English law and commercial contract

TRADE ASSOCIATIONS

There are a great many Trade Associations and I will refer to just two that have their headquarters in London:

GAFTA

Having replaced the Federation GAFTA now looks after and protects the interests of the grain and animal feeding stuffs industries in national and international affairs.

Business done on GAFTA contracts amounts to over 80% of world trade in cereals.

The use of acronyms is useful: it is also a trademark, easy to remember and, many years ago, a High Court judge was quoted as saying: “…acronyms are only useful when they refer to something really well-known, such as GAFTA”

FOSFA

Business done on FOSFA contracts amounts to 85% of world trade in these commodities.

These two trade associations alone are concerned with hundreds of thousands of individual contracts with an annual turnover of billions of dollars.

1. What Trade Associations work with

The traders among you will be aware from the FAO Biannual Report in June 2016 that world cereal production in 2016 was anticipated to fall slightly short of projected demand in 2016/17, bringing end-of-season inventories in 2017 somewhat below their near record 2016 level. The forecast for global cereal stocks by the end of seasons in 2017 has been lifted by 27 million tonnes since May and (as of September 2017 see below) stands at nearly 642 million tonnes. At 369million tonnes, global trade in cereals in 2016/17 is predicted to decline by 1.9 percent compared to 2015/16, mostly due to reduced import demand for barley and sorghum. The overall contraction in world cereal trade is likely to intensify competition for market share among major exporters, a prospect that could keep international prices in check.

With regard to oil seed crops the FAO’s latest forecasts for the 2015/16 season point to a tightening in the global supply-and-demand balance for oilcrops and derived products. Low estimates for global rape and cottonseed output, together with downward adjustments in the soybean forecast for South America – due to adverse, El Niño-related, weather conditions – are expected to result in a contraction in global oilseed production. Add to that shrinkage in the global output of Palm Oil for the first time in 18 years, after prolonged El Niño-related dryness hit palm plantations across Southeast Asia. Based on current forecasts, world output of both oilmeals/ cakes and oils/fats are expected to contract in 2015/16. Record high levels of carry-in stocks for meals should prevent global 2015/16 supplies from falling, but total availabilities of oils/fats are likely to decline. World production is estimated to fall short of consumption, explaining the recent strengthening in international prices for oilseeds and derived products, which had followed a downward trend since early 2014. Current forecasts for 2016/17 would translate into a record output of vegetable oils, global oilmeal production with the FAO expecting upward pressure on prices which would merely recuperate from the 2015/16 drop. Assuming a continuation of current utilization trends, global production – in particular of meals but also of oils – could again fall short of world demand, possibly resulting in additional cutbacks in end-of-season inventories. The current outlook gives scope for international prices of oilseeds and oilseed products to remain under upward pressure over the coming months.

2. The concrete benefits of standard form contract

All of this information translates on the ground into hundreds of thousands of individual contracts with a combined annual turnover running into billions of dollars.

Remember, much of this trade takes place between people who do not share a common language and are operating under different legal systems, and you begin to see why there is value and benefit in both belonging to a Trade Association and using the standard form contracts developed over the years by these associations.

Without some standardisation of contract terms and language, we can easily see that there could be any number of disputes, with lengthy and unnecessary litigation – which comes with associated costs, not just in dollars but also in lost time and effort.

3. Trade Association Standard Form Contracts.

Trade Associations contracts are drawn up by the members to suit trade practices, through elected specialist committees – with those committees being formed of members from different countries to ensure a fair balance between buyers and sellers, from the producers to end receivers.

Trade Associations have “Contract Committees” that are charged with these contracts being regularly updated and amended as trade terms change or circumstances dictate.

A standard form contract provides a large measure of safety for all concerned.

Developing standard form contracts is therefore an on-going matter and involves participation of all sectors of the trade.

4. Services to the Trade – Superintendents and Analysts

As mentioned above, the soft commodity trade generates a cash flow in billions of dollars but, as in all contracts, it comes down to a Seller expecting to be paid for the goods he has shipped. For this to happen the Trade relies on services provided by Superintendents and Analysts (as well as Banks and Insurers) to provide what is known as the “Shipping Documents”.

5. What has to be done for a Seller to ensure that he is paid promptly?

This requires an understanding of what is required of each party – that is the duties and obligations on each party – and the proper execution of the terms agreed in the contract.

To begin at the beginning:
A simple definition of a contract of sale:

“An agreement to sell and an agreement to buy on equal terms”

If only it were that simple. It actually is that simple if each party performs their obligations towards the other party.

We only turn to the law when there is a problem and a failure to perform obligations under a contract will lead to a dispute with the innocent party looking to the law to enforce his rights under the contract.(Which may be a request to order performance or a claim for loss).

a) What is required before it can be said that a contract has come into existence?

English law has “The Sale of Goods Act 1979” which is the law relating to the sale of goods and defines a contract at section 2(1) as:

“2 (1) A contract of sale of goods is a contract by which the seller transfers or agrees to transfer the property in goods to the buyer for a money consideration, called the price.

Be aware of sections 2 (5) and 2 (6) which makes a distinction between future sales and actual sales.

“2 (5) Where under a contract of sale the transfer of the property in the goods is to take place at a future time or subject to some condition later to be fulfilled the contract is called an agreement to sell.

2 (6) An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred”.

b) How does a court or an arbitration tribunal decides that the contract has been created?

There are three basic essentials to the creation of a contract for it to be recognise and enforced, these are

i. Agreement

The first requisite of a contract is that the parties should have reached agreement. Generally speaking, an agreement is reached when one party makes an offer, which is accepted by another party.

An example would be a Seller making an offer to sell 10,000 tons Ukrainian barley, US10.00 per tonne F.O.B. Odessa shipment first half November.

It is taken to be an expression of willingness to contract made with the intention that it will become binding on the seller as soon as it is accepted by the person to whom it is addressed

The offer can be in writing, by words or conduct and all that is necessary is that it should be clear and made with the intention that it should be binding if accepted.

Be careful here that you do not make a unilateral offer. That is an offer to the world at large that could be accepted by anyone anywhere.

Acceptance of an offer is a final and unqualified expression of assent/agreement to the terms of an offer. Again, there must be an objective manifestation, by the recipient of the offer, of an intention to be bound by its terms. An offer must be accepted in accordance with its precise terms if it is to form an agreement. It must exactly match the offer and ALL terms must be accepted. Acceptance has no legal effect until it is communicated to the offeror (because it could cause hardship to the offeror to be bound without knowing that his offer had been accepted). An offer which requires acceptance to be communicated in a specified way can generally be accepted only in that way. If acceptance occurs via an instantaneous medium such as email, it will take effect at the time and place of receipt.

BE CAREFUL and take note that a Seller (offeror) cannot stipulate that the Buyers (offeree’s) silence amounts to acceptance.

If there is a counter-offer, the Seller (that is the original offeror) can either accept or reject it. For example, where the Seller offers to trade on its standard terms and the Buyer purports to accept, but on its own standard terms, that represents a counter-offer. Making a counteroffer amounts to a rejection of the original offer which cannot subsequently be restored or accepted (unless the parties agree). It is important to distinguish a counter-offer from a mere request for further information regarding the original offer.

An offer may be revoked at any time before its acceptance, however the revocation must be communicated to the Buyer (offeree). Although revocation need not be communicated by the Seller (offeror) personally. If it is not communicated, the revocation is ineffective. Once an offer has been accepted, the parties have an agreement. That is the basis for a contract, but it is not sufficient in itself to create legal obligations.

ii. Intention

Once an offer has been accepted, the parties have an agreement. That is they have shown an intention to be bound by the agreed terms.
It is the basis for a contract, but is not sufficient in itself to create legal obligations.

iii. Consideration

Under common law, a promise will not, as a general rule, be binding as a contract unless it is supported by consideration. Consideration should be “something of value” given for a promise. Consideration is required in order to make the promise enforceable as a contract. Two examples:

• Payment by a buyer is consideration for the seller’s promise to deliver goods, and delivery of goods is consideration for the buyer’s promise to pay.
• If I offer to sell you my house for $1, this is valid consideration. If I offer to give you my house for nothing, there is no consideration and this agreement could not be enforceable.

Be careful: An informal gratuitous promise does not amount to a contract.

Consideration must be sufficient, but need not be “adequate”. A Tribunal or Court is not interested in the “adequacy” of consideration (that is whether the price is a “fair” price) it will only be concerned with whether or not the consideration in question can be expressed in terms of economic worth.

• An interesting example of this is the case of Chapell v Nestlé12 Chapell was a seller of records which were sold with the “consideration” being payment of one shilling and sixpence (15p in new money) and three chocolate wrappers. The question for the court was whether the chocolate wrappers formed part of the consideration. It was held that they did – even though Nestlé simply threw them away. It follows from this that the wrappers would have been good consideration even if no sums had been paid.

iv. Contractual Intention

The final hurdle before we can say that a contract is binding.

Even where an agreement is supported by consideration it will not be binding as a contract if it was made without an intention to create legal intentions. In other words, the parties must intend their agreement to be legally binding. In ordinary commercial deals, there is a presumption that the parties intended to create legal relations. If one party wants to rebut (or defeat) this presumption the onus is on that party to do so. That party would have to show that no legal effect was intended, and the onus is a heavy one. Think of domestic arrangements, such as between husband and wife, or between parent and child, lack force because the parties did not intend them to have legal consequences. An agreement which is made “subject to contract” (typically, agreements for the sale of land) or a “letter of comfort” is generally unenforceable. The words normally negate any contractual intention, so that the parties are not bound until formal contracts are exchanged.

v. Clarification on Obligations under a contract

We now begin to see the elements that need to be in place for a court, for a court/ tribunal to decide that there is indeed a contract.

It is not unusual for the first question that a trade arbitrator has to decide on is whether or not there was a contract. The most common argument made in defence is that there is no contract because:

• the contract was not signed (it does not have to be in English law)
• the person who made the deal did not have authority to do so (generally a Tribunal would find that there was an implied authority for that person to make a binding contract)
• the Respondent did not agree to English jurisdiction (more on this below)
• there was no arbitration agreement (Trade Association standard forms generally make reference to disputes being referred to arbitration in London)

Clarification can be best done by referring to an English Supreme Court legal judgement where a senior judge (Lord Diplock) said the following:

“The law of contract is part of the law of obligations. The English law of obligations is about their sources and the remedies which the court can grant to the obligee for a failure by the obligor to perform his obligation voluntarily. Obligations which are performed voluntarily require no intervention by a court of law. They do not give rise to any cause of action.“

English law is thus concerned with contracts as a source of obligations. The basic principle which the law of contract seeks to enforce is that a person who makes a promise to another or to keep his promise. This basic principle is subject to a historical exception that English law does not give the promise see a remedy for the failure by a promisor to perform as promised unless either the promise was made in a particular form, e.g. under seal, or the promisee in return promises to do something for the promisor which he would not otherwise be obliged to do, i.e. gives consideration for the promise…

Each promise that a promisor makes to a promise see by entering into a contract with him creates an obligation to perform it owed by the promisor as obligor to the promise see as oblige. If he does not do so voluntarily there are two kinds of remedies which the court can grant to the promisee. It can compel the obligor to pay to the obligee a sum of money to compensating for the loss that he has sustained as a result of the obligee’s failure to perform his obligation. This is the remedy at common law in damages for breach of contract. But there are some kinds of obligation which the court is able to compel the obligor to actually to perform. In some cases… A remedy to compel performance by a decree of specific performance or by injunction is also available. It was formerly obtainable only in a court of equity… But, since a court of common law can make and enforce orders for payment of a sum of money, where the obligation was itself an obligation to pay a sum of money, even a court of common law could compel the obligor to perform it.

In brief this case makes it clear that, firstly, contract law is part of the law of obligations and regulates situations where one person must pay money or transfer property to another or carry out a service. Secondly it states that the law of contract is about enforceable promises and explains one key aspect of English Contract law which is the requirement of “consideration”. As said above, in general terms, consideration is the payment of the price but does not have to be payment in currency.

Having covered the purpose of contract law we have seen the requirements for a contract to be made enforceable. In a famous maritime case commonly known as “The Eurymedon” the question of consideration was examined from a different angle.

This was a contract for the carriage of a drill/machine by ship to New Zealand that provided that the owners of the goods could not sue the carriers or stevedores unless any claim was brought within one year of the action giving rise to the cause of action. The carrier had limited liability which extended to servants, agents, or independent contractors. Stevedores damaged the drill but they were independent contractors engaged to load and unload the ship by the ship owner. The drill owner brought an action against the stevedore after the limitation period specified in the contract. The stevedore sought to rely upon the limitation clause in order to escape liability. The drill owner argued that the stevedores could not rely on the clause as they were not privy to the contract and had not provided them with any consideration.

The issue to be decided was whether the stevedores, as 3rd parties could take benefit of the time limitation provision, when they have provided no consideration under the contract?

Held: The stevedores had provided consideration in the form of services of unloading the drill. Relying on the older case of Scotson v Pegg (1861), 158 ER 21 it was found that there is nothing to prevent consideration owed to a 3rd party being valid consideration for a new promise to another party. Therefore the stevedores benefitted from the protection by way of the limitation clause. The Bill of Lading was treated as an offer and the unloading by the stevedores was taken as acceptance of the offer. The claim was unsuccessful.

In “The Eurymedon” Lord Wilberforce confirmed what has been said above, that in order for a contract to be enforceable, a few elements have to be satisfied. These elements include offer, acceptance and consideration. Offer here was the expression of willingness to contract whereas acceptance was the unqualified assent to the terms of the offer.

Trade Associations produce “Standard Form Contracts” examples could be GAFTA 100 or GAFTA 49.

The actual “form” a contract can take is an open question. The general rule is that they can be made informally; most contracts can be formed orally, and in some cases, no oral or written communication at all is needed.

So, it is possible that an informal exchange of promises over a telephone can still be as binding and legally valid in the same way as a written contract.

At its most basic level a broker will issue a “Confirmation” to both buyers and seller advising that a trade ‘has been done’ or completed. Often this is just an email confirmation that sets out the date of the agreement with a description of the cargo, quantity, specifications, load and/or discharge port, shipping period, price and payment details.

It could look something like the following:

This is the starting point for any Tribunal. It is the basic outline of the agreement, but actually it is just the entry point to what has been agreed between the parties.

A Tribunal will consider the confirmation and then refer to the underlying contract, (in this case GAFTA 49 but it could be any of the standard GAFTA or FOSFA forms). GAFTA 49 is a six-page document with 25 clauses.

It is the Standard Form Contract which sets out the manner in which the contract is to be performed.

It is in the agreement to use a Standard Form Contract that we find the entry to the use of English law. This because Standard Form contracts contain a Domicile Clause. In GAFTA 49 this is Clause 21 and reads as below:

It can be seen from this Domicile Clause that there can be no argument against the view that these standard form contracts are governed by English law and English jurisdiction applies.

Trade Contracts & Arbitrations

Both GAFTA and FOSFA (and to a lesser degree the LMAA) have committees but we do not have time to explore these in great details here so I will concentrate on GAFTA the larger of the two. It can be taken as read that FOSFA provides similar services.

There are many committees within GAFTA that review every aspect of the trade. These committees are formed from people within the trade whose companies are members of GAFTA. For example, the members of the International Contracts Policy Committee consider any amendments to a contract or proposed new contracts. The contracts provide for trade in different commodities, which include those covered by the generic terms “grain” and “feed”. They cover the principal cereals such as wheat, barley, maize (corn), as well as oilseed cakes and meals, fishmeal, pulses and rice, from different origins worldwide, using different methods of transportation and/or for different terms of trade.

The different trading terms are cost, insurance and freight (CIF) and free on board (FOB) and various variations of these. There is also the qualification on some contracts that they are “Tale Quale,” this means that the Buyer agrees to accept the goods as they come, subject to their being shipped initially in good condition. The other qualification is “Rye Terms,” which means that the condition of the goods on arrival is guaranteed by the Seller.

One very important fact to stress about GAFTA contracts is that they are drawn up by trade members to suit trade practices. As trade practices change and develop, the standard contracts may have to be changed. GAFTA contracts do not impose trade practices and methods on to the Trade.

Bearing this in mind, GAFTA’s Committees have, at the request of the international trade, drawn up and included in GAFTA contracts quality and condition parameters, sampling rules (GAFTA 124) and a superintending scheme under which all superintending companies/organisations have to abide by a strict code of practice. GAFTA, through its contracts and rules, assists in providing for the successful execution of a contract between Buyer and Seller. The importance of certainty and the old adage “my word is my bond” cannot be stressed enough in international trade, and GAFTA provides this.

Alongside the standard forms of contract, GAFTA provides an arbitration, or Dispute Resolution, service that is well respected. This service has developed because trading companies need certainty. By choosing English law and jurisdiction they have certainty and show that they are willing or prefer to be judged by their peers, rather than having disputes referred to the Courts.

The Arbitration Rules are printed in a separate booklet, Form No. 125 (or GAFTA 125.) By virtue of the Arbitration Clause being part of the standard form contracts, they are deemed to be part of the agreement (contract) between the parties.

Arbitrators must be Members of the GAFTA who are, or have been, engaged in the Trade for a minimum period of 10 years and who are registered on the List of Qualified Arbitrators. This will be explained more fully below.

We shall look at how the Arbitration process works in more detail below.

Trade Policy & Legislative Issues

GAFTA’s services in the context of Trade Policy are to protect the interests of Members. GAFTA has excellent contacts with government departments and many other international authorities and organisations concerned with Agriculture, to whom GAFTA will try to make prompt and effective representation on behalf of Members when required. The Trade Policy Department covers areas such as international trade negotiations, the Common Agricultural Policy, trade legislation, plant and animal health regulations, customs nomenclature, in fact any issue that has a bearing on World Trade.

GAFTA will, provided it falls within the general remit of “liberalisation of trade”, support any issue for any sector within the Membership.

Circulars are sent out on a regular basis giving information highlighting current affairs and matters affecting agricultural trade. There is a monthly Newsletter with reports on Trade, contractual matters, which provides news about Members and forthcoming international events.

General

Most bulk commodities are carried by sea and therefore a contract of carriage will come into existence. These maritime contracts, such as Charterparties and Bills of Lading, are also available in standard form, many being approved for use by the BALTIC & INTERNATIONAL MARITIME COUNCIL (‘BIMCO’) based in Denmark. GAFTA offers its members a standard Charterparty contract as well as the various Sale Contracts.

While it is possible to trade on standard forms in their unamended state the general practice, as we have seen, is that a specific (or ‘special’) contract is used (see the brokers Confirmation above) that will contain a phrase such as ‘otherwise as per GAFTA Standard form No…….’ This effectively fills in any gaps the parties may have in their agreement. On the Maritime side, the practice is for there to be a number of amendments made to the standard form to produce the final agreement between the parties.

WHY IS ARBITRATION USED?

As a Trade Association GAFTA can trace its roots back a considerable way. The trading companies who are the principal members of GAFTA have, historically, had the practice of trying to resolve their differences amicably rather than through the Courts. Where amicable settlement proved impossible rules for settlement by arbitration evolved, where trading companies looked to one of their peers (generally an experienced ‘trader’ in another organisation) for a quick resolution. A benefit of arbitration in England is privacy. Commercial disputes can be resolved without news of that particular commercial problem being broadcast in the market place.

Trading companies looked to arbitration for a speedy and cost effective solution.

GAFTA, on behalf of the trade, attempts to keep a check on the cost element with rules that prevent lawyers from presenting cases in arbitration hearings unless both parties agree. This does not prevent any party from using a lawyer to prepare their case, but it limits the chance of recovery of legal costs. GAFTA 125 (the Arbitration Rules) The latest which came se will come into effect on 1st September 2016 covers the appointment of lawyers at rule 1, and the recovery of their fees specifically at 17:2 (See also under Representatives below.) Where only one party is using lawyers legal costs are not recoverable.

Trading companies are the reason why the shipping industry exists. It is the profit made from buying and selling cargoes that pays the shipowner for his carriage of the contractual goods, and pays the cargo underwriter for the insurance of the goods so carried, and pays the fees to the banks that finance the operation.

WHY ARBITRATION?

Commodity trading is trading under pressure – particularly pressure of time. It is probably due to this pressure that certain obligations under the contract are not sufficiently covered at the time that the contract is finalised. The movement of goods by sea is always fascinating and varied with the unexpected liable to occur without notice. Other people’s wars, strikes, fires, theft, fraud and piracy are just some of the everyday problems in the commodity world. Delays both at sea and in port cause losses both to the trader and the shipowner. Damage, howsoever caused, can result in delay. A Buyer might refuse to take delivery of goods that have arrived, ‘not as per contract’. Damages in the commodity business can be very high indeed.

The very nature of the commodity business, that is international sales, means that there are (and will be for the foreseeable future) many disputes that need to be arbitrated upon. Generally, arbitration is considered to be a normal part of trading life. This has the advantage of creating a climate where disputes are, in the main, resolved without damaging continuing trade between the parties.

Trading companies therefore have a need for a system of arbitration that is quick, reasonable, effective and available at a cost that is not prohibitive. GAFTA, as perhaps the leading and most active international trading association, have developed this service (as we shall see below.)

London is not the only centre for arbitration but we are concentrating on contracts where the parties have agreed to English law and jurisdiction. London has the well-established and respected London Maritime Arbitrators Association (the ‘LMAA’) but that body does not administer arbitrations itself.

For the trading companies the beauty of using GAFTA is that it provides a secretariat that administers the arbitration process in accordance with known rules. Complaints about delays, or anything else for that matter, can be addressed to GAFTA. If justified GAFTA can take sanctions against the arbitrators concerned. This, as they say, ‘concentrates the mind wonderfully’.

THE PARTIES TO A COMMODITY ARBITRATION

In a Sale Contract one party will be a Buyer and the other a Seller. Because they are traders the Buyer will be selling the cargo on (trading on) and probably be involved in a similar arbitration where he will take the position of Seller towards his Buyer.

This trading on of the cargo leads to what is called a ‘string’ of parties and to ‘string arbitrations’ where the dispute is handed on ‘down the string’. To avoid unnecessary duplication and expense rules have been developed to cover this aspect. See GAFTA 125 Rule.

Because the Seller has to enter into a contract of carriage there will be a contractual relationship under the Maritime contracts with the shipowner. It is now possible for disputes under Maritime contracts to be handled by GAFTA. (More on this below.)

Representatives

While many large trading companies have specialist departments such a luxury is not available to all. While parties can, and do, instruct lawyers to prepare their case we have seen that Grain Trade in particular discourages the use of Lawyers at any oral hearings. The intention here is surely to continue to have commercial disputes resolved by commercial people.

Legal Representation is covered in GAFTA 125 at Rule 17.

A party can prepare his case himself, or he can use a Trade Representative. A Trade Representative is generally someone with knowledge of the trade in question, who has probably acted an arbitrator and is therefore experienced in the process, and is willing to act for the party that nominates him. Once involved in a dispute as an arbitrator that person is prevented, by the rules of GAFTA, from acting as a Trade Representative if the case is taken on to the Board of Appeal.

If one party does not agree to legal representation at any oral hearing, then both parties are limited to either attending in person or appointing a Trade Representative.

Expert witness’ can attend but most often this covered by the submission of a written report. Because trade arbitrators are drawn from the ranks of the trade, and have detailed knowledge of the trade, it may be that this restricts the use of expert witness’s to prove a point. This leads nicely into the next point.

ARBITRATORS QUALIFICATIONS – HOW ARE THEY OBTAINED?

Who are the trade arbitrators and where and how do they obtain qualifications?

Trade arbitrators are generally drawn from the ranks of trading companies. While it varies from Trade Association to Trade Association, most have open requirements.

That is to say that it is open to anyone to become a Trade Arbitrator – they simply have to satisfy the requirements laid down by that Trade Association. To become a GAFTA qualified arbitrator a person must be either an individual member of GAFTA, or have the permission of their employers, that they must be employees of Members. Such persons must also meet the qualifications of the GAFTA Continuing Professional Development Programme (‘CPDP’). That is they must complete the Grade 2 section of the CPDP, earn 75 CPD points and successfully complete all elements of the GAFTA Trade Diploma.

Before becoming a GAFTA qualified arbitrator the applicant must have a minimum of 10 years’ experience in the trade. To the writer’s mind it is this requirement, of a number of years’ experience ‘in the field’, that is essential in providing commercial arbitrators with knowledge and experience.

There are a limited number of exemptions available but it is generally felt in the trade that it is the ‘years served’ that bring most value to the role of the arbitrator.

The CPDP course does provide some legal background but, it should be remembered, trading companies are looking for quick and economical commercial resolutions and not Court Judgements. Arbitrators must, of course, have a grounding in law and the CPDP aims to provide this.

WHO APPOINTS THE ARBITRATORS?

Under the Rules of GAFTA each party may nominate an Arbitrator and GAFTA will then appoint the Chairman and complete the Tribunal.

It is open to the parties to agree to a sole arbitrator, or to apply to GAFTA for the appointment of a sole arbitrator. GAFTA Arbitration being a two-tier system the parties have the right of Appeal to a GAFTA Board of Appeal but do not then have anything to do with the appointment of Board of Appeal members.

If the first tier arbitration is from the award of a sole arbitrator then the Board of Appeal will consist of 3. If it is a 3-man tribunal then the Board of Appeal will consist of 5.

Where one party refuses to act or reply GAFTA will, on the request of the other party, nominate an arbitrator to complete the Tribunal.

WHO PAYS THE ARBITRATORS?

Because the arbitration department in GAFTA, which acts as the secretariat, administers the system payments for the costs of the arbitration are made to GAFTA.

The rules permit GAFTA to request payment, in advance, of a deposit to cover the costs of the administration of the arbitration process. The rules also allow the Tribunal to call for a deposit in respect of arbitrators’ fees prior to continuing with the case.

Following the decision of the Tribunal, GAFTA will announce that the Award is ready for collection on payment of a fee. There is a difference between the fee charged to members and to none members. On payment of that final fee the award is said to have been ‘picked up ’.

Under this heading we should also look at the question of security for legal costs and this is covered in Rule 17 of GAFTA 125.

There are no decided cases on this. However, following a discussion between the writer, another GAFTA arbitrator and a senior London solicitor, the view is that GAFTA arbitrators do not have the power to make an order for the provision of security for legal costs – particularly where there has been no agreement over the use of legal representatives. (While it might be implied that – where the parties have agreed to legal representation – there is agreement over such costs, it is the writer’s view that it is still uncertain whether GAFTA Arbitrators do have power to make an order for the provision of security for legal costs. Time will tell.)

It will be seen from the above that there is an effective lien over the award in that it will not be issued until costs and fees have been paid.

GAFTA, and the trade in general, are aware of the need to keep the provision of an arbitration service cost effective. Arbitrator’s fees are often discussed at the GAFTA Arbitration Committee meetings. This committee is a “users” committee and is responsible for making sure that the requirements of the Trade are met. Costs (i.e. fees) are kept under scrutiny and are not allowed to run away.

THE GAFTA PROCESS AND INTERLOCUTORY PROCEEDINGS

There is no set procedure to GAFTA arbitrations although Appeals do tend to be more formal than first tier arbitrations. To assist the trade, GAFTA have produced the GAFTA A-Z of Arbitration. This is a guide for users but is also aimed at the legal profession. For example, in this A-Z under the heading of ‘Drafting of Submissions’, it is made clear that the purpose of submissions is for each party to state and explain its case and that submissions should be written in plain, clear language. There is also a note to lawyers reminding them that submissions are not pleadings and the formal (Court) rules of pleadings do not apply and, unlike pleadings, submissions should refer not only to matters of fact but also to matters of evidence and to matters of law.

Arbitration procedure is covered in GAFTA 125 at Rule 4. Rules 4:5 & 4:6 cover the point that the tribunal can vary the procedure to ensure that each party has a reasonable opportunity of putting his case, and dealing with that of his opponent. Rule 4:6 stresses the duty of the tribunal to ensure prompt progress including the making of orders where appropriate. Rules 4:5 and 4:6 are reflections of Section 33 of the Arbitration Act 1996.

Orders for Discovery, or for Directions or, where there has been no progress, Peremptory Orders are all explained in the A-Z.

Documents-only.
The majority of cases at GAFTA are dealt with on a documents only basis, with the Arbitrators meeting to discuss the reference as and when required. When they are satisfied that the matter has been fully discussed the Chairman will advise the parties that the submissions are closed and that the tribunal is moving towards issuing its award.

Hearings
As stated above, it is unusual but not unknown for there to be an oral hearing at the first tier level. It is more common for there to be a hearing when the matter proceeds to the Board of Appeal. By their very nature they tend to be more formal but efforts are made to keep the level of formality to a minimum. The usual practice is for the case to be presented by a Trade Representative but, if the parties agree, lawyers can represent them.

Enforcement
I will touch on this only briefly as Arthur and his team at Interlegal will be able and have time to explain this more fully for you.

Validity of the Arbitration Process.

It may be that one party does not wish to go along with the arbitration process.
That party may wish to obtain a Court Order that the Claim should be dealt with in the High Court. If you are in this position you should seek expert advice and will probably need to use the services of an English solicitor. Again, Arthur and his team at Interlegal can advise you.

In brief, the usual position would be that the Court would not accept to deal with the case if there was an arbitration clause in the contract. This is known as the “Scott v Avery Rule”. Simply it means that where there is an Arbitration Clause in the contract it is a condition precedent to the enforcement of any rights under that contract that there will be an Arbitration Award.

It may be that one party has already applied to the Court
If the claim should have been dealt with by way of arbitration then it will be necessary to make a request to the Court and apply for a stay of proceedings in order that the arbitration process can be completed.

If there is an argument over whether the Tribunal has jurisdiction to deal with the problem:
Under the Arbitration Act 1996 power has been given to the Arbitrators themselves to decide on whether they have jurisdiction.

Enforcement of the Arbitration Award.

The New York Convention and the Geneva Convention
These list the countries that are signatories to the agreements that say they will enforce foreign arbitral awards in their Courts. I believe that Ukraine is a signatory to this convention. In theory any Arbitration Award should be enforceable in a country on that list.

Most GAFTA/FOSFA Awards are honoured. That is one of the advantages of the GAFTA system. However from time to time it can happen that a party will fail to honour an Award and the Claimant will resort to relying on these Conventions to enforce the Award through the Court where the Debtor resides.

Both Trade Associations can to some extent assist with this process by providing the appropriate notarized and authenticated statements of affidavits from the Arbitrators involved.

CONCLUDING REMARKS

It is not possible to cover all aspects of commodity trading in the time allowed. GAFTA has been used, because it is the leading example of commodity trade arbitrations. Much of what has been said for GAFTA will apply to other associations. The most important point to note is that GAFTA looks for real experience in the handling of its arbitrations and by real experience I mean the experience of living, or dying, by a commercial contract.

Real experience of the commercial world is essential and GAFTA has experienced arbitrators available who have a knowledge and understanding, not only of the sale contracts, but also of all the collateral contracts that come about because of the international sale of goods carried by sea. That includes Charterparties, Bills of Lading, Letters of Credit, Insurance (both marine and liability) and others including special financing arrangements.

GAFTA does have a small claims procedure known as the Simple Dispute Arbitration Rules Form No.126 known in the trade as GAFTA 126. Parties who agree to this process sign a separate agreement that evidences that GAFTA 126 shall apply in place of GAFTA 125 and that this is accepted by both parties as a reference where there will be no appeal; either to the GAFTA Board of Appeal or the High Court.

GAFTA have also created a set of Maritime Arbitration Rules known as GAFTA 127, this is also a single tier system but does not prohibit parties appealing to the High Court if they so wish.

There must be a clear commercial sense in having arbitrations for sale contracts and the collateral contracts, such as the Charterparty and Bill of Lading, handled by one secretariat and with access to a known band of commercial people with real experience of the commercial world.

The GAFTA Arbitration service has expanded to cover arbitrations in respect of the London Rice Brokers Association and, I believe, has handled other commodities from time to time. The possibility to handle Maritime arbitrations is a further expansion of this service to the Commodity Trades and this expansion need not be limited to the Grain and Rice Trade.

It is a further development of the increasing need for arbitration and the fact that in this continuing evolution London remains a leading light. With evolution in mind GAFTA has now produced a set of Mediation Rules known as GAFTA 128.