INTERNATIONAL TRADE DELIVERY OBLIGATIONS UNDER CIF CONTRACTS

It is easy to see how timing issues in relation to delivery under sale contracts can rapidly escalate into disputes. Late shipment or delivery can defeat a partys contractual purposes by, for example, having an impact on any on-sale arrangements and the pricing of the cargo, if pricing is anchored on or determined by reference to the bill of lading date. It can also provide a buyer with an opportunity of getting out of what has become an unprofitable deal. With so much hinging on precise timing, we are often asked to advise if and when exactly a party to a sale contract can terminate for breach of timing obligations relating to delivery. The answer to that question of course depends upon the particular terms of the contract but, as a general rule, time is of the essence in commercial contracts. That means that stipulations as to time are considered to be fundamental terms of the contract, breach of which justifies the innocent party terminating the contract. This briefing considers the parties obligations in respect of the timing of delivery under one of the most common international trade terms, CIF. 1. Classic CIF CIF terms are shipment terms meaning that the point of delivery is when the goods are placed on board the vessel. Of course, under a CIF contract, the seller makes the carriage arrangements. Under a classic CIF contract, the sellers obligation as to time of delivery relates only to the time for shipment of the goods at the load port. Accordingly, despite the fact that the seller makes the carriage arrangements, the seller does not make any commitment to the buyer as to when the goods will arrive at their intended destination. In fact, the seller is not under any positive obligation to ensure the goods actually arrive at the discharge port. Rather, the sellers duty is to conclude a contract of carriage with a carrier to undertake the transportation of the goods to the discharge port, coupled with a duty not to interfere with or prevent delivery by the carrier.

The classic CIF sellers obligation, in terms of the timing, is therefore based on a shipment date range rather than a delivery at discharge port date range. The obligation is simply to ship the cargo within the shipment period set out in the contract. To be precise, that is an obligation to complete loading within the contractual shipment period (as opposed to merely commencing the loading of the cargo within the shipment period). If the seller fails to do this, then the buyer may terminate the contract. 2. CIF with a loading laycan We often see parties using loadport laycans in their contracts which are, of course, standard features of voyage charterparties. However, a laycan is a different beast to a shipment period and the use of laycans can lead to unexpected and unwanted consequences. In the shipping world, a laycan is the period within which the chartered ship is supposed to arrive at the load port, the first day of the laycan being the earliest date upon which laytime can commence and the last day being the last day for arrival, after which the charter can be cancelled by the charterer. In the context of a CIF contract, where it is the sellers obligation to make the carriage arrangements and ship the goods, it is difficult to see how the laycan concept might usefully fit into that arrangement. It is perhaps easier to see how a laycan might appear more at home in a FOB contract, where the buyer is responsible for the carriage arrangements and may want to provide that he will not automatically be in breach of contract if his nominated vessel fails to arrive at the load port by the last day of the laycan (i.e. the cancellation date). However, the problem is that the word laycan when used in a sale contract is not the same as a shipment period.

In the Azur Gaz [2006] 1 LLR 163, for example, the parties had concluded a CIF contract for the sale of butane, which provided laycan: Feb 17 19 2003 and consequently eta gabes 20 Feb am La Goulette 19 Feb pm. The vessel arrived at the loadport within the laycan, but due to bad weather was not expected to berth until 3 March 2003. On 27 February, the buyers cancelled As between the parties to the sale contract at least, a CIF seller the contract, claiming the sellers had failed to ship the cargo is responsible for supplying the goods to be sold and the ship on within the agreed period, which they argued was 17 19 to which they are to be delivered. The CIF seller can, therefore, February. A dispute arose and the matter went before the ship the goods without the buyers involvement. Where the English courts. The judge held that the buyers were not entitled parties have agreed a time frame for shipment in a CIF contract, to terminate. The term laycan merely set out the window it is usually therefore the seller who determines exactly when, within which the vessel should arrive at the load port ready to (within the shipment window) to ship the goods. load; it did not mean shipment period. Since the sellers vessel

INTERNATIONAL TRADE DELIVERY OBLIGATIONS UNDER CIF CONTRACTS

had complied with the requirement that the vessel should arrive at the load port ready to load within the laycan, there was no breach by the sellers. The parties in that case were, therefore, in a contract where there was no express contractual time limit on the sellers in relation to making the cargo available at the load port. It is unlikely that the parties actually intended the use of a laycan to have that result. 3. Hybrid versions of the classic CIF contract We deal with the CIF delivered contract below, but there are various other hybrid versions of the CIF contract which are used. For example, contracts providing CIF [destination], delivery consistent with loading [load port] [date range]. If the subject cargo is not loaded within the date range stated it is difficult, giving the words their natural meaning, to say that delivery at the discharge port can then be consistent with loading between those dates. This term would, therefore, seem to have the same effect as stipulating a standard CIF shipment period.

provide contractual certainty in relation to delivery, CIF sellers are developing contract wordings designed to dilute their CIF delivered commitment as to the time when the goods will arrive at their destination. In this context, we are seeing the influx of traditional shipping phrases, for example parties committing to physical delivery of the cargo at the discharge port within the specified date range all going well , weather permitting, unforeseen circumstances excepted etc. Such phrases naturally create a great deal of uncertainty for the buyer as it will often be difficult for him to determine whether things have not gone well, or there have been unforeseen circumstances etc; and what the resultant effect has been in terms of delay and, therefore, whether the circumstances excuse the late arrival. In such cases, terminating a contract on the basis of the vessels lateness will be fraught with danger.

Certain oil majors standard terms and conditions also include terms designed to restrict attempts to place contractual burdens on the seller with regard to delivery at the discharge port of the CIF delivered goods by including provisions to temper the sellers obligations with regard to delivery. For example, BPs General Terms & Conditions for Sales and Another example is the reference to scheduled dates (e.g. basis Purchases of Petroleum Products 2007 contain terms explicitly scheduled loading [load port] [date range] ). Reference in the restricting the effect of the use of CIF delivered language. delivery terms to the scheduled loading dates does not Clause 7.3 of those terms provides: amount to a contractual obligation to load during those dates. But what is the contractual commitment created by such 7.3 CFR and CIF Indicative Discharge Date terms? This remains open to debate but it is arguable that, since Where the Seller expressly or impliedly provides the Buyer the information as to scheduling will usually be coming from the with a date or range of dates within which a nominated seller, he should be contractually obliged to ensure that that Vessel shall arrive at the Discharge Port these shall be information is given honestly and on reasonable grounds and indicative only, made by the Seller as an honest assessment the contract terminable by the buyer if it is not. without guarantee. The Seller shall not assume any responsibility for the delivery of the Product at the Discharge 4. CIF delivered Port and save as regards the calculation of laytime and As we have seen, under a classic CIF contract, the seller demurrage as set out in Section 13 below the rights and provides no guarantee as to the time of delivery at the obligations of the parties including the provisions of Section discharge port and the CIF buyer remains in the uncertain 7.1 shall be the same in all respects as for CFR and CIF position of not knowing (or at least not knowing exactly) when deliveries. the goods are going to arrive at their ultimate destination. This clearly creates uncertainty for the CIF buyer. It is, however, The result of such a provision is that any term in the contract possible to modify the classic CIF contract into what is called a that on the face of it obliges the seller to deliver at the CIF delivered contract. The use of CIF delivered terms is discharge port within a date range will not actually have that especially well-established in the oil trade, where the majority effect. of CIF trades are conducted on a delivered basis. Comment In a CIF delivered contract, the seller commits that the ship will In summary, in order to avoid unexpected consequences, best arrive at the discharge port in time to discharge the cargo practice when entering a CIF deal is to (a) decide whether you within a specified delivery window, notwithstanding the fact wish to contract on a classic CIF or a CIF delivered basis and (b) that delivery in the legal sense (the trigger for the passing of provide clearly for your choice in the contract. Unless spelled risk) still occurs on shipment. In a CIF delivered sale, failure to out clearly in the contract, there may be considerable arrive at the discharge port in time to discharge the cargo by uncertainty as to whether lateness justifies the termination of the end of the delivery window specified in the contract would the contract or not. be a breach of condition, entitling the buyer to reject. It is important that the parties make their intentions clear as to whether the CIF seller is agreeing to perform the obligations of the classic CIF seller or the CIF delivered seller; clear words are required to displace the assumption that a CIF seller does not intend to commit to a time when the goods will arrive at the contractual destination. An express undertaking is therefore required, evidencing that the seller has assumed responsibility for the physical delivery of the cargo at the discharge port within the specified date range. 5. CIF delivered watering down provisions Ironically, almost as quickly as CIF buyers in the oil trade have negotiated themselves into CIF delivered territory so as to

Stuart Shepherd Partner, London stuart.shepherd@incelaw.com

Jane Fitzgerald Solicitor, London jane.fitzgerald@incelaw.com

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