Mix and (not) Match – does combining house sale terms with GAFTA contracts work?

When traders combine GAFTA with other standard terms in soft commodity contracts they may wish to present an appearance of neutrality – or simply to have a bit of the best of both worlds. This practice might be a compliment to the Grain and Feed Trade Association’s (GAFTA) standard terms, but careful thought is needed to avoid creating confusion.

Superimposing GAFTA terms on another set of contract terms runs the risk of lengthy and costly legal argument.

In fact recent appeals from GAFTA illustrate how the possibility of conflict can lie hidden even within the clauses of one GAFTA contract.  This article considers some recent GAFTA appeals, and explores how conflict might also persist when GAFTA standard terms and non GAFTA terms are combined.

The GAFTA Board of Appeal (Board) has considered diverse cases of export bans over the years¹. GAFTA’s “prohibition” clause operates (broadly speaking) to cancel an export contract when there has been a relevant government act restricting its fulfilment.

In considering a Russian ban on the export of wheat, announced on 5 August 2010, the Board took note that in practice export embargoes can be modified or withdrawn. Bunge SA declared a wheat export contract cancelled on 9 August 2010 but were met by a claim for default from Nidera BV as buyers, who argued that the announcement on 5 August of a ban that would take effect on 15 August did not automatically cancel a contract for FOB delivery between 23 and 30 August.

The debate ultimately moved to the Court of Appeal where it was held in Bunge SA v Nidera BV [2014] LLR 404 that the prohibition clause would only operate if the seller’s inability to perform was caused by the restriction. At the time Bunge purported to terminate, that was not the case and the clock could not be wound back by Bunge subsequently offering to reinstate the contract.

When poor harvest conditions led Ukraine to introduce grain export quota restrictions in October 2010, some sellers were unable to secure the required export licences. GAFTA’s prohibition clause was again in the spotlight.  

In Public Company Rise v Nibulon SA [2015] LLR 108, there was an added complication. This time the relevant contract terms included a licence clause which obliged the seller to obtain “at his own risk and expenses any export licence or any other official document” (Licence Obligation). All terms of GAFTA Form 78 “not in contradiction” with the seller’s terms were also incorporated into the contract.

Contracts often state that certain provisions are to prevail over others to the extent of any conflict between them. In many circumstances this will help interpretation. However it is impossible to foresee all eventualities, and different views are possible about, for example, whether competing provisions cover the same ground in different ways, impose different outcomes, can or cannot be reconciled and if so how. Nibulon illustrates how readily this will occur.  

• For its part, the buyer argued that the prohibition clause was “in contradiction” of the Licence Obligation and must not be considered.  
• The seller believed that it had used its best endeavours to fulfil the Licence Obligation but with the quota restrictions no licence was available, so prohibition must be deemed to have occurred.  
• The Board formed the view that the Licence Obligation was absolute and only a total export ban could qualify that obligation.  
• On appeal on a point of law under s 69 of the English Arbitration Act, the court found that it was possible to give effect to both the Licence Obligation and the GAFTA prohibition clause.

To reach this conclusion, the court applied guidance by the Court of Appeal in a different export quota case², affirming that the first task is to see if clauses can sensibly be read together; only if they cannot is there an inconsistency. In Nibulon, the two clauses were not in conflict; but further consideration was needed by the Board about whether the seller’s’ inability to perform was caused by quota restrictions or the authorities’ failure to issue export licences. The Board would then be able to decide whether the seller was protected by the prohibition clause.  

In dealing with vexed questions of when one clause should override another, the High Court said

“…It is not enough if one term qualifies or modifies the effect of another; to be inconsistent a term must contradict another term or be in conflict with it, such that effect cannot fairly be given to both clauses”.

Although this conclusion may seem unsurprising, the fact that similar issues had repeatedly to be referred to the higher courts over a relatively short time for clarification indicates how vexed the question of the interaction of different contractual provisions can be.

Although the above discussion has focused on the issue of prohibition clauses, the common law principles and analysis used in Pagnan and Nibulon are of general application.

• Traders should give careful consideration before taking the “mix and match” approach to contract drafting.
• Where traders use a mix of GAFTA standard and specifically negotiated terms, time and costs will be saved and uncertainties minimised if there is a clear mechanism for the interaction between the two sets of terms.
• Where parties intend a specific clause to override (or be qualified by) a standard clause, this should be set out clearly in the contract itself.
• When incorporating multiple clauses (such as an entire alternative sale contract) each provision should be cross checked for overlap, competing operation or inconsistency.
• When seeking to rely on clauses that excuse performance or relieve from obligation, parties need to be careful not to “jump too early” and arbitrators and courts will look closely at whether the circumstances are sufficient to activate the particular wording of the relevant clause, and at what has actually caused a particular breach or non-performance.

Often, an ounce of prevention at the drafting stage is worth a pound of cure once the contract is in force.