AIC Contract Guidance
Contracts Guidance
AIC Grain & Pulse Contracts Whilst every effort is made to cover all possible contingencies in the terms and conditions of the Associations Grain and Pulse Contracts, inevitably there will be areas which cannot or should not form part of a contract. The Contracts Committee has provided the following advice in relation to some of these areas.
1. Quality Standards Members are advised to confirm the precise quality specification when contracting. In particular, it is noted that some purchasers stipulate higher standards for feed quality grain (e.g. sprouted, broken, shrivelled or other grains).
2. Infestation Queries are raised from time to time on the meaning of "infestation" in the Quality clause of the Grain and Pulse Contracts. The Contracts Committee considers that the meaning of "infestation" should not be constrained by any strict definition. If the interpretation of this clause is challenged at Arbitration, it will be for the Arbitrator(s) to determine a reasonable interpretation under the particular circumstances.
3. As Available The term 'As Available' is used by much of the trade to qualify the way in which the collection or delivery is made during the contract period. It is particularly used when grain is traded for movement during the harvest period. Members are reminded that the definition of 'as available' may be subject to various interpretations and should not be regarded simply as a substitute for the term buyer's call. That relatively few problems arise from the way such contracts are executed reflects the mutual understanding that exists in general between contracting parties on how the term affects the operation of the contract.
From the Seller's point of view the principal objective is to protect his position in the event that the grain will not be harvested or made ready for movement until later in the contract period. He should not wait until all the contracted grain is available but should notify the buyer as soon as each portion is available. Unless the delivery clause is amended it remains a contract where uplift/delivery may be exercised by the Buyer at any time remaining within the contract period following notification. The Buyer should note that unless a special condition is agreed to cover availability being notified at the end of the contract period then there is no automatic time extension to the contract. To avoid the obvious difficulties that would arise if availability is notified at the very end of the contract period the Buyer may consider inserting a clause similar to the following: 'The Seller is required to notify availability a minimum of 5 business days before the end of the contract period'. From the Buyer's point of view, the seller must supply the grain within the designated period. In the event of failing to deliver/collect during the contract period or during a mutually agreed extension period the Default clause will apply.
With regard to collection or delivery instructions, in the absence of a contrary special term, these should be passed in accordance with the Delivery and/or Collection Instructions clause prior to the grain being made available.
It is implicit and should be expected that Sellers act reasonably in supplying the grain when available. However, the terminology, 'as available' is vague enough to allow considerable abuse and contrary interpretation. If a particular parcel is identified ex-farm then it can be very clear whether or not such a parcel is ready for movement.
However, if a large bulk is sold from unspecified origins it is clearly impossible to verify the intentions of the Seller. In the event a Seller makes a series of sales, there can be no clear way of arranging the sequence of tenders against the various contracts.
In the light of these comments members should be aware of the problems of interpreting this terminology from the point of view of satisfactorily executing the business and of the difficulties arbitrators may have in resolving disputes arising from differences of interpretation.
4. String Trading - Code of Practice Certain difficulties associated with string trading can be overcome by means of identification of the parties involved. A working party of the Contracts Committee have produced the following code of practice to this end.
Code of Practice, String Trading - Identification of Parties
1. It is recommended that the First Seller contacts either the last buyer or the receiver, if appropriate the receiver's silo manager, as soon as possible on receipt of delivery instructions preferably latest 1600 hours on the next business day in order to discuss fixings.
2. If required by other members of the string, the First Seller should identify himself as such to his Buyer and the information passed on to all buyers in the string.
The Contracts Committee considers that these practices would:-
1. help interested parties in the string to monitor actual deliveries
2. encourage prompt passing on of information/claims
3. reduce opportunistic delays and/or defaults
4. help establish circles.
While obviously there is no compulsion in the Code of Practice, the Contracts Committee hopes that it will be used as widely as possible.
In the event of a dispute, Parties in a string are asked to note the recent clarification of the Arbitration Rules applicable to string trading. Attention is drawn specifically to the requirements for appointing of Arbitrators, Rule 3.3.b in the AIC Arbitration Rules.
5. Passing of Instructions to Company Branches In cases where a company named in a contract has a number of branches, the Contracts Committee consider that the only acceptable destination for passing instructions is the company branch specified in the contract.
6. Passing of Ownership and Risk It is important to distinguish between ownership and the right of rejection of grain. Ownership and risk normally pass on delivery wherever this is agreed in the contract itself. In other words, once a farmer whose duty it is to deliver to the merchant's lorry, on his own farm, has done this, the ownership in that grain from that moment vests in the merchant and if the goods deteriorate whilst on the lorry before reaching their ultimate destination it is the merchant who would have to bear the loss. However, this in no way affects the merchant's right under Sale of Goods Legislation to reject the goods once he has had a reasonable opportunity of inspecting them. For this the lorry driver is not an agent capable of inspection and therefore the merchant has time to reject until after the goods have arrived at their destination and whatever tests are appropriate have been made, provided the rejection is not unreasonably delayed. If the farmer alleges deterioration in quality occurred in transit, and this is disputed by the merchant, that would be a matter for arbitration.
7. Payment Terms The Association receives requests from time to time for a definition or interpretation of what constitutes 'payment', especially when this is effected by cheque. For instance a payment term in common use is payment within 28 days. Members ask whether compliance with such a term means despatch or receipt of the cheque on or by the 28th day, or whether earlier receipt is necessary in order to provide time for clearance through the bank.
The Contracts Committee has considered this matter and is of the opinion that where payment by cheque in a contract is acceptable that cheque must arrive in the office of the seller by the due date.
Any demand for a cheque to be received in advance of the due date, for example, in order to provide time for clearance of the cheque, will require a specific contract clause agreed by both parties.
8. Interest and Credit Guidance on the application of interest and credit can be found under Late Payment of Commercial Debts (Interest) Act 1998 in the General-Miscellaneous Legislation section.
9. Insolvency Clause In a legal action which did not proceed to trial and which therefore created no legal precedent, the AIC Insolvency Clause was considered and certain possible misinterpretations of it came to light. It may be useful to explain to members the intended application of this clause and its limitations.
The insolvency clause envisages a situation where one of the Parties to a contract falls into one or more of the financial difficulties enumerated in the Insolvency clause including - but not limited to -actual bankruptcy or liquidation. This happens at a time when there are still unperformed contracts.
Each party then has a choice. Either party can wait to see if the other party will perform its contract or take advantage of the AIC Insolvency clause and terminate all outstanding contracts forthwith by notice. If a Party terminates, there is no breach of contract but the contracts shall be closed out and settled at market price. You must therefore judge whether the loss of the rights, remedies and potential profit (if any) caused by your cancellation of the contract outweighs the additional risk and uncertainty if you continue with it, given the possibility that the Receiver / Liquidator (if appointed) may not wish to do so. Before reaching a decision you can negotiate with an Administrative Receiver / Liquidator as to the performance of outstanding contracts.
The intention of the clause is to protect the innocent Party without giving the innocent party the right to receive any windfall gain from the contract cancellation, as such windfall gain could well be to the detriment of other innocent creditors.
Remember, it is only an Administrative Receiver and/or Liquidator with whom you can safely negotiate since if they adopt outstanding contracts they become personally financially responsible for payment. In cases where one or more of the events occurs, which in the Insolvency clause triggers off the right to cancel (e.g. the other party ceases to trade or announces it cannot pay its debts) but there is as yet no Administrative Receiver appointed - nor a liquidation in progress - delay in cancelling may simply aggravate ultimate loss if the market is going against you whilst waiting to see what happens.
10. Retention of Title ('ROMALPA') clauses
(a) A retention of title clause creates a conditional sale. Title only passes when the price has been paid. (b) To be effective the Seller must be able to identify the goods subject to this clause still in the conditional buyer’s possession. (c) This usually renders them useless in grain contracts where the grain loses its identity when becoming mixed with other grain in a bin or silo unless an entire bulk, bin or silo is from the same supplier and clearly marked as being so. (d) Other goods such as seeds or animal feed, are immediately planted or fed to animals. The clause could only apply to sacks of unused goods on the conditional buyer’s premises. (e) ROMALPA clauses are not acceptable to lending institutions whose security for their loans is greatly diminished by them. Buyers therefore often strongly resist such clauses. (f) The inclusion of such a clause in standard contracts would lead to demands for reciprocity.
11. Claims Procedure The NFU of England and Wales, with whom the No. 1 Contract is discussed, have made a plea for effective communication of the claims referred to in clause 21. of the AIC Grain & Pulses Contract. Whilst the advent of mobile telephones and faxes has ensured that more farmers are immediately contactable now than hitherto, the merchant buyer still experiences difficulty in making contact with the farmer seller when attempting to make a claim (for allowances or otherwise). It is suggested that the farmer should identify in advance the name of the member of his/her staff or family empowered to accept contract claims. That person's name should then be entered in the "Special Terms" clause in the contract.
Of course, the buyer must confirm the claim in writing within the stipulated time period(s) irrespective of whether or not he/she has been able to make contact with the seller.
12. Specific (Bushel) Weight Allowances Where relevant and possible, members are advised to agree fall back rates for specific weight allowances at the time of making the contract. This advice arises from concern expressed by the NFUs at the large variation in allowances apparently imposed on growers.
The NFU and AIC consider there would be advantages for both sides in a system of all back rates. By pre-arranging any allowances which might become applicable the grower would know in advance the extent of any such claims and the merchant would be relieved of having to contact the grower at the time of delivery to provide notification of the application of allowances.
13. Weight Tickets Members are reminded that the Delivery and Weights clause in AIC Contract Grain/Pulses No1 stipulates that a copy of the weight ticket will be produced on request. The NFUS have given notice of their intention to request greater compulsion in the contract if the situation does not improve.
The NFUS have also complained that handwritten weighbridge tickets are being issued in some cases. This practice should be avoided as it attracts the risk of fraud.
14. Making Contracts other than on AIC Standard Contracts AIC provides a number of contracts for use by members and non-members. However, some members prefer to use their own contracts - increasingly in computerised form - and merely make reference to AIC terms. The following advice is provided for members adopting this practice as to their obligations:
Reference must be specific and precise. For instance, statements such as ”AIC terms apply” will or “The Terms and Conditions of the AIC Grain & Pulses Contract 1/12 including any current amendments therein shall be deemed to form part of and be incorporated into this Contract “ may be insufficient to prove the jurisdiction of the AIC Arbitration Rules and AIC Arbitrators. Subject always to the particular circumstances of any individual dispute, Members are advised to include the words, “including the arbitration clause therein, shall apply to this transaction'”. Even then, there is no validity in such a reference if the other party is unaware of the terms referred to. This can be achieved in a number of ways: (a) by pre-circulation annually, or at more frequent intervals, to all customers, preferably by recorded delivery. (b) by attachment to, or inclusion in, invoices or catalogues. (c) in some cases it may be possible to prove that a customer is sufficiently aware of the terms as a result of continuous trading over a number of years, but dependence on this facility is fraught with risk. See ‘Capes (Hatherdon) Ltd v. Western Arable Services Ltd.’
Whilst the above precautions will provide protection in most cases, the AIC Contracts Committee is of the opinion that the only real assurance as to the validity of a contract is for all the terms on which a member is trading to be sent to the other party before the contract is concluded.
(*Specific reference to the arbitration clause may be necessary to ensure the existence of an agreement by both parties to arbitrate in the event of a dispute).
15. Use of Contracts by Members and Non-members Members and Licence Holders are reminded of the official copyright attached to AIC Contracts. These contracts or any of their terms and conditions, should not, therefore, be reproduced or incorporated into contracts by anyone other than Members or Licence Holders.
16. Special Terms AIC contracts are updated from time to time and any necessary amendments or additions are included. However, it is important to remember that most of the above contracts contain a ”Special Terms” clause which provides a space for parties to insert special terms or conditions considered necessary in particular situations, but which are not appropriate for inclusion in the printed matter.
Examples of terms and conditions which members may wish to add to their contract note, whether under “Special Terms” or elsewhere, are:
(a) Grain/Pulses No. 2/12 – Seller’s Option of Haulage In cases where grain is sold “ex-farm, seller’s option of haulage at competitive rates”, problems sometimes arise in that the buyer - having received collection instructions - is under no obligation to advise the seller of the destination. It is suggested that the problem could be overcome by the addition of a clause to the effect that collection instructions should be given as under the existing Delivery and/or Collection Instructions clause but with the additional requirement that delivery instructions must be passed within X working days from the receipt of collection instructions. In this context collection instructions may be taken only to mean the approximate location of the grain, not the actual farm or store address, as the main reason for selling by this method is presumably to protect the seller’s source of grain.
(b) Weighing Charges Members have sought guidance as to where liability lies for the payment of weighing charges on unweighed goods. The normal trade practice appears to be that the dispatcher of unweighed goods pays the weighing charges involved.
Furthermore, concern has been expressed by a number of members that certain receivers of grain make a charge for weighing loads on intake even though evidence of previous weighing is presented with the load. In these circumstances, members may wish to include the following wording under “Special Terms”: “ in the absence of acceptable evidence of weighing, an appropriate charge may be made”. This is by way of a suggestion but is not to be regarded as a recommendation of the Contracts Committee.
(c) Other possible entries under Special Terms:
Description of Goods (Grid) There may be some confusion over the use of the “admixture” and “screenings” boxes for milling wheat as some flour millers combine admixture and screenings i.e. if the maximum admixture is 2% and the maximum screenings are 2% with an overall combined maximum of 2% the following could be used: Max. Admixture box - 2% Max. Screenings box - 2% retained on a 3.5 mm screen and through a 2 mm screen Special terms - combined total of admixture and screenings not to exceed 2% by weight
The appropriate screening sizes would need to be used and the above are only given as an example.
17. Force Majeure Members are reminded of the obligations and safeguards which require to be made in advance in order that force majeure can be held to be sustainable. Members have been advised in the past that claims for force majeure can only be upheld if the precise source or destination of the product has been stated in the Contract and the force majeure situation (whether it be strike, breakdown of machinery, fire, etc) has directly affected that source or destination. To put it another way, if a contract is left open as to the purpose for which the goods/products are intended or indeed where they are to come from or destined for that contract would still require to be performed and force majeure could not be invoked.
Notwithstanding the above advice, there has been a demand from some members for a voluntary force majeure clause to apply to grain for export in contracts with farmers. This is a matter for special arrangements and the Contracts Committee have decided, with legal advice, not to include such a clause in the printed conditions. However, the following suggested alternative clauses have been produced for those who may wish to use either one of them. It is essential, whichever clause is used, that the farmer is notified before the contract is made of the purpose for which the grain is intended, so that he can accept or not, as the case may be, special provisions in the event of a dock and/or shipping strike.
Force Majeure (Grain for Export) (optional clause A)
"(1) The Seller is hereby advised that the grain bought from him under this contract is part of a consignment intended for export. (2) It is therefore possible that such export and hence movement of the grain from the farm to the port of destination may be prevented at any time during delivery / collection period owing to dock and/or shipping strike. (3) Should that occur, providing the Buyer notifies the Seller in writing of the force majeure occurrence within five business days of the start of the occurrence, or of the delivery/collection period, whichever is the later, the delivery/collection period will then be automatically extended for the duration of the occurrence providing that this does not exceed fourteen days. (4) If due to the said occurrence the Buyer is still unable to collect or accept delivery of the grain at the end of this extended period, the Seller has the option of cancelling the delayed portion of the contract by giving the Buyer written notice which must be sent not later than the last business day prior to the end of the extended period. (5) If the Seller does not exercise this option then the period will be extended for a further and final fourteen days at the end of which, subject to any agreement between the parties to the contrary, the contract or any unfulfilled part of it shall be cancelled. (6) The time for claiming default and/or arbitration shall not commence to run until the end of the extended period whichever is applicable. Neither party however, shall have a claim against the other providing that the Buyer has supplied to the Seller, if so required, satisfactory evidence of the occurrence justifying the delay or nonfulfillment."
One point not dealt with here is what is to happen if in fact the occurrence causing the delays potentially ceases during the time when the original delivery/collection period is still running. In other words, whether the extension should apply anyway (bearing in mind that other shipping arrangements may have to be made), or whether in the event the original terms of the contract should be kept. At the end of a strike there is almost certain to be a period of disruption to delivery/collection whilst shipping is rearranged and the backlog cleared. Therefore the full extension period might be needed to complete collection/delivery whether or not the strike ends in the original collection/delivery period or in the extension period itself. It is suggested that this is a matter for agreement between the parties.
Force Majeure (Export) (Optional clause B) "The Seller accepts that any time between the date of this contract and the date fixed for
delivery/collection of the goods, the Buyer is entitled to give the Seller written notice of his intention to export all or part of the goods sold to him.
Should such notice be given, the Buyer can at any time thereafter invoke the Force Majeure clause if export is prevented by a dock and/or shipping strike at the port of intended embarkation. The Seller is entitled to ask for reasonable proof that the export sale took place before the occurrence of the alleged Force Majeure."
18. Passing of Instructions, Claims, Notices etc by electronic means
The Contracts Committee draws attention of all parties using the AIC contracts to clause 23.a, Notices, of the Grain /Pulses Contract No.2/11.
“All notices required to be served or information passed on under this contract shall be communicated without delay by telephone or by rapid written communication. Notices which are served or passed on by telephone shall be confirmed by rapid written communication within one business day. Methods of rapid written communication for the purposes of this clause shall be defined as either fax, e-mail, or other rapid electronic means, or by letter sent by first class post no later than the subsequent business day. If receipt is contested the burden of proof shall be on the sender who shall, in the case of a dispute, establish, to the satisfaction of the arbitrator(s) or Board of Appeal appointed pursuant to the Arbitration Clause, that notice was actually transmitted to the addressee”.
The Contract Committee recommends that this clause is adopted as ‘good practice’ in the passing of any Claims, Instructions, Notices, and/or other communications between the parties to all AIC contracts.
19. Electronic Records
It is recommended that documents stored electronically can be reproduced in their original format and with their original content. This is particularly true of contract confirmations, where a reprint often displays contract references amended subsequent to the original contract confirmation being issued, or as part of the necessary audit trail for contract amendments, every reprint is shown as ‘amended’ even where no changes have been made.
In a dispute, it is helpful to be able to recreate a relevant record in its original format, being an accurate copy of the original despatched to the other party, or at least substantiate why any changes from the original are evident and why they have occurred.