The Grain and Feed Trade Association (GAFTA) is a renowned association that plays a great role in the global grain and feed industry. Founded in 1878, GAFTA has made a history in the agricultural trade sector. Over the years, it has continually adapted to the changing global economy.
With a membership base spanning over 95 countries, GAFTA is a help behind smooth international trade of grains, rice, dairy, and animal feed. Then, there are GAFTA contracts which is an agreement used in trading across borders whether the shipment of grains, rice, soybeans or animal feeds. It could be unprocessed, partially processed or processed.
As at the time of this writing, GAFTA provides over 100 contracts for its members’ use. “Sometimes, there might be defaults where one party fails to fulfil its own part of the obligations. When this occurs, there are damages to pay for and if the damages are not mutually agreed, GAFTA has made an arbitration system to help resolve disputes among members.
This system ensures that disputes between parties are resolved efficiently and fairly, maintaining the integrity of international trade relationships, market expert Roman Zenon Dawidowicz explains. Roman Zenon Dawidowicz delves more on the default clause, providing a scenario on how this can happen including how GAFTA steps in to help.
Default clause is an important component that provides a clear way of handling breaches of contract and ensuring that both parties understand their rights and responsibilities in the event of a default. Default can be failure to deliver goods, failure to make payment, or any other breach of the contract’s terms.
The default clause entails: If one party believes the other is in default, they are usually required to give formal notice. This notice should outline the nature of the default and requires setting a period for the defaulter to to remedy the situation.
If the default is not remedied within the specified time, the non-defaulting party may have the right to terminate the contract and/or seek damages. The clause may also provide for the recovery of any additional costs incurred due to the default.
An anticipatory repudiatory breach occurs when one party to a contract indicates, either through words or actions, that they will not fulfil their contractual obligations before the time performance is due. This is different from actual repudiatory breach wherein the defaulter failed to fulfil obligations when the time was due.
This type of breach allows the other party (the non-breaching party) to take immediate legal action, even though the actual breach has not yet occurred. The party in breach must clearly communicate an intention not to perform their obligations.
This can be through direct communication, such as a statement that they will not or cannot fulfil the contract, or through actions that make performance impossible. The repudiation occurs before the time when performance is due under the contract.
The breach is “anticipatory” because it occurs in advance of the performance deadline. Besides, the breach must be serious enough to go to the root of the contract. It must be one that deprives the non-breaching party of the primary benefit they were supposed to receive under the contract.
Company A, a grain exporter based in Argentina, enters into a GAFTA contract with Company B, a grain importer based in Egypt. The contract specifies the sale of 5,000 metric tons of wheat, with delivery scheduled for August 1, 2024. Payment is to be made 30 days after the Bill of Lading is issued, on a Cost, Insurance, and Freight (CIF) basis.
June 15, 2024: Global grain markets experience a sudden surge in prices due to a change in weather conditions that causes wheat prices to increase by 25%. July 10, 2024: Company A realizes that fulfilling the contract at the agreed price would result in financial loss and the market has increased more than the contract price.
They contemplate not fulfilling the contract to avoid the loss. July 20, 2024: Company A informs Company B that they are unable to deliver the wheat as scheduled, satting that there were logistics issues and hinting on the financial loss they might incur if they sell at the contract price.
However, Company A does not officially declare their intent to breach the contract. August 1, 2024: The delivery date passes without Company A delivering the wheat or providing any further communication.
August 2, 2024: Company B issues a formal notice to Company A, declaring them in default under the GAFTA contract and demanding either immediate delivery or compensation for the breach.
Roman Zenon Dawidowicz says the court has an option to choose between the agreed delivery date or when renunciation was carried out. The default date is important in order to assess the extent of the damage.
The default occurs on August 1, 2024, the agreed delivery date, when Company A fails to deliver the wheat as per the contract. This failure constitutes a breach of the delivery obligation. For the date of default, it will be the date of the anticipatory repudiatory breach or renunciation which is July 20, 2024.
Roman Zenon Dawidowicz explains that the “date of default” cannot be later than the date of acceptance of a repudiatory breach. If it were to be a repudiatory breach, it will be date of breach of performance of obligation.
Company A’s communication on July 20, 2024, can be said to be an anticipatory repudiatory breach. Although they did not explicitly declare their intention to breach, their statement indicates an inability to fulfil the contract due to logistical and financial concerns.
It is important to know the relevant date of default in cases of anticipatory repudiatory breach as decided by the court. Besides, there should be a clear and unambiguous language when stating renunciation.
Company A(defaulter) was not clear enough on the renunciation but only hinted on the financial loss and all. The court says languages such as “it seems that the parties cannot agree” was tentative and not a firm intention not to comply with the contractual obligations.
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