This article is available in Ukrainian only.
We’re thrilled to introduce the first installment 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:
- Moisture limits represented a condition of the contract. Even a deviation of 0.58% entitled the buyer to reject the goods.
- 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.
- 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.
- As the cargo was not analysed in Ukraine, the quality was determined by tests in Turkiye which did not show contractual results.
- 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 can a business 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 soybeans. 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.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
Compensating for damages caused by the Russian invasion of Ukraine has become a pressing issue. Over the past two years, significant efforts have been made both internationally and within Ukraine to develop direct mechanisms for compensation.
General mechanisms
Since 2022, there have been five main avenues for seeking damage compensation:
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- International Register of Losses
- Ukrainian courts
- Investment arbitration
- Courts of foreign countries
- European Court of Human Rights (ECHR)
The possibility of filing claims to ECHR ceased to exist after the exclusion of Russia from the Council of Europe. As of the date of this article this tool is already not accessible due to the expiration of the limitation period. The International Register of Losses is still being established, and its operational specifics, especially concerning business claims, remain unclear. Investment arbitration is suited for high-value claims where assets have been occupied and expropriated by the Russian Federation. The main issue with pursuing claims in foreign courts is complicated by issues of jurisdiction and the immunity of the Russian Federation, which is currently recognized by these countries.
While each of these mechanisms warrants a detailed discussion, such an exploration would be beyond the scope of this article. Therefore, we will focus on the mechanism readily available to all Ukrainians: filing claims in Ukrainian courts. Below, we provide a practical overview of this process based on our current practice and its potential outcomes.
Is it possible to pursue claims against Russia in Ukraine?
The short answer is yes. From 2014 (after the annexation of Crimea and “antiterrorist operation” in Donetsk and Luhansk regions of Ukraine) just until spring 2022 there were many attempts of individuals and of companies to bring Russia to justice in the Ukrainian courts. However, before April 2022 the Ukrainian courts mostly (with some exceptions) denied jurisdiction over the disputes against Russia due to the Russian immunity as a state. It is a standard clause in almost all jurisdictions that a state cannot be brought to justice in the local courts unless the relevant convent is given by that state.
From April 2022 the situation in the Ukrainian courts changed and is now been followed by all the courts in the same lien: after the full-scale invasion into Ukraine, Russia has lost its immunity in the Ukrainian courts.
Is it worth going to the Ukrainian courts?
Nowadays there are two possible mechanisms where the positive decision of the Ukrainian court can be used.
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- within the framework of the international compensation mechanism which is still being elaborated.
- As a decision to be recognised and enforced in other jurisdictions.
With the first option, we now know for sure that within the framework of the compensation mechanism the Ukrainian judgments will not be regarded as the only necessary and final evidence. Rather it would simplify the work of the commission especially if there would be hundreds of evidences and reports. In this vein we do not know at this stage when the commission will start its work for the business and how the decisions will be made. As well as the timeframes of executing such compensation decisions are unclear.
The second option of direct recognition and enforcement of the Ukrainian judgments also has its pros and cons. From one side, it will be necessary to search for assets in the particular country and to choose the country which would allow enforcement against the sovereign state. In this regard we highly recommend to our clients to add a particular Russian company, which took part in the invasion of devastation of the asset into the co-defendants. This might make the enforcement of the decision in the foreign jurisdiction easier, especially if particular assets of that company are found.
From the other side, at this stage we do not know any “firstcommer” who would successfully use this path of enforcing the Ukrainian judgement.
However, in any case, since the Ukrainian path is now available, we suggest using it at least for those to whom the path of investment cases is unavailable/unprofitable.
What are the benefits of using this option?
Unlike in arbitration, Ukrainian courts do not take the fee for participation in the court against Russia. The legal fees will also be much lower than for participating in any other available procedure.
Moreover, before filing the claim to the court, it would be necessary to gather all the necessary and possible evidence, make all expert and accountant reports, open criminal proceedings, which is 60% of work in preparation of the claim. Therefore, in any case we highly suggest starting the evidence gathering.
What is required for filing the claim?
Filing a lawsuit against Russia requires careful preparation and adherence to legal protocols. Below is a step-by-step guide to ensure your case is properly presented in a Ukrainian court.
First, consider whether your property has been damaged or destroyed, or whether it is located in the occupied territories. In all these three cases there should be gathered and provided different evidence.
Second, determine the venue to avoid delays. Choosing the appropriate court venue is essential to prevent unnecessary delays. Make an informed decision on where your case will be heard to ensure a timely process.
Third, gather relevant evidence to initiate the case. The necessary documentation includes:
Expert Reports: Obtain expert evaluations, especially for real estate. For movable goods, expert reports can serve as supplementary evidence.
Criminal investigation: File an official application to receive an Excerpt from the Unified State Register of Pre-Trial Investigations. Ukrainian courts see the opening of the criminal procedure as a mandatory step before the claim.
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- Evidence of Damages by Russia: establish a clear link between the damages and actions taken by Russia. There should be direct evidence showing that a particular destruction was cause by Russian actions.
- Evidence of Property Location: Provide proof of the property’s location in the occupied territories.
By following these steps in preparing your evidence, you can effectively file a lawsuit against Russia in a Ukrainian court.
Factual implementation of the decision
AGA Partners has already established groundwork with various experts in this respect. We would be happy to provide advice and recommendations upon your respective requests.
Conclusion
Filing a lawsuit in Ukrainian courts to seek compensation for business damages resulting from the Russian invasion is a viable and practical option for those to whom the path of investment arbitration is closed or is unreasonably high in value. In any case, we believe that businesses affected by the invasion should already take proactive steps to document their losses.
Where the problems stem from?
During the full-scale war, many traders revise the terms of their contracts. For example, under DAP terms, most traders include provisions for quality checks during unloading. This has become pertinent due to falling market prices and issues at the Ukrainian borders.
Such a practice allows buyers to take samples of the goods themselves, which puts them in a more favourable position. However, sellers in such circumstances often have no control over the sampling process.
This can lead to situations where buyers assess the quality of goods after unloading them at their warehouses. In such cases, the goods may be mixed with other products, complicating the process of quality determination.
After performing an analysis of the quality of the goods, buyers may refuse to accept the goods, demand a discount or refuse to pay. In doing so, they argue that the goods do not meet contractual specifications or EU regulations.
How to solve the problem?
In order to reduce risks for sellers, it is important to change the terms of contracts, especially those on the DAP basis, by including a provision that the quality of the goods must take place at the time of loading. To do this, independent surveyors should be involved in sampling and analysis in accredited laboratories. Such an approach will ensure the final quality certificates are issued.
In order to refute a product quality certificate, one must prove the fraudulent actions at the time of its issuance, which is a complex process. This creates flexibility and confidence for both parties. Sellers can confirm the quality of the goods at the time of loading, and buyers receive proof that the goods meet the terms of the contract.
If the buyer disagrees with the quality of the goods during unloading, sellers may offer to appoint their own surveyor to take independent samples. This is important for sellers, as they will have their own evidence in the event of a dispute over the quality of the goods.
Do buyers have the right to refuse to pay for the delivered goods if they find deviations in their quality indicators?
As a general rule, buyers cannot refuse to pay for the goods if there is a complaint about the quality of the goods. Payment for the goods and the quality assessment are independent terms of the contract.
For example, in many DAP contracts, payment is due upon unloading of the goods without any reference to quality inspection.
If the contract does not make payment dependent on inspection of the quality of the goods, sellers have the right to demand payment in full upon the due date. If buyers refuse to pay for the goods, sellers should consider filing a claim against the buyers for breach of their contractual payment obligations.
In the event of minor deviations from the quality specifications of the goods, buyers have the right to claim compensation for damages due to the supply of noncontractual goods.
However, if the quality of the goods differs materially from the contractual specifications, buyers have the right to reject the goods, in which case no payment obligation arises.
Is it possible to resell goods on a DAP basis?
If the buyers reject the goods or unreasonably refuse to pay, the seller may consider reselling the goods on a DAP basis if the goods have not yet been unloaded at the destination and the buyers have not yet accepted them. In this case, sellers have the option of redirecting the goods and issuing shipping documents to any other final buyer.
If the goods have already been cleared in the European Union, there may be certain technical obstacles to their further resale. Under these circumstances, sellers should respond quickly to the above actions, as there is a risk of losing access to the delivered goods.
Conclusion.
The optimal solution is to enter into contracts stipulating that the quality of the delivered goods be assessed at the time of loading. This ensures that buyers are not obligated to pay for the goods until their quality is verified, creating acceptable conditions for both parties.
If the terms of the contract stipulate that the quality of the goods shall be checked during the unloading of the goods at the destination, the sellers shall appoint their own surveyor who will independently take samples of the quality of the delivered goods.
Once sellers have accepted the contractual requirements for unloading quality testing, they must monitor the buyers' compliance with these requirements. Any breach of this process by the buyers may result in the annulment of the results of such tests.
In view of the above, it is necessary to change the structure of contracts, paying particular attention to the quality of goods. Resolving this issue between the parties helps to reduce risks for both parties at the stage of contracting.
Iryna Moroz, партнерка AGA Partners
Andrii Tantsiura, юрист AGA Partners
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.
This article is available in Ukrainian only.