I see no ships – condition precedents under FOB contracts
A recent judgment of the Commercial Court suggests that a FOB buyer can be excused from nominating a vessel by an unaccepted renunciation of contract by a seller. This blog questions the court's approach in this case and examines the basic principles engaged.
Shipment under an FOB contract is a collaborative exercise between seller and buyer and it is well recognised that the nomination and provision of a vessel by the buyer, in accordance with the agreed shipment period, is a condition precedent to the seller's obligation to ship the goods. Indeed it is physically impossible for the seller to "ship" the goods if the buyer does not provide a vessel. The recent judgment in Vitol S.A v Beta Renowable Group S.A  EWHC 1734 suggests that a buyer can be excused from nominating a vessel by an unaccepted renunciation of contract by a seller. We would, however, advise caution in relying on this decision.
The facts of the case
Under 4 separate contracts Vitol bought 4,500 mt of biofuel from Beta, FOB Bilbao with a shipment period of 16 - 30 June 2016. The contract required Vitol to nominate the performing vessel(s) 3 working days prior to arrival of the vessel at the loadport.
Furthermore, the contracts provided that "the buyer's obligations with regard to the timing of lifting will be fulfilled provided that the nominated vessel arrives at the loadport and gives notice of readiness by 24:00 on the last day of the lifting period."
It was common ground that this meant that the deadline for Vitol's nomination was 24.00 on 27 June 2016.
On 1 June 2016 Beta advised that their plant had stopped production and as a result they would not be able to perform the contracts and proposed a "washout" of those contracts. Further correspondence followed without a solution being reached and at trial Beta accepted it had made it clear (in communications dated 1, 15 and 17 June 2016) that it was unable to perform the contract and thus were in anticipatory breach by renunciation.
But Vitol did not expressly accept Beta's repudiatory breach and terminate the contract at any time before the deadline for nomination of a vessel or indeed the deadline for the arrival of that vessel at the loadport. Indeed whilst the point is not discussed in the judgment, the correspondence from Vitol throughout June 2016, in which it insisted on performance by Beta, appears to positively affirm the contracts. Vitol did eventually give written notice of termination of the contracts on 7 July 2016; and when doing so relied on Beta's alleged failure to deliver within the "delivery window".
Despite not terminating the contacts for breach (and indeed arguably affirming the contracts) Vitol did not nominate a vessel or put in a vessel to load within the above deadlines or at all.
Vitol then made a claim against Beta for damages. Beta's defence on liability was that whilst they were in renunciatory breach Vitol had not accepted such breach as bringing the contract to an end before the deadline for their vessel nomination and thus Vitol remained obliged to fulfil its obligation under the contracts with regard to nominating a vessel(s). Further, since it was a condition precedent to their obligation to supply the biofuel that Vitol nominate a vessel(s) on which to load it and that never happened they were not in breach in failing to deliver biofuel under the contracts.
Vitol's principal response to this argument was that their failure to nominate amounted to an acceptance of Beta's repudiation.
The Court's findings
The Court found that Vitol's failure to nominate a vessel(s) did not amount to an acceptance of Beta's renunciatory breach.
Mrs Justice Carr then went on expressly to consider the question "Did Vitol's failure to nominate by midnight on 26 June 2017 (sic) relieve Beta of its obligation to deliver the biofuel?" (its is assumed that the Judge intended to refer to 27 June 2016).
The Judge was referred to and cited the relevant authorities and reference texts which made clear that at common law:
- It is the duty of an FOB buyer to nominate a vessel and that is a condition precedent to the seller's duty to ship the goods;
- If shipping instructions/nominations are not given within the time allowed by the contract, the seller is not liable for damages for non-delivery; and
- Where a renunciation is not accepted the rights and obligations under the contract continue to subsist for the benefit of both parties.
However, the Judge appears not to have followed the above principles and concluded that:
"It is relevant to examine the purpose of the condition precedent contended for by Beta. It is to enable performance by the seller under the Contracts. When the parties know that such contractual performance is impossible, as was the case here, the obligation to nominate is simply stripped of its purpose and otiose. Without an assumed ability to perform, there is no rationale for the existence of a condition precedent. On the facts of this case, where to both parties’ knowledge, the Contracts could not and would not be performed by Beta, the condition precedent contended for does not thus arise on a proper construction of the Contracts."
The Judge's reasoning is difficult to follow. The post contract conduct of the parties can't be relevant to the question of whether the contract was subject to such a condition precedent and it is suggested that it plainly was. It may be that by word or conduct compliance with such condition precedent could be waived but it appears from the judgment that Vitol did not maintain such an argument; indeed their case on acceptance of renunciatory breach assumed a continuing obligation to nominate.
On the back of her finding that contrary to what was implicitly Vitol's primary case, Vitol were under no obligation to nominate a vessel by 27 June 2016, the Judge found that Beta were liable to Vitol and awarded Vitol damages of US$351,830.25.
However, the basis for the finding of breach by Beta is not clear. In particular it is not clear whether the breach which the Judge concluded gave a right to damages was Beta's anticipatory breach (evidenced by their June correspondence) or their actual breach in failing to ship the goods. This is not clear because a large section of the judgment concerns itself with the question of whether Beta was "discharged of its further obligations under the contract by reason of Vitol's failure to make the required nominations under the Contracts….." which would be irrelevant if the relevant breach was Beta's earlier anticipatory breach. Indeed the Judge concludes that "I am unable to accept on the facts of this case that there was no breach of contract by Beta in failing to deliver the biofuel because Vitol did not nominate under the Contracts". But it is difficult to see how Beta can have "failed" to deliver since without Vitol presenting a vessel to take delivery it was impossible for Beta to deliver.
It is a well-established principle that unless and until a renunciatory breach is accepted the rights and obligations under the contract continue to subsist for the benefit of both parties; in other words it is vital for the innocent party to continue to perform its obligations whilst the contract remains extant. There can be little doubt that in this case the shipment of the biofuel by Beta required Vitol to nominate and procure a vessel to load it and as a matter of contract it would be a breach by Vitol themselves to fail to do so.It is easy to see why Vitol might have regarded making a nomination pointless in all the circumstances and why there was a temptation, irresistible as it transpired, for the Court to find that they were somehow relieved from doing so. However, it is suggested that the basis for the Court doing so on this case is flawed and that any trader finding itself in the position Vitol found itself in this case should not assume that another tribunal would follow the Court's approach. Much safer to make a decision to accept the counterparty's repudiatory breach and give clear notice of that acceptance.