Contractual clauses which should not be omitted

• Shipping
• International Trade

Every day, thousands of contracts are concluded in Transport, Shipping and International Trade between the parties speaking different languages, working in different law systems and often understanding the same contractual provisions in a different way. Therefore, absolute majority of market players, while drafting contract, uses standard proformas drafted by professional associations. Of course, contracts based on standard proformas have advantages, such as fewer drafting costs, convenient study of essential contractual terms, increased trust to formulation, fewer chances for deviation of transaction terms and solid court practice for dispute settlement.

In fact, contract proformas, drafted by market experts, serve as perfect instrument for users. Meantime, standard proformas are unable to foresee all the possible situations, so there are many chances for disputes between the parties referring to standard text. Some clauses of standard proformas are more or less perfect, depending on the contract type and organization which drafted it. In our opinion, there are no reasons for non-including into contracts certain provisions from other commercial or transport proformas.

But I have paid...

Prompt actions of the parties play crucial role for the contract performance. One of frequent reasons for dispute is misunderstanding the moment from which payment obligation is deemed as fulfilled. Does it occur at the moment of cost withdrawal from the buyer’s bank account or at the moment of cost remittance to the seller’s account? What should we do in case when costs got stuck between banks?

Case study: The buyer states that it has paid for the goods, as confirmed by the Bank’s SWIFT. But no costs were remitted to the seller’s account within the standard term. The buyer claims for fulfillment of the seller’s obligations but the seller retains goods with reference to non-payment. Such situation may get complicated in case of goods supply on “C” terms, while the vessel is already in the buyer’s jurisdiction, where the latter has an option to take legal (and sometimes illegal) measures.

GAFTA contract proformas do not prescribe the payment moment, while FOSFA proformas include the following formulation:

Payment shall not be deemed to have been effected before receipt of cleared funds by the payee or his bank. If payment is agreed to be by bank transfer, the party shall effect payment to the payee’s bank on or before the due date for payment and payment instructions shall specify a value date not later than the second bank working day after the day of payment.

It prescribes clearly two vital concepts:

• Moment of payment: it shall be deemed as performed only in case of cost remittance to the beneficiary’s account;
• Payment without delay: bank transfer shall be made on or before the prescribed payment date, while valuation date in the Payment Order shall be not later than the following banking business day after the payment date.

It is bank’s fault, not mine!

Sometimes delays or losses of payments are caused by errors in banking system operation. Neither FOSFA nor GAFTA proformas contain any clauses related to such problem. Meantime, anti-technicality clauses are widespread in merchant shipping law and apply for a long time. They are aimed at diminishing negative effects for the party in case of payment term breach due to fault of the servicing bank:

Where there is failure to make punctual payment due to oversight, negligence, errors, or omissions on the part of the ... [Party] or their bankers, the [Party] shall be given ___ clear banking days written notice to rectify the failure, and when so rectified within those days following the notice, the payment shall stand as punctual.

Similar provisions provide more time for buyers to adjust situations when it is not their fault in breach of terms.

I’m not guilty, it is force majeure!

In accordance with civil law concept, force majeure shall release one or both parties from obligations in case of unforeseen events beyond their control. European law system sets forth in legislation the concept of force majeure which shall apply irrespective of whether it is stipulated by the contract or not.

In the English law, force majeure is not an independent law concept, nor does it exist outside contractual terms. In such case, construction of force majeure clause in the contract may play crucial role. It may exist either as reference to force majeure in the contract or as detailed provision on force majeure. In first case, the fact of force majeure shall be determined by the court on a case by case basis and may cover not only acts of God (hurricanes, earthquakes etc.) but also human factors (wars, embargos, strikes etc.). In second case, parties to the contract shall agree on a detailed list of force majeure circumstances and effects of their occurrence.

Special attention should be drawn to force majeure clauses, since their structure differs in various proformas. For instance, under GAFTA 49 validity of the contract shall terminate for both parties in case of force majeure, while under GAFTA 48 it shall terminate for the seller only. FOSFA 53 standard proforma also provides termination of the contract for both parties but only in case when force majeure occurs at the loading port:

“Should Sellers be prevented from loading the goods on board Buyers’ ship or should buyers be prevented from taking delivery by reason of fire, strikes, lockouts, riots, civil commotion or any cause comprehended in the term Force Majeure at the port/s of loading, or elsewhere preventing transport of the goods to such port/s, the contract delivery period shall be extended by 21 days beyond the termination of the Force Majeure event”.

One of Interlegal recent case studies

The dispute arose under the pea sale and purchase contract with the Indian counterparty. The Indian government imposed multiple and sudden restrictions on pea import. Thus, the buyer ceased to fulfill its obligations, with reference to force majeure. But the contract included GAFTA 88 proforma, under which force majeure clause shall cover the seller’s obligations, not the buyer’s ones. It is quite unobvious that force majeure clause, as treated by the English law, shall cover actions committed by the government of import country. GAFTA Arbitration will settle this dispute finally soon.

Gentlemen, you are in default...

The guarantee of correct default procedure is to comply with default clause in the contract. It is often quite large and complicated, like in FOSFA 53 proforma, stating the following:

“DEFAULT: In default of fulfillment of this contract by either party, the other party at his discretion shall, after giving notice, have the right either to cancel the contract, or the right to sell or purchase, as the case may be, against the defaulter who shall on demand make good the loss, if any, on such sale or purchase. If the party liable to pay shall be dissatisfied with the price of such sale or purchase, or if neither of the above rights is exercised, the damages, if any, shall, failing amicable settlement, be determined by arbitration. The damages awarded against the defaulter shall be limited to the difference between the contract price and the actual or estimated market price on the day of default. Damages to be computed on the mean contract quantity. If the arbitrators consider the circumstances of the default justify it they may, at their absolute discretion, award damages on a different quantity and/or award additional damages. Prior to the last day of the contract delivery period either party may notify the other party of its inability to deliver or take delivery but the date of such notice shall not become the default date without the agreement of the other party. If, for any other reason, either party fails to fulfill the contract and is declared to be in default by the other party and default is agreed between the parties or subsequently found by the arbitrators to have occurred, then the day of the default shall, failing amicable settlement, be decided by arbitration”.

A certain procedure is formulated on the grounds of such provision. It consists of the following stages:

• Sending a notice of default;
• Purchase or resale of goods under the new contract;
• Fixing default cost and assessment of additional losses.

At each stage, there are some nuances which should not be ignored, in order to avoid default or at least being left with nothing. Anyway, before cancelling the contract, you should decide: whether you would like to terminate relations or wish to preserve the contract with the right to claim for damage recovery. If you decide to cancel the contract, you should verify the prescribed default procedure and the fact, whether the default party is entitled to eliminate breach of the contract within a certain period.

Although the guiltless party should not make such choice in a split second, it should neither delay such decision nor commit any actions which could be treated as desire to retain the contract in force. Any further correspondence should have notes on rights reserved. In the contract is cancelled but the parties still act for a certain period in accordance with previous arrangements, such actions may be recognized as conclusion of the new contract — probably under the same terms, which may cause unfavourable effects.

As we see, at first sight simple and meaningful clauses often conceal vital aspects being often omitted. Therefore, while using standard commercial contract proformas in daily practice, you should either study their content thoroughly or ask experts for advice.