Guidelines for Appropriations

Reprinted 1 st September 2010 Guidelines for Appropriations Printed in England and issued by GAFTA THE GRAIN AND FEED TRADE ASSOCIATION 9 LINCOLN S INN FIELDS, LONDON WC2A 3BP E-mail Address: post@gafta.com URL: www.gafta.com 1

GUIDELINES FOR APPROPRIATIONS UNDER THE APPROPRIATION CLAUSES OF GAFTA CIF, CIFFO, C&FFO CONTRACTS These notes have been prepared as a simple guide for Members trading under the terms and conditions of GAFTA Contracts containing an appropriation clause. They serve only as a means to assist Members in the practical execution of their obligations under the appropriation clause by highlighting the intentions contained in the various paragraphs in the clause. The notes are not intended, nor should they be taken as being a contractually binding interpretation of all or part of the paragraphs contained in the clause. The definitive appropriation clause is contained in the specific contract form negotiated between the parties and many clauses in the GAFTA range of contracts have a number of differences. Whilst every care has been taken in the preparation of these notes which are believed to be accurate, neither the Association nor its officers can accept any liability whatsoever resulting from any error, mis-statement or omission therein. THE NOTICE OF APPROPRIATION INTRODUCTION: The appropriation clauses in GAFTA contract forms vary in accordance with the geographical and logistic requirements of the individual contract forms. The giving and receiving of notices of appropriation should be performed by the parties to the contract with all due consideration of the appropriation clause in the applicable contract form. There is clear distinction to be observed between the obligations of the first seller/shipper and those of the subsequent sellers. The obligations of subsequent sellers (string sellers) are dealt with under the sub-heading "STRING SELLERS". (NB: In some markets it is customary to describe the notice of appropriation as a tender ). OBJECTIVE: The notice of appropriation serves primarily to ascertain or identify previously unascertained goods. It is to confirm to the buyer that the shipper has fulfilled his obligation to provide, identify and ship the goods described in the contract within the quantity and time constraints of that contract. The prime practical purpose is to provide the last CIF buyer/receiver with sufficient information to enable them to be in a position to take delivery of the goods on arrival of the appropriated vessel. The notice does not pass ownership of the goods or property; that will generally pass when the shipping documents are taken up and paid for. CONTENT: The appropriation clauses require the notice issued by the shipper to state the vessel's name and the approximate quantity loaded. The date of bill(s) of lading and port(s) of shipment may be required to be given by the clause in some contracts, where not required the clause will normally contain a paragraph that the date or presumed date of the bill of lading should be stated in the notice, but that it will be for information only and shall not be binding. VESSEL S NAME: The correct vessel's name must be given in the notice, however, an error in transmission of the vessel's name will normally be acceptable. In addition, the vessel named must have been in the port of loading and have loaded the goods described in the contract at the time indicated by the bill of lading. 2

APPROXIMATE QUANTITY LOADED: The weight loaded has to fall between the quantity tolerance margins defined in the contract. Where the weight is outside of those tolerance margins the buyer can reject the notice. An exception to this would be where a contract has been traded on parcel terms and the quantity appropriated is below the lower tolerance margin, but the shipper has stated that the quantity appropriated is in part fulfillment of the contract quantity. Such a notice would indicate to the buyer that the shipper intends to appropriate a further quantity against the contract, either on the same vessel or another vessel. As stated in the contracts, in the case of more than one shipment being made against the contract, each shipment is considered a separate contract, but the tolerance margins of the mean quantity sold are not affected. BILL OF LADING: The bill of lading date is not binding in the sense that it is being stated for information only in the appropriation. However, it does fix the start of the time limit by which the notice must be despatched, and for this the actual date of the bill of lading will prevail. The date also identifies to the buyer that the shipper has complied with his obligations to ship within the contractual period for shipment. In the case of contracts under cargo/part cargo terms, the date of the last bill of lading is the effective date. The actual date of the bill will become known when the shipping documents are passed, and it is then that it will be seen finally whether the appropriation has been despatched by the shipper within the time limit. TIME LIMITS: a)the sending of the notice of appropriation by the first seller/shipper is bound by time limitations, that is say, by a stipulated number of days from the date of the bill of lading. As a general principle, the time limits are based on the approximate length of the sea voyage. The non-business days clause does not apply to these time limits. In the event of a notice not being within the time limits, the buyer can reject the appropriation. The time limits are imposed to try and ensure that the information contained in the notice reaches the last buyer/receiver prior to the vessel arriving at the contract destination. When the vessel arrives before receipt of the notice, any extra expenses incurred by the last buyer/receiver will be borne by the seller. b) There are additional time limit provisions pertaining to subsequent sellers i.e. parties in a string, those time limits are dealt with in the paragraphs referring to "STRING SELLERS". DESPATCH OF NOTICE: The notice of appropriation must be despatched by the first seller/shipper to his buyer either direct, or to the selling agent or broker named in the contract. Where a notice is despatched to the selling agent, such selling agent may despatch that notice either direct to the buyers or to the broker. A notice despatched to the broker is considered as an appropriation despatched to the buyer. It should be noted that the emphasis is on despatch. To comply with the time limits, the notice must be despatched within those time limits. The time of the notice being received only comes into play when the first buyer is also a subsequent seller and is required to pass that notice on within the time limits laid down in the clause for subsequent sellers. The means of despatch must be by way of a telegram, telex or other rapid written communication, or by letter if delivered by hand on day of writing. The notice is open to correction of any errors occurring in transmission, provided that the sender is not responsible for such errors, and for any previous error in transmission that has been repeated in good faith. VALIDITY: A buyer receiving an appropriation that does not comply with the terms of the contract can reject the invalid appropriation. A seller, having given an invalid appropriation, can re-appropriate always providing the new appropriation itself is valid and in particular, complies with all the time limits laid down in the appropriation clause. A valid notice of appropriation, once given, cannot be withdrawn, except by consent of the buyer. NAMED VESSEL SALES: In the event that a CIF sale is made on a named vessel on a shipped or afloat basis, the contract provides that the appropriation clause is cancelled as the goods have already been effectively identified and loaded. On 3

the other hand, if a sale has been made by a named vessel with expected to load dates or on a shipping/shipped or about to be shipped basis, then it is necessary for a timely notice of appropriation to be given to indicate that the goods have indeed been loaded. ARRIVAL PERIODS: Members are reminded, that to trade basis arrival periods as opposed to shipment periods on conventional contract forms, is a dangerous practice as the appropriation clause and other notice giving clauses of these contracts are drafted only in the context of shipment periods. There are contracts in the GAFTA range of forms, whose specific purpose is to provide for CIF trades on an arrival basis. (See Contracts Nos.: 94, 94A, 95, 112). STRINGS: Very often there will be a number of intermediate buyers and sellers, collectively known as the string intervening between the first seller/shipper and the last buyer/receiver. The strings can be of indeterminate length and where long strings are involved in the more volatile markets they can be a constant source of problems. In many cases it will be the passage of the notice of appropriation that will establish the string. When the first seller/shipper originates the notice, there will usually be no way of knowing the length of the string, nor how long it will take for the notice to finally arrive with the last buyer/receiver. The situation where the notice of appropriation has not been received by the time the vessel arrives can cause considerable problems and will often mean extra expense is incurred by the last buyer/receiver. This extra expense is to be borne by the intermediate sellers and in a string situation this will normally be the seller who received the notice before arrival of the vessel, but did not pass it on to his buyer until after the arrival of the vessel. In markets where the length of string frequently means the appropriation is not received until after arrival of the vessel, it may be advantageous if the participants mutually agree to the voluntary provision of their sellers names at time of appropriation. This would enable the parties in the string to establish if circles existed, thus saving time and expense not only for the last buyer/receiver, but for the parties in string as well. The following is a suggested clause, which could be negotiated between the parties to be added to a notice of appropriation Identification of String: To assist in establishing circles, and to enable efficient processing of shipping documents on or before arrival of the vessel at destination in order to save administration/presentation costs, please add name of your seller to list below and pass on to your buyer. The above list is for information only and shall not be contractually binding. Any absence or error in the list given above shall not invalidate the appropriation. NB:Ideally, the inclusion of this addendum should be agreed at the time of trade. Such a clause is used in some markets, but all parties in a string have to co-operate in its use, otherwise it could be unworkable. STRING SELLERS: Where the parties to a contract are neither a first seller/shipper nor a last buyer/receiver, they are effectively parties to a string. Although not actually originating the notice of appropriation, the parties to a string must each take on the role of subsequent sellers which requires very careful observance of their obligations under the appropriation clause of their respective contracts, particularly the passing on of notices. Subsequent sellers are initially bound by the same time limits as the first seller/shipper, that is to say, the notice of appropriation must be sent within the stipulated number of days from the date of the bill of lading. However, bearing in mind the potential length of strings, provision is made for the situation where subsequent sellers may receive an appropriation on or after the last day for appropriation. In such a situation, the notice the subsequent seller passed on to his buyer is only deemed to be in time if it is passed on without delay. In most contract forms, the period of delay is clearly defined and depends on when the notice has been received 4

by the subsequent seller If received before 1600 hours on a business day, the notice will be deemed in time if despatched to the buyer on the same calendar day. If received after 1600 hours or on the next business day or on a non-business day, the notice will be deemed in time if despatched to the buyer not later than 1600 hours on the next business day. Apart from these additional time limits, the subsequent seller is bound by the same obligations as the first seller/shipper described in previous paragraphs above. The only difference is that the subsequent seller is passing on a notice that has been originated by the first seller/shipper and at the time of receipt has no way of confirming the accuracy of the information in it. The contract protects the subsequent seller from any errors not of his making and any errors in transmission which he repeats in good faith. REJECTION: A buyer wishing to reject an invalid notice of appropriation should do so as soon as possible after receipt, by giving written notice of rejection to the seller, such notice should state the reason for rejection. Where a buyer in a string receives an invalid or a suspected invalid appropriation, but wishes to preserve his string status by not initiating the rejection himself, but in turn passing the appropriation on to his buyer, he will be well advised to give notice to the seller that he accepts the appropriation under reserve and subject to its acceptance by the subsequent buyer(s). However, the presentation of shipping documents will follow and each buyer in the string must make a decision to take up and pay for the documents or reject them. To reject documents on the basis that an appropriation was invalid and which subsequently turns out to be valid, will, of course, put the buyer himself in a default situation and liable to a possible claim for damages. The buyer, even though he may be in a string, will usually need to make a positive decision on whether an appropriation is valid or not, by the time the documents are presented. PROOF OF STRING: Non-compliance with time limits, is the most common cause for invalidating appropriations. Any notice received outside the specified number of days may be suspect, depending on the length of the string. To establish validity from a time point of view, the party receiving a suspect appropriation can request the seller to provide a proof of string. If it is felt necessary to make such a request it should be done so without delay. The request should be in the form of a rapid written communication, asking for names of previous sellers, the times they received the appropriation and the times they despatched it to their respective buyers. In considering the validity of these times it should be borne in mind that an appropriation despatched to the broker is considered as being despatched to the buyers. The request for proof of string can only be passed back to the point where it gets to the party who received the appropriation on the last day of the specified period, that party must show that he despatched it timely to his buyer. Provided the first seller/shipper passed the appropriation on within the specified period from the date of the bill of lading, it is of no consequence who or how many passed it on within that period. However, after that period has expired, each subsequent seller in the string must show that they passed the appropriation on timely. Whilst every effort should be made by all parties in a string expeditiously to provide proof of string, if proof is not available at time of documents presentation, in itself this lack of proof is not sufficient reason for the buyer to reject the documents. In such a situation, the buyer may ask for a guarantee that a valid proof of string document will be provided in due course and he should pay for the documents under reserve. VESSEL SINKS: The notice of appropriation does not give title/ownership of the goods under a CIF contract, but at the time of receipt by the buyer, it does identify to him that the goods are his, "they are appropriated to him", and that he will have to take ownership of them when the seller presents him with the shipping documents for payment. In situations where the appropriated vessel sinks, or suffers some sort of marine accident en route to the contractual destination, the buyer must still take up and pay for those shipping documents. The buyer is effectively paying for documents giving title rather than for the goods themselves. Where there is a mishap at sea the insurance certificate provided with the documents and/or the provisions in 5

the contract form should provide sufficient cover for any loss that may be incurred by the CIF buyer. The receipt of a valid notice of appropriation under the CIF contract obliges the buyer to take up and pay for contractual shipping documents, even if the vessel sinks prior to receipt of the valid notice of appropriation. The appropriation is valid if it correctly represents the situation at the time the goods were shipped, that is at time the loading of that parcel/cargo was completed. An event that could subsequently lead to the rejection of the appropriation is if it is passed on out of time. An accident at sea will not, in itself, invalidate the appropriation, and in such a situation a buyer would have to accept a valid appropriation. 6