Trade Advantage March 2021

March 2021 hilldickinson.com/commodities TAI PRIZE – Bills of Lading and “apparent good order and condition” – apparent to whom? Page 6 Halliburton -v- Chubb: Full disclosure? It depends. Page 10x Additional damages for shipowners – Eternal Bliss, or short-lived? Page 16 A commodities update >>> continues on page 2 Trade Advantage Brexit and Russia-related sanctions On 31 December 2020 at 23:00, EU sanctions ceased to have effect in the UK and autonomous UK sanctions came into force replacing them. This article identifies key implications for businesses with activities that may be affected by Russia-related sanctions. 3 TRADE ADVANTAGE MARCH 2021 >>> continued from page 1 2 Welcome Welcome to the first edition of Hill Dickinson’s Trade Advantage for 2021. Whereas our 2020 editions understandably focused on issues such as frustration, force majeure and the impact of Brexit, in this edition (and hopefully subsequent editions in 2021) we look ahead. With the UK transition period post-Brexit having ended on 31 December 2020, we look at Russian sanctions applicable in the UK post-Brexit. We look at the impact of fluctuating commodity markets and also have an analysis of the recent update to the ICA Rules. In addition, there are some interesting case insights analysing the decision of the Supreme Court in the conclusion of the Halliburton -v- Chubb litigation, as well as that of the High Court in the “ETERNAL BLISS” that could settle decades worth of debate regarding the issue of whether vessel owners are entitled to additional damages over and above demurrage in respect of delays. Finally, our Team News update showcases our upcoming webinars on topical issues arising in the energy and soft-agri sectors, as well as a session on dispute resolution. Please do consult and sign up if you wish to attend. I hope that you find this edition of interest. As always, your comments are welcome. Best wishes, Darren Wall Partner [email protected] 3 Contents Brexit and Russia-related sanctions Can a fixture ‘subject to’ be binding? TAI PRIZE – Bills of Lading and “apparent good order and condition” – apparent to whom? Calculation of damages – a cautionary tale for inter-company transactions Halliburton -v- Chubb: Full disclosure? It depends. Negative and zero commodity prices - legal issues for traders Additional damages for shipowners – Eternal Bliss, or short-lived? Which law prevails - the law of the seat or the law of the main contract? The International Cotton Association Rules: a guide to arbitration Team news Forthcoming webinars Key contacts 1 4 6 8 10 12 16 18 20 22 23 24 At the same time, businesses within the jurisdictional scope of UK sanctions are no longer permitted to provide restricted finance to EU subsidiaries of the designated entities, whereas prior to 1 January 2021, they were allowed to do so. This is due to the imposition in section 17 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the UK Regulation) of restrictions equivalent to Article 5(3) affecting (at the time of writing this article) the same Russian entities but with a subsidiary exception carving out UK subsidiaries only. The trade exception A further exception from the Article 5(3) restrictions carves out otherwiseprohibited finance if it is for the purpose of importing or exporting goods or non-financial services to or from an EU member state. As the UK is no longer an EU member state, restricted finance supporting trade with the UK is no longer carved out by the Article 5(3) exception. There is an equivalent carve out in section 17 of the UK Regulation but it only covers finance supporting trade with a UK nexus. As a result, UK businesses are no longer allowed to provide restricted finance to support the flow of goods between third countries and the EU. ‘Financial services’ The UK Regulation contains restrictions on ‘financial services’ for dealings relating to restricted military and dual-use goods and technology, and oil exploration and production equipment. These restrictions reflect equivalent restrictions on ‘financial assistance’ in the EU Regulation. However, the UK has advised in its guidance that ‘financial services’ within the meaning of the UK Regulation includes payment processing. This gives the UK restrictions significantly wider effect than the EU restrictions, as the latter do not treat payment processing as falling within ‘financial assistance’. As a result of this divergence, businesses (mainly banks) who may have been permitted to process payments relating to restricted trade prior to 1 January 2021 are now restricted from doing so. ‘Brokering services’ The UK and EU sanctions both include restrictions on ‘brokering services’ but the UK Regulation gives this term a wider meaning than the EU. The term is defined in the UK Regulation as covering the matching of potential parties (brokering in the traditional sense) but also covering ‘the provision of any assistance that in any way promotes or facilitates the arrangement’. This will potentially capture a very wide range of activities. Conclusion This is a non-exhaustive summary of issues arising from Brexit in relation to financial restrictions targeting Russian companies. It does not cover other measures under the UK’s Russia sanctions programme or the intricacies of the regulations. Affected businesses should review their counterparty relationships, transaction structures, contractual language and compliance programmes in light of the new rules and monitor the sanctions landscape in the UK closely going forward. As no framework for co-operation on sanctions was ultimately included in the Trade and Co-operation Agreement further divergence cannot be ruled out. Miranda Hearn [email protected] UK sanctions mirror EU sanctions broadly but the regimes are not identical. There are differences in substance, interpretation and with respect to designation, licensing and other aspects of implementation. Furthermore, the UK can no longer benefit from EU carve-outs. In relation to financial restrictions targeting the Russian economy in particular, there are significant points of divergence and gaps in continuity between the UK and EU. The overall effect is that UK businesses will be more restricted by Russia-related sanctions than they were prior to the end of the transition period. This has potential implications for both UK and non-UK businesses. Lending and extension of credit One of the restrictions imposed by Council Regulation (EU) No 833/2014 (the EU Regulation), Article 5(3) is the prohibition on loans or credit exceeding 30 days’ maturity to designated entities in Russia’s finance, military equipment, and oil exploration and production sectors. Due to the UK no longer being an EU member state, and by replacing EU sanctions with UK sanctions, UK businesses lose the benefit of certain carve-outs from the Article 5(3) restrictions. This disconnection between the UK and EU regimes has potential implications for financial institutions and other businesses providing finance or credit. In the commodities space, this includes pre-export finance and extended payment terms under trading contracts. The subsidiary exception Subsidiaries of designated entities are exempt from the Article 5(3) restrictions if they are ‘legal persons established in the Union’ (and if certain other criteria are met). From the end of the transition period on 31 December 2020, UK subsidiaries of the relevant designated entities are no longer covered by this carve-out as they are no longer EU persons. The effect of this is that EU businesses and other businesses required to comply with EU sanctions are no longer allowed to provide restricted finance to UK subsidiaries of the designated entities without authorisation. 4 5 TRADE ADVANTAGE TRADE ADVANTAGE MARCH 2021 MARCH 2021 Can a fixture ‘subject to’ be binding? The background The parties initially agreed the terms of their fixture ‘subjects to chrts’ S/S/R/ MGT approval latest 1700 hours’ on 12 January (where ‘S/S/R/MGT’ stood for stem/suppliers/receivers/ management). Before the expiry of the deadline, Trafigura, the charterer, offered to lift all the subjects, with the exception of the ‘suppliers’ approval’, in return for a reduction of the demurrage rate and an extension of the time limit for lifting that last subject. Nautica, the owner, accepted that offer. Trafigura, having subsequently lost interest in confirming the fixture, engineered a rejection message coming from the terminal at which the vessel would have loaded. The deception did not succeed and Nautica requested Trafigura to provide a ‘genuine rejection’ by a given time limit. No response was received by the time limit set and, accordingly, Nautica said that it accepted Trafigura’s repudiatory breach as bringing the charterparty to an end. Was there a binding charterparty? In the dispute that ensued, the owner contended that the charterparty was concluded when an agreement was reached on all but one of the subjects. At that point, said the owner, the charterparty was binding but it would have ceased to be binding if it had not been possible for Trafigura to lift the ‘suppliers’ approval’ subject, despite taking reasonable steps to do so. The question of law that the owner’s position raised was whether the ‘suppliers’ approval’ subject was a pre-condition or a performance condition. If it was a pre-condition, no contract was entered into, whereas if it was a performance condition, the charterparty was binding but its performance was subject to Trafigura taking reasonable steps to obtain the suppliers’ approval. Predictably the question of whether a term is a pre-condition or a performance condition is to be addressed in light of the facts and the particular commercial context of each situation: on an objective analysis of the circumstances and the correspondence, did the parties intend to enter into a binding agreement, despite there being remaining ‘subjects’ to be addressed? It should be noted however that the starting point of that analysis is that when the parties made an agreement on ‘subjects’ the court will not lightly hold that, against the background of the circumstances, they nevertheless intended to enter into a binding contract. Furthermore, the court will consider a number of factors that will assist in determining the objective intention of the parties. In this situation, the court considered the following: 1. [2020] EWHC 1986 (Comm) • The ‘who’ factor The court very clearly stated that ‘when the event on which the entry into contractual relations depends is a [personal and/or commercial] decision by one or both parties […] there is no room for the argument’ that a binding agreement was entered into. When however the ‘subject’ is within the control of a third party or indeed when the lifting of the ‘subject’ is to occur automatically on the occurrence of some external event, the term may be treated as a performance condition. • The terms used The phrases ‘subject to contract’ or ‘subject to details’ are clear indicators of the parties’ intention not to be bound. The same applies to ‘subject to board approval’, because, said the court, ‘the effect of those words is to postpone the decision on whether to enter into legal relations to a subsequent stage’. Similarly, ‘subject to management approval’ also creates a pre-condition. The court further said that there is longstanding authority that ‘subject to stem’ (where ‘stem’ stands for ‘subject to enough material’), is a pre-condition, rather than a performance condition. This latter point had a particular significance in this situation, given that the first and the last part of the phrase ‘S/S/R/MGT’ intended to create pre-conditions. Therefore, the judge commented that it would be surprising if the two intermediate elements had a different status. A further and relevant point was that it was unclear what the ‘suppliers’ approval’ meant, that is to say who were the ‘suppliers’ contemplated in this subject: did it include the loading terminal(s) and/or Trafigura’s sellers and, if the sellers, only those with whom Trafigura was in contact when the subject was agreed or, more generally, any party on the supply side from whom Trafigura wished to obtain approval? Given the degree of uncertainty the court said that it was highly unlikely that the ‘suppliers’ approval’ subject was intended to be a performance condition. In light of the above elements, combined with the fact that there were a number of gaps in the agreement that had been left for later discussion, the court held that the ‘suppliers’ approval’ was a pre-condition and that, therefore, no binding charterparty had been entered into. As to Nautica’s questioning what would have been the significance of Trafigura lifting three of the four pre-conditions, in return for a reduction of the demurrage rate, if it then retained an absolute right not to proceed with the charterparty, the court commented that while the point had force, it essentially related to a commercial negotiation that did not affect the legal position: for as long as the last subject was not lifted, the terms of that negotiation were not binding on the parties. In the recent decision Nautica Marine Limited -v- Trafigura Trading LLC1 , the Commercial Court considered whether the negotiations between the parties ‘crossed the finish line’ irrespective of an outstanding ‘subject’ of those negotiations. Comment This is an interesting decision, both because it clarifies the concept of a ‘performance condition’ that may not be familiar to many in the industry; and also because it serves as a reminder that ‘on subjects’ will not necessarily avoid there being a binding agreement between the parties, if, on an objective analysis, the communications and other circumstances of the case strongly suggest that the parties’ intention was to be bound. A corollary question that the court did not need to address is whether, pending Trafigura’s lifting of the last subject, Nautica was bound by the agreement. There are arguments in both directions, but we believe that the better view is that until and unless Trafigura confirmed that it lifted the last subject, the agreement was not binding on either party and Nautica was free to walk away if it so wished. Jean-Francois van Hollebeke [email protected] hilldickinson.com Darren Wall [email protected] 6 7 TRADE ADVANTAGE MARCH 2021 “TAI PRIZE” – Bills of lading and ‘apparent good order and condition’ – apparent to whom? In the previous edition of Trade Advantage (August 2020), we reported on the High Court decision. The Court of Appeal has recently issued their decision, upholding the High Court’s judgment. Background At the heart of this action is a cargo of soyabeans, for which a bill of lading had been issued stating them to be in ‘apparent good order and condition’ and where the LMAA sole arbitrator held them to have been damaged before loading. Head owners had settled a claim under the bill of lading and recovered 50% of their loss from disponent owners under the interclub agreement (ICA). Disponent owners now sought to recover from the charterers under the voyage charterparty on the Norgrain 1973 form, on implied indemnity principles. Disponent owners pointed to the draft B/L having been provided by the shippers/charterers, with the master and crew having had no reasonable opportunity for their own examination of the soyabeans during loading. LMAA decision Briefly, the sole arbitrator (Ms Sarra Kay) had concluded that: 1. The damage was pre-existing but it was not reasonably visible to the master at the time of shipment due to the modus operandi (the cargo being loaded from silos). 2.The shippers (charterers) must be taken to have known the damage, such that their draft B/L which stated that the cargo was ‘shipped in apparent good order and condition’ was inaccurate. 3.Charterers were in breach of an implied warranty in the charterparty to provide an accurate draft B/L and were, therefore, obliged to indemnify owners. High Court decision Charterers appealed to the Commercial Court under s.69 of the Arbitration Act 1996. HHJ Pelling QC held that: 1. The tender of a draft B/L was only an invitation from shippers to the master to make a representation of fact in accordance with his own reasonable assessment of the apparent condition of the cargo at the time of shipment. More specifically, the Court of Appeal held that: 1. The representation ‘shipped in apparent good order and condition’ is made by the master, based on his own reasonable examination of the cargo at the time of shipment. What matters, therefore, is what would be apparent to the master at the load port and not to anyone else, such as shippers, who may have other means of examining the cargo at an earlier time. 2.What amounts to a reasonable examination depends on the actual circumstances at the load port. The master must take reasonable steps in the circumstances but he is not required to disrupt the loading procedures (in this case, for example, by pausing the loading from silos to let the dust settle) in order to examine the cargo; or for example waiting for daylight and better visibility. 3.In light of the above and since the damage was not reasonably visible to the master, this cargo was indeed ‘shipped in apparent good order and condition’. The arbitrator’s decision that the B/L was inaccurate was wrong in law. 4.The tender of a draft B/L is only a request by the shipper that the master should satisfy himself as regards the apparent condition of the cargo. It does not give rise to any warranty or representation by the shipper. To imply a warranty would (a) run contrary to the scheme of the Hague Rules (which distinguishes between (i) information provided by shippers, and which shippers are held to guarantee and (ii) the apparent order and condition of the cargo, subject to the master’s reasonable visual examination) and (b) it would also not be necessary, because signing the B/L does not preclude shipowners from establishing the true condition of the cargo. The Court of Appeal left open the possibility that, by tendering a draft B/L containing a statement that the cargo is shipped in apparent good order and condition, the shippers make an implied representation that they are not aware of any hidden defects, which, if known, would mean that the master would not sign the B/L as tendered. This is not, however, how owners put their case and there was no finding of fact by the arbitrator that shippers or charterers had actual knowledge of the preexisting damage. Comments The Court of Appeal decision is a reminder that, despite information on a draft B/L provided by shippers, the master must still perform his own reasonable examination of the cargo, exercise his own judgement, and then decide whether to sign. This does not mean, however, that shippers are being encouraged to misdescribe; the Court of Appeal had sympathy for the owners’ position where shippers/charterers had actual knowledge of pre-existing damage, noting that this may seem unfair. They left open the possibility that the position could be different in such scenario. But that was not the issue before the Court on this arbitration appeal: the issue under appeal was as to the B/L’s reference to apparent order and condition. Anastasia Alexaki [email protected] Claire Messer [email protected] Noble Chartering Inc –v– Priminds Shipping (HK) Co Ltd [2021] EWCA Civ 87 (the “TAI PRIZE”) 2.In light of (1) and, since the arbitrator found that the damage was not visible to the master upon reasonable examination, the statement in the bill of lading was accurate. 3.There was no room to imply a warranty or an indemnity owed by shippers/charterers as to the apparent condition of the cargo. This would run counter to Article III, Rules 3 to 5 of the Hague Rules, that were incorporated into the sub charter. Court of Appeal The question before the Court of Appeal was whether a right of an indemnity arises in cases where owners incur a liability as a result of a misdescription in a B/L, which was not reasonably discoverable by the master but which was known (or should be known) to charterers. Reviewing the authorities, the Court of Appeal upheld the Commercial Court Judge’s decision in that, as ‘everyone in the shipping trade knows1 ’, it is ultimately the master’s responsibility to verify the condition of the cargo and decide whether to sign a draft clean B/L. 1. The Nogar Marin, [1988] 1 Lloyd’s Rep 412 8 9 TRADE ADVANTAGE MARCH 2021 Calculation of damages – a cautionary tale for intercompany transactions Palmali Shipping SA –v– Litasco SA [2020] EWHC 2581 (Comm) Under English law, claimants can only recover in damages their ‘net loss’ which should give credit to any losses saved. In this case, owners, who did not own their own fleet, had to deduct from their loss of profits claim the cost of char - tering in vessels from associated companies, even though, in practice, owners may never actually have had to pay these costs. Background The facts of this case are hotly disputed, but Palmali Shipping SA (the Owners) contended that they had entered into a long-term COA with Litasco SA (the Charterers) for the exclusive carriage of oil between certain ports. Owners pleaded that the Charterers were in breach of the exclusivity and minimum quantity obligations under the COA and sought damages for loss of profit of around US$1.9 billion. Summary application - net loss calculation of damages The Charterers applied for summary judgment on the Owners’ quantification of loss of profit claim on the basis that it wrongly assumed that the Owners would not have incurred any expenses in chartering in their own fleet vessels to carry the additional cargos under the COA. This was not supported by evidence. In fact, the Owners did not own their ‘own fleet’ but chartered in vessels by entering into ship management agreements (SMAs) with ship-owning companies that belonged in the same beneficial ownership as the Owners. Under the SMAs, the COA revenues would be held on the account of the related ship-owning companies, which, in turn, invoiced the Owners for freight due. These invoices were recorded on the Owners’ books as an inter-company debt or payable. The ship-owning companies would only pay the Owners a management fee of 2.5%. The Owners argued that the terms of the SMAs did not reflect the practical basis on which the vessels of their own fleet were actually operated. The Owners’ position was not that the SMAs or the Owners’ books were a ‘sham’, instead, the Owners accepted that the inter-company debt was a ‘real’ asset of the ship-owning company, which would be available to its creditors in case of an insolvency. The Owners suggested, however, that ‘in practice’ they were never required to pay the invoices and were entitled to treat all of the sums earned under the COA as their own. Mr Justice Foxton granted the Charterers’ application and held that: • When determining the loss suffered, the ‘net loss approach’ should be followed. • In conducting this ‘net loss’ calculation, the Owners should have taken into account not only the expenses incurred and the benefits lost as a result of the breach, but also the expenses saved and the benefits obtained. An unpaid liability could constitute a loss for the purposes of calculating damages 1 . • The Owners’ argument that the court should ignore the liabilities owed to their associated shipowning companies was a significant departure from the conventional position. The inter-company balances clearly showed that these liabilities were real and remained. • The Owners’ evidence, therefore, fell short of proving that the Owners would never have to discharge their liabilities against the ship-owning companies. • In light of the above, the judge concluded that the Owners did not have real prospects of succeeding on this part of their claim at trial and summarily dismissed it; the Owners had to account for their liabilities to the ship-owning companies when calculating their ‘net loss’. Amendment application – the transferred loss principle The Owners sought to amend their particulars of claim to formulate their damages on the alternative basis that they were entitled to recover the total amount of their loss of profit claim under the transferred loss principle. The ‘transferred loss’ would be the loss of profits that the ship-owning companies would have made under contracts, which they would have entered into with the Owners. The judge dismissed this alternative basis and held that: • The transferred loss principle operates only where the common intention or the ‘known object’ of a contract is to benefit a third party so that the foreseeable result of breaching the contract is the loss to that third party. • In this case, the ‘known object’ of the COA was to benefit the Owners. The Owners were contracting with the Charterers for their own benefit and it was their decision whether they would charter their own fleet or third party vessels - not the Charterers’. • If the ship-owning companies had suffered any losses, these should be claimed under their contracts with the Owners. • The ship-owning companies suffered, at best, the loss of the opportunity to conclude a contract with the Owners and the principle of transferred loss does not extend so far. Conclusion This judgment highlights how intercompany transactions can have a dramatic impact on the size of the damages suffered by way of loss of profits. It also serves as a reminder that the ‘transferred loss principle’ has limited application to situations where a contract is entered into for the benefit of a third party, and is not capable of extending so far as to include the loss of opportunity of a third party to conclude a contract. Anastasia Alexaki [email protected] Darren Wall [email protected] 1.Total Liban SA –v- Vitol Energey SA [2001] QB 643 applied. 10 11 TRADE ADVANTAGE TRADE ADVANTAGE MARCH 2021 MARCH 2021 In a pivotal ruling, the Supreme Court has recently confirmed that the mere appointment of an arbitrator in concurrent arbitrations, arising out of the same or overlapping subject matter, was sufficient to give rise to the appearance of bias, and that arbitrators who do not disclose this fact are in breach of their duty of disclosure. However, this breach does not automatically indicate apparent bias, and must be considered against the backdrop of the particular facts, with specific attention paid to the customs and practices of the chosen arbitration institution. Facts Transocean Ltd (Transocean) was the owner of the Deepwater Horizon oil rig, which it leased to BP Exploration and Production Inc. (BP). Both Halliburton Company (Halliburton) and Transocean entered into insurance policies with Chubb Bermuda Insurance Ltd (Chubb). As a result of the explosion, thousands of civil claims were brought against BP, Halliburton and Transocean. BP also claimed against Halliburton and Transocean. Following a trial in the US, three concurrent arbitrations were commenced: (1) Haliburton -v- Chubb (Reference 1); (2)Transocean -v- Chubb (Reference 2); and (3)Transocean -v- a third party insurer (Reference 3). Mr Rokison QC was appointed in all three references. Halliburton learned of Mr Rokison’s appointment in References 2 and 3 and issued a claim form in the High Court, seeking an order, under s. 24(1) (a) Arbitration Act 1996, that Mr Rokison be removed as an arbitrator. In the meantime, the tribunals proceeded to issue their awards in all three references. Following decisions in Chubb’s favour in the High Court and the Court of Appeal, the case was referred to the Supreme Court and deals with substantially the same issues as in the Court of Appeal. Issue 1: Is it possible for an arbitrator to accept appointments in multiple references concerning the same or overlapping subject matter with only one common party without thereby giving rise to the appearance of bias and, if so, to what extent? The Supreme Court took into account the test for apparent bias, as established in Porter-v-Magill [2000] UKHL 67; (2002) 2 AC 357. Specifically, one must look at whether the fairminded and informed observer, having considered the facts, would conclude that there was a real possibility that a tribunal was biased. The Supreme Court concluded that, where an arbitrator accepts appointments in multiple references concerning the same or overlapping subject matter with only one common party, this could, in fact, be an independent factor giving rise to an appearance of bias. However, and importantly, the Supreme Court caveated this by stating that each case would depend on its own circumstances, the relevant customs, and arbitration practices. If it were found that it was customary, in the chosen arbitration institution, to appoint specialist arbitrators in related cases, then multiple appointments would likely go against a finding of apparent bias. Issue 2: Is it possible to identify the circumstances in which an arbitrator should disclose their appointments in multiple references concerning the same or overlapping subject matter with only one common party? The Supreme Court concluded it would be sufficient that the circumstances which are to be disclosed might cause the fair-minded and informed observer to conclude that there is a real possibility that the arbitrator is biased; not that it would do so. In fact, the failure of the arbitrator to disclose such facts and circumstances may itself amount to apparent bias. However, the disclosure requirement was subject to an important caveat that this disclosure was customary in the relevant field. For instance, GAFTA and the LMAA provided undisputed evidence that it is common for parties to require specialist tribunals familiar with niche subjects and that the pool of specialist arbitrators was relatively small. The Supreme Court agreed that, in those cases, it would not be desirable to stifle the parties’ chances of appointing highly competent arbitrators if they chose. However, in contrast, there was no evidence of any such practice within International Bar Association (IBA) Guidelines on Conflicts of Interest in International Arbitration. In fact, the IBA guidelines placed greater emphasis on the duty to decline appointments, than on the duty of disclosure. In addition, the Supreme Court took time to consider and reconcile an arbitrator’s duty of disclosure with the duty of privacy and confidentiality of the parties. The general rule was that an arbitrator would have to obtain consent from the parties prior to disclosing their appointment to third parties. However, this could be circumvented by agreement, or with evidence that the custom and practice in the relevant field allows an arbitrator to do so. The latter method, the court found, was common across ICA, LCIA, CIArb arbitrations and generally for English-seated arbitrations. Therefore, an arbitrator in Mr Rokison’s position would not have needed to obtain the consent of the parties before making any disclosures. Taking everything into account, and despite concluding that Mr Rokison breached his disclosure duty, the Supreme Court found that, in the circumstances, a fair-minded and informed observer would not have inferred that there was a real possibility of unconscious bias. When challenged, Mr Rokison offered to cede his position on the relevant tribunals, but this was opposed by Chubb. Indeed, it was found that the overlap between the references was not so significant as to suggest that Chubb would gain an advantage through Mr Rokison’s appointment in the references. The facts did not suggest that Mr Rokison expressed any ill-will or bias of any sort, or that his appointment conferred any secret financial benefit on him. Therefore, it was impossible for the fair-minded and informed observer to conclude that there was any possibility of apparent bias or any circumstances giving rise to justifiable doubts as to Mr Rokison’s impartiality under s24(1)(a) of the Arbitration Act 1996. Therefore, the appeal failed, and Mr Rokison was not removed. Comment On impartiality, the Supreme Court was critical of Halliburton’s attempt to show that party-appointed arbitrators were held to a lower standard of impartiality than arbitrators appointed by agreement. The duty was a core principle of arbitration law and applied equally to all arbitrators. Though the test of the fair-minded and informed observer is an objective one and applies equally to both judges and arbitrators, the Supreme Court clarified the arbitration-specific factors to be borne in mind for the test to apply in this case. Namely, the following factors must be considered: 1. The confidential nature of arbitration which puts a premium on disclosure 2.There is limited appeal from the award of an arbitratorArbitrators are funded directly by the parties involved in the arbitration – usually the losing party 3.Arbitrators come from a wide range of business activities some, but not all, have significant experience 4.Where there are multiple references to the same issue, a party in one arbitration may not know what evidence has been led in another arbitration 5.The reality that party-appointed arbitrators may be specifically selected by the parties because they hope they may be predisposed to them while remaining, on the face of it, neutral 6.Accordingly, the objective observer would need to look at the facts of the particular case and especially upon the custom and practice in the relevant field of arbitration in order to determine whether there is a real possibility of bias. As to the timing of this assessment, it would have to look at:   1. Only the facts and circumstances as at and from the date when the duty arose must be considered in relation to an arbitrator’s duty to make disclosure; and 2.whether there is a real possibility that an arbitrator is biased, reference must be had to the facts and circumstances known at the date of the hearing to remove the arbitrator. This is a rare example of a case of the courts dipping their toes into the world of arbitration practices. It seeks to clarify the integral duties of an arbitrator while not upsetting the already existing balances set up by the various arbitration institutions. For institutions such as GAFTA and the LMAA, to which the Supreme Court explicitly refers as having clear practices of arbitrators being appointed in concurrent cases, this judgment is no cause for concern. The Supreme Court acknowledged that, since it is a commercial reality and is well-founded in these institutions, parties will be able to continue appointing the same arbitrators in appropriate cases. Beth Bradley [email protected] Victor Oliynik [email protected] Katia.Tsidemidi [email protected] This article originally featured in the December 2020 edition of Hill Dickinson’s Shipping Case Digest. Halliburton -v- Chubb: Full disclosure? It depends. 12 13 TRADE ADVANTAGE MARCH 2021 On 20 April 2020, the benchmark oil price in the United States plummeted below zero for the first time and the Brent price also fell sharply. This article looks at some of the legal questions that may be relevant to traders when commodity prices fall to zero or into negative values. In a very low-price environment, the performance of some deals will be against the commercial interests of both seller and buyer. This is not uncommon in the aftermath of a price shock as the lack of liquidity affects entire supply chains and any available storage space gets bought up quickly. As a result, some buyers will not want, or be able, to accept goods that they agreed to purchase, meanwhile some sellers will not want to sell at a negative or zero price. In these situations, parties can work together to achieve a negotiated outcome. This may involve suspending performance and/or rescheduling deliveries, or terminating the contract by agreement. However, some buyers will want their sellers to honour deals notwithstanding the price crash. Some sellers may not want to perform in the circumstances. Below are some of the questions arising in these situations. Must a seller perform if the price has dropped to zero or a negative value? Does the contract address zero or negative prices? Clauses explicitly dealing with what will happen if prices drop to zero or into negative values were not generally used in trading contracts prior to Q2/2020 but have begun to appear since then. Such clauses take one of two potential approaches, each providing for the continued performance of the contract. The first, and more common, type of clause imposes a price floor of zero stating that there will not be any obligation to pay the absolute value of a negative floating price. In other words, the seller will not be required to pay the buyer for the goods. A variation of this clause is to provide for a price floor of say US$1.00 lump sum, thus providing nominal consideration to the seller. The second type of clause will say that the seller shall be required to pay the absolute value of a negative floating price. In other words, the seller will have to pay the buyer to take the goods. Both such clauses may also state that the buyer remains obligated to accept delivery of the full contracted volume of goods but shall not be required to pay anything. Language acknowledging that the contract shall remain valid in spite of any negative pricing may also be included for avoidance of doubt. It may also be useful to acknowledge that the parties’ liabilities to pay demurrage and other ancillary costs remain unaffected. The International Swaps and Derivatives Association (ISDA) published model clauses along the above lines in October 2020 for use, on an optional basis, in ISDA trading documentation. Is there a price review or renegotiation clause? In oil, at least a few trading parties have started including clauses requiring the parties to discuss reasonably – or sometimes ‘in good faith’ - with a view to negotiating modifications to the terms of the contract as necessary to restore the intended economic equilibrium in the event of a price crash or other extraordinary market events, such as a regulatory change. This approach is somewhat contrary to the English law principle of certainty of contract and is not one that the author would generally recommend. From a contract operating and dispute avoidance perspective, a more structured and prescriptive mechanism for dealing with exceptional events is preferred. In gas trading, the above mentioned general approach is relatively wellestablished in the form of price review mechanisms in long-term agreements. Many such agreements have terms of 15 years or longer. A party can be exposed to catastrophic levels of financial risk if economic circumstances change to their detriment in the middle of the term. However price review clauses are generally only useful when a party wishes to make long-term changes, as they can normally be invoked once every few years, and involve referring the issue to an arbitrator or independent expert. They do not provide quick, one-off relief in response to a price crash. However, as oil markets become more volatile and gas trading activity grows, gas traders may consider invoking price review mechanisms to shift oil-indexed price formulae towards gas-hub-indexation if they believe this will reflect more accurately the market value of the gas traded under their agreement. Negative and zero commodity prices - legal issues for traders TRADE ADVANTAGE MARCH 2021 >>> continues on page 14 14 15 TRADE ADVANTAGE MARCH 2021 Force majeure clauses - or tailored ‘price collapse’ clauses As explained in the March 2020 edition of Trade Advantage, English law does not recognise force majeure (FM) as a standalone concept. FM relief will only be available where a contract contains an FM clause. The meaning and effect of FM will depend on the wording of the clause each time. Typically, FM clauses list a set of trigger events and limit the right to invoke the clause to situations where the trigger event was unforeseeable and prevents or hinders performance. Therefore, a party seeking to invoke FM on the grounds of a price collapse should first check whether the contract contains an FM clause and, if so, whether the clause specifically enumerates price collapse as a trigger event. If it does not, it may be possible to argue that price collapse is encompassed by one of the trigger events that do appear in the clause. This will be a matter of contractual construction each time and is likely to be contentious. Some will take the view that the risk of price collapse is an inherent part of commodity trading, especially where parties choose to use a floating price instead of a fixed one, and not something that should excuse a party from performing when things do not go their way commercially. After all, traders are expected to accept the risk and reward associated with market movements. However the arguments available to a party seeking to invoke an FM clause will depend on its wording. In order to avoid such disputes, FM clauses should be drafted as comprehensively as possible, specifically enumerating all of the desired trigger events. In the past it has not been common practice to include price collapse as a trigger event in FM clauses in trading contracts. Looking forwards, in the post-2020 world counterparties may or may not want to do so. On the one hand, they may view this as contrary to the spirit of commodity trading. Other traders, however, may view negative or zero prices as an extraordinary event that should discharge them from having to perform under contracts. Where parties wish to take this approach, they should ensure that their contracts clearly provide for this. While this can, in theory, be done by way of an FM clause, this may not be the best way as some of the typical features of FM clauses do not fit well with price collapse. For example, typical FM language referring to unforeseeability and prevention of performance is not suitable in this context. A separate tailored clause designed specifically to address price collapse is likely to be a better approach. Such clause might follow a similar structure as an FM clause, providing a mechanism to relieve one or both parties of their performance obligations without liability. Whichever type of clause is used, in order for it to provide a seller with relief, it would need to be drafted in such a way that permanently discharges the obligation to deliver the affected goods at the negative/zero price. Depending on the terms of the clause and the pricing formula, suspensory relief without the express right to cancel cargoes or terminate the contract may not release the seller from eventually having to deliver the affected cargo priced as per the original pricing period. Frustration If none of the above clauses are contained in the contract, sellers may try to rely on the doctrine of frustration to argue that the contract has been discharged automatically. The doctrine of frustration involves a strict legal threshold and arguing that a price crash constitutes a frustrating event will not be straightforward. Among other criteria, there has to be unexpected supervening circumstances making performance a radically different thing from what the parties had bargained for at the outset. The courts have ruled that changes in economic circumstances or increased expense will not frustrate a contract1 . However, there does not appear to be binding authority dealing with a contract that has become completely unprofitable for one of the parties, such that, arguably, it is radically different from what was contemplated at the outset. Some may not consider that a seller would ever contemplate receiving nil payment or, even worse, paying its buyer to take goods. Pending the emergence of binding authority on this point, the issue of whether a zero or negative price crash is a frustrating event remains hard to call. What about consideration? Lawyers have debated whether a contract shall become invalid if the floating price falls to zero or a negative value on the basis that the seller will not receive any benefit. It will be interesting to see whether the principles of consideration will be developed by the courts in cases in the context of price volatility. Would a seller have to pay its buyer to take goods? Where parties are to proceed with sale transactions when prices are negative, this could see sellers paying buyers to take the goods. This may be a seller’s best option commercially at the time. However what is the legal position on accounting for negative prices in trading contracts? Is a seller legally obligated to pay its buyer to take the goods? This is another novel question that has not been addressed by the courts in the commodity trading context. There is recent Court of Appeal authority on negative rates in the context of interest on collateral in ISDA derivatives transactions, although its application may be somewhat limited outside of the ISDA context. In The State of the Netherlands -v- Deutsche Bank AG2 the Court of Appeal ruled, in favour of Deutsche Bank, that the standard form Credit Support Annex (CSA) to the ISDA Master Agreement did not provide for the payment of negative interest. The terms of the CSA in this case had been amended to require Deutsche Bank only, and not Netherlands, to post collateral. Netherlands was to pay interest on this collateral at the rate of EONIA, a European index average, with a fixed discount. The interest rate under the CSA was negative from 2014 onwards. Netherlands argued that interest accruing on collateral posted by it should be in negative figures and payable by Deutsche Bank. The Court considered it significant that neither the CSA nor ISDA’s User Guide contained language indicating that payment of a negative interest had been contemplated. This reasoning drew on the particular factual matrix in the case including the specific wording of the ISDA documentation. Any transactions involving negative commodity prices would have to be analysed on their own facts. Of more general application, however, the Court took guidance from legal authorities which said that rival interpretations of contractual terms should be given weight according to business common sense3. This general approach would be likely to apply to disputes concerning commodity prices. Conclusion As will be clear from this article, the legal issues at play in a negative or zero-price environment will require intensive factual inquiry and legal analysis on a case-by-case basis. Where trading counterparties are unable to agree on a negotiated way forward, they should proceed cautiously before making any decision not to perform contractual obligations – including any possible obligation to pay a buyer to take goods. To avoid disputes in the future, parties should consider including language explicitly dealing with negative and zero prices, or market volatility generally in contracts. Miranda Hearn [email protected] 1. Davis Contractors v Fareham Urban DC [1956] AC 696 2. [2019] EWCA Civ 771 3. Rainy Sky [2011] UKSC 50; Wood v Capita Insurance Services Limited [2017] UKSC 24 16 17 TRADE ADVANTAGE MARCH 2021 ‘From time to time, a case provides the opportunity to resolve a longstanding uncertainty on a point of law of significance in a particular field of commerce. This is such a case.’ – Baker J In what is being widely touted as a resolution to a debate that has circulated for many years on the nature of a demurrage claim, the High Court, London, has recently handed down judgment that promises to cause as much excitement in shipping and trade law (certainly in legal circles) as The Astra series of judgments did five-to-six years ago. The facts K-Line Pte Ltd (the Owners) and Priminds Shipping (HK) Co., Ltd (the Charterers) entered into a voyage charterparty on an amended Norgrain form for the carriage of soybeans on the “ETERNAL BLISS” (the Vessel) from Tubarao, Brazil to Longkou, China. The Vessel arrived at the Longkou anchorage and tendered notice of readiness at 0442 hours on 29 July 2015. Due to port congestion and a lack of storage space for the cargo, the Vessel was kept at the anchorage for some 31 days. On 30 August 2015, when discharge was underway, it was observed that the cargo exhibited significant moulding and caking throughout. The Owners later settled cargo receivers and their insurers’ claims at US$1.1 million. The Owners thereafter commenced arbitration against the Charterers seeking damages or an indemnity in respect of that cost. Pleadings were served in the arbitration, and no breach of contract was alleged by the Owners against the Charterers other than failure to discharge within the laytime. Simply put, the Owners alleged that the cargo deteriorated as a result of its extended retention on board the Vessel, and that it would have been in sound condition if timely discharged. The questions before the Court Pursuant to s.45 of the Arbitration Act 1996, the parties agreed to refer a preliminary point of law to the High Court, namely whether the Charterers were liable to compensate or indemnify the Owners by way of: a) Damages for the Charterers’ breach of contract as a result of their failure to complete discharge within the permitted laytime; or b) An indemnity in respect of the consequences of complying with the Charterers’ orders to load, carry and discharge the cargo. The crux of the debate For almost 100 years, it has been debated whether, in order to recover a loss beyond that of the loss of the use of the vessel (traditionally compensated by way of demurrage), it would be necessary to identify a separate breach of contract. Before considering the authorities before him, Baker J first made the ‘obvious point’ that parties could contract by way of the language in the relevant demurrage clause so as to directly deal with this issue. However, the Norgrain form does not contain such language, and neither had the parties’ amendments to the form. Instead, the parties had simply agreed that ‘demurrage…if incurred,’ was to be paid at a certain rate. The parties had not agreed what demurrage is, or what it seeks to liquidate, which is how the contentious question before Baker J arose. This is typical of many standard voyage charter forms – for example, the Gencon and Asbatankvoy forms. Baker J then considered the Court of Appeal case of Aktieselskabet Reidar -v- Arcos [1927] KB 352, in which the charterers failed to load the cargo of timber at the specified load rate. As a result, the charterers exceeded the permissible laytime and demurrage became payable. Further, as a result of the delay, the vessel was only permitted to carry a winter deck load, which was significantly less than the summer deck load it would have carried had it been loaded within the laycan. The Lord Justices unanimously held that the shipowners were entitled to damages for deadfreight. However, they disagreed whether there had been one breach, being a failure to load within the laytime, or two breaches, being a failure to load within the laytime and a failure to load a full cargo. In this regard, Bankes LJ held there was a single breach, whereas Sargant LJ agreed with the owners that there had been two breaches. A point of contention is where Atkin J’s view on the matter lay, although the majority view in subsequent cases is that he was a ‘two breach’ man. The Bonde [1991] 1 Lloyd’s Rep 136 was the principal case relied upon by the Charterers. In The Bonde, a cargo of wheat was sold under an FOB contract of sale. The buyers invoked a clause in the contract which provided that the delivery period could be extended by a further 21 days if notice thereof was given. The sellers completed loading within the extended delivery period, but were unable to achieve the guaranteed loading rate. The sellers claimed that the buyers were liable to pay carrying charges for the 21-day extension period. The buyers denied liability, claiming that the sellers’ breach disentitled them from claiming these charges. In The Bonde, the Court considered Reidar -v- Arcos and held that, where a charterparty contained a demurrage clause, in order to recover damages in addition for demurrage for breach of the charterers’ obligation to complete loading within the laycan, the shipowners needed to demonstrate that such additional loss was not only of a different nature than the loss of use of the vessel, but stemmed from a breach of an additional and/or independent obligation. In other words, two breaches were needed. By analogy, the same conclusion was to be drawn in respect of the rights and obligations of a buyer and seller under an FOB contract in which provisions relating the payment of demurrage and rates of loading were incorporated. In reaching this decision, the Court reasoned that if the majority view in Reidar -v- Arcos was that two breaches were required, it followed that Bankes LJ’s ‘one breach’ view was wrong in law. Baker J’s decision After considering the cases before him, Baker J concluded that the correct reading of Reidar -v- Arcos was that the majority had found there had been two breaches. However, he also said that this did not mean that the shipowners’ claim for deadfreight would have failed had it been unanimously found that there had been only one breach. This left Baker J to conclude that The Bonde had been wrongly decided, as it was based on faulty reasoning in relation to Bankes LJ’s ‘one breach’ view. This reasoning was non sequitur, ie it did not logically follow. Baker J commented that it was a strong thing for a judge of a court of first instance to refuse to follow a prior decision of a court of the same level which has stood without direct criticism for 30 years. However, he concluded the point at hand and previously decided in The Bonde is a specific, narrow point that does not often arise, and on which there has not been a fully considered decision of a later court agreeing therewith. As such, the doctrine of precedent permitted him not to follow the decision in The Bonde. Accordingly, Baker J decided that it was both open to him and right to reject The Bonde, and that he could apply his view as to what demurrage is intended to compensate. In this regard, he said: ‘Agreeing a demurrage rate gives an agreed quantification of the owner’s loss of use of the ship to earn freight by further employment in respect of delay to the ship after the expiry of laytime, nothing more. Where such delay occurs, the demurrage rate provides an agreed measure by which the parties are bound for the owner’s claim in damages for detention, but it does not seek to measure or therefore touch any claim for different kinds of loss, whatever the basis for any such claim.’ In answer to the questions before him, therefore, Baker J found that: (a) The Charterers were liable to compensate the Owners in respect of the loss, damage and expense that the Owners had suffered as a result of the Charterers’ breach of contract in failing to complete discharge within the permitted laytime; and (b) as he had reached the conclusion set out in (a), it was not necessary to decide whether the Charterers were liable to indemnify the Owners in respect of the consequences of complying with the Charterers’ orders to load, carry and discharge the cargo. Comments Many commentators have been quick to assume that the “ETERNAL BLISS” settles the position with respect to whether shipowners may recover losses other than demurrage from charterers which are caused by delays at the load or discharge port. However, we are of the view that this matter is far from settled, and claims seeking to rely on this judgment shall have to be carefully considered on a case-by-case basis. Despite this judgment, there are still hurdles for shipowners to overcome in order to successfully claim from charterers. For example, in the present case, which shall now be referred back to the arbitral tribunal, the Owners shall have to prove that they complied with their obligation to safely carry, care for and stow the cargo; that the damage in question was not caused by issues other than the delay at the load or discharge port; and not caused by an event which broke the chain of causation. Thereafter, the Owners shall have to evidence that the US$1.1 million settlement reached with cargo owners and receivers was reasonable. If the Owners are unable to surmount the hurdles described above, they may only be entitled to recover a small percentage of the sum claimed, if at all. In other words, although this judgment could mean an increase in shipowners seeking to make recoveries from charterers, it is by no means certain that their claims shall prevail. This judgment shall also have ramifications for claims pursuant to contracts of sale for losses other than demurrage which are caused by delay. Although the “ETERNAL BLISS” concerns a voyage charter, Baker J rejected that there was a material distinction between the demurrage provisions in a charterparty and the demurrage provisions in a contract of sale. The key question at hand is: what is demurrage, and what does it liquidate? Unless otherwise defined in the contract, this judgment is authority that demurrage does not measure or affect claims for loss other than damages for detention, regardless of the basis for those claims. In order to protect their position, therefore, and ensure that claims which are able to overcome the hurdles identified above may be passed on, we would recommend that parties ensure that the demurrage provisions in their charterparties and contracts of sale are on materially back-to-back terms. Charterers have been granted leave to appeal to the Court of Appeal, and the appeal is presently outstanding. Christina Whitehead [email protected] Sumeet Malhotra [email protected] Additional damages for shipowners – Eternal Bliss, or short-lived? 18 19 TRADE ADVANTAGE MARCH 2021 Introduction In previous editions of Trade Advantage we have reported on the decisions of the High Court1 (Trade Advantage March 2020, page 12) and the Court of Appeal2 (Trade Advantage August 2020, page 14) in Enka Insaat ve Sanayi -v- OOO Insurance Co Chubb. The question of which law prevails in the absence of an express choice, where there is an arbitration agreement but that agreement is silent as to the law applicable, has long been a question of legal and academic debate: the law of the seat of an arbitration or the law governing disputes in the main contract? Such question arises because an arbitration agreement is treated as an independent agreement, severable from the contract which contains it. We cannot be guided by the Rome I Regulation on applicable law for contractual obligations to answer this question because the Regulation excludes from its scope at article 1(2)(e) ‘arbitration agreements and choice of court agreements’. The Court of Appeal had wanted to ‘impose some order and clarity’ to the common law position and yet, the Supreme Court gave permission to appeal. While agreeing that an anti-suit injunction (ASI) against proceedings in Russia should be upheld because there was an enforceable English arbitration agreement, the Supreme Court reached that conclusion on a very different legal basis from the Court of Appeal3. Reminder of the factual background To recap, the parties’ dispute had arisen under a construction contract (the Contract) that contained an ICC arbitration clause where London was to be the seat for any arbitration. Chubb had subrogated claims against a subcontractor, Enka, following a fire on a construction site in Russia. In breach of the arbitration clause, Chubb brought proceedings in a Russian court against Enka. Enka then sought an ASI from the English High Court to restrain the Russian proceedings in favour of ICC arbitration. Importantly, neither the Contract nor the arbitration agreement within it contained an express choice of law clause. The judges in all three instances therefore had to grapple with the default position in the absence of the parties’ express choice of law. It is also of note that while the Rome I Regulation could not aid interpretation of the arbitration agreement, it did assist in identifying the law governing the main contract, which was found to be Russian law, although there was no applicable law clause per se. The Court of Appeal’s findings The Court of Appeal sought to lay down the principle that, in the absence of an express choice of law in the arbitration agreement, there was a strong presumption that the law of the chosen arbitral seat would govern the arbitration agreement. With the seat in London, hence English law applied. The Supreme Court’s findings On appeal, the Supreme Court disagreed that the choice of arbitral seat determined the applicable law. Instead, all five judges of the Supreme Court found that, if there is to be a general rule, it is that the governing law clause of the main contract, if present, would also apply to the arbitration agreement within it (where the arbitration agreement itself does not contain a governing law clause). They considered it was reasonable and natural to assume that the same system of law governs all elements of a contract. And where there is no choice of law in either the contract or the arbitration clause, the relevant English common law test is to determine the law with which the arbitration agreement was most closely connected. It was at this point that the law lords diverged. The majority found that the law with which the arbitration agreement was the most closely connected was usually the law of the seat. The minority (Lords Burrows and Sales) dissented, stating that the law most closely connected to the arbitration agreement was the law most closely connected to the main contract. Consequently, in the view of the minority, Russian law should have applied to the arbitration agreement. What if Russian law applied with an English arbitral seat? In a further significant determination, all five judges affirmed the Court of Appeal’s finding that the grant of an ASI where there is an English arbitral seat is subject to the same principles whether or not English law applies to the main contract. Had Russian law applied to the arbitration agreement, the English court would have had to apply Russian law to determine whether the arbitration agreement was valid so as to justify an ASI being granted. Conclusion Based on the Supreme Court’s views in this case, we would extract the following principles when interpreting the proper law to apply to an arbitration agreement. a) Does the arbitration clause contain a choice of law? If yes, that law will govern the arbitration. b) If the answer to a) is no, does the contract contain a separate applicable law clause? If yes, this law will generally govern the arbitration. c) If the answer to b) is no, then the law applicable to the arbitration agreement will be the law that is most closely connected to it. If there is a chosen arbitral seat, the law of that seat will be the law most closely connected to the arbitration agreement. d) What if the contract contains one applicable law clause and the arbitration agreement contains a different applicable law clause? The main contract applicable law clause will prevail, as decided by the Court of Appeal in another recent case.4 These are thorny issues and ‘clarity’ is not the first word that springs to mind. Our advice therefore is to ensure you stipulate the applicable law as clearly as possible when drafting contracts and any arbitration clauses. Saskia Scharnowski [email protected] Paul Taylor [email protected] Which law prevails - the law of the seat or the law of the main contract? Enka -v- Chubb (Supreme Court) [2020] UKSC 38 1. [2019] EWHC 3568 (Comm) 2. Enka Insaat ve Sanayi AS -v- OOO Insurance Co Chubb [2020] EWCA Civ 574 3. Enka Insaat Ve Sanayi AS -v- OOO Insurance Company Chubb [2020] UKSC 38 4. Kabab-Ji SAL (Lebanon) -v- Kout Food Group (Kuwait) [2020] EWCA Civ 6 TRADE ADVANTAGE MARCH 2021 20 21 TRADE ADVANTAGE MARCH 2021 The International Cotton Association Rules: a guide to arbitration Most contracts for the international sale of cotton are subject to the Bylaws and Rules of the International Cotton Association (the ICA Rules), and recent volatility to cotton prices has led to an increase in arbitrations commenced under those rules. Cotton trading parties should therefore ensure that they are familiar with the particularities of arbitration under the ICA Rules. The applicable rules The ICA Rules are updated once or twice a year (the latest version being released in November 2020) so it is important to check which edition applies. The rules that govern an ICA arbitration itself are those in force at the time of application. Otherwise, the ICA Rules applicable to a contract are those in effect at the time that the contract is concluded. The ICA Rules divide arbitrations into quality and technical arbitration. Quality arbitrations relate to any dispute arising from examination or testing of cotton quality or characteristics. Technical arbitrations relate to all other disputes, such as non-performance. This guide focuses on technical arbitrations as this is where the uptick in ICA arbitrations has been particularly notable. The closing out process Technical arbitrations commonly arise from the closing of a contract by invoicing back under the ICA Rules. If either party closes a contract, an invoicing back settlement is payable regardless of which party, if any, is responsible for non-performance or is in breach of the contract. A party can therefore close a contract at any point and trigger the invoicing back process. The invoicing back settlement is calculated as the difference between the contract price and the available market price at the date of closure. The date of closure is the date when both parties knew, or should have known, that the contract would not be performed. If the invoicing back settlement is claimed in arbitration, the ICA tribunal will normally establish the available market price based on input that it obtains from other cotton traders. The tribunal will not share the identities of its sources, but it is required to give the parties the opportunity to comment on the price information that it obtains. Commencing arbitration A party can commence arbitration by completing a form on the ICA’s website. The ICA has the power to consolidate multiple arbitral proceedings between the same parties, and it is possible to commence arbitration under multiple contracts with the same counterparty in the same form. The ICA will notify the respondent of the request but the arbitration will not be commenced until the claimant has paid the requested deposit to the ICA. Appointment of arbitrators The arbitrators must be members of the ICA. The ICA’s website lists the profiles and contact details of its arbitrators. The ‘three and eight rule’ means that an arbitrator may only accept up to three appointments to act as arbitrator for a party, or related party, per calendar year, and cannot have more than eight active first tier cases open at a time. The eight arbitrations cap does not apply to quality arbitrations. The recent increase in the number of technical arbitrations means that many ICA arbitrators have already reached their limit of eight appointments for technical arbitrations. Conduct of the arbitration The ICA Rules do not provide for a particular timetable, but the standard directions issued by a tribunal at the outset provide for four rounds of submissions starting with the claimant and ending with the respondent. This is unusual, as normally the claimant in legal proceedings is allowed the final word. The ICA does not accept submissions directly from law firms or independent lawyers, and an ICA tribunal will not award recovery of the successful party’s legal costs. That does not prevent a party’s in-house lawyers from serving submissions and, in practice, parties often retain external lawyers to advise them in the background and prepare submissions. Appeals A party can appeal an ICA arbitration award to a five person committee appointed by the ICA. In the event of appeal, the respondent to it can require the appellant to provide security for 20% of the principal amount awarded at first tier. If the appellant fails to do so, the appeal will not be permitted to proceed. This enables the party successful at first tier to obtain a degree of security in advance of enforcement and acts as a deterrent to the pursuit of a meritless appeal in order to delay such enforcement. The successful party should, however, consider obtaining legal advice from the jurisdiction of enforcement on whether curbing an appeal in this way could cause problems down the line. The parties cannot appeal to the English courts on a question of law arising out of an ICA arbitration award. That is not the case for many other arbitral rules, such as those of the LMAA, GAFTA or FOSFA. The parties can still apply to the English courts to challenge an award on the grounds either that the tribunal lacked substantive jurisdiction or that there was a serious irregularity. Unsatisfied awards If the unsuccessful party fails to honour or appeal an ICA award within 28 days of publication, the ICA can add such defaulting party to part one of its list of unfulfilled awards, which is publically available on its website. The ICA can also add the names of any entities which appear to be related to the defaulting party to part two of its list of unfulfilled awards. This is only made available to the ICA’s members and other cotton associations and is not publically available on its website. The part two list helps guard against the risk of a business avoiding the consequences of defaulting on an ICA award by continuing to trade cotton in the name of a different entity to that named in the award. The ICA will refuse arbitration facilities to a party included on the part one list and, if an ICA member contracts with a party on either the part one or part two list, it can be censured, fined up to £100,000 and/or suspended or expelled from the ICA. The post-award procedures are probably the most notable feature of the ICA Rules governing arbitration, and are a welcome way of assisting the successful party with recovery of the sums awarded to it. John McNeilly [email protected] Amy Walmsley [email protected] TRADE ADVANTAGE MARCH 2021 22 23 TRADE ADVANTAGE MARCH 2021 Team newsForename The Legal 500 2021 rankings We are pleased to announce that Hill Dickinson, London was ranked in Commodities Disputes as a Tier 1 law firm in The Legal 500 Guide 2021, closely followed by our Shipping and Trade Finance teams which were ranked in Tier 2. From our very own team, Fred Konynenburg, Paul Sinnott, Paul Taylor and Jeff Isaacs were recognised as Leading Individuals, and Darren Wall was recognised as a Next Generation Partner. Details can be found on The Legal 500 website Chambers and Partners rankings Hill Dickinson achieved rankings in over 20 areas in the Chambers and Partners UK 2021 legal directory, including Commodities (Band 2) and Shipping (Band 3). Chambers highlights the Commodities team’s experience in complex arbitrations before major trade association boards and court litigation, with particular reference made to its sugar, grains and energy expertise. Ranked individuals and notable practitioners recognised from our team are Jeff Isaacs (Band 1), Fred Konynenburg (Band 3), Mark Aspinall (Band 3), Darren Wall (Band 3) and Paul Taylor (Band 4). https://chambers.com/law-firm/hilldickinson-llp-uk-1:193 Publication in Gaftaworld Andrew Buchmann has published an article in the November 2020 edition of Gaftaworld on the decision in Fimbank Plc –v- Discover Investment Corp [2020] EWHC 254 (Comm). The case concerned a misdelivery claim against a ship owner by a bank holding a bill of lading as security for financing its customer’s cargo and the defence of consent raised to resist the claim. Miranda Hearn rejoins the team Miranda has rejoined the team following an 18-month secondment to the London office of the energy trading department of a global natural resources group.  She spent six months of the secondment as legal counsel supporting the crude oil, products, gas and chartering desks and assets.  Thereafter she provided interim cover in the sanctions compliance team for 12 months advising on sanctions in the context of commodity sale, trade finance and vessel-related matters. She also delivered sanctions trainings, developed sanctions policies and procedures, and advised on the impact of EU and UK sanctions post-Brexit.  As well as supporting the trading business, Miranda provided legal and compliance support on projects relating to group assets. Working in-house during the 2020 oil price crash and COVID gave Miranda insight into the dynamics of energy trading. Forthcoming webinars To register for a webinar, please email Katia Tsidemidi ([email protected]). Audience members will be able to submit questions to the speakers live on the day. Additionally, please feel free to submit questions to the speakers in advance by emailing the speakers directly. Recordings of the webinar will be available afterwards. Recent legal issues in energy trading Wednesday 5 May 2021, 12:00 London / 13:00 Geneva / 20:00 Singapore Duration: 70 minutes Force majeure and frustration in the context of agricultural commodities Wednesday 19 May 2021, 12:00 London / 13:00 Geneva / 20:00 Singapore Duration: 70 minutes Moderator: Jeff Isaacs Speakers: Fred Konynenburg Darren Wall Introduction by: Katia Tsidemidi Speakers: Contractual flexibility in LNG - Miranda Hearn Whose terms apply? - John McNeilly Price issues in oil trading – Paul Taylor Trade finance fraud – Mark Aspinall Commodities team update on dispute resolution Wednesday 23 June 2021, 12:00 London / 13:00 Geneva / 20:00 Singapore Duration: 70 minutes Speakers: In-house counsel privilege – Toby Miller Anti-suit injunctions - Saskia Scharnowski Negotiating contracts: is there an arbitration agreement? – Amy Walmsley Demurrage and damages at large under sale contracts - Elaine Carter TBC - Edwin Cheyney The information and any commentary contained in this newsletter are for general purposes only and do not constitute legal or any other type of professional advice. We do not accept and, to the extent permitted by law, exclude liability to any person for any loss which may arise from relying upon or otherwise using the information contained in this newsletter. Whilst every effort has been made when producing this newsletter, no liability is accepted for any error or omission. If you have a particular query or issue, we would strongly advise you to contact a member of the commodities team, who will be happy to provide specific advice, rather than relying on the information or comments in this newsletter. About Hill Dickinson The Hill Dickinson Group offers a comprehensive range of legal services from offices in Liverpool, Manchester, London, Leeds, Piraeus, Singapore, Monaco and Hong Kong. Collectively the firms have more than 850 people including 185 partners and legal directors. For further information about our services, please contact any member of our dedicated commodities team. hilldickinson.com/commodities Liverpool Manchester London Leeds Piraeus Singapore Monaco Hong Kong TRADE ADVANTAGE MARCH 2021 Key contacts Jeff Isaacs Partner and Head of Commodities +44 (0)20 7280 9125 [email protected] Edwin Cheyney Partner +44 (0)20 7280 9133 [email protected] Fred Konynenburg Partner +44 (0)20 7280 9250 [email protected] Paul Taylor Partner +44 (0)20 7280 9261 [email protected] Andrew Buchmann Partner +44 (0)20 7280 9283 [email protected] Darren Wall Partner +44 (0)20 7280 9265 [email protected] Claire Messer Partner +44 (0)20 7280 9129 [email protected] Toby Miller Legal Director +44 (0)20 7280 9126 [email protected] Shanna Ghose Partner +65 6576 4726 [email protected] Saskia Scharnowski Associate +44 (0)20 7280 9126 [email protected] Olga Newman Associate +44 (0)20 7280 9386 [email protected] Anastasia Alexaki Associate +44 (0)20 7280 9389 [email protected] Elizabeth Elliott Trainee +44 (0)20 7280 9168 [email protected] Sumeet Malhotra Partner +65 6576 4747 [email protected] Miranda Hearn Senior Associate +44 (0)20 7280 9136 [email protected] Jean-Francois Van Hollebeke Legal Director +44 (0)20 7280 9279 [email protected] Amy Walmsley Associate +44 (0)20 7280 9278 [email protected] Cansu Yildirim Legal Admin Assistant +44 (0)20 7280 9105 [email protected] Elaine Carter Associate +44 (0)20 7280 9320 [email protected] Conor O’Brien Associate +44 (0)20 7280 9349 conor.o’[email protected] Beth Bradley Partner +44 (0)20 7280 9317 [email protected] Katia Tsidemidi Paralegal +44 (0)20 7280 9140 [email protected] John McNeilly Legal Director +44 (0)20 7280 9141 [email protected] Mark Aspinall Consultant +44 (0)20 7280 9373 [email protected] Paul Sinnott Partner +44 (0)20 7280 9374 [email protected] Singapore London Christina Whitehead Associate +65 6576 4734 [email protected]