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From Volatility to Stability: A Practical Guide to Tackling Contractual Defaults Head-On16 January 2025

In today’s volatile commodities market, managing contractual defaults is more crucial than ever. Supply chain disruptions are increasingly common due to traditional force majeure events, including pandemics, extreme weather and political unrest, leading to challenges, including significant price fluctuations in the market price of goods.

This shifting background often leads to defaults, not only due to genuine external events affecting parties’ ability to perform their contractual obligations, but because of sharp price shifts – a concept referred to in the industry as “price majeure”.

In the last few years, we have witnessed several instances of attempted contractual non-compliance and defaults by our clients’ counterparties under the garb of the aforementioned issues and have accumulated valuable experience in managing such situations as they unfold.

We therefore set out below a user-friendly guide on best practice in relation to managing a situation where a client is confronted with a counterparty that is unwilling (rather than unable) to perform its obligations in a sharply moving market, in breach of the terms of the contractual agreement between the parties.

"The first step in response to a purported counterparty default is to thoroughly review the underlying contract between the parties to understand the mechanics of the agreed trade flow and the consequent obligations of each party."

Understanding the contractual provisions on pricing and each party’s obligations

The first step in response to a purported counterparty default is to thoroughly review the underlying contract between the parties to understand the mechanics of the agreed trade flow and the consequent obligations of each party. This includes all terms relating to shipment and delivery, payment, and any clauses that may address price fluctuations or force majeure events. Understanding each of these elements is critical to identifying whether a party is genuinely unable to perform, whether a breach has occurred/is about to occur, together with the nature of that breach.

Ascertaining where the breach has occurred

The next step is to determine where and how the breach has occurred. For instance, if a counterparty is apparently unwilling to perform its obligation to ship in a rising market or to buy in a falling market, it is important to establish whether the said refusal constitutes a breach of the contractual terms. This involves evaluating the timing and express language of the perceived unwillingness to perform, to confirm whether it constitutes a breach of the contract at that moment, the specific contractual obligations unmet and any relevant conduct/communication or lack thereof.

Once a breach has been identified and the consequences thereof are known, the innocent party should review the contract in detail to understand the regime (if any) prescribed for resolving disputes; for example, in the case of purported force majeure, the form, content and timing of any notice that should have been given by the affected party; or in the case of a quality or quantity dispute, clauses governing the drawing of samples, assaying and umpire analysis; in both cases, to ensure that there is and has been complete and ongoing compliance with the foregoing.

Convening a dedicated response team

It is important to ensure that an internal response team is convened to handle the dispute and that only members of that team engage in correspondence relating to the dispute. We consider this step to be crucial as, in the event that a dispute proceeds to arbitration/court, all correspondence in relation to the matter, whether internal or external, formal or informal (WhatsApp, Telegram, etc.), may eventually be disclosable, and it is therefore essential to ensure that stakeholders/third parties refrain from generating speculative correspondence which might potentially be unhelpful to the innocent party’s case in due course. In our experience, the rapid establishment of a limited response team, and the prevention of those outside of that team from engaging in correspondence relating the issue at hand, is a sensible way to eliminate the risk of detrimental communication being issued.

It is also important to place all relevant parties (e.g. vessel owners, suppliers) on notice of the potential issue, and to reserve rights moving forward. Separately, it is crucial to ensure that any relevant parties are notified of a claim, and a claim formally filed, before the expiry of any time bar provisions that may be contained within or incorporated into the underlying contract. By way of example, claims made under a bill of lading will normally require to be commenced within the one-year time limit prescribed by the Hague-Visby Rules.

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Key contacts

Sumeet Malhotra

Partner Singapore

Christina Whitehead

Senior Associate Singapore

Tiana Dias

Associate Singapore

Aditi Mozika

Associate Singapore

"We therefore make it a point to ensure that the issue of liability for any breach of the underlying contract due to “price majeure” is clarified and settled even before the matter is taken to trial."

Gathering evidence

To support a claim, all relevant evidence must be gathered – this will likely include the underlying contract itself, all communications with the counterparty, market price data and records of any mitigation efforts. This evidence will be necessary to negotiate a settlement with the counterparty or to substantiate before a court or a tribunal the financial impact of the breach and the steps taken to minimise losses. In our experience, it is useful for parties to keep a thorough record of all relevant evidence in the matter from the outset, to prevent the situation where evidence is lost or is difficult/time-consuming to organise due to the lapse of time.

Calculation of damages

In contracts for the international sale/purchase of goods, the primary remedy for a breach thereunder is usually an award of damages. Pursuant to the general/normal measure of damages under sections 50(3) (in the case of non-acceptance of goods) and 51(3) (in the case of non-delivery of goods) of the English Sale of Goods Act 1977, where there is a market for the underlying goods, damages are calculated based on the difference between the contract price and the market price for said goods at the time of the breach or the time when the breach ought to have been rectified.

Of course, the innocent party is also under a duty to mitigate the consequences of the defaulting party’s breach by selling the goods in, or buying replacement goods from, the market. It is essential that the innocent party ensures to take reasonable mitigation efforts, in a timely manner, so that the quantum of damages recoverable from the defaulting party is not negatively affected by any perceived failure or delay to mitigate. It can be a ‘fine line’ striking a balance between giving the defaulting party every opportunity to perform the contract/make good its breach and mitigating losses caused by said breach, particularly in a rapidly moving market and we therefore recommend that legal advice be obtained as soon as possible by any innocent party facing a potential situation of “price majeure”.

Furthermore, all mitigation efforts should be documented meticulously, including all arrangements made to reduce the financial impact of the breach and all communications issued to the defaulting party demanding that it perform its obligations and/or informing it of the intended mitigation efforts and requesting it to match the price(s) obtained in mitigation.

The damages owed by a defaulting party can usually be calculated easily as the difference between the market price and the mitigation price where mitigation is done on a one-to-one basis. However, if it is not possible to match contracts, which is often the case where traders run books, the measure of damages will be calculated pursuant to the general measure of damages mentioned above.

Our case management philosophy

Our case management philosophy is to limit costs exposure for our client, in particular where they are already suffering economic hardship due to the conduct of its defaulting counterparty. We therefore make it a point to ensure that the issue of liability for any breach of the underlying contract due to “price majeure” is clarified and settled even before the matter is taken to trial. This approach is effected by generating correspondence or documentation, in the phase prior to the commencement of litigation, that demonstrates the counterparty’s illegitimate conduct and makes it very difficult for it to argue that it was genuinely prevented from performing its obligations. We have seen time and again that, where a counterparty admits liability for a breach, such admission significantly simplifies the litigation process by limiting the scope of the dispute to merely the calculation of damages owed, with reference to the market rate for the goods at the relevant time and the mitigation efforts made by the innocent party.

"Our carefully curated approach led to a spectacular outcome at arbitration for our client, which included not only an award of damages, together with interest accrued thereon since the date of each of the counterparty’s breaches, but also of its costs in pursuing the Award, thereby demonstrating not only the strength of our client’s case, but the effectiveness of our strategy in managing contractual defaults from an early point."

Recent experience

We assisted a client with an arbitration recently and deployed the ‘playbook’ set out above and achieved great success in this regard. The matter in question involved breaches by our client’s purchasing counterparty in respect of several shipments for the FOB sale/purchase of coal (the “Material”) under a long-term contract (the “Sale Contract”). Pursuant to the Sale Contract, one shipment of Material was to be sold by our client/purchased by its counterparty per month over the course of five months (i.e. a total of five shipments). Whilst the first two shipments were performed successfully where the market for the Material was rising, after the market suddenly fell on an ongoing basis, in breach of the terms of the Sale Contract, our client’s counterparty wrongly asserted that it was unable to fulfil its obligations thereunder. In particular, it sought to rely on a purported force majeure event affecting a power plant, pursuant to which it claimed its obligation to take delivery of the Material at the load port and pay for the same were suspended without liability to our client. Assistance from our team was sought by our client at an early stage, and we rapidly identified this matter as an obvious example of “price majeure”.

Notwithstanding the counterparty’s ongoing breaches of the Sale Contract over consecutive months, we advised our client to afford its counterparty every opportunity to rectify each of its breaches, keeping it fully appraised of all mitigation efforts made in relation to each of the unperformed shipments. However, in this instance, the counterparty failed to adequately respond to our client or to make good its breaches of the Sale Contract. In view of this, our client had no option but to initiate arbitration against its counterparty.

By way of carefully curated correspondence exchanged with the counterparty in connection with each of the three unperformed shipments, we were able to establish that the counterparty’s failure to perform its obligations arose out of its unwillingness, rather than inability, to perform and that, as such, it was undeniable that the counterparty was in breach of its obligations and thus owed our client damages under the Sale Contract. In its award (the “Award”), the Tribunal readily accepted this position, and the main discussion therein accordingly revolved around mitigation and the quantum of damages payable to our client. The Tribunal held that our client had indeed suffered losses due to its counterparty’s breaches of its obligations under the Sale Contract and awarded it damages as per the usual measure of damages contained in the Sale of Goods Act 1979, being the difference between the contract price and the market price for the Material at the time of the breach, namely the last day of each laycan. As the market price for the Material had sharply fallen in comparison with the contract price in respect of each of the unperformed shipments, the damages awarded to our client were significant.

Our carefully curated approach led to a spectacular outcome at arbitration for our client, which included not only an award of damages, together with interest accrued thereon since the date of each of the counterparty’s breaches, but also of its costs in pursuing the Award, thereby demonstrating not only the strength of our client’s case, but the effectiveness of our strategy in managing contractual defaults from an early point.

Final words