FOSFA arbitration: the Buyer has no right to unreasonably withhold payment for the goods
31 July, 2025
151
Interlegal law team successfully defended interests of the Ukrainian exporter in the framework of FOSFA arbitration against a company from the United Arab Emirates that purchased 3,500 metric tons of Ukrainian sunflower oil on CIF FO terms, Izmir, Turkey.
Essence of the dispute
As per contract terms, 98% of cost of the goods should be paid by the Buyer within 2 days from the date providing the documents. The outstanding 2%, as determined by the FOSFA-accredited inspector at the port of discharge, should be paid by the Buyer within 2 days after receiving invoice for the balance.
Despite the Seller’s proper fulfillment of its contractual obligations, the Buyer paid only 98% of the amount, having rejected payment of the balance in the amount exceeding 65 thousand USD. In order to justify such position, the Buyer referred to the alleged non-compliance of the goods with Turkish sanitary standards due to exceeding the permissible level of pesticide residues. In particular, the Buyer provided the results of several laboratory tests, as well as made counterclaims in the amount exceeding 260 thousand USD or full refund of the paid costs in the amount exceeding 3.3 million USD.
The Seller reasonably rejected the aforesaid claims and initiated arbitration proceedings in FOSFA.
Seller’s position
Defense of our Client’s interests was based on the following key arguments:
1. Violation of payment terms. The Buyer unreasonably withheld 2% of cost of the goods, contrary to clear terms of the contract.
Inadmissibility of the Buyer’s evidence. The contract stipulates that final quality of the goods shall be determined by a certificate issued by FOSFA-accredited laboratory at the port of loading. The Buyer failed to follow the prescribed procedure for quality dispute settlement, in particular, neither secured selection of common samples and nor sent them to a certified laboratory. Instead, the Buyer provided analyses that were carried out:
- at the port of discharge,
- by uncertified laboratories,
- based on samples of dubious origin without proper identification.
2. Compliance of the goods with contractual quality. The contract did not contain requirements upon crude oil unconditional suitability for consumption. The Seller provided health certificate confirming its suitability for consumption after refining, as required by the contract.
3. Actual acceptance of the goods. The buyer did not return the goods. On the contrary, it disposed of the goods for commercial purposes, i.e. sold them to a third party, and only then filed claims.
Buyer’s position
The Buyer, in turn, referred to the following circumstances:
- Provided analyzes from several laboratories, in particular, the Turkish state laboratory which allegedly confirmed the import ban due to exceeding the pesticide norms.
- Claimed that it was unable to accept the goods due to actions of the Turkish authorities, followed by alleged re-export, disposal of or destruction of the goods.
- Claimed a refund of 98% of cost of the goods jointly with additional cost recovery in the amount exceeding 100 thousand USD.
FOSFA arbitration award
The Arbitration analyzed the parties’ positions in detail and stated on the following:
1. The goods complied with contractual description and quality. The contract did not require suitability for consumption in raw form.
2. The documents referred to by the Buyer could not be accepted as proper evidence, since they were obtained in breach of the contractual procedure and FOSFA standards.
3. The Buyer proved neither the fact of non-conformity nor the losses incurred. On the contrary, actions to resell the goods to a third party indicated its actual acceptance.
The Arbitration ordered the Buyer:
- To pay balance cost of the goods in the amount exceeding 65 thousand USD;
- To accrue and to pay interest for the period of delay;
- To reimburse the Seller’s arbitration and legal costs.
Conclusion
This case confirmed that local restrictions of the importing country shall not exempt from performance of the contract, unless such requirements are expressly agreed by the parties. In quality disputes, only evidence obtained in accordance with the contractual procedure and FOSFA standards shall be taken into account. Unjustified payment withholding, even given the quality claims, shall be treated as breach of payment obligation.
Thanks to a carefully formulated position, our team secured full satisfaction of the Client’s requirements and rejection of groundless claims.
Interlegal partner Aleksey Remeslo and lawyer Larysa Roshu led the case.
