Quantity in crude oil contracts can be expressed in volume or in weight. There are two aspects to be considered. The first is the quantity to be delivered and accepted;
and the second is the measurement or determination of the quantity actually supplied.
In practice, the contract quantity is expressed in many different ways. Sometimes it is a specified tonnage, which may or may not be subject to a tolerance (eg, 500,000 barrels; or 500,000 barrels ± 5%). Expressions such as ‘about’ or ‘approximately’
should be avoided, as they introduce uncertainty, as does the use of the expression
‘operational tolerance’, at least where a ship is involved. Furthermore, if there is to be a tolerance, or a range, the contract ought to identify the party which is to have the right to determine the quantity (eg, 500,000 barrels ± 5% buyer’s option). The exercise of the option is also generally subject to the agreement of the terminal. If
the contract does not state which party is to have the option, then the general rule is that in an FOB contract the option is the buyer’s, and in a CIF or C&F contract it is the seller’s.
Measurement of liquid cargoes and their conversion from volume into weight is a notoriously imprecise science, at any rate where they are loaded into ships. The contract should leave no doubt as to the basis upon which the quantity supplied is to be determined, which is usually the bill-of-lading quantity or the determination made by an independent inspector.
3.3 Price
Currently, it is rare for a price to be agreed on a ‘fixed and flat’ basis (ie, at a specific monetary amount per barrel). A typical clause in a spot contract will provide that the price in US$ per barrel is to be the average of the daily highs and lows of, for example, Platts Crude Oil Marketwire quotations for Dated Brent, for the five days after the bill-of-lading date, plus or minus a fixed premium or discount. The price per barrel will usually be rounded to three decimal places.
Occasionally in CIF or CFR contracts the date of the vessel tendering notice of readiness at the first discharge port will be taken as the reference point for fixing the price. In the case of CIF and CFR contracts particularly, this kind of pricing mechanism gives a degree of flexibility to the seller, and the seller may be able to perform the contract in such a way as to maximise the price which it receives.
Contracts will sometimes contain provisions for the adjustment of the contract prices. It is common in CIF or CFR contracts for the buyer to have the option to discharge at any suitable port within a specified geographical range (eg, West Europe, Hamburg to Bilbao range). The buyer’s choice ought to have an impact on the price, because the cost to the seller includes a freight element. The amount of the freight payable to the shipowner will depend on the length of the voyage. This is dealt with in the sale contract by means of a freight differential provision. In such a case the contract contains a base CIF price, for example, US$140 per barrel CIF basis Rotterdam, and then provides for an adjustment corresponding to the increased or decreased freight payable under the charterparty if the vessel discharges at a port other than Rotterdam.
With long or medium-term contracts, it has historically not been usual (even in times of relative price stability) to fix prices ahead for more than a few months, or perhaps a year. Where the market is in a phase of significant price volatility, then the contract may provide for a formula under which the premium or discount is varied according to the level of the reference grade of crude oil which is used to calculate the price of a particular shipment (eg, the higher the average price of the reference grade of crude oil, then the greater the premium). As a further measure to deal with price volatility, a term contract may also contain a provision for the pricing formula to be reviewed if the price of the reference grade exceeds a certain amount.
3.4 Payment
It is usual for the contract to provide for the price to be paid at a specified time after the date of the bill of lading, or (in the case of CIF/CFR sales) perhaps tied to
completion of discharge or to the tendering of notice of readiness at the discharge port. When the seller is content to rely upon the buyer’s creditworthiness, no security for payment will be required. Payment will then become due at the agreed time, either upon presentation of a simple invoice from the seller or (more commonly) an invoice plus shipping documents. If payment is to be made against documents (as is usual), then it is desirable to specify in the Special Provisions precisely the documents which will be required. Expressions such as ‘usual shipping documents’ should be avoided, if possible, as they create uncertainty. The BP General Terms and Conditions specify the documents which are to be tendered in return for payment. These are:
• an invoice;
• 3/3 original bills of lading;
• original certificates of quantity, quality and origin; and
• (in the case of a CIF contract) an original certificate of insurance or a cover note.
It is very common in crude oil transactions for the contract to permit the seller to obtain payment not against the shipping documents but against presentation of the seller’s letter of indemnity, sometimes countersigned by a bank, if the shipping documents are not all available when the due date for payment arrives. It is often the case, particularly where the carrying voyage is short and there is a chain of contracts, that the vessel will arrive at its discharge port and/or the time for payment will arise, while the bills of lading are still in the hands of a seller in the early part of the chain and can take months to reach some subsequent sellers. The letter of indemnity is designed to enable the seller to obtain payment even though he is unable to tender all of the required documents. A letter of indemnity constitutes a contract under which the seller (and sometimes also its bank): warrants that title and the free right to use the goods has passed from the seller to the buyer in accordance with the contract; undertakes to supply the shipping documents when available; and agrees to indemnify the buyer against any claims which may be made by third parties claiming to have interests in or rights over the goods.
Where the seller wishes to be sure of payment, he will provide for a letter of credit to be put up by a bank acceptable to the seller and in terms acceptable to him.
It is preferable for the contract to provide explicitly for the time by which the letter of credit must be in place, and this is often done. If not, then it must be in place by the beginning of the contract shipment period, and probably in the case of C&F and CIF contracts a reasonable time prior to that. If there is no shipment period specified in the contract (eg, in a CIF contract which provides for a delivery period), it must be in place within a reasonable time after the making of the contract. It is important to note that the time for provision of a letter of credit by the buyer is of the essence of the contract. If it is late, even by a day, the seller is entitled to terminate the contract, and to sue for damages if he has suffered any loss.
It is not uncommon to find a buyer reluctant to pay the full price because he believes that he has a claim against the seller – for example, delivery may have been made late, or there may allegedly be a defect in quality, or the quantity received at
discharge may be less than the bill of lading or certified quantity. The buyer therefore wishes to make a deduction from the price to take account of his claim. If payment is by means of a letter of credit and the seller is able to present documents which accord with the terms of the letter of credit, there is in fact no problem for the seller, as there is no means by which the buyer can deduct. Its bank is bound to pay the price in full. But the position is not so clear-cut where there is no letter of credit.
Then, if the buyer does in fact deduct, it will be necessary for the seller to take legal proceedings to recover the balance of the price. It is therefore quite common to find a provision in the payment clause which specifically obliges the seller to pay the price in full, without any deduction on account of any set-off or counterclaim.
3.5 Delivery
An FOB contract will always provide for a delivery period (ie, a period during which the goods are to be shipped at the loadport). In principle, and subject to the specific terms of the contract, the buyer must present a vessel at the delivery port in sufficient time to enable the seller to complete loading by the end of the shipment period.
Conversely, the seller must make the goods available in sufficient time to enable shipment to be completed by the end of the period. If either party defaults on its obligation as described above, the other is entitled to terminate the contract and claim damages for loss suffered.
In the absence of any indication to the contrary in the contract, in a classic FOB contract the buyer in effect has the right to determine the time within which the delivery period at which the goods are to be shipped, because, subject to giving reasonable notice of arrival of his vessel, the buyer is entitled to present the vessel at any time during the shipment period. What is the position if the delivery period is, say, the whole of the month of March and the buyer, having given reasonable notice, presents his vessel on March 1, but the seller does not make the goods available until, say March 25 and loading is not completed until March 31? Is the buyer obliged to keep his ship waiting until March 25? The answer is that he is so obliged, and that even a lengthy delay such as this does not entitle him to terminate the contract, provided always that delivery is made by the end of the month. His remedy is demurrage (ie, damages at the rate agreed in the contract for delay to the ship).
Under a CIF or CFR contract, it is the seller rather than the buyer who is responsible for provision of the ship. Classic CIF and CFR contracts also contain a shipment period; and if the goods are not shipped within the shipment period, the buyer is entitled to reject the goods and recover damages for loss suffered because of non-delivery. However, crude oil contracts are often not typical, and will very frequently stray from the classic CIF/CFR model. It is common for such contracts to contain a delivery period rather than a shipment period (ie, a period during which it is intended that the goods be discharged at the contractual destination). Sometimes the Special Provisions will contain a combination of both, for example delivery June 26 to 28 “always consistent with scheduled loading at [named terminal] during June 15 to 17”. It is likely that clauses of this kind will be interpreted by the courts as imposing upon the seller an obligation to ship on a vessel which is scheduled to arrive, in the ordinary course of events, at any time within the delivery period;
however, a slight variation in wording may be treated as imposing an absolute duty on the seller to ensure that the goods actually arrive at the discharge port on time, which means that the seller bears the risk of transportation delays. Much will depend on the precise wording of the clause. If the seller fails to comply with the relevant obligation described above, the buyer is entitled to terminate the contract and to recover damages for non-delivery if loss has been suffered. Assuming that the goods are made available for discharge in accordance with the contract, must the buyer discharge them in an expeditious manner? The contract will almost certainly contain a demurrage clause, so that if there are delays in discharge which are not attributable to the ship, the buyer will have to pay demurrage. Apart from that, it seems that the buyer is not at risk unless he delays commencing discharge for an inordinate time, probably at least several weeks beyond the end of the delivery period, or unless it becomes clear either that he cannot or will not discharge within such a time. It is only when inordinate delay has occurred, or it has become clear that inordinate delay will occur, that the seller is entitled to take his ship away, sell the goods elsewhere and claim damages for non-acceptance of the goods by the buyer.
Where crude oil contracts contain shipment or delivery periods which are any longer than a few days, it is common for them to contain further provisions intended to narrow the shipment or delivery timeframe. For example:
• an FOB contract with a March shipment period might contain a provision such as “seller to specify three days’ loading range at least seven clear days prior to the commencement of such range”; or
• a CFR or CIF contract with a delivery range of July 5 to 15 might contain a provision such as “seller to give at least five working days’ notice of a three-day laythree-day range”.
The first point to note is that if the party obliged to give such notice does so late, the notice will be invalid. The other party may well accept the notice. If so, all is well.
But if it does not accept it, what then? There is a very strong tendency for the courts to treat notice provisions in commercial contracts as being of the essence of the contract, requiring strict adherence. On this basis, the party obliged to give the notice is entitled to give a new notice, nominating a new three-day range, provided there is still sufficient time remaining for a valid notice to be given.
FOB contracts in particular sometimes provide for the delivery period to be narrowed to a laycan. The time of delivery is usually “of the essence” (ie, the goods must have been loaded on board the vessel by the end of the delivery period, and if they are not, then the buyer may terminate the contract). The English courts have recently decided that, in such a case, the buyer is not entitled to terminate the contract if loading has not commenced or contemplated by the end of the laycan period. Thus, the time for delivery is no longer of the essence of the contract, and the buyer is entitled to present the vessel at any time up to the end of the laycan period.
What has been said so far applies to one-off or spot contracts, and in principle the same considerations apply to term contracts. However, in relation to term contracts there is in practice another dimension to be considered. Often the parties
will not wish to be tied down to a rigid delivery timetable at the time when they are making the contract. Some contracts provide for, say, one delivery per calendar month for one year, but more often the contract will be more flexible than that (eg, it might provide for quarterly tonnages, or perhaps even just for delivery to be “at a reasonably even rate”). The more vague the delivery provisions are, the more difficult it is to determine their meaning and legal effect, and hence the likely outcome of any dispute.
Any contract should contain as precise details as possible concerning delivery and scheduling as the dictates of commercial flexibility permit. If possible it should:
• specify the intervals at which shipments are to be made;
• specify the quantities (with a tolerance) for each shipment; and
• provide machinery to enable the date for any shipment to be narrowed to a small date range.