As we discussed last week, the cotton market has become increasingly volatile over the past two years. Cotton farmers and mills have failed to honor the terms of their contracts when cotton prices changed in their favor. Consequently, the number of arbitration cases has risen sharply in recent years.
According to The Wall Street Journal, “cotton contracts usually stipulate that disputes be resolved outside the courtroom in front of arbitration panels.” In addition, cotton farmers do not typically sell their product directly to cotton mills. Instead, cotton merchants contract with the farmers to buy their product and then contract with the mills to sell the product. The risk to the merchants is apparent, as they are dependent on two parties fulfilling the terms of the agreements. In addition, the merchants are susceptible to significant changes in the price of cotton.
When one side or another does not fulfill the terms of the agreements, many parties have the potential for suffering large losses.
Often, these contracts are between businesses based in different countries. Consequently, it can be difficult to enforce decisions made in arbitration. According to the International Cotton Association, arbitration awards totaling approximately $251 million have yet to be paid by around 520 different companies, since 1988.
As the number of arbitration requests increase, the dollar amount awarded each year increases. For instance, in 2011, the International Cotton Association awarded $76.7 million in total – in 2012, that figure has already skyrocketed to $317 million.
As a result, it is likely the amount owed to businesses in the cotton market from arbitration awards will continue to increase, so long as the market remains volatile.
Source: The Wall Street Journal, “Plague of Broken Contracts Frays Cotton Market,” Michael Rothfeld and Carolyn Cui, August 30, 2012.
Our firm handles situations in which businesses face contract disputes. If you would like to learn more about our practice, please visit our Fayetteville business collections page.