In recent years, the number of liquefied natural gas (LNG) produced and imported in China has continued to increase significantly. In 2021, China surpassed Japan in the amount of LNG imported, becoming the world's largest LNG importer. As a major LNG importer, many import enterprises in China need to sign LNG purchase and sales agreements with overseas LNG exporters or sellers. Due to the characteristics of commodities, LNG purchase and sales agreements have formed a unique model and habit, but they may not be very familiar to Chinese companies newly entering this field. Gaopeng Law Firm has reviewed relevant LNG international sales contracts on behalf of relevant domestic companies. As a relevant attorney, this article, from the perspective of domestic buyers, provides a preliminary introduction to several typical terms and issues that need to be noted in purchase and sales agreements, in order to help Chinese enterprises facing similar cases better respond to such contractual and legal issues.

1、 Determination of purchase price

Due to the dynamic changes in LNG prices in the international market, which are different from the prices that are inevitably agreed upon in sales and purchase contracts, the contracting parties usually do not specify a fixed price in long-term agreements, but rather provide some mechanism for setting the price (such as a price calculation formula), or separately determine it at each shipment (such as agreed upon in the Confirmation Notice attached to the main agreement).
It should be noted that the composition of the purchase price varies depending on the delivery method used for each transaction. For example, in some commissioned procurement contracts, it is agreed that the delivery point of both parties is the connection between the flange coupling of the gas transmission pipeline of the LNG carrier and the flange coupling of the unloading pipeline of the terminal. In this case, the seller not only bears the cost of purchasing ship gas from upstream LNG suppliers, but also bears the costs incurred in customs declaration such as freight forwarding fees and testing fees. Therefore, the price calculation formula for this transaction is the purchase price of LNG ship gas plus customs declaration fees.

Some purchase and sales agreements only leave a space for filling in the price each time in the Confirmation Notice, without specifying the price determination mechanism or calculation formula, and are intended to determine the price according to the market. However, this type of agreement is usually accompanied by detailed agreements between the buyer and seller in other parts of the agreement on the cost of transportation, delivery, unloading, and other aspects, to clarify the cost sharing between the two parties.

Therefore, we suggest that if the purchase and sales agreement signed by both parties is relatively general and general, the price determination mechanism or price calculation formula should be specified in the purchase price agreement.

2、 Quantity difference adjustment mechanism

In the actual LNG trading market, the proportion of futures trading is high, while the proportion of spot trading has always been low. Therefore, the actual delivery of LNG may differ from the ordered quantity.

Currently, in LNG purchase and sales contracts, there are different protection and adjustment mechanisms for the seller and buyer regarding quantity differences in delivery:

(1) Buyer's "take or pay" mechanism

"Take or pay" in the LNG purchase and sales agreement refers to the fact that if the market changes and the user's gas consumption does not reach the relevant quantity, the payment must still be made at this quantity. The seller actually ensures a minimum transaction volume through this mechanism.

However, at the same time, the buyer can also enjoy a mechanism of "paid cancellation rights". That is, if the Buyer is unable to receive the LNG cargo from the Seller for some reason, the Buyer shall first notify the Seller in a timely manner and make reasonable efforts to reschedule the collection of LNG that the Buyer has not received, such as rescheduling the receiving window, receiving station, or seeking other buyers. At the same time, the buyer shall also bear the reasonable expenses actually incurred by the seller due to such rescheduling. This mechanism provides a certain degree of flexibility for the buyer to receive goods. Under certain conditions, if the downstream demand of the buyer shrinks, the buyer pays a certain compensation to the seller and cancels the receipt, which is much smaller than the loss caused by the inability to resell the goods after receipt.

(2) Seller's "take delivery without error" mechanism

The "take or pay without negotiation" clause provides a significant degree of assurance to the seller and plays a certain role in ensuring the stable supply of LNG by the seller. However, under the framework of a long-term agreement, the seller may still be slow to supply to the buyer due to changes in the LNG market price and other reasons. For the sake of fairness in the agreement and the interests of the buyer, a "take as supplied without error" clause is usually also agreed in the LNG purchase and sales agreement.

The so-called "take delivery without error" refers to requiring the seller to provide stable gas supply at the agreed price, quantity, and quality for a long time within the validity period of the purchase and sales agreement. When the LNG price is higher than the agreed price, gas must also be supplied at the agreed price. If the Seller fails to supply the Buyer's LNG goods as agreed, the Seller shall bear the reasonable costs and losses incurred by the Buyer in re searching for LNG gas sources, suppliers, and canceling downstream orders.

3、 Agreement on the quality of goods

In the text of the purchase and sales agreement or the attached Confirmation Notice, the specifications of LNG when it is converted to a gaseous state are generally agreed upon, including the calorific value, composition, quality, and whether it contains water, mercury, bacteria, or other toxic or harmful substances.
More importantly, the seller's quality notification obligation should be stipulated in the goods quality clause. For example, if FOB is used, the seller should notify the buyer of the quality of the LNG before loading begins. If the seller is unable to notify the buyer, it should also notify the buyer in a timely manner within a relatively short time after the completion of LNG loading; If the method of delivery at the port of destination (DES/DAT/DAP/DDP) is adopted, the seller should generally notify the buyer within a relatively short time after completing the transfer at the loading port.

At the same time, the buyer should also provide timely feedback on whether to accept the batch of goods after receiving the notice from the seller that the goods do not meet the specifications. "If the Buyer notifies the Seller in a timely manner that the goods can be received, both parties will receive and make payment as originally agreed, but the Seller is obligated to bear the costs and losses incurred by the Buyer in handling the non-conforming LNG.". "If the Buyer notifies the Seller in a timely manner that it does not accept the Goods, it shall be deemed that the Seller has failed to deliver the LNG Goods as agreed.". However, if the buyer fails to notify the seller whether to accept the goods in a timely manner (usually within 48 hours after receiving the notice), it shall be deemed that the buyer agrees to accept the batch of goods and shall receive and pay the goods as agreed. However, the Seller shall also bear the costs and losses incurred by the Buyer in disposing of unqualified LNG.
If LNG cargo that does not meet specifications is found during or after delivery, what should be done? The common handling method still requires that the party who discovers the problem promptly send a notice, and that the buyer promptly inform the seller whether to agree to receive the defective goods. "If the buyer agrees to receive or fails to notify the seller, it is generally deemed that the buyer agrees to receive, but the seller shall bear the additional costs and losses incurred by the buyer;"; If the Buyer refuses to accept, it shall be deemed that the Seller has not delivered the defective LNG cargo.

4、 Delivery window of goods

The unloading of LNG cargo ships must rely on a dedicated LNG receiving station at the port. Currently, there are only over 20 ports with LNG terminals nationwide. With the increasing number of imported LNG, it is bound to lead to an increase in the workload of LNG terminals and a shortened unloading window.
During the process of shipping LNG cargo, it is inevitable to encounter delays in the shipping schedule due to various reasons. Once the original window period is missed, it will lead to delayed delivery or change of the receiving port, which is bound to incur additional costs. Therefore, in a purchase and sales agreement involving delivery at the port of arrival, it is necessary to clearly stipulate the window period for the delivery of the goods, as well as the corresponding costs and losses to be borne if the window period is missed.

5、 Force Majeure

"Force majeure is a common agreed clause in maritime trade. In the context of the current global epidemic still at a high level and the domestic dynamic clearing policy has not changed, in particular, the occurrence of an epidemic at the loading or unloading port and the containment measures taken due to the epidemic should be included in the" force majeure "situation. It may be considered to agree in the corresponding clauses that if the loading and unloading operations cannot be completed due to force majeure,", The reporting obligations of both parties and the method of bearing additional costs.

6、 Dispute Resolution and Applicable Law

Due to the fact that imported LNG belongs to a foreign related goods sales transaction, the parties to the transaction may agree that a domestic or overseas judicial authority or arbitration institution shall be the dispute resolution institution, and may choose to apply foreign laws as the applicable law of the purchase and sales agreement.
The dispute resolution and applicable legal provisions in a contract seem to have the furthest relationship with the transaction itself, but they often best reflect the status and market power of the parties involved in the transaction. The strong party always chooses its own local dispute resolution institution and its own familiar laws, and the majority of them choose local arbitration institutions. However, the relatively weak party often finds it difficult to persuade the other party to change such choices, but it is also worried that the other party will gain some "advantages" or "care" by choosing a local dispute resolution institution.

Domestic buyers may attempt to recommend that the other party accept reputable arbitration institutions in China as dispute resolution institutions, such as the China International Trade Arbitration Commission, Beijing Arbitration Commission, etc. These arbitration institutions generally have arbitrators with different legal and linguistic backgrounds who are competent to hear cases involving foreign transaction disputes. In addition, if the other party is not willing to conduct dispute resolution within China, the Hong Kong International Arbitration Center in Hong Kong can be considered as the second option; Once again, consider arbitration institutions in places such as Singapore.

7、 Impact of international sanctions

After purchasing LNG goods, domestic LNG buyers can not only import them into the domestic market of China for sale, but also resell them to other countries. Currently, many Western countries have promulgated trade sanctions against other countries, entities, or individuals. In particular, after the Russia-Ukraine conflict, the United States and Europe imposed all-round trade and financial sanctions on Russia. If goods produced in a regulated country are resold to a sanctioned country, entity, or individual, it is highly likely to trigger sanctions against the reseller.

We have noted that in the recent international LNG purchase and sales agreement, a trade law compliance clause has been added, which states that purchased LNG must not be resold to sanctioned countries, entities, or individuals, and requires the buyer to submit to the seller a report on the resale of LNG goods to a third country and final delivery location information.

Many buyers' enterprises in China are not sensitive to which countries, regions, entities, or individuals are subject to sanctions in their sales activities, and there is a risk of inadvertently triggering sanctions. Therefore, domestic buyers can consider adding a requirement for the seller to assume the obligation of notification and provide advisory advice in such clauses, so that domestic buyers can promptly learn about the potential risks of resale trading partners.