08 12 Commodities Economic
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1 Facts S was the very well known Japanese brewing company which part owned a Chinese company (XS) to secure hop supplies for sale on the domestic and international markets. Another share holder was a consortium of Chinese farmers (FF). L was an English company who traded beer hops. In 2005, L and S made a series of forward contracts set out in nine purchase orders under which L purchased quantities of Marco Polo hop pellets and hop extract from S. In each case, the quantity was 26,712 kg alpha of Marco Polo hop extract at US$ 24 per kg alpha CIF UK port. These Marco Polo hops were usually harvested in August/ September, but hop harvests can be adversely affected by disease and pests and are difficult to predict. This can cause major problems with honouring forward contracts such as those between the L and S. This was all the more a problem here as the supply chain was strictly controlled by FF and it was known that the extraction facility used to convert these hops was unique in China and quite obviously L were very heavily dependant upon them. Harvest Problems Problems with the supply started in 2005 and continued owing to harvest problems; disease, closing down of the extraction facility for a substantial period, and the increase in international market price in hops. By early-mid 2008, the market price for the hops increased thirty times to 600 Euros per kg of alpha compared to a contract price of US$ 24 per kg. Further harvesting problems led S to make it clear to L that it would not deliver contractual quantity unless that quantity was reduced and it also stated that an increased price was required as well as terms that would involve L paying transport costs which reflected the increased price S was going to have to pay to XS. These terms were presented on a “take it or leave it” basis. L seemed to be in an invidious position. L had made onward sale contracts which they would only fulfil by a purchase from S or in the spot market which was now 20-30 times the contract price. L was not in a position to claim any damages or obtain any order for specific performance before L would face claims from its buyers which were potentially ruinous in both financial and reputational terms. Eventually a purchase order was revised and executed to reflect these revised terms but payment was never made on a final invoice. L alleged that its total losses were in the region of US$ 4.6 million and it refused to pay an outstanding invoice of approximately 1 million Euros. Against S’s claim for the invoice price, L alleged; (i) economic duress and wrongful intimidation and (ii) misrepresentation. Our interest related to the question of economic duress. Economic Duress The Court considered that had English law applied to the contracts L’s claim for economic duress based upon the case Kolmar Group AG v Traxpo Enterprises PVT Limited [2010] to LLR page 653, might have assisted L. The question here was whether English law applied at all as the contract contained no express reference to it. English or Japanese Law? The only alternative applicable law was Japanese, but if this applied the claim for the equivalent of economic duress under Japanese law would fail. The Court looked at Art 3 of the Rome Convention 1980 (incorporated into English law by The Contracts (Applicable Law) Act 1990) to consider whether English was chosen by the circumstances of the case. The English Court dismissed reliance by L on this and where L relied upon a specific circumstances Commodities in Focus Economic duress and the pitfalls of not applying English law August 2012 briefing note GUANGZHOU HONG KONG LONDON PARIS PIRAEUS SHANGHAI SINGAPORE Associated offices: ATHENS BUCHAREST JAKARTA KUWAIT The current economic climate leads to regular instances of commercial exploitation by one contracting party over another. The remedy of economic duress has been recognised in some recent English cases as providing redress under English law. However, the absence of English law can have serious consequences, as demonstrated by the decision in Sapporo Breweries v Lupofresh Limited.
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Economic Duress in Commodities Trade
Transcript of 08 12 Commodities Economic
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1
Facts
S was the very well known Japanese brewing company whichpart owned a Chinese company (XS) to secure hop supplies forsale on the domestic and international markets. Another shareholder was a consortium of Chinese farmers (FF). L was anEnglish company who traded beer hops. In 2005, L and S madea series of forward contracts set out in nine purchase ordersunder which L purchased quantities of Marco Polo hop pelletsand hop extract from S. In each case, the quantity was 26,712kg alpha of Marco Polo hop extract at US$ 24 per kg alphaCIF UK port.
These Marco Polo hops were usually harvested in August/September, but hop harvests can be adversely affected bydisease and pests and are difficult to predict. This can causemajor problems with honouring forward contracts such as thosebetween the L and S. This was all the more a problem here asthe supply chain was strictly controlled by FF and it was knownthat the extraction facility used to convert these hops wasunique in China and quite obviously L were very heavilydependant upon them.
Harvest Problems
Problems with the supply started in 2005 and continued owingto harvest problems; disease, closing down of the extractionfacility for a substantial period, and the increase in internationalmarket price in hops. By early-mid 2008, the market price forthe hops increased thirty times to 600 Euros per kg of alphacompared to a contract price of US$ 24 per kg. Furtherharvesting problems led S to make it clear to L that it would notdeliver contractual quantity unless that quantity was reducedand it also stated that an increased price was required as wellas terms that would involve L paying transport costs whichreflected the increased price S was going to have to pay to XS.These terms were presented on a take it or leave it basis. L
seemed to be in an invidious position. L had made onward salecontracts which they would only fulfil by a purchase from S or inthe spot market which was now 20-30 times the contract price.L was not in a position to claim any damages or obtain anyorder for specific performance before L would face claims fromits buyers which were potentially ruinous in both financial andreputational terms. Eventually a purchase order was revised andexecuted to reflect these revised terms but payment was nevermade on a final invoice. L alleged that its total losses were inthe region of US$ 4.6 million and it refused to pay anoutstanding invoice of approximately 1 million Euros. AgainstSs claim for the invoice price, L alleged; (i) economic duress andwrongful intimidation and (ii) misrepresentation. Our interestrelated to the question of economic duress.
Economic Duress
The Court considered that had English law applied to thecontracts Ls claim for economic duress based upon the caseKolmar Group AG v Traxpo Enterprises PVT Limited [2010] to LLRpage 653, might have assisted L.
The question here was whether English law applied at all as thecontract contained no express reference to it.
English or Japanese Law?
The only alternative applicable law was Japanese, but if thisapplied the claim for the equivalent of economic duress underJapanese law would fail.
The Court looked at Art 3 of the Rome Convention 1980(incorporated into English law by The Contracts (ApplicableLaw) Act 1990) to consider whether English was chosen by thecircumstances of the case. The English Court dismissed relianceby L on this and where L relied upon a specific circumstances
Commodities in Focus
Economic duress and the pitfalls of not applying English law
August 2012
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GUANGZHOU HONG KONG LONDON PARIS PIRAEUS SHANGHAI SINGAPORE
Associated offices: ATHENS BUCHAREST JAKARTA KUWAIT
The current economic climate leads to regular instances of commercial exploitation by onecontracting party over another. The remedy of economic duress has been recognised in some recentEnglish cases as providing redress under English law. However, the absence of English law can haveserious consequences, as demonstrated by the decision in Sapporo Breweries v Lupofresh Limited.
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2 Briefing Note August 2012 Stephenson Harwood
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suggesting that English law was chosen; (i) the purchase ordersbeing issued by L on its standard headed notepaper and werewritten in English, (ii) terms familiar in English law such CIF UKport or EX-Fubei were used, (iii) the fact that the alphaextract was to conform to US and EU food regulations, (iv)comments made by L in correspondence as to their views ofEnglish law and (v) the fact that the parties shook hands onthe deal in England.
In the absence of using Art 3 the Court looked to Art 4 of theRome Convention which, in the absence of being able to rely onArt 3, identified the law the country to which the contract ismost closely connected as the applicable law and in that case,there was a presumption that it is connected with the countrywhere the party who is effecting performance of the contracthas its habitual residence. Since the characteristic performanceof the contract was the sale and delivery of the hops by S to L.Whether or not the handover or delivery of the hops tookplace in either Fubei or at a United Kingdom port. That deliverywas by S and so Japanese law was held to apply.
Comment.
The lesson is clear to all parties trading internationally thatwherever possible they should ensure that there is an expressapplicable law clause or they feel satisfied that thecircumstances are such that under the Rome Convention 1980as applied in a particular jurisdiction the law it favours wouldbe treated as the applicable law. The latter, however, isuncertain and risks adverse consequences. Certainly in the caseof Sapporo v Lupofresh, the latters prospects of succeeding in aclaim for economic duress would have been vastly improved hadEnglish law been expressly chosen as the applicable law. Basedupon the first instance decision, that omission proved a veryexpensive one.
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