Rights and responsibilities - freight payable BBB and demurrage
Posted on 19th March 2018 at 16:53
London Arbitration 2/18 [(2018) 994 LMLN 3] is another example of demurrage as the common factor in a dispute involving the sale contract and the charterparty, and of the need for parties to perform their separate obligations.
Further to an 8 September 2014 CFR sale of 3,000 tonnes of Ukrainian barley, the sellers concluded a voyage charterparty for carriage to Benghazi. Delay in paying freight caused demurrage and the issue was whether the sellers or the buyers should bear that.
Under the sale contract:
The sellers shall provide the buyers with the following Shipping Documents:
Full set 3/3 original ‘Clean on Board’ Bill of Lading marked, ‘freight prepaid’.
Original Shipping Documents shall be released to the buyers/buyers’ bank immediately upon receiving 100 per cent payment for the Goods by the sellers.
The buyers shall pay freight according to the charterparty… as soon as possible after signing Bill of Lading. Balance [of the sale price] shall be paid ... within 48 hours of banking days against presentation of original shipping documents … at the buyers’ bank ...”
Under the charterparty:
100% OF FREIGHT TO BE PAID WITHIN 3 BANKING DAYS FROM MASTER’S SIGNING/RELEASING BILLS OF LADING IN ANY CASE BBB. IF BS/L MARKED FREIGHT PREPAID THEN ORIGINALS TO BE KEPT BY THE OWNERS REPRESENTATIVES AT LOAD PORT UNTIL FREIGHT IS RECEIVED BY THE OWNERS.
A “freight prepaid” B/L is often needed under an L/C and for a buyer to trade the cargo. Owners will frequently agree such marking, but won't (and shouldn't) release the B/L before they have full freight, and as here will secure and enforce charterparty wording accordingly.
Sellers often use the protection of an L/C, but (among other documents) generally need to present the B/L to get payment, which under a CFR sale usually includes the freight element.
Here however it had been agreed that the buyers would pay the sellers the freight in advance. Nevertheless, the sellers remained liable to the owners for the charterparty freight.
On 13 September loading was completed, the master signed one complete “freight prepaid” B/L and the vessel sailed the next day.
Freight invoices, amendments, correspondence, sanction checks and other delay ensued, until with an ETA at Benghazi of 20 September the owners warned the sellers that the vessel would not berth until they received full freight. The sellers in turn told the buyers that discharge would not start until they received full payment under the sale contract. (That was probably impossible at that time, as they needed the B/L to present at the buyers’ bank, and the owners would not release that until they had 100% of the freight.)
The vessel arrived at Benghazi and tendered NOR on 20 September, and after further delay the sellers received and paid the owners about 75% of the freight. Having also received a guarantee for the balance owners released the B/L on 26 September and discharge was completed on 11 October.
In arbitration under the sale contract the sellers tried to recover the US$70,917.84 demurrage that they had paid the owners under the charterparty.
The Tribunal rejected this, holding that:
1. The obligation to pay freight to the owners arose under the charterparty and was that of the CFR sellers as charterers;
2. Under the sale contract the buyers had to pay the sellers the freight element in advance, but that made no difference to the sellers’ primary obligation to pay owners the charterparty freight;
3. The buyers had breached the sale contract by delaying payment of the freight to the sellers; however
4. By failing to grasp that timely payment was not coming and thus paying owners the freight themselves - as they had to - the sellers either (a) broke the causal link between the buyers’ breach and the demurrage or (b) wholly failed to mitigate loss: if they had paid the freight sooner there would have been no demurrage.
This sale contract wrangle offers useful reminders for owners and traders:
First, the issues were only between the buyers and the sellers. There was no challenge to the demurrage or the validity of the owners’ (a) retention of the B/L before payment of full freight and (b) indicated refusal to berth until then.
Second, the owners were quite right to retain the B/L. The charterparty was plain on that and any sale contract freight provisions were of no concern to them.
Third, owners should indeed focus on their own position. With freight outstanding they must rely on their charterparty rights and remedies, especially where charterers may be seeking to deflect responsibility to their buyers or the buyers or other receivers are making threats about discharge. Both the charterparty and B/L contracts here probably also contained a lien clause which would likely have further entitled the owners to hold the cargo until payment of freight.
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