Transition Feeds LLP v Itochu Europe Plc

There are two separate sets of applications before the court brought by Transition Feeds LLP, formerly known as Advanced Liquid Feeds LLP (“the Buyers”). The first is an application under section 68(2)(d) of the Arbitration Act 1996 (“the Act”) for the remission of an arbitration award made by a FOSFA Board of Appeal (“the Board”) and contained in arbitration appeal award no 1049, dated 12 January 2012 (“the Award”) in an arbitration between the Buyers and Itochu Europe plc (“the Sellers”). Secondly, there are two appeals under s. 69 of the Act in respect of two further arbitration awards made by the same FOSFA Board of Appeal contained in arbitration appeal award no 1050 dated 12 January 2012 (the “Chemstar Yazoo award”) and arbitration appeal award no 1051 dated 12 January 2012 (“the Oak Galaxy award”) in two further arbitrations between the Buyers and Sellers.

The background to the s. 68(2) applications is as follows. By a contract in writing dated 21 August 2008 (“the Supply Agreement”) the Sellers agreed to supply to the Buyers a minimum of 72,000 metric tons per year of Crude Palm Oil Feed Grade (“CPO”) and Palm Fatty Acid Distillate (“PFAD”) for three years from October 2008 to September 2011 on the basis of delivery “Cif Mersey Gladstone Dock”, but with the Buyers’ option of discharge at Rotterdam subject to the Sellers’ or the shipowners’ consent, but without discount.

The supply agreement was subject to FOSFA rules, the FOSFA arbitration clause and, where otherwise applicable, FOSFA contract nos 80 (for CPO) and 81 (for PFAD).

Under clause 2 of both FOSFA contract forms, the Sellers undertook that “At time and place of shipment the oil shall be of good merchantable quality of the agreed description and specifications.” Clause 2 of FOSFA 80 for CPO provided in full:

The arbitration concerned seven individual contracts, three for CPO and four for PFAD, the goods for which were shipped on board the vessel Chemstar Venus at Dumai, Indonesia, and Pasir Gudang, Malaysia. During the carriage from the Far East and Liverpool, the vessel was seized by Somali pirates and was detained by them from 15 November 2008 to 13 February 2009. As a result of the detention of the vessel and its cargoes, the Buyers contended that the goods were not of contract quality in that they were no longer of good merchantable quality (“GMQ”) and would not be allowed to be used in the feed industry for which they had been purchased. The Buyers’ stance was prompted by being informed by Product Authentication International (“PAI”) that the unambiguous view was that the goods must not be used in feed and by Sefton Borough Council (“Sefton”), the authority responsible for enforcing EU regulations that the goods should not be allowed to enter the food or feed chain. These views were not based on any physical examination of the goods after the vessel had been released from detention but on the fact of the detention itself.

The Buyers proposed that the Sellers withdraw the Chemstar Venus cargoes and replace the shipment with conforming goods on other vessels. The Sellers refused and demanded payment, to which the Buyers responded by saying that that was a repudiatory breach for which they were terminating the contract. In their turn, the Sellers treated the Buyers as being in repudiatory breach and discharged the goods at Rotterdam where they were sold with notice of the hijack and on the basis, in respect of two parcels, that they would not be used in food or the feed chain industries.

There were numerous issues raised in the arbitration before the First Tier Tribunal (“the Tribunal”) including whether: (1) the contracts were CIF or ex-tank Liverpool? (2) the Sellers were obliged to deliver goods which, pursuant to section 14(3) of the Sale of Goods Act 1979, were fit for the Buyers’ purposes, namely to sell the goods for use in feed; (3) under clause 2 of FOSFA 80 the Sellers were obliged to deliver goods at Liverpool which were GMQ and, if so, whether, pursuant to the Precautionary Principle laid down in Article 7 of EU Regulation 178/2002, and in light of the position taken by PIA and Sefton, the CPO goods would not have been GHQ had they been delivered at Liverpool; (4) the goods were not GMQ on arrival by reason of arsenic contamination; (5) if the Buyers had wrongfully repudiated the contract, the Sellers’ measure of damages was the difference between the contract price and the resale prices achieved in Rotterdam or the difference between the contract price and the market value in Liverpool of goods in the condition and of the quality as they were required to be under the contract; (6) on the basis that the CPO would not have been GMT on arrival at Liverpool because it could not have been sold for use in feed or the food chain, the price payable under the CPO contract should be reduced and the Sellers’ damages reduced accordingly.

The Tribunal held, inter alia, that: (1) the contracts were CIF contracts and not ex-tank; (2) the Buyers had wrongfully repudiated the contracts; (3) the words “the above” in clause 2 of FOSFA 80 meant the whole clause including the requirement of GMQ at shipment so that the CPO had to be GMQ on arrival, which it was not, because by reason of the position adopted by the regulatory authorities, it could not be used for its intended purpose of sale for use in feed or the food chain; (4) such arsenic contamination as there was did not render the goods non GMQ. (5) the buyers were not entitled to any allowance against the price under clause 2 of FOFSA 80 because the CIF value at Rotterdam was about dollars $600 per ton and the goods had been re-sold at dollar $640 per ton; (6) the sellers were entitled to damages based on the difference between the contract price and the resale price achieved in Rotterdam, the latter being evidence of the value of the goods in the sellers’ hands

Both sides appealed to the FOSFA the Board. The Buyers repeated the contentions as to contractual quality of the goods and price allowance under clause 2 of FOSFA 80 that they had advanced before the Tribunal. Thus, the Buyers contended on appeal, inter alia: (1) the goods had to have been of satisfactory quality and fit for their intended purpose pursuant to section 14(2) and (3) of the Sale of Goods Act 1979; (2) the Buyers were entitled to an adjustment of the price under clause 2 of FOSFA 80 because, if the goods had been delivered at Liverpool they would not have been GMQ on arrival there; (3) the Tribunal should have calculated the price allowance by taking the difference between the contract price and the value of the cargo fit for the purpose intended had it arrived at Liverpool; (4) the goods were not GMQ by reason of arsenic contamination; (5) the Sellers had not complied with the obligation to ship GMQ goods because they had not provided loading samples.

The Sellers contended that: (1) the Tribunal had (a) misconstrued clause 2 of FOSFA 80; the words “the above” should be construed as referring only to divergences from the detailed contractual specification as to FFA and moisture and impurities and not to GMQ; (b) misinterpreted the letters from PAI and Sefton which were not legally binding; (2) the precautionary principle had no application; (3) even if the Buyers were entitled to an allowance under clause 2 of FOFSA 80, the Tribunal’s decision that the allowance was zero was correct.

In paragraph 4.2(a)(ii) of the Award, the Board summarised the issues raised by the Buyers, inter alia, as follows:

The Board further stated (Footnote: ¹) that the issues would be “dealt with in their full extent under Findings, that follow on the next section of the Award”, and went on to find: (1) the contract was CIF and not ex-tank Liverpool (paragraph 5.34); (2) the Buyers had been in breach in refusing to accept the goods (paragraph 5.34); (3) the absence of loading samples did not mean that the goods had not been GMQ at shipment (paragraph 5.35); (4) the level of arsenic did not constitute a breach of contract (paragraph 5.36).

Paragraphs 5.37, 5.38 and 5.39 of the Award read:

The Award then goes on to deal with other matters unrelated to the parties’ contentions as to quality of the goods on shipment and on arrival.

Mr. Rainey QC for the Buyers submits that paragraphs 5.34 to 5.39 are the only paragraphs of the Award that deal with the quality of goods on shipment and on arrival and that it is manifest that the Board failed to deal with the Buyers’ contention that under clause 2 of FOSFA 80 they were entitled to an allowance against the price on the basis that if the goods had been delivered at Liverpool in accordance with the contracts, they would not have been GMQ. It followed, argued Mr. Rainey, that the Board had been guilty of a serious irregularity within s. 68(2)(d) of the Act.

S. 68 (1) & (2) provide:

I gratefully adopt the approach taken by Flaux J in paragraphs 6, 7 and 30 in Primera Maritime (Hellas) Ltd et al v. Jiangsu Eastern Heavy Industry Company Ltd et al [2013] EWHC 3066 (Comm):

In Petrochemical Industries Company (K.S.C.) v The Dow Chemical Company [2012] 2 Lloyd’s Rep 691 (at paragraphs 16, 26 and 27) Andrew Smith J had this to say on what constitutes an “issue” and the considerations relevant to whether an issue had been dealt with by a tribunal for the purposes of section 68 (2)(d):

In my judgment, whether the Buyers were entitled to an allowance against the price on the basis that if the goods had been delivered at Liverpool they would not have been GMQ, was “an issue” in the arbitration before the Board. Realistically, Mr. Parsons QC for the Sellers did not contend to the contrary. What Mr. Parsons argued was that I should read the award in a reasonable and commercial way and on that basis find that the Board had dealt with the price allowance issue. He submitted that the Board, having found that the Buyers were in breach and having dismissed the contentions based on the absence of load port samples and arsenic contamination, were dealing with the price allowance issue in paragraphs 5.35 to 5.39. The Buyers’ case that the goods would not have been GMQ on arrival at Liverpool had been based, argued Mr Parsons, on arsenic contamination and/or the precautionary principle that had been engaged as a result of the attitude adopted by the PIA and Sefton. The arsenic contention was rejected in paragraph 5.36 and in paragraph 5.38 the Board rejected the precautionary principle contention. Accordingly, the Board had rejected the only two bases upon which the Buyers had argued that the goods would not have been GMQ on arrival within clause 2 of FOSFA 80. And in paragraph 5.39, the Board were saying that the Buyers had not proved any other lack of GMQ based on the physical state of the cargo. It followed that the Board had indeed dealt with the price allowance issue.

Attractively though Mr. Parsons’s submissions were advanced, I decline to accept them. In the first place, it is far from clear that the Board were dealing only with the price allowance case in paragraphs 5.35 to 5.39 since: (i) the issue of load samples went to the question of GMQ on shipment, not arrival; and (ii) the fitness for purpose issue went to the quality of the goods on shipment as well as on arrival and was advanced as a justification for terminating the contract as well as a reason for the price allowance under clause 2 of FOFSA 80.

In the second place, I accept Mr. Rainey’s submission that the Board is not to be taken as having found that the Buyers’ contentions as to the quality of the goods and price adjustment under clause 2 failed on precautionary principle grounds. In my view, in paragraph 5.38 the Board are not dealing with whether or not the goods were GMQ or fit for purpose, but are criticising the Buyers for having terminated the contract before the arrival of the vessel.

In the third place, the Board only address clause 2 of FOSFA 80 in paragraph 5.39 and there they reject the Buyers’ case founded on that clause on the ground that the goods had not arrived in Liverpool, which was a ground neither party had advanced. The issue raised by the Buyers’ price adjustment case involved a consideration of what would have happened if the goods had arrived at Liverpool. In my judgement, the Board simply did not deal with this issue.

Has the failure of the Board to deal with the price allowance issue caused substantial injustice to the Buyers? The approach the court should take when dealing with this question is accurately set out in paragraph 20.8 to Professor Merkin’s arbitration law:

Mr. Parsons submitted that if the Board had failed to deal with the price adjustment issue no substantial injustice had been caused to the Buyers because it was not reasonably arguable that the Board would find that there should be a 100% price reduction as contended for by the Buyers. This was so because: (1) there was no evidence of actual contamination; (2) the Buyers had not diverted the cargo to Rotterdam or elsewhere to have the cargo tested; (3) in any event, the resale price of the cargo for technical purposes was greater than the market price in Rotterdam for goods suitable for food and feed; (4) it was plain that on its proper construction clause 2 did not apply where the goods were not GMQ on arrival having been GMQ on shipment; (5) the Buyers would not have taken the CPO in Liverpool if the contract had not been terminated because they did not have sufficient storage space; they believed there were no Buyers for the CPO in the UK; and there was no certainty of recovery from insurers if they (the Buyers) treated the CPO as a total loss.

I reject these submissions. In my judgment, the way in which the price allowance issue was developed before the tribunal and the Board was and is reasonably arguable, including the question of the true construction of clause 2. It may be that the Buyers would have to give credit for the value, if any, of the cargo on the basis that it was delivered at Liverpool but that does not render the whole issue unarguable. As for the Sellers’ contention that the Buyers would not have taken the CPO, it is arguable as submitted by Mr. Rainey, that the correct approach for the Board to take is to assume that the Buyers had taken the goods at Liverpool and to disregard what the Buyers might then have decided to do with the goods.

It follows in my judgment that the Buyers’ section 68(2)(d) challenge in respect of the price adjustment issue succeeds and the Award should be remitted for this issue to be dealt with by the Board.

The Buyers argue that the Board were guilty of another section 68(2) irregularity with respect to the Buyers’ case on the quantum of the Sellers’ damages. It was contended by the Buyers before the Board that, quite apart from any price allowance, the Tribunal had been wrong to use the Rotterdam resale price as the market value of the goods at the time and place when they should have been accepted when determining the Sellers’ damages. It was argued that this was so for two reasons. First, the relevant market for determining the value of the goods was Liverpool, not Rotterdam. Second, the Rotterdam resale contracts were on wholly different terms from the terms on which the goods had been actually sold. (Two of the contracts of resale had included an express clause in which the Buyers acknowledged that they were purchasing in full knowledge of the provenance and condition of the goods and the goods were not to be used or processed or resold into the food and feed chain industries. The third resale contract contained no such clause but was for a price $40 per tonne in excess of the price achieved in the other two contracts).

The Buyers supported this contention with a witness statement from their Dr. Howells to the effect that the market value in Liverpool was the appropriate reference point and by references to passages in Benjamin’s Sale of Goods, in particular paragraph 16-074 where it is stated: “There will be no evidential value from the price obtained by the seller under an actual resale if the terms of the resale are different in an important respect from those of the original sale.”

The Sellers in their cross-appeal contended that the Tribunal’s finding that the goods had not been GMQ on arrival should be reversed and further that the damages should be increased by reference to certain figures put forward by Dr. Howells in his third witness statement (as Mr Rainey observed, a case of “the biter bit”).

It was submitted by Mr. Parsons that the Buyers’ contention as to damages was advanced on the sole basis that the goods were not GMQ on arrival, but I am satisfied that at the hearing before the Board these contentions were advanced on the basis that they were to apply whatever the Board might find as to whether the goods were GMQ on arrival. Mr. Parsons also argued that the Buyers’ contentions as to the inapplicability of the Rotterdam resale prices were not an “issue” before the Board but instead were an argument or a step in the argument in respect of a broader issue, namely: what was the Sellers’ correct measure of damages for breach of contract. I reject this submission. In my judgment, the Buyers’ contentions with respect to the inapplicability of the prices achieved on resale in Rotterdam constituted a distinct “issue” before the Board.

The Board began to deal with the question of damages at paragraph 5.56 of the Award. In paragraphs 5.57 and 5.58, they set out the details of the Sellers’ damages claim as presented to the Tribunal. Paragraphs 5.59 and 5.60 read as follows:

Did the Board deal with the issue of the alleged non-applicability of the Rotterdam resale prices in calculating the Sellers’ damages? Mr. Parsons submitted that I should find that this issue was dealt with by the Board in paragraphs 5.59 and 5.60, bearing in mind that the Board had already decided that the contracts were on CIF terms which necessarily meant that the risk of diminution of the value of the goods by taint of contamination post hijacking was on the Buyers and not the Sellers. Since it had not been suggested that the Sellers had failed to mitigate their loss by selling the goods in Rotterdam, it followed ineluctably, argued Mr Parsons, that the correct measure of damages, whether under the Sale of Goods Act provisions or under the default damages provisions in the contract (Footnote: ²), depended on a comparison of the contract price and the resale price. Mr. Parsons also contended that, since the Board explicitly dealt with the Sellers’ claim in these paragraphs that the damages should be increased by reference to the default clauses, the Board should be taken to have dealt with the Buyers’ damages case. I do not accept these submissions. The issue of the non-applicability of the Rotterdam resale prices for the reasons advanced by the Buyers to the Board was a quite distinct issue from the Sellers’ claim for an increase in the damages. It was an issue raised fair and square before the Board by the Buyers and yet it received no mention at all by the Board in their Award. In my judgment, even after a fair, reasonable and commercial reading of the Award, the conclusion must be that the Board failed to deal with this issue.

I am further of the view that the failure of the Board to deal with the inapplicability of the Rotterdam resale prices issue has caused the Buyers substantial injustice. I do not accept Mr. Parsons’s argument, based principally on the Board’s finding that the contracts were on CIF terms, that the Buyers’ contentions are unarguable and are bound to be rejected by the Board upon a remission. In my opinion, the argument of the Buyers in their written submissions to the Board, supported as they are by references to Benjamin and an authority cited in Benjamin, has sufficient merit to entitle the Buyers to an order requiring the Board to deal with the Buyers’ case on this issue.

It follows that the two s. 68(2)(d) challenges made in the first set of applications before the court succeed with the result that the Board’s Award dated 12 January 2012 ought to be: (i) set aside with a declaration that it is to be of no effect insofar as it determined the damages payable by the Buyers to the Sellers (including orders as to costs); and (ii) remitted for consideration of the two issues the court has found were not dealt with by the Board.

As recorded above, the second set of applications before the court are the two s. 69 appeals in respect of the costs orders made by the Board in two appeals arising out of further deliveries under the Supply Agreement made on the Chemstar Yazoo and the Oak Galaxy.

The Chemstar Yazoo arbitration concerned eight individual contracts, one for CPO and seven for PFAD. The goods the subject of these contracts were shipped at Dumai under various bills of lading. The Sellers terminated the contracts on 9 April 2009 alleging non-compliance by the Buyers with contractual terms as to payment.

The Oak Galaxy arbitration concerned three individual contracts, one for CPO and two for PFAD. Once again, the Sellers terminated these contracts on 1 May 2009 alleging non-compliance by the Buyers with the payment terms under the contracts.

In the Chemstar Yazoo arbitration, the Buyers claimed damages under five heads of which the first four related to damages in respect of the Buyers’ need to buy replacement cargoes totalling US$1,497,380.50. In addition, they claimed additional storage costs in relation to the replacement cargoes in the sum of £75,177.69. Before the Tribunal, the Buyers succeeded in full on liability and in full on the first four heads of damages, but failed on the ancillary claim for storage costs. The Buyers commenced an appeal in which they sought to overturn the Tribunal’s decision on its claim for storage costs and sought an award in respect of these costs from the Board. For their part, the Sellers cross-appealed in respect of all of the adverse findings made against them by the Tribunal. In this cross-appeal, the Sellers sought, inter alia, to overturn the Tribunal’s decision on the wrongful termination by the Sellers which necessitated the Board considering in detail in their Award all of the issues of liability upon which the Sellers had lost before the Tribunal. The Board then dealt with the comparatively short storage costs issue appeal brought by the Buyers. In the result, the Board rejected the Buyers’ appeal on storage costs and also rejected the Sellers’ cross-appeal on liability and all other issues. In dealing with costs, the Board dealt with only with the costs of the award and the arbitration, holding over the party and party costs at the Sellers’ request. In paragraphs 7.31 and 7.32 of their Award, the Board ordered that the Buyers should pay all the costs of the appeal before them.

In the OAK GALAXY arbitration and appeal, the same approach was taken by the Board. As already recited, the claims made by the Buyers against the Sellers were essentially the same as in the Chemstar Yazoo arbitration. The Buyers claimed damages under six heads of which the first four related to damages in respect of the Buyers’ need to buy replacement cargoes at a cost of $2,610,750. In addition, they claimed additional haulage and storage costs incurred in respect of the replacement cargoes respectively in the sums of £10,999.80 and £147,901.45. Before the Tribunal, the Buyers succeeded in full on liability and in full on the first four heads of damage, but the smaller claims for haulage and storage costs were rejected.

The Buyers appealed seeking to overturn the Tribunal’s rejection of their claim for haulage and storage costs. The Sellers cross-appealed in respect of all findings made by the Tribunal. As in the Chemstar Yazoo appeal, the Sellers’ cross-appeal on liability necessitated the Board considering in detail issues of liability upon which the Sellers had lost before the tribunal. The Board then dealt shortly with the Buyers’ separate haulage and storage costs appeal. The Board allowed the Buyers’ appeal on haulage costs but rejected the appeal on storage costs. It also rejected the Sellers’ cross-appeal on liability and all other issues. Again, the Board dealt with the costs of the award and arbitrators’ costs only, holding over the question of party and party costs. In paragraph 7.23 of the award, the Board ordered that the Buyers should pay all the costs of the appeal:

The question for this court to decide is whether the Board’s interpretation and application of the “costs follow the event rule” was obviously wrong.

Section 61(2) of the Act provides:

When dealing with the costs of the arbitrations in both of the appeals, the Board was not engaged in an exercise of discretion but was purporting to apply the “costs follow the event rule”. In identifying the relevant event, the Board had regard only to the appeal first lodged -- that of the Buyers -- and disregarded the cross-appeal filed by the Sellers after the Buyers had lodged their appeal. In my judgment, the Board’s interpretation and application of the “costs follow the event rule” was obviously wrong. In both appeals there were two events -- the outcome of the Buyers’ appeal and the outcome of the Sellers’ cross-appeal -- not one event. The order for costs should therefore have been made on this basis with the Board deciding what proportion of the costs should be borne by each of the appellants, each of whom had lost its appeal. It follows that both of the s. 69 appeals brought by the Buyers succeed, with the result that the costs orders in both of the challenged awards must be set aside and the question of costs remitted to the Board to be determined on the basis that there were two events and not one.