Organic Corn and Gafta Arbitration: Certification Challenges and Legal Consequences

Organic products, including organic corn, are gaining increasing popularity in the global market. These products attract consumers with their quality and safety. However, despite the high standards and thorough inspections associated with the production and certification of organic products, challenges and disputes often arise. In this article, we will examine the important aspects of organic corn certification and provide an example of a Gafta arbitration decision to illustrate the potential risks and consequences of such disputes.

Features of Organic Corn Certification

Organic corn must comply with strict production and processing standards to receive certification. In the European Union, these standards are established by the Regulations (EC) 834/2007 and 889/2008. Organic products must be grown without the use of synthetic pesticides and fertilisers and without the application of genetically modified organisms (GMOs).

Gafta Arbitration Dispute

One Gafta arbitration decision involved a dispute over a contract for the supply of Ukrainian organic corn on a CIF Rotterdam basis. The Seller guaranteed that the goods would be “… merchantable in EU as: full organic according to EEC 834/2007 – 889/2008.”. The contract also stipulated that the Buyer is responsible for import authorisation in the destination EU country.

Key Events and Certification Problems

After the contract was concluded, the Seller sent the Buyer draft inspection certificates for importing corn into the EU (Certificates of Inspection; “COI“), prepared by the seller’s accredited surveyor. The COI is one of the documents provided within the import procedure to confirm the organic status of the cargo.

Since the corn came from three different producers and, therefore, consisted of three separate lots, the buyer instructed that three separate COIs be issued. All three lots were loaded into one ship hold, and for this reason, the COI specified a single number for all three lots. The Buyer approved the COI drafts and paid 70% of the cargo’s value.

As the importer, the Buyer submitted documents for the cargo to Skal (Stichting Skal Biocontrole) – the control body responsible for inspection and certification in the field of organic production in the Netherlands. However, Skal revoked the organic status of the goods due to traceability problems. Skal also mentioned that there were issues with the overall batch code and the mixing of lots.

The Seller insisted that the buyer appeal Skal’s decision. Subsequently, the buyer informed the seller that Skal had taken samples of the goods and, according to the analysis, the corn was organic. However, the buyer did not inform the seller of the appeal results. In arbitration, the buyer attached a letter from Skal stating that they plan to uphold their decision.

In light of Skal’s decision, the buyer refused to pay 30% of the cargo’s cost and resold the goods as non-organic.

The Seller filed a claim with Gafta due to the incomplete payment for the goods. The Buyer filed a counterclaim related to the resale of corn at a lower price.

Seller’s Arguments

The Seller’s arguments were as follows:

1. The Buyer is responsible for import authorisation, which includes the confirmation of certificates and communication with the certification body (Skal).
2. The Buyer approved the mixing of lots and the COI drafts that indicated a common lot number.
3. Skal might not have made a negative decision if the Buyer had responded to its requests in a timely manner and properly informed the Seller.
4. The reason for decertification is related to the mixing of lots, which was approved by the Buyer, and the Buyer bears full responsibility for the consequences.
5. Skal confirmed that the product characteristics met organic standards; however, the Buyer did not provide the Seller with the results of the appeal of Skal’s decision.

Separately, the Seller opposed the counterclaim on several grounds: the late date of resale, the understated price, the incorrectly determined default date, etc.

Buyer’s Arguments

The Buyer’s arguments were as follows:

1. The Seller did not provide all documents confirming the organic status of the goods, and the available documents contained many errors.
2. The Seller guaranteed that the corn could be sold in the EU as organic. Therefore, although the buyer formally submits the import documents, Skal’s negative decision was the Seller’s responsibility.

Gafta Arbitrators’ Decision

The decisive argument in the dispute was that the Seller guaranteed that the corn could be sold in the EU as organic according to EEC 834/2007 – 889/2008. Any guarantee, by definition, is a condition of the contract, allowing the innocent party to terminate the contract and claim damages.

As for the Buyer’s responsibility for import authorisation, the arbitrators noted that the contract does not make it clear what exactly this term means, but in any case, it does not negate the Seller’s guarantee.

The arbitrators separately noted that, in essence, the dispute in this case arose from internal contradictions between reality and the Seller’s ability to guarantee something they could not control. In fact, the organic status of the goods depended solely on Skal. The maximum that the Seller could realistically guarantee within the deal was to provide the Buyer with the necessary documents, such as COIs, in accordance with EU rules. Everything else was clearly beyond the Seller’s influence.

The arbitrators recognised that the Seller violated the guarantee and the goods were not organic. However, the Seller proved that the default date was different from what the buyer claimed. Since the correct default date had a significantly higher price, the final balance was in favour of the Seller. The breach of guarantee did not relieve the Buyer of the obligation to pay for the accepted goods, albeit at a lower price. Thus, despite acknowledging the Seller’s fault, the final compensation was awarded to the Seller.

Lessons from this Case

This case highlights several key aspects that may be useful for participants in the organic product market:

1. Importance of Certification and Documentation: Organic certification not only confirms the compliance of products with established standards but also serves as an important element of trust between the parties to the contract. Insufficient or inadequate documentation can lead to payment refusals and become the cause of lengthy and costly disputes.
2. Risks for Contract Parties: Sellers may face problems related to non-compliance of products with organic standards, so it is worth paying close attention to documentation. Buyers may also encounter difficulties if the documentation is incomplete or does not meet the requirements, affecting certification possibilities.
3. Contract Drafting: It is important to clearly define the guarantees and responsibilities that the parties are willing to assume. In the case of organic products, where standards often go beyond the control of one party, it is worth carefully assessing the feasibility of guarantees.

Thus, attention to detail and compliance with standards at all stages of trade operations with organic products can be crucial for the successful fulfilment of contracts.

Conclusion

Trading organic goods, such as corn, involves a number of risks and complexities. Certification and documentation play a crucial role in preventing disputes and financial losses. Understanding these aspects and complying with all requirements can significantly reduce risks and facilitate successful contract performance.

If you require assistance or consultation on issues of organic certification and Gafta arbitration, please contact me via email, Telegram, or WhatsApp. I provide legal assistance and support in resolving any issues related to international trade and arbitration.