Dunavant Enterprises Incorporated v Olympia Spinning & Weaving Mills Ltd
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE BURTON |
| Judgment Date | 29 July 2011 |
| Neutral Citation | [2011] EWHC 2028 (Comm) |
| Docket Number | Case No: 2010 Folio 1318 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 29 July 2011 |
[2011] EWHC 2028 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Justice Burton
Case No: 2010 Folio 1318
MR M V SMITH (instructed by Stitt & Co) for the Claimant
MISS PHILIPPA HOPKINS (instructed by Watson, Farley & Williams LLP) for the Defendant
Hearing dates: 22 July 2011
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.
This has been the hearing of an arbitration appeal by permission of Teare J, granted on 6 April 2011. The case arises out of the provisions of the "invoicing back clauses", which, it is common ground (partly by virtue of permission to appeal having been refused on certain other grounds), were incorporated into the contract between the Claimant as seller and the Defendant as buyer constituted by the "Contract for Export for Sale of Raw Cotton" dated 30 July 2007, which provided for delivery by the Claimant to the Defendant of cargoes of bales of cotton, the first shipment to be in August 2009 (payment to be by way of letter of credit opened at least 15 days prior to the first day of the contract shipment month).
There is no doubt that "invoicing back" clauses have been a source of contention over the years. Mr M V Smith of Counsel, for the Claimant, drew my attention to a number of cases in which there has been judicial criticism or scepticism about them ( Lang v Crude Rubber Washing Co, a 1911 case reported in [1939] 2 KB 173 Note, In Re Bourgeois and Wilson Holgate & Co [1920] 25 Com Cas 260 CA, Lancaster v J F Turner & Co Ltd [1924] 2 KB 222 CA, J F Adair & Co Ltd v Birnbaum [1939] 2 KB 149 CA and Cassir, Moore & Co Ltd v Eastcheap Dried Fruit Co [1962] 1 Lloyds Rep 100, and Miss Philippa Hopkins of Counsel also referred me to Podar Trading Co Ltd v Tagher [1949] 82 Lloyds Rep 705. They can be contentious because they provide for a contractual method of 'closing out' a contract, irrespective of who is to blame for its termination, based upon the market price at the date of closure. Thus in many cases:
i) an 'innocent' seller (I shall use this epithet, and its antonym, to refer to the party who is not in breach or alleged breach of an obligation, if a seller, to deliver, or, if a buyer, to take and pay) may find himself liable to pay sums to the guilty buyer if the market price goes up, and the buyer thus invoices back the goods at a price which is more than the contract price, i.e. by reference to the difference between the (unpaid) contract price and the higher market price which the seller must pay.
ii) An innocent buyer may have to pay money to the guilty seller, if the market price goes down, and the buyer finds himself having to pay to the guilty seller the difference between the (unpaid) contract price and the lower price now obtainable.
This can make sense if the seller in the first case is able to sell on to another purchaser at the now higher market price, thus recouping on such profit the sum he has had to pay over to the buyer, or if the buyer has thus avoided being left with a cargo which has fallen in price. But:
i) It is on any basis, as it was put in the course of argument, extremely 'irritating' that the guilty party 'gets away with it'.
ii) It may not work out as above if the innocent seller does not manage to sell the goods at the higher price, or the price falls again before he can do so, or he has other cargoes which he could have sold at the higher price anyway, or if the innocent buyer is committed to a sub-buyer – though it was left open in argument as to whether there then might be some room for a 'special damages' claim (not relevant in this case).
However the significant fact is:
i) that on any basis the procedure for calculating the sums due either way, by reference to market price, and without reference to contractual responsibility, as it has evolved by an established contractual machinery, well understood in the cotton trade, is simple, and may be simpler than the calculation of common law damages.
ii) whatever may or may not be its demerits, as discussed in the cases I have referred to above, it has nevertheless been retained by the trade in the 100 years since Lang, the 90 years since Bourgeois and Wilson Holgate and Lancaster and the 70 years since Adair, and has been confirmed, as will be seen, as recently as 1997, as part of the conditions of the International Cotton Association Ltd ("the Association"), and it was adopted and accepted by the parties in this case.
The invoicing back provisions are contained in the Bylaws and Rules of the Association, as per the Rule Book which "was approved by our Members and Associate Members on 31 January 1997 to come into force on the commencement of the Arbitration Act 1996", and are concededly incorporated into this contract. It is important to refer first to the General Bylaw No 102, which reads (in material part) as follows:
"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; but
•the buyer and seller can agree terms in their contract which are different to any of the rules."
It is thus made expressly clear that the Bylaws cannot be ousted or varied by amendment, but the Rules can be.
Bylaw 201 (amended with effect from 18 May 2005), apart from providing for incorporation of the Bylaws and Rules into each contract, and for arbitration in accordance with the Bylaws as an exclusive remedy, provides:
"•If any contract has not been, or will not be, performed, it will not be cancelled. It will be closed by being invoiced back to the seller under our rules in force at the date of the contract."
Part 8 of the Rules contains Rules 225 and 226 (amended with effect from 18 May 2005), which in material part read as follows:
"225. If for any reason a contract has not been, or will not be, performed (whether due to a breach of the contract by either party or due to any other reason whatsoever) then that contract must be closed by being invoiced back to the seller in accordance with our rules in force at the date of the contract.
226. Where a contract is to be closed by being invoiced back to the seller, then the following provisions will apply:
(i) The party seeking closure must send written notice of closure to the other party.
(ii) If the parties cannot agree upon the price at which the contract is to be invoiced back, then that price will be determined by arbitration, and if necessary, appeal.
(iii) The date of closure will be the date when both parties knew, or should have known, that the contract would not be performed…
(iv) In determining the price at which the contract is to be invoiced back, the arbitrators or appeal committee will take into account:
a the date of closure of the contract as determined in (iii) above;
b the terms of the contract;
c the conduct of the parties; and
d all other matters which the arbitrators or appeal committee consider to be relevant."
A panel of the Association, consisting of Messrs Hursthouse (Chairman) and Aldcroft and Hungate (appointed by the parties) resolved a price by reference to the invoicing back provisions of Rules 225 and 226, by an Award dated 15 January 2010, and concluded that the sum of $456,352.20 was payable by the Claimant to the Defendant, plus interest and costs. The Defendant considered that this was an inadequate award, and appealed to the Technical Appeal Committee ("TAC"), and ended up with a lesser sum on appeal of $357,145.20, again by reference to Rules 225 and 226, plus interest, but with costs to be borne by the Defendant.
The significant feature of this appeal is that, before the TAC (although not before the first instance Tribunal), the Claimant ran a case, which, it asserted, entitled it to resist any liability to the Defendant at all, being a way to avoid the consequences of the invoicing back provisions, by reference to the special term, which was incorporated into the contract, by way of an exemption clause; and, if such a contention were successful, it would be an answer to the unfairness referred to in paragraph 2(i) above. It reads as follows:
"No liability shall result to us from our delay or failure to deliver commodities sold when such delivery is delayed or prevented by force majeures [sic], riots, strikes, floods, fire, storm, earthquake, tornado, act of God, delays of carriers, governmental embargoes, or other causes beyond our control."
The "us" and "our" is a reference to the seller, i.e. the Claimant, whose standard term in such Contract it appears to be, given that it was pre-printed in the form used.
For that reason, it is consequently agreed that, if such issue arises, it falls to be construed contra proferentem, with the Claimant as proferens. It is also common ground that the standard application of the eiusdem generis construction (by reference to the Claimant's reliance on the words "or other causes beyond our control"), does not apply in commercial contracts: see per Devlin J in Chandris v Isbrandtsen-Moller Co Inc. [1951] 1 KB 240 at 244–245 and Chitty on Contracts (30 th Ed) at para14–138.
In the circumstances of this case, it is important to set out the events which led to the closing out of the contract, and I do so by reference to the relevant exchange of correspondence, which was helpfully recorded in the first instance Award.
On 19 March 2009 the Defendant seems to have informed the Claimant for the first time that "though we have enough time in hand to open L/Cs…we would like to...
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