Our previous client alert on this issue, “Are you presented at the loading port in readiness to load? Clarification of buyer’s obligation under FOB contracts” (Alert 09-275) provided an update on a High Court ruling, which determined that, under GAFTA FOB contracts, a buyer will have fulfilled his FOB obligations regarding the presentation of a vessel within the delivery period, simply by presenting that vessel, provided that the vessel is physically and legally capable of loading the intended cargo, even if it is not capable of tendering a valid Notice of Readiness (“NOR”), for example due to lack of hold cleanliness.
The High Court decision in favour of the buyers was appealed to the Court of Appeal (Soufflet Negoce S.A. v. Bunge S.A.  EWCA Civ 102) and the judgment was handed down on Wednesday 13 October 2010. Bunge as buyers were again successful.
The key factual points were:
- The parties agreed to the sale and purchase of a quantity of feed barley on an FOB basis with a delivery period (for delivery of a performing vessel) of 9-22 October 2006 (with no extension). GAFTA 49 was expressly incorporated into the contract.
- The vessel arrived at the load port and tendered NOR on 22 October (i.e. the last day of the delivery period). Upon a joint holds inspection, the Sellers’ surveyor rejected the holds on the grounds that they were dirty, while the Buyers’ surveyor certified that the holds were suitable for loading.
Following the expiry of the delivery period, the Sellers declared the Buyers in default for failing to provide a vessel, in time, that was “in readiness to load”. The Buyers’ position was that they had fulfilled their obligations by presenting a vessel that was, in fact, ready to load within the delivery period and that, as a result, the Sellers were still obliged to load the vessel, notwithstanding any reservations they had about the vessel.
The Procedural History
In the GAFTA arbitration, the first tier Tribunal concentrated on the factual question of whether the vessel’s holds were, in fact, fit to load the cargo within the delivery period. The Tribunal rejected the Buyers’ claim that they were so fit and found in favour of the Sellers.
Upon appeal by the Buyers, the GAFTA Board of Appeal considered whether Clause 6 of GAFTA 49 (which deals with the period of delivery) imposed a requirement on the Buyers to present a vessel ready to load in all respects (similar to an Owner’s obligation under a charterparty) or to simply present a vessel for loading. The Appeal Board expressly concluded the latter on the basis that (a) the claim was under a sale contract for failure to load and not for demurrage; and (b) having bought on FOB terms, the Buyers had a responsibility to provide a vessel within the delivery period which was physically and legally possible to load and the Sellers were obliged to load, whatever concern they might have about the cleanliness of the vessel’s holds. The Appeal Board therefore overturned the first tier findings and held in favour of the Buyers.
The Sellers appealed to the English High Court, who agreed with the Buyers that their responsibility was to provide a vessel for shipment which was “physically and legally possible” for the Sellers to load and that no further requirements (i.e. as provided for in the charterparty) had to be satisfied.
The Sellers appealed this decision to the Court of Appeal.
The Court of Appeal Decision
The Court of Appeal identified that the concept of the vessel presenting “in readiness to load within the delivery period” was common to both Clause 6 and Clause 8 (extension of delivery) of GAFTA 49 and questioned whether the concept carried with it a requirement that the vessel be in a position in which a valid NOR could be given.
In answering this question, the Court of Appeal found that the concept of “in readiness to load” had a particular meaning in a charterparty context and a very different meaning in a sale contract situation. Therefore:
- Simply because the provisions of the charterparty (with the associated technical rules relating to NOR) have been incorporated into a sale contract for the purpose of calculating laytime, demurrage, etc, this does not mean that a buyer could not contractually require the seller to begin loading when the vessel was ready to load within the meaning of GAFTA 49.
- Very clear wording is necessary if the shipping law requirements as to “readiness to load” are to be transported into an FOB sale contract.
- By making it clear that a valid NOR is required to operate the laytime and demurrage provisions of the contract, the parties are by implication saying that a valid NOR is not required for other purposes (e.g. for determining whether the vessel has arrived during the period of delivery). All that has to happen within the delivery period is that the vessel must be presented in readiness to load at some time in that period. The fact that, for example, the holds may need some cleaning on arrival, does not mean that the seller can get out of 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 a seller, it would probably be necessary to have some provision entitling the seller to inspect the holds in addition to whatever rights the buyer might have under the charterparty. However no such provision appeared in the contract in question.
The Court of Appeal therefore dismissed the Sellers’ appeal and the Buyers’ claim was upheld.
The Court of Appeal agreed with the key approach taken by the GAFTA Board of Appeal, namely that based on “the fundamental commercial dynamic in [a] shipment sale”, it was obviously correct that if the Buyers assumed the risk of loading the cargo into unclean holds, the state of the holds was not a matter in which the Sellers had any real legitimate interest. The Sellers therefore did not really have a right to object to the Buyers’ decision to load the cargo, notwithstanding the lack of cleanliness of the holds. Therefore the Sellers’ declaration of default was incorrect and a breach by them.
There is now Court of Appeal authority on the interpretation of Clause 6 of GAFTA 49 (and similar clauses in other GAFTA FOB contracts). This will have impact on standard FOB contracts on many other terms where a period is provided for delivery of the vessel to load port (e.g. FOSFA contracts, SCoTA Coal contracts, RSA Sugar).
In the absence of any contrary agreement, a buyer’s obligation is to “present” a vessel which is physically and legally capable of loading the contract goods. If the buyer does so within the agreed delivery period, the seller is not entitled to refuse to load, even if the vessel is not entitled to tender NOR because it is not “ready” as required by the charterparty.
The application to non-GAFTA contracts will depend on the exact contractual wording (contrast for example, BP (Petroleum Products) “in all respects ready to commence loading...” and SCoTA “Vessel must arrive at the Delivery Point for commencement of loading...”). The decision will inevitably have general application to prevent a FOB seller from taking “readiness” type arguments to avoid loading a buyer’s tendered vessel (for example, if the market moves in a seller’s favour).
Parties should not assume that, simply because terms in different contractual documents (e.g. sale and charterparty) look the same, their effect is in fact the same. Much will depend on the logic of why the wording is contained in that specific contract. As such, caution must be exercised before wholesale lifting of shipping terms contained in, for example, a charterparty, into a sale of goods contract, as the terms in the former contract may have a very different meaning if incorporated into the latter.
Reed Smith acted for the successful Buyers.