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Tackling Contractual Defaults Head-On – A Refresher21 April 2025

For those keeping a close eye on trends and developments in the commodities market, it should come as no surprise that the industry expects an increase in the number of contractual defaults. A variety of factors play a role in contractual performance, including supply chain disruptions attributable to climate change and, in the past few weeks, heightened political instability and ensuing volatility.

"A variety of factors play a role in contractual performance, including supply chain disruptions attributable to climate change and, in the past few weeks, heightened political instability and ensuing volatility."

In this constantly changing and adapting commodity market, we considered it would be useful to follow up on our previous article which set out a ‘play book’ to assist our clients with navigating contractual defaults. Our previous article on this topic can be accessed here.

Through this piece, we aim to provide a ‘refresher’, by way of a handy infographic checklist, to our clients and other stakeholders on steps that should be taken when faced with a contractual breach by a counterparty. We also set out a few additional suggestions that we consider will be beneficial to companies in preparing for and handling defaults in this volatile market.

StepsActions
Identify the dispute
  • Ascertain the basis of the dispute

  • Undertake a preliminary inquiry in relation to the obligation alleged to have been breached and the scope thereof

  • Consider instructing trusted counsel to avoid said counsel being instructed by the counterparty

  • Consult with counsel to ascertain whether the counterparty has a counterclaim
    Ensure compliance with all contractual requirements
    • Identify obligations under the relevant contract, and, to the extent possible, ensure compliance with the same

    • Pay attention to any applicable time bar
      Quantify the claim
      • Take steps to quantify the claim once the basis thereof has been established, with input from the trading, operations, legal and financial teams

      • If the counterparty has a counterclaim, determine the quantum of the same

      • Gather evidence in support of the claim, e.g., calculation spreadsheets and invoices) and keep proper records of the same
        Mitigate losses
        • Consider whether the loss can be mitigated e.g., if the counterparty has defaulted on its payment obligations under a spot contract, the party should consider whether it can sell the relevant cargo to a different counterparty

        • If so, take the necessary step

        • Ensure that detailed records of the mitigation efforts are maintained
          Consider initiating a claim
          • Consider whether it is worth pursuing the claim in view of various factors, e.g. extent of breach, commercial relationship between parties, etc.; and

          • Seek necessary approvals from the relevant parties, e.g., the compliance and legal teams.
            Document pre-litigation correspondence
            • Convene a small response team to streamline communication and decision-making;

            • Establish a communication protocol with the counterparty to ensure that all exchanges are documented;

            • Consider issuing a short notice to the counterparty placing it on notice of the breach, and to reserve rights under the contract and/or in law; and

            • Label all correspondence relating to any settlement as “without prejudice”.
              Issue a letter of demand and commence proceedings
              • Obtain a merits opinion and a budget for running proceedings from external counsel;

              • Issue a letter of demand to the counterparty, to be be drafted with counsel’s guidance;

              • Commence proceedings in accordance with the relevant law and dispute resolution clause in the contract; and

              • Maintain close contact with external counsel to monitor the proceedings and ascertain whether a settlement agreement can be reached.
                Enforce the decision
                • Once a judgment or award is obtained, depending on the outcome, the party should seek to enforce the same; and

                • If the assets of the counterparty are in another jurisdiction, the judgment or award will need to be first recognised / enforced as a judgment in the courts of that jurisdiction.

                  Building on the basic/foundational steps set out above, we also set out some advanced steps that may be taken to further enhance a company’s readiness to tackle contractual defaults and manage disputes effectively.

                  1. Proactive Risk Assessment

                  It is beneficial to regularly assess the risk factors that could lead to contractual defaults. This includes monitoring market trends, geopolitical events and industry-specific disruptions. By staying ahead of potential issues, a company can implement preventive measures to mitigate risks before they escalate. By way of example, assessing a business’ vulnerability to climate events should prompt a review of that business’ contractual obligations should an event of force majeure occur. For additional guidance on the drafting of force majeure clauses and the management of force majeure events, please see our previous article.

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                  "Given the technological advancements made in recent times, companies also have the opportunity now to integrate solutions such as contract management software and blockchain technology in their systems and we highly recommend doing so."

                  2. Flexible Contract Clauses

                  It is important to incorporate flexible clauses in contracts that respond to unanticipated market movements. This could include provisions for renegotiation, price adjustments, or alternative dispute resolution mechanisms. Flexibility can help both parties navigate unforeseen challenges without resorting to defaults. When drafting clauses of this nature, clients must be cautious to ensure that the clauses drafted operate to produce commercially desirable outcomes and ones that are equitable in character.

                  3. Legal Preparedness

                  In our experience, disputes are handled more efficiently if the parties to the dispute approach their differences with a certain degree of preparedness. This includes having a clear understanding of the contract’s terms, the legal implications of defaults, and the procedures for dispute resolution. Being legally prepared can expedite the resolution process, minimise disruptions and save millions of dollars in costs. We consider that it is advisable to instruct trusted external counsel at the earliest to ensure your legal advisors have a good understanding of the dispute and can provide prompt advice.

                  4. Regular Review

                  Regularly reviewing and updating the company’s strategies for managing contractual defaults can assist with managing events of default more effectively. A record may be made of lessons learnt from past experiences with the incorporating of proposed best practices to continuously improve the company’s approach. A prime example would be to regularly update contractual provisions, in particular, ‘clauses of concern’ such as force majeure and dispute resolution clauses.

                  5. Advanced Data Analytics

                  Companies may also leverage advanced data analytics to predict potential defaults. By analysing historical data and market trends, a company can identify patterns and indicators that may signal an impending default. This proactive approach will allow a company to take pre-emptive actions and mitigate risks.

                  6. Training and Development

                  Companies are advised to focus on training and development programmes for their internal teams, ensuring that they are well-versed in contract management, dispute resolution and risk mitigation techniques. A knowledgeable and skilled team can better handle defaults and minimise their impact. Our team offers regular training on various matters falling within the realm of dispute resolution, such as tackling quality and quantity or force majeure disputes and would be more than happy to tailor our content to the specific needs of the company.

                  7. Technology Integration

                  Given the technological advancements made in recent times, companies also have the opportunity now to integrate solutions such as contract management software and blockchain technology in their systems and we highly recommend doing so. These tools can enhance transparency, streamline processes, and provide real-time insights into contract performance, making it easier to identify and address potential defaults.

                  Conclusion

                  Given the current challenging global market environment, corporations will see incidents of contractual defaults, not for malicious reasons but due to the uncertainty surrounding global markets. We have assisted our clients in navigating contractual defaults during crises on several occasions and should you require guidance on any of the matters traversed in this article, please do not hesitate to reach out to us.

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