Almost each and every trader, who works with the Black Sea market, has faced a dramatic increase in the number of disputes when procuring grains. A company had to be lucky enough to perform even one contract without any challenges as most transactions are significantly affected by the unprecedented turbulences in the region. The Russian invasion of Ukraine, the imposed sanctions and the flawed operation of the Black Sea Grain Initiative – all these factors together with unpredictable natural conditions had and continue to have a significant impact on the supply chains and commodities contracts. As a result, there have been a vast number of disputes that traders had to handle in their business.
Specializing in commodities trade, AGA Partners were actively involved in resolving hundreds of those disputes. As the turbulences on the market generated genuinely novel situations, this article is designed to provide a ‘helicopter view’ of the recent cases and basic recommendations on how to address the challenges in the Black Sea trade.
UKRAINIAN BLACK SEA PORTS: AGAINST ALL ODDS
Within the last two years, the trade through the Ukrainian Black Sea ports has gone through a critical transition which was marked by numerous disputes between the market players.
- The first stage: The blockade of ports. Before the Russian invasion, ~96% of Ukrainian commodities were exported through the Ukrainian Black Sea ports. However, the situation changed critically with the beginning of the full-scale war when Ukrainian Black Sea ports were blocked by Russia. Ukrainian exporters naturally were not able to live up to their commitments and claimed force majeure under the contracts. Because of the harsh effect of the invasion on Ukrainian business, buyers mostly accepted the cancellation or suspension of sale contracts and there were few cases as to their non-performance (they mainly concerned the payment for the lost goods). At the same time, many vessels that had called the Ukrainian ports before the Russian invasion were blocked there. This triggered disputes on detention and payment of hire under the charters as well as gave rise to insurance cases on constructive total loss of those vessels.
- The second stage: The grain deal. After the Black Sea Grain Initiative was reached on 22 July 2022, the export of Ukrainian commodities from the major Black Sea ports resumed. But the unique mechanism introduced by the Grain Initiative inherently posed serious challenges to the delivery of grain from Ukraine. Because of the delays in inspections of vessels by the Russian side, buyers were often not able to timely tender vessels for loading the cargo while sellers struggled with shipping the goods within the agreed periods. These delays also caused disputes between shipowners and charterers on detention costs which accrued while awaiting inspections. The peak of the tensions happened when Russia withdrew from the Grain Initiative (both in October 2022 and July 2023). Such a development, of course, led to claims as to the impossibility of the performance of concluded contracts.
- The third stage: the humanitarian corridor. In August 2023, Ukraine launched the humanitarian corridor for the export of commodities with the route set as close as possible to the Romanian and Bulgarian borders. As of the time when this article was written, several vessels have already called the port of Chornomorsk for shipment of grains bound for Africa and Asia. While it remains to be seen whether this route will operate at a full scale, any format of shipments from the Ukrainian Black Sea ports – either through the humanitarian corridor or under the revised grain deal – is still likely to involve challenges in the performance of supply contracts.
So, it is advisable for buyers of Ukrainian commodities to revise their contracts and adjust them to the peculiarities of deliveries from Black Sea ports (whether it be agreed on a political level or not). The primary focus should be on the transfer of risk and title, payment terms, insurance, and the order of the contract execution. The contract should clearly address the consequences of events preventing its performance and provide your company with adequate remedies.
EXPORT THROUGH THE DANUBE: THE BEACON OF HOPE
After Russia blocked the Black Sea ports, Ukrainian suppliers started to explore alternative export routes. While many traders supplied commodities through the Western border by road and rail, these routes were not sufficient (and, in some cases, commercially viable) to export the entire crop from Ukraine.
In such circumstances, Ukrainian river ports in Izmail and Reni became huge export hubs where major traders transferred their facilities. The increase in the export capacity was truly impressive: in 2022, the Danube ports processed three times as much cargo delivered from there in 2021. Such a surge could not help but affect the performance of sale contracts as the infrastructure was not first prepared for the large number of vessels calling those ports. The massive congestion to enter the Danube ports caused and continues to cause many disputes on demurrage and detention.
The procurement of grain from the Danube ports was further influenced by natural causes. The Sulina Channel, which leads to them, does not work at night and is closed for entrance in case of adverse weather. As a consequence, there were disputes where Ukrainian sellers were not in a position to ship the goods within the agreed timeframe. Another challenge was the seasonal shallowing of the Danube which led to the short loading of vessels. Having faced the problems caused by adverse weather, suppliers were forced to invoke force majeure and claimed excuse from liability for breaching their contracts.
Within the last months, Russia has launched a new wave of shelling which aims at agricultural facilities and port infrastructure. Sadly, there were numerous accidents of damage to cargo stored at the warehouses which also prompted Ukrainian companies to rely on force majeure and frustration of sale contracts.
Despite these challenges, the Danube ports remain the major export hub in Ukraine which is reported to have the capacity to ensure the export of the entire Ukrainian crop. As the export of commodities via this route involves unique features relating to the passage of vessels to river ports through channels, it is important to customize contracts to these specific deliveries. Updated contracts can decrease the number of disputes between the parties as their agreement will contain guidance on how to proceed in case of typical problems.
SANCTIONS AGAINST RUSSIA: CONTRACTUAL SAFEGUARDS
While Ukrainian suppliers mainly suffer from the logistical problems caused by the blockade of seaports, trade with Russian businesses might be complicated by the imposed sanctions. Those restrictions often have a wide scope – they apply not only to companies expressly included in the sanctions list but also to those entities that are controlled by them. Because of this feature, buyers may accidentally conclude contracts with the companies affected by sanctions or face their illegal execution (e.g. carriage of cargo by a sanctioned vessel).
The conclusion of contracts with sanctioned companies will probably have far-reaching consequences as the sanctions may obstruct the performance of contracts. To avoid detrimental consequences, it is crucial to conduct due diligence on your counterparty. The contract should also provide your company with efficient remedies in case you face (or even are likely to face) a problem with the sanctions restrictions. They may include the right to terminate the contract or suspend its performance, reject the cargo/vessel, or demand their substitution.
Another problem widely reported in the mass media was the delivery of Ukrainian grain from the territories temporarily occupied by Russia. Sellers of such grain and, accordingly, buyers upon its delivery received claims as to those goods from the Ukrainian government. This unexpected development caused substantial turbulences in the performance of the contracts as it involved the detention of the vessel carrying that grain.
To reduce the risks connected with such a situation, buyers may include a clause in their template contract that goods shall not originate from the occupied territories and stipulate legal safeguards in case of its breach. In the same vein, it can be envisaged that parties are prohibited from nominating and loading vessels that had previously sailed to the ports in the occupied regions of Ukraine. These contractual mechanisms may assist your company in avoiding disputes connected with the breach of the sanctions regime or illegal deliveries of grain.
INFERIOR QUALITY OF WHEAT: A WILD CARD
Recently, there has been an increase in the number of quality disputes. This trend is explained by a small crop of milling wheat in the Northern Hemisphere in 2023. In particular, Ukraine harvested less wheat of milling grade not only because Russia occupied a large part of its lands but also due to adverse weather conditions. As a result, purchasers of Ukrainian wheat probably will face problems with the quality of grain which might prompt them to refuse to accept the shipments.
Quality disputes are always complex – there is a thin red line between the situations when buyers are allowed to reject the goods because of their poor quality and when they are not. This nuance comes from the rules of English law which frequently govern commodities contracts and provide that purchasers may refuse the cargo only in case of the breach ‘going to the root of the contract’. In other words, the goods usually can be rejected if the cargo is unacceptable for the purposes it was procured. Such vague rules involve a high degree of uncertainty and, for this reason, require a detailed assessment of the consequences for each particular deviation from the specification.
In this situation, the wording of the contract becomes very important as it will point to the level of quality that can be expected from the goods. The quality clause should contain clear a specification that will not lead to conflicting interpretations (for example, as to possible allowances). It is also recommended to include a clause specifying the purpose for which grain is purchased. Additionally, contract terms should provide for safeguards as to the order of quality determination: the right of the buyer to take samples, test them in the laboratory, and dispute the quality results of the seller, if necessary. Such provisions will strengthen the position of the buyer in the case of a dispute.
It is also essential to prudently conduct correspondence as each word written (or even said) might be taken into account during arbitral or court proceedings. From our experience of handling +50 arbitrations in 2023, the correct communication is often determinative as to the chances of the party to achieve success in the dispute.
Conclusion: Contract terms are vital to minimise the risks
In the light above, it can be said that the challenges in the Black Sea trade have reached their peak. In these circumstances, it is of great importance for buyers of grain to keep abreast of all events on the market and revise the procurement contracts accordingly. Such an approach will help your company to minimize the risks connected with the turbulences in this region and cope with the arising challenges.
Pavlo Lebediev, senior associate at AGA Partners
Oleksandr Zub, associate at AGA Partners