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  • QA 199
    Question:
    What can a buyer do when his shipper defaults?
    Background:
    Over the past few years we have developed some direct contacts, leading to multi-shipment contracts with a particular shipper. They have now demanded we revise the price for the remaining container under a previously concluded contract upwards 'because prices have gone up'. This we have refused and now no shipment is forthcoming, causing us embarrassment. What would be our options here?
    Asked by:
    Roaster - European Union
    Answer:

    Default, in this case the deliberate failure to honour a contract, is extremely serious as it flies in the face of all that makes the international trade in green coffee feasible: mutual trust and total respect for commitments that are undertaken. Demanding a price revision because a particular commitment has become less attractive demonstrates the party in question does not understand this principle and suggests he or she should not be in the business.

    Nevertheless, one should also mention that in recent years there has been much promotion and hype around direct contact between roasters and producers, particularly so in the specialty segment of the market. Undoubtedly this has also brought parties into play that may not always be fully conversant with the obligations and the risks that direct business brings, particularly in the case of forward shipment contracts. This does not detract from the seriousness of default but, it is not unusual for a buyer to try and assist a shipper in some way so as to resolve a problem and maintain a working relationship. Or to ensure delivery is made because the buyer himself has already sold the coffee in question on. And so on…

    But, assisting shippers by adjusting prices upwards might also entail a risk that some might begin to see this as an entitlement, something that again chips away at the structure of the trade in green coffee. If such an idea were to be entertained then why should buyers not react in the same way - the market is down so we now want a reduction? If shippers and buyers cannot rely on each other's integrity then forward trading would become impossible. More likely though is that those engaging in such practices will find it increasingly difficult to do business, certainly not at reasonable prices

    Whatever the case, once agreed a contract is a contract and there is no formal obligation on a buyer to accept any subsequent changes. Of course he may agree if he so wishes but, he is not obliged to!

    We assume the transaction in question was based on the European Contract for Coffee (ECC). Accordingly the buyer has the right to declare a seller who fails to ship to be in default. Once the buyer makes this declaration he can claim discharge of the contract with or without damages. If the seller does not comply or disputes the amount of the damages then the matter shall be determined by arbitration at the place stipulated in the contract. Arbitrations can be held also if a seller refuses to cooperate with the procedure. *

    If a favourable award is obtained but the seller refuses to honour it then the buyer can

    1. Approach industry associations and coffee authorities in the seller's country of domicile for assistance;
    2. Request for the defaulting seller's name to be 'posted' (made public) by the Coffee Association under whose auspices the arbitration was held;
    3. Undertake legal proceedings. Whether this is worthwhile will depend on how the buyer sees the chances of successful litigation in the seller's country of domicile.

    It is not for us to suggest what shippers and buyers should be doing other than to say that deliberate defaults, by either, should not be without consequences. In reality though not all such cases are 'punished' because an aggrieved party cannot always afford the time and effort to go through the entire arbitration procedure, let alone follow this up with legal action. Particularly in foreign and unfamiliar countries where the legal environment may not always be entirely accommodating… 

    In this particular case, assuming no amicable settlement is possible, an initial action could be to make the formal default declaration and simultaneously inform the industry association or coffee authority in the country in question. Depending on the reaction one could then decide whether to proceed further - under ECC a buyer has 45 calendar days from the last day of the contractual shipping period to lodge a formal claim if the coffee has not been shipped. If an arbitration is held and a favourable award is obtained but the losing party ignores it, then the buyer could decide whether to have the offending party 'posted'. If the defaulting party ignores also this then an assessment will have to be made whether the pursuit of legal process will be worthwhile. **

    We would repeat that deliberate defaults are extremely serious and can cause great damage, far beyond what one might imagine. What if, for example, a buyer had hedged the forward purchase by selling futures against the physical coffee? The market goes up and the shipper defaults. Now the buyer i) does not get the physical coffee and ii) has to face the loss on the futures that have to be bought in. Price fluctuations on the futures markets can sometimes be far in excess of what takes place in the physical markets. ***

    Chapter 4 of the Guide discusses Standard Contracts (the ECC and the GCA) in great detail whereas Chapter 7 deals with Arbitration. Q&A's in the Archive that deal with related issues are Q&A 006, 179, 180, 182, 184 and 198.

    *   Under ECC (Europe) and GCA (North America) all disputes shall be decided upon through arbitration. If necessary arbitration awards can subsequently be enforced through the courts, depending on how the successful claimant sees his or her chances of doing so successfully.  The industry's preferred way to resolve disputes though is through amicable settlement.

    **   Using an arbitration award one can also obtain a local court order to freeze any assets a defaulting party may have in the aggrieved party's own country. In theory this could include shipping documents that may be presented for payment to any other buyer. However, one would need advance information on when such documents are to be presented as they would have to be seized before the other buyer pays for them… Unlikely therefore but, not entirely impossible…

    *** Where (serious) loss occurs, an aggrieved party will probably also wish to obtain an official arbitration award in order to demonstrate the legitimacy of that loss to the tax authorities.

    Posted 29 August 2008

    Related chapter(s):
    Related Q & A:
    Q&A 006, 179,180, 182, 184, 198