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Standard Grain Shipping Contract Term Interpreted

In a ruling which gives useful guidance on the interpretation of a standard term incorporated into many grain shipping contracts, the High Court has rejected a seller’s plea that it was excused from performing its contractual obligations by difficulties it encountered with officialdom at the port of loading.

The seller had agreed to sell a shipment of Ukrainian feed wheat to the buyer. The contract was in the common form employed by members of the Grain and Feed Trade Association (GAFTA) and incorporated a ‘prohibition clause’ which had the effect of enabling cancellation of the agreement in circumstances where its terms could not be fulfilled due to government export restrictions.

The insistence by the Ukrainian authorities that samples had to be taken from any grain shipments and tested at a single laboratory produced substantial delays and was at the time causing great difficulties to grain exporters. In those circumstances, the seller cancelled the contract and argued that it was discharged from liability by the terms of the prohibition clause.

In arbitration proceedings, the GAFTA board of appeal upheld the buyer’s case and ordered the seller to pay damages of $270,000 in respect of its wrongful repudiation of the contract. The seller appealed against that ruling on the basis that the terms of the prohibition clause had been too narrowly construed and that the appeal board had ‘set the bar too high’.

In dismissing the appeal, the Court noted that the burden was upon the seller to prove that the difficulty in exporting the goods went beyond mere disruption or delay in obtaining customs clearance but was due to a restriction on exports imposed by the Ukrainian authorities.

Noting that the broader construction of the prohibition clause contended for by the seller was ‘unworkable’, the Court ruled that it only applied in circumstances where exports were restricted by a government’s executive or legislative act. There had been no such formal restriction and the clause could not be construed as extending to every action of an official body which had the effect of restricting exports.

In order to justify the contract’s cancellation, the seller had to show that it had tried all avenues and made all reasonable efforts to either ship the goods or to buy replacement goods elsewhere. The seller had failed to establish that the Ukrainian authorities had ‘restricted all possible methods’ of performing the contract.