Treasury Today Country Profiles in association with Citi

Trade finance: settling disputes peacefully

Law gavel and hour glass

Although rare, disputes in trade finance are sometimes unavoidable. But when a disagreement between your company and a counterparty arises over a certain transaction, litigation or arbitration may not be the most desirable recourse. Fortunately, with the ICC’s new, improved DOCDEX there is a third way.

Since they are self-liquidating, trade finance transactions usually function smoothly and reach a peaceful, beneficial conclusion for all parties. From time-to-time, however, the banks and businesses involved in trade finance transactions will inevitably find themselves in disagreement.

Disputes can arise over any aspect of a trade finance arrangement. They might relate to the way in which the particular terms of an agreement are interpreted, the level or coverage of any security or the extent to which a financier might have a claim over certain assets. Often such disputes are not necessarily an indication of fraudulent practise on the part of one of the counterparties, but rather the wrong reading of the rules (which given the cross-border nature of many trade finance transactions are not unknown to get lost in translation).

In most cases, good faith negotiation is enough to settle these disputes. When that fails to conclusively resolve the matter though, companies will find themselves facing something of a dilemma. Court litigation or binding arbitration would seem to be the logical next steps, yet heading down this route could have very onerous consequences, not just in terms of legal fees, but also with respect to business relationships. Dragging an important supplier or buyer into a bitter, protracted court battle is, after all, probably the last thing any strategically mindful corporate executive wants to do.

Fortunately for companies then, there is a third way: alternative dispute resolutions (ADRs) like, for example, DOCDEX. This is the International Chamber of Commerce’s (ICC) Documentary Dispute Resolution Expertise which offers companies the opportunity to resolve the matter, peacefully, with the help of a neutral third-party expert. This week the ICC unveiled to 600 trade finance professionals in Singapore a new set of rules that DOCDEX will be subject to, which, the ICC state, will improve transparency, accessibility and, perhaps most significantly, considerably broaden its scope.

It is not difficult to understand why DOCDEX has, since it was established in 1997, become such a trusted and popular route for the resolution of disputes related to documentary credit arrangements. Organisations who use DOCDEX as a recourse for such disputes can call upon the technical expertise of professionals from ICC Banking Commission (who better to advise on such matters than those who drafted the rules?), independently administered by the International Centre for ADR. Decisions are non-binding and differences are often resolved much more quickly – typically three months or less – than they would in court. And with a standard fee of $5,000 for claims less than $1m, at a much lower cost too. Yet with the introduction of the new set of rules at the beginning of May 2015, a new, improved DOCDEX may help even more companies avert costly legal battles when disputes arise.

“We realised that there were some limitations to DOCDEX as it previously existed,” says Dr Georges Affaki, an independent arbitrator based in Paris and Chair of the ICC DOCDEX Drafting Group. To begin with the scope of the rules was relatively narrow, encompassing only the trade finance instruments governed by ICC rules. This meant that some disputes involving widely used trade finance instruments and practices – receivables financing, trade loans, syndication and participation, risk purchase agreements, for example – were not eligible to be resolution through DOCDEX. “We have gone beyond the traditional boundaries that were set in the previous DOCDEX rules which limited eligible disputes to those arising under the ICC Banking Commission Group. Now all of those instruments are open to DOCDEX if the parties so wish and eligible to the new dispute resolution.”

The other changes relate to accessibility and transparency. On the accessibility front, details of DOCDEX decisions (which once published are a reference for international standard banking practise) were previously compiled and published only on a three-four year basis for a price. Now they will be available free of charge through a dedicated website (www.iccdocdex.org). Submissions will also now be made electronically through this same website, using standard electronic templates which, Affaki argues, should speed up the decision making process considerably. In order to enhance transparency, the process for appointing experts too has changed, with prospective experts who wish to sit on the decision panel required to state from the inception their availability, independence and, not to mention, impartiality. Once an individual has served as a DOCDEX experts, additional safeguards will ensure he or she has no further involvement in the dispute under any capacity.

All of these measures should add up to method of resolution for trade finance disputes that is not only faster and more straightforward for those, like corporates, who might become embroiled in a dispute over trade finance, but also more widely applicable. Will DOCDEX be able to rescue even more trade finance quarrels from the courts moving forward? Affaki believes it will. “With the limited scope of the old rules we had 150 decisions handed down since 1997. On the one hand you could that is 150 litigations or arbitrations avoided, which is wonderful because it saves business prospects. But on the other hand consider the probably greater number of disputes which were not eligible for DOCDEX and had to go to court. Under the new rules I would anticipate that we would have a substantially larger number.”

In the time that has passed since DOCDEX was first introduced in 1997, the landscape of world trade has altered dramatically. We have seen extensive liberalisation in emerging markets and the growing prevalence of multi-dimensional supply chains, both of which have made trade finance an even more integral component of the export strategies of modern businesses. DOCDEX needed to be brought into the modern age and with these new rules that looks to be exactly what the ICC DOCDEX Working Group has done.