Mitsui & Co (USA) Inc v. Asia-Potash International Investment (Guangzhou) Co Ltd, KBD (Comm. Ct),  15 May 2023

In a contract dated May 2, 2012, the plaintiff, Mitsui, agreed to sell 60,000 metric tons of Brazilian soybeans to the defendant, then known as DGO. The contract terms were governed by the FOSFA 4 and ANEC 41 forms, stating that the soybeans would be delivered to the port of Santos, Brazil, between July 15 and 31, 2012. Payment was to be made through an irrevocable letter of credit, which was successfully initiated by June 30, 2012

This contract was part of a larger transactional chain. Intergrain, as an intermediary, purchased a shipment of Brazilian soybeans from multiple suppliers. A portion of this cargo, amounting to 60,000 metric tons, was then sold to Multigrain, who subsequently sold it to Mitsui (an affiliated company of Multigrain). The original five suppliers were responsible for shipping the cargo.

Background Facts

On July 17, 2012, DGO nominated MV Yusho Regulus to carry approximately 66,000 metric tons of soybeans. Loading commenced on September 13, 2012, authorized by the Santos Port Authority. However, at 01:14 on September 15, 2012, the vessel broke free from its moorings, causing damage to the port’s equipment. At that point, the ship held 42,973.03 metric tons of cargo. Following the incident, the vessel was detained.

DGO claimed that the contract had been terminated, a position Mitsui contested. Mitsui argued that the agreement was still valid, suggesting that DGO could have requested the Port Authority to re-berth the vessel. However, in January 2013, Mitsui accepted DGO’s repudiation of the contract and considered it null and void.

Arbitration Proceedings

This situation led to a series of arbitration proceedings throughout the supply chain. In the arbitration against DGO, Mitsui’s claims included (i) a declaration that DGO was liable for sums awarded to Intergrain against Multigrain and (ii) indemnification for costs incurred in defending claims by Multigrain and costs claimed by Multigrain in its defense against Intergrain’s claim. Alternatively, Mitsui sought damages corresponding to claims made by Intergrain against Multigrain, for which Mitsui would be liable to Multigrain. Another alternative was seeking damages from DGO for failing to present a vessel or wrongfully repudiating the contract. Mitsui’s main argument was that DGO’s failure to re-berth the vessel constituted a breach of the contract, making DGO responsible for Mitsui’s liabilities up the supply chain.

In a July 24, 2020 decision, the first FOSFA arbitration largely favored Mitsui. However, DGO appealed to the FOSFA Board of Appeal, which issued its verdict on December 20, 2021. The Board upheld DGO’s breach of contract for failing to re-berth the vessel. Damages were calculated starting from the last possible performance date, December 1, 2012, when the letter of credit expired. DGO was ordered to pay damages of US$7,007,430 and compound interest. Mitsui was also directed to pay demurrage of US$1,274,110, plus compound interest. Both parties were required to share the costs equally.

In addition, the Board of Appeal ruled that Mitsui’s losses along the sales chain were too remote to be compensated. The losses were deemed unforeseeable due to differing terms in the various contracts. Mitsui claimed that a string of contracts made such losses foreseeable, but DGO argued that the contracts were independent, rendering the losses remote.

Contesting the Arbitrations

Mitsui contested the award, alleging three alternative errors of law. Firstly, Mitsui claimed that the Board of Appeal misapplied the remoteness test. Secondly, Mitsui argued that the Board’s dismissal of its indemnity claims was unreasonable. Thirdly, although not initially raised, Mitsui contended that Clause 29 of the contract granted the tribunal the discretion to award additional damages.

Revisiting the Criteria of Remoteness

The court concluded that the Board of Appeal had erred in applying the remoteness test. The correct approach should have assessed whether Mitsui’s losses resulting from DGO’s breach were foreseeable, irrespective of differences in contract terms. Therefore, the award was remitted for reconsideration.

The court ruled that the decision established in Hadley v Baxendale (1854) 9 Exch 341 should be used.  Thus, when a breach of contract occured, damages should cover losses that both parties could have predicted at the contract’s start, including losses that come naturally or from special but known circumstances.  Transfield Shipping Inc v Mercator Shipping Inc (The Achilleas) [2008] 2 Lloyd’s Rep 275 changed this rule slightly in very rare cases where applying the usual test led to unquantifiable or disproportionate liability or when such liability contradicted market expectations.  However, the Achilleas criteria were deemed inapplicable in this case.  The court ruled that damages were to be determined based on traditional Hadley v. Baxendale principles.

Judge Picken determined that the Board of Appeal was mistaken that the presence of a contract chain was the only significant factor in this context. The proper approach should have been to inquire whether Mitsui’s losses due to DGO’s breach were foreseeable, irrespective of contract differences. Given the clear legal error, the court wasn’t required to assess whether the Board of Appeal’s conclusion was unreasonable.

Applicability of Clause 29

The court rejected Mitsui’s request to re-amend the claim based on Clause 29, highlighting procedural limitations and citing no procedural basis upon which the re-amendment could be sought. This decision was based on the following:

CPR PD 62, para 12.6 stated that if a party disagreed with an appeal request, it could counter that the award should be upheld for reasons not expressed (or not fully expressed) in the award; However, it did not provide a mechanism for the court to vary, remit or set aside an award on a point not raised in the arbitration.

While a respondent could assert an award should be upheld on different legal grounds, the point had to be raised at the permission stage in a respondent’s notice.  Late amendments were rarely granted, as Hamblen J noted in Cottonex Anstalt v Patriot Spinning Mills Ltd [2014] 1 Lloyd’s Rep 615

Although Andrew Smith J in Ramburs Inc v Agrifert SA [2015] EWHC 3548 (Comm) said that a responding party didn’t have to disagree with an appeal request, Jacobs J in MUR Shipping BV v RTI Ltd [2022] 2 Lloyd’s Rep 297 stated that if the responding party did disagree with the appeal request, they had to provide the reasons for their disagreement in the response notice. This was to prevent completely new arguments being raised in the appeal hearing without warning the appellant.

Finally, the court affirmed that a respondent could not bring up a new legal argument that the arbitral tribunal didn’t decide on, which would grant awards over and above dismissal of the appeal.