26.11.2021

Formation of Contract: Black Sea Commodities Ltd v Lermarc Agromond Pte Ltd

The English High Court decision in Black Sea Commodities Ltd v Lermarc Agromond Pte Ltd [2021] EWHC 287 highlights the importance of parties to commodities contracts expressly including an arbitration clause in the contract. This is particularly when the contract is formed by email or instant messaging negotiations.

The background

In early 2018 Lermarc Agromond (the buyer) and Black Sea Commodities (the seller) negotiated a contract for the sale and purchase of Ukrainian corn.

By 9 March, various key terms had been agreed, including the quantity to be purchased, quality, price, payment and delivery period. 

A number of terms remained to be agreed.  These terms were summarised by the parties’ broker (referred to as “draft conditions”) and included GAFTA terms incorporating a GAFTA arbitration clause (such contracts commonly incorporate GAFTA terms).

Between 9 – 14 March, various iterations of the draft conditions were exchanged between the buyer and seller each of which included changes and comments.  Throughout this, the GAFTA terms were not objected to by either party. 

Eventually there was only one term outstanding, the notice of readiness spread, to which the buyer would not agree.  Negotiations broke down.  The seller gave the buyer a final ultimatum date, which was not met.  Consequently, the seller withdrew from negotiations.

The buyer commenced GAFTA arbitration proceedings, alleging that there was a binding contract that the seller had not performed.  The seller rejected the claim, asserting there was no binding contract, nor a binding arbitration agreement.

The arbitrators agreed that there was a binding contract which included a GAFTA arbitration clause by incorporation of the GAFTA terms.  The arbitrators found in the buyer’s favour on liability and quantum.

The award was appealed to the English High Court.  While the parties disagreed as to whether a binding sale contract had ever come into existence, it was agreed the only question for the court was to decide whether a GAFTA arbitration clause was a term of the contract.

The High Court decision

The buyer advanced two arguments. The primary argument was that there was a binding agreement on 9 March 2018, which was varied or supplemented by virtue of the subsequent exchanges up until 14 March 2018.  The secondary argument was that there was a binding agreement on 9 March 2018, which contained a term implied by trade custom – the GAFTA arbitration clause. 

The seller argued that even if there was a binding agreement on 9 March 2018, it did not include a GAFTA arbitration clause.  Although the subsequent exchange of terms in the draft conditions included reference to GAFTA terms, those draft conditions were never agreed to when the negotiations broke down. 

The court concluded that it was likely that there was a binding contract on 9 March 2018.  However, at this point the parties had not discussed an arbitration clause, nor was it agreed via the later negotiations on the draft conditions.  Those draft conditions were to be “accepted or not in total, and not by way of building blocks”. 

The secondary argument brought by the buyer, that there was a binding contract on 9 March 2018 which contained a term implied by trade custom – the GAFTA arbitration clause – was also rejected. 

For a term implied by trade custom to be established, the trade custom must be one which is “invariably” certain.  While it was accepted that there was evidence of the existence of the GAFTA clause in Ukrainian corn contracts, the court was not persuaded the contracts would “invariably” contain such a condition. 

Comment

This case highlights three important features of contractual negotiation and interpretation.

Firstly, it is possible to have a binding contract even if some additional terms remain to be agreed.  If you want an agreement to be conditional upon such additional terms, it must be made clear.  This position is further outlined in our recent article on Septo Trading Limited v Tintrade Limited [2021] EWCA Civ 718.

Secondly, clearly identifying and agreeing to dispute resolution terms in contracts is critical.  In particular, an agreement to arbitrate must be accepted by both parties.  Ironically, if there was a binding agreement on 9 March 2018, the buyer could have brought court proceedings (rather than GAFTA arbitration proceedings) and may have been successful in obtaining damages on the basis the seller repudiated the contract.

Lastly, for a term to be implied by reference to trade custom, it must be one which is invariably certain.  This position is similar to the approach of the New Zealand courts: see the New Zealand 2021 Supreme Court decision in Bathurst Resources Limited v L & M Coal Holdings Limited [2021] NZSC 85 and our article on this case. 

If you have any questions about trade or maritime arbitration, please get in touch with our Trade and Transport team or your usual contact at Hesketh Henry.

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

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Kerry
Media contact - Kerry Browne
Please contact Kerry with any media enquiries and with any questions related to marketing or sponsorships on +64 9 375 8747 or via email.

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