Default Situations of Buyer and Seller According to GAFTA (Grain and Feed Trade Association) Rules Sharp v. Viterra Decision Review

The Grain and Feed Trade Association (GAFTA) is an international London- based trade association with over 1ç00 members in 100 countries, consisting of traders, brokers, superintendents, analysts, fumigators, arbitrators, and other professionals in the international grain trade.

GAFTA sets out to promote international trade and protect the interests of its members. Activities include definition and regulation of

 

•  Quality standards, conditions of trade, guaranties
•  Shipping documents and delivery conditions
•  Terms of payment
•  Maintenance of a Register of Superintendents
•  Dealing with problems and extraordinary circumstances
•  Insurance
•  Non-fulfilment of the contract
•  Weighting rules, sampling, analysis and insurance

Companies engaged in international trade conduct their activities on the basis of uniform contracts of this institution. In addition to these institutions, which deal with disputes arising out of virtually all types of commercial contracts, there are a few specialised arbitration mechanisms tailored to the demands of a particular sector. These arbitration institutions are known as “commodity arbitrations”. These arbitration services are provided by trade associations, particularly in the major port centres in London. Due to their efficiency, speed and sector-specific expertise, commodity arbitrations have established trust and reputation among traders. As an indication of this, more than 70% of disputes arising from these commodities are handled by GAFTA and FOSFA.

One of the most frequently encountered problems is the default of one of the parties acting as Buyer and/or Seller against the other party of the contract by acting in breach of its obligations under the contract, which takes GAFTA’s contracts as a reference and seeks the application of GAFTA Arbitration Rules to a contract. In the context of the concrete case; the Buyer’s failure to take delivery of the cargo although it is ready within the time specified in the contract – which may differ according to the modes of carriage -, failure to make payment within the specified periods, the seller’s failure to deliver the commodity within the specified periods and / or at all. In response to these problems, the Buyer or the Seller has some optional rights against the defaulting party.

GAFTA has regulated these issues in the so-called conventions No. 48 and 4y issued by GAFTA.

Contract No. 48 is a transport contract concerning the shipment of bulk packages or cargoes on CIF, CIFFO, C&F and C&FFO terms. Contract No. 4ç is a delivery contract regulating the transport of bulk packages and sacks from Central and Eastern Europe on FOB (Free on Board) terms. The default situation is regulated in Article 24 of Contract No. 48 and Article 1ç of Contract No. 4ç.

(a) The party other than the defaulter shall, at their discretion have the right, after serving a notice on the defaulter to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

(b) If either party be dissatisfied with such default price or if the right at (a) above is not exercised and damages cannot be mutually agreed, then the assessment of damages shall be settled by arbitration.

(c) The damages payable shall be based on, but not limited to, the difference between the contract price and either the default price established under (a) above or upon the actual or estimated value of the goods, on the date of default, established under (b) above.

(d) In all cases the damages shall, in addition, include any proven additional expenses which would directly and naturally result in the ordinary course of events from defaulter’s breach of contract, but shall in no case include loss of profit on any sub-contracts made by the party defaulted against or others unless the arbitrator(s) or board of appeal, having regard to special circumstances, shall in his/their sole and absolute discretion think fit.

(e) Damages, if any, shall be computed on the quantity appropriated if any but, if no such quantity has been appropriated then on the mean contract quantity, and any option available to either party shall be deemed to have been exercised accordingly in favour of the mean contract quantity.

(f) Default may be declared by Sellers at any time after expiry of the contract period, and the default date shall then be the first business day after the date of Sellers’ advice to their Buyers. If default has not already been declared then (notwithstanding the provisions stated in the Appropriation Clause) if notice of appropriation has not been served by the 4th business day after the last day for appropriation laid down in the contract, the Sellers shall be deemed to be in default, and the default date shall then be the first business day thereafter.

**Clause (f) is not included in Contract No. 4ç. In Contract No. 48, the term ‘quantity appropriated’ is used, while in Contract No. 4ç, attention is drawn to whether a specific quantity is specified as ‘quantity called for’.**

According to clause (a), the party other than the defaulter shall, at their discretion, have the right, after serving a notice on the defaulter, to sell or purchase, as the case may be, against the defaulter, and such sale or purchase shall establish the default price.

According to clause (b), if either party is dissatisfied with the default price or if the right in (a) above is not exercised and damages cannot be mutually agreed upon, the assessment of damages shall be settled by arbitration.

According to clause (c), the damages payable shall be based on, but not limited to, the difference between the contract price and the default price established under (a) above or the actual or estimated value of the goods on the date of default, as established under (b) above

As stated in clause (a), the non-defaulting party shall have the right to decide whether to mitigate its damages. However, clause (a) clearly specifies that the non-defaulting party is under no obligation to mitigate the defaulting party’s damages.

Clause (c) further specifies that damages shall be determined by calculating the difference between the contract price and the default price, and therefore, the defaulting party will be responsible for this difference.

Due to the confidentiality of GAFTA arbitral awards, it is difficult to determine whether an arbitrator would award the full contract price to the non-defaulting party in this particular case.

In the event of default, the contracting parties may be faced with the problem of compensating the counterparty for a large number of losses, especially due to fluctuations in grain and feed prices in the market. Therefore, it is of utmost importance that the contracting parties fully comply with the GAFTA Rules throughout the process and take all necessary measures to take all necessary precautions to avoid damages.

We would also like to present for your review a decision rendered in a GAFTA arbitration regarding the matters we have outlined in the appendix of our document.

Sharp v Viterra Decision Review:

In the case of **Sharp v Viterra**, the parties had entered into two contracts for the purchase and sale of red lentils and yellow peas under C&F Free Out Mundra terms. When the goods arrived at the discharge port, they were cleared through customs and stored, but the buyers did not make the payment. The sellers took back the goods and resold them; during this time, India implemented new import tariffs, which increased the domestic market value of the goods. The sellers sought compensation under the GAFTA Default Clause.

The Trade Court determined that, under clause (c) of the GAFTA Contract No. 24 Default Clause, the appropriate approach to calculating damages was to base them on the value of the goods according to the terms of the contract where the dispute arose. In this case, the values of the goods were assessed based on the purchase cost at the port of origin and additional transportation costs, rather than the domestic market values on the date of default. The court’s decision highlights the importance of accurately analyzing the value of goods according to the contract delivery terms and providing satisfactory evidence of the goods’ value at the date of default. The court found the sellers’ evidence to be valid and justified in this case.

GAFTA is fundamentally a specialized institution created by and for traders, focusing on all aspects of international trade in the grain sector. As a result of this niche specialization, GAFTA’s arbitration mechanism is specifically designed and tailored for such commercial activities. Consequently, GAFTA’s specialized structure and flexible arbitration processes ensure the effective resolution of commercial disputes.