"There has been a much reduced level of financing transactions in relation to trade, and specifically in relation to commodities," declares Ed Patton, a senior partner at Clifford Chance (CC), with particular reference to the major economic problems arising 18 months ago in southeast Asia and Russia. This has made banks, institutions and traders very wary, but Patton detects a restlessness over the last six months that may suggest a resurgence of activity. "The commodity legal work tends to be driven by the prices in the market at the time," explains Diane Galloway, a partner in international trade and commodities at Richards Butler, which dominates this area along with Middleton Potts. "As soon as the prices go up or down, people try to get out of their contracts, and that leads to more disputes."
Commodities is technically split into physicals, futures and derivatives and the markets are all different. Metals and oil prices have steadily increased since June "to much healthier levels," according to Robert Parson, a partner in commodities and international trade at Middleton Potts. He says that traders are more interested in making money than litigating. So while disputes are settled quickly and economically, lawyers are used instead to tap innovative trade finance areas. Patton says there is less work in oil-related disputes than five or 10 years ago, as many fringe players have gone and many remaining players have consolidated.
In the vegetable oil trade, a substantial price drop, coupled with the impact on the Far East as a major consumer has led to "a great deal of disputes" during the last six to 12 months, according to Richard Black, partner in shipping and commodities litigation at RD Black & Co.
Black sees a clear trend towards a greater use of arbitration. As most of the international trade bodies, whose standard term contracts are incorporated into trade contracts, are historically based in London, this represents an opportunity for UK firms. Nevertheless, CC's Patton is doing a lot of sugar arbitrations in China. In grain, "the market is still very sluggish", according to Patricia Francies, head of soft commodities at Holman Fenwick & Willan.
She reports a downturn in trade and in disputes relating to trade. Shipping is down and freight rates are at an all-time low, with supply exceeding demand. But although trade is down, it does not mean legal work grinds to a halt. "We are damn busy," says Black, whose niche firm combines a shipping expertise with commodity trading work.
The trend for firms to extend their specialisation from the contract of carriage on a ship to the contracts of sale, insurance and finance that international trading encompasses has prevailed over the last 10 years. Commodities lawyers have plenty of changes afoot to keep them busy. Robert Finney, a partner in banking and financial markets at Denton Hall, points to the Financial Services and Markets Bill currently before Parliament that aims to consolidate the various regulators into the Financial Services Authority (FSA). Other changes include the application of the civil burden of proof to determining penalties for market abuse. "It is quite a controversial area," Finney says. With the restructuring of the electricity and gas markets, debate abounds as to the role that the FSA should play in regulating the derivatives market. The Futures and Options Association claims this area is beyond the scope of the regulator.
Rapid development of internet facilities to trade physicals and, increasingly, futures have attracted the need to regulate exchanges. Finney argues that the Internet is "changing the securities market enormously. As trading gets easier, there is increasing focus on clearing and settlement issues, which is where a lot of the credit risk lies".
Parson, of Middleton Potts, identifies the provisions of the Arbitration Act of 1996 and the new Civil Procedure Rules as having the greatest impact on the daily work of commodities lawyers. He adds that the continuing trend for mergers of the big trading houses across the board are "to some extent, overdue".
Despite the lack of vigour in some markets, there is an overall optimism within the profession about the future of commodities. Patton forecasts a growth in trading finance and "an increase in transactional work". Parson plans more expansion in the next six to 12 months and Dentons' Finney sees February's merger with Wilde Sapte as a growth opportunity. Black concludes: "The more that populations and economies develop, the more there is a need for commodities and commodity lawyers."