March 8, 2019

Review of Recent GAFTA Contract Amendments

GAFTA have approved the amendment of a number of its standard form contracts, the most significant of which are the removal of the contractual limitation period, or "time bar", in respect of claims for "amounts payable" from GAFTA Arbitration Rules No. 125 ("GAFTA 125"), and the elimination of the express obligation, in GAFTA No 49, for FOB sellers, to have cargo ready at any time during the agreed period of delivery.

GAFTA 125 – Abolition of Rule 2.3

Prior to 1 September 2018, Rule 2.3 provided that:

"In the event of non-payment of amounts payable, either party may notify the other that a dispute has arisen and, within 60 consecutive days from the date of that notice, appoint an arbitrator or apply to Gafta for an appointment of an arbitrator". 

A degree of ambiguity surrounded which disputes fell within its remit. Prior to September 2016, the 60 day time bar was triggered by notice that a dispute had arisen as provided for in the "Payment Clause" of the contract. Removal of the reference to "Payment Clause", in the September 2016 iteration, arguably meant that it now applied to all claims for "amounts payable" arising out of the contract.

GAFTA has now decided to remove this rule in its entirety from contracts which incorporate GAFTA 125 entered into on, or after, 1 September 2018.

Save for disputes where arbitrators need to examine samples – the time limit here being counted in days, depending on whether Rye Terms or others are used – the limitation period (being one year) is determined by reference to the parity of the contract (FOB, CIF, etc), thereby simplifying the time limits scheme.

GAFTA has also removed from the Payment Clause in all of its contracts the term that:

“Amounts payable under this contract shall be settled without delay. If not so settled, either party may notify the other that a dispute has arisen and serve a notice stating his intention to refer the dispute to arbitration in accordance with the Arbitration Rules.”

Practical Effect of Change

Traders who incorporate GAFTA 125 into their contracts would be well advised, in the event of a dispute, to commence GAFTA arbitration proceedings at the earliest opportunity. As a matter of English law, which governs all GAFTA contracts, the commencement of arbitration proceedings in accordance with GAFTA 125, interrupts the running of time, i.e. protects the time limit. This protective measure comes at little or no cost to the claimant, and does not carry an obligation for the parties to immediately progress the reference, so commercial negotiations can continue. Once proceedings have been commenced, the claimant has one year, from the date of commencement, to prepare and serve submissions, or to renew their claim to arbitrate for another year – see clause 4.10.

GAFTA 49

Previously, Clause 6 of GAFTA 49, provided:

"The Sellers should have the goods ready to be delivered to the Buyers at any time within the contract period of delivery".

This term was unique to GAFTA 49.

At common law, under a "classic" FOB contract, where the contract does not state who has the option as to the time of shipment, the buyer is normally entitled to call for shipment at any time during the period. The seller is correspondingly obliged to put the goods on board any ship nominated by the buyer but this does not mean that the seller is bound to have the goods ready at the port of shipment for the whole of the period. 

GAFTA 49 provides for delivery at buyer's call, but contrary to the common law position, the previous edition required the seller to have the goods ready to be delivered to the buyer at any time within the contractual delivery period. This could be onerous for the seller. Under the new clause, sellers have been relieved of this obligation, but the contract still provides for delivery at "Buyers' Call" so the seller has to have the goods ready within a reasonable time of receiving proper shipping instructions from the buyer. 

Practical Effect of Change

This amendment sees a return to the common law position and aligns the contract with the other GAFTA FOB contract forms. As a consequence, a buyer will only have grounds for rejection and termination if the seller fails to load the goods within the contractually agreed delivery period. If a buyer wants the right to terminate because the goods are not available for shipment at any time during the delivery period then an express term must be agreed. 

This is not however necessarily all good news for FOB sellers as there may be a greater potential for delay which may result in demurrage and detention claims by buyers. Sellers are also exposed to such claims because clause 6 obliges them to continue loading beyond the agreed delivery period, provided that the carrying vessel was presented within it. 

First published in Gaftaworld, December 2018