Advanced Liquid Feeds LLP v Itochu Europe Plc [QBD (Comm)]
| Jurisdiction | England & Wales |
| Judge | Field J. |
| Judgment Date | 15 November 2013 |
| Date | 15 November 2013 |
| Court | Queen's Bench Division (Commercial Court) |
Queen's Bench Division (Commercial Court).
Field J.
Simon Rainey QC (instructed by Holman Fenwick Willan LLP) for the claimant buyers.
Luke Parsons QC and Paul Toms (instructed by Baker & McKenzie LLP) for the defendant sellers.
The following cases were referred to in the judgment:
Petrochemical Industries Co (KSC) v Dow Chemical Co [2013] 2 CLC 864.
Primera Maritime (Hellas) Ltd v Jiangsu Eastern Heavy Industry Co LtdUNK [2013] EWHC 3066 (Comm); [2013] 2 CLC 901.
Arbitration — Award — Appeal — Serious irregularity — Whether tribunal had dealt with issue put to it — Costs — Agreement for supply of palm oil — Incorporation of FOSFA 80 and 81 — Vessel detained by Somali pirates during carriage — Buyer terminating contracts on basis that goods no longer of good merchantable quality because not allowed to enter food or feed chain — Both sides appealing from first-tier decision to FOSFA Board of Appeal — Board failing to deal with issue of whether buyers entitled to allowance against price under cl. 2 of FOSFA 80/81 — Board failing to deal with further issue on quantum of sellers” damages — Board wrongly applying “costs follow the event” rule — Awards remitted for reconsideration — Arbitration Act 1996, s. 68(2)(d), 69.
These were challenges to arbitration awards under s. 68(2)(d) and s. 69 of the Arbitration Act 1996 by the buyers under an agreement for the supply of crude palm oil (CPO) and palm fatty acid distillate (PFAD).
The agreement was for the sellers to supply a minimum of 72,000 mt per year of CPO and PFAD for three years “Cif Mersey Gladstone Dock”, but with the buyers” option of discharge at Rotterdam subject to the sellers” or the shipowners” consent. The agreement was subject to FOSFA rules, the FOSFA arbitration clause and, where otherwise applicable, FOSFA contract no. 80 (for CPO) and 81 (for PFAD). Under clause 2 of both FOSFA contract forms, the sellers undertook that: “At time and place of shipment the oil shall be of good merchantable quality of the agreed description and specifications.”
Cargoes of CPO and PFAD were shipped on board the vessel Chemstar Venus in Indonesia and Malaysia. During the carriage from the Far East, the vessel was seized by Somali pirates and detained for three months. As a result of the detention, the buyers contended that the goods were not of contract quality in that they were no longer of good merchantable quality (GMQ) and would not be allowed to be used in the feed industry for which they had been purchased. The buyers said that the sellers were in repudiatory breach and terminated the contract. In their turn, the sellers treated the buyers as being in repudiatory breach and discharged the goods at Rotterdam where they were sold with notice of the hijack and on the basis, in respect of two parcels, that they would not be used in food or the feed chain industries.
Numerous issues were raised in an arbitration before the first tier tribunal and both sides appealed to the FOSFA Board of Appeal. The board found that the buyers had been in breach in refusing to accept the goods, and that the absence of loading samples did not mean that the goods had not been GMQ at shipment. It was not necessary to decide whether sellers were in breach of duty for failing to ensure the goods were in conformity with the contractual requirements on arrival, as provided by the terms of the supply agreement and FOSFA Contracts No 80 and No 81, since the buyers terminated the contract prior to the arrival of the vessel and the goods did not arrive at the contractual destination.
The buyers argued that there had been a serious irregularity within s. 68(2) (d) because the board failed to deal with their contention that under clause 2 of FOSFA 80 they were entitled to an allowance against the price on the basis that, if the goods had been delivered at Liverpool in accordance with the contracts, they would not have been GMQ. They further argued that the board was guilty of another s. 68(2) irregularity with respect to the buyers' case on the quantum of the sellers' damages, because it had not addressed the buyers' contention that the tribunal had been wrong to use the Rotterdam resale price as the market value of the goods.
The s. 69 appeals related to the costs orders made by the board in two appeals arising out of further deliveries under the supply agreement on two other vessels. The sellers terminated the relevant contracts alleging non-compliance by the buyers with contractual terms as to payment. The buyers succeeded in their claims for substantial damages in respect of the purchase of replacement cargoes but failed to recover in respect of associated haulage and storage costs. The buyers appealed against the finding on storage costs and the sellers cross-appealed on all the adverse findings against them. The appeals were dismissed and the buyers ordered to pay all the costs.
Held, granting the s. 68(2)(d) applications and allowing the s. 69 appeals:
1. Whether the buyers were entitled to an allowance against the price on the basis that, if the goods had been delivered at Liverpool, they would not have been GMQ was an “issue” in the arbitration before the board, and the board simply did not deal with it. There would be substantial injustice within s. 68 if it could be shown that the irregularity in the procedure caused the board to reach a conclusion which, but for the irregularity, it might not have reached, as long as the alternative was reasonably arguable. The price allowance issue was reasonably arguable, including the question of the true construction of clause 2. The buyers might have to give credit for the value, if any, of the cargo on the basis that it was delivered at Liverpool but that did not render the whole issue unarguable. As for the sellers” contention that the buyers would not have taken the CPO, it was arguable that the correct approach for the board to take was to assume that the buyers had taken the goods at Liverpool and to disregard what the buyers might then have decided to do with the goods. The buyers' s. 68(2) (d) challenge in respect of the price adjustment issue succeeded and the award should be remitted for that issue to be dealt with by the board.
2. The buyers” contention that the Rotterdam resale prices were inapplicable in the measurement of the sellers” damages, because the relevant market for determining the value of the goods was Liverpool, not Rotterdam, and because the Rotterdam resale contracts were on very different terms from the terms of the supply agreement, was an “issue” before the tribunal, and not merely an argument or step in an argument. Even after a fair, reasonable and commercial reading of the award, the conclusion was inescapable that the board failed to deal with the issue of the alleged non-applicability of the Rotterdam resale prices in calculating the sellers” damages. The failure of the board to deal with that issue had caused the buyers substantial injustice. It followed that the buyers were entitled to an order remitting that issue to the board for reconsideration.
3. The board's purported application of the “costs follow the event” rule in s. 61(2) of the Act was obviously wrong. In identifying the relevant event, the board had regard only to the buyers” appeal, but in both appeals there were two events: the outcome of the buyers” appeal and the outcome of the sellers” cross-appeal. The order for costs should therefore have been made on that basis with the board deciding what proportion of the costs should be borne by each of the appellants, each of whom had lost its appeal. The costs orders in both of the challenged awards were set aside and the question of costs remitted to the board to be determined on the basis that there were two events and not one.
Field J: Introduction
1. There are two separate sets of applications before the court brought by Transition Feeds LLP, formerly known as Advanced Liquid Feeds LLP (“the buyers”). The first is an application under s. 68(2)(d) of the Arbitration Act 1996 (“the Act”) for the remission of an arbitration award made by a FOSFA Board of Appeal (“the board”) and contained in arbitration appeal award no. 1049, dated 12 January 2012 (“the award”), in an arbitration between the buyers and Itochu Europe plc (“the sellers”). Secondly, there are two appeals under s. 69 of the Act in respect of two further arbitration awards made by the same FOSFA Board of Appeal contained in arbitration appeal award no. 1050 dated 12 January 2012 (the “Chemstar Yazoo award”) and arbitration appeal award no. 1051 dated 12 January 2012 (“the Oak Galaxy award”) in two further arbitrations between the buyers and sellers.
2. The background to the s. 68(2) applications is as follows. By a contract in writing dated 21 August 2008 (“the supply agreement”) the sellers agreed to supply to the buyers a minimum of 72,000 metric tons per year of crude palm oil feed grade (“CPO”) and palm fatty acid distillate (“PFAD”) for three years from October 2008 to September 2011 on the basis of delivery “Cif Mersey Gladstone Dock”, but with the buyers” option of discharge at Rotterdam subject to the sellers” or the shipowners” consent, but without discount.
3. The supply agreement was subject to FOSFA rules, the FOSFA arbitration clause and, where otherwise applicable, FOSFA contract no. 80 (for CPO) and 81 (for PFAD).
4. Under clause 2 of both FOSFA contract forms, the sellers undertook that: “At time and place of shipment the oil shall be of good merchantable quality of the agreed description and specifications.” Clause 2 of FOSFA 80 for CPO provided in full:
“2. QUALITY AND SPECIFICATIONS: Minimum flashpoint of 250° F (121° C).
Free fatty acid should be...
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