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:
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?”
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.
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.
Dmytro Izotov, Senior Associate at AGA Partners
(exclusively for Asapagri)