LONDON ARBITRATION – SALE OF GOODS – TRUE NORTH

An interesting London arbitration was published earlier this month involving a sale of goods dispute.

Pursuant to a sales contract the Seller chartered a ship on voyage basis to carry a consignment of feed barley from Kiliya (Ukraine) to Benghazi (Libya) on CFR (cost and freight) terms.

The case related to delay sustained by CFR Buyers in making timely payment of freight to Sellers who as a result refused to allow the ship to discharge. The vessel incurred demurrage in the sum of USD 70,917 which Owners claimed from the Sellers in their capacity as Charterers. Sellers in turn sought to recover this loss from Buyers in arbitration arguing it was them that had to bear the consequences of the delay in Owners receiving payment of the charterparty freight.

In brief, the Sellers submitted that the vessel’s delay at the discharge port was the result of Buyers’ failure to pay for the goods in compliance with the terms of the Sales Contract. Sellers argued that no losses would have been suffered had Buyers paid freight at least before the vessel reached Benghazi as this would have allowed them to pay freight to the Owners. The Buyers denied liability asserting that Sellers’ obligation to pay freight under the charterparty was separate from the obligations arising under the sales contract so that, if they had breached said obligations, it did not necessarily follow that they were responsible for demurrage at the discharge port.

The arbitration tribunal agreed with the Buyers dismissing Sellers claim for demurrage in its entirety. Absent agreement in the charterparty suggesting otherwise, the arbitrators held that the Sellers had an obligation in their capacity as charterers to pay freight to the Owners. There was no evidence that Owners were to look to Buyers for payment. Indeed freight invoices issued by the Owners were addressed to the Sellers (charterers) and not the Buyers. Equally, Sellers’ invoices to the Buyers required them to payment to the Sellers and not the Owners.

Arbitrators further agreed with Buyers in that even if they breached the sales contract by paying late, the Sellers by taking the risk of delaying discharge of the vessel broke the chain of causation that there might have been between Buyer’s breach under the sales contract and the demurrage incurred by the vessel. Sellers should have mitigated damages flowing from Buyers’ breach by taking steps to remit freight to the Owners themselves before the ship went on demurrage.

Conclusion

Though one must feel some sympathy towards Sellers in that, after all, it was the Buyers who delayed the freight payment, ultimately it is for the Seller to meet his contractual obligations arising out the charterparty with the Owner, which means they must bear the risk of late payment of freight by Buyers even if that late payment was in breach of the sales contract 

Although as a matter of common law, arbitration awards do not set binding precedent on future decisions made by other arbitrators or Courts, this case highlights the need by CFR Sellers to ensure that their charterparty terms or at least clauses dealing with payment of freight and bills of lading are strictly back to back with the sales contract. Moreover, if Sellers wish to attempt to pass any payment responsibility for ocean freight direct to the Buyers, they must agree so with Owners so that invoices are expressly addressed to them.   

This case is a good illustration of how complex legal disputes of shipping nature can arise under sales and purchase agreements. Swift and cost effective legal advice becomes key in these circumstances which generally falls outside Assured’s standard FD&D cover.

TRUE NORTH, a claims advisory service part of the MECO GROUP, can fill this gap by providing legal support to Assureds embroiled in sale and purchase disputes on favourable and flexible terms.