Client guide: Managing risk in contractual chains and the ‘back-to-back’ illusion

In commodity trading, goods are frequently bought and sold multiple times before reaching the end receiver. Parties operating in the middle of these contractual ‘chains’ often seek to align their purchase and sale contracts, allowing rights, obligations and liabilities to flow along the chain. In practice, however, this is difficult to achieve and small differences – in contractual terms, notice requirements, time limits and dispute resolution provisions – can create significant exposure. This guide examines the challenges of achieving a truly back-to-back position and outlines practical steps for managing risk. 

This client guide explores the risks faced by traders operating in ‘string’ or ‘chain’ trades, where goods change hands multiple times before reaching their final destination. It examines why perfectly aligned contractual chains are difficult to achieve and how seemingly minor contractual differences can leave a middle party exposed when disputes arise.

Why this matters 

A common assumption in commodity trading is that liabilities can be passed seamlessly up and down a contractual chain. However, differences in contractual wording, claims procedures, notice requirements and dispute resolution mechanisms can create gaps that only become apparent when a dispute arises. Those gaps can result in middle parties in the chain facing liabilities that cannot be passed on.

This guide provides practical insight into these risks and outlines best practice for managing contractual chain exposure to minimise exposure in the event of a dispute: . 

• What back-to-back arrangements are and what they are not. 
• The impact of differing contract terms and the battle of the forms. 
• Risks arising from notice provisions and contractual time limits. 
• Demurrage and force majeure notification traps. 
• The challenges of managing contractual correspondence in a chain. 
• The implications of differing governing laws and dispute resolution clauses. 
• Practical measures to reduce exposure and strengthen contractual alignment.