R G Grain Trade Llp (UK) v Feed Factors International Ltd [2011] EWHC 1889 (Comm) (20 July 2011)

Neutral Citation Number: [2011] EWHC 1889 (Comm) Case No: 2010 FOLIO 1408 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH DIVISION COMMERCIAL COURT Royal Courts of Justice Strand, London, WC2A 2LL 20/07/2011 B e f o r e : MR JUSTICE HAMBLEN ____________________ Between: R G GRAIN TRADE LLP (UK) Claimant - and - FEED FACTORS INTERNATIONAL LTD Defendant ____________________ Michael Nolan (instructed by Swinnerton Moore LLP) for the Claimant Henry Byam-Cook (instructed by Mills & Co) for the Defendant Hearing dates: 8 July 2011 ____________________ HTML VERSION OF JUDGMENT ____________________ Crown Copyright © Mr Justice Hamblen: Introduction The Claimant Sellers ("the Sellers") appeal under section 69 of the Arbitration Act 1996 against Appeal Award No 4224 dated the 1 st November 2010 ("the Award") by which the GAFTA Appeal Board awarded the Defendant Buyers ("the Buyers") US$360,374.52 and £13,071.92 by way of damages and dismissed the Sellers' claim for the balance of the purchase price, overturning the award of the first tier arbitrators. The Sellers appeal that decision having been granted permission to appeal by Teare J on 18 January 2011. The questions of law in respect of which permission to appeal was given are as follows: (1) Whether on a true construction of the contract, the certificates of quality and condition issued by the superintendent chosen by the Sellers were final and binding; and (2) Whether the Buyers were entitled to reject the documents and the goods despite the terms of clause 5 of GAFTA No. 119. Factual background By a contract dated the 1 st July 2008, the Sellers sold to the Buyers 1,500 mt +/- 10 % in Buyers option Ukrainian origin sunflower expeller FOB Nicolayev sea port ("the contract"). The contract provided materially: "Commodity: UKRAINIAN ORIGIN SUNFLOWER EXPELLER In bulk, sound, loyal and merchantable quality. Specifications: Protein min 32% - Moisture max 7% - Fiber max 23% - Fat min 11% All tests as per as is basis (GAFTA), allowances as per GAFTA. Quality and condition to be final at time and place of loading as per certificate of first class superintendent approved by GAFTA at seller's choice and expense. The buyers have the right to appoint their own GAFTA approved supervisor at their expense. In this case the sampling to be done conjointly, as per GAFTA terms and conditions. nd analysis, if any, as per Salamon and Seaber, London. Quantity: 1500 metric tons 10% +/- in Buyer's option at contract price. Weight final at place and time of loading, as per first class superintendent certificate at Sellers' choice and expense. Payment: 100% CAD by telegraphic transfer within 2 banking days after receipt of shipping documents at BNP Geneva. Seller to provide the following documents: ...... Quality Certificate Contract: Gafta 119... Special Conditions: Other terms and conditions not in contradiction with above as per GAFTA 119 ..." The contract accordingly incorporated other terms and conditions from GAFTA 119. These included the following: "5. QUALITY Official…………certificate of inspection, at time of loading into the ocean carrying vessel, shall be final as to quality. Warranted to contain not less than % of oil and protein combined and not more than 1.5% of sand and/or silica. Should the whole, or any portion, not turn out equal to warranty, the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below, except that for any deficiency of oil and protein there shall be allowances to Buyers at the following rates viz:1% of the contract price for each of the first 3 units of deficiency under the warranted percentage: 2% of the contract price for the 4 th and 5 th units and 3% of the contract price for each unit in excess of 5 and proportionately for any fraction thereof. When the combined content of oil and protein is warranted within a margin (as for example 40%/42%) no allowance shall be made if the analysis ascertained as herein provided be not below the minimum, but if the analysis results below the minimum warranted the allowance for deficiency shall be computed from the mean of the warranted content. For any excess of sand and/or silica there shall be an allowance of 1% of the contract price for each unit of excess and proportionately for any fraction thereof. Should the goods contain over 3% of sand and/or silica the Buyers shall be entitled to reject the goods, in which case the contract shall be null and void, for such quantity rejected. For the purpose of sampling and analysis each mark/parcel shall stand as separate shipment. The right of rejection provided by this Clause shall be limited to the mark/parcel or marks/parcels found to be defective. 16. SAMPLING, ANALYSIS AND CERTIFICATE OF ANALYSIS- the terms and conditions of GAFTA Sampling Rules No.124, are deemed to be incorporated into this contract. Samples shall be taken at time and place of loading. The parties shall appoint superintendents, for the purposes of supervision and sampling of the goods, from the GAFTA Register of Superintendents. Unless otherwise agreed, analysts shall be appointed from the GAFTA Register of Analysts." GAFTA 119 therefore incorporated terms and conditions from GAFTA Sampling Rules No. 124. Those Rules include the following: "1. GENERAL 1.3 If one of the parties is not represented for sampling or refuses to draw and/or seal samples as called for under the contract, the other party shall under advice to that party call upon a competent independent organisation for the appointment of a superintendent to act on their behalf to draw and/or seal samples according to these Rules. Extra expenses incurred in this connection shall be borne by the defaulting party. 1.4 The word "sealed" shall mean jointly sealed samples by the Buyers and Sellers or their superintendents and shall be sealed in such a manner as to prevent any access to the sample without breaking or removing the seal. The seal's mark should be clearly identifiable and clearly visible. … 4. QUALITY CERTIFICATION AT TIME OF LOADING Where the contract provides that a certificate of inspection of a superintendent, government or authority at time of loading shall be final as to quality, then the superintendent, government or authority shall be solely responsible for drawing samples and Rules 1:3, 1:4 and 5 do not apply." …. 5. CONTRACTUAL SAMPLES REQUIRED FOR ANALYSIS TESTS AND ARBITRATION PURPOSES …. 5:1:6 For Marine and Animal Products Sold on Contracts No.9 at Discharge and No.113 and for Feedingstuffs on Contract No.119 at Loading One Set of samples is required consisting of the following:- MPC – analysis MPC – arbitration Buyers may accept Sellers' analysis but if required by Buyers, any one of the sealed samples together with instructions shall, within 14 consecutive days of sealing, be dispatched to Salamon & Seaber. In the event that this option is not decided at the time of arrival, the choice of analyst shall be that of the instructing party. This analysis shall be final and any claim arising from it shall be made within 14 consecutive days of the date thereof, accompanied by the certificate of analysis or a true copy." When the cargo came to be loaded, the Buyers exercised their option to appoint their own supervisor, Control Union, to act on their behalf. Accordingly sampling was carried out conjointly by Control Union and Inspectorate Ukraine LLP ("Inspectorate"), the superintendent chosen by the Sellers. Inspectorate issued certificates showing that all analysis results of the cargo were in accordance with the contract specifications. However, whilst loading was still underway, the Buyers wrote to the Sellers to say that their analysis results in respect of the first loaded portion suggested that the cargo was off specification for protein and fibre content. The Buyers followed this up by sending samples to Salamon and Seaber for analysis. That company produced a certificate stating that the protein content of the cargo was 26.8% (less than the minimum of 32% specified in the contract) and the fibre content was 26.57% (more than the maximum of 23% specified in the contract). On the 24 October 2008 the Buyers rejected the goods and the documents. They were subsequently sold for US$101 pmt by agreement between the parties. Against that background, the Sellers claimed US$670,296.61, the balance of the purchase price, and the Buyers counterclaimed damages of US$360,374.52 and £13,071.92. The Sellers' claim succeeded before the first tier arbitrators. However, the Board of Appeal allowed the Buyers' damages claim and dismissed the Sellers' claim for the balance of the price. st question – Whether on a true construction of the contract, the certificates of quality and condition issued by the superintendent chosen by the Sellers were final and binding In finding for the Buyers, the Board held that pursuant to the terms of the parties' contract, the Salamon & Seaber analyses superseded the analysis certificates issued by Inspectorate. The Sellers contended that this conclusion was wrong, relying on the words "Quality and condition to be final at time and place of loading as per certificate of first class superintendent approved by GAFTA at Seller's choice and expense" in the "Commodity" clause. Having held that the certificates of Inspectorate showed that the cargo met the contract specifications, the Sellers submitted that the Board should have gone on to hold that that certificate conclusively determined, as between the parties, that the expellers were of the quality and met the specifications set out in the contract – see Toepfer v Continental Grain [1974] 1 Ll. Rep. 11 at 13. In holding that it was the Salamon and Seaber certificate of analysis rather than the certificate of inspection of Inspectorate which was final and binding the Board's essential reasoning was as follows: (1) The contract provided "2 nd analysis, if any, as per Salamon and Seaber London": para 7.5 of the Award; (2) The contract referred to the governing contract as GAFTA 119. Under the terms of clause 16 of GAFTA 119, the terms and conditions of GAFTA Sampling Rules No 124 were deemed to be incorporated: Award para 7.6; (3) "Of the GAFTA Sampling Rules No 124, particularly paragraph 5.1.6 applied". Under that paragraph, the Buyers had the right to require samples to be sent to Salamon and Seaber for an analysis, which analysis should be final: Award para 7.7; (4) The parties had not expressly excluded the rules in GAFTA 124 or any part of them, so that those rules applied and the Salamon and Seaber analysis superseded the Inspectorate Certificates and was to be treated as final: Award paras 7.8 to 7.12. The Sellers contended that steps (3) and (4) in that reasoning and the conclusion reached were wrong for the following principal reasons: (1) Rule 4 of GAFTA 124 expressly provides that Rule 5 does not apply "Where the contract provides that a certificate of inspection of a superintendent ... at time of loading shall be final as to quality", as the present contract does. Paragraph 5.1.6 is part of Rule 5. Accordingly contrary to what the Board concluded at paragraph 7.9 of the Award, there was an exclusion of a section of the Sampling Rules, namely Rule 5, so that paragraph 5.1.6 and the provision that a Salamon and Seaber analysis should be final, were not applicable to the present contract. (2) In any event the provision that "Quality and condition to be final at time and place of loading as per certificate of first class superintendent approved by GAFTA at seller's choice and expense" was part of the written contract made between the parties and was inconsistent with paragraph 5.1.6 of GAFTA 124 insofar as it provided that the Buyers could require a sample to be sent to Salamon and Seaber and that that company's analysis of that sample (which may or may not have been a second analysis depending on whether the Sellers had carried out an analysis at the time of the Buyers' request) should be final. "If clauses are incorporated by reference into a written agreement, and those clauses conflict with the clauses of the agreement, then, in the ordinary way, the clauses of the written agreement will prevail" – see Chitty on Contracts (30 th Edn) para 12-079. (3) Further the written contract provided that "Other terms and conditions not in contradiction with above as per GAFTA 119 including arbitration clause as per GAFTA 125" [emphasis supplied]. The provision in Rule 5.1.6 from GAFTA 124 to the effect that a Salamon & Seaber analysis should be final was incorporated into GAFTA 119 by virtue of paragraph 16. Since that was "in contradiction with above" it was not incorporated into the contract. (4) The contract gave the Buyers the right to appoint its own supervisor in which case sampling of the cargo would be carried out jointly with the Sellers' superintendent. It also provided that any second analysis would be carried out by Salamon & Seaber but it did not provide that the results of that second analysis should in any way bind the parties although, of course, had they been set out in the certificate of the GAFTA approved superintendent chosen by the Sellers, they would have done so. The Buyers supported the Board's reasoning and conclusion and submitted as follows: (1) The provision "2 nd analysis, if any, as per Salamon and Seaber, London" indicates that the analysis certificate of the Sellers' appointed supervisor will not be final and binding in all cases. If it were to be final and binding in all cases, there would be no scope for a nd analysis, the only purpose of which would be to test the accuracy of the Sellers' supervisor's certificate. The Board recognised this in Award para. 7.9 – "the parties must have been aware that a second analysis was…possible". (2) The "Commodity" clause contemplates two possible scenarios at the loadport: (1) the Sellers choose and pay for a superintendent and that supervisor will act on behalf of both parties or (2) the Buyers also appoint and pay for their own supervisor, in which case each party will have its own separate representation at loading. Scenario (2) was contemplated by the option expressly granted to the Buyers – "The buyers have the right to appoint their own GAFTA approved supervisor at their expense". (3) Which of Scenario (1) or (2) would end up applying, would depend on whether or not the Buyers exercised this option. In Scenario (1), the Sellers' supervisor, being the only supervisor present, would sample the cargo on his own and have those samples analysed. The parties agreed that under this scenario the analysis certificate of the Sellers' supervisor would be final and binding. In Scenario (2), there are two key differences. First, the samples will not be taken just by the Sellers' supervisor, rather "the sampling to be done conjointly" by both supervisors. Secondly, the Buyers have the right to submit a sample for their own 2 nd analysis – "2 nd analysis, if any, as per Salamon and Seaber, London". They are not bound by the Sellers' supervisor's analysis certificate. (4) The next question which arises is, if (as in this case) the Buyers send a sample to Salamon & Seaber for a 2 nd analysis and that analysis differs from the Sellers' supervisor's analysis, how is this difference to be resolved? The Board correctly held that the answer to this lies in GAFTA No. 124 Rule 5.1.6. Rule 5.1.6 provides that the 2 nd analysis performed by Salamon & Seaber is to be final. As a result, the Board were correct to find that the Salamon & Seaber analysis in this case was final and binding. The application of Rule 5 was not excluded by Rule 4 of GAFTA 124 because: (i) Rule 4 applies where the parties have agreed that a superintendent's certificate will be final as to quality. However, the parties had agreed that the Sellers' superintendent's certificate was not final in the context of Scenario (2). (ii) In any event the parties had expressly overridden the provisions of Rule 4 in the main terms of their agreement in the context of Scenario (2) because Rule 4 provides that the Sellers' superintendent shall be solely responsible for drawing samples but (a) the parties expressly agreed that "the sampling to be done conjointly" and (b) the parties expressly agreed that "2 nd analysis, if any, as per Salamon and Seaber, London". In my judgment the Board were correct to conclude that the Salamon and Seaber analysis was final and binding for the reasons given by the Board and the Buyers and in particular: (1) The starting point is, as the Sellers submit, that quality is final as certified by the superintendent appointed by them. In circumstances where the Buyers do not appoint their own supervisor there can be no doubt that that is the applicable regime. There can also be no doubt that in such a case Rule 4 of GAFTA 124 means that Rule 5 does not apply. In that case the contract does provide that a "certificate of inspection of a superintendent…at time of loading shall be final as to quality" and that superintendent "shall be solely responsible for drawing samples". (2) An alteration to that contractual regime is, however, made when the Buyers appoint their own supervisor. In that case sampling is to be done conjointly in accordance with GAFTA 124. That means that, contrary to Rule 4, the seller's superintendent will not be "solely responsible for drawing samples". It also means that although Rule 4 states that Rule 1.4 does not apply, that cannot be the case. Rule 1.4 clearly does apply where there is joint sampling. (3) A further alteration to the contractual regime is made when a 2 nd analysis is called for by the Buyers. Although the "Commodity" clause does not state in terms that this is the Buyers' right I agree with the Buyers that this is clearly what is contemplated. In particular: (1) it appears immediately following the provision dealing with the Buyers' right to appoint their own supervisor and it is linked to and follows on from that right; (2) given that the first analysis will be done by at the direction of the Sellers' (through their appointed superintendent) it is difficult to see why they should have or need a right to call for a 2nd analysis; (3) in GAFTA 124 the right to call for a "2nd analysis", which appears in various provisions, is generally a right given to the counterparty to that who had arranged for the first analysis (see, for example, Rules 5.1.3; 5.1.5). (4) The only purpose for having a right to call for a "2nd analysis" is if doing so has some effect or consequence. If, however, quality is final as certified by the Sellers' superintendent then there will be no purpose in doing so. Realistically the only circumstances in which a second analysis is likely to be called for is where the Buyers are not satisfied with the analysis results recorded in the Sellers' superintendent's certificate. Unless and until that certificate is produced the Buyers will not know what the relevant analyses are and whether there is any need or warrant for a second analysis. The existence of such a right is therefore inconsistent with a certificate final regime. This is further borne out by GAFTA 124 where a right to call for a "2nd analysis" only arises in circumstances where there is no such regime, as Rule 4 makes clear. I therefore agree with the Buyers that the effect of conferring a right on the Buyers to call for a second analysis necessarily means that, where that right is exercised, the certificate final regime does not apply. (5) It follows that, where the Buyers call for a "2nd analysis" the contract does not provide that a "certificate of inspection of a superintendent…at time of loading shall be final as to quality". If so, it equally follows that there is no exclusion of Rule 5, which is the Rule which deals with second analyses in various cases, including in relation to GAFTA 119. In such a case there is neither a quality final provision nor sole sampling and the exclusion of Rules 1.3, 1.4 and 5 has no application. (6) That being the case the clear effect of Rule 5.1.6 is to make the results of the second analysis "final". The Sellers submitted that it was not clear that this applied to a Salamon and Seaber analysis, as opposed to the analysis contemplated by the rather obscure penultimate sentence in the Rule, but I am satisfied that it does so apply and that there is no sensible reason for drawing the proposed distinction, nor was any suggested. (7) It follows that I agree with the Buyers that Rule 5 of GAFTA 124 has the effect that the "2nd analysis" carried out by Salamon and Seaber is final and binding. This conclusion is supported by the fact that the Sellers were unable to identify any realistic circumstances in which the "2nd analysis" provision would apply. Given that this was a specifically agreed term in the short form contract one would clearly expect it to have meaningful effect. The circumstances suggested by the Sellers were: (1) When the first analysis produced obviously aberrant results so that the Sellers' superintendent did not think that they could possibly reflect the condition of the cargo and wished to have another analysis carried out before producing his certificate. However, it is not the role of a seller's supervisor to question his own analysis results. Even if he did, he would simply have the goods retested. Further, this example does not explain why the contract granted the Buyers the right to have a 2 nd analysis performed. (2) When the results of the first analysis were mislaid before the Sellers' superintendent saw them and was able to produce his certificate (although, realistically, this was not pressed at the hearing). However, if the results were mislaid, the supervisor would simply ask for another copy. (3) If the Buyers wished to have an analysis performed themselves with a view to providing it to the Sellers' superintendent for comparison and cross-checking with the analysis obtained by him before he issued his inspection certificate. However, this ignores the fact that the Buyers will only find out the Sellers' analysis results when the Sellers' supervisor provides the Buyers with his certificate. Under the Sellers' construction it would, by then, be too late for the Buyers to do anything. (4) If the first analysis was vitiated for fraud or admitted error and a second analysis was accordingly required. However, these rare circumstances are unlikely to be established until much later and the provision is clearly addressing an analysis to be performed at the time of the transaction. As to the Sellers' submissions that Rule 5.1.6 is not incorporated because it is inconsistent with or contradicts the certificate final provision, this is not so. There may be many cases in which the certificate final provision would apply and govern. It is only in a case where the Buyers call for a 2nd analysis that a different contractual regime applies. Finally, in reaching my conclusion I have regard to the fact that this is the type of question of law upon which some deference should be accorded to the Board, the trade tribunal, as the arbitrators' experience is likely to be of assistance. In particular, it involves the construction of a short hand expression, "2 nd analysis, if any, as per Salamon and Seaber, London" which takes meaning from its context and in particular knowledge and experience of GAFTA 124. Whilst the fact the Board's conclusion differed from that of the first tier arbitrators is a relevant factor, I do not consider that this means that no deference should be accorded to their Award. As stated by Jackson J in Kershaw Mechanical Services Ltd v Kendrick Construction Ltd [2006] 4 All ER 79 at [57] after a consideration of the relevant case law: "1. The court should read an arbitral award as a whole in a fair and reasonable way. The court should not engage in minute textual analysis. "2 Where the arbitrator's experience assists him in determining a question of law, such as the interpretation of contractual documents or correspondence passing between members of his own trade or industry, the court will accord some deference to the arbitrator's decision on that question. The court will only reverse that decision if it is satisfied that the arbitrator, despite the benefit of his relevant experience, has come to the wrong answer." Question 2 - Whether the Buyers were entitled to reject the documents and the goods despite the terms of clause 5 of GAFTA No. 119. Even if the Board had been correct to hold that the Salamon and Seaber certificate was final, the Sellers contended that the Board was wrong to hold that that gave the Buyers the right to reject the goods. At paragraph 7.11 of its award it said: "If a contract does not contain a scale of allowances for deficiency in certain specifications (viz fibre) and the goods subsequently fall outside this then it must follow that the goods can be rejected unless the parties agree to any other course of action." The Sellers contended that this conclusion was wrong on two grounds: (1) The Board failed to give effect to clause 5 of GAFTA 119 which is a non-rejection clause. (2) The Board proceeded on the erroneous basis that any failure of the goods to meet the specification would justify rejection. In relation to ground (1) the Sellers relied on clause 5 of GAFTA 119 and in particular lines 35-39 which provide that: "Warranted to contain not less than ..... % of oil and protein combined and not more than 1.50% of sand and/or silica. Should the whole, or any portion, not turn out equal to warranty, the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below...." [Emphasis supplied]. The Board held at paragraph 7.10 of the Award that the provision that the goods "must be taken at an allowance" referred only to oil and protein and sand and/or silica and not to fibre and implicitly in paragraph 7.11 that goods could not be taken at an allowance unless there was a scale of allowances specified in the contract itself. The Sellers contended this was wrong because: (1) It is apparent from the terms of clause 5 that: (a) the clause provides for an allowance to be agreed or settled by arbitration where the quality of the goods is not as warranted; (b) as an exception to the general rule that allowances are to be agreed or settled by arbitration, a specific scale of allowances is specified in respect of deficiencies of oil and protein and for excesses of sand or silica; (c) further an express right of rejection is given where the sand or silica content exceeds 3%. (2) If, as the Board found, the clause only applied to deficiencies of oil and protein and excesses of sand and silica, there would be no need for it to provide for allowances to be settled by agreement or arbitration because the allowances in respect of those four elements are expressly set out in the clause itself. Indeed the fact that immediately after the words "the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below", the clause: (a) says " except that for any deficiency of oil and protein ..." and (b) then goes on to specify the scale of allowances for oil and protein and for sand and silica, shows that the general provision as to allowances being agreed or decided by arbitration is intended to apply to all departures from specification apart from those in respect of oil, protein, sand and silica. The Buyers supported the Board's conclusion and contended that: (1) The opening words of the material part of clause 5 at lines 35-36 make no reference to the fibre content of the goods. They provide the confines within which the rest of the clause operates – it only addresses matters relating the combined oil and protein content and the sand and/or silica content of the goods and nothing more. (2) The provision that "the goods must be taken at an allowance to be agreed or settled by arbitration as provided for below, except that for any deficiency of oil and protein there shall be allowances to Buyers at the following rates…" does not broaden the scope of clause 5 beyond the limit already set down by lines 35-36. They reflect the fact that under clause 5, matters of (i) the amount of the cargo to which an allowance is to be applied and (ii) the degree of deficiency are left to be agreed or arbitrated but the question of what rate of allowance is to be used has been fixed in advance. In my judgment the Board's conclusion was correct for the reasons given by the Board and the Buyers and in particular: (1) The warranty which is set out in clause 5 begins with the words at lines 35-36: "Warranted to contain not less than…% of oil and protein combined and not more than 1.50% of sand and/or silica". (2) It is therefore specifically a warranty relating to oil and protein and sand and/or silica. No reference is made here or elsewhere to the fibre content of the goods or to any other quality characteristics. (3) The reference in lines 36-38 that "Should the whole, or any portion, not turn out equal to warranty.." would naturally be read as a reference back to the warranty set down in lines 35-36 (i.e. the warranty regarding the combined oil and protein content and the sand and/or silica content of the goods). (4) As to the Sellers' argument that since the "allowance" for the oil and protein, sand and/or silica is "provided for below" the allowances "to be agreed or settled by arbitration" must relate to other warranted quality specifications, it is perfectly possible for the applicable allowance in respect of oil and protein and sand and/or silica to require agreement or arbitration. In particular, as the Buyers submitted, in any case where it is alleged that an allowance is due in respect of oil and protein or sand and/or silica, there are three matters which will go towards deciding the amount of that allowance: (i) The amount of cargo to which the allowance is to be applied; (ii) How deficient the cargo is as compared to the warranty; and (iii) What rate of allowance is to be used. (5) Absent express provision, each of these matters may well be the subject of disagreement between the parties. For example: (i) Clause 5 itself contemplates in line 36 that it may only be a "portion" of the goods which does not comply with the warranty rather than "the whole". The parties may well disagree over the precise amount of that portion. (ii) The degree of deficiency will depend on the quality analyses carried out on the cargo. If each side has its own analysis, then they may disagree over how deficient (if at all) the cargo is. (iii) Each side may disagree over the effect of the deficiency on the value of the cargo and so disagree over the rate of allowance. (6) Issue (iii) is settled by the rates of allowance fixed by clause 5. However, the other matters are not so settled and therefore may require agreement or arbitration. It follows that these words are not necessarily referring to other specifications of quality. Further, if the Sellers' argument were correct, one would expect the provision in lines 40-43 which addresses warranties within a margin to be of general application. However it is notable that it is expressly confined to cases where "the combined content of oil and protein is warranted within a margin". This serves to confirm the narrow and specific ambit of the clause. In addition, the effect of the Sellers' argument is that clause 5 is a non-rejection clause that excludes any right of rejection for all deviations in quality specification, however gross such deviation may be, and however serious its consequences. One would expect such a general exclusion to be clearly spelt out, not left as a matter of inference to be drawn from a sentence buried in a clause dealing with specific and limited quality matters. In reaching this conclusion I have regard to the fact that this is the type of question of law upon which some deference should be accorded to the Board as their experience is likely to be of assistance. Again I do not consider that the fact the Board's conclusion differed from that of the first tier arbitrators means that no deference should be paid to their Award. The scope of application of a standard form clause such as clause 5 is an important matter for the trade and it is those in the trade who have the knowledge and experience to be best able to appreciate the practical implications of a decision as to that scope. In relation to ground (2), the Sellers contended that the Board appears in paragraph 7.11 of the award to have proceeded on the basis that unless a scale of allowances for deficiency is provided for in the contract then "it must follow" that any failure of the goods to meet the specification would justify rejection. This is not the law. Whether there is a right of rejection depends on whether the specification as to quality is a warranty (in which case there will be no right of rejection), whether it is a condition (in which case there will be a right of rejection), or whether it is an innominate term (in which case there will be a right of rejection if the breach of it would deprive the other party of substantially the whole benefit of the contract). This issue has not been addressed by the Board properly, or at all. The Buyers submitted that this ground was not open to the Sellers since Teare J's grant of permission was limited to the proper construction of clause 5. I reject that contention. Teare J gave permission in respect of "The second error of law suggested at paragraph 2 of the Submissions in support of the application: The finding that, despite the terms of clause 5 of GAFTA no.119, the Buyers were entitled to reject the documents and the goods". Paragraph 2 of the Submissons referred to the question of law in the same terms as the Judge but the body of the Submissions made it clear that both grounds were being relied upon under that heading. Had Teare J intended to limit the appeal to only one of those grounds he would have said so expressly. The Sellers submitted that the provision as to fibre content was a warranty, as borne out by clause 5 of GAFTA 119 which refers to the provisions as to the quality of the goods as warranties, breach of which would sound only in damages. Alternatively the Sellers submitted that if the term was not a warranty, it was an innominate term: see Tradax v Goldschmidt SA [1977] 2 Ll. Rep. 604. In that case the contract provided that there be "4% foreign matters" but the goods were certified as containing in excess of this. The issue which arose for decision was whether this was a breach of condition giving rise to a right to reject the documents. In concluding that the provision was an innominate term Slynn J stated as follows at 612-613: "What I have to decide is not whether the certificate is conclusive but whether the documents can be refused because the certificate shows that there was a percentage of impurities greater than that specified and which on any view entitles the buyers to an allowance. If the documents did not include a quality final certificate or if the quality final certificate which was included dealt with goods other than barley it seems to me that the buyer could refuse the documents. Equally if the certificate dealt only with weight and failed to deal with quality it may well be that the documents could be refused without more. But here the certificate is a good certificate in that it does state what is the quality, what is the percentage of impurities. It shows that there was not a full compliance with the contractual term as to quality and it does what it was intended to do. It is a valid document capable, as Mr. Hallgarten says, of being transferred as part of a subsequent sale. The question here, it seems to me, is not whether the document can be rejected because it did in itself not comply with the contractual terms relating to the provisions as to a certificate, but because it shows that the goods did not comply with the contractual terms. It is accepted that the provision as to impurities was not part of the description of the goods so there was no implied condition under s. 13 of the Sale of Goods Act, 1893, entitling rejection on non-compliance. Nor is any condition implied by s. 14 of the Sale of Goods Act, 1893, relied on. Accordingly it seems to me that on the basis of what was said in the case of The Hansa Nord , [1975] 2 Lloyd's Rep. 445; [1976] Q. B. 44 at pp. 451 and 61 by Lord Denning, M. R., and at pp. 457 and 70H-71B by Lord Justice Roskill and what was said in Hong Kong Fir Shipping Co. Ltd. v. Kawasaki Kisen Kaisha Ltd ., [1961] 2 Lloyd's Rep. 478; [1962] 2 QB 26 , in the absence of any clear agreement or prior decision that this was to be a condition, the Court should lean in favour of construing this provision as to impurities as an intermediate term, only a serious and substantial breach of which entitled rejection. At pp. 445 and 61 of The Hansa Nord , Lord Denning, M. R., stresses that in the ordinary case where there is a deviation between the goods and the contractual provisions the buyer does not have the right to reject the whole cargo unless the breach was serious and substantial. Where the discrepancy is a minor discrepancy the buyer is bound to accept the goods. He should not reject them unless there is a serious and substantial breach clearly attributable to the seller. At pp. 457 and 70, Lord Justice Roskill said: In my view, a Court should not be over ready, unless required by statute or authority so to do, to construe a term in a contract as a "condition" any breach of which gives rise to a right to reject rather than as a term any breach of which sounds in damages-I deliberately avoid the use of the word "warranty" at this juncture. In principle contracts are made to be performed and not to be avoided according to the whims of market fluctuation and where there is a free choice between two possible constructions, I think the Court should tend to prefer that construction which ensure performance and not encourage avoidance of contractual obligations. If there had been no provision as to a quality final certificate I would have had no doubt whatever that the present breach of the provision as to impurities would not have entitled rejection of the goods but would have entitled the buyers only to an allowance. Does it make any difference that the quality final certificate whose purpose is to finalise quality between the buyer and the seller (and which is otherwise valid) shows this minor breach, which but for the final certificate must be met by a prior allowance. In my judgment, on the terms of the present contract, it does not make any difference. The buyers here had to consider whether the breach established by the quality final certificate was substantial and serious or went to the root of the contract or, on the other hand, whether it was of such a kind that they should have been satisfied with the price adjustment. There was, on the findings of the Board of Appeal, only one answer to that. Those findings are in strong terms and show that commercial men (to whose conclusions on these matters I must and do attach great weight) considered that this kind of deviation in quality would not be treated as entitling a rejection either of a quality final certificate (the quality final certificate being otherwise valid) or the goods. Accordingly I hold that the buyers were not entitled automatically to reject the document because of this statement in the quality final certificate that the goods contained 4.1 per cent. impurities." The Sellers relied on Slynn J's reasoning and conclusion in support of their alternative case that the fibre content provision was an innominate term. There is no hint in the Board's reasoning that they even considered this possibility. The Buyers contended that the Board had in fact determined that the breach was one of condition, alternatively that their conclusion can be upheld on that basis. In particular, the Buyers submitted that the breach of the "maximum" fibre content provision was a breach of description, and therefore of a condition, alternatively was a condition because the term was expressed in "maximum" terms and fell outside the Clause 5 regime. In this connection they relied on the decision of Bingham J in Tradax Export SA v European Grain & Shipping Ltd [1983] 2 Lloyd's Rep 100. That case concerned a contract which provided for the sale of "Goods in bulk U. S. A. solvent extracted toasted soya bean meal – maximum 7.5% fibre". Bingham J held that the provision "maximum 7.5% fibre" was a condition of the contract. However, the basis of that decision was that this was part of the description of the goods and indeed the words appeared next to that description. The alternative argument that it was in any event a condition was not determined. There is no suggestion in the Board's reasons that they regarded the fibre content provision as a matter of description, and indeed this does not appear to have been argued before them. Further, unlike in the Tradax v European Grain case, the term does not appear next to the description of the goods. On the contrary it appears under the heading "Specifications" and next to a specification characteristic which is clearly a matter of quality rather than description, namely protein. That too contained a specified limit ("min" rather than "max"). However, as Clause 5 makes clear, it is a warranty. Reading the award in a fair and reasonable way and in the expectation that no substantial fault will be found with it, I agree with the Sellers that the Board proceeded on the basis that there is a right of rejection for quality matters unless the contract provides otherwise. That approach involves a clear error of law. There is no hint in the Board's reasons that they have addressed their minds to the issue of whether the fibre content provision should properly be regarded as a condition, as opposed to a warranty or an innominate term. They have assumed that the term is a condition unless there is a clear indication to the contrary. That is not the law. I am accordingly satisfied that the Board has erred in law in concluding that the breach of the fibre content provision gives rise to a right to reject and that they have not addressed their minds to the relevant legal questions in reaching that conclusion. In such circumstances it was common ground between the parties that the appropriate course of action would be to remit the matter to the Board for them to consider whether the term is a condition, a warranty or an innominate term rather than for the court to reach its own conclusion. On such remission the Board will also be able to address the alternative case that the breach meant that the goods were not of merchantable or satisfactory quality and, if there is no right to reject, what the proper allowance/damages or fit for their purpose would be. Conclusion I accordingly conclude that: (1) On a true construction of the contract, the certificates of quality and condition issued by the superintendent chosen by the Sellers were not final and binding; and (2) The Board of Appeal did err in law in concluding that the Buyers were entitled to reject the documents and that this issue should be remitted to the Board for further consideration. BAILII: Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII