There is no doubt that this is a volatile time for the commodities markets. China's economic slowdown and falling commodities prices are being monitored with concern, while the JCPoA reached in July paves the way for potential easing of sanctions and means Iran is on the verge of becoming one of the hottest investment opportunities globally. These factors together are creating both exciting opportunities and new challenges for players in the market.
Welcome to In-Short, our new international trade & commodities newsletter, which is designed to give you practical advice on the key issues and opportunities facing the global commodities market today.
In this first issue we cover:
- Commodity trade finance and how the market needs to evolve
- Iran and what you need to consider when investing
- Enforcement of arbitral awards in China
- Facilitation payments in Australia's foreign bribery laws
- MiFID II and its effects on commodity liquidity
We hope you enjoy reading In-Short.
TRADE FINANCE: TIME TO JOIN THE CLUB?
The results of a trade finance survey by Clyde & Co, in association with Commodities Now Magazine
By Philip Prowse and Laura Hingley
With the world's population predicted by the World Trade Organisation (WTO) to rise to nine billion by 2050, international demand for commodities is likely to significantly increase. Access to funding to support commodity transactions is essential to meet this increased flow.
It is concerning that since the 2008 financial crisis, there has been a dramatic decline in the availability of trade finance. In fact, bank led trade finance has roughly halved from an estimated USD 14 trillion at its peak to near USD 7 trillion today.
Post financial crisis, with banks less focused on risk and trust at a premium – where will the funds come from? How does the commodity trade finance market need to evolve?
We posed these questions to the commodities industry. Working with Commodities Now, we sought the views of finance providers, commodity traders and commodity producers involved in the international trade of multiple commodities.
We asked respondents about their trade finance challenges, in particular the availability of appropriate finance and the willingness of lenders to lend. We also asked what kinds of finance the market was keen to have more readily available.
The results suggest that:
- Trade finance is more difficult to access than ten years ago, particularly for smaller producers and traders
- There is a mix of factors which have led to market contraction including a reduction in banks' willingness to lend, greater regulation and costs
- No single funding solution dominates. Instead, most traders rely on a patchwork of solutions to meet their funding needs
- Many in the market are not familiar with the LMA suite of trade finance documentation
- A large proportion of traders are exploring alternative finance solutions
- There is a strong sense that closer, more responsive and more trade-related club relationships are required
Our report discusses the survey results further, along with the factors behind these findings. We pose recommendations for how we return to an environment where there is sufficient finance to facilitate the trade required to meet the needs of the world's growing population.
IRAN - WHAT YOU NEED TO CONSIDER FOR RE-ENTRY
By Patrick Murphy and Amir Kordvani
After years of economic stagnation Iran is preparing for the post-sanctions era following the historic Joint Comprehensive Plan of Action reached by the P5+1 on 14 July. The deal could result in the lifting of economic sanctions and the Iranian market reopening for international business.
Iran is an exciting environment for foreign investors to operate in with healthy demographics, low debt and one of the largest oil reserves in the world.
At the same time it can be a challenging environment. Investors planning to enter Iran for the first time, or looking to expand an existing presence should prepare themselves for the challenges ahead.
In this article, we discuss the legal factors that investors should take into account when planning a market re-entry strategy.
Take note of sanctions obligations which remain in place
Despite the JCPoA deal, Iran will remain under sanctions until the IAEA verifies Iran's compliance with its nuclear obligations and the necessary legislation has been passed in the relevant jurisdictions. Even after the necessary legislation has been passed there will be residual sanctions applicable to Iran (notably for the US).
Before taking any steps to engage in Iran-related business, investors should identify and comply with sanctions obligations that are still applicable to them.
Be aware of recent legal and regulatory changes
As the next step, investors will need to assess how the recent developments in the local Iranian legal and regulatory environment will affect their business in Iran. For instance, new laws have been introduced where financial incentives (such as tax breaks) are offered to attract private sector investment. By contrast, the law has recently changed to require a higher percentage of local content for investments in the oil and gas sector and auto industry.
Investors returning to Iran after a lengthy absence should make themselves aware of any legal and regulatory changes.
Consider whether pre-sanctions relationships are still valid
Investors should carefully consider the terms of pre-sanctions contracts to determine whether those contacts have expired or been duly terminated. It is also important to determine whether it is possible to work with former partners or to build new relationships. If investors are planning to continue with former relationships, it may be worth carrying out fresh due diligence before resuming business relationships.
Understand the boundaries of your existing business structure
Investors who already have a business vehicle in Iran will need to consider what steps to take to revive and reactivate it. In particular, they should consider if the licence is still valid and if not, what steps are needed to apply for a new licence. In this context, investors should consider if they have any outstanding tax (or other financial liabilities) from past activities before applying for a licence renewal account with Iranian authorities.
Investors planning to expand existing operations in Iran will need to consider whether their existing business structure allows them to engage in their new operations. For instance, under Iranian law, a representative office cannot take part in profit-making activities or receive Iran-sourced income. Steps would therefore have to be taken to obtain the necessary licenses before any expansion of operations.
Register your intellectual property rights promptly
It is advisable for foreign investors intending to do business in Iran to register their intellectual property (IP) rights at the outset. Iranian law allows foreign companies to register patents, trademarks and copyright. If an investor has already registered its IP in Iran, it is important to investigate whether there has been any infringement of the IP in the interim and what enforcement action is appropriate.
Resolve any pending disputes you may have
Many investors were forced to withdraw quickly from the Iranian market. There might therefore be dormant or pending disputes (including labour disputes) against investors. Until those disputes are resolved, they could adversely affect future operations and the ability to obtain the necessary approvals and permits.
Investors planning to return to the market and who cannot afford lengthy litigation should make an immediate assessment of their legal position to determine the best options for settling any disputes (including via alternative dispute resolution mechanisms such as mediation).
There is no doubt the market will be watching the sanctions developments closely. The Swiss government is the first nation to remove sanctions against Iran, although as most commodity houses are still bound by US and European sanctions, this will have little effect on the market. Who will be next?
ENFORCEMENT OF ARBITRAL AWARDS IN CHINA
By Ik Wei Chong and Yong Tong Ang
China as an emerging economic superpower is an active player in the field of arbitration. The enforcement of arbitral awards in China has become an important topic not only in the legal community but also for those looking to do business with Chinese companies.
There are two components of the Chinese Arbitration Law ("the Law") which are critical to the validity of arbitration.
- Article 16 of the Law provides that an arbitration agreement shall contain a designated arbitration commission.
- Article 10 of the Law further provides that arbitration commissions may be established in municipalities directly under the Chinese Central Government, and the establishment of an arbitration commission shall be registered with the administrative department of justice of the relevant municipality, directly under the Chinese Central Government.
There are few instances where an arbitration agreement (which provides for the arbitration to be administered by a non-Chinese institution under its own arbitration rules) also provides for the seat of arbitration to be in China. In fact such an agreement will likely be declared invalid by Chinese Courts. This is of vital importance to foreign companies trading with Chinese counterparts.
A recent decision in the BP vs Long Li De case indicates the Chinese judicial position may be changing. We include below details of the case.
|BP vs Long Li De
In 2010 BP Agnati ("BP") and Anhui Long Li De ("Long Li De") entered into a commercial contract. The contract contained a clause for the disputes to be submitted to the ICC Court of Arbitration. It also stated that "the place of arbitration shall be Shanghai, China" and that any arbitration was to be conducted in English.
A dispute arose between the parties and BP commenced proceedings against Long Li De. Long Li De submitted a jurisdictional challenge to the Intermediate People's Court of Hefei (Hefei Court). The basis of this challenge was that the arbitration clause was invalid and in breach of Article 16 of the Law. Long Li De contended that the arbitration clause did not identify a Chinese arbitration commission. It was further asserted that the appointment of the ICC to administer the arbitration in China violated the judicial sovereignty of China.
The Hefei Court took judicial notice of the provisions of Article 10 of the Law. The Hefei Court then found that as Chinese arbitration was not open to foreign arbitral institutions these institutions (such as the ICC) did not qualify as arbitration commissions for the purposes of Article 10 of the Law. Accordingly, Article 16 of the Law is not satisfied by inclusion of an ICC arbitration clause.
On the basis of these findings the Hefei Court was prepared to find the arbitration clause to be invalid. Under the Chinese judicial reporting system the Hefei Court referred the case to the Anhui Higher People's Court ("AHPC").
The AHPC was divided on the question of the validity of the arbitration clause under Article 16 of the Law. While a minority supported the Hefei Court's reasoning, the majority held that the arbitration clause was valid in accordance with the requirements of Article 16 of the Law. Upon further referral to the Supreme People's Court ("SPC") in 2013, the SPC concurred with the majority decision of the AHPC, and agreed that the requirements of Article 16 of the Law were satisfied. The arbitration clause was accordingly determined to be valid via the reply from the SPC ("the Reply).
The Reply on the Long Li De decision is a positive development and reverses the earlier predominant Chinese judicial position. However, the decision has no binding effect upon Chinese Courts.
To streamline and regulate the position the SPC needs to issue a binding, judicial interpretation on this issue once and for all. Until such time, traders are advised to avoid agreeing to China-seated arbitration which is administered by a foreign arbitral institution.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.