Instalment Deliveries in Gafta and FOSFA Contracts Under English Law

Instalment deliveries are used in Gafta and FOSFA contracts to provide flexibility in logistics and risk management. However, misunderstandings regarding the terms of instalment deliveries can lead to financial losses and lengthy arbitration disputes.

I am a co-author of a Gafta course on instalment deliveries, and in this article, I will outline the fundamentals that help determine when instalment deliveries are permitted and when they may lead to contract termination and claims for damages.

In practice, disputes frequently arise in the following scenarios:

• Non-payment by the buyer for one or more instalment deliveries: Can the seller refuse to make further deliveries and claim damages?
• Failure to deliver by the seller: Can the buyer terminate the contract as a whole or only in relation to the missed instalment?
• Non-conformity of goods with the contract terms: Does this affect the entire contract or only the specific instalment?

The resolution of these issues depends on the contractual terms, Gafta and FOSFA rules, as well as the applicable English law, particularly the Sale of Goods Act 1979 and relevant case law precedents.

Are Instalment Deliveries Allowed?

Before deciding whether to terminate a contract due to instalment deliveries, it is crucial to determine whether they are permitted in the specific case. According to Sale of Goods Act s. 31(1):

Unless otherwise agreed, the buyer of goods is not bound to accept delivery of them by instalments.

This means that by default, instalment deliveries are prohibited unless the parties have explicitly agreed otherwise. Exceptions include:

• Nature of Contract Performance: If the contract contemplates obligations that inherently involve instalment deliveries (e.g., delivery by railcars for a volume of 15,000 tonnes), they are considered permitted.
• Contractual Terms: Instalment deliveries are allowed if they are explicitly stated in the contract. For example, phrases like “in instalments,” “partial shipments allowed,” or “shipment to be made in lots” indicate the possibility of instalment deliveries.

Conversely, terms such as “shipment in one bottom” or “one full cargo” imply a prohibition on instalment deliveries.

Loading from Different Ports onto One Vessel in CIF Contracts

Although instalment deliveries are typically associated with rail transport (e.g., shipping multiple railcars), they can also occur in CIF and FOB contracts, sometimes in less obvious forms.

Consider the following scenario: a contract for the supply of 30,000 tonnes of U.S. wheat on CIF Santos, Brazil terms. The contract provides for shipment during April. The seller loads the goods at two different ports:

• 15,000 tonnes in New Orleans – on 10 April, with a bill of lading dated accordingly
• 15,000 tonnes in Houston – on 20 April, with a separate bill of lading

The entire quantity is shipped within the shipment period and on one vessel, but separate sets of documents are issued for each shipment: bills of lading, certificates of quality, certificates of origin, invoices, etc.

In CIF contracts, the buyer legally acquires not the physical goods themselves but the documents representing the goods. This is a fundamental principle of CIF contracts. Therefore, even if the goods are physically on the same vessel, the presence of two different sets of documents with different dates constitutes a partial delivery from a legal perspective.

From a practical standpoint, this situation presents significant commercial risks for the buyer:

• Difficulties in reselling the goods further down the chain
• Potential issues with banks in documentary credit transactions (including situations where the buyer purchases on CAD terms and resells under a letter of credit)

Case law confirms that one set of documents is required for a CIF shipment, and failure to meet this requirement can result in default by the seller (e.g., Cobec Brazilian Trading and Warehousing Corporation of the U.S. v Alfred C. Toepfer [1983] 5 WLUK 304).

Therefore, even if the entire quantity is loaded within the shipment period and on one vessel, the existence of separate sets of documents for each shipment legally constitutes a partial delivery and results in default by the seller.

When Can a Contract Be Terminated in Instalment Delivery Contracts?

If instalment deliveries are permitted, it is essential to understand which breaches can be considered substantial and justify contract termination, and which only give rise to claims for damages.

Gafta and FOSFA Contract Wording

Gafta and FOSFA contracts often include the clause:

Each delivery shall be considered as a separate contract.

This means that each instalment delivery is treated as a separate contract with its own set of obligations:

• The seller’s obligation to deliver the goods and provide the documents;
• The buyer’s obligation to pay for the goods.

As a result, liability is divided for each instalment delivery. This also implies that a breach of one instalment does not automatically justify the termination of the entire contract. условий одной поставки не дает права на расторжение всего контракта.

Sale of Goods Act s. 31(2)

However, English law adopts a more flexible approach. Under Sale of Goods Act s. 31(2):

Where there is a contract for the sale of goods to be delivered by stated instalments, which are to be separately paid for, and the seller makes defective deliveries in respect of one or more instalments, or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case whether the breach of contract is a repudiation of the whole contract or whether it is a severable breach giving rise to a claim for compensation but not to a right to treat the whole contract as repudiated.

This provision establishes a general principle but also leaves significant room for judicial discretion. The Sale of Goods Act does not provide a clear answer as to when a breach of one instalment becomes “severable.”

Fortunately, English case law has developed a test to determine this in practice. One of the leading precedents in this area is Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 K.B. 148, where the court formulated this test.

Maple Flock Co Ltd v Universal Furniture Products (Wembley) Ltd [1934] 1 K.B. 148

In this case, a contract was made for the supply of 100 tonnes of rag flock (cotton filling for mattresses and upholstered furniture) over several months, with three instalments per week. Each instalment was paid for separately. The contract included an obligation for the goods to comply with government standards on chlorine content (not exceeding 30 parts per 100,000). Breaching this standard was a criminal offence under British law.

The seller made 16 deliveries, all of which were accepted by the buyer. However, one instalment was found to have a significantly high chlorine content (250 parts per 100,000). The buyer sought to terminate the contract, arguing that the breach in one instalment demonstrated the seller’s inability to fulfil the contract obligations as a whole.

The court held that, in this case, the breach in one instalment did not justify the termination of the entire contract. The court formulated a test for determining the materiality of a breach, consisting of two parts:

1. Proportion of the Breach to the Total Contract Volume:
   • In this case, the defective instalment amounted to 1.5 tonnes out of 100 tonnes, i.e., less than 2% of the total volume.
2. Likelihood of Recurrence:
   • The court found that the probability of recurrence was extremely low because the seller conducted business in good faith, and the breach was considered an isolated incident.

This test demonstrates that a breach in one instalment does not automatically entitle the buyer to terminate the entire contract. To justify contract termination, the following criteria must be met:

• The breach must constitute a significant portion of the contract;
• There must be a high likelihood of recurrence in subsequent instalments.

In this case, the court ruled that the buyer was not justified in refusing further deliveries because the breach was not material and did not affect the performance of the contract as a whole.

This precedent established a flexible approach to terminating contracts involving instalment deliveries, which is widely applied in English law.

Practical Example: Analysis of a Gafta Arbitration Case

Now that we have covered the key rules on instalment deliveries, let us look at a real-life example from my practice. In 2019, Gafta considered a dispute in which I represented the seller. This case illustrates how payment and delivery issues are resolved in arbitration.

Case Background

In February 2018, the Seller entered into a contract with the Buyer for the supply of 3,500 tonnes of wheat on DAP Ukraine terms. The contract incorporated the Gafta 78 proforma.

The Seller made instalment deliveries totalling 1,959.8 tonnes, divided into four separate shipments, with corresponding invoices issued for each instalment. The first invoice contained a technical error in the contract number.

The Buyer refused to pay for the delivered goods, initially citing the error in the documents and later referring to a contract clause (Clause 7.5), which allowed for payment withholding in case of unjustified delivery delays.

Additionally, the Buyer claimed a right to set off counterclaims based on an allegedly assigned debt owed by the Seller to a third company in the amount of approximately US$260,000.

Key Issues

The key issues considered by the GAFTA arbitration were:

1. Did the technical error in the invoice entitle the Buyer to withhold payment?
2. Did the Buyer have the right to withhold payment under Clause 7.5 of the contract?
3. Was the Buyer entitled to set off counterclaims related to the debt owed by the Seller to a third company?
4. Was the Seller entitled to suspend further deliveries due to non-payment for the goods already delivered?

Gafta’s Decision

The Gafta arbitration reached the following conclusions:

1. Regarding the technical error in the documents:
   • The addition of two letters at the beginning of the contract number was deemed an obvious technical error, which, according to Clause 11(g) of Gafta 78, did not entitle the Buyer to withhold payment.
   • The Buyer was required to make payment within three banking days of receiving the invoice.
2. Regarding the withholding of payment:
   • The Buyer did not provide sufficient evidence of an agreed delivery schedule, the breach of which would justify the application of Clause 7.5.
   • Therefore, the Buyer was not entitled to withhold payment on this basis.
3. Regarding the set-off of counterclaims:
   • The arbitration panel ruled that claims related to other contracts involving a third party, which were also governed by Ukrainian law, could not be set off under this contract, which was subject to English law.
4. Regarding the suspension of deliveries:
   • Given that the Buyer failed to pay for more than 50% of the delivered goods and demonstrated an intention to continue withholding payments, the Seller was entitled to suspend further deliveries until payment was received for the goods already delivered.

Lessons learned

This case reinforces several important principles in international grain trading:

1. Minor technical errors in documents do not justify refusal to pay if they do not prevent the identification of the goods.
2. The right to withhold payment for breach of a delivery schedule must be based on a clearly agreed and provable schedule.
3. To set off mutual claims, there must be a close connection between the claims, arising from one transaction or closely related transactions.
4. In cases of non-payment for a significant portion of the delivered goods, the seller is entitled to suspend further deliveries, even if the contract states that each delivery is considered a separate contract.

This case illustrates Gafta’s comprehensive approach to assessing breaches of contractual obligations in the context of instalment deliveries and highlights the importance of timely payment for delivered goods.

Conclusions

In conclusion, several key points about instalment deliveries can be highlighted:

1. The legal status of instalment deliveries depends on the contract terms. Under English law, they are prohibited by default (Sale of Goods Act s. 31) unless the parties explicitly agree otherwise.
2. When assessing the right to terminate the entire contract due to issues with one instalment delivery, the following factors must be considered:
   • What proportion of the total volume does the breach represent?
   • How likely is it that the breach will recur in future deliveries?
3. Even if the contract includes a provision stating that each delivery is considered a separate contract, non-payment for a significant portion of the delivered goods may entitle the seller to suspend further deliveries.
4. Technical errors in documents do not justify refusal to pay if they do not prevent the identification of the goods.
5. GAFTA arbitration applies a comprehensive approach to resolving disputes involving instalment deliveries, taking into account both the formal terms of the contract and the commercial substance of the relationship between the parties.

If you need advice on issues related to instalment deliveries, structuring GAFTA and FOSFA contracts, or disputes in international trade, feel free to contact me via email, Telegram , or WhatsApp.