The Contractual Implications Of Changes To VAT Rate Or Trade Tariffs On The Maritime Trade With Soya Beans

A government act or order which introduces a new VAT rate or new trade tariffs does not prevent delivery of the goods, but it could have an impact on the commodity prices and cause delays in the customs clearance and the delivery of the goods. Therefore, the commodity suppliers should include among their sale terms and conditions either provisions specifically covering trade tariff increase or alternatively, a clause covering the change of regulations that could have a material adverse economic effect on the contracting parties. An example of such a clause is the Clause 64 in BP`s General Terms and Conditions for the Sales and Purchases of Crude Oil and Oil Products, which has the following provisions:

"Section 64 - New and changed regulations, etc.
64.1 It is understood by the parties that the Seller is entering into the Agreement in reliance on the laws, rules, regulations, decrees, agreements, concessions and arrangements ("Regulations") in effect on the date hereof with governments, government instrumentalities or public authorities  affecting the Crude Oil or Product sold hereunder including those relating to the production, acquisition, gathering, manufacturing, transportation, storage, trading or delivery thereof, insofar as such Regulations affect the Seller or the Seller`s supplier(s).
64.2 If at any time and from time to time during the currency of the Agreement any Regulations are changed or new Regulations have become or are due to become effective, whether by law, decree or regulation or by response to the insistence or request of any governmental or public authority or any person purporting to act therefor, and the material effect of such changed or new Regulations (a) is not covered by any other provision of the Agreement; and (b) has or will have a material adverse economic effect on the Seller, the Seller shall have the option to request renegotiation of the price(s) or other pertinent terms of the Agreement. Such option may be exercised by the Seller at any time after such changed or new Regulations are promulgated by written notice to the Buyer, such notice to contain the new price(s) or terms desired by the Seller. If the parties do not agree upon new price(s) or terms satisfactory to both parties within 15 days after the date of the Seller`s notice, either party shall have the right to terminate the Agreement immediately at the end of such 15 day period."

Who Bears The Liability For Financial Losses Arising From Delays In FOB Sale Contracts

In FOB contracts, the sellers shall bear all the risks and costs until the time of delivery of goods on board the carrying ship at the loading port. Therefore, the sellers shall bear the additional costs in the case of delays in the clearance of goods by the customs authority, including any charge for the time spent on demurrage by the ship.
In the scenario where a trader buys a commodity cargo on FOB terms for re-sale on CFR terms and incurs a financial loss due to unfavorable price movements while the chartered ship waits for the cargo at the loading port, he can also claim damages for late delivery, in addition to demurrage, but only in the case of contracts stating the delivery period as a shipment period, because in such contracts the seller`s obligation to load the goods by the end of the contract delivery period is considered a condition of the contract. In the case of such contracts, the sellers` obligation to have the cargo ready for loading by the contractual due date implies the obligation to have the cargo cleared by the customs authority by the due date and to do what else it is necessary to enable the vessel to berth on the expiry of the pre-advice period for the vessel`s readiness for loading.
However, most of the FOB contract forms incorporated by the grain exporters state the delivery period as a vessel presentation period rather than as a shipment period. In such case, the time of delivery is an obligation which is not of the essence of the sale contract (i.e. not a condition of the contract). At least, this is the rule in English case law. In the case of the prolonged delays in vessel berthing, loading or in the completion of the necessary formalities for the vessel departure, the seller will be liable for demurrage, but the buyer cannot terminate the contract in the case of unfavorable price movements, unless the buyer is able to include in contract specific provisions in this regard. For instance, Clause VI (5) of INCOGRAIN Contract No. 13 stipulates that if the seller does not commence loading within three working days following the day when the vessel is in all respects ready to load at the loading berth, he shall be in default, save in case of force majeure.
In the absence of such provisions, even if the buyer`s vessel arrives at loading port and tenders valid NOR when there is sufficient time left for the completion of loading by the end of the last day of the contract delivery period, the seller is not contractually obliged to complete loading by that time. He is not even required to commence loading within a prescribed time. If, for whatever reason, the loading berth or the goods are not available at the time of the vessel`s arrival at the loading port, the vessel can be kept waiting and the buyer cannot withdraw the vessel until after the expiry of a "frustrating time", that is ill-defined by the English Courts¹. The seller shall not be in breach of contract for failing to provide a free berth and commence loading promptly after the vessel presentation for loading, unless the sale contract provides otherwise.

Who Bears The Liability For Financial Losses Arising From Delays In CFR Sale Contracts

In CFR contracts, the buyers shall bear all the risks and costs after the time of delivery of goods on board the carrying ship at the loading port. Therefore, the buyers shall bear the additional costs in the case of delays in the clearance of goods by the customs authority at the discharge port, including any charge for the time spent on demurrage by the ship.
Prolonged delays in the customs clearance of goods at the discharge ports are not uncommon in the maritime trade with China.
For instance, in 2017, while several ships carrying soya bean cargoes were on route to China, the Chinese government decided to reduce the VAT charged on imports of agricultural commodities. In order to take advantage of the reduction of VAT, the Chinese importers let the ships waiting until the decree reducing the VAT entered into force.
A famous case was in June 2018, when the ship "Peak Pegasus" carrying a cargo of 70,000 tonnes of U.S. soya beans sold by Louis Dreyfus to the Chinese buyer Sano Grain rushed from Seattle in a race against the clock in an attempt to reach the Chinese Dalian Port before the noon on 6 July 2018 when new 25% tariffs imposed by Chinese government on US agricultural commodities took effect.
The ship missed the noon deadline by just a few hours and then had to wait for over a month off the port pending a settlement over the import tariff. Two other ships carrying U.S. soya bean cargoes, "Star Jennifer" and "Cemtex Pioneer", had a similar experience.
If the CFR sale contracts provide that the quality specifications have to be met at the time and place of delivery of goods on board the carrying ship, then the cargo quality characteristics determined at that time and place shall be conclusive evidence, i.e. final and binding, and the buyers shall bear the risk of deterioration of cargo in the event of prolonged storage on board the carrying ship at the discharge port². 

by Vlad Cioarec, International Trade Consultant

This article has been published in Commoditylaw`s Grain Trade Review Edition No. 10.

Endnotes:

1. See the English law case ERG Raffinerie Mediterranee SPA v. Chevron USA Inc., [2007] 2 Lloyd`s Rep. 542, [2007] EWCA Civ. 494.
2. See the article "Who Bears The Risk Of Deterioration Of Perishable Commodities In FOB, CFR And CIF Sale Contracts" published in Commoditylaw`s Grain Trade Review Edition No. 4.