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Financial Issues In Contracting

April 26, 2010

Financial capabilities and issues have always been fundamental to contract negotiations – hardly surprising, when you recognize that contracts are primarily about economic exchanges. I wrote recently about one aspect of this, following a conference about on-line dispute resolution.

Last week, there were a couple of announcements which illustrate the point that contracts experts need increasingly to be on top of financial trends and developments. One was a report from the International Chamber of Commerce on the ‘fragility’ of the recovery in world trade. A particular issue they have identified is the drop in trust between trading partners, reflected in increased demand for ‘higher levels of insurance’ by suppliers, in particular for confirmed letters of credit, where previously payments were taken on trust. Because of their aversion to credit risk, the banks have in turn increased their fees for commercial letters of credit and other instruments.

This aspect of the credit crunch has been under-reported. There has been extensive press about the fears of buyers that their suppliers might go out of business; but here is evidence from the other side of the coin – that suppliers are concerened about their buyers, and increasing the cost of doing business accordingly. For those buyers who demanded an extended payment period, the reaction by their suppliers is certainly understandable. Once again, it is the banks that profit!

The ability of the financial industry to protect its interests is reflected in the second story, that Visa has acquired e-commerce specialist, Cybersource. It is just the latest in a series of acquisitions by major credit card providers to ensure their ability to compete with alternative sources of funding and payment protection – for example e-Bay / Paypal (mentioned in my original story). Although the focus right now is on retail business (Cybersource apparently processes about a quarter of all US e-commerce transactions), how long will it be before such partnerships start to serve the lower end of business to business transactions?

Many contracts staff tend to leave these issues – and awareness of market trends – to their colleagues in Finance. But this means that negotiations are frequently disjointed and trading opportunities are missed. It is time for those in the contracts and commercial world to ensure they are on top of the trends in trade finance.

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