A Problem with Carpets and Shawls

Heather Douglas

General Information

Srinagar Products Export Ltd. (“SPE Ltd.”) and East West Home Imports Ltd. (“East West Ltd.”) have enjoyed a good business relationship for 10 years.

SPE Ltd. is based in Srinagar in the Kashmir Valley of India. It is run by Mandeep Kumar. The company specializes in the export of carpets and Kashmir shawls. All of the products exported by the company are either made in Srinagar itself or in the surrounding area. It has always been important to Mandeep to promote goods locally made in the Srinagar area outside of India — firstly, because the local goods are of excellent quality; and secondly because the region has suffered over recent years due to ongoing internal conflict. Too often, international business has chosen to overlook Srinagar because of safety concerns. Mandeep was therefore delighted when East West Ltd. made an initial approach about a possible business venture.

SPE Ltd. exports pure wool and wool and silk carpets and Kashmir shawls, including pashminas, to East West Ltd. The quantity of products and frequency of shipments has varied over the years, but for the last three years the arrangement has been that SPE Ltd. has made three shipments to East West Ltd. during each 12-month period — namely in March, July and November. Each shipment has comprised US$500,000 worth of carpets and US$300,000 worth of shawls. The contract with East West Ltd. produces an income of US$2,400,000 a year to SPE Ltd. and accounts for 70% of SPE Ltd.’s annual turnover. East West Ltd. makes payment for each shipment within 14 days of the arrival of the shipment in London.

East West Ltd. is based in Bristol, England. It is run by Alex Taylor. The company specializes in the import of home furnishings from Asia. Alex has a particular affection for India having spent time backpacking there as a student. Alex set up East West Ltd. after realizing there was a market in England for quality products made in Asia. The company focuses on the import of carpets and fabrics, including shawls. East West Ltd. has well-established business links with the two biggest chains of department stores in England and most of the upmarket home furnishing shops in London. This means that all the imported products are sold on to retailers and East West Ltd. does not sell any of its imports directly to the public itself. SPE Ltd. is not the only company East West Ltd. deals with in India but it is the main source of the carpets and shawls it imports because the quality is so good. And SPE Ltd. is the company with whom East West Ltd. has had the longest business involvement. The contract with SPE Ltd. accounts for 40% of East West Ltd.’s annual turnover of US$10 million.

Unfortunately, a dispute has arisen between the two companies. In March last year SPE Ltd. sent the usual shipment of carpets and shawls with a total value of US$800,000. The shipment arrived in London on 30 March. Under the terms of the contract East West Ltd. should have made payment in full by 13 April. However, on 11 April SPE Ltd. received a payment of only US$450,000. Mandeep waited for a few days before following this up, thinking that perhaps there had been a banking problem. However, as no further payment was received, SPE Ltd. e-mailed East West Ltd. to ask why there had not been payment in full for the shipment. East West Ltd. did not reply to the e-mail immediately. But on 20 April, SPE Ltd. received a reply. The e-mail said that of the payment of US$450,000, US$250,000 represented payment for the carpets and US$200,000 represented payment for the shawls. The e-mail further explained that questions had been raised by the buyers for the two department stores about the quality of the carpets and that was why the payment had been limited to 50% for the time being. As regards the shawls, upon inspection of the shipment it was clear that one-third of the shawls were damaged and could not be sold on, so that was why the payment was for only US$200,000. The e-mail ended with the suggestion that the matter be discussed further in May last year when Mandeep would be in England to attend the wedding of Alex’s daughter — Ellen.

Mandeep was very concerned by the content of the e-mail but decided it would be best to do as the e-mail suggested, and discuss the situation further when in England. However, Mandeep did check with the shipping company in Mumbai, in particular on the location of the containers on the ship, and was assured that the containers had been in the hold and not on the deck. The original contract between the two companies provides that SPE Ltd. is contractually responsible

[Page58:]

for the loading of the containers onto the ship in Mumbai and that East West Ltd. is contractually responsible for the shipment once the ship leaves Mumbai port.

Mandeep spent 10 days in England in May last year. This was the first time that Mandeep had been to England. The trip was very important for a number of reasons, including the fact that Mandeep felt very honoured to be included in such an important family occasion for Alex. During the 10 days Mandeep spent some time in London with relatives and several days in Bristol, which is where the wedding was held. Mandeep had brought some beautiful Srinagar products as wedding gifts for Ellen.

The discussion with Alex about the March shipment took place the day before Mandeep returned to India. Alex talked about the apparent problem over the quality of 50% of the carpets shipment. At first Alex was non-specific about the actual quality issues raised by the buyers, but when pressed said the buyers had questioned the wool/silk mix (which should be 60/40) and the type of colour dye used for the rejected carpets. SPE Ltd. has always maintained that the carpets it exports use only vegetable dyes and never chemical ones. The type of dye used is important as it significantly affects the price and overall quality of the carpets. A much higher price can be commanded for carpets made with vegetable dye. Mandeep sought to reassure Alex that the wool/silk mix was as it should be and that only vegetable dyes had been used.

With regard to the alleged damaged shawls, Alex told Mandeep that one third of the shawls were badly discoloured and so had no retail value. Mandeep assured Alex that the shawls had been delivered to the shipping company in perfect condition. Mandeep also showed Alex the documents from the Mumbai shipping company confirming where the containers had been stored on the ship during transportation. Mandeep suggested that if the shawls were damaged then this must have occurred during the voyage and was not the fault of SPE Ltd. Mandeep also pointed out that a matter such as this should be covered under East West Ltd.’s shipping insurance since East West Ltd. was contractually responsible for the shipment from Mumbai to London. So there was no good reason why SPE Ltd. should not be paid the US$100,000 balance due to it for the shawls. Alex took photocopies of the documents Mandeep had brought and said East West Ltd. would consider its position further. Mandeep left the meeting not really understanding where matters stood over the US$350,000 unpaid balance of the March shipment.

Mandeep returned to Srinagar feeling disillusioned about SPE Ltd.’s business relationship with East West Ltd. The situation improved a little in June when East West Ltd. confirmed by e-mail that it had made an insurance claim for the damaged shawls and that it would make a payment once the claim had been settled. But the e-mail did not say when that was likely to happen.

As July and the time for the next shipment approached, Mandeep considered what to do. Mandeep decided to send the shipment as usual having heard nothing from East West Ltd. to the contrary. So in July SPE Ltd. sent the usual US$800,000 shipment of carpets and shawls. The shipment arrived in London on 29 July. East West Ltd. should have made payment in full by 12 August. But by 13 August SPE Ltd. had received no payment at all from East West Ltd. SPE Ltd. sent an e-mail to East West Ltd. on 14 August asking why no payment had been received. In its response East West Ltd. referred to an earlier e-mail dated 28 June (never received by SPE Ltd.) stating that the July 2011 shipment should be delayed until further notice from East West Ltd.

By September, direct communications between the two companies had broken down completely. SPE Ltd. has received no further payments from East West Ltd. for either the March or July shipments and Mandeep has sought legal advice in respect of the US$1,150,000 owed to the company. East West Ltd. maintains it owes SPE Ltd. nothing for the July shipment and that it is being charged US$12,000 per month storage charges by London Docks Authority for the unclaimed shipment (calculated at 1.5% the value of the shipment). Alex has also sought legal advice on the situation and maintains East West Ltd. is entitled to claim the storage charges from SPE Ltd.

The lawyers for both parties have explained that the original contract between East West Ltd. and SPE Ltd. provides for the ICC Mediation Rules to be applied in the event of a dispute between the companies. The mediation will take place in Paris and will be attended by Alex and the lawyer for East West Ltd. and by Mandeep and the lawyer for SPE Ltd. Alex and Mandeep will both attend the mediation with full authority to settle on behalf of their company. In advance of the mediation, it was agreed via the lawyers for each company that there would be no shipment sent in November last year and neither company would make any claim against the other company in respect of the agreed non-shipment.

[Page58:]

A Problem with Carpets and Shawls

Heather Douglas

Confidential Information for SPE Ltd.

Requesting Party

You really need to get this dispute resolved. The company is facing a serious short-term financial situation as the contract with East West Ltd. accounts for such a high percentage of the company’s business.

You have no idea whether or not East West Ltd. wants to continue its business with you. This is something you need to find out early on in the mediation. But you do not want to give them the impression that you are desperate for the business to carry on, as this is not the case. While you were staying in London in May last year you visited the areas where you understood the upmarket home furnishing shops to be. You actually saw several of your carpets on display in shop windows. You were amazed at the prices they were being sold for. It made you realize just how big the market is in England for these goods and that SPE Ltd. should expand its market there — either beyond, or in place of, its business with East West Ltd. So before you left London you had meetings with a number of the retailers selling your carpets and shawls to get a better understanding of their market and how SPE Ltd. might meet their needs. There have since been follow-up discussions with these retailers and you are optimistic that definite orders will soon follow.

You plan to make it clear to East West Ltd. that, although you are prepared to discuss the idea of ongoing business with them, you do have other options. However, you do not want to be too specific about those other options as you do not want East West Ltd. to do anything in England that could upset things for you there.

You intend to be firm about payment of the outstanding monies due to the company. The US$350,000 still due from the March shipment should be paid in full together with interest at the rate of 5%. If you receive this payment, then this will mean that SPE Ltd. can pay the balance owing to the people who made the carpets and shawls for the July shipment. This is your first priority as a lot of the people involved make the products exclusively for SPE Ltd. and so are reliant on you for their livelihood. You want to make sure that East West Ltd. understands this and the effect that the non-payment has had upon these people. You were able to pay the carpet and shawl makers for the March shipment from the payment East West Ltd. made in April last year. But you have only been able to pay the makers 50% of the amount due to them for the July shipment.

You do not believe that there was anything wrong with the quality of the carpets in the March shipment. In fact, during June and July you made a point of visiting each of your carpet makers to check for yourself the dyes used and the wool/silk ratio. You found nothing to cause you any concern. East West Ltd. has not provided any more information other than that Alex provided in the discussion after the wedding. So the balance of US$250,000 for the carpets should be paid in full with interest. You believe the insurance claim for the damaged shawls must have been dealt with by now and that East West Ltd. should also be able to pay the US$100,000, plus interest, still owing.

With regard to the payment due for the July shipment, you are prepared to be more flexible over how this is resolved. You do not yet know why East West Ltd. wanted the shipment delayed. You are prepared to wait and see what Alex says about this at the mediation. As the carpets and shawls are now in London, if East West Ltd. does not want any, or all, of the shipment itself, then you would like it to assist SPE Ltd. in finding other buyers for the shipment. You believe it is likely your new business contacts in London might be interested in some of the shipment, but they would not want the entire quantity.

SPE Ltd.’s accountant has told you that the company needs to recover at least 50% of the value of the July shipment to avoid the Srinagar Bank calling in its US$500,000 loan to the company. You have to attend a meeting with the bank, at the bank’s request, a week after the mediation.

You will attend the mediation with an open mind. Although you have been advised that SPE Ltd. has a strong legal case in respect of most of the outstanding monies due to it, your lawyer

[Page60:]

has explained there may be a problem over the damaged shawls. This is because the wording of the original contract on liability for shipment is not clear enough. It does not explain which company is responsible for the shipment after the containers have been loaded onto the ship but before the ship actually leaves the port. So your lawyer has warned you that if the insurance claim is rejected, SPE Ltd. might not recover in litigation all, or any, of the amount owing for the shawls. Of course you will not reveal your concern about this in the mediation. Instead you will encourage Alex to agree to pay at least US$50,000. Given the uncertainty you would much rather settle matters out of court. You hope that Alex will attend the mediation in the same frame of mind. Sadly, you feel that there are a lot of bridges that need mending in your business relationship now.

[Page61:]

A Problem with Carpets and Shawls

Heather Douglas

Confidential Information for East West Ltd.

Responding Party

Last year should have been a great year for the company and for you personally with the wedding of your only daughter, but it was neither. With the improvement in the economy East West Ltd. had planned to increase significantly its imports of products from India and had intended to enlist the help of Mandeep in doing this. However, this all changed following your receipt of the March shipment from SPE Ltd. When you inspected the carpets included in the shipment you did not initially see any problems. But when you took a sample of the wool/silk mix carpets to the buyer for each of the department store chains, you received the same reaction: both buyers questioned the percentage of the wool/silk mix and both expressed the view that the colour dye used in the carpets was chemical and not vegetable. Since the meeting in May with Mandeep you have had the carpets further analysed and have had the wool/silk mix confirmed as being 60/40. The analysis also confirmed the colour dye as being vegetable and not chemical. So you do not understand why the buyers made these allegations. You received the analysis in late July, but have not yet had an opportunity to follow this up with the buyers due to everything else you have had to deal with. It seems, therefore, that East West Ltd. has no good reason not to pay the US$250,000 balance due to SPE Ltd.

The other problem with the March shipment was the damaged shawls. After the meeting with Mandeep in May and having seen the documents from the shipping company, you accepted that it seemed East West Ltd. would have to bear responsibility for the damage rather than SPE Ltd. The insurance company has taken a long time to deal with the claim and has asked many questions relating to shipment and how the shawls are transported onto and off the ship. Then last week you heard from the insurance company that the whole claim has been rejected. The insurer is not satisfied that the damage to the shawls has been shown to have occurred when East West Ltd. was contractually responsible for the shipment (i.e. once the ship had left Mumbai port). Your lawyer says the insurer is relying on the ambiguous wording of the original contract over liability for the shipment once the goods are on the ship but before the ship leaves Mumbai port. Your lawyer says it is difficult to anticipate how a court would interpret the contract on that point. You will tell Mandeep about the insurance claim at the mediation and emphasize the reason for the insurer’s rejection. You believe that both companies should share responsibility for the damaged shawls, but not equally, and you will strongly resist attempts by Mandeep or Mandeep’s lawyer to make East West Ltd. agree to pay US$50,000 or more for the shawls.

Additionally, on 16 June last year your whole world was turned upside down when you received truly awful news. Your daughter was involved in a terrible car accident and was very badly injured. She was in a coma for three weeks. Her spine is fractured and the doctors do not think she will be able to walk again.

As far as you are concerned, Ellen’s well-being must be your first priority. What that means for East West Ltd. is that your plans to expand the company cannot go ahead. You need to simplify the business and you feel this can be best achieved by limiting your focus to one product — carpets. So you need to change the current arrangement with SPE Ltd. with immediate effect by cancelling the import of shawls and by reducing the quantity of carpets. You regret having to do this as you know how important the contract with East West Ltd. is to SPE Ltd. You would like to help Mandeep in some way, to reduce the impact of your decision on Mandeep’s business, but you do not know how Mandeep will react to the news you have to give in the mediation. You fear an offer to help may not be welcome.

Talking about Ellen’s accident and its effect on the business is going to be difficult for you. You have not yet decided at what point in the mediation you will do this.

You accept that the problems arising from the July shipment are really of East West Ltd.’s making. You had intended to ask for the July shipment to be delayed once you knew the results of the analysis of the carpets would not be available until the end of July — but you forgot all

[Page62:]

about this after Ellen’s accident. The e-mail dated 28 June was never sent to SPE Ltd. You have since found it in East West Ltd.’s drafts folder. You do not really have any intention of asking SPE Ltd. to reimburse East West Ltd. the storage charges by London Docks Authority. Your lawyer has advised you there is no legal basis upon which East West Ltd. can do so. What you need to do at the mediation is to sort out with Mandeep how to deal with the July shipment with as little financial cost to East West Ltd. as possible. You recognize that the July shipment should fall outside any new agreement reached with SPE Ltd., however, given your circumstances you can only offer to accept 25% of the shipment of carpets and shawls to sell on to your usual retailers.

It is not going to be easy for you to discuss any of the above matters at the mediation. You really need a lot of understanding from Mandeep. You hope that the business and personal relationship you have built up with Mandeep over the years will encourage this.

[Page63:]

A Problem with Carpets and Shawls

Colin J Wall

Case Analysis

This is a role-play where there is a close personal relationship between the parties and a past history of successfully working together for a number of years. The dispute arises due to damage caused to a shipment of shawls and questions as to whether the carpets are of the specified quality. This results in a part-payment for the goods and a claim for the balance due.

Mandeep who represents SPE Ltd. is based in Srinagar, in India, and Alex who represents East West Ltd. is based in Bristol in UK. Mandeep supports the local community by selling carpets and shawls made by them and Alex sells those products on to retailers in the UK. Initially, Mandeep is at a loss to know why s/he has only received part payment of the shipment of goods but is content to wait for an explanation, when s/he attends Alex’s daughter’s wedding in UK. This enables Alex to explain first hand to Mandeep the problems with the goods and why part-payment has been made. Alex explains the problems to Mandeep and states that a third of the shawls appear to have been damaged en-route and are thus the subject of an insurance claim and questions have been raised by Alex’s retail buyers as to whether the carpets are 60/40 wool/silk mix and whether vegetable dyes have been used in their manufacture. This exchange of information enables both parties to carry out their own investigations to ascertain exactly what has happened. The results of these investigations enable the parties when in subsequent mediation to gain momentum towards a settlement.

To add a further layer of complexity to the dispute, the July shipment of carpets and shawls is sent as usual from India to UK but results in non-payment of the goods and a counterclaim for storage and this adds substantially to the sums of money in dispute. This in turn leads to a breakdown in communications between the parties and to each of them seeking legal advice. Part of that advice is that the disputes should be mediated.

The fact pattern in this mediation is such that it makes sense for Alex to speak first in the plenary session because Alex’s information would go a long way to allaying Mandeep’s concerns on most if not all issues in dispute. It is however normal for the Requesting Party to make the first presentation in mediation but if the mediator has held preliminary meetings with the parties or telephone conference calls, s/he may have gained sufficient information about the disputes to suggest that Alex speak first. Notwithstanding who does speak first, the information exchange in plenary session will add a greater understanding as to why payments have not been made and the validity of the counterclaim. This should enable a settlement to be reached.

There is also the potential for the parties to do business together in the future but on different terms to those that have been used in the past. In any settlement agreement a wise mediator would also suggest that the ambiguous wording in the original contract on liability for shipment should be clarified, so as to prevent disputes arising in the future on the same subject.

[Page64:]

A Problem with Carpets and Shawls

Greg Bond

Commentary for Training

the Mediator as Coach

Mediation is a decision-making process which leaves the decisions firmly with the parties. Except for decisions about the process itself, which the mediator will usually make, all matters of substance are in the hands of the parties. This is what makes mediation so different from arbitration and litigation and also what makes it an attractive alternative. In this role-play, the parties need to make decisions that arbitration and litigation would take from them. These decisions are too important and too personal for this to happen.

Mandeep is not sure whether East West Ltd. and its Managing Director Alex Taylor is the right UK distributor for SPE Ltd. There have been allegations about poor quality, which Mandeep cannot understand, and there has been poor communication. Mandeep has also seen that the carpets exported by East West Ltd. are on sale at high prices and has begun negotiations with retailers that are likely to be successful. In spite of the auspicious start to business between SPE Ltd. and East West Ltd. and the friendly relations between Mandeep and Alex, Mandeep now has to decide if s/he wishes to continue to do business with SPE Ltd. and, if so, under what conditions.

Alex also has a decision to make. Alex knows that East West Ltd. has handled the complaints about quality poorly, and knows that some recompense is owed to SPE Ltd. Alex also knows that communication was poor. The dispute about quality and outstanding payments is not Alex’s only or even primary concern. Alex’s main worry is his/her daughter. The business needs to be simplified. Perhaps settling the outstanding financial issues and then simplifying to a smaller order of just carpets is the way forward?

How can the mediator help? In this role-play, the mediator can facilitate decision-making on what to talk about within the mediation as a way to facilitate decision-making on the pressing issues the two parties face. If Alex is able to explain to Mandeep that worry for his/her daughter has made business difficult, then any personal mistrust between the two parties is likely to be completely allayed. Alex can do this with the assistance of the mediator. This does not mean that the mediator speaks for Alex, but that the mediator can first talk privately with Alex and find out what Alex needs to say and coach Alex on how best to say it. When Alex does speak to Mandeep, if s/he decides to do so with the mediator present, just this presence will be supportive and protective.

The mediator can also assist Mandeep, in private if necessary, in making the right decisions about how to tell Alex that s/he wishes to reduce the volume of business between SPE Ltd. and East West Ltd. Equally, when the discussion turns to this matter, the mediator can help Mandeep to be frank without any fear of distressing Alex.

This mediation is likely to be emotional. The emotions can facilitate the business decisions that the parties need to make. The mediator can coach the parties on how best to talk openly with each other and thereby also facilitate the right business decisions. In training, mediators can practice the art of coaching, while the students playing the parties can ask for the mediator’s assistance. A Sticky Printing

[Page65:]