England and Wales Court of Appeal (Civil Division) Decisions

IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE QUEEN'S BENCH DIVISION
COMMERCIAL COURT
THE HONOURABLE MR JUSTICE DAVID STEEL
[2009] EWHC 2454 (Comm)

		Royal Courts of Justice Strand, London, WC2A 2LL
		13/10/2010

Lord Justice Longmore:

Introduction

1. If, in a typical Free On Board ("FOB") contract, the buyer presents a vessel at the loading port which is not ready to take the cargo because the holds need to be cleaned, is the seller obliged to begin loading? No doubt if the buyer agrees the holds need to be cleaned, an accommodation will usually be reached. But if the buyer asserts that the holds do not need cleaning while the seller insists that they do, there will be an impasse and there is then a risk that the cargo will not be delivered during the delivery period in the contract. If, in such a situation, the goods are never shipped, can the buyer sue the seller for damages for non-delivery? A panel of arbitrators has said "No"; the GAFTA Board of Appeal has said "Yes". David Steel J has agreed with the Board of Appeal but has given permission to appeal to this court.

Facts

2. On 19^th September 2006, in a written "contract confirmation", Soufflet Negoce S.A. ("the Sellers") agreed to sell and Bunge S.A. ("the Buyers") agreed to buy 15,000 metric tons of Ukrainian Feed Barley, "free from alive insects and foreign smell" for a price of US$135.00 per metric ton FOB stowed/trimmed Nikotera, Ukraine. It was further agreed that weight, quality and condition were to be "final" at load port as per surveyor's certificates "Sellers' option and costs". Delivery was to be:-

"Between 9^th – 22^nd October 2006 at Buyers' call both dates included (No Extention)."

Under the heading "Shipping Terms" it was agreed that the Sellers were to load the cargo at the rate of 5000 metric tons per weather working day of 24 consecutive hours Saturdays, Sundays and holidays excepted even if used. There were then provisions for laytime which expressly required the valid tender of a Notice of Readiness and it was further said "All other terms and conditions as per relevant C/P". If the Sellers took more than 3 days to load the cargo, they would have to pay demurrage to the Buyers while if the Sellers took less than 3 days to load cargo they would earn dispatch "as per Charter Party rates". All other terms and conditions, not inconsistent with these terms were to be "as per GAFTA 49", a standard form of contract for delivery of goods from Eastern Europe in bulk or bags on FOB terms.

3. The references to "relevant C/P" and "Charter Party" rates show that the Buyers would have to charter a vessel (or buy space in an already chartered vessel) from a shipowner in order to perform the contract. Under that contract the Buyers would become liable for demurrage if loading exceeded the time stipulated in the charterparty but they would be able to recover such demurrage from the Sellers under the sale contract. Laytime would, of course, only begin under the charterparty when the shipowners served a valid "Notice of Readiness" for which purpose the holds would have to be clean and ready to receive the cargo of feed barley.
4. GAFTA 49 has its own standard "Period of Delivery" clause (clause 6) leaving a gap for that period (here agreed to be 9^th – 22^nd October 2006). There is then a provision for the Buyers to give not less than [x] days notice of the "name and probable readiness date of the vessel" (but no number of days was stipulated in the contract). It was then provided as follows:-

"The Sellers shall have the goods ready to be delivered to the Buyers at any time within the contract period of delivery.

Buyers have the right to substitute the nominated vessel, but in any event the original delivery period and any extension shall not be affected thereby. 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."

The reference to carrying charges is a reference to clause 8 (Extension of Delivery) under which the Buyers can require an additional period for delivery of 21 days but, if so, the Sellers are to "carry the goods for the Buyers' account". That is, of course, irrelevant in the present case since the contract confirmation had stipulated that there was to be "no extention" (sic).

5. On 10^th October, the Buyers nominated the vessel "LADY HIND" with an ETA Nikotera of 18^th October. They then chartered that vessel from her owners on 12^th October. The shipowners gave an ETA of 18^th/19^th October with a laydays/cancelling date spread of 0800 hours 7^th October/2400 hours 22^nd October. The shipowners served a notice of readiness on the Buyers/Charterers at 0520 hours on 22^nd October 2006. It would thus be necessary (if the contract was to be performed) for the Buyers to invoke that part of clause 6 of GAFTA 49 which would oblige the Sellers to complete loading after the delivery period had expired.
6. On the same day the Buyers' surveyors issued a certificate of cleanliness for the ship while the Sellers' surveyors issued a certificate which included the following

"Remarks – hoppers partly covered with coal powder (traces) at holds No. 1, 2, 3 and 4 ….

Conclusion – Based on the above mentioned inspection we find cargo holds and hatches not suitable to receive and carry the above mentioned cargo."

On the same day the Regional State Grain inspectorate also stated that the ship and holds were found to be not suitable for loading grain in bulk.

7. At 10.10 hours on 23^rd October the master advised that the vessel's holds were ready for re-inspection at 11.00. By that time the Sellers had at 09.24 hours declared the Buyers in default.

"due to the fact M/V LADY HIND was not presented ready to load at Nikotera, Ukraine."

8. In due course the first-tier arbitration panel held that the vessel's holds were not ready to receive cargo on 22^nd October. The Board of Appeal made no express finding about this in view of their decision as to the meaning of clause 6 of GAFTA 49. The Sellers accept that, if their appeal succeeds, the award will have to be remitted to the Board for them to deal with this issue. On the assumption that the holds were not ready to receive cargo (which is the hypothesis on which this appeal is proceeding) it is perhaps slightly surprising that Board of Appeal has decided that the Buyers can nevertheless sue the Sellers for non-delivery of the goods. Why, one asks, should the Sellers be obliged to load the barley into unclean holds? The answer given to this question by the Board of Appeal was (para 26) that it was the Buyers' responsibility to provide a vessel for shipment within the time agreed at the place agreed for shipment.

"So long as it was physically and legally possible for Sellers to load, on the nominated ship, the agreed goods at the agreed place within the agreed time, then Buyers would have discharged that responsibility and Sellers were under a duty to load – loading which, by Sellers' own admission, never happened."

The Board further referred to what they called "the fundamental commercial dynamic of the sale" namely that risk of loss or damage passed from the Sellers to the Buyers on the loading of the goods onto the vessel chartered by the Buyers. If the goods were damaged by shipment into unclean holds, the shipment was the Buyers' decision and at their risk.

9. The reference by the Board to it being "physically and legally possible for Sellers to load" is probably a reference to the standard position under an FOB contract at common law in the absence of any relevant express terms. As set out in the 8^th edition (2010) of Benjamin's Sale of Goods paras 20-046 to 20-047 the FOB buyer is bound to give instructions with regard to the shipment of goods and those instructions must be "effective" instructions

"in the sense that it must be possible and lawful for the seller to comply with them."

The authority for this proposition is Agricultores Federados Argentinos v Ampro S.A. [1965] 2 Lloyds Rep 157 and has thus stood as the law for 45 years or so.

The Argument

10. Mr David Owen QC for the Sellers did not seek to quarrel with the common law position as set out in Benjamin but submitted that this case was different by reason of first the express term in relation to the period of delivery in GAFTA Form 49 (which was replicated in many other GAFTA Forms e.g. Form 64 for FOB grain in bulk and Form 119 for other feeding stuffs) and secondly the express terms of the typed confirmation note PT 31006.
11. The main purpose of the Period of Delivery clause in the GAFTA forms is, of course, to define the time within which delivery is to be made. If the parties agree a delivery period between 9^th – 22^nd October (as they did in the present case) that, without more, would mean that the barley would all have to be loaded by 22^nd October and the Buyers would have to ensure that the vessel arrived at the port in sufficient time for that to be achieved. The printed form of GAFTA 49 provides for two ways in which this strict position can be qualified. One is set out in clause 8 and enables the Buyers to claim an extension of the delivery period of not more than 21 days in which case the

"Sellers shall carry the goods for Buyers' account … unless the vessel presents in readiness to load within the contractual delivery period."

In the present case, however, the parties agreed that there would be no extension to the shipping period. The second possible qualification is set out in the Period of Delivery clause itself.

"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."

The concept of the vessel presenting "in readiness to load within the delivery period" is thus common to both clauses and the question is whether that concept carries with it the requirement that the vessel must be in a position in which a Notice of Readiness can be (or perhaps has been) given.

12. As is well-known in a charterparty context a ship must in fact be ready to load (or discharge as the case may be) before it can be said to be at charterers' disposal. One of the most important consequences of being in the appropriate state of readiness is that laytime begins to count and, once laytime has expired, demurrage begins to accrue. A fairly elaborate set of rules governs the question whether the ship is, in fact, ready namely (unless otherwise agreed) the vessel must have been an "arrived" ship, she must have been granted free pratique (unless the granting of free pratique is a formality), she must have been cleared by Customs and the holds must be in a state in which they can receive cargo. The third edition of Mr Julian Cooke's book on Voyage Charters takes 17 paragraphs (15.22 – 15.38) to set out the law on the topic and the question is whether all this fairly elaborate law is intended to be incorporated into GAFTA FOB sale contracts by using the concept of the vessel presenting "in readiness to load".
13. In my view much clearer words would be necessary if all this shipping law is to be transported into an FOB sale contract. The phrase "in readiness to load" does not expressly say that a Notice of Readiness must have been (or at least be capable of being) given. If that was the intention the form would have said so and not left it to implication.
14. It is noteworthy that in one respect the parties to this contract have expressly specified the circumstance in which a Notice of Readiness must be given and that is for the purpose of commencement of laytime under the sale contract. I have already said that, in a shipping context, the Notice of Readiness ("N.O.R.") is relevant to the commencement of laytime and that, once laytime has expired, charterers will have to pay demurrage to the shipowners. In an FOB contract, the Buyers have to charter the ship and potentially render themselves liable for demurrage; but it is of course the Sellers who in practical terms have to put the goods on board the vessel; if therefore Buyers are liable for demurrage because the Sellers have taken too long to load the vessel, they will wish to make the Sellers responsible for indemnifying them in respect of that demurrage liability. Ideally the Buyers will wish to have terms in the sale contract which are identical (or at least similar) to the terms of the charterparty in respect of that laytime and demurrage. That is what Bunge as the Buyers have effectively achieved because the typed confirmation note expressly says that, as between them and the Sellers:-

"Laytime start counting at 8.00 a.m. the next working day if N.O.R is validly tendered during official working hours or between 8.00 a.m. and 5.00 p.m. local time from Monday to Friday whichever applicable. …. All other terms and conditions as per relevant C/P."

15. The express reference here to the tender of a valid Notice of Readiness does mean that the laytime allowed by the charterparty will not, as between Buyers and Sellers, start before such a notice is given and will start at 8.00 a.m. on the following day once it is given. For this purpose the rules about the validity of a notice of readiness have been expressly incorporated into the contract so that the Sellers will not be liable to the Buyers for any demurrage incurred unless a Notice of Readiness has actually been tendered and validly tendered. But it does not to my mind follow that, merely because the technical rules relating to Notices of Readiness have been incorporated into the sale contract for the purpose of calculating laytime and demurrage, those technical rules have been incorporated for all purposes by the use of the phrase "in readiness to load" in the printed form of GAFTA 49.
16. Mr Owen submitted that if the printed form did not make it clear that a valid Notice of Readiness had to be served (or at least, could be served) by the shipowners on the charterers within the delivery period, it had left the matter open by the use of the phrase "in readiness to load" and that the typed confirmation note made the matter clear by its use of the concept of a formal N.O.R. in the laytime provisions of the sale contract. But, in my view, the true position is precisely the opposite. By making clear that a valid N.O.R. is required to operate the laytime and demurrage provisions of the contract, the parties are by implication saying that a valid N.O.R. is not required for other purposes (e.g. for determining whether the vessel has arrived during the period of delivery). All that has to happen within the delivery period is that the vessel must be presented in readiness to load at some time between 00.01 hours on 9^th and 24.00 hours on 22^nd October. The fact that the holds may have needed some cleaning on arrival does not mean that the Sellers can throw up the sale contract on the basis that no vessel has arrived during the period fixed for delivery.
17. For my part I am satisfied that the legal position is as I have set it out, whether one looks only at the printed form No. 49 of GAFTA or that form in conjunction with the Confirmation Note. I would be troubled if it were not the correct legal position in the light of the Board of Appeal's assessment of what they have called "the fundamental commercial dynamic in this shipment sale". As business men the Board is in a much better position to assess that "dynamic" than this court. But it is obviously correct that if the Buyers assumed the risk of loading the cargo into unclean holds the state of the holds was not a matter in which the Sellers had any real legitimate interest. Mr Owen sought to say that the Sellers might be exposed to claims in tort from third parties or, alternatively that their commercial reputation might be at risk but it is difficult to see that either of those situations could in practice arise, particularly when it is common form in sales of this kind to have a clause saying that Quality and Condition are to be final as per certificates issued at loading port by a GAFTA approved surveyor. If the state of cleanliness of the holds were to be a legitimate concern of the Sellers, it would probably be necessary to have some provision entitling the Sellers to inspect the holds in addition to whatever rights the Buyers might have under the charter but no such provision appears in this contract. In my view there is no need for it.
18. Lastly Mr Owen relied on a dictum of Lord Ackner in Compagnie Commerciale Sucres et Denrees v Czarnikow Ltd (The Naxos) [1990] 1 WLR 1337 to the effect that an FOB Seller has to have cargo available to load without delay "as soon as the vessel is ready to load the cargo in question" (see 1345 G). But Lord Ackner was there encapsulating the sellers' obligation to make delivery not the buyers' obligation in relation to the degree to which the vessel must be ready to load. His use of the phrase "ready to load" does not, to my mind, intend to import the requirement that an N.O.R. has been or can be served any more than the phrase in "readiness to load" imports such a requirement in the printed GAFTA form 49. Lord Ackner was not considering the point that has arisen in this case.
19. For these reasons I agree with the judgment of David Steel J and would dismiss this appeal.

Lord Justice Wilson:

20. I agree with both judgments.

Lord Justice Toulson:

21. I also agree.
22. David Steel J gave permission to appeal because GAFTA 49 is a form in common use and its construction is a matter of general interest for traders in the grain market.
23. It is well established that an FOB buyer is obliged to give instructions for the shipment of the goods with which it is possible and lawful for the seller to comply.
24. I agree with the GAFTA Board of Appeal and with the judge that the phrase in GAFTA 49 "Provided that the vessel is presented at the loading port in readiness to load within the delivery period" requires no more than that the vessel should be ready in the sense of it being lawful and possible for the loading to take place – which I take to mean possible in a normal fashion, ie without abnormal hindrance. The vessel might be on voyage charter, time charter or for that matter in the buyer's ownership, but that does not affect the meaning of the words in question.
25. I have begun with GAFTA 49 rather than the wording of the contract confirmation because it is the standard form which is of general interest. But the question arises in the present case whether the language of the "Shipping Terms" in the contract confirmation had the effect that the seller's obligation to load was conditional on the buyer giving a Notice of Readiness conforming with the requirements of a Notice of Readiness under the charterparty. The contract of sale did not say so, and I do not consider that it is necessary to construe it as if it did in order for it to make sense. As the Board of Appeal observed, it was not on the face of things a matter for concern on the part of the seller whether the holds were clean, when the weight, quality and condition were to be final at the load port as per certificates issued by a GAFTA approved surveyor to be chosen by the seller.
26. I agree with Longmore LJ (para 15) that it does not follow that, because the provisions of the charterparty with the associated technical rules relating to Notices of Readiness have been incorporated into the sale contract for the purpose of calculating laytime, demurrage or despatch, the buyer could not contractually require the seller to begin loading when the vessel was ready to load within the meaning of GAFTA 49.
27. As the Board of Appeal said, the dispute before the Board was not one for demurrage, but was a simple claim under the contract for failure to load by the shipment date. I agree with Longmore LJ that under the terms of the contract the seller would not be liable for demurrage unless a Notice of Readiness complying with the requirements of a Notice of Readiness under the charterparty had been validly tendered, but that is a separate matter. I have considered what would be the position if, conversely, the seller loaded at a rate which would have prima facie entitled it to claim despatch. Would it then be open to the buyer to deny the claim on the ground that there had been no valid Notice of Readiness, even though it had called on the seller to load, and is this therefore a reason for accepting the seller's case on the construction of the sale contract? The point was not advanced in argument, but my answer to the first part of that question (as at present advised) would be no and my answer to the second part is no. I would not consider it to be open to the buyer both to assert that the vessel was ready for loading but also to deny that an effective notice had been served for the purpose of entitling the sellers to claim despatch, because that cannot have been the parties' intention; and I do not see this point as providing a good argument for regarding the contract as limiting the buyer's right to require the loading of the vessel when the operation was legal and possible.
28. For those reasons and those given by Longmore LJ, I agree that the appeal should be dismissed.