In trade practice, the word “washout” is often used as if it were a convenient way to close an unattractive contract. Legally, it is neither a cancellation button nor a unilateral right to walk away.
A washout is a separate agreement by which the parties close out the existing contract and settle in money at an agreed price. Instead of physical delivery and payment for the goods, the parties fix a close-out price and the losing side pays the difference.
The essential element is consent. A washout works only if both parties agree. It is a deal, not a right.
Standard GAFTA contracts do not contain a standalone washout clause. “Washout” is market language for a separate settlement or washout agreement made in connection with the underlying contract.
GAFTA does contain a different mechanism: the Circle clause. It applies where goods sold through a string of contracts return to the original seller, the string closes into a circle, and settlement is made under the special contractual mechanism for a closed chain.
Circle is an automatic contractual mechanism for a closed string. A washout is a voluntary agreement between two parties. They may look similar commercially, but they are not the same legal mechanism.
When the counterparty no longer wants to perform and proposes to “wash out” at a stated price, the first question is not whether the proposal sounds convenient. The question is whether it is better than default.
If the time for performance has passed and the counterparty has failed to perform, the innocent party may proceed under the default clause. Damages are usually assessed by reference to the difference between the contract price and the default price or market value of the goods on the date of default. Depending on the facts, proved expenses may also be recoverable.
Sometimes the proposed washout is better than the default outcome. Sometimes it is the opposite: the counterparty is trying to close the position more cheaply than it would as the defaulting party. The alternative must be calculated before agreement is given.
For the party facing an unattractive performance position, a washout can be a way to limit losses and close the position at a clear price without pushing the matter into default and arbitration.
But proposing a washout does not create a right not to perform. The other side may refuse and insist on performance. If performance is then withheld, the result is not an exit by washout. It is default.
At that point the calculation moves to the default clause, tied to the value of the goods on the date of default. The result may be worse than a timely negotiated settlement.
A washout is a new contract. Like any other commercial contract, it may be formed by a short exchange of messages if the correspondence shows clear terms and real agreement.
Washout at 240?
If the other side confirms, the price may be fixed. A later market movement does not, by itself, undo an agreement already reached.
There is also a separate risk where washout negotiations fail but performance has meanwhile stopped. If no agreement is reached and the performance date passes, the party may be in default even though it believed the matter was still being discussed.
A washout is a voluntary agreement to close a position, not an emergency exit from the contract. If there is no agreement, the contract remains in force. Or default follows.