Judges decide that skyrocketing prices unbalance future crop purchase contracts
07/12/2022
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Fernando Bilotti Ferreira — Foto: Divulgação
Farmers have been sentenced to pay compensation for losses and damages to trading companies that operate in the commodities market. The reason is a contractual clause called washout. With the rise in grain prices, this clause has been activated more often by the companies.
Future crop purchase contracts generally include this clause. They establish that farmers will be held responsible for losses if they fail to deliver the product on the agreed date and the buyer is forced to make a new purchase at a higher market price.
This clause is meant to prevent the producer from being seduced at harvest time by higher offers than those closed at the time of the contract and sell the grains to someone else.
Until last year, however, before the record surge in prices of agricultural commodities, this clause was hardly ever used by companies because the fines that are also provided for in the contracts used to be enough to cover the losses.
“Commodities, nevertheless, have doubled in price and the fine, even if high, no longer covers the difference between what was contracted and what is currently practiced in the market,” says attorney Fernando Bilotti Ferreira, with law firm Santos Neto.
He refers to contracts that were closed in 2020 and had delivery scheduled for 2021. According to the lawyer, the fines vary between 10% and 30% of the contracted value. The washout clause, on the other hand, covers all the losses, which can even be above the total value of the contract.
The increase in commodity prices was impacted last year by the strong international demand and the high exchange rate. It rose 45.23% in relation to 2020, according to the Brazil Commodities Index (IC-Br), released by the Central Bank.
“It started with soy, then corn, cotton and coffee. In September 2020, each coffee bag was traded for about R$600 — currently it is at almost R$1,500,” adds Mr. Ferreira.
One of the lawyer’s client — a company that won in court the right to compensation — bought 1,200 tonnes of corn grain that was not delivered on the agreed date. The agreed value was R$612,000 and the established fine in case of non-compliance was set at R$134,000.
The losses for having to acquire again the same amount of corn in the market, at the current price, however, totaled R$1.088 million. The fine, in this case, would cover a little more than 10%.
The decision that secured the payment of the fine and the reparation, together, was made by Judge Carlos Dias Mota, at the Court of Justice of São Paulo (TJSP). He considered the conditions provided for in the contract and the fact that the parties — producer and company — were aware of the risk of fluctuations in the market price of grain.
“It is reasonable to consider that the losses and damages do not correspond only to the price of the product adjusted when the contracts were signed, but also to the losses resulting from the need to purchase the undelivered volume of corn from a third party,” he says in the decision.
Most of the requests that have been made to Justice have this format: they include the fine and the payment of compensation for losses and damages — which corresponds to the difference between the contracted price and the market price at the time when the product should have been delivered.
The producers, on the other hand, have been alleging contractual imbalance. They consider the accumulation of fines and compensation to be abusive and say that the contracts, in this format, benefit only the creditors.
They also argue that the washout clause could not be used automatically. The companies, in the farmers’ view, should demonstrate, through documentation, that the broken contract was linked to a subsequent deal also agreed based on the old price.
But they have not been able to convince judges and appeals court judges. The jurisprudence has been consolidating in favor of the companies. There are even decisions from the TJSP validating these charges.
Lawyers say that these decisions of the TJSP give security to future purchase contracts — which are important for the entire chain. The trading company is not the final recipient of the product. It buys and sells, usually to the foreign market.
“The trading is important for financing the producer and for exports,” says José Afonso Leirião Filho, a partner at law firm VBSO Advogados.
He says that the producer has the obligation to deliver the product and that when this does not happen, the trading company resorts to a court, first, to search for the grains. “Only when they don’t find them, the washout takes place and changes the course of the case to collect the values. It makes sense for the courts to validate this clause. The idea is precisely to rebalance the chain,” he says.
*By Joice Bacelo — Rio de Janeiro
Source: Valor International