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Contract, Not Trade Association Rules, Paramount Rules Court

A contractual clause that has been relied upon by cotton traders for more than 100 years came under the legal spotlight as the High Court overturned an arbitration award of more than $720,000 in respect of a sale of goods contract.

Company A had sold 600 metric tonnes of cotton to company B. The contract was never performed and the resulting dispute was submitted to the arbitration of the Technical Appeal Committee of the International Cotton Association Limited (ICA), which made the substantial award in company B’s favour.

The committee found that the contract had incorporated all of the ICA’s bylaws and rules, including an ‘invoicing back’ provision which was a method of closing out a contract based on the market price at the date of closure, irrespective of issues of breach or which party was to blame for the contract’s termination.

Each company had accused the other of breaching the contract, but company B successfully argued that such issues were irrelevant and that, by virtue of the invoicing back provision, it was entitled to succeed in the arbitration.

In determining company A’s challenge to the committee’s decision under section 69 of the Arbitration Act 1996, the Court noted that the ICA’s invoicing back provision had been ‘the subject of some judicial criticism’ over the years but had been a feature of the cotton trade for over a century.

The Court noted that neither party’s interpretation of the sale contract made more business common sense than the other’s. However, in upholding company A’s appeal, the Court found that the committee had focused too heavily on the ICA’s rules and byelaws rather than the wording of the contract itself.

Overturning the award of $720,744 to company B, the Court found that the committee had been wrong in law to find that the invoicing back provision was incorporated into the contract. In those circumstances, the matter was remitted to the committee for fresh consideration in the light of the Court’s decision.