UK: Grain Traders, Beware! A Note To Those In A Contract Or Planning To Contract

Out of all the soft commodities, the greatest drama of the season is undoubtedly centred upon the Black Sea region, as the grain traders are effectively on standby, in anticipation of potential government interference with trade.

Even though some of the restrictions are said to be expected or, in the case of Ukraine, even "agreed" with traders, it is market pressure and the uncertainty caused by the governmental authorities' unclear position which is obstructing the normal course of trading operations, and which could lead to various mistakes that may prove quite costly at a later stage.

The purpose of this short note it to remind all concerned of the issues to bear in mind where restrictions, or other impediments to trade, may be imminent.

Pre-contractual negotiations and the contract

If you are still at the pre-contractual stage and have not yet committed yourself to a firm offer, it would be highly advisable to consider the risks related to any restrictions, or other impediments, as well as the impact of any potential delays which may occur during the execution process. Once the deal is agreed, make sure that your contract reflects all the essential terms of your agreement, is drafted so as to address all relevant risks, and contains all the clauses aimed at protecting you from liability for any potential delays or breaches caused by events outside your control.

Standard contract forms

If you trade on the standard contract forms, be it GAFTA, FOSFA or any others, you have to work out what the exact terms are, and whether they cover the events in consideration (e.g. force majeure, prohibition, ice provision, etc...). Make sure that you are well aware of all the requirements stated in the respective clauses (e.g. timely notices, standard of proof, etc...) as this will affect your ability to rely on protection from the particular clause should the related event occur. You may also wish to consider including a particular provision in your main contract to avoid potential disputes as to the applicability of the standard form clause.

Nature of the restrictions

Restrictions may come in all sorts of forms, for instance a complete ban on exports, the reduced export of a particular commodity, various transport conventions, etc. Bear in mind that different types of restrictions lead to different consequences, and that these require different actions from your side in order to qualify for an exemption from liability for any subsequent inability to perform. Your contract should be your first point of reference for this purpose.

Time

Timely performance of your obligations can never be stressed enough, especially, if at the time of execution of the contract, the market goes against you. This applies to all communications, pre-advice, other notices and even default declarations. At the same time, you must understand the distinction between the various time stipulations in your contract, as the importance and consequences of these may differ greatly. For example, you may not always be in a position to hold your FOB buyer in breach of contract for non-compliance with the pre-advice terms, or hold your FOB seller to performance if your notices are served too late to enable delivery within the contractual delivery periods. On the other hand, there may be circumstances where waiting for the right time may prove to be advisable; for example, premature declarations of default may affect liability for non-performance, which would otherwise be protected by the contractual clause, (e.g. prohibition) and may lead to an adverse change of your position.

Direct link between restrictions and your ability to perform

This is an area where a lot of things can, and do, go wrong. The supervening event must not only exist or occur after conclusion of your contract; it must actually prevent you from performance. This may not necessarily be the case, even where the majority of your fellow traders on the market cannot perform. Therefore, unless you are in a position to provide compelling evidence illustrating how performance of your contract was impeded by the particular event, you are unlikely to be able to rely on the protective clauses and avoid liability.

Knowledge

As a final comment, excercise caution with regard to both the knowledge and reasonable expectations factors. Your otherwise perfect defence to non-performance may be greatly affected if you knew, or should have known, about restrictions and the time when they were to be introduced. In this context, we invite the readers to revisit the Ukrainian scenario and consider whether occurrence of a particular event, such as an exhaustion of the agreed uninterrupted export volume, may have any potentially adverse implications in this respect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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