Problems of the “grain corridor” – are they a force majeure for the supply of Ukrainian grain?

On July 22, 2022, Ukraine, Turkey, and the UN signed the Initiative on the Safe Transportation of Grain and Foodstuffs from Ukrainian Ports. The same document was signed separately by Turkey and the UN with Russia. This Initiative became widely known as the “grain agreement” (or “Black Sea Grain Initiative”) and allowed the resumption of Ukrainian grain exports from certain Ukrainian seaports, creating the so-called “grain corridor”. At the same time, the grain agreement was of a fixed-term nature and was extended from time to time.

As is well known, the grain corridor included the ports of “Greater Odesa”: Odesa, Chornomorsk and Pivdennyi. It is also known that the Russian Federation never performs its obligations properly, but rather sees such initiatives as an opportunity to manipulate, blackmail and force concessions. The implementation of the grain agreement has always been problematic and accompanied by uncertainty, the possibility of the grain corridor “falling off” at any time, and the last few months have been particularly difficult for all those who exported/sold grain through the specified ports.

On Monday, July 17, 2023, the Russian Federation announced that it objected to the further extension of the grain agreement, which shall expire on July 18, 2023. At the same time, the issues that arose during the validity of the grain agreement and the existence of the grain corridor have not been exhausted, and this “termination” raises new questions that are related and adjacent to those that arose during the Black Sea Grain Initiative.

The closer it was to the end of the grain agreement, the fewer and fewer vessels were authorized to undergo JCC inspections due to non-compliance on Russia’s behalf. Thus, by the time the grain corridor expired, a large amount of grain had been accumulated in the ports, which could not be exported for a long time. In the future, if it is not possible to restore the routes of grain exports and supply by sea, this may lead to a number of negative consequences, in particular:

– the goods already brought to the port and not delivered anywhere else are subject to storage fees, which constitute additional costs for quota holders in the port. This is also a problem for farmers, who, due to the lack of actual ability to export and “close” export contracts, may eventually be charged a penalty by the tax authorities for violating currency control requirements;

– due to the full load of goods at the port elevators, it is impossible to accept new goods, and therefore, grain supply contracts between farmers and quota holders, which were concluded during the validity of the grain agreement and the existence of the grain corridor (contracts on the CPT/DAP/DAT delivery basis), cannot be performed;

– the absence of vessel calls contributes to the non-performance of grain supply contracts by sea between quota holders in the port and non-residents who entered into the relevant contracts during the validity of the grain agreement and the existence of the grain corridor (contracts on the FOB/CIF delivery basis).

Naturally, farmers and traders are primarily interested in the possibility to recognize the above cases as force majeure and to be released from performing their respective contractual obligations. The practical significance of this issue is added by the fact that despite the actual and complete blocking of the grain corridor by Russia in the last months of the grain agreement, it was impossible to obtain a certificate from the Ukrainian Chamber of Commerce and Industry confirming the existence of force majeure, because legally the grain corridor existed and continued to operate.

More experienced market players have adapted to the changing conditions of the grain business during martial law and have included separate clauses on the grain corridor/military risks, etc. in their standard forms of supply contracts. This is an advantageous position, as it is much easier and safer to manage a potential dispute than to subsequently manage an existing dispute, including in arbitration. But what if the problem already exists and there are no such clauses in the supply contract?

In any case, you should first of all read the supply agreement carefully and comprehensively. The contract is the document that establishes the balance of risks between the parties. And most likely, you will have to study not only the contract itself, but also the provisions incorporated into it.

Provisions incorporated into the contract

Most of the contracts used in this area contain references to the GAFTA standard proforma contracts, mostly to the following ones:

– GAFTA Standard Proforma Contracts No. 78 and No. 78UA for supply contracts on CPT/DAP/DAT basis;

– GAFTA Standard Proforma Contract No. 48 for supply contracts on a CIF basis;

– GAFTA Standard Proforma Contract No. 49 for supply contracts on FOB basis.

All of the above proforma GAFTA contracts contain force majeure clauses, which are proposed to be understood as circumstances that make it impossible to perform the contract, in particular: (a) prohibition of export or other executive or legislative act done by or on behalf of the government of the country of origin or the territory where the port or ports named herein is/are situate, restricting export, whether partially or otherwise; (b) a blockade; (c) acts of terrorism; (d) hostilities; (e) strike, lockout or combination of workmen; (f) riot or civil commotion; (g) breakdown of machinery; (h) fire; (i) Act of God; (j) unforeseeable and unavoidable impediments to transportation or navigation; (k) any other event comprehended in the term “force majeure”.

Thus, the proposed list of force majeure circumstances is open-ended. At the same time, the standard GAFTA proforma contracts do not establish rules for automatic release from liability in the event of force majeure, but provide for certain rules of interaction between the parties to the contract, only subject to which the term for performance of the contractual obligation will first be suspended for the duration of the force majeure, and only later, provided that the force majeure continues, the contract will be considered automatically canceled.

At the same time, a prerequisite for the application of force majeure is to prove a causal link between the force majeure circumstance and the inability to perform specific obligations under the contract.

In this context, two logical questions arise regarding the situation with the grain corridor:

1. Can we assume that in the context of Ukrainian realities there is a blockade and/or hostilities, which the above-mentioned GAFTA proforma contracts refer to as force majeure?
2. How can the existence of force majeure circumstances be confirmed in accordance with the requirements of the GAFTA standard proforma contracts?

Blockade and/or hostilities

The study of the issue of naval blockade takes us from the usual field of the law of England and Wales (which usually regulates “port” grain supply contracts) to the field of public international law.

In the most general sense, a blockade is an act of isolation of a certain territory, when a belligerent party blocks the entry and exit from a certain part of the territory of its enemy, and, in fact, a blockade is the only means of traditional naval warfare that allows to prevent its enemy from exporting.

The current understanding of a naval blockade, including the relevant requirements for its existence, rights and consequences, is largely based on the London Declaration concerning the Laws of Naval War of 1909, as well as the San Remo Manual on the International Law Applicable to Armed Conflicts at Sea, which was prepared by international lawyers and maritime experts gathered by the International Institute of Humanitarian Law and adopted in June 1994.

It is generally accepted that a blockade exists when the following requirements are met: (a) the blockade must be imposed by one of the parties to the conflict; (b) the blockade must be declared by such party; (c) the blockade must be effective; (d) the blockade must be impartially enforced; (e) the blockade must not impede travel to and from any point on the neutral coastline. If these requirements are met, then under public international law, a blockade is deemed to exist, and the “blockading” party has the right to visit, search, seize, and in extreme situations, destroy vessels that seek to violate the blockade.

It is a common fact that Russia has not officially declared war against Ukraine and continues to call the actual war a “special military operation”. Therefore, the question arises whether a naval blockade can take place without an official declaration of war by the “blockading” party. Or does the current understanding of a naval blockade give grounds to assert that the mere fact of an international armed conflict is sufficient to establish a blockade regime? The fact of Russia’s military aggression against Ukraine at the international level is confirmed, in particular, by the UN General Assembly resolution of March 02, 2022, entitled “Aggression against Ukraine”.

Given all of the above, it is hardly possible to prove the existence of the blockade as a force majeure circumstance during the validity of the grain agreement and the existence of the grain corridor, since the relevant entity could perform its contractual obligations and export grain (in other words, although it was difficult, it was not impossible).

As for the fact that the Russian Federation did not register vessels for inspection by the JCC and thus effectively made it impossible to export grain, it is not known to the public in what form the Russian Federation refused to register vessels for inspection. Such a refusal was evident from the “-” mark in the corresponding column in the summary table of vessel access to Ukrainian seaports, which was regularly published on its website by the Ukrainian Sea Ports Authority (USPA). At the same time, if such a refusal was expressed in a document in the form of a letter or email, etc., which was repeatedly sent to the relevant party to the contract, one could consider the existence of grounds for additional force majeure circumstances that are not explicitly mentioned in the relevant GAFTA standard proforma contracts (“any other event, covered by the term “force majeure“) – for example, an executive act adopted by the authorized body of the country carrying out military aggression in the territory where the port(s) specified in the contract is located, which makes export impossible etc., if such notifications do not specify certain specific deficiencies that make the refusal to register the vessel individually determined.

However, speaking of the situation that arose after the termination of the grain agreement and the existence of the grain corridor, then it seems that the presence of a sea blockade as a circumstance that makes it impossible to perform a particular contract looks quite different. To legally qualify the existence of force majeure in the form of a naval blockade, special attention should be paid to: (a) the announcement of the Ministry of Foreign Affairs of the Russian Federation dated July 17, 2023, on the withdrawal of guarantees of navigation safety in connection with the “termination of the Black Sea Initiative”; and (b) the announcement of the Ministry of Defense of the Russian Federation dated July 19, 2023, which was disseminated in the media, that from 00:00 Kyiv time on July 20, 2023, all vessels sailing in the Black Sea to Ukrainian ports will be considered by the Russian Federation as potential carriers of military cargo. At the same time, the final legal qualification always depends on the specific factual circumstances and details of the dispute, and therefore it is impossible to provide a universal answer.

As for hostilities as a force majeure circumstance, much again depends on the specific factual circumstances. For example, if the export infrastructure of a certain port was partially destroyed as a result of a missile attack by the Russian Federation, such an event, at first glance, and quite rightly, may be attributed to hostilities, i.e. a force majeure circumstance that releases the party from liability for failure to perform its contractual obligation. However, it is also important to prove that as a result of such a missile attack the relevant party to the contract was actually deprived of the opportunity to perform its contractual obligation. It should be taken into account whether the subject matter of the contract (grain) was destroyed, whether the party had a certain logistical opportunity to perform the contract in another way, and whether the contract period provided sufficient time for such performance. In the presence of such circumstances, the arbitral tribunal may have doubts about the existence of a force majeure circumstance. On the other hand, if the missile attack destroyed the grain that was the subject of the contract, there may be a different case under English law – not force majeure, but frustration, which leads to termination of the contract. However, the issue of frustration is beyond the scope of this article and deserves a separate analytical review.

Confirmation of force majeure

As for the second logical question of the reader, we should pay attention to the following. The relevant GAFTA standard proforma contracts establish with which party to the contract lies the burden of proof of force majeure, and that, at the request of the other party, such party must provide other “satisfactory evidence justifying the delay or non-fulfilment” of the relevant obligation.

In Ukraine, a certificate on the existence of force majeure issued by the Ukrainian Chamber of Commerce and Industry on the existence of force majeure is considered to be such satisfactory evidence of force majeure. As noted at the beginning of the article, it was impossible to obtain an official document on the circumstances that have developed with the grain corridor in recent months and that have actually made it impossible for it to operate, because legally the grain corridor existed and was in operation.

At the same time, GAFTA standard proforma contracts use the term “satisfactory”, which may differ from the term “official”. Therefore, you can try to collect other evidence of force majeure: reports in various media (preferably international media), witness statements, notifications from the Ukrainian Sea Ports Authority (USPA), collective statements of market players, etc.

It is very important not to oversimplify the situation and to collect evidence of force majeure immediately, since in the event of a dispute, such evidence will ultimately be evaluated by the arbitral tribunal. Although the proposed option is not a panacea and does not ensure that the arbitral tribunal will unconditionally decide in favor of the relevant party, it still allows for progress in this matter.

However, it should be noted that if the parties have determined in the supply contract itself that the certificate of the Ukrainian Chamber of Commerce and Industry on the existence of force majeure shall be sufficient and satisfactory evidence of the existence of force majeure, it will not be possible to deviate from these provisions. In this case, the parties have voluntarily limited themselves to the method of confirming the force majeure circumstance and are fully dependent on such an agreed condition.

Instead of a conclusion

Any conflict situation, whether existing or only potential, requires a comprehensive approach to the study of the contract. Therefore, in addition to the force majeure provisions themselves, it is also necessary to investigate and take into account other provisions of the contract, such as title transfer, delivery period, payment, etc. Only by assessing all these conditions in the aggregate can the parties determine the balance of risks that they have established between themselves and adopt the most appropriate strategy for resolving the situation or protecting their interests.

For example, after evaluating the terms of the contract and critically analyzing the actual circumstances, one may come to the conclusion that there is no need to declare force majeure, since the other party to the contract has already committed a material breach (default), which gives the first party the right to terminate the contract and claim compensation for default damages.

It should also be borne in mind that the current grain supply contracts were concluded during the war, and therefore it is almost always assumed that the parties could have been aware of the existence of “war” risks at the time of concluding their contracts, and therefore proving the existence of force majeure circumstances may be even more difficult.

Either way, no matter how sad is the context in which we live, Ukraine is currently living through a historic moment, and the situation in which the Ukrainian grain market has found itself is unique. The arbitration practice has yet to respond to such challenges, and therefore there are opportunities to develop new approaches. It is likely that the “Ukrainian” cases will become precedents and will be the ones that will be referred to in arbitrations and courts by future generations.

Yuliya Atamanova, Partner, Head of International arbitration LCF Law Group, and Polina Bitiuk, Associate at LCF Law Group, for “Latifundist.com”