Worldwide: Trade Wars – Politics Creates Legal Headaches For Traders

By Hatty Sumption and Alexander George Oct 22 2019 / Mondaq

The growing trade war between China and a number of Western economies presents a unique set of challenges for commodities traders.

The present trade war began in 2018 with the US imposing tariffs, targeted at China, on manufactured products such as washing machines, and finished commodities such as steel and aluminium. China, naturally, responded in kind.

Since then the dispute has spiralled, with a second front opening up over allegations that Chinese mobile phone manufacturer, Huawei, could be used by the Chinese government to gain sensitive information. Australia banned Huawei from its 5G network rollout, citing the same security concerns, and in December 2018 Huawei’s CFO and vice-chairwoman was arrested, at the request of US authorities, while passing through a Canadian airport. The arrest was highly controversial and viewed rather differently on each side of the Pacific.

China, the largest exporter of rare earth metals, which are key to production of smart technology, has since threatened to restrict its exports to the US. In turn, the US, Canada, and Australia are seeking to invest more in mining and production in developing markets in an attempt to reduce China’s control over key minerals.

More recently, the latest round of tariffs imposed by the United States on finished goods has changed the dynamics of international trade as new countries move into the gaps left by Chinese goods and seek to mitigate any trade imbalance with the US by importing more US raw materials.

Problems for commodities traders

The most obvious and immediate consequence of high tariffs is non-performance by buyers who find that the sudden imposition of high tariffs makes a commodity from one origin significantly more expensive than the same commodity sourced elsewhere. There are, however, other legal issues that arise, even when the parties wish to perform.

The application of tariffs between the US and China risks a distortion in the market as a result of increasing costs. An example of this can be seen in the soyabean market. The increase in the cost of US soyabeans for Chinese importers caused an increase in Chinese demand for Canadian canola. Canadian canola exports then also became embroiled in the dispute, with the Chinese authorities suspending licences for two major Canadian canola exporters. Chinese authorities justified this by alleging a prevalence of quality issues in recent canola imports, but the Canadian authorities disagreed with this assessment. It has been suggested that these measures may be retaliation for Canada’s role in the arrest of Huawei’s CFO. Whether or not this is correct, such events give rise to unexpected operational and legal difficulties for those who trade in the commodities that are caught in the cross-fire.

If nothing else, the risk of such measures being imposed causes considerable uncertainty about the parties’ ability to perform contracts for the sale of goods as they expected and intended. The sort of issues we have seen, and that traders should anticipate at the contract drafting stage, include questions of liability for delay, title and risk, cargo damage and – in some cases – force majeure.


An area of considerable increased risk relates to shipping delays and congestion at ports. In January 2019, for example, when China instructed customs authorities to “control” the import of Australian coal, this led to delays in obtaining customs clearance, and long waits for discharging at Chinese ports. The Chinese authorities stressed the controls were in response to alleged pollution concerns, but critics accused them of retaliation over Australia’s Huawei ban.

For the parties to the supply contracts and shipping contracts, the terms allocating liability for such delays may well not have been designed to cover such circumstances. It would be usual for the buyer under a C&F contract to be responsible for discharge port delays – but where the cause of such delay is alleged to be defects in the seller’s cargo, the position is much less certain, especially if the allegations of defects are thought to be politically motivated and are not, in fact, being made by the buyer at all.

Even less clear is the position where the discharge of the cargo has not simply been “controlled” or slowed down but has been prohibited as a result of a change of law, as in the case of the Canadian canola. In such circumstances, who is liable for the ensuing losses: is the seller excused non-performance? If the prohibition is implemented before the vessel is loaded, questions will arise as to the seller’s obligation to source an alternative cargo. Whether the contract either requires or permits the seller to do so, will therefore be crucial. If the description of the goods is too specific, it may be that the contract is frustrated, or impossible.

The position is more complicated still if the change in law happens during the voyage. Where a cargo is lawful when loaded, but becomes unlawful during the voyage, whose problem is it? If title and risk have passed and all the documents are in order before the import of the cargo becomes unlawful, has the buyer failed in its obligation to secure an import licence, or has the seller tried to deliver a non-contractual cargo? What orders can the seller/charterer give to the ship if the goods are no longer lawful at the discharge port? These are all difficult questions that will be easier to address if some thought is given, at the contract drafting stage, to the potential practical and operational consequences of such events.

The reality is that in these situations, the parties are likely to have to find a way to co-operate to resolve the practical problem, potentially by unwinding the contract and sending the vessel elsewhere – that means not only the buyer and seller but also the shipowner. If the seller wants to retain control over what happens, it will need to have addressed these issues in its sale and shipping contracts by means of provisions allowing title to revert and changes of destination for the vessel.

Cargo damage

Delays, increased costs and potential abrupt changes in customs policies lead to the risk of inbound cargoes self-heating and/or deteriorating on vessels. Liability for cargo damage in this scenario is also a complex area. Questions of the passing of title and will be important, but there will also be questions about whose breach caused the delay and, therefore, the deterioration. This is not simply a matter of who is liable under the sale contract and the related issues described above. There will also be issues arising under the charterparty and the bill of lading – was all or part of the deterioration due to inadequate care of the cargo by the vessel, in these difficult circumstances? What instructions were given to the vessel? In some cases, getting an independent surveyor on board to assess the condition of the cargo and advise will be essential.

How can traders reduce their risk?

Contractual allocation of risk

A good way to counter the risk of uncertainty is to expressly allocate risk in the sales contract. This includes risks that have always been considered, such as liability for demurrage if cargo is on a vessel caught up in port congestion, and the question of when risk in the cargo passes if it deteriorates whilst detained on the vessel. However, it also means addressing the risks that are more peculiar to the current economic climate – those that arise when there is a change of law in the country of either the loadport or the discharge port, or sometimes, not even a change of law, but a change of policy or attitude on the part of governmental authorities. These last events are likely to present considerable evidential difficulties and, therefore, some mechanism for demonstrating such a change of attitude, is likely to be required. Those in the strongest negotiating position may be able to insist on a self-certification mechanism.

Force majeure

Traders, particularly those selling on delivered terms, should carefully consider the definition of force majeure in their sales contracts, and, if it suits them to do so, amend it as necessary to include a situation where performance of the contract becomes significantly more onerous – for example, the delays in importing coal, the significantly smaller pool of suppliers from which Canadian canola can be sourced, and the risk of sudden changes in policy or law.

Quality clauses

China’s action against exporters of Canadian canola was said to be based on concerns as to the quality/condition of certain cargoes of Canadian origin, which was vehemently disputed by the Canadian Food Inspection Association. Where there is a risk of a politically motivated decision by the authorities in the country of export or in the country of import, it may be helpful to have a final and binding quality clause in the contract, assessed by an independent surveyor as appropriate. This can reduce the risk of a spurious quality claim, based on a biased customs inspection, but will only address the position as between buyer and seller. It will not solve the practical problem of what to do with a cargo that the discharge port authorities simply will not permit to discharge

Trading with new markets: further considerations

Market distortion and attempts to diversify supply by Western governments can bring with it opportunities to import and export from unfamiliar markets.

It may be necessary to take local law advice, as regulations may vary significantly. This is particularly true for environmental regulations, which can carry criminal sanctions for breach in some jurisdictions.

It is also important to note that the UK’s Bribery Act 2010 has extraterritorial application for anyone with a close connection with the UK. Care should be taken to avoid inadvertently committing an offence under the Bribery Act 2010 in unfamiliar, smaller ports or jurisdictions.

Increased exports from certain countries might also lead to greater scrutiny of local regulations, potentially making them subject to change. Keeping up to date with evolving local laws is therefore important, and it may be useful to think about including a “Change of Law” clause in the agreement, even where the new trading jurisdiction is not a direct participant in the trade war, in order to allocate the risk of local regulations becoming burdensome during the course of the contract. Some of the market distortions caused by the present trade war have given rise to local problems that may lead to the imposition of further local regulations. For example, the Chinese importers’ switch from US to Brazilian soyabeans, left the local consumers and local crushing facilities short of product. There is always a risk of protectionist measures being taken by new markets that have been taken by surprise in the sudden uptick in exports.


In these uncertain times it will not be possible to anticipate every possible consequence of the growing trade war. However, we can certainly look at what has happened over the past year or so and identify the contractual provisions that might need tightening up. The clauses dealing with delay, title and risk, and force majeure are certainly a good place to start. The Charterparty clauses may also need some attention to ensure that a C&F seller is able to respond flexibly to an unexpected and politically motivated change of circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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