Challenge Jurisdiction of GAFTA Arbitral Tribunal under s.67 of the Arbitration Act 1996

Bizar Male

Cecilia Xu Lindsey practises in a wide spectrum of Commercial and Chancery areas in both dispute resolution and advice, with an emphasis on Commercial Law (contract, sale of goods, ecommerce, sports law), Company Law, Fraud and Economic Crimes, Financial Services and Banking Law, Insurance/Reinsurance, and International Law (international trade, FDI and investment treaty). She also acts as Counsel in arbitrations, and accepts appointments as Arbitrator. She is fluent at native level in written and oral Chinese Mandarin.

Background

The author Cecilia Xu Lindsey provides analysis of a recent English High Court case law relating to a matter of GAFTA arbitration, based on her experience of having acted as arbitration counsel under GAFTA arbitration rules.

The dispute between Black Sea Commodities Ltd (Claimant Seller) and Lemarc Agromond PTE Ltd (Defendant Buyer) arose from a sale of a consignment of Ukrainian corn FOB Odessa in March 2018. The market was volatile in the relevant times of this trade.

The parties’ dispute had been arbitrated by a GAFTA arbitral tribunal of three arbitrators – Messrs Burneski, Lucas and Sipos. An award dated 14 April 2020 was given in favour of the Defendant on jurisdiction and liability, followed by a second award on quantum dated 8 July 2020.

The Claimant subsequently made an application to the English High Court under s.67 of the UK’s Arbitration Act 1996 (the 1996 Act) to challenge the GAFTA tribunal’s jurisdiction and the Award dated 14 April 2020.

In this case, the English court was asked to decide whether there was a binding agreement for arbitration between the parties.

The author’s note: s.67 provides ground for challenge of an award as to tribunal’s substantive jurisdiction (subsection (1) (a)). On such an application, the English court may by order confirm (subsection (3) (a)), vary ((3) (b)), or set aside the award in whole or in part ((3) (c)).

Brief facts

The parties engaged a broker in this trade to carry out exchange of communications between them. Aspects of agency or authority were not disputed in this case.

There was no prior dealing between the parties.

After 9 March 2018, the parties negotiated a number of terms in the draft conditions (including the GAFTA terms which covered the arbitration clause) sent by the broker. On 14 March, the Defendant sent to the broker the signed draft, which was not accepted by the Claimant.

The Claimant submitted that there was no arbitration agreement between the parties. It also submitted that if (contrary to their contention) there had been a binding contract of sale on 9 March (as found by GAFTA Arbitrators), the contract did not contain an arbitration clause or a GAFTA arbitration clause, despite that the Claimant’s broker sent on 12 March 2018 to the Defendant draft conditions which included a GAFTA arbitration clause. The Claimant further submitted that the conditions were never agreed and that there was no consensus ad idem by virtue of the subsequent exchanges of the draft conditions until 14 March 2018 when negotiations broke down and the Claimant pulled out.

The Defendant submitted that there had been a binding sale contract on 9 March 2018 which was then varied by the parties’ subsequent exchanges, including the parties’ agreement to a GAFTA arbitration clause, so that there was a binding arbitration agreement by virtual of variation of the sale contract or as an independent arbitration agreement.

In arbitration, GAFTA arbitral tribunal concluded that there was a valid contract of sale which included the GAFTA arbitration rules as referred to in the parties’ contract, so that the tribunal had jurisdiction.

What did the court find?

The court confirmed that there was sufficient agreement of essential terms of the contract between the parties by 9 March albeit some ancillary terms remained outstanding. The Judge expressed that how the GAFTA arbitrators reached their conclusion on the parties’ having included a GAFTA arbitration clause in the contract of slae lacked basis and direction.

The court held that if there was no binding agreement on 9 March then there was no subsequent consensus ad idem to an arbitration clause; and that if on 9 March there was a binding contract of sale, the GAFTA arbitration clause was not included as set out in the terms and this was not agreed then or by virtue of the parties’ subsequent exchange of draft conditions.

The court further found that after 9 March 2018, the Claimant gave an ultimatum of date which was not complied with by the Defendant so that the Claimant pulled out.

The court held that before a party can apply s.7 so as for this party to assert the existence of a valid arbitration agreement, there has to be an agreement of arbitration, as addressed by the House of Lords in May & Butcher v The King [1934] 2KB 17.

In respect of evidence, the court found that the Defendant’s further evidence supplied by Messrs Heston and Gurov failed to prove that GAFTA arbitration would have been incorporated in such a contract as contended as implied by custom/usage of the trade in the Ukrainian corn FOB Odessa; that such evidence did not have support from expert witness, other (independent) traders or documentation; that the Defendant did not submit such a case before the GAFTA tribunal’s arbitrators (who would have knowledge as to whether this was the custom/usage); and that such evidence was not sufficient but the whole case was an “afterthought”.

The court rejected the Defendant’s contentions that the arbitration clause in the draft conditions was as a term provided pursuant to GAFTA Contract No. 49 and that in the absence of prior dealing between the parties an arbitration agreement could be implied without reference to what was required by s.6 (2) of the 1996 Arbitration Act. The Claimant succeeded in its s.67 application.

What are the practical implications of this case?

For commercial parties, it is crucial to communicate clearly and keep written records of what terms have been agreed and what are not agreed. When the market was volatile, traders may take particularly unsparing action against each other to guard their profit margins. Such actions may see one party or the other breach any of the terms of their agreement – the contract of sale or purchase and/or the dispute resolution agreement including the arbitration agreement as was concerned in this case. Further, English contract law has strong feature of flexibility – it depends on specific facts of circumstances of the case. Obtaining counsel’s advice on uncertain matters will undoubtedly benefit trading companies in deciding on what actions would be available to take. When instructing counsel for arbitration, counsel’s practical experience and opinion are also indispensable for resolving the disputing party’s contention.

For arbitrators, their expertise and professionalism (including independence and impartiality) are showcased through the tribunal’s case management process and the arbitrator’s awards. Often arbitrators are independent practitioners; they should always be conscious of the issue of jurisdiction – without such authority, the entire arbitration process including the arbitral awards given by the arbitrators will flame the parties’ dispute, generate further costs and proceedings, and waste legal resources in a number of aspects, which will fundamentally challenge the effectiveness of arbitration to be adopted as a method for dispute resolution and 4 further question the professionalism and ethical standard of arbitrators in international arbitration.

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