Kronos Worldwide Ltd. v Sempra Oil Trading SARL

Where a sale contract requires payment to be secured by a letter of credit, and that requirement is a condition precedent to the seller’s duty to load, the seller is not obliged to perform any part of the loading operation until the credit is provided. Laytime is the period allowed for that loading operation. It therefore cannot begin, and demurrage cannot accrue, before the letter of credit is opened. The condition operates prospectively, not retrospectively. Laytime provisions in a sale contract need not operate back-to-back with a sub-sale or charterparty where the contracts have different terms or conditions.

Kronos agreed to sell gasoil to Sempra on FOB terms. The contract required payment to be secured by an irrevocable letter of credit and incorporated laytime and demurrage provisions. Sempra’s vessel arrived at Constantza before the letter of credit was opened, and Sempra claimed demurrage for the intervening period.

On a preliminary issue, HHJ Nicholas Chambers QC held that laytime could run before the credit was provided. Kronos appealed. The Court of Appeal had to decide whether the letter-of-credit requirement was separable from the laytime provisions and whether late provision could retrospectively trigger laytime and demurrage.

1. Appeal allowed. Subject to waiver, laytime did not begin under the sale contract until the letter of credit had been opened. The respondent’s application for permission to appeal to the House of Lords was refused, and there was no order for costs.
2. The court accepted that opening the letter of credit was a condition precedent to the seller’s obligation to load. Mance LJ held that the condition extended to every aspect of the loading operation for which the seller was responsible, including berthing, connecting hoses and putting the goods on board. Treating physical delivery as subject to the condition but other loading activities as independent would be artificial and contrary to principle.
3. Laytime is the time allowed for the loading operation. Because laytime and the letter-of-credit condition concern the same subject matter, the absence of the credit prevents laytime from running. A late credit cannot retrospectively cause laytime to run or demurrage to accrue for a period when, viewed contemporaneously, neither was running or accruing.
4. The court rejected the suggested alternatives of treating the seller’s loss as a set-off, or treating the buyer’s failure to provide the credit as merely interrupting laytime. Those analyses failed to give effect to the condition precedent. Nor was there any requirement that the sale contract operate back-to-back with the sub-sale or charterparty. Different contractual terms could produce different commencement dates.
5. The court distinguished The Aello. That case concerned a vessel unable to become an arrived ship without cargo being ready. Here the vessel had arrived and could give notice of readiness; only the absence of the letter of credit prevented laytime from running. The court added, obiter, that if berthing had been necessary to become an arrived ship, the letter-of-credit condition might also have applied to any duty to provide cargo for berthing, and a demurrage-based damages recovery appeared improbable.

• Court of Appeal (Civil Division): allowed Kronos’s appeal from the preliminary-issue decision of HHJ Nicholas Chambers QC in the Commercial Court. The issue was answered in Kronos’s favour: subject to waiver, laytime did not run until the letter of credit had been opened.