Invoicing back - an explanation
The most common type of cotton dispute to be presented at arbitration is when a contract, or part of a contract, has not been performed or is not going to be performed, for whatever reason. In such circumstances, the concept of "invoicing back" or "closing out" of cotton contracts is the basic rule of ICA arbitration procedure and practice. In its simplest form, it is essentially an accounting device, a tool for "balancing the books". It is important to emphasise that the principle applies in all circumstances of contract closure, not only when the failure of a contract is due to the fault of one contracting party.The authority for dealing with unfulfilled contracts, or parts thereof, is contained in Rules 225 and 226.
In practical terms the application of the provisions of Rule 226 should place the parties, in so far as it is possible, in the same financial position as that which they would have occupied had the contract been performed, bearing in mind any variation to the terms of such contract as may have been brought about by either written amendments or by the conduct of the parties and/or their accredited agents. That principle is generally satisfied by accounting for unfulfilled contracts or parts thereof by reference to the free representative market value of the growth and quality of the cotton contracted for ruling on the date or dates when both parties knew or should have known that they the contract would not be performed. This is sometimes referred to as the date of breach of the contract, though the invoicing back procedure applies equally in situations where there is no breach.
In practice, the invoicing back principle is intended as a compensatory device' - if the market has moved up between the date of the contract and the date of breach, the Seller would be directed to pay the market difference to the Buyer. If the market has gone down, the Buyer would be directed to pay the market difference to the Seller. The principle is simple, but of course assumes that both parties act promptly on the date of breach/close out, to cover their respective positions and to minimise potential losses.
Do you want to find out more, or have a particular question about invoicing back? Please contact us at arbitration@cotlook.com for guidance.
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