UK: HFW Commodities Bulletin - September, 2009

Last Updated: 12 October 2009

Incorporation Of General Terms And Conditions In Commodities Contracts
By Marine Pesret

In its recent decision in Trafigura Beheer BV v Yieh Phui (China) Technomaterial Co Ltd & anor (24 July 2009) the Commercial Court considered the issue of incorporation of general terms and conditions into commodities contracts and the significance in this context of previous contracts between parties.

In 2005 and 2006 Trafigura agreed contracts for the sale and delivery of zinc to Yieh Phui Enterprise ("YPE"). The negotiations were conducted by Trafigura's local agent, Parex Metals, and by E-United Group on behalf of YPE. The written contracts incorporated Trafigura's physical non-ferrous metal trading general terms and conditions (the "GTCs"), which included a clause stipulating that disputes should be determined in London in accordance with the Arbitration Regulations of the LME. The GTCs had not been discussed by Parex and E-United, who had focused on agreeing the main commercial and operational terms.

During performance of the 2006 contracts, YPE sent Trafigura a purchase order which purported to make a delivery subject to Singapore arbitration. This document was ignored by Trafigura.

In November 2006 the parties agreed terms for 2007 delivery contracts. Agreement on the main commercial terms was reached on 24 November 2006, and, on 27 November 2006, Parex sent E-United a fax setting out the terms agreed and stating "all other terms and conditions as per 2006 contract". On 7 December 2006, Parex sent E-United draft contracts in the same form as the 2006 contracts. E-United replied on 13 December 2006 accepting the contract terms and "all other terms same as the contract for year of 2006". Contracts signed by Trafigura, with the GTCs attached, were then sent to E-United but were never signed by YPE.

YPE failed to open letters of credit for shipments between July and December 2007, and Trafigura began LME arbitration in London. YPE contended that the dispute should be heard in Singapore.

The Court held that the dispute was subject to LME arbitration in London because the GTCs had been incorporated in the 2007 contracts. The judge found that E-United's email of 13 December 2006 constituted acceptance of the commercial terms and that the parties were proceeding on the mutual expectation that if those essential terms were agreed, Trafigura would embody them in the same form of contract as previously used (a draft of which had been sent to E-United on 7 December 2006). E-United's email of 13 December 2006 could therefore be viewed as an acceptance of the GTCs.

The Court also held that the Singapore arbitration clause in the 2006 purchase order had had no effect because its terms had not accepted by Trafigura, and because YPE had already been performing the 2006 contract on the basis of the written contract incorporating the GTCs.

This decision is a further example of the robust approach adopted by the English courts to questions regarding the conclusion of commodities contracts and the incorporation of general terms and conditions, recognising the informal manner in which such contracts are typically concluded. It also demonstrates again the willingness of the English courts to enforce arbitration and jurisdiction clauses in the face of attempts to circumvent them.

FSA and CFTC To Coordinate Oversight Of Oil Markets
By Alistair Feeney

The Leaders' Statement issued at the end of the G20 Pittsburgh Summit on 24-25 September 2009 committed G20 countries to improving regulatory oversight of energy markets. The Statement explained that G20 governments would direct market regulators to collect data on large concentrations of trader positions and other relevant information from oil futures markets with a view to combating market manipulation and decreasing excessive price volatility, and to report back on progress at the next G20 meeting. The Statement also called for refinement and improvement of commodity market information, including through the publication of international and more detailed data.

This follows the joint announcement on 20 August 2009 by the U.K. Financial Services Authority and U.S. Commodity Futures Trading Commission they would take steps to strengthen crossborder supervision of the energy futures markets. The FSA and CFTC stated that they would work towards implementing greater surveillance of US-linked energy contracts including, where appropriate:

  1. enhanced direct access rights to trade execution and audit trail data;
  2. mutual on-site visits of exchange operators;
  3. sharing of exchange regulations and notices;
  4. sharing of disciplinary notices; and
  5. coordinated emergency action.

CFTC chairman Gary Gensler explained that the co-operation with the FSA was aimed at ensuring that "futures markets remain free of manipulation, fraud or other market abuses".

There remains a perception, particularly in the U.S., that the activities of hedge funds and speculators were largely responsible for the steep increase in the price of oil products up to summer 2008, when the price of crude oil reached more than US$140 a barrel. It seems likely following the G20 Leaders' Statement and the joint FSA-CFTC statement that there will now be more stringent monitoring of energy markets, including by measures such as phone tapping.

The implementation of these initiatives will pose significant challenges for the FSA in particular. Without enough staff with the knowledge and expertise required effectively to oversee oil products markets, detect market abuse, and prosecute offenders, the FSA may struggle to meet the objectives that have recently been set. FSA has not previously been seen intervening extensively in commodities markets.

HFW Sugar Bulletin

HFW will shortly begin publishing a bulletin covering key issues in the sugar trade. The bulletin will report and analyse recent cases and developments in sugar markets.

The bulletin will be edited by Mark Morrison. The first edition will be published in October 2009.

Conferences and Events

FIS Iron Ore Swaps & Physical Spot Market Forum
Société Nautique de Genève, Geneva (8 October 2009)
Brian Perrott, Mark Morrison

29th Coaltrans World Coal Conference
Queen Elizabeth II Conference Centre,
London (25-26 October 2009)
Damian Honey, Robert Wilson, Guy Hardaker, Brian Perrott, Rory Gogarty, Sarah Taylor

Hotel President Wilson, Geneva (17-19 November 2009)
Chris Swart, Brian Perrott, John Rollason

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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