Energy, Metals and Softs

Trading houses will have their specialism, for example, the “ABCDs” (which now stands for ADM, Bunge, Cargill and Dreyfus) would focus on the agri market. Some other focus solely on energy. And some other ventured into the multi-commodities business (of course, Glencore has recently sold Viterra (who traded softs) to Bunge).

A common element of those diverse markets is English law. For a variety of reasons, including, competent and independent judiciary, stability of law, and strong maritime traditions, English law has become the prevalent governing law in many commodities markets.

The same does not quite apply to dispute resolution. Traditionally, the London High Court was the dominant venue, but many more modern contracts opt for arbitration, be it the LCIA or the LMAA. Of course, arbitration in Hong Kong, Singapore and Switzerland is also a popular choice.

In addition to governing law, international trade in commodities, irrespective of the market, is almost invariably conducted on Incoterms basis. However, it is not quite true that the market understanding of those terms is uniform. In some regions and in some trades, a contract expressed to be subject to a certain Incoterm basis may in fact be a different type of contract. For example, with reference to trade with China, some DAP contracts with delivery by rail should probably have been drafted as CPT contacts. Vice versa, for the softs trade, some CPT contracts should probably have been entered into as DAT contracts.

Naturally, the sale purchase agreements documenting the flow of commodities in each main market category will be different. But within each market, there also sub-categories with significant differences.

Taking energy as an example, a contract for sale purchase of LNG will typically be significantly longer than that for the purchase of crude oil. An LNG trade willy typically be documented by a master sale agreement (MSA), where, among other things, the negotiation would very much focus on indemnification. By contract, for a crude oil sale marine trade a simpler sale-purchase contract may well be sufficient.

There will be difference within the metal & mining industry, too. For example, in a concentrates sale purchase contract, weighting, sampling and moisture determination (WSMD) clauses will be an important negotiation point. Given the nature of refined metals, there will be no need for such detailed and developed clauses dealing with testing (or, at least, clause of the same intent).

Standardisation of legal terms also developed different depending on the market.

For the crude oil market, general terms and conditions released by majors (major producer-traders) have become widespread, so that they are also used by (other) traders. And so GTCs developed by BP International may well also be incorporated by reference in contracts made by other traders.

In other markets, instead of using GTCs, industry associations have developed template agreements which have also received widespread use. Among others, so did SCoTA for coal and GAFTA for grain. Interesting, specifically for softs, the relevant templates have been heavily litigated and the language used in those agreement now often has a very specific meaning.