05 May 2021
A large proportion of Australia’s bulk exports are sold on FOB terms. FOB is short for ‘Free On Board’ which is an Incoterm that describes an export contract under which the FOB Buyer makes the transport arrangements and the FOB Seller loads the contractual cargo onto the nominated vessel within the contractual shipping window.
Under FOB contracts, timing is critical (and often ‘of the essence’) so that the cargo and the vessel both arrive at the port at the same time. Any delay to the ship or cargo can cause major (and very expensive) problems including demurrage.
The execution of FOB contracts can also be subject to commercial pressures. When the contract price and the market price of the commodity at the time of performance of the contract differ materially, the FOB Buyer or Seller may have an incentive to try to terminate the contract on a ‘technicality’, if the other party can be held in breach of a condition of the contract (as opposed to a warranty or a ‘mere’ term of the contract, a breach of which will only result in a compensation claim).
A recent decision of the Commercial Division of the High Court in London provides a compelling illustration.
On 31 March 2021, Henshaw J handed down judgment in A v B  EWHC 793 dismissing an appeal by the claimant seeking to set aside an arbitration award handed down by the Grain and Feed Trade Association (GAFTA) Board of Appeal on 19 March 2020 relating to the sale of a cargo of Ukrainian feed corn.
Background of the dispute
According to a contract dated 13 December 2018 (Contract), the claimant (Sellers) agreed to sell to the defendant (Buyers) 25,000 metric tonnes of Ukrainian feed corn on FOB terms.
In this case, the Contract provided for the feed corn cargo to be loaded at any of the Ukrainian ports of Yuzhny, Odessa or Chernomorsk and included the following terms:
The Contract additionally incorporated GAFTA’s terms and conditions. GAFTA Form 49 clause 6 ("Period of Delivery") provides, in part:
“Nomination of Vessel…The Buyer has the right to substitute any nominated vessel…Buyer's obligations regarding pre-advice shall only apply to the original vessel nominated. No new pre-advice is required to be given in respect of any substitute vessel, provided that the substitute vessel arrives no earlier than the estimated time of arrival of the original vessel nominated and always within the delivery period. Provided the vessel is presented at the loading port in readiness to load within the delivery period, Sellers shall if necessary complete loading after the delivery period and carrying charges shall not apply. Notice of substitution to be given as soon as possible but in any event no later than one business day before the estimated time of arrival of the original vessel…"
On 20 March 2018, the Buyers nominated the M/V Tai Hunter and gave an expected time of arrival (ETA) at the load port of 1 April 2018 (all going well, weather permitting) and the country of destination as Egypt. The Buyers did not, however, provide the name of the owner as required under the contract.
Shortly after they had received the nomination from the Buyers, the Sellers did some digging. They were informed by a third party that the vessel was berthed at the Olimpex Terminal in Odessa (one of the Ukrainian ports nominated in the Contract) but that it was due to complete loading on 21 March 2018, then sail to Ireland without calling at any other Ukrainian ports.
Concerned about (and perhaps sceptical of) the nomination, the Sellers asked the Buyers for the charterparty documents in respect of the fixture. In response, the Buyers told the Sellers that they had made enquiries with their sub-Buyers for the relevant documents, and would revert to the Sellers as soon as they had received them. The Buyers then also asked the Sellers to nominate the port of loading following the terms of the contract.
On 21 March 2018, the Sellers sent another message to the Buyers indicating that they doubted the genuineness of the nomination of Tai Hunter and said that the nomination of the port of loading was now moot on the basis that they knew that Tai Hunter would not be in Ukrainian Black Sea waters at the pre-advised ETA of 1 April 2018.
An exchange of correspondence followed, with the Sellers requesting the charterparty documents on the one hand and the Buyers requesting the details of the nominated port on the other, with neither party budging. Eventually, the Sellers sent a message to the Buyers which purported to terminate the contract for repudiatory breach. The message said:
“Your continuous refusal and failure to provide the charterparty in respect of the m/v Tai Hunter, coupled with her current position and itinerary, supports our allegation that your nomination of the referred vessel was a fanciful nomination after all. I[n] turn, fanciful nomination constitutes a repudiatory breach which we hereby accept.”
The Buyers, in an effort to save the commercial arrangement for the carriage of the cargo, nominated a substitute vessel, the M/V Mariana with an ETA of 5 April 2018. This was rejected by the Sellers on the basis that the Contract had already been terminated. So too rejected was the Buyers’ substitution of Mariana with another ship, M/V Deribas, by the Sellers on the same grounds.
By 3 April 2018, the Buyers accepted that the Contract was at an end. They sent a message to the Sellers complaining of their rejection of Mariana, and their refusal to provide a port of loading which (they said) constituted a repudiation of the Contract.
The matter was referred to arbitration and the Tribunal determined that Sellers were in breach of the Contract.
Appeal to the Court
The Sellers applied for and were permitted to appeal on the following bases:
Ground 1: Was the making of a “false” nomination a breach of a condition?
The Sellers submitted that the arbitration Tribunal was correct to say that the nomination of Tai Hunter with the estimated arrival date of 1 April 2018 was “not valid” but should have further concluded that this was a breach of a condition.
The Buyers submitted that where time is of the essence, strict compliance with the time for performance is a condition, however, where the obligation is to perform within a certain timeframe (in this case, 1 April 2018 to 15 April 2018) – a party whose performance is defective is entitled to correct that performance within the stipulated timeframe.
After an examination of the authorities, His Honour held that:
His Honour went on to determine the relevant principles as follows at :
His Honour then found that the Buyers’ nomination of Tai Hunter was not a breach of a condition that would allow the Sellers to terminate the agreement.
Ground 2: Obligation to nominate a vessel already chartered
Ultimately, as the arbitral Tribunal could not substantiate on the evidence served in the arbitral proceedings the allegation that the Buyers had fixed or had a reasonable expectation of fixing Tai Hunter to carry the cargo, his Honour found that “the determination of the question of law could not affect the outcome of the case”.
However, his Honour did elect to consider the arbitration Tribunal’s conclusion at law and found that:
Ground 3: Obligation to provide a copy of the charterparty
The Sellers submitted that the arbitration tribunal failed to consider whether the provision of a copy of the charterparty at “first request” was a condition.
Given his previous findings in respect of the “false” nomination issue, his Honour found at  that:
…it would be clearly illogical to hold that the buyer could be in breach of condition for failing promptly to provide a copy of the charterparty relating to what might well turn out not to be the effective nomination. Moreover, as the present Buyers point out, there is an obvious risk in chain transactions that delays may be incurred in passing copy documentation down the chain. I very much doubt that commercial parties would have intended any such delay to render the contract liable to immediate termination.
His Honour, therefore, held that the non-provision of the charterparty for Tai Hunter prior to the date on which the Buyers nominated a substitute vessel was not a breach of condition.
Ground 4: Cumulative effect of breaches?
The Sellers submitted that, in the alternative, the cumulative effect of the Buyers’ breaches constituted a repudiation of the Contract. The relevant breaches relied on cumulatively were:
Given the content of his reasons in respect of each of the breaches in isolation that were presented earlier in his judgment, his Honour found at  that it was:
"…not reasonably arguable that the matters referred to… above amounted to repudiation or renunciation of the Contract, particularly in circumstances where the Board did not find the nomination of the Tai Hunter to have been made in bad faith, and the Board found that, as at the date of the Sellers' purported termination, the Buyers had ample time to make a valid nomination in its place. I do not consider that the Board could, on any remission, properly hold to the contrary."
While this is a decision of an English Court, and FOB contracts are often themselves subject to English law, Australian exporters will often be faced with difficult decisions around timing and execution of FOB contracts. This decision highlights that a cautious approach is required and careful consideration should be given before a decision is made to call default.
Authors: Geoff Farnsworth & Charlie Coleman
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.