Rice and contract terms

by Pamela Kirby Johnson OBE, Director General, The Grain and Feed Trade Association (Gafta)

Rice contracts may be negotiated and agreed up to twelve months or more ahead of the time for shipment. This means buyers and sellers have taken a view on what the forward market price will be when the time comes for the contract to be performed. It is expected that every contract will be fulfilled on the terms agreed irrespective of any rise or fall in the market price.
Most transactions start with either an email or telephone call between sellers and buyers by one of them making an offer, with an acceptance of that offer and their agreement on the price. When these three elements, offer, acceptance and price, are agreed a contract is made.
However, as Groucho Marx said, a verbal contract is not worth the paper it’s written on. Clearly it is not good business practice to leave the arrangements for fulfilling a complex transaction to a telephone call or to an email exchange. So the parties, or their brokers, will follow up a deal with a written contract confirmation. This confirmation of the contract should identify key terms such as price, the delivery or shipment period and detailed quality specifications.

 

Letters of credit

Along with the price and quality terms, the time for delivery or shipment is probably the most important factor which traders will bear in mind when negotiating a deal. Any stipulation as to time for performance is generally thought to be at the heart of a contract and it is not unusual to hear the comment ‘time is of the essence’.
Likewise, payment for the goods is obviously crucial and generally speaking it will depend upon the relationship between sellers and buyers as to whether any credit terms are agreed. Countries have witnessed tectonic shifts in their economies where prices have dramatically risen or fallen; nevertheless by the time of performance contracts still have to be fulfilled. Letters of credit are mostly used to secure payment for goods. When letters of credit are not opened in time or their terms are not in accordance with banking or contract requirements it is a breach of the contract and will probably give rise to a dispute. Gafta contracts contain instructions on how the documents representing the goods should be tendered and how payment should be made, with useful codes of practice to give guidance.

Specification factors

Clear, quality specifications are crucial and based on a number of factors. For sellers it is the anticipated harvest or what is available for that season’s shipments. For buyers it is the needs of their customer or final consumer, not forgetting the legislation buyers have to comply with in the country of destination on import, which will often differ from that of the exporting country.
Most rice is described simply in contracts as either Basmati, Long, Fragrant, Paddy, Husked, Milled, Parboiled or Glutinous Rice. Some rice crops are handled and transported in vast bulk tonnages and that implies that the harvest from one producer is similar enough to that from any other, to be sold via a common grading and distribution system. On the other hand depending on the rice variety or origin, for some rice it will be necessary to maintain its identity, for it to be segregated and labelled specific to origin or quality.
Depending on the origin or rice variety, the parties will negotiate the classification of rice and the quality specifications on each and every transaction, concentrating on moisture content and maximum percentages of foreign or damaged grains which must not be present. Moreover, in accordance with the Gafta terms there is an over-riding requirement that the rice is guaranteed to be in good condition and of satisfactory quality at the time of shipment, with the promise that the goods must be fit for all purposes for which goods of the kind in question are commonly supplied, that is for human consumption.

During the negotiation of a contract buyers may also seek additional guarantees with regard to limits of undesirable substances or pesticides levels depending on their own national legislation in the country of import.

 

The GM issue

Genetically Modified (GM) rice poses a major issue for many countries, be they exporters or importers. For example, in the European Union it is unlawful to import rice of a GM event that the European Food Standards Agency has not approved. There have been cases where rice has been checked by customs officials when imported, seized and in some cases destroyed if comprising wholly or partially an unapproved GM event. Currently for feed imports there is an EU low level presence tolerance of 0.1 percent, but this does not apply to food. At the time of writing this article representation is being made to the European Commission to adopt this ‘technical solution’ for food. Unfortunately, many countries’ citizens still react adversely to GMO and it becomes a political and emotive issue. Our representation on this matter is that decisions and approval processes should be based on science based policies and evidence.

The Gafta standard

Many of the other contract terms will not be the subject of detailed discussion by the parties at the time of negotiation as they rely on the knowledge that they will be covered by the appropriate Gafta standard contract terms. Whether the buyers and sellers are specialists in milling or food processing, together with the shippers, exporters and importers, they are all traders of the vast movement in rice being transported around the globe, and who rely on the standard Gafta CIF or FOB contracts. These standard terms will give instructions to the buyers and sellers on the next steps in fulfilling the transaction and provide protection in certain circumstances. They will also show who carries the risks and responsibilities for the goods at any given time. Good contract terms will alleviate many risks parties face and this is a reason so many companies incorporate in their contract confirmations reference to the Gafta standard terms and conditions.
Gafta contract forms provide continuity of purpose and operational consistency of the way trade is customarily done and complement the essential elements of the trade by setting down the means and methods by which a contract is to be performed by the parties. These standard contracts provide a framework on which the parties may rely to supply rice from country of origin to country of consumption. When choosing to incorporate a Gafta form of contract in their own individual contract terms, the parties should have uppermost in minds the means and mode of transport and choose a contract appropriate for the carriage of goods by sea, by road or rail, in bulk or bags, or in containers, as the situation warrants.
A trader will need to know where he stands either on having to deliver the goods or being in a position to receive the goods. What happens if ships do not arrive on time due to shipping vagaries? Then the contract terms allow the possibility of an extension of time to be claimed for a few days, with payment of allowances to compensate for the delay. But then any breach of an obligation regarding shipment and delivery means a breach of a condition of the contract, which could give rise to the innocent party having the right to reject.

 

‘Force majeure’: unforeseen circumstances

The agricultural trade has felt the impact more than most of changing weather patterns. We have witnessed droughts, fire and floods, in various countries in just a few years. These major changes to what is thought to be traditional weather patterns have resulted in loss of crops and variations in quality. What happens then when there is an impediment to shipping such as strikes, floods or fire often referred to as ‘force majeure’? In those circumstances the contract will allow a period of time for the impediment to end and for the parties to continue with the fulfillment of the contract.
On occasion contracts may have to be cancelled where a government imposes an export ban, and where there is no fault in those circumstances by the exporter, there would be no breach of the contract. Otherwise, if a party fails to fulfill his obligations they will be in breach of the contract terms.
If a party is in breach of the contract the default clause comes into play and provides the formula to compensate the innocent party for that failure. Depending on the precise nature of the breach damages are calculated on the basis of the difference between the contract price and the market price, on the day of default, on the mean contract quantity. The intention being to put the innocent party in the financial position they would have enjoyed had the contract been fulfilled.

 

Beyond contracts

To accompany contracts there are a number of useful rules, guides and codes of practice. Incorporated into the contracts are weighing rules so that goods are weighed by the same methods worldwide and likewise there are rules for taking and testing samples which apply both at load ports at origin and discharge ports.
There will of course be difficulties and disputes from time to time and the most popular method chosen by parties for the settlement of their disputes is through arbitration. When parties enter into a contract incorporating a reference to the terms and conditions of a Gafta contract form they have agreed that their disputes will be heard and determined by arbitrators in accordance with the Gafta Arbitration Rules. The object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal comprising commercial people who will deal with the case without unnecessary delay or expense.

Arbitrators have to be familiar with the operations in the commodity markets; have knowledge of the basic principles of contracts and; also understand the legal principles underlying contracts, carriage and insurance contracts and letters of credit. Arbitrators are acting in a judicial capacity to ensure that they meet the basic requirements of justice and must act with fairness and impartiality towards both the parties.

Mediation

Although not often used, mediation is an alternative dispute resolution procedure to facilitate the parties in settling their differences to find a resolution and reach a settlement.
All the contracts’ clauses provide a wide range of measures to ensure the smooth trade from origin to destination. The standard contracts Gafta provides are the standard terms which are almost entirely in place for commercial, financial and legal purposes, to be adopted by two parties, a willing buyer and a willing seller, to form the basis of their individual transactions.
However, there are additional demands made outside of the contract terms by consumers and retailers who need assurances on the safety of their food. For these purposes GTAS, the Gafta Trade Assurance Scheme, was introduced to help demonstrate an all year round good practice and due diligence for food safety. GTAS aims to provide, within one complete HACCP based trading scheme, the best professional practices which are designed to maintain consumer confidence for the delivery of safe food.

Future challenges

Looking to the future, there are emerging issues where parties need to have assurance on the social conditions in countries of origin and also in relation to the environment. Environmental challenges are many and varied, and consumers are keen to know that they are supplied from sustainable sources. When any future biotechnology, social and environmental demands are made the mechanism needed by the trade on how to meet the challenges can be addressed within the framework of the Gafta Trade Assurance Scheme. In essence GTAS is the standard of best practice for all trade operations.
The theory of comparative advantage, common sense and experience all tell us trade is good for economic growth. Trade helps all areas of major concern today, including social and environmental standards. The association started over 130 years ago with the aim to promote free trade internationally and this still applies today with Gafta continuing to seek an ever better trading environment.

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