In this article we will explain how Gafta arbitration works and how much it costs, and how to improve your chances of not only winning, but also recovering money from your debtor.
What is Gafta?
Gafta is more than just arbitration. It is an international trade association (Grain and Feed Trade Association) established in 1878 (at that time called the London Corn Trade Association) whose main purpose is to protect the interests of grain market participants. Gafta is headquartered in London and has its offices in Geneva, Kyiv, Beijing, and Singapore. Gafta performs many functions, but the main one is drafting of standard pro forma grain trade contracts (which greatly simplifies and speeds up the contracting process).
Even if the seller and the buyer are in different countries, thanks to the pro forma they do not need to agree all the terms again each time, but simply agree on the most important ones (goods, price, quality, basis and delivery period, etc.) and make a reference to a specific pro forma, which will contain already more detailed terms.
According to the Association's statistics, more than 80% of the world`s grain is shipped under contracts that are based on Gafta pro formas. The most common pro formas in the Black Sea region are Gafta 48 (delivery in bulk on CIF), Gafta 49 (delivery in bulk on FOB), Gafta 78 and 78UA (rail and road). Gafta 88 is often used also for deliveries in containers.
All pro forma contracts contain a provision that all disputes are settled by Gafta arbitration under English law.
What is the time limit to make a claim?
The time limit at Gafta is one year, which, depending on the terms of delivery, shall be calculated from either the date of the bill of lading, the date of discharge, or the end date of the delivery period. If the dispute is about quality, and the arbitrators need to examine samples, the time limit is 21 days. The notice of arbitration must be lodged within this time limit. The claim itself must be lodged within one year of the notice of arbitration. The parties may, however, apply for an extension for a further year. In this way, the claim can be postponed for a maximum of 6 years.
Is Gafta arbitration expensive and complicated?
According to Association`s statistics, the average cost of a first tier arbitration award is £14,654.65. The amount is calculated simply: the more time the arbitrators spend on the dispute, the higher the final bill will be. This may seem expensive, but by comparison, at the London Court of International Arbitration (LCIA) the average cost of arbitration is US$97,000. Therefore, Gafta is an inexpensive English arbitration.
Regardless of the final cost of the arbitration, the claimant will be asked to pay a deposit as soon as the claim is filed. If the case is heard by a tribunal of 3 arbitrators, the amount of the deposit will be:
- £12,000 if both parties are members of Gafta;
- £13,500 if only one party is a Gafta member;
- £15,000 if neither party is a Gafta member.
If the case will be heard by a single arbitrator:
- £8,000 if both parties are Gafta members;
- £9,700 if only one party is a Gafta member;
- £11,400 if neither party is a Gafta member.
The final cost of the arbitration may be more or less than the deposit paid. If it is more, the claimant will have to pay more. If it is less (e.g. when the parties come to an amicable agreement), part of the unspent deposit may be refunded.
Here is an example. We made a claim for non-payment for goods, agreed a single arbitrator and paid £8,000 as a deposit. After filing the claim, the defendant got in touch with a promise to pay in the next few days. After receiving payment, we informed the arbitrator and asked him to close the case. Gafta refunded us £7,000 of the unspent deposit.
The arbitration procedure is fairly straightforward because:
- the arbitration rules fit on 15 A4 pages. You can ask your lawyer to show you the civil procedure code of your country for comparison;
- by default, there are no oral hearings in arbitration - it is no need to travel to London and the decision is made on the basis of documents submitted by email.
Who covers the costs of the arbitration?
Initially, all costs related to the dispute are borne by the claimant. If the claimant wins, the costs are borne by the losing party.
Can the legal costs be recovered?
The Gafta Arbitration Rules provide that legal costs can only be recovered if the parties so agree. Usually, there is no such agreement between the parties, so legal costs cannot be recovered.
What is the procedure for adjudicating a dispute?
Gafta provides for several variants of the arbitration rules: Gafta 125 and Gafta 126. Gafta 125 is usually applied, while Gafta 126 applies to simple disputes and provides for an expedited procedure. Since rules 126 are less frequently used, the following will refer to the standard rules of Gafta 125.
In the first stage, the parties appoint arbitrators, and the plaintiff files a claim. After the deposit is paid, Gafta gives the defendant 28 days to prepare a reply to the complaint, and then the plaintiff has 21 days to respond to the reply. However, the process does not usually end there. The arbitrators may, at the request of either party, give the parties another 'round' to exchange explanations. Normally, the period for clarification is 7-14 days. However, there is no limit to the number of such rounds, which may cause the arbitration to be delayed due to the complexity of the case or the abuse of the parties.
Regarding the process, at Gafta all correspondence in the case is handled through the secretary of the Association. The parties do not communicate directly with the arbitrators.
There are no oral hearings at Gafta — the case is heard only on the basis of written materials submitted by the parties. The parties may request an oral hearing, but it will only be held if the tribunal considers it necessary for the case. In practice, this is very rare. Due to the pandemic, Gafta has made provision for virtual oral hearings, which significantly reduces the cost of the process.
Can I challenge the award of Gafta?
Gafta has an appeal stage, and any party can challenge the first tier arbitration award. The appeal provides for a full review of the case and the parties do not have to justify the grounds of appeal.
The appeal procedure is identical to the procedure at first instance, with a few exceptions. The board of appeal consists of three arbitrators if the first tier arbitration award was made by a sole arbitrator and five arbitrators if the first tier award was made by a tribunal of three arbitrators.
The parties also have a right to challenge the award before the High Court of Justice in London. However, in this case, the decision can only be challenged on limited grounds and such challenges are rarely successful.
What to do after the award was made?
Once the award is enforceable, it has to be recognised and enforced either at the place of registration of the company or at the location of the debtor's assets (e.g. in the country where the debtor has a bank account). Normally, the recognition procedure involves filing a certified judgment and contract with the local court to verify compliance with the formal requirements. At the recognition stage, the court does not review the award on the merits. The award is then handed over to the executor to seize assets and enforce recovery against the debtor.
What if the debtor hides all assets until the award is enforced?
Remember that Gafta is not a panacea for all problems. Before going to arbitration, it is advisable to take a few simple steps to determine the feasibility of the process:
- due diligence - as practice shows, many people often neglect to at least check the company through Google, that helps avoid trouble 50% of the time.
- interim measures.
Let's talk about the latter in a bit more detail. Under the Gafta pro forma, which is incorporated into the contract, the place of arbitration is London. On the face of it, this may seem like a minor clause, but in practice it has serious implications.
Because the place of arbitration is London, the claimant may apply to the High Court of English and Wales for interim measures, to secure their claim. One specific type of interim measure is a “worldwide freezing order” (known as a WFO), which "freezes" the debtor's worldwide assets for the amount owed. Even more impressive is that directors and sometimes beneficiaries can be liable to imprisonment if they fail to comply with such an order. In tandem with a WFO, it is also common for an applicant to obtain a disclosure order, under which the debtor is required to disclose all his assets (the consequences of violating this order are similar to a WFO).
The main advantage of the WFO is that it can be obtained before the claimant goes to arbitration, and the hearing where the court will decide whether to issue the WFO is held without the debtor being present.
The WFO is particularly useful in cases of fraud, where there is a high risk of dissipation of assets. For example, when the money for the goods has been paid but the goods have not been received (such as with irrevocable letters of credit, the bank will not have the right to reject the payment if the documents for payment have been presented). It is crucial to act as quickly as possible in such situations. Since it takes several days to transfer money from the sender's bank account to the beneficiary bank account, the applicant has all chances to "freeze" the money in transit.
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's 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], s[email protected] or your usual contact at Fortior.