ERG Raffinerie v. Chevron USA (CofA)

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DMC/SandT/07/31
ERG Raffinerie Mediterranee Spa v Chevron USA Inc
English Court of Appeal: Buxton and Longmore LJJ, Sir Martin Nourse: [2007] EWCA Civ 494: 22 May 2007
Jeffrey Gruder QC and Robert Bright QC, instructed by Fishers, for the appellant buyer, Chevron
Stephen Males QC, instructed by MFB, for the respondent seller, the Refinery
CONTRACTS - SALE OF GOODS – SHIPPING: CANCELLATION: CONDITIONS: DELAY: DELIVERY: DEMURRAGE: FOB CONTRACTS: FRUSTRATION: LAYTIME: LOADING: OIL AND GAS INDUSTRY: REPUDIATION: SHIPMENT: TERMINATION: TIME OF THE ESSENCE: LAYCAN PROVISIONS: CREATION OF NON-STANDARD FOB CONTRACT IN WHICH TIME OF SHIPMENT NOT OF ESSENCE
Summary
Where, under an FOB contract containing a delivery period that was later narrowed to a two-day laycan period, the vessel arrived within the laycan window but the sellers failed to load the cargo by the end of the delivery period, the buyers were not entitled to terminate the contract four days after the end of the delivery period even though the cargo had not yet been made available for loading. Although the obligation to load the vessel within the specified laytime had been breached by the sellers, the buyers were not entitled to terminate until a frustrating time had elapsed, which had not happened in this case. Until that occurred, the buyers’ remedy was limited to the demurrage provided by the sale contract.

DMC Category Rating: Confirmed

This case note is based on an article that appeared in the August 2007 edition of the Shipping, Offshore and Transportation Bulletin produced by the London office of DLA Piper UK LLP

Background
On 11 May 2004, the parties to an fob sale contract agreed to a 4-day delivery period from 27-30 May. On 21 May, the buyers, in accordance with the terms of the contract, narrowed that period to a 2-day range of 29-30 May. On 26 May the sellers started to blend the cargo but encountered technical problems with the plant. Repairs at the plant were begun but not completed before 3 June.

On 28 May, the vessel nominated by the buyers arrived at the port and gave notice of readiness but it could not begin to load because of the problems with the plant. On 3 June, loading had still not occurred and the buyers informed the sellers that they accepted their "failure to commence loading…as repudiatory of the sale contract, which is hereby terminated." The buyers ordered the vessel to leave.

Delivery clause
The delivery clause in the contract provided:
FOB ISAB REFINERY…IN THE PERIOD 27-30/05/2004.
BUYER WILL NARROW SUCH PERIOD TO A TWO DAY LAYCAN LATEST BY 21/05/2004
THE LAYCAN IS AN ESSENTIAL ELEMENT OF THE CONTRACT, IN FAVOUR OF SELLER.

The issue
The sellers claimed that the buyers were not entitled to terminate the contract and that it was therefore they who were in repudiation. The buyers argued that the delivery period was a condition of the contract, non-compliance with which entitled them to terminate the contract and sue for damages in respect of any loss they had suffered. At first instance, the Commercial Court had found in favour of the sellers.

The buyers contended that the sellers were obliged to begin loading the vessel at such a time as would permit it to complete loading by end of the delivery period, i.e. by the end of 30 May. Given that the contract provided for laytime of 36 hours plus 6 hours' notice period, this would mean that loading would have had to begin by 0600 hours on 29 May. Of course, for the reason set out above, it did not. In the buyers' view, the failure to load entitled them to terminate the contract, which they ultimately did on 3 June. In support of their stance, the buyers emphasised that:

1. Times of delivery are almost always of the essence in mercantile contracts;
2. The price of the oil was calculated by reference to average prices around the delivery date;
3. The delivery clause in the contract was primarily concerned with delivery of the cargo (in which context the sellers were in breach of their obligations) and less with the laycan element, which was expressed as "an essential element of the contract, in favour of seller".
4. The parties had also expressly agreed the loading dates orally.

The decision
In line with the courts' normal approach, the Court of Appeal found that the delivery clause had to be read as a whole and, when so read, the laycan provisions were important. In an fob contract, it is the buyer who has control of the vessel and is in a similar position to an owner in a charterparty situation. Accordingly, where a laycan provision is used in such a contract, it is the buyer who is at risk of the vessel being cancelled if it does not present itself before the last day of the laycan period.

The laycan provision thus gives the fob seller the right to cancel the contract and the other side of that coin is that the buyer is entitled to present the vessel at any time up to 2400 hours on the last day of the laycan period, in this case, 30 May. In those circumstances, the parties cannot also have intended that the seller must have completed loading by 2400 hours on 30 May as that would create an absurd situation.

The Court found instead that the seller would in fact be bound to load within the contractually agreed laytime (broadly 36 hours from NOR in this case) and a failure to do so will be a breach of contract, but not a repudiatory breach. That was primarily because terms as to delivery are not generally regarded as conditions of the contract entitling the innocent party to accept a breach as repudiatory. In addition, as the court pointed out, there would be great practical difficulties if the buyers were able to terminate the contract when the vessel had only partly loaded its cargo.

The court therefore dismissed the appeal, reminding the parties of the meaning of "condition" in its technical legal sense: If a party does not comply with a term of the contract which is a condition (as opposed to a warranty or innominate term), the "innocent party" can treat the "guilty party" as being in repudiatory breach, can accept the repudiation by bringing the contract to an end and sue for damages, if he has suffered any loss. The delivery clause in this contract was not a condition.

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