Article

Prior History: Sempra Oil Trading S.A.R.L. v. Kronos Worldwide Ltd. [2003] 1 Lloyd's Rep. 567.

Note: Seller, Kronos Worldwide Limited, and Buyer, Sempra Oil Trading S.A.R.L., contracted for the sale of gasoil. The contract provided that Seller would supply up to 14 shipments of oil at 25,000 tons plus or minus 5%, f.o.b. Constantza, Romania. There was to be a 15-day loading range for each shipment that could be narrowed to three days on mutual agreement. Payment was to be assured by an irrevocable letter of credit that was to be opened "promptly". The contract also provided that any demurrage was to be calculated in accordance with the charter party terms provided that a proper claim was made by Buyer. As explained by the appellate court, "the charter-party terms, as incorporated into the sale contract, provided for notice of readiness to be served after the vessel had arrived in Constantza at the customary anchorage, berth or no berth, and for laytime to run from 6 hours after such service or from when the vessel was ready to load, whichever first occurred."

For one of the shipments, the vessel anchored on 28 June 2001, and according to Buyer, tendered notice of readiness at 09:34 hours, that laytime commenced six hours later and expired after 48 hours. On either 5 or 6 July, Seller demanded a letter of credit pursuant to the contract which was promptly arranged to be issued. Loading did not commence until 9 July and was not completed until 11 July, resulting in demurrage charges of US$160,265.26. When Buyer claimed the charges from Seller, it refused. Buyer then brought this action against Seller to recover the demurrage.

Seller claimed that "the opening of a letter of credit was a condition precedent to any duty on its part to load cargo, and that laytime cannot therefore have begun to run until (a reasonable time) after the letter of credit was put up."

As a preliminary matter, the court interpreted the contract. The trial judge, Chambers, J., ruled that laytime began to run after giving the notice of readiness and was not linked to the issuance of the letter of credit. Seller appealed. The Court of Appeal, Civil Division, in an opinion by Mance, L.J., in which Thorpe, L.J, and Eans-Lombe, J., concurred without opinion, the appeal was allowed and the preliminary issue resolved in Seller's favor.

In his opinion, Lord Justice Mance stated that:

"If the provision of a letter of credit is a condition precedent to the running of laytime, the consequence must be that no laytime runs and no demurrage can accrue before such a letter of credit is provided. The idea that the late provision of a letter of credit could retrospectively trigger the running of laytime and the accrual of demurrage, during a period when (viewing the matter contemporaneously) no laytime was running or demurrage accruing, is obviously unacceptable. A condition precedent enables a party to know where it stands contemporaneously. Until a letter of credit has been provided, for all the seller knows none may ever be. The seller (assuming that it does not treat the contract as repudiated) must be entitled to do nothing in the meanwhile."

Lord Justice Mance quoted definitions of "laytime" and "demurrage" from Union of India v. Compania Naviera Aeolus S.A., [1964] A.C. 868, 899, "'[l]ay days are the days which parties have stipulated for the loading or discharge of the cargo, and if they are exceeded the charterers are in breach; demurrage is the agreed damages to be paid for delay if the ship is delayed in loading or discharging beyond the agreed period.'"

Lord Justice Mance also stated:

"It seems to me that, particularly in a trade of this kind, where, as is known to all parties participating, there may well be a string of contracts all of which are financed by, and can only be financed by, the credit opened by the ultimate user which goes down the string getting less and less until it comes to the ultimate supplier, the business sense of the arrangement requires that by the time the shipping period starts each of the sellers should receive the assurance from the banker that if he performs his part of the contract he will receive payment. That seems to me at least to have the advantage of providing a definite date by which the parties know they have to fulfil the obligation of opening a credit. "

The appellate court thus concluded that the contractual requirement to open a letter of credit to secure payment for cargo was a condition precedent to the seller's obligation to load the goods. Until the LC was provided, the seller had no assurance it would be paid and is, therefore, under no obligation to begin loading. Thus, the laytime could not commence before receipt of the LC.

[JEB/sal]

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