In 1999, a company incorporated in the British Virgin Islands (Claimant) and a company incorporated in Gibraltar (Respondent) entered into a contract of sale by the former to the latter of a chemical product to be shipped from Russia to Pakistan. Disagreements arose between the parties over the quality and price of the goods delivered in several shipments. The parties' agreement, which was governed by English law and subject to Incoterms 1990, included the following price clause: 'The price will be fixed by both parties for each cargo or for 2 cargoes if necessary. The price will be fixed on FOB basis to which it should be added the freight indication, the financial cost such as L/C charges, confirmation fees, inspection, insurance, [Respondent's] commission. The CFR price agreed with the Pakistani importer will be communicated to the Seller, and prior to closing the deal, the Seller should give the green light to the Buyer. The Seller and the Buyer agree to work on open book basis. The commission of [Respondent] is fixed at 3% on FOB basis.' Respondent accused Claimant of breaching this clause by failing to offer FOB prices, to which Claimant replied that the only practical way of arriving at an FOB price was to work backwards from the CFR price at which Respondent could sell to a Pakistani importer. A fall in market prices made the CFR price uncompetitive, leading Respondent to cease ordering the product from Claimant.

'36. Up to the time of the Exclusivity Agreement, [Claimant]'s practice seems to have been to fax firm offers to [Respondent] in Moscow setting out quantities of [product] it was prepared to sell for shipment to Pakistan . . .

37. From the time of the Exclusivity Agreement, however, [Claimant] ceased to send written offers of [product] to be shipped to Pakistan. According to [Respondent's witness], thereafter:

Everything was agreed upon with them by phone, followed by [Respondent] Moscow faxes confirming the agreements. . . .

Though in fact, as will appear, [Claimant] did make further written offers in early 2000.

38. Perhaps more important, as [Respondent's witness] makes clear:

8. For Pakistan CFR indications became more important and actually they were the basis for fixing the deals, not FOB indications. This happened through natural course of affairs for the following reasons:

1) [Product] market in Pakistan is a buyer's market and CFR indications from the buyers would determine what corresponding FOB could be achieved;

2) At time of fixing the price for future shipments it was not known, for example, what the exact freight rate would be, as vessels are chartered closer to shipment date, not price fixing date, therefore it was impossible to establish exact FOB price at time of deal fixing. This went in conformity with the Exclusivity Agreement and suited all parties as [Respondent] were supposed to convey to [Claimant] CFR price levels, which it did. In addition [Respondent] provided freight rate evaluations by phone and in writing … and other costs' structure … that enabled [Claimant] to get FOB price idea and to make a decision on it through their attitude towards CFR quotations. When everything was agreed upon or when previous arrangements were adjusted, [Respondent] Moscow would send a written notice on that to [Claimant] . . .

In other words, whether shipments could be made under the Exclusivity Agreement was dictated by whether the CFR price at which [Respondent] could sell cargoes to customers was sufficient to enable [Claimant] to quote a commercially viable FOB price.

. . . . . . . . .

139. [Claimant] never undertook to offer products at competitive prices. If it had done, it might have been promising to do the impossible. Likewise [Respondent] never undertook to take 150,000 metric tonnes whatever FOB price [Claimant] might offer. If it had done, [Respondent] might have been promising to buy when it could only sell at a loss. What the parties agreed was that [Respondent]'s obligation to take 150,000 metric tonnes per year was conditional upon [Claimant] offering that quantity at competitive prices.

(a) Although clause 5 initially speaks of the freight indication, cost of L/C charges, confirmation fees, inspection, insurance and [Respondent's] commission being added to the FOB price, it then goes on to provide for the CFR price to be communicated to the Seller prior to closing the deal. In reality, of course, what this must mean, and in practice did mean, is that [Respondent] must find a Pakistani importer and then see if [Claimant] can offer an FOB price which, when the other elements (including [Respondent]'s commission of 3%) are added to it will produce a CFR price that the importer is prepared to pay. If such a price cannot be agreed there can be no sale. The Agreement entitles [Respondent] to its commission, and [Respondent] is not obliged to buy where it cannot make that commission, a fortiori where it must sell at a loss.

(b) Moreover, clause 16 provides that [Claimant]'s obligation to deal exclusively with [Respondent] is dependent upon [Respondent] taking the quantity of product provided for in the Agreement; that, in turn, is dependent on [Claimant] offering that product at "a competitive price". In context, a competitive price must mean, not competitive in the sense of competitive with the prices offered by other suppliers of [products], but competitive in the sense of enabling [Respondent] to take 150,000 metric tonnes per year in lots of 20,000 to 25,000 metric tons and reselling those lots at CFR prices able to cover the specified costs and charges and its own 3% commission.

Reading the Agreement as a whole, I am clear that [Respondent] is obliged to buy 150,000 metric tonnes per annum in lots of 20,000 to 25,000 metric tonnes where the lots offered are at a competitive price in the sense set out above. If [Respondent] is only offered less than 150,000 metric tonnes at prices that are competitive in that sense, it is not obliged to take the balance at uncompetitive prices, simply to make up the full quantity. [Respondent] is not obliged, in order to fulfil the contractual amount of 150,000 metric tonnes to take [products] at FOB prices that will not enable it, on resale, to recover the costs, charges and commission specified.

140. It follows that [Respondent] was not in breach of its obligations under clause 2 of the Exclusivity Agreement in failing to take the full 150,000 metric tonnes during the year to 28th February 2000. It was not offered enough at prices that were, in the relevant sense, competitive.'