AGIC - SINGAPORE

MITIGATING LEGAL RISK IN VOLATILE COMMODITIES MARKETS- TOP TIPS AND AVOIDING COMMON MISTAKES

§ T: +61 (0)2 9320 4646 § stephen.thompson@hfw.com

§ Stephen Thompson

Areasfordiscussion

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§ Counterparty Risk.

§ Will the contract keep you safe?

§ Drafting – is room for improvement?

§ Back-to-Back contracts GTA vs GAFTA vs Gencon.

§ What are your rights to damages?

§ Time limits? Are they fatal?

§ Sanctions – shifting sands, effect on currencies and country competitiveness?

Panamax – Time Charter Average

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Due Diligence Agencies

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§ Dun and Bradstreet Reports – they are an off the shelf service provider for counterparty risk analysis, including sanctions (website http://www.dnb.com)

§ Kroll – they are bespoke (web-site http://www.kroll.com/en-us/who-we-are)

§ Infospectrum – they are bespoke, but (website http://www.infospectrum.net)

Insurance cover

Trade Credit Risk

§ Protection against§ Non-payment due to commercial risks (insolvency of customer)§ Late payment (protracted default) of trade debts

Political Risk§ Two main types of policy

§ Asset cover- Confiscation – deprivation, nationalisation, expropriation and

forced abandonment.§ Trade-related cover

- Events before shipment- Events after shipment

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Personal Property Securities Act (PPSA)

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§ ThePPSAregistercreatesasinglenationalonlineregister, knownasthePersonalPropertySecuritiesRegisterorPPSR,fortheregistrationofallsecurityinterests inpersonalproperty.

§ Thiscanincludetitletograin.

§ Whereastoragefacilitygoesintoliquidation,unlessyourinterest inthegrainisregistered onthePPSR,youmaynothave therighttorecoverpossession, despiteowningthatgrain.

Will the contract keep you safe?

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Comply with notice requirements

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§ A ‘free kick’.

§ Advantage given.

Drafting – Is there room for improvement?

§ Which contract is to be incorporated?§ GTA, GAFTA? Which one?

§ Executing the contract.

§ Is it necessary or will a handshake suffice?

“This contract is valid and binding whether or not it is executed”

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Unsigned Contracts

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§ If a contact is not signed, the party seeking to enforce it will have to show acceptance by some other means:

a. written communications between the parties (e.g. emails, text messages etc);

b. witness statement as to conversations in which a binding oral agreement was reached; or

c. proof that steps have been taken in accordance with the terms of the offer, i.e. the performing party did so with the intention of accepting the offer (Brogden v Metropolitan Railway (1877) 2 App.Cas. 666).

Certificate Final. Is it?

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§ GAFTA 124, para. 3 (“Analysts”) states that:

“Analysts shall be appointed from the GAFTA Register of Approved Analysts...”

§ Sub-contracting in this manner is only permitted if both the contracting and the sub-contracted laboratory are GAFTA approved.

Force Majeure – Shape the clause to the trade

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Common Industry ClauseCl.10.1 If the Force Majeure Event delays or prevents the delivery of the Cargo to the Port area, the:

a) obligations of the Seller under this Contract will be suspended until the termination of the Force Majeure Event; and

b) Time during which the Seller is required to effect the delivery will be extended by the same number of business days as the number of business days in respect of which delivery or forwarding of the Goods was so delayed or prevented.

BewaretheGapsbetweenstandardindustrycontracts

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Quality/FitnessforPurpose

MostAustraliaWheatContracts includethisclause:

Quality

§ Otherthanthatspecifically providedinthisContract,theSellersdonotmakeanyotherrepresentation orgiveanyotherwarrantytotheBuyersastothequality,variety,performance,characteristics, specification orfitness forpurposeordescription oftheCargoandanyandallrepresentations orwarrantiesstatutoryorotherwise astothequality,variety,performance,characteristics, specification, fitness forpurposes ordescription oftheCargoarespecifically excludedotherthantotheextenttowhichpursuanttoanyapplicableStatute,anysuchrepresentation orwarrantycannotbeexcluded,restricted ormodified.

§ GTAandGAFTAcontractsdonotinclude theaboveclauseandthishasanimpact undertheSaleofGoodsAct.

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A Buyer with a ship but no cargo

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NOR:FOBContract– vs – Charterparty

Austwheat1990(11.(b))andGenconCharterparty 1994

NoticeofReadiness6(c)"If,afterinspection,theVesselisfoundnottobereadyinallrespectstoload/dischargetimelostafterthediscoverythereofuntiltheVesselisagainreadytoload/dischargeshallnotcountaslaytime."

The FOBBuyercannot terminate theCharterparty asafreshvalidNoticeofReadiness isnotrequired...and laytimebeginstocountoncetheVessel's holdsarecleanedandloading/dischargingabletocommence.

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NOR:FOBContract– vs – Charterparty

GTAFOBNo.1Cl.14 ANORisinvalidifthevessel isnot,at

thetimeaNORisgiven, infactreadyinallrespects. IfaninvalidNORisgiven,afreshvalidNORmustbegivenwhen thevesselisinfactreadyinallrespectsandlaytimedoesnotbegintocountuntil24hoursafter...

Cl.9.Vessel toarriveandtendervalidNORatfirstloadingportbetween____________bothdatesinclusive.

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AUSTRALIAN GOVERNMENT’S SOLUTION

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§ Australian Government’s Department of Agriculture and Water Resourceshas started a pilot program to assess the use of marine surveyorsauthorised to undertake empty bulk vessel phytosanitary inspections atanchorage.

§ The pilot program is expected to finish in June 2016 and will be limited tothe port of Kwinana, Western Australia.

What are your rights to damages

Bunge SA vs Nidera BV [2015] UKSC 43

The Facts§ Bunge sells to Nidera 25,000 metric tonnes Russian milling wheat f.o.b.

Novorossyisk.

§ The contract incorporated GAFTA 49.

§ Delivery 23rd-30th August 2010.

§ 5th August 2010: Nidera nominated

the M/V 'Royal‘.

§ 5th August 2010: Russia announces Resolution 599 imposing "temporary prohibition" on the export of milling wheat from Russia between 15th August and 31st December 2010.

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Bunge SA v Nidera BV

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§ 9th August 2010: Bunge wrote to Nidera informing them of the export ban:

“In accordance with Gafta 49, clause 13, sellers hereby advise buyers, and declare the contract in reference as cancelled.”

Clause 20: GAFTA Default Clause

“In default of fulfilment of contract by either party, the following provisions shall apply:

(a) The party other than the defaulter shall, at their discretion have the right, after serving notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

(b) If either party be dissatisfied with such default price or if the right at (a) is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.

(c) The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or the actual or estimated value of the goods on the date of default established under (b) above...".

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In Dispute – Assessment of Damages

§ Bunge’s position:

To award damages, there must be (1) a decision that loss has been suffered by reason of the default and (2) an assessment of the amount of that loss.

§ Nidera’s position:

Because the Default Clause applied, they were entitled to damages whether or not they would actually have suffered the loss for which they claimed based on the formula in the clause.

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First Tier GAFTA Tribunal – 1 November 2011

§ Bunge was in anticipatory breach by sending their cancellation notice on 9 August 2010. The possibility existed at the date of the cancellation that the embargo might have been lifted in time to permit shipment.

§ However, the contract would have been cancelled in any event and this had no value.

§ That is: Nidera suffered no loss and were not entitled to any damages.

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GAFTA Board of Appeal - 22 June 2012

§ The GAFTA Appeal Board accepted that the contract would have been cancelled in any event.....but

§ that Nidera was entitled under sub-clause (c) of the Default Clause to a damages award of US$3,062,500, reflecting the difference between the contract price and the market price on the agreed date of default.

§ In the Appeal Board’s view, such an award was required by clause 20(c) of GAFTA 49.

§ "…A very large number of default cases come before GAFTA arbitrators and GAFTA Appeal Boards. The GAFTA Default Clause is a clause with which everyone in the trade is fully familiar”.

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The Commercial Court - 29 January 2013

§ His Honour Hamblen J agreed with the GAFTA Appeal Board.

§ "The Default Clause sets out a simple and clear scheme that damages "shall" be based upon.

§ There is no principled reason for cutting across the parties' agreed contractual damages scheme. Indeed there is every reason for not so doing, as the Board made clear. Keeping to the agreed contractual scheme promotes simplicity and certainty.”

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UK Supreme Court 1 July 2015

§ Unanimously allowed the appeal.

§ The fundamental principle of the common law of damages is the compensatory principle, which requires that the injured party is “so far as money can do it to be placed in the same situation with respect to damages as if the contract had been performed”: Robinson v Harman (1848) 1 Exch 850, 855 (Parke B).

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Supreme Court

§ Per Lord Sumption:

§ A damages clause may, with clear words amend The Golden Victory compensatory principle.

and

§ Clause 20(a)-(c) of GAFTA 49 is concerned with the determination of the difference between the contract price of the goods and their market price or value.

In respect of the need for the common law to provide commercial parties with certainty, finality and ease of settlement of disputes, Lord Sumptionsimply said:

“commercial certainty is undoubtedly

important…but it can rarely be thought

to justify an award of substantial

damages to someone who has not

suffered any”.

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UK Supreme Court

LORD TOULSON: (with whom Lord Neuberger, Lord Mance and Lord Clarke agree) at para. 61:

“the words “shall be based on” were not to be construed as synonymous with “shall consist exclusively of” or “shall be limited to””.

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Where to for the GAFTA Default clause?

§ The GAFTA Default clause was not sufficiently clear to preclude the application of The Golden Victory.

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Grain Trade Australia FOB No. 1

§ DEFAULT: If a party defaults on any of its obligations under this contract the party not in default may at its discretion and upon giving the defaulter notice of default elect to either cancel this contract, or to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase.

§ If the party liable to pay shall be dissatisfied with the price of such sale or purchase or if neither of the above rights is exercised the damages if any shall be determined by arbitration, failing amicable settlement.

§ The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages are to be calculated on the mean contract quantity. The arbitrators may at their absolute discretion award damages on different quantity and/or award additional damages if they consider it justified by the circumstances of the default.

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Time Limits for Commencing Arbitration

GAFTA

2.2 Other DisputesIn respect of all other disputes relating to the sale of goods:

a. arising out of CIF, CIFFO, C & F, C&FFO and similar shipment contract terms, not later than one year after (i) the expiry of the contract period of shipment, including extension if any, or (ii) the date of completion of final discharge of the ship at port of destination, whichever period shall last expire,

b. arising out of FOB terms, not later than one year after (i) the date of the last bill of lading or (ii) the expiry of the contract period of delivery, including extension if any, whichever period shall first expire,

c. on any other terms, not later than one year after the last day of the contractual delivery, collection or arrival period, as the case may be.

d. Irrespective of the time limits in (a), (b) and (c) above, in the event of non-payment of amounts payable, not later than 60 consecutive days from the notice that a dispute has arisen as provided for in the Payment Clause of the contract.

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YOUR CLAIM IS – OUT!

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Time Limits for Commencing Arbitration

GTA - Article 3

1. A Request must be lodged with GTA and the filing fee paid by the Claimant, on or before 12 months after the expiration date for performance of the contract(s) otherwise any claim is deemed to be waived and absolutely barred.

2. A party wishing to commence a Process under these Rules (“the Claimant”) shall send to GTA (with copy to the other party(s) to the dispute) a written Request containing or accompanied by the following:

a. The type of Process requested; b. The names, addresses (postal and email), telephone and facsimile numbers (if

known) of the parties to the dispute and of their legal representatives (if known);

c. A brief statement describing the nature and circumstances of the dispute and specifying the claims advanced by the Claimant against another party to the dispute (“the Respondent”), including the amount involved;

d. A copy of the contractual documentation including the incorporation of the GTA Trade Rules or Dispute Resolution Rules;

e. Any agreement between the parties or proposal regarding the procedure for arbitration or other Process;

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Sanctions

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HFW Offices

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Lawyers for international commercehfw.com

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