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  • QA 184
    Question:
    What would an arbitrator consider when reviewing a (partial) default, i.e. failure to ship all or some of a contract?
    Background:
    We have read Q&A 182 on the potential consequences of partial non-delivery with much interest. Whilst we understand you cannot forecast what an arbitration might find, you might perhaps have some thoughts on what the considerations would be? *
    Asked by:
    Academia/press - United Kingdom
    Answer:

    It is important to understand that arbitrators do not take sides as would advocates in a court of law for example. Arbitrations are held purely to determine the facts, and to quantify and apportion the consequences as may be appropriate. To note also that defaults run contrary to the spirit of mutual trust that governs the trade in green coffee: without this trust trading would be extremely difficult if not impossible. Default is therefore viewed extremely seriously and the identity of defaulters, although kept confidential under arbitration rules, nearly always becomes known.

    Unfortunately arbitration awards are normally never published, certainly not so in the United States, the United Kingdom and Germany. This is so first of all because they are considered to be confidential between the parties to the dispute, and do not concern anyone else. And even if individual parties agreed to their publication, then still the arbitral body under whose auspices and rules the arbitration was held might not encourage publication. This because even with the names of the parties and arbitrators deleted, the nature of the dispute could still lead to the identification of any of them. This in turn could have unwanted spin-off effects. Yet it can also be argued that especially awards in arbitrations of principle, i.e. arbitrations that are held with the willing consent of both parties to determine a question of principle, would provide useful guidance to many.

    It would be helpful if existing award archives were opened for review but at this stage such access is not available. However…

    Without extenuating circumstances**, failure to fulfil all or part of a contract automatically places a seller in default and makes him or her responsible for all the consequences…

    In simple default cases (the seller just does not ship and keeps quiet) the likely award against the defaulting party might be

    • Payment of the difference between the contract price and the market or replacement value on the day the buyer held the shipper in default (obviously some time after the shipping period expired).
    • Interest on the above value, calculated at current bank rates.
    • Arbitration costs to be paid by the shipper.

    However, in less straightforward cases we assume the arbitrators will consider first of all whether or not a default has occurred as claimed.  If they find the claimant has a valid case the arbitrators might then look into the circumstances, i.e. how did this come about (what were the circumstances) and finally, what have the consequences been?  Arbitrators will certainly also be looking at the actions taken by both seller and buyer, particularly the extent to which the seller has attempted to mitigate, to minimize, the potential harm the non-delivery might cause.

    Once a default has been established the consequences have to be quantified. Here it is important to note that the aggrieved party will have to provide clear evidence of any loss or damage incurred and what actions had been taken to mitigate (keep to a minimum) such loss. Establishing such loss or damage can be extremely complicated, especially for instance where the buyer is facing a non-delivery claim himself from his own client. Or, where the purchase has been hedged on the futures market and the hedge transaction has had to be reversed. Or, where the buyer had to buy in against the default to safeguard his own onward sales contract. Or, prices have risen or fallen…  But in all cases proof will have to be provided.

    Once satisfied that the consequences are known and warrant action, the arbitrators will proceed to apportion them to one or both of the parties as they consider appropriate.

    In other words, in most instances the considerations and decisions of arbitrators will depend on the circumstances of the case in question. It would be helpful therefore to be able to quote from previous awards but, such information is not readily available…

    To conclude we would point out that all those trading in green coffee should at least be familiar with the provisions of the Standard Forms of Contract that apply, particularly those clauses dealing with the allocation of responsibilities in case of delays or other mishaps.
     
    Chapter 4 of the Coffee Guide discusses these contracts, which are issued by the European Coffee Federation - ECF and the Green Coffee Association of New York - GCA. Chapter 7 deals with arbitration, both with the underlying principles and the different jurisdictions where arbitrations may be held.

    * Q&A 182 in the Q&A Archive reads as follows: "In case of partial contract execution, what penalty if any does the European Contract for Coffee prescribe?' The original communication stated that 'We have signed a contract for delivery of a substantial tonnage of coffee but we have only been able to supply about two thirds. What sanctions are foreseen under the European Contract for Coffee (ECC) for non-delivery of the balance?'…

    ** Extenuating (guilt reducing) circumstances can only prevail if a seller is entitled to claim Force Majeure because the partial performance of the contract is the result of unforeseeable and insurmountable occurrences. But this only applies if these occurrences arise after the conclusion of the contract and before the expiry of the performance period allowed by the contract, and if all applicable rules have been followed. See topic 4.05.08 of the Coffee Guide for more on this.

    Posted 07 March 2008

    Related chapter(s):
    Related Q & A:
    Q&A 006, 182