26. May 2020 / Absorbing the Corona Consequences: the Cotton Industry’s Trade Rules Could Help

Interview with Axel Trede, arbitrator at the Bremen Cotton Exchange and at the International Cotton Association.

The corona crisis is having an extreme impact on the textile chain. Textile and clothing shops that have been closed for weeks are slowly opening their doors again and the economy is hoping for a mood of consumer confidence. But the damage is obvious and has long-term effects. In the textile chain itself, developments have emerged that were previously unknown in this intensive form, at least in the last stages of the supply chain: cancellations, unilateral contract dissolutions, breaches of contract. The cotton trade, at the very beginning of the chain, knows these problems and created its own trade laws over a hundred years ago in order to maintain contract loyalty and compliance with good, fair business conduct. The Bremen Cotton Exchange and the International Cotton Association, Liverpool, have their own international arbitration tribunals with trade experts who intervene in the event of a dispute.

We asked Axel Trede, arbitrator at the Bremen Cotton Exchange and at the International Cotton Association, as well as a board member of both associations, for his opinion:

Axel Trede

Mr Trede, how do you assess the current situation and the contractual irregularities of some textile companies from the point of view of a cotton dealer?

Textile manufacturers‘ associations in various countries are reporting considerable difficulties in dealing with existing contracts, in part also with well-known brands, textile chains and resp. or textile retailers. The picture is not consistent – some companies are showing exemplary behaviour, but various others are trying to pass the weakness in sales caused by COVID-19 on to their (pre) suppliers. The damage is considerable and is already estimated at several billion euros. As a result, even companies at upstream production levels no longer see themselves in the position, or are using this as an excuse not to comply with contracts.

As a cotton trader and arbitrator, I have seen a significant increase in international arbitrage resp. arbitration tribunals over the past four weeks.

Can you imagine extending a system similar to that which has been used in the cotton trade for over a century to the following stages of the supply chain? Is there a need?

The cotton trade works to the iron principle of the ‚inviolability of a contract‘ – at least if the contract has been concluded according to the rules of the CICCA* members, such as the Bremen Cotton Exchange or the International Cotton Association. This principle works by ignoring the ‚guilt‘ factor, and according to the provision that both parties are financially placed in a position as if the contract had been executed. Thus in the event of non-settlement, the difference in market value applicable at that time must be settled. This difference is the disparity between the agreed price and the actual market price to be achieved at the date of delivery. You must know that cotton is a stock exchange listed commodity – there can be considerable price fluctuations between contract conclusion and delivery date.

I do not know the contract system or the legal basis at the ‚end‘ of the textile chain well enough to be able to judge whether the above system would also be applicable to the textile trade. However, it works excellently in the field of raw materials, as the principle is impressively simple and fair and arbitration courts with experts can provide legal security much faster and cheaper than disputes before courts.

I am surprised to hear, however, that companies operating from legally ‚safe‘ countries such as the USA, Europe, Singapore or Hong Kong are apparently quite coarse in some cases with their contract partners in the typical manufacturing countries such as Bangladesh, Indonesia, Vietnam, Pakistan and India, without fear of serious legal consequences.

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