Extension clauses in FOB contracts

by Reed Smith
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The High Court has recently considered the purpose and effect of the GAFTA FOB contract “Extension of Delivery” clause, which entitles a buyer to claim an extension to the delivery period. This alert considers the conclusions reached in the Nidera BV v Venus International Free Zone for Trading & Marine Services SAE case.

Background

Extension clauses are a regular feature of both CIF and FOB contracts, usually giving one party an automatic right to extend the contract period. Without an express extension clause, a party may find itself in breach of an important term for late performance (unless reliance can be placed on a force majeure clause), leading to a default.

In CIF contracts, extension is usually in a Seller's option, giving a right to extend the shipment period, usually with some financial cost to the Seller. Traders using “hybrid” CIF contracts with some arrival terms – e.g. arrival dates rather than simple shipment dates/range – should be aware that extension clauses are difficult to operate in such hybrid contracts.

In FOB contracts, extension is more typically (but not always) a Buyer’s option: the trigger for the Seller’s obligation to load is the arrival of the Buyer’s vessel and the time period provided in the contract for performance is often the time for the arrival of the Buyer’s vessel at the loadport rather than a shipment period for completion of loading that vessel.

In the GAFTA FOB contracts, extension is in a Buyer’s option and the question in Nidera v Venus was in what circumstances could the Buyer exercise the option – the importance of the issue lay in a prohibition of export and when the contract was cancelled because of that prohibition.

The Nidera v Venus case – the facts

The Seller agreed to sell Ukrainian yellow corn on FOB terms. The contract incorporated GAFTA Contract No. 49.

The “Extension of Delivery” clause in the GAFTA 49 contract (which provides terms for the delivery of goods from Central and Eastern Europe in bulk or bags on an FOB basis) is at Clause 8, which reads as follows:

“8. EXTENSION OF DELIVERY – the contract period of delivery shall be extended by an additional period of not more than 21 consecutive days, provided that Buyers serve notice claiming extension not later than the next business day following the last day of the delivery period. In this event Sellers shall carry the goods for Buyers’ account and all charges for storage, interest, insurance and other such normal carrying expenses shall be for Buyers’ account unless the vessel presents in readiness to load within the contractual delivery period.

[…]

Should Buyers fail to present a vessel in readiness to load under the extension period, Sellers shall have the option of declaring Buyers to be in default, or shall be entitled to demand payment at the contract price plus such charges as stated above, less current FOB charges against warehouse warrants […]”

The Buyer’s vessel in this case arrived and tendered NOR in advance of the contractual delivery period. However, during the delivery period the Ukrainian government published resolutions which implemented a quota system over the export of corn. The Seller relied upon the Prohibition Clause at Clause 13 of GAFTA 49 (which provides that the contract is cancelled where shipment is prevented due to a legislative act restricting export effected by the government of the country of origin of the goods) and advised the Buyer that it might not be able to load during the delivery period.

At the end of the delivery period, the Buyer claimed an extension of 21 days pursuant to Clause 8 of GAFTA 49. Following the expiry of the original delivery period, the Seller attempted to cancel the contract pursuant to the GAFTA Prohibition Clause. The Buyer sent a message to the Seller stating that it viewed this attempted cancellation as a repudiatory breach of contract, which brought the contract to an end.

The Nidera v Venus case – the decision

In practice, Clause 8 of GAFTA 49 is usually relied upon by a Buyer where it is unable to present a vessel at the load port within the delivery period. Arguably, this might be recognised as the commercial purpose of the clause: it is intended to benefit the Buyer by giving it extra time to perform this obligation. This understanding is re-enforced by the later wording of Clause 8, which clearly links the right to an extension to the presentation of the vessel within the delivery period. This was the position taken by the Seller in Nidera v Venus: that the intention of the contract drafters, and the understanding of the trade, is that the right for a Buyer to extend the delivery period is to be limited to circumstances in which it is unable to present the vessel within this period.

This was not, however, the view of the GAFTA tribunal, the Board of Appeal or the High Court, all of which found in favour of the Buyer. The High Court agreed with the GAFTA arbitrators that there is nothing in Clause 8 which qualifies or limits a Buyer’s right of extension. The Seller in Nidera v Venus may (it was said) have been able to obtain the required licence from the Ukrainian authorities and ship the goods during the extension period, and there was no reason why a Buyer should not be entitled to extend the delivery period so that this could occur. The Seller’s attempted cancellation was accordingly a repudiatory breach of contract (which would lead to damages being payable to the Buyer).

The court’s justification for this conclusion was that it provides certainty for the trade: if a clause is not obviously limited on its face, it should not become subject to any implied limitations when interpreted by arbitrators and the courts.

Practical consequences

Buyer’s perspective This decision is helpful for a Buyer where it wishes to receive the relevant goods but shipment is delayed for a reason other than the vessel’s failure to present on time. For example, a vessel might arrive within the delivery period but then break down, or the vessel for whatever reason (such as a limitation on export as in Nidera v Venus) might fail to load. In both of those circumstances, the Buyer might wish either to substitute a new vessel for the one it has previously nominated, or “wait and see” whether loading can take place at a later time. The Buyer can accordingly use its right under Clause 8 to buy some time for it to take one of these options, rather than simply accepting that it will not receive the goods.

Seller’s perspective This decision is potentially worrying for a Seller, as it will need to continue to make attempts to load/obtain export licences for a more extended period and must take care in exercising any options available to it under the contract and take account of potential extensions of the contract period.

General points

  • The case indicates the importance of looking at the exact wording of any incorporated contract terms, rather than simply looking at the commercial purpose.
  • The case reminds traders that a cancellation or termination which is premature risks being a repudiation of the contract, so extreme care should be taken with the timing of any such messages.
  • In particular, extension provisions in the contract must be considered when working out the timing of any cancellation or default.
  • Most extension clauses have specific times set out by which the extension option must be exercised – traders must take care to be in time or the option is lost.
  • As mentioned at the outset, hybrid CIF contracts with arrival terms with extension provisions can be especially difficult to operate where there is no express “shipment” period, but the extension clause timing is based on the shipment period.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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