Managing Three Risks: Physical, Political And Juridical
August 22, 2013 During the last two years, the main view of the cotton trade – as expressed in the home office of many cotton merchants – is that historic and nerve-wracking price volatility has pushed certain classes of buyers into their first step toward default. The lack of consequences attracts a second step, and before you know it, the problem has taken on a life of its own.
But if we were looking down from the moon at the global impacts of shrinking regional trade, we might well argue that the larger view must include the tactics of big-box retailers who are forced to react to the sad shape of so many national economies.
We know in our hearts that both of those situations are linked. But in any case, on the ground, the immediate concerns are simple:
• Are there more difficult times ahead?
• Will our livelihoods continue be at risk due to turbulence like the crisis we just endured?
Navigating Hairpin Turns
Avoiding danger in today’s cotton industry is a lot like driving a car. When we’re on the financial “road” with the shipper, we know that it’s prudent to advise extra care when we hear reports of upcoming patches of narrow, mountainous roads that are filled with hairpin turns and little room to maneuver.
And after settling fire losses in China and India, as well as water damage in Vietnam, the concept of merchant risk as a treacherous mountainous road becomes all too real – especially when risk has been extended after arrival at many of the usual destinations.
Extended storage scenarios arise when merchants learn that:
• the buyer’s letter of credit (L/C) was never opened, or never confirmed,
• the buyer has failed to take up the documents needed for payment, or
• the cotton has shipped, and subsequently been rejected by the buyer.
When that last scenario occurs, we know that it is really time to slow down. Perhaps the buyer has “cross applied” cotton across several shipments – or in some other way has avoided making payment – effectively rejecting the shipment back to the shipper.
The New Meaning of ‘Delivery Order’
The newest type of risk – or missing “guard rail,” to continue the driving analogy – might be that warehouse delivery orders are no longer what we thought they were.
If things go as expected and the shipper’s cotton arrives at the foreign port safely, it should be stored in containers there. What happens next?
In scenarios where cotton is about to be de-vanned at a foreign destination, the storage risk has three primary dimensions: physical, political, and juridical.
For the physical risk: Everything starts with an inspection of the facility to validate its sprinkler systems, fire doors, compartment size and more than a dozen other important characteristics.
For the political risk: The answer can be as simple (and expensive) as keeping the goods in bond and in port-bonded warehouses, and guaranteeing that insurers can get recovery moneys out of a country.
Finally, there is the juridical risk. For starters, we need to ask:
• What is stated in the tariff and storage contract?
• What are the laws and customs that will govern insurers’ recovery after we have paid the shipper for his cotton loss?
• In other words, what is the legal and practical treatment of bailment?
In the West, we consider bailment to be the body of common law that covers the duty owed by the warehouse (bailee) hired to store and return the goods of the depositor (bailor) in the same condition as given.
Should losses occur, certain set rules govern the standards of proof, amount of remedy (payment owed), and timing.
Practically speaking, however, there are as many legal systems and treatments of storage and bailment as there are countries in the world.
Conceptual Comparisons
Because Asia is so critical for today’s cotton shipper, we have envisioned the systems of an important few destinations: China, Vietnam, India, and Singapore.
In all four countries – and with the help of no fewer than five law firms – we have charted both the availability of any doctrine of bailment and the standard of care that drives the practicality of enforcement, whether underwriters can actually recover.
The results are intriguing. For example, while India has a long history of the doctrine of bailment, the practicality of proof can be an obstacle.
Perhaps the opposite may apply in Vietnam. In the absence of bailment law, proof of the level of responsible care owed to goods of others may be easier under civil codes.
Singapore bailment law and practice is reportedly very close to the British version, and China is currently finding its own way.
The truth of the situation is that navigating international bailment laws is a work in progress – primarily because the liability for storage losses is highly fact-dependent.
The wise merchant is fully aware of how varied and vital the “pre-need” steps required to approve warehouses can be, and as a result, is sure to discuss prospective tariffs with his insurer, review sales and payment terms, and conduct inspections.
The prospect of continued volatility means the need for vigilance at the foreign destination is real and won’t be going away any time soon.
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