Enforcement of FOSFA Arbitration Awards – A Cautionary Tale
Enforcement of FOSFA Arbitration Awards – A Cautionary Tale
The case of Grains & Fourrages v. Papas Olio JSC, (to whom we shall refer as “G&F” and “Papas” respectively) has been widely reported in the legal press recently.
The dispute between the parties arose out of a contract for the sale by Papas to G&F of a quantity of Bulgarian sunflower seeds for delivery in November and December 2006 and was the subject of a FOSFA arbitration award. Its importance to traders worldwide is principally due to the main issue which was whether or not a contract had been validly made, since there was no paper contract signed by both parties. Given the amount of trade that is done without the apparent need for signed contracts, a decision on this point is surely of interest to all traders.
The problem is, whatever the findings of the FOSFA arbitrators, whether or not the award is enforceable depends upon who you are trading with and where they are domiciled or carry on business.
The Background to the Case
In this case, a contract was agreed both orally and in email exchanges between brokers for the two parties on 8 November 2006. In fact, G&F and Papas had previously contracted with each other using the same brokers. In this instance, a contract confirmation on similar terms to those previously agreed (and containing a FOSFA arbitration clause), was sent by G&F’s brokers to Papas’s brokers on 9 November, for signature and return by Papas. Papas did not sign and return the confirmation but nor did they deny the contract. On 16 November G&F’s broker chased Papas’s broker for an update as to their loading intentions for the seeds and, having received no reply, chased again on 21, 24 and 27 November. Papas themselves finally responded on 1 December to say that partly due to “unusually sharp market fluctuation” they considered that negotiations were continuing and that no contract had been finalized. The fluctuation referred to was the price of the sunflower seeds, which had risen sharply throughout November.
The Arbitration Award
As it was clear that Papas were not going to perform the contract, G&F held them in repudiatory breach of contract and gave notice of arbitration. At first, Papas insisted that they would “fight their corner” but they took no part in the arbitration proceedings. They did, however, receive communications from FOSFA and G&F’s London lawyers throughout. In September 2007, the FOSFA arbitrators issued their award finding that a valid contract had been made by the parties through their respective brokers and that the contract had been repudiated by the non-performance of Papas.
At that point, Papas tried to bring an appeal against the award but they did so out of time. Papas also suggested for the first time in November 2007, that the broker acting on their behalf did not have their authority to enter into the contract.
At common law, if a broker has represented that he is acting for a party, and has acted for them in the past, the presumption is one of valid representation. The burden of proof is therefore upon the party he allegedly represents to prove that he does not have authority, rather than the other way around.
When FOSFA declined to permit the attempted appeal to proceed, Papas brought an arbitration claim in the High Court to try to force FOSFA to convene a Board of Appeal to re-consider the case. FOSFA took no part in those proceedings and the claim was defended by G&F. The High Court dismissed the claim, finding that the request for appeal was indeed made out of time. Papas then appealed to the Court of Appeal, where the appeal was also dismissed. The FOSFA award has therefore been upheld in the English Courts.
Enforcement of the Award
That, however, is only one half of the story. G&F have sought to enforce the award in Bulgaria, under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The Convention is supposed to enable the courts of contracting states to recognise and enforce each other’s arbitration awards and does not permit the foreign court to reconsider the substance of the Award. The legal principle of res judicata (already judged) applies. A decision on the merits of the dispute has been made and that decision is not to be undone by an enforcing court unless there are very good reasons, such as evidence of fraud. There was no such evidence in this case.
The Court of First Instance in Sofia refused to recognise the FOSFA award by giving Article II(2) of the Convention a very narrow interpretation. That Article requires contracting states to recognise an arbitration agreement in writing that is “an arbitration clause in a contract or a separate arbitration agreement contained in an exchange of letters and telegrams”. The Bulgarian court relied on this Article to say it did not have to enforce the award because (a) it did not accept that there was a valid contract containing an arbitration clause because the contract confirmation had not been signed by Papas and (b) that there was no evidence that the broker acting on behalf of Papas had valid authorization to conclude the contract.
G&F appealed the decision using the following arguments:
- The arbitrators had decided that there was a valid contract;
- The parties had contracted previously on the same standard form (which terms included the FOSFA arbitration clause);
- The same brokers had represented the parties previously;
- International commercial practice recognises the existence of valid contracts concluded orally and by exchanges of correspondence;
- Article II of the New York Convention accepts that an arbitration clause can be valid even if agreed in an exchange of correspondence;
- The Arbitration Act 1996 says that “the reference in an agreement to a written form of arbitration clause … constitutes an arbitration agreement if the reference is such as to make that clause part of the agreement.”
Despite all these points, and supportive caselaw put forward by the Bulgarian lawyers representing G&F, the Court of Appeal in Sofia followed the lower court’s decision and refused to enforce the award for precisely the same reasons as the lower court.
These decisions completely undermine the award itself which had already determined that the contract containing a FOSFA arbitration clause was validly made, despite the lack of signature. Further, Papas had not proved that the broker did not have authority.
It is somewhat ironic that Papas brought an arbitration claim in England in respect of the same contract (and therefore implicitly acknowledged the validity of the arbitration clause) but the Bulgarian courts chose to ignore this.
There is one further appeal possible in Bulgaria before taking the case to the European Courts and that is to the Supreme Cassation Court. However, that court decides whether a case merits an appeal or not and the indications are that it would refuse to allow a further appeal. In the light of the decisions of the lower courts, even the Bulgarian lawyers could only say:
“As you are probably aware there is much criticism of our court system at the moment on the part of the European Union, one of the reasons being that the judges rule too formally on cases that are not usual for their practice so far. Under the circumstances we are very skeptical about an eventual further appeal.”
G&F are therefore left with an award they cannot enforce in Bulgaria, despite that award being upheld by the Court of Appeal in England. The “reasons” of the Bulgarian courts for not enforcing the award strike at the heart of commodities trading in Europe – and indeed elsewhere – where it is common for negotiations to be held via brokers and for no paper contract to ever be signed.
It may sound far-fetched but it seems that in the light of these decisions, if you are going to trade with a Bulgarian company, you would do well to take a “belt and braces” approach and first ensure that you have written confirmation that the broker you are dealing with is authorized to enter into contracts on behalf of the party he (allegedly) represents, and that you must also ensure the contract is signed.
This may have the additional benefit of ensuring that the contract is properly performed. If, however, the contract is repudiated then the chances of enforcing an arbitration award may be considerably better than they would otherwise have been. Even then, it is feared that enforcement in Bulgaria will not be straightforward, notwithstanding its accession to the EU and adoption of the New York Convention.
Susan Leonard
Hill Dickinson LLP