Wednesday, 1 April 2015

The GAFTA prohibition clause revisited

Apri 2, 2015.

Public Company Rise v. Nibulon S.A. [2015] EWHC 684 (Comm)

This was an appeal from a GAFTA Appeal Board which concerned the relationship between the obligation on the seller to obtain export licences and the standard form GAFTA prohibition clause. Whilst the Court was asked to determine three separate issues, the core issue was whether the GAFTA prohibition clause qualified in any way the seller’s absolute obligation to obtain export licences. Hamblen J, in the Commercial Court, concluded that it did.

The background facts

The dispute between the parties arose out of three contracts relating to the sale by Public Company Rise (“the Sellers”) of 158,000 mt of Ukrainian feed corn to Nibulon S.A. (“the Buyers”). The contracts were on CPT terms (carriage paid to) and were for delivery to the Buyers’ transhipment terminal. The contracts were on the GAFTA 78 form.  Each contract provided as follows

Clause 11.3 - “Seller is obliged to obtain at his own risk and expenses any export license or any other official document and to perform where it is required, all customs formalities for export of the goods”

Clause 12 – “All other terms, conditions and rules, not in contradiction with the above contained in Form 78 of GAFTA…”

Clause 17 of GAFTA 78 - “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 station(s) or private siding(s) of loading 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 therefore and, if required, Sellers must produce proof to justify the cancellation."

The Ukrainian Government introduced Grain Export Quota Restrictions in October 2010 as the result of a poor harvest. These imposed a limit on the total quantity of grain which could be licensed for export during the relevant delivery period. The Appeal Board concluded that despite their best endeavours, the Sellers were not granted the necessary export licences. As a result, the Sellers cancelled the contracts pursuant to the prohibition clause. The Buyers treated this is as a repudiation and held the Sellers in default. 

The Appeal Board found for the Buyers and held that they were entitled to damages in excess of US$17 million. In reaching their conclusion, the Appeal Board made the following findings:-
the obligation to obtain export licence(s) was an absolute one and overrode the prohibition clause except in the situation of a total ban on export;
there was, during the relevant period, no total ban on exports; and
in any event, the Sellers could not rely on the prohibition clause as they were not “prevented” but merely “restricted” in making shipment to the Buyers.
The issues for the Commercial Court 

The three questions that were put to the Commercial Court on appeal from the GAFTA Appeal Board award were as follows:-
Does the obligation to procure an export licence override the prohibition clause or does the prohibition clause operate as a qualification on the obligation to obtain an export licence?
Does the prohibition clause only relieve the Sellers of an obligation to obtain an export licence in circumstances where the prohibition amounts to a “total ban”?
Are the Sellers not able to rely on the prohibition clause when they are not “prevented” but merely “restricted” from making shipments?

The Commercial Court Decision

The Commercial Court answered the above questions as follows.

As to question (1) the Buyers’ essential argument was that there was a conflict between the absolute obligation to obtain an export licence and the prohibition clause. They said that this was so since the contracts expressly provided that the terms and conditions in GAFTA Form 78 only applied when not in contradiction with the terms of the contract and here there was a contradiction. Hamblen J. referred to the decision in Pagnan v. Tradax [1987] 2 Lloyds’ Rep 342, which was concerned with the very same issue of the relationship between an obligation to obtain an export licence and the GAFTA prohibition clause. He quoted Bingham LJ in that case, where he 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.”  As in the Pagnan case, Hamblen J. concluded that the obligation on the seller to obtain export licences at his own risk and expense is to be read subject to any other terms of the contract which may be invoked by the seller in the event of a contingency such as prohibition. In other words, if there is a provision, such as a prohibition clause, which excuses the seller from delivering the goods concerned, it will not have an obligation to obtain an export licence.

As to question (2), Hamblen J. dealt with this point fairly swiftly. He pointed out that the prohibition clause expressly applies to prohibition restricting export “whether partially or otherwise” and that to the extent of “such total or partial restriction“, the contract or any unfulfilled portion shall be cancelled. He found that “in accordance with its wording, the clause plainly applies to a qualifying event ‘partially restricting’ export. As such it applies to a partial prohibition or other qualifying event which has a like effect.”

Lastly, as to question (3), Hamblen J. pointed out that the prohibition clause requires proof of a qualifying event which is (a) a “prohibition of export” or “blockade” or “hostilities” or an “executive or legislative act done by or on behalf of the (relevant) Government” which has the effect of (b) “restricting export, whether partially or otherwise”.  In order to be able to rely upon the clause, it is necessary to prove that the qualifying event caused a relevant inability to perform. On the specific question addressed to the Court, the Judge said that: “Insofar as the Appeal Board are…saying that it is necessary to establish a qualifying event which prevents export that is not correct. What needs to be established is a qualifying event which restricts export. The word ‘prevent’ appears as part of the deeming provision in the clause. It is not part of the definition of the relevant qualifying event. However, if the Appeal Board are saying that it is necessary to show that the qualifying event prevented performance in the sense that it caused inability to perform then that would be a correct approach.”

The Judge then considers whether the Appeal Board had reached any definite conclusions as to whether the restriction on export in fact restricted export of the goods concerned.  In that respect, the Judge concluded that the Board of Appeal had not specifically addressed that question nor could he confidently conclude what the answer to that question was on the basis of the findings in the Award. As a result, he remitted the matter to the Appeal Board for further consideration.


In terms of the question of the relationship between the Sellers’ obligation to obtain export licences and the GAFTA prohibition clause, this decision speaks for itself.  However, on a more general level, the case illustrates how the courts will endeavour to give effect to all contractual provisions unless it is simply impossible to do so.  This is of particular significance in construing together clauses imposing absolute obligations on a party on the one hand and clauses which, on the other hand, excuse a party from performing.



Post a Comment