Pacific Inter-Link Sdn Bhd v Efko Food Ingredients Ltd.

Pacific Inter-link SND BHD (“PIL”) is a Malaysian company based in Kuala Lumpur which trades in palm oil. EFKO Food Palm Oil Limited (“EFKO”) is a Russian-based company engaged principally in the purchase and sale of oils, fats and other related commodities. The claims arise out of a series of six contracts for the sale by PIL to EFKO of 1,500 mt of palm oil per month for each of the six months from January to June 2008 said by EFKO to have been concluded orally on 7 September 2007. They were also alleged to include FOSFA arbitration clauses agreed either orally on 7 September or by exchange of emails on 11 September 2007.

In each case EFKO were said to be represented by Mr Adrian Bell, a broker or intermediary, who worked for a company called Pontus Trade S.A. (“Pontus”). Mr Bell or Pontus had previously as principal sold parcels of palm oil to EFKO and bought parcels of palm oil from PIL. However in regard to the present contracts it was contended by EFKO that Pontus and Mr Bell were acting as agents and in accord with the authority of EFKO. PIL denied any binding contracts (and any arbitration agreements) and in any event purported to cancel the contracts, pursuant to a cancelling clause, on the grounds that the contracts were not signed. EFKO alleged this was repudiatory breach.

The present procedural position is complicated not least because EFKO commenced six separate FOSFA arbitrations, one on each contract. The result was six separate arbitrations; six separate awards; six separate appeals; four separate appeal hearings, the witnesses being thus examined and cross examined four times on the same issues and same materials; and six separate Appeal Awards. Five of the first instance awards found in favour of PIL and one found in favour of EFKO.

All six arbitration awards were subsequently appealed to the FOSFA Appeal Board and all six Appeal Awards found against PIL that binding contracts with arbitration clauses were agreed. This gives rise to challenges under s.67 and s.69 of the Arbitration Act 1996 (the Act”). Four of EFKO’s appeals were out of time but EFKO obtained extensions from either (it being controversial) the FOSFA secretariat or the Boards of Appeal. This gives rise to applications under both s.68 and s.69 of the Act.

In all six claims, PIL has brought a challenge pursuant to s.67 of the Act on the basis that there was no arbitration agreement between the parties and the Board therefore lacked jurisdiction. PIL claims a rehearing of this issue. PIL’s case is that there were no binding contracts and, in any event, no arbitration clauses were agreed by the parties during a telephone conversation on 7 September 2007, or by the emails on 11^th September, as found by the six Boards of Appeal; or if there was any such agreement, Mr Bell did not have actual authority to act for EFKO.

EFKO’s case is that there was an oral sale agreement, including agreement to the arbitration clauses, by telephone between Mr Bell on behalf of EFKO and Mr Rastogi on behalf of PIL on 7 September, or that there was agreement to the arbitration clauses by exchange of two emails on 11 September; and that Mr Bell had actual authority to make such agreements for EFKO. Alternatively, EFKO’s case is that it subsequently ratified the contracts.

EFKO also contests the s.67 challenges on the basis of an allegation that PIL, in letters sent by its Malaysian lawyers when nominating its arbitrator or by its submissions in the references, agreed ‘ad hoc’ to submit the question of jurisdiction to the FOSFA arbitrators and therefore there cannot be a successful challenge pursuant to s.67. PIL’s case is that it preserved its right to challenge the arbitrators’ ruling pursuant to s.67 of the Act.

Four of the six claims include a challenge pursuant to s.68 of the Act. This is based on the exercise of a discretion pursuant to FOSFA Rule 7(e) to extend time to permit four of EFKO’s appeals, which it had originally submitted in time, but subsequently withdrew and then reinstated out of time (twice in respect of two of the appeals). The basis of EFKO’s application to extend time was an alleged “gentlemen’s agreement” between the parties not to appeal (which caused withdrawal of timely appeals, but which was then repudiated by PIL leading to the reinstatement), and further that it had been subjected to economic duress (which caused the withdrawal of timely appeals), which PIL denied.

It is controversial when and by whom the extension was given. There is a dispute as to whether it is possible to construe a letter from FOSFA dated 1 December 2009 as a conditional extension or a reference of the issue to the Boards of Appeal to investigate the relevant facts or whether, as EFKO alleges, it simply amounts to the granting of an extension of time.

There are several distinct grounds of appeal pursuant to s.69. The first relates to the Rule 7(e) issue on which the s.68 challenge is based and is an alternative challenge. PIL contends that the discretion only arises if timely filing of appeal was ‘impossible’ and the extensions were granted without any finding (or even investigation) of impossibility.

The second error of law, which is raised in four of the six appeals, arises from the same points relied on in PIL’s s.67 challenge. In summary, PIL’s case is that the Appeal Board, despite having slightly different contractual analyses between various appeals, fell into error in each in finding that a contract containing an arbitration clause had been agreed by the parties, while also holding that various other terms contained in the same document sent by PIL to EFKO on 11 September 2007 were not. It was not open to EFKO, it was submitted, to pick and choose among the terms offered by PIL. To do so would be to make a counter-offer.

Finally, PIL says there is an error of law relating to the Board’s findings in relation to the cancellation clause contained within PIL’s terms. In 2010 Folio 588, PIL states that the Board erred in law in wrongly assuming that PIL was required to give further notice to EFKO before exercising its right to cancel the contract on the basis that no signed and sealed copy had been returned to PIL.

Three witnesses were called to give oral evidence for the purposes of the section 67 application:

As already noted, negotiations in relation to the disputed contracts were conducted by telephone between Mr. Rastogi and Mr. Bell supplemented by e-mail exchanges. Mr. Lyashenko in turn was in communication with Mr. Bell who was said to be acting as agent for EFKO. I should accordingly record my impressions of those witnesses (who were giving evidence for the fifth time on the topic).

Mr. Rastogi struck me as a straightforward and reliable witness. Mr. Lyashenko gave his evidence through an interpreter which renders any impression as to his reliability difficult. Nonetheless, I was left with some concern as to whether his command of English was as limited as he claimed. More importantly I did not feel that he was prepared to face up to and deal with the inconsistencies between his evidence and the contemporary documentation.

Mr. Bell was not a satisfactory witness. His evidence in chief set out in a number of statements was notable for its ill tempered and aggressive approach to PIL’s evidence. In cross-examination he tended to be evasive and rambling. My confidence in his evidence was further undermined by alterations in his account including for instance the record of his earlier sworn evidence before a US court that the contracts were made in a face to face meeting in Malaysia and not over the telephone.

But these witnesses were dealing with matters which arose four years ago. It is accordingly another paradigm case for applying the following dictum of Lord Goff in Grace Shipping v. Sharp & Co [1987] 1 Lloyd's Law Rep. 207 at p. 215-6:

"And it is not to be forgotten that, in the present case, the Judge was faced with the task of assessing the evidence of witnesses about telephone conversations which had taken place over five years before. In such a case, memories may very well be unreliable; and it is of crucial importance for the Judge to have regard to the contemporary documents and to the overall probabilities. In this connection, their Lordships wish to endorse a passage from a judgment of one of their number in Armagas Ltd v. Mundogas S.A. (The Ocean Frost), [1985] 1 Lloyd's Rep. 1, when he said at p. 57:-

"Speaking from my own experience, I have found it essential in cases of fraud, when considering the credibility of witnesses, always to test their veracity by reference to the objective facts proved independently of their testimony, in particular by reference to the documents in the case, and also to pay particular regard to their motives and to the overall probabilities. It is frequently very difficult to tell whether a witness is telling the truth or not; and where there is a conflict of evidence such as there was in the present case, reference to the objective facts and documents, to the witnesses' motives, and to the overall probabilities, can be of very great assistance to a Judge in ascertaining the truth."

“That observation is, in their Lordships' opinion, equally apposite in a case where the evidence of the witnesses is likely to be unreliable; and it is to be remembered that in commercial cases, such as the present, there is usually a substantial body of contemporary documentary evidence.”

In these circumstances it is necessary to set out at some length the background material as it emerges from the contemporary documents.

Discussions between Mr Bell and Mr Rastogi about a possible purchase by EFKO of palm oil from PIL began in late August 2007. On 27 August 2007, at Mr Bell’s request, Mr Rastogi sent to Mr Lyashenko a quotation for 15,000mt of palm oil. This was followed up by a quote for a smaller quantity (1,000mt each month from October 2007 to June 2008) dated 6 September 2007. It is of some note that the quotation made express provision for guaranteeing the arrival specification of the cargoes.

On 7 September 2007 there was at least one telephone conversation between Mr Bell and Mr Rastogi. This forms the focus of one of the primary disputes between the parties as to whether binding oral agreements were arrived at and on what terms. It is EFKO’s case that a binding oral agreement was reached for the sale of 1,000mt per month for six months CFR Iliychevsk with provision for arbitration under FOSFA rules. PIL contends that no binding agreement was reached (let alone one with any provision for arbitration). Any agreement it was contended was subject to the preparation and signature of a written contract on PIL’s standard terms.

The following day Mr Bell sent the following e-mail to Mr Rastogi:

“FGOS please to confirm as per telecom in writing:

100mt rbd olein each month for shipment JFM 2008 at usd 740 FOB and AMJ 2008 at USD 735 FOB. Transformation to CFR Illychevsk at USD68 inclusive of 125 ppm TBHQ. Payment 15 days before arrival in Illychevsk.

This is the first confirmation for EFKO – well done to us all”

On 10 September 2007 Mr Bell e-mailed Mr Lyashenko to “confirm in writing your fixations from 07.09.07 1,500mt of Olein each month” and Mr Liashenko responded to “confirm the fixations”.

On 11 September 2007, PIL e-mailed documents headed “Sales Contract” to Mr Bell. They were all in the same form covering each month of the sale. The covering e-mail described them as contracts for the olein “sold to EFKO”. The contracts themselves stated as follows:

“Attn:

We are pleased to confirm having sold to you the following, subject to our general terms and conditions of sale and as per hereunder.

…

Other terms and conditions I): Extension of shipment and arbitration, relating to the terms of this contract, with arbitration in London, shall be as per FOSFA-81, about which the parties have knowledge and notice and hereby accept.

…

NOTE: The Buyers shall acknowledge contents and receipt of this document, by the close of the working hours, today by returning by signed/sealed copy of the sellers. If the signed and sealed copy of the contract is not received as mentioned above, the seller shall reserve the right to cancel the contract.”

In an e-mail later that day Mr Lyashenko thanked Mr Bell for the contracts “concluded with PIL” and went on:

“…Further to our telephone conversation – I understand that contracts have already been concluded, but yet we would appreciate it very much if you could try to offer them to make some amendments in terms of goods’ quality warranties at the port of discharge. And, maybe, any other amendments as you may think fit. As regards our contracts, soon Timur will send you a more detailed message.”

The response from Mr Bell was:

“…I understand your concerns regarding the quality and you are right in saying that the contracts have already been concluded. However, I will try to discuss this matter with PIL, taking into account that they were happy to make these 6 contracts with you and, maybe, they will come to terms with you.”

Later that night Mr Bell duly contacted Mr Rastogi:

“I think that the contract looks reasonable/standard with the exception of missing quality guarantee at disport and the final sentence regarding signature/non-signature (I cannot guarantee on which day it will be signed not least because I must first translate it).

Also I imagine we need an agreement on non-double commitment as we once had with Pontus and OMZhK.”

On 14 September 2007 Mr Rastogi pressed Mr Bell for countersigned copies of the contracts:

“…Please note that these being our first contracts with EFKO and as per our internal control for forward contracts, we need someone authorised from EFKO to stamp and sign these contracts and fax/E mail back to us urgently.

Please ensure that these contracts are received back by us by Monday 17 September”.

The response from Mr Bell on the date nominated for receipt of the signed versions was: “Pls bear with me”.

The waiver is said to be evidenced by letters from PIL’s Malaysian lawyers to as quoted below:

“Our clients are prepared to submit to the jurisdiction of the arbitration panel, to rule on their own jurisdiction as to whether there is a valid arbitration agreement strictly without prejudice, derogation or waiver of any of our client’s rights, defences and liabilities, and in particular whether a valid sales contract had come into existence between the parties, all of which are fully hereby reserved.”

This is an aspect of the case where the credibility of Mr. Rastogi and Mr. Bell is of great importance. I have already stated my overall impressions. Their evidence in relation to this issue provides a striking example of the consistency and clarity of Mr. Rastogi’s evidence as compared to that of Mr. Bell.

As regards Mr Bell I have already mentioned his remarkable evidence to a US court in 2008 that the contracts were made at a meeting in Malaysia and not over the telephone. I will refer hereafter to his contention that the inclusion of the FOSFA arbitration clause was raised (and concluded) during that 7 September conversation, a proposition that only emerged in his oral evidence. I will also refer to the fact that his insistence that there was a direct contract between PIL and EFKO was difficult to reconcile with his acceptance that when PIL cancelled the contracts he did not tell Mr Lyashenko immediately (as he initially claimed) but only a fortnight later. But the most telling feature undermining his evidence was its lack of consistency with the contemporary material.

The meat of Mr. Rastogi’s evidence in chief was set out in paragraph 15 of his witness statement dated 22 October 2008:-

“I was apprehensive of Mr. Bell’s/Pontus authority to act on EFKO’s behalf, as Mr. Bell could not produce any written authorization to substantiate his/Pontus agency when I asked him to. In particular, during our initial telephone conversations on or about 07 September 2007 I specifically asked Mr. Bell if he could produce any written authority from EFKO, to which Mr. Bell replied that he did not have any written document “at present”, but would try to obtain the same. I therefore expressed PIL’s intention to deal directly with EFKO, and not through Mr.Bell/Pontus. In the telephone conversations which followed that day, however, Mr. Bell and I agreed to overcome the lack of authority on his/Pontus’s part by virtue of the usual manner in which PIL conducts business. In other words, it was agreed that PIL would prepare contract offers on PIL’s format, setting out the agreed terms and incorporating PIL’s standard terms and conditions of sale, and thereafter pass the same on to Mr.Bell/Pontus, who would then obtain the agreement and acceptance of EFKO. I made it very clear to Mr. Bell that unless and until the offers were returned signed and stamped by an authorized person at EFKO, indicating their complete acceptance within the time provided, as is PIL’s standard practice in forward sales, the contracts would not become valid or effective. Mr. Bell, well aware of this procedure and PIL’s standard terms and conditions of sale from previous dealings, agreed to do so. This understanding is clear from the email exchange which followed between us in which Mr. Bell informed me that he was trying his best to have the contracts signed and stamped by EFKO. ”

I conclude that no effective Sale Contract was concluded on 7 September 2007 and further that the documents dispatched on 11 September 2007 required stamping, signing and returning. This did not happen and as a result no concluded agreement was reached prior to cancellation of the transaction on 24 September 2007.

This alternative case strictly does not arise absent the execution of a written agreement prior to 24 September 2007. Nonetheless the suggestion that there was any mention of, let alone agreement to, an arbitration agreement in the telephone conversation on 7 September 2007 has to be rejected. Leaving aside my general acceptance of Mr. Rastogi’s evidence in preference to that of Mr. Bell it is striking that Mr. Bell’s oral evidence to that effect was not supported by any statement made by him in 2008 (Footnote: ³). Indeed, his evidence to Appeal Board 1002, was summarised by the arbitrators as follows:

“There were four items contained in the confirmation which Mr. Rastogi and Mr. Bell admitted had not been discussed on the telephone…(6) the reference to FOSFA…”

Again this issue does not strictly arise since, as already found, the documented contracts were subject to stamping and signature. There is an added difficulty from EFKO’s perspective which is highlighted in the Ruling of Christopher Clarke J dated 24 August 2010 in which he gave leave to appeal to PIL in 2010 Folio 588 on the grounds that the tribunal’s decision that a concluded agreement was reached on 11 September 2007 was obviously wrong.

The proper analysis is as follows:

It is not arguable that the arbitration clause contained within the original offer was nevertheless accepted by the counter-offer. The submission advanced by EFKO was that, in sorting out the details of the contracts, the parties agreed FOSFA arbitration even if the terms of the main contract were never concluded. But this is a contradiction in terms. There was no contract the details of which needed to be sorted out.

Reliance on UK Power v. Kuok Oils [2009] 2 Lloyds Rep 495 does not advance matters (even assuming Gross J’s “provisional inclination” is to be accepted). The issue in that case was whether the provision as regards a letter of credit was a contingent condition against the background of agreement of all other terms including an arbitration clause. Here there was no mention of, let alone assent to, the FOSFA arbitration clause prior to the provision of the sale contracts. They in turn needed to be accepted or rejected as a whole or in the further alternative made the basis of a counter-offer.

There is a further difficulty about the contention that contracts between EFKO and PIL were concluded and contained an arbitration clause. Given my earlier conclusion that no consensus was reached it is once again only necessary to comment briefly on the point. It arises in two associated ways. First, the question arises as to whether Mr. Bell was acting for Pontus as principal in the transaction and, if not, whether in purporting to act as agent for EFKO he had any authority so to act.

It was EFKO’s case (and indeed PIL’s expectation) that the sales to it by PIL were on CFR Ilyichevsk terms although Pontus would take care of various matters, including insurance, transhipment and freight forwarding so as to achieve delivery DAF. In short whilst Pontus acted as agent of EFKO as regards the sales, Pontus would achieve a return on these various administrative requirements chargeable to EFKO.

It was PIL’s case that, despite their own wish to enter into agreements with EFKO, the contemporary material passing between EFKO and Pontus demonstrates that Pontus was in fact entering into back to back agreements with PIL on the one hand and EFKO on the other and were not authorised to execute an agreement between EFKO and PIL direct.

The following parts of the e-mail correspondence are potentially instructive:

This point reaches a head when Mr. Lyashenko wrote to PIL on 26 November 2007 setting out what would appear to be his understanding of the contractual position namely that the two contracts were “back to back”. Mr. Lyashenko’s attempt to distance himself from the content of the letter as being the uninformed work product of his secretary is impossible to accept. Nor do I accept that an invalid shadow contract would have been of no possible commercial value. For instance it might be of great value in terms of customs clearance or import licences.

This all goes some way to explain Mr. Lyashenko’s reluctance to sign the PIL contract himself. If it had mattered I would have concluded that any agreement between PIL and EFKO would have been treated as an invalid companion to the back to back contracts. This in turn was consistent, in my judgment, with the terms of an “agency” agreement disclosed by EFKO very shortly before the trial. Even assuming it to have been in force in September 2007 (and there were a number of worrying and inconsistent features emerging from an apparent later amendment) it appeared to extend authority to Mr. Bell to enter into back to back contracts.

Again, if it had mattered, I would have rejected the submission that EFKO ratified the contracts by embarking on the arbitration references. Such would have been outside a reasonable time for ratification, both beyond the date for performance and after a significant movement in the market.

I conclude that PIL has made good its case under section 67 of the Act that the arbitration awards should be set aside on the grounds that the arbitrators lacked substantive jurisdiction. This conclusion renders the applications under sections 68 and 69 redundant.