Chevron failed to overturn the High Court judgment in ERG Raffinerie Mediterranee SpA v. Chevron USA Inc. (The “Luxmar”)  – see News Update No.32. The Court of Appeal has confirmed that the effect of describing an FOB delivery period as a “laycan” is to put the seller in a similar position to that of the charterer under a charter party. The seller has no obligation to load before the first day of the laycan and may cancel the contract if the vessel arrives after the last day of the laycan. Furthermore, the seller is not required to load within the laycan period or within the agreed laytime allowance. The seller’s only penalty for delay is the agreed demurrage rate. The buyer is in the same position as a ship owner, in as much as the buyer’s vessel can arrive at anytime up to the last minute of the “laycan”.
Ship owners welcomed the New York arbitration decision, now published as the M/T “Magpie” SMA No.3948 (N.Y.Arb.2006) - see News Update No.33, where the arbitrators accepted that the logical way to calculate any delay caused by the inefficiency by a vessel’s pumps was to use the pumping performance formula. Regrettably, we now have another New York arbitration, the M/T “Niki” , where the arbitrators were not persuaded to accept the formula. It appears that the arbitrators felt they were given insufficient evidence of the logic behind the formula to enable them to accept it, even though they acknowledged that the charterers were gaining an unfair advantage if all time in excess of 24 hours was deducted. This case highlights the need to provide very detailed and tightly argued submissions if entrenched opinions are to be overturned, particularly when arbitrations are decided on documents only. The arbitrators conceded that the pumping performance formula could provide “a fair and equitable solution to this vexing problem”. However, they suggested that pumping clauses needed to be reworded otherwise it would be difficult for owners to convince arbitration panels “that an acceptable method exists and should be applied to achieve the fairness and justice expected of the arbitration process”. The arbitrators might have reached a different conclusion if they had taken account of the difference in law between a penalty clause and an indemnity clause. Fortunately, most of the rest of the world has accepted the logic and the benefits of using the pumping formula to settle such disputes. While it should not be necessary to include the formula specifically in pumping clauses, it would no doubt be sensible if it was.
An ICC arbitration reported in Lloyd’s Maritime Law Newsletter (2007 717 LMLN 2) related to protracted negotiations over what would form an acceptable letter of credit to be opened by the FOB buyers. However, the real cause of the delay to loading was the sellers’ difficulty in opening a letter of credit to their own supplier. Nevertheless, the sellers claimed that because their buyers had failed to open their L/C “latest five days prior to loading”, they were not liable for the delay to the vessel. The arbitrator decided that this did not mean that the sellers had no obligation to load during the five days. It meant that if the sellers could show they had suffered a loss as a result of their buyers’ failure to open their letter of credit in good time, they would have a counter claim for damages, such as demurrage, that they would not otherwise have incurred. It may be useful to compare this award with the Court of Appeal judgment in Kronos Worldwide Ltd. v. Sempra Oil Trading (The “Spear 1”) - see News Update No.25. In that case a letter of credit was held to be a condition precedent and that the sellers had no obligation to load the vessel until the buyers’ letter of credit was in place. In this ICC arbitration, the letter of credit was in place, but not with the required five days in advance of the intended loading date.
Andrew Wilding who is in charge of Asdem’s Singapore office has a new email address: email@example.com. His new telephone number is +65 6534 9278. We have received a number of enquiries regarding training courses and workshops in Asia and anyone interested in such courses can contact Andrew Wilding to discuss their requirements. Andrew specialises in providing in-house training seminars on legal issues relating to trading and shipping which he can tailor to a company’s specific needs. He has contributed the following article to this News Update:
The FOB buyer is sometimes forced to find a replacement when his original ship has been delayed. In principle, there is nothing in law to prevent the buyer from nominating a substitute vessel. However, FOB contracts often contain provisions requiring the buyer to nominate an acceptable vessel with a minimum notice period, for example “at least five calendar days prior to the first day of the delivery period”. So long as the substitute nomination meets the contractual notice requirements and is an acceptable ship, the seller cannot reject it.
A substitute nomination will count as a new nomination. If the substitution cannot be made with the contractual notice before the start of the delivery period, the seller can reject the new nomination for being late and cancel the contract. This was confirmed by the Court of Appeal in Cargill UK Ltd. v. Continental UK Ltd.  1 Lloyd’s Rep. 193. Needless to say, this usually only happens in a rising market.
If the seller accepts the substitution without imposing any new conditions, he will be deemed to have waived his rights to reject the late nomination. All the terms of the sales contract will stand, including those for demurrage. The seller cannot later claim that laytime will only commence on berthing. If this is what he wanted, he should have made it a condition for accepting the late nomination.
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