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Note: Prolat S.R.L. (Buyer/Applicant) and Toyota Tsusho Sugar Trading Ltd. (Seller/Beneficiary) contracted for the sale of approximately 10,000 MT of sugar with the shipments to be broken up in varying amounts. Through the course of performance, the parties' contract was renegotiated and eventually incorporated formal addenda containing price and order changes.

The initial contract offer called for Seller/ Beneficiary to receive payment in the form of 10% cash deposit and an LC for the remaining balance. However, Buyer/Applicant's agent instead proposed payment by a bank guarantee in favor of Seller/ Beneficiary for EUR 3,800,000 with respect to the first shipment of 8,000 MT of white sugar. The contract, after undergoing further negotiation, was agreed to by both parties, providing that payment be made within 60 days of bill of lading date after Seller/Beneficiary presented the commercial invoice and shipping documents.

Accordingly, Buyer/Applicant obtained a bank guarantee issued by Banca Nazionale del Lavora SpA (Guarantor) in favor of Seller/Beneficiary. Both the contract between the parties and the subsequent bank guarantee for the final amount of EUR 4,838,115 were subject to English law, and the contract included an arbitration clause providing for arbitration under the rules of the Refined Sugar Association in the event of a dispute.

Thereafter, Seller/Beneficiary received the original guarantee by mail and began shipments. The parties later re-negotiated the contract for the second shipment of 2,000 MT of sugar. Buyer/Applicant requested a later date for payment of the purchase price, to which Seller/Beneficiary agreed after negotiating increases in the price and the subsequent bank guarantee (increased to EUR 4,838,115). Once this agreement was reached and Seller/Beneficiary received notice of the guarantee increase, Seller/ Beneficiary released the remainder of the first delivery to Buyer/Applicant.

After Seller/Beneficiary received formal notice of the increase from Buyer/Applicant, it attempted to verify the guarantee amount with the Guarantor and "it emerged that the bank guarantee and amended guarantee were unauthorised forgeries," which Buyer/ Applicant denied.

To determine its right to proceed against Buyer/ Applicant to recover losses from the dissolution of their contract (including the purchase price of one shipment, the damages resulting from a 'returned' shipment, and the costs incurred from the repudiation of the contract) under Section 5 of the Arbitration Act 1996, Seller/Beneficiary applied to the court for a determination on substantive jurisdiction to avoid an appeal from an arbitral tribunal decision on those grounds.

Buyer/Applicant claimed that it should not be bound to the contract and the subsequent arbitration clause because the agreement was negotiated and signed by a third party who it claims did not actually act in Buyer/Applicant's interest, but rather on Seller/ Beneficiary's behalf. However, the court found that the evidence directly contradicted this defense.

The High Court of Justice, Queen's Bench Division, Commercial Court, Cooke, J., found that because the parties were adequately represented by their agents to form a binding contract that included the arbitration clause, the arbitral tribunal had the jurisdiction to decide the substantive question of whether the guarantee was forged.

[ALC]

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