The International Cotton Association (ICA) Limited ordered the Chinese firm last year to pay compensation after the Bangladeshi firm approached it for an arbitration
Valleycot Marketing, a Bangladeshi cotton trader, plans to sue a Chinese company that breached contracts to supply natural fibre back in 2017 and failed to pay any compensation for it.
In more than three decades in business, this is the first time Valleycot finds itself in this position.
Valleycot described it as a last resort move after Shandong Jining Ruyi Import and Export Co's remained silent regarding the payment of nearly $1 million as compensation.
The International Cotton Association (ICA) Limited issued the compensation order last year after the Bangladeshi firm approach it for arbitration, with evidence of violation of the agreements – one signed in November 2016 and another in February 2017.
Shandong was to supply 7,000MT of Australian raw cotton by August 2017 but could supply 2500 MT. It refused to deliver the rest of the consignment.
In the meantime, cotton price in the global market went up.
This is when Valleycot decided to close the contracts and claimed from Shandong the damages amounting to the difference in the contract price and the current market price. Shangdong was liable to pay such damages according to ICA regulations.
The order became effective and binding from October 25 last year.
On top of the compensation, Shangdon will have to bear interest burden at an annual rate of 4.25 percent from November 15, 2019 on the entire amount, if not paid, or any partial amount remaining unpaid, as per the order.
The Chinese firm failed to pay the arbitration award and in consequence the association placed it on an industry blacklist.
The move has the potential to freeze Shandong Ruyi's access to purchasing cotton from major suppliers and squeeze production at its brands, said the Financial Times in a report published last week.
"Shandong Ruyi has expressed their inability to pay up even a fraction of the award due to their financial woes," said Khondoker Shahriar, chief executive of Valleycot that supplies cotton to more than 40 local spinning mills.
Shandong Ruyi was founded as a textile manufacturer in northern China in the 1970s but began to expand rapidly into the world of fashion since 2015.
In a major shopping spree, it has bought global brands Paris-based SMCP, UK clothing maker Aquascutum and Savile Row tailor Gieves & Hawkes at $4 billion. As the Financial Times put it, the company is one of the Chinese companies that made costly overseas acquisitions in recent years and is now struggling to manage them.