A Sales and Purchase Agreement (SPA) is the binding contract between a buyer and a seller that governs all aspects of a commodity transaction. It supersedes preliminary documents such as the LOI, ICPO, and FCO, and sets out the full legal and commercial framework.
Role of the SPA
The SPA is the definitive agreement that governs the transaction. It incorporates all agreed terms from prior correspondence and adds the legal protections, warranties, and operational procedures necessary for execution.
Key Clauses
A comprehensive SPA includes: product specification and quality standards, quantity and tolerance, pricing formula or fixed price, Incoterms, delivery schedule, payment terms and instrument, inspection procedures, force majeure, dispute resolution, and governing law.
Pricing Mechanisms
In commodity trading, pricing may be fixed or formula-based. Formula pricing typically references a recognized benchmark (e.g., Platts, Argus) plus or minus a premium or discount. The SPA must clearly define the benchmark, assessment window, and calculation methodology.
Execution and Performance
Once signed, the SPA governs the operational execution of the transaction, including vessel nomination, inspection, document exchange, and payment. Both parties must adhere strictly to the SPA terms to avoid disputes and ensure smooth settlement.