Kronos v. Sempra Oil, CofA

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Kronos Worldwide Ltd v Sempra Oil Trading S.A.R.L
English Court of Appeal: Thorpe and Mance LJJ., Evans-Lombe J: 23 January 2004
Edmund King, instructed by Ince & Co, for Kronos
Andrew W. Baker, instructed by Waterson Hicks, for Sempra Oil
This case addressed the single issue whether laytime can begin to run under a sale contract, even if the buyer has failed in its contractual obligation to provide a letter of credit? The Court of Appeal held that there should be a simple rule to govern such situations. Until the appropriate letter of credit is provided, a seller is not obliged to perform any part of the loading operation and laytime cannot start running.

DMC Category Rating: Developed

This case note is based on an Article in the February 2004 Edition of the ‘Bulletin’, published by the Marine and Insurance teams at the international firm of lawyers, DLA. DLA is an International Contributor to this website.

By a sale contract evidenced by telexes dated 24 and 25 April and 17 May 2001, Kronos Worldwide Limited agreed to sell and Sempra Oil Trading agreed to buy either one or two cargoes of gasoil per month "FOB one safe port/berth…". The sale contract provided for a 15-day loading period for each cargo "to be mutually narrowed to three days loading range (always minimum five days between liftings)". Payment was to be secured by an "irrevocable letter of credit to be opened promptly through a first class bank".

The provisions for laytime stated "As per charterparty…calculated as per charterparty terms, conditions and exceptions". Demurrage, if any, was also to be calculated in accordance with the charterparty.

The charterparty terms, as incorporated into the sale contract, provided for notice of readiness to be served after the vessel had arrived at port at the customary anchorage, berth or no berth, and for laytime to run from 6 hours afterwards, or from when the vessel was ready to load, whichever happened first.

On 8 May 2001, Kronos declared it would supply a second cargo in June 2001. The loading range was 20-30 June 2001, but this was subsequently narrowed to 28 - 30 June. The vessel duly arrived at port early on 28 June No letter of credit, however, was opened by Sempra until 5 or 6 July, when Kronos called for one. Loading then began on 9 July and was completed on 11 July.

Sempra argued that laytime began six hours after notice of readiness was given and expired 48 hours thereafter, which meant that the vessel was on demurrage for 11 days, 1 hour, 16 minutes, earning US$160,265. Kronos, however, argued that laytime did not begin until a reasonable time after provision of the letter of credit, which, it said, was not before 9 July, after which the vessel was loaded within the permitted laytime. Consequently, there was no demurrage due.

The purpose of this hearing was to decide a narrow point of law - could laytime begin to run under this contract before the letter of credit had been opened? All other issues, such as whether the notice of readiness was valid, or whether Kronos had waived the requirement for a letter of credit, were set aside for the present.

At first instance, the judge held that laytime could run prior to the opening of the letter of credit. In his view, the laytime provision could be treated separately from the contractual requirement for the letter of credit. Although he agreed that the letter of credit was a condition precedent to Kronos' obligation to load cargo, that did not mean that laytime only began to run when Kronos first became obliged to load. Alternatively, he suggested that, even if the provision of a letter of credit was a condition precedent to the running of laytime, it could be satisfied retrospectively.

The Court of Appeal disagreed. Laytime is the time allowed for loading, while the provision of a letter of credit is a condition precedent to any duty on the seller to perform any part of the loading operation. The two things could not be treated separately. There needed to be a clear rule in such situations. That rule is that, until the appropriate letter of credit is to hand, a seller is not obliged to perform any part of the loading operation and laytime cannot start to run


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