The Commercial Court reverses six arbitration awards and holds that no binding contracts were formed between the parties in the absence of contracts prepared and signed in accordance with terms agreed during negotiations.

The recent decision of Mr Justice David Steel of the English Commercial Court in Pacific Inter-Link SDN BHD v EFKO Food Ingredients Ltd (2011) serves as a forceful reminder that trading parties need to ensure that agreements are properly concluded, otherwise there is a risk that no binding contract will come into existence.

The claimant, Pacific Inter-Link (PIL) was a Malaysian company trading in palm oil. The defendant, EFKO Food Ingredients (EFKO), was a Russian-based company engaged in the sale and purchase of oils and fats. PIL appealed six FOSFA arbitration awards in the English Commercial Court on the grounds that, inter alia, FOSFA had no jurisdiction to determine the disputes.

The underlying arbitrations concerned six contracts for the sale by PIL to EFKO of 1500 m.t. of palm oil per month between January and June 2008.

EFKO asserted that the contracts had been concluded orally on, 7 September 2007, between their broker and the Chief Commodity Trader at PIL, and that the contracts incorporated FOSFA arbitration clauses, either orally or via an exchange of emails on 11 September 2007.

PIL denied that any binding contracts (or indeed arbitration agreements) existed, contending that any agreement was subject to the preparation and signature of a written contract on PIL's standard terms. PIL had therefore sought to cancel the contracts on the grounds that they were not signed. EFKO alleged that this purported cancellation was a repudiatory breach of contract. EFKO commenced six separate arbitrations, one in respect of each contract, each of which resulted in appeal awards in favour of EFKO, the Boards of Appeal having found that binding contracts with arbitration clauses were concluded.

PIL challenged these awards before the Commercial Court, their principal argument under section 67 Arbitration Act 1996 being that no contracts had been concluded with EFKO, so FOSFA did not have jurisdiction to determine the disputes.

The Court reversed the awards, finding that when PIL sent the contracts via the broker to EFKO, a term on which they were sent was that they had to be signed and returned. As this did not happen, the contracts had not become binding, ie, they were subject to contract. PIL was therefore entitled to cancel the transactions as they had no legal effect. Other arguments were also raised under sections 68 and 69 of the Arbitration Act but because the Court found that no contracts had been concluded, these arguments fell away. This decision has caused some controversy in the market, given that six Boards of Appeal had found in favour of EFKO, and given that all of these decisions have been effectively overturned by the Court exercising its powers under section 67 Arbitration Act 1996.

Ultimately this case turned on its own facts, but the Court's decision clearly emphasises the importance of contracting parties and their brokers paying attention to detail and ensuring that paperwork is properly dealt with, particularly when trading in a volatile market.

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