• Contracts

    Chapter 3 - Cotton marketing - Contracts 

    The essential value of a well written contract

    In the global cotton market it is important to establish a concise contract, placing particular emphasis on both parties holding a clear understanding of their joint obligations under the agreed terms and conditions. These terms and conditions should be clearly expressed and understood during the negotiations of ‘offer and acceptance’, and many of them are specific to the international trade in raw cotton.

    Trade in cotton is generally conducted under a standardized set of terms and conditions. There are several recognized cotton trade associations assisting trade in cotton, of which the International Cotton Association Ltd (ICA), formerly the Liverpool Cotton Association Ltd, is most prominent. It is estimated that their rules are involved in approximately 60%–70% of global cotton contracts. This Association provides a draft international contract form for this purpose and a majority of cotton traded internationally is concluded under ICA Bylaws and Rules which can apply to contacts provided there is mutual consent. The ICA model contract can be found in the annex to this chapter on pages 167–168.

    Parties can elect that any disputes will be resolved by ICA Arbitration; or they can mutually agree to limit ICA jurisdiction to either technical or quality matters arising from the contract.

    Most sellers prefer to contract on their own personalized forms which contain, in general, a common or standard clear set of terms and conditions. Although under English law it is not mandatory to have a written contract it is commercially prudent. It is also important to recognize that for an arbitration agreement to be effective it must be made by ‘an exchange in writing’.

    When contracting it is necessary to be clear and concise in the identification of such items as the buyer’s title and address and that of any involved agent or broker. The specifications and terms that apply to the contract, including items such as growth and quality, price, terms, shipment and payment, should be clearly and adequately expressed as they were agreed with the buyer. In addition contracts can include specific or special terms with the buyer’s agreement.

    It is important to recognize that if a contract incorporating the ICA Bylaws and Rules has not or will not be performed it cannot be cancelled by either party without mutual agreement and will be closed by being ‘invoiced back’ to the seller at a price to be agreed amicably between the parties. However, if this is not possible the invoicing back price will be determined by arbitration subject to English law.

    Variations and amendments to the contract

    After the terms and conditions of the contract have been agreed and prior to contract fulfilment it may be necessary, at the request of one party, to mutually agree to vary or alter the original terms and conditions. For example, the shipment period may be extended or the payment terms may be changed because of circumstances that develop ‘post contract’. In such cases amendments should be documented clearly stating the changes, and that the statement is ‘without prejudice’ to the original terms of the contract. A contract amendment should be put in writing, issued and signed by both parties as evidence to the agreed changes.

    In the event of disputes

    Problems can develop and it is necessary to address such developments immediately so that each contract party has the appropriate time to try and protect its self interests. If the buyer is kept fully informed of any developments that may affect the terms and conditions and current or future performance of the contract it is likely the problem can be better controlled and any ensuing costs limited.

    In relation to quality, if the contracted quality is unavailable it is prudent to inform the buyer and provide wherever possible a solution of reallocation or replacement. In the event of anticipated late shipment or late opening of the payment instrument it is prudent to advise the other party of any rescheduling at an early stage so that appropriate action can be taken to mitigate each party’s position and costs.

    Silence is no solution to a problem and in fact may result in delays, adding to costs and creating disputes leading to contractual default and arbitral action.

    If a dispute cannot be settled amicably then the contract should contain the remedy and direction to an arbitral institution. Arbitration should be a last resort; priority should always be given to settling claims and disputes amicably and promptly.

    Appointment of an agent

    A majority of trade is conducted through a third party or ‘agent’, an intermediary acting on behalf of the supplier. The choice of agent can be fundamental to the positive and successful performance of the contract as agents hold an extensive knowledge of their market, local practices, and buyers’ individual requirements in terms of quality and administration. The agent gives the seller a clear understanding of the workings of the market, market information and increased sales potential.

    The agent will assist in negotiations at the offer and bid stage. The agent should monitor the contract performance and established timelines, and address any resulting problems or claims at an early stage before they develop into disputes.

    The agreement between the seller (the principal) and its appointed agent should be documented in an ‘agency agreement’ and signed by both parties. This agreement should define the extent of the responsibilities of the agent along with any limitations. For example, the agent’s client base may be defined or restricted, along with any other terms and conditions associated with the agency appointment.

    Brokers work within a given geographical area, bringing local buyers and sellers together. Like agents they declare the name of both the buyer and the seller, and receive a commission but do not represent a party. Traders buy or sell in their own name and for their own account. Agents or brokers who do not declare the buyer’s name operate as traders because they take the cotton over in their own name. 
  • contentblockheader
    Cotton Exporter's Guide

    Brochure - African cotton promotion
  • Region:
    Date from:
    Date to:
  • contentblockheader