Case No. Moot 7
Feed Processing Corp.
Grain Dealers, PLC
PROCEDURAL ORDER NO. 2
In accordance with Procedural Order No. 1 a number of requests for clarification have been received by the Secretariat of the Tribunal. Since many of the questions overlapped, it has not been possible to repeat them as asked. Instead, they have been re-stated to cover the several different forms of essentially the same question.
Applicable Legal Rules
1. Have either Danubia or Mediterraneo entered any reservation to the Convention?
2. What definitions of FOB are in use in Danubia and Mediterraneo or in the grain trade from Danubia?
Trade terms, such as FOB, used in the grain trade from Danubia are interpreted according to INCOTERMS 1990.
3. What is the law in Danubia and Mediterraneo governing agency?
The question is too broad to give a complete answer. However, both Danubia and Mediterraneo are party to the Convention on Agency in the International Sale of Goods http://www.unidroit.org/english/conventions/c-ag.htm
4. Is there a doctrine of impracticability in the contract law of Danubia that would permit allocation among regular customers not under contract?
The domestic contract law of neither Danubia nor Mediterraneo would be applicable so long as the matter in question was governed by the CISG. Performance of the contract, or exemption from the obligation to perform, would seem to be a question governed by the Convention.
Conclusion and Terms of the Contract of Sale
5. Was it normal for IMPORTS and DEALERS to conclude a contract by telephone with subsequent written confirmation.
Although it did not always happen that way, such a procedure was common.
6. Were provisions of the Standard Conditions ever varied in contracts between IMPORTS and DEALERS, other than that partial shipments were not allowed?
7. What was meant in the Statement of Defense by referring to PROCESSING as the "ultimate buyer" or the "ultimate party in interest"?
It simply meant that IMPORTS would be purchasing the grain in its own name at the request of one of its customers to which it would resell the grain. DEALERS would know that that customer would receive the grain and would be the party most affected by any failure of DEALERS to deliver. DEALERS knew that PROCESSING had not been purchasing directly for importation to Mediterraneo.
8. Did IMPORTS make any other contracts with DEALERS in 1998?
Yes, there had been several contracts for various grains prior to 16 February 1998, all of which had been concluded by Mr. Dean for IMPORTS. The first contract entered into subsequent to that date was on 2 March 1998, at which time DEALERS learned that Mr. Dean was working for PROCESSING rather than for DEALERS.
9. As of when did PROCESSINGís purchasing department begin to make direct import contracts and when did DEALERS learn of it?
Direct importation by PROCESSING began on 16 February 1998. DEALERS learned that PROCESSING would be doing its own importing through a press announcement on 28 February 1998, the day the sale of the stock in IMPORTS by PROCESSING was completed.
10. What was the reason that Feed Processing Corp. had wished to vary the Standard Conditions of Sale so that partial shipments were not allowed?
There would be an increase in shipping costs for partial shipments.
11. Why did PROCESSING insist on full delivery in its letter of 21 May 1998 and subsequently?
It was a combination of factors. DEALERS had contracted to deliver the full amount and PROCESSING did not believe that DEALERS had a valid excuse not to fulfill its contractual obligation. If PROCESSING had accepted the 4,800 tons, it would have not known whether it would receive the additional 1,200 tons at a later date. Not too much can be made of that, however, since it could have procured the missing amount from another source and, if the 1,200 tons had become available later in the year, it could have used it. In either case, there would have been extra trouble and expense involved. Although normally a buyer in such a case would take the proferred 4,800 tons and claimed for the extra costs, essentially the same legal arguments would have arisen in the dispute over the 1,200 tons as have arisen in this dispute over the 6,000 tons. PROCESSING saw no reason to accommodate DEALERS under those circumstances.
12. Did PROCESSING have an urgent need to have all 6,000 tons shipped by July 31, 1998?
PROCESSING had a need for the wheat, but the need was not "urgent". The additional 1,200 tons of wheat could have been purchased from other sources. As it turned out, the business need was fulfilled by the 6,000 tons of wheat purchased from Equatoriana, albeit at a higher price.
13. Did the contracts between IMPORTS and DEALERS entered into prior to 19 February 1998 contain an arbitration clause? If so, did such a clause provide for joinder of third parties?
All the contracts were concluded on the basis of form contracts of the Danubia Feed and Grain Association, which were used for all sales by the various grain dealers in Danubia, all of which (including DEALERS) were members of the Association. All those form contracts have the same arbitration clause found in clause 13 of Standard Conditions No. 5, the form used in this contract. Clause 13 contains the complete arbitration provision in the form.
14. To whom did DEALERS send the originals of their written communications in past years when the contracts were concluded with IMPORTS but the shipment was directly to PROCESSING?
The originals were sent to IMPORTS.
15. Had PROCESSING ever contracted with DEALERS in the past?
16. Had PROCESSING ever opened a letter of credit in favor of DEALERS in the past, or made a direct payment to them?
No. Letters of credit had always been opened by IMPORTS.
17. Does Standard Conditions of Sale No. 5 contain any provision on assignment of rights?
18. What was the purpose of the 10% added to the contract price in the letter of credit?
This is normal practice called for by the Uniform Customs and Practice of Documentary Credits (UCP 500). It assures that the credit will be large enough to cover any possible additional expenses properly chargeable to the buyer. For example, a contract for a certain amount of grain, e.g. 6,000 tons, would have an allowable margin of a certain percentage more or less and still fall within the contract amount. Therefore, the actual shipment weight might be 6,010 tons, and in that case the buyer would be charged for 6,010 tons.
Danubia Export Control Regulations
19. Could DEALERS have had any recourse under the law of Danubia against the allocation of only 80% of the amount for which they were allowed to apply?
There are recourse procedures, but there was no apparent reason that a recourse would have been successful.
20. Is DEALERS a government or government controlled corporation?
No, it is a privately owned corporation.
21. Did the Danubia export control regulations require DEALERS and other exporters to allocate wheat to its regular customers?
No. The allocation of 80% of the amount requested was a global allocation. The regulations did not specify how that allocation to the exporter should be allocated by the exporter.
22. What was the definition of regular customer in the export control regulations?
The definition was rather technical, but in essence it included parties with which the exporter had dealt on a regular basis during the previous five years. Since PROCESSING had not made direct purchases from DEALERS in the past, it was not a "regular customer" under the regulations.
23. In determining the export quota, did the government make the calculation on the basis of 80% of firm contracts and 80% of regular customers not under contract?
The allocation was a global allocation of 80% of the total amount that was allowable under the regulations, i.e., amounts under firm contract prior to 17 April 1998 plus an amount equivalent to the average amount sold to regular customers (as defined in the governing regulations) the previous five years for which firm contracts had not been placed by 17 April.
24. As of which date could exports from Danubia be made under the export control regulations?
As soon as the allocations were made on 20 May 1998 exports were permitted within the amount allocated.
25. Had export control regulations been applied in Danubia in the past?
There had been no export control regulations of the type implemented by Danubia on 20 May 1998.
26. Did DEALERS enter into any contracts with non-regular customers after 17 April 1998 and during the period the export limitations were in effect?
27. Did any of the other buyers from DEALERS which received only 80% of the contract amount avoid the contract or otherwise take legal action?
No other contract was terminated as a result of the buyer receiving only 80% of the contract amount. Several that had firm contracts prior to 17 April 1998 had argued that they should have been furnished the full amount of their contract or that they should be recompensed for the difference in price they had to pay for the missing 20%. Discussions are still going on and no arbitration has been commenced as yet in any of those cases.
Correspondence between PROCESSING and DEALERS
28. Did PROCESSING answer DEALERíS letter dated 24 February 1998?
As stated in paragraph 5 of the Statement of Defense, "Neither Mr. Dean nor anyone else acting for PROCESSING or IMPORTS replied to this letter."
29. Has PROCESSING avoided the contract?
The full correspondence in regard to the contract in question is set forth as exhibits to the Request for Arbitration and the Statement of Defense.
30. Why did PROCESSING send to IMPORTS copies of the letter it wrote on 21 May 1998 and 2 June 1998 to DEALERS?
It will be noted that the letters were sent by Mr. Dean. He is not available to be questioned in regard to this point. No one presently employed at PROCESSING is in a position to answer the question.
31. Did IMPORTS react in any way to any aspect of the correspondence?
IMPORTS did inquire of PROCESSING as to what was going on but when it was told that matters were being taken care of, it did not react to DEALERS.
32. On 19 February 1998 did Mr. Dean have power to represent PROCESSING and/or IMPORTS?
As of Monday, 16 February 1998 Mr. Dean began to work for PROCESSING as a salaried employee and was authorized to enter into contracts for the purchase of various goods for PROCESSING. His authority to enter into contracts in the name of IMPORTS, where he had been a salaried employee, terminated on Friday, 13 February 1998.
33. Why was Mr. Dean dismissed at PROCESSING?
As stated in Procedural Order No. 1, the reasons have nothing to do with this arbitration, nor do they raise questions as to the credibility of Mr. Deanís witness statement.
34. Would Mr. Dean appear at a hearing if asked?
That is unknown. Since Mr. Dean no longer works for PROCESSING, it is not in a position to send him to a hearing in Danubia as part of his job. Even if a hearing were to be held in Mediterraneo, it is not known whether he would voluntarily appear at a hearing. Furthermore, as indicated in Procedural Order No. 1, because of the litigation between Mr. Dean and PROCESSING arising out his dismissal, PROCESSING has been advised by counsel in that litigation not to contact him. The statement in Procedural Order No. 1 that PROCESSING had not spoken to Mr. Dean about the arbitration meant that it had not spoken to him since he had been dismissed on 31 August 1999.
35. Has Mr. Dean been ordered to appear?
No. It is normally expected that a party to an arbitration will bring forward any witnesses on which he relies. LCIA article 20 is the relevant provision. The UNCITRAL Model Law, article 27 provides the possibility of court assistance in the taking of evidence. The Model Law has been adopted by Danubia, but Mr. Dean is in Mediterraneo. Mediterraneo has not adopted the Model Law and it does not have a procedure for court assistance for the taking of evidence for an arbitration taking place in a foreign country.
36. How was Mr. Deanís statement taken? Was it under oath?
As provided in LCIA article 20.3, Mr. Deanís testimony was in the form of a typed signed statement taken by counsel for PROCESSING as part of the preparation for the arbitration. It was not taken under oath.
It might be noted that the LCIA rules anticipate that a party and its employees can be "witnesses". This is in accord with the procedural rules and terminology in common law countries in general.
37. When did DEALERS learn that Mr. Dean had been involuntarily terminated by PROCESSING?
It learned of Mr. Deanís dismissal on 15 September 1999.
Implementation of the Contract
38. In what country is Super Bank located?
Super Bank is located in Danubia. The letter was opened at the request of Regional Bank of Mediterraneo.
39. Who is the account party on the letter of credit?
The letter was issued for the account of PROCESSING.
40. Was the letter of credit stipulated as revocable or irrevocable; divisible or indivisible; transferable or non-transferable?
The letter stated that it was irrevocable but had no stipulations as to the other two points. The letter was, however, issued subject to UCP 500.
41. What documents were required for DEALERS to receive payment under the letter of credit?
The letter of credit provided that DEALERS would be paid against a bill of exchange drawn by DEALERS on Super Bank accompanied by an on board bill of lading for 6,000 tons of standard feed wheat showing July 1998 shipment, an inspection certificate issued by the Danubia Feed and Grain Association and an affidavit of DEALERS that the shipment was within the export quota it had received.
42. Were all the customers of DEALERS who had contracts as of 17 April 1998 shipped 80% of the contract amount?
43. Would DEALERS have suffered a substantial loss in good will if it had not reserved supplies for its regular customers with which it did not have firm contracts as of 17 April 1998?
The thought that lay behind regulation permitting exporters to request export allocations based on firm contracts as of 17 April 1998 and average amounts exported to regular customers over the past five years seems to have been to protect the markets of the exporters, and therefore of Danubia. Whether DEALERS would have suffered any loss of good will if it had not reserved an amount for those regular customers would be difficult to prove. All of the regular customers of DEALERS also purchased grain from other suppliers.
44. Had there previously been floods in Danubia causing a comparable loss of grain production?
There had been minor floods in the past, but nothing to compare with the flood in 1998.
45. When did the 1998 flood commence?
The first expectations of flooding were announced on 11 April. The river went over its banks on 15 April. The fact that the flooding would cause significant crop losses became evident on 17 April, the day on which the government of Danubia announced the export prohibition.
Questions relative to Damages
46. Is there a difference in the price per ton of wheat for a purchase of 1,200 tons, 4,800 tons or 6,000 tons?
47. What would the price per ton have been if PROCESSING had purchased 1,200 tons on 21 May 1998?
The world market price for standard feed wheat for July delivery had reached the price of $75 per ton by 21 May 1998, and it remained at essentially that level through the month of June 1998.
48. Was the substitute contract with the firm from Equatoriana subject to terms comparable to those of Danubia Feed and Grain Association Standard Conditions of Sale No. 5?
49. At what price did DEALERS sell the 120,000 tons of standard feed wheat to its "regular customers"?
The wheat was sold at the then current market price, i.e., $75 per ton.
50. When did DEALERS conclude the contracts with its "regular customers"?
Contracts for the full amount of 120,000 tons for which DEALERS had applied to service such customers were entered into after 17 April 1998. All of those contracts provided that they were "subject to availability" of sufficient wheat.
51. Were there differences in freight or other costs depending on whether the shipment would be for 6,000 tons or in two shipments of 4,800 and 1,200 each?
The only difference in costs would be in regard to freight. A shipment of 6,000 tons from Danubia to Mediterraneo would have cost $24 per ton. A shipment of 4,800 tons would have cost $28 per ton. A shipment of 1,200 tons would have cost $36 per ton.
52. What was the cost of freight of the 6,000 tons of wheat from Equatoriana to Mediterraneo?
The freight cost $22 per ton.
53. Will the Tribunal permit argument as to interest?
It will permit argument as to whether interest should be paid and, if so, for what period of time. It will not accept argument at this time as to the level of any interest that might be due.
Relationship between Imports and Processing
54. Was the relationship between IMPORTS and PROCESSING limited to the 51% shareholding and 3 out of 9 board members?
Yes. As indicated in the statement of Mr. Stanis, Claimantís Exhibit No. 13, all of the import purchases for PROCESSING were made through IMPORTS, but the two firms operated completely separately. Under the law of Danubia the two firms were not required to be treated as a holding/subsidiary entity. Similarly, financial results were not consolidated for tax or any other purpose. Nevertheless, the perception in the market was that PROCESSING had a privileged position with IMPORTS. The result of this perception was thought to be detrimental to IMPORTS. That was the main motivation for the sale of the entire 51% of IMPORT shares held by PROCESSING.
55. Did the 3 board members remain on the IMPORTS board subsequent to the sale of the stock by PROCESSING?
No. On 28 February 1998, the day on which the sale of the stock was completed, there was a special stockholders meeting and a new board was elected. The 3 members of the former board who were also on the board of PROCESSING were not re-elected.
56. May the request for relief be amended?
The procedure for amendment of any claim, counterclaim, defense or reply is governed by LCIA article 22.1. If either party should wish to amend its claim or defense, it may request the Arbitral Tribunal for permission to do so in its written memorandum and in its oral presentation, and the other party shall have the opportunity to state its views on the request.
57. Will Mr. Stern attend for oral questioning at a hearing before the Arbitral Tribunal?
If PROCESSING so requests, DEALERS is prepared to bring Mr. Stern to a hearing.