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Commodities Brief
August 2011
Certificates of quality – final and binding?
Quality and inspection certificates, as commercial documents, play an important role in international trade.
Disputes can often arise as to the accuracy of the contents of certificates 1
and whether or not one certificate
or another is final and binding on the parties to the underlying contract. A recent case before the English
Commercial Court has shown that certificate final clauses are not always what they might at first seem.
RG Grain Trade LLP (UK) v Feed Factors International Ltd (2011)
In the above case, the sellers (RG Grain) of 1,500 MT +/- 10% of animal feed supplement, Ukrainian origin
sunflower expeller, appealed under s.69 of the Arbitration Act 1996 against a decision of the Board of Appeal
of the Grain and Free Trade Association (GAFTA) awarding damages to the buyers (Feed Factors) and
dismissing the sellers’ claim for the balance of the purchase price.
The contract incorporated terms and conditions from GAFTA 119. Clause 5 of GAFTA 119 provided that the
certificate of inspection at the time of loading into the carrying vessel would be final as to quality. The
contract also incorporated terms and conditions from GAFTA Sampling Rules No. 124. Rule 4 provided that
where such a certificate was to be final as to quality, that inspector would be solely responsible for taking
samples, disapplying Rule 5 which provided that a buyer could request a further analysis.
The contract further provided that quality and condition was to be tested by a GAFTA approved supervisor
appointed by the sellers, with the buyers having the right to appoint their own GAFTA approved supervisor.
Further analysis (if required) was to be carried out by an analytical chemist.
When the cargo was being loaded, the buyers exercised their option to appoint their own surveyor and joint
sampling was conducted. The sellers’ inspector certified that the cargo was in accordance with the contract
specifications. However, the buyers’ analysis suggested that the cargo did not comply with the protein and
fibre content specifications. The buyers sent samples to an analytical chemist (Salamon & Seaber) for analysis,
who certified that the cargo did not comply with the protein and fibre content specifications. The buyers
rejected the cargo, which was then sold to another buyer.
1 See AIC Ltd v ITS Testing Services (UK) Ltd (2006) 1 Lloyd’s Rep. 1 - an inspection company had a duty to take reasonable
care to ensure that any certificate it issued was accurate as to those matters on which it was instructed to report.
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Before the first-tier arbitrators, the sellers’ claim for the balance of the purchase price succeeded. On appeal,
the Board found that the Salamon & Seaber analysis superseded the sellers’ certification and allowed the
buyers’ appeal. The following questions came before the court:
(1) Whether on a true construction of the contract, the certificates of quality and condition issued by the
superintendent chosen by the sellers were final and binding; and
(2) Whether the buyers were entitled to reject the documents and the goods despite the terms of Clause 5 of
GAFTA 119.
As to the first question, the court held that the Board had been correct to conclude that Salamon & Seaber’s
analysis was final and binding. Quality as certified by the sellers would be final in circumstances where the
buyers had not appointed their own supervisor. An alteration to the contractual regime was made when the
buyers appointed their own supervisor. Sampling was then to be carried out jointly, in accordance with GAFTA
124, which meant that, contrary to Rule 4, the sellers’ inspector would not be solely responsible for drawing
samples. A further contractual alteration occurred when a second analysis was requested by the buyers.
Although it was not expressly stated in the contract as the buyers’ right, the court held that it was clearly
what was contemplated under the contract. If quality was final as certified by the sellers’ inspector, there
would be no purpose in providing for a second sample. Hamblen J added:
“…The existence of such a right is therefore inconsistent with a certificate final regime. This is further
borne out by GAFTA 124 where a right to call for a “2 nd analysis” only arises in circumstances where
there is no such regime, as Rule 4 makes clear.”
It followed that when the buyers requested a second sample, the contract did not provide that the sellers’
certification would be final. The second analysis carried out by Salamon & Seaber (at the request of the
buyers) was final and binding.
As to the second question, the court held that the Board had proceeded on the basis that there was a right of
rejection for quality matters unless the contract provided otherwise. The Board’s approach involved “a clear
error of law”. There was nothing in the Board’s reasons to suggest that it had addressed the issue of whether
the fibre content provision should be properly regarded as a condition, as opposed to a warranty or an
innominate term 2 . The Board assumed that the term was a condition unless there was a clear indication to
the contrary. This was not the law. The court further held that the Board had erred in concluding that the
2 Breach of which may or may not go to the root of the contract depending on the nature of the breach. See Hong Kong Fir
Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd., [1961] 2 Lloyd’s Rep. 478
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each of the fibre content provision gave rise to a right to reject and it had not addressed the relevant legal
questions in reaching that conclusion. The buyers were not entitled automatically to reject the documents
because of a statement in the quality final certificate that the goods contained 4.1 per cent impurities. The
Board had erred in law in concluding that the buyers were entitled to reject the documents, and that this
issue should be remitted to the Board for further consideration.
Regulation: Dodd-Frank - one year on
One year after the enactment of the Dodd-Frank Act, US policymakers have yet to detail many of the rules
which will clarify the extent to which Wall Street giants and commodity markets will be regulated. Democrats
and others argue that banks are still too big, the derivatives market lacks controls and transparency, and that
the rule making process has been slow. Republican lawmakers and the financial industry say that regulators
have gone too far with onerous demands which are hurting economic recovery.
The coming months are expected to clarify new capital and liquidity standards, and the Volcker limits on
proprietary trading. An initial draft of the Volcker rule is expected some time this summer, with a final rule
due by October.
On 21 July, the Commodity Futures Trading Commission (CFTC) Chairman, Gary Gensler, said that the CTFC
could take up in September a long-anticipated rule designed to curb excessive speculation in the commodity
markets. Traders have argued that curbs could increase price volatility by removing liquidity and driving
business to markets overseas. The CFTC continues to take a tough stance on market manipulation and in May
sued oil trader Arcadia Petroleum for manipulation. A former portfolio manager for Moore Capital
Management agreed last week to pay the CTFC US$1 million to settle charges he attempted to manipulate
prices of palladium and platinum futures contract on the NYMEX, by engaging in a trading practice known as
“banging the close” 3 .
Some believe that the CFTC may re-propose a rule to allow clearinghouses more time before they have to
decide whether to accept and guarantee trades in the US$600 trillion swaps market. The new proposal would
require decisions as soon as technologically possible and, according to the CFTC’s Chairman “The proposed
rule promotes market participants’ access to central clearing, increases market transparency and supports
market efficiency”. The CTFC has estimated that it will vote on at least 37 rules between July and October.
According to joint recommendations published by the CTFC, the Federal Reserve and the Securities and
Exchange Commission (SEC), regulators plan to increase cooperation on overseeing US clearinghouses.
3 When a trader acquires a substantial position leading up to the closing period, and then offsets the position before the end
of trading to try to manipulate closing prices.
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Regulators’ plans would see clearinghouse operators subject to an increased level of scrutiny as they prepare
to handle more of the over-the-counter (OTC) derivatives market. Last week, the SEC was expected to
increase its market oversight by adopting new rules to help track the activities of large traders. The
large-trader reporting system 4 , and a proposed rule for a consolidated audit trail, could be finalised later this
year.
G20 leaders agreed in 2009 that to curb risks, derivatives traded OTC or privately between banks should be
cleared centrally and reported to a repository by the end of 2012. Delays have also beset the rule making
process in Europe. It has been reported that new EU derivatives rules are unlikely to be agreed until at least
early autumn. Equally, France’s drive to get the world’s leading economies to toughen regulation on
commodity markets appears to be losing traction as governments express concern that tighter trading rules
may harm their financial interests.
In other news
According to the China Futures Association, commodity futures trading in China dropped 30 per cent in the
first half as regulators curbed speculation and the central bank took steps to ease rising inflation.
In July, gold prices rose to a record of more than US$1,600 per ounce, as US politicians failed to reach
agreement to raise the government’s US$14.3 trillion borrowing limit. The risk of an unprecedented US debt
default lingers on and Europe’s sovereign crisis escalated as Ireland joined Portugal and Greece as the third
Euro-area nation to have its credit rating but to below investment grade.
On the NY Comex and the London Metal Exchange (LME), copper futures for September delivery and for
delivery in three months both fell, signifying that demand may be dwindling in China, the world’s largest
metal user.
Last week Bloomberg reported that China’s largest shipping companies are lobbying the government to block
Vale SA’s plan to build a US$2.3 billion fleet of the world’s largest iron ore carriers. Zhang Shouguo, executive
vice chairman of the China Shipowners Association, claims that “Vale is seeking to control the freight market
as it has done with iron ore prices”. According to Clarkson Research Services Ltd, the global fleet of bulk
carriers will expand 13 per cent this year, compared with the 4 per cent growth it forecasts for shipping
commodities by sea. According to data compiled by Bloomberg, the cost of transporting iron ore to China
from Brazil is now equal to 10 per cent of the value of the commodity used by steelmakers, compared with 64
per cent in 2003.
4 First proposed in April 2010. A brief period of volatile trading in May 2010, known as the “flash crash”, highlighted the
need for faster and more detailed data.
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In June, Singapore said that it will set capital levels for local lenders 2 percentage points above the so-called
Basle II rules to solidify the city’s reputation as a financial hub. In July, Malaysia-based Pheim Asset
Management Sdn failed in its bid before the Singapore Court of Appeal to overturn Singapore’s first (civil) High
Court decision on market manipulation. Singapore’s central bank, which has beefed up its financial
misconduct rules the wake of the 2008 credit crisis, has said that it will not tolerate “window dressing” 5 by
fund managers.
Events and conferences
Kennedys Breakfast Seminar
Letters of Indemnity in international trade and shipping
80 Raffles Place, #44-05 UOB Plaza 1, Singapore 048624
10 August 2011, 8:45am for a 9am start
To register, please contact Faith Lee, T +65 6671 7400, f.lee@kennedys-law.com.sg
Energy Risk Asia 2011
Singapore
29 September 2011
Iain Sharp is participating in a panel discussion on the implementation of Dodd-Frank and changes to the
regulation of global OTC markets at Energy Risk Asia 2011. The conference, hosted by Energy Risk magazine,
brings together energy professional from across the region to discuss trends and developments in regulations,
hedging strategies, risk management techniques and commodities markets. www.energyriskasia.com
For more information, please contact
Iain Sharp – Partner
Kennedys
80 Raffles Place
#44-05 UOB Plaza 1
Singapore 048624
T +65 6671 7413
E i.sharp@kennedys-law.com.sg
www.kennedys-law.com.sg
5 The manipulation of share prices so as to enhance the performance of funds under a fund manager’s charge.
5