repudiatory breach and as a result the Buyers could claim damages from the date of the default under the GAFTA contract, being the following business day after the breach.

The Court Decision

The Sellers appealed the decision pursuant to section 69 of the Arbitration Act 1996 and submitted that the GAFTA Board had erred on three questions of law. The Commercial Court found in relation to each question as follows:

  1. Where the Buyers are required to give a specified period of notice of the vessel's ETA, would uncontractually short notice entitle the Sellers to reject the notice?

Before the GAFTA Board the Sellers had argued that this requirement was a warranty. Before the Court, however, they argued that this time requirement was a condition, breach of which would entitle the Seller to reject the nomination. The Sellers relied upon decisions in Bunge Corp. v Tradax Export SA, Panama ([1981] 1 WLR 711) and Cargill UK Ltd v Continental UK Ltd ([1989] 2 Lloyds Rep 290) in support of their arguments that, in the interests of commercial certainty, this seven working day time stipulation should be precisely complied with and termination available following non-compliance.

The Commercial Court held, however, that the ETA notices were valid and effective. The notices contained all the necessary information and were complete except for their timing. An ETA is exactly that, only an estimate and therefore subject to the possibility that the vessel would arrive before or after that date. The obligation to provide a cargo after tender of a valid NOR was not dependent on there having first been seven full working days notice of ETA. Here, the Sellers would be protected because laytime would not run after the NOR was tendered until the expiry of the seven working days after the notice.

  1. Where the Sellers reject such short notice and say that they do not have cargo to meet the nominated vessel, are they in repudiatory breach of the contract?

The Court answered "yes". The issue was whether any reasonable Tribunal could make that finding based on the facts before them. The legal test was whether the messages were a "clear and unequivocal" repudiation of the contracts (as in the decisions in The "HERMOSA" [1982] 1 Lloyds Rep 570 and more recently, The "PRO-VICTOR" [2009] EWHC 2474). The Court found that on the evidence before the Tribunal this was a reasonable finding for it to make. Such evidence had included details of the rising markets (arguably the Sellers were looking to profit elsewhere), which had led the GAFTA Board to conclude that the Sellers knew that the Buyers had other cargoes to load before their cargo. The messages of repudiation from the Sellers made no mention of the alleged invalidity being a reason for the rejection of the notices. Even if it did, however, it was open to the Buyers (had the repudiatory messages not been sent) to remedy the defect by sending new ETA notices within the shipment period.

  1. Are the Sellers liable for substantial or nominal damages where the repudiation was not accepted by the Buyers until the end of the shipment period?

The Sellers were liable for substantial and not nominal damages, to be assessed by reference to the date of the repudiation being the breach. In this instance, the GAFTA contract required the damages to be assessed by reference to the "date of default", which was defined as the business day after the breach. The fact that the Buyers waited and did not treat the Sellers as being in repudiatory breach until later does not mean that the date of default or the date of the repudiatory breach had changed. That date would only move by agreement of both Sellers and Buyers.

Conclusion

The lesson to be learned is that not all notices that are linked to time periods are "of the essence". Care needs to be taken when determining the remedies available, particularly in a volatile market where one party is looking to get out of a contract. Trading contracts such as Version 8 of the Standard Coal Trading Agreement expressly provide that time is to be of the essence for the purposes of that agreement (Clause 3.5). One must bear in mind, however, that such a blanket statement does not necessarily have the effect of making every provision involving a period of time one where time is of the essence.

The Sellers in this case were trying to extricate themselves from contracts to take advantage of a rising market. In such circumstances, careful consideration needs to be given to how such messages are worded, as they will provide the critical evidence for assessing whether the seller or buyer is in repudiatory breach. The situation is not always clear and trading parties risk "jumping the gun", believing their counterparty is in repudiatory breach by alleging that either a seller will be unable to deliver or a buyer to take delivery, when it may be an issue only of delay.