Seagrain LLC v Glencore Grain B V

This is an arbitration appeal under s. 69 Arbitration Act 1996 concerning the proper construction and application of the GAFTA Prohibition Clause. The appellants, Seagrain LLC, are the sellers, and the respondents, Glencore Grain BV, are the buyers. Permission to appeal was given by Popplewell J on 1 February 2013.

The contract between the parties is dated 6 July 2010, and by it, the sellers agreed to sell, and the buyers agreed to buy, 3,000 MT 10% more or less at sellers’ option of feed wheat of Ukrainian or Russian origin C & F free out, one safe port, one safe berth, Haifa or Ashdod. Shipment was from 15 to 31 August 2010 inclusive at sellers’ option. The contract incorporated the GAFTA 48 contract form, which includes the GAFTA Prohibition Clause.

It is common ground that Russian wheat was subject to an export ban at the material time. The award states that the buyers accepted that “the contract had to be fulfilled by Ukrainian wheat”. The sellers’ contention was that measures taken by Ukrainian customs had the effect of restricting the export of wheat and that accordingly the contract was cancelled and they were discharged from liability to perform by virtue of the Prohibition Clause. They relied on, amongst other things, letters from Ukrainian customs imposing controls, in particular a letter of 2 August 2010 (13 days before the beginning of the shipment period) requiring all customs samples to be sent to one laboratory.

The sellers further relied on an article in the Gaftaworld publication of October 2010 saying:

“About 400,000 tonnes of wheat and barley are in the vessels which Customs has not cleared for export and about 1.3 M tonnes are in export terminals awaiting any clarity as to export restrictions”

The sellers further relied on a statement from Pasternak & Baum to the effect that:

“Ukrainian government imposed export restriction, but export quotas were not announced and distributed yet. One could not buy grain for export and load a vessel. The situation lasted August through September, vessels were not loading, vessels which completed loading prior to restrictions were not allowed to sail. Market was at a standstill.”

The sellers’ contentions were not accepted. By GAFTA Appeal Award No. 4277 dated 20 August 2012 (the appeal being conducted on the documents), the GAFTA Board of Appeal upheld the buyers’ claim for damages for the wrongful repudiation of the contract by the sellers. The Board awarded the buyers damages of US$270,000 plus interest and fees and expenses.

The questions of law in respect of which permission to appeal has been given are pleaded in the sellers’ arbitration claim form as follows:

It is not in dispute that round about the relevant time difficulties were experienced in exporting Ukrainian wheat. The circumstances give rise to the two questions in the appeal. The first is as to the nature of an “executive act … restricting export”. What kind of “executive act” qualifies for these purposes? The second is as to what a seller has to prove to rely on the clause. This is essentially a causation question. Does the seller have to prove that it made all reasonable efforts either to ship the goods or to try and buy replacement goods? Or can it simply rely on the deemed incorporation of the restriction?

The facts as found by the Board are as follows. On 29 April 2010, State Customs Control of Ukraine strengthened controls in relation to the export of cargoes by taking samples during loading. There was no actual restriction on exports however, and no suggestion in the letter issued by Customs that export cargoes would actually be prevented at any time.

By letter of 28 July 2010 (that is, after conclusion of the sale contract) customs stated that completion of customs clearance should be made exclusively after receiving the results of research and approval by the risk management and audit analytical department.

On 2 August 2010, the letter of 28 July 2010 was withdrawn, and the Kyiv Research Forensic Institute became the only laboratory to which customs samples were to be sent. This is the letter on which the sellers place primary reliance in the appeal (though saying that it has to be seen against the background.) An export quota system was eventually put in place in respect of Ukrainian exports, but not until 19 October 2010.

The Board found that at the time the contract was entered into the sellers were fully aware that there were restrictions in place because two of the Customs letters were dated to prior to the contract. The buyers accepted that wheat exports were delayed and disrupted due to the inspections being carried out by Ukrainian Customs.

The Board found that the sellers had made little or no effort to indicate what steps they took to try to perform, for example attempts to buy in goods already loading/loaded/afloat. It noted that whilst the contract did not envisage that the sellers would purchase goods afloat, that would not have prevented them from doing so.

The key findings of the Board are as follows:

“8.6

… There was no actual restriction on exports per se, in the same context as when an outright ban/prohibition had been implemented. The inspections might well have been a contributory factor in the delay of customs clearance and/or sailing of export cargoes. However, there was no suggestion in the letter, that export cargoes would actually be prevented at any time.”

Then later at paragraph 8.16:

“The burden is on Sellers to show that they were entitled to the protection of the Prohibition Clause. Sellers have to clearly demonstrate that they have tried all avenues and made all reasonable efforts to either ship the goods or to try and buy replacement goods in order to comply with their contractual obligation to ship the goods. This the Sellers, in the Board’s view, have failed to do. At no stage was there an official prohibition or ban, enacted by or on behalf of the Ukrainian Government prior to, or during, the shipment position and evidence shows that goods were loaded by others during 15/31 August. Sellers have stated that the Ukrainian authorities were hindering exports, however no proof had been provided by Sellers to substantiate that any of their cargoes were hindered. There may have been delays and difficulties in loading and/or shipping the goods but this did not constitute a prohibition and therefore Sellers were not protected under the contract for their non shipment. The risk and costs of such a situation are with a seller not a buyer. ”

The sellers’ case is that the Board did not ask itself, as it should have done, whether the executive acts of Ukrainian Customs (and in particular the requirement in the letter of 2 August 2010 that all samples be sent to one laboratory), and the consequential delay and disruption, had the effect of restricting export of goods of the contractual description (i.e. feed wheat) partially or totally in the limited 16 day window allowed by the contract. Instead it treated “restrictions” and “prohibition” as synonymous and asked itself whether Customs had imposed any ban or prohibition on export.

The sellers contend that the Board thereby set the bar too high. It should have been asking itself whether the delay and disruption caused by the acts of Customs had the effect of restricting, partially or totally, shipment of wheat during the limited shipment period at the end of August specified in the contract. Had it asked itself that question, it would inevitably have concluded that it did restrict shipment for it is obvious that the delay and disruption caused by a requirement that all Customs samples should be sent to one laboratory will restrict export where there is a requirement that that export should take place within a limited period (in this case 16 days).

The buyers submit that at its highest, the sellers’ case is that after 2 August 2010, samples of wheat for export from the Ukraine could only be analysed by one laboratory. They submit that delays in and disruption to the customs clearance regime did not constitute a restriction on export within the Prohibition Clause. The buyers say that the Board was right to find (as it did) that this was not an actual restriction on exports, as when an outright ban/prohibition had been implemented. The inspections might well have been a contributory factor in the delay of customs clearance and/or sailing of export cargoes, but there was no suggestion that export cargoes would actually be prevented at any time.

The GAFTA Prohibition Clause has featured in a considerable number of decided cases. In general terms, the clause is intended to excuse a seller from performance if a sovereign act has had the effect of prohibiting export. However, the discussion in Benjamin’s Sale Of Goods, 8^th edn, at paragraphs 18-385 to 18-395 shows the difficulties experienced in balancing the interests of buyer and seller.

The disputes arising from the embargo on the export of soyabean meal by the US Government in 1973 led to a change in the terms of the clause. As appears from Bremer Handelsgesellschaft Schaft M.B.H v. Vanden Avenne Izegem P.V.B.A. [1978] 2 Lloyd’s Rep. 109, HL, the terms of the clause as it was in 1973 were as follows:

“Prohibition - In case of prohibition of export, blockade or hostilities or in case of 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 shipment named herein is/are situate, preventing fulfilment, this contract or any unfulfilled portion thereof so affected shall be cancelled. In event of shipment proving impossible during the contract period by reason of any of the causes enumerated herein, sellers shall advise buyers of the reasons therefore. If required, sellers must produce proof to justify their claim for cancellation.”

Benjamin explains at 18-395 that the soyabean cases illustrate the difficulties which faced sellers who sought to rely on the prohibition clause, which applied only where the sellers could show that performance had been “prevented” by the supervening event. It was “…with a view to improving the seller’s position that this clause was later redrafted. In its revised version it applied in the case of a prohibition or of an executive act of the government of the country of origin ‘restricting export whether partially or otherwise’; and it provided that ‘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’”.

The revised clause (which is the applicable version in the present case) reads as follows:

“PROHIBITION - In case of prohibition of export, blockade or hostilities or in case of 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 shipment named herein is/are situate, 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. Sellers shall advise Buyers without delay with the reasons therefor and, if required, sellers must produce proof to justify the cancellation.”

The sellers refer in particular to the deletion of the words “preventing fulfilment” in the old clause and their replacement by the words “restricting export” in the revised clause. Such restriction can be the effect of a wide range of executive acts, they say. On their side, the buyers point out that a reference to “preventing fulfilment” remains in the clause, because it goes on to provide that the restriction is deemed by the parties to apply to the contract, and to the extent of such total or partial restriction “… to prevent fulfilment”.

The effect of the revision was the subject of judicial decision in Pancommerce S.A. v Veecheema B.V. [1982] 1 Lloyd’s Rep. 645 (Bingham J), and on appeal, [1983] 2 Lloyd’s Rep 304. The court had to consider the application of the clause in the context of restrictions on the export of Spanish sugar beet. An export licensing system had been in operation for some years, with licences freely available on request. However on July 1, 1976, after the conclusion of the sale contract, the Ministry of Commerce imposed an embargo on the granting of licences. In fact, the sellers did have a licence which was sufficient to cover the contract, but because of other non-binding commitments, sought to argue that there was a deemed prevention of fulfilment.

Sir John Donaldson MR said at p.306:

“It is quite clear that the decision of the Spanish government was an executive act done by or on behalf of the government of the country of origin or of the territory where the port or ports of shipment were situate and that it restricted export ‘whether partially or otherwise’. Accordingly the restriction is deemed to apply to the contract.”

He went on to say at p.307:

“The clause falls to be construed according to its terms. The restriction which is deemed to apply to the contract with the buyers is, in effect, a restriction upon the export of sugar beet pellets not covered by a licence granted before July 1, 1976. It can be notionally written into the contract in these terms. If and insofar as this prevents shipment, the contract is cancelled. But on the facts it did not prevent shipment. Accordingly the sellers are in breach ….”

Benjamin comments on this decision at paragraph 18-395. Taken literally, the editors say, the words of the clause might be thought to have been intended to apply irrespective of any causal connection between the prohibition and the seller’s non-fulfilment. In Pancommerce, the court rejected the argument that the sellers could rely on this provision merely because a prohibition had been imposed, when in fact that prohibition had not prevented them from performing. (The remaining commentary is mainly relevant to the second question in this appeal.)

The buyers point out that though the decision of the Spanish government in the Pancommerce caseto refuse requests for licences was not a positive prohibition of export, it was nevertheless an executive act, akin to an outright ban, which restricted export from that date. The Board’s construction of the executive act relied on by the sellers in the instant case is, they say, consistent with the approach taken by the Court of Appeal.

I note that the above authorities show two examples of a prohibition within the clause. Another is Russian Government Resolution No.599 published by the Prime Minister by which the export of wheat from the territory of the Russian Federation between 15 August and 31 December 2010 was prohibited (see Bunge S.A. v Nidera S.A. [2013] EWHC 84 (Comm) at [6]). Each of them was a formal act of the executive of the country concerned which had the expressed intent of banning or restricting exports.

The sellers submit that the delay and disruption caused by the acts of Customs were similarly “executive acts” which had the effect of restricting, partially or totally, shipment of wheat during the limited shipment period at the end of August specified in the contract.

The buyers submit that if the term “executive acts” is construed in this broad way, commercial certainty would be undermined. Automatic cancellation would occur on any adjustment of a customs clearance regime which resulted in delay or disruption to exports. For example, austerity measures might lead to the sacking of experienced customs officials, a complex form might be introduced for those applying for customs clearance, or a new computer system for customs officials might not work properly. Each of these examples would result in delays in and disruption to the issuing of customs clearance.

Mr Michael Nolan, counsel for the sellers, accepted that the logic of his argument is that these examples would fall within the Prohibition Clause because, subject to de minimis cases, they would be executive acts restricting export. In effect, he submits that provided the act is done by the executive, and has the effect of restricting exports, it falls within the clause. The Customs letter of 2 August 2010 by which customs samples were to be sent to a particular laboratory restricted exports, and was certainly an act of the executive. The Board misdirected itself as to the test, it was submitted, taking the erroneous view that there had to be something akin to an outright ban on or prohibition of export, and as a result reached the wrong conclusion.

My conclusions are as follows. The revision of the clause following the soyabean episode does not appear to have been prompted by any question as to what was meant by “executive acts”. There was no doubt that the US Government ban was a prohibition within the clause. No case was cited to me to support an argument that the interpretation of the term has given rise to particular problems.

I agree with the buyers that the sellers’ broad construction is unworkable. The clause stipulates that the “… 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 …”. In the passage from Pancommerce at p.307 cited above, the court had no difficulty in holding that the restriction which was deemed to apply to the contract was, in effect, a restriction upon the export of sugar beet not covered by a licence granted before July 1, 1976. It could, as the court said, be notionally written into the contract in those terms. In the present case, a restriction based on a requirement that samples be tested in a particular laboratory lacks that kind of clarity.

Further, the term “any executive … act” has to be construed in context. The clause applies to “any executive or legislative act done by or on behalf of the government … restricting export, whether partially or otherwise”. In my view, the term “any executive … act” means an act done by or on behalf of the government which is in the nature of a formal restriction on exports. This is how it has been applied in the reported cases. It cannot be construed as extending to every action by an official body which has the effect of restricting exports. Beyond that, I do not think that the court should impose a prescriptive interpretation. Factual situations will differ widely, and what amounts to an “executive or legislative act” within the meaning of the clause is a question for the specialist GAFTA tribunals to determine, in the light of their experience of the trade.

I do not think that the Board applied the wrong test in this case. In finding that “there was no actual restriction on exports per se, in the same context as when an outright ban/prohibition had been implemented”, they were not finding that the seller had to show an outright ban on exports to come within the clause. A similar argument by sellers was rejected on the facts of that case in Agrokor A.G. v Tradigrain S.A. [2000] 1 Lloyd’s Law Rep 497 at 500, Longmore J.

It was up to the sellers to “produce proof to justify the cancellation”. In my view, the Board was fully entitled to reject on the facts their case that the requirements of Ukrainian Customs, in particular the requirement to send samples to a particular laboratory, constituted an executive act within the meaning of the clause. This is the kind of issue on which the court gives considerable weight to the views of the trade tribunal (see e.g. Andre et Cie v Cook Industries Inc [1986] 2 Lloyd’s Rep. 200 at 204, Bingham J, cited in Kershaw Mechanical Services Ltd v Kendrick Construction Ltd [2006] 4 All ER 79 at [55], Jackson J). Whether such circumstances could fall within the Prohibition Clause would depend on the particular facts. It follows that the appeal must fail.

The sellers say that the Board was in error to find that in order to obtain the protection of the clause, “Sellers have to clearly demonstrate that they have tried all avenues and made all reasonable efforts to either ship the goods or to try and buy replacement goods in order to comply with their contractual obligation to ship the goods”.

The buyers say the Board correctly construed the prohibition clause. Proof that the restriction had in fact prevented performance is required before a seller can take advantage of it. To obtain a complete discharge from their obligations, the sellers were required to show that the “restriction” had the effect of restricting all possible methods of performance under this C&F contract. This, the buyers say, they failed to do so.

This raises the “causal connection” point referred to by Benjamin in the passage cited above. The issue has been the subject of a recent decision of the Commercial Court, albeit on different facts (Bunge S.A. v Nidera S.A., ibid, Hamblen J). I am told that the judge gave permission to appeal to the Court of Appeal, and that the appeal is fixed for November 2013. In those circumstances, I do not think that there is anything I can or should add myself, given my decision on the first question.

In the result, the appeal is dismissed.