When Does a Contract Become Real?

Walker: Upon receipt of the confirmation, the other party should take the time to carefully review and check all specifications therein, and if any notable or material differences are found, immediately notify the other party to the contract by telephone and confirm by written communication.

F&G: What’s the recommended timing for executing the contract confirmation procedure?

Walker: After the first step of mailing the confirmation and after three business days or more as the business may determines you should consider contact with the other party to confirm receipt of the confirmation, answer questions and verify the immediate return of a signed copy. This step is not required by NGFA rules or the UCC; it just makes good business sense.

If the signed confirmation is not received within five to seven business days the date of confirmation was mailed, follow up with a call to the other party to request a meeting to sign the confirmation, or resend the confirmation via a confirmed delivery service (certified mail, UPS, FedEx, etc.)

That second copy of the confirmation should be accompanied by a notice to the other party that the contract will be cancelled and that the party is responsible for damages, if the confirmation, is not signed and returned immediately. If the second confirmation is not signed within five to seven business days of its issuance, terminate the agreement, notify the other party of their breach of contract and close any corresponding hedge positions.

F&G: Why is it important to close hedge positions?

Bylund: Under the UCC and NGFA rules, damages are generally fixed on or about the date the nondefaulting party receives written notice of default by the counterparty. If a grain company closes out a contract and does not close out the associated hedge position, any hedging losses subsequent to the default may not be recoverable in subsequent legal proceedings.

As you can see, there is no replacement for following proper procedures. As mentioned earlier, the cost of doing business goes up dramatically relative to time lost, possible legal/court costs and maybe most importantly, lost trust between potential trading partners, when poor procedural practices are used when creating contracts.