Aligning sales contract and charter party terms

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Skuld Charterer
Written by Sylvie Allen, Senior Claims Executive, Lawyer, Skuld Oslo, 13 April 2021

Even though the voyage charter party is dependent on the sale and purchase of cargo, it is often difficult to align the terms of the sales contract with the charter party. This is partly because of the standard form contracts used in the industry, the allocation of risk between the owner of the vessel and charterer versus the seller and the buyer of the cargo and because often the sales contract is concluded before the charter party.

In this article we will discuss why it is important to align terms in the voyage charter party and sales contract concerning laycans, laytime, shipment windows and delivery windows and we will consider some issues that may arise under commonly used FOB and CIF contracts. We will then consider whether these issues could be solved by incorporating charter party terms directly into the sales contract.

CIF/CFR/C&F contracts

Under a CFR/CIF sales contract, the seller is responsible for arranging the transportation of the cargo and for paying freight and, in the case of CIF, the cargo insurance as well. Unless the contract is on 'CIF delivered' terms (that is, the goods must be delivered within a certain period or by a certain date) then the cargo must usually be shipped within a specified period or within a period that, in the ordinary course of events, would allow the cargo to arrive at the discharge port within a specified delivery window.

If the cargo is not shipped within the specified period, the buyer will usually be entitled to terminate the contract and purchase replacement cargo in the market and claim any difference in value. However, under the voyage charter party, the CIF seller will only be able to cancel the charter party if the vessel does not tender a valid Notice of Readiness (NOR) within the laycan and will not be able to claim damages from the owner unless there has been a separate breach of the charter party.

There may also be implications for demurrage claimable under the sales contract. Under BP General Terms and Conditions for Sales and Purchases of Crude Oil and Petroleum Products 2015 CIF terms, the NOR only needs to be tendered at the loading terminal within the laycan and the loading can be completed outside of the laycan. However, if the seller has also provided an Indicative Discharge Date (IDD) and the vessel arrives after the IDD, then laytime will commence 36 hours after tendering NOR (berth or no berth) or upon commencement of discharge, whichever is the earlier (rather than six hours after tendering NOR, which would be the case if the vessel had arrived within the IDD). This means that, unless the vessel commences discharge before laytime commences under the voyage charter party, the seller may be liable for more demurrage under the charter party than the buyer is liable for under the sales contract. Even where the vessel arrives at the discharge port after the IDD due to fault on behalf of the vessel – for instance, the vessel underperformed on the voyage – then the seller may struggle to claim damages for the difference in demurrage under the two contracts.

FOB contracts

Under an FOB sales contract, the buyer of the cargo is responsible for procuring a vessel to take delivery of the cargo and the seller is responsible for completing shipment of the cargo on board within the delivery period. The FOB buyer is required to nominate a vessel which is able to arrive at the load port with sufficient time to complete loading within the delivery window and, if they fail to do so, the seller may cancel the contract.

If the vessel does arrive with sufficient time to load, it is usually a condition of the contract that the seller completes loading within the delivery window. However, both GAFTA FOB contracts and BPGTC15 allow the cargo to be loaded outside of the delivery window provided that the vessel arrives within the laycan or delivery window.

Under GAFTA 64 (General Grain), the period of delivery may be extended for up to 10 days but, during the extended period, the buyer will be responsible for carrying charges. If the buyer fails to present a vessel in readiness to load within the extension period, the seller can either hold the buyer in default and claim damages or can demand payment of the cargo at the contract price plus carrying charges. If the vessel has not tendered a valid NOR within the laycan then the buyer would be entitled to cancel the charterparty, but it is unlikely that they would be able to claim damages, even if there has been a separate breach of the charter party, as the losses are likely to be considered too remote.

Incorporating charter party terms into the sales contract

Unfortunately, simply stipulating that laytime and demurrage terms in the sales contract are to be "as per the charter party" may not solve the above issues but rather create additional issues.

For instance, including "demurrage as per charter party" does not necessarily mean that all of the charter party terms relating to demurrage will be incorporated in the sales contract. In OK Petroleum AB v Vitol Energy S.A [1], the court held that "demurrage as per charter party" meant that demurrage under the sales contract was to be calculated in accordance with the charter party but it did not incorporate the charter party requirement that a claim for demurrage be presented within 90 days.

Issues may also arise when certain terms are used interchangeably in the charter party and the sales contract but have a different meaning under each contract.

For instance, the parties should be careful to avoid using the term "laycan" to describe the shipment or delivery period under the sales contract unless they intend for the shipment or delivery window to be limited by the laycan [2].

In Soufflet Negoce v Bunge SA [3], which concerned the wording in clause 6 of GAFTA 49 "...provided vessel is presented at loading port in readiness to load within delivery period, sellers shall complete loading after delivery period and carrying charges shall not apply", the court held that "readiness to load" in the context of the sales contract does not require that a valid notice of readiness has been (or is capable of being) tendered.

Conclusion

Traders and charterers should pay particular attention to these common pitfalls when agreeing voyage charter party and sales contract terms and bear in mind that stipulating that the sales contract terms are to be "as per the charter party" may not provide an effective solution.

How Skuld can help

Skuld has specialist lawyers from major jurisdictions providing contract reviews and drafting clauses ad-hoc to isolate risk. We want to ensure that our members and clients fully understand the impact of the contract and that they are provided with the cover that they need and want. Contract reviews can be provided under our standard FD&D service product, which can be extended from the more traditional cover in relation to a charter party to also include maritime disputes under sale and purchase contracts.

Should you have any comments or questions, then please do not hesitate to contact us at any time.

On behalf of your Skuld team of underwriters and claims handlers who serve our charterers and traders 24/7/365.


[1] OK Petroleum AB v Vitol Energy S.A (The Chemical Venture and The Jade) [1995] 2 Lloyd's Rep 160.
[2] ERG Raffinerie Mediterranee SPA v Chevron USA Inc (The Luxmar) [2007] EWCA Civ 494.
[3] [2010] EWCA Civ 1102