Five things you need to keep in mind in agricultural commodities trading

18 July 20197 min reading

“Successful trading in agricultural commodities is not only about having a big portfolio of reliable partners, good track record with ‘multinationals’, agile negotiators in the team and high profit margin. It is also about certain processes and steps during negotiating and executing contracts that help to ensure that company’s interests are duly protected if things go wrong. We have summarized certain things that are sometimes forgotten, sometimes are not given due weight, albeit are proved to be useful in practice.”

Iurii Gulevatyi - AVELLUM, Senior Associate Dmytro Koval - AVELLUM, Senior Associate

1. KNOW YOUR CLIENT New companies constantly appear on the market, and if you want to grow, you should work with them. There is always a risk of default or even worse, fraud. These risks cannot be absolutely avoided, though you may minimize them. The first thing is to ensure that you know with whom you are doing the business.

First, you should answer some basic questions: Do I know this company? Is it known in the market? Gather information of potential partner from market participants – your current partners, brokers, banks etc. Absence of publicly available information about the company also means a lot.

Another hint is to check the company with trade associations such as Gafta and Fosfa, - whether the company is a member in any of it - and God forbid that should occur – is in defaulters’ list for one of its’ awards of arbitration (this information is available only for association members).

As a rule of thumb, no one can tell your story better than you, so give your prospective partner such opportunity. One of easiest ways is to ask it to complete a so-called Know Your Client (KYC) form. KYC is a simple questionnaire, in which your counterparty should give information about itself. Usually such forms request basic company information (registration number, country of incorporation, legal and actual address, parent and affiliated companies, banking details, directors’ names, email and postal addresses, telephone numbers etc.). Preferably, such form should also ask for copies of certain common company documents such as certificate of incorporation, certificate of good standing or the like, articles of association, power of attorney of its representative.

You may create and advance such KYC form with any questions you want your potential partner to answer. However, refusal to fill in basic company information and provide some general documents should definitely be an alert to you.

Why do you need all this information? There are at least two good reasons for that: 1) To assess your risks while deciding whether to deal with that company or not; 2) If things go wrong after conclusion of the contract – to ensure that you have enough information about your counterparty to enforce your legal rights and remedies.

2. BE CLEAR Another important thing is communication with a counterparty, both before and after the contract conclusion.

It is often the case that parties are conducting negotiations with a view that the contract will be concluded once a single written document, containing all necessary terms, is signed by both parties. However, under many national legislations, before the contract is actually signed, the parties may well find themselves bound by the contract – once the offer is unconditionally accepted.

And this is a common thing for agricultural market, where many contracts are subject to English law and agreements are often reached in email or other (messengers) correspondence. In other words, during negotiations parties may believe that they are merely discussing terms of potential transaction and have no liability for breaking off negotiations, but in fact may already be bound by contract, without even realizing it.

To avoid such surprises, at least be maximally clear of what is your offer, what are conditions of the offer (for instance, how long it is valid), and how it must be accepted in order to result in a binding contract. If you do not want to be in the contract until both sides will sign it, indicate it by making that condition explicit in your correspondence. For instance, by marking all correspondence ‘subject to contract’, you are indicating that you are not bound by the contract yet.

Clear communication is no less important during contract execution. Your counterparty should be properly informed about each step in execution process, and all required notices and documents shall be served accordingly.

All messages should be clear and unequivocal. The message should not leave a space for misinterpretation by another party.

Always remember that every word counts. Therefore, correspondence should not include things that may be interpreted as contradicting to contract terms. A few ‘technical’ recommendations in relation to correspondence that may be decisive to building successful position vis-à-vis counterparty: 1. Link correspondence with counterparty to the particular contract in question. It should be identifiable. 2. Follow-up telephone conversations with emails; 3. Store all correspondence with counterparty in chronological order and in appropriate place. If messengers (WhatsApp, Viber, Telegram etc.) are used, make sure that this correspondence is not automatically deleted after some time and is properly copied/backup.

If the problem situation occurs, the above steps may be crucial in proving your case and leaving no doubt of what was actually agreed and promised by the parties.

3. KNOW YOUR CONTRACT Particular attention should be drawn to the terms of your draft contract. Make sure that: (1) you include all necessary terms without inconsistencies; (2) you understand all your rights and obligations and that of the counterparty; (3) you can and want to perform obligations you intend to undertake.

To avoid omissions, traders are also encouraged to go through the checklist of some crucial terms of the contract whilst negotiating it.

Make sure that you include the correct standard Gafta or Fosfa contract for the commodity you are selling or buying and for the delivery terms, you intend to use.

Traders frequently do not take seriously standard contract forms their contracts incorporate, and how wrong they are! When your contract does not include certain term, the first place the parties will look into for answer will be the standard contract form you incorporated. Thus, to know what to expect from your contract, ensure that you know and understand the conditions of the Gafta or Fosfa form that you are incorporating.

4. FOLLOW YOUR CONTRACT The central part of proper execution is fulfilment of obligations in strict accordance with contract terms.

This is not only the matter of strict compliance with what was undertaken in the contract. There are certain steps that may help a proper execution: 1) Roadmap or list with actions to be taken and deadlines. This helps to avoid mistakes or omissions. 2) Recording all steps taken and main events during contract execution. If things go wrong, this may assist at dispute resolution stage. 3) Copies of all shipping and other documents in relation to the contract should be stored in appropriate place in systematic order (in relevant folders, sub-folders). This also includes proofs of delivery of documents to the counterparty (do not forget to download them from tracking system of the courier).

5. REACT IN APPOPRIATE WAY During execution disagreements or disputes may occur. It is important to be responsive. If one party attempts or actually derogates from or breaches the contract and another party is silent, such silence may be interpreted as acceptance, meaning that it may be simply too late to turn back the clock. So, once problem occurs it is important to fix and lay down your position to the counterparty clearly and without delay.

The same applies to you actions – if you perform as requested by your counterparty, but not as contract says it should be done – you changed agreement and cannot go back on previously agreed terms. The rule is quite simple here: you should follow instructions of your counterparty provided that instructions are contractual.

It is also common that the problematic situation may require a very prompt intervention of decision-makers and lawyers. They should promptly and fully put in the way of things i.e. provide with all relevant details, correspondence and documents of the case to make a well-reasoned decision and render a proper legal advice respectively.

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