Court upholds appeal as tribunal's conclusion wrong in law (Cottonex Anstalt v Patriot Spinning)

On 14 February 2014, the Commercial Court upheld an appeal against an arbitral award of the Technical Appeal Committee (TAC) of the International Cotton Association (ICA), finding that the tribunal erred in law when construing the dispute resolution clause in the parties’ contract. In this article, we analyse the court’s decision and identify the key points for practitioners.

Judgment details

The appeal in Cottonex Anstalt v Patriot Spinning [2014] EWHC 236 (Comm) was heard by Hamblen J in the Commercial Court and the judgment was handed down on 14 February 2014.

Key points for practitioners

What did the dispute resolution clause provide?

Clause 5 of the parties' contract of sale provided that:

'Claims and controversial matters, that may occur in connection with the execution of the following contract, are to be solved by the representatives of the Buyer and Seller, having full power to act. All disputes relating to this contract will be resolved through Arbitration in accordance with the Bylaws of the International Cotton Association Limited. This agreement incorporates the Bylaws which set out the Association's Arbitration procedure.'

The ICA has both 'Bylaws' and 'Rules' and it is clear from the wording of clause 5 above that only ICA's Bylaws were referred to explicitly. However, in its award the TAC decided that clause 5 incorporated both the ICA's Bylaws and the ICA's Rules. As a result of this wider construction, the respondent was able to take advantage of an 'invoicing-back' provision contained in the ICA's Rules, which meant that it was owed money by the claimant.

The respondent's new arguments and new documents on appeal—how did the Commercial Court react?

In opposing the claimant's appeal on a point of law pursuant to s 69 of the Arbitration Act 1996 (AA 1996), the respondent sought to raise three entirely new arguments as to how the 'invoicing-back' provisions were incorporated into the parties' contract and also relied upon three new documents in this respect. The court held that the new documents and arguments were inadmissible.

In relation to the admissibility of the new documents, the court stated that CPR PD 62, paras 12.5 and 12.15 clearly circumscribe the documents that are admissible for the purpose of permission to appeal and appeal pursuant to AA 1996, s 69 (see Practice Note: AA 1996—appealing the award—leave to appeal (s 69)) and that the respondent's new documents did not fall within these limited categories.

In answer to the respondent's argument that CPR PD 62, para 12.6 contains no prohibition as to the documents that a respondent may rely upon in contesting an appeal, the court was clear that there are no separate provisions in the CPR governing a respondent's ability to put documents before the court at either the permission to appeal or appeal stage and that the same restrictions apply to both parties. If a party wishes to put any further documents before the court beyond those contemplated by CPR PD 62, this should be raised at the permission to appeal stage (CPR PD 62, para 12.10).

In relation to the new arguments that the respondent sought to make to uphold the TAC's award, the court stated that it is generally impermissible:

'to raise a new point of law which requires consideration of factual materials and in relation to which material findings might have been sought and made had the point been raised at the arbitration. Both the appellant and the respondent are confined to the findings made in the award. The respondent can argue new points of law based on those findings. If, however, the failure to argue the point which the respondent wishes to raise has the result that not all potentially relevant findings have been made then it should not be open to it.'

On the basis that the respondent's arguments regarding the incorporation of the Rules had not been raised before the first tier tribunal or the TAC, they were not open to it in contesting the instant appeal.

Did the tribunal err in law in its construction of the contract?

The TAC's approach to construing the parties' contract to establish whether the ICA Rules had been incorporated was held by the court to be wrong in law. Instead of looking first to see whether the words in clause 5, or some other provision in the parties' 'host' contract, incorporated the ICA Rules, the TAC proceeded as a 'first step' to consider the wording of the ICA Rules alleged to be incorporated. The court held that this was a wrong approach in law and involved assuming what had to be proved. The correct approach was stated by Rix LJ in Tradigrain SA:

'[t]he first rule relating to the incorporation of one document's terms into another is to construe the incorporating clause in order to decide on the width of the incorporation.'

The respondent also asserted that its interpretation of the clause made more business common sense in accordance with the Supreme Court's guidance in Rainy Sky (see Practice Note: Rules of contract interpretation); the court disagreed. The court was sympathetic to the respondent's argument that it may make good sense for a tribunal to apply its own substantive rules when determining a dispute, but held that the parties may have simply wished to rely upon the tribunal's industry experience and there was no necessity for the ICA's Rules to be applied. As for the respondent's argument that the parties' contract would have more content if the ICA Rules were incorporated, the court stated that the contract was perfectly workable without them. The court's view was that this was not a case where one interpretation of the contract made more sense than the other and even if the respondent's argument did make more commercial sense, the difference was 'marginal and [not] sufficient to mean that it would be appropriate to prefer that interpretation given that there is little, if any, ambiguity about the words used'.

Accordingly, the court allowed the appeal and ordered that the award be remitted to the TAC for it to decide whether the respondent's alternative claim was before it. If it was, the TAC should determine that claim, and, if not, then that was the end of the matter.

A quick note on framing a question of law

The court amended slightly the question of law for which permission to appeal was granted so as to relate it to the actual clause in the parties' contract, rather than to 'a' clause in 'a' contract. The judge stated that, provided the substance of the question of law remains the same, further permission to appeal is not required. In this regard, the court referred to Eder J's statement in The Mahakam that it is sufficient if it falls within the 'spirit if not the letter of the leave granted'. In any event, if permission were required, the court was prepared to grant such permission.

This article was first published on Lexis®PSL Arbitration on 19 February 2014. Click here for a free trial of Lexis®PSL.

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