Flick on a light switch and the result is instantaneous. But behind this seemingly simple outcome lies a vast and complex chain of innovation, enterprise, investment and negotiation.
Exploration for resources such as oil and gas is a high-risk, multi-year endeavour. Regulations change. Prices are volatile. End users are often thousands of kilometres away; to light their homes requires ships, ports, refineries and power plants.
Developing nations’ appetite for resources, as well as the shift from fossil fuels signal more demand – not just for minerals such as iron and copper, but new inputs for a new economy. The pace at which the world shifts to new energy makes this sector fraught with legal danger.
Managing Director
Helmsman LLC
At the macro level, there are obvious risks in rapidly shifting regulatory frameworks, contract challenges in volatile markets, and lawsuits from regulators, governments and environmentalists. The switch to cleaner fuels is risky, too. Lithium, nickel and rare earth minerals are often mined under poor labour and environmental oversight, for example.
At the micro level, new and complex legal issues constantly emerge. Fraud in commodity trading is not uncommon. Scandals still before the courts include the 2020 collapse of Singapore’s Hin Leong Trading on the back of more than USD2 billion in alleged fraudulent oil trades, and the USD500 million nickel fraud allegedly committed by companies controlled by Indian tycoon Prateek Gupta.
The effects of such frauds often spread far beyond the immediate parties, leaving banks and other entities all along the trading chain fighting over who bears the ultimate losses. Sanctions-related disputes are also on the rise. The inherent complexity of sanctions laws and the overlapping and at times conflicting regimes in various jurisdictions ensure a legal mine field.
Companies become entangled when funds are blocked, or vessels detained because of the hitherto unknown involvement of a sanctioned entity somewhere in a long supply chain. Others may be snared by banks’ over-cautious compliance.
Commodities trade is also vulnerable to earthquakes, typhoons and other natural disasters, bringing into play force majeure – a frequent legal battlefield for traders and miners. The fact that disasters can correspond with soaring prices for affected commodities adds complexity to disputes.
Shipping is another fertile area for disputes. Vessels are late. Cargo gets damaged. The ship may have called at a Russian port. These issues can be a flashpoint between two sets of players – commodity traders and the shipping concerns. Disputes are often complex and involve substantial sums.
So far, we have only discussed physical trades. Traders may also use paper trades, derivatives to manage risk, or for speculation. We don’t have space here to explain the gulf between the two, but one would be hard pressed to find a single lawyer qualified to advise on both. A physical trading lawyer is probably not a paper trading lawyer, and vice versa.
The wider commodities world has many areas with their own legal practitioners. There are upstream specialists in mining, exploration and production, infrastructure and construction. Mid-stream has the familiar shipping lawyer. Downstream, however, commodity trading is not yet fully regarded as a separate specialist field. That is changing.
Growing sophistication of commodity traders is driving demand for specialist lawyers. It takes a legal mind experienced in commodities to fully comprehend the risks in a modern commodity trade, and to understand the operational and commercial motivations underpinning the legal issues.
Today’s commodity trading lawyer must know much more than plain contract, or shipping law. They need to understand parallel trading and logistics chains, and have a working knowledge of the main sanctions regimes, as well as anti-dumping, competition and trade finance law, among others.
And this knowledge must be at their fingertips. A vessel waiting to load crude oil could be incurring USD50,000 a day in demurrage and the client needs to know now what to do. An astute seller in a soaring market wants immediate advice on whether they can walk away from a trade and resell the cargo at a higher price.
As commodity trading grabs headlines – from supply chain shocks and contested minerals vital to the new economy to high-profile scandals – young lawyers are being drawn to the field; some older hands see opportunity in growing demand.
Commodity trading lawyers are now a fast-growing breed in what will surely soon be recognised as their own specialist area of practice.
Ian Teo is a managing director at Helmsman LLC
HELMSMAN LLC
21A Duxton Hill
Singapore 089604
Contact details:
T: +65 6950 8666
E: ian.teo@helmsmanlaw.com
www.helmsmanlaw.com
