FOB Buyers Beware: Sale Contract Letter Of Credit And Laycan Provisions Vitol SA v JE Energy Ltd

• Published date: 19 December 2022
• Subject Matter: Litigation, Mediation & Arbitration, Transport, Marine/ Shipping, Arbitration & Dispute Resolution
• Law Firm: Quadrant Chambers
• Author: Mr Paul Henton

OVERVIEW

The Court's decision inVitol SA v JE Energy Ltd [2022] EWHC 2494 (Comm) contains much useful guidance regarding the liability obligations of an FOB Buyer, including as regards the obligation to open a contractually compliant letter of credit and to provide a performing vessel within the laycan.

The case involved a familiar factual scenario often encountered in repudiatory breach disputes. The parties contracted for the sale of 30,000 mts (+/- 10%) of fuel oil on FOB Tema (Ghana) terms. The buyers (Jeda) had purchased the cargo speculatively, without having either a sub-buyer or a performing vessel lined up. The market turned and the deal became loss-making to Jeda. By the time a sub-buyer was found, it was at a sub-sale price far below the price at which Jeda had agreed to purchase the cargo from Vitol (Jeda having purchased at + $100 pmt over the relevant benchmark, but sub-sold at +$43).

Jeda was found to have repudiated the sale contract through a combination of: (i) failing to nominate a performing vessel to arrive within the agreed laycan, (ii) failing to open a contractually-compliant letter of credit, (iii) when an acceptable LC was eventually opened, failing to extend its expiry date to match the likely date of shipment, and (iv) purporting to declare the contract null and void prior to shipment of the fuel oil by Vitol.

The decision confirms and clarifies the law in four important respects.

First, the decision confirms that where parties agree a (short-form) "deal recap" which sets out the essential terms of the trade, then this may readily be supplemented by a subsequent long-form contract, and that it is not necessarily appropriate for the strict requirements of a positive offer and a positive acceptance to be satisfied. Orthodox contractual analysis of offer/acceptance is less obviously apposite in cases involving "sorting out the details against the background of a concluded contract" (per the classic dictum of Bingham J in Pagnan v Feed Products (1987)). On the facts, both parties had envisaged that long-form contract terms would apply, and had negotiated by reference to Vitol's long-form terms until there were no or virtually no differences between them: those terms were thus held to form part of the bargain. See Judgment [15, 19].

Second, the decision clarifies the classic meaning of the term "laycan", when used in an FOB sale contract. The facts were that the deal recap referred to a contractual laycan of 23-24 December 2019...