On 15 May 2024, the UK Supreme Court in RTI Ltd v MUR Shipping BV [2024] UKSC 18 ruled that when the charterparty expressly provides for payment of freight in USD, the shipowner has no obligation to accept the charterer’s offer to pay it in EUR to overcome the adverse effects of sanctions. The court made it clear that the scope of reasonable endeavours of the party relying on the force majeure to overcome its effects does not extend beyond acceptance of the contractual performance.
Facts of the Case
In 2016, RTI Ltd (“Charterers”) concluded a charterparty with MUR Shipping BV (“Shipowners”), under the terms of which vessels owned by the Shipowners should have carried bauxite from Guinea to Ukraine, performing regular voyages from 2016 to 2018. The freight payments should have been made regularly in USD.
In April 2018, the USA imposed sanctions on Charterers’ parent and sister companies belonging to the Russian aluminium-producing group Rusal. Several days after this, the Shipowners sent a force majeure notice, stating that although the Charterers were not sanctioned, sanctions against their affiliated companies would preclude or delay payment of freight in USD due to bank compliance.
The Charterers rejected the force majeure notice, offering to pay the freight in EUR and cover additional costs of converting EUR to USD. The Shipowners rejected this proposal and refused to nominate vessels, thereby suspending the contractual performance. By the end of April 2018, the USA allowed the said sanctioned companies to make payments under already existing contracts. The Shipowners resumed the nomination of vessels and accepted payments in EUR with the conversion costs being covered by the Charterers.
However, the Charterers commenced arbitration to recover the costs of affreighting seven replacement vessels during the period when the charterparty’s performance have been suspended. The arbitral tribunal admitted the claim, stating that the Shipowners were not entitled to invoke the force majeure clause since the respective force majeure event could have been overcame by the Shipowners’ reasonable endeavours, namely, acceptance of the Charterers’ proposal to pay the freight in EUR and cover the conversion costs.
The Shipowners appealed the award before English courts. The High Court allowed the appeal. Later, the Court of Appeal overturned the lower court’s judgement and reinstated the arbitral award. The Shipowners applied to the Supreme Court to reverse this judgement.
The Supreme Court’s Judgement
The chief question before the Supreme Court was whether the exercise of reasonable endeavours to overcome the adverse effects of a force majeure event put an obligation on the party declaring force majeure to accept an offer of non-contractual performance from its counterparty. To put it short, the Supreme Court’s answer was “no”. In concluding so, the court relied on the following findings.
First, the objective of the reasonable endeavours provision, precluding parties from relying on force majeure event if they could have reasonably prevented it, is “to maintain contractual performance, not to substitute a different performance”. This provision does not concern any different, non-contractual performance – in this particular case, payment of freight in EUR instead of USD – even if it may result in the same ultimate outcome.
Second, the Supreme Court underscored the supreme importance of the freedom of contract, stressing that this principle “includes freedom not to contract; and freedom not to contract includes freedom not to accept the offer of non-contractual performance”. In reaching such a conclusion, the court relied on the prior case law, in which English courts drew a distinction between the “business options” of parties to opt for certain ways of contractual performance if the underlying contract so allows and their contractual rights not to choose such ways even if it is commercially unreasonable and detrimental for their counterparties.
Third, the Supreme Court found that clear words are needed to forego valuable contractual rights. Applying this approach to the case at hand, the court concluded that the Shipowners would have been obliged to accept the offer of non-contractual performance only if the contract had contained express provisions to this effect.
Last but not least, the court emphasised the importance of certainty in commercial contracts, stating that the reasonable endeavours provision is limited by the charterparty’s wording and that the parties should follow their contract instead of doing what may be reasonable. The court stated that “it is not unmeritorious or unjust to insist on contractual performance, all the more so if being precluded from doing so would introduce uncertainty contrary to the expectations of business people”.
Conclusion
This judgement, despite being well-reasoned, may be surprising for those involved in the grain trade since the court took a legalistic stance, favouring the textual interpretation of contractual provisions over commercial reasonableness. Considering this, the wording of contracts gains even more importance, as courts will consider only offers of contractual performance as those the party invoking the force majeure clause must accept. Offers on non-contractual performance, even those leading to the same ultimate outcome, may not be enough.
On the commercial side, the above-described judgement tends to support the party invoking force majeure, as it will give them more room to rely on force majeure even if an alternative but non-contractual performance is possible. We also expect force majeure clauses to be invoked more frequently since it would be harder to overcome them by offering alternative performance.
Iryna Moroz, partner at AGA Partners
Viktor Pasichnyk, associate at AGA Partners
This article is available in Ukrainian only.
24 February 2022 etched itself on the memory of every Ukrainian citizen. With the beginning of a Russian full-scale invasion of Ukraine, the lives of many changed forever. But not only ordinary citizens were caught off guard by unprovoked invasion – among those affected were commodities traders and shipowners alike. While the Russian attacks were underway, dozens of commercial vessels were anchored in the ports of Berdyansk and Mariupol (Azov Sea), unaware that this place would become one of the first targets of the occupying army.
ASAP Agri: Dmytro, tell us please the core of the problem.
Dmytro Izotov: Among those vessels, one (a coaster) was engaged by our client. Under the sale contract concluded in the first days of February 2022, the seller was expected to deliver Ukrainian milling wheat and barley to the Mediterranean on a CIF basis. While the vessel was loaded with the necessary goods, it simply was not able to leave the port. On the day of the invasion, Russian authorities prohibited navigation in the Sea of Azov. A few days later, the situation deteriorated even more as the Russian military reached the port and took control of it.
For the whole month, the vessel stayed in the port basically as a hostage with no right to leave. No customs authorities or surveyors were working during this time, making it impossible for our client to procure necessary documents under the agreement with the buyer. In other words, the fate of the contract remained unknown.
Finally, in the middle of March, the Russian military allowed all the vessels staying in the port to leave. For this purpose, they made a corridor lying through the Kerch Strait and convoyed every ship. While arriving at the waiting area, the vessels were forced to stop at the Kerch Strait, waiting for the authorization to proceed further. Again, our client and the vessel’s crew had no idea, what would happen further. Having no clear understanding of the prospects, the client decided to terminate the contract, relying on a special war risk clause. This clause did not contain any deadlines and simply stated that a contract can be terminated immediately if the performance is precluded by any kind of war risk.
After the contract was terminated, the vessel stayed for more than a week at the Kerch Strait until the Russians finally instructed it to proceed to a Turkey port. There the vessel undertook necessary repair work, while the client managed to salvage the goods onboard by reselling them to a new Turkish buyer.
The original buyer during the first days of the invasion demonstrated a reasonable approach not pushing with the performance of the contract. However, after finding out that the client eventually managed to sell the goods in Turkey, the buyer quickly changed his position and initiated arbitration proceedings against our client. The buyer alleged that the client did not have a right to cancel the contract and was in a position to ship the goods to the original destination.
ASAP Agri: What was the outcome of this case?
Dmytro Izotov: The buyer’s position was that the seller, after leaving the port of Berdyansk, was able to perform the contract and ship the goods to the agreed destination. The buyer, in particular, referred to the fact that the seller eventually managed to sell the goods in Turkey. The buyer’s way of thinking was: “if they were able to resell in Turkey, then they surely were capable of shipping the goods to us”.
The arbitral tribunal, however, disagreed with such an argument:
o The tribunal stressed that a war risk clause (on which our client relied) provided for the immediate cancellation. Thus, to decide whether or not our client had a right to cancel the contract, the tribunal had to answer the following question: “was our client in a position to perform its obligations on the day they decided to cancel the contract?”
o Arbitrators answered this positively. They established that, on the date the contract was cancelled, the vessel was still stationed at the Kerch Strait. Thus, our client was not in control of the vessel and was unable to direct it to the original destination. Moreover, the goods were not customs-cleared and the majority of shipping documents were not issued. Taking into account all the above, the tribunal stated that our client had a right to cancel the contract.
o The fact that the client managed to resell the goods a few weeks later did not change this conclusion. Our client could not predict the future, when deciding whether or not to terminate the contract – all that mattered was the situation on the day of cancellation.
ASAP Agri: What is the main takeaway from this decision?
Dmytro Izotov: I believe this arbitration decision provides a great guideline in interpreting the cancellation clauses.
In this particular case, the contract was terminated with reference to a war risk clause. The wording of such clause can be different from contract to contract. However, in the majority of agreements, it provides (just like in our case) that a contract can be cancelled immediately, without any waiting. The only necessary condition is an existent war risk that does not allow a party to deliver or accept the goods.
Thus, if your contract contains a war risk clause and is affected by any military conflict, you may consider terminating this contract based on such a provision.
ASAP Agri: The war in Ukraine has continued for more than 2 years. Can companies still cancel a contract relying on this ongoing conflict?
Dmytro Izotov: Even now, 2 years into the war, companies continue to be affected by military actions. From time to time, we can see the news about destroyed port facilities or attacks on vessels in Ukraine. So, it is still common to have special clauses (like war risks clauses) that allow the cancellation of the contract in case of military risk. Such risks can also be covered by usual force majeure clauses.
But in either case, you should be very careful and attentively analyse the wording of a contract. To have a right of cancellation, you should always be sure about two things.
First, a military risk should be covered by a contract (in a war risk or force majeure clause). For example, contracts may provide that only an unexpected military attack on the engaged vessel can give the right of cancellation. In such a case, you cannot cancel the contract simply because of the ongoing war. Only even mentioned in the clause can allow you to cancel the contract.
Second, you need to check the time periods for cancellation of a contract. As described above, if you use a war risk clause, in the majority of cases you can cancel the contract immediately. But if your contract only contains a usual force majeure provision, you should wait for a specified period of time before cancellation. Only if a force majeure event continues beyond this waiting time, you can terminate the contract.
If you terminate a contract ignoring the above two conditions, this can lead to dreadful consequences. In particular, ungrounded cancellation may be considered as a refusal to perform the contract. This will allow your counterparty to declare your company in default and seek compensation for default damages in lengthy arbitration proceedings.
Therefore, you should always check what type of cancellation clauses are contained in your contract, what their scope is and what time periods are prescribed there.
Stay tuned for more insights from recent arbitral awards that could impact your business practices. Understanding these nuances can be the difference between a smooth transaction and a costly dispute.
We’re thrilled to introduce the first installment of ASAP Agri's new interview series with AGA Partners, "Arbitration Wisdom: Top 10 Awards in Commodity Arbitration." In our debut article, we dive into an interesting case from 2021 involving Brazilian soybeans that were severely damaged due to delays and storage issues. How was the dispute between the buyer and the seller resolved, and what caused the damage to the cargo? The questions are answered by Pavlo Lebedev, Counsel at AGA Partners, all the details are available here:
ASAP Agri: Pavlo, tell us please the core of the problem.
Pavlo Lebediev: In March 2021, a Ukrainian oil producer purchased a Panamax vessel of Brazilian soybeans for crushing. After a Brazilian seller shipped the cargo at Barcarena port, the vessel arrived in Ukraine where the Ukrainian company faced problems with import. In this situation, it resold the cargo to Turkiye, after the vessel idled near Pivdennyi port for almost a month.
Upon arrival in the Turkish port of Aliaga, the surveyor revealed that the cargo had completely deteriorated. In this situation, the seller relied on the quality of goods at loading in Brazil, which was contractual, save for a “slight” deviation of 0.58% in moisture content.
Although the Turkish buyer refused to pay the full price, it attempted to settle the dispute by making a without prejudice offer to accept the cargo with a 50% discount. The Ukrainian seller rejected the offer and, instead, declared the buyer in default for refusing to pay for the cargo.
As the market prices significantly increased, the Turkish buyer instructed AGA Partners to initiate arbitration to recover losses.
ASAP Agri: What did arbitrators decide?
Pavlo Lebediev: They decided in favour of the Turkish buyer because of the following findings:
- Moisture limits represented a condition of the contract. Even a deviation of 0.58% entitled the buyer to reject the goods.
- The buyer did not waive their right to reject the goods by offering a 50% discount. The correspondence was protected by a ‘without prejudice’ mark.
- There were two separate voyages – from Brazil to Ukraine and from Ukraine to Turkiye. The Ukrainian seller had to test the cargo in Ukraine and issue the documents for the second voyage from Ukraine to Turkiye but failed.
- As the cargo was not analysed in Ukraine, the quality was determined by tests in Turkiye which did not show contractual results.
- The Ukrainian seller did not tender contractual certificates for the voyage from Ukraine to Turkiye and, therefore, had no right to payment. The seller’s default declaration was wrongful.
The result: the Turkish buyer was awarded damages of around USD 1 million, plus legal and arbitration costs.
ASAP Agri: What was the main mistake of the seller which led to such a result?
Pavlo Lebediev: The mistake was made while preparing the documents. The Ukrainian seller had to prepare two sets of documents for two voyages – (1) from Brazil to Ukraine and (2) from Ukraine to Turkiye – and then he would have chances to receive compensation from the insurance company.
Also, the Ukrainian buyer did not synchronize the provisions of his purchase and sales contracts (they had different moisture indicators). As a result, the Turkish buyer had grounds to claim compensation from the Ukrainian seller, but the latter had no such right against its Brazilian supplier.
ASAP Agri: what key takeaways can a business get from this case?
Pavlo Lebediev: There are three main lessons a business can learn:
Lesson 1: Quality. Moisture is an essential quality parameter for soybeans. Even relatively minor deviations might allow a buyer to reject the cargo.
Lesson 2: Documents. The payment documents should strictly comply with the contractual requirements. The discrepancies might prevent the seller from claiming the price. So, draft the list of shipping documents prudently.
Lesson 3: Settlement offers. Use 'without prejudice' marks on genuine settlement offers to shield them from being disclosed in arbitration. But remember, this protection is only effective if the correspondence contains a real settlement offer.
Stay tuned for more insights from recent arbitral awards that could impact your business practices. Understanding these nuances can be the difference between a smooth transaction and a costly dispute.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
Compensating for damages caused by the Russian invasion of Ukraine has become a pressing issue. Over the past two years, significant efforts have been made both internationally and within Ukraine to develop direct mechanisms for compensation.
General mechanisms
Since 2022, there have been five main avenues for seeking damage compensation:
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- International Register of Losses
- Ukrainian courts
- Investment arbitration
- Courts of foreign countries
- European Court of Human Rights (ECHR)
The possibility of filing claims to ECHR ceased to exist after the exclusion of Russia from the Council of Europe. As of the date of this article this tool is already not accessible due to the expiration of the limitation period. The International Register of Losses is still being established, and its operational specifics, especially concerning business claims, remain unclear. Investment arbitration is suited for high-value claims where assets have been occupied and expropriated by the Russian Federation. The main issue with pursuing claims in foreign courts is complicated by issues of jurisdiction and the immunity of the Russian Federation, which is currently recognized by these countries.
While each of these mechanisms warrants a detailed discussion, such an exploration would be beyond the scope of this article. Therefore, we will focus on the mechanism readily available to all Ukrainians: filing claims in Ukrainian courts. Below, we provide a practical overview of this process based on our current practice and its potential outcomes.
Is it possible to pursue claims against Russia in Ukraine?
The short answer is yes. From 2014 (after the annexation of Crimea and “antiterrorist operation” in Donetsk and Luhansk regions of Ukraine) just until spring 2022 there were many attempts of individuals and of companies to bring Russia to justice in the Ukrainian courts. However, before April 2022 the Ukrainian courts mostly (with some exceptions) denied jurisdiction over the disputes against Russia due to the Russian immunity as a state. It is a standard clause in almost all jurisdictions that a state cannot be brought to justice in the local courts unless the relevant convent is given by that state.
From April 2022 the situation in the Ukrainian courts changed and is now been followed by all the courts in the same lien: after the full-scale invasion into Ukraine, Russia has lost its immunity in the Ukrainian courts.
Is it worth going to the Ukrainian courts?
Nowadays there are two possible mechanisms where the positive decision of the Ukrainian court can be used.
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- within the framework of the international compensation mechanism which is still being elaborated.
- As a decision to be recognised and enforced in other jurisdictions.
With the first option, we now know for sure that within the framework of the compensation mechanism the Ukrainian judgments will not be regarded as the only necessary and final evidence. Rather it would simplify the work of the commission especially if there would be hundreds of evidences and reports. In this vein we do not know at this stage when the commission will start its work for the business and how the decisions will be made. As well as the timeframes of executing such compensation decisions are unclear.
The second option of direct recognition and enforcement of the Ukrainian judgments also has its pros and cons. From one side, it will be necessary to search for assets in the particular country and to choose the country which would allow enforcement against the sovereign state. In this regard we highly recommend to our clients to add a particular Russian company, which took part in the invasion of devastation of the asset into the co-defendants. This might make the enforcement of the decision in the foreign jurisdiction easier, especially if particular assets of that company are found.
From the other side, at this stage we do not know any “firstcommer” who would successfully use this path of enforcing the Ukrainian judgement.
However, in any case, since the Ukrainian path is now available, we suggest using it at least for those to whom the path of investment cases is unavailable/unprofitable.
What are the benefits of using this option?
Unlike in arbitration, Ukrainian courts do not take the fee for participation in the court against Russia. The legal fees will also be much lower than for participating in any other available procedure.
Moreover, before filing the claim to the court, it would be necessary to gather all the necessary and possible evidence, make all expert and accountant reports, open criminal proceedings, which is 60% of work in preparation of the claim. Therefore, in any case we highly suggest starting the evidence gathering.
What is required for filing the claim?
Filing a lawsuit against Russia requires careful preparation and adherence to legal protocols. Below is a step-by-step guide to ensure your case is properly presented in a Ukrainian court.
First, consider whether your property has been damaged or destroyed, or whether it is located in the occupied territories. In all these three cases there should be gathered and provided different evidence.
Second, determine the venue to avoid delays. Choosing the appropriate court venue is essential to prevent unnecessary delays. Make an informed decision on where your case will be heard to ensure a timely process.
Third, gather relevant evidence to initiate the case. The necessary documentation includes:
Expert Reports: Obtain expert evaluations, especially for real estate. For movable goods, expert reports can serve as supplementary evidence.
Criminal investigation: File an official application to receive an Excerpt from the Unified State Register of Pre-Trial Investigations. Ukrainian courts see the opening of the criminal procedure as a mandatory step before the claim.
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- Evidence of Damages by Russia: establish a clear link between the damages and actions taken by Russia. There should be direct evidence showing that a particular destruction was cause by Russian actions.
- Evidence of Property Location: Provide proof of the property’s location in the occupied territories.
By following these steps in preparing your evidence, you can effectively file a lawsuit against Russia in a Ukrainian court.
Factual implementation of the decision
AGA Partners has already established groundwork with various experts in this respect. We would be happy to provide advice and recommendations upon your respective requests.
Conclusion
Filing a lawsuit in Ukrainian courts to seek compensation for business damages resulting from the Russian invasion is a viable and practical option for those to whom the path of investment arbitration is closed or is unreasonably high in value. In any case, we believe that businesses affected by the invasion should already take proactive steps to document their losses.
Where the problems stem from?
During the full-scale war, many traders revise the terms of their contracts. For example, under DAP terms, most traders include provisions for quality checks during unloading. This has become pertinent due to falling market prices and issues at the Ukrainian borders.
Such a practice allows buyers to take samples of the goods themselves, which puts them in a more favourable position. However, sellers in such circumstances often have no control over the sampling process.
This can lead to situations where buyers assess the quality of goods after unloading them at their warehouses. In such cases, the goods may be mixed with other products, complicating the process of quality determination.
After performing an analysis of the quality of the goods, buyers may refuse to accept the goods, demand a discount or refuse to pay. In doing so, they argue that the goods do not meet contractual specifications or EU regulations.
How to solve the problem?
In order to reduce risks for sellers, it is important to change the terms of contracts, especially those on the DAP basis, by including a provision that the quality of the goods must take place at the time of loading. To do this, independent surveyors should be involved in sampling and analysis in accredited laboratories. Such an approach will ensure the final quality certificates are issued.
In order to refute a product quality certificate, one must prove the fraudulent actions at the time of its issuance, which is a complex process. This creates flexibility and confidence for both parties. Sellers can confirm the quality of the goods at the time of loading, and buyers receive proof that the goods meet the terms of the contract.
If the buyer disagrees with the quality of the goods during unloading, sellers may offer to appoint their own surveyor to take independent samples. This is important for sellers, as they will have their own evidence in the event of a dispute over the quality of the goods.
Do buyers have the right to refuse to pay for the delivered goods if they find deviations in their quality indicators?
As a general rule, buyers cannot refuse to pay for the goods if there is a complaint about the quality of the goods. Payment for the goods and the quality assessment are independent terms of the contract.
For example, in many DAP contracts, payment is due upon unloading of the goods without any reference to quality inspection.
If the contract does not make payment dependent on inspection of the quality of the goods, sellers have the right to demand payment in full upon the due date. If buyers refuse to pay for the goods, sellers should consider filing a claim against the buyers for breach of their contractual payment obligations.
In the event of minor deviations from the quality specifications of the goods, buyers have the right to claim compensation for damages due to the supply of noncontractual goods.
However, if the quality of the goods differs materially from the contractual specifications, buyers have the right to reject the goods, in which case no payment obligation arises.
Is it possible to resell goods on a DAP basis?
If the buyers reject the goods or unreasonably refuse to pay, the seller may consider reselling the goods on a DAP basis if the goods have not yet been unloaded at the destination and the buyers have not yet accepted them. In this case, sellers have the option of redirecting the goods and issuing shipping documents to any other final buyer.
If the goods have already been cleared in the European Union, there may be certain technical obstacles to their further resale. Under these circumstances, sellers should respond quickly to the above actions, as there is a risk of losing access to the delivered goods.
Conclusion.
The optimal solution is to enter into contracts stipulating that the quality of the delivered goods be assessed at the time of loading. This ensures that buyers are not obligated to pay for the goods until their quality is verified, creating acceptable conditions for both parties.
If the terms of the contract stipulate that the quality of the goods shall be checked during the unloading of the goods at the destination, the sellers shall appoint their own surveyor who will independently take samples of the quality of the delivered goods.
Once sellers have accepted the contractual requirements for unloading quality testing, they must monitor the buyers' compliance with these requirements. Any breach of this process by the buyers may result in the annulment of the results of such tests.
In view of the above, it is necessary to change the structure of contracts, paying particular attention to the quality of goods. Resolving this issue between the parties helps to reduce risks for both parties at the stage of contracting.
Iryna Moroz, partner at AGA Partners
Andrii Tantsiura, associate at AGA Partners
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.