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GAFTA Contracts – Legal Pitfalls of Extending Shipment or Delivery Windows

  • Market Insight 21 May 2021 21 May 2021
  • Trade & Commodities

This article discusses the judgment of the Commercial Court in Alegrow S.A. v Yayla Agro Gida San Ve Nak A.S. [2020] EWHC 1845 (Comm), in which the Court upheld the Sellers’ Section 69 Arbitration Act 1996 appeal of a GAFTA Appeal Board award, on the basis that the Board had erred on questions of law relating to the Sellers’ delivery obligations under the contract.

GAFTA Contracts – Legal Pitfalls of Extending Shipment or Delivery Windows

Written by Ben Bryant and Eurof Lloyd-Lewis

Facts

The dispute arose out of a contract between Sellers, Alegrow S.A. ("Alegrow"), and Buyers, Yayla Agro Gida San Ve Nak A.S. ("Yayla"), for the sale of 24,000 MT of Russian Paddy Rice Rapan Type Crop 2016 (the "Goods") CIF Free Out Mersin, Turkey (10% at Sellers' option) (the "Contract"). The Contract was governed by English law and incorporated GAFTA Contracts No. 48, 124 (Sampling Rules) and 125 (Arbitration Rules).

The Contract provided for shipment between 1 September 2016 to 15 December 2016 (inclusive of both dates). Owing to delays, on 9 November 2016 Yayla sought to extend the shipment period to 31 December 2016 but it was never formally amended.

Between 1 and 3 December 2016, 12,614.42 MT (approximately half) of the Goods were loaded on two vessels destined for Mersin.

On 23 November 2016, Yayla requested a shipment time for the unshipped balance of the Goods (the “Remaining Goods”).1 Alegrow however failed to ship the Remaining Goods by 31 December 2016 and subsequently, by emails dated 20 January 2017 and 29 March 2017, Yayla requested a shipment schedule.

By its email of 29 March 2017, Yayla specifically asked that a shipment schedule up to 15 April 2017 be provided by the next evening (30 March 2017), absent which it would consider that Alegrow was not willing to ship the Remaining Goods.

On 1 April 2017, Yayla emailed Alegrow to complain of its failure to ship the Remaining Goods within the contractual delivery period, and notified it that, absent a response by 4 April 2017, Yayla would commence arbitration under the Contract. Yayla served a notice of arbitration on 7 April 2017, claiming damages for the difference in the price of substitute goods it had been forced to purchase as a consequence of the alleged default.

The Arbitral Awards

Yayla’s Claims before the First Tier Tribunal (“FTT”) and the Appeal Board

Yayla alleged before both the FTT and the Appeal Board that time was of the essence under the Contract, and as a result of Alegrow’s failure to deliver the Goods within the contractual shipment period, it was in default as of 15 December 2016, and had committed on that date a material breach which entitled Yayla to terminate.

The Awards of the FTT and the Appeal Board

Both the FTT and the Appeal Board agreed that by first seeking an amended shipping period, and by its subsequent requests for a shipping schedule, Yayla had kept the Contract alive beyond the contractual shipment period (such that time ceased to be of the essence), but had eventually made time of the essence again by virtue of its emails dated 29 March and 1 April.

However, the FTT concluded that Alegrow defaulted on 7 April 2017, being the date on which Yayla commenced arbitration proceedings, while the Appeal Board found that, since time had been made of the essence by Yayla’s email of 29 March (which requested a response to its request for a shipment schedule by 30 March), Alegrow defaulted on the next business day after that deadline, being 31 March 2017.

Decision of the Commercial Court

Alegrow appealed to the Commercial Court under section 69(1) of the Arbitration Act 1996 (the “Act”), on the basis that the Appeal Board was wrong in law to conclude that it was: (i) obliged to provide a shipment schedule by 30 March 2017, and (ii) in repudiatory breach of contract by failing to do so.

Mr Justice Henshaw found that the Appeal Board’s award was wrong in law and that, on a correct determination of the questions of law put to the Court by Alegrow, Yayla was not contractually entitled to demand a shipment schedule on 29 March, nor was Alegrow in repudiatory breach by failing to provide such a schedule by 30 March. Consequently, Alegrow had not committed a breach of contract entitling Yayla to rescind the Contract (at least not before 15 April 2017). By doing so, Yayla had in fact renounced the Contract and was liable to Alegrow in damages.

The judge first considered that in relation to challenges to GAFTA awards, the Court should a fortiori strive to uphold arbitration awards and should read them in a reasonable and commercial way, not expecting to find any substantial fault. Additionally, judges ought generally to defer to trade tribunal decisions where arbitrators’ experience assisted in determining a question of law such as the interpretation of contractual documents or correspondence passing between members of an arbitrator’s own trade or industry.

However, in ultimately rejecting the Board's award, the judge, referring to Benjamin’s Sale of Goods2, found that, in a situation in which time is originally of the essence, in order for there to be a mutual affirmation that time is no longer of the essence (alternatively in order for the buyer to waive its right that the goods be delivered within the original contractual period), the buyer must fix a further reasonable period of time for delivery of the goods by the seller. Neither the FTT nor the Appeal Board had made a finding that the period between 29 March 2017 and 15 April 2017 was a reasonable period of time.

Further, on the basis that the 29 March email had required shipment by 15 April, a failure to provide a shipment schedule that was not contractually required in the intervening period did not constitute a breach by Alegrow. The Appeal Board had not identified in the Contract any obligation to provide a shipment schedule by 31 March, or why one should be implied. It had not been required to address, and had not made any finding that Alegrow had renounced the Contract by failing to provide a shipment schedule. Neither the facts available to the Appeal Board (comprising the various communications between the parties), nor the application of case law, were sufficient to uphold the Appeal Board’s Award on the basis of a renunciatory breach by Alegrow.

Additionally (and among other things) the Appeal Board’s finding that the 29 March email made time of the essence and that default occurred on 31 March was inconsistent with its finding that Alegrow was not required to deliver the Remaining Goods by 31 March, but only to provide a shipment schedule.  

Comment

As well as providing a useful overview of the principles judges ought to apply when considering challenges brought against GAFTA awards under section 69 of the Act, the judgment serves as a reminder that, despite the need to show deference to arbitral awards, the Court will intervene where a tribunal has clearly erred in applying the law.

More practically, it provides a concise summary of the legal effect that statements made by a buyer purporting to amend the shipment/delivery window in a contract may have on its right to terminate under that contract, where time is originally of the essence, and the consequences of misinterpreting that effect.

In particular, traders should be aware that intimating in correspondence that they are willing to find a commercial solution to enable delivery at a later date, or proposing a timetable which extends beyond the original contractual period, may amount to either a mutual affirmation or a waiver by the buyer of its right to delivery, rendering the original time no longer of the essence, subject to the proposal of a further reasonable period of time for delivery. In such a case, time will once again become of the essence in relation to the new date agreed, and a failure by the seller to deliver goods by that date will enable the buyer to rescind the contract for repudiatory breach and claim damages. On the other hand, parties ought to beware that breach of a subsequent notice requiring performance by a certain date will not in itself create a condition, where none existed before, i.e., where time was not originally of the essence under the contract.

Finally, the case serves as a reminder that silence by one party will not normally amount to a renunciation of the contract, without more (see Stocznia Gdanska SA v Latvian Shipping Co [2002] EWCA Civ 889, [2002] 2 Lloyd’s Rep. 436).

Practical Considerations

Practical considerations for traders arising out of the case include the following:

  • Determine at the negotiation stage whether the proposed contract makes time of the essence for delivery;
  • Seek legal advice before negotiating extensions to shipment or delivery windows and highlight to staff the potential legal consequences of doing so; and
  • In the case of buyers, consider whether the period of time proposed for later delivery would be considered reasonable if the matter came before a court or arbitral tribunal.

If you require clarification or assistance on any of the points discussed in this article, at Clyde & Co, we have extensive experience in assisting Sellers and Buyers with drafting well-structured, clear and balanced sale and purchase agreements, and will be happy to assist you.

 

1 It also requested (and again on 27 December 2016) that Alegrow revise the latest shipment date in the Contract if it could not meet the deadline of 31 December 2016.

2 10th ed. (2017) paras 8-026, 8-028, 8-030, and 20-033

End

Additional authors:

Benjamin Bryant

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