Current Issues

 

The following presentation was delivered to the ICAC Standing Committee as part of an initiative to re-emphasise the essential need for member states to recognise and support the provisions outlined in The New York convention of 1958.

THE SANCTITY OF CONTRACTS

The purpose of the presentation is to make use of this opportunity to address the subject of the Sanctity of Contracts and the pivotal role undertaken by (CICCA) the Committee for International Co-operation between Cotton Associations in support of this. I would wish to re-emphasise the importance to the International Cotton Trade, of Government support too, and, when necessary, action, to underpin this underlying principle through the enforcement of Foreign Arbitral Awards.

A reference to enforcement leads into the important subject of conventions that relate to international commercial arbitration. Conventions are of course designed to ensure that international arbitration agreements and awards are enforceable. Today, we are particularly concerned about The New York Convention of 1958 since it introduces a much more straightforward procedure for obtaining the recognition or enforcement of arbitral awards while placing a burden on the party challenging the award, to establish the reasons why the award should not be recognised or enforced.

The significance of the New York Convention cannot be over emphasised. It has been ratified by 125 states providing the most extensive network presently in existence for the enforcement of decisions resolving disputes.

However, it does not appear to be working as intended since presently, there are 263 defaulters on the CICCA default list. Placing a monetary value on this, based upon a 6 year period, awards exceed 120m$ of which 50% of this sum is still owed by defaulting parties. This is an intolerable situation especially if international trade is to continue to prosper and confidence in the market be maintained.

The Merchant believes and accepts that when a contract is made, it should be executed as agreed - this principle is enshrined in the commercial and contract law of most trading nations. The abrogation of contractual responsibilities simply brings into question the cornerstone of the entire trading system. What perhaps is needed to help reduce the level of defaulters, is a partnership between Governments and the cotton industry. The purpose would be to help create an environment that enables International Trade to take place in an equitable and even handed manner.

CICCA was established twenty-five years ago in order to provide a forum for determining how best to promote the Sanctity of Contracts and to maintain high standards of trading practices, which in turn should help avoid disputes. Today, this Committee comprises more than 17 Nations most of whom are signatories to the New York Convention. CICCA represents over 1600 companies trading raw cotton on the International Market. It is not however, the purpose of CICCA to lobby against tariffs, taxes or quotas. Nevertheless, it does believe that when a contract is made it should be executed as agreed. Should this fail then the disadvantaged party should be adequately compensated - through the arbitration process.

Arbitration may be broadly described as a private process, which commences with the agreement of parties to submit that dispute for decision by a tribunal of one or more arbitrators. The decision or award is final and legally binding on the both parties. Importantly, the award will then be recognised and enforced by the courts which is why the 1958 New York Convention is so important.

For cotton merchants, the spot purchase of raw cotton is only one option; forward trading is the principle method of conducting business. Whilst forward trading has its advantages it also carries risks, which to an extent, can be contained by commercial judgement. If circumstances change after a contract has been agreed, those who feel that they can do better elsewhere must not be permitted to ignore their legal obligations. CICCA through its member - associations provides a framework of rules, checks and balances to enable forward trading to take place in an orderly way. This order is very much in the interests of a sound, stable world cotton economy.

It is reasonable to assume that no one enters into a contract expecting it to go wrong, there is however, much evidence to suggest that a great many contracts are written in a confusing manner; frequently this can cost one of the parties money. Disputes will occur however, no matter how watertight the contract. When they cannot be settled amicably then it is usually necessary to resort to arbitration.

If a party refuses to abide by an award, the other party will need to take enforcement action through the courts. The award may be registered as a judgement under the provision of the New York Convention. An award is enforced when a court assists in compelling the unsuccessful party to comply with the terms of the award. In other words, the court accepts the decision of the arbitral authority and that it is final and binding on both parties. This goes to the very roots of why it is essential that signatories to the NY Convention are fully and properly supported by the action of the courts.

Most cotton trade associations make provisions in their rules for an appeal. At the end of the period for appeal, (normally 28 days), if no challenge is raised then the award is judged to be final and binding. It is at this point that the successful party will expect fulfilment of the award. This may sometimes lead to frustration and disappointment, which leads me towards the default list.

The purpose of the default list is to deter a company from engaging in malpractice. The CICCA default list is representative of the industry in terms of Merchants and Spinners. Following an examination of the size of the awards it may be concluded that the average size of awards are less than 200,000$. From this it is reasonable to deduce that:

  • in most cases, the awards are not so great that they cannot be fulfilled by medium sized company;
  • enforcement action is therefore a realistic option;
  • government support for the New York Convention will strengthen the resolve of the injured party;

The reasons why there are so many defaulters are not entirely obvious but it may perhaps be one or more of a number of reasons, for example:

  • because spinners believe awards are biased towards merchants;
  • merchants believe spinners unreliable in a fluctuating market;
  • there judged to be insufficient Government support for enforcement;
  • because CICCA's procedures for enforcement are unclear or insufficiently well known or understood.

Going back one hundred years, trading activity was based upon the concept that the word is my bond. Inevitably, however, it has now become necessary to do more than shake hands. Today, the market is confronted with instances where even my contract is not my bond. All this when technology is demanding that increasingly, if businesses are to survive, they must embrace modern working practices. Today there exists a relentless drive towards electronic trading which brings with it the obvious implications of this upon the sanctity of contracts.

CICCA and its membership is clear that for arbitration to work it must be governed by national law. Firms who enter into an arbitration agreement under the rules of a trade association, must in the event of a dispute, accept that the law of the seat of arbitration applies. This is a matter of considerable concern the Committee since increasingly there are attempts to frustrate enforcement from firms who challenge arbitration awards in their own Supreme or High Courts. Individual companies must also accept responsibilities too, even when an arbitration decision goes against them. In this, you will appreciate that courts have a major role to play. It should be a matter of public policy that agreements are adhered to, in order to ensure that a nation's export reputation is not tarnished by the disreputable exporter or importer.

The present problem relating to the sanctity of contracts and the enforcement of arbitral awards are not issues that cotton merchants can solve alone. ICAC can help. CICCA is not asking however, for intervention but rather; recognition of the problem; application of the law; and Government support for the principles of fair trade. Unless the Industry abides by both the spirit and the letter of whatever arbitration arrangements are stipulated in the contract and importantly, accept its judgements, then the whole process of agreeing and fulfilling a contract on paper or in electronic form becomes almost meaningless.

In broad terms, the Committee proposes that ICAC and CICCA in partnership, underwriting international support for the Sanctity of Contracts and the ethic of good trading practice, through the New York Convention, should have the effect of stabilising the international cotton market. This in turn will help underpin a free market economy, and increase cross border co-operation between trading partners.

Secretary CICCA


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