UK: FOB Contract - Rights and Obligations of Buyer and Seller Re-Examined

Last Updated: 21 September 2010
Article by Patric McGonigal

A trading dispute under an FOB contract provides the opportunity to clarify a number of issues including the role of local custom in the nomination of a port,  whose right it is to nominate a loading place within a port, the nomination of a vessel incapable of loading at the original loading place and the nomination of a vessel incapable of performing the shipment.

On 9 February 2010, Mr Justice Steel issued a ruling in an application for leave to appeal two arbitration awards arising out of a series of disputed contracts for deliveries of "white refined sugar" on the London International Financial Futures and Options Exchange, Euronext LIFFE, under the White Sugar Futures Contract No. 4071.

The ruling is of interest given that it concerns the rights and obligations of parties to an FOB contract, in particular in relation to the applicability of local practices and the right to nominate a loading port (including a loading place within that port) as well as nomination of vessels incapable of performing.

As the court's ruling concerned a request for leave to appeal, on various issues of law, awards made by a Refined Sugar Association arbitration panel, there is little in terms of the background to these disputes. However, it is known that the parties entered into a series of contracts for the sale and purchase respectively of quantities of sugar through their clearing brokers with LCH Clearnet Limited. Lots were tendered for the physical delivery of sugar from Thailand and disputes subsequently arose under the relevant contracts.

ISSUES

Four issues of law were raised in the request for leave to appeal by the sellers:

  1. Are local customs and practices relevant to the determination of parties' obligations to nominate a loading port or place under an FOB/FOB stowed contract?
  2. Under an FOB contract giving the seller the right to nominate a port, is it the seller or the buyer which has the legal right (and duty) to nominate a loading place within that port?
  3. May a vessel nominated under an FOB contract be substituted by a vessel incapable of loading at the original loading place?
  4. "Ghost Nominations": is a seller in repudiatory breach of contract if it declines to accept a vessel nominated under an FOB contract which has already been fixed to a third party and is therefore incapable of performing at the time the seller is called on to accept it?

1. Relevance of Local Customs

The customs in question are those which are in use by Thai shippers (i.e. "Thai terms") which provide for loading at a berth at Bangkok and any topping up to be carried out at a second Thai port. The nominated loading port was "Bangkok/Kohsichang" and the sellers argued that this meant loading at Bangkok with any topping off at Kohsichang anchorage. The buyers said that they were entitled to take delivery in Kohsichang alone and no such custom should apply.

The tribunal disagreed with the sellers on the basis that, as regards the custom of the trade, the correct factual matrix was that of the London futures market and not the market relating to physical exports from Thailand. In any event, for the purposes of the LIFFE Exchange Contract, Bangkok/Kohsichang was deemed a single port and a custom of Bangkok port could not by definition be a custom of the deemed port. Moreover, it was not accepted either that the Thai terms did constitute an invariable practice or that the sellers' interpretation of those terms was even correct.

In any event, the court did not disagree and instead disputed whether this was an issue of law as opposed simply to one of factual matrix.

2. Right to Nominate a Loading Place Within a Port

The sellers contended that the tribunal was wrong to hold that "the right of choice of the loading place is that of the buyer and the seller can take no action which will have the effect of undermining or defeating that right."

In considering the issue, the court noted a number of the practical considerations which surround this issue. These included the prospect that, if the sellers nominated Bangkok/Kohsichang, the buyers could nominate a vessel which was too large to enter Bangkok but not the Kohsichang anchorage. Consequently, the sellers, on their case, could nominate a berth in Bangkok which the buyers' vessel could not reach and therefore arguably override the true meaning of Bangkok/Kohsichang.

The point was first addressed in the context of the incorporation of the ASSUC Rules into the Exchange Contract as well as the annexation of the Administrative Procedures to the Exchange Contract. However, the court agreed with the tribunal that, firstly, the section in the ASSUC Rules relied upon by the sellers was not in fact incorporated and, secondly, the Administrative Procedures provided for details of the vessel's tonnage (including the tonnage to be loaded) to be advised when the vessel nominated, and this therefore necessarily restricted the berths to those which were suitable to the vessel.

Of perhaps more interest - albeit that this situation is thought unlikely to arise very often in practice2 - is that the court also considered the issue on the basis of its understanding of the law and general practice in circumstances where there is no express option in either party's favour to nominate a berth. The court acknowledged that the volume of authority identified by the tribunal as being in support of the buyers' case was modest but nevertheless held it to be correct. Specifically, the court endorsed the reference to Boyd v Louca3 in which Kerr J stated that "...when nothing is expressly agreed and where there is no custom...from which any particular conclusions can be drawn, the choice of the loading port under an FOB contract is that of a Buyer if the contract leaves it open at what port shipment is to be made." Similarly, in Benjamin on Sale of Goods4, the court made reference to where it is stated that "if the contract does not specify which party is to nominate the berth, it is submitted that the right and duty of doing so is the Buyer's."

As regards any practical difficulties, it would not be too hard to envisage circumstances in which, regardless of which party was said to have the right to nominate, the other might be said to be inconvenienced and vice versa.  In short, given the court's earlier ruling on the lack of any relevant custom and the absence of any term dealing with the nomination of a berth or anchorage, it seems the court had little difficulty in agreeing with the tribunal that, in the case of an FOB contract, it is for the buyers to nominate the place of delivery.

3. Substitution by Vessel Incapable of Loading at Original Loading Place

It is understood that the third issue concerned the substitution of "non-Bangkok compliant" vessels in place of vessels that were "Bangkok-compliant" such that loading would instead have to take place at Kohsichang. The sellers' main concern presumably being that by having to arrange for shipment by barge to anchorage rather than loading at berth, significant additional costs would be incurred.

The court dealt with this issue in one paragraph, holding that the tribunal was clearly correct to conclude that: (a) where substitution is permitted without any requirements in terms of size and characteristics, the only physical requirement is that the new nominated vessel is suitable for the loading and carrying of sugar; (b) any prejudice the sellers may suffer in having to load at Kohsichang anchorage rather than berth in Bangkok may be compensated by exercising their right to recover costs incurred as a result of the substitution; and (c) as discussed above, "Bangkok/Kohsichang" is a single port and, therefore, there could not be any objection on the ground that a loading place had already been nominated (i.e. no new loading place was being nominated and the right of substitution remained expressly open).

4. Ghost Nominations

The final issue concerned the practice in the sugar trade of an FOB buyer nominating a vessel which at the time of nomination was fixed to a third party and therefore incapable of performing the shipment. The sellers argued that, in refusing to accept such a nomination, they were not in repudiatory breach of contract. The buyers said that, as they were entitled, if necessary, to substitute whatever vessel was nominated, it was not improper to nominate a vessel which was working elsewhere at the time, thereby allowing the buyers the time to finalise their loading arrangements in what may have been a difficult freight market.

The tribunal disagreed and held that, given the right of substitution and the right to recover in respect of any losses which were sustained, the sellers were not entitled to decline what were valid nominations. Moreover, there was no requirement on the part of buyers to charter other vessels knowing that they would also be rejected as being "non-Bangkok compliant."

The court concluded that the tribunal's findings on these issues could not be challenged and that, even if there was any serious doubt as to the effect of declining the nomination of vessels which were not in any event available to perform, the sellers could still properly be treated as being in anticipatory breach of contract. As such, a finding on either ground would not substantially affect the rights of the parties.

Ultimately, leave to appeal the awards was refused on all grounds.

COMMENT

The practical consequences of this ruling may be viewed as being harsh on the sellers, particularly in circumstances where matters were determined by reference to the expectations of the London futures market and not the market relating to physical exports from Thailand (with which both the first sellers and end buyers would have been familiar). However, the reality is that an equally convincing case for hardship could have been advanced by the buyers had the ruling gone the other way. Ultimately, in assessing the balance of convenience between the parties, the court has come down on the side of the FOB buyers on the basis that it is they who shoulder the burden of having to arrange for transport of the goods, whereas the sellers merely have to make their cargo available on time for shipment. As such, the options in relation to delivery of the goods to the ship are the buyers', except where the contract otherwise states.  

BLG represented UBS' interests in the matter.

This article was first published in Maritime Risk International, April 2010

Footnotes

1. (1) Cargill International SA; (2) Eagle Trading Limited (sellers) v (1) ED&F Man Sugar Limited (buyers); (2) Sucden Financial Limited; (3) UBS Clearing and Execution Services Limited; and (4) LCH Clearnet Limited [2009] Folios 1170 & 1171

2. We suspect that, in most cases, the place of delivery or berth will be selected by the relevant harbour authority and not the parties (albeit that the vessel's characteristics will be taken into account)

3. David Boyd & Co Ltd v Luis Louca [1973]

4. (7th) Edition) page 1691

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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