The disputes arising from the drought can be very controversial. Quite often, it is challenging to draw a clear red line between what can be considered a force majeure under the GAFTA contract and what is not. In these circumstances, it is advisable to create a tailor-made solution in your contracts by adapting the force majeure clause to the possible effects of drought in Europe.

Recently the European Commission has raised concerns regarding the continued dry conditions in south-western Europe. It is reported that the drought might lead to a reduction of the yield potential in the key growing regions in Europe – in particular, Romania, Italy and Hungary. In the circumstances where Ukrainian export experiences unprecedented challenges due to the blockade of the seaports by Russia, the bad weather conditions in Europe might have a significant effect on importers of grain and the performance of their contracts.

The previous experience in such situations shows that bad weather conditions might cause a shortage of goods on the market and lead to a cascade of defaults under forward contracts. No doubt, the defaulting companies will rely on the force majeure clause in their contracts to be released from liability. In these circumstances, it is advisable for the traders to analyze potential risks arising from the drought in Europe and in advance develop legal safeguards to minimize them.

To help you with this matter, AGA Partners will share their recent experience in commodities arbitration involving a largely similar background – the drought in Romania in 2020. In this article, we will elaborate on the legal consequences of the drought and present specific tips which might help traders to indemnify the risks arising from this situation.

DROUGHT IN ROMANIA: BACK TO THE FUTURE

The current dry weather is no longer a big surprise for European farmers. In 2018-2020, certain growing regions in Europe also experienced soaring temperatures and intense drought. In particular, the moisture-deficient soil reserve was observed in eastern Romania.

Despite these unfavourable conditions, a Romanian grain trader decided to conclude a forward contract on the sale of a large parcel of ‘Romanian origin corn’ to its partner in Turkey. In July 2020, the parties agreed on the shipment of the goods in September 2020 on a CIF Marmara basis. It is important that the GAFTA force majeure clause was incorporated into their contract.

To perform the agreement with its Turkish customer, the seller contracted the goods from its regular suppliers in the eastern part of Romania. However, in August 2020, farmers in this region faced hot and dry weather which led to a significant reduction in the yield. The reduced amount of the harvested crop naturally triggered a spike in the prices of Romanian corn. The market fluctuations, in their turn, prompted the seller’s suppliers to deliver the goods to companies paying a higher price for them. As a result, the seller could not procure the necessary amount of corn from its regular suppliers.

For this reason, the seller approached its client with the request to cancel the contract due to unfavourable weather conditions. The buyer, however, was inexorable – he urged the seller to stick to its obligations and procure the goods, despite the price increase. Nevertheless, the seller failed to do so and did not supply even a pound of corn as agreed.

There was nothing left for the Turkish buyer but to declare the Romanian seller in default and initiate arbitration to recover the losses incurred due to the increase in the price of the goods.

FIERCE BATTLE IN ARBITRATION

In arbitration, the seller took the position that the drought in Romania constituted a force majeure which released him from liability for the non-delivery of the goods.

In support of this position, the seller’s counsel submitted the reports of the commissions allegedly appointed by the government. These documents fixed that certain lands in eastern Romania and crops grown on them were damaged by the drought, either totally or partially. In the seller’s view, the reports represented undeniable evidence of force majeure (he even called these reports ‘force majeure certificates’).

Having received the defence, we have started to vigorously dispute that the seller could be excused from liability because of the drought in Romania. Our position was straightforward: there was no force majeure at all, the seller just refused to procure the goods because of the high acquisition prices. In addition, we argued that the seller was not protected by the force majeure clause as it failed to send a formal notice about the drought to the buyer.

After numerous rounds of the parties’ submissions, the tribunal proceeded to the preparation of the award.

TRIBUNAL’S VERDICT

In a few months, the tribunal rendered an award which provided a detailed interpretation of the GAFTA force majeure clause. While the award, of course, is not binding for further disputes, it vividly illustrates the possible legal consequences of the drought and thus might serve as a lodestar for the current circumstances.

High Threshold for Force Majeure

From the outset, the arbitrators noted two fundamental rules of English law on force majeure which laid the basis of their award. First, the tribunal emphasized that force majeure is not ‘a term of art’ under English law. A party is allowed to use it as a defence only within the four corners of the agreed clause. This means that only those events that are expressly specified in the force majeure provision can constitute a ground for releasing a defaulter from liability. Any other ground which is not directly specified in the clause cannot protect a defaulting party from the unfortunate events impeding the contract performance.

It flows from this rule that the wording of the force majeure clause is extremely important as it serves as a strict guideline for the tribunal. It is, therefore, essential for the traders to revise the contracts carefully in order to avoid undertaking unnecessary risks that arise from the drought in Europe.

Second, it was established by the tribunal that the seller bore the burden of proving force majeure which was a rather high one. This is a direct consequence of a traditionally strict attitude of English law to the performance of contracts allowing the release from liability only in exceptional circumstances. The defaulting party must demonstrate that the force majeure event truly prevented the performance of the contract, it does not suffice to show that performance became merely burdensome or unprofitable.

Sympathy Towards the Difficulties

Having established these basic principles, the tribunal proceeded with their application to the facts of the case. The arbitral panel noted that the drought, in general, could be treated as a force majeure event. In their opinion, the prolonged dry conditions could fall within the notion of ‘Act of God’ or the catch-all phrase ‘any other event comprehended in the term “force majeure”’. As a next step after establishing the event of force majeure, the seller had to prove that this drought directly affected his ability to perform the contract.

Accordingly, the arbitrators proceeded with analyzing the reports which were filed as evidence of force majeure. They acknowledged that these reports showed “catastrophic damage to the corn crop” in the specified farms and the “extremely serious” effect of the drought. Although the reports did not represent a formal certificate, they were accepted by the tribunal as proper evidence of force majeure. This decision was explained by the fact that the GAFTA clause does not require the tender of formal certificates to prove force majeure (it merely refers to ‘satisfactory evidence’). In this way, the arbitrators have taken a flexible approach making emphasis on the content of evidence rather than its form.

The tribunal also agreed with the seller that the said clause generally does not require a force majeure event to be unforeseeable. They noted that this condition is mentioned only for the event called ‘impediments to transportation and navigation’ and thus evidenced the intention of the draftsmen to exclude the requirement of foreseeability for other events. In the arbitrators’ opinion, the existence of precursors of the drought at the time of the contract conclusion could not prevent the seller from relying on the force majeure defence.

In the light of the above conclusions, it appeared at first glance that the arbitrators were pretty sympathetic towards the difficulties the seller faced due to the bad weather conditions in Romania.

Difficulties ≠ Prevention of Shipment

Despite this sympathy, the tribunal eventually held that the filed evidence did not allow it to excuse the seller from liability for the non-delivery of the goods. In making this decision, the arbitrators relied on the following reasoning.

1. The contract performance was not really prevented

The seller had to demonstrate that corn of Romanian origin was not available for supply to the buyer. The seller’s reports did not prove that as their scope was very limited – these documents related only to the land in five localities in eastern Romania. They merely showed a sharp reduction in the crop in those particular regions. At the same time, western Romania was not affected by the bad weather. These facts led the tribunal to the conclusion that the seller could have procured Romanian corn on the market, albeit at a higher price. The effect of the drought, hence, was not unavoidable for the seller.

2. The seller failed to send a force majeure notice

The tribunal stated in the award that seller’s obligation to serve a force majeure notice within 7 days after its occurrence represented a condition of the contract. This means that the seller could be released from the liability only if this requirement was strictly complied with. It is essential that the force majeure notice must be sent in writing – a mere reference to the drought during the call was not accepted by the arbitrators as a ‘notice’. Thus, the timely service of the notice was declared essential for the force majeure defence.

In the case of the drought, there is also a tricky question of when exactly this 7-days period starts and ends. The discussed arbitration is an illustrative example of that: the tribunal was puzzled by this question because drought does not occur on a single day like, for instance, an earthquake; rather its impact is cumulative over a protracted period. In this case, the arbitrators held that the impact of drought on crops became evident only at the end of August 2020 and regarded this period as the last opportunity to serve a force majeure notice. Since the seller did not send the notice at all, he could not in principle be excused from the liability based on the force majeure clause.

As a result, the arbitrators supported the buyer’s position and held that the seller was fully liable for the non-delivery of the goods.

IT IS HIGH TIME TO CHANGE YOUR CONTRACT!

As it can be seen from the analyzed case, disputes arising from the drought can be very controversial. Quite often, it is challenging to draw a clear red line between what can be considered a force majeure under the GAFTA contract and what is not.

In these circumstances, it is advisable to create a tailor-made solution in your contracts by adapting the force majeure clause to the possible effects of drought in Europe. In particular, the importers of the goods from the EU can indemnify potential risks through the following amendments.

1. Limit the force majeure events only to those truly exceptional. Consider excluding drought expressly from the scope of the force majeure clause.

2. Specify that time limits for invoking force majeure must be complied with strictly. Indicate precisely when this period starts and ends.

3. Determine that force majeure must be proven by the certificate of the chamber of commerce.

4. Designate clear consequences of force majeure (initial suspension of the shipping period / subsequent cancellation of contract).

In addition, it is also important to avoid concluding contracts which require goods to be grown in specific fields or originate from a specific region of the country. If drought affects this particular region or field, the seller will have better grounds to invoke force majeure. Instead, importers should consider stipulating the origin of the goods widely – for example, EU corn instead of Romanian corn (if possible from a commercial point of view). This amendment will create a leeway for you to demand the supply of the commodity of alternative origin in case the planned goods become non-available for supply.

These simple steps might minimize the risks caused by the dry weather in Europe and contribute to the smooth performance of your contracts!