Five common errors in trading transactions and how to avoid them

Commodity trades are often fast paced and driven by the commercial considerations of closing a deal. There may be no scope for detailed review of the legal terms and instead, parties rely on standard terms and conditions (GTCs). This helps to reduce the risk of a dispute, but it does not fully eliminate it. Below we have identified some of the common errors made at the time of concluding a deal that have led to disputes in the English courts and how to avoid them.

1. There is a risk of uncertainty as to when the contract is concluded and on what terms

Commodity trades are often concluded via a mix of verbal and written negotiations and evidenced in email exchanges between traders. At times, it can be difficult to identify when exactly a contract has been formed.

In a dispute¹ arising from a contamination claim in respect of a cargo of crude oil, BP Oil International Limited (BPOI) and Glencore Energy UK Limited (Glencore) exchanged a series of at least eight emails from 1 April to 8 April 2019, negotiating various terms. The Court carefully considered each of the communications and found that a contract had been formed on 2 April 2019, during the early stages of negotiations. This meant that subsequent exchanges could only be considered in the context of attempted variation of that contract and, on the facts, no such variation was agreed. The Court found that “this was not the original intention of the parties, this is nevertheless the result of the subsequent exchanges given that no subsequent agreement was reached.“

It is important to make sure that the parties are clear as to when a contract is agreed because this will affect the nature and effect of subsequent negotiations.   

2. Can silence ever amount to acceptance of the counterparty’s terms? 

Typically, as a matter of English law, an offer cannot be accepted by silence. Nevertheless, remaining silent can be a risky strategy. This is because whilst an offer cannot be accepted by silence, it can be accepted by conduct, for example by commencement of performance.

In the same dispute between BPOI and Glencore², the Court considered the “last shot” doctrine. (This provides that where counteroffers are exchanged and a contract results, it will be on the terms of the final offer in the series. If you remain silent in response to a counteroffer and a contract then comes into effect, for example by conduct, the terms of that counteroffer may apply under the “last shot” doctrine.) The Court accepted that carefully worded reservations during contract negotiations can prevent unwanted terms being included in the contract. It held that the “last shot” doctrine was expressly displaced by BPOI’s inclusion of this statement in one of its emails:

“only terms which have been expressly agreed by both parties, at the time of trade or subsequently, shall be binding for the agreement. We hereby reject any proposed amendments unless expressly agreed by us in writing. Neither failure or delay in responding, nor performance of the agreement, shall constitute acceptance to any terms which have not been expressly agreed between the parties.”

The Court found that the effect of this wording was to prevent an agreement being reached by the parties on certain terms. Including wording of this nature may help to displace your counterparty’s “last shot” – but it may also result in no agreement being formed at all.

Clarity is always preferable; rather than remaining silent, make sure you agree the terms of your contract expressly, to avoid unwanted terms being included or a finding that no contract was formed at all.

HFW acted for BPOI in this case.

3. Check for any inconsistencies between recaps and GTCs

Trading transactions are often evidenced by a recap sent from one party to the other. Such recaps tend to incorporate a set of GTCs that form part of the deal. As a matter of English law, a recap which contains a set of specially negotiated terms agreed between the parties would typically prevail over GTCs in case of an inconsistency between the two. However, a question as to what amounts to an inconsistency may not be straightforward.

In one case³, a recap for the sale of fuel oil provided for the results of quality and quantity inspections to be “binding on parties save fraud or manifest error.” At the same time, the relevant GTCs provided that certificates of quality and quantity “shall, except in cases of manifest error of fraud, be conclusive and binding on both parties for invoicing purposes… but without prejudice to the rights of either party to make any claim…“

At first instance, the Court read the recap and GTCs together, so that the certificates were binding for invoicing purposes only and did not prevent the buyer from making a quality claim. The Court of Appeal overturned that decision, holding that the terms were inconsistent with each other. On this basis, the terms of the recap prevailed so that the buyer was not able to pursue its quality claim.

In relation to the key terms of your contract, pay particular attention to expressly negotiated terms. 

HFW acted for Tintrade Limited.

4. Exercise care when leaving terms to be agreed by future negotiations

Long term sale contracts tend to be subject to a longer negotiation process and result in a bespoke sale contract. In such cases, parties sometimes opt to leave the negotiation of certain specific terms to a later stage by adopting clauses that envisage they will agree these terms at some point in the future.

The Court considered the effect of such clauses in KSY Juice Blends UK Limited v Citrosuco GMBH [2024] EWHC 2098 (Comm). In this case, KSY Juice Blends UK Limited (KSY) sold Citrosuco GMBH(Citrosuco) orange pulp wash to be delivered on the basis of 1,200mt per year from 2019 – 2021. The parties fixed the price for the first 400mt per year and left the price of further 800mt to be agreed at a later date. Citrosuco paid for 400mt but refused to take delivery of the remaining 800mt. KSY claimed about Euro 4.8 million as a claim for contract price or, alternatively, damages. The Court dismissed KSY’s claims because the term whereby the price for the remaining 800mt was left to be determined at a later stage was found to be a mere agreement to agree and therefore unenforceable under English law. 

Try to ensure that any term which contemplates future negotiation is sufficiently certain to avoid it being a mere “agreement to agree.”

5. Use phrase “subject to” in the right context

Whilst more typically seen in the charterparty context, trading transactions can also be finalised on a “subject to” basis in circumstances where deals are near agreement but, for example, may require internal approval first.

In the shipping context, in DHL Project & Chartering Limited v Gemini Ocean Shipping Co Limited (“The Newcastle Express”) [2022] EWCA Civ 1555 the Court confirmed that typically, the effect of the phrase “subject to” in charterparty negotiations is that no binding contract is concluded until “subjects” are lifted. It quoted examples of terms which have been held to mean that there was no intent to form a contract, such as “subject to details“, “subject to board approval” and “subject to stem.“

These general principles also apply to trading transactions. However, depending on the precise nature of the negotiations, it may be possible to distinguish a genuine “pre-condition” which prevents a binding contract from being concluded from a “performance condition”, which does not stop the contract coming into being but means that performance “does not have to be rendered if the subject is not satisfied for reasons other than a breach by one of the parties”⁴.

Parties to trading transactions should use “subject to” wording carefully so as to achieve the intended outcome.

HFW acted for Gemini Ocean Shipping Co Limited.

HFW Comment

Clarity is always preferable and with careful drafting, most common errors and uncertainties can be avoided.  For key clauses, we recommend careful consideration of GTCs to ensure they achieve the desired result.  If not, expressly negotiated terms should be used. When negotiating the terms, it is important to keep track of the exchanges and to make sure that the parties are clear on what has been agreed before commencing performance.

Research conducted by Nina Armangue i Jubert, Trainee Solicitor.

Footnotes

1. BP Oil International Limited v Glencore Energy UK Limited [2022] EWHC 499 (Comm).
2. BP Oil International Limited v Glencore Energy UK Limited [2022] EWHC 499 (Comm).
3. Septo Trading Inc v Tintrade Limited [2021] EWCA Civ 718].
4. Judgment paragraph 34.