In my last post regarding PPE, I discussed the normalization of the Chinese N95 mask market, the increasing insanity of the Malaysian nitrile glove market, and other market forces at work, including limitations based on shipping container shortages and financing troubles. In this post I will provide some additional insights our international PPE lawyers have learned along the way to help buyers avoid PPE problems. This time I have brokers in my crosshairs because they can either be a crucial part of the transaction or dead weight (or worse).
The term “broker” needs a little unpacking. For simplicity’s sake, let’s say that any party that does not step into the chain of title in an international PPE goods transaction is a broker. This is my own definition because when I am looking at brokers being involved in international trade, there are three types:
1. Brokers that do nothing except connect manufacturers, buyer, and sellers. These brokers know people, and you hope they know the good people to work with. Allocation providers are very important brokers to know, especially at this stage of the PPE market.
2. Brokers that like to play international lawyer. Some of these brokers are lawyers, but that does not make them good brokers or good international lawyers. The bad ones think they are the good type of broker from category 1 above. The good ones fit into category 3 below.
3. Brokers that bring true value to a transaction and know when to get out of the way. This is the type of broker who both knows the good people to work with, like allocation providers, factories, and banks or private equity groups that will actually bank a PPE transaction. These brokers know what they are good at, know what they are worth, and they know when to bow out of a transaction and wait until they are needed again in the deal.
There is a fourth type of broker, which I do not call a broker because they are willing to step into the chain of title for the goods, which means they have a lot of skin in the game. I like to refer to these brokers as resellers. They fit into category 3 above and know that they need to bring other likeminded people and companies into their transaction to ensure that they can finance the deal, acquire and resell the goods, and minimize their liability regarding nonconforming and late goods.
These categories of brokers are not mutually exclusive. You can spot a category 1 or category 2 broker easily because they are the ones who think that international transactional lawyers just slow the deal down and muddy the waters of what should otherwise be “a simple transaction.”
The irony of these brokers is that by trying to cut out the lawyers or do the international transactional lawyer’s work themselves – or by trying to make everyone’s life easier using their own contracts – they just slow the deal down and muddy the waters of what should otherwise be a relatively simple PPE transaction. I say relatively simple because PPE transactions are not simple, but they are manageable if every party knows where they fit into the chain of the transaction.
You can also spot brokers because they move together in packs. You will very rarely get into a PPE transaction that has fewer than 5-7 brokerage groups in the mix, and you may have 10+ brokers involved by the time you connect the factory, the allocation provider, the initial buyer, the chain of intermediary buyers, and the ultimate end purchaser.
International trade deals were never for those with a low risk appetite, but to engage in PPE deals now you need to have a high tolerance for risk, a sensible appetite for reward, and a very high tolerance for idiots (in the extreme) and dead weight (in the less extreme but no less of a hurdle for your deal).
In later posts I will tackle more questions like dealing with defective PPE, warranties, dispute resolution, financing options, the CISG, and how deep to get in with your PPE partners.
For more reading, see:
- An FAQ on China PPE
- International PPE Deals: From Chinese N95 Masks to Malaysian Nitrile Gloves
- Due Diligence: Always Important, but Critical in Times of COVID