Eleven months ago, Essar Steel Algoma Inc. completed its restructuring. Now, the Canadian company is suffering from tight covenants, liquidity problems and a very serious contract dispute. The contract dispute involves Cliffs Natural Resources, which supplies iron ore to Essar.
According to an analyst familiar with the contract dispute, Cliffs cancelled its contracts with Essar because they are not profitable. According to Cliffs, it terminated its iron ore supply contract with Essar on Oct. 6 because Essar had defaulted on the agreement. Cliffs says that it will continue to supply iron ore to Essar but only under commercially reasonable terms.
Essar responded with a temporary restraining order request, and stated that the issue of iron ore supply is now in dispute with a U.S. judge in Cleveland. Essar says that Cliffs must therefore honor the agreement until the legal matter has been resolved.
It appears that both Cliffs and Essar are in difficult positions. For one, Cliffs has only three customers that are buying iron ore, and losing Essar as a client will make it necessary to raise its prices to other clients. Meanwhile, Essar does not have any other firm from which it can purchase its iron ore.
At this point, Essar is trying to build its own operation to produce iron ore, but it will not go into operation until 2016. The business dispute appears to be another wrench in the works for Essar amid its already worsening financial circumstances.
The contract dispute between Cliffs and Essar is an example of how no side ever benefits from a contractual disagreement. This is why it is important for Canadian companies to try and resolve contract disputes as quickly as possible. If necessary, it may be helpful to bring a skilled contract dispute lawyer in to help negotiate a solution.
Source: The Deal, “Essar Steel battered by contract dispute, declining financials,” Lisa Allen, Oct. 15, 2015
