SECURITY OF SUPPLY: INSTABILITY AND LEGAL ISSUES

AUSTRALIAN GRAINS INDUSTRY CONFERENCE

11 MARCH 2015

Peter Murphy, Partner T: +852 3983 7700 Peter.Murphy@hfw.com

2015 – exchange rate and currency fluctuations?

Devaluation of Australian Dollar

AUD/USD

2015 - The new 'normal' and the oil price ?

Oil traders celebrate market rout

©Bloomberg Financial Times February 16, 2015 1:24 pm

Recent article published in The Australian on 19 December 2014. !

While many suggest that the Russian rouble crash and sliding oil price could threaten equity markets and risk currencies such as the Australian dollar, Australian farmers and agribusiness should be preparing themselves to take advantage of opportunities arising from falling oil prices and a lower exchange rate.

Oil price crash offers opportunities for us

Source: www.ft.com

Vessel Freight Rates - Panamax

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Vessel Freight Rates - Supramax

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Counter-party insolvency risk?

Situation GTA GAFTA

SELLER INSOLVENT ü ü BUYER INSOLVENT ü ü SHIPOWNER INSOLVENT û û

SHIPOWNER LOSES VESSEL û û

How to protect your position?

Defend against counterparty insolvency risk

§  "Automatic termination" mechanism:

"If at any time a Bankruptcy Event occurs in relation to either of them (the “Defaulting Party”), the other party (the “Non-Defaulting Party”) may by not more than 20 days’ notice to the Defaulting Party designate a close-out date in respect of all Transactions then outstanding between them on which the process set out in paragraph (b) shall occur [...].

(b) As of the close-out date

(i) all performance obligations of the parties under outstanding Transactions shall terminate

(ii) the Non- Defaulting Party shall promptly calculate its Loss in respect of each Transaction

(iii) the Losses so calculated shall be aggregated and netted to the greatest extent possible [...] and

(iv) the net resulting amount, if positive, shall be paid by the Defaulting Party to the Non-Defaulting Party within 3 days of the close-out date.

How to protect your position?

Defend against counterparty insolvency risk

"(c) A close-out date [...] shall occur automatically as of the time immediately before the start of a Bankruptcy Event [...]."

§  Aim is to effect a quick and clean break from an insolvent counterparty.

§  The clause on certain events applies automatically, rather than providing an option to terminate.

§  Drafted by HFW and tested by the Court, saving one client in excess of US$200m.

Import bans and price fluctuations

Natural News, June 2014

Force Majeure

§  A contractual provision which operates to: §  cancel the contract or to excuse performance of the contract; or §  suspend performance or allow more time for performance

if a specified event or events beyond a party's control occurs.

§  A party seeking to rely on a FM clause needs to show that: §  the FM event is covered by the clause and that the FM event has

prevented or delayed the performance of the contract;

§  delay or non-performance is due to circumstances beyond his control; §  FM event was not reasonably foreseeable at the time that the contract

was made; and §  that no reasonable means to avoid or mitigate the FM event(s) exist.

Price Majeure – General position

§  General principle is that a change of economic circumstances will not frustrate a contract even if the effect is that the contract becomes significantly more expensive for one party to perform than was anticipated at time of entry into contract.

§  Same position under majority of FM clauses.

§  There is a long line of cases in which courts have been unwilling to relieve parties from imprudent bargains.

§  Rationale - well known that freight and commodity markets fluctuate and traders take these risks.

§  To be covered, market movements etc would need to be specifically referred to as FM events.

Ukrainian Crisis – Commodity Prices

Institutionalinvestor.com , May 14

Force Majeure – Key points

§  General words are not sufficient to protect against a "price majeure" situation!

§  Do pay attention to the wording of any clause §  e.g. a supplier prefers "hindering supply" over "preventing delivery"

§  Tactical - Commercial considerations §  Be alert to the notice provisions in the contract. §  What do you have to do to comply, and by when? Is this feasible?

GTA – Force Majeure - Consequences

GTA FOB Contract No.1 Grain and Oilseeds in Bulk Clause 22: Strikes, Etc/Force Majeure §  Performance of the Seller's obligations suspended for duration of FM event.

§  Sellers must use best endeavours to minimise/remove effects of FM event.

§  If the FM situation continues for 30 days = Buyers have the right to extend the shipment period by a further 30 days.

§  If the FM situation continues after the expiry of the further 30 days = contract automatically terminated.

GTA Trade Rules Rule 21.3: Extension of Contract due to Force Majeure §  Unless otherwise agreed, a party invoking FM is entitled to a contract extension

of not more than 30 days from the end of the delivery period.

§  If after 30 days delivery is still prevented, the party not invoking FM has the option of cancelling the contract or agreeing a further extension of not more than 30 days.

Grain Trade Australia – Prohibition Clause

GTA FOB Contract No.1 Grain and Oilseeds in Bulk Clause 23: Prohibition

§  Applies to situations where there is an executive or legislative prohibition on export, or a blockade or hostilities restricting export.

§  Event will be deemed by both parties to prevent fulfillment of the contract.

§  To the extent of the restriction (total or partial) on fulfillment – the unfulfilled element of the contract will be extended 30 days beyond the end of the prohibition event.

§  If the prohibition event continues for more than 30 days after the expiry of the delivery period the contract, and any unfulfilled part, will be cancelled.

GAFTA - "Prevention of Shipment" clause "Event of Force Majeure" means

(a) prohibition of export or other executive or legislative act done by or on behalf of the government of the country of origin or of the territory where the port or ports named herein is/are situate, restricting export, whether partially or otherwise, or

(b) blockade, or

(c) acts of terrorism, or

(d) hostilities, or

(e) strike, lockout or combination or workmen, or

(f) riot or civil commotion, or

(g) breakdown of machinery, or

(h) fire, or

(i) ice, or

(j) Act of god, or

(k) unforeseeable and unavoidable impediments to transportation or navigation, or

(l) any other event comprehended in the term "force majeure"."

GAFTA - "Prevention of Shipment" clause

§  A new unified concept of 'Force Majeure' applying to all FOB, C&F and CIF GAFTA contracts entered into after 1 June 2014.

§  Contract will be suspended if a force majeure event ("FM Event") prevents the sellers from performing and adequate notice is served on the buyers.

§  GAFTA new clause expressly lists events such as prohibition on exports, fire, machinery breakdown and acts of terrorism.

§  Notice of the FM Event must be given:

§  within seven consecutive days of the occurrence; or §  not later than 21 consecutive days before commencement of the

shipment period, whichever is later.

Dispute Resolution

§  Know your options

§  GTA and GAFTA Clauses

§  Arbitration clause - reliable jurisdiction

§  Asia-pacific – Hong Kong, Singapore or Australia

§  Hong Kong

Insurance cover – trade credit risk

§  What is it? Protection against §  Non-payment due to commercial risks (insolvency of customer) §  Late payment (protracted default) of trade debts

§  Political risks – associated with exporting

§  Protecting balance sheet from impact of loss

§  Covers trade in goods and services does not cover individuals

Insurance cover – political risk

§  Two main types of policy §  Asset cover §  Trade-related cover

§  Asset cover may include: §  Confiscation – deprivation, nationalisation, creeping, expropriation,

forced abandonment and forced divestiture

§  Political violence – war on land and terrorism

§  Inability to convert or transfer currency

§  Trade-related cover may include: §  Events before shipment

§  Events after shipment §  Unfair calling of own performance bonds

Wheat export market – supply variability

0

5,000

10,000

15,000

20,000

Wheat Export variability over last 5 years in '000 mt

(high minus low export year)

Argentina Australia European Union Canada India Russia Ukraine

Your grain – It was … but is it now?

Mandatory Port Access Code. §  Competition and Consumer (Industry Code—Port Terminal Access

(Bulk Wheat)) Regulation 2014

§  From 30 September 2014, the Code requires port terminal operators to:

1.  meet basic transparency requirements; 2.  allocate available port terminal capacity equally to all exporters; and

3.  undertake a process for amendments to port loading protocols.

Mandatory Port Access Code - exemption

§  A port terminal service provider has the option to apply to the Australian Competition & Consumer Commission (ACCC) for an exemption from the new Code.

§  The new Code also permits the Minister for Agriculture to exempt a port terminal service provider that is a co-operative.

Mandatory Port Access Code – Exempt Port Terminal

§  Exempt Port Terminal service provider will not be subject to a number of Code provisions, including:

§  the non-discrimination requirement;

§  dispute resolution processes;

§  ACCC approval of capacity allocation systems; nor

§  certain reporting requirements.

Port terminal service providers in Australia

27

2008

CBH

Viterra (subsidiary of Glencore)

GrainCorp

Emerald

Port terminal service providers in Australia

28

2014

CBH

Viterra (subsidiary of Glencore)

GrainCorp

Emerald

Queensland Bulk Handling

Bunge

Newcastle Agri Terminal

Port terminal service providers in Australia

29

CBH

Viterra (subsidiary of Glencore)

GrainCorp

Emerald

Queensland Bulk Handling

Bunge

Newcastle Agri Terminal

Quatro

VicStock

Expected 2016

A busy year for Mr. Abbott…

ChAFTA 2015 – DFAT "Key Outcomes"

Source: DFAT.gov.au

ChAFTA 2015 – Grains

Elimination of: §  the 3 per cent tariff on barley and 2 per cent tariff on

sorghum on day one of ChAFTA; §  the 15 per cent tariff on cotton seeds over 4 years – exports

worth $75 million in 2012-13, and $36 million in 2013-14; §  the 10 per cent tariff on malt and wheat gluten in four years; §  tariffs which are currently up to 7 per cent on pulses within

four years.

§  ChAFTA is also designed to simplify investment between the two countries.

Lawyers for international commerce hfw.com

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