Publications
What does the grain trader need to know when exporting grain crops and oilseeds?

Due to this fact, twice as difficult to comprehend for traders who grew up professionally in the fold of the continental law is English law, which, historically, has always been, if not the backbone of international trade, then one of the most widely used instruments of its regulation to date.

Since practically the entire global trade in grain, oilseeds, metals and other staples, as well as international cargo shipping are coordinated by associations and international organizations, whose legal framework is based on English law, correct perception of some alien notions and concepts is truly vital for producers and traders who seek to have a foothold in any of the markets above.

Contract.

The first and principal component of any international trade transaction is the trade contract per se, which may be made up of ten sentences describing the transaction’s key terms and conditions (for example, contracts entered into within the framework of the Grain and Feed Trade Association (GAFTA) GAFTA standards incorporating contracts), or may consist of several hundred pages.

Everything is quite simple: if a trader intends to sell anything, he needs to understand clearly what is to be sold, to whom, how, on what terms, at which price, and what risks he is willing to undertake (if at all). Moreover, the seller must be certain that his identical to that of his own, so that there occurs no difference or misunderstanding between the parties at the trade performance stage that may result not only in delays and additional expense, but also the collapse of the deal.

Attention to contract details.

When deciding on what to trade, one should remember that some legal systems that are frequently used in trading are very meticulous about the so-called goods description. For instance, if a contract includes a reference to "wheat of the Russian origin to be delivered in December", the same wheat delivered in January, with no extenuating circumstances provided, will be treated as  non-contractual goods, so that the buyer will be entitled to turn it down and demand compensation for failure to perform the contract. Equally carefully one needs to deal with phrases like "goods of normal marketable quality", because, despite the relatively obvious understanding of the implication of “normal marketable quality” of such goods, lack of distinct criteria of their assessment may also give rise to certain speculations on the part of the buyer.     

For example, the aforementioned English law entitles the seller to terminate a contract if the goods traded are not “of satisfactory quality”, and there exist practically no precedents that would disclose or interpret this notion.

Counterparties.

The significance of counterparty selection can hardly be overestimated, and not only so as to be certain of the counterparty’s solvency. If one trades via a broker or any other intermediary, one needs to obtain from them all available information about the counterparty, its operations, business reputation etc. prior to the confirmation of the deal. It is not always worth accepting a lucrative proposal from a company that is not known to you or if the company’s legal status seems doubtful. One must also pay attention to the powers of the person who signs the contract on behalf of the counterparty, if one wants to avoid invalidation of the deal or to have the deal challenged.

Delivery of goods.

Transportation by sea is one of the most difficult types of shipping in terms of its organization, but one that is least costly; accordingly, maritime traffic is one of the most frequently used method of long-haul delivery of goods, including grain crops.

Historically, principal terms of delivery by sea have always been two most frequent terms — FOB (free on board) and CIF (cost, insurance and freight), or its analogue, С&F/CFR (cost and freight), which is more popular when shipping goods in the Black Sea region.

Basically, the difference between FOB and CIF is in the identification of the time of risks or ownership transfer, as well as in a different approach to pricing due to additional cost incurred by the CIF seller. In FOB shipping, the decisive factor is the moment of the goods crossing the ship’s rails, whereupon the risk of loss or damage to the cargo, as well as the title to it transfer to the buyer, whereas in CIF shipping, the buyer assumes solely risks at the moment of goods loading, whereas the title to goods remains with the seller until the shipping documents have been furnished, unless the parties specify otherwise. It is also important to remember that both of the options above include a number of mandatory consecutive actions taken by each party (for example, identification by the buyer on FOB terms), and any delay may cause unforeseen legal consequences, even termination of the contract due to failure to perform it.

Shipping contract or charter-party.

Two principal forms of contracts are used in international trading, depending in who, what, where, and on which terms is shipping goods. In the event of long-distance or sufficiently regular shipments, this will be charter-party, a contract regulating the relations and the scope of mutual responsibility of the freighter and of the shipper. At the same time, the document that confirms the fact of loading and shipment of gods is a bill of lading, which testifies, as a rule, the transfer of ownership or title to relevant goods and provides legal grounds for lawsuits to be files with a court of law or another competent dispute resolution tribunal claiming compensations for loss or damage to goods in the course of their shipment. Both of these contract forms are often used simultaneously, so parties to a trade deal are to specify which of the carriers they deal with, and on which of the contracts, since this will be a decisive factor in claiming compensation, suing the carrier, and determining the limits of the latter’s liability by virtue of certain international rules and conventions incorporated in the contracts (e.g., the Hague Rules 1924 or the Hague-Visby Rules 1968, which may provide different interpretations to certain aspects of the parties’ liability).

Settlements of commercial transactions.

Along with bank wires, which is a form of settlement well known to the domestic producer and is often the only acceptable and clear option to both the producer and local fiscal authorities, we would like to emphasize the other two forms of settlement that are most popular in the international settlement practices, — payment collection and letters of credit, as well as several aspects of their application, which may both help the operations of parties to commercial transactions and complicate them severely.

«Cash against documents».

Payment collection, or "cash against documents", is the simplest and least costly method of settlement, where the producer’s bank makes payments against a package of shipping documents regarding goods supplied by the seller after loading, and each of the party finds itself in a less protected position, since they are exposed to both the risk of being not paid for the goods delivered (the seller), and the risk of failure to deliver the goods (the buyer). On the other hand, in the payment collection form of settlement, the seller invariably comes across a situation, when he no longer holds the documents confirming his ownership of goods, but is yet to get paid, which makes him exposed to a high probability of risk of never being paid, although he is no longer able to dispose of his own goods. Accordingly, this form of settlement is the most convenient and easy to use, provided you confident in your counterparty and have dealt with him for several years now.

Letter of credit.

The seller is better protected and enjoys more certainty when using letters of credit or documentary credits, which constitute a guaranteed obligation of the buyer’s bank to pay the seller on condition that the latter furnishes the documents specified in the letter of credit and complies with other terms and conditions as specified in the letter of credit. Despite the seemingly simple and convenient form of this settlement option, this transaction underscores the key role of the banks proper: that of the issuing bank and of the confirming bank, if the parties make use of the confirmed letter of credit. Banks abide firmly with their own rules and customs accepted in the banking practices; moreover, their approach to the verification of documents and making payments is purely formal, inasmuch as they are not obliged to take into account the clauses of a commercial contract executed by the parties thereto, is said clauses run counter to the guidelines receive or the letter of credit opened. Therefore, the seller is still exposed to the risk of not being paid for his goods, if the documents contain even a minor difference, although the current practice proves that, regrettably, this is the case in an overwhelming majority of cases.

Dispute resolution.

In the course of performing commercial contracts, every trader sooner or later faces disputes or problem situations, when the counterparty often refuses to cooperate. Such disputes may result in lengthy litigation or in the parties turning to international commercial arbitrations, a more popular alternative to courts of law in international trading activities. In grain trading, the instrument used to arbitrate disputes among all participants of grain trading who apply standard form of GAFTA contracts is GAFTA arbitration.

04.01.12