Ukraine is one of the world's major producers and exporters of sunflower oil. Traders not only enter a large number of oil transactions, but they also succumb to a variety of disputes that arise because of their failure to fulfil obligations to their counterparties. These disputes are mainly dealt with by FOSFA arbitration.
In the article we will explain the process and costs of FOSFA arbitration and how to improve your chances of success in this arbitration.
Briefly about FOSFA
FOSFA (Federation of Oils, Seeds and Fats Associations) is an organisation established in 1863 in London whose primary objective is the protection and promotion of the oil, seed, and fats trade.
FOSFA has three main areas of activity: it is a platform for the development and protection of its business, it administrates the arbitration; and it drafts standard pro forma contracts. According to FOSFA, 85% of the global trade in oils and fats is traded under FOSFA contracts.
There are currently more than 50 pro-forma FOSFA contracts. Each contract has a number and differs in terms of commodity and delivery basis. For example, FOSFA 53 is used for the sale of vegetable oil and fish oil on FOB terms. FOSFA 54 is used for the sale-purchase of the same commodity on CIF terms. FOSFA 4a is used for trade in European oilseeds and so on.
The contract provides for FOSFA arbitration — what is important to remember?
Applicable law and arbitration clause. FOSFA contracts provide that disputes between the parties are governed by English law.
At the same time, the FOSFA model arbitration clause has its own particularities (the so-called “Scott v Avery” clause). In contrast to the same GAFTA arbitration clause, the FOSFA clause prohibits parties from seeking interim measures before the courts such as "worldwide freezing orders" (WFO). If parties have included a model FOSFA clause in the contract, but do not want to limit themselves to the provisions prohibiting the obtaining of interim measures, they should exclude the application of the clause in this part. In the event of a breach of the clause (for example, when a party seizes goods in dispute), the other party can apply to the High Court of Justice for an "anti-suit injunction", which is a court order prohibiting the case from being heard anywhere other than in arbitration. Normally, this order also provides for costs to be paid by the party who breached the clause.
What rules should be applied? The latest version of the arbitration rules is dated 1 April 2021. Remember that one should apply the rules in force at the time the contract was made, and not at the time the dispute arose. For example, if the contract was entered into in December 2020 and the dispute arose after 1 April 2021, the FOSFA arbitration rules dated 1 April 2020 and not 1 April 2021 shall apply.
The rules and pro formas are not publicly available, they are chargeable. Old pro forma contracts and regulations are available to FOSFA members upon request.
It should be noted that FOSFA regularly updates its arbitration rules and pro formas. Such updates can be substantial, which can have a significant impact on the outcome of arbitration. For example, the current FOSFA arbitration rules have extended the time limits for non-quality claims from 120 days to one year.
Time limits. The FOSFA rules provide for two different time limits (i.e., the period within which the notice of claim must be submitted) depending on the type of dispute:
- In quality disputes: 90 days from the date of unloading of the goods (if under CIF, CIFFO, C&F contracts) or delivery (if under FOB, Ex-tank, Ex-mill and Ex-store contracts);
- In all other disputes: within 1 year from the actual shipment or delivery of the goods, or from the end of the contract period for shipment or delivery (whichever ends later).
It should be noted that the previous rules (which were in force until 1 April 2021) provided for a shorter time limit of 120 days for non-quality disputes.
Cost of arbitration. FOSFA arbitration is one of the cheapest commercial arbitrations in England. Within 30 days of filing a claim the claimant must pay a deposit which is £5,000 at first tier and £10,000 at appeal. The costs are usually borne by the losing party.
Unlike GAFTA, FOSFA does not prohibit the recovery of legal costs from the losing party, but this does not mean that the successful party will be fully reimbursed for its costs. In recovering legal costs, arbitrators consider many factors, such as the conduct of the parties, the proportionality of the costs to the claim, etc. In practice, if the party wins, 60-80 per cent of costs can be recovered. However, in FOSFA arbitration practice, there have been decisions where arbitrators have refused to reimburse costs because, in the arbitrators' opinion, disputes were simple and did not require lawyers.
What is the procedure for adjudicating a dispute?
Like GAFTA, FOSFA is a two-tier arbitration: first tier, and then appeal.
FOSFA provides several versions of the arbitration rules: the FOSFA Rules of Arbitration and Appeal (under which most disputes are handled) and the Rules for Small Claims Single Tier (the dispute is heard by a sole arbitrator, no appeal). The following is a discussion of the FOSFA Rules of Arbitration and Appeal.
Once an arbitrator is appointed by the claimant, the other party has 30 days to appoint an arbitrator on its side. The Federation will then appoint a third arbitrator, the head of the tribunal. The parties may also agree to appoint a sole arbitrator.
All documents and applications shall be submitted by the parties in writing or electronically. On the basis of these documents, the arbitrators shall hear the disputes and make decisions. In exceptional cases, arbitrators may initiate oral hearings. The exchange of documents is as follows:
- after the appointment of the arbitrators, the claimant files a claim;
- the respondent files a reply;
- the claimant files an objection to the reply;
- the parties may then ask the arbitrators for permission to exchange objections again (which often leads to delays in the case).
What is the procedure for challenging a first tier arbitration award?
The parties may appeal to FOSFA within 28 days from the date the award was made. A Board of Appeal consists of 5 arbitrators appointed by FOSFA. The respondent has 21 days to prepare a reply to the appeal. As in the first tier, the parties can then request permission from the arbitrators to exchange further explanations.
An appeal involves re-examination of the case, and the parties may submit new evidence.
The parties may also appeal the arbitration awards (both first tier and appeal) to the High Court of Justice in London. However, such appeals are only possible on a number of grounds set out in the Arbitration Act 1996 and successful appeals are rare.
How to enforce a FOSFA arbitration award?
If the losing party does not voluntarily enforce the award, the successful party may apply to the national court where the debtor is domiciled or where its assets are located. The procedure for the recognition of an award is formal — the court verifies that the arbitration clause and the parties have complied with it, as well as that the award is enforceable. If the award is recognised, it is referred to the enforcement authorities for recovery of the debtor's assets or other coercive measures against the debtor.
Fortior Law is an international dispute resolution firm with the main office in Geneva (Switzerland), and the offices in Rotterdam (the Netherlands), and Kyiv (Ukraine). The Ukrainian office and GAFTA and FOSFA arbitration practice are headed by Danil Hristich, who has been recommended by The Legal 500 in Dispute Resolution and International Trade in 2020. For more information, please contact [email protected], [email protected] or your usual contact at Fortior.