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COVID-19: Practical Advice for Sellers and Buyers Trading under Gafta Contracts

  • Market Insight 20 May 2020 20 May 2020
  • UK & Europe

  • Coronavirus

This article seeks to explore key contractual considerations arising under Standard Form Gafta Contract Numbers 64 (effective as of 1 January 2020) (“Gafta 64”) and 100 (effective as of 1 January 2020) (“Gafta 100”) (each a “Contract”, and together the “Contracts”) following the outbreak of the novel coronavirus ("COVID-19”). It also provides advice to Sellers and Buyers for mitigating against the impact of COVID-19 upon their ability to perform under sales contracts.

Written by Eurof-Lloyd Lewis and Benjamin Bryant

1. Ability of Parties to discharge their obligations under the Contracts

a. Force Majeure

Both Gafta 64 and Gafta 100 are construed in accordance with English law, under which parties’ only recourse to Force Majeure as a means of suspending and / or cancelling their obligations is through the express incorporation of Force Majeure wording. Such wording is present in both Contracts.

i. Event of Force Majeure

Under each Contract, Sellers (only) may suspend performance of their obligations where their performance has been prevented “whether partially or otherwise” by an “Event of Force Majeure”. In order to rely upon this wording, Sellers will have to prove that the event falls within one of the twelve definitions of “Event of Force Majeure” ((enumerated (a) – (l)). It should be noted that some GAFTA standard form contracts, e.g. Gafta 49, enable both Sellers and Buyers to suspend performance, or where this is not the case, parties occasionally amend the standard wording in favour of a mutual right to suspend. For the purpose of this article, we will proceed on the basis of the Seller's unilateral right. The following merit consideration:

(i) Definition (a) (“prohibition of export or other executive or legislative act done by or on behalf of the government of the country of origin or of the territory where the port or ports named herein is/are situate, restricting export, whether partially or otherwise”) – the former limb of this definition may cover a situation in which Sellers are prevented from performing owing to the imposition of restrictions on exports of certain goods (for example to ensure domestic food security in light of the outbreak of COVID-19). The latter limb may cover a situation in which an executive order is given to close or restrict access to a port preventing a seller from delivering or loading irrespective of the origin of the goods.

(ii) Definition (j) ("Act of God") – under English law the term Act of God generally denotes an event arising due to natural causes, without any human intervention, and which could not be prevented by any form of foresight, for example violent storms, floods and earthquakes. Whether the COVID-19 pandemic constitutes an Act of God is likely to be a question of interpretation; in this regard, Sellers should note that none of the definitions in either Contract expressly refer to an epidemic, pandemic or infectious disease.

(iii) Definition (k) (“unforeseeable and unavoidable impediments to transportation or navigation”) may apply in circumstances where the owner suddenly deviates owing to illness of crew members. Under English law, questions of whether an impediment is “unforeseeable” and “unavoidable” are generally viewed from the point at which the parties entered into the contract. As the global response to the COVID-19 pandemic develops, legal disputes as to whether a COVID-19-related event, which prevented performance, was "unforeseeable" or "unavoidable" as at the date the contract was entered into, are to be expected.

(iv) Definition (l) (“any other event comprehended in the term "force majeure"”) – under English law, any use of the expression “Force Majeure” must be construed in light of the nature and general terms of the contract, as well as the words which precede (and follow) it. Such term, may therefore serve to “sweep-up” any non-performance owing to events that have arisen as consequence of, or in response to, the COVID-19 pandemic. Legal disputes as to the precise scope of events caught by the above or similar wording, are expected to develop, though Courts will often apply a narrow interpretation to such questions, by reference to the specific wording and nature of the contract in question.

ii. Burden of Proof

Sellers must prove that they were prevented from performing. Under English law this requires Sellers to show that performance became physically or legally impossible (and not merely difficult or unprofitable), though the addition of the words "whether partially or otherwise" in the Contracts may serve to broaden the scope of scenarios caught, for example, where export quotas are imposed. Sellers must also prove that their performance was prevented by reason of the Event of Force Majeure identified, that the Event identified was beyond their control, and that there were no reasonable steps they could have taken to avoid or mitigate the event or its consequences. If Sellers (i) would have defaulted in any event; (ii) could have performed by adapting their plans (e.g. by sourcing goods from a different supplier, or by delivering (loading) at another nominated port) or (iii) are prevented only by commercial considerations, the causal link will likely not be satisfied. Further, the more that the COVID-19 pandemic is understood and brought under control, the less arguable it will be that an event caused by COVID-19 which prevents performance, is an event beyond the reasonable control of the parties.

iii. Remedies

Wrongfully seeking to invoke Force Majeure to excuse contractual non-performance will constitute a repudiatory breach of contract by Sellers, allowing Buyers (should they wish) to terminate the contract and seek damages. Sellers should therefore obtain independent legal advice before asserting Force Majeure. In the event that Sellers can identify an Event of Force Majeure, and satisfy the above causal requirements, both Contracts set out the following mechanism:

(i) Sellers have the option to suspend performance, on the condition that they serve a notice of suspension on Buyers (in accordance with the Notice requirements stipulated in the Contracts) within the later of (i) 7 consecutive days after the occurrence of the Event, or (ii) not later than 21 consecutive days before commencement of the delivery (shipment) period.
If the Event of Force Majeure continues for 21 consecutive days after the end of the period of delivery (shipment), Buyers have the option to cancel the unfulfilled part of the contract, subject to serving a notice of cancellation not later than the first business day after expiry of the 21-day period.

(ii) If Buyers’ option to cancel is not exercised, the contract will remain in force for an additional 14 consecutive days, after which (if the Event of Force Majeure has not ceased) any unfulfilled part of the contract will be automatically cancelled.

(iii) If the Event of Force Majeure does cease, Sellers are obliged to notify Buyers “without delay”, upon which notification the Sellers will be allowed as much time as was left for delivery (shipment) under the contract, before the Event of Force Majeure occurred, and in any event not less than 14 consecutive days.

iv. Limitations

The Force Majeure wording in the Contracts does not cover circumstances in which Buyers are prevented from performing. Sellers wishing to rely on the doctrine of Frustration, as an alternative means of excusing non-performance, should be mindful that: (i) the Doctrine of Frustration  has a narrow scope given the usual reluctance of English Courts to hold that a contract has been frustrated; and (ii) the presence of express Force Majeure wording, coupled with the lack of any express preservation of the Doctrine of Frustration, in either Contract, may serve to further narrow the scope of Sellers’ (though not Buyers') ability to rely on the Doctrine, in as much as, if the express Force Majeure wording is deemed to already cater for the event, it is no longer (by definition) an unforeseen, supervening event, required in order to invoke the Doctrine of Frustration.

b. Delay

Sellers (in circumstances where they are unable to rely on Force Majeure) and Buyers should also ensure that they understand their position under the Contracts, where performance is delayed as a result of COVID-19 related-events. Below, two examples are considered:

i. Delivery (shipment)

Each Contract requires the nominating party to ensure arrival (and loading) of the nominated vessel within the agreed delivery (shipment) period. As a result of the COVID-19 pandemic, delay to delivery (shipment) may arise as a result of: (i) disputes as to the nominated vessel’s suitability to carry or fitness to receive the goods, where the vessel has called at affected ports or has recently carried infected crew (though neither Contract incorporates an express right to veto); (ii) personnel shortages at the load port; (iii) the inclusion of new owner-friendly COVID-19-specific clauses in the attendant charterparty, allowing owners to nominate alternative load ports; (iv) the refusal of ports to grant Free Pratique to vessels entering ports (not addressed for either CIF or FOB sales, in either Contract), and (v) the imposition of stringent health screening tests and quarantine periods.

In such cases both Contracts allow the nominating party to extend the period of delivery (shipment), subject to serving notice upon the other party no later than the next business day following the last day of the delivery period. If however, delivery (shipment) does not occur within the extended period provided for, the non-nominating party has the option to declare the nominating party to be in default (triggering the default provisions for establishing damages) or to demand payment at the contract price plus additional premium or charges, in accordance with the specific provisions of each Contract.

ii. Documents

Both Contracts provide for payment in cash against documents. It is highly likely that, in the wake of COVID-19, the disruption to courier services and other means of document delivery will lead to delay in the presentation of shipping documents by Sellers, and consequently payment by Buyers. Sellers should further factor in Buyers’ implied right under English law to a reasonable amount of time to inspect the documents prior to deciding whether to accept them (as distinct from the goods). Gafta 100 alone provides (i) an alternative option of payment in exchange for documents on or before arrival of the vessel at destination (at the Buyers’ option); failing which (ii) Sellers are obliged to provide other documents or an indemnity entitling the Buyers to obtain delivery of the goods, in exchange for payment, failing which Buyers may take delivery under a self-provided indemnity (costs to be borne by the Sellers) and shall pay for the other documents when presented. In the absence of express provision, parties may wish to agree that the bills of lading and other documents are transported aboard the vessel, or otherwise agree to delivery / payment against a Letter of Indemnity.

2. Risk of contamination to cargo

On current evidence published by the World Health Organization, it does not appear likely that COVID-19 can survive for long periods of time in bulk cargoes of feed and / or grain. Nonetheless, in order to ensure that Sellers meet their obligation to make delivery (shipment) in good condition, (and that the vessel is otherwise suitable to carry the goods), parties may wish to agree that: (i) any holds are subject to additional cleaning prior to loading; (ii) previous cargoes do not include livestock or animal product and/or (iii) cargoes are fumigated pursuant to GAFTA Fumigation Rules No. 132. FOB Sellers under Gafta 64 should also be aware of their obligation to use reasonable endeavours to supply a phytosanitary certificate in circumstances where, after the date on which the contract has been entered into, the named country of import changes its phytosanitary requirements. Despite no overwhelming evidence to date that this is the case, Buyers should double-check any change in requirement with the country of import.

3. Insolvency

Parties should be prepared for the eventuality that they or their counterparties may become insolvent as a result of the impact of the COVID-19 outbreak on businesses’ cash-flow. Under the Contracts, should any of a number of acts, each defined as an “Act of Insolvency”, occur, the party in question is required (within two days of such Act) to serve notice of the occurrence of such Act of Insolvency upon the other party, upon proof of which the contract shall be closed out at the market price ruling on the business day following the service of the notice. If no such notice is served, the other party has the option to declare the contract closed out at either the market price on the first business day after the date when it first learnt of the occurrence of the Act, or at the market price ruling on the first business day after the date when the Act occurred.

4. Concluding thoughts

As well as affecting parties’ ability to perform contractually, the outbreak of COVID-19 is likely to cause parties to suffer commercially as supply chains are interrupted and counterparties default.

If you require clarification or assistance on any of the points discussed in this article, at Clyde & Co, we have extensive experience in advising Sellers and Buyers with drafting well-structured, clear and balanced sale and purchase agreements, and will be happy to assist you.

This article was first published in Gaftaworld, Issue 243, April 2020

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