Dunavant Enterprises Incorporated v Olympia Spinning & Weaving Mills Ltd

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 “invoicingback 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]2KB 222 CA, J F Adair & Co Ltd v Birnbaum [1939] 2 KB 149 CAand 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:

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:

However the significant fact is :

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:

•

allofthe 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 remind [the Claimant] that our problems with our bankers are still continuing and they are still very hesitant to open new L/Cs. It is not known that by the time the L/Cs are to be established, we would be in a position to do so or not”. They then state:

“We shall appreciate if [the Claimant] could let us know whether [it would] like to close this contract now or should wait until June/July 2009 when we would be in a position to know for sure whether our bankers will open L/Cs for us or not. We are however constantly trying to get a firm commitment from our bankers … If for any reasons [the Claimant] is of the opinion that the contracts may be closed now, please inform the price idea at which this contract can be closed.”

The Claimant responded on 19 March that it had no desire to close out the contract at that stage but asked what the Defendant’s “idea for a close out” would be, to which the Defendant responded, on 21 March, that “if at any time before the time to open Letter of Credit arrives and if [the Claimant] is interested for a close out, we can at that stage discuss the close out price”.

There was then seemingly a gap until 28 May 2009, when the continuing problems with the Defendant’s bankers were once again brought to the Claimant’s attention. The Defendant again said that it did not know whether it would be in a position in July, when the letters of credit fell to be established, to establish them or not, and, if not, “then we would have no alternative but to close the contract”. They then asked the Claimant to “review the situation and inform us if they are interested to close the contract now at the prevailing prices for similar cotton ... or would like to wait until July 2009 when we would be in a position to know whether L/Cs for the above subject contract will be established or not or the contract is to be closed.” They reiterated that they were in constant contact with their bankers. The Claimant’s response of 4 June was a regret to see the Defendant’s continuous bank problems, and to ask them for their “firm close out proposal for our consideration”, which led, on the following day, 5 June, to an expressed willingness from the Defendant to close the contract on that day “on today’s prevailing prices as per bylaws of ICA”. The Claimant’s response, on 6 June 2009, was to state that it was not interested to close the contract out, but would listen to any “firm and reasonable proposal”.

On 8 June, the Defendant’s response was that, since the Claimant would like to wait until July to know if the Defendant’s bank would open the letters of credit or not, then it would have no alternative in July 2009 but to operate the Association Bylaws:

“We however would like to submit that the reason for offering to close the contract now was to allow [the Claimant] enough time to be able to dispose of goods to some other customer at market price. Therefore ... please let us know so that both of us could once again review the possibility of an anticipatory closure of the contract depending on our progress with our bankers and our ability to open L/Cs at that time.”

The Claimants responded on the same day by again suggesting that the Defendant make a firm proposal, including a firm price to settle the contract out.

The Defendant’s response of 9 June 2009 was, in the event, the last word in the run of correspondence:

“we submit that as per the bylaws & rules of ICA, any contract which will not be performed will be closed by being invoiced back to the Seller. As it is anticipated that we may not be able to open the L/Cs when due, we therefore make our firm proposal in line with the Rule no. 225 & 226 of I.C.A. that firstly we and [the Claimant] both agree to a common date for closure of contract. Once the contract is closed, we then would amicably try to determine the available market price of cotton on the date of closure on the basis of which the quantity of contract is to be invoiced back to the Seller. If for any reason we are unable to agree upon a settlement price, the matter would then be referred for arbitration.”

This was accepted by the Claimant: “In view of [the Defendant’s] difficulties to perform as per the contract terms sold we hereby consider this contract closed out” on 10 June 2009. It is significant that both in the course of that exchange, and in the exchange of emails that led afterwards and up to the commencement of arbitration on 28 July, every figure that was mentioned involved a payment by the Claimant to the Defendant (because of the increased market price).

The relevant findings, to which the parties refer, made by the first instance panel, were repeated and adopted verbatim by TAC:

“The [Claimant’s] contractual responsibility was to complete the performance of the contract in accordance with the terms and conditions contained therein.

The [Claimant’s] inability to satisfy their contractual responsibility entitled the parties to seek to have the contract closed out by being invoiced back in accordance with the Bylaws and Rules of the [Association], to which they were made specifically subject.

It therefore falls to us ... to account for the said contract or unfulfilled parts thereof, in accordance with … Rules 225 and 226.”

As to the new argument raised by the Claimant for the first time before the TAC that, by virtue of the exemption clause, it has “no liability under the close out of this contract”, the TAC “considered the statement by the [Claimant] that the [Defendant] had breached the contract and [that] “no liability shall revert to the seller” referring to a specific clause in the contract in support of their argument”, and concluded that:

“We have applied our knowledge and custom of the trade and consider this clause relates to ‘force majeure’ events … The failure of the Appellants to open a Letter of Credit due to banking restrictions (for whatever reason) did not, in the opinion of the TAC constitute ‘an event’ under what may be construed the ‘force majeure’ clause of the contract. The TAC do not consider this banking matter between a bank and its client to be defined as a ‘force majeure’ event, as understood under the standard custom and practices of the raw cotton trade and we find that the Respondents did not seek to pursue this argument until the time of Appeal and accepted that the closure of the contract and the application of the invoicing-back Rules was appropriate.”

Mr Smith’s submissions were as follows:

With regard to the words of the clause, he recognised that he would have to establish that the liability found by the TAC resulted from (and for ease of understanding I here insert numbering) (i) the Claimant’s “failure to deliver commodities sold (ii) when such delivery is prevented by … (iii) other causes beyond [the Claimant’s] control.” He recognised, as Miss Hopkins contended, that he would need to establish all three of these requirements in order to bring the Claimant within the exemption clause, if it were otherwise applicable, and otherwise survived the provisions of the Bylaws. With regard to them:

Miss Hopkins’ submissions were underpinned by her reminder that the Court should be slow to interfere with the conclusion of a commercial tribunal applying, as was expressly stated by the TAC, their “knowledge and custom of the trade” and by reference to the “standard custom and practices of the raw cotton trade”. Insofar as necessary, she also relied upon the contra proferentem rule, together with the requirement that the party seeking the benefit of an exemption clause must prove its applicability, to cast a particular burden on the Claimant to show that this exemption clause had the effect for which Mr Smith contends.

Her primary case was, however, that the exemption clause is overridden by, and inconsistent with, the Bylaws. There is, she submits, no basis for the submission made by Mr Smith, which I have recorded in paragraph 17(i) above, that “the exclusion clause was more specific; and Rules 225 and 226 were more general.” She submits that there is no answer to the proposition that, by virtue of Bylaw 201, the invoicing back provisions are not simply a Rule (the methodology being contained in Rules 225 and 226), but the subject matter of a Bylaw, which cannot be excluded or amended as a result of the provisions of Bylaw 102. Mr Smith’s suggestion that the exemption clause could come back in through the back door under Rule 226(iv) was unsupportable and I did not call on her on this aspect. Either the Arbitrators were to do their job under Rules 225 and 226 or they were not: the exemption clause must prevent the exercise ab initio rather than popping up part way through.

I put to Miss Hopkins what seems to me to be the consequence of what she was submitting, namely that the exemption clause was overridden by Bylaw 201, is that it effectively has no role to play in protecting the Claimant from liability. If it had, as she was submitting, no role in avoiding the seller’s liability to pay if it was, as in this case, innocent, it would also have no role to play if it were guilty. The effect of Bylaw 201 and Rules 225 and 226 is that there is no allocation of responsibility, and hence no liability resulting from a failure (in breach of contract) by the shipper to deliver, which would need to be, or could be, exempted, because the outcome so far as payment is concerned would not depend upon guilt or innocence, but upon which way the market moved. If a guilty seller were liable, it would be as a result of a 225/226 calculation, and it could no more rely on the exemption clause than the innocent seller. Miss Hopkins accepted this proposition, but submitted that that did not mean that there is no role for the exemption clause to play. There could be room for the traditional operation of an exemption clause in one and possibly two situations:

This argument, if successful, would prevent the applicability of the exemption clause in limine where there was an automatic application of the closing out and invoicing back provisions pursuant to Bylaw 201 and Rules 225 and 226. But Miss Hopkins had a further in limine submission, relevant to the particular facts of this case. She submitted, by reference to the facts as found and recorded by the Arbitrators, set out in paragraphs 12 to 15 above, that, in this case, there was what might be called a special contract, into which the parties entered on 10 June 2009. She submits that it is quite clear that at that stage the Defendant was not in anticipatory breach, and was simply indicating that there might well be continuing difficulties when it came to July 2009, but was in the meantime offering the possibility to the Claimant of an agreed close-out, which the Claimant took up. In those circumstances, in any event, the liability in this case, which was to pay a sum which both sides appreciated would be payable by, rather than to, the Claimant as a result of the way that the market had gone, was not a liability falling within the exemption clause at all. Without prejudice to Miss Hoskins’ careful case, to which I refer below, with regard to the three requirements of the exemption clause, none of which she submitted were satisfied, the liability of the Claimant arose pursuant to the agreed close-out provision, and did not result from any failure to deliver, whether falling within the exemption clause or at all.

I propose to address Miss Hopkins’ in limine submissions at this stage. I deal first with her second proposition. The difficulty in this regard, although I can perfectly well see the force of her case, once one looks at the actual history set out above, is that it does seem that the TAC (and the Arbitrators) concluded that there was an “inability to satisfy [the Defendant’s] contractual responsibility” and a “failure of [the Defendant] to open a letter of credit due to banking restrictions.” Hence it seems to me implicitly, if not expressly, that the Arbitrators found (although such was not necessary for their conclusion) that the close-out arose at a time when the Defendant was in anticipatory breach, such that it was not some special pre-breach agreement, but rather the operation of the close-out in the context of breach.

However, I do not consider that Miss Hopkins needs her “special agreement” argument to establish her case. It is quite clear to me that the operation of Bylaw 201 cannot be ousted, and does, indeed, have the result that, irrespective of whether there is breach or not, the close-out operates so as to create a contractual obligation only to make payment pursuant to the terms of Rules 225 and 226.

Thus, whether the case is put in accordance with Miss Hopkins’ primary submission that the exemption clause is (for all purposes relevant to this case) entirely ousted, or whether it is on the basis that the liability which is established does not result from anything which could be said to fall within the exemption clause, but results from the contractual obligation to comply with the close-out provisions, on either basis Mr Smith’s argument must fail. His submissions set out in paragraph 17(i) above as to some equitable balancing role played by the clause are mere wishful thinking.

I conclude that while the existence of this exemption clause might be of relevance where questions of contractual responsibility leading to common law damages might otherwise apply, it has no impact, and is a provision which falls foul of Bylaw 201, where the contract is “treated as cancelled” and “closed by being invoiced back to the seller under [the Association’s] rulesin force at the date of the contract”.

This resolves the appeal, but I shall now deal with Mr Smith’s arguments in relation to the three requirements referred to in paragraph 18 above.

As to the first of Mr Smith’s requirements, Miss Hopkins submits that it is quite plain that failure to deliver commodities implies a breach of an obligation in that regard, which is then sought to be excused by reference to one of the causes set out in the exemption clause. Failure is used as an alternative formulation to default, in a clause which is intended to excuse or avoid liability for that default. In any event, the liability did not result from any failure to deliver commodities by the Claimant, but from the close-out in a rising market.

As to the second, she submits that delivery was not prevented. Delivery could still have taken place, although the Claimant might not have been paid. Miss Hopkins referred to the passage in Benjamin’s Sale of Goods (8^th Ed 2011) para 8-092, which states:

““Prevented” clauses. Where the seller seeks to invoke the protection of a clause which states that he is to be relieved of liability if he is “prevented” from carrying out his obligations under the contract or is “unable” to do so, he must show that performance has become physically or legally impossible, and not merely more difficult or unprofitable.”

Although Mr Smith points to the need to deliver documents to a nominated banker, there was nothing, save a risk that the Claimant might not be paid, to prevent shipment. Miss Hopkins referred to the dicta of Parker LJ in CIF v Sealink [1988] 1 Lloyd’s Law Rep 323 at 327:

“It is important in my view to bear in mind:

(1)

that it is for the party relying on a force majeure clause to bring himself squarely within that clause;

(2)

that in most cases that can only be done by showing either legal or physical impossibility.

(3)

…

(4)

a party must not only bring himself within the clause but must show that he has taken all reasonable steps to avoid its operation, or mitigate its results.”

It is not the case, as Mr Smith submitted, that by reference to any passage in the Award, whether those referred to in paragraph 16 or 18 above, the TAC, or the Arbitrators, found that the delivery was prevented, and it was not.

As for the third requirement, Miss Hopkins refers to Benjamin at 8-089:

“Frequently a number of events are specified and then followed by the words “or any other causes beyond our control”. Such general words in a commercial document are prima facie to be construed as having their natural and larger meaning and are not limited to events eiusdem generis with those previously enumerated. They should be construed as applying only to matters which have some connection with the performing party’s obligation.”

The last sentence is a reference to the judgment of Hamblen J in Tandrin Aviation Holdings Ltd v Aero Toy Store [2010] 2 Lloyd’s Law Rep 668, where, in discussing a force majeure clause, he stated, at para 46:

“(a)

The expression “any other cause beyond the Seller’s reasonable control” cannot sensibly be construed to include matters with which the seller was never expected to be concerned. For instance, the seller would never have been expected to be concerned with, still less to have any control or influence over, the purchaser’s financing arrangements; or any back-to-back sale by the purchaser to a third party which would have provided the purchase monies.”

In any event, she submits that the cause of the liability was the entry by the parties into the close-out, with its market price consequences.

Had I not already concluded that the exemption clause is wholly inapplicable, for the reasons I gave in paragraphs 24 to 26 above, I would have been persuaded by Miss Hopkins, for the reasons she gives, that there was not a liability caused by the Claimant’s failure to deliver, and that delivery by the Claimant was not prevented. As for the third requirement, I am not persuaded that the words of Hamblen J can be interpreted as meaning that a breach of contract by the other party can never be a cause beyond the control of the innocent party within the meaning of a force majeure clause. But I am satisfied that the liability in this case was not caused by such breach of contract, but by the effect of Rules 225 and 226, which applied independently of fault, and led to a calculation of compensation irrespective of fault.

I do not in the circumstances need to address Miss Hopkins’ estoppel argument. It seems to me that, as she submitted, if, at any time during the exchanges referred to in paragraphs 12 to 15 above, the Claimant had suggested that Rules 225 and 226 did not apply, and that compensation would be payable otherwise than in accordance with the market price calculation, then the Defendant might well not have agreed to the closure, but sought to take other steps, given that July had not yet arrived. As it was, the exemption clause was not mentioned or relied upon at any time prior to the appeal to the TAC from the initial Award.

Irrespective of this, and for the reasons I have given, I am satisfied that the appeal must be dismissed. The question raised by the Claimant, as to whether the Defendant’s claim was excluded by the exemption clause must be answered in the negative.