Ukrainian custom authorities placing controls on exports of wheat – Sellers contending prohibition clause in contract discharging liability in the light of customs restrictions

Seagrain LLC v Glencore Grain BV: Court of Appeal, Civil Division: 12 December 2013

In 2010, Seagrain LLC (the sellers) agreed to sell to Glencore Grain BV (the buyers) a cargo of wheat of Ukrainian or Russian origin. The contract incorporated the GAFTA 48 contract form, which included the GAFTA prohibition clause (the prohibition clause). The prohibition clause provided, inter alia, that in ‘case of prohibition of export, blockade or hostilities or in case of any executive or legislative act done by or on behalf of the government of the country of origin or of the territory where the port or ports of shipment named herein is/are situate, restricting export… any such restriction shall be deemed by both parties to apply to this contract and to the extent of such total or partial restriction to prevent fulfilment whether by shipment or by any other means whatsoever and to that extent this contract or any unfulfilled portion thereof shall be cancelled…’.

At the relevant time, Russian wheat was subject to an export ban and the contract had to be fulfilled by Ukrainian wheat. However, Ukrainian customs authorities had sent letters to the sellers stating that controls in relation to the export of cargoes would be strengthened by customs officers taking samples from goods during loading. The letters contained no actual restriction of exports, but stated that completion of customs clearance should be made exclusively after receiving the results of research and analysis of samples. The sellers informed the buyers that they were unable to export anything from Ukrainian ports.

Accordingly, the buyers sent a notice of default and the matter was referred to the GAFTA board of appeal (the board of appeal). It rejected the sellers’ contention that the measures taken by the Ukrainian customs authorities had constituted a restriction of the export of wheat within the prohibition clause and that they were discharged from liability to perform the contract. The board of appeal held that there was no actual restriction on exports in the same context as an outright ban or prohibition; there might have been delays, but that had not constituted a prohibition. That decision was upheld on an appeal under section 69 of the Arbitration Act 1996. The judge held, inter alia, that the construction advanced by the sellers was unworkable and would undermine commercial certainty, that the term ‘any executive… act’ in the prohibition clause could not be extended to every action by an official body which had the effect of restricting exports and that the board of appeal had applied the correct test. The sellers appealed.

The sellers submitted that the board of appeal had erred by approaching the prohibition clause as if it required the sellers to establish an official or outright ban or prohibition enacted by or on behalf of the Ukrainian government, or something akin to such a ban or prohibition; the natural and ordinary meaning of the relevant words in the prohibition clause was more than wide enough to encompass any act of the executive carried out on behalf of the government which had the effect of restricting exports, partially or otherwise; and the word ‘act’ was a wide one and encompassed any deed or action, and not just a formal prohibition or restriction.

The appeal would be dismissed.

An ‘act’ which only made it more onerous to obtain customs clearance might make the obtaining of clearance slower, and thus delay export, but it did not stop export from taking place eventually. Just as delay did not stop export from taking place eventually, so did it not ‘prevent’ fulfilment of the contract but merely postponed it (see [37], [39], [40] of the judgment).

In the instant case, the construction of the clause for which the sellers had contended would have led to an uncommercial position because any act adjusting a customs regime which resulted in delay or disruption would have fallen within its scope and resulted in the cancellation of the contract. It was unlikely that commercial parties would have agreed such a result for such a broad category of collateral consequences, particularly in the light of the other provisions in the contract dealing with delay. In addition, the construction for which the sellers contended had not fitted into, and had cut across, other provisions in the contract.

The board of appeal had found that the Ukrainian customs authorities’ letters might have led to delays and difficulties in the loading and/or shipping of the goods, but that that had not constituted a prohibition. It had not found that fulfilment of the contract had been prevented. Against that background, the board of appeal’s conclusion that the sellers had not shown that there was an act falling within the scope of the prohibition clause, and the judge’s conclusion to the same effect, were entirely justified (see [33], [36], [38], [40] of the judgment).

Decision of Blair J  [2013] 2 All ER (Comm) 640 affirmed.

Michael Nolan (instructed by W Legal Ltd) for the sellers; Susannah Jones (instructed by Reed Smith LLP) for the buyers.