Penalty - Invoicing back clause - Buyer in default

Dunavant Enterprises Inc v Olympia Spinning & Weaving Mills Ltd: Queen's Bench Division, Commercial Court (Mr Justice Burton): 29 July 2011

The claimant as seller and the defendant as buyer entered into a contract constituted by the 'Contract for Export for Sale of Raw Cotton' of in July 2007 which provided for delivery by the claimant to the defendant of cargoes of bales of cotton, the first shipment to be in August 2009. 'Invoicing back clauses' as contained in the bylaws and rules of the International Cotton Association Ltd (the Association) were incorporated into the contract.

Those clauses provided for a contractual method of 'closing out' a contract, irrespective of who was to blame for its termination, based upon the market price at the date of closure. Bylaw 201 of the association, provided for arbitration in accordance with the Bylaws as an exclusive remedy, it further provided that 'if any contract had not been or would not be, performed, it would not be cancelled.

It would be closed by being invoiced back to the seller under our rules in force at the date of contract'. Part 8 of the Rules of the Association contained r 225 and 226. Rule 25 provided for the closing of a contract for non-performance and r 226 provided the terms on which it would be closed (see [7] of the judgment). The defendant as a result of a failure to obtain letters of credit sought to close out the contract in line with r 225 and 226 of the Association rules.

A panel of the Association resolved a price by an award of 15 January 2010 and concluded that a sum of $456,352 was payable by the claimant to the defendant. The defendant considered that it was an inadequate award and appealed to the Technical Appeal Committee (TAC). Before the TAC the claimant relied on an exemption clause which read as follows 'no liability shall result to us from our delay or failure to deliver commodities sold when such delivery was delayed or prevented by force majures....'. (the exemption clause).

The claimant asserted that on the basis of that clause it was entitled to resist any liability to the defendant at all. The TAC concluded that the clause had no effect in the instant circumstances and that failure to obtain letters of credit could not be called a 'force majure'. The claimant appealed.

The claimant submitted, inter alia, that the exemption clause was not inconsistent with, and was not overridden by, the Association's Rules and Bylaws. The prominence of the exclusion clause in the contract, was one of many reasons why it should prevail, in cases where the exclusion applied, over the standard terms in rr 225 and 226 insofar as they sought to make the seller as an innocent party liable to the buyer as a defaulter, where the cotton market had moved in favour of the buyer (see [17] of the judgment). The appeal would be dismissed.

The operation of Bylaw 201 could not be ousted, and had the result that, irrespective of whether there was a breach or not, the close-out operated so as to create a contractual obligation only to make payment pursuant to the terms of rr 225 and 226 (see [24] of the judgment).

In the instant case, the claimant's submissions as to some equitable balancing role played by the clause were mere wishful thinking. While the existence of the exemption clause might be of relevance where questions of contractual responsibility leading to common law damages might otherwise apply, it had no impact, and was a provision which fell foul of Bylaw 201, where the contract was 'treated as cancelled' and 'closed by being invoiced back to the seller under [the Association's] rules in force at the date of the contract' (see [25], [26] of the judgment).

The question raised by the claimant as to whether the defendant's claim was excluded by the exemption clause had to be answered in the negative (see [34] of the judgment).

M V Smith (instructed by Stitt & Co) for the claimant. Philippa Hopkins (instructed by Watson, Farley & Williams LLP) for the defendant.