Navigating Trade Wars: Perspectives from Clyde & Co’s Singapore Office

This is the first insight in Clyde & Co’s commodities series covering developments arising from new tariffs imposed by and against the US following the inauguration of US President Donald Trump.

Drawing on their experience advising clients in similar situations, Partner Leon Alexander and Legal Director Hannah Chua provide an overview of the key contractual issues that the commodities sector is likely to face due to these tariff changes. 

Overview

Sitting at the tip of the Malay Peninsula, Singapore plays a critical role in facilitating global trade as the Singapore Strait provides the shortest ocean voyage linking the Indian Ocean and the Pacific Ocean. More than 10,000 commercial vessels call at Singapore each month, making it the world’s busiest bunkering hub and a leading transshipment port for many years.
 
Outside the shipping and trade sectors, Singapore has emerged as a global technology powerhouse, attracting worldwide investment and talent, including the Chinese-owned TikTok, now headquartered in Singapore.
 
Unsurprisingly, Singapore-based companies will feel the direct ripple effects of trade wars, especially between economic giants such as the US and China. If early indications are a sign of things to come, US President Donald Trump’s second term will see an increase in tariffs and other trade restrictions or “trade wars”.
 
This article highlights the key legal issues and challenges that shipping and commodities businesses based in Singapore (and the broader region) are likely to encounter.

Force Majeure 

Force Majeure ("FM") clauses typically provide contracting parties with relief when the performance of their obligations is affected by any unforeseen events. How effective will they be against new tariffs imposed by or against the Trump administration?

The starting point is that there is no specific definition or legal test given to FM as a matter of English or Singapore law. Instead, FM is a "creature of contract", so the parties' rights and remedies relating to FM are all derived from the terms of the contract, particularly the FM clause. It follows that there is no "one size fits all" approach, as each case must be analysed based on its facts against the specific wording of the FM clause. 

That said, most FM clauses do not offer parties any relief when the performance of their contractual obligations has simply become more expensive. Instead, FM clauses usually require the performance of a party's obligation to be prevented, hindered, impeded or delayed. Therefore, the imposition of additional tax on importing goods may seldom entitle a party to obtain FM relief. However, the position may differ in cases involving an outright ban on the export or import of the product. 

Importantly, when seeking to issue any FM declaration or notice, it should be remembered that a wrongful declaration and refusal to perform may, in certain circumstances, constitute a repudiatory breach of the contract. All requirements necessary for FM relief (e.g. the way the obligation is affected) must therefore be met. 

Delays - Demurrage, Detention & Frustration 

When tariffs and trade restrictions are announced and implemented at short notice, vessels can be heavily delayed as receivers encounter unexpected difficulties obtaining the necessary import permits, or shippers wish to prevent discharge where payment is not forthcoming.  Indeed, the position can worsen if sales contract parties simply decide to cancel deals or not accept deliveries due to additional tariffs on the goods. While traders try to work out a plan for their cargo, laden vessels may have no choice but to wait outside the discharge port for instructions. 

This is what happened in 2020, when more than 50 bulkers carrying Australian coal were reportedly stranded off Chinese ports. Although there was no formal announcement of an import ban on Australian coal, it is understood that these vessels were not permitted to berth for discharge at Chinese ports. Consequently, some vessels were left waiting for months off China in limbo.

In such situations of unprecedented and prolonged delays, issues as to the shipowners' remedies invariably arise. On the one hand, shipowners will be keen to recover damages for the detention of their vessel which may not have been permitted to be used as “floating storage”, especially in a rising freight market. On the other hand, charterers will try and minimise their exposure, e.g. by only paying demurrage which they may recover from cargo buyers. 

Particularly long delays may further prompt shipowners to consider whether the charterparty has automatically come to an end due to frustration. Frustration is a common law doctrine which deems a contract as being terminated where there has been an unforeseen event which either renders the performance of the contractual obligations impossible, or which radically changes a party's principal purpose for entering into the contract. As one would expect, there is a high threshold for events to amount to frustration. 

In addition, Owners may consider their contractual options for discharging the cargo elsewhere, a drastic measure often left to the last resort but, with a degrading or dangerous cargo, may be considered a necessity.

As can be gleaned from the above, these are all difficult areas which traders, shipowners and charterers need to navigate carefully.  

Material Adverse Change Clauses

A Material Adverse Change ("MAC") clause seeks to offer parties an opportunity to re-negotiate the terms of the contract and, at times, suspend or terminate the contract, where there have been material or unforeseen changes or events which may affect the parties' performance or the outcome of the contract. 

MAC clauses are typically found in acquisition agreements. However, in the wake of recent trade wars, they are increasingly making their way into long-term sales contracts or charterparties, especially those contemplating specific trade routes. 

These clauses give parties comfort that they may be able to mitigate the effects of any major changes in the geopolitical landscape which make the contract no longer viable. However, to prevent abuse, they are still often drafted narrowly or on a non-committal basis. Where there is only a low threshold on parties to re-negotiate, the effectiveness of MAC clauses may have its limits.  

Conclusion

The biggest difficulty for companies navigating a trade war is the unknown. Tariffs and trade restrictions are often implemented (and lifted) with immediate effect, playing havoc on markets and straining even the strongest commercial relationships. 

This Series continues next week with perspectives from Australia. 

Clyde & Co maintains a Tariff Tracker which summarises the tariffs announced and implemented, alongside periodic updates.