Commodities - Clyde & Co

Expert legal advice in a changing worldWritten by legal experts, Clyde & Co’s Commodities Newsletter is a regular publication in which recent developments are reviewed: new case law, changing legislation and new areas of potential liability.

In this issue, we review the following:

• Was an agreement to agree, for the sale of goods, unenforceable on the grounds of uncertainty? MRI Trading AG v Erdenet Mining Corporation LLC [2013]

• Was a sale contract automatically cancelled by virtue of the Prohibition Clause in GAFTA 49 following the 2010 Russian grain export prohibition? Bunge SA v Nidera BV (formerly known as Nidera Handelscompagnie BV) [2013]

• What does a seller have to show in order to rely on the Prohibition Clause in GAFTA 48 to excuse non-performance of contract of sale? Seagrain LLC v Glencore Grain BV [2013]

• How does Bunge SA v Nidera BV [2013] impact FOSFA Prohibition and Default Clauses? Novasen SA v Alimenta SA [2013]

• Is a cargo of gasoil which was on spec at the load port but was later found to be unstable at the discharge port, of satisfactory quality for the purposes of the Sale of Goods Act 1979? Bominflot Bunkergesellschaft fur Mineralole mbH & Co v Petroplus Marketing AG, The “LADY MERCINI” [2012]

• Can a bank be the lawful holder of bills of lading? Standard Chartered Bank v Dorchester LNG (2) Ltd (The “ERIN SCHULTE”) [2013]

• Oil Price-fixing – the next Libor?

• Australia’s agricultural sector: The National Food Plan and Policy on Foreign Investment

• Is it possible to imply a term as to satisfactory quality within a Memorandum of Agreement where the vessel is sold “as she was at the time of inspection”? Dalmare Spa v Union Maritime Ltd (The “Union Power”) [2012]

We hope that you find our newsletter informative.

If you wish to discuss any of the issues raised, please feel free to write to us o [email protected] or alternatively please liaise with your usual contact.

Clyde & Co – A leading international law firm with over 1,400 lawyers operating over 6 continents.

NewsletterJuly 2013

Commodities

ContentsIntroduction Page 1

Agreements to agree: Are we all agreed?Page 2

Russian grain export embargo: Three years on and still going...Page 4

Russian grain export embargo: More on GAFTA’s prohibition clausePage 6

FOSFA Prohibition and Default Clauses in the aftermath of Bunge SA v Nidera BV [2013]Page 8

On-spec gasoil breaches Sale of Goods Act 1979 implied terms Page 10

Can a bank be the lawful holder of bills of lading? Page 11

Oil price-fixing – the next Libor?Page 13

Australia’s agricultural sectorPage 15

The meaning of “as is”Page 18

Meet the teamPage 19

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Commodities Newsletter July 2013

Agreements to agree: Are we all agreed?John Whittaker Sabina Cehajic

In the latest case on “agreements to agree”, the Court of Appeal in MRI Trading AG v Erdenet Mining Corporation LLC [2013] held that a contract for the sale of goods, in which certain charges and the shipping schedule were left to be agreed, was not unenforceable on grounds of uncertainty since it was to be viewed in its wider context. As it was one of three contracts entered into as part of a settlement between the parties, a term could be implied that disputes as to outstanding matters were to be referred to arbitration. But was the Court of Appeal right to come to this conclusion?

The issues In 2005, the parties entered into a contract for the sale of copper concentrates. Disputes arose as to the performance of the contract and the matter was referred to arbitration. The parties agreed under a settlement agreement concluded in January 2009 to enter into three fresh contracts for the sale of copper concentrates. Two contracts for delivery in 2009 with all terms agreed were fully performed. The third, the 2010 Contract, a framework contract which left the treatment charge (TC), refining charge (RC) and the shipping schedule to be agreed “between Buyer and Seller during the negotiation of terms for 2010”, and providing for delivery in 2010, became a matter of dispute. The parties had failed to reach agreement during the annual negotiations in 2010.

MRI sought to enforce the 2010 Contract. It claimed that EMC was in breach of its delivery obligations. EMC, on the other hand, argued that the contract was unenforceable because key material terms, namely the TC/RC and shipping schedule, were left as “agreements to agree”. The 2010 Contract expressly provided that it was governed by English law and contained a London Metal Exchange (LME) arbitration clause.

Decision of the arbitral tribunalApplying the principles relating to agreements to agree as set out in Mamidoil-Jetoil Greek Petroleum Co SA v Okta Crude Oil Refinery AD (No. 1) [2001] and BJ Aviation Ltd v Pool Aviation Ltd [2002], the LME arbitral tribunal (consisting of three market arbitrators) held that there was no enforceable obligation on EMC to deliver. The tribunal,

on the basis of their own experience and as confirmed by expert evidence adduced before them, held that the TC/RC play a significant role in the conclusion of concentrates contracts and is an integral part of the contract negotiation. Therefore, since the contract, which was a framework contract, left these material terms as “agreements to agree”, the tribunal had no option but to conclude that the delivery obligation was non-existent.

What the courts saidThe Commercial Court disagreed, as did the Court of Appeal which found that:

• Each case must be decided on its own facts and on the construction of its own agreement.

• The 2010 Contract was to be construed so as to take light of the fact that it was part of the settlement agreement.

• The parties, by the language used, clearly intended to create a legally binding obligation, and in the event of a dispute, this was to be determined by arbitration.

• The use of the mandatory “shall” in the relevant clauses is a strong indicator that the parties did not intend that a failure to agree should destroy their bargain. Given they were contracting in January 2009 for delivery in 2010, it was sensible to leave open for future agreement the appropriate level of charges and the appropriate shipping schedule.

• This was particularly the case, since EMC had already received the benefit of some advantage from entry into the settlement agreement and 2010 Contract.

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(Continued from page 2)

Since this was a commercial dealing between parties who were familiar with the trade and who had acted in a manner consistent with being a party to a binding contract, the contract should be construed so as to enable it to be carried out.

The presence of an arbitration clause supported the conclusion that the agreement was sufficiently certain or capable of being so, since it provided a mechanism by which the parties could resolve a dispute about a reasonable TC/RC or shipping schedule.

So are we all agreed? Whilst in the past agreements to agree were often unenforceable due to lack of certainty, in more recent years courts have been willing, to give effect to such agreements and fill in contractual gaps where possible. For commercial parties this is an important development since in certain trades so called “framework agreements” are agreed to reflect advanced negotiations rather than binding

agreements. In the commodity context, the framework agreement may be used by the buyer to solicit interest for sub-sales or obtain indicative quotes for financing. Certainly, custom of trade may well be a relevant factor in the factual matrix, but it has to be proved which may not be straightforward. In light of the recent decisions by the courts to fill in the gaps, there may be unintended consequences. Parties need to make clear in the drafting of these framework agreements that they are “subject to contract” and that they do not give rise to binding obligations otherwise what was to be agreed between the parties may well be agreed for them.


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Russian grain export embargo: Three years on and still going...Ivanna Dorichenko

Courtroom developments in cases relating to the 2010 Black Sea grain export restrictions are now among the hottest topics in both legal and trade circles as English courts have finally started delivering their judgments on those matters which have passed through the two-tier GAFTA arbitration process. The first landmark decision giving long awaited guidance on the issue was a late January judgment in the case of Bunge SA v Nidera BV (formerly known as Nidera Handelscompagnie BV) [2013].

The dispute The dispute concerned the sale of 25,000 mt of Russian milling wheat FOB Novorossiysk, in August 2010, with a loading window of 23-30 August 2010. The contract incorporated GAFTA 49 form with unamended Prohibition and Default Clauses.

The Prohibition Clause provided that:

“PROHIBITION

In the case of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin of the goods, or of the country from which the goods are to be shipped, restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and that to that extent this contract or any unfulfilled portion thereof shall be cancelled. Sellers shall advise Buyers without delay with the reasons therefore and, if required, Sellers must produce proof to justify the cancellation.”

On 5 August 2010, at the same time as the Buyers nominated their vessel, the Russian government imposed a temporary ban on the export of various agricultural products, including milling wheat, for the period from 15 August to 31 December 2010. On 9 August the Sellers contended that the sale contract was automatically cancelled on the basis of the Prohibition Clause in GAFTA 49.

The Buyers treated the Sellers’ position as a repudiation of the contract, and initiated GAFTA arbitration to recover their losses.

The findingsThe first-tier GAFTA Tribunal, and the GAFTA Appeal Board both disagreed with the Sellers’ reasoning and found in favour of Buyers. On appeal to the Commercial Court, Hamblen J agreed with the GAFTA Appeal Board, and dismissed the Sellers’ appeal. In reaching his decision, Hamblen J relied particularly upon the reasoning of the GAFTA Appeal Board, and the findings in Samuel Sanday & Co v Cox McEuen & Co [1922] and Pancommerce SA v Veecheema BV [1983]. The judge’s main conclusions could be summarised as follows:

1. (i) The Russian export prohibition ban could have been lifted at any time before expiry of the contractual shipment period

On 9 August, when the Sellers purported to declare the contract cancelled, there was a possibility that the declared export prohibition could have been revoked or modified, and this would not have restricted export of goods of the contractual description during the contractual shipment period. If that were the case, then, the Sellers would have been able to re-negotiate the price to reflect the effect of the export prohibition.

1. (ii) The GAFTA Prohibition Clause required proof that a prohibition “restricting export” actually affected the goods under the contract

In practical terms, it meant that at the time the Sellers purported to cancel the sale contract, there was no prohibition in place restricting the Sellers’ ability to ship the goods, or preventing the Sellers’ performance. Hence, the Sellers showed no causal link between the Russian export prohibition and the Sellers’ ability to export goods of the contractual description during the contractual shipment period.

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(continued from page 4)

Hamblen J went on to conclude that automatic cancellation of the agreement on the mere announcement of a prohibition, regardless of its likely or actual duration, or whether it had any impact on performance, was such a crude re-allocation of contractual risk that it was most unlikely to be intended by the parties, or the drafter of the Prohibition Clause.

On the issue of quantum, the first-tier GAFTA Tribunal did not award the Buyers any damages on the basis that the sale contract would automatically have been cancelled by virtue of the Prohibition Clause, and therefore the Buyers

would have suffered no loss at common law. The GAFTA Appeal Board disagreed, and so did the Commercial Court Judge, stating that on the facts there was no reason to depart from the parties’ contractually agreed scheme for assessing damages, as established by the Default Clause, and to replace it instead with common law principles.

At the time of writing, the above decision is being appealed to the Court of Appeal and the appeal is currently fixed for November 2013.

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Russian grain export embargo: More on GAFTA’s prohibition clause Caitriona McCarthy

A second case dealing with matters arising out of the 2010 Russian grain export prohibition came up in the form of Seagrain LLC v Glencore Grain BV [2013]. This case concerned an arbitration appeal under Section 69 of the Arbitration Act 1996 regarding the proper application of the GAFTA Prohibition Clause. The appellants (Seagrain LLC) were the Sellers and the respondents (Glencore Grain BV) were the Buyers.

The factsThe disputed contract was dated 6 July 2010, and under it the Sellers agreed to sell and the Buyers agreed to buy feed wheat of Ukrainian or Russian origin. It was common ground that Russian wheat was subject to an export ban at the material time, and the Buyers accepted that the contract had to be fulfilled by Ukrainian wheat. However, the Sellers’ contention was that measures then taken by Ukrainian customs had the effect of restricting the export of wheat, and that accordingly the contract was cancelled, and they were discharged from liability to perform by virtue of the GAFTA Prohibition Clause.

The Sellers’ contention was not accepted, and by GAFTA Appeal Award No. 4277 the GAFTA Board of Appeal upheld the Buyers’ claim for damages for wrongful repudiation of the contract by the Sellers. The Board awarded the buyers damages of USD 270,000 plus interest and fees and expenses.

The issueThe question of law on appeal was the following:

What does a Seller have to show in order to rely on the Prohibition Clause in GAFTA 48 to excuse non-performance of a contract of sale?

The relevant part of section 18 of GAFTA 48 (the Prohibition Clause) read:

“In case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin... restricting export, whether partially or otherwise, any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled.”

It was not in dispute that at the relevant time, difficulties were experienced in exporting Ukrainian wheat, however the Buyers submitted that, at its best, the sellers’ case was that samples of wheat taken from Ukraine could only be analysed by one particular laboratory. The Buyers submitted that delays in, and disruption to the customs clearance regime did not constitute a restriction of export within the meaning of the Prohibition Clause.

The decisionMr. Justice Blair agreed and quoted from the Board’s findings on this point at paragraph 14 of this judgment:

“The inspections might well have been a contributory factor in the delay of customs clearance and/or sailing of export cargoes. However, there was no suggestion in the letter that export cargoes would actually be prevented at any time.”

Furthermore, the Buyers submitted, and the court agreed, that if the term “executive acts” was construed in the broad way argued by the Sellers, commercial certainty would be undermined because automatic cancellation would occur on any adjustment of a Customs clearance regime which resulted in delay or disruption to exports

Mr. Justice Blair held that the Sellers’ broad construction of “executive acts” in the Prohibition Clause, to include “delay and disruption caused by the acts of Customs which had the effect of restricting, partially or totally, shipment of wheat during the limited shipment period” specified in the contract, was unworkable.

The term “any executive act” meant any act done by or on behalf of the government which is in the nature of a formal restriction of exports. Mr. Justice Blair held that it could not be construed as “extending to every action by an official body which has the effect of restricting exports”.


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The Court held that the Board had been entitled to reject the sellers’ case that the requirements of the Ukrainian Customs, in particular the requirement to send samples to a particular laboratory, constituted an executive act within the meaning of the Prohibition Clause and, on the particular facts of the case, dismissed the appeal.

CommentThis decision stands as a warning to any enterprising sellers who might seek to use GAFTA’s Prohibition Clause more widely than it is intended. The judgment serves further to refine the narrow definition of “executive acts” under the Prohibition Clause.

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FOSFA Prohibition and Default Clauses in the aftermath of Bunge SA v Nidera BV [2013] Eurof Lloyd-Lewis and Francesca Corns

The High Court gives an unequivocal message to both buyers and sellers of commodities under FOSFA Prohibition and Default Clauses, in the wake of the decision in Bunge SA v Nidera BV

Following Bunge SA v Nidera [2013] which concerned the construction and application of the GAFTA 49 Prohibition and Default Clauses, the decision in Novasen SA v Alimenta SA [2013] is thought to be the first time the FOSFA Prohibition and Default Clauses have been tested in circumstances where a buyer has been awarded substantial damages by FOSFA arbitrators in accordance with the terms of the clause notwithstanding having suffered no loss on applying “GOLDEN VICTORY” principles. This case could have significant ramifications for commodities traders as both cases head to the Court of Appeal.

This decision means that sellers should now be wary of inadvertently committing repudiatory breach of contract due to the imposition of an export prohibition or other similar event (such as force majeure or strike) at the risk of presenting a buyer with a windfall profit. Buyers must also be mindful that, following this decision, they may only be entitled to recover nominal damages if they choose not to buy against their defaulter in circumstances where subsequent events would have terminated the contract without imposing a liability on sellers. In contrast, by buying replacement goods in the market, sellers would then have to reimburse buyers for the difference between the market and contract prices, irrespective of events after the default.

BackgroundThe parties entered into a contract for the sale of crude groundnut oil exported from Senegal CIF Genoa for shipment December 2007/10 January 2008. The contract incorporated the terms of FOSFA Contract No 201. The contract remained open for performance on 2 April 2008 when Sellers properly notified Buyers pursuant to the clause that there was a prohibition on export in force in Senegal, so as to extend the shipment period for 30 days until 2 May 2008; the prohibition remained in force until 6 June 2008. However, in this communication, Sellers also purported to terminate the contract on the grounds of the prohibition. Buyers’ declared this to be an anticipatory repudiatory breach and accepted it, thus bringing the contract to an end.

Buyers brought a claim for damages against Sellers. Sellers contended that no loss was suffered by Buyers because, absent Sellers’ termination, the contract would have, in any event, come to an end without liability on the part of Sellers upon expiry of the 30 days, pursuant to the Prohibition Clause. The FOSFA Board of Appeal rejected this argument and held that by terminating the contract prematurely, Sellers deprived themselves of the right to rely on the potential automatic cancellation of the contract on 2 May 2008 in accordance with the Prohibition Clause. Buyers were awarded damages under the Default Clause being the difference between the contract and the market prices on 2 April 2008.

Sellers appealed to the High Court under section 69 of the Arbitration Act 1996 arguing that, when assessing whether or not buyers suffered a loss, the arbitrators should have taken account of matters occurring after 2 April 2008, applying the common law principles of the House of Lords in Golden Strait Corp v NYKK (The “GOLDEN VICTORY”) [2007]. Buyers contended that the arbitrators were correct in ignoring the subsequent events after default because the Default Clause is a contractual regime agreed by the parties in place of the common law.

The Court found in favour of Sellers. Mr Justice Popplewell held that if there was no entitlement to damages at common law because no loss had been suffered due to events after the breach, clear words are needed to confer a contractual entitlement to such a remedy, particularly where the contractual term is a standard clause drafted and adopted by a trade body. The remedy would otherwise be contrary to the compensatory principle governing the quantum of damage, in that a party claiming damages for breach of contract should be entitled to recover no more than the loss occasioned by the breach.

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Popplewell J went further to distinguish the assessment of damages under the FOSFA Default Clause as between an innocent buyer (1) who goes into the market to buy substitute goods; and (2) who does not buy against the default and chooses to just claim damages instead. In the former scenario, the Default Clause modifies the common law position such that the innocent buyer would be entitled to damages irrespective of the subsequent events, and the effect they might have had on the contract if it remained in force. However, in the latter, the innocent buyer is entitled to recover damages “if any”. The Default Clause therefore does not modify the common law position and entitlement to damages would be in accordance with “GOLDEN VICTORY” principles. The Default Clause places a ceiling upon the damages, and confers no right to recover where no damage has been suffered.

In justifying this reasoning, Popplewell J asserted that the Default Clause strikes a balance between the common law position and the commercial considerations of certainty and finality. For a buyer, choosing not to buy against their defaulter “the effect of subsequent events on his lost bargain might sensibly be seen as an acceptable uncertainty inherent in his decision not to replace the lost bargain, or at least one which from the seller’s point of view should not override the compensatory principle.”

This decision comes in the wake of the decision of Mr Justice Hamblen in Bunge SA v Nidera [2013], which considered the GAFTA Prohibition and Default Clauses. Although there are material differences between the FOSFA and GAFTA clauses, and whilst upholding the Board of Appeal’s decision to award the Buyers substantial damages under the clause, Hamblen J acknowledged he was essentially ruling for certainty over fairness in the assessment of damages.

The Judge also considered, although he left undecided, the question of whether “GOLDEN VICTORY” principles could apply to a one-off sale contract at all. The “GOLDEN VICTORY” concerned the repudiation of a long term charter that had four years left to run. Fifteen months later, the Second Gulf War started, which would have resulted in the charterers exercising their right to cancel the charter had it still been in force. The House of Lords ruled that the general principle that damages fell to be assessed at the date of the breach was subject to the overriding compensatory principle, and that a court or tribunal should have regard to what actually occurred after the breach. Hamblen J considered that the “GOLDEN VICTORY” concerned a period contract, and the departure from the general rule was only adopted in relation to the period element of the damages claimed, not the applicable hire rate. He noted that Lord Scott in the “GOLDEN VICTORY” recognised that assessment of damages at the date of breach is “particularly apt” in sale of goods cases, as is reflected in the Sale of Goods Act 1979. Hamblen J also drew a distinction between a one-off sale contract, and a contract for the supply of goods over a specified period. However, this was not fully argued in Bunge SA v Nidera so it was unnecessary for Hamblen J to decide on the matter but it is nevertheless a point for consideration.

On this basis, regardless of whether the contract is based on GAFTA or FOSFA terms, both cases send an unequivocal message to sellers to ensure they do not declare an anticipatory repudiatory breach prematurely. Buyers and sellers should follow closely the outcome of these appeals in the Court of Appeal.

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On-spec gasoil breaches Sale of Goods Act 1979 implied terms Tara Smith

In the case of Bominflot Bunkergesellschaft fur Mineralole mbH & Co v Petroplus Marketing AG, The “LADY MERCINI” [2012], the High Court took the view that a cargo of gasoil which was on spec at the load port but was later found to be unstable at the discharge port was not of satisfactory quality for the purposes of the Sale of Goods Act 1979 as it could not be used for that particular grade’s usual purposes.

The factsBominflot (Buyers) purchased from Petroplus (Sellers) a cargo of 1% EU qualified gasoil.The purchase contract in question provided for various quality specifications including total sediment content. There was, however, no mention of stability. Quality was to be determined by a surveyor at the loadport, and the surveyor’s analysis was to be final and binding except in the case of fraud or manifest error. Title passed at the same time as risk, the transfer of risk taking place at the moment when the gasoil passed the vessel’s permanent hose connection at the loadport.

The loadport surveyors, SGS, provided an analysis of the gasoil which showed it to be within specification. However, upon arrival at the destination, some four days later, further sampling showed the cargo to be significantly off-specification with regards to sediment. The Judge accepted expert evidence that the sediment was inorganic in nature, rather than it being rust from the vessel’s tanks or lines, thus indicating the vessel was not responsible for the increased sediment. The only other possible explanation for the off-specification sediment deposit was therefore that the cargo must have been unstable on delivery at the load port. During the four days’ sailing to the port of destination, the instability caused increased sediment in the gasoil, meaning the cargo was out of specification by the time the vessel arrived a the discharge port.

The issue Unstable gasoil, even prior to the formation of sediment, cannot be used for any of the usual purposes usually associated with this grade of product. The Buyer’s sub-buyers therefore rejected the cargo, and the Buyers claimed against the Sellers for loss of value to the gasoil, and associated losses, claiming that Sellers had breached the implied term of satisfactory quality under the Sale of Goods Act 1979 s.14(2).

S.14 (2) states:

14 Implied terms about quality or fitness.…

(2) Where the seller sells goods in the course of a business, there is an implied term that the goods supplied under the contract are of satisfactory quality.

The decisionThe Judge found in favour of the Buyers. Where the provisions of the Sale of Goods Act 1979 have not been expressly excluded from the sales contract, that legislation implies various terms into it, one of which is that the goods should be of satisfactory quality. Even in circumstances where the contract provided a detailed specification, of which stability was not a characteristic, this did not in itself exclude the implied term.

Satisfactory quality means that the product must be fit for all purposes for which it was intended. Therefore, whilst the gasoil complied with the specification on delivery at the loadport, it was not in fact of satisfactory quality at the point of delivery as the nature of its instability meant that it could not be used for its normal purposes. The instability although neither covered by the specification, nor tested for, still rendered the cargo of unsatisfactory quality and provided a legitimate basis for both rejection and a claim for damages.

CommentAs a general rule, sellers would be well advised to exclude implied terms or warranties regarding fitness for purpose from their sales contracts, whilst buyers may wish to do the opposite. Traders should ensure that the contractual terms on this point are back to back. All parties should seek to ensure the specifications for their commodities are set out in as much detail as possible, as reliance on implied terms at a later date is never a desirable course of action.

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Can a bank be the lawful holder of bills of lading?Pressiana McQuinn

In the recent case of Standard Chartered Bank v Dorchester LNG (2) Ltd (The “ERIN SCHULTE”) [2013], the main issue was whether a bank that took possession of, and retained bills of lading presented to it pursuant to a letter of credit, was the lawful “holder” of those bills for the purposes of s. 5(2)(b) of the Carriage of Goods By Sea Act 1992 (COGSA).

The factsThe claimant bank, SCB, sued the shipowner of the “ERIN SCHULTE” for the misdelivery and/or conversion of a cargo of gasoil.

The gasoil was bought by United Infrastructure Development Corporation (UIDC), the first buyer, from Gunvor International BV (Gunvor) and then sold to Cirrus Oil Services Ltd (Cirrus), the second buyer. On the application of Cirrus, United Bank of Africa (UBA) opened a letter of credit in favour of UIDC which was confirmed by SCB and which was later transferred to Gunvor.

The cargo was split into two shipments, the second of which was shipped on board the “ERIN SCHULTE”. The bills of lading were consigned “to the order of Société Générale, Paris”, who acted as agent for Gunvor.

On arrival, it was found that the first shipment was not of the required quality. Therefore, UIDC and Cirrus, the first and second buyers, rejected the cargo on both vessels. Although Cirrus offered to purchase the first shipment at a reduced price, it refused to do the same in respect of the second shipment.

Consequently, the letter of credit was amended to reduce the value and quantity of the cargo covered by it, to that of the first shipment. The amendment was sent to SCB, the claimant bank, which sought and obtained UIDC’s consent. SCB then sent the amendment to Gunvor, the seller. However, before obtaining Gunvor’s consent, SCB advised UBA that UIDC had consented to the amendment.

In the meantime, Gunvor received payment for the first shipment. Gunvor also presented documents to SCB under the original letter of credit seeking payment in respect of the second shipment, and confirmed to SCB that it had

rejected the amendment. Although SCB initially rejected the documents as discrepant because of the amendment to the letter of credit, following discussions, it eventually accepted that it was obliged to honour the letter of credit and paid the sum claimed by Gunvor plus interest and costs.

In the meantime, the cargo was discharged on the instructions of Gunvor and on production of letters of indemnity. Delivery was taken by two new purchasers who had paid UIDC, the first buyer. However, UIDC had not paid either Gunvor or SCB and, therefore, it was the beneficiary of a windfall. This windfall resulted from SCB’s error in notifying UBA that UIDC had agreed to the amendment to the letter of credit. Crucially SCB had failed to obtain Gunvor’s prior agreement to that amendment. The error meant that whilst SCB remained obliged to honour the transfer letter of credit to its full value, SCB could only seek recourse from UBA to the limited extent permitted by the amendment. This resulted in SCB paying Gunvor with no right of recourse against UBA.

The issuesThe main question for the court was whether SCB could recoup its loss from the shipowner on the basis that SCB was the lawful holder of the bills of lading. If it could, then Gunvor would have to indemnify the shipowner pursuant to the letters of indemnity.

SCB’s case was put on several bases, the first of which was that it became the lawful “holder” of the bills of lading when the bills were delivered to it by Gunvor. In the main, the shipowner argued that SCB never became the lawful holder of the bills.


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The decisionJudgment was given for SCB. Teare J rejected the shipowners’ submission that since SCB did not honour the credit when the bills were first presented to it, SCB’s possession of the documents was conditional in nature and the documents belonged to Gunvor, the presenter, until the documents were “taken up” within the meaning of UCP 600. The court declined to construe COGSA in the light of UCP 600 holding that delivery of an endorsed bill of lading for the purposes of COGSA is a simple act and it is not linked to whether the bank to whom the bills had been endorsed had decided that the documents were compliant with the letter of credit.

CommentThe significance of this decision lies in the clear distinction drawn by the court between the transfer of the right of suit operating under the bills of lading, and the delivery of the bills within the context of a documentary credit. Therefore, although documents presented pursuant to a letter of credit are held by the bank to the order of the presenter until the credit is honoured, this does not mean that the bank is not the “holder” of the bills for the purposes of COGSA.


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Oil Price-fixing – the next Libor?Clare Hatcher Mark Lakin

“The lamp burns bright when wick and oil are clean” Ovid

In May of this year the European Commission launched raids on the oil majors Royal Dutch Shell, BP and Statoil. The London office of Platts (a unit of US publisher McGraw Hill), the world’s leading price reporting agency, was also raided. The Commission’s concerns were stated to be that the companies:

“may have colluded in reporting distorted prices to a Price Reporting Agency to manipulate the published prices for a number of oil and biofuel products…”

This is not the first time that concerns have been raised about the benchmarking of oil prices. The issue was raised at the 2011 G20 summit in Cannes and Total Oil Trading of France informed regulators last August that “several times a year, estimates of market prices on key [energy] indices… are out of line with our experience of the day”.

With the finance world still reeling from the revelations regarding the rigging of LIBOR, is oil price-fixing the next skeleton to tumble out of the cupboard? This article will briefly explore the current benchmarking system for oil prices, the EU’s antitrust regime under which the case will be considered and possible future developments.

How the current pricing system worksPlatts Market On Close (MOC) assessment process for oil and some petrochemicals markets publishes the daily final trading price for these commodities. This is done through a voluntary window system. For between a half hour daily, Platts polls buyers and sellers of crude oil, petroleum products and financial instruments tied to the value of oil about bids, offers and the details of completed transactions. This information is provided on a voluntary basis. The companies include major international oil companies, national oil companies, independent trading houses, financial institution and end-users. The system thus relies on oil traders voluntarily and truthfully disclosing prices during this window although Platts does also ask for supporting evidence.

Platts MOC pricing does have some in-built protections in guidelines Platts uses, and it also has a right to exclude companies from the MOC pricing process when they do not adhere to the guidelines. For example months before its collapse, Lehman Brothers was blacklisted due to concerns over the figures it was submitting.

The price assessments established by Platts are then used by buyers and sellers as a basis for pricing spot transactions and term contracts; risk managers use them to settle contracts and to place a market value on the products they hold; and analysts use them to identify trends in supply and demand.

Legislative regimeThe European Commission brought its investigation under the two main antitrust provisions in the Treaty on the Functioning of the European Union (TFEU), article 101 and 102. These are:

1. Article 101 TFEU – This prohibits agreements or practices which have as their object or effect the restriction, distortion or prevention of competition within the EU, and which affect trade between EU member states. Examples of agreement or practices which may infringe Article 101 include agreements between competitors which fix purchase or selling prices or any other trading conditions, agreements which share markets and exclude others from those markets, and long-term or exclusive agreements which foreclose the market.

2. Article 102 TFEU – This prohibits firms who hold a dominant position in a determined market from abusing that position.


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InvestigationThe European Commission has very broad investigatory powers; it is considered by many to be one of the few regulators with real “teeth”. Its investigation powers are set out in Council Regulation (EC) No 1/2003 (the Regulation) and include the power to:

1. Request Information – The Commission may obtain all necessary information from government and competent authorities

2. Take statements – the Commission may interview any natural or legal person who consents to be interviewed

3. Conduct inspections – this includes the power to enter premises, examine books and records, seal any business premises and books or records for the period of the inspection, and ask any representative or member of staff for information and record their answers

EnforcementUnder the Regulation the Commission has wide ranging enforcement powers: The Commission can order the company concerned to bring an end to the behaviour which breaches Article 101 and/or Article 102. It can also order interim measures in cases of urgency where there is a serious risk of irreparable harm.

The Commission may impose fines up to 10% of group turnover on companies which participate in the infringement of Article 101 and/or Article 102 TFEU, contravene a decision ordering interim measures or fail to comply with a binding Commission decision.

The Commission has successfully brought numerous enforcement actions under Articles 101 and 102. Recent examples include a total of 1.3bn Euros of fines in 2008 against a number of car glass manufacturers for sharing target prices and markets, and for customer allocation.

However in practice most cases are settled by the Commission, either informally or under new settlement powers contained in the Regulation.

The future?The European Commission’s investigation into the setting of oil prices is still a long way from completion. It could take some time for the Commission to publish any findings; previous Commission investigations have taken years to complete. However, what is clear is that the European Commission has potent investigatory and enforcement powers, and if the oil majors or Platts are found to be in breach of TFEU 101 or 102, they could face very stiff penalties.

There could also be consequences well beyond Europe. A commodities trading firm in Chicago, Prime International Trading has filed a civil lawsuit in the United States, accusing a number of oil companies of colluding on prices and the defendants in the class action include the three majors subject to the EU investigation. After the EU probe began, the head of the Senate Committee on Energy and Natural Resources, Rob Wyden, called on the Justice Department to start its own investigation. We may therefore see parallel investigations taking place in both the US and the EU before the year is out.

In the meantime, the EU appears determined to impose restrictions on the price assessment mechanisms in the oil markets. The EU has published a draft regulation which, if enacted, will give the supervision of published benchmarks used as a reference for exchange traded financial instruments or financial contracts, such as LIBOR and Platts MOC price assessment mechanism, to the European Securities and Markets Authority. It remains to be seen whether this legislation will be enacted.

Whatever the outcome of the investigation, the industry is facing uncertainty about how prices are set and how this core part of their business is supervised.


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Australia’s agricultural sector Dean Carrigan Avryl Lattin Leah Hewish

Australia has recently made two major policy announcements which are designed to boost its agricultural sector: the National Food Plan and the Policy on Financial Investment in the Agricultural Sector.

The aim is to increase productivity in the food production industry in Australia, and take advantage of significant growth opportunities in the Asian region. Australia is already a major net exporter of agricultural produce (producing food for over 60 million people) and in the past five years foreign investors have made substantial investments in Australia’s agricultural sector as companies seek to vertically integrate their operations, and build up their Asia-Pacific presence. Given the expectations for food demand over the coming decades, strong investment flows into this sector in Australia are expected to continue.

National Food PlanThe Australian Government released the first National Food Plan (the Plan) on 25 May 2013.

The Plan identifies four priority areas:

• Strengthening Australia’s competitive advantage in agriculture and food-related exports, and capturing global opportunities.

• Improving productivity of the food industry in Australia, and increasing its contribution to the Australian economy.

• Ensuring Australians have access to safe and nutritious food, and assisting with efforts to achieve food security in the Asian region.

• Producing food sustainably.

The Plan sets out 16 goals to be achieved by 2025 which are focused on each of these priority areas.

Seizing Opportunities in Asia

By 2050, it is predicted that world demand for food will increase 75% from that of 2007 and almost half of this will emanate from China. The Plan aims to increase the value of Australia’s agricultural and food exports by 45% by 2025, create stronger regional trade relationships in

food commodities, and generate a food brand that is recognisable internationally for its high-quality, safety and sustainability.

In order to achieve this, the Australian Government will be working to reduce trade barriers and negotiate market access for Australia’s food sector through global, regional and bilateral trade agreements. In addition, an Asian Food Markets Research Fund will be launched to help businesses increase exports of food products and services to Asian markets.

Improvements to Food Production Industry

With greater scarcity of resources, particularly water, energy and arable land, the Plan is focussed on efforts to improve productivity in the agricultural sector. The goal is to increase Australia’s agricultural productivity by 30% by 2025 through significant investment in rural research and development, building a skilled workforce and improving access to capital.

A specific element of the Plan is to continue to encourage foreign investment in Australia’s agricultural sector. It is predicted that between 2013 and 2050, Australia’s food industry will need up to AUD 1 trillion in additional capital to increase its size, productivity and competitiveness in the global market. There is express recognition that domestic capital will be insufficient to reach this target and that Australia will continue to welcome foreign investment.

The Plan also sets out the objective of developing Australian agriculture into a more technologically progressive industry allowing it to increase the scale of production with a highly-skilled workforce.

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The Plan promotes the scaling up of Australian production through collaborations and foreign investment.

The Australian Government is to augment this development with more efficient regulation in order to reduce business costs. The aim is to become one of the top five most efficiently regulated countries in the world.

Domestic and Regional Food Security

Domestically, the Plan strives to ensure that there is sufficient safe, nutritious food available, especially for those in remote areas. Further, the Plan aspires to assist developing countries improve their farming techniques and implement new technology so as to address food inequality and food security globally.

Policy on Foreign Investment in Agriculture (the Policy)In response to domestic debate about the level of foreign investment in Australia’s agricultural sector, the Australian Government released a Policy Statement on Foreign Investment in Agriculture earlier this year. The Policy makes it clear that Australia will continue to rely on foreign investment to support its agricultural sector, boost productivity and encourage technological innovation.

Foreign investment in Australia is reviewed on a case-by-case basis pursuant to the Foreign Acquisitions and Takeovers Act 1975 (Cth). Pursuant to this legislation, the Treasurer or his delegate has the ability to review investment proposals to determine if they are contrary to Australia’s national interest. In practice, the Treasurer seeks advice from Australia’s Foreign Investment Review Board.

All foreign government investors are required to seek prior approval before making a direct foreign investment in Australia.

For any private company, other than investors from New Zealand or the United States, prior approval is required before acquiring a substantial interest in an Australian corporation or business which is valued above AUD 248 million. New Zealand and United States’ investors must seek prior approval for investments above AUD 1,078 million in non-sensitive sectors, and AUD 248 million for sensitive sectors. Additional restrictions apply with respect to foreign investment in the media and real estate sectors.

In applying national interest considerations, a range of factors may be considered by the Treasurer and are applied on a case-by-case basis. The issues which have been specified for consideration include national security, competition, the impact on other Australian Government policies such as taxation revenues, the impact on the economy and the community, the character of the investor and the extent to which an investor operates independently of foreign governments.

The Policy sets out additional factors that will be considered in relation to the agricultural sector. The Australian Government will seek to ensure that foreign investments do not adversely affect the sustainability of Australia’s national agricultural resources, including their economic, social and environmental contribution to Australia. Additional factors which will be considered include:

• The quality and availability of Australia’s agricultural resources, including water

• Land access and use

• Agricultural production and productivity

• Australia’s capacity to remain a reliable supplier of agricultural production, both to the Australian community and Australia’s trading partners

• Biodiversity

• Employment and prosperity in Australia’s local and regional communities

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The strong affirmation that the Australian Government supports foreign investment in agriculture is positive for foreign investors, and many will welcome the clarification that has been provided around the national interest test for investment in the agricultural sector.

More still to come….The recent announcement by GrainCorp Directors that they supported the AUD 2.8 billion takeover offer by Archer Daniels Midland Company (ADM) has fuelled further discussion about the future of Australia’s agricultural industry, and the role that foreign investment will play. GrainCorp is the largest independent grain handler in Australia.

In June, the Australian Competition and Consumer Commission (Australia’s competition regulator) announced that it would not oppose the takeover. It determined that the proposed transaction would not substantially lessen competition in any market, and that the incentives faced by ADM with regard to the storage and transport supply chain would not be materially altered by the acquisition.

However, the deal has not yet been approved by the Foreign Investment Review Board, and other investors will watch with interest to see how the national interest test will be applied in this case. Approval from Chinese regulatory authorities will also be required.

The Australian Senate has separately requested a report to be prepared by the Senate Standing Committee on Rural and Regional Affairs and Transport on the ownership arrangements of grain handling. This is expected to be released at the end of July and the findings may also have implications for foreign investment policy.

In July, the New South Wales Government released an Agriculture Industry Action Plan – Issues Paper for consideration by the industry. The issues identified through the Action Plan and consultation process will be used to formulate the framework for future actions of industry and government in this sector in New South Wales. This will add a further dimension to the policy framework for agriculture in Australia’s largest State economy.

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The meaning of “as is”Marko Kraljevic

Norwegian Saleform 1993 (NSF 93) currently remains the wording of choice for parties to most ship sale and purchase transactions. The recent landmark High Court decision in The “UNION POWER” [2012] has challenged the perceptions of some practitioners regarding the application of the Sale of Goods Act 1979 (SOGA) implied terms to NSF 93, and is therefore of great significance to the market.

The factsThe dispute arose following the sale of the 1994 built vessel “UNION POWER” for US$7 million in 2009. The vessel and her records had been inspected by the buyers in the usual way, on 18 August 2009, and the buyers’ surveyor found nothing of significance. The parties entered into a Memorandum of Agreement (MOA) based on NSF 93, on 4 September 2009, which by clause 11 stated that the vessel was sold “as she was at the time of inspection”. The vessel was delivered to the sellers, on 1 October 2009, at Tuzla, Turkey. Following drydock repairs and special survey, the vessel sailed from Tuzla on a ballast voyage. Only some 30 hours after departure from Tuzla, the main engine broke down. Further investigation revealed that the no.1 crankpin bearing had failed, and that the crankpin was significantly undersize and oval.

The buyers argued that a term as to satisfactory quality was implied into the MOA by virtue of section 14(2) of SOGA, and that the sellers were in breach of that term. The sellers, on the other hand, maintained that the section 14(2) implied term was excluded because this was inconsistent with the stipulation in clause 11 that the vessel was sold “as she was at the time of inspection”.

The decisionAt arbitration, the tribunal rejected the sellers’ argument, holding that the implied term as to satisfactory quality was to be implied into the MOA, that the sellers were in breach of that term and that the buyers’ claim therefore succeeded.

The sellers appealed and, after hearing detailed argument on the point, the High Court upheld the approach of the tribunal. Flaux J concluded that the words “as she was”, in the first sentence of clause 11, were merely a necessary part of a sentence which recorded the obligation to deliver the vessel in the same condition as she was when

inspected but that this said nothing about what the sellers’ obligations were, either on inspection or delivery, as regards the quality of the vessel, and as such they could not exclude the implied term as to satisfactory quality under section 14(2) of SOGA.

CommentAlthough the Court’s finding is of considerable significance to users of NSF 93, as the judge recognised, it is already common practice for additional language to be incorporated into MOAs based on NSF 93, with a view to excluding SOGA implied terms. Flaux J noted that, in order to be effective, such amendments must either expressly exclude the SOGA implied terms, or amount to an unequivocal statement of an alternative regime as to quality “which was wholly inconsistent with the section 14(2) implied terms as to satisfactory quality, such as an entire agreement clause.”

The decision may also have a wider impact on any contract for the sale of goods on “as is, where is” or equivalent terms. This is because Flaux J considered the notion of “as is sales” generally, and expressed the provisional view that, in the absence of proven market practice, a mere stipulation that goods are sold on an “as is basis” may be insufficient to exclude SOGA implied terms. In particular, he indicated that such words may operate to exclude only a right to reject the goods but not the right to sue for damages if they are found to be of unsatisfactory quality.

Clyde & Co acted for the successful buyers in the “UNION POWER” case.

This article was first published in Fairplay, 7 February 2013 issue.

For a more detailed analysis of the case, please click here to read our full update.


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Avryl LattinE: [email protected]

Sabina Cehajic E: [email protected]

Francesca CornsE: [email protected]

Mark Lakin E: [email protected]

Dean CarriganE: [email protected]

Marko KraljevicE: [email protected]

George MingayE: [email protected]

Pressiana McQuinn E: [email protected]

Ivanna Dorichenko E: [email protected]

Caitriona McCarthy E: [email protected]

Leah Hewish E: [email protected]

Clare HatcherE: [email protected]

Tara SmithE: [email protected]

John WhittakerE: [email protected]

Eurof Lloyd-LewisE: [email protected]

Michael SwangardE: [email protected]

Meet the team

Our team of international trade and commodities lawyers provides legal expertise both contentious and non-contentious across the supply chain on a global basis.

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