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Could supply and demand pressures lead to an increase in LNG sale and purchase disputes?

Last week it was reported that global LNG supplies are at their limit.

However, global demand for LNG continues to grow, in particular in Europe which is experiencing a perfect storm of high seasonal demand, low stocks and political uncertainty in respect of pipeline gas deliveries from Russia. As a result, commentators are predicting fierce competition for cargoes globally and a surge in European gas prices.

Could this mean an increase in LNG sale and purchase disputes during 2022? Potentially, yes.

For sellers, there may be a temptation to scrutinize sale and purchase contracts for lawful means of avoiding the delivery in order to divert the cargo to new buyer at an improved price. For example, are there grounds to avoid the cargo on the basis of force majeure, an alleged buyer default (even a minor one), or the exercise of rights of relating to a change in the buyer’s corporate or financial position (for example, a ‘change of control’ or ‘material adverse change’ clause)?

It has been argued that this temptation to seek out rights of cancellation or termination is greater in LNG than in other commodity markets since failure to deliver liabilities are frequently capped at a percentage of the quantity not delivered multiplied by the (perhaps much lower) contract price. Therefore, even if the seller’s actions are found to have been unlawful, the price achieved on the replacement sale may exceed the seller’s liability to its original buyer. 

For affected buyers, the stakes are high. Missed cargoes need to be replaced, perhaps at short notice and almost certainly at a much higher cost. In this context, attempts by sellers to exercise rights of cancellation or termination are likely to be subject to close scrutiny and challenge.  For the same reason, disagreements which might once have been settled at a discount in order to avoid the time and expense of formal proceedings may be more likely to be pursued at a legal level, perhaps all the way to a court or arbitration tribunal.

Therefore, for so long as global LNG supplies remain stretched, we could see changes in the way rights under sale and purchase contracts are exercised and enforced and, potentially,  an increased willingness among buyers and sellers to enter into disputes and pursue them to a final conclusion.

the world's largest LNG exporters are already producing as much as they can of the gas that is super-cooled into a liquid form for transportation

Tags

lng, commoditytrading, commoditiestrading, sale of goods

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