Successful challenges to arbitral awards are rare. The case of K v A [2019] EWHC 1118 (Comm) is one of those highly rare cases where a Gafta Award was subject to a successful challenge.
First published by Gaftaworld, July 2019
What was it about?
In very brief terms the issue in dispute was whether or not the buyer had effectively made payment to the seller under the terms of the contract between them.
Under a contract prepared by an intermediary broker, A agreed to sell and K agreed to buy a consignment of sunflower meal, FOB. The contract incorporated Gafta Form 119. The contract price was US$1,167,900.
The contractual payment provision required, “100% Net cash within 2 banking days to the Sellers’ bank upon presentation of scan/fax copies of the following original documents to [Buyers]”. The requisite document in this instance was the commercial invoice.
Clause 18 of Gafta 119 provided that, “A notice to the Brokers or Agent shall be deemed a notice under this contract”.
The consignment was loaded onto a vessel and this constituted good delivery. A sent an email to the broker with an attached invoice which showed A’s bank account at Citibank and provided the destination account for A at Citibank New York. The broker forwarded A’s email to K. K did not receive that email, but received an email which appeared to come from the broker and which directed payment to a different destination account at Citibank in London.
K gave instructions to its bank to make payment through Citibank New York to the London branch of Citibank.
A Gafta Board of Appeal found that:
a. there had been an act of fraud; and
b. the emails from A to the broker contained the correct bank details for A. By reason of Clause 18 of Gafta 119, the emails to the broker constituted good notice under the contract; and
c. K bore the risk of receipt of the money into the wrong bank account as K’s duty was to make payment to an account nominated by A. A had nominated its correct bank account in its email to
the broker; and
d. A had satisfied its obligations by delivering the consignment and was entitled to receive the full invoice price in cash equivalent into its nominated bank account.
The court’s approach
K challenged the Board’s Award under sections 68 and 69 of the Arbitration Act 1996 on the ground of serious irregularity (S.68) and an appeal on a point of law (S.69).
K argued (among other things):
The Board had made an error of law in finding that K’s obligation was to make payment into A’s bank account at Citibank as on a true construction of the contract, K’s obligation was only to pay the price to A’s bank and that obligation had been fulfilled by the payment to Citibank irrespective of the account details;
There had been a serious irregularity on the part of the Board by holding that the broker was the agent for K as this point had not been advanced by A before the Board and K had not therefore been afforded an opportunity to address that point.
The court made the following findings:
The contractual obligation to make a payment, “net cash” against the background of modern banking practice would permit any commercially recognised method of transferring funds providing it is equivalent to cash.
It is commercially impossible to transfer funds to a bank without identifying the beneficiary and the destination account. The requirement to make payment was not satisfied by merely sending the payment to the nominated bank.
The Board’s reasoning as a whole on this point was such that it had reached the correct legal conclusion. The appeal under section 69 was dismissed.
A had not relied on clause 18 in the arbitration and K was therefore not given an opportunity to address the point before the Board. This was a serious irregularity.
The court used section 68 to remit the matter to the Board to reconsider its reliance on clause 18 of Gafta 119.
Conclusion
The courts of England and Wales are very pro-arbitration and will be slow to overturn an Award of a Tribunal. The hurdle to clear for a successful appeal under section 69 of the Arbitration Act 1996 is very high and rarely achieved.
In regard to section 68 challenges, a Tribunal must be careful not to go beyond its terms of reference and the parties’ submissions because to do so may result in the court exercising the remedies available under section 68.
The moral of the story for businesses is, have in place a security protocol before making a payment by bank transfer. At the very least call the payee to confirm bank details before processing the payment. Fraud is rife unfortunately, and increasingly fraudsters are hacking email accounts and causing payments to be made to fraudulent bank accounts.
