Contracts, advance payments and trust: legal lessons learnt from a multi-million dispute in the cherry sector

Attorney Álvaro Jofré, who represents foreign investors and a Chilean exporter in legal proceedings related to a commercial transaction in the cherry sector, calls for greater attention to informality, weak contracts and the lack of due diligence in business transactions.

The attorney, who in Chile represents foreign investors and a Chilean exporter in a dispute arising from a cherry-related deal, analyzes what he believes continue to be the main weaknesses of contracts in the fruit sector.

Guarantees, advance payments, penalties, exclusivity and compliance with commitments emerge as key elements in protecting the assets of the parties and Chile’s reputation in the eyes of international investors.

The Chilean fruit industry generates billions of dollars every season and operates in some of the world’s most demanding markets. However, a significant share of transactions continues to be structured around elements historically typical of the sector: personal relationships, advance payments, trust, future delivery commitments and contracts that may extend over several seasons.

Contracts and trust

This model has made it possible to build long-term business relationships, but the growing economic scale of the sector, the presence of foreign investors and market volatility are prompting a reassessment of how much room can still be left for trust when millions of dollars are at stake.

This is the issue raised by Álvaro Jofré, attorney and founding partner of Jofré y Cía., who represents one of the parties involved in a dispute arising from a cherry export transaction. The case includes arbitration and criminal proceedings relating to a fruit supply contract and advance payments worth several million dollars.

According to the information provided during this interview, the transaction allegedly began in 2024, when a group of foreign investors reportedly agreed to purchase, for eight seasons, the cherry production linked to the producer involved, paying approximately US$2 million (around €1.7 million) as an advance on the future price, in addition to other additional funds.

Legal standards and due diligence

Following a negative commercial season, a dispute allegedly arose over contractual obligations, and several legal proceedings were subsequently initiated.

Jofré uses the case to raise an issue that, he argues, goes far beyond the individual dispute: is the Chilean fruit industry applying legal standards appropriate to the economic scale of the transactions it conducts?

In his view, answering this question requires reviewing several aspects, ranging from contracts and guarantees to the way due diligence is carried out before granting financing, purchasing future production or making commitments covering multiple production seasons.

In an interview with Diario Frutícola, the attorney suggests the measures that producers, exporters and investors should adopt to reduce the risk of litigation and explains why, in his opinion, commercial trust must be accompanied by clear rules.

Álvaro, what is your view of how business is currently conducted in the fruit sector from a legal perspective?

In my experience of more than ten years in the sector, I can responsibly state that there is a very high level of informality, precarious agreements, contracts that are difficult to enforce and a general lack of rigor in transactions worth millions and millions of dollars.

This is something that is not seen in other transactions of this scale.

Can you give some examples of bad practices and explain how a producer, exporter or investor can protect themselves?

Excessive trust seems harmful to me and can open the door to abuse. I believe that in this sector, trust in the counterparty is being confused with a kind of blind faith in their statements, proposals, guarantees and so on.

This applies to everyone involved in the process, and the risk can be mitigated through a preliminary assessment of the transaction. It does not necessarily have to be complex, sophisticated or expensive: it can be a simple verification, largely based on public information, that makes it possible to obtain a realistic picture of the situation.

Not a fantasy mistakenly called “trust”, which, unfortunately, has been abused.

Based on the case in which you are involved as an attorney, concerning a transaction in the cherry sector with foreign investors and multi-year contracts, what would you say is the first major lesson?

As the representative of the parties who consider themselves harmed by the transaction, the lesson is not to base everything on “trust” in the counterparty, but rather to apply the strictest standards commonly used in any international transaction worth millions, adapting them as necessary to allow the business to operate.

This is an industry that, in order to function, needs foreign capital and requires this capital to be less “rigid” than bank financing. That is understandable, but it cannot mean transferring millions of dollars solely on the basis of an entrepreneur’s word, without establishing binding guarantees or including contractual representations and warranties.

There must be a middle ground that makes the transaction viable while also protecting foreign capital.

It is important to clarify that this is not about protecting foreign investors at the expense of Chilean producers, but about safeguarding the image and reputation of Chile as a reliable country in which to do business, considering the positive impact that the cherry sector has on Chile’s development and, in particular, on the Maule Region.

What should have been done differently in this case to avoid going to court, and what is the current status of the proceedings?

The first part of the answer is obvious, but it highlights something that I consider deeply unfair. If the producers had honored their word, it would not have been necessary to initiate litigation.

In addition, my clients proposed several alternatives for addressing the problems together, but the producer entrenched himself in his negative position and, according to our claims, even refused dialogue, prioritizing exclusively his own economic interest.

Personal relationships of trust, an entire business, relationships with foreign investors and other elements have been compromised. According to our position, simply honoring the commitments and agreements would have been enough to avoid ending up in court.

Several legal proceedings, both civil and criminal, are currently underway and will require time to reach a conclusion.

The Chilean judicial system is not as swift as one might wish, but justice eventually comes, and in my opinion that will also happen in this case.

In the Chilean fruit industry, many transactions are based on relationships of trust, advance payments, future settlements and fruit delivery commitments. How should this commercial trust be balanced with concrete legal safeguards so that the business remains sustainable and does not end up in court?

As I was saying, on the one hand there is traditional bank financing, which requires guarantees and imposes conditions that would make the current business model practically unsustainable, especially considering the downward trend in prices.

At the opposite extreme is the current situation: investors who believe and trust virtually anything, with little or no specialized financial, technical and legal advice, and who transfer millions of dollars with nothing more than the “hope” of having a good season. Both extremes are unsustainable.

This sector needs a middle ground, in which conditions and rules are verified and made explicit before transactions are concluded, so that they serve as genuine deterrents without blocking the flow of capital.

In today’s world this is entirely possible, yet very outdated approaches continue to be applied here, approaches that are no longer sustainable and that seriously jeopardize the continuity of the sector.

When signing a contract for the purchase and sale of fruit over several seasons, which clauses are essential to protect the parties? I am thinking, for example, of fruit exclusivity, collateral, pledges, advance payments, settlements, fruit quality, breaches, penalties, arbitration and exit mechanisms.

In fact, all the aspects you mention are relevant and deserve careful consideration. I would add, as an element that I consider fundamental, the existence of penalties associated with breaches of contract.

Objective, clear and significant penalties. This helps reduce the tendency to forget the commitments undertaken.

That said, I believe it is impossible to draw up a standardized list of points or issues that must necessarily be included in a contract. Agreements of this magnitude are, and must be, tailor-made, rather than based on a template applied indiscriminately to dozens or hundreds of transactions.

I believe this is precisely where one of the main problems I have observed lies, and it is placing the system under considerable pressure.

From the agricultural producer’s perspective, which contractual or financial mistakes can put assets, reputation and production continuity at risk? What should a farmer do to properly organize their companies, guarantees and commercial commitments before seeking financing or international buyers?

Common sense, internal responsibility and honoring one’s word are a good answer. A responsible producer who operates within the limits of the trust placed in them and honors their commitments should not encounter difficulties.

The problem arises when abuses occur, when cash flows are poorly planned, when certain eventualities are ignored or when it is unclear what obligations are being undertaken.

It is in these situations that, when difficulties arise, there may be a tendency to place all responsibility on others, without acknowledging one’s own responsibility or the negative economic consequences of the decisions made.

When abuse or deception occurs, the entire market is affected. I do not see how a situation of this kind could fail to have an impact on the sector. First, because the investor involved is unlikely to want to do business in Chile again.

Second, because other parties interested in the potential of the Chilean fruit sector may think twice before investing in the country after seeing damaging situations of this kind.

China is a key market for Chile, especially for cherries. Based on your experience, why are trust, keeping one’s word and contractual clarity such sensitive values when doing business with Chinese companies?

In the interactions I have had throughout my career with businesspeople from that country, I have observed a strong sense of respect for one’s word and for trust in the counterparty.

For them, this matters greatly, sometimes even more than contracts that run for dozens of pages: they place great value on a person’s word.

It is unfortunate, but in Chile these boundaries can become less clear, especially when dealing with counterparties characterized by a significant cultural distance, as is the case with China.

In such a volatile and unstable world, it seems very risky to me to call into question something that, in their business culture, represents a central element of commercial relationships. The risk of damaging this commercial relationship increases and, if the lesson is not learned, the consequences could be very negative.

Beyond this specific case, what impact can conflicts of this kind have on Chile’s reputation as a reliable supplier of fresh fruit? Is there a risk that private disputes could ultimately influence the perception of foreign investors or international buyers toward the country?

I have no doubt that cases such as the one I am handling can have broader repercussions on Chile’s commercial reputation. I have personally heard the investors involved express views that no one would want to hear about the Chilean business system.

Does anyone really think these comments are not repeated abroad? Before reaching the point of excessive regulation and turning the current system into an unsustainable model, I believe the time has come to raise ethical and professional standards and make a long-term commitment to the sector, accepting both its positive and negative aspects.

Continuing with abusive behavior, attempting to evade problems or obtain undue advantages could cost the entire country dearly, particularly medium-sized and small operators in the industry. A very large number of jobs are at stake.

If you had to provide a practical guide for exporters, farmers and investors who are about to sign long-term fruit contracts, what would be the five minimum safeguards that should never be missing in order to prevent fraud, breaches or conflicts capable of blocking investments?

In fact, I believe I have already answered this question. There do not necessarily have to be five, six, seven or eight elements. In some cases three or two may be enough, while in others fifteen may be necessary.

The central point concerns two aspects. The first is to apply to this industry what is standard practice in transactions of this scale in other sectors: a specific technical and legal assessment for each individual case.

The second is that the parties should not misrepresent their own situation or abuse their position, but should honor in good faith what they have agreed.

Naturally, the first element goes a long way toward ensuring that the second also works. These two aspects are what the entire matter ultimately hinges on.

Source: www.diariofruticola.cl

Image source: Stefano Lugli

Cherry Times - All rights reserved