COMMODITIES | NOVEMBER 2019

COMMODITIES: This is the third in our series looking at common problems which can arise COMMON ISSUES in oil trading contracts. In a previous IN OIL TRADING article, we looked at issues arising from the use of the term “laycan” CONTRACTS – in sale contracts. Here, we consider IN why and how demurrage clauses are included in sale contracts SALES CONTRACTS and what effect they have. “English law will not imply terms regarding and demurrage into a contract, so express written terms must be included if the parties want this option.”

Why is a demurrage clause needed Is an express term required in order •• Importing the in a sale contract? to claim demurrage? laytime and demurrage regime into the sale contract A demurrage clause in a charterparty Yes: English law will not imply terms will incorporate all rules of is a means by which the parties agree regarding laytime and demurrage interpretation, including the rule upfront what the charterer will pay into a contract, so express written that demurrage is the sole remedy to the owner if laytime - the time terms must be included if the parties for delay3. This is restrictive, in that allowed for loading and unloading want this option. demurrage then becomes the the - is exceeded. Can I just incorporate the only remedy available for breach If the charterer is also a buyer or charterparty provisions? of loading rate or laytime. You will seller under a sale contract, it will only be able to claim damages There are risks associated with just not have full control over how in addition to demurrage if you incorporating charterparty provisions: much time is spent in loading and can prove a separate breach of discharge. It may therefore find itself •• You may not know what the contract, for example, a failure with a demurrage liability under the charterparty terms are, especially to deliver within the DDR. charterparty that it wants to pass if it has not yet been agreed. Case study: “Demurrage as onto its counterparty under the sale •• It will not work if you have a time per charterparty” contract, because the counterparty charter, since time charters do not was the cause of the delay. In order In OK Petroleum v Vitol4, the English include demurrage provisions.1 to achieve this, demurrage provisions Commercial Court considered what are often included in sale contracts. •• It may give a false sense of terms would be incorporated into security that you are “back-to- a sale contract which stated that However, a sale contract is very back” when you are not. The demurrage was “as per charterparty” different from a charterparty in terms obligations in the sale contract will and laytime “36 hours + 6 hours of rights and obligations. This can override those in the charterparty. SHINC.” As is not uncommon in the lead to confusion as to whether or For example, if payment under the sale of goods, the charterparty was how much demurrage is due, where sale contract is by L/C, and that not drawn up until after the sale the delay is not simply to the vessel, L/C is not opened, the seller will contract had been signed. The Court but in giving or taking delivery of have no obligation to deliver and made the following findings: goods. For example, what if the vessel laytime cannot start to run2. arrives before (or after) the agreed •• The term had the effect of time for delivery; what if no letter of •• As the seller, you may want incorporating “the provisions credit (“L/C”) is opened on time; what time to start running (or end) in the charterparty specifying if an FOB buyer fails to nominate at a particular time or date – for the rate of demurrage and a vessel, or give the ETAs required example, the beginning of the those clauses going to the under the sale contract? delivery date range (“DDR”). calculation of demurrage” (not laytime), if not in conflict with express terms of sale contract. 1 Malozzi v Carapelli [1976] 1 LLR 407. 2 Kronos Worldwide Ltd v Sempra Oil Trading SARL [2004] EWCA Civ 03. 3 See Bonde, Richco v Toepfer [1991] 1 LLR 136. The Claimant could not recover back carrying charges, (additional storage costs at the loadport) which it had had to pay. 4 OK Petroleum v Vitol [1995] 2 Lloyd’s Rep 160. •• It did not incorporate “ancillary” depend on the language of the or collateral provisions, such provision. If there is reference to a If you would like to discuss as the arbitration, jurisdiction charterparty in the sale contract, any of the issues raised in this and time bar clause. A specific then the nature, purpose and briefing, please contact: incorporating provision was effect of that reference is critical. required for that. This matters because if demurrage is •• Such general terms of not an indemnity: incorporation will only incorporate •• you can make a profit provisions which are “germane from demurrage. and relevant” to the contractual SARAH HUNT rights and obligations arising •• you cannot demand to see Partner, Geneva under the sale contract. the owners’ claim from your T +41 (0)22 322 4816 counterparty. Can you recover demurrage under E [email protected] a sale contract even if you have not •• clear words must be used if you paid demurrage under the want your demurrage clause to charterparty? operate as an indemnity. In Fal Oil v Petronas5, the Court was asked to decide whether Fal Oil (as shipper under the charterparty and seller under the sale contract) JEREMY DAVIES could claim demurrage from Consultant, London Petronas (the buyer) under the sale T +41 (0)22 322 4810 contract even though no demurrage E [email protected] was due from Fal Oil under the corresponding charterparty. At first instance, the English Commercial Court held that the obligation to pay demurrage operated as an indemnity, so that Fal Oil could not claim from Petronas. On appeal, the Court of Appeal AMANDA RATHBONE held that it was not an indemnity Professional Support Lawyer, and that the provisions in the sale Commodities, London contract operated as an independent T +44 (020 7264 8397 code. It found that each case will E [email protected]

5 [2003] EWCH 2225 (Comm). HFW has over 600 lawyers working in offices across the Americas, Europe, the Middle East and Asia Pacific. For further information about our commodities capabilities, please visit www.hfw.com/commodities

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