Here is the second part of the detective story "What should a FOB seller do when goods were unloaded without payment?", where we explain that a breach of contract may potentially serve the interests of a claimant in certain situations.
The essence of a dispute
OilTrade (Seller) entered into a FOSFA contract for the sale of oil with Ether (Buyer). The contract stipulated the classic "cash against documents" method of payment. Ownership was to pass to Buyer upon full payment.
Ether resold the goods to a third party (Nomax) on the basis of scanned copies of the shipping documents but did not pay any money to OilTrade. After that, Ether instructed the shipowner to discharge the goods in Rotterdam to Nomax. The shipowner did so based on a Letter of Indemnity without the original bills of lading from Ether.
OilTrade failed to settle the matter amicably. In order to compel the other parties to enter into negotiations, OilTrade arrested the goods in Rotterdam (as ownership had not passed to Ether) and the vessel in Malta (for illegal discharge of the cargo without the original bills of lading).
As a result, Nomax agreed to compensate OilTrade for the contractual value of the goods. In fact, Nomax ended up paying for the goods twice: first to Ether and then to OilTrade. However, OilTrade still had claims against Ether, which were comprised of: (i) damages for non-payment for the goods (being the difference between the contract price and the market price) and (ii) damages for the under-delivered part of the goods.
OilTrade initiated FOSFA arbitration. Ether filed a counterclaim, seeking damages for what it alleged were wrongful arrests of both the cargo and the vessel.
Ether's main argument was that the FOSFA contract pro forma incorporates the “Scott v Avery” clause which prohibits parties from seeking arrests in the courts before the initiation of FOSFA proceedings. All FOSFA pro forma contracts contain this clause.
OilTrade's position was as follows:
- the “Scott v Avery” clause did not apply to the arrest of the vessel, because this arrest took place in the context of separate proceedings involving the OilTrade – Shipowner dispute, and not within the contractual dispute between OilTrade – Ether;
- Ether did not prove the losses it allegedly suffered because of the arrest of the goods.
The claim was upheld. Even though it was found that the goods had been arrested in breach of the “Scott v Avery” clause, the Tribunal did not award any damages because Ether failed to prove that it suffered any damages as a result of the arrest. The Tribunal also agreed with OilTrade that the clause did not apply to the arrest of the vessel for the reason given above.
Sometimes situations arise where it may be necessary to breach a contract in order to be able to properly protect your interests. There are also situations where it is easier to recover the debt not from the debtor directly, but from the end buyer to whom the debtor has resold the goods.
If OilTrade had chosen the classic route to recover the damages through the FOSFA proceedings, without arresting the goods and the vessel, there would likely have been nothing to recover from Ether at the time when the award was issued – Ether would likely have dissipated its assets. OilTrade would have been right "on paper" but would have lost US$2 million (being the value of its claim against Ether).
Thanks to the arrests, OilTrade negotiated with Nomax from a position of strength: the goods were arrested, which meant Nomax could not fulfil the contract with its buyer; the vessel was likewise arrested, so the shipowners incurred demurrage and put pressure on Nomax as charterer to resolve the issue as quickly as possible (Nomax would have been liable for demurrage otherwise).
On the other hand, there was a risk that Ether would recover damages for the wrongful arrests in the FOSFA proceedings. However, Oil Trade’s case was as follows:
- At worst, such losses would not exceed the damages OilTrade claimed against Ether in arbitration.
- At best, the Tribunal would conclude that Ether had not suffered any damages at all and that OilTrade's claim would be upheld (which was in fact what the Tribunal decided).