Expert legal advice in a changing worldNewsflash - The 2013 edition of the Chambers UK Directory has now been published and Clyde & Co maintains its Tier 1 ranking in the Commodities section with the following editorial: “The team is recognised for its first-rate abilities in contentious and non-contentious matters, drawing on its global reach to provide a multi-jurisdictional service to clients ... Sources highlight the team’s “excellent client service,” while noting that it is “unusually commercial for a law firm.”

Written by legal experts, Clyde & Co’s Commodities Newsletter is a regular publication in which recent developments are analysed: new case law, changing legislation and new areas of potential liability. In this issue, we begin with two GAFTA cases, one which highlights the difference between seeking to vary a contract and seeking to claim an extension of the delivery period under a GAFTA contract, and the second which tackles the time limit for bringing a jurisdiction challenge under section 67 of the Arbitration Act 1996. There follows an article in which grain traders are advised to be aware of potential governmental intervention into trade operations, and are reminded of important issues to consider in such situations. We continue with an insightful analysis of trade finance today.

The follow-up article examines a case in which the court confirmed the position that a charterer’s duty to discharge cargo under a Gencon charterparty was non-delegable resulting in a demurrage bill in excess of USD 3.5 million for the charterer. We then review a claim for demurrage, and the charterer/seller’s attempt to pass their liability on to their own cargo supplier, an attempt which failed as a result of a force majeure clause in the sale contract. The next piece discusses a Court of Appeal decision whereby a letter of indemnity, issued in favour of one party, was found to be enforceable by a different party on the strength of the Contracts (Rights of Third Parties) Act 1999. We then analyse the Court of Appeal’s ruling which held a side letter to a binding agreement to be unenforceable, before concluding with an article on the status of arbitration awards.

We hope that you find our newsletter informative.

If you wish to discuss any of the issues raised, please feel free to write to us on info@clydeco.com or alternatively please liaise with your usual contact.

Clyde & Co – A leading international law firm with over 1,400 lawyers operating over 6 continents.

NewsletterDecember 2012

Commodities

ContentsIntroduction Page 1

When is an extension not an extension?Page 2

Clarification on the time limit for bringing a jurisdiction appeal in respect of a GAFTA awardPage 4

Grain traders beware! A note to those in a contract or planning to contractPage 5

Trade Finance: Plenty of one, but not enough of the otherPage 7

Beware charterers delegating their duty of discharge Page 8

Force majeure clause breaks demurrage indemnity chainPage 9

Charterers’ letter of indemnity enforceable by shipownersPage 10

Court rules that a side letter is an unenforceable agreementPage 11

Court reviews status of arbitration awardsPage 12

Meet the teamPage 13

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Commodities Newsletter December 2012

When is an extension not an extension?Eurof Lloyd-Lewis

In PEC Limited v Thai Maparn Trading Co Limited [2011] the English Commercial Court gave judgment on an appeal against a GAFTA Board of Appeal award, which had considered amongst other things, whether a buyer’s claim for an extension under a FOB contract was valid. Claims for extensions will be familiar to many GAFTA members and the result emphasised yet again the importance of getting such matters right as US$ 14,520,000 turned on the outcome.

The ContractThe parties entered into a contract to sell FOB Kohsichang 22,000 mt of rice, with shipment to take place during April – 07 May 2008. All other terms and conditions of the contract were to be as per GAFTA 120.

The FactsOn 8 May, the day after the expiry of the contractual shipment/delivery period, the Buyers wrote to the Sellers stating they had not booked the carrying vessel as the Sellers had not confirmed that the cargo was ready. As a gesture of goodwill, but without prejudice to their rights, the Buyers said they were ready to extend the delivery period by 21 days, subject to confirmation within two days that the goods were ready. Failing this, they would hold the Sellers in default. Shortly after, the Buyers’ solicitors wrote to the Sellers to say that “despite … clear indication that you are in breach of contract, [buyers] hereby give you notice under clause 7 of GAFTA Form No 119 that they require the delivery period to be extended by an additional period of 30 days.” A response was required within seven days, otherwise the Sellers would be held in default.

Was the Buyers’ message of 8 May a valid claim for an extension?Clause 7 of GAFTA 120 (in common with other GAFTA standard form contracts) permits a buyer to unilaterally claim an extension of the delivery period by an additional period not exceeding 21 consecutive days, provided a valid notice is served. The Court accepted that the “notice” had to be clear as to both the fact that an extension was being claimed and as to its duration.

After analysing the exchanges, the Court agreed with the GAFTA Board of Appeal that the Buyers’ message of 8 May had not validly claimed an extension, for the following reasons:

1. It stated that they were “ready” to extend the delivery period, not that they were doing so, i.e. it was conditional upon the Sellers’ response.

2. That this was a proposal was further supported by the reference to it being “a gesture of goodwill” and “without prejudice to our right”.

3. If an extension of the delivery period had been claimed, this would have affirmed the contract and there could be no question of the Buyers being able to rely on their “right” with regard to alleged breaches.

4. The Buyers’ argument that they were referring to the right to treat the Sellers as being in default of the extended delivery period also failed. If the delivery period had effectively been extended, the Sellers could not be treated as being in default in two days’ time, as even in the absence of confirmation of load readiness, the Sellers would still have had 19 days of the extended delivery period to perform and could not be in default.

5. Buyers were offering the Sellers a choice.

6. The Board of Appeal had come to the same conclusion.

7. The effect of combining these matters in the terms used was to make the extension conditional upon the Sellers confirming the readiness of the cargo. This never happened so there was no valid claim for an extension.

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With regard to the message sent by the Buyers’ solicitors, they had made the fatal error of going on to require Sellers to confirm their intention to ship the cargo within seven days, failing which they would be held in default. The judge’s conclusion was that it was unclear whether the message claimed an extension regardless of the Sellers’ requested response.

Lessons to be learnedThe Buyers in this case were seeking to vary the contract rather than claim an extension under GAFTA terms. The moral of this tale for the parties seeking to claim an extension is that they should read the contract to ensure any notice sent is clear, and contains all the ingredients necessary to be effective.

This article first appeared in Gaftaworld, August 2012.

Commodities Newsletter December 2012

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Clarification on the time limit for bringing a jurisdiction appeal in respect of a GAFTA AwardAnousheh Bromfield

The Commercial Court has confirmed, in the case of PEC Limited v Asia Golden Rice Co Ltd [2012] that the 28 day time limit for bringing a jurisdiction challenge under section 67 of the Arbitration Act 1996 (the “Act”) runs from the date of the first tier GAFTA award.

Background A GAFTA award was issued on 2 July 2012 in respect of a disputed sales contract (the “Award”). The Award held that the tribunal had jurisdiction to hear the dispute and found in favour of Asia Golden Rice Co Ltd (“AGR”). PEC Limited (“PEC”) appealed to the GAFTA Appeal Board. The appeal is due be heard in January 2013 and does not raise the question of jurisdiction as both parties have accepted that the GAFTA Rules do not permit appeals on jurisdiction.

The current case results from PEC’s application for an extension of time for making a section 67 jurisdiction challenge up until 28 days after the publication of the GAFTA Appeal Award (“Appeal”). Despite the parties having reached an agreement that the Court had jurisdiction to, and should, grant an extension of time, Mr. Justice Hamblen produced a reasoned judgment due to “uncertainty as to the legal position”.

The parties’ positionsPEC’s primary case was that there was no need for any extension, as time only ran from the date of the Appeal (section 70(2) of the Act). It submitted that the provisions requiring that any arbitral process of appeal, or review, should be exhausted before the 28 day time limit began to run, applied despite the fact that the GAFTA Rules did not allow for appeals on jurisdiction. In the alternative, PEC requested an extension pursuant to section 80(5) of the Act.

AGR’s position was that the time for making an application under section 67 ran from the date of the Award. As this had expired, it was up to the Court to exercise its discretion to grant the extension based on PEC’s evidence.

FindingsThe matter turned on the interpretation of sections 70(2) and (3) which provide, in so far as is relevant:

“(2) An application or appeal may not be brought if the applicant or appellant has not first exhausted –

(a) any available arbitral process of appeal or review…

(3) Any application or appeal must be brought within 28 days of the date of the award or, if there has been any arbitral process of appeal or review, of the date when the application or appellant was notified of the result of that process. …”

Mr. Justice Hamblen held that because the GAFTA Rules do not permit appeals on jurisdiction, the only way the jurisdiction of the tribunal can be challenged is by virtue of a section 67 application. Consequently, there is no available arbitral process of appeal or review. It follows that the time limit for bringing a section 67 application runs from the date of the first tier award, regardless of whether an appeal is submitted to the GAFTA Board of Appeal. In the circumstances, however, the Court held that it was appropriate to grant an extension of time.

CommentThis case provides welcome clarification on the time limit for bringing a jurisdiction challenge, under section 67, in respect of a GAFTA award. Parties who seek to make a jurisdiction challenge should do so within 28 days of the date of the award, regardless of whether any appeals are to be made to the GAFTA Board of Appeal. The influence of this case is likely to extend beyond GAFTA proceedings to other arbitral proceedings, including FOSFA, given the similarities in the arbitral rules regarding jurisdiction challenges. Parties should be aware of the need to make any jurisdiction challenge promptly following the publication of the first tier award to avoid the expense and uncertainty of having to make an application to Court for an extension of time.

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Commodities Newsletter December 2012

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Grain traders, beware! A note to those in a contract or planning to contract Ivanna Dorichenko

Out of all the soft commodities, the greatest drama of the season is undoubtedly centred upon the Black Sea region, as the grain traders are effectively on standby, in anticipation of potential government interference with trade.

Even though some of the restrictions are said to be expected or, in the case of Ukraine, even “agreed” with traders, it is market pressure and the uncertainty caused by the governmental authorities’ unclear position which is obstructing the normal course of trading operations, and which could lead to various mistakes that may prove quite costly at a later stage.

The purpose of this short note it to remind all concerned of the issues to bear in mind where restrictions, or other impediments to trade, may be imminent.

Pre-contractual negotiations and the contractIf you are still at the pre-contractual stage and have not yet committed yourself to a firm offer, it would be highly advisable to consider the risks related to any restrictions, or other impediments, as well as the impact of any potential delays which may occur during the execution process. Once the deal is agreed, make sure that your contract reflects all the essential terms of your agreement, is drafted so as to address all relevant risks, and contains all the clauses aimed at protecting you from liability for any potential delays or breaches caused by events outside your control.

Standard contract formsIf you trade on the standard contract forms, be it GAFTA, FOSFA or any others, you have to work out what the exact terms are, and whether they cover the events in consideration (e.g. force majeure, prohibition, ice provision, etc…). Make sure that you are well aware of all the requirements stated in the respective clauses (e.g. timely notices, standard of proof, etc…) as this will affect your ability to rely on protection from the particular clause should the related event occur. You may also wish to consider including a particular provision in your main contract to avoid potential disputes as to the applicability of the standard form clause.

Nature of the restrictionsRestrictions may come in all sorts of forms, for instance a complete ban on exports, the reduced export of a particular commodity, various transport conventions, etc. Bear in mind that different types of restrictions lead to different consequences, and that these require different actions from your side in order to qualify for an exemption from liability for any subsequent inability to perform. Your contract should be your first point of reference for this purpose.

TimeTimely performance of your obligations can never be stressed enough, especially, if at the time of execution of the contract, the market goes against you. This applies to all communications, pre-advice, other notices and even default declarations. At the same time, you must understand the distinction between the various time stipulations in your contract, as the importance and consequences of these may differ greatly. For example, you may not always be in a position to hold your FOB buyer in breach of contract for non-compliance with the pre-advice terms, or hold your FOB seller to performance if your notices are served too late to enable delivery within the contractual delivery periods. On the other hand, there may be circumstances where waiting for the right time may prove to be advisable; for example, premature declarations of default may affect liability for non-performance, which would otherwise be protected by the contractual clause, (e.g. prohibition) and may lead to an adverse change of your position.

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Direct link between restrictions and your ability to performThis is an area where a lot of things can, and do, go wrong. The supervening event must not only exist or occur after conclusion of your contract; it must actually prevent you from performance. This may not necessarily be the case, even where the majority of your fellow traders on the market cannot perform. Therefore, unless you are in a position to provide compelling evidence illustrating how performance of your contract was impeded by the particular event, you are unlikely to be able to rely on the protective clauses and avoid liability.

KnowledgeAs a final comment, excercise caution with regard to both the knowledge and reasonable expectations factors. Your otherwise perfect defence to non-performance may be greatly affected if you knew, or should have known, about restrictions and the time when they were to be introduced. In this context, we invite the readers to revisit the Ukrainian scenario and consider whether occurrence of a particular event, such as an exhaustion of the agreed uninterrupted export volume, may have any potentially adverse implications in this respect.

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Commodities Newsletter December 2012

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Trade Finance: Plenty of one, but not enough of the otherPhilip Prowse

Whilst the need for the export of commodities from the emerging markets has never been greater, with populations in vast countries such as China and India continuing to open up to the influences of urbanisation and consumerism, the continued scarcity of finance to facilitate these trade flows remains of great concern to those operating in the industry.

The great question today within trade finance is simple: “Where’s The Money?” The primary (IPO) and secondary (rights issues) equity markets are as good as shut for business, and traditional international structured trade and commodities finance from banks, particularly the Eurozone ones that dominated the industry pre-financial crisis, remains patchy at best. The return of these banks to the asset class is eagerly awaited, but consolidation of capital appears to be their watchword for 2012 at least.

Over-regulation of the commodities industry, the restrictions, at least in the US, on proprietary trading, along with reduced margins on trading activity and disintermediation taking root in the supply chain, are all factors that may dissuade banks from re-entering the commodities market, at least until the regulators re-open the stable door that they have recently tried to close long after the horse bolted.

Key trading entities and investors in the commodities markets have always relied on a combination of structured trade bank finance, IPOs, rights issues, or on general borrowing-based revolving credit facilities to finance their pre-export, prepayment and general international trade operations. Now, however, with these sources being largely unavailable, at least in sufficient quantity to satiate the needs of traders and other commodities players, the bond markets are opening up as an attractive alternative, with relatively low investor yields providing a comparatively cheap and available finance opportunity for commodities houses.

Mining entities have led the way throughout 2012, as bond insurances in this sector are expected to peak at about 100 billion US dollars by year end (source: Financial Times).

Trading entities are now following suit, looking to tap into the bond markets through use of the dreaded “S” word –but this time not built on a wing and a prayer, on a pool of remote, over-valued and under-performing assets, but instead constructed with solid foundations, on actual hards, softs, and energy resources necessary for the world and its wife to live. When one considers that often such receivables are backed by insurance or bank/sponsor guarantees, “securitisation” does

not seem to be such a dirty word after all.

As traditional trading houses continue to follow a re-vamped business model predicated on diversifying up and down the supply chain, their financing needs will need to become increasingly solution-orientated; it is not just that traders will look to raise any form of capital, it is that they will need to find the right type of capital to mesh with their diversified supply chain activities without hand-cuffing them at the same time. Financing, for example, will be particularly attractive if it is not only viable financially, but also if it is committed and unsecured, but secured trade financing will still be attractive to traders if the security is against the individual assets financed by the lender(s) concerned, rather than by way of all-assets debenture type security, more suited to the world of corporate finance.

But banks hoping to return to the asset class will have credit committees looking to ramp up security packages from those that were taken pre-financial crisis, and will not necessarily be selective in their security demands. This will not aid traders who will be looking to a portfolio of banks, on either a syndicated or bilateral basis, to finance their needs.

Insurance could provide an answer; perhaps as a buffer between commodities houses and banks so that, when allied to trader risk and bank risk, and when supplemented by intelligent hedging and enhanced risk mitigation techniques, it could still be the final piece of the jigsaw which comprises an overall financing package for international trade flows that is acceptable to all parties. Even in these cash-strapped times.

It is much needed; and it will supplement the unstructured receivables-based supply chain and reverse factoring that is flavour of the month at the moment, but which alone does not suffice.

Finally, if structured trade and commodities finance becomes more freely available to facilitate international trade, that can surely only help the longed-for resurgence of the world economy.

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Commodities Newsletter December 2012

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Beware charterers delegating their duty of dischargeTara Smith

In the case of DGM Commodities Corp v Sea Metropolitan S.A. [2012], the Receivers’ refusal to discharge a shipment of frozen chicken landed the Charterers with a demurrage bill in excess of USD 3.5 million.

BackgroundDGM Commodities (Charterers) chartered the vessel “ANDRA” from Sea Metropolitan SA (Owners) under a voyage charterparty on the Gencon form, to carry a cargo of frozen chicken from the United States to St Petersburg. The sales contracts between the Charterers and the Russian Receivers provided for release of the cargo against payment. The vessel arrived in St Petersburg in December 2007, but commencement of discharge was delayed whilst Receivers paid for the cargo in a piecemeal fashion. Once discharge finally commenced (after laytime had expired and the vessel was on demurrage), one hold was found to be contaminated with gasoil. Discharge from the rest of the vessel continued, but discharge of the contaminated hold ceased.

As the Owners were liable for the gasoil leak, the Receivers refused to accept the rest of the cargo until payment of a cash settlement was received. The Owners offered security for damages in the form of a letter of indemnity from their P& I Club, pending resolution of the dispute and full assessment of the extent of the damage. However, this was rejected by the Receivers, who continued to refuse to discharge the contaminated cargo. In the meantime, the Russian Veterinary Service placed an order over the cargo “suspending” its discharge.

Eventually, in October 2008, the Owners paid a cash settlement to the Receivers, the Veterinary Service lifted the order, and the contaminated cargo was re-exported. Charterers were held liable for demurrage to the tune of US$ 3,605,630.

The present case was the appeal by the Charterers to the Court of Appeal, under s69 of the Arbitration Act, whereby the Charterers sought to overturn the first instance decision by submitting that the arbitrators had erred in law in rejecting their submission of frustration of the Charterparty.

FindingsThe appeal was dismissed. It was found that the true frustrating event was not the Veterinary Service order, which was a temporary prohibition of the discharge, but the act of the Receivers in refusing to discharge the contaminated goods. The Receivers could have procured the lifting of the order at any time, as they eventually did when they received the settlement sum demanded from the Owners in November.

Notwithstanding, the Charterers had no actual control over the Receivers in this case, the Receivers were not party to the Charterparty, and it was the Receivers’ conduct which delayed the discharge. The charterparty was not deemed to be frustrated, and the Charterers were held liable for demurrage. The Charterers’ duty to discharge under the Gencon charterparty is non-delegable. Even if the Veterinary Service order had been a frustrating event, the Charterers would not have been able to rely upon it to avoid liability for demurrage, because it was the Receivers’ conduct in refusing to discharge that effectively kept the order in place.

Concluding advice to any charterer in light of this caseCheck the terms of your charterparty carefully. If you are under a non-delegable duty to discharge (as you most probably are), you will need to ensure any corresponding sales contract acknowledges that and forces a receiver to discharge in any circumstances except force majeure, with an indemnification for any losses incurred as a result of receivers’ failure to discharge for any other reason.

Commodities Newsletter December 2012

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Force majeure clause breaks demurrage indemnity chainPressiana McQuinn

An FOB buyer at the top of a chain of sale contracts was unable to pass demurrage liability to its seller because the force majeure clause in the sale contract applied.

The Great Elephant Corp v Trafigura Beheer BV & Others [2012] case concerned a claim brought by the owners of the oil tanker “CRUDESKY” against the charterer, Trafigura, for demurrage and other sums incurred when the vessel was not permitted to leave Nigeria by the local authorities.

Trafigura bought a cargo of crude oil from Vitol on FOB terms and chartered the “CRUDESKY” to lift the cargo. Vitol had bought from China Offshore (Singapore) International Pte Limited (“COOSI”) which in turn contracted with Total as the ultimate supplier.

When the vessel arrived at the Total terminal off Port Harcourt, Nigeria, the representative of the Nigerian Department of Petroleum Resources (the “DPR”) was absent. Total sought clearance to load, by telephone, and, believing that verbal authorisation was given by the DPR’s head of operations at Port Harcourt, the lifting supervisor gave instructions for loading to commence. The DPR’s head office then issued clearance to load but later the same day the clearance was revoked. As a result, the necessary cargo documents were not completed and the vessel was, both practically and by law, prevented from leaving the terminal.

The Minister of Petroleum Resources required Total to pay a ‘fine’ of US$12m before the “CRUDESKY” was allowed to sail back to the terminal where the cargo documents were put on board. The vessel was therefore detained for a month and a half and the shipowner claimed demurrage from Trafigura.

The Court held that the vessel was on demurrage from the time laytime expired until the time when cargo documentation was put on board the vessel. The court further held that the first seven days’ delay was caused by the lack of documentation and therefore the shipowner was entitled to demurrage at full rate. However, the

subsequent delay was caused by an abuse or arbitrary exercise of power by the Minister in imposing the ‘fine’ which amounted to “arrest or restraint of process”. Demurrage therefore counted at half the full rate under the vessel charter.

Trafigura sought to pass its demurrage liability to Vitol. Trafigura’s claim was made on several bases, the first of which was Article 18 of the Nigerian National Petroleum Corporation (“NNPC”) Conditions, which formed part of the sale contract. Trafigura alleged that there was a failure to comply with all relevant rules and regulations necessary for the performance of Vitol’s obligations under the contract. Teare J accepted that Vitol (through Total) acted in breach of Article 18 but held that this caused the vessel’s delay for the first seven days only and, thereafter, the delay was caused by the improper actions of the Minister.

Trafigura also sought to rely on the terms implied by the Sale of Goods Act 1979 alleging that Vitol had no right to sell the cargo, that the goods were not free from encumbrances and that Vitol breached the implied term of quiet possession. Teare J rejected the first two allegations and accepted the last but held that this only caused the first week’s delay.

The court then considered the force majeure clause in the sale contract and concluded that Vitol’s breaches were caused by an unforeseeable act or event which was beyond its reasonable control. Therefore Trafigura’s claims against Vitol failed.

Whilst the decision is largely dependent on the facts, the case provides a useful illustration of the issues that an FOB buyer should be aware of when seeking to avoid demurrage liability incurred under the charterparty.

Commodities Newsletter December 2012

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Charterers’ letter of indemnity enforceable by shipownersRob Collins

In the case of (1) Far East Chartering Ltd (Formerly Visa Comtrade Asia Ltd) (2) Binani Cement Ltd v Great Eastern Shipping Co Ltd [2012], the Court of Appeal had to examine whether a letter of indemnity issued in favour of one party (charterers) was enforceable by a different party (shipowners), on the strength of the Contracts (Rights of Third Parties) Act 1999.

The dispute in this matter arose out of the sale of a shipment of Indonesian coal where the Buyers, who were also the Charterers of the vessel, refused to pay the Indonesian Sellers the agreed full price, claiming the product was off-spec. In response, the Indonesian Sellers refused to release the bills of lading. Upon arrival at the discharge port in India, and in order to proceed with the discharge of the cargo without bills of lading, the Indian Receivers provided the Charterers with a letter of indemnity which was addressed to “The Owners / Disponent Owners / Charterers”. In it, the Indian Receivers agreed to indemnify the Charterers for any loss caused by the discharge.

Unaware of the underlying dispute, or of the existence of the letter of indemnity, the Owners of the vessel ordered the port authority to carry out the discharge of the coal. However, when the Owners found out about the issue between the Indonesian Sellers and the Charterers, they instructed the port authority to cease delivery to the Indian Receivers. The instructions were ignored and the discharge was completed.

The Indonesian Sellers pursued the vessel Owners for loss and damage, and the Owners, in turn, sought to rely on the existing letter of indemnity, under the Contracts (Rights of Third Parties) Act 1999, claiming to have acted as Charterers’ agents. At first instance, the court found in favour of the vessel Owners but the Indian Receivers sought to overturn, on appeal, the decision entitling the Owners to enforce the letter of indemnity given by the Indian Receivers to the Charterers. However, the Court of Appeal rejected the Indian Receivers’ submissions.

The Court disagreed with the contention that, as the letter of indemnity was addressed to shipowners, it could not be accepted by the Owners acting as Charterers’ agents. The Court found that the proper meaning of the document was that it was addressed to both the Owners and the Charterers, so was capable of acceptance by the latter.

The Court also rejected the argument that because the Owners of the vessel had not transferred physical possession of the cargo to the Indian Receivers, they had not performed the request to deliver the cargo contained in the letter of indemnity. It was held that delivery involved the divesting or relinquishing of the power to compel any dealing in, or with, the cargo which could prevent the consignee from obtaining possession, and this the Owners of the vessel had done.

Finally, the Charterers had argued that, as a matter of public policy, they would have been unable to enforce the letter of indemnity on the grounds that they were aware, at the time the document was issued, that the Indonesian Sellers were withholding the bills of lading as security for payment for the cargo. Under the 1999 Act, the Owners of the vessel could be in no better position than the Charterers. The Court rejected this argument on the basis that there was a bona fide dispute between the Indonesian Sellers and Charterers, and the bills of lading might well not have been available at the port of discharge, but public policy here was not engaged and did not prevent enforcement of the letter of indemnity.

Commodities Newsletter December 2012

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Court rules that a side letter is an unenforceable agreement Caitriona McCarthy

The Court of Appeal recently had to consider whether a side letter, drafted in parallel to a binding contract, and whose purpose was to confirm the parties’ agreement to enter, at a later date, into a separate secondary agreement, was itself legally binding. The case in question was Georgi Velichkov Barbudev v Eurocom Cable Management Bulgaria Food & Ors [2012].

Mr Barbudev (“Mr B”) was the major shareholder of Bulgarian cable and internet company Eurocom Plovdiv EOOD (“Eurocom”). Eurocom was being sold to Warburg Pincus Group (“Pincus”), and Mr B wished to reinvest some, or all, of his share proceeds into the proposed new combined business. Mr B and Pincus agreed on an investment amount of 1,650,000 Euros and a figure of 10% of the shares.

A side letter was drafted by lawyers and signed by the parties. It contained a provision stating that: “... we shall offer you the opportunity to invest in the Purchaser on the terms to be agreed between us which shall be set out in the [investment and shareholder’s agreement (“ISA”)] and we agree to negotiate the [ISA] in good faith with you”.

The ISA was never completed and Mr B sued to enforce the terms of the side letter. In June 2011, the High Court held the side letter to be unenforceable. The decision was appealed, and the Court of Appeal had to determine whether the side letter constituted an enforceable agreement, or, on the contrary, a simple non-enforceable agreement to agree.

The Court of Appeal agreed with the High Court, taking the view that the side letter was simply an agreement to agree. However, it disagreed with Blair J on the issue of the intention of the parties to create legal relations. The Court of Appeal found that the parties had intended to create legal relations, on the basis that:

– the side letter had been drafted by lawyers

– the wording used was of a legal nature including references to the Contracts (Rights of Third Parties) Act 1999 and to English law

– there was a clear intention that the confidentiality agreement was to be contractually enforceable, irrespective of the status of the other parts of the letter

However, although the parties intended to create legal relations, it did not follow that the effect of the side letter was to create a legally enforceable contract. The Court had to consider the nature of the legal relations that were actually created and the terms of the side letter in a commercial context.

Aikens LJ expressed the view that the wording “the opportunity to invest in the Purchaser on the terms to be agreed between us” was not the language of a binding commitment, and no amount of taking account of the commercial context and Mr B’s concerns and aims could make it so. Furthermore, there remained many crucial matters that were not agreed in the side letter and which needed to be agreed before it could be said that there was a sufficiently certain contract.

In this case, the Court of Appeal’s finding that there was an intention to create legal relations did not assist Mr. B in enforcing the side letter. The court went on to consider the nature of the legal relations that were actually created in order to see if the agreement constituted an enforceable contract and held that the side letter was not enforceable.

Accordingly, for parties wishing to rely on the enforceability of a side letter to assist them with their commercial objectives, the advice is to proceed with caution from the outset. However, this case also illustrates how readily the court will find that a written agreement prepared by lawyers is evidence of intention to create legal relations.

Commodities Newsletter December 2012

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Court reviews status of arbitration awardsGeorge Mingay

In the case of Sucafina SA v Rotenberg [2012], the court examined the status of various arbitration awards and whether a provision in the arbitral institution’s rules regarding payment of its costs invalidated the final and binding award.

Section 39 of the Arbitration Act 1996 allows the parties to agree that the tribunal may make a provisional award (which is subject to the tribunal’s final award on the merits). Section 47 allows the tribunal to make awards on different issues (“partial awards”) – such awards being final and binding on the parties.

In issue in the case of Sucafina SA v Rotenberg was the status of certain “appeal interim awards” made by a Board of Appeal. The appellant sought to argue that these awards, although they represented the Board of Appeal’s final decision on the matters with which they dealt (and it did not intend to revisit those matters), they remained conditional until a further award was made which operated to ratify them (pursuant to the arbitral institution’s rules). The Court of Appeal rejected that argument for the following reasons:

(1) There was no express or implied agreement by the parties to exclude section 47 of the Act; and

(2) An award is either final and binding, or it is not. It is unfortunate that the drafters of the Act used the term “interim” as it is capable of giving rise to confusion. Here, the appeal interim awards amounted to partial awards under section 47.

A further rule of the arbitral institution provided that if an appeal award was not taken up (eg because fees and costs were not paid in time) “the original award of the arbitrator(s) or umpire shall become final and binding immediately”. Despite that wording, the Court of Appeal held that “no arbitral body of standing in London would

have drafted ...a provision that was intended to have the effect that a final and binding award on an issue would be rendered nugatory because a fee for a subsequent award was not paid, given powers to take security for its fees (see [relevant arbitral institution rule]) and the powers in s.56 of the 1996 Act. The construction contended for by [the appellant] would, far from making any commercial sense, be damaging to the standing of the arbitral body and inimical to the proper conduct of arbitration, in the light of the common practice to make partial awards existing at the time the rules were drafted and as is reflected in the 1996 DAC report. No one with any understanding of arbitration law and practice or commercial dealing could have intended such a result”.

The rule in question could only be given effect by reading it as referring to that part of the umpire’s award that remained extant after the appeal interim awards. The Court of Appeal went on to find that the umpire’s award on costs did remain extant and so the appellant was entitled to enforce that part of the umpire’s award.

COMMENT: Section 56 of the Act (which cannot be excluded by the parties) provides that the tribunal may refuse to deliver an award until its fees and expenses have been paid in full. Where an award has, however, been released prior to payment, this case confirms that the award itself will remain binding even if the fees are not subsequently paid (notwithstanding any contrary provision in the arbitral tribunal’s rules). The only sanction that the arbitrators will have in such a situation will be to sue for their fees.

Commodities Newsletter December 2012

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Pressiana McQuinn E: pressiana.mcquinn@clydeco.com

Caitriona McCarthy E: caitriona.mccarthy@clydeco.com

Rob CollinsE: rob.collins@clydeco.com

Eurof Lloyd-LewisE: eurof.lloyd-lewis@clydeco.com

Philip Prowse E: philip.prowse@clydeco.com

Ivanna Dorichenko E: ivanna.dorichenko@clydeco.com

John WhittakerE: john.whittaker@clydeco.com

George MingayE: george.mingay@clydeco.com

Michael SwangardE: michael.swangard@clydeco.com

Meet the team

Our team of international trade and commodities lawyers provides legal expertise both contentious and non-contentious across the supply chain on a global basis.

– Soft commodities

– Hard commodities

– Oil and gas trading

– Trade finance

– Logistics and infrastructure

– Shipping

Tara SmithE: tara.smith@clydeco.com

Anousheh BromfieldE: anousheh.bromfield@clydeco.com

Judith PastranaE: judith.pastrana@clydeco.com

Commodities Newsletter December 2012

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