Rory Macfarlane Partner
Court concludes parties had not agreed to arbitrate commodities dispute
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Black Sea Commodities Ltd v. Lemarc Agromond Pte Ltd  EWHC 287 (Comm)
Parties to commodities contracts will often reach agreement on the main terms, with subsequent details to be agreed afterwards. So long as sufficient certainty has been reached on the terms agreed, English law will find that there has been a concluded contract. However, a recent case has illustrated the difficulties that can arise where the initially agreed terms do not include an arbitration agreement.
The background facts
The case arose out of negotiations for a potential sale contract between Lemarc Agromond Pte Ltd (the “Buyer”) and Black Sea Commodities Ltd (the “Seller”).
The relevant events happened over the course of a few days in March 2018. Negotiations for a sale contract of Ukrainian corn were carried out between the Buyer and the Seller through a broker. As of 9 March, the parties had agreed on a number of important terms, including the identities of the Seller and Buyer, the quantity, that there should be one or two shipments, the quality, the price, payment terms and the delivery period.
There remained, however, a number of other terms to be decided. These were the subject of negotiations up to 14 March. A number of drafts passed between the parties, each of which included the standard GAFTA arbitration clause. Neither party objected to the inclusion of this clause. Subsequently however, negotiations broke down including (at least) as to the NOR spread. The Seller gave the Buyer an ultimatum of a date which could not be complied with, and pulled out.
The Buyer commenced GAFTA arbitration proceedings, presumably on the basis that a binding contract had come into existence and been repudiated by the Seller, and obtained an award in the Buyer’s favour on jurisdiction, liability and quantum.
The Seller appealed to the Court, arguing that the GAFTA tribunal had no jurisdiction, as there was no arbitration agreement between the parties. Although the Seller contended that no binding sale contract had ever come into existence, whereas the Buyer contended that such a contract had been concluded, the parties agreed that the Court did not need to decide this point; the Court needed to decide only if there was a binding arbitration agreement.
The Commercial Court decision
The Court found that the parties had not concluded an arbitration agreement and overturned the GAFTA award.
The Buyer argued that although agreement had not been reached on all outstanding points during the negotiations between 9 and 14 March, no objection was made to the GAFTA clause. As such, the Buyer contended that the parties had agreed to the arbitration clause by conduct, i.e. by not expressly rejecting it as they did some other clauses. An arbitration agreement can survive and resolve disputes even where the underlying agreement has been rescinded. Therefore, the Buyer submitted that the arbitration agreement extended to resolving the issue of whether or not the parties had concluded an underlying contract.
The Court disagreed. If it were the case that no binding contract had ever come into existence, then there was no consensus between the parties as to an agreement to arbitrate.
In fact, the Court considered it more likely that a binding contract had come into existence on 9 March (although it did not need to decide this point). As at 9 March however, the parties had not discussed an arbitration clause. The only reference to an arbitration clause came during subsequent negotiations. However, these negotiations involved the “supply of draft conditions in total which are then either accepted or not in total”. It was not permissible to pick out individual terms which were not objected to where no overall agreement had been reached. This would be contrary to the usual doctrine of offer and acceptance in English contract law.
The Buyer also ran an alternative argument, to the effect that there was a trade custom for Ukrainian corn FOB Odessa that all contracts would include the GAFTA arbitration clause, and that therefore this should be implied into the sale contract.
However, although there was evidence from the traders for both the Buyer and the Seller that such a clause would invariably be included in such sale contracts, the Court considered that there was insufficient evidence for the implication of such a term. Further, even if there were more evidence, the Court did not think that the terms of the clause to be implied would be sufficiently certain, or that such a clause could be implied as a matter of principle.
It appears that the Court would have agreed with the GAFTA tribunal that, under English law, a binding contract had come into existence on 9 March. As such, it is likely under English law that the Seller repudiated that contract, and the Buyer would have been entitled to damages – as it appears that the GAFTA tribunal found.
Had there been a clear arbitration and governing law agreement in the original terms agreed on 9 March, there would likely have been no reason for the award the Buyer obtained to be set aside. As it is, the Buyer will likely now need to consider whether the claim can be pursued again – at further cost – in a different forum.
This case is, therefore, a reminder that agreement on a governing law and jurisdiction clause is as important as agreeing any other term in a commercial contract. Otherwise, a party can be left without an effective remedy if the other walks away.
It is also noteworthy that the Buyer’s alternative case on an implied term failed not just on the evidence, but also would likely have failed as a matter of principle. Implied term arguments are always difficult, and the parties should not expect the Court to imply an arbitration agreement if the parties have not made their intention to arbitrate clear.