International Trade and Commodities Legal Update

October 2010
Contents
Introduction Trading
Seller under FOB contract liable for economic duress and tort of intimidation - Kolmar Group AG v Traxpo Enterprises Pvt Ltd
I N T E R N AT I O N A L T R A D E & C O M M O D I T I E S L E G A L U P D AT E

Application of pricing formula in event of postponed lifting and relevance of hedging position in assessing damages for failure to deliver cargo - Glencore Energy UK Ltd v Transworld Oil Ltd Interpretation of quality clause in naphtha contract, damages for breach and hedging issues - Choil Trading SA v Sahara Energy Resources Ltd
OCTOBER 2010

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Trade Finance
Implied obligation under Article 16(f) of UCP 600 to return rejected documents reasonably promptly - Fortis Bank S.A./NV and Stemcor UK Ltd v Indian Overseas Bank 7

Litigation and arbitration

Consequence of delay in pursuing appeal against GAFTA jurisdiction finding - Broda Agro Trade (Cyprus) Ltd v Alfred C Toepfer International GmbH Consequences of FOSFA sending Arbitration Award to partys previous address - Papas Olios JSC v (1) Grains & Fourrages SA and (2) FOSFA Ltd No extension of time for buyers to commence FOSFA arbitration under section 12 Arbitration Act 1996 - (1) SOS Corporacion Alimentaria SA (2) Mataluni Spa v Inerco Trade SA 8 10

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Shipping
Demurrage claim time-barred where full and correct documentation not submitted - AET Inc Ltd v Arcadia Petroleum Limited (Eagle Valencia) 13 16

Contacts

D U B A I | H A M B U R G | H O N G K O N G | L E H AV R E | L O N D O N | PA R I S | P I R A E U S | S H A N G H A I | S I N G A P O R E

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Introduction
We are delighted to introduce the second edition of our recently relaunched International Trade and Commodities Legal Update, particularly in view of the very positive response we have received to the first edition. Once again, the cases we have chosen to report on are those which we consider will be of commercial and practical interest to our clients. Two of the cases featuring in this Update, Glencore v Transworld and Choil v Sahara Energy, deal with quantification of damages for breach of oil sale contracts; both confirming that hedging losses/ gains may be taken into account in calculating the damages. Kolmar v Traxpo is worth noting because it is rare for the English courts to hold that there has been economic duress where the parties are both experienced commercial entities. The court held that the seller had overstepped the mark in trying to extract more from the buyers than they were entitled to under the contract when the market went against them. On the trade finance side, we report on the next stage of the litigation in Fortis Bank v IOB. In our February 2010 Update, we summarised Mr Justice Hamblens decision in relation to allegedly discrepant documents under letters of credit governed by UCP 600. The decision we deal with in this issue covers the same judges findings on the implied obligation under Article 16(f) of UCP 600 to return rejected documents reasonably promptly and the preclusion point under that provision. There have also been a number of cases recently involving appeals from commodity association arbitration awards to the High Court involving essentially procedural issues. Broda Agro Trade v Alfred Toepfer involved an appeal from a GAFTA arbitration award, Papas Olios and another v FOSFA and SOS Corporacion v Inerco Trade both involved appeals from FOSFA arbitration awards. Lessons to be learned from these cases might be said to instruct lawyers qualified to advise on English law, if you are involved in a dispute governed by English law (and at an early stage) and dont expect much sympathy from the Courts if you fail to comply with the various time limits relating to such commodity arbitrations. On the shipping side, we report the Court of Appeal decision in the Eagle Valencia, which we reported on at first instance in our last legal Update. The Court of Appeal reversed the first instance decision

and held that the NOR tendered was invalid pursuant to the relevant provisions of the charter party. Whilst that part of the decision was based very much on the facts and the interpretation of the specific laytime and demurrage provisions in that charter party, the outcome is of more general application insofar as the Appeal judges held that the owners demurrage claim was time-barred because the alternative NORs which the Master had issued without prejudice to the validity of the original NOR (which was invalid) had not formed part of the documentation submitted in support of the demurrage claim. We have attached to this publication Ince & Cos commentary on Iranian Trade Sanctions. The briefing summarises the different categories of sanctions that have recently been introduced against Iran as a result of the ongoing international initiative to curb any attempts by Iran to develop a nuclear weapons program and to prevent its involvement in financing terrorism. The briefing also highlights some of the impacts these sanctions are already having, and may be expected to have in the coming months. If you have any questions on this topic, please contact Michelle Linderman or your usual Ince contact. Ince & Cos International Trade and Commodities Group provides a full service to clients in the global trading community. We advise clients in a range of industries including oil and gas, biofuels, coal, sugar/ molasses, grain and feed, oils and fats and metals. If you have any queries arising out of the content of this Update, or any other problems you wish to discuss with us, please feel free to contact the head of our International Trade & Commodities Business Group, Stuart Shepherd, the authors of specific case reports you are interested in or your usual contact at Ince & Co.

Stuart Shepherd Partner, London stuart.shepherd@incelaw.com

Trading
Seller under FOB contract liable for economic duress and tort of intimidation
Kolmar Group AG v Traxpo Enterprises Pvt Ltd [2010] EWHC 113 (Comm) Background to dispute The dispute in this case arose out of a contract for the sale and purchase of methanol, with shipment to be FOB Kandla within September 2007. Payment was to be at sight under an irrevocable documentary letter of credit (L/C). The buyer intended to sell the methanol to a customer in the U.S., which needed methanol urgently. However, at the time that the seller made the FOB Kandla contract, it did not have access to sufficient cargo at the same or a lesser price than the contract price. After the contract was made, the market price of methanol increased dramatically. The seller then indicated that he would not supply the goods unless the buyer agreed to pay a higher price. Faced with the inevitability of a huge claim for deadfreight and from defaulting with its US customer the buyers gave in to the pressure. The original L/C had been opened on 12 September but subsequently amended a number of times to reflect new shipment dates, to provide for partial shipments and to incorporate amended payment terms in respect of some of the parcels of cargo. The final amendments were made on 5 October following a take it or leave it proposal from the seller that compelled the buyer to agree to a price revision that would result in the average price for the total cargo increasing by about US$100 per m.t. as compared to the original contract price. In its related correspondence with the seller regarding these final amendments, the buyer stated that it had no other alternative but to accept. Notwithstanding this acceptance, the shipment was much delayed and by mid-October, the vessel had loaded only a part of the methanol that the seller had been obliged to deliver under the contract. The buyer subsequently brought a claim against the seller for, amongst other things, restitution of sums the buyer claimed were extracted from it by economic duress. Under English law, a threat to break a contract will generally be regarded as illegitimate, particularly where the party threatening to break the contract must know that it would be in breach of contract if the threat were implemented. It is also relevant to consider whether the claimant had a real choice

or realistic alternative, so that it could have resisted the pressure placed on it by the party threatening to break the contract. If there was no reasonable alternative, this is a strong indicator leading to a finding of economic duress. Furthermore, whilst it might be relevant to consider whether the claimant protested against the threat made, a failure to protest does not necessarily mean any payment made as a result of the coercion was made voluntarily. Commercial Court decision Economic duress The judge found that the buyer had been compelled to amend the L/Cs to increase the price and reduce the quantity of the methanol and to accept and pay for the documents tendered as a result of illegitimate pressure amounting to economic duress on the sellers part. In his view, the buyer was left with no practical choice but to agree to pay an increased price for such methanol as it did receive. For every day that the cargo was not loaded, the buyer was exposed to ever increasing claims from the shipowners in respect of demurrage and if a full cargo was not loaded, the buyer would be faced with a very large claim for deadfreight. Furthermore, had the buyer failed to supply its client in the US with the order of methanol, it would have suffered a loss of reputation and would probably have been exposed to very large claims from that client. The judge also said that the seller had given no contractual consideration for the increased payment because a promise to perform a contractual obligation which it was already obliged to perform was not good consideration. The buyer was therefore entitled to recover the increased payment it had been forced to make as a result of the sellers illegitimate threat to breach the sale contract. The judge also held that the seller was guilty of the tort of intimidation in that it had made demands for price increases which were backed by coercive and unlawful threats that the seller would not perform its contractual obligations. Accordingly, the buyer was entitled to damages for intimidation. Provision of a letter of credit The seller sought to argue that it was not obliged to perform the contract at all because the buyer had failed to provide an acceptable L/C in accordance with the provisions of the contract. The issue in question was the relevant time for providing an acceptable L/C pursuant to an FOB sale. The judge referred to a number of authorities dealing with this point. He favoured the view taken in two cases, Ian Stach v Baker Bosley Ltd [1958]
3

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2 QB 130 and Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 2 LLR 386. Mr Justice Diplock in the first case and the Court of Appeal in the second case held that the buyers under an FOB contract were obliged to open an acceptable L/C in accordance with the contractual requirements before the shipment period began. On that view, the judge said that the buyer had failed in this case to comply with the contractual requirements because an acceptable L/C had not been opened by the beginning of the shipment period (originally this would have been 1 September). However, he also stated that the seller had waived the buyers obligation to open an acceptable L/C by that date in a number of ways, including by asking for further amendments to the L/C during the course of September and October, by confirming towards the end of September that the latest amendments to the L/C appeared acceptable, and by never suggesting that the contract was to be regarded as at an end. Consequently, the seller was unsuccessful with this defence. Comment It is not often the English courts hold that there has been economic duress where those concerned are experienced commercial parties who are usually taken to have equal bargaining power. In the present case, however, the seller clearly went too far in trying to negotiate its way out of a commercial transaction that had become less favourable due to the economic climate.

Application of pricing formula in event of postponed lifting and relevance of hedging position in assessing damages for failure to deliver cargo
Glencore Energy UK Ltd v Transworld Oil Ltd [2010] EWHC 141 (Comm) Background facts G was the buyer and T the seller under a contract dated 6 March 2008 on FOB terms for the sale of a cargo of Nigerian Ukpotiki crude oil. Under the contract, the delivery period was during 2529 March 2008. The laycan was subsequently narrowed to 26 to 28 March 2008. The pricing provision in the contract stated that the price would be determined by the average of five (5) consecutive quotations as published in Platts Crude oil marketwire for the mean of dated Brent within a period around the narrowed laycan. The pricing provision further stated that the exact five day quotation period was in the buyers option and was to be declared latest one working day prior to the first of the chosen days. Dated Brent is the price benchmark for crude oil in such transactions. In this case, the contract also provided for payment of a premium above the dated Brent price. On 26 March 2008, G declared 27 March to 2 April 2008 as the pricing period for the relevant lifting. However, due to security concerns arising out of the kidnapping of the crew of one of the tugs that was due to assist the vessel to berth, the cargo was not loaded at Ukpotiki during the contractual period. On 3 April, T e-mailed G stating that it would not be possible to receive the vessel back at the terminal to load the cargo within a reasonable time and that all parties involved were advised to take whatever steps they deem appropriate in the circumstances. On 8 April, there was a telephone conversation between the parties, which was followed by an e-mail on 9 April from G confirming inter alia our commitment to load the cargo at the soonest possible time for all parties concerned at the agreed contractual pricing and our declaration dated 27th March 2008 remains unchanged. Discussions continued thereafter to fix a new loading period. G had hedged its market exposure in respect of this transaction and continued to maintain its hedges. T subsequently proposed a new, June lifting period and sent an e-mail seeking to make a number of changes to the contract. These included the addition of a new clause headed entire agreement which

Ted Graham Partner, London ted.graham@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

stated that the parties obligations under the contract were extinguished and replaced by their obligations under a new contract. The proposed new contract also contained a price clause requiring a new pricing declaration instead of the pricing period that G had already declared under the March contract. When T refused to ship the cargo on the basis of the previously nominated pricing window, G bought back its hedges, cancelled the on-sale of the cargo and proceeded to accept what it considered to be Ts repudiatory breach thereby bringing the contract to an end. G then commenced proceedings against T to recover its losses. Commercial Court decision Liability The judge agreed with T that under an FOB contract, delivery has to take place during the time specified by the contract. Therefore, where the vessel sailed from Ukpotiki without having loaded the cargo, in normal circumstances this would mean that the contract expired unperformed. However, the judge was satisfied on the basis of the evidence before him that the parties in the present case had agreed to maintain the existing March contract. Although the parties continued to discuss new shipment dates, this did not prevent them from affirming the March contract on the basis of the March pricing declaration in the meantime. In the judges view, the parties behaved as though the original contract continued to subsist. Consequently, the judge held that T was in repudiatory breach of contract in refusing to make the shipment and G was entitled to succeed on the liability issue. Damages As to the measure of damages, the judge held that G was entitled to claim the difference between the contract price and the value of the oil on the date when it ought to have been delivered (G argued, and the judge accepted, that the oil should have been delivered within the new, agreed loading range 25 to 27 June 2008, so that the bill of lading would probably have been issued on 26 June 2008). In the absence of an available market for the Ukpokiti crude, the judge said that the measure of damages would be the estimated loss directly and naturally resulting from the sellers breach of contract (section 51(2) of the Sale of Goods Act 1979). In the event of an anticipatory repudiatory breach such as in the present case, the relevant date was the due date for delivery, alternatively the date when the goods ought reasonably to have been delivered, not the date of the repudation or the buyers acceptance of it.

He disagreed with Ts argument that the value of the oil should be calculated at the time of the making of the contract rather than its performance because contracts for the delivery of Nigerian crude were typically negotiated some 15 to 45 days before delivery. Notwithstanding that the price of dated Brent was by its nature a price for future delivery, the judge said it provided a ready means to measure the market price of the oil in question at the time of non-delivery. However, the judge did uphold Ts contention that the damages recoverable by G should take into account the reduction in Gs losses as a result of the closing out of its hedges. G had argued that the only step it could have taken in mitigation of its loss was to purchase a substitute cargo and that closing out its hedges did not constitute mitigation. Rather, G maintained that its hedges were independent transactions it had entered into prior to Ts repudiatory breach and that these merely reduced its exposure to a paper loss. The judge disagreed and said that hedging was an integral part of the business by which G entered into this contract for the purchase of oil and since the closing out on early termination established a lower loss than would otherwise have been incurred, that had to be taken into account in calculating Gs losses.

Daniel Jones Partner, Hamburg daniel.jones@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

I N T ER NAT IONAL T R ADE

Interpretation of quality clause in naphtha contract, damages for breach and hedging issues
Choil Trading SA v Sahara Energy Resources Ltd [2010] EWHC 374 (Comm) Background Facts S was the seller and C the buyer under an FOB Port Harcourt sale of naphtha. The contract provided Quality: PHRC naphtha quality and the specs referred to in the quality clause were taken from an analysis of a sample provided by Ss seller, Port Harcourt Refinery Company (PHRC). In pre-contract exchanges between the parties, the contractual significance of which was disputed, S stated that the product was to be sold as is. C then on-sold the cargo to P. The contract between C and P provided as part of the specification Mtbe mg/kg 50ppm max. MTBE is Methyl Tertiair Buthyl Ether, a man-made substance which is not a by-product of the production of naphtha. That onsale was on terms that if the cargo did not meet the specification, P could renegotiate the price and C had no obligation if the cargo was off spec. According to reports subsequently produced by SGS from composite samples both from the ships tanks and from the shore tank, the MBTE content was considerably higher than the limit in the contract between P and C. As a result, P rejected the cargo. In mitigation of its losses, C then sold the cargo to B and commenced proceedings against S to recover its losses, including its hedging losses. Commercial Court Decision Liability Mr Justice Christopher Clarke held that the exchange which referred to the product being sold on an as is basis formed part of the contract but disagreed with Ss argument that this meant there was no warranty as to quality at all. Rather, he held that the quality provision (PHRC naphtha quality) was inconsistent with such an interpretation and that as is meant that the naphtha received would have whatever characteristics a cargo supplied ex PHRC should have. Therefore, since such a cargo would not normally contain such quantities of MTBE, the naphtha did not comply with the contractual standard and the judge concluded that S was in breach of the implied condition that the cargo would comply with its description and of the implied term that it should be of satisfactory quality.

Damages The starting point for the calculation of damages is S.53(3) of the Sale of Goods Act 1979 which provides: In the case of breach of a warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had answered the warranty. S relied on the application of this prima facie test and said that the relevant time for assessing values was on delivery to C i.e. shipment. C however argued (a) this rule could be displaced where the circumstances required it, and the relevant time should be a date after the final analysis was received (some two weeks after shipment), when it became clear P would reject the goods and C would have to find a substitute buyer as this was the first opportunity for C to understand the extent of the contamination and (b) that its damages were then to be assessed by reference to the difference between the value of a sound cargo represented by the sub-sale to P and its actual (contaminated) value represented by its mitigation sale to B. Whilst the Court agreed with submission (a) it rejected submission (b) on the basis that prima facie damages are not to be measured by reference to any particular sub-sale save when such sub-sale was in the contemplation of the parties at the time the contract was concluded, which was not the case here as C was buying for re-sale generally. On the basis of the evidence presented to the Court it concluded that in fact the cargo as supplied, in its contaminated state, was worth no less, and ironically more, than a cargo in a sound condition (largely due to the fact that physical values rose during the period in which C were seeking an alternative buyer once P rejected the cargo). That was not however the end of the matter as C also claimed hedging losses. Hedging losses When P rejected the naphtha, C was left in a long position so they sold an equivalent quantity of Brent because there was no live naphtha market for hedging purposes and the naptha market was likely to follow the Brent market. The effect of this exercise was that if the market fell, C would profit on the hedge but lose on the physical. However, the market rose and C lost on its hedging position. The Court concluded that the hedging position taken by C was reasonable and foreseeable (referring to

dicta in Addax v Arcadia Petroleum [2000] 1 Lloyds Rep. 496) and Cs hedging losses represented losses attributable to a reasonable attempt to mitigate Cs losses. The Court therefore concluded that C was entitled, by way of damages, to their hedging losses less the increase (over sound value) in the physical price of the cargo which it received by virtue of the mitigation sale to B. Stuart Shepherd Partner, London stuart.shepherd@incelaw.com

UCP 600 Article 16 of UCP 600 deals with discrepant documents, waiver and notice. Where the issuing bank determines that a presentation does not comply with the documentary requirements of the letter of credit, it can refuse to honour or negotiate the presentation. However, Article 16 (c) requires the bank to give formal notice to the presenter, stating each discrepancy in respect of which it is refusing to honour or negotiate. This Article 16 (c) notice must also state inter alia either that the issuing bank is returning the documents (a return notice) or that it is holding the documents pending further instructions from the presenter (a hold notice). Article 16(d) requires the Article 16 (c) notice to be communicated to the presenter before close of business on the fifth banking day following the day of receipt. Article 16(f), which deals with preclusion, states as follows: If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation. The wording of the equivalent provision in UCP 500, the predecessor to UCP 600, differed in that it contained an express obligation on the issuing bank to act in accordance with its disposal statement by actually returning the documents to the presenter or holding the documents at the presenters disposal pending further instructions. If it did not do so, it would be precluded from relying on that statement. There is no such express wording in Article 16(f). Issues in the present case

Scarlett Henwood Solicitor, London scarlett.henwood@incelaw.com

Trade Finance
Implied obligation under Article 16(f) of UCP 600 to return rejected documents reasonably promptly
Fortis Bank S.A./NV and Stemcor UK Ltd v Indian Overseas Bank [2010] EWHC 84 (Comm) In our International Trade and Commodities Legal Update February 2010, we reported that the beneficiaries under five letters of credit (L/Cs) issued by Indian Overseas Bank (IOB) had succeeded in defeating all save one of IOBs defences based on alleged documentary discrepancies under the L/Cs. The sole discrepancy that was upheld by the court gave rise to a preclusion point under Article 16(f) of UCP 600 as incorporated into the L/Cs. The court has now dealt with the preclusion point as a preliminary issue at a subsequent hearing. Background The ICC Uniform Customs and Practice for Documentary Credits (UCP) governs the operation of letters of credit where its provisions have been incorporated into the documentary credit. UCP 600 is the latest revision of the rules and came into effect on 1 July 2007. There is, therefore, little case-law on the interpretation of its provisions.

IOB had rejected a number of drawings under the L/Cs by sending either return notices or hold notices to F, but it did not return the discrepant documents to F until some weeks later. The court was invited to consider whether Article 16(f) imposed an implied obligation on IOB as the issuing bank to act in accordance with the disposal statement made in its Article 16 (c) notices to F (i.e. to return the documents to F and/or hold them pending Fs instructions) and, if so, how soon it had to do so. Commercial Court decision Mr Justice Hamblen found that best practice and the reasonable expectations of experienced market practitioners meant that a disposal statement by an issuing bank carried with it an implied

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obligation to act in accordance with the statement made. This reflected what had been required under UCP for 40 years and was what any bank would be expected to do in such circumstances. In particular, he said, failing to deal with the documents as stated could lead to very serious consequences, for example where documents of title affecting the beneficiarys rights and security were involved (in this case, the documents included bills of lading relating to the merchandise shipped under the sale contracts). If the issuing bank said it was returning the documents but did not do so or did so only after some considerable delay, the beneficiary could lose the opportunity to deal in the documents or even to re-present conforming documents before the L/C expired. As to the time period within which IOB would have been expected to act on their refusal notices, the judge accepted expert evidence that it was normal and expected international banking practice for documents to be returned and document disposal instructions to be complied with reasonably promptly. Most international banks could rely on speedy methods, such as a courier, to return the documents within one or two banking days.

Conclusion Despite the change in wording, it seems that UCP 600 does not bring with it any real change on the preclusion point. The moral would seem to be that if you are a bank with discrepant documents, you hold on to them at your peril.

Steven Fox Partner, London steven.fox@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

The judge rejected IOBs argument that they were not in breach of any duty to return the documents Consequence of delay in pursuing with reasonable promptness because F had asked appeal against GAFTA jurisdiction them to retain the documents and not return them. finding The judge said that this request was no more than a demand by F for payment under the L/Cs and Broda Agro Trade (Cyprus) Ltd v Alfred C Toepfer did not undermine IOBs obligation to return the International GmbH [2009] EWHC 3318 (Comm) documents that were the subject of the return notices. Background to dispute As regards the hold notices, the judge also rejected IOBs argument that F had not given them valid instructions to return the documents because F had insisted on the bills of lading being endorsed to them before being returned, which IOB said F had no right to do under the UCP. The judge held that F had negotiated the documents under the relevant L/C, was their owner and was entitled as a matter of law to request the endorsements. However, even if that were not so, IOB could still have returned the documents unendorsed, as they ultimately did. Consequently, the judge held that the claimants had made out their case on preclusion and IOB could not rely on the relevant documentary discrepancy because they had not acted on their disposal statement reasonably promptly. The parties in this case were in dispute as to whether there was a validly concluded contract between them for the supply of milling wheat. Toepfer had commenced GAFTA arbitration against Broda pursuant to the GAFTA arbitration clause in that contract, claiming damages for breach of contract. Broda maintained that no valid contract had been entered into and therefore that the arbitration clause in the contract was not binding on them. The GAFTA first tier tribunal dealt with the question of their own jurisdiction as a preliminary issue. Brodas foreign lawyers disputed GAFTAs jurisdiction in writing but that correspondence was stated to be without prejudice and with full reservation of rights.

Litigation and arbitration

Broda also sought and obtained a declaration from the Russian court that there was no validly concluded contract between the parties. Nonetheless and with knowledge of the Russian court decision, the GAFTA first tier tribunal issued an Interim Award on Jurisdiction, concluding that there was a binding contract and that disputes thereunder were subject to GAFTA arbitration. Both parties subsequently served submissions in the substantive dispute. Brodas submissions dealt with issues of liability and damages, as well as summarising their reasons for continuing to contend that the GAFTA tribunal lacked jurisdiction. The Tribunal eventually delivered its Final Award, finding that Broda were in breach of contract and awarding Toepfer damages of over US$5 million plus interest and costs. Broda appealed the Final Award to a GAFTA appeal tribunal. However, it also sought to challenge the Tribunals jurisdiction in the Commercial Court by seeking relief under sections 72 and 67 of the Arbitration Act 1996. Section 72 of the Arbitration Act 1996 preserves the common law entitlement which allows a person to seek a declaration that an arbitral tribunal lacks jurisdiction, but its application is limited to circumstances where the applicant has taken no part in the arbitration proceedings. Section 67 of the Arbitration Act 1996 allows a person to seek to set aside an arbitration award on the grounds of the tribunals lack of substantive jurisdiction. However, pursuant to section 70(3) of the Arbitration Act 1996, such an application must be made within 28 days from the award in which jurisdiction is accepted. Brodas application to set aside the Interim Award on Jurisdiction under section 67 was 14 months late so they sought an extension of time under section 80(5) of the Arbitration Act 1996. Commercial Court decision Mr Justice Teare had to consider whether it could properly be said that Broda took no part in the GAFTA arbitration pursuant to section 72 of the Arbitration Act 1996. He distinguished between, on the one hand, a submission that the arbitrators should not be acting and, on the other hand, attempting to argue the case against jurisdiction so that the arbitrators can consider it. As the judge put it, a person may inform a tribunal of his view that the tribunal lacks jurisdiction without being held to have taken part in the arbitration proceedings. But if he makes submissions to the tribunal for it to take into account when exercising its jurisdiction under section 30 of the Arbitration Act 1996 to rule on its own substantive jurisdiction he risks being held to have taken part in the arbitration proceedings.

The judge rejected Brodas arguments that section 72 was only concerned with taking part in the arbitration proceedings for the purposes of challenging the tribunals jurisdiction. He stated that the wording of section 72 did not restrict its scope in the way suggested, it simply stated that a person wishing to avail himself of section 72 should satisfy the condition that he takes no part in the proceedings, which the judge interpreted to mean the proceedings as a whole. Having reviewed Brodas correspondence in the present case, the judge did not consider that they had taken part in the arbitration when they corresponded with the tribunal prior to the Interim Award on Jurisdiction. However, he held that they clearly took part in the arbitration thereafter, in particular by making submissions on the merits of the claim in relation to liability, breach and damages. They had therefore lost their right to seek a declaration pursuant to section 72. The judge also refused to extend time for Brodas application to set aside the award under section 67 of the Arbitration Act 1996. He reviewed the authorities on the way in which the courts discretion to extend time under section 80(5) of the Arbitration Act 1996 should be exercised. These authorities highlighted a number of factors which should be taken into account. These factors included the length of delay which, in this case, was very considerable, according to the judge. Another factor was whether the applicant acted reasonably in permitting the time limit to expire and the subsequent delay to occur. In this regard, the essential reason that time expired and delay occurred was that Broda were not in receipt of correct advice on English arbitration law and were not aware of the 28 day time-limit applicable pursuant to section 70(3) of the Act 1996. However, the judge was not sympathetic to this argument. In his view, Broda had not acted reasonably in consulting only Russian lawyers until very late in the day. He emphasised that Broda were grain traders concluding contracts with some of the largest and most reputable grain trading companies located all over the world. They knew that there was a claim against them for over US$5 million and it would not have been unreasonable to incur the costs of an English lawyers advice in connection with the claim at a much earlier stage. Additionally, the judge had to consider whether it would be unfair to Broda to deny them the opportunity of having their application under section 67 determined. Mr Justice Christopher Clarke concluded that the hardship that Broda

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might suffer if time was not extended was not disproportionate to their fault in not seeking advice from an English lawyer. His view was that Broda had taken the risk that the advice they received from Russian lawyers in relation to English law and arbitration would not be appropriate or correct. However, the judge did agree to stay enforcement of the Final Award in favour of Toepfer, pending Brodas appeal of that Award on quantum to the GAFTA Appeal Tribunal subject to Broda providing adequate security for the amount likely to be awarded on appeal if Brodas evidence on quantum was accepted. Comment Parties to international commercial contracts providing for English law who are faced with arbitration claims against them would be well advised to take English legal advice at an early stage, particularly on their rights and obligations in English arbitration proceedings. As can be seen from Mr Justice Christopher Clarkes decision in this case, ignorance of the law will not be considered a valid excuse for failing to observe the relevant procedure and conforming to the relevant time limits including for challenging the arbitrators jurisdiction. Since this article was first published, the Court of Appeal has heard and dismissed Brodas appeal from the Commercial Court decision. We will report on the Court of Appeal judgment in more detail in our next legal update.

Consequences of FOSFA sending Arbitration Award to partys previous address

Papas Olios JSC v (1) Grains & Fourrages SA and (2) FOSFA Ltd [2009] EWCA Civ 1401 This appeal arose from a first tier FOSFA arbitration award that dealt with the existence of a contract for the purchase of Bulgarian sunflower seeds by Grains & Fourrages (G & F) from Papas. Papas took no part in the arbitration, having taken the position that the oral negotiations between the parties never led to a concluded contract. The FOSFA arbitrators found in favour of G & F that there was a valid contract and that Papas were in repudiatory breach. FOSFA issued the award on 7 September 2007. Rule 6(b) of the FOSFA Rules of Arbitration and Appeal provide that FOSFA have to give notice to the parties that the award is at their disposal upon payment of the relevant fees and expenses and that, upon receipt of payment, FOSFA had to send the award to the parties immediately. Consequently, FOSFA wrote to the parties on the same day the award was issued, notifying them that the award was available and reminding them of the FOSFA Rules on Appeal. In brief, those Rules provide that either party has a right to appeal a first tier FOSFA award to the FOSFA Appeal Panel, provided that the award has been paid for within 42 days of the date of the award and notice of appeal has been received by FOSFA within 28 days of the date on which the award is sent to the parties. FOSFAs letter was sent by mail to Papas to the address given for them in the contract confirmation issued after the parties oral negotiations, as well as by fax. It subsequently transpired that Papas were no longer at that address, having moved in April 2005. However, the fax number remained the same. Papas ignored the fax. G & F paid for the award and copies were posted to both parties on 12 September 2007. Again, the award was sent to Papas old address so they did not receive it. After the 28 days for lodging a notice of appeal had expired, G & F called on Papas to honour the award. Papas ignored this and wrote to FOSFA stating they had just heard of the outcome of the arbitration through the oil-bearing seeds market. FOSFA proceeded to fax Papas a copy of the award, whilst for the first time noting Papas new address on their letterhead. On 7 December 2007, Papas issued a notice of appeal but FOSFA ruled that the notice was out of time.

Max Cross Partner, Hong Kong max.cross@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

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Papas appealed to the court for a direction under section 18 of the Arbitration Act 1996 that FOSFA should appoint an appeal tribunal to hear Papas proposed appeal. Commercial Court decision The first instance judge referred to rule 11(b) of the FOSFA Rules which specified inter alia that any notice may be delivered personally or left at the place where the party to whom it is to be delivered is carrying on business or (by reason of the provisions of the contract) was to be considered to be carrying on business. A copy shall be delivered to the Federation. He was prepared to assume, without deciding, that the sale contract was oral but nonetheless held that the wording of rule 11(b) embraced a document which either contained or evidenced the terms of the contract in question: the information as to the address was derived from, or appears by reason of, the provisions of the contract. He concluded that Papas previous address was a place which a reasonable person, considering the provisions of the contract in question, would consider on 12 September 2007 was a place where Papas were carrying on business. Papas were therefore out of time. Papas appealed to the Court of Appeal. Court of Appeal decision The Court of Appeal held that rule 11(b) dealt with the delivery of notices by the parties on each other and was not aimed at the delivery by FOSFA of copies of the award. That was dealt with by Rule 6(b), which provided for FOSFA to send the award, which was different from delivery. FOSFA were obliged to send the award or a copy of it to the address which FOSFA reasonably believed to be appropriate for the party concerned. In the Courts view, FOSFA had done so. Given that FOSFA had sent the award by fax and by mail, it was reasonably entitled to suppose that if the mail address was inaccurate, Papas would inform the Federation accordingly upon receipt of the fax. The Appeal Judge stated that it was unnecessary to address the question whether at the time of sending the award, Papas was reasonably to be considered as carrying on business at its previous address by reason of the provisions of the contract. It was enough that FOSFA reasonably considered the address to be Papas address. However, had it been necessary, he would have agreed with the first instance judge and decided this question in the affirmative. The FOSFA arbitrators had found that the contract between the parties incorporated all the terms and conditions of FOSFA 4A where

not in conflict with the express terms of the contract confirmation, as well as the FOSFA Rules of Arbitration and Appeal. Whether the contract confirmation was a contractual document (as the appeal judge believed) or a written expression of the parties oral agreement (as the first instance judge thought), it identified Papas previous address as its address. In the context of the FOSFA Rules, the provisions of the contract should be interpreted to include the information about the parties addresses because it was sensible to do so. It therefore made sense that FOSFA should be entitled to take the parties addresses from the contract documents when sending out the award. The appeal was therefore dismissed.

Stuart Shepherd Partner, London stuart.shepherd@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

No extension of time for buyers to commence FOSFA arbitration under section 12 Arbitration Act 1996
(1) SOS Corporacion Alimentaria SA (2) Mataluni Spa v Inerco Trade SA [2010] EWHC 162 (Comm) Background to dispute This dispute arose out of the industry wide contamination of Ukrainian sunflower oil with mineral oil in 2008. Following an urgent alert by the European Commission on 30 April 2008, the European authorities recommended the withdrawal of contaminated goods to safeguard consumer health. In the present case, the buyers of certain cargoes of Ukrainian sunflower seed oil commenced FOSFA arbitration proceedings against the sellers in respect of contamination of the cargoes. The sale contracts incorporated the standard form FOSFA 54, Rule 2 of which specifies certain time limits for commencing FOSFA arbitration including a time limit of 21 days from discharge for quality/condition claims. Rule 2(d) provides that where the claimant does not comply with these time limits and the respondents raise the non-compliance as a defence, then claims are deemed to be waived and absolutely time-barred

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unless the FOSFA arbitrators, umpire or Board of Appeal determine otherwise in their absolute discretion. The cargoes in question were loaded prior to the EU alert and the testing at loadport did not include analysis for mineral oil. When the buyers became aware of the industry wide contamination, they focussed on recalling all products as had been recommended and testing all stocks to determine which had been affected. By the time that they commenced FOSFA arbitration to recover their financial losses in respect of the oil that was found to be contaminated, the time limits specified under Rule 2 of FOSFA 54 had expired. Nonetheless, the FOSFA arbitrators exercised their discretion under Rule 2(d) to allow the claims to proceed. The sellers appealed to the FOSFA Board of Appeal which reversed the decision of the First Tier Tribunal and held that the buyers claims were time barred. The buyers made two applications to the court. Firstly, they applied under section 12 of the Arbitration Act 1996 (the Act) for an extension of time to commence arbitration. Secondly, they applied for permission to appeal against the FOSFA arbitration awards pursuant to section 69 of the Act, which relates to appeals from arbitration awards on a point of law i.e. the Board of Appeals refusal to exercise its discretion to admit the claim out of time. Commercial court decision Mr Justice Hamblen dealt first with the application for permission to appeal under section 69 of the Act because if that application was dismissed, it would follow that the FOSFA Appeal Boards exercise of its discretion to hold that the claims were time-barred was not open to challenge and that might be relevant to the exercise of the courts discretion under section 12 of the Act. Alternatively, if the court were to allow the appeal, then it might decide to remit the issue of a time extension to the FOSFA Appeal Board, in which case the section 12 application would have to be postponed pending the outcome of the arbitral process. The judge stated that the circumstances in which the court will find that the arbitrators have exercised their discretion contrary to the law are likely to be rare. The FOSFA Board of Appeal had exercised its discretion not to grant the buyers a time extension to commence arbitration. The Board was unimpressed with the buyers

explanation for their delay. In the present case, the Judge concluded that the buyers had not demonstrated that the FOSFA Appeal Boards decisions were open to serious doubt or that they revealed any error of law. The section 69 application was, therefore, dismissed. Turning to the section 12 application, the buyers had argued that the risk of sunflower oil contamination by mineral oil was not a recognised risk in the industry prior to the Ukrainian sunflower oil scandal in mid 2008 and was not generally tested for by sunflower oil traders. They alleged that there was no industry standard method of testing for this type of mineral oil at the time that the contamination was discovered and it was only in direct response to the problem which was discovered in 2008 that the relevant authorities introduced a standard method of testing with effect from August 2008. Consequently, the buyers maintained that at the time of contracting, the parties would not reasonably have contemplated that the sunflower oil might be contaminated by a substance which was not recognised as a usual or likely potential contaminant and which had likely been deliberately and fraudulently added (although not by the sellers). Mr Justice Hamblen highlighted the fact that the test for making a successful application for a time extension under section 12 was more stringent than that under its predecessor, section 27 of the Arbitration Act 1950. Under section 27, the court had been permitted to grant an extension of time if failure to do so would have resulted in undue hardship. Under section 12 of the Arbitration Act 1996, undue hardship would not be sufficient and time would be extended in exceptional circumstances only. Section 12(3) provides that the court should only make an order to extend time for commencing arbitration if (a) the circumstances were outside the reasonable contemplation of the parties when they agreed the time limit in question and it would be just to extend the time or (b) the conduct of one party makes it unjust to hold the other party to the strict terms of the time limit. The judge said that the relevant factors that he needed to take into consideration in deciding whether to exercise his discretion under section 12 were: the length of the delay; whether it was due to the claimants fault; if so, the degree of fault and whether either party would suffer prejudice if the discretion were not exercised. However, any prejudice suffered by the buyers as a result of the

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time bar was of no great weight because this was matched by the prejudice to the sellers in losing a good defence to a substantial claim. The judge accepted the buyers evidence that the mineral oil contamination had not been a recognised risk within the industry at the relevant time and that the parties could not reasonably have contemplated such contamination. However, in respect of one of the claims, the contamination had been established eight days prior to the expiry of the time limit, yet the buyers had not taken the relevant steps to protect their position in due time. In respect of the other claims, the buyers had delayed in commencing arbitration even after they had become aware of the contamination and were in a position to put in a claim notice. In the judges view, the buyers failure to commence arbitration as soon as they became aware of the contamination involved a high degree of fault. In his opinion, they were also guilty of culpable delay even after being put on notice that the sellers were relying on the time bar. The judge rejected the buyers argument that they had not known of the relevant time limits for claiming FOSFA arbitration until they had been made aware of these by another company in the same group for whom the oil had originally been purchased. He stated that the buyers should have been familiar with the terms of the contracts they had made and the time bars they contained. The buyers were a well-established international producer and distributor of vegoils and had a legal department which was actively involved in dealing with the contamination issue. They should therefore have been well aware of the rather fundamental practice of contractual time limits for bringing claims relating to goods in international contracts for the sale of goods governed by Trade Association terms, including FOSFA. In the circumstances, the judge did not consider that the buyers failure to comply with the FOSFA time limit could be said to involve circumstances beyond their reasonable contemplation. The Judge therefore dismissed the section 12 application. Comment Section 12 of the Arbitration Act 1996 contemplates that an extension of time for commencing arbitration can be obtained from the court in cases where there is already an arbitral process for seeking such an extension, so long as any available arbitral process for obtaining a time extension has been exhausted. However, as Mr Justice Hamblen stated in this case,

such cases are likely to be rare. The applicant would have to show that it was not an ordinary case and that there was a good reason why it would be just to extend time notwithstanding the contrary decision of the chosen arbitration tribunal.

Daniel Jones Partner, Hamburg daniel.jones@incelaw.com

Reema Shour Professional Support Lawyer, London reema.shour@incelaw.com

Shipping
Demurrage claim time-barred where full and correct documentation not submitted
AET Inc Ltd v Arcadia Petroleum Limited (Eagle Valencia) [2010] EWCA Civ 713 This was an appeal by charterers against a first instance decision of Mr Justice Walker in the Commercial Court in 2009, which was covered in some detail in our February 2010 Update. The appeal was allowed and the appeal judges have held inter alia that the original NOR tendered by owners was invalid. Whilst this finding depended on the interpretation of the specific charterparty clauses in the present case, a point of more general application arises as a result of the appeal decision. This is that, in the event that there is any doubt as to the validity of an original NOR tendered by owners and a demurrage claim is subsequently submitted, the demurrage claim and accompanying documents need to include at the very least any subsequent NORs tendered without prejudice to the validity of the original NOR. Otherwise, the demurrage claim will be time-barred. Facts and first instance decision The Eagle Valencia was chartered on a Shellvoy 5 Form as amended, with Shell Additional Clauses (SAC). Clause 13 of the charterparty provided amongst other things that time at each loading/discharge port was to start to run six hours after the vessel was in all respects ready to load or discharge and written

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notice had been tendered, or when the vessel was securely moored at the specified loading or discharging berth, whichever first occurred. Further, if the vessel did not immediately proceed to such berth, time was to commence six hours after (i) the vessel was lying in the area where she was ordered to wait or, in the absence of such a specific order in the usual waiting area; (ii) written NOR has been tendered and (iii) the specified berth was accessible. Clause 22 of SAC provided that if owners failed to obtain free pratique and/or customs clearance either within the six hours after NOR was originally tendered or when time would otherwise normally commence under the charterparty, then the original NOR would not be valid (SAC 22.1). The clause further stated (at 22.5) that the presentation of the notice of readiness and the commencement of laytime shall not be invalid where the authorities do not grant free pratique or customs clearance at the anchorage or other place but clear the vessel when she berths. The charterparty also contained a demurrage time bar provision which provided for demurrage claims to be presented within 60 days after completion of discharge and full and correct documentation to be presented within 90 days, failing which the demurrage claim would be extinguished. In this case, free pratique was granted more than six hours after the original NOR was tendered and whilst the vessel was still at anchorage (i.e. free pratique was not granted when the vessel berthed). The Master did, however, subsequently send two e-mails repeating the original NOR on the day that free pratique was granted. Owners primary claim for demurrage was calculated on the basis that the original NOR was valid. Charterers argued that that NOR was invalid because free pratique was not obtained within 6 hours per c/p clause 22. At first instance, Mr Justice Walker upheld owners claim for demurrage on the basis that clause 22.5 meant that the original NOR was not invalid if free pratique had been granted before the vessel berthed. Charterers appealed. Court of Appeal Decision (i) Validity of original NOR The Court of Appeal disagreed with Mr Justice Walker and allowed the appeal. Lord Justice Longmore gave the leading judgment. He considered that the scheme of SAC 22 in relation to free pratique was intended to implement different arrangements to the position under clause 13 of

the charterparty, as otherwise there would be no point in having a special additional clause at all. The judges view was that if the NOR was valid under SAC 22.5 if free pratique was given at any time before berthing, it is difficult to see how clause 13 had been altered. Lord Justice Longmore found that SAC 22 means that clause 13 will govern if free pratique is granted within six hours of the tender of NOR, but if it is not then, in accordance with clause 22.1, the original NOR is not valid. That regime does not, however, prevent a fresh NOR from being tendered once free pratique has been granted after the six hour limit from the original NOR. Time would then run from six hours after that fresh NOR was tendered. The judge considered this to be an eminently workable scheme and, although not so favourable to owners as clause 13 alone, nonetheless allows them to start the laytime clock six hours after free pratique is granted and the fresh NOR is tendered (which is admittedly somewhat later than envisaged by clause 13 alone). He considered that the only situation where owners would be heavily disadvantaged by this interpretation would be if free pratique was only granted when the vessel berthed. However, in that scenario SAC 22.5 would come into play and allow the original NOR to be valid unless the delay in obtaining free pratique was in some way attributable to the fault of the owners. The Court of Appeal therefore found that in this case, since free pratique was granted more than six hours after the original NOR and was not granted at berth, the original NOR was rendered invalid under SAC 22.1. (ii) Validity of subsequent e-mails as NORs Owners alternative case was that the subsequent e-mails sent by the Master constituted valid NORs and that in the event the original NOR was invalid, laytime began to run six hours after these e-mails were sent (by which point free pratique had been granted). At first instance, the judge did not have to determine this issue as he had upheld the validity of the original NOR. On appeal, the Court of Appeal stated that there is no legal requirement for an NOR to be in a prescribed form and the only additional requirement mentioned in 13(1)(a) of Shellvoy Part 2 was that the notice be in writing. They held that the contents of the first e-mail, stating that the vessel was in all respects ready to load a parcel of crude oil, constituted a valid NOR. (iii) Time bar relating to alternative demurrage claim Mr Justice Longmore then considered whether owners alternative claim for demurrage based on

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this subsequent NOR was time-barred, as alleged by charterers. At first instance, Mr Justice Walker had suggested that it would be. Owners argued that the demurrage time bar provision was not intended to extinguish an alternative lesser but correct claim and, to the extent that the documentation submitted by owners in accordance with their claim under the first NOR (which the Court had found to be invalid) was incorrect, only a small amendment of the claim was required. The Court of Appeal found that the substance of owners claim was presented in time in as much as it was clear that owners were claiming a particular number of days and hours spent at the port when no berth had been accessible. However, Mr Justice Longmore added that an essential document in support of every demurrage claim is the NOR and the only NOR submitted by owners in support of their demurrage claim was the original, contractually invalid NOR. He therefore held that the alternative claim could not be said to be fully and correctly documented. The judge stressed that this was not necessarily to say that alternative laytime statements and invoices would always have to be submitted to avoid an alternative claim being time-barred, but merely that the documents submitted pursuant to a claim for demurrage must include a valid NOR. The Court of Appeal therefore concluded that owners alternative claim for demurrage was extinguished pursuant to the demurrage time-bar provision in the charterparty. Comment It is noteworthy that the Court decided that an NOR did not need to be in a particular form; an e-mail from the ship saying that the vessel has arrived and is in all respects ready to load/discharge the cargo is sufficient (see also Cooke on Voyage Charters, Third Edition at paragraph 15.22 and following). The outcome in respect of the alternative demurrage claim might, at first blush, seem somewhat unfair (as owners submitted) given that charterers had not taken the point that the original NOR was invalid until after time for submitting the claim documentation had expired. Nonetheless, Lord Justice Longmore said that this consideration was not conclusive. In his opinion, in similar circumstances to the present case, it is not unreasonable to expect an Owner claiming demurrage to include alternative notices of readiness when he submits a claim, on the basis that they may be legally relevant.

Paul Herring Partner, London paul.herring@incelaw.com

Jo Stephens Solicitor, London jo.stephens@incelaw.com

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