24.1 In December 2002, AWB concluded the sale of a further 1 million tonnes of wheat to Iraq. This was AWB's last sale to IGB under the Oil-for-Food Programme.
This sale was concluded following a visit to Iraq by Messrs Long and Whitwell between 19 and 21 November 2002.[354] Whilst there were negotiations with IGB for the sale of wheat during that visit, a concluded agreement was not reached at that time. [355]
Mr Whitwell continued negotiations with IGB following his return to Australia from Iraq[356], and on 29 November 2002 sent an offer to IGB to supply a further 1 million tonnes of Australian wheat for delivery in 2003. [357] Following further communications between AWB and IGB regarding price, the sale was concluded in early December 2002.
24.2 On 4 December 2002, Mr Whitwell sent an email to Mr Abdul-Rahman confirming the terms of the sale that had been agreed to.[358] The agreement as at 4 December 2002 was to the 'CIF Free Out Umm Qasr' price per tonne in US dollars. The amount of that inland transportation fee remained to be agreed. As Mr Whitwell stated in his email:
Inland transport not included in price and to be mutually agreed
…
Inland transport: USD to be agreed PMT
100% payable before vessel discharge. [359]
On 5 December 2002, Mr Abdul-Rahman sent a facsimile to AWB confirming the terms of the sale, so far as they had then been agreed.
24.3 This sale was split into two contracts, A1670 and A1680. Each was for half a million tonnes.
24.4 Between 5 December and 11 December 2002, AWB and IGB had reached agreement on both the final contract price and the amount of the inland transportation fee. On 11 December 2002, Mr Whitwell sent two facsimiles to Mr Abdul-Rahman setting out the final terms of each of these two contracts.[360] The inland transportation fee was agreed at US$51.15.
24.5 A short-form contract for each of contracts A1670[361] and A1680[362] was prepared within AWB. Both were dated 11 December 2002 and signed on behalf of AWB by Mr Hogan. Both were in similar terms to AWB's preceding short-form contracts. The price of the wheat was described in each of the short-form contracts as 'CIF Free in Truck' and the shipment clause provided for the cargo to be discharged 'Free into Truck to all silos within all Governorates of Iraq'.
24.6 As with AWB's previous short-form contracts, neither of the short-form contracts for A1670 and A1680 referred to AWB's obligation to pay inland transportation fees or the additional 10 per cent after-sales-service fee. Neither contract included any reference to the amount of the inland transportation fees or made plain that the inland transportation fee payable by AWB included the 10 per cent after-sales-service fee. This was notwithstanding reference to the inland transportation fees in Mr Whitwell's two facsimiles to IGB of 4 December 2002 and 11 December 2002 confirming the terms of the sale. Neither of these short-form contracts made plain that the price of the wheat sold included the amount of the inland transportation fees payable under the agreement AWB concluded with IGB.
24.7 A copy of each of these short-form contracts was sent by Mr Hogan to IGB under cover of a letter dated 12 December 2002.[363] A copy of each of the short-form contracts was subsequently returned to AWB, executed by IGB.[364]
24.8 A long-form contract was prepared by IGB for each of contracts A1670[365] and A1680.[366] These were dated 14 December 2002 and were in the same form as the long-form contracts that had been previously prepared by IGB in respect of its earlier purchases from AWB. The long-form contracts were signed on AWB's behalf by Mr Long.[367] The price of the wheat sold was described in each long-form contract as a 'CIF F.O.T. to silo to all governerates of Iraq via Umm Quser port'. The long-form contracts did not contain any reference to the inland transportation fees or 10 per cent after-sales-service fees payable by AWB or to the inclusion of these fees as components of the price.
24.9 The sale comprised in contracts A1670 and A1680 was negotiated against a background in which two significant issues featured.
The first was the negotiations for the repayment of the Tigris debt and the utilisation of an AWB sale to Iraq for that purpose. The second was the iron filings compensation that AWB had agreed to pay IGB.
24.10 The 'Tigris debt' refers to the cost of 20,833 tonnes of wheat that AWB shipped to Iraq on board the Ikan Sepat in January 1996, which was funded by BHP Petroleum Limited (BHPP). In September 2000, BHPP assigned the IGB's purported liability to repay BHPP for the cost of this shipment to The Tigris Petroleum Corporation Limited (Tigris). Following this assignment, the principal of Tigris, Mr Davidson Kelly, enlisted AWB's assistance to recover this debt from Iraq. Negotiations with Iraq commenced in October 2000 and continued through 2001 and 2002. Representatives of AWB assisted and participated in those negotiations. A detailed examination of the Tigris debt is set out in Chapter 27.
24.11 The significance of the Tigris debt, for immediate purposes, is that its recovery was linked to the conclusion and subsequent performance of contracts A1670 and A1680. When contracts A1670 and A1680 were concluded, the price payable by IGB was inflated by US$8.375 per tonne on account of the Tigris debt.
As a result, the final contract price (in US dollars) under contracts A1670 and A1680 was the sum of:
That price in US dollars was then converted into euros, at an exchange rate that AWB and IGB had agreed upon.
24.12 Despite its inclusion in the calculation of the contract price, there was no reference in either the short-form contracts or long-form contracts to the recovery of this allegedly pre-existing debt payable to Tigris through the inflation of the price of the wheat sold under these contracts [369] in order to recover this debt. Nor at any time did AWB otherwise disclose this to either the United Nations or DFAT.
24.13 In July 2002, IGB sent an email to AWB asserting that wheat that had been discharged was contaminated by traces of 'iron powder'. [370] AWB was initially sceptical about the claim and responded to IGB in those terms. [371] However, by August 2002, IGB had advised that two further shipments had also been found to be contaminated and that as a result the discharge of wheat from AWB vessels had been stopped. He suggested that AWB send representatives to confirm the contamination.[372]
24.14 A delegation from AWB travelled to Iraq in August 2002 to investigate and discuss with IGB the alleged contamination. The delegation consisted of Messrs Flugge, Lindberg, Long and Cracknell. [373] Following discussions with IGB and the Minister of Trade, AWB agreed to settle the IGB's claim by agreeing to pay to IGB US$6 per tonne for so much of the wheat that was allegedly contaminated. In the end, over 335,000 tonnes of wheat from approximately 6 shipments was said to have been contaminated, resulting in AWB agreeing to pay IGB approximately US$2 million in compensation.
24.15 Whilst the amount of the settlement had been agreed to, there was no agreement at that time as to the way in which this settlement would be paid by AWB. Between August 2002 and December 2002, further exchanges and discussions ensued, both between AWB and IGB and within AWB itself, in relation to the manner of payment of this compensation.
24.16 One proposal that AWB put to IGB was for AWB to offset the amount it had agreed to pay IGB against IGB's liability for the Tigris debt. In this way, the amount of that settlement would be paid by AWB directly to Tigris in reduction of the monies that Tigris claimed IGB owed it. That proposal was, however, rejected by the Iraqis, whose preference was for the agreed settlement to be paid by AWB 'through the inland transport mechanism'. [374] These proposals and the discussions that took place in relation to them are examined in Chapter 27.
By the time AWB concluded its sale with IGB on 4 December 2002, agreement as to the means of the payment of the compensation for the Iron Filings Claim had still not been reached.
24.17 The issue was raised again by Mr Whitwell in his email of 9 December 2002 to Mr Abdul-Rahman:
Following our email dtd 28/11/02 ref 'Quality Issues' where we asked his Excellency, the Minister for Trade, to consider again the issue of offsetting the quality issue payments against the Tigris issue we would respectfully ask whether the Minister has reached a final decision in this regard.
In the event that the Minister is agreeable to an offset situation then we would ask for your confirmation of the pricing option A.
Otherwise please confirm your acceptance to option B. [375]
24.18 Mr Whitwell then set out in his email two options for the calculation of the final contract price.
The first-option A-gave a price for the sale of the wheat that was equal to the sum of the CIF free out price, the inland transportation fee payable by AWB and the additional US$8.375 for the recovery of the Tigris debt, less US$2.01389 per tonne on account of the quality issue rebate.[376] Under this option, AWB would pay the agreed settlement of the Iron Filings Claim in part reduction of IGB's liability to Tigris for the Tigris debt, with the balance of that debt to be recovered by AWB from the proceeds of sale of the wheat by loading up the contract price for the wheat sold.
The second option-option B-gave a price for the wheat that was simply the sum of the CIF free out price, the inland transportation fee and the additional US$8.375 for the recovery of the Tigris debt. Under this option, there was no deduction or allowance for the settlement of the Iron Filings Claim. Rather, under option B, the 'quality issue rebate to be settled as previously discussed' [377], namely through the inland transport mechanism.
The Iraqis responded to Mr Whitwell's email by reiterating their preference for the second option, and in the end, it was that option B which formed the basis of the final contract price for contracts A1670 and A1680.
24.19 On 17 December 2002, Mr Abdul-Rahman sent an email to Mr Hogan in which he confirmed the final contract price for the sale comprised in contracts A1670 and A1680 (namely, as per option B above); the inland transportation fees payable by AWB in respect of those contracts (namely US$51.15); that the agreed settlement of the Iron Filings Claim was to be repaid by the addition of US$2.017 per tonne to the inland transportation fees otherwise payable under those contracts; and that the amount per tonne to be paid by AWB as inland transportation fees under these contracts would therefore be US$53.157 or €53.33 per tonne. [378]
24.20 On 23 December 2002, Mr Edmonds-Wilson faxed to Mr Cuddihy at DFAT a copy of the AWB short-form and IGB long-form contracts, together with a duly completed 'Notification to ship goods to Iraq', for each of contracts A1670 and A1680, for United Nations approval.[379]
24.21 Both applications were received by the Office of Iraq Programme on 10 January 2003. Contract A1670 was initially allocated to phase XII.[380] Contract A1680 was allocated to phase XIII.[381]
24.22 There was no disclosure in Mr Edmonds-Wilson's facsimile or otherwise by AWB to DFAT or the United Nations of the inflation of the price under both of these contracts on account of the recovery of the Tigris debt.
24.23 On 22 January 2003, Mr Cuddihy sent an email to Mr Whitwell, passing on an extract of an advice that the Australian mission in New York had received from the OIP in the following terms:
These are both huge contracts. They're both approx. $[figure deleted] million each. Comm 1210376 we know for a fact won't be funded as there is no money in Phase 12 Food. Comm 1300016 might be funded and we're really stretching that 'might'. Most of the money in Phase 13 is already committed to the priorities that the GOI sent in. So for that one we'll know in about 2 weeks and 1201376 could be transferred but then again we don't know if it will get funded. [382]
Mr Cuddihy advised that the Australian mission would follow up with OIP again in a week or so. He also advised:
… but it looks like one contract (Comm No 1201376) will not be funded under Phase 12. Moving this contract to Phase 13 is an option, but as that Phase is also short of money, its unlikely that both it and Comm 1300016 can be both funded. Even funding Comm 1300016 will be a stretch.
You may wish to consider asking the Iraqi Grains Board to ask the Government of Iraq (GOI) to revisit its priorities, but I expect that would be difficult.
Please give me a call if you wish to discuss …[383]
That day Mr Whitwell wrote to IGB advising it of the position and requesting that it urgently re-prioritise funds to allow AWB to begin executing these contracts as soon as possible.[384]
24.24 The approval[385] was issued on 12 February 2003.[386] Later that day, Mr Cuddihy received an email from Ms Thorpe from the Australian mission advising:
Great news
I called Felicity Johnstone in OIP, who told me she signed funding approval for Comm No 130016 [contract A1680] about two minutes ago !! Well done to AWB for getting Baghdad to recognize their contract as a priority for phase 13. Alas, phase 12 is not likely to come through according to Johnstone.
She said it will be a few days before we will have a formal approval on Comm. No 130016, but she will fax us when it is ready. [387]
Mr Cuddihy passed a copy of this message onto Mr Whitwell the following day. [388]
24.25 On 3 March 2003, Mr Cuddihy faxed to Mr Whitwell a copy of the United Nation letter of approval and accompanying OIP report.
24.26 A letter of credit was established by BNP in favour of AWB for the proceeds of sale of the wheat under contract A1680. [389] On 12 March 2003, Mr Werner from AWB sent a facsimile to Mr Abdul-Rahman requesting certain amendments to that letter of credit. [390] However, before those amendments could be agreed, the incursion into Iraq commenced on 20 March 2003.
24.27 AWB was eventually able to fulfil contract A1680 fully. This was after AWB had agreed to amendments to the price and terms of delivery of the wheat under contract A1680 in April and September 2003. These amendments were sought from AWB by the World Food Programme (WFP), a UN body that had been empowered by the OIP to take over the conduct of contracts to Iraq following the incursion.[391] At no time during its renegotiations with the WFP in either April or September 2003 did AWB disclose to the WFP that the original contract price included an allowance of US$8.375 in repayment of the Tigris debt. A more detailed examination of the terms of these amendments and circumstances in which they were negotiated appears in Chapter 25.
24.28 Following the renegotiation of the terms of this contract in both April and September 2003, an amended letter of credit was established by BNP Paribas. BNP Paribas was reimbursed from the United Nations Iraq account for the payments that it made under this letter of credit.
24.29 In all, AWB shipped 12 shipments of wheat to Iraq under contract A1680. AWB was paid for each of these 12 shipments made from funds drawn from the United Nations Iraq account. Upon the receipt of those funds, that amount that represented that portion of the contract price that was being used to repay the Tigris debt[392] was set aside by AWB for payment to Tigris. The circumstances in which this occurred are set out in Chapter 27.
24.30 Approval was eventually issued on 2 September 2003.[393] The following day, the Australian mission in New York received a copy of that approval from the OIP, which it sent by facsimile to Ms Armstrong at DFAT's Iraq Task Force. Ms Armstrong in turn faxed a copy of the approval to Mr Hockey at AWB.[394] The initial approval was valid until 1 September 2004. Later that month, the OIP issued an extension of this approval, valid up until 15 November 2004. A copy of that extension was sent by the Australian mission to Ms Armstrong on 30 September 2003. [395]
24.31 In September 2003, the WFP renegotiated the contract price for contract A1670. The reason for the amendments sought by the WFP was to remove the 10 per cent after-sales-service fee that had been included in the calculation of the original contract price. At the time of this renegotiation, AWB did not disclose to the WFP that the original contract price for this contract had also included an allowance of US$8.375 per tonne in repayment of the Tigris debt. AWB and the CPA negotiated a further amendment to contract A1670, in particular an increase in the contract price to support the accelerated delivery of approximately 220,000 tonnes under the contract. [396] The terms of these amendments and circumstances in which they were negotiated are set out in Chapter 25.
24.32 After agreement had been reached on the renegotiated terms in September 2003, a letter of credit was established by BNP Paribas. AWB proposed some amendments and corrections to the terms of the letter of credit in November 2003[397], and eventually an amended letter of credit was agreed and issued. In April 2004, there was a further amendment to the letter of credit to reflect the amendment to the terms of contract A1670 agreed to in December 2003. [398]
24.33 AWB fulfilled contract A1670, by 12 shipments between January and April 2004. AWB was paid for each of these shipments under the letter of credit established in its favour by BNP, from funds ultimately drawn from the United Nations Iraq Account. Upon the receipt of the proceeds of sale of each shipment, a portion[399] was set aside for repayment to Tigris. The circumstances in which this occurred are set out in Chapter 27.
Notes
[354] Ex 76, WST.0004.0063 at 0088, paras 83-84, Ex 300, WST.0001.0066 at 0068-0069, para.15.
[355] Ex 76, WST.0004.0063 at 0088-0089, para. 84.
[356] Ex 76, WST.0004.0063 at 0088-0089, para. 84.
[357] Ex 300, WST.0001.0066 at 0069, para. 16.
[358] Ex 1424, AWB.0356.0119_R.
[359] Ex 1424, AWB.0356.0119_R.
[360] Ex 1223, AWB.0439.0151 for contract A1670; Ex 1224, AWB.0440.0173 (AWB.0060.0183) for contract A1680.
[361] Ex 729, AWB.0111.0459_R.
[362] Ex 729, AWB.0111.0453_R.
[363] Ex 1223, AWB.0439.0176 for contract A1670; Ex 1224, AWB.AWB.0147.0088 for contract A1680.
[364] Ex 729, AWB.0111.0459_R for contract A1670; AWB.0111.0453_R for contract A1680.
[365] Ex 729, AWB.0111.0460_R.
[366] Ex 729, AWB.0111.0454_R, AWB.0111.0455_R.
[367] Ex 1223, AWB.0439.0176.
[368] The inclusion of this additional amount was made plain, for instance, in Mr Whitwell's email to Mr Abdul-Rahman sent on 9 December 2002, Ex 1223, AWB.0147.0119. It was to be included under both options A and B in that facsimile, the difference between the two being the treatment of the Iron Filings Claim (as to which see further below).
[369] And thereby of the price which AWB and IGB had otherwise agreed that the wheat would be sold at.
[370] Ex 1133, AWB.5046.0055_R.
[371] Ex 1055, AWB.0140.0390_R.
[372] Ex 1134, AWB.5046.0058_R.
[373] Mr Cracknell was a senior wheat quality consultant with AWB at the time.
[374] Ex 194, AWB.0129.0167.
[375] Ex 1223, AWB.0439.0178.
[376] The amount deducted per tonne represented the total amount of the agreed settlement spread over the 1 million tonnes comprised in this sale (that eventually became contracts A1670 and A1680).
[377] Ex 1223, AWB.0439.0178 at 0179.
[378] Ex 1377, AWB.0129.0215.
[379] Ex 729, AWB.0111.0452_R.
[380] Ex 1211.UNO.1216.0009. Contract A1670 was allocated UN Comm No. 1201376.
[381] Ex 1211, UNO.1217.0010. Contract A1680 was allocated UN Comm No. 1300016.
[382] Ex 729, AWB.5021.0107_R.
[383] Ex 729, AWB.5021.0107_R.
[384] Ex 1223, AWB.0439.0170, AWB.0439.0171.
[385] Which also advised that AWB was eligible for payment for that contract from the escrow account.
[386] Ex 1211, UNO.1217.0007.
[387] Ex 729, AWB.0106.0325_R.
[388] Ex 729, AWB.0106.0325_R.
[389] Ex 1224, AWB.0440.0163.
[390] Ex 1224, AWB.0440.0160.
[391] There is reference to the role of the WFP and to AWB's discussions in April 2003 with them in Ex 1223, AWB.0439.0217.
[392] And after deduction of the commission payable to AWB (see Chapter 27).
[393] Ex 1211, UNO.0003.1453
[394] Ex 1233, AWB.0439.0180, AWB.0439.0181, AWB.0439.0182, AWB.0439.0183; Ex 729, AWB.0152.0048_R, AWB.0152.0049_R, AWB.0152.0050_R, AWB.0152.0051_R.
[395] Ex 1233, AWB.0439.0166, AWB.0439.0167, AWB.0439.0168; Ex 729, AWB.0111.0530_R, AWB.0111.0531_R, AWB.0111.0532_R.
[396] Ex 1223, AWB.0439.0080.
[397] For example in Ex 1211, UNO.1216.0310.
[398] Ex 1376, HDD.0003.0042.
[399] Along with a portion of the proceeds of sale of each of the shipments under contract A1680.
