Arbitration in trading in grain and oilseeds

Today, Ukraine is the world's third exporter of crops, after the United States and the European Union, with the figure of 34.8 million tons and a world market share of 11%. Ukraine is the world's sunflower oil market leader with a share of 55% and 3.87 million tons in 2014-2015 MY.

In other words, our country delivers crops totaling more than any other country among the world's major exporting countries except the United States and the European Union. One-third of the world's sunflower oil is produced at Ukrainian enterprises.

Moreover, the Ukrainian agrarian export grows. For example, for the last seven years, Ukraine has increased agricultural exports by 3.5 times.

Along with the growth of exports the number of international transactions is increasing: Ukrainian companies conclude more and more contracts for the supply of commodities around the world. However, big international deal does not always run smoothly - such contingency as, say, force majeure, or a simple "fall" of prices on the market can make the deal unprofitable for the buyer. In these cases, the proper performance of obligations under the contract is hardly awaited.

Accordingly, more and more conflicts arise between companies located in different parts of the world that develop into disputes that cannot be settled by negotiations. This is exactly the stage where the court enters in the relations, whose decision will be final for both parties.

However, according to the established international practice of many years, the vast majority of such disputes, particularly between entities from different jurisdictions, are resolved not by the ordinary courts, but mainly by international commercial arbitration, specializing in trading commodities. These arbitrations are GAFTA and FOSFA.

GAFTA and FOSFA

More than 80% of international trade in grain, feed, oils and fats is performed using standard forms of GAFTA and FOSFA contracts.

The Grain and Feed Trade Association (GAFTA) and the Federation of Oils, Seeds and Fats Associations (FOSFA) are non-governmental international associations and arbitration bodies, whose main aim is to promote international trade in grain, feed, oils and fats.

Most trading companies worldwide, regardless of membership in GAFTA and FOSFA carry out their activities in accordance with the unified system of standards, rules and principles of international commodity trade, specially developed by these associations in order to protect the interests of the trading community, including not only traders but superintendents, logistics experts, brokers, laboratories and others.

Standard GAFTA and FOSFA trade contracts are developed considering the specifics of trade in various kinds of commodities of different origin and methods of transporting them around the world.

In addition to the standard forms of contract, GAFTA and FOSFA have their own systems for the settlement of disputes. This service has been initially developed for traders wishing to have their dispute being resolved by their "colleagues", recognized experts, familiar with the peculiarities of the industry, rather than to apply to ordinary state court.

GAFTA and FOSFA Arbitration

Over the years, GAFTA and FOSFA arbitrations evolved into a complex multi-level system, recognized throughout the world as a forum for the resolution of disputes related to the world trade in grain, feed, oils and fats, and other commodities.

Benefits

  • Specialization. All arbitrators at GAFTA and FOSFA have years of experience in commodity trading. Moreover, all the arbitrators pass mandatory qualification, developed with all the features of international trade.

 

  • Cost. The costs of the dispute, including the arbitration fee, the fees of the arbitrators and lawyers are well below the cost of an ordinary court or a non-specialized arbitration.

 

  • Efficiency. In general, a dispute resolution at GAFTA and FOSFA arbitration is much faster than in state courts and non-specialized arbitration. This is due to a greater degree of specialization of the arbitrators and less formal arbitration procedure as a whole.

 

  • Simplicity and flexibility. Arbitration is less formal than court proceedings. Arbitration works on the principle of minimum intervention and maximum assistance to the parties to the dispute. For example, the timing of materials submission is flexible and can always be extended at the request of one of the parties. Parties may also be assisted in providing documents for review, or in representing the interests of the parties at the hearing by experienced members of GAFTA and FOSFA.

 

  • Privacy. Unlike state courts, arbitration hearings are held in private, all procedures and decisions are confidential for both sides.

 

How to recourse to arbitration?

Regulations

Companies wishing to apply to GAFTA or FOSFA arbitration not necessarily must be members of an association. It is enough to have in the contract an arbitration clause expressly providing for the settlement of disputes on the basis of the rules of an association:

  • For GAFTA -  GAFTA Arbitration Rules № 125;

 

  • For FOSFA -  FOSFA Rules of Arbitration and Appeal.

Applicable law

By default, GAFTA or FOSFA arbitration solve the dispute on the basis of English common law. However, the parties may choose different substantive law applying to their contract in arbitration clause.

The place of arbitration

Another advantage of GAFTA or FOSFA arbitration is that in most cases, the dispute takes place remotely. However, if the parties wish to hold an oral hearing, they can determine any place of the oral proceedings.

If the parties cannot agree on a particular place, a hearing is held in London. It is important to note that wherever the hearing had occurred, the dispute will be considered on the basis of the law of England (unless the parties have chosen otherwise). The arbitrators, regardless of their location, shall be appointed only from the list of arbitrators qualified by association.

The arbitration procedure

If a dispute arises, diligent party (the claimant) informs the other party (the respondent) about its intention to recourse to arbitration in order to resolve the dispute.

The claimant prepares a detailed statement of facts, attaching the available evidence. The respondent is also preparing evidentiary support of his position, and sends copies of these materials to the association and to the claimant. The claimant can comment defendants’ materials and provide further evidence. 

Submission of a claim, the appointment of arbitrators and submission of documents are carried out in accordance with the time frames that are an integral part of the rules of the association.

GAFTA and FOSFA arbitration have a "two-instance" arbitration system - the first instance - arbitration, and the second instance - the appeal.

The first instance - Arbitration

In the first instance of GAFTA arbitration, the parties may agree on the appointment of a sole arbitrator or a tribunal of three arbitrators. Each party has the right to appoint one arbitrator from three, the third one is appointed by the Association.

In FOSFA arbitration, tribunal of the two arbitrators appointed by the parties examines the dispute, or the parties may agree on the appointment of sole arbitrator. If the arbitrators of the parties could not come to a consensus, they determine candidacy of an umpire and send him their opinions on the case, after which the appointed umpire decides solely.

The purpose of arbitration is to receive the award within 6 months from the date of filing a lawsuit. The Tribunal usually considers the case in the absence of the parties, relying solely on the documents submitted by parties to the dispute. To issue decision, it is sufficient that one of the parties to the dispute participates in this process. Association, for a fee, can appoint an arbitrator on behalf of the second party, and as a result the tribunal shall decide on the merits of the dispute based on the documents provided.

The arbitral tribunal is free to decide whether the oral hearing is needed. Interestingly, at the oral hearing the parties may be represented exclusively by: a) one of its employees; b) an arbitrator qualified by association. The parties may not choose a representative from among solicitors, barristers or other lawyers that are wholly or partly involved in private practice, except in cases where the parties agreed to such a representation.

Thus GAFTA and FOSFA limit legal participation in its arbitration. The parties may engage lawyers to draft written materials for the Tribunal, however, lawyers are not allowed to attend the oral hearing, unless both parties expressly agree otherwise.

The Tribunal awards the legal costs to the winning party only if those are reasonable and the parties have expressly agreed that the lawyers can take part in the proceedings. But despite such limitations, international trading companies on an ongoing basis instruct lawyers to conduct their disputes in order to ensure that all legal issues are properly presented before the tribunal.

As a result of the dispute, the arbitrators make an award and set it out in writing. After payment of the fees and expenses of the arbitrators, award is transmitted to the parties.

The second instance - Appeal

Parties have the right to appeal the arbitrators’ award of the first instance. In this case, the board of qualified arbitrators, appointed by the Association, conducts appeal hearing. If the first decision was made by a sole arbitrator, the Appeal Board will consist of three people, and if the first decision was made by three arbitrators, the Appeal Board will consist of five people.

Appeal, traditionally, is more formal, and, as a rule, at the hearing the parties' interests are represented by professionals in the field of trade.

Appeal to court

Since GAFTA and FOSFA contracts provide that law of England is an applicable law, the English courts have jurisdiction in respect of awards of the Arbitral Tribunals.

Thus, the awards of the GAFTA and FOSFA appeal instances are not final and can be appealed in the courts of England and Wales.

However, such an appeal is very rare, because the court permits it in limited circumstances and only with regard to the matters of law. In addition, the Tribunal's decision may be appealed on the grounds of serious violations of the Tribunal, for example, in the case of Tribunal’s bias, the pressure on arbitrators. In case court admits an appeal, it may either confirm the decision of the tribunal, cancel or change it, or bring it back for reconsideration to arbitration.

Resolution of "simple disputes"

In addition, within the framework of GAFTA and FOSFA arbitrations, there exists such a form of dispute resolution as a simple disputes resolution.

The procedure of simple dispute resolution has been developed as an alternative mechanism for disputes with the subject matter of relatively small sums of money, and that circumstances of the dispute are not complicated. If the parties agree to settle the dispute in accordance with these rules, they should fill out the form of the agreement provided by the association, thereby expressing the consent to settle their dispute under the simple disputes resolution procedure.

The simple dispute resolution procedure takes place in an expedited manner. The Association appoints sole arbitrator and the parties are notified of the size of the fee in advance. The decision is not subject to appeal and shall be made within a few months after filing a claim.

Execution of GAFTA and FOSFA awards

Most GAFTA and FOSFA awards are accepted and executed by the parties voluntarily. However, if a party refuses to settle the dispute in accordance with the final award, the Association reserves the right to notify all members of the Association throughout the world that that party refuses to execute the award. It is sufficiently effective measure in a situation where a reputation is a significant factor.

In addition, GAFTA and FOSFA arbitral awards may be enforced, in particular, according to the New York Convention.

At the moment, the New York Convention was signed by 156 countries. This means that the arbitration award rendered in one of the countries-signatories to the Convention, may be enforced and executed in any other country that ratified the Convention. It is important to note that the place of execution of the decision is not always the place of registration of the debtor. The decision may be enforced in any country of the Convention, where the debtor's property is located.

Conclusion

GAFTA and FOSFA arbitration are real, effective, affordable means of resolving disputes that arise in the course of trade in commodities worldwide. However, companies that want to include GAFTA or FOSFA arbitration clause in their contracts, must fully understand and take into account all the features of regulatory procedures and the applicable English law.

This page is contributed by Ivan Kasynyuk, Partner, and  Dmitry Koval, Associate, at AGA Partners law firm

Members of the Association can be an individual with a law degree, is a specialist in international commercial arbitration or have a professional interest in international commercial arbitration and share the goals and objectives of the Association.Read more

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