Interlegal Trade digest Q3 2022

• International Trade

How to correctly initiate GAFTA arbitration proceedings upon several contracts simultaneously (court practice)

Often the parties enter into several contracts of the same type on similar conditions, and one of the parties violates several of them at once. What should a party that intends to initiate arbitration proceedings do if all the breached contracts contain a similar arbitration clause and essence of the dispute in all contracts is the same? Is it necessary to initiate separate arbitration proceedings upon each contract and to pay several arbitration fees? Or is it possible to initiate single proceedings and save on arbitration costs? A similar situation was considered by the London High Court in LLC Agronefteprodukt v. Ameropa AG [2021] EWHC 3474 (Comm).

In this case, the parties entered into two separate contracts on supply of two batches of milling wheat. Each contract contained an arbitration clause to submit any disputes to arbitration in London in accordance with GAFTA Arbitration Rules No. 125.

Disputes arose under both contracts, so the buyer decided to submit these disputes to arbitration and sent one notice of arbitration to the seller.

Title of the notice identified both contracts, but its text referred to a single arbitration and appointed a single arbitrator “in order to settle disputes under both contracts”. In the last paragraph of the notice, it was proposed that disputes under two contracts should be considered in one arbitration “for the sake of efficiency and economy”. The seller did not respond to the notice of arbitration.

The seller objected the arbitration court jurisdiction on the basis that the buyer failed to properly initiate arbitration proceedings upon each contract and instead incorrectly intended to initiate single consolidated arbitration proceedings.

The GAFTA Court of Arbitration rejected the seller’s objection regarding jurisdiction, holding that the seller had waived its right to object by non-reply to the buyer’s proposal to combine two contracts into single arbitration proceedings. The seller filed an appeal, but the Board of Appeal upheld the first decision, albeit for slightly different reasons. The seller appealed to the High Court in London.

The court stated the following.

Pursuant to Article 14(4) of the Arbitration Act 1996, arbitration proceedings shall commence upon serving notice to the other party. The Court noted that, apart from the requirement in writing, there are no formalities prescribed by law for such notice, and courts should apply a commercial approach to interpreting such formalities. The Court also referred to one of the previous precedents, which provided guidance on compliance with Article 14 of the Arbitration Act 1996:

? Article 14 should be interpreted “broadly and flexibly”, avoiding a strict or technical approach, especially when the notice is not drawn up by lawyers;

? Requirements are generally met if the notice sufficiently identifies the dispute and clearly states that the person making the notice intends to submit the dispute to arbitration;

? It is worth to focus on the content rather than the form of notice and assess how a reasonable person, as the notice recipient, would understand its content.

Based on this guidance, the court stated that the notice of arbitration sent to the seller in fact initiated two separate arbitration proceedings, especially since the last paragraph of the notice required the seller to agree on consolidating the disputes under the two contracts into single arbitration proceedings.

This case reminds that all formal notices should be drafted correctly and in accordance with terms of the contract whereto they relate. Although the notice in this case was ultimately treated as valid, time and expense related to jurisdictional appeal could have been avoided.

 

Alternative way of debt recovery from Swiss counterparties

We often encounter requests from clients who cannot recover debts for delivered products from unscrupulous contractors. Usually, in such a situation, two ways are available: either out-of-court settlement, or arbitration/court proceedings in accordance with the contractual dispute resolution clause. If your debtor is a resident of Switzerland, a third, alternative route is available under the 1889 Swiss Federal Debt Enforcement and Bankruptcy Act (DEBA).

This process can be resorted both for the purpose of actual debt recovery from the counteragent and for the purpose of exerting pressure and confirming seriousness of the creditor’s intentions. The procedure varies slightly from canton to canton, but in general it is the following.

The creditor shall submit an application to the Swiss Debt Recovery Agency, jointly with prima facie evidence of the debt existence. The official fee for filing such an application makes up nearly 200 CHF. Within a few weeks, the Debt Recovery Agency will most likely issue a payment request to be sent to the debtor, jointly with demand for debt repayment.

If the debtor fails to file an objection to the demand for debt repayment within 10 days of receiving thereof, or fails to repay the debt within 20 days, the Swiss Debt Recovery Agency shall initiate the procedure for seizure of the debtor’s registered assets or its bankruptcy procedure.

If the debtor files an objection within the prescribed period, a trial shall commence, whereunder the parties will prove their positions. If the debtor loses such a trial, the Debt Recovery Agency will continue debt recovery. This trial lasts in average 6-9 months.

Interlegal lawyers, jointly with their Swiss associated office, succeeded in legal support of interests upon debt recovery in Switzerland. In case of any questions, please don not hesitate to contact Igor Kostov, Interlegal associated attorney.

 

The need for physical signing the contract in accordance with English law (court practice)

In a recent decision, Jamp Pharma Corporation vs Unichem Laboratories Limited [2021] EWHC 1712 (Comm), the court stated that the parties may implicitly agree in negotiations that a contract will only be concluded when it is signed by both parties.

Usually the contract is not required to be formally signed by both parties under English law in order to become legally binding. If one of the parties to the contract wishes to associate its legal force just with signing a formal document, in the process of concluding the deal, the clause “subject to contract”, etc. should made in the offer or acceptance, etc. However, in this case, the court stated that such a reservation can be made indirectly.

Canadian pharmaceutical company Jamp has entered into a supply agreement with Indian pharmaceutical company Unichem. The agreement was governed by English law and all disputes were to be settled in the High Court of London.

The agreement was signed by the director of Jamp and two representatives of Unichem. At the moment of signing, the agreement provided for supply of only one medical product. In March 2019, the parties began to discuss an option to supply one more medical product.

In the course of agreeing on terms of delivery and price of the second drug, the parties conducted relevant correspondence, in which Jamp confirmed the proposed conditions, asked to accept the same cooperation scheme that was originally specified in the agreement, and to sign a supplementary agreement on supply of a new drug. Unichem thanked Jamp for confirmation and agreed to adopt the same scheme that was used to supply the first drug.

The parties agreed on a draft supplementary agreement and confirmed its wording, followed by holding negotiations, during which Unichem informed Jamp that cooperation upon the second drug was suspended, while the supplementary agreement was not legally binding without its formal signing.

Jamp claimed on breach of the agreement by Unichem and applied to the court for loss recovery. The dispute was the following: whether Unichem was obligated to supply the second drug to Jamp, given that the supplementary agreement was never formally signed by the parties.

Jamp argued that, as objectively follows from the correspondence, the parties have confirmed terms of the supplementary agreement, and it should be treated as concluded in accordance with applicable English law. Unichem argued that signing the supplementary agreement by both parties was a precondition for its entry into force.

English law does not require signing the contract in order to facilitate its entry into force. The main requirement for entering into a legally binding contract shall be an offer by one party, which, in turn, should be accepted by the other party. Offer and acceptance may be expressed in any form. In other words, if the buyer sent the draft contract to the seller, and the seller replied “confirm”, the contract shall be deemed as concluded even without a formally signed document.

However, in this case, the court ruled that the supplementary agreement did not enter into force without its formal signing by both parties. Based on objective analysis of the correspondence between the parties and the supplementary agreement itself, the court stated that in the correspondence, Jamp demanded that cooperation regarding the second drug should be confirmed “by signing the supplementary agreement”. While confirming the draft supplementary agreement, Unichem clarified that in order to facilitate its entry into force, it should be entered into in the same form as the principal agreement, that is, it should be signed by Unichem representatives. Consequently, the court ruled that the supplementary agreement had not been properly concluded and had no legal effect.

The court noted that it is not necessary to use the “subject to contract” clause in order to tie legal force of the contract to its formal signing. It is important that the parties clearly and unequivocally state their intentions during negotiations/correspondence upon entering into the contract, in order to reduce the risk of uncertainty or disputes.

This case also shows that if the contract was not signed by the parties, correspondence between the parties may indicate their objective intentions and should be subject to detailed analysis in case of a dispute. Therefore, correspondence should clearly reflect true intentions of the parties and there should be no space for ambiguity. If you do not want the contract to enter into force until it is signed by both parties, it is better to state this directly and use the “subject to contract” clause at the initial stage of negotiations upon concluding the deal.

 

The court explained procedure for calculating price difference in accordance with Default clause of the GAFTA standard proforma

Default clause is well known to companies engaged in trading under the terms of GAFTA standard proformas. Although there are minor differences between wording of this clause used in various GAFTA proformas, Default clause in general governs the amount of losses payable in case of default by one of the parties to the contract.

An important interpretation of this clause was given by the court in Sharp Corp Ltd v Viterra BV [2022] EWHC 354 (Comm). The Court stated that “actual or estimated value of the goods, on the date of default” should be calculated on the basis of a conditional replacement contract under the same conditions, not on the basis of actual market value of the relevant goods at the port of discharge.

The parties entered into two contracts on sale of lentils and peas from Vancouver to Mundra, India, on C&F Free Out basis. After delivery to the port of destination, the goods were discharged by the buyer, followed by customs clearance and placement for storage at the warehouse until payment. However, the buyer failed to pay for the goods.

The seller declared the buyer as default and claimed losses in accordance with the contracts that incorporated GAFTA 24 proformas. GAFTA 24 Default clause provides the following:

“25. Default

In default of fulfilment of contract by either party, the following provisions shall apply:

(a) The party other than the defaulter shall, at their discretion have the right, after serving a notice on the defaulter to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

(b) If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.

(c) The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods, on the date of default, established under (b) above”.

A keystone issue was whether, under subparagraph (c) of the above clause, “actual or estimated value of the goods, on the date of default” should be based on the price of the relevant goods in the condition and at their actual location (i.e. customs cleared goods in Mundra , India), or on the price under a conditional replacement contract on the same terms (i.e. price of goods at Vancouver plus freight to Mundra).

This issue had a significant impact on the amount of losses, since cost of the customs cleared goods increased significantly after discharge at Mundra due to imposing customs duties by the Government of India. Therefore, if actual or estimated value of the customs cleared goods discharged in Mundra was taken into account for calculation of losses, it would significantly reduce the amount of losses to be reimbursed to the seller. So, the seller insisted that, in order to determine the amount of losses, it is necessary to take into account the price difference based on market value of the goods in Vancouver and cost of freight to Mundra; the buyer relied on market value of a similar product in Mundra.

The GAFTA Court of Arbitration ruled in favor of the seller, while the buyer filed an appeal with the London High Court. The court rejected the buyer’s appeal and held that “actual or estimated value of the goods, on the date of default” should be based on a conditional replacement contract on the same terms. The cost of a similar product in Mundra cannot be taken into account, since such a product will not be similar to the product supplied under the contract, since the product on the internal market in Mundra has undergone customs clearance.

This case shows very well what options are available under Default clause of the standard GAFTA proforma, since the amount of losses required can vary significantly depending on the chosen option.