We’re thrilled to introduce the first instalment of ASAP Agri's new interview series with AGA Partners, "Arbitration Wisdom: Top 10 Awards in Commodity Arbitration." In our debut article, we dive into an interesting case from 2021 involving Brazilian soybeans that were severely damaged due to delays and storage issues. How was the dispute between the buyer and the seller resolved, and what caused the damage to the cargo? The questions are answered by Pavlo Lebedev, Counsel at AGA Partners, all the details are available here: 

ASAP Agri: Pavlo, tell us please the core of the problem.

Pavlo Lebediev: In March 2021, a Ukrainian oil producer purchased a Panamax vessel of Brazilian soybeans for crushing. After a Brazilian seller shipped the cargo at Barcarena port, the vessel arrived in Ukraine where the Ukrainian company faced problems with import. In this situation, it resold the cargo to Turkiye, after the vessel idled near Pivdennyi port for almost a month.

Upon arrival in the Turkish port of Aliaga, the surveyor revealed that the cargo had completely deteriorated. In this situation, the seller relied on the quality of goods at loading in Brazil, which was contractual, save for a “slight” deviation of 0.58% in moisture content.

Although the Turkish buyer refused to pay the full price, it attempted to settle the dispute by making a without prejudice offer to accept the cargo with a 50% discount. The Ukrainian seller rejected the offer and, instead, declared the buyer in default for refusing to pay for the cargo.

As the market prices significantly increased, the Turkish buyer instructed AGA Partners to initiate arbitration to recover losses.

ASAP Agri: What did arbitrators decide?

Pavlo Lebediev: They decided in favour of the Turkish buyer because of the following findings:

 o   Moisture limits represented a condition of the contract. Even a deviation of 0.58% entitled the buyer to reject the goods. 

 o   The buyer did not waive their right to reject the goods by offering a 50% discount. The correspondence was protected by a ‘without prejudice’ mark.

 o   There were two separate voyages – from Brazil to Ukraine and from Ukraine to Turkiye. The Ukrainian seller had to test the cargo in Ukraine and issue the documents for the second voyage from Ukraine to Turkiye but failed.

 o   As the cargo was not analysed in Ukraine, the quality was determined by tests in Turkiye which did not show contractual results.

 o   The Ukrainian seller did not tender contractual certificates for the voyage from Ukraine to Turkiye and, therefore, had no right to payment. The seller’s default declaration was wrongful.

The result: the Turkish buyer was awarded damages of around USD 1 million, plus legal and arbitration costs.

ASAP Agri: What was the main mistake of the seller which led to such a result?

Pavlo Lebediev: The mistake was made while preparing the documents. The Ukrainian seller had to prepare two sets of documents for two voyages – (1) from Brazil to Ukraine and (2) from Ukraine to Turkiye – and then he would have chances to receive compensation from the insurance company. 

Also, the Ukrainian buyer did not synchronize the provisions of his purchase and sales contracts (they had different moisture indicators). As a result, the Turkish buyer had grounds to claim compensation from the Ukrainian seller, but the latter had no such right against its Brazilian supplier. 

ASAP Agri: what key takeaways a business may get from this case?

Pavlo Lebediev: There are three main lessons a business can learn:

Lesson 1: Quality. Moisture is an essential quality parameter for soybean. Even relatively minor deviations might allow a buyer to reject the cargo.

Lesson 2: Documents. The payment documents should strictly comply with the contractual requirements. The discrepancies might prevent the seller from claiming the price. So, draft the list of shipping documents prudently.

Lesson 3: Settlement offers. Use 'without prejudice' marks on genuine settlement offers to shield them from being disclosed in arbitration. But remember, this protection is only effective if the correspondence contains a real settlement offer.

 

Stay tuned for more insights from recent arbitral awards that could impact your business practices. Understanding these nuances can be the difference between a smooth transaction and a costly dispute.