• QA 035
    Is credit risk in Europe different from in the United States?
    Your QA 018 deals with the credit risk involved in direct sales but aimed mostly at the USA. Is the situation any different in Europe?
    Asked by:
    Exporter - Honduras

    Again, we can only respond in general terms but, yes, there are differences. 

    The European Contract for Coffee (ECC) states that the coffee remains the property of the sellers until it has been paid for in full. No third party can therefore lay claim to any coffee that has not been paid for. This is important when documents are sent in trust because, if a buyer is declared insolvent after the documents (or the coffee) have been received but before payment has been made, then the judicial authorities (or liquidators) have no claim to the goods.

    However, in some European countries national insolvency law takes precedence over individual contract conditions. In how far sellers can enforce this ECC stipulation may therefore also depend on local law in individual European Union member states and other importing countries. 

    In the United States there are no doubts in this respect. When invoked, bankruptcy law (11 USC365 (e) 11) overrides all the terms and conditions of the Green Coffee Association (GCA) Contract. As we have previously said, most coffee is sold on deferred payment terms in the United States and Canada, and the risks are great. Selling for example net 30 days from delivery means the seller is granting the buyer possession 30 days before payment. If the buyer goes bankrupt, the seller may lose the value of the coffee. 

    There can even be problems with payments that are made within the 90 days prior to a bankruptcy. This is called the preference period and if the liquidator or trustee can show that the payments were not normal (i.e. extraordinarily late or extraordinarily early), then a supplier might even be forced to return the payments to the bankruptcy pool.

    But when it comes to selling to small specialty roasters in Europe then a good part of such differences may be rather theoretical. European specialty roasters too mostly, if not nearly always, operate on credit and retrieval of unpaid goods may not be feasible which suggests  that channelling sales through well-established importers remains a viable alternative.

    Posted 05 August 2005

    Related chapter(s):
    Related Q & A:
    QA 018