This was an application under section 67 of the Arbitration Act 1996 (the Act) by the claimant as seller of a consignment of Ukrainian corn FOB Odessa challenging an award by GAFTA arbitrators in favour of the defendant as buyer.

The issue depended upon what occurred between 9 and 14 March 2018, and whether the arbitrators had jurisdiction to decide that there was a binding arbitration agreement in place between the claimant and defendant in respect of the sale. The claimant submitted that there was no arbitration agreement and the defendant that there was.

As this was a jurisdictional challenge under section 67, not an appeal, oral evidence was called at the trial. On the basis of the oral evidence the defendant was permitted to amend its claim and argue that a GAFTA arbitration clause was implied into the contract by trade custom. This point had not been argued or pleaded before trial.

Factual background

The parties had agreed by the end of 9 March 2018 as to certain terms including seller, buyer, quantity, price and delivery period. These were arrived at in a series of communications, not always setting out all the terms agreed, but using the words ‘rest as per below’.

The parties were not agreed as to other terms, which were set out in the draft conditions sent by the broker, to the defendant amongst which was ‘GAFTA terms including the arbitration clause’.

By 14 March 2018 after three exchanges of drafts, there was one issue left in dispute between the parties, which was the NOR spread, to which the defendant would not agree. Eventually the claimant gave the defendant a date ultimatum, which could not be complied with and pulled out.

The defendant's primary case was that there had been a binding agreement on 9 March, varied/supplemented by agreement as to a GAFTA arbitration clause by virtue of the subsequent exchanges. The defendant said that the arbitration clause was not agreed on 9 March, but that subsequently, in the exchange of draft conditions, in which there was no dispute as to the GAFTA clause, the arbitration agreement became binding, either by virtue of a variation of the contract or as an independent agreement. Reliance was placed on section 7 of the Act which provided that an arbitration agreement which formed or was intended to form part of another agreement should not be regarded as invalid, non-existent or ineffective because that other agreement was invalid or did not come into existence.

The defendant submitted further by a late amendment at the hearing that there was a binding contract of sale on 9 March, which contained a GAFTA arbitration clause by implication from trade custom.

Legal analysis

It was common ground before the judge that his task was not to decide whether or not there had been a binding sale agreement, but rather whether there was a binding agreement for arbitration.

Binding agreement

Even though he did not have to decide it, the judge noted that he agreed with the arbitrators that there was a binding agreement on 9 March by reference to the terms which were agreed. Objectively, there was sufficient agreement of the essential/cardinal terms.

However, the arbitrators had given no roadmap to their conclusion, which immediately followed, that the tribunal had jurisdiction: if there was a binding agreement on 9 March, there was no sign in the communications between the parties that it included a GAFTA arbitration clause, and there were no draft conditions on 9 March making reference to it.

In order to take the benefit of section 7 of the Act the defendant had to show that the arbitration agreement (i) was the subject of consensus (even if the underlying agreement was not), or (ii) was incorporated into the underlying agreement by a variation. The defendant further had to establish that the arbitration clause was agreed by virtue of it being included in the draft conditions and not rejected when other conditions were rejected.

The judge held that before one could apply section 7, there had to be an arbitration agreement. He was satisfied that if there was no arbitration agreement on 9 March (as the claimant contended), there was no subsequent consensus to an arbitration clause. But in any event, if, as the judged considered likeliest, there was an agreement on 9 March, the GAFTA arbitration clause was not one of the terms set out, and it was not agreed then or by virtue, or in the course, of the ensuing abortive exchange of draft conditions between 12 and 14 March.

Custom/usage

Counsel for the defendant proposed his amendment to the defendant’s case in the course of his closing submissions in the light of the evidence before the judge.

The case put forward by the defendant was by reference to a term allegedly implied by virtue of custom/usage of the trade in Ukrainian corn F.O.B. Odessa that GAFTA arbitration would be incorporated in such contracts. This was not a question of prior dealing between the parties, there had been none.

In order for this to be established, the defendant had to establish a trade custom/usage that was ‘an invariable, certain and general usage or custom of any particular trade or place’. Chitty on Contracts (33rd Ed.) at 14-033.

The custom relied upon had to be invariable, binding in the market, in the sense that all trades, in this case of Ukrainian corn F.O.B. Odessa, invariably contained this provision.

The defendant did not put forward this case before the GAFTA arbitrators, who would have had some knowledge as to whether it was correct. It did not appear in any evidence for the defendant, and no evidence which would normally be produced to prove such a trade custom or usage was adduced by the defendant. There was no expert witness evidence, no evidence from other traders and no documentation in support.

The evidence relied upon by the defendant arose in the cross-examination of the COO of the claimant who said that he always included a GAFTA arbitration clause in his concluded contracts and the re-examination of a senior trader of the defendant who said that he always dealt on that basis. The judge did not accept this as sufficient evidence. The judge noted that this allegation was contrary to the defendant’s primary case that the arbitration agreement was not made on 9 March.

The judge further said that (i) he was not persuaded that a term that there be ‘provision for GAFTA arbitration’ was sufficiently certain; (ii) the arbitration clause in the draft conditions was not as per GAFTA 49; and (iii) in the absence of prior dealing, an arbitration agreement could not be implied without any reference in the agreement ‘...to a written form of arbitration clause or to a document containing an arbitration clause’ as required by section 6 (2) of the Act.

The application by the claimant accordingly succeeded.

This case is a useful reminder that the courts will not usually entertain any arguments regarding prior custom or usage unless there is strong evidence (such expert witness evidence and documentation) to support the party’s case.