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Gafta GPD Trade Foundation Course

23rd – 26th April 2019

London

Day Three

@Gaftaworld

Insurance

Jonathan Waters

LLB, LLM, MCIARB, CMC Registered Mediator, Barrister General Counsel

Gafta

@Gaftaworld

Brief Overview (1)

Why Insure?

Responsibility to Insure

CIF - Seller

FOB - Buyer

Purpose of Insurance

Contract

Compensation for loss or damage to goods on payment of a premium

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Brief Overview (2)

Insurance Act 2015

Pre contract – insured to disclose material circumstances which insured knows/ ought to know and carry out reasonable search of records

Disclose information clearly, signpost material information

Act in good faith

Breach

Avoid policy and keep premiums

Avoid claim, repay premium

Amend terms to reflect the policy that would have been entered into

Increase premium

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Gafta 49, clause 9 (FOB)

Note risks to be insured against

Contractual Obligations (1)

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Gafta 48, clause 13 (CIF)

Note risks to be insured against

Contractual Obligations (2)

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Gafta 48, Clause 13

Contractual Obligations (3)

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Contractual Obligations (4)

Incorporation of Gafta Form 72

Law of incorporation

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Claims

Notice

In accordance with Policy – check notification requirements and time limits

Proof of loss

Duty to assist

Insurer suing in your name – implications?

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Payment terms

Brian Perrott

Partner

HFW

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Introduction

Are payment terms merely about receiving money for the goods?

Measure of security

Passing of title

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Competing interests of the parties

Buyer wants:

To take delivery of the goods he has contracted to buy (quantity and quality)

Pay as late as possible

Seller wants:

To receive payment as soon as possible

Retain physical possession and legal title pending payment

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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 goods/transferring title to the goods but not getting paid

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Main considerations of the parties

Seller:

When is money received?

When are documents released?

When is control of the goods lost?

Buyer:

When is money paid away?

When is title obtained?

When are the goods and documents under my physical control?

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Most common forms of payment

Pre-payment

Letter of credit

Cash against documents

Open account

Note: additional/alternative forms of security,

i.e. performance bonds and bank guarantees etc.

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Pre-payment i.e. cash in advance

Most secure for Seller

Least secure for Buyer

Possible solution to the credit risk: ask Seller or Seller’s parent to put up a guarantee or performance bond

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Open account/credit terms

Least secure for Seller

Most secure for Buyer

Seller may consider:

Bank or parent company guarantee

Retention of title aka Romalpa clause

Credit risk insurance

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Cash Against Documents

The seller presents documents

Stated place for presentation

The buyer checks the documents and pays for compliant documents

The documents are then released to the buyer

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Cash Against Documents - Advantages

From the Seller’s point of view:

Enhanced security if a bank is chosen as the place of presentation

Knowledge that it is possible to agree that the documents (and goods) are not released until payment is received

From the Buyer’s point of view:

Payment to a reputable intervening bank

Documents released immediately

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Cash Against Documents - Disadvantages

From the Seller’s point of view:

The risk remains that the Buyer will not take up the documents

The Seller is still relying on proper performance by the Buyer – the bank undertakes no obligation of its own so there is no security of payment

From the Buyer’s point of view:

No real disadvantages

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Cash Against Documents - Clauses

Areas to consider when agreeing a cash against documents form of payment:

Which documents are to be presented?

Where?

When?

Fax copies or originals?

What are the documents to say? Documentary instructions. What if discrepant? Can documents be amended and re-presented?

When is payment to be made for the documents?

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Why use a Letter of Credit

L/Cs provide payment security to seller:

The Buyer’s bank guarantees it will make payment so long as the Seller presents certain conforming documents

It is a separate self standing contract known as the autonomy principle - the Seller is guaranteed payment by a third party

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Key Terminology

The parties:

The Applicant

The Beneficiary

The Issuing Bank

The Advising Bank

The Confirming Bank

The Nominated Bank

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Structure of a Credit Transaction (1)

Seller and Buyer agree contract – payment by L/C

Buyer requests its Issuing Bank to issue L/C – Bank’s own irrevocable undertaking to pay Beneficiary on compliance with conditions. Buyer agrees to indemnify bank and gives pledge over documents

L/C issued and sent to Seller’s local bank (Advising Bank)

Advising Bank examines L/C and informs Seller (adds own undertaking if Confirming Bank)

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Structure of a Credit Transaction (2)

5. Seller ships goods to Buyer

6. Seller presents documents under L/C to Advising Bank, also called if nominated as paying bank, Nominated Bank

7. (a&b) Documents checked, if in order payment made and documents forwarded to Issuing Bank

8. Documents checked and reimbursement made to Confirming Bank (if any)

9. (a&b) Documents released against payment from Buyer (or other arrangements)

10. Buyer uses documents to obtain possession of goods

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Documentary Letter of Credit

Look at the contract terms to see what has been agreed – when is the L/C required to be in place – is it for one shipment or is it for all shipments?

Often there are delays in the negotiation of an L/C – beware of the consequences of failing to put up an L/C by the first day of the shipment period – and L/C must fully conform to contract to be valid

Where possible, pre-negotiate the wording of the L/C to avoid problems at a later stage

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Key terms to be included in L/C

An Issuing bank will often have their own standard terms, and the Seller and Buyer will want particular terms, but the following are important to bear in mind:

Expiration

Amount (to allow for tolerance)

Documents to be presented

Currency

LOI

Force Majeure

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Types of Letter of Credit (1)

Irrevocable/revocable

Revocable: Issuing bank can cancel

Irrevocable: cannot be cancelled but only expire

Article 3 UCP 600 : all L/Cs deemed to be irrevocable

Transferable Letter of Credit

Beneficiary may transfer to a second beneficiary provided L/C is stated to be transferable

Distinguish from assignment of proceeds

Sight Credit or Usance Credit

Article 6 UCP 600 – L/C must indicate if available for payment at “sight” or upon deferred terms

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Types of Letter of Credit (2)

Confirmation/Silent Confirmation

Sellers/Beneficiaries sometimes request an Advising Bank to confirm the credit, without authority from the Issuing Bank

Back-to back Credits

Risks for Seller and banks in case discrepancies between the documents in different credits

Revolving Letters of Credit

“Cumulative” or “non-cumulative”

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Types of Letter of Credit (3)

Stand-by Letters of Credit

Called on only if the Buyer/debtor defaults in performance of underlying contract – similar to a demand guarantee

Guarantees customer's ability to perform under the terms of a contract

Does not cover the direct purchase of merchandise

Not meant to be drawn on (generally) – but can be

Red Clause Letters of Credit

Percentage in value of the letter of credit in advance of the payment for account and risk of the Issuing Bank

Common means of pre-financing

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Role of Banks (1)

UCP 600

Duty of an issuing bank

UCP article 14(a): “Must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation”

Bank's undertaking is autonomous from the sale contract

Verify that documents presented by beneficiary comply with those stipulated by the applicant

Consistency

75% of documents are rejected in the first presentation

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Role of Banks (2)

Compliance

Article 14 sets out in the sub-articles the standard for the examination of documents

If documents are rejected

Seller retains control of the cargo and may re-present conforming documents if there is still time before the expiration date of the credit try to get waiver from counterparty

Bank's security

Until the bank is reimbursed, it retains the document (valuable cargo)

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Role of Banks (3)

Time frame

UCP article 14(b): “a maximum of five banking days following the day of presentation to determine if a presentation is complying.”

Payment

At sight

Deferred payment credit

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Approving/requesting changes to a Letter of Credit (1)

A Letter of Credit can only be amended under the UCP 600 with the agreement of:

1. The issuing bank

2. The confirming bank (if any)

3. The beneficiary

An issuing bank is irrevocably bound by an amendment as of the time it issues the amendment

The original Letter of Credit remains in force for the beneficiary until it communicates its acceptance of the amendment to the bank

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Approving/requesting changes to a Letter of Credit (2)

If the beneficiary is silent, a presentation that complies with the amendment will be deemed to be notification of acceptance by the beneficiary of such amendment

Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment

A provision in a proposed amendment that the amendment shall enter into force unless rejected within a certain time shall be disregarded

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To confirm or not confirm a Letter of Credit?

Provides more security for the Seller but also at the additional expense

Consider where the original issuing Bank is located and whether that provides sufficient security?

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Approving/Requesting changes to a confirmed Letter of Credit?

A confirming bank may extend its confirmation to an amendment and will be irrevocably bound as of the time it advises the amendment

BUT

A confirming bank may choose to advise an amendment without extending its confirmation and, if so, must inform the issuing bank and the beneficiary without delay

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Fraud

Banks deal in documents not goods.

Banks disclaim responsibility for genuineness of documents.

Fraud entitles a bank to decline payment where a Seller fraudulently presents to the confirming or issuing bank documents containing whether expressly or by implication material representations of fact which are untrue and untrue to the Seller’s knowledge.

Time at which to assess beneficiary’s knowledge or conduct is the time of tender of the documents to the bank.

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Fraud (continued)

Unlikely that you will obtain injunctive relief.

Bank owes no duty to its customer to police or conduct any form of investigation into the documents. Onus is on customer to draw fraud clearly and unequivocally to the bank’s attention.

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Letters of Credit – Practical Points

GAFTA’s guide on Letters of Credit.

Course notes include Buyer’s and Seller’s check lists.

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Refreshments

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Case study session introduction: Payment terms Please review the Payment Terms case study document

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Exceptional circumstances

Jonathan Waters

LLB, LLM, MCIARB, CMC Registered Mediator, Barrister General Counsel

Gafta

@Gaftaworld

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.

Common to have a clause in a contract allowing for termination without further liability/obligation when an event arises outside of the parties control (i.e. doesn’t apply if parties have otherwise been in breach of contract)

Such clauses are commonly called ‘Force Majeure’ and are very often overlooked when contract negotiated

Beware: Force Majeure events may be on increase (climate change) but term is often abused e.g. Counter Party attempting to get out of an unprofitable contract!

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Prohibition of export

Blockade

Act of Terrorism

Hostilities

Strike/Lockout

Riots

Breakdown of Machinery

Fire

Ice

Act of God

Unforeseeable/unavoidable impediments to transport or navigation

Any other event comprehended by ‘Force Majeure’

Gafta Clause

Event of Force Majeure (Gafta 49 Clause 13)

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Note:

List of Force Majeure events is wide/non-exhaustive

Parties are free to add to examples/delete examples (e.g. GPC Contract)

Intention is to cover most commonly experienced problems

Burden of proof: On seller: “He who asserts must prove”

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Prohibition

Prohibition of export by:

Any 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 of named in the contract are situated

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Prohibition (2)

Example: Bad Harvest in Russia

Insufficient product for domestic market. Therefore:

Cap on exports contractually promised (e.g. only allow 40% of contract quantity)

Limitations as to time period for exporting (e.g. only allow exports in certain months): August to December

Prohibition is outside of either Parties control

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How does the clause work in practice? A summary

No immediate cancellation of contract, which is suspended

Time is given for the problem to be resolved provided notice given as per the contract

If problem continues, there is an option to cancel provided that notice is given

If no notice is given to cancel, contract automatically comes to an end after an additional period of time

Ultimately, neither party has liability to other for delay/non-performance

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Notices

Gafta 49, clause 14

Critical get it right

Served

In time

By letter or by fax, or by email or by other electronic means

Rapid communications in legible form

Contested receipt – burden of proof on sender (prove to arbitrators)

What if notice is given verbally?

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First: Sellers notify Buyers – performance 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

Second: Buyers have option to cancel unfulfilled part of contract if Force Majeure continues for 21 consecutive days after end of shipment period. Notice must be served on Seller on first business day after 21st day

If Buyer does not cancel, contract remains in force for further 14 days, after which if Force Majeure continues, contract automatically cancels

Notices: Time Limits (1)

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Third: if Force Majeure ceases before contract is cancelled, sellers must notify buyers “without delay”. Sellers can then ship goods in accordance with any remaining time left under contract prior to occurrence of Force Majeure. If time is <14 days, 14 consecutive days is allowed

Notices: Time Limits (2)

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Relationship with Frustration

English Law Concept

Frustration: An external, unforeseeable, event without fault of either party, which makes contractual performance impossible

Contract terminates – parties exempt from further performance

Rare for frustration to be applied by English courts

In practice, most commercial contracts will contain Force Majeure clauses – right to terminate on occurrence of specified event(s) (e.g. Prevention of Shipment): Possible to argue Frustration if event is not covered by Force Majeure

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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 – contract has already allocated risk and consequences

Frustration terminates the contract. Force Majeure doesn’t always terminate, but effectively suspends for a specified period of time

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

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Sanctions

New

Optional Clause

Gafta 131

Parties to comply with/must not put other party in breach of sanction

Breach: termination of contract without further liability

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Imposition of New Tariffs/ Duties

Increase in cost

Volatility in markets

Generally, Buyer pays import tax, Seller pays export tax: Check contract!

Contracts may become less profitable/ unprofitable – increased risk of Default

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If New Tariffs/Duties Imposed

Does contract contain a price review clause?

Force Majeure?: Only if it falls within the definition:

Increase in cost is not normally Force Majeure. Courts are not sympathetic.

Frustration?: Very unlikely (for same reasons as Force Majeure)

Economic Duress? Forcing a party to agree to a demand they would not otherwise have agreed to – innocent party has no option but to agree (more than ordinary commercial pressure)

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Lunch Group photo will be taken prior to lunch.

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Exceptional Circumstances Exercise

Jonathan Waters

LLB, LLM, MCIARB, CMC Registered Mediator, Barrister General Counsel

Gafta

@Gaftaworld

Is it Force Majeure?

Australia – contract of goods by rail

Adverse weather caused severe floods / storm damage

Railway line closed

Seller could not deliver to load port using that line

Scenario 1

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Is it Force Majeure?

Argentina

Truck drivers’ strike – roads blockaded. Cargo unlikely to reach the port

Sellers were unable to load ship & after 8th day of blockade sent a notice by SMS to Buyers claiming Force Majeure

The notice is not received

Buyers sue for damages for breach of contract

Scenario 2

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Is it Force Majeure?

Sellers agree to sell 10,000 MT of banana skin pulp to buyers at a fixed price

5 days after contracting, the UK government imposes an immediate new export tax on all banana skin pulp leaving the UK

The new tax makes the contract unprofitable, the seller now wants to sell the banana skin pulp within the UK market and claims Force Majeure

Scenario 3

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Breaches, default and damages

Jonathan Waters

LLB, LLM, MCIARB, CMC Registered Mediator, Barrister General Counsel

Gafta

@Gaftaworld

What happens if it goes wrong ?

The other party is in breach of contract

What do you do?

What do you get in damages?

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Rules and procedures

Gafta Default Clause

Damages

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Default

Total breakdown of the contract, i.e. a breach of a condition.

Examples:

Failure of CIF seller to ship goods/procure goods afloat in time

Failure of FOB buyer to nominate a vessel in time

Failure of CIF buyer to open letter of credit in time

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Default

When can I put party in breach in default?

Clear evidence of breach.

Be careful! Risk of acting too early - "jumping the gun“.

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GAFTA Default Clause

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

Gafta No. 100 Clause 23: “DEFAULT – In default of fulfilment of contract by either party, the following provisions shall apply:- (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.”

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Basis of damages under Default Clause

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”

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Establishing the default price

Difference between contract price and current market price at the date of default (Sale of Goods Act 1979)

No obligation on innocent party to sell or purchase as per Default Clause procedure – instead, 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

Procedure: send notice => sell or purchase => notify paying party of price achieved

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Default Clause;- Loss of Profit

Gafta No. 100 – Clause 23 (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

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Date of Default

Gafta No. 100 – Clause 23 (f)

“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.”

Sellers may declare themselves in default – to establish default date as early as possible in a rising market

Otherwise, first business day after “deemed default”

NB – Not always "10th consecutive day" – different periods in different GAFTA Contracts: make sure you rely on right contract!

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Summary: Time scale for buyer to terminate Contract under GAFTA 100

NB Different time periods under different GAFTA Contracts

Shipment period – clause 6

Any extension to Shipment period – Clause 10

Appropriation period 10 days – clause 11

Default period 10 days – Clause 23

Default date + day

-Clause 23

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Damages for breach of contract: Principle

Damages are compensatory

i.e. an actual loss that can be proved.

Bunge v. Nidera (2015)

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Damages: starting points

There must be a contract. Liability for damages does not arise if there have been negotiations but no contract has been concluded.

There must be a breach. Until one party is in breach of its obligations to the other, no question of a claim in damages can arise.

What has been breached? Condition, warranty, innominate term?

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Available Market

Difference between contract and market price.

Not restricted to regulated markets, exchanges

‘A state of affairs where there are sufficient traders actually or potentially in touch with each other to allow a seller or buyer to trade in goods if they wish to do so.’

Time: there must be a buyer or seller on the day required.

Geography: the place where performance should have been made.

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No Available Market

Assess the true value of the goods at the time of the breach

In practical terms, the best measure of the actual value of the goods is often their resale price or the actual cost of obtaining substitute goods

Price of “nearest equivalent” may be a reasonable comparison

Costs of adapting goods to satisfy another customer and costs of transporting goods to place of resale can also be recovered

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Losses on sub-sales (lost profits)

Often irrelevant where there is an available market

Require “special knowledge” on behalf of the contract breaker

“Special knowledge” can operate for and against the contract breaker – actual loss may be less than what would be payable by reference to the market movement.

Expressly excluded by GAFTA terms unless special circumstances (Arbitrators' discretion)

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General Damages

Damages which “naturally result … in the ordinary course of events” (section 50(2))

What is foreseeable to a “Reasonable Person” in the market?

“Reasonable person” - a trader of ordinary skill and competence, with knowledge of his market, how it operates and the pressures of supply and demand within it

No need to foresee:

actual breach

precise sequence of events

financial extent of loss

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Liquidated damages / penalties

Liquidated damages are recoverable under English law but penalties are not

Common example of liquidated damages: demurrage

Liquidated damages represent a “genuine pre-estimate of loss”

Where the amount of the payment has been determined with the intention of deterring the other party from breaching his contract, this will be treated as a “penalty” and the Court (or arbitrators) will not enforce it

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Special Damages

Recoverable if contract breaker had actual knowledge of special circumstances affecting the innocent party’s position

Section 54 Sale of Goods Act 1979:

“Nothing in this Act affects the right of the buyer or the seller to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover money paid where the consideration for the payment of it has failed.”

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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

Remoteness of damages – are losses not only caused by breach but reasonably foreseeable as such at time of entering into the contract?

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Mitigation

No damages can be recovered for losses caused by the innocent party’s own action or failures to mitigate

“Duty to Mitigate”, i.e. to take all reasonable steps to minimise loss

Strong incentive to accept substitutes

Onus of proof is on the defendant to show that the claimant ought reasonably to have taken certain steps to mitigate his loss.

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How to mitigate

The Claimant is not required to take any step “which a reasonable and prudent man would not ordinarily take in the course of his business”

He must consider an offer of substitute performance by the contract breaker

Innocent party is under a duty to mitigate from the time when he discovers or ought to have discovered that the defendant has broken his contractual obligation. He has a reasonable time to decide how to mitigate

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Interest

Right to recover interest: Section 54, Sale of Goods Act 1979

Contractual interest (GAFTA 100, Clause 12 (h)

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Bunge v. Nidera (2015)

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Issues to be considered

Gafta Contract – Gafta 49

Interpretation of Clause 18 – Default

Gafta Arbitration: First Tier and Appeal

Role of the Courts

Assessment of Damages

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Background

Gafta Contract: English Law

Presumption: Parties bound by what they agree

Damages: “compensatory principle”/mitigation

Default Clause:

Provides certainty

Mechanism for calculating damages

Clear guidelines

Ease of application by arbitrators

Cost effective enquiry

Common in other sectors too e.g. ‘the parties acknowledge that it is difficult to quantity damages and have agreed that X shall levy a cancellation fee against Y as liquidated damages and not as a penalty’

Penalty clauses

A clause penalising / deterring a party from breaching contract. Damages are out of proportion to any potential loss

Generally, not enforceable

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Facts

B sold 25,000 MT Russian Milling Wheat to N.

Delivery 23-30 August 2010

Contract Incorporated Gafta 49

5 August 2010: Russian Government – Temporary ban of Wheat export 15 August – 31 December (i.e. would take effect during delivery period)

9 August 2010: B prematurely cancelled contract – Prohibition Clause (now replaced by Prevention of Shipment)

Premature: should have waited to see if the ban remained in place

11 August 2010: N treated cancellation as breach of contract (no evidence that ban would definitely come into existence and, if it did, that it would last for that period)

12 August 2010: B offered to reinstate the contract on same terms. N rejected this.

N brought arbitration claim – damages of $3m. Difference between contract and market price on 11 August 2010 (Default Clause)

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Arbitration

First Tier

B in Default

No damages. Why?

Contract would have been cancelled anyway (after 15 August 2010 when ban took effect), so no loss

Appeal Board

B in Default

N entitled to damages

$3m – difference between contract and market price as per Default Clause

Application to Courts (Arbitration Act 1996)

High Court

Court of Appeal

Upheld Appeal Board

Referred to Supreme Court

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Supreme Court

Default Clause not a ‘complete code’ for assessing damages: Court could not overlook the fact that contract could never have been performed

Default Clause: mechanism for determining market price for assessing damages but did not deal with effect of subsequent events

Overruled court of appeal and agreed with First Tier. There was no loss

Compensatory Principle

No damages if no loss

Mitigation?

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Lawyers

Will scrutinise contracts!

Look for ‘ways out’ of contract without breaching it

Need to understand the contract and your obligations

If in doubt – take advice! Particularly before alleging a Default

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Summary – Know Your Contract

If you do not understand your contract the risk is that you have an unknown level of potential liability

Knowing and understanding the contract you trade on reduces risk

Understanding what the contract clauses actually mean reduces risk

Communicate with your counterparty

Communicate internally – across the desk

Don’t leave things to chance, collect regular updates from those in the chain

Manage the contract by an attitude of ‘no surprises’

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Refreshments

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Q&A Panel Discussion

Chair:

Sophie Webber, Head of Training & Events, Gafta

Panellists:

Jonathan Waters, General Counsel, Gafta

Brian Perrott, Partner, HFW

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Networking Event 18:00 – 21:00 The London Eye and Troia Restaurant. Details can be found in your delegate pack.

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