Palm oil ban and PORAM contracts in Indonesia

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Introduction

Indonesia’s month-long thermal coal export ban in January 2022 to meet domestic market demands; the Venezuelan oil strike of 2002-2003, which reduced Venezuelan exports to almost nothing for several months; and, the nationalization of Libyan oil assets in August 1973, which led oil companies to look to more distant producers in the Middle East for oil supplies.

To these crises that have shaken the trade of raw materials, we can now add the palm oil export ban imposed by Indonesia in 2022.

The ban on the world’s largest shipper of edible oils has raised concerns about global food prices, with palm oil ubiquitous in food products such as cooking oil, ice cream and pasta spreading. The ban also shocked global markets with the speed of its implementation and the breadth of its coverage.

This article will discuss the effect of the ban on parties who have contracted the standard form of the Association of Palm Oil Refiners Malaysia (“PORAM“)[1] contracts and the options available to them as a result of the ban.

Takeaway meals

Sellers in PORAM contracts should consider whether their contracts include the “prohibition” or “force majeure“, which can be found in standard sales contracts abroad.

If these clauses are indeed included, sellers must take prompt action to comply with them so that their performance under the contract can be excused.

Prompt action in this manner will not only preserve the business relationship between the parties, but also (potentially) avoid substantial monetary claims by aggrieved buyers.

The ban and its effects

What ban?

Indonesia has banned the export of all palm oil derivatives, effective April 28, 2022. The ban, announced on April 27, 2022, prohibits the export of (among other things) crude palm oil, refined, bleached and deodorized (“RDB“) palm olein, palm oil effluent and waste cooking oil.

The ban is a reversal of an earlier decision to only ban the export of RBD palm olein.

Why?

The ban follows a sharp rise in cooking oil prices in Indonesia caused by disruptions resulting from the Russian invasion of Ukraine and lower corn and soybean production in South America in due to drought.

The Russian invasion (in particular) caused supply shortages of sunflower oil from Ukraine, driving up prices for palm oil, a key ingredient in cooking oil.

Escalating prices have caused Indonesia – ironically, the world’s largest producer of palm oil – difficulty in acquiring palm oil for domestic consumption. As a result, cooking oil prices in Indonesia have increased by 45% since February this year.

What is the effect?

The effect of the ban is that monthly supplies of 300,000 to 325,000 tonnes of palm oil (about 60% of global supply) will be withdrawn from world markets. The ban on RBD palm oil in particular will increase global prices for cooking oil and a host of products from snacks to ice cream.

When will this end?

Indonesia did not specify the duration of the ban, saying only that exports will be restored once domestic needs are met.

How can palm oil industry players cope with the ban?

Downstream players in Indonesia may be able to circumvent the government’s decision by withholding their stocks of refined oil to benefit from higher prices, if and when the government lifts the ban. According to industry experts, refined oil can be stored for up to eight months with no impact on quality.

This decision, however, could lead them to incur the wrath of the Indonesian government.

Obligations Under PORAM Contracts – An Overview

FCA contracts

In a Cost, insurance and freight (“CIF“) Contract, the seller can ship the goods himself or assign the goods already afloat to the sales contract. The choice of which method to adopt is generally up to the seller. Therefore, if one mode of performance becomes impossible, the contract is normally no charge because the seller is generally obliged to adopt the alternative.

Thus, for example, when the seller intends to ship the goods but cannot do so due to events beyond his control (war, export ban, strikes, etc.), he is in the obligation to procure the goods afloat. The seller is only released from performance when he is able to invoke illegality as a defense or to invoke force majeure or barring provisions (both explained below) to void the contract.[2]

The main duty of the CIF buyer is to pay the price of the goods and designate the destination of the goods (usually in a confirmation note).

FOB contracts

In a Free on board (“FOB“) Contract, it is up to the buyer to designate the vessel and to the seller to put the goods on board on behalf of the buyer. Sometimes the seller is asked to make the necessary shipping arrangements and take the bill of lading in his own name and obtain payment against the transfer of the invoice.

As in a CAF sale, the seller is only released from performance if he can invoke the illegality or invoke force majeure or prohibitory provisions.

The buyer’s primary obligation under an FOB contract is to actually name the vessel on which the seller is to place the goods and to pay the price for the goods.

The prohibition clause in PORAM contracts

General considerations

The public order consideration underlying a discharge (of the seller’s obligation under the contract) following the occurrence of an export ban is not the material impossibility of complying with the terms of the contract.

Instead, the underlying policy is that parties should not be induced to perform contracts affected by the occurrence of illegality (i.e. violation of Indonesian law). In other words, the contracting parties should be deprived of the incentive to perform an illegal act in a friendly foreign country.

The wording of the clause

Perhaps the most relevant clause in the PORAM contract to the current situation might be the clause titled “Prohibition“. This clause is included in all PORAM standard contracts for sales abroad.[3]

It says, in summary, that a ban on exports during the term of the contract by the government of the country of origin where the port of shipment is located is deemed by both parties to apply to the contract, and to the extent where the prohibition prevents the execution of the contract, the contract is extended by 30 days.

The clause goes on to say that if shipment proves impossible even during the extended period, the contract (or any unperformed part of it) will be void.

The idea behind the clause seems to be that export bans in the palm oil industry are not unheard of, but a temporary ban of less than 30 days should not in itself be allowed to derail the contract.

Practical application of the clause

In concrete terms, sellers affected by the ban must first determine whether the standard clause remains applicable to their contract and has not been otherwise modified or shortened by the text of the contract (read as a whole) or by tailor-made clauses. clauses added to the contract or the context in which the contract was concluded.

Second, if the clause remains in force, it seems likely that the prohibition will be considered an export prohibition preventing performance of the contract. This is of course provided that one of the terms of the contract states that the palm oil must come from a source in Indonesia.

Third, sellers should notify buyers as soon as possible that they intend to avail themselves of the clause, giving reasons for doing so. Fourth, sellers must mention the expiry date of the 30-day extension.

Finally, at the end of the 30-day extension, sellers must reassess the situation to determine if the contract can be fulfilled or if it should be canceled.

If the prohibition clause cannot be invoked, sellers may attempt to argue that the prohibition constitutes a force majeure event (as understood in the force majeure clause[4]), and which also provides for a mechanism for terminating the contract. However, this mechanism varies greatly depending on the version of the PORAM contract adopted by the parties.

Conclusion

PORAM contracts seem well suited to deal with incidents related to export bans, which testifies to the foresight of the drafters of the contracts.

However, it is up to the sellers to ensure in due time that the provisions of the contract are complied with in order to benefit from the protection offered by the “prohibition” clause.

Overall, there is unfortunately little the parties can do to deal with the volatility of the palm oil trade, except perhaps to remind us that the next ice cream we buy could cost us a pretty penny. .

If you have any questions about the impact of the ban on PORAM contracts, please do not hesitate to contact the author of this update, Clive Navin Selvapandian, who is both a member of the Merchant Shipping Law Committee and Admiralty of the Malaysian Bar and Treasurer of the International Malaysian Society of Maritime Law.

Questions about maritime litigation can also be directed to John Rolan. Questions about ship financing can be directed to Por Chuei Ying and Evelyn Ch’ng.

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