Preparing for dispute - understanding FOSFA arbitrations

The Federation of Oils, Seeds and Fats Associations (FOSFA) is one of the world’s main commodity trade associations. Its standard form contracts are widely adopted in the global trade in oils, seeds and fats.

FOSFA contracts are governed by English law. If a dispute arises under a FOSFA contract, and if the buyer and the seller of a commodity are unable to reach a consensual agreement, that dispute must be resolved by arbitration (a process by which an official body or independent individual settles the matter) under rules published by FOSFA (the FOSFA Rules).

Here's what you need to know about FOSFA arbitrations.

What are the key steps in a FOSFA arbitration?

The FOSFA Rules divide potential disputes into two categories. First, claims regarding the quality or condition of the goods which have been sold; and secondly, all other claims (e.g. claims for non-delivery of goods, claims in relation to the wrongful termination of a contract etc). This distinction is important because the procedural deadlines prescribed by the FOSFA Rules differ depending on which category the dispute falls under.

The FOSFA Rules require each party to file written submissions, together with supporting documents in relation to each type of claim. Given the nature of the trade, these submissions frequently give rise to complex factual and legal issues such as:

• Whether a contract was wrongfully terminated
• If a buyer has complied with its obligation to issue delivery instructions
• Whether a seller was excused from its obligation to deliver goods due to a force majeure event (e.g. strikes, riots, or civil commotion)
• The impact of any blockade or hostilities which restrict the export or import of commodities
• Other events that may disrupt the transit route
• The basis upon which damages for breach of contract should be assessed or quantified.

In cases where the market price for a commodity has risen or fallen between the date of the contract and the date when a party has breached a contract (giving rise to a claim for damages), it will often be necessary for parties to submit reports from traders or brokers to establish the applicable market price(s) on the day of default.

Moreover, the tribunal has the power to request further information or documents from the parties.¹ This will often be important where only one party to the dispute is in possession of relevant documents.

After the written submissions and evidence has been filed, the tribunal has a discretion to hear oral submissions and evidence. Under the FOSFA Rules, the holding of an oral hearing is at the discretion of the tribunal. If the tribunal decides not to order an oral hearing, they will issue an ‘award by reference’ to the written submissions and documentary evidence. If the tribunal orders an oral hearing, only the parties and their representatives may attend; lawyers may not attend or make submissions.² Once the oral hearing has taken place, the tribunal will then decide the dispute and issue an award.

Appointing the arbitrators/the tribunal

One of the defining characteristics of arbitration is the ability of the parties to appoint an arbitrator to resolve their dispute. The position is different in domestic court proceedings where the parties have no choice over the identity of the judge who hears the dispute. This is one of the reasons why arbitration is such a popular method of dispute resolution.

The FOSFA Rules set out certain requirements as to who is, and who is not, eligible to act as an arbitrator. These requirements reflect the different types of FOSFA membership which cover each aspect of the supply chain. For example, only trading, full broker and non-trading members of FOSFA are eligible to act as arbitrators. Moreover, a person who is wholly or principally engaged in private legal practice is not eligible to act as an arbitrator. In practice, this will prevent most lawyers from acting as arbitrators.³

Under the FOSFA Rules, a party (the claimant) who wishes to commence an arbitration must despatch the notice of claim together with the name of its appointed arbitrator to the other party (the respondent) and to FOSFA within certain specified time limits. The respondent must then nominate an arbitrator within 30 days following receipt of the notice of claim. FOSFA will then appoint a third arbitrator to act as the chair of the tribunal comprising three arbitrators. Alternatively, the parties can agree to appoint a sole arbitrator instead of a three-person tribunal.⁴ Once the arbitrator(s) are formally appointed, they become the ‘tribunal’.

It is important for a claimant to comply with the time limits in the FOSFA Rules for appointing an arbitrator, otherwise there is a risk that the claim will be deemed to have been waived and barred unless the arbitrators or the Board of Appeal determine otherwise ‘in their absolute discretion’.⁵

What happens after the tribunal’s award?

A notable feature of FOSFA arbitrations is that they are a two-tiered process. This means that the tribunal’s award may be appealed within the FOSFA framework. This appeal – the second tier – needs to be commenced within 28 days of the award, and will be determined by a FOSFA Board of Appeal (comprised of five members appointed by FOSFA). The appeal will be a complete rehearing of the dispute; this is significant because the parties will be able to submit new evidence and arguments.

As with the hearing (if any), lawyers are not generally permitted to attend or make submissions before the first tier tribunal (although the Board of Appeal may permit a lawyer if it considers the case to be of special importance).⁶

Assistance from the English courts

By default, the FOSFA arbitration clause specifies London as the ‘seat of arbitration’ (i.e. the jurisdiction in which an arbitration is deemed legally to take place and the award issued). London is a world-leading ‘seat’, and its reputation is largely built on the arbitration-friendly approach of the English courts.

The English courts are able to issue various measures (orders) in support of arbitration under the Arbitration Act 1996, including, for example, orders to freeze a respondent’s assets to prevent their dissipation pending the determination of the dispute.

However, the FOSFA arbitration clause is what is known as a ‘Scott v Avery’ type-clause. Simply put, it is worded in a way which ousts the English court’s ability to issue interim measures in support of the arbitration. Indeed, in one case, the English court held that a FOSFA arbitration clause prevented it from granting a freezing order in support of the arbitration.⁷ Helpfully, some of the English court’s powers are mandatory and cannot be excluded by the wording of the arbitration clause.

Accordingly, parties to FOSFA contracts will need to carefully consider the extent to which the English court may be able to assist their arbitrations if the need for such supportive measures arises.

When can a FOSFA award be challenged in the English court?

With London being the default seat for FOSFA arbitrations, a challenge to a FOSFA award must be brought in the English courts under the Arbitration Act 1996. There are three limited grounds on which an arbitral award may be challenged in the English court:⁸

1. That the tribunal lacked jurisdiction
2. That the tribunal committed a serious irregularity
3. That the tribunal made an error of law.

A challenge cannot be brought unless the dissatisfied party has first exhausted “any available arbitral process of appeal or review”.⁹ Since the FOSFA Rules provide for a right of appeal to the Board of Appeal,¹⁰ the dissatisfied party cannot challenge the award in the English court until it has first exhausted its right of appeal to the Board of Appeal.

There are many detailed rules which govern each type of challenge. These are beyond the scope of this article, however, one brief point is notable; many arbitral rules (such as those of the LCIA and the ICC) expressly exclude a party’s right to challenge an award on the basis that the tribunal committed an error of law. The other two grounds – lack of jurisdiction and serious irregularity – cannot be excluded. By contrast, the FOSFA Rules do not exclude this right. Therefore, if a party considers that the tribunal (including, for this purpose, the Board of Appeal) erred in law, it can appeal against such findings of law and ask the English court to express a different conclusion. 

Key takeaways

Although lawyers are (by default) excluded from hearings in FOSFA arbitrations, they are frequently involved in drafting written legal submissions on behalf of parties in FOSFA arbitrations. We would strongly recommend engaging lawyers with such experience at an early stage of any dispute. This is because of the numerous complex issues of fact and law which typically arise in FOSFA arbitrations, combined with peculiarities in the process of FOSFA arbitrations as compared with other forms of arbitration.

No doubt the tribunal (and, if applicable, the Board of Appeals) will be assisted by well-prepared and informative written submissions which clearly explain the relevant legal principles and their application to the facts. This is particularly important given that the outcome of the arbitration may be determined without a hearing, and is susceptible to an appeal to the English court.

Moreover, depending on the type of dispute, the outcome of the arbitration may depend on the correspondence and communications exchanged between the parties before the parties come to appreciate that a dispute is likely. Accordingly, involving lawyers at the outset may ensure that those communications do not materially undermine the prospects of success; this may be helpful (if not decisive) to the outcome of the arbitration. 

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