Case No: 2004/ 1099
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE CHRISTOPHER CLARKE
Between :
Tradigrain | Claimant |
- and - | |
State Trading Corporation of India | Defendant |
Mr Stephen Males QC (instructed by Richards Butler ) for the Claimant
Mr Paul Downes (instructed by Ince & Co) for the Defendant
Hearing date: 12 September 2005
Judgment
MR JUSTICE CHRISTOPHER CLARKE:
Tradigrain S.A. appeal, with the permission of Langley J, against Appeal Award No 4012 of 19th November 2004 of the GAFTA Board of Appeal. The question of law at issue in this appeal is this:
“Where it has been determined that a buyer under a sale contract has called upon a performance bond provided by the seller in an amount exceeding the buyer’s true loss, is the seller entitled to immediate repayment of the amount overpaid or does the seller’s entitlement to repayment depend upon whether the seller can show that he, rather than an intermediate bank, has suffered an actual loss as a result of the buyer’s call upon the performance bond?”
The findings of the Board of Appeal
By a contract concluded on 4th February 1997 Tradigrain S.A. (“Sellers”) agreed to sell and the State Trading Corporation of India (“Buyers”) agreed to buy 100,000 mt +/- 5% of Argentine hard red wheat C & F JNPT Nhava Sheva in India. The contract provided for the quality of the wheat to be final in accordance with independent inspection certificates issued at loading. It also required the Sellers to put up a performance bond in the amount of 5% of the contract value. The contract was subject to GAFTA arbitration.
On 15th February 1997, the State Bank of India (“SBI”) issued at the request of the Sellers a performance bond in the sum of US $ 908,250 subject to Indian law and jurisdiction. That bond was backed by a counter guarantee from the Seller’s bank, Swiss Bank Corporation (“SBC”), now named Union Bank of Switzerland (“UBS”).
The goods were supplied in two shipments. The first shipment was on board the m.v. “Dynamic”. The quality certificate issued at loading in respect of the goods loaded on that vessel showed that the percentage of damaged kernels slightly exceeded the contractual maximum of 3%. The parties dealt with that by agreeing a discount on the price. The second shipment was on board the m.v. “Trade Carrier”. The goods shipped on that vessel were certified as being in accordance with the contract.
After the goods had been discharged in India the Buyers claimed that the goods were not of contractual quality and claimed against the Sellers US$ 680,920 in that respect. They also claimed despatch monies of (eventually) US$115,834.71. The Sellers admitted liability for $100,669.55.
On 25th September 1997 the Buyers required SBI to pay them the full amount of the bond, i.e. $908,250 and SBI requested SBC to remit that amount to them under the counter guarantee. On 21st January 1998 the Buyers obtained from SBI payment of the rupee equivalent of that sum. On 26th September 1997, the Sellers obtained an ex parte injunction in the Court of First Instance of the Republic and Canton of Geneva ordering SBC not to pay SBI under the counter guarantee. That order was upheld at a contested hearing on 31st March 1998, and upheld on appeal by the Buyers to the Judiciary Supreme Court on 18th June 1998 and ultimately by the Swiss Federal Supreme Court on 17th December 1998. As a result, neither SBC nor the Sellers has paid SBI under the counter guarantee.
In June 2000 SBI began proceedings before the Debts Recovery Tribunal in New Delhi against UBS, the Sellers and the Buyers, claming payment of the $908,250 paid to the Buyers under the bond. If the claim succeeds against UBS, UBS will claim against the Sellers. The Indian proceedings have not yet been resolved. I was told that the current position in India was that an order has been made for the final resolution of the matter, preferably by the end of September 2005.
On 15th April 1999 the first tier arbitral Tribunal issued an award in which it accepted that it had jurisdiction. On 6th November 2000, it issued an award on the substantive issues before it. Under that award it found, inter alia, that the Sellers’ claim for arbitration had been made in time; that the contract provided for quality and weight to be final at loading; that Buyers had no justification for invoking the Bond; and that Buyers had no claim against Sellers in respect of the quality of the wheat. It also held that the Sellers should pay the Buyers despatch in the sum of $100,669.55.
The Sellers did not include a claim for the return of monies paid by SBI in the original arbitration. Two years, six months and twenty-three days out of time they sought to appeal the first tier award so as to secure that result (and also to claim an indemnity in respect of costs incurred in the Indian proceedings) and the Board of Appeal exercised its discretion to admit the Sellers’ appeal.
The Board of Appeal found that the call by the Buyers on SBI for $908,250 was wrongful in that:
The quality claim as to $680,920 was invalid because (i) the contract provided for quality to be final as certified at loading and, (ii) even if the discharge quality was relevant, the evidence produced by the Buyers did not satisfy the Board that the quality on discharge was non- contractual;
There was, as the Buyers knew, no justification for calling the whole amount of the Bond. In respect of $126,660.45 (the difference between $908,250 and [a] the quality claim of $680,920 and [b] despatch of $100,669.55) there was no claim at all.
It also found that the retention by the Buyers of all save the figure for despatch of $100,669.55 was wrongful and a breach of the contract of sale. The Buyers had obtained $807,580.45 (“the overpayment”) to which they had no entitlement under the contract.
By a majority of 3 to 2 the Board found that, although the Sellers were entitled to an indemnity in respect of such loss as they had suffered in consequence of the wrongful call, and were, thus, entitled to recover their legal costs of the Indian proceedings in the sum of $98,148, which the Board awarded to the Sellers (and which has not been paid), the Sellers had not yet suffered any other loss as a result of the wrongful claim or retention, although the position might change in future depending on what happened in, or as a result of, SBI’s proceedings in India. The majority found that the Sellers were not, presently, entitled to the return of $807,580.45 since neither they, nor UBS, had yet paid it.
The Sellers contend that the majority award is wrong in law and that the authorities establish that, in circumstances such as the present, the Sellers are entitled to the return of the overpayment as a debt due to them. The Buyers contend that the Sellers’ entitlement is, or should be, an entitlement to an indemnity in respect of loss occasioned by the wrongful call and retention.
The authorities
14 In Cargill International S.A. & Another v Bangladesh Sugar & Food Industries Corporation [1996] 2 Lloyd’s Rep 524 Cargill had agreed to sell to the defendants a cargo of sugar and arranged for the Dhaka branch of Banque Indosuez to provide a letter of guarantee for $526,273.15. The contract contained a provision that the guarantee was liable to be forfeited by the buyer if the seller failed to fulfil any of the terms of the contract or if any loss or damage occurred to the buyer due to any default of the seller; and a further term that, if the seller failed to adhere to the arrival period/time, the buyer would be entitled to recover liquidated damages at 2% of the contract value of the undelivered goods for each month or part of a month during which delivery was in arrears or to terminate the contract and forfeit the bond. There was a dispute between the parties as to whether the vessel’s late arrival at the discharge port and the fact that an overage vessel was used was due to the seller’s or the buyer’s default. The preliminary issues that the Court had to decide, on the assumption that the sellers were in breach of contract in one or both respects, and the answers eventually given were as follows:
“(1) Whether the defendant was entitled to make a call for the full amount of the performance bond if the breach or breaches of contract (a) caused no loss to the defendants; (b) caused some loss to the defendants which was less than the amount of the performance bond; (c) caused some loss to the defendant which was equal to or greater than the amount of the performance bond.
Yes, in all cases
(2) Whether, in the event of the defendant having obtained
payment under the performance bond as a result of any such call as it was entitled to make the defendant was entitled to retain (a) all of the moneys received by it; (b) only such amount as was equal to the amount of the loss suffered by it; or (c) some other, and if so what amount.
The answer is (b).”
It is not clear from the report of the case whether Banque Indosuez had received a counter guarantee from another bank. The letter of guarantee recited that Cargill had requested Banque Indosuez “through the Chase Manhattan Bank, London” to issue a guarantee, so there may well have been one. Banque Indosuez had not paid up under the guarantee. By an agreement between the parties the original guarantee was cancelled and a new guarantee was substituted upon the footing that the rights of the parties in relation thereto were to be governed by the terms of the original guarantee and the contract of sale.
16. In the course of his judgment Morison J said this:
“I start with the commercial purpose of a performance bond. There is a wealth of authority concerned with the question whether and in what circumstances an interlocutory injunction may be granted (1) against the bank which issued the bond to restrain it from paying in accordance with its terms; (2) against the beneficiary of the bond to prevent it from calling the bond.
The Court will not grant an injunction in either case unless there has been a lack of good faith. The justification for this lies in the commercial purpose of the bond. Such a bond is, effectively, as valuable as a promissory note and is intended to affect the “tempo” of parties’ obligations in the sense that when an allegation of breach of contract is made (in good faith) the beneficiary can call the bond and receive its value pending the resolution of the contractual disputes. He does not have to wait the final determination of his rights before he receives some monies. On an application for an injunction, it is, therefore, not pertinent that the beneficiary may be wrong to have called the bond because, after a trial or arbitration , the breach of contract may not be established; otherwise the Court would be frustrating the commercial purpose of the bond. The concept that money must be paid without question, and the rights and wrongs argued about later, is a familiar one in international trade, and substantial building contracts. A performance bond may assume the characteristics of a guarantee, especially, if not exclusively, in building contracts, where the beneficiary must show, as a prerequisite for calling on the bond, that by reason of the contractor’s non-performance he has sustained damage: Trafalgar House Construction (Regions) Ltd v General Surety & Guarantee Co. Ltd., [1966] 1 A.C. 199.
However, it seems to me implicit in the nature of a bond, and in the approach of the Court to injunction applications, that, in the absence of some clear words to a different effect, when the bond is called, there will, at some stage in the future, be an “accounting” between the parties in the sense that the rights and obligations will be finally determined at some future date. The bond is not intended to represent an “estimate” of the amount of the damages to which the beneficiary may be entitled for the breach alleged to give rise to the right to call. The bond is a “guarantee” of due performance. If the amount of the bond is not sufficient to satisfy the beneficiary’s claim for damage, he can bring proceedings for his loss”
Then, after considering a number of authorities and text books he said:
““As a matter of general principle, therefore, in the light of the commercial purpose of such bonds, the authorities to which I have referred and the text-book comments, I take the view that if there has been a call on the bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank, (where, for example, the bank has not been paid by him) but that does not affect his right to bring the claim in his own name. In the normal course of events, the bank will have required its customer to provide it with appropriate security for the giving of the bond, which would be called upon as soon as the bank was required to pay. On the facts of this case, no question of a trust or agency will arise. In principle, I take the view that the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary.”
17. He then turned to consider whether two particular terms of the contract then under consideration indicated that the seller could not recover any overpayment. Having decided that they did not, he said:
“The basis upon which recovery may be made in respect of an
overpayment is, I think, contractual rather than quasi contractual. It
seems to me that it is necessary to imply into the contract that
moneys paid under the bond which exceeded the buyer’s actual loss
would be recoverable by the seller. I am content to adopt Mr Males’
formulation of the term which is to be implied into the sale contract,
as a matter of necessity or on the basis that the implication of such a
term was so obvious that its incorporation in the contract went
without saying:
“…that the buyer will account to the Seller for the proceeds of the bond, retaining only the amount of any loss suffered as a result of the Seller’s breach of contract.”
He then answered the questions at issue in the manner that I have set out above.
In Comdel Commodities Ltd v Siporex Trade S.A. [1997] 1 Lloyd’s Rep 424 Lord Justice Potter, giving the judgment of the Court, expressly approved the decision of Mr Justice Morison in Cargill in the following words:
“The law in this respect has recently been the subject of an illuminating decision of Mr Justice Morison, in Cargill International S.A. v Bangladesh Sugar and Food Industries Corporation [1996] 2 Lloyd’s Rep 524 in which the authorities are reviewed, most notably decisions in two Australian cases and dicta of Lord Denning, M.R. in State Trading Corporation of India Ltd v E.D. & F. Man (Sugar) Ltd., July 17 1981.
Those authorities are to the effect that it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the bond is called, there will at some stage in the future be an “accounting” between the parties to the contract of sale in the sense that their rights and obligations will finally be determined at some future date. The bond is a guarantee of due performance; it is not to be treated as representing a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to the right to call for payment under the bond. If the amount of the bond is not enough to satisfy the seller’s claim for damages, the buyer is liable to the seller for damages in excess of the amount of the bond. On the other hand if the amount of the bond is more than enough to satisfy the seller’s claim for damages, the buyer can recover from the seller the amount of the bond which exceeds the seller’s damages.
It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an “accounting” between the parties in the sense that their rights and obligations would be finally determined at some future date”.
19. The Cargill case itself reached the Court of Appeal – [1998] 1 W.L.R. 461 - where the reasoning of the judge’s decision that, if the amount of the bond exceeded the true loss sustained, the party who provided the bond was entitled to recover the overpayment (I adopt the summary given by Potter LJ) was not challenged. In TTI Team Telecom International Ltd v Huthcison 3G UK Ltd [2003] EQHC 762. [2003] 1 All ER (Comm) 914 Cargill was applied.
The wrongful call
20. The Board of Appeal determined that the call upon the bond was wrongful for the reasons set out in paragraph 8 above and there has been no appeal from that decision. I do not, in those circumstances, propose to say much about it. However, the passages in the Board’s award which state that the claim under the bond was a breach of contract because the claim for damages for poor quality was bad appear to be inconsistent with the general principle that a claim under the bond is not, itself a breach of the sale contract, if made in good faith. (See also, to like effect, the dicta of Phillips J, as he then was, in Deutsche Ruckversicherung v Walbrook Insurance Co. [1995] 1 W.L.R. 1017, 1030 in relation to payment under Letters of Credit) (Footnote: 1). The Board do, of course, go on to say that, in respect of $126,660.45 the claim made was one that the Buyers knew they had no basis for making.
Mr Paul Downes, for the Buyers submitted that the Sellers’ claim was properly characterised as a claim for compensation arising from an unwarranted call on the bond or an unwarranted failure to return the monies; for which the remedy must necessarily be a claim in damages. The Board had rightly recognised that, although the Sellers might suffer damage if and when they were called upon to pay UBS, they had not yet done so and were not entitled to recover as if they had. The only “windfall” which the Buyers enjoyed was the right to retain the monies called until such time as the Sellers proved that they had suffered damage, and that was a right that arose from the liberal terms of the guarantee which they had received in their favour. He went so far as to say that this was a benefit to which his clients were entitled even if the claim under the guarantee had been fraudulent.
Mr Downes further submitted that an obligation to make repayment could only arise as an implied term of the contract of sale and there was no implication that was either necessary or obvious. Firstly, there was the question as to when any such obligation arose: was it when a wrongful call was made and what constituted a wrongful call (Footnote: 2). What then was the position if the call was initially valid? Did an obligation to repay arise if, after the call, the Buyer came to know that the call was invalid; or did that obligation arise only upon the determination of the arbitral tribunal and what, then would be the position if there was an appeal? All these difficulties, he submitted would vanish if the implied term was, as he suggested that it should be, namely that the Buyers would hold the sellers harmless to the extent that any call they made exceeded the buyer’s true loss. This would equate the position of the sellers, who would have to prove loss before recovery, with that of the buyers, who would have to prove any loss if they sought to recover more than the amount of the bond. And it would have the practical benefit that the stronger the Sellers’ case the more quickly would they recover. It would also have the practical benefit that Sellers would not recover until they had established a loss, and would thus avoid the possible result that the Buyers found themselves liable to repay Sellers and also liable to SBI.
Such a solution would, he submitted, also avoid the problems inherent in accepting that, if Sellers recover, they would hold the monies on trust for either UBS or SBI. As to those, firstly, it was not clear which of these banks would be the beneficiary of any trust. Secondly it was not clear whether there would be successive trusts, whereby a trust arose in favour of UBS when the Sellers received payment from the Buyers, and a trust in favour of SBI, when UBS received payment from the Sellers; or a trust and sub trust whereby, on payment by the Buyers Sellers held the money on trust for UBS who held it on trust for SBI. Thirdly, he pointed out that the relationship between the Sellers and UBS and between UBS and SBI was probably not governed by the Law of England, in which case the trust analysis might well be inapplicable.
In Mr Downes’ submission the authorities do not compel any different conclusion. In Cargill the question was whether or not the Buyers were entitled to keep the proceeds of the guarantee. The issue as to what should happen if a call is made and honoured, but neither the seller nor his bank has paid the bank that honoured the call, did not arise.
25. Mr Stephen Males QC, for the Sellers, submitted that there are two distinct questions to be addressed (a) whether the call on the guarantee was wrongful and (b) whether the retention of the money called was wrongful. As to the latter, the authorities to which I have referred, made it plain that, in the light of the findings of the Appeal Board, the overpayment has become due and owing as a debt to the Sellers.
Conclusions
26. In my judgment Cargill (and the citations in it) are authority for the proposition that there is an implied term in the contract of sale that the Buyers will account to the Sellers for any amount that has been paid under the bond to the extent that the amount paid exceeds the true amount of the Buyer’s loss. The amount is due to the Sellers as a debt, whether or not the sellers have indemnified either the paying bank or the indemnifier of the paying bank. In essence this is because, by calling for too much under the bond, the Buyers have procured payment to themselves from the paying bank (acting, for this purpose, on the Sellers’ behalf) of an amount that is not due, and must, obviously, return it to their contractual counterparty from whom they should not have procured it in the first place. Otherwise they will have retained a windfall in the form of money to which they were not entitled since, to the extent of the overpayment, there has been either no breach or no loss entitling them to retain it. This conclusion appears to me to be correct in principle and has been approved by the Court of Appeal.
Morison J did not have to decide when exactly the obligation to return the payment arises. Mr Males submitted that it was either after the dispute had been resolved by arbitration or, as he would prefer, after the lapse of a reasonable time for the purpose of enabling the parties to determine what was truly due. He does not presently seek an award of interest, reserving his right to do so hereafter. In those circumstances and since, on either basis, the amount is now due anything that I say on this subject is obiter.
28. I incline, however, to the view that the overpayment is due when the fact that it is an overpayment has been established either by agreement or judgment. Such a conclusion appears to me consistent with a number of passages in the judgment of Morison J i.e.:
“it seems to me implicit in the nature of a bond .. that … when the bond is called, there will, at some stage, be an “accounting” between the parties in the sense that their rights and obligations will be finally determined at some future date.”
and, citing Lord Denning in State Trading Corporation of India Ltd v E.D & F Man (Sugar) Ltd v The State Bank of India, July 17 1981
“If he receives too much, that can be rectified later at arbitration”
and, citing the 11th ed. of Hudson’s Building and Engineering Contracts:
“It is generally assumed .. that the Courts will provide a remedy by way of repayment to the other contracting party if a beneficiary who has been paid under an unconditional bond is ultimately shown to have called on it without justification”
and, referring to the particular clauses under consideration in that case:
“But in either event, there will be an “accounting” at trial or arbitration to ensure that the buyer has not been underpaid or overpaid”
To similar effect is the following passage in the judgment of Potter LJ, in Comdel v Siporex:
“It does not appear that there is anything in the words of the contracts of sale in this case to exclude the implication that there would at some stage be an “accounting” between the parties in the sense that their rights and obligations would be finally determined at some future date”.
The decision of the majority of the Appeal Board
29. The Board recited the argument of the Buyers in terms which included the following in paragraph 8.3:
“The call on the Bond made by Buyers was made against their own bank, SBI, and not against either Sellers’ bank or Sellers. [Sellers (Footnote: 3) ] have not at this stage suffered any loss other than legal costs… For this reason it is not considered appropriate that Buyers should be ordered to pay the net proceeds.. to Sellers for Sellers to hold on trust either for SBI or UBS. That is not to say that there should not be an accounting at some future date when the parties rights and obligations will finally be determined but so far as matters stand at present such final accounting cannot take place – the reason being the interlocking nature of the cross guarantees. As distinct from the facts in the Cargill and Comdel cases above cited Buyers made an unjustified call against their own bank, SBI and not against the Sellers bank, UBS or Sellers. Sellers will become liable for losses if proceedings by SBI against UBS to recover the sums paid by SBI to Buyers …cause UBS to initiate recovery proceedings against Sellers. In anticipation of such action there is justification now for directing Buyers to provide Sellers with an indemnity in respect of any sums for which Sellers are or become liable to any third party consequent upon Buyers’ unjustified call on the Bond”.. There is no justification for requiring Buyers to pay the net proceeds of the Bond to Sellers”
30. The majority do not expressly adopt this reasoning and there are a number of things wrong with it. Firstly, it is inconsistent with the reasoning in Cargill. Secondly, the fact that Sellers have not suffered loss may be a reason for determining that they hold any money recovered on trust; but is not a reason, on the Cargill analysis, for disentitling them to receive the money now. Thirdly, the “accounting at some future date” to which the passage refers is not a determination of the amount due (or not due) to the Buyers under the contract of sale but a quite different determination namely as to what liability Sellers have to UBS. Fourthly, whilst SBI may well be the Buyers’ Bankers, for present purposes they were acting on behalf of the Sellers. Fifthly, the principles enunciated in Cargill are not dependent on their being only one bank involved rather than, as is commonly the case, two.
The Board also summarised the argument of the Sellers in the following terms in paragraph 8.2:
“Sellers submitted that, in the absence of express wording in the contract to the contrary it is implicit in the contract that one party must account to the other party after the Bond has been called if the amount of the Bond differs from the losses incurred by Buyers. If the amount of the Bond is greater than the losses suffered by Buyers then Buyers have to account to Sellers for the amount that exceeds its losses and to which it is not entitled. In the Court of Appeal in Comdel Commodities Limited v Siporex Trade S.A. [1997] 1 Lloyds Rep 424 Potter LJ sates (first column on p 431) “...it is implicit in the nature of a performance bond that, in the absence of some clear words to a different effect, when the Bond is called, there will at some stage in the future be an “accounting” between the parties to the contract of sale in a sense that their rights and obligations will finally be determined at some future date”. In a further decision of the Court of Appeal in Cargill International S.A. v Bangladesh Sugar & Food Industries Corporation [1998] 1WLR 461 Potter LJ states (pp 468H-469A) “... Not only does the Buyer have an unquestionably solvent source from which to claim compensation for a breach by the seller, at least to the extent of the Bond, but payment can be obtained from the seller’s bank on demand without proof of damage and without prejudice to any subsequent claim against the seller for a higher sum by way of damages. In these circumstances the obligation to account later to the seller in respect of what turns out to be an overpayment, is a necessary corrective if a balance of commercial fairness is to be maintained between the parties”. Sellers contend that Buyers must pay to Sellers the proceeds of the Bond. There was no breach of contract by Sellers and no losses suffered by Buyers. Sellers, therefore, are entitled to receive payment of the entirety of the proceeds of the Bond pursuant to the accounting after deduction of the despatch monies of USD100,669,55. Support for this position is provided in the judgment of Mr Justice Morison in the Commercial Court in the above cited Cargill/Bangladesh Sugar case [1996] 2 Lloyds Rep 524 when he states (second column p 530) “If there has been a call on the bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party my hold the amount recovered in trust for the bank (where, for example the bank had not been paid by him) but that does not affect his right to bring the claim in his own name … the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary.” In this arbitration, contend Sellers, the vehicle for accounting is the Appeal Award itself in which the over-payment or under-payment should be determined and awarded. On the determination of the over-payment Buyers should pay to Sellers this sum. However following the above dicta of Morison J upon receipt of the funds Sellers would hold the funds in trust for SBI/UBS and would in due course have to reimburse SBI/UBS for the over-payment.”
The expressed reasoning of the majority is in paragraph 8.4:
“The majority of the Board in reaching this conclusion took full regard of the words of Morison J cited in 8.2 above but noted that this part of the Judgment of Morison J was not adopted in the Court of Appeal. The words of Potter LJ, as also cited in 8.2 above, only focused upon the requirement for there to be an “accounting” between the parties at some “future” or “later” date when the monies in the Bond exceeded the losses suffered by the party calling on the Bond. It also noted that these words of Morison J were observations and, not as such, part of his judgment. The Board’s majority view, therefore, is that the accounting should only take place when the account [sic] party has suffered loss which, at present, Sellers have only suffered in relation to their legal fees in the New Delhi Court proceedings. Thus for Sellers now to receive the proceeds of the Bond less the despatch monies would provide Sellers with a windfall benefit of the bond monies without having suffered loss. The fact that Buyers continue to have the “windfall benefit” of the bond monies is a matter, for the present between the Buyers and SBI and not between Buyers and Sellers.”
With due respect to the majority, they have, in my judgment fallen into error. First, the passages cited from the judgment of Morison J were not “observations and not, as such, part of his judgment”. They were part of the ratio. Secondly the Court of Appeal did not adopt only part of his judgment. On the contrary it described his judgment, including his review of the authorities, as illuminating and adopted language very similar to his own in summarising the effect of the authorities. There is nothing whatever in the judgment of Potter LJ, to indicate that the Court of Appeal did not accept the passages in Morison J’s judgment cited at paragraph 8.2 of the Appeal Award, which are some of the most important parts of it. Thirdly, it may also be the case that the majority were making the same mistake about what was meant by “accounting at some future date” as is inherent in the argument of the Buyers as summarised by the Board in paragraph 8.3 of the Award. The Court of Appeal was plainly referring to an accounting between the parties to the contract of sale. Fourthly, there is no windfall benefit if Sellers hold the amount due back in trust for, or are otherwise liable to make payment of that amount to, either UBS or SBI. Fifthly, the fact that the Buyers continue to have a windfall benefit from the bond monies cannot be regarded as, at present, only a matter between the Buyers and SBI.
Penalty
Mr Downes submitted at one stage of his argument that, if the obligation to make repayment arose in the manner contended for the result would be penal and unenforceable. In my view no question of penalty arises. The overpayment is due to Sellers as a debt and they will be obliged to restore that money to SBI (directly or indirectly).
Trust
It is not necessary for present purposes for me to determine the precise nature of the obligation owed by the Sellers upon receipt of the overpayment, just as in Tomlinson (A) Hauliers Ltd v Hepburn [1966] A.C. 451 Lord Reid did not find it necessary to decide whether the obligation of a bailee with a limited interest in goods, who has insured up to the full value of the goods entrusted to him, to account to the owner for their value when received from insurers, was a trust in the strict sense. Nor is it necessary to determine whether the Sellers are bound to account to UBS who will account to SBI, or to SBI directly. I incline to the view that, in circumstances where UBS had not paid SBI, the Sellers’ obligation is to make payment to SBI, since the Sellers requested SBI to issue the guarantee and payment to them would satisfy their implied obligation (or, if there was one, any express obligation) to indemnify them for the cost of so doing as well as any obligation to UBS (apart from in respect of costs).
36. In the result, therefore, I shall allow the appeal. The Award of the Board should be varied by adding a provision that the Buyers must pay to the Seller the sum of US $807,580.45.
Jurisdiction
The Buyers disputed the jurisdiction of the arbitrators. On 15th April 1999 the first tier arbitration tribunal issued its award on jurisdiction in favour of Sellers. The Buyers did not challenge that Award under section 67(1) of the Arbitration Act 1996 either within the prescribed period (28 days from the date of notification of the decision) or at all. The Board of Appeal found that the contract of sale was entered into between the parties on 4th February 1997; that it contained a GAFTA arbitration clause; and that they had jurisdiction. They also upheld the finding of the first tier tribunal that the latter had jurisdiction. Lastly they held that the latter finding was, in any event, binding on them and that under GAFTA 125 Arbitration Rules effective 31st January 1997, incorporated into the contract of sale, no appeal on jurisdiction lay to the Board. The Buyers did not seek to obtain permission to appeal to this Court from the Board’s decisions on jurisdiction.
By a letter dated 9th September 2005 the Buyers’ solicitors, Messrs Ince & Co, stated that their clients had always maintained that GAFTA did not have jurisdiction and disputed the jurisdiction of the Commercial Court to decide the Sellers’ appeal. They pointed out, as is correct, that the time limit for contesting GAFTA’s jurisdiction had long since passed and that the Court’s permission would be required in order to reopen the issue. They stated that they had advised their clients that the prospects of the Court allowing this were so remote that they did not recommend making the application. They went on to record that, in those circumstances their clients had instructed them to defend the appeal and not to request permission to challenge the jurisdiction, but said that this should not be construed as an admission that GAFTA and the Commercial Court had jurisdiction. As is apparent the Buyers have defended the appeal.
As a matter of English law it is not now open to the Buyers to object to the
Appeal Award or the original award on the ground that the arbitrators lacked substantive jurisdiction.