The first (possibly most obvious) question buyers will examine is whether they are, in fact, under any contractual obligation to perform at all. In assessing whether the parties are bound contractually, it is necessary to consider the standard English law principles of offer and acceptance that apply to commodity contracts, as to any other contract subject to English law. However, in a classic spot deal where the speed of the market requires the parties to agree the main terms and leave details (some of which may be important) to be discussed and agreed later, the question of whether and precisely when the parties entered into a formal contract is often open to argument. It is not uncommon for parties seeking to escape contractual obligations to seek to take advantage of a perceived lack of clarity in the contract negotiation process. Such process is often conducted through brokers and between parties in different jurisdictions who may be communicating in a language in which they are not necessarily fluent.

The Commercial Court decision in Proton Energy Group SA v Orlen Lietuva highlights the principles to be applied in deciding whether a binding contract has been reached between traders. The disputed contract concerned the sale of crude oil mix. A rapid series of "quick fire" e-mail exchanges (common in the commodity trade) culminated in a one word e-mail from buyers to sellers stating: "confirmed". The buyers subsequently refused the cargo and did not open a letter of credit. The sellers argued that they were in repudiatory breach of contract and claimed damages.

The judge held that the question to be decided was whether the parties had agreed on all the terms they objectively regarded as essential for the formation of legally binding relations between them. The judge decided that there was a contract, having reviewed the various exchanges between the parties. The sellers had made a firm offer that the buyers had accepted with the word "confirmed". On the facts, the judge decided that this demonstrated an intention to be bound. Although there were continuing discussions, these only related to ancillary details left to further negotiation. An e-mail from the sellers stated that "all other contractual terms not indicated into the offer shall be discussed and mutually agreed between parties upon contractual negotiations". This further indicated an intention to be bound. The judge rejected the argument that this meant no contract had been agreed and contractual negotiations were still to come. The performance of the contract was required within strict time constraints (a vessel had to be nominated within days, with delivery taking place within a couple of weeks). The offer was made in such terms that acceptance was required the same day. The nature of the deal therefore required the parties to make a binding commitment immediately, even if details remained to be discussed and agreed later.

For a binding contract to exist, and to be enforced, the terms must be certain. Parties must ensure that their agreement is complete, does not lack essential terms and is otherwise not uncertain, vague or ambiguous. Where the parties intend to contract but leave ancillary details to be agreed at a future date (as often happens in the commodity trade), it is important to ensure that the agreement does not lack important or fundamental components as it will otherwise be considered incomplete and will only amount to an "agreement to agree". These agreements are usually held to be unenforceable, giving a buyer an easy way of exiting an unprofitable deal.

If a contract is not evidenced in writing, it will be necessary for the arbitrators or the court to review all the relevant exchanges between the parties. It will also usually be necessary to obtain detailed witness statements from the parties involved. In these circumstances, a buyer will do everything possible to argue that no contract was agreed, and could potentially allege that:

In a falling market, the seller is well advised to set out contractual terms unambiguously from the outset and to ensure that the counterparty has the necessary authority to sign on behalf of the company, so that the above arguments can be avoided or robustly rejected.

It is common for international trade contracts to contain clauses allowing suspension or termination on the occurrence of a force majeure event. Market price falls are occasionally cited as falling within such clauses, excusing non-performance. The position under English law is that price falls do not usually constitute a force majeure event. Price fluctuations are common in the commodity markets and therefore lack an essential characteristic intrinsic to force majeure, namely that the event must not be reasonably foreseeable at the time of contracting.

It is of obvious importance in international trade, particularly in the commodity trade, where goods are sold between parties on opposite sides of the world and often sold in transit before a buyer can examine them, that the seller complies strictly with the obligation to ship precisely the goods that they agreed to sell to the buyer.

To promote commercial certainty , contractual terms relating to the goods are viewed as fundamental to the contract so that their breach gives the buyer the option to reject the goods and terminate the contract.

English law implies three types of conditions into all sale contracts:

It is common place in the commodity trade for the parties to agree allowances, margins or price adjustments without which the seller would otherwise be in breach of contract. It will not usually be possible for a buyer to terminate a contract where such margins or adjustments apply. The parties, by including the margin, will usually be taken to have agreed that the relevant clause is not to be treated as a condition of the contract. This restriction can lead to a buyer seeking to categorise a breach with respect to quality as a breach of contractual description (a condition that gives rise to the right to terminate).

Commodity contracts invariably provide that the price is payable on sight of an inspection certificate issued at shipment by an independent inspection agency. Where payment is made by letter of credit, these certificates are usually tendered by the seller to the buyer's bank before payment. The contract often makes these certificates final and binding on the parties. The buyer has assurance that the goods shipped accord with the contract. The seller has protection against a buyer subsequently alleging that the goods were defective. A valid certificate that the goods meet the contractual specification is conclusive evidence that the seller has complied with its obligations.

The options for a buyer seeking to avoid a certificate final clause are limited. It is important a seller ensures that any contractually agreed testing procedures are adopted by the inspection agency; otherwise the use of incorrect testing methods will mean that the certificate does not bind a buyer. Many commodity contracts incorporate specific sets of standard and approved rules relating to testing procedures that, if followed, will limit challenges from buyers.

However, if a certificate is said to be "final as to quality", it may not protect the seller if the goods supplied are of the wrong description. Much turns on the precise wording of the contractual clause and the certificate itself (see above, Contractual terms relating to the goods).

Buyers successfully challenged the certificate final issued on shipment in the Bow Cedar case, heard by FOSFA. Sellers sold 500 tonnes of groundnut oil FOB to the buyers. The contract provided: "weight and quality final at loading as per certificate of independent surveyors". The shipment was certified regarding samples of crude groundnut oil and given an analysis regarding acidity and moisture. On discharge, the shipment was in fact a mixture of groundnut oil and soybean oil. The buyer claimed damages, being the difference between the value of sound oil and the sale price of the mixture. The sellers relied on the certificates as being final and conclusive. The Commercial Court held that it was clear from the form and layout of the certificates that what was in fact being certified was the result of the chemical analysis undertaken and not the commodity being analysed. Even if the certificates did certify the commodity (which the judge thought they did not), the certificates were final as to the quality and not the identity of the commodity itself. The certificate was accordingly not binding on the buyers.

A seller has the basic duty to deliver the goods in accordance with the terms of the contract of sale (section 27, Sale of Goods Act). In international commercial sales, this duty is discharged through physical delivery of the goods. The buyer is also under a documentary duty to tender contractual documents. These duties are independent of each other. A buyer looking for a way out of the contract will carefully review the seller's conduct in respect of both obligations.

CIF contracts. The duties of a CIF seller are to ship (or procure the shipment of) goods in accordance with the contract or, where necessary, appropriate such goods to the contract (see below, Appropriation of goods to the contact). The seller has the obligation to procure or prepare shipping documents that must be tendered to the buyer, or as the buyer directs, in accordance with the contract. The CIF seller is under no duty to ensure physical delivery of the goods at destination, although he must not take active steps to prevent delivery.

Provisions on the timing of delivery in international trade contracts are of the essence. Unless the parties have agreed otherwise, failure by the seller to deliver within the delivery period will entitle the buyer to terminate the contract.

FOB contracts. In a basic FOB contract, the buyer is required to present a ship at the load port in time to enable it to complete loading within the stipulated period for delivery. Assuming the buyer has complied with their contractual obligations regarding nomination of the vessel, and subject to the vessel arriving within the time set out in the contract, the seller must load the complete cargo before the end of the delivery period. Alternatively, the contract may provide for loading to be at the buyer's option, which in practice usually requires the seller to have the cargo ready for loading immediately on the vessel's arrival at the load port.

A failure by the seller to load the complete cargo within the delive ry period (or to have the cargo ready for loading on the vessel's arrival) may provide the buyer with grounds to reject the delivery and terminate the contract.

In CIF contracts, buyers often overlook or misapply provisions relating to a laycan period (that is, a period of time within which the vessel should arrive at the load port, ready to load). A laycan period must be distinguished from a shipment period (see SHV Gas Supply & Trading SAS v Naftomar Shipping & Trading Co Ltd [2006] 1 LLR 163). In the case of delay by the seller, subject to the precise wording of the contract, damages in the form of demurrage may be recoverable, whereas termination of the contract is unlikely to be available to the buyer.

Buyers on CIF terms must therefore exercise caution when declaring sellers in default for late shipment. Many commodity contracts provide sellers with an automatic right to serve notice of extension of the shipment period against deductions to the purchase price. For example, clause 10 of FOSFA Contract 11 provides as follows:

"When the contract shipment period does not exceed 31 days the period of shipment can, at the request of the shipper, be extended by an additional period not exceeding 8 days, provided notice is given to the Buyer by any means of rapid written communication, of his intention to claim such extension not later than the first business day following the last day of the original contract shipment period. Successive Buyers must pass on this notification with due despatch. The Seller need not state the number of additional days claimed, but the contract price shall be reduced as follows by: ½% for 1, 2, 3 or 4 days, 1% for 5 or 6 days, 1 ½% for 7 or 8 days. If the Seller requests an extension and fails to ship within the 8 days, the original contract shipment period shall be considered to have been extended by 8 days and the contract price reduced by 1 ½%."

If the buyer seeks to terminate the contract for late delivery before the seller exercises any right to serve notice to extend the shipment period, then the buyer will be in repudiatory breach of contract.

CIF contracts require a seller to:

These basic obligations are invariably supplemented by specific terms that require the seller to provide additional details to enable the buyer to ensure that arrangements are in place to receive the goods at the port of discharge.

A seller will usually be required to provide notice of nomination of the vessel that is to undertake the carriage. For example, under GAFTA Contract No. 100 (GAFTA 100) (clause 9), the seller must nominate the intended carrying vessel to the buyers "at a date agreed between the parties but in any event prior to the commencement of loading".

If the contract specifies a date or time by which the notice of nomination must be given, it is well established that this is to be treated as a condition of the contract. It follows that if the seller is late in giving the notice of nomination, the buyer will be entitled to reject that nomination and will not be obliged to accept the delivery.

The seller is generally entitled to remedy a non-compliant nomination by making a further nomination, provided that the second notice is given within the time specified in the contract. Clause 9(b) of GAFTA 100 provides, "Sellers are entitled to substitute the nomination(s) provided that the substituting vessel (s) complies with the terms of this clause."

CIF commodity contracts require the seller to appropriate goods to the specific contract with the buyer. This is done by way of a formal notice of appropriation served on the buyer. Such notices require identification of the vessel in addition to the approximate quantity of goods loaded. The date of the bill of lading and port of shipment may also be required.

A notice of appropriation must be served on the buyers within a time limit specified in the contract. The appropriation clause of GAFTA 100 (clause 11) stipulates that notice must be served "within 10 consecutive days from the date of the bill(s) of lading". A seller who fails to provide notice of appropriation within the relevant period will be in breach, entitling the buyer to terminate the contract. A buyer wishing to reject the notice must do so as soon as possible after receipt, by providing written notice to the seller.

A valid notice of appropriation cannot be withdrawn by the seller. However, a defective notice can be rectified, but only if the contractual time limit for serving the notice has not expired. Again, buyers must exercise caution. Purporting to terminate before the relevant time for appropriation has expired and before the seller has exercised any right to cure the defective notice may be a repudiatory breach.