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Frequently Overlooked Risk Management Issues in Contracts of Affreightment and Sale Contracts

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Frequently Overlooked Risk Management Issues in Contracts of Affreightment and Sale Contracts Frequently overlooked risk management issues in contracts of affreightment and sale contracts 2021 AMPLA Queensland Conference Chris Keane MinterEllison 18 June 2021 The focus of today’s presentation - risk associated with two contracts used to facilitate the export of Australian commodities: . the sale contract / offtake agreement / supply agreement (sale contract) . the contract of affreightment / voyage charterparty / bill of lading (sea carriage contract) Specific focus is on risk and risk mitigation options that are frequently overlooked (both at the time of contract formation and also when disputes arise) 2 Risk arising out of seemingly straightforward issues . Duration of the sale contract - overarching issue that impacts on many other considerations; legal and commercial considerations will overlap . Port(s) of loading and port(s) of discharge - relevant considerations include: access to certain berths; special arrangements regarding loading and unloading; port congestion and other factors likely to cause delay; and the desirability of not requiring a CIF buyer to nominate a specific port of unloading (e.g. “one safe port and one safe berth at any main port(s) in China…”) . Selection of vessel - risk will depend on which party to the sale contract is responsible for arranging the vessel; CIF sellers need to guard against the risk of selecting an unsuitable vessel; FOB sellers need to ensure they have a right to reject an unsuitable vessel nominated by the buyer 3 Risk arising out of seemingly straightforward issues . Selection of contractual carrier - needs to be considered as an issue separate from the selection of the vessel; what do you know (and not know) about the carrier?; note the difficulties the contractual carrier caused for both the seller and buyer in relation to the ‘Maryam’ at Port Kembla earlier this year; proper due diligence is critical; consider (among other things) compliance with anti-slavery, anti-bribery and sanctions laws and issues concerning care of seafarers, safety and environment . Use of letters of credit - preferable to avoid ambiguous (but frequently used) clauses permitting the buyer to nominate a “first class international bank” and instead include an all-inclusive list of banks acceptable to the seller; include a requirement that the buyer must provide a draft version of the letter of credit to the seller for comment and acceptance at least several business days before the commencement of laycan; stipulate that any costs (especially demurrage) associated with delays arranging a fully workable letter of credit will be to the buyer’s account 129907490 4 Risk arising out of seemingly straightforward issues . Choice of law clause - buyers in Asia will frequently insist upon foreign law, especially England and Singapore; this is usually okay for both charterparties and sale contracts but still important to identify and consider differences to Australian law (e.g. legislative provisions regarding frustrated contracts, implied duty of good faith); it is always advisable to obtain formal advice regarding application of any foreign law . Dispute resolution clause - arbitration seated in London or Singapore is the norm for charterparties and LMAA / SIAC / SMAC is arguably preferable to arbitration seated in Australia; note that many disputes determined in accordance with a dispute resolution clause providing for foreign arbitration proceed electronically and will not involve overseas travel (even after COVD-19 is behind us); problems can arise from the simplest oversights (e.g. sale contracts containing an exclusive, rather than non- exclusive, jurisdiction clause in favour of the courts of a particular State - are you certain the selected courts will always be the most appropriate forum to resolve any dispute?) 129907490 5 Use of Incoterms in sale contracts . CIF / CFR and FOB are the two most commonly used Incoterms for shipment of solid and liquid bulk commodities . If the sale contract is CIF - the seller must arrange the vessel . If the sale contract is FOB - the buyer must arrange the vessel . However, there will be occasions when both CIF and FOB are entirely inappropriate - e.g. CIF and FOB should never be used for containerised cargo or for cargo that is delivered into the custody of the carrier other than directly onto the vessel 6 Use of Incoterms in sale contracts . Incorrect use of an Incoterm can result in a sale contract that is internally inconsistent and thus inherently uncertain . It is almost always appropriate to stipulate that any Incoterm used is subject to any contrary provision in the contract - e.g. “CIF has the meaning given by Incoterms 2020, subject to any contrary provision of this Agreement” 7 What type of sea carriage contract is appropriate? . Contract of affreightment - strictly speaking, any contract for the carriage of goods by sea is a ‘contract of affreightment’; however, in the shipping and commodities sectors, contract of affreightment usually means a contract concerning volume freight tasks where a series of voyages (a.k.a. ‘liftings’) are required at a specified frequency and/or within specified date ranges over an agreed period . Time charterparty - a contract for the provision of a vessel for an agreed period; hire is paid (usually) at a daily rate for the duration of the time charter; the charterer must pay for fuel, port charges and stevedores; the charterer nominates the cargo and the voyages that will be undertaken 8 What type of sea carriage contract is appropriate? . Voyage charterparty - a contract for the provision of a ship for a specific voyage where instead of paying a daily rate of hire, payment is calculated by reference to either the amount of cargo that is carried, a minimum quantity of cargo or a lump sum amount . Bills of lading - frequently used for smaller cargoes, especially containerised cargo; performs three functions: . evidence of the contract of carriage between the shipper and carrier . as a receipt for the goods shipped on board the vessel . as a document of title . Sea waybills are an important variation of bills of lading, used in instances where a negotiable document of title is not required 129907490 9 What type of sea carriage contract is appropriate? . Bills of lading are also used in conjunction with voyage charterparties and contracts of affreightment . Where the voyage charterer of a vessel is also the shipper of the cargo on board the vessel: . any bill of lading issued by the carrier acts only as a receipt for, and a document of title to, the cargo; and . any waybill issued by the carrier acts only as a receipt (because the contract of carriage between the charterer / shipper and the carrier is the voyage charterparty) 129907490 10 What type of sea carriage contract is appropriate? . It is important to consider the provisions in the sale contract regarding sea carriage documents - does the nominated sea carriage document align with the selected Incoterm?; is there a more appropriate sea carriage document?; is the allocation of rights and obligations between buyer and seller in relation to sea carriage document appropriate? 129907490 11 Voyage charterparties . Most commonly used type of sea carriage contract for bulk commodities (solid and liquid) shipped out of Queensland . 3 overarching issues in relation to voyage charterparty risk: . a dispute with the carrier has the potential to become a major problem for both parties to the sale contract (i.e. not just the party responsible for contracting with the carrier) . carriers are frequently unwilling to compromise, often because they are answerable to interested parties upstream . charterers are potentially liable to carrier in contract, tort (including damage to hull) and claims unique to maritime law (salvage, general average) 12 Voyage charterparties and the nominated vessel - relevant parties . Interested parties are not limited to the ‘Owner’ and ‘Charterer’ . Reference to ‘Owner’ in a charterparty is (more often that not) a misnomer . The interests of other parties will impact upon the terms of the charterparty and any disputes relating to it 13 Incorrect (almost always*) Owner Voyage Charterer * in Australia the most significant exception to the rule is coastal shipping 14 Correct (though the number of parties may vary) Owner Disponent owner / bareboat charterer Time charterer / ‘head charterer’ / (confusingly referred to as ‘Owner’) Voyage charterer / ‘sub charterer’ 15 The interested parties upstream . The existence of interested parties upstream, as per the previous slide, needs to be kept in mind during the negotiation of charterparties (i.e. some requests might be unrealistic, given the carrier’s obligations as a charterer itself) . It is critical that the existence of interested parties upstream is kept in mind in the event that a dispute arises between the carrier and the party to the sale contract that has contracted with the carrier - this will need to be carefully factored in when considering settlement tactics 129907490 16 Key clauses / provisions in a voyage charterparty relevant to demurrage and detention . Loading port(s) and discharge port(s) . Loading and discharge rates - are they realistic?; very important as it will impact upon laytime and, as a consequence, also demurrage (refer to following slides) . Laycan period - this is when the vessel must present itself at the port of loading, ready to load the cargo; laycan will be addressed in the charterparty and should also be properly addressed in the sale contract; how flexible is the laycan spread?; what rights do you have as a seller (against the buyer and, where applicable, the carrier) if the vessel does not arrive at the port of loading within the laycan period? . Notice of readiness - this notice will trigger the commencement of laytime so it is critical for both buyer and seller to note when the carrier is permitted to issue the notice under the charterparty 17 Key clauses / provisions in a voyage charterparty relevant to demurrage and detention . Laytime - this is the amount of time the carrier allows the charterer to load and discharge the cargo; either expressed as a number of hours or days or (more likely, in relation to bulk commodities) as a number of tonnes per day .
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