International Cotton Association Rules

The court’s judgment deals with a number of issues, including procedural points and a re-cap of recent judicial decisions dealing with the interpretation of contracts on the basis of business common sense. This summary focuses on the dispute as to whether the entire by-laws and rules of the International Cotton Association (ICA) Rules and, in particular, the invoicing back rules, were incorporated into a sale contract between the parties, or if only the ICA arbitration by-laws were incorporated.

Facts

The parties concluded a contract for the sale and purchase of cotton, which included the following clause (of which the last sentence is of particular importance): ‘Claims and controversial matters that may occur in connection with the execution of the following contract are to be solved by the representatives of the buyer and seller having full power to act. All disputes relating to this contract will be resolved through arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out The Association’s Arbitration Procedure.’

The contract was not performed. Both parties contended the other was in breach, but Patriot contended that irrespective of the breach, it was entitled to payment from Cottonex on the basis of an invoicing back clause, which it argued had been incorporated into the contract. Cottonex denied that the clause was incorporated. This dispute was referred to arbitration and the tribunal ruled in favour of Patriot, finding that the invoicing back clause was incorporated into the contract. Cottonex appealed against the award.

Legal arguments

It is not disputed by either party that the tribunal’s reasoning was flawed in one respect, i.e. that the tribunal’s starting position should have been to refer to the incorporating language in the contract: ‘This agreement incorporates the bylaws which set out the association’s arbitration procedure.’ This was not the approach adopted by the tribunal. Instead, the tribunal had considered the language of the ICA by-laws and rules themselves as a starting position, which is wrong in law.

Notwithstanding the above error, Patriot maintained in the appeal that ICA’s entire bylaws and rules were incorporated into the contract because:

  1. The reference to ‘bylaws’ in the sentence ‘This agreement incorporates the bylaws which set out the association’s arbitration procedure’ is shorthand for the bylaws and rules as a whole.
  2. It makes business common sense to read the reference to ‘bylaws’ as incorporating the bylaws and rules as a whole because:
    1. the parties were submitting to the jurisdiction of ICA arbitrators who are used to applying the ICA substantive provisions. It would be odd if the parties intended the arbitrators not to apply the rules they are used to; and
    2. the contract would be thin and missing several key elements, such as sampling provisions, if the word ‘bylaws’ were restricted to arbitration bylaws and did not include substantive provisions.

Judgment

The court found that the entire ICA bylaws and rules, which include the invoicing back procedure, were not incorporated into the contract because:

  1. The incorporating provision only refers to bylaws which set out the ICA’s arbitration procedure.
  2. The incorporating words appear in an arbitration clause. It would be unusual to incorporate governing substantive obligations as part of an arbitration clause.
  3. Patriot’s arguments on the basis of business common sense were not sufficiently strong to prefer its interpretation because:
    1. although it makes sense to have a tribunal apply its own substantive rules, the parties may want to involve ICA arbitrators for their experience of the cotton trade; and
    2. although the contract would have more content if all the ICA by-laws and rules were incorporated; the contract is workable without them