Содержание
Default Clause in FOSFA contracts is a contractual damages mechanism triggered when one party commits a material breach. When a seller fails to ship oil or a buyer fails to provide a vessel, the aggrieved party may invoke Default Clause and recover damages calculated under a fixed formula embedded in the contract itself.
FOSFA International (Federation of Oils, Seeds and Fats Associations) publishes standard form contracts for bulk oils and fats trading. The principal forms — FOSFA 53 (FOB), FOSFA 54 (CIF), and FOSFA 33 (flexitanks) — contain near-identical Default Clause structures. This article examines how the mechanism operates, using FOSFA 53 (Clause 27) as the primary example.
What FOSFA 53 Clause 27 Provides
When one party fails to perform, the aggrieved party — upon notice — may choose between two courses of action:
Option 1: Cancellation. The aggrieved party terminates the contract and claims the difference between the contract price and the market price on the default date. This option works well when the market is liquid and pricing is easily demonstrated.
Option 2: Buy-in / Sell-out. The aggrieved party enters the market and executes a replacement transaction: buying oil from another supplier (if the defaulter was the seller) or selling to another buyer (if the defaulter was the buyer). The defaulter must reimburse the difference between the contract price and the replacement price.
If the defaulter disputes the replacement price, or if the aggrieved party did neither, FOSFA arbitrators determine damages. Under Clause 27’s standard rule, damages are capped at the difference between contract price and actual or estimated market price on the default date. However, this is not an absolute ceiling: if arbitrators find the default circumstances warrant it, they may award additional damages beyond the standard formula at their discretion.
Proving Damages at Arbitration
In practice, parties use several overlapping methods to establish market price.
Broker quotations are the most common tool. A broker active in the relevant market (sunflower oil, meal) provides written confirmation of price levels on a specific date. FOSFA tribunals generally accept such quotations as reliable evidence.
Replacement contract. If the aggrieved party executed a real transaction to cover its position, the price difference directly proves damages. The advantage is objective pricing confirmed by genuine market activity.
In complex disputes, it is prudent to present arbitrators with multiple alternative calculations — both broker-based quotations and reference to an actual replacement contract — allowing the tribunal to select the most reliable figure.
Mean Contract Quantity
Default Clause provides that damages are computed on mean contract quantity — the average contractual volume of goods.
FOSFA contracts typically include tolerance — the right to deviate from the nominal quantity. Under Clause 3 of FOSFA 53, the buyer may take 2% more or less, with overages or shortfalls to mean quantity invoiced at contract price. Thus a contract for 1,000 metric tonnes with ±2% tolerance actually covers a range from 980 to 1,020 tonnes.
Under general English law principles on damages assessment, the court assumes the breaching party would have performed in the manner least favorable to the aggrieved party. In this example, that would mean calculating damages on 980 tonnes — the minimum the seller was obliged to deliver.
However, Default Clause imposes a different standard: damages to be computed on the mean contract quantity. Damages are assessed on 1,000 tonnes regardless of what the breacher would have actually delivered. This is an intentional contractual departure from general English law — and in practice the difference can be material.
Clause 27 nonetheless gives arbitrators discretion to award damages on a different quantity and/or additional damages if circumstances justify it. This is a broad discretionary power that FOSFA arbitrators exercise only in exceptional circumstances — for instance, where the standard calculation plainly fails to reflect genuine loss.
Default Clause and Extension Clause: The Connection
One critical feature of FOSFA contracts that directly affects default mechanics is Extension Clause (Clause 12 in FOSFA 53).
Under FOB terms in FOSFA 53, the buyer bears the obligation to provide a vessel. Clause 12 allows the buyer to extend the delivery period by up to 15 days to source suitable tonnage. Notice of extension must be given to the seller by the last business day of the original delivery period.
During the extension period, the seller must store the oil at the buyer’s expense under carrying charges (Clause 13: US$0.50 per metric tonne per day through day 15 or bill of lading date, whichever is later).
If loading has not commenced within 15 days after the original delivery period ends, Default Clause is triggered. The buyer is in default and, besides paying damages under the Default Clause formula, must pay the seller carrying charges for the entire extension period.
However, the buyer has an alternative: with at least 4 business days’ advance notice, the buyer may take delivery ex warehouse — paying by warrant, delivery order or equivalent document. After such payment, all subsequent costs (including relocation to separate storage, but excluding FOB loading costs at day 15 extension prices) fall to the buyer. If the vessel arrives before the extension period closes, the seller must still load.
For the seller, this means: do not declare the buyer in default before the 15-day extension period expires if the buyer has given timely notice. Premature default declaration makes the seller the breacher.
Default Date: A Contested Issue
Determining the default date lies at the heart of any Default Clause dispute. In oils markets, prices shift daily, and a default date change of just days can materially alter the damages calculation.
Clause 27 of FOSFA 53 provides two regimes:
Notice of inability to perform before the last delivery day. Either party may notify the other of inability to perform before the delivery period closes. However, such notice date does not become the default date without the other party’s agreement. This is an important protective provision: a party may disclose problems early without fixing an adverse default date for damages calculation.
Default on other grounds. If a party fails to perform for any reason and the other party declares default, the default date is determined by agreement or, absent agreement, by the arbitrators’ decision.
Anticipatory Breach: When a Party Repudiates Before the Deadline
Complexity arises when a seller or buyer renounces performance before the delivery period ends (anticipatory breach). The question: on what date should damages be assessed — the date of repudiation, the date it is accepted by the other party, or the last day for performance?
English courts in a line of cases — from Toprak v Finagrain (1979) through Thai Maparn v Louis Dreyfus (2011) to Ayhan Sezer v Agroinvest SA [2024] EWHC 479 (Comm) — have established a consistent principle: the default date attaches to the moment when the repudiation became clear and unequivocal. Not to the date of formal acceptance by the aggrieved party, and not to the last day of the delivery period.
The Sezer v Agroinvest decision involved a GAFTA 100 contract, but its significance extends beyond GAFTA forms. Default Clause in FOSFA standard forms follows an identical structure, and FOSFA arbitrators apply the same principles. A detailed analysis of all competing positions on default date — including obiter dictum by Lord Sumption in Bunge v Nidera — appears in the article on GAFTA Default Clause.
Circle Clause: When Default Clause Does Not Apply
Clause 26 of FOSFA 53 addresses the situation of a circle — when a seller repurchases the same goods from its buyer or from any downstream buyer in the supply chain. If a circle is established, Default Clause does not apply. Instead of physical delivery and damages under the default formula, parties in the circle perform a netting calculation: each buyer pays its seller the difference between the seller’s invoice price and the lowest invoice price in the circle.
For traders, this means: if your counterparty breached but a circle has been established, you cannot use Default Clause. Damages are calculated under Circle Clause rules, not market price on default date.
Circle must be established no later than 45 days after the last day of the delivery period. All sellers and buyers must cooperate in establishing it.
Typical Default Scenarios in FOSFA 53 Contracts
Because FOSFA 53 is an FOB bulk oils contract, typical default situations differ from CIF grain contracts.
Buyer Default
- Failure to provide a vessel during the delivery period (and after the 15-day extension period expires)
- Non-payment upon presentation of documents — breach of Payment Clause (Clause 15)
- Failure to open a letter of credit (if required by the contract)
Seller Default
- Oil fails to meet contract specifications (Clause 1 and 2) — breach of description or quality
- Failure to obtain export license (Clause 8, final paragraph)
As in GAFTA contracts, default presupposes a breach of condition. If only a secondary term (warranty) is breached, the aggrieved party may claim an allowance but cannot rescind and invoke Default Clause.
Default and Force Majeure: The Distinction
Clause 23 (Force Majeure) and Clause 24 (Prohibition) in FOSFA 53 describe situations where non-performance is not a default — instead, it triggers extension or cancellation.
When force majeure (fire, strikes, lockouts, civil unrest) occurs at the loading port or on the transportation route, the delivery period extends by 21 days after the force majeure event ends. If the event lasts more than 60 days beyond the original delivery period, the contract is cancelled.
For export prohibition, the delivery period similarly extends 21 days after the prohibition is lifted. If the prohibition continues for 30 days, the contract is cancelled.
In both cases, the party invoking force majeure or prohibition must notify the other with due despatch and, if necessary, provide evidence.
This distinction is critical: if non-performance stems from circumstances falling within Clause 23 or 24, Default Clause does not apply. But if a party fails to meet notification requirements or cannot prove force majeure, it risks defaulting.
Practical Takeaways
For traders working with FOSFA contracts, several key recommendations:
Preserve all correspondence. Every message from the counterparty — directly or indirectly indicating a refusal to perform — may anchor damages calculation. Following Sezer v Agroinvest, default date is fixed at the moment repudiation became clear and unequivocal, and this is determined from the correspondence trail.
Submit price evidence for multiple dates. Arbitrators may reject your proposed default date. Submit market price evidence for several alternative dates — this protects your position regardless of outcome.
Watch Extension Clause deadlines. If you are the seller and the buyer gave timely extension notice, you have no right to declare default before the 15-day extension period ends. Premature default declaration makes you the breacher.
Check for circles. Before asserting Default Clause rights, confirm that no circle has been established. If a circle exists, damages are calculated under different rules.
If you have questions about FOSFA Default Clause or need assistance preparing for FOSFA arbitration, get in touch:
