hi I have 12 questions need answer for them please

Trade Foundation Course

Briefing Papers

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Introduction.

The documentation contained in this briefing paper is not intended to provide participants on the Trade Foundation Course with an exhaustive commentary.

The twelve separate sections highlighted will enable the reader to gain a broad appreciation of the topics and those areas of trade relevance, to be covered in much greater detail during the course.

Contents Page

Topic Area 1. Basic principles of contracting 3

Topic Area 2. Basic contractual obligations (FOB/ CIF) and contractual terms 4

Topic Area 3. Responsibility and risk 6

Topic Area 4. Certification of Contracts - Instruction for supervision 7

Topic Area 5. Shipping documents 8

Topic Area 6. Ascertaining the goods and the vessel 9

Topic Area 7. Charterparties, laytime, despatch and demurrage 10

Topic Area 8. Insurance 11

Topic Area 9. Payment terms 12

Topic Area 10. Exceptional circumstances 13

Topic Area 11. Breaches, default and damages 14

Topic Area 12. Dispute resolution 16

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Topic Area 1. Basic principles of contracting

A Contract is a legally binding written or spoken agreement made between a willing buyer and a willing seller. The Key elements of which are: - (i) an Offer by one party to the other, (ii) an unconditional Acceptance, (iii) a Consideration, normally identified as the Price, (iv) an Intention to create a legal relationship, (v) Legality – Sanctions/Prevention of Shipment, (vi) Capacity – legal ability to enter into a contract.

Parties can agree the main terms of a contract but leave others to be agreed at a later date.

Gafta Contracts are used extensively in the world trade in grain. Underpinning those contracts is a standard clause, inserted in those contracts, known as the Domicile clause which has the effect of incorporating English Law, as the law under which the contract shall be made and performed.

For example; - Gafta 48. Clause 26 Domicile; - “This contract shall be deemed to have been made in England and to be performed in England, notwithstanding any contrary provision, and this contract shall be construed and take effect in accordance with the laws of England……”

Consequently, English courts have exclusive jurisdiction over the contract and if disputes arise, then there is a well-documented arbitration procedure contained within the same contract.

Establishing a Contract. The basic constituents but All must be present; -

An Offer: A statement of willingness to contract on specified terms made with the intention that, if accepted, there will be a binding contract. The offer must be sufficiently clear and detailed but can be withdrawn any time up until acceptance.

Acceptance: A contract will not be concluded and legally binding until the terms of the offer are accepted unconditionally and without qualification. Acceptance must be communicated and importantly, ‘silence’ under English Law is not generally considered as acceptance, whereas ‘conduct,’ may well be.

An attempt to introduce new terms is not an acceptance but a counter-offer. A counter-offer operates as a rejection of the initial offer. However, a party cannot, at a later date, then go back to accept the initial offer if negotiations fail over the detail of the counter offer. Subject of course to the other parties’ agreement.

Consideration: Essential to the formation of a contract. English law will not enforce a gratuitous promise – there must be a “bargain”. In practical terms, it is the price that a party pays in return for goods. The Courts are not concerned with whether the parties have made a good or a bad deal!

Capacity: The legal ability to enter into a contract. Compare with authority to contract (does the signatory have the authority to enter into the contract on behalf of the counterparty?)

Intention to create legal relations: What if the contract is disputed? (particularly relevant if the contract is verbal or there have been subsequent variations to a standard contract) Needs to be evidence to show there was a contract. (n.b presumed in commercial contracts)

Miscellaneous Points: Inclusion of relevant terms – Incorporation of insurance (Gafta 72), weighing (Gafta 123), sampling (Gafta 124), arbitration (Gafta 125): all form part of a contract.

Contractual document Terms must be in a document intended to be contractual and reasonable steps must be taken to bring it to the attention of the other party.

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Topic Area 2. Basic contractual obligations (FOB/ CIF) and contractual terms

In a Grain Trade context with specific regard to Gafta contracts, there are two principle contracts that require mention.

FOB (Free on board) Seller provides goods that conform with the contract and places those goods on board ship. The buyer arranges shipping/insurance and gives proper notice to the seller of vessels arrival which is a pre-condition of contract without which the seller is under no obligation to perform. The Legal title to the goods and the risk passes on delivery to vessel.

CIF (Cost Insurance Freight) Seller organises freight and insurance, ships and delivers the goods. Buyer nominates the port, takes delivery and meets the cost of unloading/ import licences/ customs duties. The buyer then pays for the goods on receipt of shipping documents. Risk passes on delivery, but legal title passes later

Contractual Terms; The contents of a contract are called terms. A term imposes a contractual duty /obligation, on the parties to the contract. The terms of a contract are designated as conditions, warranties and innominate (intermediate) terms. It is important to distinguish the difference as classification determines the remedy in the event that a counter party defaults.

Gafta has a number of standard contracts which the parties are free to vary and amend as they see fit. The terms can be expressly agreed either orally or in writing. Terms can also be implied. An implied term is one that is not specifically agreed but ‘included’ in the contract by statute, for example the Sale of Goods Act 1979, or by customs and practice.

Sale of Goods Act 1979: Statutory Implied Terms. Of critical importance in context of defaults

The main relevant sections of the Sale of Goods Act 1979 include S12 Seller has the legal title to the goods. S13 Goods must correspond to the ‘description’. S14 Goods must be of satisfactory quality. Although this test is objective it rests on what a reasonable buyer would regard as satisfactory, considering price, description and other relevant factors. S14 the goods must be fit for their intended purpose. S15 Goods supplied in bulk must correspond with the sample.

Distinction between Terms; - Conditions A major (or fundamental) term: goes to the very heart of the contract. A breach entitles the innocent party to ‘repudiate’ - terminate the contract and sue for damages.

Warranties A minor (less important) term. A breach entitles the innocent party to damages only and the contract continues. Most terms in a contract tend to be warranties.

Intermediate Terms Intermediate term is neither a condition or a warranty. In the past a traditional approach caused inflexibility and unfairness. For example, a minor breach of a condition would give rise to a termination whereas a major breach of a warranty would not. The approach is to consider the impact of the breach and the effect is that the right to terminate will depend upon the seriousness of the breach.

The Goods, Description, Quality and Condition

Statutory implied terms emanating from the Sale of Goods Act 1979 are key components of Gafta Contracts. The Act contains numerous sections but those covering Description – (S13) and Satisfactory Quality – (S14) are frequently addressed in contractual disputes.

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Description, Section 13 of the Sale of Goods Act 1979 states: - "Where there is a contract for the sale of goods by description, there is an implied condition that the goods correspond with that description". If there is any difference in description between the contract and the goods, the buyer is entitled to reject the goods and to claim damages.

Satisfactory Quality, Section 14(2) of the Sale of Goods Act 1979: - Under English Law there is an implied condition that the goods supplied must be of a satisfactory quality taking into account any description, price and other relevant circumstances.

Included within Section 14 is an implied term related to Fitness for Purpose – (S14.3)

“If a Seller sells goods in the course of business to a buyer who has expressly or by implication, made known to him the particular purpose for which the goods have been purchased there is an implied condition that the goods supplied are suitable for that purpose.”

The condition is not implied when the buyer does not rely on the sellers' skill and judgment or where it is unreasonable for the buyer to do so.

Defining quality in contracts - Certification

Certificate Final is a recognised mechanism for dealing with issues such as description and quality. Parties agree that a third party (surveyor/superintendent) will make a determination. Buyer has assurance that goods have been supplied in accordance with the contract. Seller has protection against buyer later alleging goods were defective

Certificates are generally final and binding where the buyer has no right to challenge findings (fraud is an exception). Although the clause is perceived as pro-seller the buyer may argue that wording of the certificate allows a challenge to be made.

It is important to understand that issued certificates are only final in relation to the matters they are intended to cover (e.g. “quality”). They are not final in respect of any other matters not expressly required to be certified in the contract – final as to “quality” would not be final as to “description”

In such cases the buyer is not precluded from bringing a claim if the goods did not match their description

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Topic Area 3. Responsibility and risk

Risk; - The obligation to bear the loss, which in commodity contracts usually passes “as from shipment”. It is not to be confused with “title” to the goods which refers to ownership rather than possession.

We will look at two Gafta contract areas from a buyers’ and sellers’ perspective and categorise the associated risks, specifically in respect of FOB and CIF contracts.

FOB Buyer – Principal Obligations;

To give effective shipping instructions including – nominating and presenting an appropriate vessel at the port of loading in sufficient time and to give accurate documentary instructions.

FOB Seller – Principal Obligations;

To provide contract-compliant goods loaded on board the vessel nominated by the buyer, and to provide the buyer with the required documentation.

CIF Seller - Principal Obligations;

Seller to provide documents which show the goods have been obtained with the correct contract description and insured for the intended voyage on a vessel the seller has fixed and paid to carry the goods to the agreed destination, or, sellers had purchased documents from another party who had already done so.

Risks associated with the Goods

Ensuring the goods conform with the terms of the Contract: including description, specification, condition, sampling and analysis. Sale of Goods Act: satisfactory, fit for purpose.

Risks associated with Shipment

Ensuring that the timings for performance such as nomination and delivery periods conform under the contractual obligation. Providing a suitable vessel regarding classification on a contract of carriage including loading /discharge at a safe port / safe berth. Ensuring the goods are safely stowed. Awareness of factors impacting on Laytime obligations. The type and value of insurance cover.

Documentary Risks

What documents are required under the contract? Buyer to provide documentary instructions to the seller. Can the seller supply them? Are seller’s documents sufficient to obtain payment?– a critical part of the contract process.

The Bill of Lading receipt for goods shipped, document of title, evidence of a contract of affreightment.

Payment: CAD: where? When? How? Letter of Credit: is it workable? Can Receiver import the goods?

Legal Risks Sale of Goods Act - Conformity with domestic legislation, transfer of title, potential conflict with other important documents –e.g. Charter Party, Bill of Lading, Letters of Credit Jurisdiction and Arbitration Proceedings

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Topic Area 4. Certification of Contracts - Instruction for supervision, sampling, analysis and fumigation

Superintendents’ Roles and Responsibilities

A superintending company is an organisation whose primary business activity is associated with the inspection, supervision and sampling of contracted goods. They are appointed by (or on behalf of) buyers and/or sellers – in accordance with the terms and conditions of the relevant contract.

They operate in accordance with agreed contract terms, sampling & weighing rules, Code of Practice and the Code of Conduct of GAFTA. They undertake inspections, verifications, examinations, quality and condition assessment, sampling and measurements, of goods traded.

Rules and Code of Conduct for Superintendents; - Intended for Superintendents listed on GAFTA’s Register of Approved Superintendents. Minimum criteria for Superintendent companies – Accreditation ISO/IEC 17020 (type A), certification to ISO 9001 or GTAS certification.

All operations shall comply with appropriate rules and the contract terms “When a Superintendent issues reports and certificates relating to its operations they shall reflect their actual and true findings”

A Superintendent found to have acted contrary to the provision of these Rules may be subject to disciplinary action. Can only subcontract to other Superintendents on the GAFTA Register.

Responsibilities of those involved in the contract certification; -

Principal. To give instructions in due time, which must be clear and unambiguous. An instruction is a directional message describing the task that is to be performed. Instructions should be in writing and provide sufficient details to enable performance of the inspection in accordance with requirements of the contract and expectations of the principal and include;

Details of the parties – buyer / seller / receiver and their representatives

Place of inspection, Name of vessel and Time of Arrival (ETA) Name of vessel agents and contact telephone number, GAFTA contract No, Quantity – any tolerances (+/-, min / max)

Details of the Commodity and its correct description. Certification of the Quality – including testing methods and any special sampling requirements. 24-hour contact phone number.

Superintendent. When accepting instructions, the Superintendent must acknowledge and confirm the details received. He / she must make sure that they understand what certificates are required and the quality criteria attached to the instructions.

Equally important is that any statements applying to the goods such as “free from …”, “Sound Loyal & Merchantable”, “fit for ….” may require analysis.

A Superintendent is there to act on the Clients’ / Principals’ behalf.

They are present to certify that the consignment is sampled and weighed correctly, that the reporting is accurate and if needed, make reserves against the parties involved in the contract.

Superintendents are there to look after the best interests of the parties to a contract and act with neutrality, honesty and integrity at all times.

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Topic Area 5. Shipping Documents

Common Shipping Documents would include the following; -

Bill of lading (B/L) is a document issued by or on behalf of the carrier, to the shipper, who has contracted with the carrier for the carriage of goods. A Bill of Lading has 3 functions; -

(i) Receipt for Goods Shipped. The bill of lading tendered under a CIF or FOB contract on Gafta terms must show that the goods comply with the contract, including, description of the goods, their quantity and condition - in which case it will be considered a “clean” bill of lading. A “claused” bill of lading (i.e. one which indicates that the goods have not been shipped "in apparent good order and condition") will not be accepted by a bank to obtain payment under a letter of credit on standard UCP 600 terms.

(ii) Evidence of a Contract of Carriage. Very rarely will the bill of lading, between the original shipper and the vessel, be the contract of carriage. In the case of bulk goods, the contract of carriage will usually be the charterparty. However, a buyer under a CIF contract and a shipper or previous buyer/seller of the goods who is not the charterer of the vessel, then the bill of lading counts as conclusive evidence of the terms of the contract of carriage.

(iii) Document of Title. When making out a bill of lading for signature by the master of the vessel it is normal in the box headed "consignee" to specify "to Order". This provides maximum flexibility to the shipper under which the bill of lading is tendered. Correspondingly the buyer will normally require a bill of lading made out to order endorsed on the back by the shipper. A bill of lading made out in this way operates as a document of title.

B/L: a transferable contract. By reason of the triple function covered by the Bill of Lading, the shipper of the goods and subsequent holders of the bill, acquire valuable rights against the carrier. These rights are necessary since, under a contract on CIF or FOB terms the seller is under no obligation to ensure that the goods arrive at their destination, undamaged or indeed at all. In most cases the holder of the bill of lading (or its insurer) will only have a remedy against the carrier, who is usually the registered owner of the vessel.

Conversely the shipper of goods under a bill of lading incurs certain responsibilities towards the carrier. In its capacity as seller under a CIF contract or under an FOB contract, the shipper will transfer its rights under the bill of lading to its buyer when the shipping documents are taken up.

In a sale contract, risk passes on shipment – so buyer looks to the shipowner if goods arrive damaged.

Mates Receipts. A document drawn up prior to the B/L – operates as a shipper’s interim receipt for goods delivered to the ship owner.

LOIs – Letters of Indemnity. Contractual agreement to indemnify a party if they carry out a request. Examples: Discharge without B/Ls, rain LOIs, missing documents.

Invoices. Should contain buyers address, description of the goods, contract price including any contractual allowances and payment instructions, together with specific requirements under UCP600 for letter of credit sales.

Certificates. Certificates are part of “Shipping Documents”. The buyer will usually pay against compliant shipping documents of which any certificates may be “final” and binding. The seller will usually want to retain control of the documents until payment is made.

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Topic Area 6. Ascertaining the goods and the vessel

This includes, Nomination of FOB vessel, pre-advice, substitution and under a CIF contract the Appropriation of goods shipped.

Definition of FOB Contract "The Seller must at his own expense put the goods on board a ship which has to be nominated or designated by the Buyer. The Seller is not bound to reserve shipping space in advance nor to bear any expense of shipment which arises after the goods have been put on board “. GAFTA FOB contracts designate a “Delivery Period”, which is for the arrival of the buyer’s vessel during a specified period at the load port.

Buyer’s duties are to give: Effective Shipping Instructions (i.e. present a performing vessel at the agreed load port) So that sellers can deliver goods in accordance with the terms of the contract i.e. place, quantity, time. Adequate Notice (i.e. Nomination) Either agreed period of time e.g. 10 consecutive / 3 business days, or other sufficient period of time according to circumstances (if the contract is silent). Substitution. Usually the buyer has a contractual right to substitute a nominated vessel provided the replacement vessel fulfils all the requirements of the contract.

Seller’s duties include: To deliver goods on board when required by the buyer during the agreed period; There is no obligation to have goods available during the entire period. Goods to be delivered at an agreed rate (e.g. tonnes per day) or otherwise at a reasonable rate in a customary manner. Usually the seller will pay damages for any delay to the vessel if the seller does not deliver at the agreed rate, usually referred to as demurrage.

Nomination (Service); See for example GAFTA 64, clause 6. Nomination is a Notice to be served under the contract. Check provisions carefully (notices clause, how many days, what information). A Notice is valid via a broker. Usually the period of notice is expressed as a number of days or hours preceding the estimated date of arrival (eta) and readiness to load.

Nomination (Content); GAFTA 64 clause 6 – name of vessel is required. "T.B.N." vessels (to be nominated) Estimated tonnage and Probable readiness date not just arrival date: Further information may include, Ship's Agents, Superintendent, Documentary requirements. Nominations must be honestly and reasonably given but there is no requirement to have a vessel fixed.

Failure to nominate at all or failure to nominate correctly gives rise to a breach: Seller may reject a defective nomination or refuse to load a vessel not nominated correctly. Seller may declare buyer in default if there is no valid nomination in time notwithstanding any extension clause.

If the contract period has expired, buyers may claim extension (10 days under GAFTA 64) in exchange for payment of carrying charges to the seller. If extension period expired, sellers may declare buyers in default.

Appropriation on CIF / C&F contracts is a performance obligation on the seller, where the seller has to make shipment of goods of contract quantity and description at the agreed time; Seller has to present contractual shipping documents including a contract of carriage (usually Bill of Lading) to the agreed destination and any necessary insurance documents. The function of the appropriation is to advise the buyer of performance. Appropriation is a notice to be served under the contract usually within a number of days following the date of the Bill of Lading.

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Topic Area 7. Charterparties, Laytime, Despatch and Demurrage.

A Charterparty Is a contract between a shipowner described in the contract as the “owner” and a “charterer” for the use of the whole (or part) of a ship.

There are three main types of Charterparty: Time, Voyage, Bareboat (demise).

Time charterparties – The shipowner provides the ship, crew, spares, food, water etc. But no bunkers. The ship is subsequently placed under charterers’ orders against an indemnity. The charterer pays “hire” for the use of the ship and the provision of its services but is separately responsible for the cost of purchasing bunkers.

Voyage charterparties – The shipowner provides the ship, crew and all fuel. Charterer pays an agreed amount for the “freight”, normally expressed in bulk cargoes as cost per tonne.

Bareboat Charterparties – The shipowner provides only the ship. Charterer provides crew / bunkers / stores / maintenance. Charterer is responsible for all liabilities that arise during the charter period.

Contract of Affreightment (COA). Strictly speaking this is not a contract for the carriage of goods but a contract for a series of voyages involving bulk cargoes. The contract will normally specify a stated quantity by a stated number of shipments over a defined period.

Standard form charterparties, E.g.: Voyage: Gencon. Time: NYPE. Bareboat: Barecon.

Laytime, demurrage and despatch:

Laytime (“lying alongside time”): This is the period of time agreed between the parties (charterer and shipowner) during which the shipowner will make and keep the ship available for loading or discharging without the charterer paying additional freight.

Demurrage: an agreed amount payable to the shipowner in respect of delay once the laytime has expired, for which the shipowner is not responsible (i.e. liquidated damages). What the shipowner has actually “lost” (if anything) is irrelevant.

Despatch: an agreed amount payable to the charterer if the charterer uses less than the agreed loading/discharging time.

Damages for detention: A loss caused by delay flowing from a breach of a different term - something other than the circumstances applying to the laytime/demurrage clause of the charterparty.

Commencement of laytime under a voyage charterparty; The ship must have arrived at the destination specified in the charter and must be ready and in a fit condition, both legally and physically, to load/discharge the cargo. The notice of readiness (“NOR”) must also have been given to the charterer which signifies that the ship has “arrived”.

Interruptions / exceptions to laytime: Interruption: periods of time where laytime does not run. Exception: periods of time within the definition of laytime but excluded by an exceptions clause. E.g. “any time lost through bad weather not to count as laytime”.

Under English law the laytime/demurrage clause in a sale contract operates independently of the position under the charter.

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Topic Area 8. Insurance

Insurance is a way of managing risk and is a requirement under most Gafta contracts. It involves a separate contract which secures compensation for loss of or damage to goods on payment of a premium. The insurance contract effectively transfers a risk but at a price and the responsibility for insuring the goods, depends upon the type of contract.

CIF: Cost Insurance Freight. Seller is responsible. C&F: Cost and Freight. Seller to provide goods and transportation. Buyer to arrange insurance. FOB: Free on-board. Buyer arranges freight and insurance

There are various types of Insurance cover available. GAFTA Insurance Terms Form No. 72 contains 8 Sections detailing the impact of relevant insurance risks.” Insurance cover shall be provided in the proportions and manner agreed pursuant to the sale contract, including whenever incorporated by reference the clause(s) set out in the following sections.”

Section 1 – Cargo Clauses (All Risks) - The cover is limited to “maritime perils” which is defined in the Marine Insurance Act 1906 (England and Wales) Section 3(2) as “the perils consequent on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, rovers, thieves, captures, seisures, restraints, and detainments of princes and peoples, jettisons, barratry, and any other perils, either of the like kind or which may be designated by the policy.”

Section 1 – Cargo Clauses (All Risks) - Clause (No. 5) reads “This insurance is against all risk of loss or damage to the subject matter insured but shall in no case be deemed to extend to cover loss, damage or expense proximately caused by, Delay, Or inherent vice Or nature of the subject matter insured Claims recoverable hereunder shall be payable irrespective of percentage.”

Section 2 – Cargo Clauses With Average (WA) “Average” here is used to mean “loss”. “With Average” cover, is similar to All Risks but more restrictive in the cover it offers. The restriction to the cover offered is that the loss must exceed a specified amount of the total value of the goods - referred to as the “franchise” - before it will be paid.

Section 2 – Cargo Clauses Free from Particular Average (FPA) Particular in this sense means partial and only covers total loss in the majority of cases. This is the most restrictive type of cover available.

Incorporated within GAFTA Insurance Terms Form No. 72 is a Transit Clause which deals with the operations of loading and unloading and identifies the period when the goods are insured and when the cover stops. The terms also refer to Constructive Total Loss (CTL), where the goods are abandoned because their actual loss is unavoidable.

Seaworthiness Admitted Marine Insurance Act 1906 S. 39(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship shall be seaworthy for the purpose of the particular adventure insured. The “Seaworthiness Admitted” clause.

Insurance Certificate is required under most Gafta Contracts. It is exchangeable for the policy and must identify the Insurer and the insured value.

Claims Some contracts of insurance make it a term, that the insurer’s liability is contingent on claims being notified within a short period. Time limits apply.

Subrogation Recovery by Insurer - An underwriter who pays a claim is subrogated to all the rights and remedies of the assured.

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Topic Area 9. Payment Terms

Payment terms are not just about receiving money for the goods. Payment covers security, passing of title and a balancing of risk. However, there are competing interests of the parties - Buyer wants: To take delivery of the goods he has contracted to buy (quantity and quality) and then pay as late as possible. Seller wants: To receive payment as soon as possible and retain physical possession and legal title pending payment.

Key risks of the parties: Buyer risks paying for goods but either never receiving them or receiving goods of a lesser quantity / quality, than paid for. Seller risks shipping the goods and transferring title to the goods but not getting paid.

Most common forms of payment; Pre-payment, Letter of Credit, Cash against documents, Open Account.

Cash Against Documents. The seller presents documents for payment at a stated place. The buyer then checks the documents and pays accordingly as long as the documents are compliant. The seller then releases the documents to the buyer.

Documentary Letter of Credit L/C. Provides payment security in a contract to the seller. The buyer’s bank effectively guarantees it will make payment so long as the seller presents certain conforming contractual documents. It is a separate self-standing contract where the seller is guaranteed payment by a third party.

An understanding of the Key Terminology associated with L/Cs is essential i.e. who and what are the following; - The Parties, The Applicant, The Beneficiary, The Issuing Bank, The Advising Bank, The Confirming Bank, and The Nominated Bank?

Structure of a Credit Transaction

Seller and buyer agree a contract with payment by L/C. Buyer requests its Issuing Bank to issue an L/C – Bank’s own irrevocable undertaking to pay the Beneficiary (the seller) on compliance with conditions. Buyer agrees to indemnify the issuing bank and gives a pledge over documents. The L/C is then issued by buyers issuing bank and sent to seller’s local Advising Bank to be examined. The Advising Bank confirms the details with the seller and adds its own undertaking if it is to be the Confirming Bank. Seller then ships goods to buyer. Seller then presents the documents under the L/C to the Advising Bank, also called if nominated as the Nominated Bank (the paying bank). The Nominated Bank checks the documents and if in order, payment is made to the seller and the documents forwarded to the Issuing Bank where the documents checked again, and payment made to the Confirming Bank. The contractual documents are then released to the buyer against payment from the buyer and then the buyer uses those documents to obtain possession of the goods

Types of Letter of Credit; Revocable: Issuing bank can cancel Irrevocable: cannot be cancelled but only expire. Sight Credit or Usance Credit: L/C must indicate if available for payment at “sight” or upon deferred terms. Stand-by Letters of Credit: Called on only if the Buyer/debtor defaults in performance of the underlying contract. Confirmed L/C: Seller asks Advising Bank to confirm the credit without the authority from the Issuing Bank.

UCP 600 – The Uniform Customs and Practice for Documentary Credits: Is a set of agreed rules that apply to financial institutions which issue Letters of Credit. Many banks and lenders are subject to this regulation.

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Topic Area 10. Exceptional Circumstances

English Contract Law; - Once a contract has been entered into, English law expects performance. However, there may be situations when the parties are prevented from performing due to no fault of their own. Unplanned events impacting on the execution of the contract are covered by the term ‘Force Majeure’.

Gafta Prevention of Shipment/Delivery Clause is a consolidated clause dealing with issues surrounding Prohibition, Force Majeure and Strikes. An event of Force Majeure would include; Prohibition of export, Blockade, Act of Terrorism, Hostilities, Strike/Lockout, Riots, Breakdown of Machinery, Fire, Ice Act of God. Proving an event of Force Majeure rests with the seller.

An example of a Force Majeure Event; Prohibition of export means any executive or legislative act done by or on behalf of the government of the country of origin where the port or ports named in the contract are situated. e.g. Bad Harvest in Russia leading to insufficient product for the domestic market, leading to a cap on exports.

Impact: No immediate cancellation of contract but the contract is suspended. Time is then given for the problem to be resolved as long as the correct contractual notices have been issued. If the problem persists, there is an option to cancel provided that again relevant notices are given and in time. If no notice is given to cancel, then the contract automatically comes to an end after an additional period of time. Ultimately, neither party has liability to the other for delay/non- performance.

Notices under this clause are very important to get right. They need to be served in time, to the correct party and conform to the process as laid down in the clause.

Notices: Time Limits: Sellers notify buyers that performance has been suspended with reasons. Notice within 7 days of occurrence or no later than 21 days before start of the shipment period, whichever is the later.

Frustration is a concept of English Law. In this context it is an external, unforeseeable, event without fault of either party, which makes contractual performance impossible. At which time the contract terminates, and the parties are exempt from further performance. However, it is rare for frustration to be applied by English courts

In practice, most commercial contracts will contain Force Majeure clauses – the right to terminate on occurrence of a specified event(s) (e.g. Prevention of Shipment)

Differences between Frustration and Force Majeure. Force Majeure allocates risks in advance, within the contract. If the ‘event’ falls within the Force Majeure clause, there is no frustration – the contract has already allocated risk and likely consequences. Frustration terminates the contract. Force Majeure doesn’t always terminate, but effectively suspends for a specified period of time.

The remedy for Force Majeure is contractual. Allocation of loss for frustration is statutory – Law Reform (Frustrated Contracts) Act 1943

Sanctions. A New Optional Clause exists within GAFTA Form 131 where the parties to the contract, agree to insert a clause that obliges the party not to put other party in breach of any sanctions. If a breach occurs, then the non- defaulting party may terminate the contract without further liability.

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Topic Area 11. Breaches, default and damages

What happens when it all goes wrong, and your counterparty commits a breach of contract?

A protocol exists which is covered by the Gafta Default Clause which highlights a process of establishing a potential claim for damages. If a Default occurs, then the contract incorporating the relevant default clause will provide the actions to be undertaken by the innocent party and the timing of those actions following a breach.

Gafta Contract No. 100 Clause 23: states that the innocent party is entitled to recover in damages from the defaulting party the difference between the contract price of the goods and the market price of the goods on the date of the default

“(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.”

Gafta No. 100 – Clause 23 (b) and (c):

“(b) If either party be dissatisfied with such default price or if the right at (a) above 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 upon the actual or estimated value of the goods, on the date of default, established under (b) above”

There is no obligation on the innocent party to sell or purchase as per the Default Clause procedure – instead, they can pursue a claim in arbitration and produce to the arbitrators’ evidence of what the market price of the contract goods would have been at the time of default.

Gafta No. 100 – Clause 23 (d):

“(d) In no case shall damages include loss of profit on any sub contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.”

A feature of all Gafta contracts, CIF and FOB

GAFTA No. 100, Clause 23 (e): Quantity for measure of damages

"(e) Damages, if any, shall be computed on the quantity appropriated if any but, if no such quantity has been appropriated then on the mean contract quantity, and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity."

Gafta No. 100 – Clause 23 (f): Time limits for claiming default

“Default may be declared by Sellers at any time after expiry of the contract period, and the default date shall then be the first business day after the date of Sellers’ advice to their Buyers. If default has not already been declared then (notwithstanding the provisions stated in the Appropriation Clause) if notice of appropriation has not been served by the 10th consecutive day after the last day for appropriation laid down in the contract, the Seller shall be deemed to be in default and the default date shall then be the first business day thereafter.”

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Damages are compensatory: There are two types of compensatory damages: “Expectation losses” –to be put in the same position as if the contract had been properly performed; and “Reliance losses” – wasted expenditure.

To claim Damages there must be a contract and there must be a breach and the measure of any damages is governed by the Sale of Goods Act 1979:

Sections 50(2), 51(2) and 53(2)

“The measure of damages is the estimated loss directly and naturally resulting, in the ordinary course of events, from the [buyer’s/seller’s] breach of contract.”

Sections 50(3), 51(3) and 53(3)

“Where there is an available market for the goods in question the measure of damages is prima facie to be ascertained by the difference between the contract and the market or current price of the goods” at the relevant time.

Frequently where there is no available market, the best measure of the actual value of the goods is often their resale price or the actual cost of obtaining substitute goods.

Recoverable Damages

General Damages: Damages which “naturally result … in the ordinary course of events” (SOGA section 50(2)) – in other words that which is foreseeable to a “Reasonable Person” in the market!

Liquidated damages are recoverable under English law, but penalties are not

Special Damages are recoverable if the defaulter had actual knowledge of special circumstances affecting the innocent party’s position.

Interest: Section 54, Sale of Goods Act 1979

Non - Recoverable Damages

Losses on sub-sales (lost profits). Expressly excluded by GAFTA terms unless there are special circumstances (Arbitrators' discretion)

Causation / Remoteness: Innocent party cannot recover losses which have not been caused by the breach. An independent act of a third party which occurs between the breach and the loss can “break the chain of causation” and prevent a recovery of damages.

Duty to Mitigate i.e. to take all reasonable steps to minimise loss. In any default situation no damages can be recovered for losses caused by the innocent party’s own action or failures to mitigate.

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Topic Area 12. Dispute Resolution

In the event a dispute arises during the execution / delivery of a contract there are several methods available to facilitate a remedy. They include, Discussion and Negotiation, Mediation by a neutral third party, Arbitration, the Courts (litigation).

Arbitration; - Resolution of a dispute outside the courts in private where the parties agree to refer the dispute to a panel of one or more arbitrators. The parties agree to be contractually bound by the decision of the arbitrators which is legally binding. The advantages of arbitration include Neutrality, Confidentiality, Cost-effectiveness, Speed, Flexibility, Enforceability.

Possible Examples of Disputes; - Breach of contract (was there a contract?), Failure to Ship, Failure to pay.

Arbitration; - An agreement to arbitrate is included as a standard term in all Gafta Contracts and specifies the rules associated with arbitration in Arbitration Form No 125. The rules incorporate the relevant law and matters of jurisdiction, as well as the process associated with the Gafta two tier system of arbitration.

Two Tier System; - Involves an initial arbitration at first tier overseen either by a sole arbitrator or by a panel of three arbitrators known as a tribunal. Second tier involves a possible appeal overseen by an Appeal board of five arbitrators.

Procedure; Gafta Form 125, details the procedure to be observed in claiming arbitration and the process to be undertaken by both Claimant and Respondent. There are strict time limits for claiming arbitration

The Tribunal; - Generally, the Claimant appoints an arbitrator, the Respondent appoints an arbitrator and Gafta appoint the chair. The three appointed arbitrators must be neutral and have no connection to the case. The Tribunal determines the timetable and case management.

Submissions; - To establish the Tribunal, the Claimant pays a deposit and makes a submission detailing his view of the case. The Respondent then submits his defence and the Claimant then has a last right of reply. The Tribunal then determines if it has jurisdiction i.e. an ability to hear the case, and if so, then proceeds to make an award (judgement) The award is made in writing and sets out the decision along with reasons and includes remedies and costs.

Remedies would potentially include damages which may require consideration such as ascertaining a market price on the day of default to establish loss. The Tribunal has the power to award interest on any sums outstanding and the costs associated with the arbitration.

Appeals; - there is in the Gafta two tier system a right of Appeal which must be lodged within 30 days of the date of the arbitration award at first tier. Appellants pay a deposit and a Board of Appeal is appointed by Gafta. The Appeal takes the form of a new hearing of the case and the Board can confirm, vary, amend, or set aside the original award.

Enforcement; Most trading nations, but not all, have signed up to the New York Convention on the enforcing of arbitral awards.

Access to the Courts; - will only be granted by the courts under Gafta’ s two tier system, in the event of a serious irregularity during the arbitration / appeal, or the Tribunals’ / Appeal Boards’ failure to deal with the issues presented or under a point of law.

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Gafta Simple Disputes – Rules No. 126; - this enables the parties to appoint a Sole Arbitrator under a fixed fee and fixed timetable. However, there is no right of appeal on the award issued.

Gafta Mediation Rules No. 128 Managed negotiation. Designed to lead to a binding settlement agreement. The mediator is NOT a judge. The Gafta mediator is Gafta’s General Counsel, Jonathan Waters. Controls the procedure: open sessions and separate meetings.