Most of the problems encountered when buying or selling grain are resolved mutually, probably on a give and-take basis, reflecting a sound and valued trading relationship. Some occasionally escalate into disputes, where one party takes an intransigent view of their position, producing an impasse which cannot be settled mutually.
This is where third-party involvement is frequently necessitated, calling for the appointment of a mediator or arbitrator. Dispute management, involving a professional consultant, also is a good commercial alternative.
Mediation. The process and principles of mediation are generally well known and widely used in the United States in many sectors of business and commerce. Elsewhere in the world, dispute resolution by mediation is less well known and, consequently, less used.
The fundamental difference between mediation and arbitration is that arbitration imposes a decision on the parties by which they are legally bound, while mediation seeks to establish a point at which both parties can say, in simplistic terms, "I'll settle for that."
At that time, the parties write up their agreement or ask the mediator to do so. In effect, the parties write a new agreement to deal with the problem that caused the dispute, or they write an addendum to the original contract and move to implement it. Ideally, the contract in dispute is completed without hindrance to the commercial relationship.
In order to reach a settlement by mediation, both parties must enter the proceedings with a desire to find common ground. Without this desire, the process is almost bound to fail, especially if one party is adamant that their position is right.
The mediator acts as a go-between, talking to the parties separately to ascertain what each wants from a settlement. He moves between the two sides to "tease out" the strands of their respective positions until he feels the parties are ready to meet face to face, or, through him, to make an offer. Even at that stage, agreement may not be reached, and the parties are free to withdraw. The mediator also may decide that settlement is not possible and he may withdraw.
A mediator is usually paid in advance of the hearing, with both parties agreeing to share the costs in an effort to achieve an acceptable settlement.
The failure of mediation is not a hindrance to the subsequent use of arbitration, as provided under the rules of most trade associations. A good precaution to be taken by the claimant once it has been agreed to mediate is to notify the other party of their intention to seek settlement by arbitration if mediation does not produce a settlement. This secures their position and prevents them from subsequently falling foul of a "time count-out" — the 90-day period in which arbitration must be claimed under the rules of the London-based Grain and Feed Trade Association.
Arbitration. If arbitration follows an unsuccessful mediation, the mediator — if he is also qualified as an arbitrator — may not participate in any role, nor may his notes made during the mediation be called for by either party or by their legal advisers.
The principles of arbitration are generally well known, and the process is widely used to determine disputes in the grains and commodities businesses. Arbitration is the determination of a dispute by a neutral third party (or a tribunal of three), which imposes a decision on the parties by which they are legally bound.
The process may be conducted on "documents only," the exchange of written submissions of claim and rebuttal, accompanied by documentary evidence and witness statements. Alternately, a hearing may be required, at which the parties will present their cases orally, having first exchanging statements, submissions and documentary evidence.
Witnesses may be called, and will be subject to examination and cross-examination by the other party and by the arbitrator. Many companies choose to hire a lawyer, if the rules allow, or employ an experienced trade representative to present their case. The trade representative is often a qualified arbitrator who knows the procedure and who may write the submission for his party.
An arbitration hearing is basically informal, not to be approached as many would an appearance in court. But there are formalities and procedural niceties to be observed.
The arbitration procedure follows court procedures: claimant, respondent, claimant's last word. If a counter-claim has been entered, the procedure will be claimant, respondent, counter-claimant, claimant's last word and counter-claimant's conclusion.
To enter into settlement by arbitration, the parties must have included an "Arbitration Clause" in their contract terms. In most legal jurisdictions, an arbitration agreement has to be in writing; it will not suffice to claim there was an oral agreement. My experience shows that without this clause, a party which is claimed against later is extremely unlikely to agree to arbitration. At that stage, the claimant has little option other than to take the respondent to court, with all the expense and time delay involved.
The solution is to be sure your contract terms contain an arbitration clause.
Dispute management. In overly simple terms, dispute management is the adoption of an in-house system to ensure that the stable door is properly fastened so the horse cannot get out.
Dispute management involves designating a suitably experienced staff member who has time within their existing work-load or, more commonly, hiring a consultant to examine the company's trading procedures and practices.
A consultant will often produce better results than an in-house checker, for the latter is like proof-reading for errors in something you have written — in effect, you read what you think is there rather than what is actually there. A fresh approach from an outsider will almost certainly detect those errors which everyone within the company has become used to.
The examination will check the note-keeping (make sure every trader has a day-book and uses it constantly); the style, layout and content of contract confirmations; counter-parties; internal administration and practices; book-keeping; record filing; invoices and payment — the list can go on and on. The idea is to eliminate, as much as possible, the procedural holes and system "bugs" to prevent the glitches and procedural errors which all too frequently cause or lead to disputes.
REAL CASES. I was recently called upon by a family-run trading company that was locked in a serious dispute with a company in another country from whom they had purchased. My client was asked to pay alleged damages of nearly £125,000 (U.S.$200,000).
My first question to the managing director was, "May I have a copy of your contract note?" I was amazed when he told me that it was not their practice to send such confirmations, and that as word of mouth had been suitable for his father, so it was good enough for him. The company had, though, accepted the contract note issued by the seller, even though it had not been received until after movement of the goods had started.
This confirmation imposed requirements and contract terms which the buyers (my party) had not discussed at the time of making the transaction, and included trade association terms of which they were not aware. It was almost inevitable that there would be quality problems with the product. Had there been a water-tight agreement and clear contract terms, the transaction would probably have gone through unimpeded.
This could have been avoided had the buyers taken care to put in writing their expectations and requirements. It is commercial naivete in this day and age to fail to look after your own interests and leave yourself so vulnerable.
In my role as a commodities consultant, I am frequently called in after a nasty, and probably costly, dispute has arisen, and which I am expected to resolve. That's why I promote the adoption of a positive, "Let's do it now" approach before such a dispute arises.
As an arbitrator, I frequently see parties relying on a contract for grains in which the quality parameters are not specified, or are incorrectly specified. Recently, I had a case involving seed wheat. The deal was struck between two parties who had dealt with each other for seed grain previously, for quantity, price and period of delivery. Both parties issued their confirmations — all too often referred to as the "contract." In the eyes of the law, the contract is the point at which the deal was done, when one party offered and the other said "okay."
In their confirmations, neither party stated the minimum germinative level or the maximum acceptable moisture. Instead, both relied on what they expected to apply as buyer or seller, but neither stated these parameters.
The buyer's confirmation stated, "Full details of our terms and conditions are available on request," while the seller's confirmation state, "This contact is subject to the standard terms and conditions, a copy of which is available on request." Neither asked the other for those terms.
On the day of delivery, the buyer claimed that the wheat seed was too wet and the germination was too low, and rejected the wheat. The buyer, from 300 miles away, responded that it had "sold on figures which show that by our terms the wheat is not too wet and the germination is acceptable." Then each party reached for their confirmation notes, which gave no support to either of them.
The buyers maintained their rejection of the two truck loads (25 tonnes each), so the sellers took the loads to a nearby elevator where they were resampled and reanalyzed. Reanalysis showed that the moisture and germination did meet the buyer's requirements, but the buyer was still not persuaded to take the wheat, and refused to consider the remainder of the contract (another 125 tonnes).
Then it became contractually interesting. The sellers had to dispose of all the wheat on the feed wheat market, for at that stage of the season they could not resell it for seed. The seller placed the buyer "in default" and sought to claim losses and costs, but in the process forgot to advise the buyer, as is required by the terms included in their confirmations.
To make a long story short, the sellers claimed arbitration to recover damages for the two rejected loads and the remaining tonnage. As the sole arbitrator on this case, I found against the buyers for the two loads they had rejected on delivery, for although neither party had made clear their quality standards, the sellers had proved the wheat did meet the buyer's requirements.
Because the sellers did not comply with the contractual requirements regarding disposal of the balance of the wheat, I ruled against them on that count and they had to carry their losses.
Because both parties failed to write good contract notes, both shared the costs of the arbitration.
This example shows the value of the principle of dispute management. Had both parties taken care to prepare a standard form of contract that was clear and unequivocal in its terms, the problem would not have arisen and the seller would not have been faced with losses of £25 per tonne (U.S.$40) on the balance of 125 tonnes of the wheat