Thank God for the Courts – Too Bad there is a Hole in the Law
In arbitration circles it is often said that the less the courts intervene with the work and work-product of the arbitrators, the better it is for all concerned. Some eminent practitioners have even proposed that international arbitrations should be carried out under a regime of law which has no specific national links in the form of a somewhat undefined “Lex Mercatoria”, with the consequence that neither the procedural nor the substantive legal regime underpinning the arbitral proceedings would be amenable to the jurisdiction of any national (or, indeed, international) court. The English system of arbitration, governed more particularly by the Arbitration Act 1996, goes quite the other way and gives the possibility to the parties to arbitrations under English law to apply to the courts for a review of arbitral awards under a number of different headings.
While a lot may be said for allowing commercial parties the possibility of having their disputes determined by their peers before commercial arbitral tribunals, from time to time such tribunals make such fundamental errors in their awards that justice is simply not done. Such errors are luckily rare, as is attested to by the large number of applications made to the Commercial Court for rectification of awards which are simply refused; the courts quite rightly taking the view that if the parties have chosen to have their disputes determined outside the court system, only really egregious departures from good legal practice justify their intervention.
A recent series of six FOSFA Appeal Awards, all turning on essentially identical facts, were accepted for review by the Commercial Court under various sections of Arbitration Act (ss 67, 68 and 69) and all were found to have been fundamentally wrongly decided.
The history of these cases is convoluted. The parties initially entered into oral negotiations for the sale of six cargoes of Malaysian Palm Olein for shipment from Malaysia to Ilychevsk in the Ukraine in 1,500 MT lots over a six-month period from January to June 2008. The potential sellers were represented by their chief trader whereas the potential buyers were represented by the director of a company which had previously sold Malaysian Palm Olein direct, as a principal, to the buyers. The oral negotiations were carried out over the telephone in one or several conversations on 7th September 2007. The sellers’ representative gave evidence to the effect that he had made it quite clear to the buyers’ representative that he would need to have proof of the buyers’ representative’s authority to conclude a contract on behalf of the buyers or, alternatively, that he would need to receive from the buyers a contract in writing sealed and signed by an authorized signatory of the buyers before any contract binding on his company could come into existence. As the buyers’ representative was unable to provide proof of his authority to commit buyers, the parties agreed on the key terms of price, quantity, quality and shipment period orally, leaving it to sellers’ representative to draft full and final contracts containing all the necessary terms of a professionally drafted contract for sealing, signature and return by buyers’ authorized signatory.
In consequence, on 11th September 2007, the sellers’ representative sent to buyers’ representative for onward transmission to buyers’ authorized signatory for sealing, signature and return, six typed contracts, inter alia, incorporating sellers’ usual terms of sale for Malaysian Palm Olein in the form of their Standard General Conditions and designating English law as the law of the contract and FOSFA arbitration as the forum for settling any disputes arising under the contract(s). The contracts, moreover, all included a Note reading:
“The buyers shall acknowledge contents and receipt of this document, by the close of the working hours, today by returning the signed/sealed copy of the sellers. If the signed & sealed copy of the contract is not received as mentioned above the seller shall reserve the right to cancel the contract.”
It was common ground between the parties that, despite an urgent request from sellers’ representative on 14th September 2007 giving buyers until 17th September 2007 in which to sign, seal and return the six contracts, the contracts were never signed, sealed and returned to sellers and that when a further week had elapsed with no reaction from buyers, sellers, on 24th September 2007, advised buyers direct that their failure to have complied with the terms of sellers’ proposed contracts relieved sellers from any obligation to execute. In sellers’ view, no contracts had ever come into existence.
Buyers were not happy with this outcome and, in December 2007, commenced six separate arbitration proceedings before FOSFA for the recovery of the contract/market price differential in respect of each contract (the amounts claimed varying as the market changed from end of January 2008 to end of June 2008, but amounted to a total sum of close to USD 5,000,000, excluding interest).
Despite the request of the sellers to hold one consolidated arbitration to decide what was, in fact, one fundamental point: whether valid and binding contract(s) had ever come to existence as a result of the telephone conversation(s) between the buyers and sellers’ representatives on 7th September 2007, buyers insisted on six separate arbitrations.
The sellers then suggested that given the essential identity of all six cases it would be sensible to appoint the same arbitrators to determine all six cases. The buyers disagreed and whereas the sellers appointed one arbitrator for all six cases, the buyers appointed four different arbitrators; with two of the arbitrators dealing with one case each and with the other two arbitrators dealing with two cases each out of the total of six.
Sellers denied that any contracts had ever come into being and that even if they had, the only contracts that might conceivably have been said to have come into existence and which were even, prima facie, subject to English law and the jurisdiction of FOSFA arbitrators were those sent for acceptance by sellers. However, as these contracts incorporated not only sellers’ General Terms and Conditions specifically requiring sealing, signature and return as a precondition to their entry into force but also the manuscripted wording of the Note (see above page 2 para 3), it was clear that in the absence of any contractual basis for their intervention, FOSFA arbitrators would have had to decide that they had no jurisdiction to pronounce on the substance of buyers’ various claims.
Buyers based their case largely on the telephone conversation(s) of 7th September 2007 where the basic terms of the contracts were discussed between the two representatives, arguing that their representative was fully authorized to enter into binding contracts with sellers; that all the essential terms of the six contracts had then been agreed over the telephone and that, in consequence, six contracts binding on sellers had been concluded on 7th September 2007. Buyers, however, denied that these contracts incorporated either sellers’ General Terms and Conditions or the “Note”, which appeared for the first time in the written contracts sent to Buyers on 11th September 2007.
It was initially common ground between the parties that the governing law and dispute resolution mechanism were never discussed on 7th September 2007. However, when the buyers’ representative was called as a witness he opined that English law and FOSFA arbitration had been agreed or, at least, understood between the two party representatives as being applicable to the contracts. This affirmation was hotly disputed by the sellers’ representative.
In five of the six cases, the first tier tribunals all decided in favour of sellers: either that no valid contracts had come into existence or that even if they had come into existence they had been rightfully cancelled by Sellers pursuant to the provisions of the Note. The umpire, in the remaining case, determined that a contract had come into existence; that he had jurisdiction over the merits; that the sellers were in default and that sellers should pay buyers close to USD 1 Mio.
The sellers appealed in respect of the single case they had lost and the buyers appealed in respect of the five cases they had lost. Because the buyers had withdrawn their appeals on no less than two separate occasions, a great deal of argument, time and money was spent in determining whether buyers’ appeals should be allowed to proceed. In the event, following extensive submissions from both sides, the FOSFA Council decided to exercise discretion to allow the appeals to proceed.
Once again the question arose as to whether buyers’ five appeals might be consolidated. This time it was the sellers who refused consolidation. In consequence, three separate boards heard the appeals from the five awards of three first tier FOSFA Tribunals in favour of Sellers.
At the appeals, for the first time the witnesses on both sides were heard either in person or by video conference.
This time the cases all went against the sellers.
Sellers in consequence made applications to the Court to hear their applications for rectification of all six appeal awards under ss 67, 68 and 69 of the Act.
This time it was agreed between the parties’ legal representatives that all the six applications might be consolidated before the same judge.
The thus consolidated applications were heard before Mr Justice David Steel who, after a five-day hearing at which each side’s witnesses were heard, determined the cases on the question of jurisdiction under s. 67 of the Act, holding that no contract(s) had ever come into being and, a fortiori, there was no submission to FOSFA arbitration and the FOSFA arbitrators and Appeal Boards consequently had never had jurisdiction.
Because Mr Justice Steel had held that there was no contract(s) and hence no jurisdiction, it was not necessary for him to go into the merits of sellers’ other applications based on ss 68 and 69.
What is particularly interesting in the judgment was the articulation by the judge of the principles which should be followed in determining the credibility of the witnesses. The correct test, he said, was that set out by Lord Goff in Grace Shipping v. Sharp & Co [1987] 1 Lloyds Law Rep. 207 at p 215-216 approving the words used in an earlier House of Lords case:
“And it is not to be forgotten that, in the present case, the Judge was faced with the task of assessing the evidence of witnesses about telephone conversations which had taken place over five years before. In such a case, memories may very well be unreliable; and it is of crucial importance for the Judge to have regard to the contemporary documents and to the overall probabilities. In this connection, their Lordships wish to endorse a passage from a judgment of one of their number in Armagas Ltd v. Mundogas S.A. (The Ocean Frost), [1985] 1 Lloyd’s Rep. 1, when he said at p.57:
Speaking from my own experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses’ motives, and to the overall probabilities, can be of very great assistance to a Judge in ascertaining the truth.
That observation is, in their Lordship’s opinion, equally apposite in a case where the evidence of the witnesses is likely to be unreliable; and it is to be remembered that in commercial cases, such as the present, there is usually a substantial body of contemporary documentary evidence.” (Pacific Inter-Link Sdn Bhd v. Efko Food Ingredients Ltd 2011 EWHC 923 Comm. 13th April 2011 at para 17 of Steel J’s judgment).
Having enunciated the text to be applied, Mr Justice Steel went very carefully through the oral evidence of both sides’ witnesses and, assessing that witness evidence in the light of the contemporary documentary and the other parameters such as the witnesses’ motives, came to the conclusion that whereas the sellers’ single witness’s evidence was credible, the evidence of buyers’ two witnesses was not.
It is suggested that had that test been present in the minds of the members of the respective FOSFA Boards, who chose to believe the evidence of buyers’ witnesses over that of sellers’, they would have come to the correct decision and thereby, in all likelihood, obviated any need to involve the courts in this quintessentially commercial dispute.
This said, at the end of the day, thanks to the intervention of the court, justice was done – or was it?
Unfortunately, justice was only partly done, for, in determining that no contract(s) had ever come into existence, still less contracts providing for FOSFA arbitration, the judge found that neither the FOSFA First-Tier Arbitrators nor the FOSFA Appeal Board had any jurisdiction over the matters in dispute.
Now, the problem with that determination is that whereas the judge could subsequently, following an application by the sellers’ lawyers, make an order that the reasonable costs of the application and five-day hearing before the court should be paid by the losing party, namely, the buyers, he was apparently not asked or was unable to make any order as to the payment of the costs of the ultimately successful party in respect of the proceedings before the FOSFA First Tier, Council and Boards of Appeal. At all events, it appears that the sellers, despite their ultimate success, were advised that because the judge had determined that neither the FOSFA First-Tier Arbitrators nor the various Appeal Boards had ever had jurisdiction, the costs must lie as they fall.
Now, if indeed that is the law, it cannot possibly be right; for the net result of such an interpretation is to deprive a party that has successfully defended itself against a series of important claims from recovering costs necessarily incurred in proving that the claims brought against it were entirely unfounded. Sellers’ victory is thus Pyrrhic, for the costs of defending themselves over a period of three years in six sets of arbitration proceedings at two levels with multiple interlocutory exchanges at each level and extensive intermediate submissions to the FOSFA Council over the admissibility of the twice withdrawn appeals cannot have been less than GBP 500,000 – something of a bitter pill for an entirely successful and innocent respondent to swallow.
If this is the law, it should be changed.
J.S. (Stephen) Smid
Vernate, June 2011