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Commodities Trade and Force Majeure Events
One of the most pertinent issues in international trade in commodities has always been avoidance of contract and exemption from liability for contract breach. One of the grounds that can be relied on is force majeure circumstances — but exactly when do they apply? Despite the fact force majeure is a principle of law common to many jurisdictions, the legal nuances differ depending on the applicable law. International contracts for sale of commodities are often governed by Ukrainian law. Even more frequently, the United Nations Convention on Contracts for the International Sale of Goods (‘CISG’) applies if the applicable law to the contract is that of a country which acceded to the CISG. However, when it comes to trade in agricultural commodities, parties frequently use standard contract forms of GAFTA (Grain and Feed Trade Association) and FOSFA (Federation of Oils, Seeds and Fats Associations), which are subject to English law. Each of these sets of legal rules contains its own peculiarities in regulating force majeure events.
Notion of Force Majeure
According to the Civil Code of Ukraine No. 2478-VIII, a party failing to perform its obligations can be exempted from liability if it proves that such failure was due to a contingency or an irresistible force. The concept of irresistible force is defined in the Commercial Code of Ukraine No. 2473-VIII as ‘extraordinary and irreversible circumstances’. Thus, the notion of irresistible force refers to unavoidable events beyond the control of a party, and is used interchangeably with the concept of force majeure both by courts and legal scholars.
The CISG does not expressly use the notion of force majeure. Instead, the concept of an ‘impediment beyond control’ is used — which is similar to force majeure in its application. The parties may rely on this legal mechanism contained in Article 79 of the CISG to get relief from liability for breach of contract in the event of force majeure.
As to English law, it does not expressly govern the situations of force majeure; however, this gap is often filled by the contractual agreement of the parties — in the event of the commodities trade, often by GAFTA or FOSFA standard contract forms.
Force Majeure under Ukrainian Law
Under Ukrainian law, force majeure circumstances may be invoked if the following requirements are met:
— the force majeure circumstances are extraordinary in character and, therefore, were unpredictable at the time of the contract’s conclusion;
— the circumstances of force majeure were beyond the control of the party that failed to perform its obligations;
— the parties could not avoid or overcome the force majeure circumstances;
— there is a direct causal link between unforeseen and uncontrolled events and the inability of a party to perform the contract.
Consequently, only unforeseen circumstances beyond the control of a party are to be regarded as a ground for exemption from liability. Permanent impediments (ongoing conflicts or continuous embargoes), and events that occur occasionally (regular natural disasters) are foreseeable, and so do not relieve the parties from liability for breach.
The Law of Ukraine No. 835-VIII On Chambers of Commerce in Ukraine provides for an indicative list of circumstances which can trigger a force majeure defence and which include, in particular, social turbulence, governmental restrictions, hostilities and natural disasters. This list is not exhaustive, and other events preventing a party from performing a contract can also be regarded as force majeure circumstances. However, the Civil Code of Ukraine explicitly excludes in Article 617 from the scope of force majeure events those situations that fall within the scope of ordinary commercial risks of a party. For instance, failure of third parties to fulfill their obligations, lack of goods on the market, or lack of funds.
CISG — the “Impediment Beyond Control” test
Article 79 of the CISG stipulates that a party can be exempted from liability if it proves that failure was due to an unforeseeable and unavoidable impediment beyond its control. Thus, the conditions for claiming force majeure circumstances under Article 79 of the CISG resemble those under Ukrainian law. However, by contrast with Ukrainian law, the CISG also allows exemption from liability due to the failure of a third party to fulfill its obligations.
GAFTA and FOSFA Force Majeure Provisions
GAFTA and FOSFA take different approaches to the regulation of events preventing performance of a contract. FOSFA standard contracts, although differing significantly from one another, usually contain two separate clauses — force majeure and prohibition. The former pertains to events of social turbulence and natural disasters, while the latter consist of government restrictions on trade in commodities or shipment of goods. In contrast to FOSFA, GAFTA contracts combine these two clauses into one general provision on preventing shipment/delivery. Notably, both FOSFA and GAFTA provide a non-exhaustive list of force majeure events which could be supplemented by other situations satisfying the following criteria:
— there must be an event beyond the control of the parties;
— performance must be actually prevented or delayed because of this event;
— this event must be unforeseeable and unavoidable.
It is a common feature of the above-mentioned legal rules and contractual provisions that the affected party is obliged to notify the innocent party of the force majeure circumstances within the agreed time limits. Only in this case can the affected party rely on available remedies.
If the events precluding the performance of a contract satisfy the criteria of force majeure, the party shall not be liable for failing to fulfil its obligations. In practice, it is likely that the non-affected party will file a claim for specific performance and/or damages. The affected party should then seek a corresponding court order to be exempted from liability on the basis of safeguards provided by the law or the contract.
It should also be noted that in the event of force majeure a party can be exempted only from liability for failure to fulfil its obligations. That is, it’s not obliged to pay damages for non-performance. However, such a party must perform its contractual obligations once the force majeure circumstances cease to exist.
With regard to the termination of a contract due to force majeure circumstances, Ukrainian law does not stipulate a specific period for such termination. If the parties failed to include a provision to this effect in the contract, the issue of termination will have to be decided by a court. Therefore, it is advisable for the parties to expressly regulate in the contract the remedies available in the event of force majeure. Neither does the CISG expressly provide for automatic termination due to force majeure circumstances — although termination for fundamental breach of contract remains open to the innocent party.
As to GAFTA and FOSFA standard contracts, the affected party is entitled to suspend performance of the contract for a stipulated time limit. If the force majeure event ceases to exist before the expiry of this time limit, the period of contract performance shall be extended by as much time as was left for performance prior to the occurrence of the event of force majeure. If the period of suspension has lapsed and the force majeure event continues, the innocent party may terminate the contract. If the innocent party does not avail itself of this right, the contract automatically terminates after the expiry of an additional period of suspension.
Issues of force majeure have come to light more often recently due to the armed conflict between Ukraine and the Russian Federation in Crimea, Eastern Ukraine and the Azov Sea. These events have resulted in numerous cases of companies and individuals claiming exemption from liability on the grounds of force majeure to be decided by courts and arbitral tribunals.
Regarding the occupation of Crimea, Ukrainian courts were reluctant to release parties from liability solely due to the occurrence of this event, and required evidence that occupation of Crimea directly prevented performance. For example, the High Commercial Court of Ukraine held in its Decision of 27 January 2015 that the claimant’s losses caused by events in Crimea did not meet the requirements of unavoidability and extraordinary character, and so the claimant remained liable for its failure to perform.
Several claims of force majeure events were raised in Ukrainian courts after the adoption of the Decree of the National Security and Defense Council of Ukraine On Urgent Additional Measures to Сounter Hybrid Threats to the National Security of Ukraine, whereby carriage of goods to and from the occupied territory of Donbas was prohibited. In these cases Ukrainian courts reached the conclusion that such events constituted force majeure circumstances and exempted the affected parties from liability.
The introduction of martial law in Ukraine last November for a short period of time also led to public discussion as to whether martial law could be regarded as a force majeure event. In general, the imposition of martial law satisfies the requirements of unforeseeability and unavoidability. However, in order to be exempted from liability, a party needs to demonstrate that it was actually prevented from performing a contract. Since few measures related to the economic sphere were adopted, performance of international contracts was unlikely to be affected.
Force majeure is a useful legal mechanism in commodities arbitration, since commodities trade contracts are frequently affected by government restrictions as well as unforeseen political events. To allow exemption from liability, the event of force majeure must be unforeseeable and unavoidable, and must directly prevent a party from performing its obligations. In this context a lot depends on clear legal drafting of the contractual provisions setting out the consequences of force majeure events. When it comes to disputes as to the existence of force majeure circumstances, it’s important to present the court or arbitral tribunal with sound legal arguments covering all the aspects of force majeure mentioned above, otherwise the party relying on force majeure risks incurring liability for breach of contract.