UK: Forward Freight Agreements - Financial Weapons Of Mass Destruction?

Last Updated: 25 February 2009
Article by Jeb Clulow and Eurof Lloyd-Lewis

Forward Freight Agreements ("FFAs") are often in the news, at present with Armada of Singapore being the latest major operator to blame them for its financial woes.

FFAs are derivatives contracts. In essence, a FFA is an agreement between two parties whereby one party will be required to pay the other party depending on whether the market freight rate for a type of voyage or period of time turns out to be higher or lower than the figure specified in the contract.


Where used as a "hedge" against a physical charterparty trade, a FFA should, in theory, reduce a party's risk. However, FFAs are often stand-alone transactions, unrelated to any physical charterparty trade, and are purely for the purpose of speculating on the market. In the current market, such trades can be, as Warren Buffet described them, "financial weapons of mass destruction". In addition to Armada, there have been a number of insolvencies which have been attributed to FFAs.

This highlights another problem with FFAs: counterparty risk. Most FFAs are traded "over the counter" ("OTC") and not through an exchange. Accordingly, as with a physical charterparty trade, a party to a FFA is at risk in the event that the counterparty becomes insolvent.


The Forward Freight Agreement Brokers Association has issued three editions of FFA terms: 2000; 2005; and 2007. The majority of transactions are on the most recent 2007 terms, but there are still many transactions on the earlier 2005 terms.

At first blush, a FFA, whether on 2005 or 2007 terms, can appear simple. However, lurking behind the main FFA terms is a more complex document, known as the ISDA Master Agreement, which runs to 18 pages of dense type. It is this document which sets out in detail the parties' rights and obligations with regard to payment, interest, events of default, early termination and so on.

We discuss below the main obligations under the FFA and then contrast the position between the 2005 and 2007 terms in cases of counterparty bankruptcy.


At the end of each delivery month, the parties will calculate, by reference to the relevant Baltic Index, who is "in the money". The party who is "in the money" will send to its counterparty an invoice with bank details to allow payment of the "Settlement Sum". Payment is due on the later of two London business days after presentation of the invoice, or five London business days after the Settlement Date, which is the last Baltic Exchange Index publication day of each contract month.

If payment is not made by the stipulated time, the non-defaulting party has to decide whether to terminate the transaction early, thereby accelerating or crystallising the value of the transaction. If the non-defaulting party chooses to terminate the transaction early, it must first give notice requiring payment within three local business days. It is worth mentioning that the notice provisions of the ISDA are particular and antiquated (for instance, notice by email is not valid).

Alternatively, the non-defaulting party may choose not to terminate and withhold payment in respect of any future transactions where the defaulting party may be "in the money".


The most significant difference between the 2005 and 2007 terms is that the later edition provides for automatic early termination while the earlier edition does not. In cases of counterparty bankruptcy, this can result in radically different outcomes.

Under the 2007 terms, bankruptcy has the effect of automatically terminating or "closing out" all transactions between the parties. The transaction is accelerated which, as you will see below, can have unpleasant consequences for the non-defaulting party who is "out of the money".

The non-defaulting party is obliged to make a calculation applying the contractual formula of Second Method and Loss. The party who is "out of the money" is obliged to pay their counterparty.

If it is the bankrupt party who is "out of the money", the non-defaulting party may have a very long wait for their money, if they get any at all. In those circumstances, the non-defaulting party will feel pretty hard done by.

If it is the non-defaulting party who is "out of the money" it may be required to pay a large lump sum because the market is currently unfavourable in the sense that it can buy or sell the same trade on more favourable terms and ISDA requires it to account for this benefit to its counterparty. This can have serious cash flow implications for the non defaulting party.

The significant difference under the 2005 terms is that bankruptcy does not result in automatic early termination. This can have very significant advantages for the non-defaulting party who is "out of the money".

Under the 2005 terms, the solvent party has the right but, importantly, not the obligation to terminate the contract. If the non-defaulting party does not exercise its right to early termination, the transaction is not accelerated. However, its primary obligation to make payment in relation to each delivery month, and to pay interest on any sums which would otherwise be payable, are suspended, at least until the default has been cured. An insolvent party will not usually emerge from bankruptcy as a going concern and the practical effect of the suspension is therefore to allow the solvent party to "walk away" from any unprofitable trades. With regard to any profitable trades, the solvent party may still claim payment, subject to the insolvency rules governing the bankruptcy.

There have been instances where the liquidator of the insolvent company has sought to utilise his power to disclaim unprofitable contracts in order to try and "unsuspend" the solvent party's obligations. These attempts have generally been unsuccessful. See, for instance, Enron Australia v TXU Electricity in which the court held that it would "...deprive [the solvent party] of [its] contractual rights, under contracts which expressly contemplate and deal with the consequences of liquidation, to decline to trigger early termination, and of the benefits they would derive from that course". The 2005 terms, therefore, confer a significant advantage to the solvent party in the event of counterparty bankruptcy. There is a debate as to whether it is unfair that the solvent party may "walk away" from unprofitable trades. However, we expect that few FFA users would dispute that the automatic termination regime of the 2007 terms can have harsh consequences for the non-defaulting party as it can affect cash flow significantly. In these difficult economic times, when the ability to maintain one's cash flow may be crucial to one's own survival, it is debateable whether the 2007 terms achieve an equitable result.

Parties involved in the FFA market may, therefore, want to pay particular attention to the difference between the two forms and, indeed, may wish to negotiate their own terms so as to take advantage of the different options available under the ISDA Master Agreement to address specifically the issue of termination in the event of insolvency.

Commodity and Interest Rate Futures/Swap Agreements

Commodity and interest rate futures/swaps are often also on ISDA form and many of the issues discussed in this article are equally relevant to them.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.