Forms of Countertrade
16.06 As introduced above, countertrade operations in essence cover any contractual structure that involves goods moving in opposite directions between two trading partners.
Although countertrade does not on its face involve the provision of finance, the premise of this chapter is that countertrade essentially involves one supply transaction being used as the means of financing a matching transaction.[1799] Indeed, the ‘distinctive feature of [countertrade] transactions is the existence of a link between the supply contracts in the two directions in that the conclusion of the supply contract or contracts in one direction is conditioned upon the conclusion of the supply contract or contracts in the other direction’.[1800] Indeed, if no such ‘link’ existed between the opposing sale transactions, then they would hold little interest from a trade finance perspective, as they would simply be independent (albeit coincidental) transactions. Accordingly, it is the ‘link’ (whatever its form) that makes these transactions legally interesting,[1801] and that qualifies them as a form of financing: the ‘link’ effectively means that the price for goods is paid by means of the matching sale transaction, rather than the direct payment of currency. In that regard, there appear to be four broad types of countertrade operation.name="_ftnref1802" title="">[1802]16.07 The first type of countertrade is the barter transaction. A true barter involves only one contract between the trade parties.[1803] Obviously, in its very simplest form, a barter transaction could simply involve a one-off transaction where goods or services are exchanged for other goods or services.
Whilst such a simple and straightforward international transaction is certainly possible, it is unlikely to give rise to many of the difficulties considered further below.[1804] A more complex variation is the ‘valued barter’, which similarly involves the exchange of goods or services, but a balancing payment is made into a settlement account to reflect the difference in relative value between the respective goods or services.[1805] Barter is not, however, simply limited to the type of transaction that might occur in under-developed economies or between unsophisticated trading parties, but may extend to ‘an intergovernmental agreement addressing mutual trade in particular goods between identified partners, or to countertrade in which trans-border flow of currency is eliminated or reduced or where a single contract governs the mutual shipment of goods’.[1806] Accordingly, whilst barter was particularly common in post-War East-West trade,[1807] more sophisticated, complex, and longer-term barter-like transactions have developed subsequently.[1808] Accordingly, the type of barter transaction that is potentially legally problematic is when there is a frameworkagreement covering a series of current and future deliveries of goods and/or services in both directions between two trading parties,[1809] without funds being exchanged at all or only being used to balance out any disparity in the value of the goods provided on either side.
16.08
This more complex type of barter transaction does, however, start to resemble (and, indeed, may in some circumstances be indistinguishable from) the second (more modern) form of countertrade transaction, namely counter-purchase. In contrast to barter or barterlike contracts (which in its truest form involves only one contract between the parties),[1810] ‘counterpurchase [is a] multi-contractual arrangement effected on the basis of two or more interrelated contracts which provide for mutual performance by the parties of an agreed value, based on independent payment mechanisms’.[1811] As counter purchase involves parallel, albeit independent, contracts of sale: it is ‘a transaction in which the parties, in connection with the conclusion of a purchase contract in one direction enter into an agreement to conclude a sales contract in the other direction’[1812] Accordingly, the hallmark of a counterpurchase transaction is a provision in the first transaction to the effect that a second matching and opposite transaction will be concluded at some future time.
Whilst counterpurchase can be used in respect of discrete matching sale transactions,[1813] it is not unusual for the parties to conclude ‘a framework agreement indicating the principal rules under which the future export contracts are to be concluded,[1814] or at the very least the parties may enter into a non-binding ‘memorandum of understanding' with respect to future transactions.[1815]16.09
A variation of the counter-purchase transaction is the third broad type of countertrade, namely the buy-back transaction. This typically involves a long-term arrangement under which one party supplies the raw materials, equipment, technology, or know-how for the production of defined goods or the building of a production facility,[1816] the necessary work being done by the counterparty on condition that the supplier of those materials purchases any finished product. This form of countertrade often involves a single over-arching framework transaction with each party obtaining funding through their own bank for the acquisition of the raw materials or the production facility used to create the finished product.[1817] Given its long-term character, it is important to include in the framework agreement provision for the relationship to be adjusted to accommodate changing circumstances.[1818]
16.10
A variation on the buy-back transaction is the fourth type of countertrade, namely the direct off-set transaction:[1819] the difference between the buy-back and off-set transaction is that ‘in a direct offset both parties commit themselves to purchase over a period of time goods from each other, whereas under a buy-back transaction the party that has supplied the production facility commits itself to purchase goods resulting from the production facility’.[1820] In some respects, the direct off-set transaction resembles the more complex forms of barter described above in that, like the buy-back transaction, there will usually be an overarching framework transaction regulating the individual dealings between the parties.
16.11 That said, the categories of countertrade are not watertight and parties may develop their own individualised variations on the four structures described above.[1821] Moreover, the above description was premised upon the notion that the dealings were purely bilateral, but there are usually contractual mechanisms in countertrade transactions allowing third parties to join the contractual framework.
Moreover, multiple parties may engage in more complex forms of countertrade that perform the same basic financing function as bilateral arrangements. These include the ‘switch’ or ‘swap’ transaction:[1822] the former involves one of the parties to a bilateral arrangement looking to a third party for the provision of hard currency; and the latter involves three or more parties utilising a ‘merry-go-round’ arrangement to swap goods amongst themselves.[1823]16.12 Thus far, the forms of countertrade considered have involved the supply obligations in independent, but matching, transactions being used as the finance mechanism for the equivalent obligation in the opposing contract. It is also possible, however, for the necessary link to operate not on the supply obligation, but the payment obligation. By linking the payment obligations, the parties may avoid having to provide the necessary hard currency, having to tackle exchange control difficulties or having to rely too extensively on an unreliable banking or financial system. There are effectively two broad types of linked counter-payment.
16.13 The first type is the ‘blocked account’,[1824] which involves one party paying the price in respect of goods that they have purchased into a designated account, which the other party may then access when they have shipped their own goods and satisfied any conditions attached to the account (any balance being left in the account to finance future transactions between the parties). This mechanism is only likely to be helpful when the parties can agree on a jurisdiction with an effective banking system, have established clearly defined conditions for withdrawal of the funds from the account, and want to avoid the expense, risk, and delay that may result from using a letter of credit.
Where these practical concerns can be overcome, a ‘blocked account’ device may prove helpful in avoiding currency exchange issues or legislative or governmental restrictions on capital flows.The second type is a payment set-off structure,[1825] which, like the countertrade transactions 16.14
considered above, avoids the need for either party to transfer significant funds to their counterparty, with only the balance being transferred to one party or the other. The set-off arrangement may relate to a single pair of matching transactions or may provide a framework for a series of ongoing bilateral trades between the parties. The advantage of this arrangement is that the set-off is capable of covering payment obligations that are otherwise expressed in different currencies (provided there is the requisite mutuality), as well as accommodating multi-party set-off when a ‘set-off account' or multi-party netting arrangement is used.[1826]
III.