COVID-19 and trade in agricultural commodities & commodity arbitration: Ukraine

The COVID-19 outbreak has already affected many legal industries in Ukraine. This post is a brief reflection on those changes in the field of trade in agricultural commodities and commodity arbitration as seen presently as of 6 May 2020 and those dynamics which have already emerged under the circumstances. The post, however, does not aim to provide an exhaustive picture of the entire effect of the pandemic as the situation continues to develop and new factors may dramatically impact the analysis. While there are no grounds now to speculate on possible restrictions on export, it shall be noted, however, that state interventions and regulatory measures, if and when they take place, may critically affect the local market as well as the number and nature of subsequent arbitration disputes.

When we talk about trade in agrarian commodities and commodity arbitration in the Ukrainian context, we talk primarily about the export of commodities like grains, fats and oils and oilseeds. Ukraine is a well-known and significant agricultural exporter. Many of the contracts featuring this trade are done on the basis of standard contract forms prepared by the Grain and Feed Trade Association (GAFTA) and Federation of Oils, Seeds and Fats Associations (FOSFA) in London. These standard contracts forms reflect the peculiarity of trade usages and regulation in the region, and are typically subjected to English law as the governing law. In terms of dispute resolution, both associations, GAFTA and FOSFA, offer their facilities. It is not entirely infrequent that other arbitral institutes, including the International Commercial Arbitration Court at the Chamber of Commerce and Industry of Ukraine, appear in contracts on export of agrarian commodities as well.

The high volatility of the agrarian commodities market often trigger disputes arising out of commodities originating from Ukraine. Accordingly, what we see at present is not something that’s unusual or incomprehensible. Rather predictably, the ongoing lockdown and uncertainty which surrounds COVID-19 are causing disruptions of supply chain. The patchwork of consequences in relation to existing contracts includes the following:

• contractual amendments taking place (including extension of delivery dates, amendments of terms relating to price and payment, etc.);
• defaults being announced (a declaration of default leads to a contract’s termination and essentially signifies that a defaulter has failed to fulfill its contractual undertakings);
• washout being negotiated and concluded (a washout is a settlement resulting in payment of the difference between contract price and the market price instead of the physical delivery of the goods);
• arbitration proceedings being already initiated in cases where no alternative solution has been found.

It appears that some medium-size and small traders operating on the Ukrainian market have already assembled what can be referred to as a ‘critical mass’ of defaults, and it remains to be seen how they will survive. The fastest and most determined in arbitration may get all, whereas those who will wait will receive little, if anything. We also see quite a number of successful renegotiations of contractual arrangements and washouts. In overall terms, the market seems to be entering a stabilizing curve and it remains to be seen how the situation will develop further and whether another wave of contractual disruptions will follow.

In relation to newly-negotiated contracts, we see a more careful attitude towards provisions on payment and prevention even between long-term partners. Insecurity has an effect on relationships without exceptions. Parties are more careful about the timing and conditions for payment as well as circumstances preventing performance.

As of now, the COVID-19 outbreak has already lead, and will undoubtedly continue to lead, to a rise in the number of requests to external lawyers in relation to contractual terms and disputes.  Lawyers able to bring value, whether in drafting of contracts, or in negotiations and arbitration, will be the biggest winners.

 

By Yuliya Chernykh, of counsel at ARBITRADE

Posted in Covid-19 Guidance