This article has been written by Aditi Sharma, pursuing a Diploma course on Technology Law, Fintech Regulations, and Technology Contracts from LawSikho.
It has been published by Rachit Garg.
Contrary to what the title may imply, assurance and sample issues are the “bread and butter” of commodity arbitrations, according to Peter MacDonald Eggers QC of 7 King’s Bench Walk.
It is a subset of international commercial arbitration that has developed over time and become more structured and specialized in international commodities trading. With the expansion of commerce, commodity markets originally emerged in Great Britain in the 19th century, particularly during the Victorian period, before spreading to the rest of the civilised world. For strategic reasons, London continues to be the major location for resolving disputes over a variety of commodities, notably wool, certain minerals, cereals, lipids, seeds, and fats, as well as coffee, cocoa beans, sugars, and nuts.
Arbitration conducted in accordance with the regulations of different trade organisations is one of the dispute settlement options outlined in standard forms of contract. Comparatively speaking, commodity arbitration under some arbitral organisations, such as the ICC or the LCIA, varies greatly from traditional commercial arbitration.
The Arbitration Act of 1996 has limited the ability of these issues to go to court, but it would have the effect of providing less direction in some areas. “When handling a commodities dispute, especially one involving a quality concern, one often finds themselves dealing with an ageing authority.”
A quick mechanism was required owing to the nature of the goods or products involved in such disputes. Therefore, the mechanism of dispute resolution was adopted, especially through arbitration. And that is how the concept of commodity arbitration originated.
What is a commodity?
A commodity is a fundamental thing that is used in trade and may be exchanged for other items of the same nature. The majority of the time, commodities are utilised as raw materials to create other services or products. Therefore, a commodity is often a raw resource utilised to create completed items. Contrarily, a product is a finished good that is offered for sale to customers.
Features of commodity arbitration
Despite the fact that each trade organisation has its own set of dispute settlement guidelines, there are specific universal characteristics of commodities arbitration that are covered herein.
The arrangement of arbitral courts represents one of the most notable distinctions between commodities arbitration and conventional commercial arbitration. Contrary to commercial arbitration, in which a tribunal is normally made up of arbitrators or attorneys, commodity arbitration tribunals are frequently made up of merchants or other participants in the commodity’s trading.
Usually, time constraints for starting proceedings are quite short under the procedural rules regulating commodities arbitration. Traders sometimes use such time restrictions as a negotiating tactic. For instance, vendors may negotiate a lower contracted cost in exchange for a limited time period for claims pertaining to, say, amount or weight. In some situations, claims are barred if a deadline is missed. For example, the Federation of Cocoa Commerce’s Arbitration Rules and Appeal include strict deadlines for initiating the arbitration, preventing parties from pursuing a banned claim.
Some commodity groups’ regulations forbid parties from having legal representation. Since the restrictions only apply to active attorneys, it is feasible to identify parties who are represented by other competent experts, such as academicians or impartial arbitrators.
Procedure for Appeal
Multi-tier appeals options are an additional characteristic of commodities arbitration. In contrast to ordinary commercial arbitration, the loser party in commodity arbitration frequently has the option of appealing to a second tribunal or board of appeals within the framework of the trade organisation.
Three to five adjudicators normally make up the board of appeals. A de novo hearing of the matter is required as a component of the appeal, and both parties may present fresh arguments and new evidence.
The obligation of oral remarks is another aspect of the hearing in the appellate phase. Although the majority of commercial arbitrations are performed on paper, witnesses or specialists in commodity arbitrations sometimes need to be cross-examined at hearings.
Commodity trading often involves continuous sales and re-sales of commodities between several parties. Contracts known as “string contracts” have the same basic terms and conditions for all parties, except for clauses relating to the dates and pricing.
String agreements come with the possibility of contradictory outcomes: if a disagreement arises over the terms of a good or its quantity, many parties might bring separate legal actions addressing the same issue.
To avoid inconsistent results, the arbitration rules of several trade organisations require that any quality or condition issue be resolved between both the original seller and the final customer as if they were parties to a single contract. However, the arbitrator’s decision is final and binding on all third parties, and it can be applied by any party directly to the party with whom it entered into a contract.
The norms of the relevant trade organisation apply to the appellate rights in string arbitrations. Each participant in the string typically has the option of appealing to the appropriate authority.
The article further explains the meaning of trade wars and summarises an arbitration proceeding conducted in accordance with the norms of various important trade groups.
Trade wars have followed nearly every armed conflict or partisan confrontation in human history, with adversarial powers prepared to engage in the most extreme measures in order to prevail. This is not unexpected because trade has a direct bearing on the economy, which in turn impacts a nation’s capacity to successfully battle and defend.
However, to comprehend what “trade war” implies, we must check the most recent developments. We are not required to dig into history. Much like in the earlier years, these measures today form a crucial component of every global war: trade barricades, sanctions, tariffs on imports, caps and licences, favouritism, and numerous more “tools” are proactively employed by global actors for their respective ends. The manufacturers and trade firms of both nations, who are the least “guilty” players in the market, naturally bear the brunt of such disputes. As a consequence of a variety of limitations and bans, which frequently prove catastrophic for their firms, these competitors are brazenly forced to endure enormous losses.
The commodities trading industry is particularly vulnerable because it is potentially possible that events could arise that hinder contract performance over the prolonged period of time between the contract’s completion and its implementation.
Some trade associations
The Grain and Feed Trade Association
The Grain and Feed Trade Association (GAFTA) is a group of grain traders that was founded in 1971. Contracts for the trade of grains are produced by the GAFTA with standardised clauses.
All GAFTA contract issues are submitted to arbitration (Arbitration Rules No.125). Within the time frame specified in the GAFTA Arbitration Rules, the contracting party may begin arbitration by intimating the other party.
The GAFTA Board of Appeal, which is chosen by the GAFTA itself and not by the parties, accepts appeals from all parties. A de novo hearing would be held by the Board of Appeal. Parties are therefore permitted to provide fresh arguments and proof. According to Rule 10.1(c), an appeal must be filed within 30 days of the award’s issuance.
The London Metal of Exchange
The London Metal Exchange (LME), founded in 1877 but with roots dating back to the sixteenth century, is the global trading centre for metals. When the LME was first established, it was done so with the intention of defending the metals industry by establishing a unified market and uniform terms for all transactions.
The LME Regulations and Rules, comprising the LME Arbitration Regulatory requirements, set down the guidelines that apply to metals trade through the LME. All claims arising out of “Exchange Contracts” must be resolved by arbitration following the LME Arbitration Guidelines, according to Part 4 of the LME Contract Regulations.
A party desiring to begin arbitration must, per the LME Arbitration Rules, deliver a notice outlining the scope and characteristics of the conflict as well as a specification of the relevant contract. On the day the respondent gets the notification, the arbitration is assumed to have started.
Unless the parties have agreed to a different number, the default number of arbitrators in LME arbitration procedures is two. A three-member arbitral panel or a lone arbitrator could also be proposed by the parties. In the event of a dispute, the LME Secretariat could step in.
Although there is no particular string arbitration rule in the LME Arbitration Rules, there are rules for the unification of arbitrations if one might occur.
According to Section 69 of the 1996 English Arbitration Act, parties to LME arbitrations have the option to omit this power, but they can appeal on legal issues. The High Court in London hears cases involving the execution of LME arbitration rulings.
The Federation of Oils, Seeds and Fats Associations
The trading of seeds, oils, and fats is the only focus of the Federation of Oils, Seeds, and Fats Associations (FOSFA). Sunflower seeds, rapeseed, vegetable oils, and marine oils are covered by a variety of standard methods and criteria that are included in FOSFA contracts. FOSFA contracts also call for arbitration with knowledgeable market participants.
Notification to the respondent must be delivered no later than 21 days after the shipment has concluded if a party wishes to assert claims about the nature and/or conditions of the goods. The chosen arbitrator’s identity (name) must be included in such a notification. Following that, the respondent gets seven days to reply and choose an arbitrator. When it comes to claims involving payments, the notification must be delivered no later than 60 days after the issue first surfaces.
The claims are presumed to be disqualified if the deadlines are not met unless the arbitrator rules differently. In accordance with the FOSFA, complaints concerning the quality and/or state of products deriving from contracts that are substantially identical on all material issues should be resolved in a single arbitration, much like the GAFTA Arbitration Rules. Any decision taken is final and is susceptible to appeal. Last but not least, after receiving notice of the decision, litigants in FOSFA arbitration have 42 days to appeal the decision.
Federation of Cocoa Commerce
The Cocoa Association of London and the Fédération du Commerce des Cacaos merged to form the Federation of Cocoa Commerce (FCC). The two organisations merged intending to harmonise cocoa contracts and open up the cocoa bean market internationally.
Contractual disputes must be resolved through arbitration in accordance with the FCC Arbitration Rules, which are governed by English law. A written notice of arbitration containing information about the agreement and the disagreement must be sent to the responder in order to start an arbitration proceeding.
Then, three arbitrators who would act “impartially and fairly” will be chosen by the FCC Secretariat. Such appointments could be questioned by parties without a reason.
Only issues involving the quality and/or condition of the items are eligible for string arbitration under the FCC Arbitration Rules. The contract and other pertinent documents must be provided to the arbitral tribunal by the party filing the case. Whether such contracts qualify as “string arbitration” is up to the arbitral panel. It must be assumed that the original seller and ultimate purchaser of the string were represented by the FCC Secretariat when it constituted the arbitral panel. Any decision can be appealed, and all parties involved must abide by it.
Freudenberger v. Banque Delubac
As a result of an arbitration agreement stipulated both the jurisdiction of the Paris International Court of Arbitration (PICA) as well as the application of the norms of another organization, the International Seed Federation (ISF), along with PICA’s authority, the Paris Appellate Court heard a request for vacating an award where the arbitral panel retained jurisdiction. As a result of the first institution’s separation from the second institution, the applicant claimed, the first institution was no longer able to exercise jurisdiction over the conflict. The Paris Appellate Court denied the motion to set it aside despite the parties’ choice to use another institution’s procedures, stating their intent to abide by those regulations was evident in their decision to submit their disagreement to the institution’s decision-making process.
In deciding an appeal award under the FCC Arbitration and Appeal Rules, the FCC Appellate Board relied on items that were not “in issue” before them, among other things. According to Mr Justice Bryan in the Commercial Court, there was a gross inconsistency in violation of sections 68(2)(a) and 33 of the Arbitration Act 1996 (AA 1996), resulting in material unfairness for the claimant. The Board found that the parties had not been able to make arguments regarding (i) whether PBO (respondent and counterclaimant in the arbitration) was a claimant in the English court and had demonstrated that it did not intend to execute specific contracts, or (ii) whether CODON (a third defendant in the English court; a party added to the arbitration) had the right to annul the agreements (iii) the Board’s authority over particular supplementary claims.
Additionally, they rejected requests to revise a statement of the case that included arguments that would have significantly changed the positions of the parties. The claim was specifically contested in the updated statement of a case due to (i) the deadline for filing the claim and (ii) the claimant’s assignment of some obligations. It should be emphasised that the Board decided the appeal process based on the written record and without holding an oral argument.
Commodities disputes have an inherent risk element that must be considered when conducting business with other nations since they are, sadly, a component of their present economic and commodities policies. Countries are always prepared to impose commodity barriers to punish rivals to the greatest extent necessary, usually for political purposes. A commodity dispute results in losses for both parties, just like any other conflict.
Given the intricacy of the challenges, the number of transactions, the parties engaged, and the sum of money at stake, resolving disputes that arise from commodity transactions could be difficult. So, arbitration has been successfully used to swiftly, discreetly, and economically settle disputes involving commodities. Instead of a judge and jury, parties in an arbitration procedure have their disagreement settled by unbiased individuals knowledgeable about the issues.
So one can say that arbitration in the commodities sector has a significant impact on resolving commodities disputes and likewise, the organisations must inculcate more of it, as it is the best practice available.