Solving commercial disputes painlessly
March 01, 1999
by Teresa Acklin
Arbitration and mediation are inexpensive and quick ways to settle grain trading disputes.
By Peter Brown
Considering the vast quantities of grain and feed materials shipped around the world every year, there will inevitably be disputes no matter how well trading contracts are written, as parties wittingly or inadvertently breach the terms of their contracts and one claims damages or compensation.
How do these disputes get resolved? The knee-jerk reaction is to call a lawyer. But an alternative is to seek settlement by “Alternative Dispute Resolution,” such as mediation or arbitration.
Arbitration has been used in Europe as a way to settle disputes since the Middle Ages. In arbitration, both parties agree to submit their dispute to a sole arbitrator or to a panel of three arbitrators, called a tribunal. The arbitrator makes a binding decision of the rights and wrongs of the situation.
The dispute may be presented in writing and accompanied by the pertinent documentary evidence or may be put forward by an oral presentation, at which both parties (who may be represented by a lawyer or a trade representative on their behalf) present their case to the arbitrators. In either case, in agreeing to arbitrate the parties are bound to accept the outcome.
The arbitrator writes a formal award, which spells out the details of the case and the findings and which culminates in a decision generally who shall pay what to whom, and who shall pay the costs of the arbitration. It is a general rule that “the costs follow the event” in other words, that the loser is liable, but that is not a hard and fast principle.
What is certain is that, pending an appeal if the procedure provides for one, the parties are bound by the arbitrator's decision, for the award carries the weight of the law. Even if appealed to the courts, the decision will likely be upheld providing that the arbitrator's decision followed the law. Even if the arbitrator arrived at the wrong decision and that's a rarity he cannot be held liable for that error.
CLASSIC ARBITRATION RULES.
Many trade associations do not allow for the involvement of lawyers within the arbitration process, so that legal fees do not rack up the costs to the parties. The classic set of arbitration rules that govern a large proportion of the international trade in grain and feed materials are those issued by the London-based Grain and Feed Trade Association.
Known and used worldwide, GAFTA contracts provide for arbitration to be held in London, under English law, regardless of the location of the parties involved in the contract. With a highly qualified and approved list of arbitrators all of whom have been involved in the grain and feed business over a number of years and with a regulated fee structure, GAFTA arbitrations are a swift, private and cheap means of settlement.
The first determination may be conducted by a sole arbitrator or by a three-person tribunal. An appeal may be heard by a five-person board of appeal, which represents a completely new hearing, at which new evidence and witnesses may be entered. At this stage, lawyers may become involved.
Claimants at arbitration may be asked to put up a sum of money as security for the arbitrator's costs. Without this deposit the arbitrator may decline to proceed. An appeal normally requires another deposit for the fees and costs of that action.
Defaulters a party that has ignored an award made through GAFTA may be “posted.” That is, they have their names publicized in the GAFTA quarterly journal, which is distributed to every member, showing them to be “less than honorable” and probably less than financially sound.
Apart from the GAFTA rules, which are comprehensive in their scope, arbitration in England is governed by the latest act of parliament, the Arbitration Act of 1996, which was preceded by arbitration legislation in 1950 and 1979. Arbitrators are required to be thoroughly aware of the terms of these acts and know how to conduct an arbitration judicially and in the application of “natural justice.” There are sanctions that may be applied in the case of arbitrator misconduct; this can include the arbitrator being dismissed from an appointment.
The amount of time between lodging a claim for arbitration, providing the intent is good by both parties, and the issuing of an award can be as little as eight weeks, but that's a rarity. Twelve to 16 weeks is nearer the norm, and even then the participants have to be willing to get the proceedings under way.
If a party becomes involved in a dispute and does not know who to appoint as an arbitrator, they may refer to a trade association or to the London-based Chartered Institute of Arbitrators or to the American Arbitration Association, headquartered in New York. Each of these bodies will suggest a list of names from which a party may choose an arbitrator.
If a disputant does not wish to involve a lawyer, even behind the scenes, they may employ a trade professional often an arbitrator who can prepare their case by writing a submission and gathering evidence, and perhaps ultimately present the case to the arbitrators at an oral hearing. These professionals will generally have commercial experience in a particular trade over many years, and may be well known to those involved in that trade. The arbitrator will charge for their services, but their fees will be less than any lawyer. An arbitrator is additionally valuable because he generally knows the business and how to approach the problem.
While arbitration is well recognized and widely practiced in the United States through the A.A.A. and in Europe through the London Court of International Arbitration or the International Chamber of Commerce, there is a newer and different scheme available for the settlement of disputes mediation.
The fundamental difference between arbitration and mediation is that while arbitration is binding upon the parties, the outcome of mediation is not binding unless or until the parties agree. This system seeks to find, by the skillful application of the talents of a trained mediator, a point at which the parties may say, “That will do, let's settle on that.” At that juncture the parties themselves write a new contract or agreement by which they agree to be bound. At this point, the mediator, who will have sought payment from both parties up front to cover his fees, has completed his task.
If an agreement is not reached, mediation does not prevent the parties from going to arbitration or to court, for neither side is likely to have prejudiced their position by discussing the pros and cons.
Mediation encompasses everything from international political disputes, such as those in the Middle East, Croatia or Yugoslavia (think of Henry Kissinger and more recently U.S. Secretary of State Madeleine Albright and their “shuttle diplomacy” between nations), to something as basic as a domestic boundary dispute between neighbors. The former are generally conducted by skilled lawyer-mediators; the latter, by trained and accredited laymen mediators. But all apply the same principles, with the mediator going between the parties (not taking sides or expressing a view) until such time as the mediator brings the two sides together when he deems the parties are close to an agreement.
Mediation may take weeks where international diplomacy is involved, several days when large sums of money are in dispute, or hours where a simple dispute exists. It is essentially clean, cheap and private.
While many lawyers are seeking to gain accreditation as the courts propose the wider use of mediation, there are a considerable number of trained laymen who are able to conduct a mediation without the seeming negative effect that lawyers have on the average citizen, who fears the lawyer's big fees and vested interests.
If a busy commercial director or managing director does not wish to become involved in the time-consuming business of the day-to-day motions of a mediation, he may appoint a representative at the early stages of the mediation process. This way, the executive is called only when and if an agreement is in sight, at which stage he may step in to make the agreement, settle on the terms and go back to work while others write up the agreement by which his company will be bound.
Whichever route is chosen arbitration or mediation the result will be swift compared to litigation, which might take three years to go to court, during which time all business between the two parties is generally put on hold. Arbitration or mediation will be cheaper than litigation, and it will be private. The outcome is absolutely confidential and there is no danger of the dispute or the outcome being publicized.
To be able to resort to arbitration, however, the contract between the parties has to provide for this option. In most cases, a simple clause is added to the contract that says, “In the event of a dispute concerning any feature of this transaction, settlement is to be made by referral to arbitration under X's rules; the arbitration to be conducted under English law.” Without this contractual proviso, it is hard to get an agreement to arbitrate once a dispute has arisen for the respondent is unlikely to want to agree to anything at that stage.
ARBITRATING GRAIN DISPUTES.
That arbitration is “alive and kicking” in the international grains market is exemplified by the fact that some 350 referrals are made through the arbitration system of the Grain and Feed Trade Association in London every year. Of these, approximately 85 go from primary arbitration to appeal, especially when the sums of money being disputed are large and they frequently are in the range of U.S.$1.5 million to $5.5 million.
It is galling for an arbitrator to see a company pursue a matter “on a point of principle,” even though all the pointers indicate they are not going to win. Lawyers say they frequently have clients who want to fight on principle. Even though they have been advised to settle, they “want their day in court,” win or lose.
Grain disputes frequently feature the failure of a party either buyer or seller to do what was required by the contract. It may be that a ship had to arrive by a certain date, and was late or did not appear at all; or that goods had to be dockside a given number of days before shipment for examination and analysis, and were not; or that a letter of credit had to be opened before goods were loaded or shipped, and when it wasn't the seller refused to load a cargo; or that the buyer refused to accept and pay for documents submitted on arrival of a cargo that had been sold CIF. Then there are quality disputes. Say the goods are in poor condition before loading or on arrival at their destination, and cannot be taken. The buyer might then buy elsewhere to secure his requirements and debits any price difference (known as “damages”) to the seller of the original cargo. The seller does not pay, so the buyer enters a claim at arbitration. The arbitrators decide if the claim is fair and reasonable, and order for the sake of this example the seller to pay the buyer the damages claimed.
The circumstances of grain disputes are many and varied. They encompass milling wheat from Turkey destined to New Zealand; malting barley from Australia to China; corn from the U.S. to anywhere; feed barley from U.K. to Korea; soybean meal from Argentina to Rotterdam; vegetable oils from the Gulf of Mexico to Europe; manioc from Thailand to Italy. All have a contract, and most are shipped and paid for without a problem. Those contracts that run into difficulties are minute compared with the whole annual world trade, and that shows how fundamentally well most contracts are written and observed.
There are rogue traders who play the markets and who do not care about their reputation, so when prices fall the buyer fails to call for goods they have bought. The seller goes to arbitration and wins, even if the buyer fails to participate in the arbitration.
As most countries are signatories to the New York Convention, anyone who gains an award of arbitration against a trader in another country can serve that award in the courts of the country of the defaulter and can expect to get the settlement in that country. Although in some countries it may take a long time and large lawyers' bills to get the money, it can be, and is, done.
Peter Brown is a commodities consultant, a chartered arbitrator and an accredited mediator, based in Britain. He had many years of senior-level corporate executive responsibility before setting up his own practice representing millers, maltsters, shippers, traders, growers, lawyers and farmers organizations in many countries. He can be reached at Peter Brown Associates, Topsail House, Mistley, Essex CO11 1HB, U.K. Tel: 44-1206-39-69-30. Fax: 44-1206-39-19-19. E-mail: firstname.lastname@example.org.