• THE-COFFEE-GUIDE.gif 
  • QA 239
    Question:
    How are damages for default (non-shipment) calculated? **
    Background:
    We sold coffee for shipment but due to unforeseen circumstances we could not deliver. Because of this the buyer now wants us to pay damages as a result of the termination of the contract. How are such damages calculated? The contract was based on the European Contract for Coffee – ECC.
    Asked by:
    Exporter – Central Africa
     
    Answer:

    Failing amicable settlement, the level of damages can only be determined through arbitration. This requirement lies at the heart of the European Contract for Coffee which states that all disputes that cannot be resolved amicably shall be settled through arbitration, thus avoiding lengthy (and costly) court proceedings*. To note that our answer presupposes that your buyer has formally declared you to be in default as stipulated in Article 13 (d) of the ECC. That is to say, the contract was not fulfilled due to non-shipment, the buyer has declared you to be in default and now claims damages as a result.

    As stated in Section 04.01 of the Coffee Guide, amicable settlement is nearly always the best way in which to resolve disputes. In the case of default such settlements can take many forms, ranging from the outright payment of an allowance to agreeing to an extension or a new contract but on different terms and conditions. Because such settlements are negotiated between individual buyers and sellers we cannot comment on them and our answer is therefore limited to the likely course that arbitrators might follow.

    To note that most jurisdictions accept the principle that in the event of a failure by one party to a contract to perform, the other party is entitled to be put in the same position as if the contract had been performed. Similarly, arbitrators in the coffee trade are nearly always certain to follow the same principle when considering disputes relating to default…

    This means that in the event of non-shipment the buyer would be entitled to what are called market damages, based on the difference between the contract price and the market price on the date of default. The assumption here is that the date of default is the date that the buyer would have given up on the contract being performed and would have been able to cover (replace) the coffee in the open market The actual date of default will depend on the facts of the case but if the steps set out in Article 13 (d) of the ECC have been followed it can be worked out quite easily.

    When determining the level of damages the arbitrators will look at market prices ruling at the time for the same or comparable coffees as well as certain indicators, for example the New York futures market (for arabica – the London futures market for robusta), the ICO Indicators and prices quoted in trade publications and/or market reports. Of course, depending on what the buyer claims the arbitrators may also award other expenses including the cost of the arbitration itself.**

    NB: Chapter 7 of the Coffee Guide deals with arbitration itself – Chapter 4 deals with Contracts and the obligations of each party. Recommended also to read Q&A’s 182, 184 and 199 in the Q&A Archive - these are particularly relevant.


    *   The same principle applies to the Green Coffee Association
         of New York (GCA) contracts.
    ** Of course it is in principle possible that the ruling price on  
         the date of default is lower than the contract price – if so      
         then there would be no damages.
     

    Related chapter(s):
    Related Q & A:
    Q&A 182, 184, 199