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  • QA 191
    Question:
    What are the functions and responsibilities of brokers?
    Background:
    What are the functions and responsibilities of brokers?
    Asked by:
    Exporter/trader - Costa Rica
    Answer:

    Brokers are independent intermediaries who arrange transactions between buyers and sellers. For this they charge a fee, the brokerage.  Usually this is a percentage of the transaction value but it may also be a fixed amount. Normally brokers are registered or licensed by an authority or supervisory body in their country of domicile.

    In years gone by brokers conducted business in specific geographical areas: a city or a country. Today however many operate internationally, for example those who are linked with the futures markets of New York and London. And, such companies or individuals are registered and licensed.

    Green coffee brokers operate in specific geographical areas: for example in the European Union, or in the United States and Canada. They arrange green coffee trades between parties in those areas and, usually, do not work with producing countries *. True brokers disclose the names of both buyer and seller, and prepare a contract that both parties sign, together with the broker. However, in the US intermediaries who sell on behalf of exporters or producers abroad may also be called brokers: they disclose the name of the seller/buyer and they are not responsible for the execution of the contract.

    Intermediaries who represent exporters/shippers in consuming countries are mostly called agents, certainly so in Europe. Normally they work on a commission that is agreed with and paid by the seller. The difference with brokers (who work with many buyers and sellers) is that an agent usually only represents one or perhaps two exporters/shippers from a particular producing country**. But most also represent exporters/shippers from other countries. Agents do not have to be registered or licensed to handle coffee: in theory anyone can offer to represent an exporter or shipper but of course buyers will not deal with 'unknowns'. They would expect a respectable agent to operate in accordance with local regulations and to be a member of at least a Coffee Association, a Chamber of Commerce or some such formal body.

    Agents promote the coffee of 'their shippers' and will provide regular market information. They will report on how buyers judge the quality of individual shipments and will assist in case of problems. True agents work on a commission basis and disclose the names of both buyer and seller - they may also prepare the contract but there are sellers who prefer to prepare their own.

    Brokers or agents who sell "on behalf of" , i.e. they disclose the name of the seller and the buyer, are normally not responsible for the execution of the contract. However, if they do not disclose the name of the seller or the buyer then they are 'taking the coffee over their own name'. In so doing they become responsible for contract execution.

    They can no longer claim to be either a broker or an agent because they now act as principals and become dealers. This is also important to know in the sense that brokers or agents who trade for their own account are fellow buyers or sellers. And whose advice or information may be influenced by their personal exposure to the market…

    To summarise…

    In our view the function of a broker is to bring independent parties together so that a transaction between them may be arranged. The broker's responsibility is to draw up the contract, correctly so, and to have this signed by both parties. After this the broker's responsibility basically ceases unless the contract states to the contrary. The true agent on the other hand remains responsible for providing service to the sellers, for example by passing on information from the buyer, passing on samples, helping to smooth completion of the contract, etc.

    Without knowing the exact circumstances or event that led to your question we cannot comment on your question in any more detail. However, one should note that the European Contract for Coffee - ECC (see www.ecf-coffee.org) states in Article 27 that "brokerage/intermediary's commission becomes due on the making of the contract without regard to its performance and is payable on whichever of the following events first happens viz. on fulfilment of the contract, on default by either party or on cancellation". The point of this is that the broker or intermediary earned the brokerage or commission by arranging a contract between the two parties that was accepted by both. The inference is that 'brokerage' and 'commission' are not the same with 'brokers' earning the first and 'intermediaries (or agents)' earning the second.

    The Green Coffee Association of New York's contract - GCA (see www.green-coffee-assoc.org) on the other hand states that "Broker's commission is earned and payable at the same time coffee is tendered, or on the last day of the period prescribed for delivery if by consent of buyer and seller, no tender is made. However, on contracts sold subject to approval of quality by buyer, if no approval is made, there is no commission payable. Whether it is buyer or seller responsibility to pay broker's commission should be specified at the time of contract."

    These two clauses (ECC and GCA) suggest the terms broker and agent can be interpreted differently. This is probably why ECC refers to 'intermediaries' rather than 'agents', which is further supported by the fact that ECC mentions both brokerage and commission, whereas GCA refers to commission only.

    Finally, US security regulations (see Section 05.04 of the Coffee Guide) today require exporters to name a US entity as their import agent. Furthermore, many US roasters buy coffee 'ex dock' rather than FOB, meaning that someone else takes responsibility for the clearing and receiving of coffee from abroad, then delivering it to the roaster. This is where the functions of broker, intermediary/agent and dealer become blurred in that some brokers and intermediaries/agents also assist in the import function.

    * Green coffee trade or physical coffee trade: sellers sell and buyers take delivery of actual green coffee. This as opposed to those trading contracts that are offset against each other, for example as often happens on the futures markets. Sometimes known as 'paper trade'.

    ** For example, one exporter who may specialise in specialty coffee and another who perhaps mostly deals in mainstream coffee.

    Posted 13 May 2008

    Related chapter(s):
    Related Q & A:
    Q&A 018, 027, 035,090, 171