Navigating Trade Wars: Perspectives from the UK

Following the first two insights from Clyde & Co’s Navigating Trade Wars series focused on Singapore and Brazil, Partner Will Trustram, Senior Associate Alexander George, and Associate Alisha Kumar share their thoughts from an English law perspective on the issues that might arise under commodities sale contracts – and how traders can protect themselves from them in an increasingly uncertain trading landscape.

Within the first few weeks of his second term, US President Donald Trump has threatened the imposition of tariffs against several countries.

Without a crystal ball, nobody can say for certain what further changes to tariffs might be on the horizon, but one thing is for certain: global commodities businesses will find themselves contending with the fallout (our Tariff Tracker can help you stay up to date).

Those based in the UK, or contracting on an English law basis from economies that are (for the moment, at least) out of the US tariffs’ crosshairs, are not immune from knock-on effects. As anyone in the commodities trade already knows – anything can happen. Proactively managing your exposure and risk when negotiating your contracts is therefore vital.

In this article we focus on three potential issues for buyers and sellers in the UK and those elsewhere trading under English law contracts:

1. Change in the commercial bargain;

2. Delays in transit; and

3. Moving into new markets.

Change in the Commercial Bargain

The direct effect of tariffs is, of course, that certain goods will become more expensive. However, there may be hidden cost increases even for goods not subject to tariffs – with disruption in the freight market potentially pushing up the costs of moving goods, and with port congestion increasing exposure to demurrage as we discussed in the first insight.

That could, in turn, increase the risk of default under what at first look, may seem like an unconnected contract. Aside from the increased risk of a party defaulting on a delivery obligation if it becomes uncommercial for them to perform, increased costs could strain a buyer’s cashflow causing a payment default under a contract otherwise unaffected by tariffs or even lead to the unexpected insolvency of your counterparty.

At the outset, insofar as possible within the limits of commercial bargaining, it is prudent to expressly agree who should bear the risk of external factors affecting the pricing of the commodity in question, for example tariffs. One way to do this is with a Material Adverse Change, or MAC, clause, as highlighted in our first article.

With or without a MAC clause, there are also ways to protect yourself if your counterparty defaults. As a seller concerned about your buyer’s solvency or ability to make payment in accordance with the terms of a contract, consider:

1. Requiring payment to be made under a letter of credit issued by a first-class bank. Under English law, a letter of credit governed by the UCP 600 is a separate contract creating an independent payment obligation owed by the bank to the seller. Provided the seller tenders conforming documents, it is (subject to limited exceptions) entitled to payment from the bank – regardless of whether the bank has been put in funds by the buyer.

2. Inserting a retention of title (or ROT) clause into your contract. English law recognises the parties’ ability to agree that the seller can retain title to goods until certain agreed conditions have been satisfied. Most commonly, an ROT clause provides for a seller to retain title to goods until they have been paid for by the buyer. That can entitle a seller to retake possession of goods which have not been paid for, but in practice can be difficult to enforce if goods have been sold on to a different end-receiver, co-mingled or used in industrial processes. Careful drafting could reduce this risk (for example, by explicitly requiring the goods to be stored separately), but regaining possession can be difficult where local law takes a different approach from English law, particularly in the context of local insolvency law.

3. Choosing a method of dispute resolution that will allow you to quickly and easily obtain a judgment or award that you can enforce against your buyer. If arbitrating in England, neither the London Maritime Arbitrators’ Association (LMAA) nor the London Court of International Arbitration (LCIA) rules include an expedited procedure in their current editions. However, where certain discrete issues can be disposed of quickly, the English Arbitration Act 1996 allows the tribunal to issue partial awards. In the High Court, the summary judgment procedure in Part 24 of the Civil Procedure Rules allows the court to dispose of claims where there is no real prospect of the defence succeeding and no other compelling reason for a full trial. However, English court judgments can be more difficult to enforce overseas than arbitration awards.

Likewise, a buyer concerned about its seller’s ability to deliver the goods can reduce its financial exposure by planning ahead in the sales contract. A buyer might consider:

1. Obtaining a standby letter of credit or a performance bond to guarantee the seller’s obligations. This can be helpful if you have already made a payment to your seller (e.g. a pre-payment) and can oblige a bank to reimburse you if the seller does not perform.

2. Requesting an on-demand guarantee from your seller’s parent company. This can be helpful if, for example, your seller is a smaller entity in a larger group or is incorporated in a jurisdiction where it might be more difficult to recover any losses arising out of a failure to deliver.

Delays in transit

As we discussed in the first of our series, disruption and congestion can cause delay, and delay can create problems (and additional costs) under a contract of carriage. But what about the impact on your sales contract?

A seller responsible for transportation (e.g. a CIF, C&F, or DAP seller) can protect itself from demurrage exposure at the discharge port by including a demurrage clause in the sales contract. English law will not automatically imply an obligation to pay demurrage into a sales contract, and so an express clause will be required. Sales contract demurrage clauses should also be drafted carefully – particularly if you, as a seller, have a vessel on time charter (i.e. without any demurrage liability to the shipowner) – to create an independent demurrage obligation or a clear indemnity.

Likewise, it is worthwhile ensuring your sales contract is clear about who might be responsible for deterioration of goods during prolonged transit, particularly for perishable goods. As a CIF seller, you might want to push for a certificate final, or final & binding, clause, which binds both parties to a quality or quantity determination on loading. That would bind a buyer to accept the quality and quantity as determined on shipment, regardless of what might happen to those goods if caught up in discharge port congestion. Conversely, as a buyer, you might want quality and quantity determined on discharge. English law readily enforces such clauses, and it can be difficult to get around them, even where, for example, the surveyor at the load port has been negligent.

Care should also be taken when shipping hazardous goods which might be caught up in port congestion. For example, when shipping a cargo that is liable to self-heat, such as coal or wheat, the shipper should ensure that, if it arrives at the port before the ship is ready to receive it, it is taking precautions to protect it from the elements in line with the International Maritime Solid Bulk Cargoes Code (IMSBC Code) and the International Code for the Safe Carriage of Grain in Bulk.

New markets

Tariff-led disruption can present traders with new opportunities. Increased import costs may reduce demand in one part of the world, but could cause increased demand elsewhere, opening up new markets. Likewise, end-receivers might change their manufacturing practices to avoid exposure to tariffed goods. For example, the threat of tariffs on aluminium has led to suggestions from Coca-Cola’s CEO that the company may increase use of plastic bottles over aluminium cans.

When exploring a new market, it is always worthwhile co-ordinating with local lawyers to avoid being caught out by unexpected regulations in new jurisdictions. Likewise, an increase in supply into a new market may lead local authorities to adjust those regulations to address an influx of goods, and so it is important to clearly address in your sales contract who bears responsibility for any changes to the law of the country of import.

Conclusion

Market uncertainty is likely to create increased and unexpected risks for traders based in the UK or trading under English law over the next few years. Prevention is better and cheaper than cure. Heading issues off while drafting your contract can pay dividends if things do go wrong further down the line.