Type: Client Alerts
Buyer’s Right to Substitute
Gafta’s contract amendment to its nomination clause effective 1 September 20171 favours fob buyers and makes late vessel substitutions much easier for the buyer. Gafta’s amendment to its nomination clause is a response to the practical view of the trade: soft commodities buyers often struggle to understand what prejudice would be suffered by an fob seller by the buyer substituting one suitable vessel for another, even at a very late stage. There is often no real prejudice suffered by sellers when an fob buyer wishes or is forced to substitute a vessel. An obvious exception would be Argentinian grain contracts, which are often subject to strict port requirements requiring vessels to wait before proceeding upriver to the terminals. Accordingly, Gafta Contract No. 38 is not affected by these amendments.
Substitution of vessels is a fertile ground for mistakes, disputes, terminations and delays. It is important to get any substitution right in terms of both timing and information given to avoid disputes.
English law position
It is generally a buyer’s duty under an fob contract to “name the vessel and give shipping instructions in time to enable the seller to send forward the goods so that they can be shipped in accordance with instructions”.2 In other words, where the time of shipment in an fob contract is at the buyer’s option, the buyer is obliged to nominate a vessel to arrive at a time which would allow the seller to load the contractual goods before the end of the shipment period; and to give suitable pre-advice of arrival so that the seller can have the goods available and ready to load. Of course, most contracts will expressly provide for a time for that pre-advice, for example, seven days before the ETA of the vessel.
The buyer is also generally entitled to cancel that nomination and substitute another vessel to load, provided that the substituted vessel also fulfils all of the buyer’s contractual obligations and the substitution itself is made in accordance with the contract.3 The fob buyer’s option to substitute is therefore generally subject to the buyer’s duty to make a further valid nomination in accordance with the contract.4 This duty does not change when the right to substitute is expressly provided for in the contract: the substitute vessel’s details and readiness to load are relevant details for the seller and must be provided in accordance with the relevant contract, along with the pre-advice and any other nomination requirements in the contract.5
Gafta’s new nomination clause
Gafta’s new nomination clause is set out below, with the additional wording highlighted in italics:
“Nomination of Vessel. Buyers shall serve not less than ………………….consecutive days’ notice of the name and probable readiness date of the vessel and the estimated tonnage required. [The Sellers shall have the goods ready to be delivered to the Buyers at any time within the contract period of delivery.]6 The Buyer has the right to substitute any nominated vessel. Buyer’s obligations regarding pre-advice shall only apply to the original vessel nominated. No new pre-advice is required to be given in respect of any substitute vessel, provided that the substitute vessel arrives no earlier than the estimated time of arrival of the original vessel nominated and always within the delivery period. 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. Notice of substitution to be given as soon as possible but in any event no later than one business day before the estimated time of arrival of the original vessel. In case of re-sales a provisional notice shall be passed on without delay, where possible, by telephone and confirmed on the same day in accordance with the Notices Clause. In any month containing an odd number of days the middle day shall be accepted as being in both halves of the month, except for pricing purposes the middle day shall be considered to be in the first half of the month.”
As will be clear, this wording changes the English law position in certain Gafta contracts, giving fob buyers greater latitude to substitute their nominated vessel by avoiding the need for renewed pre-advice and requiring limited notice to be given to the fob seller. Please click here to see a table detailing which Gafta contracts now include this provision.
However, if the original ETA for the nominated vessel was early in the delivery period, this potentially leaves the fob seller open to significant additional costs, e.g. storage costs, and it may affect the vessel line-up at the terminal. That the notice of substitution only need be given by the fob buyer one business day before the ETA of the original vessel does little, if anything, to assist the fob seller in avoiding such risks. Fob sellers may therefore wish to consider amending this clause in the sales confirmation, either to require additional days’ notice of the substitution or, for example, to require no new pre-advice only if the substituted vessel arrives no earlier than – and no later than, say, three days after – the ETA of the original nominated vessel, and always within the delivery period.
How does Gafta’s amended clause compare to other widely used fob terms?
Oils/Fats/Seeds. The Federation of Oils, Seeds and Fats Associations’ (FOSFA) fob contracts7 provide varied nomination and substitution requirements, although usually they expressly allow for substitution. Pre-advice is required between 10 and 15 days prior to the vessel’s arrival. Substitutions should be made as soon as possible but can be made with only two business days’ notice provided the vessel does not arrive earlier than, and no later than five working days or 10 days after, the original vessel’s ETA. The longer pre-advice requirements reflect the fact that string sales are commonplace for many of the products covered by these contracts: the terms seek to allow enough time for the relevant notices to pass between the ultimate buyer and seller. Fob buyers should therefore pay close attention to the specific requirements of their contract in relation to nomination and substitution (as well as in respect of documentary instructions, which in some FOSFA fob contracts have separate pre-advice requirements). Fob sellers should be aware that the vessel may not arrive until some time after the original vessel’s ETA and with limited notice, much like Gafta’s new clause.
Sugar. The Sugar Association of London’s (SAOL) raw sugar fob contract8 (and any contract incorporating the SAOL Rules9) requires that the fob buyer must give notice of the vessel on which the sugar is to be shipped, including its ETA, in accordance with Rule 210(b). That notice must be given by 5pm on a business day at the fob seller’s place of business and, unless otherwise stated in the sales confirmation, at least 10 days before the vessel’s ETA at the loadport or off the contracted range of loadports.
The fob buyer has the right to substitute the vessel under Rule 210(c). Assuming there is no change to the quantity called for, no new pre-advice is required if the substitute vessel arrives before or no later than five days after the ETA of the original vessel. However, if the substitute vessel arrives more than five days after the ETA of the original vessel, it is considered a new declaration and a new 10-day pre-advice would be required. This clause seeks a balance between the needs of the seller and the buyer but still leaves the fob seller open to some additional costs, e.g. storage, which the seller may wish to contract out of. The fob buyer may also wish to consider whether a shorter contractual pre-advice may be required at the time of contracting.
The Refined Sugar Association Rules10 (RSA Rules) are not prescriptive in respect of the amount of pre-advice required, leaving it to the parties to agree any such requirements, but they are otherwise more seller-friendly. Fob buyers should note that any substitution made will be considered a new declaration unless the substitute vessel arrives before the ETA of the original vessel. In all other cases, absent clear contractual wording to the contrary, the substitution will be contingent on the fob buyer complying anew with any contractually agreed pre-advice requirements. Fob buyers should also note that the RSA Rules provide explicitly that the fob buyer shall be responsible for any proven costs incurred by the fob seller both (i) if the originally declared vessel fails to present itself within five days of the originally declared ETA11 and (ii) as a result of any substitution.
Oil. Both BP’s and Shell’s general terms and conditions (for both crude and products)12 are seller-friendly in relation to nomination, given that oil terminals are usually extremely busy and the demand for crude and oil products is generally high. The requirements of the fob buyer on nomination are wide and subject to five days’ pre-advice for oil products and eight days’ pre-advice for crude13 unless otherwise accepted by the seller. Substitution is permitted, and in fact required of the buyer if needed in order to perform its obligations, albeit subject to specific conditions and always subject to acceptance by the seller.
The main difference between the two company’s terms is that: Shell’s terms provide that the name and destination(s) of the substitute vessel must be given as soon as possible but not later than the ETA of the substitute or original vessel, whichever is earlier, whereas BP’s terms provide that these details must be provided within one business day of fixing or receiving notice of the substitute vessel but, again, no later than the ETA of the substitute or original vessel, whichever is earlier. Although under both companies’ terms an fob seller is entitled to reject any nomination on reasonable grounds, the right to substitute with minimal notice assists the fob buyer in much the same way as the new Gafta clause does.
Coal. Under SCoTA version 8 terms, both the nomination and notice of readiness are subject to the particulars of the relevant RSS adopted. Substitution is required within two working days if the buyer’s nomination is rejected but there is no express contractual right for the buyer to substitute. Any substitutions made by the fob buyer will therefore be subject to the contract requirements for nomination, including any required pre-advice or notice, in order to be effective.
Gafta also introduced an entirely new Phytosanitary Certificate clause into a number of its fob contracts, effective 1 September 2017, in response to Gafta members’ requests:14“
Where the provision of a phytosanitary certificate has been agreed between the parties, Sellers shall use their reasonable endeavours to supply, at their own cost, a phytosanitary certificate in circumstances where:
(a) After the date on which the contract has been entered into the named country of import changes its phytosanitary requirements; or
(b) As at the date on which the contract has been entered into Sellers are not aware of the named country of import.”
Please click here to see a table detailing which Gafta contracts now include this provision.
The inclusion of this clause by Gafta serves as a reminder of the risk that fob sellers of soft commodities regularly take when contracting and seeks to reduce the risk to sellers in situations where the destination either is not available or has changed.
The phytosanitary certificate is a certificate issued by an exporting country’s public authorities which confirms that the goods meet the phytosanitary import requirements of the destination country. Soft commodities sales contracts will almost always contain an obligation on the seller to obtain one. This means that the seller is committed to obtain and provide a phytosanitary certificate, regardless of the destination. This will not be a problem for cfr/cif sellers whose sales contracts will include a range of or set destination(s). However, it is more burdensome for fob sellers because the seller often has no knowledge – and certainly no control – over the destination of the goods.
Failure to provide a satisfactory and contractually compliant phytosanitary certificate would put the seller in breach of its obligations under the sales contract and will affect the seller’s ability to obtain payment (payment being made against the contractual documents). Therefore, from the seller’s perspective, a good clause will mitigate this onerous obligation by requiring the relevant information from the buyer, e.g. a requirement that the fob buyer will notify the seller of the destination or a list of potential destinations in good time prior to the vessel loading. Gafta’s new clause goes some way to protecting an fob seller where the relevant destination details are not as contracted for, but an fob seller should still check the sales contract carefully to ensure it can comply with its obligation to produce a phytosanitary certificate.
This clause, however, creates a potential problem for the fob buyer. The buyer may now want to list the possible destinations in the contract to avoid an fob seller later using the new clause to avoid providing a phytosanitary certificate. Even with this list, the risk of changes to phytosanitary rules post contract is now a buyer’s risk.
It also creates a potential problem for fob sellers. Fob sellers selling on letter of credit terms will only be able to take advantage of the new clause if they insist that the phytosanitary certificate is not one of the payment documents under the letter of credit; it often is.
Vessel substitution is an area that often causes disputes and delays, even terminations. It is important for traders to be very familiar with the requirements of their contracts and, if necessary, to use an express clause at the time of contracting to meet their needs.
- Gafta communication to all members No. GA/2017/09: “Gafta – Contract changes 01 September 2017 – Corrected”; Gafta communication to all members No. GA/2017/10: “CORRECTION: CHANGES TO GAFTA CONTRACTS”.
- Henderson & Glass v Radmore & Co (1922) 10 Ll L Rep 727.
- Agricultores Federados Argentinos v Ampro SA  2 Ll Rep 157, 167.
- Cargill UK Ltd v Continental UK Ltd  1 Lloyd’s Rep 193.
- Ramburs Inc v Agrifert SA  EWHC 3548 (Comm), in respect of Gafta Contract No. 49.
- The text in square brackets applies to Gafta Contract No. 49 only.
- See FOSFA contract Nos. 4A, 51, 52, 53, 60, 82 and 202.
- Raw Sugar Basis 96ᵒ Pol. FOBS/FAS (SAOL/3). See clause 5.
- Effective 1 May 2017.
- As at April 2016. See Rule No. 7 of the Rules Relating to Contracts.
- Costs are incurred by the fob seller after the fifth calendar day.
- See sections 5 and 6.1 of both Shell’s General Terms & Conditions for Sales and Purchases of Crude Oil, 2010, and Shell’s General Terms & Conditions for Sales and Purchases of Products, 2010. See also sections 5.2 and 5.3 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products (2015 Edition, version 1.1).
- Save when the agreement is entered into after the eighth day, in which case the fob buyer must give two days’ pre-advice.
- Gafta communication to all members No. GA/2017/09: “Gafta – Contract changes 01 September 2017 – Corrected”.
Client Alert 2017-221