The essentials of commodities arbitration

Jonathan Waters MCIArb, General Counsel at The Grain and Feed Trade Association (GAFTA) and Kateryna Honcharenko MCIArb, Ciarb’s Arbitration Professional Practice Manager explain the beginnings of commodities arbitration, and how GAFTA has a two-tier system.

Early versions of alternative dispute resolution developed alongside the general evolvement of societies. National and international commerce was one of the driving powers of such evolvement; it developed rapidly and, as a consequence, in some cases gave rise to commercial disputes. Even then, parties to such disputes had the right to initiate arbitration, however, the nature of it used to be significantly different.

For instance, commercial disputes could be resolved within different kinds of merchant guilds, which resembled modern trade associations. Such guilds were often associated with self-regulatory membership entities, they contributed to the production system growth, as well as the development of international commercial arbitration. Guilds, however, also kept transforming, which led to the establishment of trade associations in many jurisdictions, in particular in England, with their own standard form contracts, as well as arbitration rules and clauses.

The Grain and Feed Trade Association (GAFTA) was among them. Since its establishment in 1878, GAFTA has continued to be a powerful international commodities trade membership organisation. It promotes the international trade of agricultural commodities, spices and general produce, seeks to protect its members’ interests worldwide and provides an international arbitration service to resolve disputes that arise under its contracts. GAFTA handles between 300-1,000 arbitration claims a year, and has over 1,900 members in 100 countries.

Domicile clause

An important term of all GAFTA contracts is the domicile clause, which provides that English law shall apply to the contract. Further, another key term is the arbitration clause which provides that any disputes arising from or out of the contract must be referred to GAFTA arbitration.

Arbitration under the auspices of GAFTA

GAFTA offers two types of arbitration – under Rule 125 and Rule 126. The latter provides for expedited arbitration and is most often used where the value of a claim is relatively small or the issues are less complex. This article focusses on Rule 125.

Disputes arising out of GAFTA contracts are normally heard by a panel of three arbitrators. GAFTA Arbitration Rules set out the procedures for appointments, however, if either party fails to appoint an arbitrator or fails to give notice within the time limits specified, the other party is entitled to ask GAFTA to appoint.

All GAFTA arbitrators are experienced professionals with at least 10 years of relevant experience in the trade. A list of all GAFTA Qualified Arbitrators can be found on the GAFTA website.

Parties may be represented at an arbitration hearing by one of their employees or by a trade representative, but, unless they agree, they may not be represented by solicitors, barristers or other legally qualified advocates in private practice.

The general exclusion of lawyers is intended to prevent the process from becoming overly legalistic and to focus on arbitration ‘for the trade, by the trade’.

Multi-tier arbitration

GAFTA, as well as Global Trade in Oils, Seeds And Fats (FOSFA) and London Maritime Arbitrators Association (LMAA), operate a two-tier arbitration system.

As noted, disputes are typically resolved by a panel of three arbitrators or, where the parties agree, by a single arbitrator and tend to be based on the submission of documents only. In-person hearings are rare.

If either party is dissatisfied with the award, they are entitled to appeal it to a GAFTA Appeal Board (second-tier). If the original award was made by three arbitrators, the appeal will be heard by five new arbitrators. If the first-tier decision was made by a single arbitrator, the appeal will be heard by three arbitrators.

The board may confirm or modify or overturn an award.

Default posting

Parties resort to arbitration if there is a conflict which they have been unable to resolve.

If a losing party fails to honor the award of arbitration, the winning party can apply to GAFTA stating that the award has not been complied with and that the losing party should be posted on the GAFTA Defaulters List.

The decision on whether to post a defaulter is made by the Council of GAFTA. Most of the parties who are posted are not GAFTA members. Additional sanctions are available, such as suspension/termination of membership if the defaulter is a GAFTA member.

This link will provide you with more information about GAFTA arbitration.