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Can a buyer’s invalid vessel nomination entitle a seller to terminate its FOB contract?

05 May 2021

#Transport, Shipping & Logistics

Published by:

Charlie Coleman

Can a buyer’s invalid vessel nomination entitle a seller to terminate its FOB contract?

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 [2021] 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 incorporated a dispute resolution clause by which the parties agreed to compulsory arbitration in accordance with the GAFTA Arbitration Rules
  • that the Port of Loading was to be declared by the Sellers not prior to eight days to the delivery period and, at latest, the nomination of the vessel
  • that the delivery and loading period was to be between 1 April 2018 and 15 April 2018
  • that the Buyers were to provide the Sellers with a working copy of the charterparty at their first request
  • that the Buyers were to provide to the Sellers at least eight days’ pre-advice of the following information, among other things:
    • the vessel’s name and age;
    • the vessel’s flag
    • the dimensions of the vessel
    • the owner of the vessel’s name
    • the country of destination
    • estimated quantity of the cargo to be loaded onto the vessel.

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…"

What happened?

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.

Arbitration

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:

  • whether the obligation on the Buyers not to make a “false” nomination of a vessel was a condition, breach of which entitled the Sellers to terminate the contract?
  • on a true construction of the Contract, were the Buyers obliged to nominate a vessel which had been chartered by them or by their sub-buyers at the date of nomination?
  • was the obligation of the Buyers to provide a copy of the charterparty, by which the vessel nominated had been chartered, to the Sellers "at their first request" a condition, breach of which entitled the Sellers to terminate the Contract?

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:

  • it is well established that where a vessel and an ETA are identified expressly under a sales contract, there is a breach of a condition if that ETA has not been given “honestly and on reasonable grounds”. The same principle applies to ETAs written into charterparties
  • when a contract provides for a nomination to be made – that is, not expressly nominated in the contract itself – the position is different where the possibility of substitution arises
  • although there are grounds for the provision of a valid nomination to be a necessary condition precedent that goes to the heart of contract so that the Sellers can be certain about its arrangements with the goods, it does not follow that such a pre-advice obligation imports a negative obligation – that is, there’s a duty not to make a “false” or mistaken nomination
  • there are differences between cases in which nominations are made in bad faith in which the relevant vessel could not possibly attend the port of loading at the requisite time and those cases in which a bad nomination is made, but where a valid replacement nomination could in practice still be made
  • there is an inherent risk in FOB contracts that the buyer may make a last-minute substitution, even if the original nominated vessel has unexpectedly failed to meet the deadline. The contractual timetable for the Buyers’ vessel nomination is designed to give the Sellers sufficient time to arrange the provision of the goods. Provided a valid nomination is given by the applicable deadline, it should be possible for the contract to be fulfilled without difficulty
  • there is no authority that a false nomination is a per se breach of a condition which entitles the Sellers to treat the contract as having come to an end, and thereby precluding the Buyers from replacing it with a valid nomination.

His Honour went on to determine the relevant principles as follows at [71]:

  • where a contract of sale requires the buyer to nominate a vessel by a particular date (including by stipulating a notice period and a shipment period), then it is (subject to any contrary intention expressed in the contract) a condition of the contract that the buyer provides a valid nomination by the relevant deadline. That is a stipulation as to time in a mercantile contract in relation to which the parties should be taken to have intended time to be of the essence
  • accordingly, if by the latest date on which a valid nomination could be made the buyer has failed to provide one, then there is a breach of condition that will entitle the seller to treat the contract as being at an end
  • a valid nomination is one made honestly and on reasonable grounds, and in accordance with the contract terms
  • a valid nomination may be preceded by an initial nomination that is or becomes invalid, because either (a) it is 'non-contractual' in the sense of failing to provide the contractually stipulated notice period, or stating an ETA outside the contractual shipment window, (b) it is not made both honestly and on reasonable grounds, or (c) it becomes invalid due to subsequent events e.g. unforeseeable delays
  • the giving of the initial invalid nomination is not in itself a breach of condition – no breach of condition occurs provided that a valid and timely nomination is given in due course
  • an initial invalid nomination made otherwise than honestly and in good faith (e.g. of a vessel which the buyer knows could not possibly meet the contractual lifting deadline) may indicate an intention not to perform the contract, and thus entitle the seller to treat the contract as having been renounced by the buyer
  • it is unnecessary to decide in the present case whether, and if so in what circumstances, a prior invalid nomination could amount to a breach of contract sounding in damages, as no such claim had been advanced on the appeal.

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:

  • the Buyer's obligation only extended to require that sufficiently timely and effective steps were taken to secure the vessel by the date of loading. It was not possible to infer that the parties intended to go further by requiring, as a condition of the contract, that the charterparty actually be fixed at the time of the nomination
  • although it was a term of the contract to provide a copy of the charterparty at the Sellers’ "first request", this does not lead to the conclusion that the charterparty must have been fixed by the date of the nomination. Rather, where the charterparty remains to be fixed, the obligation must be construed as being to provide, following the Sellers’ request, a copy of the charterparty as soon as the fixture has been made.

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 [95] 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:

  • the invalid nomination of Tai Hunter
  • the initial nomination of Tai Hunter omitted the name of the vessel’s owner as required by the contract
  • there was no finding of a breach in relation to the allegation that the Tai Hunter had been fixed
  • the Board found that the Buyers’ failure to provide a copy of the charterparty relating to the Tai Hunter at the Sellers’ first request to be a breach of contract – despite it being of no consequence.

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 [107] 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."

Conclusion

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

Disclaimer
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.

Published by:

Charlie Coleman

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