Contract Law

Cotton Price Free Fall Puts Trade Group Arbitration at Center of Arguable Force Majeure Situation

Updated: Earlier this year, cotton was $2.15 a pound on the wholesale market. Now it’s down 54 percent from that high, to less than $1 a pound for December delivery.

As a result of the precipitous price drop, some buyers are reneging on earlier contracts. That has led to a record 168 arbitration requests, the most since the International Cotton Association began compiling this statistic over a decade ago, reports the Wall Street Journal (sub. req.).

The ICA itself is 170 years old, and its arbitration rulings have been enforced internationally since 1958. It is based in the United Kingdom, in Liverpool.

Bangladesh is the second-largest importer in the world cotton market, and some 150 of the country’s more than 300 textile millers are potentially facing such ICA arbitrations, after canceling over $500 million in orders, the Priyo News reported in July.

In addition to fines that can be enforced in court, industry blacklisting is another means of bringing those who don’t comply with ICA rulings into line.

However, as a practical matter, there has to be some flexibility in pricing in a situation like this, purchasers contend, in what amounts to a force majeure argument.

A number of banks urged spinners not to open lines of credit to purchase the high-priced cotton, fearing that doing so would simply multiply losses, reports the Priyo News in an article that relies on information from the Financial Express.

Higher-than-expected yields on Indian and Pakistani cotton crops exacerbated the situation, and there was not likely to be a market for high-priced yarn manufactured from expensive cotton.

“Cotton shipments worth more than $500 million have been canceled after the cotton price tumbled in the international market after March. Our importers simply had no choice but to cancel or freeze the shipments,” an unidentified top spinner tells the publication.

Those in Bangladesh who bought cotton at a price close to the market high were competing with Indian spinners offering a product for half to two-thirds as much, said president Jahangir Alamin of the Bangladesh Textile Mills Association. “Suddenly many mills found that there are no buyers for their high-cost yarn.”

Related coverage:

EurasiaNet: “Tashkent’s Cotton Fair Opens: Do Boycotts Work?”

Updated at 7:45 p.m. to reflect updates to Wall Street Journal coverage.

We welcome your comments, but please adhere to our comment policy and the ABA Code of Conduct.

Commenting is not available in this channel entry.