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  • QA 180
    Question:
    On what grounds, if any, can a buyer reject a shipment and what would the consequences be?
    Background:
    On what grounds, if any, may a buyer withhold payment? And, on what grounds, if at all, could a shipment of green coffee be rejected on arrival? What would happen to such a shipment and what redress would a shipper have? *
    Asked by:
    Financial institution - Switzerland
    Answer:

    In the normal course of business coffee quality disputes are, usually, settled through payment of an allowance. In extreme cases arbitrators may award cancellation of a contract, with or without a penalty, in which case the goods are invoiced back to the seller. To clarify…

    As already stated in QA 179 most of the international trade in green coffee takes place under standard contracts. The ECF (European Coffee Federation) and the GCA (Green Coffee Association of New York) range of contracts deal with the trade of green coffee to Europe and North America respectively. These two areas alone accounted for some 80% of world import consumption in the 2005/06 Coffee Year (1 October - 30 September). The same contracts are also used for trade to other destinations, for example in Asia, and set the standard. Both ECF and GCA contracts expressly exclude recourse to the law for the settlement of disputes, stating instead that this shall be resolved through arbitration. This is partly to prevent consignments being held up endlessly because of lengthy (and costly…) court proceedings, but also because the trade in coffee is complex. Dispute resolution requires insight and expertise not easily found outside the coffee trade itself.

    If a dispute arises concerning quality the parties can agree settlement between themselves through the payment of an allowance. If they cannot then the matter has to be decided through arbitration. However, a shipment can only be rejected on the grounds of quality if the arbitrators make an award to this effect.

    ECF rules state that only if it can be proven that there is a radical difference in quality between what was sold and what was delivered, or that the coffee is unsound, then arbitrators may award invoicing back (at a price to be decided…). GCA rules state that if the buyer believes the quality deficiency is great enough to constitute gross negligence or fraud, he may file a technical arbitration, to seek cancellation of the contract, with or without damages. The technical arbitrators may convene a quality arbitration panel to assist them.

    If the possibility of rejection is not specifically written into the commercial contract as a variation to the standard contract's conditions, then buyers cannot unilaterally reject shipments on the grounds of quality!  In instances where they believe grounds for rejection exist they must declare a quality dispute and submit the matter to arbitration. The point to note here is that the buyers can only declare a dispute if they have paid for the goods. Failure to pay would put them in default. **

    The only possible unilateral rejection is when a government entity (customs, health authority, etc) prohibits a shipment from being imported because under local regulations it is not fit for human consumption.  For example: In the United States all food imports must pass quality inspection by the FDA: the US Food and Drug Administration, a Federal Government Agency. All US buyers therefore purchase basis 'No Pass - No Sale'. This places the rejection risk firmly with the supplier. In the European Union food security legislation is increasingly stringent, particularly as regards mould infestations that may also lead to rejection. In Japan shipments that contain traces of prohibited pesticides, or exceed permitted residual limits, are routinely rejected.  In all cases the goods must either be re-exported, or (in the US) be reconditioned to bring them up to an acceptable standard. If all fails they must be destroyed. ***

    The difficulty all buyers face is this: they are obliged to take up documents and make payment for goods that have not yet arrived and therefore have not been inspected by them. Should official rejection occur on arrival then the buyer faces serious problems, much more so than if a consignment is simply of inferior quality (because in that case it can be resold, albeit no doubt at a loss). The international trade in coffee is largely based on trust and therefore is, mostly, conducted between parties who know each other well.  The ever-increasing severity of food security regulations in consuming countries is undoubtedly expanding the role of the so often maligned middlemen (importers, trade houses) who are willing to accept these risks and provide roasters with the necessary guarantees on contract execution.

    *  This question covers two issues: withholding payment, and rejection of goods. The rejection issue is dealt with in this Q&A - for the payment issue please see Q&A 179. Some of the background text is identical in both Q&A's.

    ** A contract that makes provision for rejection. For example, an importer or a trade house sells to a roaster  'delivered roasting plant' with the proviso that only an agreed quality can be delivered. If rejected the seller will substitute and dispose of the rejected parcel elsewhere. This is common in the mainstream industry. In the specialty industry roasters sometimes reject deliveries on unclear grounds but importers replace them in order to retain the client

    *** In Japan rejected shipments must either be returned to the exporter concerned, or re-exported elsewhere. Q&A 002 in the Q&A Archive deals with FDA rejection rules for the US. For more on European Union rejection rules see topic 12.08.01 of the Guide.

    Posted 14 February 2008

    Related chapter(s):
    Related Q & A:
    Q&A 002, 006, 010, 101, 177, 179