GAFTA Prohibition clause -- legal decision

GAFTA prohibition clause: another new decision

Since the start of 2013, the English High Court has given a number of decisions on prohibition clauses, which have been covered in HFW's Commodities Bulletin. In Bunge v Nidera (29 January 2013), the Court held that it is necessary for a party relying on the GAFTA Prohibition Clause to establish a causal connection between the prohibition and the restriction of export of goods of the particular contractual description during the particular contractual shipment period. A month later, in Novasen v Alimenta (27 February 2013) – which concerned the equivalent FOSFA clause – as well as confirming the approach to the assessment of damages established by The Golden Victory (2007), the Court held that a buyer's damages against a non-performing seller relying on the clause may vary considerably depending on whether or not it buys in replacement cargo against the loss.

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In Seagrain v Glencore Grain BV (10 May 2013), the Court rejected a broad interpretation of the GAFTA Prohibition Clause, in particular of the wording "any executive act.. restricting export", and held that proof that the restriction had in fact prevented performance was required before a seller could rely on it.

In July 2010, Seagrain LLC (the Sellers) contracted to sell Glencore Grain BV (the Buyers) 3,000 mt of feed wheat of Ukrainian or Russian origin, C&F, to Israel. The contract (GAFTA 48) incorporated the standard GAFTA Prohibition Clause, the relevant section of which reads:

"...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."

Ukrainian customs authorities had recently introduced a requirement that samples of cargoes for export be taken and tested during loading. On 28 July 2010, it was made a mandatory requirement of customs clearance that the authorities had cleared the laboratory results of these samples and on 2 August 2010, it was decided that only samples tested at the Kyiv Research Forensic Institute would be accepted.

Sellers terminated the contract, relying on the Prohibition Clause. Buyers successfully claimed damages for wrongful repudiation at arbitration. Sellers appealed to the GAFTA Board of Appeal which upheld Buyers' claim, ruling that there had been no actual restriction on exports and that in order to obtain the protection of the Prohibition Clause, Sellers had to demonstrate clearly that they had made all reasonable efforts to either ship the goods or try to buy replacement goods in order to comply with their contractual obligations.

Sellers appealed to the English High Court, arguing that the GAFTA Board of Appeal should have asked itself whether the acts of Ukrainian customs – in particular the requirement that all samples must be tested at a single laboratory – had the effect of restricting the export of goods. They argued that it would have been impossible to export within the contractual window. There had been an "act restricting export" and the Board had set the bar too high.

Buyers submitted that delays in and disruption to the customs clearance regime did not constitute a restriction on export. There was no evidence that the export of cargoes would actually be prevented.

The Court upheld the Board's interpretation of the Prohibition Clause.

First, in order to rely on the Prohibition Clause, it was necessary to show that it had been impossible to perform the contract, not just that performance had been made harder.

Second, Sellers could not rely on the Prohibition Clause merely because a prohibition had been imposed – the prohibition had to in fact prevent performance.

Third, in other cases, a full export ban had been in place, which was not the case here.

Finally, the term "any executive... act" had to be construed in context, and means "an act done by or on behalf of the government which is in the nature of a formal restriction on exports... It cannot be construed as extending to every action by an official body which has the effect of restricting exports".

The Court held that whether the Prohibition Clause was triggered would depend on the particular facts of a case. Here, Sellers could not prove that they were restricted from exporting, only that they were delayed and inconvenienced. They were aware of the difficulties at the contract date and could not supply any evidence to show that they had attempted to do whatever it took to perform the contract.

Sellers' second argument was that the Board had erred in finding that they had to show that they had made all reasonable efforts to ship or buy replacement goods. The Court made no finding on this but observed that it raised the "causal connection" point considered in Bunge v Nidera, which is due to be heard by the Court of Appeal in November 2013.

This is currently a dynamic area of law and interested parties should watch developments closely over the coming year.

For more information, please contact John Rollason, Senior Associate, on +44 (0)20 7264 8345, or john.rollason@hfw.com, or your usual contact at HFW.

 

 

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