We highlight two recent English legal decisions involving demurrage claims and time bars, and a Uniform Customs and Practice for Documentary Credits (UCP 600) case involving indemnities under a credit facility and the obligations of a confirming bank.
Glencore Energy (UK) Ltd v Sonol Israel Ltd (2011)
This was a claim by the sellers (Glencore) against the buyers (Sonol) for unpaid demurrage, which the buyers resisted, and applied to strike out, on the basis that it was time-barred.
The sellers entered into two contracts to sell gasoil in late 2004, and the gasoil was procured from BP on CIF basis. The sale contracts stated that demurrage was to be “as per charter-party rate, terms and conditions”.
The performing vessel, the “Team Anmaj”, arrived at the discharge port in Israel in December 2004, but discharge was only completed in January 2005. BP claimed demurrage from the sellers in late April 2005 under a demurrage invoice. The sellers claimed against the buyers in mid-April 2011 for this demurrage. The question arose as to when the sellers’ cause of action accrued.
The sellers argued that the demurrage provisions constituted an indemnity from the buyers to the sellers, in which case time should only start running from when the sellers made their claim for demurrage, i.e. the date the sellers presented their demurrage invoice to the buyers.
The buyers argued that the demurrage provisions in the sale contracts constituted free-standing independent obligations by the buyers to pay demurrage. The obligation accrued day-by-day pro rata from the moment when the laydays expired. The claim was therefore time-barred, since discharge was completed in January 2005, more than six years ago.
The Court agreed with the buyers and held that the claim was time-barred. In doing so, the Court said that as a matter of commercial certainty, parties should be able to know precisely where they stand. This may include having an independent demurrage provision in a sale contract adopting the demurrage rate in the charter-party as a genuine pre-estimate of the receiving party’s exposure, regardless of the seller’s position under the charterparty.
Another important factor was whether the sale contracts contained laytime provisions, and if so whether the sale contract terms coincided with those in the charterparty, so as to suggest that parties had intended an indemnity. In the present case, the charterparty terms and the sale contract terms differed.
The Court also commented that if the sellers’ argument was correct, that would mean that the sellers would be able to present a claim long after discharge was complete, which would have been “commercially very unattractive”.
National Shipping Company of Saudi Arabia v BP Oil Supply Company (2011)
This was another demurrage case where the issue of time bar arose.
The owners (NSCSA) chartered their vessel to the charterers (BP) on BPVOY4 form for a single voyage from Freeport, Bahamas to Singapore. The cargo was to be dirty petroleum products.
During loading at Freeport, the vessel was required to leave berth due to unavailability of cargo. Laytime and demurrage continued to run. The vessel alter re-berthed and loaded a further cargo, heavy sulphur fuel oil, before sailing for Singapore. The owners tendered a supplementary invoice to the charterers for the time incurred for the second berthing at the demurrage rate, and for bunkers consumed. The owners also issued a demurrage invoice with supporting documents. However, the demurrage invoice incorrectly failed to reflect the fact that laytime had been wholly used at Freeport so the vessel was on demurrage at Singapore. After a small adjustment, the demurrage invoice was settled by the charterers. The owners sought payment of the supplementary invoice.
At first instance, the Court held that the settlement of the demurrage invoice settled all and any claims by the owners in respect of demurrage. In any event, a further demurrage claim was time-barred under the charter and the cost of bunkers for the second berthing was not recoverable. The owners appealed.
The owners claimed that the delays encountered by the vessel for the voyage were all attributable to the charterers, and the owners had submitted all the necessary supporting documents for the demurrage claim within time.
The charterers’ two defences were that there was a settlement which precluded a further demurrage claim, and that the owners had failed to comply with the charterparty terms for making the demurrage claim. Hence, the claim was now time-barred.
On the settlement argument, the Court of Appeal held that the agreement to settle the demurrage invoice related only to that invoice. It did not preclude the owners’ claim for a further sum for time used at both Freeport and Singapore. The owners’ claim for demurrage succeeded, subject only to charterers being at liberty to argue on rates for the effect of adverse weather.
Concerning the time-bar argument, the Court held that it would have been “unattractive and uncommercial” to find that the owners’ claim for demurrage was time-barred when it was common ground that owners had furnished all the documents required to enable the charterers to verify the demurrage claim within time, and the charterers were not misled as to the nature of the claim. The cost of bunkers consumed for the second berthing was not recoverable.
The Court of Appeal added:
“Where in a commercial contract one finds a provision to the effect that one party is only to be liable to the other in respect of claims of which he has been given notice within a certain period, it is fair to assume that the parties wish their relationship to be informed rather by certainty than by strictness …
… Thus the touchstone of the approach ought in my view to be a requirement of clarity sufficient to achieve certainty rather than a requirement of strict compliance which, if applied inflexibly, can lead to uncommercial results.”
Société Générale SA v (1) Saad Trading (2) Maan Abdulwahid Abduljmajeed Al-Sanea (2011)
The claimant bank (SG) claimed US$50 million under a facility letter (the Facility) against the first defendant (D1) and the same sum against the second defendant (D2) under a guarantee of D1’s liabilities under the Facility (the Guarantee). D1 sought the Facility from SG in order to finance its gold trading activities. Pursuant to the Facility, SG issued two letters of credit for approximately US$25 million each to enable the D1 to buy “approximately 28,000 fine oz’s of large 12.5kg gold bars” from AGR Matthey. The Facility contained instructions, or a mandate, relating to letters of credit to be issued by SG and provided that:
(a) D1 would indemnify SG against all liabilities to a confirming correspondent under or in respect of such letter of credit (b) Under the letter of credit applications D1 agreed to hold SG harmless pursuant to the provisions of the Facility
Having delivered the gold to Brinks Australia for shipment to London, AGR Matthey presented documents to, and received payment from, the confirming bank, National Australia Bank Limited (NAB). SG informed NAB by a SWIFT message that the documents were in compliance with the letter of credit terms. SG reimbursed NAB however, D1 did not reimburse SG. SG wrote to D1 stating that its failure to make the payments was an event of default. SG duly terminated the Facility and demanded immediate payment. SG also wrote to D2 demanding payment under the Guarantee.
D1 argued that it was not liable to indemnify SG under the Facility on the grounds that the bills of exchange drawn on and accepted by NAB were not forwarded by NAB to SG. D1 also argued that the failure of NAB to forward the drafts had the consequence that SG was entitled to refuse to indemnify NAB, and that in those circumstances, where a waiver had not been sought by SG from D1 pursuant to Article 16 of UCP 600, D1 was not obliged to indemnify SG. D2 adopted the same defence.
The Court held that the letters of credit did not contain or evidence the relationship between SG and D1. D1’s obligation to indemnify SG was to be found in the Facility and in the particular instructions, or mandate, which D1 gave to SG to issue the letters of credit. In the circumstances, there was no reason why the indemnity in the Facility should not be given its ordinary and natural meaning. On the issue of SG’s liability to reimburse NAB, Teare J agreed that:
“…UCP 600 distinguishes between presenting and forwarding and between honouring and reimbursing; compare Article 7(a) and (c) and Article 8(a) and (c). Honouring is defined in Article 2, where the credit is available by acceptance, as meaning to accept a bill of exchange drawn by the beneficiary and pay at maturity. On the facts of the present case it was the confirming bank, NAB, that was to honour by accepting the bills of exchange. By contract the Claimant was to reimburse NAB if NAB honoured a complying presentation.”
“But in my judgment, where the drafts are included in the letter of credit in the list of documents to be presented by the beneficiary to the confirming bank and are so presented, the duty of the confirming bank on the true construction of UCP 600, and in particular of Article 7(c), is to forward them to the issuing bank. The language of Article 7(c) does not permit any exception. Further, to permit NAB a discretion to decide not to forward a listed document because it would appear to serve no useful purpose seems to me to be contrary to the principle of strict compliance which permeates the law of documentary letters of credit …
In the present case the drafts, although required to be presented under the letter of credit and in fact presented by AGR Matthey to NAB, were not forwarded by NAB to the Claimant. However, I do not consider that that failure, in circumstances where there is no dispute that the documents presented by AGR Matthey to NAB were compliant, would ultimately have enabled the Claimant to refuse to indemnify NAB.”
The Court concluded that SG was obliged to reimburse NAB and D1 was liable to indemnify SG in respect of that liability. If SG was not obliged to reimburse NAB, it did so in good faith and D1 was bound by that decision. In circumstances where D1 was liable to indemnify SG pursuant to the terms of the Facility, there was no dispute that D2 was in breach of the Guarantee and was also liable to SG.