Cottonex Anstalt v Patriot Spinning Mills Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hamblen |
| Judgment Date | 14 February 2014 |
| Neutral Citation | [2014] EWHC 236 (Comm) |
| Docket Number | Case No: 2013–641 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 14 February 2014 |
[2014] EWHC 236 (Comm)
Mr Justice Hamblen
Case No: 2013–641
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Rolls Building, Fetter Lane, London, EC4A 1NL
Charles Kimmins QC (instructed by Holman Fenwick Willan LLP) for the Claimant
Philippa Hopkins (instructed by Watson Farley) for the Defendant
Hearing dates: 31 January 2014
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
The Claimant ("Cottonex") appeals pursuant to s.69 of the Arbitration Act 1996 against an Award of the Technical Appeal Committee ("TAC") of the International Cotton Association Ltd ("ICA") dated 12 April 2013 (the "Award").
The dispute relates to a sale contract dated 21 September 2010, pursuant to which Cottonex sold 600 mt of cotton to the Defendant CFR Chittagong, Bangladesh (the "Contract").
The essential issue which arises on the appeal is whether the Contract incorporated, as Cottonex contends, only the ICA's Arbitration Bylaws, or whether, as the TAC held, it incorporated all the ICA's Bylaws and Rules.
The ICA Rules contain substantive obligations governing performance of the sale contract, including in particular an "invoicing back" provision (contained in "Rules" 225 and 226).
An "invoicing back" provision provides for a contractual method of closing out a contract, based on the market price at the date of closure, and irrespective of the issue of breach and who is to blame for its termination. Although such clauses have been the subject of some judicial criticism, they have been a feature of trade for over 100 years — see Dunavant v Olympia [2011] EWHC 2028 (Comm) at [2]-[4].
In this case, the Contract was not performed. Both parties contended that the other was in breach of the Contract but the Respondent ("Patriot") contended that irrespective of breach, it was entitled to a payment from Cottonex pursuant to the invoicing back clause, which it argued had been incorporated into the Contract. Cottonex denied that the invoicing back clause was incorporated. The TAC found that it was incorporated, and awarded Patriot the net sum of US$720,744.74 by way of invoicing back.
The Contract and the Bylaws and Rules
Subject to arguments sought to be raised by Patriot's Respondent's Notice, the Contract is a two page document dated 21 September 2010 and described as "Sales Contract and Proforma Invoice Number 610011".
The front page of the Contract contained its essential terms, such as quantity ("about 600 metric tons"), commodity ("Raw cotton"), price ("USD117.00 cents per LB"), quality, port of loading, shipment period, payment terms and that it was CFR Chittagong.
The second page was headed "General terms and conditions", and included a number of standard provisions (such as a force majeure clause). The final clause was clause 5, which provided as follows:
"5. Claims and controversial matters, that may occur in connection with the execution of the following contract, are to be solved by the representatives of the Buyer and Seller, having full power to act. All disputes relating to this contract will be resolved through Arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out the Association's Arbitration procedure"
The ICA has "Bylaws" and "Rules". They are contained in its "Rule Book" which is headed "Bylaws and Rules of The International Cotton Association Limited".
The Bylaws and Rules are set out in four Sections as follows:
(i) Section 1: Definitions and General Bylaws (which consist of Bylaw numbers 100 to 106);
(ii) Section 2: International Trading on Cost Insurance and Freight (CIF), Cost and Freight (CFR), Free on Board (FOB) and other similar terms (which consist of Bylaw numbers 200 to 203 and Rule numbers 200 to 240);
(iii) Section 3: Arbitration (which consists of Bylaw numbers 300 to 361); and
(iv) Section 4: General Administration (which consists of Bylaw numbers 400 to 421).
Only Section 2 therefore contains ICA Rules. Sections 1, 3 and 4 consist exclusively of Bylaws. Section 3 contains the Bylaws on arbitration.
The Bylaws and Rules therefore generally have a different subject matter, although both are contained in Section 2. A further difference is that parties cannot derogate from Bylaws, but can derogate from the Rules (Bylaw 102).
The Award
The TAC's reasons for deciding that the Rules were incorporated were as follows:
"As to ICA Bylaws and Rules
1. The TAC studied Bylaw 201, which is the first step in the Arbitration procedure, which states:
Subject to Bylaws 302 and 318, the following clauses will apply to every contract made under our Bylaws and Rules, or containing words to similar effect:
• The contract will incorporate the Bylaws and Rules of The International Cotton Association Limited as they were when the contract was agreed.
• If any contract has not been or will not be performed, it will not be as cancelled. It will be closed by being invoiced back to the seller under our Rules in force at the date of the contract.
• All disputes relating to the contract will be resolved through arbitration in accordance with the Bylaws of The International Cotton Association Limited. This agreement incorporates the Bylaws which set out the Association's arbitration procedure; and
• Neither party will take legal action over a dispute suitable for arbitration, other than to obtain security for any claim, unless they have first obtained an arbitration award from the International Cotton Association Limited and exhausted all means of appeal allowed by the Association's Bylaws.
Clause 5 of the contract in question, contains a copy of bullet point 3 above, and as such adding emphasis to this Bylaw, but not excluding the introductorily sentence covering all 4 bullet point that:
"the following clause will apply to every contract made under out Bylaws and Rules"
Furthermore we cite Bylaw 102 inter alia:-
If a contract is made under our Bylaws and Rules:
• all of the Bylaws in this book will apply to the contract and no amendment by the buyer and seller is allowed;
This indicates that neither party may alter in any way what is contained in the ICA Bylaws.
Clause 5 of the contract therefore cannot overrule the Bylaws. We therefore reason and find that the contact is subject to the Bylaws and Rules of the ICA."
In summary, the TAC's reasoning would appear to be as follows:
(i) Bylaw 201 applies, and is the "the first step";
(ii) Bylaw 102 has the result that it is impermissible to contract out of Bylaw 201;
(iii) Pursuant to Bylaw 201, four bullet points are incorporated, and
(iv) The second of those bullet points provides that there must be invoicing back.
The question of law
The question of law for which permission to appeal was given was:
"Whether a clause in a contract for the sale of raw cotton which provides that. 'All disputes relating to this contract will be resolved through Arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out the Association's arbitration procedure' incorporates the Rules of the International Cotton Association relating to contract closure and 'invoicing back' (viz. Rules 225 and 226.)"
Patriot submits that this is an inapt question of law since the answer must depend on the other terms of the contract: no clause can be construed in isolation. As such, it could only be answered: "Maybe; it depends on a proper construction of the particular contract as a whole." Patriot further submits that permission to amend the question should not be given, nor should any requisite extension of time be granted.
I agree with Patriot that the question could be better expressed, although I do not accept that it could not be answered. The question should be related to the actual contract made rather than to a clause in a contract. It would be more satisfactory if it read:
"Whether the clause in the contract for the sale of raw cotton which provided that, 'All disputes relating to this contract will be resolved through Arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out the Association's arbitration procedure' incorporates the Rules of the International Cotton Association relating to contract closure and 'invoicing back' (viz. Rules 225 and 226)."
I do not consider that these minor amendments fall outside the existing permission given. The substance of the question is the same. Although the question was framed in abstract terms, permission was obviously being given in relation to how that question is to be answered in relation to the contract under appeal.
It is quite common for minor refinements to the question of law to be made at the appeal stage in the light of fuller argument and, on occasion, the court's own views. Provided the substance of the question of law remains the same I do not consider that further permission is required for such amendments. As Eder J put it in The "Mahakam" [2011] EWHC 2917 (Comm.) at [15], it is sufficient if it falls within "the spirit if not the letter of the leave granted".
If that is wrong and further permission is required to amend the question then I grant it. It was submitted that Patriot had been prejudiced because if the question had been properly framed at the time of the permission application that might have affected the grant of permission and/or Patriot's response to...
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