The International Cotton Association said it is introducing mediation services to help resolve disputes over reneged contracts that have blocked hundreds of blacklisted firms from doing business. The group, which oversees the global cotton trade, said mediation would be another, speedier tool to resolve disputes, in addition to the current methods of negotiation and arbitration.
"This will be available to everyone as of tomorrow (Thursday), even for companies that are on our default list," ICA Managing Director Kai Hughes told Reuters on the sidelines of a trade meeting in Dubai on Wednesday. The Liverpool, England-based ICA expels members that deal with companies that are blacklisted for defaulting on contracts.
"I think that with over 700 companies that are listed as defaulters, we had to find some way to help get them off that list, and sometimes negotiation doesn't work out as well," Hughes said. The global trade group was inundated with requests to resolve disputes in 2011 and 2012 following a historic run-up that lifted prices above $2 a lb in early 2011, only to fall almost as quickly.
Mills that agreed to buy raw cotton from trade houses when prices were high then refused to honour those deals when prices plunged. While the rate of contract defaults has since slowed, the problem has become endemic in the industry in periods of high price volatility, market participants say. The ICA says its blacklist of 700 includes firms that have since gone bankrupt.
Earlier on Wednesday, Joe Nicosia, the Louis Dreyfus cotton head, said he did not think the most recent drop in cotton prices would create a big default problem as it did in 2011, because companies were not as extended or exposed as they were then. Hughes said some defaulting companies had approached ICA, asking to be removed from the list and that he thought mediation could be a suitable way to achieve that.
"Negotiation is one way of doing it, but if the two parties are not comfortable talking to each other, then mediation through a mediator could be another tool" he said. If both sides agree to mediation, ICA can provide a professional mediator to help resolve a dispute, he said. The two parties share the costs, unless they have been through arbitration already, in which case the defaulting side pays the mediator.
The process is quicker than arbitration. Most mediations usually take only one day. "It provides a forum for the two parties to resolve their disputes where perhaps the relationship has broken down, or one of them is on the default list," Hughes said.
"The beauty of mediation is that it is a win-win situation as both parties have to agree, and both parties want to find a solution that they are happy with. With arbitration, one party loses at the end," he said. ICA said it was the first commodities association to offer mediation services. "This is groundbreaking, and so there will be a lot of other commodities watching us and I'm hoping it is going to be a success," Hughes said.
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