A Guide to International Trading: Professional Tools and Practice Insights for Successful Operations 3031399765, 9783031399763

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Management for Professionals

Eun Sup Lee

A Guide to International Trading Professional Tools and Practice Insights for Successful Operations Second Edition

Management for Professionals

The Springer series “Management for Professionals” comprises high-level business and management books for executives, MBA students, and practice-oriented business researchers. The topics cover all themes relevant to businesses and the business ecosystem. The authors are experienced business professionals and renowned professors who combine scientific backgrounds, best practices, and entrepreneurial vision to provide powerful insights into achieving business excellence. The Series is SCOPUS-indexed.

Eun Sup Lee

A Guide to International Trading Professional Tools and Practice Insights for Successful Operations Second Edition

Eun Sup Lee Emeritus Professor, International Trade and Law Institute Pusan National University Busan, Korea (Republic of)

ISSN 2192-8096 ISSN 2192-810X (electronic) Management for Professionals ISBN 978-3-031-39976-3 ISBN 978-3-031-39977-0 (eBook) https://doi.org/10.1007/978-3-031-39977-0 1st edition: © Springer-Verlag Berlin Heidelberg 2012 2nd edition: © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Preface

Since the first edition of Management of International Trade was published in 2012, the author has operated the postgraduate courses in several universities and institutes in Morocco as well in Korea, Indonesia, Malaysia, France, and the Netherlands. For the past ten years, in the classrooms, the author has worked for the students to make the international business plan with their own items and enforce it in the global market. In the classrooms, the academic and professional students have been consulted by the author for making their international business. Through this pragmatic approach to the courses, the author could make the classrooms not be so separated from the real business field of international trading. Full-time students made the simulations to proceed with the business transactions in the global market and to pre-experience the trading operations with their selected items. Upon completion of the course, when they applied for employment with the companies, they submitted their final report on the experience-based projects to the companies with the application, which have positively been evaluated by the companies for their employment. After they had been employed by the companies, they informed the author that they were not so strange to start their real business with their foreign partners. Part-time students could enhance their capability and productivity in processing their business in the global market. Particularly, through the classes for the professional students from government, the author consulted them for their nation-scaled projects including the new township with the international university campus and the development of the green society from the viewpoints of harmonization between the international trade and the environments. Combining the theories and principles from the classrooms with the real business field of trading, the author has shown them the productivity and reliability of the course in proceeding with the scaled international projects. The projects have been implemented inviting the capital investors, green technologies, qualified human resources, and raw materials from the world market. The author will also complete one project consulting with the Indonesian Green Community and Village valuing at USD 3.8 thousand millions in 2027, when the author will report on it to the international students and publish the case study of the project as the third edition of this book. v

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Preface

In the course of the classes, many students indicated that, through the first edition of this book, they can be more familiar with in- and out-sourcing information needed for their international trade operations. But the students recommended author to make it more practice/skill- focused, for helping them make more efficient management of risks from the global market. Such recommendations and feedbacks from the classrooms were the initial momentum for the author to make this guidebook as the second edition of Management of International Trade. This guidebook is edited through the effort of Seung Woon Lee. He has been a very wonderful assistant to work with the author. His critical and practical ideas have supported the author to make the book a practical tool to enhance the skillful capability of the students to apply the theories and principles learned from the classrooms to the business field. His recent and current experience in Ritsumeikan University of Japan, Law School of Pennsylvania State University, and Law School of Stockolm University, as a student, and Lee &Ko as an attorney at law could be melted down to this book. His ideas and experiences added practical value, in preparing for and editing the book, to the 36 years’ experience of author as a fulltime professor in Korea as well as the visiting professor of International Trade and Law program in foreign countries. Before operating the classes with the students’ business plan, the author has tried simulation with Seung Woon to minimize the trial and error in the assumed and real markets. Through the work with him, the author could realize the gap to be filled up between a classroom and the individual students’ ideas and interests, which could effectively be reflected into my classrooms having academic and professional students. Even though Seung Woon worked as my assistant, the contents of this guidebook have been from the author, and so the author should be responsible for all errors and mistakes in the contents of this book, if found. The author appreciates the positive response and feedback of the students from the classes of Al Akhawayn University, International University of Rabat, Ministry of Foreign Trade and ASMEX (Association of Morocco Export), the Kingdom of Morocco, which have been operated for four years from 2012 to 2016 under the collaboration agreement between the Ministry of Foreign Trade, the Kingdom of Morocco, and Korea International Cooperation Agency, the Republic of Korea. The author owes a special debt of gratitude to Dr. Yeon-Woo Lee and Dr. HaeMin Park for their contribution to this book through their work on briefing the judicial case review and Dr. Hwawi Choi for her laborious work to make the brief of relevant Chinese laws and regulations for cosmetic products’ import. Finally, the author returns thanks to Dr. Johannes Glaeser for his valuable contribution to this book. He gave the full idea for this book’s title and to make this book more valuable for the international students and hands-on workers. Busan, Korea (Republic of)

Eun Sup Lee

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Concepts of International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Public Regulation on International Trade . . . . . . . . . . . . . . . . . . . . . . 1.2.1 Multilateral Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.2 Gatt 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.3 Technical Barriers to Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.4 Sanitary and Phytosanitary Measures . . . . . . . . . . . . . . . . . . 1.2.5 Customs Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.6 Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.7 Pre-shipment Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.8 Import Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.9 Dumping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.10 Subsidies and Countervailing Measures . . . . . . . . . . . . . . . 1.2.11 Safeguard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.12 Gats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.13 TRIPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.14 Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.15 Trade and Environments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2.16 Trade and Anti-competitive Practices . . . . . . . . . . . . . . . . . . 1.3 Domestic Regulation on International Trade . . . . . . . . . . . . . . . . . . . 1.4 Private Regulation on International Trade . . . . . . . . . . . . . . . . . . . . . . 1.4.1 Laws on International Sales Contracts . . . . . . . . . . . . . . . . . 1.4.2 Laws on Typical Trade Terms . . . . . . . . . . . . . . . . . . . . . . . . . 1.4.3 Laws on Trade Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 General Process of International Trade Operation . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 5 8 11 13 15 15 17 18 19 20 21 21 23 24 25 26 27 29 33 33 35 36 38

2

Overseas Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Overseas Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 Reaching Potential Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Overseas Exhibitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1 Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 40 41 43 44 44 vii

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2.2.2 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 Follow-Up Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Marketing Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.2 Method of Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Credit Inquiry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Verification of Domestic Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2 Case of China as Importing Country . . . . . . . . . . . . . . . . . . 2.4.3 Case of Korea as Exporting Country . . . . . . . . . . . . . . . . . . 2.5 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5.1 Selection of Market and Items . . . . . . . . . . . . . . . . . . . . . . . . 2.5.2 Finding/Screening Counterparts . . . . . . . . . . . . . . . . . . . . . . . 2.5.3 Making Business Proposals and Inquiries . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

45 46 46 46 47 48 49 49 49 51 52 52 54 57 62

3

International Trade Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Legal Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Conclusion of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2 Special Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Counteroffers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4 Withdrawal/Cancelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.5 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Performance of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 Delivery of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Avoidance of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6.1 Partial Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8.1 Entering Into Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8.2 Consulting of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8.3 Offer, Acceptance/Conclusion of Contract . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63 64 64 64 66 66 67 68 69 69 74 74 75 75 75 91 93 100 101 102 102 104 110 113

4

Terms of International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.2 Law Sources of International Trade Contracts . . . . . . . . . 4.1.3 Governing Law/Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . .

115 116 116 116 117

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128 128 134 143 144 152 153 157 160 162 162 163 181 181

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Basic Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.2 Terms of Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.3 Terms of Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.4 Terms of Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.5 Terms of Packaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.6 Terms of Shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.7 Terms of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2.8 Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Incoterms® 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Provisions of Incoterms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Trade Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Illustrated Forms of International Trade Contract . . . . . . . . . . . . . . 4.4.1 General International Contract . . . . . . . . . . . . . . . . . . . . . . . . 4.4.2 International Sales Agreement (Purchase Order Form) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.3 International Sales Agreement (Selling Contract Form) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4.4 Plant Supply Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Payment Collection in International Trade . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Payment Collection Under Letter of Credit . . . . . . . . . . . . . . . . . . . . 5.1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.3 Concerned Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.4 Kinds of Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.5 Interpretation of Letter of Credit . . . . . . . . . . . . . . . . . . . . . . 5.1.6 Required Document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.7 Bill of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.8 Negotiation for Payment Collection . . . . . . . . . . . . . . . . . . . 5.1.9 Receipt of Goods by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.10 Illustration of Credit by Kind . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Payment Collection without Letter of Credit . . . . . . . . . . . . . . . . . . . 5.2.1 Document Against Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Remittance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 Open Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.4 Factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.5 Forfaiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Informing of Issuance of Letter of Credit . . . . . . . . . . . . . 5.3.2 Receipt of Letter of Credit for Export . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

225 226 226 227 278 286 291 302 340 344 384 385 403 403 404 411 411 413 415 415 417 425

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International Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.2 Transportation in International Trade . . . . . . . . . . . . . . . . . . 6.2 Means of Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Maritime Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 Liners/Trampers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 Air Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 Tariff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.5 Combined Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Getting Export/Import Approval (If Required by Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Manufacturing or Securing Contracted Items . . . . . . . . . . 6.3.3 Making Clearance/Arranging International Transport and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

427 428 428 428 429 429 432 481 490 491 492

494 498

7

Marine Cargo Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Marine Cargo Insurance Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1.2 Insurance Brokers in Marine Insurance . . . . . . . . . . . . . . . . 7.1.3 Insurable Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Maritime Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.2 Insurer’s Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 Types of Insurance Contract . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 Covered Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.4 Cargo Insurance Under Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . 7.4.1 Insurance Clauses on Letter of Credit . . . . . . . . . . . . . . . . . 7.4.2 Insurance Documents Under Letter of Credit . . . . . . . . . . 7.5 Insurance Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.7 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

499 500 500 501 502 503 503 507 507 507 510 517 536 536 536 538 538 544 546

8

Foreign Exchange Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Foreign Exchange in International Trade . . . . . . . . . . . . . . . . . . . . . . . 8.1.1 Foreign Exchange Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.2 Spot Rate/Forward Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 Methods to Determine Forward Rate . . . . . . . . . . . . . . . . . .

547 548 548 551 553 553 554 554

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8.2.4 Forward Exchange Transactions . . . . . . . . . . . . . . . . . . . . . . . 8.2.5 Management of Exchange Risk . . . . . . . . . . . . . . . . . . . . . . . 8.3 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Negotiation for Payment Collection with Bank . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

555 559 561 561 573

Electronic Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.1 Development of EDI System . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1.2 New Paradigm of International Trade . . . . . . . . . . . . . . . . . 9.2 Process of Electronic Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.1 Selection of Target Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.2 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.3 Negotiation and Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.4 Arrangement and Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.5 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.6 Follow-Up Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Customer Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 Method to Find Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.2 Searching for Customers Through Websites . . . . . . . . . . .

575 576 576 577 578 579 579 579 579 579 580 580 580 581

10 Claim and Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Resolution of Trade Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.2 International Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3 Commercial Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.1 Alternative Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . 10.3.2 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.3 Arbitration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.4 Arbitral Tribunal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.5 Hearing/Awarding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.1 Follow-Up Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

583 584 584 584 585 587 587 588 589 590 591 594 594 598

9

1

Introduction

Learning Objectives

Generally speaking, the hands-on workers working for the export/import company may not be so interested in the public trade laws and regulations; however, for them to be successful in the global market, they are required to understand the basic structure and contents of the public trade law as well as the private laws on trade. This is because their private trade operations can become the subject to be regulated by the public international trade laws through the government intervention. At the same time, the domestic public laws on import and export are to regulate directly or indirectly the private trade operation. While the public international trade law is the law to regulate the trade affairs between the states, the private law on international trade means the private law to regulate the trade issues between the private parties. The private law is applicable to the international trade operations when it is contractually adopted by the concerned parties as the applicable law. Thus, the private law is different from the public law in terms of the mandatory effect to the specified trade activities. Considering this characteristic of the private regulation, this chapter deals with the desirable adoption of the applicable law from the viewpoint of reasonable management of trade. That is, the workers of the company should try to make use of the most efficient private regulations as the applicable law to their export/ import through the negotiations with their partner. The contractual parties are required to save the total transaction cos t for sharing the saved cost with their counterpartners, through the proper adoption of the applicable laws. The hands-on workers in charge of export/import of the products are also required to understand the general concepts of international trade focusing on the typical risks in doing trade operation with their foreign partners and their efficient management.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_1

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1 Introduction

This chapter treats with the following issues, considering the importance of the risk management in international trade operations. 1. Public and private regulations on international business transactions. 2. Efficient market research of the students’ selected items under public and private regulations governing international trade. 3. Function of an export plan suitable for the legal environments extant in the target market and its importance. 4. Selection of the items proper to specific markets, which should be flexibly modified and adopted according to the legal circumstances of the export market. 5. Factors to be considered when enforcing international sales contracts for newly developed and environmentally friendly products as opposed to other existing products with which consumers are more familiar.

1.1

Concepts of International Trade

International trade, in the present context, refers to international or global trading activities, distinguished from domestic business transactions which do not cross customs or territories. International trade is not limited to goods but also encompasses the transfer of services, technology through license agreements, and even bonds and other investment vehicles. Individual countries provide support to promote international trade. By participating in international trade, countries can boost the welfare of their citizens through economic growth and development. Individual companies seek to promote international trade in order to expand market share globally and maximize profits by pursuing profit-securing activities. In the case of smaller countries with small and open economies, however, companies often have no choice but to expand outward to international markets beyond national boundaries in order to grow and sustain their business. International trade is a viable option for increasing market shares and profits, but it also presents risks that may not be evident to a company that limits its reach to its domestic market. First, international trade is a business transaction between parties operating businesses across different countries, meaning that there can be a significant time lag between the point at which the international business transaction is agreed upon and the point at which the transaction actually takes place. This time lag exposes companies to a number of risks that are often not involved in domestic business transactions. For instance, parties take on credit risks concerning the delivery of contracted products and the settlement of payment. This credit risk is magnified due to the fact that multiple third parties are often involved in international business transactions, including transportation companies and foreign

1.1 Concepts of International Trade

3

exchange banks. Additionally, compliance with foreign countries’ public regulations that may differ from domestic regulations and differ between individual countries presents another issue to overcome. Prior to engaging in an international business transaction, it is imperative for the participating parties to take due diligence in assessing the risks involved. After thoroughly reviewing the credit history of the potential partners regarding the payments to the other parties in full and on time, trade practitioners should try to engage in effective risk management throughout the whole process of international trade. For proper transactions to be made, detailed and specific sales contracts should be carefully negotiated to specify the relevant trade terms and conditions. These include the determination of the quantity and quality of the contracted items, the time and means of transportation, foreign exchange stipulations, and other safeguards with banks and insurers. Inspectors may also be required, for example, at the stage of enforcing the contract, through the pre-shipment inspection, to inspect the goods prepared for duly contracted delivery. According to the sales contract, an affreightment contract should be made with one or more carrying companies, while the payment method and means should be contracted with foreign exchange or commercial banks. Concluding these contracts with third parties essentially means that transaction and settlement risks are transferred to the carriers and banks from the exporter, respectively, shifting risk away from the main parties engaged in the sales contract to the third parties. Herewith, for the efficient risk management of transactions in international trade, credit and transportation risks incurred from the business transactions are required to be diversified or transferred to third parties. These include the insurance companies through maritime insurance and export/import insurance contracts. Risks in Doing International Trade

Effective risk management is very important in doing international trade. While all commercial transactions are accompanied by various kinds of risks, international business transactions increase additional risks to those incurred in domestic business transactions. Transport-related risk International transportation tends to involve greater distances, with cargo often changing hands or undergoing prolonged storage, so that there is a higher risk of damage or loss than in domestic trade. Consequently, international traders are required to make the proper transport and insurance contract to reduce and cover these kinds of risks involved in international transportation. Particularly, from the aspect of risk management during international transportation, it is important to make a proper cargo insurance contract considering the physical and seasonal characteristics of the transported goods.

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1 Introduction

Credit risk Credit or non-payment risk in doing international trade is very important and required to be managed efficiently. For credit risk to be managed properly, the exporter should be serious in examining a credit record of the potential buyers when conducting market research and in establishing the provisions concerning the payment method when negotiating the sales contract. For example, payment under an irrevocable documentary letter of credit issued by the international prime banks has practically been used as a safe method to extract payment from new partners. Quality of goods risk Importers may find it difficult to physically examine the quality of the goods before shipment, and thus their imported goods may differ from their expectations. One way of avoiding this risk is for the importer to include provisions for pre-shipment inspection. Exchange rate risk If a price is determined in a particular currency in an international contract, subsequent exchange rate fluctuations will inevitably benefit one party to the detriment of the other. The easiest way to avoid this risk is simply to stipulate contractual prices in one’s own currency. When it is not possible to stipulate the price in the domestic currency, international traders may make use of several kinds of foreign exchange transactions including forward exchange contracts. Unforeseen developments or events A strike, natural disaster, or war may render delivery impossible. To be protected from these unforeseen developments or events, it is necessary for traders to be scrupulous when incorporating details regarding the specified hardships or force majeure clauses into the sales contract. For example, when firms entering into a sales contract expect that the metal prices might drastically fluctuate, they should make special provisions concerning such drastic fluctuations of the mutual price in advance. Legal or political risks In doing international trade, exporters and importers can face legal risks, including modification of the partner country’s domestic law and impossibility of obtaining an import or export license, legal disputes between the concerned parties and difficulty in determining governing law and jurisdiction. To minimize or avoid such legal risks, traders should be careful to make proper provisions when drafting the sales contract. For example, the risk arising from possible modification of the partner country’s law could be minimized by drafting a specified hardship or frustration clause, and the

1.2 Public Regulation on International Trade

5

jurisdictional risks could be minimized by drafting a commercial arbitration clause. Investment risks Sometimes, particularly in growing markets, exporters undertake preinvestment in the importing market to prepare for or expand exports. If exports actually decrease contrary to the exporters’ expectations after making the investment, the exporter should assume the loss. To reduce or avoid such risks relating to pre-investment, the exporter should undertake serious market research and try to make use of the available insurance to cover the possible losses from such foreign investment.” See: Jan Ramberg, Guide to Export–Import Basics, 19 (ICC, 2008).

1.2

Public Regulation on International Trade

1.2.1

Multilateral Regulation

Toward the end of the Second World War, a number of international negotiations were set in motion in order to create institutional structures for conducting international relations in the post-war world. One of the most important negotiating processes at the time was the United Nations Conference on Trade and Employment, held in Havana, Cuba, in 1947, after lengthy preparatory stages in New York, London, and Geneva. At the end of this conference, the Havana Charter for the International Trade Organization (ITO) was adopted. The proposed ITO was an ambitious undertaking, covering not only trade, but also employment, commodity agreements, economic development, and restrictive business practices. However, for various reasons including the failure of the United States to ratify it, the Havana Charter never entered into force. As part of the negotiations on the Havana Charter, a group of countries engaged in tariff negotiations and in 1947 agreed on substantial tariff reductions. Pending the approval of the Havana Charter, a mechanism was needed to implement and protect the tariff concessions negotiated in 1947. To do so, it was decided to take the Chapter on Commercial Policy of the Havana Charter and convert it, with certain additions, into the General Agreement on Tariffs and Trade (GATT). To bring GATT into force quickly, a Protocol of Provisional Application was developed and entered into force in 1948. Thus, GATT was born, as a provisional agreement until such time as the Havana Charter would be ratified. The Protocol of Provisional Application, however, stated that provisions on non-tariff barriers would apply only to the fullest extent “not inconsistent with existing legislation.” Throughout its 48-year history, GATT provided the structure for a global process of steady trade liberalization through eight “rounds” of multilateral trade

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1 Introduction

negotiations sponsored by its contracting parties, covering progressively larger volumes of international trade. This process evolved with its own dynamics, through the initial years of the Cold War, the emergence to independence of many developing countries, the creation of the European Communities, the rise of new and important trading countries, the transition of many non-market countries to market economies, the increasing globalization of the world economy, and the consolidation of the multilateral trading system through the establishment of the World Trade Organization. This process of trade liberalization achieved: the reduction of tariff rates on industrial products in developed countries from an average of around forty percent to less than four percent; the practical elimination of quantitative restrictions; the development and strengthening of clear rules for the administration of different trade policy measures such as safeguards, subsidies, anti-dumping duties, technical barriers to trade; and development of procedures to resolve disputes. The eighth GATT round, the Uruguay Round, carried this liberalization forward. After the Ministerial Meeting of the GATT Contracting Parties in 1982 which could be regarded as having sown the seeds of the Uruguay Round, and the Ministerial Meeting at Punta del Este in 1986, on December 15, 1993, every issue for negotiation was resolved, including market access for goods and services. In 1994, the Final Act embodying the results of the Uruguay Round of Multilateral Trade Negotiations was signed at a meeting in Marrakesh, Morocco, by ministers from most of the one-hundred and twenty-five governments participating in the Uruguay Round. The World Trade Organization is the institutional framework of the multilateral trading system. The Marrakesh Agreement, establishing the World Trade Organization, is included in the Final Act of the Uruguay Round of Multilateral Trade Negotiations. It constitutes the principal result of the Uruguay Round and incorporates, in its annexes, the multilateral agreements on trade including the General Agreement on Tariffs and Trade. These include the General Agreement on Trade in Services, the Agreement on Trade-Related Aspects of Intellectual Property Rights, the Understanding on Rules and Procedures Governing the Settlement of Disputes, the Trade Policy Review Mechanism, and, for those countries having accepted them, the plurilateral trade agreements. The Uruguay Round was the most ambitious negotiating exercise ever multilaterally undertaken. The negotiations: made improvements on GATT provisions through understandings on GATT Articles; strengthened the institutions of the multilateral trading system through the creation of the WTO and the adoption of an integrated dispute settlement system; gave a more precise focus to disciplines on contingent remedy action, such as safeguards, anti-dumping and countervailing measures; modernized border regimes through agreements on customs valuation, rules of origin, import licensing procedures, pre-shipment inspection, etc.; integrated trade in agricultural products and in textiles and clothing into the mainstream of GATT rules; adapted to the process of globalization of the world economy through the adoption of multilateral rules on trade in services and intellectual property rights protection; and further liberalized world markets through

1.2 Public Regulation on International Trade

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market access negotiations on all products, including agricultural products and tropical products, as well as on trade in services. Furthermore, a substantial improvement in market access conditions was achieved through an average reduction in tariffs for industrial products of about 38 percent. One hundred and twenty-five countries participated in the Uruguay Round. This is another aspect of the global scope and coverage of these negotiations. Unlike the Tokyo Round of 1973–79, in which developing countries, whether or not they were members of GATT, were invited to participate fully in the negotiations with no preset conditions, participation in the Uruguay Round was open only to those countries declaring their intention to accede to GATT through the negotiations. The creation of the WTO and the adoption of the integrated dispute settlement mechanism provide a solid legal basis through the WTO Agreement for the multilateral trading system and for international cooperation and consultation on international trade relations. The results of the Uruguay Round constitute a global, integrated and interrelated package, which covers the interests of all trading partners irrespective of their being large or small. The new institutional and legal status of the WTO, with its integrated dispute settlement system, provides a framework for certainty, security, and stability of market access conditions. This applies not only to trade in industrial products but also to trade in agriculture, in textiles and clothing, and in services, as well as a newly established coherent system to protect intellectual property rights. The overall results of the Uruguay Round are contained in more than five hundred pages of legal texts, plus over twenty-six thousand pages of schedules of concessions and commitments in market access for goods, and schedules of specific commitments on trade in services. These schedules are an integral part of the WTO Agreement. For the first time in history, a multilateral framework of rules was adopted for international trade in services. It consists of the General Agreement on Trade in Services (GATS), based on general rules and principles, negotiated specific commitments, and commitment to progressive liberalization through future rounds of negotiations on trade in services. Protection of intellectual property rights at the international level was systematically restructured on the basis of existing conventions, the adoption of new disciplines on the availability, scope, coverage and use of intellectual property rights, and clear rules for their enforcement. It consists of the Agreement on Trade-Related Aspects of Intellectual Property Right (TRIPs). An important work program was also adopted on the relationship between international trade and the protection of the environment, and other issues such as investment and competition policies were clearly indicated as potential subjects for future negotiations.

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1.2.2

1 Introduction

Gatt 1994

(1) Background The original General Agreement on Tariffs and Trade,1 now referred to as GATT 1947, provided the basic rules of the multilateral trading system from 1948 until the World Trade Organization entered into force in 1995. These rules, which dealt only with trade in goods, were supplemented and modified by many further legal instruments adopted over the 47 years between 1948 and 1995, as a result of multilateral negotiations, protocols of accession, waivers, and other decisions. Provisions of GATT 1947 dealing with such matters as accession, joint action by the contracting parties (the signatories of the agreement) and consultations and complaints allowed GATT to function effectively as an international organization. GATT 1994, which sets out the main WTO rules that bear specifically on trade in goods, is legally distinct from GATT 1947. Many of its key elements, including post-1948 legal instruments, have been carried over without change from GATT 1947. Examples are the most-favored-nation rule2 and the provisions on trade and development.3 Other Articles carried over into GATT 1994 have effectively been modified, sometimes substantially, by individual agreements negotiated in the Uruguay Round. Some Articles are no longer valid, having been replaced by provisions of the WTO Agreement. The Protocol of Provisional Application is specifically excluded from GATT 1994.4 GATT 1994 is defined by a short Uruguay Round agreement entitled “General Agreement on Tariffs and Trade 1994.” This does not provide a new physical text for GATT 1994 but indicates the relationship between it and GATT 1947.5 (2) Main Features The scope and coverage of the provisions of GATT 1994 have been fully clarified and have been given a firm legal basis by incorporation into a full-fledged international treaty, accepted by governments and ratified by national parliaments. Whereas GATT 1947 was based on an interim instrument under provisional application, GATT 1994 is one of the multilateral agreements attached to the WTO Agreement.6

1

General Agreement on Tariffs and Trade. Oct. 30, 1947. 61 Stat. A-11, U.N.T.S. 55: 194. [hereinafter GATT]. 2 GATT, Article 1. 3 Id. at Art. 4. 4 See Lee (2013), World Trade Regulation, Springer, 31–32. 5 See id. at 32. 6 Id. at 33–34.

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Regarding the interpretation of the WTO Agreement, in accordance with Article IX of the WTO Agreement, the authority to adopt interpretations of that Agreement and the Multilateral Trade Agreements rests exclusively on the Ministerial Conference and the General Council. However, before the entry into force of the WTO Agreement, a number of understandings on the interpretation of GATT provisions were negotiated under the Uruguay Round. These understandings are an integral part of GATT 1994. Any further interpretations will be subject to the provisions of Article IX of the WTO Agreement.7 Regarding the schedules on trade in goods, for every Member of the WTO, there is a Schedule of Concessions on Goods which forms an integral part of GATT 1994. Each schedule incorporates all the concessions made by the Member concerned in the Uruguay Round or in earlier negotiations. Under Article II of GATT 1994, Members are obliged to accord to the trade of other Members treatment “no less favorable than that provided for in the appropriate part of the appropriate schedule.” Modalities for the modification or withdrawal of a concession (or “binding”) inscribed in a schedule are described in Article XXVIII of GATT 1994.8 ➀ The Most-Favored-Nation Clause The most-favored-nation (MFN) clause embodied in Article I9 was the cornerstone of the GATT 1947 system and is equally the cornerstone of the new WTO multilateral trading system. The commitment that “any advantage, favor, privilege or immunity granted by any contracting party [now Member] to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties [Members]” is the starting point of the WTO system of rights and obligations. It is fundamental to all the multilateral trade agreements annexed to the WTO Agreements.10 ➁ Non-Tariff Measures A number of non-tariff measures fall under provisions in Part II of GATT 1994.11 These Articles cover, successively, measures related to national treatment with regard to internal taxation and regulations,12 screen quotas for cinema films,13 freedom of transit,14 anti-dumping and countervailing duties,15 valuation for customs

7

WTO Agreement, Art. 9. GATT, Art. 2. 9 Id. at Art. 1.1. 10 See Eun Sup Lee, supra note 4, at 36. 11 See Eun Sup Lee, id. at 39. 12 GATT, Art. 3. 13 Id. at Art. 4. 14 Id. at Art. 5. 15 Id. at Art. 6. 8

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1 Introduction

purposes,16 fees and formalities,17 marks of origin,18 quantitative restrictions,19 subsidies,20 restrictions imposed for balance of payments reasons and government assistance to economic development.21 Further provisions in Part II deal with general and security exceptions, consultations, and complaints.22 ➂ National Treatment Article III of GATT deals with the principle of national treatment on imported goods.23 Paragraph 1 establishes the principle that internal taxes and other internal charges, laws, regulations and requirements, and internal quantitative regulations should not be applied so as to afford protection to domestic production.24 The main obligations of national treatment refer to (i) internal taxes or other internal charges of any kind, which should not be imposed on imported products in excess of those applied to like domestic products or in a manner dissimilar to directly competitive or substitutable domestic products, and (ii) treatment in respect of all laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, which should be accorded to imported products no less favorably than that accorded to like products of national origin.25 Local content requirements are also dealt with through provisions on internal quantitative regulations, which indicate that no Member shall require that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources, or in such a manner as to allocate any such amount or proportion among external sources of supply.26 ➃ Unfair Trade Practices Articles VI (Anti-dumping and Countervailing Duties) and XVI (Subsidies), dealing with what are sometimes known as “unfair trade practices,” provide the basis for the much more detailed, and generally more constraining, rules developed in subsequent multilateral trade negotiations and now incorporated in the separate WTO Agreements dealing with anti-dumping, subsidies and countervailing duties, and agriculture.27

16

Id. at Art. 7. Id. at Art. 8. 18 Id. at Art. 9. 19 Id. at Art. 11. 20 Id. at Art. 16. 21 Id. at Art. 12. 22 Id. at Art. 14. 23 Id. at Art. III. 24 Id. at Art. 3.1. 25 Id. at Arts. 3.2, 3.4. 26 Id. at Arts. 3.5, 3.7. 27 Eun Sup Lee, supra note 4, at 39–40. 17

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➄ Exceptions Article XX (General Exceptions) and Article XXI (Security Exceptions) recognize that governments may need to apply and enforce measures necessary28 for general purposes, such as protection of public morals, human, animal or plant life and health, protection of national treasures, etc., and for security purposes. Nothing in GATT 1994 prevents governments from adopting and enforcing such measures. In the case of general exceptions, the measures adopted are subject to the requirements that they do not constitute a means of arbitrary or unjustifiable discrimination, and that they do not represent disguised restrictions on international trade.29

1.2.3

Technical Barriers to Trade

In recent years, the number of technical regulations and standards adopted by countries has grown significantly as a result of higher standards of living worldwide, which have boosted consumers’ demand for safe and high-quality products, and of growing problems of water, air, and soil pollution, which have encouraged modern societies to explore environmentally friendly products. Although it is difficult to give a precise estimate of the impact on international trade of the need to comply with different foreign technical regulations and standards, it certainly involves significant costs for producers and exporters. In general, these costs arise from the translation of foreign regulations, hiring of technical experts to explain foreign regulations, and adjustment of production facilities to comply with the requirements. In addition, there is the need to prove that the exported product meets the foreign regulations. The high costs involved may discourage manufacturers from trying to sell abroad. In the absence of international disciplines, a risk exists that technical regulations and standards could be adopted and applied solely to protect domestic industries.30 The provisions of GATT 1947 contained only a general reference to technical regulations and standards.31 A GATT working group, set up to evaluate the impact of non-tariff barriers in international trade, has concluded that technical barriers were the largest category of non-tariff measures faced by exporters. After years of negotiations at the end of the Tokyo Round in 1979, the plurilateral Agreement on Technical Barriers to Trade (TBT) was established. The Standards Code, as the

28

GATT, supra note 1. Art. 20(b) authorizes measures “necessary to protect human, animal or plant life or health.” This provision allows Members to give priority to health over trade liberalization, provided a measure is “necessary.” See Eun Sup Lee, supra note 4, at 45. 29 GATT, Art. 20. 30 See Eun Sup Lee, supra note 4, at 52. 31 GATT, arts. 3, 11 and 20.

12

1 Introduction

agreement was called, laid down the rules for preparation, adoption and application of technical regulations, standard32 and conformity assessment procedure.33 The WTO Agreement on Technical Barriers to Trade, or TBT Agreement,34 has strengthened and clarified the provisions of the Tokyo Round Standards Code. The TBT Agreement, negotiated during the Uruguay Round, is an integral part of the WTO Agreement.35 Technical regulations and standards set out specific characteristics of a product—such as its size, shape, design, functions and performance, or the way it is labeled or packaged before it is put up for sale. In certain cases, the way a product is produced can affect these characteristics, and it may then prove more appropriate to draft technical regulations and standards in terms of a product’s process and production methods rather than its characteristics per se. The TBT Agreement makes allowance for both approaches in the way it defines technical regulations and standards.36 The difference between a standard and a technical regulation lies in compliance.37 While conformity with standards is voluntary, technical regulations are by nature mandatory. They have different implications for international trade. If an imported product does not fulfill the requirements of a technical regulation, it will not be allowed to be put up for sale. In case of standards, non-complying imported products will be allowed on the market, but then their market share may be affected if consumers prefer products that meet local standards such as quality or color standards for textiles and clothing.38 Conformity assessment procedures are technical procedures—such as testing, verification, inspection and certification—which confirm that products fulfill the requirements laid down in regulations and standards. Generally, exporters bear the cost, if any, of these procedures. Non-transparent and discriminatory conformity assessment procedures can become effective protectionist tools.39

32

Herewith, technical regulations and standards set out specific characteristics of a product including a product’s process and production methods. For the difference between a standard and a technical regulation, see Eun Sup Lee, supra note 4, at 53. 33 For the conformity assessment procedures, see Eun Sup Lee, id. 34 Agreement on Technical Barriers to Trade. 1994. Marrakesh Agreement Establishing the World Trade Organization, Annex 1, Legal Instruments-Results of the Uruguay Round, I.L.M. 33: 1125. (Apr. 15, 1994). [hereinafter TBT Agreement]. 35 Eun Sup Lee, supra note, 4, at 53. 36 TBT Agreement, Annex 1.1. 37 See Eun Sup Lee, supra note 4, at 53. 38 TBT Agreement, Annex 1.2. 39 TBT Agreement, Annex 1.3.

1.2 Public Regulation on International Trade

1.2.4

13

Sanitary and Phytosanitary Measures

During the Uruguay Round, agricultural negotiations strove to lower barriers that countries used to protect their domestic markets. Some countries feared, however, that the elimination of agriculture—specific non-tariff measures and the tariff reductions—would be circumvented by disguised protectionist measures in the form of sanitary or phytosanitary regulations.40 This concern provided a major driving force which led negotiators to create a separate Agreement on the Application of Sanitary and Phytosanitary Measures (the “SPS Agreement”),41 in parallel to the major agricultural trade negotiations.42 The SPS and Agriculture Agreements are complementary,43 but they differ in their design. While the Agreement on Agriculture contains not only rule-based commitments, but also detailed, specific quantitative commitments to reduce protection and support over a well-defined implementation period, the SPS Agreement does not impose any quantitative and legally binding schedules of concessions. It is a set of rules, principles, and benchmarks for the WTO Members to ensure, among other things, that sanitary and phytosanitary trade measures are justified and do not constitute disguised restrictions on international trade.44 Prior to the negotiation of the SPS Agreement, many food safety, animal and plant health regulations fell within the scope of the plurilateral 1979 Agreement on Technical Barriers to Trade (TBT). The “TBT Agreement,” also called the “Standards Code,” resulted from the Tokyo Round of multilateral negotiations.45 In light of the reforms resulting from the agricultural trade negotiations, it was felt that the relationship between health protection and trade measures required more specific and in-depth coverage than the Standards Code provided. Considering the concern about possible disguised restrictions on international trade under TBT Agreement and Article XX of GATT, the SPS Agreement provides an expanded and clearer set of rules and principles46 regulating the application of sanitary and phytosanitary measures.47 The SPS and TBT Agreement are

40

See Eun Sup Lee, supra note 4, at 68–69. Agreement on the Application of Sanitary and Phytosanitary Measures. 1994. Marrakesh Agreement Establishing the World Trade Organization, Annex 1, Legal Instruments-Results of the Uruguay Round, 33 I.L.M. 1125 (Apr. 15, 1994). [hereinafter SPS Agreement]. 42 See Eun Sup Lee, supra note 4, at 68. 43 See id., at 69. 44 See id. 45 See id. 46 See id. 47 Herewith, sanitary measures are those related to human or animal health, and phytosanitary measures deal with plant health. WTO, SPS Agreement. http://www.wto.org/english/thewto_e/eol/e/ world.htm. Accessed Dec. 11 2022. Cited by Eun Sup Lee, supra note 4, at 70. 41

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1 Introduction

complementary48 formally but different in their design.49 Thus, the TBT Agreement excludes from its scope of coverage sanitary and phytosanitary measures as defined SPS Agreement.50 The SPS Agreement similarly provides that it does not affect Members’ rights under the TBT Agreement with respect to measures outside the scope of the SPS Agreement.51 The SPS Agreement contains rules, principles, and benchmarks for the WTO Members to ensure and to justify sanitary and phytosanitary measures not constituting disguised restrictions on international trade.52 The SPS Agreement explicitly recognizes Members’ sovereign rights to take measures which may restrict trade in order to implement national laws protecting human, animal, or plant life or health. In line with the national treatment and MFN principles of GATT, such measures should apply to domestically produced food or to local animal and plant diseases requirements, as well as to products coming from other countries, without unjustified discrimination among foreign sources of supply.53 The SPS Agreement recognizes, however, that the animal and plant disease status may differ among supplying countries, and this must be taken into consideration in the trade measures applied. The basic right of Members under the SPS Agreement is the ability to take SPS measures necessary for the protection of human, animal, or plat life or health. This right is qualified by three provisos. Such measures must be (1) applied only to the extent necessary, (2) based on scientific principles, and (3) maintained with sufficient scientific evidence, except that such measures may be imposed temporarily, when evidence is insufficient, pending receipt of additional information necessary for a more objective assessment of risk.54 A major purpose of this agreement is to reduce the possible arbitrariness55 of governments’ decisions in the field of sanitary and phytosanitary measures by clarifying which factors should be taken into account when imposing health protection measures. In particular, measures taken to ensure food safety and animal and plant health should be based on the analysis and assessment of objective and accurate scientific data. At the same time, the SPS Agreement encourages consistent and transparent decision-making in determining an appropriate level of health protection. It requires that potentially trade-restrictive measures be applied for no other purpose than that of ensuring food safety and animal and plant health and do not result in unjustified barriers to trade.

48

For example, the TBT agreement defines its scope in part through reference to the SPS Agreement. TBT Agreement, Art. 1.5. 49 For the differences between them, see Eun Sup Lee, supra note 4, at 69–72. 50 TBT Agreement, Art. 1.5. 51 SPS Agreement, Art. 1.4. 52 Id. at Art. 2.3. 53 See Eun Sup Lee, supra note 4, at 71. 54 SPS Agreement, Arts. 2.3, 5.7. 55 For a means of arbitrary discrimination in Article XX of the GATT chapeau language, seeEun Sup Lee, supra note 4, at 72.

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15

Sanitary measures are those related to human or animal health, and phytosanitary measures deal with plant health.56 The protection of fish and wild fauna, forests, and wild flora is included in this definition while the protection, for example, of the environment per se and animal welfare, is excluded. The SPS Agreement further narrows this broad definition to a limited range of situations.

1.2.5

Customs Valuation

Customs valuation is a customs procedure applied to determine the customs value of imported goods. If the rate of duty is ad valorem, the customs value is essential to determine the duty to be paid on an imported good. Article VII of the General Agreement on Tariffs and Trade laid down the general principles for an international system of valuation. The value for customs purposes of imported merchandise should be based on the actual value of the imported merchandise on which duty is assessed, or of like merchandise, and should not be based on the value of merchandise of national origin or on arbitrary or fictitious values.57 Although Article VII also contains a definition of “actual value”; it still permitted the use of widely differing methods of valuing goods. In addition, “grandfather clauses” permitted continuation of old standards which did not even meet the very general new standard.58 It was clear that a more flexible and uniform valuation method was needed which would harmonize the systems of all countries. The Tokyo Round Valuation Code, or the Agreement on Implementation of Article VII of GATT, concluded in 1979, established a positive system of customs valuation based on the price actually paid or payable for the imported goods. Based on the “transaction value,” it was intended to provide a fair, uniform and neutral system for the valuation of goods for customs purposes, conforming to commercial realities. This differs from the “notional” value used in the Brussels Definition of Value (BVD).59 As a stand-alone agreement, the Tokyo Round Valuation Code was signed by more than 40 contracting parties.

1.2.6

Rules of Origin

Rules of origin are the criteria needed to determine the national source of a product. Their importance is derived from the fact that duties and restrictions in several cases depend upon the source of imports. There is wide variation in the practice of governments with regard to the rules of origin. While the requirement of substantial transformation is universally recognized, some governments apply the criterian

56

SPS Agreement, Annex A. para.1. GATT, Art. 7. 58 GATT, Art. 7.1. 59 See Eun Sup Lee, supra note 4, at 98. 57

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1 Introduction

of tariff classification, the criterion of the ad valorem percentage, or the criterion of manufacturing or processing operation. In a globalizing world, it has become even more important that a degree of harmonization is achieved in these practices of Members in implementing such a requirement.60 GATT had no specific rules governing the determination of the country of origin of goods in international commerce. Each contracting party was free to determine its own origin rules and could even maintain several different rules of origin depending on the purpose of the particular regulation.61 It is accepted by all countries that harmonization of rules of origin, i.e., the definition of rules of origin that will be applied by all countries and that will be the same whatever the purpose for which they are applied would facilitate the flow of international trade. In fact, misuse of rules of origin may transform them into a trade policy instrument per se instead of just acting as a device to support a trade policy instrument.62 Since, the GATT Secretariat prepared a note on rules of origin and, in 1982, ministers agreed to study the rules of origin used by GATT Contracting Parties, not much more work was done on rules of origin until well into the Uruguay Round negotiations.63 The increased number and importance of rules of origin led the Uruguay Round negotiators to tackle the issue during the negotiations. The Agreement on Rules of Origin aims at harmonization of non-preferential rules of origin and to ensure that such rules do not themselves create unnecessary obstacles to trade. The agreement sets out a work program for the harmonization of rules of origin to be undertaken after the entry into force of the World Trade Organization (WTO), in conjunction with the World Customs Organization (WCO). Until the completion of the harmonization work program, Members are expected to ensure that their rules or origin are transparent; that they are administered in a consistent, uniform, impartial, and reasonable manner; and that they are based on a positive standard.64

60

Rules of origin are used: to implement measures and instruments of commercial policy such as anti-dumping duties and safeguard measures; to determine whether imported products shall receive most-favored-nation (MFN) treatment or preferential treatment; for the purpose of trade statistics; for the application of labeling and marking requirements; and for government procurement. WTO, Rules of Origin-Technical Information on Rules of Origin (Definition). http://www.wto.org/eng lish/tratop_e/roi_e/roi_info_e.htm. Accessed Dec.11, 2022. See Eun Sup Lee, supra note 4, at 103. 61 The draftsmen of the General Agreement stated that the rules of origin should be left: “within the province of each importing country to determine, in accordance with the provisions of its law, for the purpose of applying the most-favored-nation provisions (and for other GATT purposes), whether goods do in fact originate in a particular country.” WTO, Rules of Origin-Technical Information on Rules of Origin (No specific provision in GATT). http://www.wto.org/english/tratop_e/ roi_e/roi_info_e.htm. Accessed Dec. 11, 2022. See Eun Sup Lee, supra note 4, at 103. 62 Id. 63 Id. 64 WTO, Rules of Origin-Technical Information on Rules of Origin (Aims of the Agreement). http://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm. Accessed Dec. 11, 2022 [Hereinafter, Origin Agreement].

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17

Rules of origin are defined as those laws, regulations, and administrative determinations of general application applied to determine the country of origin of goods except those related to the granting of tariff preferences.65 Thus, the agreement covers only rules of origin used in non-preferential commercial policy instruments, such as MFN treatment, anti-dumping and countervailing duties, safeguard measures, origin marking requirements, and any non-discriminatory quantitative restrictions or tariff quotas, as well as those used for trade statistics and government procurement. It is, however, provided that the determinations made for purposes of defining domestic industry or “like products of domestic industry” shall not be affected by the agreement.66

1.2.7

Pre-shipment Inspection

Since the second half of the last century, private-sector buyers and sellers have resorted to pre-shipment inspection (PSI) to ensure that the quantity and quality of the goods to be traded conform to the specifications of the sales contract. However, government-contracted, comprehensive PSI service is a recent phenomenon, with the first of such contracts signed only in the 1960s. Beginning in the 1980s, it became common for a number of countries primarily developing countries to hire commercial inspection firms to verify the customs classification and value of goods destined for their markets. These companies usually operate at seaports and airports in developed countries where they examine export claims concerning the quality, quantity, price and financing terms of the goods for export.67 In response to a growing concern that the use of inspection firms was impeding the flow of trade, the Uruguay Round negotiators included the Agreement on Pre-shipment Inspection (PSI Agreement).68 The PSI Agreement requires WTO Members employing inspection companies (user Members) to ensure that pre-shipment inspections are conducted in a reasonable manner so as not to unnecessarily interfere with legitimate trade.69 The PSI Agreement applies to all government-mandated pre-shipment inspection activities carried out inside the territory of the Members (i.e., in the country of export prior to exportation). PSI activities have been defined as any government or government body contracting for or mandating the use of PSI activities.70 The preamble of the agreement recognizes the need for developing countries to have recourse to pre-shipment inspection as long and in so far as it is necessary to verify

65

Id. at Art. 1.1. Id. at Art. 1.2. 67 See Eun Sup Lee, supra note 4, at 105. 68 Agreement of Pre-shipment Inspection, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1, Legal Instruments-Results of the Uruguay Round, I.L.M. 33: 1125 (1994) (hereinafter PSI Agreement). See Eun Sup Lee, supra note 4, at 105. 69 Eun Sup Lee, supra note 4, at 105–106. 70 PSI Agreement, Art. 1. 66

18

1 Introduction

the quality, quantity or price of imported goods. But it also recognizes the need for the programs to be carried out without giving rise to unnecessary delays or unequal treatment. Equal emphasis is laid on the objective of transparency of the operation of pre-shipment inspection entities and of laws and regulations relating to pre-shipment inspection.71

1.2.8

Import Licensing

Import licensing can be defined as administrative procedures requiring the submission of an application or other documentation (other than those required for customs purposes) to the relevant administrative body as a prior condition for importation of goods.72 GATT documentation—entitled Fees and Formalities Connected with Importation and Exportation—deals with import licensing procedures in a non-specific manner:73 General obligation is established concerning formalities whereby Members recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements;74 each Member is required “to review the operation of its laws and regulations in the light of the provisions of this Article” upon request by another Member;75 and Members are prohibited from imposing “substantial penalties for minor breaches of customs regulations or procedural requirements”.76 Members are required to publish promptly laws, regulations, judicial decisions, and administrative rulings of general application, including those pertaining to requirements on imports or exports and to administer them in a uniform, impartial, and reasonable manner. The Tokyo Round Import Licensing Code77 was one of the agreements covering non-tariff measures, with the objective of preventing

71

Id. at Preamble. Agreement on Import Licensing Procedures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1, Legal Instruments-Results of the Uruguay Round, 33 I.L.M. 1125, Art. 1 (1994) [hereinafter Import Licensing Agreement]. See Eun Sup Lee, supra note 4, at 110. 73 Import licensing means administrative procedures requiring the submission of an application or other documentation to the relevant authority as a prior condition for importation. WTO Agreement on Import Licensing. http://www.wto.org/english/tratop_e/implic_e/implic_e.htm. Accessed Dec. 11, 2022; GATT, Art. 8. See Eun Sup Lee, supra note 4, at 110. 74 GATT, Art. 8:1(c). 75 Id. at Art. 8:2. 76 Id. at Art. 8:3. 77 See Eun Sup Lee, supra note 4, at 111. 72

1.2 Public Regulation on International Trade

19

import licensing procedures from unnecessarily hindering international trade. During the Uruguay Round, this indenture, as a stand-alone agreement, was revised to strengthen the disciplines on transparency and notifications.78

1.2.9

Dumping

Dumping is defined in the Agreement on Implementation of Article VI of GATT 1994 (the Anti-Dumping Agreement) as the introduction of a product into the commerce of another country at less than its normal value.79 Under Article VI of GATT 1994, and the Anti-Dumping Agreement, the WTO Members can impose anti-dumping measures,80 if, after investigation in accordance with the agreement, a determination is made (a) that dumping is occurring, (b) that the domestic industry producing the like product in the importing country is suffering material injury, and (c) that there is a causal link between the two.81 In addition to substantive rules governing the determination of dumping, injury, and causal link, the agreement sets forth detailed procedural rules for the initiation and conduct of investigations, the imposition of measures, and the duration and review of measures.82 The Committee, which meets at least twice a year, provides Members of the WTO the opportunity to discuss any matters relating to the Anti-Dumping Agreement.83 The Committee has undertaken the review of national legislations notified to the WTO.84 Members may challenge the imposition of anti-dumping measures, in some cases may challenge the imposition of preliminary anti-dumping measures, and can raise all issues of compliance with the requirements of the agreement, before a panel established under the DSU. In disputes under the Anti-Dumping Agreement, a special standard of review is applicable to a panel’s review of the determination of the national authorities imposing the measure. The standard provides for a certain amount of deference to national authorities in their establishment of facts and interpretation of law and is intended to prevent dispute settlement panels from making decisions based purely on their own views.85

78

WTO, Import Licensing: Technical Information on Import Licensing (From the Tokyo Round Code to the Uruguay Round Agreement). http://www.wto.org/english/tratop_e/implic_e/implic_ info_e.htm. Accessed Dec. 11, 2022. See Eun Sup Lee, supra note 4, at 111. 79 WTO, Anti-dumping Agreement. http://www.wto.org/english/thewto_e/eol/e/world.htm Accessed Dec. 11, 2022. Art. 2.1. 80 See Eun Sup Lee, supra note 4, at 116. 81 See id. 82 See id. 83 Anti-dumping Agreement, Art. 16. 84 Id. at Art. 18.6. 85 Id. at Art. 17.6.

20

1.2.10

1 Introduction

Subsidies and Countervailing Measures

The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)86 addresses two separated but closely related topics: multilateral disciplines regulating the provision of subsidies, and the use of countervailing measures to remove the injury caused by subsidized imports. Multilateral disciplines are the rules regarding whether or not a subsidy may be provided by a Member. They are enforced through invocation of the WTO dispute settlement mechanism. More concretely, certain subsidies are prohibited, and most other specific subsidies may be challenged if they cause adverse effects to the interests of other Members. Three categories of subsidies are non-actionable and cannot be challenged. Thus, all specific subsidies are grouped into three kinds: prohibited, actionable, and non-actionable.87 Countervailing measures88 are a unilateral remedy but may only be applied by a Member after an investigation by that Member and a determination that the criteria set forth in the SCM Agreement are satisfied. The substantive criteria require that a Member not impose a countervailing measure unless it determines that there are subsidized imports, injury to a domestic industry, and a causal link between the subsidized imports and the injury. In-depth procedural requirements regulate the conduct of countervailing investigations and the imposition and maintenance in place of countervailing measures. A failure to respect either the substantive or procedural requirements can be taken to dispute settlement and may be basis for invalidation of the measure.89 Under the SCM Agreement, only measures that take the form of a “financial contribution,” or where there is any form of income or price support in the sense of the agreement, can constitute a subsidy. The agreement contains an exhaustive list of the types of measures that represent a financial contribution. These include direct transfers of funds (e.g., grants, loans, and equity infusion) and potential direct transfers of funds or liabilities (e.g., loan guarantees). A financial contribution also exists where government revenue that is otherwise due is foregone or not collected (e.g., fiscal incentives such as tax credits); where a government provides goods or services other than general infrastructure, or purchases goods; or where a government entrusts or directs a private body to carry out these functions.90

86

Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1. 1994. Legal Instruments-Results of the Uruguay Round. I.L.M. 33: 1125. [hereinafter SCM Agreement]. 87 See Eun Sup Lee, supra note 4, at 137. 88 For the construction of the countervailing measures, see Eun Sup Lee, supra note 4, at 145. 89 See id. at 137–138. 90 SCM Agreement, Art. 1.1.

1.2 Public Regulation on International Trade

1.2.11

21

Safeguard

The Agreement on Safeguards (“SG Agreement”)91 sets forth the rules for application of safeguard measures pursuant to Article XIX of GATT 1994. Safeguard measures are defined as “emergency” actions with respect to increased imports of particular products, where such imports have caused or threaten to cause serious injury to the importing Member’s domestic industry.92 Such measures, which in broad terms take the form of suspension of concessions or obligations, can consist of quantitative import restrictions or of duty increases to higher than bound rates. They are one of three types of contingent trade protection measures, along with anti-dumping and countervailing measures, available to the WTO Members.93 The guiding principles of the agreement with respect to safeguard measures are that such measures must be temporary; that they may be imposed only when imports are found to cause or threaten serious injury to a competing domestic industry; that they (generally) be applied on a non-selective (i.e., most-favorednation, or “MFN”) basis; that they be progressively liberalized while in effect; and that the Member imposing them generally must pay compensation to the Members whose trade is affected. Thus, safeguard measures, unlike anti-dumping and countervailing measures, do not require a finding of an “unfair” practice, generally must be applied on an MFN basis,94 and generally must be “paid for” by the Member applying them.95

1.2.12

Gats

Services production is a core economic activity in virtually all countries, developing and developed alike. In a number of countries, services have been very important for employment and employment growth, because many traditional services, including distribution, education, and social services, are labor intensive. In many service sectors, it has also proved more difficult to substitute capital for labor than in manufacturing. The expansion of services96 has been driven in particular by income-related demand shifts, benefiting for example the hotel and tourist industry; the economic stimulus results from new information and communication technologies; and the growing importance of basic infrastructural services, including transport, communication, and finance, for a wide range of user industries.97

91

Agreement on Safeguards, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1, Legal Instruments-Results of the Uruguay Round, I.L.M. 33: 1125 (1994). [hereinafter SG Agreement]. 92 Id., at Art. 2. 93 Eun Sup Lee, supra note 4, at 157. 94 SG Agreement, Art. 9. 95 Id. at Art. 5. 96 For more details, see Eun Sup Lee, supra note 4, at 195–204. 97 Id. at 197.

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1 Introduction

New transmission technologies have overturned traditional concepts of distance—banking, education, and medical services may now be provided over the Internet—and many governments have sought to open long-entrenched monopolies so as to promote efficiency and mobilize new capital and expertise.98 As the share of services in international trade has steadily increased, international efforts to deal with international trade in services also have increased.99 This has culminated in the adoption of the General Agreement on Trade in Services (GATS).100 GATT 1947 was concerned almost exclusively with rules on trade in goods. The Uruguay Round’s banner achievements were in expanding the scope of the GATT-WTO system to include non-goods sectors, liberalizing trade in several advanced sectors, and setting the WTO Members on a course to further liberalization agreements on advanced-sector trade. With the successful conclusion of the General Agreement on Trade in Services and the TRIPs Agreement, the negotiators broke new ground by introducing core GATT disciplines to trade in services and providing effective protection of intellectual property rights. Followon the WTO negotiations also have produced agreements on trade in information technology products, telecommunications, and financial services.101 Even though GATS originated from GATT with the same spirit, the particular characteristics of trade in services produce deviations under GATS regulations, in certain key respects, from the concepts and rules incorporated in GATT.102 Considering that many service industries are required to remain carefully regulated to protect public interest, GATS regulates trade barriers that distort competition or restrict access to markets on the one hand and distinctively requires legitimate policy objectives to be pursued and ensures the orderly functioning of markets on the other hand.103 Thus, restrictions on service suppliers in specified fields or discrimination against foreign suppliers are considered as barriers to service trade; however, regulations requiring compliance with technical standards or qualification requirements to ensure the quality of services and the protection of public interest are considered necessary. Multilateral negotiations have progressively liberalized GATS regulations by removing trade barriers in service markets, while not restricting the

98

Id., at 196. Id. 100 General Agreement on Trade in Service, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, Legal Instruments-Results of the Uruguay Round, 33 I.L.M. 1125 (1994) [hereinafter GATS]; Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations. Apr. 15, 1994. Legal Instruments—results of the Uruguay Round 1(1994). I.L.M. 33: 1125. 101 See Eun Sup Lee, supra note 4, at 196–197. 102 See id. at 197. 103 See id. 99

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23

individual governments’ authority to maintain and develop necessary regulations to pursue their national policy objectives.104

1.2.13 TRIPs Intellectual property rights are the rights given to persons to ownership over the creations derived from their minds.105 Specifically, intellectual property rights give a creator the exclusive right over the use of his/her creation for a certain period of time.106 Intellectual property rights are customarily divided into two main areas: (1) copyright and rights related to copyright and (2) industrial property. The rights of authors of literary and artistic works (such as books and other writings, musical compositions, paintings, sculpture, computer programs and films) are protected by copyright. Also protected through copyright and related (sometimes referred to as “neighboring”) rights are the rights of performers (e.g., actors, singers, and musicians), producers of phonograms (sound recordings), and broadcasting organizations.107 Industrial property can usefully be divided into two main areas. One area can be characterized as the protection of distinctive signs, in particular trademarks108 (which distinguish the goods or services of one undertaking from those of other undertakings) and geographical indications (which identify a good as originating in a place where a given characteristic of the good is essentially attributable to its geographical origin).109 The protection may last indefinitely, provided the sign in question continues to be distinctive; other types of industrial property are protected primarily to stimulate innovation, design, and the creation of technology.110 These properties include inventions (protected by patents; in a number of countries, innovations that embody lesser technical progress than patentable inventions may be protected by utility models), industrial designs, and trade secrets.111 Protection is usually given for a finite term (typically 20 years in the case of patents).112 The main social purposes of protection of intellectual property rights113 are: to encourage and reward creative work; to give an incentive and means to finance

104

Eun Sup Lee. 2004. Anti-Competitive Practices as Trade Barriers used by Korea and Japan: Focusing on Service and Investment Market. Bond Law Review 117, 16: 125. Cited by Eun Sup Lee, supra note 4, at 197. 105 See Eun Sup Lee, supra note 4, at 235. 106 Id. 107 TRIPs Agreement, Part II, Section 1.1. 108 Id. at Part II, Section 1.2. 109 Id. at Part II, Section 1.3. 110 Id. at Art. 7. 111 Id. at Art. 12. 112 Id. at Art. 33. 113 For the origins of intellectual property rights included copyright, trademarks, trade secrets and patents, see Eun Sup Lee, supra note 4, at 236.

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1 Introduction

research and development activities for the development of new technology; to stimulate and ensure fair competition; to protect consumers; to facilitate the transfer of technology,114 joint ventures, and licensing; and to balance legitimate interests of right holders and of users.115

1.2.14

Dispute Settlement

The dispute settlement system of the WTO is a central element116 in providing security and predictability117 to the multilateral trading system resulting from the Uruguay Round.118 Its aim is to secure a positive solution to a dispute.119 The purpose of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (the “DSU”) is to provide for an efficient, dependable and rule-oriented system to resolve,120 within a multilateral framework,121 disputes arising in relation to the application of the Marrakesh Agreement Establishing the World Trade Organization. Throughout this description, the Marrakesh Agreement Establishing the World Trade Organization, including its annexes, will be referred to as the “WTO Agreement,” whereas the agreements composing it will be referred to as the “WTO agreements.” The WTO dispute settlement system favors mutually agreed solutions consistent with the WTO agreements, and parties are encouraged to develop mutually satisfactory solutions, even when the matter is before a panel.122 The WTO dispute settlement mechanism is a rule-oriented system123 where recommendations and rulings must aim at achieving a satisfactory settlement in accordance with the right and obligations of the Members under the WTO Agreement.124 As a result, all solutions to matters formally placed under the consultation and dispute settlement provisions of the WTO agreements, including arbitration awards, must be consistent with those agreements and must not nullify and impair benefits accruing to any Member under those agreements.125 If it is not possible to reach a mutually agreed solution, the first objective of the dispute settlement system is normally to secure the withdrawal of the measures

114

Id. Id. 116 Id. at 307. 117 For the certainty and predictability to the multilateral trading system with regard to the objective of the WTO Agreement from the viewpoint of the previous decisions of the GATT/WTO panels, see Eun Sup Lee, id. at 307. 118 Dispute Settlement Understanding (Hereinafter DSU), Art. 3.2. 119 Id. Art.3.7. 120 Eun Sup Lee, supra note 4, at 307. 121 Id. 122 DSU, Art. 11. 123 Eun Sup Lee, supra note 4, at 308. 124 DSU, Art. 3.4. 125 Id., at Art. 3.5. 115

1.2 Public Regulation on International Trade

25

concerned if they are found to be inconsistent with the WTO Agreement.126 The prompt settlement of situations in which a Member considers that benefits accruing to it directly or indirectly under the WTO Agreement are being impaired by measures taken by another member is essential to: the effective functioning of the WTO; and the maintenance of a proper balance between the rights and obligations of its Members.127 Efficiency is achieved through detailed procedural provisions, including provisions which allow a party to move forward with the case even in the absence of agreement of the other party.128 The procedures for dispute settlement which are laid down in the DSU have many features which make it quasi-judicial in nature. First, there is assured access to these procedures. Second, there is near automaticity in decision-making in all key issues related to settlement of individual disputes. Third, firm time limits are stipulated for each stage of the process. And finally, there is provision for appellate review.

1.2.15 Trade and Environments During the past roughly 20 years since the WTO was established, for the purpose of sustainable development129 and promotion of free trade, a variety of issues have attracted the Members’ interests. Among those, the relationship between trade and environment has constantly drawn their attention and has challenged the principles and institutions of the international trade order. Along with this problem, the WTO has difficulty in interpreting whether a series of unilateral trade measures of one Member country are appropriate under a multilateral trading system aiming at preserving the environment or are abused to protect the Member country’s domestic market. Traditionally, there have been two possible routes in the WTO to tackle the trade and environment issues, that is, through the negotiation and consensus among the WTO Members and recourse through the dispute settlement procedures. Besides the latter recourse with some progressive efficiency in dealing with this issue, even though the WTO has coped with this problem through ministerial conferences and tried to harmonize between trade and the environment by founding the Committee on Trade and Environment [hereinafter CTE], the WTO has been unable to give any resolute attitude for diverse pending issues concerning environmental trade measures and has failed to launch a new round of trade environment negotiations.130 Considering the gradual environmental aggravation and serious pollution across the planet, it is required to harmonize the environmental preservation through,

126

Id., at Art. 3.7. Id., at Art. 3.3. 128 Id., at Art. 4.3 or 6.1. 129 See Eun Sup Lee, supra note 4, at 339. 130 See id. 127

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1 Introduction

for instance, the proper utilization of trade-related environmental measures with the principle of free trade under the WTO as soon as possible. If environmental problems, in particular, are not handled timely, it will cost an excessive amount of money and time to restore the environment. The fact that unresolved environmental problems can use up all the profits from the WTO’s free trade urges us to build the system to impose timely and efficiently trade measures related to environment.

1.2.16 Trade and Anti-competitive Practices An important goal of international trade organizations like the World Trade Organization (the WTO) is to remove trade barriers among frontiers in order to secure fair and free opportunities of competition for the Member countries. However, unfair and anti-competitive practices by private firms in the domestic markets can be manipulated to provide a further means of protection in addition to trade barriers at the frontiers. As the major frontier barriers to international trade among the Member countries have been reduced through multilateral negotiations under the GATT/WTO system, there has been an increasing worldwide interest in other types of anti-competitive practices. Many approaches have been made bilaterally, plurilaterally, and multilaterally to regulate and eliminate unfair and anti-competitive practices as trade barriers. Herewith, trade barrier means any kind of entry barrier to an importing countries’ domestic market which impedes the complete national treatment. One approach is to harmonize the conflicts between the trade policies and the competition policies, which have recently received rising interest worldwide.131 Entry barriers to the domestic market of importing countries are primarily the matter of competition policy which is under the control of domestic competition authorities. However, it can also be understood to be a matter of trade policy from the viewpoint of the exporting countries’ trade authorities. In principle, the basic purpose of trade policies and competition policies is the same, that is, the improvement of economic efficiency and the consumer’s welfare level.132 Thus, the two policies share the common objectives through non-discriminatory, transparent, and rules-based regimes. However, in the course of the enforcement of the two policies, conflicts can occur when different policies with conflicting priorities are imposed.133 Traditional discussions have focused on evaluating the effect of trade policy on domestic competition policy. As the trade barriers among major countries have been substantially removed, international trade institutes such as the WTO and Organization for Economic Cooperation and Development (OECD) have recently been concentrating on the effect of domestic competition policy on trade policy.134

131

Id., at 398. Id. 133 Id. 134 Id. 132

1.3 Domestic Regulation on International Trade

27

The main purpose of the international discussions on the effect of competition policy on international trade135 is to reduce the disparity between individual countries’ markets and to secure a fair and free domestic market structure for access to the domestic market under the precondition that the trade barriers between the frontiers should be eliminated completely.136 In the absence of effective competition law to regulate private anti-competitive practices137 in the domestic markets, the gains from liberalized trade may be undermined, and conversely, the absence of trade and investment liberalization defers or prevents access to procompetitive foreign goods.

1.3

Domestic Regulation on International Trade

While international trade among states is internationally governed by multilateral regulation under the WTO mechanisms, international trade among private entities is domestically regulated by domestic laws covering export and import activities, customs duties and clearance, and exchange transactions. For practitioners to do their international trading business effectively, they are required to be familiar with the related trade regulations of the trade partner countries. Before the WTO was launched in 1995, domestic trade-related laws were very different among the countries, rendering it difficult for practitioners to understand and apply the laws to real transactions. However, under the current WTO mechanisms, the main contents of the WTO member countries’ domestic laws regulating trade are substantially similar to each other. This is because domestic laws to affect the member countries’ interests in international trade are required to be in compliance with the regulations required by the WTO provisions. Generally speaking, there have been only meager regulations imposed on exporters’ activities, while simultaneous efforts have been made to encourage exporters to export their items and expand international markets. This is particularly true in developing countries with small and open economies. Nevertheless, there are special cases where specified restrictions are imposed depending on the nature of the goods, the market to which the goods are to be transported, or some budgetary aspects including export tax, and remission of customs duties or domestic value-added tax. Such regulations are usually imposed under the headings of export permissions or licenses. An export permission or license is operated in parallel with the control of strategic goods, which is generally administered through specific regulations on their strategic goods. Basically, regulations on strategic goods constitute one kind of external control which is focused on specified classes of goods being imported from outside the exporting country and being exported/transited by the exporting

135

Id. Id. at 399. 137 Id. 136

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1 Introduction

country’s resident entities to specifically listed countries. Strategic goods are transacted by way of official controls through which any transit or trade authorizations are required for the goods to cross the borders of different countries. While exports are apt to be encouraged by the government, imports are generally regulated by the government, due to its interest in maintaining and improving the country’s balance of payments. Imports are regulated by tariff and non-tariff measures. Even though the average levels of tariff rates have fallen under GATT/ WTO mechanisms, tariff measures have efficiently been used for the purpose of import restrictions and, sometimes, governments’ own budgeting purposes. Recently, particularly, under the WTO mechanisms, many countries have positively operated non-tariff measures for their policy objectives, including protection of human health and life. Importers are required to confirm that the imported goods are granted import permission or licenses before they make the import contract. In some countries, to regulate imports, all imported goods are grouped into: automatic-licensed goods; restrictive-licensed goods; and prohibited goods. Automatic-licensed goods can be imported simply by registration with the domestic customs office, while restrictive-licensed goods can be imported only under specified conditions including, for example, receipt of an appropriate recommendation from the relevant traders’ association or authorization from a specified government agency. Importers are also required to confirm: the tariff rate before they import; if there are any kinds of non-tariff measures to be considered including sanitary and phytosanitary measures, technical regulations, technical conformity assessments, anti-dumping and subsidy-countervailing measures, etc. Regarding customs regulation or customs entries, currently and particularly, in the case of countries with open and small economies being sustained by international trade, customs regulations: are basically designed to impose minimum necessary restrictions on the flow of trade; extend flexibility and convenience as far as possible when regulations are required for export and import; provide services and facilities for transshipment, warehousing, bonding, duties drawback, etc. In some countries, exporters and importers avail themselves of the chance to claim kickbacks on import duties which they have paid on imported materials that have been processed or transformed into final products and subsequently exported. In certain countries pursuing export-driven policies, potential exporters are permitted to import materials while claiming relief from customs duties on condition that they are to re-export final products. Exporters and importers can use bonded warehouses when imported goods are perhaps not required immediately for domestic use or where there is a chance of re-exportation. A bonded warehouse is a designated warehouse which is licensed to accept imported goods for storage before paying customs duties or other related taxes. In almost all countries, foreign exchange controls are imposed on international transactions, the purpose of which is to regulate the disposal and trade of the foreign currencies of their residents. Naturally, countries facing difficulties in

1.4 Private Regulation on International Trade

29

improving their balance of payments are apt to impose rather strict restrictions on the disposal of foreign currencies. Recently, foreign exchange control has been liberalized in many countries. However, the exporters and importers are required to verify if there are any obligations in the form of documentation or procedural practices in conducting their international business transactions.

1.4

Private Regulation on International Trade

International trade is a business transaction made across separate countries, and individual countries’ regulations may conflict with each other. Countries have different economic and political systems and policy agendas, as well as different degrees of development, and accordingly, varying domestic private laws and commercial practices. These obvious discrepancies have led to a set of international private rules guiding interstate business transactions, which has created a fair set of practices and regulations to securely facilitate international business transactions. The United Nations Convention on Contract for the International Sale of Goods (1980),138 as well as the CISG on the Law of Treaties,139 has set the groundwork for international business relations by facilitating peaceful cooperation among individual countries in spite of constitutional and social differences. These are the most imperative international laws governing basic import and export contracts between parties. Usage and Practice of Industry

The international trade practitioners are required to understand that, under the CISG, usages, and practices of the industry are automatically incorporated into any contract, unless explicably excluded in the contract: that is, obligations and representations customarily relied upon by others in the industry should be considered the part of the contract under the CISG. The following case treats with usage of the industry applied automatically to their business transactions.

138

Adopted by a diplomatic conference on April 11, 1980, the Convention establishes a comprehensive c ode of legal rules governing the formation of contracts for the international sale of goods, the obligation s of the buyer and seller, remedies for breach of contract and other aspects of the contract. The Convention entered into force on January 1, 1988. See Eun Sup Lee, Management of International Trade, 2012 (Springer) at 15. 139 The Vienna Convention on the Law of Treaties (or VCLT) is a treaty concerning the customary international law on treaties between states. It was adopted on May 22, 1969 and opened for signature on May 23, 1969. The Convention entered into force on January 27, 1980. The VCLT has been ratified by 110 states as of October 2009; those that have not ratified it yet may still recognize it as binding upon them in as much as it is a restatement of customary law. See Eun Sup Lee, supra note 138, at 15.

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1 Introduction

Case.140 Canadian defendant manufactured a chemical ingredient (clathrate) for use in the production of an anticoagulant medication (warfarin sodium). In 1994, the defendant supplied the plaintiff, the US company, with samples of the ingredient and confirmed that it would support the plaintiff’s application for approval by the Food and Drug Administration (FDA) as the supplier of the ingredient for the manufacture of the drug. In 1995, the defendant issued a letter to the FDA confirming it would serve as a supplier of clathrate to the plaintiff. Later in 1995, the defendant executed a confidential contract for the exclusive supply of commercial quantities of clathrate to a third company that would be violated if the defendant were to proceed with sales of commercial quantities to the plaintiff. When the plaintiff received approval for the manufacture of the drug in 1997, it submitted a purchase order to the defendant for the purchase of commercial quantities of clathrate, which was refused by the defendant. The plaintiff claims that, under CISG, it has a contract with the defendant for the sale of commercial quantities of clathrate and that the defendant breached that contract by refusing to supply the ingredient after the drug was approved. The plaintiff argues that according to industry practice, supplying sufficient quantities of clathrate to support an FDA application creates a contract for future supply. The plaintiff also claims that the defendant should be liable under the doctrine of promissory estoppel under the law of the State of New York. The plaintiff contends that a claim of promissory estoppel based on the otherwise applicable domestic law is not preempted by and does not conflict with CISG. As to the applicable law, the court held that the claim should be decided in accordance with CISG because the alleged sales contract involves international trade in goods. As to the merits of the case, the court held that in accordance with the general principle of good faith in international trade stated in Article 7(1) CISG the Convention embodied a liberal approach to contract formation and interpretation and a strong preference for enforcing obligations and representations customarily relied upon by others in the industry.

140

Case 579: CISG 1 (1) (a); 4 (a); 7 (1); 9; 11; 14 (1); 16 (2) (b); 18 (3); 60 (a) United States [federal court], U.S. District Court for the Southern District of New York [federal court of 1st instance] No. 98 CIV 861 (RWS), 99 CIV 3607 (RWS) 10 May 2002; 16 August 2002 Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc. et al. Published in English: 201 F. Supp. 2d 236 (S.D.N.Y. 2002); Opinion on rehearing: 2003 U.S. Dist. LEXIS 15442, 2002 Westlaw 1,933,881; http://cisgw3.law.pace.edu/cases/020821u1.html.

1.4 Private Regulation on International Trade

Indeed, as stated in Article 9 CISG, usages and practices of the industry are automatically incorporated into any agreement, unless explicitly excluded. Thus, the court agreed with the plaintiff’s argument that industry practice should be analyzed at trial in order to determine whether a contract existed. The court analyzed the elements of offer, acceptance, validity, and performance relevant to the question of contract formation under CISG. The court found that the contract for future supply of “commercial quantities” of goods was sufficiently definite under Article 14 of CISG. On the topic of acceptance, the court found that under Article 18(3), the provision of the reference letter to the FDA could qualify as an act indicating assent to a contract. Whether the defendant’s acts actually indicated assent to a contract would be analyzed at trial on the basis of industry custom. The court analyzed the defendant’s argument that consideration was lacking as a question of validity. The court found that validity of the contract, pursuant to Article 4(a) is to be decided under domestic law determined by the application of traditional conflict of laws analysis. On the basis of the court’s conflict of laws doctrine, the court found that New Jersey law should apply. Applying New Jersey law, the court found that consideration was sufficient on the basis of the alleged facts. The court also rejected the defendant’s argument that, in any event, the plaintiff failed to perform under the alleged contract by failing to give commercially reasonable notice for its purchase order. The court stated that under Article 60(a) of CISG failure to give commercially reasonable notice by the plaintiff does not entitle the defendant to terminate the contract. As to state law contract claims, the court held that CISG preempted such claims, as the availability of independent state contract law causes of action would frustrate the goals of uniformity and certainty embraced by the CISG. Parties would be subjected to different states’ laws and the very same ambiguities regarding international contracts that the CISG was designed to avoid. As a consequence, parties to international contracts would be unable to predict the applicable law, and the fundamental purpose of the CISG would be undermined. Concerning the possibility of a claim based on the US doctrine of promissory estoppel, the court first of all noted that such doctrine differed from Article 16 (2)(b) of CISG, in so far that the latter provision did not expressly require that the offeree’s reliance must have been foreseeable to the offeror and does not expressly require that the offeree’s reliance be detrimental. Consequently, a claim based on the doctrine of promissory estoppel in order to deny the existence of a firm offer was preempted by the Convention. As to tort claims, the court held that they were in general not preempted by CISG, but a tort claim which is actually a contract claim, or that bridges the gap between contract and tort law, may be preempted.

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1 Introduction

These obvious discrepancies have led to a set of international private rules guiding intercountry business transactions, which has created a fair set of practices and regulations to securely facilitate business transactions internationally. The United Nations Convention on Contract for the International Sale of Goods (1980),188 as well as the CISG on the Law of Treaties,189 has set the groundwork for international business relations by facilitating peaceful cooperation among individual countries in spite of constitutional and social differences. These are the most imperative international laws governing basic import and export contracts between parties. Closely correlated with the CISG, the International Rules for the Interpretation of Trade Terms, established in 2020 by the International Chamber of Commerce (or Incoterms® 2020) was created to clarify international trade terms for matters such as dividing responsibilities and costs incurred between exporters and importers, while reflecting the most advanced transportation practices and methods. International trade contracts are replete with specified acronyms, such as free on board (FOB) and cost, insurance, and freight (CIF), to expedite the trading process and insure clarity between trading partners. Further sets of regulations exist to clarify relations based on different transport methods. The Hague Conference on Private International Law, or HCCH, set forth The Hague Rules of 1924 as the first attempt by the international community to address the problem of shipowners neglecting to take any responsibility for the loss or damage of cargo in transit. The rules specify that the carrier must take responsibility if the shipper suffering damage can prove that the vessel was not seaworthy, was improperly manned, or was not sufficiently adequate to safely transport and preserve the cargo. The Hague Rules have occasionally been updated by protocols, the current form of which is deemed the Hague–Visby Rules established in 1968. The rules are used by about 90% of the international trading community. In the 1970s, pressure was building from developing nations and nations with insufficient competitive power in the transportation industry to require a reassessment of the liabilities and responsibilities between the carriers and shippers in freight contracts. This led to a renegotiation of international shipping policies under the UN Hamburg Rules of 1978. The rules were implemented in 1992, but their use has remained very limited in the global trade community, as the drafters may, arguably, have gone too far in allocating liabilities between shippers and carriers. Further sets of rules exist to regulate several aspects of trade. Liability in air transportation is covered by a separate agreement called the Uniform Rules for a Combined Transport Document of 1973. The most frequently adapted international regulations for insurance practices are outlined in the England Marine Insurance Act of 1906. International regulations for payment settlement by letter of credit are provided under the Uniform Customs and Practices for the Documentary Credits

1.4 Private Regulation on International Trade

33

(UCP 600141 ), and the Uniform Rules for Collection 1995 is a supplemental set of rules to aid bankers, sellers and buyers in the payment-collecting process. These international laws regarding trade contracts are grouped as follows.

1.4.1

Laws on International Sales Contracts

General laws to regulate international sales contracts include CISG 1980, UNIDROIT principles of 1994 and UNCITRAL Model Law on Electronic Commerce 1996. The United Nations Convention on Contracts for the International Sale of Goods 1980 (CISG) is a uniform set of trade laws enacted by UNCITRAL in 1980, and which relates to the vast majority of international business transactions. The CISG 1980 includes provisions concerning ➀ the formation of contracts, ➁ general rules on sale of goods, ➂ the seller’s obligations (delivery of goods and documents, conformity of contracts and third party’s right of claim, remedies consequent on seller’s breach), ➃ buyer’s obligations (payment, receipt, remedies consequent on buyer’s breach), ➄ transfer of risk, ➅ common regulations concerning the obligations of sellers and buyers (contract breaches before performance and installment contracts, damages, interest, exemption of obligations, the effect of contract cancelation, and storage of goods). The International Institute for the Unification of Private Law (UNIDROIT) is an independent intergovernmental organization that works toward harmonizing private international law, specifically commercial law, between states. The UNIDROIT Principles on International Commercial Contracts enacted in 1994 apply to international business contracts for services, constituting complementary regulations in interpreting international laws, especially the CISG of 1980. In UNIDROIT, provisions are made on ➀ general rules, ➁ formation of contracts, ➂ validity of contracts, ➃ interpretation, ➄ contents of contracts, ➅ performance of contracts, ➆ nonperformance of contracts. The UNCITRAL Model Law on Electronic Commerce was enacted to assert common regulations to govern e-commerce practices, including e-trade, which is experiencing increased demand. The Model Law of Electronic Commerce consists of ➀ general rules, ➁ legal application of rules to data messages, ➂ communication of data messages, ➃ product transport of e-commerce in certain areas.

1.4.2

Laws on Typical Trade Terms

Defining and universalizing of trade terms is essential activities for maintaining clarity and simplicity in processing international trade contracts. Incoterms® 2020

141

The latest revision of UCP is the sixth revision of the rules since they were first promulgated in 1933. It is the fruit of more than three years of work by the ICC’s Commission on Banking Technique and Practice. See Eun Sup Lee, supra note 138, at 18.

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1 Introduction

is a commonly referred to international piece of contract law, explaining buyers’ and sellers’ obligations by use of commonly used trade terms. Incoterms® 2020 can be used in coordination with the American Foreign Trade Definitions of 1990 to sufficiently clarify terms and aid in drafting trade contracts. The international commercial terms referred to as Incoterms consist of only thirteen commonly used trade terms: ➀ EXW (departure term), ➁ FCA, FAS, and FOB (main carriage unpaid terms), ➂ CFR, CIF, CPT, and CIP (main carriage paid terms), ➃ DAT, DAP, and DDP (arrival terms). Each term is defined and states a buyer’s and seller’s obligations in the matter of the exchange. Under the Revised American Foreign Trade Definitions, the set of revised definitions consists of trade terms, as well as six FOB terms that are specifically applicable in matters of trade with the United States. The initial law was ratified in 1919 when it was adopted by the US National Foreign Trade Council. Since then, the trade definitions have been revised twice—first in 1941, and then again in 1990. The definitions consist of a preface and eleven trade terms (including six FOBs) as follows. ➀ EXW: (named place) ➁ FOB: (named inland carrier at named inland point of departure) ➂ FOB: (named inland carrier at named inland point of departure). Freight prepaid to: (named point of exportation). ➃ FOB: (named inland carrier at named inland point of departure) ➄ FOB: (named inland carrier at named inland point of departure) ➅ FOB Vessel: ((named port of shipment) named inland point in country of importation) ➆ FOB: (named inland point in country of importation) ➇ FAS Vessel: (named port of destination) ➈ CFR: (named point of destination) ➉ CIF: (named point of destination)  11 DEQ: (duty paid). The Warsaw-Oxford Rules for CIF Contract were implemented in 1928 after being enacted by the International Law Association (ILA), and revised in 1932, to properly outline the rights and obligations of each party in CIF contracts. The document consists of twenty-one rules covering sellers’ obligations relating to shipment, dates, risks, property, type of vessel, freight collection rates, import tariffs and other charges, condition of goods, insurance, shipping notices, export and import permits, certificate of origin, quality certificate, references, required documents, destruction and damage after shipment, as well as buyers’ obligations of payment and goods inspection. The Warsaw-Oxford Rules, however, have become obsolete in today’s international world of commerce.

1.4 Private Regulation on International Trade

1.4.3

35

Laws on Trade Disputes

The New York Convention 1958 is shorthand for the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards enacted by UNCITRAL in 1958. It sets out guidelines for international arbitration in commercial matters. A “claim” is made by a contracting party when he believes that the other party did not fulfill his obligations as outlined in their contract.142 The Convention describes the scope of coverage, arbitral agreement methods, recognition of awards and execution, recognition and application of execution, and recognition and cause to refuse, or delay execution. There are other laws concerning conciliation and arbitration, including UNCITRAL Arbitration Rules 1976, UNCITRAL Model Law on International Commercial Arbitration 1985, and ICC Rules of Conciliation and Arbitration 1988, which stipulate provisions on arbitral awards and their enforcement.

Public and Private Regulations on Processing International Trade

142

See Eun Sup Lee, supra note 138, at 22.

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1 Introduction

1.5

General Process of International Trade Operation

International trade transactions are generally made step by step from the stage of formation of contract to the enforcement of contract. In the industrial field, several steps out of the following could be overlapped or be omitted, but the following generally covers the processed stages. ➀ Make a sales contract through the course of negotiation and discussion. ➁ Make an application for issuing a letter of credit according to the contract. ➂ Swiftly deliver a message of advice and confirm issuing the letter of credit to the advising and confirming bank. ➃ Advise and confirm the letter of credit under instructions from the issuing bank. ➃-1 Make a contract for pre-shipment inspection with a pre-shipment inspection company. ➃-2 Obtain the pre-shipment inspection certificate from the pre-shipment inspection company. ➃-3 Make an insurance contract with an insurance company in accordance with the terms of the letter of credit. ➃-4 Obtain the insurance policy from the insurance company. ➃-5 Make a transportation contract with a transportation company. ➃-6 Obtain the transportation documents from the transportation company. ➄ Make a shipment according to the instructions stipulated in the letter of credit and sales contract. ➅ Negotiate with the bank, submitting a bill of exchange accompanied by documents required under the letter of credit. ➆ Pay the export price to the exporter when the documents and bill of exchange are submitted in accordance with the terms of the letter of credit. ➇ Ask for a payment dispatching bill of exchange accompanied by documents to the issuing bank. ➈ Present the proper documents to the importer and ask for payment at the import price. ➉ Pay for the import price against the receipt of the transport documents. ➉-1 Present the transportation documents and ask for the delivery of the shipped cargo. ➉-2 Receive the goods against the transport documents from the transportation company. ➉-3 Make a claim for damage to the insurance company in accordance with the terms of the insurance policy. ➉-4 Receive the claimed amount from the insurance company.  11 Make reimbursement to the negotiating bank.

1.5 General Process of International Trade Operation

Learning Assignments

For students to implement the assignments suggested in the following chapters, they are required to select an export item to be sold and determine the target market. When selecting their items, they are required to consider their individual or groups’ comparative advantages when taking out their business transactions in the world market. With the chosen items (hereinafter, selected goods), students are assumingly or actually going to take steps to participate in the international trade through the implementation of the assignments suggested in the following chapters. When the students submit the report on their assignments, they are required to include the negotiating materials and communication records, such as e-mailed letters to support the business transactions. 1. Tariff and non-tariff barriers to be met for selected goods when they are marketed and distributed (e.g., in EU countries), and make checklists for

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1 Introduction

such items to be efficiently marketed and distributed in the EU countries in compliance with public laws and regulations. 2. A comparative study of the sanitary and phytosanitary measures as between the United States and China in the case of trade in agricultural and livestock products.

Bibliography DiMatteo LA, Dhooge LJ (2021) International business law—a transactional approach, 4th edn. West Publishing, Eagan Jackson JH,Davey WJ, Sykes AO Jr (2021) Legal problems of international economic relations. West Publishing, Eagan Lee ES (2013) World trade regulation. Springer, Berlin Lee ES (2012) Management of international trade. Springer, Berlin Murray C, Holloway D, Timson-Hunt D, Kennelly B, Schmitthoffs GD (2012) Schmitthoff Export Trade: the law and practice of international trade, 12th edn. Sweet & Maxwell Ltd., Mytholmroyd

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Overseas Market Research

Learning Objectives

The target market for the specified products may be very strange to exporting companies due to its historic development and culture being different from that of their domestic market. The exporting company is required to proceed the market research for the target market based on their prior experience in other countries. The exporting company should carefully verify the specific regulations on its products, considering the fact that strict domestic regulations on the specified products have sometimes been referred as the non-tariff barriers or technical obstacles for the foreign exporters. The hands-on workers of the exporting company may realize their prior experience to export their products to other countries could make them feel comfortable in exporting to and penetrating the new market. This result is over the simple lesson from their prior business performance or experience.. This result comes substantially from the multilaterally regulating system of WTO. For example, the TBT Agreement focuses on the international harmonization, equivalence, and mutual recognition in application of their domestic technical regulation to the specified imported products. That is, under the current TBA Agreement, it is rather simple for them to apply their prior experience in the US to China, for example, in terms of technical regulation. For the companies to be successful in doing their business in the Global market, they should also be very serious and careful to make the proper credit inquiry before they come into the business relation with the partner. Considering these, this chapter treats with the following issues.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_2

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1. Efficient ways to induce potential customers to be interested in the students’ selected items based on their comparative advantages over competitive items in the target market. 2. Factors to be considered when attracting potential customers to the (assumed to be selected) items in the exporting market, compared with the factors to be considered in the domestic market where students’ (assumed) companies are well recognized by the customers. 3. Functions and importance of established international business networks, based on mutual reliance in conducting international trade particularly with newly developed items. 4. Strategies for the cultivation of new markets abroad, with an item which is newly developed and not yet commercialized in the domestic market compared with the case of existing products which have been successfully commercialized in the domestic market.

2.1

Overseas Market Research

The first step, in any international trade negotiation, or any business venture, for that matter, is obtaining a good understanding of the market to assess viability and potential success. An exporter will then analyze the potential competitiveness of the exports, select a target market, conduct market research, find the best method to reach the target market overseas, and make a thorough credit inquiry to select the proper importer. Market research is defined as a “component of marketing research whereby a specific market is identified and its size and other characteristics are measured.” Overseas market research is this process occurring outside of a firm’s home country, which can face a new set of boundaries such as language, culture, data collection, networking, and differences in business laws and requirements. For proper market research, an exporter needs to have a basic understanding of all aspects of the country that may affect the desirability and success of exporting, such as politics, economics, culture, history, scientific technology, climate, and language. An exporter who has done proper market research would know not to sell in-house heating systems in the Congo or pork in Syria. Based on this basic understanding about the target market, an assessment of the competitors, prices, customers, and distribution structures should be made. If, upon completing scientific research, results show that the product does not have any advantages over current competitors’ products, or that product diversification is too slender to assure a high possibility of success, the exporter will have to reassess whether or not the export is viable in its current state. If the export is not assessed to be viable in the target market, changes will need to be made to the plan. One of the easiest ways to gain a basic understanding of a country’s import and export situation is to look at statistical analyses of exports and imports.

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By analyzing the records of exports and imports at a country level, one can gain knowledge as to when items were exported and which countries they were exported to. Once the proper import countries have been determined, an exporter might be able to make lists of buyers of specific items, which can become the first procession for successful product marketing.

2.1.1

Contents

(1) Target Market The target market is the particular market segment on which a marketing activity is focused. Essentially, this is to whom the goods are intended to be sold. Particulars of the contents of the target market include: selection of target areas; understanding commercial practices of target countries; current situation of import and export of isolated products; climate and geographical conditions; import management systems (item management system, customs clearance, tariffs, foreign exchange, etc.); stability of currency and economic situation; transportation and communication (especially logistics facilities such as harbors and airports); etc. (2) Market Demand Demand is a need or desire for a certain good or service supported by the capacity to purchase it. Demand analysis is an aspect of research that studies the sales generated by goods or service to determine the factors for its success or failure. Particulars of demand analysis are included: research into market potential; situation of supply and demand of the products (its own production, import quantity, and demand); estimate of market growth rates; research into market development; etc. (3) Consumer Research Consumer research is conducted to assess the preferences, motivations, and buying behavior of the target market through observation, surveys, interviews, and pushcarts. A pushcart refers to the test-selling of one’s intended product by tentatively exporting only a small amount of the item to be sold to verify the response. Considerations in consumer research include: population, its preferences and living standards; distribution of consumers by area and demographics such as age and income; purchasing motivation, place, means, time, quantity, and ability; satisfaction of goods and future change of consumers’ tastes; etc.

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(4) Competitors Any company that is in the same industry or offers like or competing products is a competitor. Thorough competitor analysis is one of the most important factors in success. Considerations in researching competitors include: competitors in countries designated as export targets, competitive products, prices, and price movements; marketing strategies of competitors; advantages and disadvantages of competitors; export prices of competitors, export quantity, and advantages of export competition; etc. (5) Products To conduct a systematic research into products, the characteristics of a good or service must be examined to determine the qualities that make those goods or services desirable. Considerations in research into products include: kinds, quality, and size of demanded products; yield of local country, selling quantity, and ratio of exports and imports; quality comparison between local products and imported products; research of color, design, size, style, function, and packing of major local imports; etc. (6) Distribution Routes The distribution route or channel is the path through which goods and services flow from the seller to the consumer and the flow of money that accompanies it. The flow of a good in its simplest path is directly from a vendor to a consumer. More commonly, there are intermediaries along the way, such as wholesalers, distributors, agents, and retailers. At each stage in the transaction, the cost increases so that each player can receive a cut for his efforts. Considerations in researching distribution routes are as follows: distribution structure of the products (distribution type, market leader, margin rate by step); research into trade practices of the products; research into the distribution area; research into seasonality, that is, highdemand season and low-demand season of the products (some products are more susceptible to seasonality than others); etc. (7) Pricing The market value or exchange value of products is largely determined by supply and demand. Considerations in researching prices are as follows: research into the price of exports and imports within the area; price comparisons between

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local products and imports; trends in price fluctuation by season; price differences between the high-demand and low-demand season; etc. (8) Promotions Promotion is the marketing activity of a product or service occurring through publicity or advertising. Considerations regarding promotion include the following: research into local advertisement, sales promotions, and public relations (PR); research into utilization of agencies and establishment of local subsidiaries; etc.

2.1.2

Reaching Potential Buyers

(1) Market Segmentation This is the process of defining and dividing a large market into clearly identifiable segments each having specified needs, wants, or demand characteristics. The objective is to design a marketing mix that precisely matches the expectations of customers in the targeted segment. Few firms are large enough to supply the needs of an entire market, and other smaller companies tend to break down the total market into segments and then choose the relevant parts of the market the firm is best equipped to handle. (2) Target Markets After market segmentation has been decided, a firm needs to realize the best methods to reach its target market. The firm will develop specific marketing activities to create exposure and product awareness tailored to that specific market. (3) Finding Specific Customers After target marketing, an exporting firm will hope to receive inquiries and responses from its promotion. The first line of customers consists of importers, and the second line consists of department stores, retailers, and vendors. Due to the Internet, it is easier to get products directly to the final customer than in the past, allowing for the exporter or producer to avoid the costs of the middlemen who often force them to sell their products at lower prices.

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2.2

2 Overseas Market Research

Overseas Exhibitions

One of the most effective ways to find buyers is to attend exhibitions (fairs, or expos), because an exporter can interact face-to-face with many potential buyers at once and easily make public their companies and items based on general pamphlets, presentations, and a strong first impression. This is never enough to be considered as a thorough inquiry, but it can serve as a good starting point. By meeting potential buyers, exporters can also create interest about their products among similar importers or others networked with contacted potential buyers. Oftentimes, an exhibition is a gathering of companies in an exhibition hall where each of them pays the hall for an allotted amount of space to set up a company display. Spots need to be reserved ahead of time and can vary in size depending on the amount a company wants to pay for the space. Contracting a spot well ahead of time also allows firms to pick a location that they predict will see plenty of foot traffic, and therefore more visibility of their products, such as a spot close to the main entrance. Some displays of established companies are quite elaborate and require trucks to unload large props, while others are quite simple, consisting of a table, a couple of chairs, posters, and pamphlets. Sufficient preparations are required for a meaningful exhibition to be staged. Although setting up a booth at an exhibition is the most beneficial way to get exposure to contacts at exhibitions, doing this repetitively can be costly for small companies or individuals. Consequently making a comparative analysis between actual attendance at an exhibition and a simple visit to an exhibition is necessary. On the one hand, when an exporter takes part in the exhibition, it can: save time in finding appropriate partners; save costs in sales promotions of exhibited items; induce interested companies to be potential buyers; provide opportunities to obtain information; and provide opportunities to learn trends in new technology, human networks, and advanced models. When a firm’s representative simply visits an exhibition, on the other hand, it can: help the firm to understand the transition of products; help the firm to learn about new products and new technology; help the firm learn changes in styles/ fads; help the firm learn trends and marketing schemes of competitors; and help firms analyze the tastes of importers.

2.2.1

Preparation

It is important to note that all exhibitions are not the same and may not be relevant to a firm’s products. For example, there might be a massive and globally recognized expo in Dubai on green technology and technological advancement, but if you are an exporter of sportswear, it is doubtful that you should be spending your time attending this particular expo because of a lack of potential interest. Another precursor to attending an exhibition is for a firm to determine its purpose in participating, whether it is to find potential buyers, to strengthen relationships with

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existing buyers, to undertake market research, to collect information, or to assess the response from consumers. The target market should also be determined after understanding features of the firm’s own products and researching market conditions to find the most profitable transactions. A target market determination will consist of multiple considerations, such as quality of the products, ability to pay for products, desire for products, political situation, trends, and fads. After the target market is determined, proper transportation methods and means need to be considered. There are two main methods of transporting the display items to the exhibition: The first method is to pay the exhibition host or moving company to transport them for an exporter. The second method is for the exporter to transport the items personally. For the proper transportation of the exhibition items, it is generally required to prepare a carnet document, which is a specific customs document that allows exhibition items to be transported across borders for display at any sort of exhibition. The carnet document generally exempts the transportation tariff of items from normal import and export regulations imposed by governments. The items can then be sold during or after the exhibition or imported back to their initial country free of import duties and approval. For the most part, the carnet currently in use for facilitating importing and exporting is termed “ATA Carnet.” The ATA Carnet is an international handbook issued for exemption from import duties and provides a rapid process of customs clearance for the temporary import or bonded transportation of working tools like movie cameras, sample items, and advertisement items, in accordance with the “tariff Convention about extortion of temporary import clearance of goods” of the Customs Cooperation Council. If ATA Carnet holders try to clear items for temporary import to countries affiliated to the Convention, the items are exempt from tariffs but must be taken out within a certain period of time. If the items are not taken out within a certain period of time, tariffs must be paid due to a breach of the Convention agreements, and the institute extending guaranty to the temporary import and issuing the ATA Carnet in that country must pay instead.

2.2.2

Strategy

To ensure strong attendance at the exhibition, the proper exhibition should be screened and selected, the pre-marketing should be made to properly inform potential buyers of the exhibition, and the exhibition booth should be properly designed and installed. With regard to exhibition selection, a lot of similar exhibitions are held around the world, so an exporter should thoroughly analyze various aspects of exhibition function to ensure that he is compensated with the best value for his money and efforts. There are sometimes more than several hundred exhibitions and several million visitors every year just in one country. The trend to aggressively visit

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famous foreign exhibitions to better understand the movement of newly developed technologies and marketing strategies of competitors is increasing. Particulars to consider include functions during the session, advertisements and sales plans of hosts, potential items to be displayed, and the estimated number and type of visitors. With regard to pre-marketing, if potential buyers are not familiar with the exhibition, they will not just go ahead and visit any specific booth. In order to make the specific booth desirable enough for potential buyers to visit, extending personal invitations, making phone calls, and sending letters are needed to attract the appropriate visitors. The aesthetic appeal of the display is another vital aspect to induce the number of high-quality customers to inquire about the exhibited products. Keep in mind here that bright lights and flashy props might attract attention, but, for example, if they take the focus away from the product they could prove to be counterproductive. An advertiser needs to find the right mix of flare and substance to attract customers’ attention and focus it on the products. Location is just as important as substance. The entryway may be the best location, but, when it is unavailable, participating exporters should be sure to avoid corners and other low traffic areas.

2.2.3

Follow-Up Management

While consulting with a visitor about the products at an exhibition, an exporter should create a “counseling file” for that visitor, so that he can reference it when he negotiates with the potential buyer in the future. Files that an exporter gathers throughout the exhibition can provide great marketing leads if they are dealt with properly. Interested visitors should be recontacted, sent thank you notes for their inquiries, and receive answers to any specific questions that were not sufficiently answered at the exhibition. Keep in mind the fact that the collected information and potential customers are important assets in pursuing sales promotion of company’s products.

2.3

Marketing Planning

2.3.1

Introduction

Once an exporting company has selected its target market and determined its basic direction and guidelines for trade, it can begin to form a marketing plan to insure the success of its exports. First, an exact analysis of the exporter’s company must be made. An unrealistic and unduly favorable assessment of its own company toward a more favorable aspect than reality will only hurt the company’s venture. In assessing the exporter’s company, relevant considerations include: advantages of the products; disadvantages of the products; opportunity factors of the company; threats to the company’s

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business; financial factors, maximum production, and production capacity for the past few years; determined targets and marketing strategy; analysis of four basic factors including products, marketing, management, and information; etc. Second, for an analysis of the external environment, external factors beyond the firm’s control should be considered: world product trends; possibilities for exporting the products; other trends that may affect sales and profits, such as weather, the economy, or the price of oil; etc. Third, for an analysis of competitors, the following two factors should be considered: ➀ competitors’ products compared against the exporter’s own products, that is, examination of whether there is a difference between the two products in price, quality, or an innovation that will make the exporter’s product succeed; ➁ market share in the targeted market, that is, examination of whether there is a monopoly making it difficult to crack the market, or whether there are many small companies competing for smaller slices of the market. Fourth, research into local markets should be thoroughly made by visiting in person, inquiring to market research institutes, attending overseas exhibitions, speaking with customers, etc. Fifth, in order to secure a trading partner in the target market, the following factors should be considered: a credit inquiry into the partner should be rigorously undertaken to assess its capacity to trade with; capacity of the partner’s role and market share in terms of funds and marketing ability; the partner should be assessed in the importing market; the partner should be assessed in terms of its ability to become a sustainable business partner; the partner should be examined from the viewpoint of its ability to stay ahead of or keep abreast of changing market trends; its ability to be a leader in the market and give the exporting firm’s product the greatest viability.

2.3.2

Method of Market Research

The most basic analysis of the means with which to reach overseas markets can be researched through online methods and off-line methods. Online research can be a great tool for saving time and money when the information is available and reliable, because browsing through websites might sometimes reap fruitful results. Government sites can also be useful in obtaining information about public regulation of trade including import restrictions, labeling requirements, and tariffs. At the very least, phone numbers and e-mail addresses can be obtained for people or organizations who can answer questions. The most reliable method is hands-on and physical research conducted by traveling to the expected import country to assess the market in person. Business acquaintances, exhibitions and fairs, domestic organizations, embassies, chambers of commerce, trade-related media, and traders’ advice facilities can be valuable resources. Based on the HS code of the exporting products, the practitioners should try to get the accurate information about tariffs, customs clearances, and other regulations and laws before proceeding with export activities. In the case of exporting to

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the United States, a valuable resource is the homepage of the International Trade Administration (ITA)—part of the United States Department of Commerce, from which firms can get useful information about current trading issues, the nation, specific industries, etc. The ITA is an organization created largely to support US industries in their trading activities, but in doing so, it has created a valuable source of information for anyone with plans to trade with the US. Another source of valuable information is the International Trade Commission (ITC) which has compiled a database of US tariffs. The ITC website shows actual records of exports to, and imports from the US, rates of trade increase and decrease annually, and the latest accumulated records by HS, SIC, and SITC. For example, you can find records of exports and imports of HS 6 in the US organized by price.

2.3.3

Credit Inquiry

International trade comes with the added difficulties of differences in language, customs, culture, and law, and therefore, it is often difficult to determine whether a potential trade partner will be faithful in honoring the agreement. Realizing only too late the fact that a chosen trade partner is immoral can often cost the trader unredeemable amounts of time and money to recover from the difficult situation. One of the methods of determining whether the deal will go through as planned is to run a credit inquiry. A credit inquiry is usually made focusing on three factors, namely the potential partner’s character, capital, and capacity: The first aspect to review is the potential partner’s character, the most difficult part of making an assessment of the partner’s credit. If a firm fails to properly determine the partner’s character, it can face detrimental results. Character refers to the sense of morality, faithfulness, reputation, and overall attitude of an individual or person representing the partnering firm. An exporter is recommended to review the partner’s character from the viewpoint of whether this is a real person with whom you could maintain a long-term and serious business relationship. The second aspect to review is the potential partner’s capital ability, which verifies whether or not the trader has enough funds to make the contracted payments. The importer does not have to be rich himself, but his company needs to have the ability to make payments through capital on hand, projected cash flows or borrowed money. If the importer has a poor credit rating, that is a sign that he has defaulted on payments before, and should raise a red flag. The third aspect to review is the potential partner’s capacity to activate the trade. This is a measure of the importer’s ability to successfully sell an exporter’s products. It is done by analyzing the company’s history, annual sales, the type of corporation (private or publically traded), experience, marketing rights and abilities, and balance sheet. It is important to make sure that the importer has successfully been growing and developing, or is equipped with sufficient capacity,

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as indicated by factual evidence. Trading with a company that files liquidation, for example, would not be very advantageous to anyone’s business. In obtaining this information, the importer himself might be the worst source. To ensure getting reliable information, an exporter needs to research the importer, enquire to his relating banks, business partners, and other references that can give insight into the company’s credibility or credit. Sometimes, special agencies such as Dun & Bradstreet Information Service can be used. If the potential importer is a publically traded company, it will be subject to stricter transparency rules and it will be easier to find financial details. Credit inquiries can be obtained through banks by using the method of a bank reference or a trade-related organization, which is called a trade reference. Of course, these organizations only provide the actual credit standing, and therefore, the other factors including capacity and character need to be measured separately.

2.4

Verification of Domestic Regulations

2.4.1

General

In preparation for customs clearance, it is basically required for the exporter to verify the Harmonized Commodity Description and Coding System (HS) code of the exported products, because public regulations on exported and imported products including customs clearance are imposed on the basis of the HS code of the traded goods. Developed by the World Customs Organization, the HS code is internationally standardized and offers an all-encompassing method to classify traded products. An HS number has six digits but can have more digits depending on the country. More than 98% of world trade markets use the HS code to determine customs tariffs, rules of origin, transport tariffs and statistics, and to monitor controlled goods such as narcotics, chemicals, weapons, ozone layer-depleting substances, and goods related to endangered species. Below are the domestic regulations to be verified prior to import and export of the specified products like the cosmetics, as the example to be applied in the business field.

2.4.2

Case of China as Importing Country

The import-relating domestic regulation has to be modified very often in accordance with the policy objectives for the import of cosmetic products, and so, in the real field, the practitioners should verify the concerned regulations very carefully in advance to the export and customs clearance.

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2.4.2.1 Chinese Domestic Regulations Concerning the Hygiene Supervision Over Cosmetics In order to strengthen the hygiene supervision over cosmetics, these regulations concerning the hygiene supervision over cosmetics have been enforced since 1990. It was consisted of general provisions, Hygiene Supervision over the Production of Cosmetics, Hygiene Supervision over Cosmetics Sales, the Organ for Hygiene Supervision over Cosmetics and its Duties, Penalty Provisions, Supplementary Provisions. Particularly, Chap. 3 (Hygiene Supervision over Cosmetics Sales) is carefully considered for exportation of cosmetic products to Chinese market. This kind of domestic regulation has to be modified very often in accordance with the policy objectives for the import of cosmetic products, and so, in the real field, the practitioners should verify the concerned regulations very carefully in advance to the export and customs clearance. This regulation is to be considered the example of such domestic regulation. 2.4.2.2 Provisions for the Acceptance of Application for Administrative License for Cosmetics In order to regulate acceptance of applications for the administrative license for cosmetics so as to ensure it will be carried out in an open, fair and just procedure, these provisions are formulated by the State Food and Drug Administration (SFDA). The Provisions for the Acceptance of Application for administrative License for Cosmetics have been in force since 2010. The following are the major content of the provision, which should be considered when the company tries to come into Chinese market with the cosmetic products. And we can divide these provisions into three parts: part 1(Article1-4), general provisions; part 2(Article5-20), acceptance of applications for the administrative license cosmetics; part 3(Article21-24), penalty. 2.4.2.3 Naming of Cosmetics The name of a cosmetics product shall usually consist of trademark, common name, and attribute name. And for naming of cosmetics, there are three principles to be followed: the naming of cosmetics shall conform to the provisions of relevant laws, regulations, rules, and normative documents of the state; the naming of cosmetics shall be simple, understandable and in line with the Chinese language customs; the naming of cosmetics shall not mislead or deceive consumers. If there is a name of specific raw materials or the words indicating the category of raw materials in the names of cosmetics, they shall be consistent with the ingredients of the cosmetics. Particularly for the Chinese name of imported cosmetics, it shall be given by the paraphrase method (priority), the transliteration method, or mixing with paraphrase and transliteration method and shall be correspond with its foreign name with the greatest extent.

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2.4.2.4 Guidelines on the Naming of Cosmetics For the guidelines on the naming of cosmetics, whether certain words and expressions are allowed to be used in the names of cosmetics shall be determined according to the context. Here, we will pay all attention to the words forbidden to be used or the meaning of words forbidden to be expressed as follows:

2.4.3

Case of Korea as Exporting Country

(1) Customs Regulation Even though the general obstacles are found when trying to enter into the importing countries with cosmetic products, the practitioners are required to take the necessary procedures when exporting from Korea. According to the Korea Customs Service, export customs from Korea are the domestic goods which are to be released to overseas. The goods to be exported must be checked to confirm whether they can be exported according to the External Trade Act and the related laws. As for the payment collection method, whether there are any restrictions according to the related laws such as the Foreign Exchange Law should be confirmed in advance. All goods which are to be exported must go through the export customs procedure at the customs. Export customs procedure refers to the procedure where the goods to be exported get the acceptance of declaration after declaring at the customs and get loaded onto the means of transportation which go back and forth between Korea and other countries. Those who want to export must declare exports to the customs collector in the jurisdiction and get the approval for the goods before they get loaded. Currently, the export declaration can be done through electronic data interchange (EDI) method. Also, the declaration method via the Internet speeds up the clearance in a speedy manner and the press materials such as the newspapers or catalog can go through the export customs through more simplified method by the simplified export declaration procedures. By principle, export goods skip the inspection process but when the computerized partial inspection according to the criminal standards, the inspection can be conducted in exceptional cases. When caught in violation of the illegal exports, violation of the marking of the country of origin and the intellectual property rights, you may subject to punishments according to the related laws such as the customs law. Therefore, a great caution must be exercised so that incidents like this will not occur.

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(2) Cosmetics exportations’ regulations In South Korea, the cosmetic regulatory system is founded on the Cosmetic Act which is the overarching regulation for cosmetics and the Ministry of Food and Drug Safety (MFDS) regulation. In South Korea, cosmetics are divided into two categories: general cosmetics and functional cosmetics. Functional cosmetics refer to products that aid in brightening skin, improving wrinkles in skin, tanning skin gently, or protecting skin from the sun’s ultraviolet radiation which are subject to more stringent evaluation than general cosmetics. To conduct commercial operations in Korean, under the cosmetic regulation, an enterprise intending to manufacture cosmetics shall be registered as a “manufacturer” while an enterprise that intends to import cosmetics shall be registered as a “marketing authorization holder”. For general cosmetics, manufacturers or importers completing registration with MFDS are permitted to manufacture/import and market the cosmetic products but are subject to post-market supervision. For functional cosmetics, both manufacturers and importers are required to undergo an evaluation on safety and efficacy of cosmetics and submit information necessary for such evaluation to MFDS. Only after getting approval, are manufacturers and importers of functional cosmetics permitted to manufacture or import. Before marketing the products, manufacturers and importers need to get approval again. Originally, all ingredients introduced to Korea for the first time that have not been designated or publicly notified as cosmetic ingredients are required to undergo an evaluation before manufacture or importation, but now (excepting sunscreen agents, preservatives, and colorants), new cosmetic ingredients can be used without any approvals from MFDS. In this case, manufacturers or importers are fully responsible for the safety.

2.5

Application to Business Field

2.5.1

Selection of Market and Items

The exporting company selects the proper items to be exported to the specifically selected areas through market research using the information from trade statistics or other concerned entities. At this stage, Dr. COFFEEXTRACT selects the several products as the strategic export items for Chinese market. These products are not just simple cosmetics but have the proper and scientific healthy effect to the skin. The exporting, herewith, company completes market research for the efficient promotion of exports to Chinese market making use of market research strategies

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and techniques. When exporters do market research, they can visit the targeted place physically or make use of second-hand information from international trade entities, and business-related media, including E-market place, databases, international trade bodies, countries’ economic newspapers, journals of commerce, etc. For the international business transaction to proceed successfully with reasonable profits, serious market research is needed to ensure that the item will have a high chance of success in its new markets. In the case of the cosmetic products, they were recognized by Korean citizens that they are good for their skin as well as their general health due to their environment-friendship and positive function. When the company comes to Chinese market as the new market, it can make use of its successful experience in Korean market by focusing on the products’ high quality in terms of function and qualified natural raw materials. In the stage of making market research, they are recommended to collect and analyze data and often make an agreement for a small shipment to “test the waters” before signing to a full-scale operation. This process of testing market is sometimes called a “pushcart.” The research will help to prove or disprove the theory that exportation of a particular product will be successful in its projected target market. “Target market” refers to the group of people who are targeted by the seller to be the main buyer(s). For example, the target market for high-priced, light-weight walking shoes, in general, are normally middle or elderly people, as they are the most likely to want to buy and use those products. Similarly, the cosmetic products would be attractive to the highly educated middle or elderly people, as they would generally be interested in pollution-free circumstances and health. Determining the target market is essential in ensuring that the products are sold in the proper stores, the proper departments, and marketed through media that will reach that particular group of consumers. If the research renders a positive decision, the exporter will move forward using the available business connections as far as possible that can help facilitate the business transaction, through which they proceed to the next stage of marketing. At this stage, the company selected China as the potentially proper market to export cosmetic products considering several factors derived from market research. Based on the market research, the exporter starts its marketing activities making use of trade and general portal website services, advertising agencies, out-posting, overseas chambers of commerce, general trading companies and agencies, etc. In China, advertising throughout-posting and off-line marketing have proved to be efficient; therefore, Dr. COFFEEXTRACT uses these methods, and then proceeds to the next stage.

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2.5.2

2 Overseas Market Research

Finding/Screening Counterparts

The exporter finds and screens the importer by searching companies, attending expositions, e-mailing and faxing potential customers, receiving inquires and replying to them, consulting export management firms, etc. The exporter can use the branches of trade companies, general trading companies and trade agencies, chamber of commerce, World Trade Center and its associations, expositions, sales promotion fairs, etc. In the case of China, for example, where reliability is regarded as very important in doing business, so utilizing existing business networks is likely to be a reliable choice, but if there are no current partners to work with, you can search for counterparts through trade directories of countries concerned, producer associations by item, or the proper chambers of commerce. At this stage, finding out the proper counterpart in China, the company makes use of the Trading Promotion Center of Yang Fu Economic Zone in China along with existing business and personal networks established by its consulting institute, the International Trade and Law Institute. Before an export manager makes a final choice, he or she is recommended to make a list of potential candidates and perform credit inquiries through credit inquiry agencies or other credit-related institutes in those companies’ country. When making a credit inquiry, one should, at least, be informed of the character, capital, and capacity of the importer at issue. The company tries to investigate the character, capital, capacity, country, currency, etc., through major businesses, branches of the export insurance corporation, credit guarantee funds, trade promotion agencies, export and import banks, etc., in addition to the networked contact supplied by the International Trade and Law Institute. Judging from the reports from the inquiring sources, the company screened Chinese Marine Trading Co., Ltd. as the potential buyer in China, considering the fact that it has been doing business very well for the past 35 years and enjoying a good reputation in its business fields.

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To find out the best importer in China, the company sent a letter to the Trade Promotion Center of Yang Fu Economic Zone, attaching the following company introduction.

Dr. COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

April 5, 2023 Trade Promotion Center Yang Fu Economic Zone Hainan Province Dear Manager, We are pleased to ask you to introduce the proper importer of our products from Korea as shown in the following table: COMPANY INTRODUCTION

COMPANY

Dr. COFFEEXTRACT

NAME COMPANY

1646, Yuseong-daero, Yuseong-gu, 509, Innobiz Park

ADDRESS

Daejeon, Korea

(Homepage) BUSINESS FIELD CONTACT

Production and commercial distribution of cosmetic products Name

Suyeon Lee

E-Mail

[email protected]

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2 Overseas Market Research POINT

Overseas Business

Dept.

Tel No.

82-42-863-51301

Fax No.

82-42-864-51301

Transactions

Title

manager COMPANY

INFORMATION

YEAR OF

2004

FOUNDATION NO. OF

100

EMPLOYEES FINANCIAL

Year

Capital (US$)

Sales Revenue (US$)

STATUS

2023

30,000,000

150,000,000

PATENT APPLICATION Product/Technology/Description

LUVIUS Premium-Gold Lifting Cream-50 DACAPO-Elegante Brightening Effect Softner PRODUCTS or TECHNOLOGY

DACAPO-Elegante Brightening Enrich Cream DACAPO-Infinite Time Essence DACAPO-Remember Triple Balance Essential Serum Miracle ATO-Aroma Moisture Body Wash Miracle ATO-Pure Moisture Cream Miracle AC-Red2 White Pore Serum

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The following is the reply from Yang Fu Economic Zone to the request to find the best importer for Dr. COFFEEXTRACT.

Yang Fu Economic Zone April 25, 2023 Dr. COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea Dear Ms. Lee, We received your letter on April 15, 20123, expressing your desire to find qualified importers who would be in a position of handling your products in China. We are pleased to inform you that the gist of your said letter will be inserted in the fourth-coming issue of our weekly bulletin, "The Chamber of Commerce News," for circulation to our members. Interested firms will contact you directly, and we also recommend a company, Chinese Marine Trading Co., Ltd., as a potential partner. We hope that this arrangement we have made will result in your developing satisfactory business relations in our country and assure you of our cooperation at all times.

Very truly yours, D. W. Pung/ Director

2.5.3

Making Business Proposals and Inquiries

Making trade inquiries is as important as credit verification in screening a final counterpart. A trade inquiry is a series of questions between an exporter and a potential importer, inquiring about the possibility of trade, asking for catalogs and product samples, and other general information about trade terms such as

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prices, transport options, and insurance requirements. Once a potential importer has passed potential importers’ credit check standards and is selected as the company with which the exporter wishes to do business, the exporter should submit a business proposal. This proposal will outline the exporter’s needs, likely be followed by negotiations, and ultimately (possibly) lead to an agreement. Most business proposals and inquiries will include the proposed details including items, transaction size, transaction area, company manual, and proposed main trade terms. When making such a business proposal, it is important to keep the other party’s interests of time and simplicity in mind. It is generally recommended to make the proposal with short concise sentences and only a few paragraphs. If the prospective business partner feels confused by the proposals, he will not be so convinced to do business with an inquirer. If the exporter is proposing to export a product which would newly be added to the prospective business partner’s current import lines, efforts should be made to point out potential advantages for the importer. Also, exporters should try to avoid exaggerations about their companies, because if the proposed company wishes to cut a business deal, they will certainly investigate the exporting company’s status. Vague descriptions should be avoided, and expressions should be limited to facts and certainties. The composer of the e-mail or letter needs to present him or herself as the potential importer/exporter to be chosen to do business with. A company’s accumulative experience in doing international business transactions will help to materialize any proposed business. If one is looking for chances to export, it is recommended to briefly summarize the products’ strong points in the new market, reflect specific potential-market research, and mention pricing and profit potential. In the proposal, likely inaccurate expressions such as “we offer the most qualitative products at the lowest prices in the industry” should be avoided. Normally, it is unnecessary to send product samples before the potential importer shows interest in a particular product. It is also recommended to stress the mutual benefits of working together. A properly written proposal should influence the potential importer to realize the potential profit and to pursue further talks and negotiations. If the potential buyer determines to do business with the exporter, then at that point the exporter can choose whether or not to select him to be the buyer of the selected items.

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After the exporter selects the potential buyer from the available sources, the exporter can invite the selected importer for the negotiation as follows:

Dr. COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea, ZIP:34054 May 1, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Gentlemen, Your company has been recommended to us by the coordinator working with Yang Fu Economic Zone as one of the large importers of environmentally friendly goods in China. We are writing to you with a keen desire to open an account with you. We have been established here for over ten years as one of the leading companies in Korea having produced and exported our environmental friendly cosmetic products and technologies to world markets since 2013. We have enjoyed a good reputation from domestic markets as well as from world markets due to the fact that all the technologies and products we have dealt in were all good for the end users and the enterprises and governments involved at the same time, because they have contributed to the human beings’ general health in the end as well as the skin health. Regarding the terms of settlement, it has been our basic policy to trade on an irrevocable letter of credit, under which we draw a draft at sight. Our banking reference is Woori Bank Daejeon branch, who will furnish you with all the information you desire. We are looking forward to your early and favorable reply. Yours very truly, Dr. COFFEEEXTRACT Suyeon Lee/Manager

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Accepting the invitation letter from the potential exporter, the potential importer can make inquiry to the referred bank as follows about the exporter’s credit standing.

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

May 2, 2023 Messrs. Woori Bank Daejeon branch Gentlemen, Your bank has been referred to us by Dr. COFFEEEXTRACT their recent proposal to open a new account with us. Should their business standing turn out unquestionable, we are prepared to accept their proposal? We would, therefore, be much obliged if you would give us such information as you may have or can secure for us regarding their financial standing and reliability.

We are particularly keen to know with which type of environmental goods they have mainly sold and to what their annual turn-over amounted on average for the last three or four years. And, if possible, please give us your candid opinion on their mode of doing business, willingness to meet obligations and general reputation they have enjoyed in your community. Any expense to be incurred in connection with this inquiry, please charge to our account. Your prompt attention will be much appreciated, and we assure you that your information will be held in strict confidence.

Sincerely yours,

Chinese Marine Trading Co., Ltd. Bruce Jin/Manager

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The bank would respond to the customer (potential buyer) about the credit standing of the potential exporter.

Woori Bank 26-8, JUNG-DONG, DONG-GU, DAEJEON, KOREA Tel: 042-253-8141 Fax: 0505-001-3025 May 6, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Gentlemen, We are pleased to report on the firm referred to in your letter of May 2 per below. Dr. COFFEEEXTRACT was established in 2004 as an exporter and importer of handling environm-entally friendly products, with a paid-up capital equivalent to US$30,000,000. The net worth at the end of last year exceeded the amount equivalent to US$150,000,000 about half of which is readily realizable. Their main lines are in trade of environmentally friendly products and technologies. Their business policy has been very active and they have many business connections both at home and abroad. They have maintained an account with us since 2005, always to our satisfaction and their latest financial statements show a very health condition. We are of opinion that they may be related as A1 and you would run the least risk in opening a connection with the firm. For this information, we would not like to accept any responsibility but we shall be pleased to be of any further service to you. The enclosed note shows the charges which we have paid on your behalf, for which we ask you to settle soon. Sincerely yours. Woori Bank Gil-Dong, Kim/Director

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Learning Assignments

1. Selecting the target market through making the comparative assessments of different markets divided into EU countries, African countries, Far East Asian countries, Middle East Asian countries, Central Asian countries, and American countries. This should focus on the most efficient enforcement of concluded contracts depending on the particular characteristics of the specified markets, including the specific business customs and behaviors. 2. Finding out the appropriate buyers, sending a circular letter, making an invitation to offer, and making an offer for the formation of contract. 3. Examination of the trade barriers that you have faced in pursuing international business transactions, or the potential trade barriers which are expected to be established in the export markets, making consideration of the specified characters of the potential export products. 4. Communications and negotiations with your counterpart to establish branch offices and subsidiaries abroad according to your plan to expand your selected items’ market, beginning from the stage of market research. After the communications and negotiations, you are free to choose them as the branch offices or subsidiaries, or just as your general business partner, considering the cost and benefit from the market as well as the characters of the selected goods.

Bibliography Carr I (2018) International trade law. Cavendish Publishing, 6th ed Fellmeth AX (2020) The law of international business transactions. West Fletcher I, Mistelis L, Cremona M (2001) Foundations and perspectives of international trade law. Sweet & Maxwell Honnold JO (2011) Sales transactions: domestic and international law. Foundation Press 4th ed Lee ES (2012) Management of international trade. Springer.

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Learning Objectives

As shown in the previous chapters, while all commercial transactions are accompanied by various kinds of risks, international business transactions increase additional risks to those incurred in domestic business transactions. Making the proper management of those risks is the essential issue to be solved for pursuing the successful business in the global market. The main purpose to make the international trade contract is to avoid and reduce such risks in proceeding with the business transactions. For them to do so, they should be familiar with the legal and contractual issues in making the trade contracts and try to make use of them for the successful business in the end. This chapter treats with the following: 1. Writing and formatting international trade contracts. 2. Defining and clarifying the relevant technical terms, including inquiries and invitations to contract, quotation, and offer, so as to give legal force to effective contract formation. 3. The importance and contractual function of unconditional and unqualified communication of acceptance. 4. The concept of contract by conduct compared with contract by expressed acceptance. 5. Newly established judicial trends reflecting the principle of “mirror image rule” in relation to the battle of forms.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_3

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3.1

Introduction

3.1.1

Concepts

(1) Contracts for Sale of Goods The sales contract for goods is a specific or general contract for sellers to transfer the ownership of goods to the specified buyer in return for a specified sum of money. The contract ensures the buyer his rights in securing the goods and ensures the seller his rights in collecting payment for those goods. Stipulations should be made to clearly define the goods to be traded by quantity, quality, and other aspects. If the details are not clearly defined, the importer could receive a shipment of goods very different from his expectations. (2) International Trade Contracts Essentially, there is no difference between an international trade contract and a typical domestic sales contract, the only variance being that the international trade contract specifies the locations of the contracting parties in separate countries. International business transactions are more complex in nature because they are subject to the laws of both contracting parties’ countries, making the task of contract implementation more difficult and often calling for dispute settlements. An “international sale of goods” is the prescribed term for such international business transactions dealing with goods, but trade in technology, services, finance, capital, and overseas construction also requires international transactions or license contracts. The international business contracts for such items other than physical goods are essentially similar to contracts for international sale of goods and are sometimes accompanied by contracts of carriage, insurance, and foreign exchange (or settlement), which are supplemental to international sale of goods contracts.

3.1.2

Legal Characteristics

(1) Remunerative Contracts A trade contract is a remunerative contract (or compensatory contract) including economic considerations for the certain implementation of contractual obligations such as the delivery of goods. The specified means of payment is normally currency, but occasionally commodities or other goods could also be used to settle the transaction.

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(2) Bilateral Contracts Bilateral contracts (where there is a trade of goods for something else, like commodities or money) are for the engagement of both parties concerned and require obligations to implement the agreement. Specifically, sellers are obligated to make delivery of the contracted goods, and buyers are obligated to make payments under the contract stipulations. In this sense, they are different from unilateral contracts which include making donations or paying rent unilaterally without being compensated. (3) Consensual Contracts The international sales contract is considered a “consensual contact,” meaning that both parties agree upon the terms and pledge to go forth in faithfully executing their respective contractual obligations. The contract ultimately comes to its conclusion through offer and acceptance, although the proceeding and details could be substantially complex. International business contracts may deal with very large sums of money, and each party will negotiate with the other party under consultation with its specialists in attempts to concede the least and gain the most from the deal. Some negotiations result in a contract to do business together, while many others end without agreement. All bilateral contracts that get signed are consensual contracts as well as remunerative. (4) Informal Contracts International trade contracts are considered informal contracts because they do not require any form of documentation to be completed. “Informal” even goes so far as to mean that these contracts do not have to be in writing, but instead they can be orally binding agreements. In the SGA and CISG, it is stated that trade contracts are made by oral or written consent, or by partially oral and partially written consent. In business transactions, even in the case of contracting with a trusted member of one’s supply chain, it is sensible to have proof of the concerned party’s contracted agreements through written and signed proposals to safeguard against unforeseen disputes.

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3.2

Conclusion of Contract

3.2.1

Offers

(1) Concepts The term “offer” is defined to be the statement intended by the offeror to induce a binding contract if it is duly accepted by the offeree.1 For a proper offer to be made, it is necessary for the essential elements of the contract to be clearly expressed in the communications exchanged by the parties.2 For example, in a contract for the sale of environment-friendly products, the description of the products inducing the scientific effect on human health, selling price, terms of payment, and terms of delivery including instructions for packing and invoicing, transportation and insurance should be expressed without ambiguity.3 (2) Invitation to Offer An offer made to many unspecified potential partners is not generally and technically an offer, but just an invitation to offer. An offer to only a single party is considered an offer. Since the invitation to offer, meaning an action to invite the other party to make an offer,4 is merely a proposal,5 an acceptance of such an invitation to offer does not constitute a contract. For the invitation to an offer to be concluded as an effective contract, there needs to be confirmation on the part of the offeror. The invitation to offer serves as an invitation for negotiations and may ultimately produce a potential trade relationship that will be mutually beneficial. Parties often seek trade partners through mailing catalogues and other forms of advertisement. If specifications of the transactions are not sufficiently stipulated in the marketing material, they are assumed to be negotiable, and an interested partner will make a counteroffer clarifying the specification. In making an invitation to offer, it is sensible to induce the other party’s interest in the negotiation by pointing out the distinguishing characteristics of the items to be offered. The other party is likely to respond positively to such an invitation when it can see the advantages of the potential transactions, which could

1

See Eun Sup Lee, supra note 138, at 39. Id. 3 Id at 40. 4 Id. 5 United Nations Convention on Contract for the International Sale of Goods, 1980, Art. 14.2 (“A Proposal other than one addressed to one or more specific persons is to be considered merely as an invitation to make offers, unless the contrary is clearly indicated by the person making the proposal”). 2

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be read from such invitations or other advertising materials. Considering these points, making the invitation to offer is an important step toward future potential transactions. (3) Firm Offer Offers are divided into firm offers and free offers. In the case of a free offer, the offeror can make changes or cancel at any time. Therefore, one submitting a firm offer must be sure that he is satisfied with the terms, while one submitting a free offer can simply be “testing the waters.” In Traditional Anglo-American law, an offer can be revoked until such time as it is accepted, except in the case where the offeree has paid “to keep the offer open,” which makes it an option. It can even be revoked if it is given as a “firm offer,” that is, if it states that the offeror will consider himself bound by it for a specified period of time.6 Other legal systems adopt a different—and less dogmatic—attitude to the firm offer by considering it binding in certain circumstances.7 For example, in the United States, a firm offer for the purchase or sale of goods given by a merchant in a signed and written statement is not revocable for lack of consideration.8 In the case of CISG on Contracts for the International Sale of Goods, a firm offer shall be binding; however, unlike in the case of the United States, it does not require that it is made by a merchant and in a signed and written statement.9

3.2.2

Special Offers

(1) Offer Without Engagement This kind of offer maintains a “cancelation clause,” meaning that the terms are completely changeable just like a free offer. However, an agreement can be reached when the acceptance from the offeree is finally confirmed by the offeror, in which it functions like a firm offer. In the case of offer without engagement, offered prices can change according to market fluctuations or other reasons. This offer is often used for the commercial transaction of commodities that are subject to severe price fluctuations such as natural resources.

6

See Eun Sup Lee, supra note 138, at 40. Id. 8 Uniform Commercial Code (UCC) § 2–205. 9 See Eun Sup Lee, supra note 138, at 41. 7

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(2) Offer Subject to Being Unsold When the offeror makes an offer subject to being unsold, even if the offer is accepted, the agreement can be reached only if stock unsold remains, which is called an “offer subject to prior sale.” This offer can be used to sell leftover stock and serves as a safeguard against being stuck with unsellable stock. (3) Offer on Approval An offer on approval is made when the offeror sends goods with an offer to the potential partner under the condition that if the offeree wants to buy the goods after reviewing the terms he may make payment to get the goods, and, on the other hand, if he does not want to engage in commerce, the goods may be returned to the offeror. This offer can be used if the offeror tries to sell newly developed products or poorly selling products directly to end consumers. (4) Offer on Sale or Return An offer on sale or return is used when the offeror sends a certain amount of goods under an offer to the offeree to sell the goods and allows him to return the unsold goods. Publishers in America use this offer often when they try to sell books to bookstores. This offer can effectively be used if the offeror wants to sell newly developed products or poorly selling products directly to distributors. (5) Sub-counteroffer This agreement is made with the offeror’s final confirmation, not just with the offeree’s acceptance. This is the same as a free offer in that it requires the offeror’s final confirmation, but is also the same as a firm offer in that it cannot be changed or canceled at the offeror’s discretion.

3.2.3

Counteroffers

If the offeree is interested in the trade terms presented by the offeror, he may return an offer of his own with modifications (if necessary) to fit his needs. These modifications to the initial offer are of effect, and the original offer is no longer effective. Essentially, the offeror and the offeree switch roles respectively through such modification. It is legally clear that the modifications to the original offer do not constitute acceptance, but merely constitute another newly made offer, and more serious attention should be paid to the counterpart’s counteroffer to proceed in doing business together. Counteroffers (negotiations) continue until the two parties come to an agreement or realize that they will not be able to reach a satisfactory agreement.

3.2 Conclusion of Contract

3.2.4

69

Withdrawal/Cancelation

(1) Validity Period An offeror is often indicated as “the master of the offer,” which means that offerors have the power to determine the terms and conditions under which they are to be subject to the binding contract.10 An offer should be as specific as possible in stating the period of time for which it is valid.11 Offers that fail to provide a specific time for acceptance are essentially valid for a reasonable period of time, which should be clarified depending on the actual situation.12 The “receipt theory” is generally adopted as the standard by which to determine an offer’s validity.13 (2) Withdrawal An offer (even in the case of a firm offer) can be withdrawn if the declaration of withdrawal arrives with the offeree before acceptance. (3) Cancelation/Revocation In the situation where the validity (response period) of the offer is not stipulated, the offer can be canceled by making sure that the offeree receives the cancelation letter before the initial offer is accepted.14 On the other hand, if the offer states an expiration date on the offer, the offer cannot be canceled before that date.15

3.2.5

Acceptance

1. Acceptance for Formation of Contract (1) Acceptance An acceptance is defined as “a manifestation of assent to the terms [of the offer] made by the offeree in the manner invited or required by the offer.”16 The acceptance is made unconditional and unqualified to the original terms of offer of the

10

See Eun Sup Lee, supra note 138, at 42. Id. 12 Id. at 42. 13 United Nations Convertion on Contracts for the International Sale of Goods, (CISG), 1980, Art. 15.1. 14 Id. at Art. 16.1. 15 Id, at Art. 16.2. 16 See id, at Art. 43. 11

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offeror. It will lose effect if it attempts to modify the terms of the offer or to add new terms, as in the case of conditional acceptance.17 Conditional acceptance, contrary to acceptance, means that the offeree agrees with the essential part of the offer and agrees to do business with the offeror if certain changes are made or newly suggested requirements are satisfied. Acceptance accompanied by a request exemplifies conditional acceptance, which may be stipulated in the following terms: “We accepted your offer dated May 10, 2012, subject to the condition of shipment to be made by the end of October 2012.” If the original terms are modified or augmented by new terms as with the case of conditional acceptance, the resulting documented communication will be a counteroffer and therefore a rejection of the original offer and a newly made offer.18 If the original offeror receives a qualified acceptance and does not express consent, acceptance is considered as not having been made.19 In judicially determining whether an offeree accepted an offer and created a contract or not, a court will look for evidence of three factors, namely the offeree’s intention to enter into the contract, the offeree’s acceptance on the original terms proposed by the offeror, and the offeree’s communication of acceptance to the offeror.20 Acceptance cannot change the original terms of the offer in any case

The following case is about the well-established elementary principle that acceptance must correspond with the offer and must be clear and unqualified and would lose the effect as the acceptance if it attempts to vary the terms of the offer or to add new terms. Case21 Catchphrases: Acceptance, reinsurance contract, run off insurance treaty, letters between brokers and defendants, whether defendants’ reply an acceptance or a counteroffer, whether defendants estopped from denying liability Abstract: O reinsured L’s liability as insurer under a whole account aggregate excess of loss reinsurance treaty. Following an explosion of asbestos-related claims in the USA, machinery known as the “Wellington Agreement” was established to short circuit the resulting disputes. As a consequence, a large number of interinsurer actions were compromised and insurers became

17

See id. See id. 19 Id. 20 Id. 21 Lark v Outhwaite 1991 WL 839,105 [1991] 2 Lloyd’s Rep. 132 [1991] 2 Lloyd’s Rep. 132. http://swarb.co.uk/lark-v-outhwaite-1991/. 18

3.2 Conclusion of Contract

obliged to make payments for which they would not have been liable under the original insurance policies. O and L both entered into the Agreement. L claimed that subsequent correspondence between the parties constituted a variation of their treaty by which O undertook to indemnify L against all payments made by L under the Wellington Agreement. L claimed in the alternative that O was estopped from denying liability. Held, rejecting L’s assertions that (1) O’s reply to L in the correspondence relied upon what was a counteroffer, and not an acceptance of L’s offer, since the words used by O did not correspond with those used by L; and (2) L’s conduct was not influenced by O’s reply, and L’s case on estoppel therefore failed. Coram: Hirst J The plaintiff asserted an intention to create legal relations but there was evidence from his agent which unambiguously showed that subjectively he did not have any such intention. Held: The claim failed. Though the test for whether a promise was intended to have legal consequences was primarily objective, the court should not be obliged to ignore entirely evidence of subjective intention. For an estoppel to be effective, the promise must be clear and unequivocal. Hirst J said: “The principles are elementary and very well-established. The acceptance must correspond with the offer and must be clear and unqualified and would fail to take effect if it attempts to vary the terms of the offer or to add new terms. On the other hand, statements which are not intended to vary the terms of the offer or to add new terms do not vitiate the acceptance.” “An act which is wholly motivated by factors other than the existence of an offer cannot in law amount to an acceptance.” This case is cited by: • Cited-Persimmon Homes (South Coast) Ltd-v-Hall Aggregates (South Coast) Ltd and Another. • The parties had agreed for the sale of land under an option agreement. The builder purchasers now sought to exercise rights to adjust the price downwards. • Held: The provisions had been intended and had achieved a prompt and binding settlement. • Cited-Dresdner Kleinwort Ltd and Another -v- Attrill and Others. • The bank appealed against judgment against it on claims by former senior employees for contractual discretionary bonuses. • Held: The appeal failed. The bank’s unilateral promise was made within the context of an existing employment relationship to.

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(2) Intention to Accept In determining the effective acceptance of an offer, the offeree’s actual intention to enter into a contract,22 the terms of the original offer communicated to him from the offeror should be considered. However, it is sometimes difficult to clarify legitimate acceptance due to its ambiguous expression. For clarity in determining the legitimate acceptance in reaching an effective contract, it is sensible for the offeror to specify the acceptance method for an effective contract in his offer.23 In indicating acceptance, the offeree must comply with the specified method of acceptance for an effective contract to be concluded.24 (3) Acceptance on Original Terms According to the traditionally established basic principles of contract law, broadly known as the “mirror image” rule, an effective acceptance should be made exactly according to the original terms of the offer made by the offeror.25 Any attempts made by offerees to modify the original terms of the offer or add new terms to it are not considered an acceptance but a counteroffer,26 which is interpreted to be a newly suggested offer rejecting the original offer. The strict “mirror image” rule, however, has judicially changed in a more liberal direction by being interpreted to allow only material modifications to be considered as an implied rejection of the originally made offer.27 However, for practical purposes it is necessary for the offeree to be careful to remain in compliance with the terms of the original offer in indicating acceptance for a binding contract.28 (4) Communication of Acceptance An effective contract is generally made when acceptance is communicated to the offeror. Silence, accordingly, cannot be treated as acceptance even where the offer so stipulates unless there is “course of dealing” between the parties or where circumstances give rise to an estoppels.29 In determining where a contract is concluded, the place at which the acceptance is to be communicated is generally recognized as the place that the contract is made.30 “Communication” is a term of art which means that the addressee must

22

See Eun Sup Lee, supra note 138, at 43. Id, at 44. 24 See id. 25 See id. 26 Id. 27 Id. 28 Id. 29 See id. 30 See id, at 45. 23

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have been able to take notice of the statement at issue.31 The statement is regarded to be duly communicated to the addressee if it has been received by the addressee, even if for certain reasons he has not read it, for example, because of a systematic problem in his internal office.32 2. Approval of Modification of Offer There may be specific cases in which acceptance of the offer is actually intended by the offeree, but changes have been made to the offer to suit the party’s needs.33 In such a case, if the reply states that the party intends to accept the offer and there are very few minor changes that do not materially modify the originally made offer, it is practically considered acceptance according to the “modified mirror image rule.” Major differences such as price, quality, quantity, delivery site and time, and major rights and obligations are too important to be considered trivial changes and are treated as counteroffers required to be further negotiated. (1) Delay of Acceptance If acceptance is delayed, the acceptance is only valid if the offeror states that it is still valid,34 because the delayed acceptance is essentially considered a new offer. (2) Partial Acceptance Since partial acceptance of the terms of the original offer, for example, the acceptance of only some parts of the quantities specified in the offer, would be inconsistent with the “mirror image rule,” it would not be considered a valid form of acceptance under the common law system, but it would be considered a valid form of acceptance of the terms of offer which are commonly recognized by each party under the civil law system.35 (3) Acceptance of Subcontract Offer A subcontract needs the offeror’s final confirmation if it is to form a binding contract. Acceptance itself in such a case does not constitute a contract.

31

Id. See id, at 46. 33 CISG, 1980, Art. 19 Formulation of reservations. 34 Id. at Art. 20. 35 See Eun Sup Lee, supra note 138, at 46. 32

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3. Cancelation When dispatch theory is applied, if the cancelation notice arrives before or when an acceptance notice arrives with the offeror, the cancelation takes precedence and the contract is no longer valid.36

3.3

Performance of Contract

3.3.1

Delivery of Goods

If a specific site has been agreed upon for delivery, it must take place at that location unless both parties otherwise mutually agree to another location. If a specific delivery site had not been determined, the following rules apply: ➀ In case of delivery through multimodal transportation, goods should be delivered to the first carrier. ➁ If the parties know that the goods are in a specific site, or are manufactured or produced in a specific site while making a contract, delivery of the goods should be at the buyer’s disposal. If a delivery site is not specified, it generally means that goods should be delivered at the choice of the buyer. ➂ In other cases, goods should be delivered to the buyer’s place of business.37 Meanwhile, INCOTERMS® 2020 provides delivery methods for goods differently according to the trade terms in use. For FOB, CFR, and CIF, goods are delivered through the ship’s rail at the port of shipment in the exporting country. For FCA, CPT, and CIP, goods are delivered to named carriers or a freight forwarder. For DAT, DAP, and DDP, goods should be at the buyer’s disposal at the named place in the importing country. Regarding the delivery time of goods, the following apply: ➀ If the delivery time is specified to a particular month, day, and year, goods should be delivered on that designated date. ➁ If the delivery time is specified as a period of time, goods should be delivered within the allotted period. ➂ If the

36

CISG, 1980, Art. 22. A state may, when signing, ratifying, accepting, approving or acceding to a treaty, formulate a reservation unless: (a) the reservation is prohibited by the treaty; (b) the treaty provides that only specified reservations, which do not include the reservation in question, may be made; or (c) in cases not failing under subparagraphs (a) and (b), the reservation is incompatible with the object and purpose of the treaty. 37 Id. Art. 31–34.

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date or period of delivery is not specified or cannot be confirmed, goods could be delivered within a “reasonable” period of time after the formation of the contract.38 If goods are not delivered on the date or within the period of time determined in the contract, the buyer can cancel the deal and force the seller to cover damages incurred in the process. On the other hand, if goods are delivered before the date agreed upon, the buyer may or may not accept the delivered goods at that time.39 In some circumstances, it would make sense for the buyer to accept the goods early, but early delivery can also cause problems in terms of warehousing and other logistics if delivery is not prepared for.40

3.3.2

Payment

When “cash with order” (CWO) base, advanced remittance base (T/T base), packing letter of credit (red clause L/C), or extended letter of credit is used, payment in advance is required. In the case of “cash on delivery” (COD), “cash against delivery” (CAD), “document against payment” (D/P), usance base, open account base, current account base, or escrow account base (impound account base), a deferred payment is required within a certain period of time after the delivery of goods.

3.4

Breach of Contract

3.4.1

Concepts

Common law defines a breach of contract as non-performance of contract, when either party does not perform all contractually agreed upon factors, without any due reason after formation of the contract. A fundamental breach of contract refers to instances which deprive a party of the rights it expects to have based on the contract. If a contract was violated from the start of the performance of obligation and is a willful (not negligent) breach, it is considered a fundamental breach. If, however, the party in breach did not foresee the results as a consequence of its actions, it cannot be considered a fundamental breach.41 Fundamental Breach of Contract

The contract parties in international trade should always try not to be in breach of the contract in making the strategic risk management of the transactions. In

38

Id. Art. 33. Id. 40 Id. 41 Id. Art. 25. 39

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particular, under the CISG rule, when the party to the contract is in breach of the fundamental performance of its obligations under the contract, he cannot seek the remedy from the other party’s breach of non-competition agreement under the contract. This is because that the party is likely to suffer irreparable harm by its own fundamental breach of the contract. I. Procedural Background42 Plaintiff Shuttle Packaging Systems, L.L.C. (“Plaintiff”) filed motions for a temporary restraining order and preliminary injunction against Defendants Jacob Tsonakis, INA S.A. (“INA”), and INA Plastics Corp. (“INA Plastics”) on October 24, 2001. By Order of October 25, 2001, the Court denied the Motion for Temporary Restraining Order on the ground that Plaintiff had not shown that it was likely to sustain irreparable harm before the Motion for Preliminary Injunction could be heard. Due to scheduling problems, the Motion for Preliminary Injunction for hearing was later scheduled for December 11, 2001, at 2:30 p.m. Briefing of the Motion was somewhat delayed owing to the fact that Defendant INA is a Greek corporation with its principal place of business in Athens, Greece. II. Factual Background Plaintiff agreed to a purchase agreement with defendants for the purchase of thermoforming line equipment for the manufacture of plastic gardening pots together with the technology and assistance to use the equipment. The contract also included other terms relating to payment schedules, non-competition, warranties, notices, expenses, interest, and an integration clause. The parties then entered into a non-competition agreement which contained various covenants of the seller not to engage in selling in its equipment and processes within the “Restricted Area,” not to disclose its technical manufacturing processes to others, and not to disclose or use trade information and customer lists of the buyer. The restricted area was not defined specifically in the contract. Although the contract did not specify the law applicable to the purchase of goods, it did state that the non-competition agreement was to be enforced in accordance with the laws of the state of Michigan.

42

Case 578: CISG 8; 9; 25; 29; 38; 39; 64; 71–73 U.S. District Court, Western District of Michigan, Southern Division. No. 1:01-CV-691 December 17, 2001 Shuttle Packaging Systems, L.L.C. v. Jacob Tsonakis, INA S.A and INA Plastics Corporation Published in English: 2001 U.S. Dist. Lexis 21,630; 2001 WL 34,046,276 (W.D.Mich.); http://cisgw3.law.pace.edu/cases/011 217u1.html.

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Plaintiff began to experience complications with the equipment and alleged that it failed to conform to Plaintiff’s specifications and industry standards. Plaintiff alleged negligent operation of the machinery on the part of the defendant. After the Plaintiff unilaterally suspended payment for the goods, defendant began to compete in the market for distribution of plastic gardening pots, which constituted an alleged violation of the non-competition agreement. Plaintiff seeks damages for breach of contract and violation of the non-competition agreement. In the motion before the Court, Plaintiff sought to restrain the defendant from selling pots in the North American market pending the outcome of the case. III. Legal Analysis In reviewing a preliminary injunction motion under Federal Rule of Civil Procedure 65, the Court was required to consider four factors: (1) Plaintiff’s likelihood of success on the merits; (2) the irreparable harm that could result to Plaintiff if the injunction is not issued; (3) the possibility of substantial harm to others caused by the requested injunction; and (4) the impact on the public interest. Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992); Performance Unlimited v. Questar Publishers, Inc., 52 F.3d 1373 (6th Cir. 1995). The evaluation allows the factors to be balanced and focuses on all four factors—rather than any particular factor. In re De Lorean Motor Co., 755 F.2d 1223, 1228-30 (6th Cir. 1985). A. Likelihood of Success In a preliminary assessment, the court first ruled that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), 19 I.L.M. 671 (May 1980), governed the controversy except for the issue of the enforcement of the non-competition agreement. As the non-competitions agreement specifies the application of Michigan law, the Court held that the law of Michigan would apply to determine liability under the non-competition agreement. B. Likelihood of Success In a preliminary assessment, the court first ruled that the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), 19 I.L.M. 671 (May 1980), governed the controversy except for the issue of the enforcement of the non-competition agreement. As the non-competitions agreement specifies the application of Michigan law, the Court held that the law of Michigan would apply to determine liability under the non-competition agreement.

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The Court applied the Convention when rejecting several arguments made by the defendants. In response to the defense that there was no consideration for the non-competition agreement, the Court held that contract modifications are enforceable without regard to consideration under Art. 29 of CISG; Michael Van Alstine, 37 Va. J. Int. Law 1 & n.47 (Fall 1996) (reaching this conclusion based on the U.N. Secretariat’s Commentary on the Draft Convention, U.N. Doc. A/Conf. 97/5 (1979)). In response to the argument that the territory covered by the noncompetition agreement was not sufficiently defined, the Court applied the Convention’s rule on the meaning of the parties’ statements (Art. 8 CISG) and course of dealing (Art. 9 CISG) to interpret the agreement as sufficiently definite. CISG, Articles 8 and 9; MCC-Marble Ceramic Center, Inc. v. Ceramica Nuova d’ Agostino, S.p.A., 144 F.3d 1384, 1387-1391 (11th Cir. 1998). The Court held that, since the parol evidence rule does not apply to contracts under CISG, the geographic application of the non-competition agreement should be interpreted based on the subjective intent of the parties and based on their prior and subsequent statements and conduct. It then concluded that the “restricted area” meant all North America. In response to the defendant’s argument that they were not bound by the non-competition agreement because the Plaintiff had breached the sales transaction first by failing to duly notify the defendant of the alleged nonconformities (Arts. 38, 39 CISG), the Court found that notice was timely because the equipment was unique, complicated, delivered in installments and subject to training and ongoing repairs. The Court however concluded that Plaintiff had committed a fundamental breach by failing to make agreed progress payments under Art. 25 CISG. See Delchi Carrier v. Rotorex Corp., 71 F.3d 1024, 1028 (2nd Cir. 1995) (discussing definition). The Court also found that the alleged non-conformities in the equipment did not constitute a constitute a fundamental breach by the defendants under Art. 49 CISG, which would have entitled Plaintiff to avoid the contract. The Court found that on the contrary, the non-payment for the goods on the part of the Plaintiff did constitute a fundamental breach, thus allowing defendants to avoid the contract of sale and non-competition agreement or to suspend their obligations under these agreements pursuant to Arts. 64, 71-73 CISG. As such, the Court concludes that Plaintiff is unlikely to succeed on the merits. C. Irreparable Harm to Plaintiff Because the Plaintiff had, most likely, committed a fundamental breach of the contract by non-payment, it has also most likely surrendered its right to seek enforcement of the non-competition agreement. As such, the Court does

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not find that Plaintiff is likely to suffer irreparable harm because of Plaintiff’s own fundamental non-performance of its duties under the contract. D. Harm to Others Since the Plaintiff has, most likely, wrongfully failed to pay amounts due under the contract, the defendants should not be expected to honor obligations for which they have not been paid. As such, the Court determines that this factor disfavors granting relief. E. Public Interest The public’s interest is best supported by a resolution which would cause both the parties to manufacture pots in the market pending the resolution of this suit. This is particularly true since the Plaintiff’s manufacturing abilities have proven suspect such that the market might be jeopardized by licensing the market solely to Plaintiff—a producer who operates its manufacturing on a shoestring budget. Although this resolution might threaten its longterm viability, it seems apparent that there are ample threats to Plaintiff’s long-term viability even absent denial of this preliminary injunction motion. IV. Conclusion The Court denied the Plaintiff’s motion for preliminary injunction. When the parties make the contract, it is advisable for them to specify in detail what qualifies as a fundamental breach. This can prevent any potential problems that might otherwise be caused due to a breach of contract. There is no standard period of time given for payment of damages resulting from a breach of contract, so this is another aspect that should be outlined clearly before any contract is signed. The breach of the non-competition agreement which lists the payment of the purchase price under the purchase agreement can be interpreted to be the fundamental breach of the purchase agreement, in specific circumstances

In the following case, one of the main issues is, under the CISG, whether the consideration of the non-competition agreement which lists the payment of the purchase price under the purchase agreement is considered to be existed or not, when in the original purchase contract, the non-competition term did not include the specific terms for non-competition agreement. In the case, it is shown that, in such case, the non-competition agreement is made part and parcel with the main purchase agreement and assumed that the consideration

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for the non-competition agreement is the consideration for the purchase agreement. Therefore, the non-payment by the buyer, arguably due to the invalidity of the non-competition agreement, is interpreted as the fundamental breach of the contract under the CISG. I. Procedural Background43 Plaintiff Shuttle Packaging Systems, L.L.C. (“Plaintiff”) filed this action against Defendants Jacob Tsonakis, INA S.A. (“INA”), and INA Plastics Corp. (“INA Plastics”) on October 24, 2001. Plaintiff’s sole member is Calvin Diller, who is a citizen of Michigan. This decision refers in many parts to East Jordan Plastics, Inc. (“EJP”) located in East Jordan Michigan, which company is related to Plaintiff by its ownership and operation. II. Factual Background A. Allegations of Complaint and Answer Plaintiff’s Verified Complaint alleges that on November 1, 2000, it agreed to a purchase agreement with defendants. Plaintiff alleges that under the purchase agreement defendants were required to supply thermoforming line equipment for the manufacture of plastic gardening pots together with the technology and assistance to use the equipment. The equipment included a “double line” having an annual output capacity of 1,800,000 lbs. and a “trade gallon line” having an annual output capacity of 3,270,000 lbs. The Contract also included other terms relating to payment schedules, non-competition, warranties, notices, expenses, interest, and an integration clause. The noncompetition term did not include the specific terms for non-competition, but required the further execution of a non-competition agreement. The parties entered into a non-competition agreement which contained various covenants of the seller not to engage in selling its equipment and processes within the “Restricted Area,” not to disclose its technical manufacturing processes to others, and not to disclose or use trade information and customer lists of the buyer. The non-competition agreement contained no covenants for the buyer, but listed the payment of the purchase price under the purchase agreement as the consideration.

43

Shuttle Packaging Systems, L.L.C. v. Jacob Tsonakis, Ina. S.A. and Ina Plastics Corporation No. 1:01-CV-691 United States 17 December 2001 Federal District Court [Michigan] http://cisgw3. law.pace.edu/cases/011217u1.html.

3.4 Breach of Contract

The “Restricted Area” was defined as “any jurisdiction throughout the world where the Company is, or in which seller has reason to know the Company expects to engage in, the Business. The jurisdictions included in the Restricted Area as of the date of this Agreement are listed on Schedule I hereto.” No Schedule I was attached to the document. Plaintiff interprets the “Restricted Area” as North America. The non-competition agreement also stated that it was to be interpreted and enforced in accordance with the laws of the State of Michigan. Plaintiff’s Complaint is stated in three state law counts, each premised on diversity jurisdiction. Defendants have also answered the Complaint. The Answer contests most of the factual allegations, but admits jurisdiction and venue. B. Plaintiff’s Affidavits and Exhibits Plaintiff’s Complaint was verified by Calvin Diller, the President and CEO for Plaintiff. Plaintiff has filed other affidavits, including the affidavits of Gary Gurizzian (CFO for Plaintiff and EJP Financial Projects Manager), Mark Lercel (EJP manufacturing engineer), Wayne DeCamp (Director of Manufacturing for Plaintiff), and Alan Druskin (EJP Vice President of Marketing). Gurizzian states in his affidavit that Jacob Tsonakis (President of INA), made representations to him, Calvin Diller and Al Druskin concerning the plastic technology manufacturing equipment sold by his company in July 2000. Gurizzian further states that EJP then provided a loan or advance of funds of $600,000 with the idea that the parties, EJP and INA, would form a joint venture. The parties eventually settled on a purchase agreement for the equipment instead of a joint venture. At the time of the purchase agreement, a contract term requiring non-competition was critical to Plaintiff. Plaintiff has made payments on the equipment consistent with the payment schedule in the contract. Upon double-line delivery, Plaintiff discovered that the equipment had been damaged in shipping. These circumstances required Plaintiff to order pots from INA for sale to its customers instead of manufacturing the pots itself. Due to constant failure of the equipment, Plaintiff suspended payment to INA. Mark Lercel has served as a consultant for Plaintiff relating to the performance of the purchased equipment. In his Affidavit, Lercel catalogs a long list of problems concerning the equipment and training. Like Lercel, DeCamp provides a catalog of the problems experienced by Plaintiff with the equipment. This catalog, for the most part, reiterates the problems described by Lercel in his Affidavit. Alan Druskin also manages the marketing of Plaintiff. Druskin worked with Jacob Tsonakis to solicit sales for Plaintiff. Druskin claims “on information and belief” that Tsonakis solicited

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customers of Plaintiff for his own business and made his products available to these customers at prices which undercut Plaintiff’s prices. According to Druskin, he has been told by his customers that they will buy from INA instead of Plaintiff because of the cost difference. C. Defendants’ Affidavit and Exhibits Defendants have filed the Affidavit of Jacob Tsonakis, which includes some attachments. The Affidavit describes events in a similar manner to Plaintiff’s representatives’ descriptions. However, one important difference is that defendant indicates that he engaged in tele-facsimile correspondence with Calvin Diller on September 28, 2000, in which he indicated that the lines might not be completed until January 15, 2001. Tsonakis’ version in the Affidavit includes Schedule A and C. Most notably Tsonakis attaches a copy of the purchase agreement which he approved, initialed, and telefaxed to Plaintiff. Tsonakis asserts that Plaintiffs’ version of the Agreement, which included replacement pages, was not approved by him as indicated by his failure to initial the replacement pages. Tsonakis also asserts that there never was agreement as to a Schedule B nor as to a Schedule D (which was not created at that time). The Affidavit describes in other paragraphs the approval of the noncompetition agreement. According to Tsonakis, he inquired of Gurizzian of the unpaid down payment of $450,000. Gurizzian told him that the balance would not be paid until he agreed to the terms of a non-competition agreement. Tsonakis then faxed a signed and initialed copy to Gurizzian. The copy referenced did not include a Schedule I which described the jurisdictions referenced in the agreement. After receiving the balance of the down payment from Plaintiff, Tsonakis turned over his customers in the United States to Plaintiff. The Affidavit also provides Tsonakis’ version of events relating to the delivery of the trade gallon line in the Forest City plant. Other paragraphs also relate to the installation of the trade gallon line. Certain accessory equipment was not part of the contract and Tsonakis advised Plaintiff of this upon his arrival to install the equipment. The Affidavit relates to the negligent operation of the trade gallon line, which Tsonakis claims to have witnessed during his assistance at the plant. Tsonakis also explained in that Plaintiff had some production problems because its workers ignored his production engineer’s advice to use some virgin material in mixtures and to avoid contaminants. In the Affidavit, Tsonakis includes in his various statements relating to training references to e-mail by employees of Plaintiff, which e-mail acknowledge the adequacy of the training. Tsonakis’ also claimed that Plaintiff wrongly deducted repair costs for the machinery from contract payments

3.4 Breach of Contract

due to his company. Additionally, Tsonakis claims that Plaintiff, after the last equipment line, stopped making the progress payments required under the Purchase Agreement despite his many requests for payment. Furthermore, Tsonakis points out that this lawsuit was filed at the deadline for Plaintiff to respond to a letter from the Trade Commissioner relating to the non-payment by Plaintiff. The remainder of the Tsonakis’ Affidavit seeks to discount the statements made by Plaintiff’s affiants for various reasons including that the statements made were untrue, that the complaints were not premised on duties of INA under the Purchase Agreement, and that the problems were caused by negligence of Plaintiff or third parties. D. Defendants’ Supplementary Evidence Defendants have filed supplementary evidence for the purpose of establishing that performance payments were due on the 11 centimeter line. Defendants have also filed the depositions of Plaintiff’s affiants for the purpose of cross-examining and testing their testimony. An examination of the SPS performance documents (and e-mail documents) generally shows that the 11 centimeter line had been twice successfully tested by Plaintiff. The apparent standard was performance meeting or exceeding the performance of the trade gallon lines, which standard had been previously approved in an e-mail by Gary Gurizzian. E. Hearing Evidence Parties to this matter were provided an opportunity to present additional evidence and testimony at hearing. However, no witnesses were called at hearing. In fact, the only additional evidence consisted of four exhibits, two by plaintiff and two by defendants. III. Legal Analysis In reviewing a preliminary injunction motion under Federal Rule of Civil Procedure 65, this Court is required to consider four factors. This evaluation allows the factors to be balanced and focuses on all four factors. A. Likelihood of Success The Court’s preliminary assessment is that this controversy is governed by the United Nations Convention on Contracts for the International Sale of Goods (“CISG”) with one exception. The exception is the legal question of the enforcement of the non-competition agreement, which is governed

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by Michigan law under the parties’ forum selection clause. The Court must assess whether defendants now have a legal right to compete for this business in North America. One argument made by defendants is that the noncompetition agreement is ineffective because of lack of consideration for the agreement. This argument fails. First of all, the non-competition agreement was made part and parcel with the purchase agreement and assumed that the consideration for the non-competition agreement was the consideration for the purchase agreement. Second, under the Convention, a contract for the sale of goods may be modified without consideration for the modification. Another argument made by defendant is that the non-competition agreement is unenforceable because the document failed to specify the jurisdictions in which seller was required not to compete. Given the wording of the Convention, federal courts have determined that international sales agreements are to be interpreted based on the “subjective intent” of the parties based on their prior and subsequent statements and conduct. In this case, the statements and conduct of the parties reveal an intent to require defendants not to compete as to the United States’ market. As such, the failure to specify the precise jurisdiction does not render the agreement invalid. Defendants also make the related argument that the agreement is invalid because the extent of the non-competition clause was too broad. Under Michigan law, a non-competition clause relating to the sale of a business is generally enforceable provided that it is reasonable in scope, considering the duration, product, and geography of the restriction. Defendants have scarcely argued this point and have made no real showing that the case law. Defendants have also made equitable arguments based upon laches and unclean hands. There has been no extensive delay in the filing of this suit and the Plaintiff’s alleged misconduct, principally non-payment, is not such as to warrant the label of “unclean hands.” Defendants’ final argument relating to likelihood of success is that the Plaintiff committed the first material breach of the contract and, as such, Defendants are no longer bound by the terms of the non-competition agreement. Defendants also make a related argument that because Plaintiff delayed in complaining about the performance of the equipment, it is not entitled to suspend payment of money owed under the purchase agreement. This related argument fails. The wording of the Convention in Articles 38 and 39 reveals an intent that buyers examine goods promptly and give notice of defects to sellers promptly. However, it is also clear from the statute that on occasion it will not be practicable to require notification in a matter of a few weeks. For this reason, the outer limit of two years is set for the purpose of barring late notices. The Court does accept defendants’ contention that the plaintiff’s non-payment of progress payments on the machinery did constitute a “fundamental breach of contract.” (Article 25 of the Convention). This is a significant definition in that Article 64 provides the seller a right to

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declare the contract avoided due to a “fundamental breach of contract.” The Convention affords the buyer a right to avoid the contract under Article 49 for a fundamental breach. On the whole, the Court concludes that the evidence submitted best supports the proposition that these complaints did not constitute either a fundamental or even a substantial breach of the contract by the seller. On the other hand, the Court determines that it is likely that non-payment of the large sums due for the performance payments was a fundamental breach of contract and that it excused defendants’ performance of non-competition obligations under the purchase agreement and non-competition agreement. As such, the Court concludes that Plaintiff is unlikely to succeed on the merits. B. Irreparable Harm to Plaintiff The Court does not find that Plaintiff is likely to suffer irreparable harm because of Plaintiff’s own fundamental non-performance of its duties under the contract. C. Harm to Others This factor focuses on the harm to defendants caused by a possible wrongful injunction. The Court determines that this factor disfavors granting relief. D. Public Interest The public have an interest in seeing that these pots, which are produced at a more cost-efficient basis than other agricultural pots, are readily available in the market. Thus, the public’s interest is best supported by a resolution which would cause both the parties to manufacture pots in the market pending the resolution of this suit. Although, as Plaintiff points out, this resolution might threaten its long-term viability, it seems apparent that there are ample threats to Plaintiff’s long-term viability even absent denial of this preliminary injunction motion. IV. C ONCLUSION An order shall issue denying the plaintiff’s Motion for Preliminary Injunction. The determination about whether certain acts or omissions constitute a breach of contract or not may generally depend on the stipulated governing law and jurisdictions and therefore the concerned parties to the contract should be diligent in

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determining the governing law and jurisdictions when making contracts.44 In some cases, due to the huge expense and inconvenience of placing a legal action before a foreign court, the concerned parties to the contract fail to fully enforce a particular contract.45 If the contract party denies the future’s performance under the implied-in-fact contract, it constitutes the breach of contract

In the following case, the contract at issue is an implied-in-fact contract to supply raw materials for the drug to the contracted party responding to the commercially reasonable notice from him or to inform him that it would not be able to supply the raw materials in a commercially reasonable time. Under this contract, it is not the breach of contract if the supplier refuses to supply the raw materials as it was not given commercially reasonable notice pursuant to the contract. However, it is the breach of this implied-in-fact contract if it refuses to supply it in the future. Case46 The plaintiff, a New Jersey corporation with its place of business in the United States, sought to develop, manufacture, and distribute a generic anticoagulant drug to treat blood clots. To develop the drug, the plaintiff obtained sample amounts of clathrate from defendant, a company with its place of business in Ontario, Canada. The defendant also supplied a reference letter in support of the plaintiff’s application to the Federal Drug Administration for approval to manufacture and distribute the anti- coagulant drug. Prior to FDA approval, the defendant concluded an exclusive purchase agreement with a third party. Following FDA approval, plaintiff sent a purchase order to defendant for 750 kg of clathrate. The defendant did not accept the plaintiff’s order and denied that it was obligated to sell clathrate to the plaintiff. The plaintiff sued the defendant, alleging, among other claims, that the defendant had breached a contract, was estopped from rejecting the order, had been negligent, and had made negligent misrepresentations. The defendant moved for summary judgment on these claims.

44

See Eun Sup Lee, supra note 138, at 50. Id. 46 Geneva Pharmaceuticals v. Barr Laboratories No. 98 CIV 961 RWS, 99 CIV 3607 RWS United States 21 August 2002 Federal District Court [New York] Published in English: 2002 JUSTIA US LAW http://law.justia.com/cases/federal/district-courts/FSupp2/201/236/2481967/. 45

3.4 Breach of Contract

Opinion Defendants Barr Laboratories Inc. (“Barr”) and Brantford Chemicals Inc. (“Brantford”) have moved for reconsideration of portions of this Court’s May 10 Opinion, Geneva Pharmaceuticals Tech. Corp. v. Barr Labs. Inc., in which their motion to dismiss the complaint of plaintiff Geneva Pharmaceuticals Inc. (“Geneva”), as successor in interest to Invamed Inc. (“Invamed”) pursuant to Rule 56 of the Federal Rules of Civil Procedure was granted in part and denied in part. Facts The parties and facts discussed herein have been described in greater detail in Geneva, 201 F.Supp.2d 236, familiarity with which is presumed. Discussion I. Standards Under Local Rule 6.3 “To succeed on a motion for reargument, the moving party must demonstrate that the court overlooked the controlling decisions or factual matters that were placed before the court in the underlying motion.” Lopez v. Comm’r of Soc. Sec. Rule 6.3 is intended to “ensure the finality of decisions and to prevent the practice of a losing party examining a decision and then plugging the gaps of a lost motion with additional matters.” Carolco Pictures, Inc. v. Sirota. The parties may not present new facts or theories at this stage. Ralph Oldsmobile Inc. v. General Motors Corp. Rule 6.3 must be narrowly construed and strictly applied so as to avoid duplicative rulings on previously considered issues and may not be employed as a substitute for appealing a final judgment. The decision to grant or deny the motion rests in the discretion of the district court. II. Barr’s Motion Is Denied In the May 10 Opinion, the Court granted Barr summary judgment on all claims against it, with the exception of Geneva’s tortious interference claims (Counts VIII and IX). Geneva asserted these claims against Barr due to ACIC/Brantford’s refusal to supply clathrate to Invamed. In the opinion, Barr’s assertion of a privilege defense was rejected because there existed a factual issue with regard to whether the interference constituted an unlawful restraint of trade and thus was not privileged. Barr now seeks reconsideration, claiming that the Court overlooked controlling authority that equates “restraint of trade” in the tortious interference context with “restraint of trade” under federal and state antitrust laws. Barr argues that because

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the Court had already concluded that Invamed failed to prove its antitrust allegations against Barr, Barr’s actions were privileged. “Under New Jersey law ... [w]hen a restraint of trade is neither intrinsically unlawful nor violative of any other law under the circumstances, it must be shown to be wrongful (e.g., violent, fraudulent, deceitful, or threatening) in order to amount to tortious interference.” In re Kentile Floors, Inc. Thus, under New Jersey law, interference need not violate the federal or state antitrust laws to be an unlawful restraint of trade; if the actions are “intrinsically unlawful” the interference is not privileged. As discussed in the opinion: “Invamed alleges that Barr arranged for the exclusive supply contract in order to thwart the development of other generic warfarin sodium. Moreover, it alleges that Barr demanded the confidentiality provisions as a means of further delaying Invamed’s entry into the generic warfarin sodium market.” Geneva. While these actions may not constitute violations of the federal and state antitrust laws, there is an issue of material fact as to whether those means were “intrinsically unlawful.” Barr cites New York case law for the proposition that interference is not unlawful restraint of trade unless the interference violates the federal or state antitrust actions. It is true that New York and New Jersey have cited to the Restatement (Second) of Torts § 768, which provides, in pertinent part: “Competition as Proper or Improper Interference (1) One who intentionally causes a third person not to enter into a prospective contractual relation with another who is his competitor ... does not interfere improperly with the other’s relation if (a) the relation concerns a matter involved in the competition between the actor and the other and (b) the actor does not employ wrongful means and (c) his action does not create or continue unlawful restraint of trade and (d) his purpose is at least in part to advance his interest in competing with the other.” Rest. (Second) Torts § 768 However, Comment (f) to Section 768 does not stretch as far as Barr would wish. Barr asserts that Comment (f) “makes clear the reference to ’unlawful restraint of trade’ ... means a violation of state or federal antitrust law.” Mem. at 4. Yet, the comment no where explicitly asserts that the only means of proving unlawful restraint of trade is to have a federal or state antitrust law violation. It states: “All of this legislation [the federal antitrust laws] ... [is] pertinent to a great number of the cases in which this Section may be applicable.” The comment does not say that the legislation is pertinent to all of the cases in which Section 768 is applicable—a phrase that would implicitly support Barr’s arguments. Finally, Barr has failed to cite any New York or New Jersey case law that adopts Comment (f), even if it had the import that Barr claims. The New York case law is no more helpful. As Geneva points out, the two cases that are cited in support of the proposition prove too little. In both Martin Ice Cream Co. v. Chipwich and Six West Retail Acquisition Inc. v. Sony

3.4 Breach of Contract

Theatre Mgmt. Corp. the courts held that a violation of federal antitrust laws constituted an unlawful restraint of trade and thus were an improper means of interference. The cases did not stand for the proposition that the only means of proving an unlawful restraint of trade was by showing a violation of federal or state antitrust laws. Barr has failed to present controlling authority that the Court overlooked that would have altered the finding that a question of fact remains as to whether Barr’s purported interference was privileged. Barr’s motion to reconsider is denied. III. Branford’s Motion is Denied Brantford urges reconsideration of the denial of summary judgment with regard to Geneva’s breach of contract and promissory estoppel claims against Brantford, claiming that the Court overlooked controlling decisions and material facts. A. Breach of Contract Claim Brantford asserts that the Court neglected to discuss the issue of whether Invamed had made a sufficiently definite proposal and that there is no evidence that Brantford breached the purported contract. 1. Sufficiently Definite Proposal Brantford asserts that its motion for reconsideration is appropriate in this instance as the Court failed to consider the element of a sufficiently definite proposal. The Court clearly addressed and considered the issue of a sufficiently definite proposal, however. First, the Court outlined that Article 14 of the Convention for the International Sale of Goods (“CISG”) is comprised of two requirements, one of which is that a proposal must “be ’sufficiently definite’ meaning that it indicates the goods and expressly or implicitly fixes or makes provision for determining the quantity and price.” Geneva. The opinion then applied this definition of a sufficiently definite proposal. First, it found that the first element was satisfied as the “alleged contract clearly identifies the goods at issue, clathrate.” Next, it determined that a question of fact existed as to whether the contract implicitly fixed the provision for determining quantity and price by its requirement of a “commercial amount.” While the opinion concluded that “the contract was sufficiently definite,” it is apparent from the foregoing discussion that what was intended was a conclusion that the proposal was sufficiently definite.

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Because the Court did consider whether the proposal was sufficiently definite, Brantford cannot base its motion for consideration on this claim. Brantford also argues that industry custom is insufficient to establish a sufficiently definite proposal under the CISG. Brantford cites to no controlling case law concerning this issue and merely rehashes the same statutory interpretation arguments that the Court considered in determining in the summary judgment opinion that industry custom could establish a sufficiently definite proposal. This motion is an inappropriate venue for Brantford’s argument. 2. Breach Brantford further claims that the breach of contract claim should be dismissed because there is no evidence that it breached the purported contract. In the Opinion, the Court determined that the contract at issue was an implied-in-fact contract for Brantford to supply clathrate to Invamed when given commercially reasonable notice or to inform Invamed that it would not be able to supply clathrate in a commercially reasonable time. Thus there was no breach in October 1997 when Brantford refused to supply clathrate as it had not been given commercially reasonably notice pursuant to the contract. However, it was held that the fact that it did refuse to supply any clathrate to Invamed in the future did breach the implied-in-fact contract. Brantford argues that the Court overlooked the undisputed fact that Brantford never breached this agreement because it claims that after the unsuccessful October rejection of Invamed’s clathrate order, Invamed never requested clathrate from it again. The Court did not overlook any facts that would have altered this decision. Brantford cites to an October 20, 1997 letter to Invamed in which it rejected the October 1997 purchase order. After rejecting that order, the letter states, “There is no contract or agreement between Brantford Chemicals Inc. and Invamed Inc. that requires BCI to supply this product to Invamed,” a jury could reasonably find that this letter constituted a refusal to supply clathrate to Invamed in the future. The motion to reconsider the denial of Brantford’s motion to dismiss Geneva’s breach of contract claim is denied. B. Promissory Estoppel Finally, Brantford challenges the Court’s denial of its motion to dismiss Geneva’s promissory estoppel claim because it claims that the court failed to discuss the issue of whether Geneva relied to its detriment on a promise made by Brantford to supply clathrate to Invamed. Brantford is correct that the opinion does not address that issue although it was briefed by both parties, and it will be addressed now.

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To survive summary judgment, Geneva must show that it in fact relied to its detriment on a promise made by ACIC/Brantford to supply clathrate to Invamed. Geneva presented a material issue of fact with regard to this element of promissory estoppel in that Invamed on its ANDA cited ACIC/ Brantford as its source of clathrate and had received a required DMF reference letter from ACIC/Brantford to complete its ANDA application. The FDA requires pharmaceutical companies to identify in the ANDA the supplier(s) they intend to use in manufacturing the product. Materials from a different source can be substituted only upon FDA approval of a supplement or amendment to the ANDA. The fact that Invamed listed ACIC/Brantford as its source of clathrate in the ANDA application presents an issue of material fact as to whether Invamed relied on ACIC/Brantford’s promises to supply clathrate. While the ANDA could have been and eventually was amended, such amendment further delayed Invamed’s ability to produce and market generic warfarin sodium. As a result, Geneva has presented an issue of material fact with regard to whether it relied in fact on ACIC/Brantford’s purported promise to supply clathrate, and the claim will not be dismissed on these grounds. Conclusion For the foregoing reasons, Barr’s and Brantford’s motions to reconsider are denied.

3.5

Remedies

It has been the general rule of most legal systems to seek to avoid creating harsh remedies for minor breaches. However, some breaches are so serious or flagrant that the aggrieved party should have access to the full range of possible remedies including those of consequential damages.47 If a party has performed the bulk of its obligations, that is, substantial performance, but has failed to perform only to a small degree or on unimportant matters, the aggrieved party may only be allowed to seek light remedy, for example, reducing a contracted price.48 The breach of the terms of contract can make the contract repudiated, which is followed by the remedies for the loss due to the breach

The following case is to treat with the breach of the contract to make it repudiated.

47 48

Id. Id.

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Case49 In a contract for the sale of 12,000 metric tons of sugar some standard sugar trading rules were incorporated, including rule 14:“…the Seller shall have the sugar ready to be delivered to the Buyer at any time within the contract period…” The buyers called for delivery on 29 May, a date which was held to have been within the contract period. When the sellers had not produced the sugar on 3 June, the buyers withdrew from the contract and bought sugar from a third party at a higher price. Held the buyers had been entitled to treat the contract as repudiated and could recover from the sellers the amount the buyers had lost by buying the sugar at a higher price. Rule 14 was a condition of the contract. The reasons were: (I) Rule 14 was a time clause of a mercantile contract, so the principle expressed in Bunge v Tradax SA (5.7.2) applied to make it likely that the rule was a condition. (II) The availability of the sugar in accordance with Rule 14 was of crucial importance to the buyers, which also made it likely that the parties had intended the rule to be a condition when made the contract. On the contrary, if a breach is so serious that it deprived the aggrieved party of the intended benefits of the contract, constituting a fundamental breach, the aggrieved party may be allowed to terminate the contract.50 (1) Remedies Available to Buyers Types of remedies are determined according to the circumstances of a particular case.51 According to the CISG, remedies will be different depending on the identity of the concerned party that initially breached the contract. If the seller breaches the contract and the buyer is taking action, the following remedies could be taken: ➀ claim for performance as measured against the contractual obligations agreed; ➁ fix an additional period of time for performance; ➂ claim for repair; ➃ claim for delivery of substitute goods; ➄ claim for reduction of price; ➅ avoid contract; ➆ claim for damages. On the other hand, if the buyer has breaches the contract, the

49

Cie Commerciale Sucres et Denrees v C Czarnikow Ltd: The Naxos (1990) HL 1 W.L.R. 1337; (1990). https://books.google.co.uk/books?id=EOb2QeQD9HgC&pg=PA123&lpg=PA123&dq= cie+commerciale+sucres+et+denrees+v+c+czarnikow+ltd&source=bl&ots=GMPm22Ny9f&sig= i5cLZCk6kAloYtjnLjRjqKUGpLo&hl=en&sa=X&ved=0ahUKEwjt0eeU9unLAhWFPKYKHc IdBM0Q6AEINzAF#v=onepage&q=cie%20commerciale%20sucres%20et%20denrees%20v% 20c%20czarnikow%20ltd&f=false. 50 Eun Sup Lee, supra note 138, at 51. 51 Id.

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ensuing list should be followed by the seller: ➀ claim for performance of the contractual obligations as agreed; ➁ fix an additional period of time for performance; ➂ avoid contract; ➃ claim for damages; ➄ confirm the specification of goods. (2) Remedies Available to Sellers The seller can, according to the CISG, require a buyer to make payment, take delivery, or perform other obligations.52 As for the obligation of payment, the seller forces payment from the buyer even though the buyer did not take the delivery. If the seller requires performance, he should not exercise other remedies like the right to avoid incompatible contract. However, since the right to claim damages is compatible with the right to claim performance, the seller can claim damages and performance concurrently. If the seller avoids contract (because the buyer rejects delivery or fails to make payment), he can resell the goods, receive the balance between the amount of the contract and the amount of disposal, and any additional damages should be compensated. The seller also retains the right to fix an additional time period for performance, the right to avoid the contract, the right to confirm the specification, and the right to claim damages.

3.6

Avoidance of Contract

Avoidance of a contract effectively terminates the agreement upon the party’s declaration of cancelation. Avoidance is made when a party declares that the contract has been avoided by the other party, and it is irreversible. In this case, the contract is canceled “retroactively,” meaning that all evidence of a contract is erased, and in law, essentially never existed. The avoidance of contract has no effect on damage claims. Thus, avoidance and claim for damages cannot coexist. Both the seller and the buyer have the right to avoid contracts. The buyer has the right to avoid contract in the following situations: ➀ If the seller does not conform to the contract agreed upon, for this is a fundamental breach of contract; ➁ If the seller fails to deliver the goods at the time or period of time outlined in the agreement. The seller has the right of avoidance in the following situations: ➀ If the buyer’s non-performance of obligations in accordance with the contract is a fundamental breach of contract; ➁ If the buyer does not pay within the additional period of time fixed by the seller, or declares that he will not make the payments in the designated period of time.

52

CISG 1980, Art. 62.

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A party which has already performed all or part of a contract can claim to return what he already provided or paid for to the other party. If both parties have obligations to make returns to each other, this should occur concurrently. Meanwhile, it is certainly possible to declare avoidance of contract if either party anticipates a fundamental breach before the transactions take place.53 As a matter of consideration, a party which tries to avoid contract should notify the other party so that it can provide proper compensation. If a contract is avoided, the remainder of the contract becomes void, but actions that have already been taken must be restituted. For example, if a shipment was supposed to come in five separate installments and only one installment had been received before the avoidance of contract, only payment for the first installment would be required. If damage from avoidance of contract persists even after making restitution, parties can make claims for damages. The burden of proof is very important issue in seeking the remedy from the breach of contract or warranty under the international sale of goods act like the CISG.

The following is the case to treat with prerequisites of the remedy from the breach of warranty under CISG. The main issue of this case was whether the party seeking the remedy from the other party’s breach of “warranty to conform the product to the contract” must demonstrate both the existence and the nature of the defect in the product before it can recover for breach of warranty or not. It was determined that, for the remedy of the breach of warranty, it is enough to prove that the defect existed at the time the product like the product left the product-supplying plant. That is, under the CISG, a plaintiff, in a product liability case, may prevail on a claim that the product supplied was unfit for the purpose for which it was expressly warranted by showing that when the product was properly used for the purpose of the warranty, the results are shoddy-even if the plaintiff has introduced no evidence as to just why or how the product unfit. All he has to do is to show that the product’s defect is that it is unfit for the purpose of the warranty in the contract under the CISG.

53

CISG 1980, Art. 72.1.

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95

Case54 On December 30, 1997, Plaintiff-Appellee Schmitz-Werke (Schmitz) filed a complaint in the United States District Court for the District of Maryland alleging that Defendant-Appellant Rockland International (Rockland) had breached a warranty under the United Nations Convention on the International Sale of Goods (CISG), 15 U.S.C.App., by supplying defective drapery fabric. Rockland filed a counterclaim against Schmitz seeking recision of a settlement agreement between the parties and recovery of moneys paid Schmitz under that agreement. Both parties moved for summary judgment, and on May 26, 1999, the district court granted Rockland summary judgment on its counterclaim, but proceeded to trial on Schmitz’ complaint. A bench trial took place from October 25 through 28, 1999, and on November 5, 1999, the district court found for Schmitz and orally issued on the record its findings of fact and conclusions of law. Judgment was entered in favor of Schmitz on its claim and in favor of Rockland on its counterclaim on December 30, 1999. Schmitz does not challenge the district court’s judgment on Rockland’s counterclaim, but Rockland now appeals that portion of the court’s judgment in favor of Schmitz. We affirm the judgment of the district court. Facts and Proceedings Below Rockland is a Maryland corporation that manufactures drapery lining fabric. In the early to mid-1990s, Rockland manufactured a type of drapery fabric called Trevira Blackout FR (Trevira). “Blackout” refers to the fabric’s ability to block light completely. The fabric was manufactured to meet European flame resistance standards and was intended for sale in European markets. Rockland no longer manufactures this fabric and claims that this is because the product did not meet its volume requirements, while Schmitz maintains that Rockland discontinued Trevira because of numerous problems with the material.

54 SCHMITZ-WERKE GMBH + CO. v. ROCKLAND INDUSTRIES, INC., et al. No. 00-1125. 37 Fed. Appx. 687 June 21, 2002. U.S. District Court, D. Maryland Published in English: 2002 WL 1357095 (C.A.4 (Md.)) http://international.westlaw.com/result/default.wl?rs=imp1.0&ssrc= 0&cfid=1&method=WIN&service=Search&sri=39%2c38&db=ALLCASES%2cALLFEDS& fmqv=s&action=Search&origin=Search&vr=2.0&rlt=CLID_QRYRLT2597633442211&query= schmitzwerke+gmbh+v.+rockland+industries%3b+rockland+international+fsc%2c+incorpora ted&mt=TabTemplate1&fn=_top&rp=%2fWelcome%2fTabTemplate1%2fdefault.wl&sp=Pus anNU3000&rltdb=CLID_DB7861733442211&eq=Welcome%2fTabTemplate1&tofrom=%2fs earch%2fresult.aspx&utid=6&srch=TRUE&sv=Split.

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Schmitz is a German company that manufactures, prints, and sells finished decorative fabrics in Germany and in other countries. In 1993, a Rockland representative introduced the Trevira fabric to Schmitz, and during their negotiations Rockland’s representatives stated that the fabric was particularly suited to be a printing base for transfer printing. Transfer printing is a process for imprinting the base fabric with dyes of particular colors or patterns. In transfer printing, the fabric is drawn over a heated metal cylinder along with a sheet of transfer paper that contains the dye. The dye is heated by the cylinder and turns into a gas, which is picked up by the fibers in the fabric. Schmitz does not transfer print its fabrics itself. Instead, it relies on another German company, PMD, which specializes in making transfer print paper and in transfer printing fabrics. Schmitz initially placed an order for about 200 meters of the Rockland fabric for testing. The sample was shipped to PMD, which transfer printed it. On receipt of the test results, Schmitz notified Rockland that there were several problems with the fabric but that in general they were satisfied with the material. After this test, Schmitz placed an initial order of 15,000 meters of Trevira, which was shipped via ocean freight in mid-August 1994. Schmitz noted some additional problems with this initial shipment, but decided to go ahead and print the material. After the printing, additional problems with the fabric became apparent, and a Rockland representative was offered a chance to inspect the fabric. There was conflicting testimony at trial about the results of a meeting between Schmitz and Rockland’s representative that followed in October of 1994, but the district court credited Schmitz’ version of events. According to Schmitz, despite some problems with the Trevira fabric, Rockland urged Schmitz to continue printing the fabric and claimed that the lower quality portions of the Trevira fabric could successfully be transfer printed with patterns (as opposed to being printed with solid colors). In November 1994, after this meeting, Schmitz placed another order of Trevira fabric, this time for 60,000 meters. PMD, meanwhile, was continuing to print the original shipment of the fabric. In December 1994, PMD told Schmitz about some of the problems it observed with the fabric. In February 1995, Schmitz had WKS, another German company, inspect part of the new order that Rockland had sent as part of the November 1994 order. On March 20, 1995, WKS issued its report, which indicated that it had found some problems with the Trevira fabric. By April 1995, the post-printing percentage of fabric that was classified as “seconds” (lower-grade material) was between 15% and 20%. On June 21, 1995, Schmitz contacted Rockland and indicated that they wanted to return approximately 8,000 meters of fabric, and eventually

3.6 Avoidance of Contract

Schmitz shipped that amount back to Rockland. There were extended discussions between Rockland and Schmitz about how to settle this dispute, but eventually these discussions broke down and this suit followed. After a bench trial, the district court issued its findings of fact and conclusions of law in an oral opinion on November 5, 1999. The parties agreed that the CISG governed the transaction in this case, although the correct interpretation of that treaty was (and still is) in dispute. The district court found that Rockland gave Schmitz a warranty of fitness for a particular purpose (transfer printing) under Article 35(2)(b) of the CISG. 15 U.S.C. App. Art. 35(2)(b). The court also found that the Trevira fabric sold by Rockland had latent defects which were not detectable before the fabric was transfer printed, and that Schmitz’ continued printing of the fabric even after it began to discover problems was reasonable since it was at the express urging of Rockland and was in any event the best way to mitigate its damages. The court specifically held that the goods did not conform to the warranty Rockland had given Schmitz, and that Schmitz had met its burden of proving that the defect existed at the time the fabric left Rockland’s plant. In making this ruling, the court held that Schmitz need not prove the exact mechanism of the defect, and that showing that the transfer printing process PMD had used on the fabric was ordinary and competent was enough to establish that the Trevira fabric was unfit for the purpose of transfer printing. Having found for Schmitz, the court awarded damages in dollars and converted those dollars to Deutsche Marks using the exchange rate as of the time Schmitz discovered the defects. Rockland now appeals. Discussion The Court of Appeals held that: (1) German manufacturer established defect element of breach of warranty claim; (2) German manufacturer satisfied reliance element of breach of warranty claim; and (3) use of exchange rate as of date on which German manufacturer discovered problems with fabric to convert award of damages into German currency was not abuse of discretion. Causation Rockland argues that Schmitz must demonstrate both the existence and the nature of the defect in the fabric before it can recover for breach of warrantyand that to show the nature of that defect, expert testimony is required. Article 35 of the CISG governs the duty of the seller to deliver goods that conform with the contract. Article 35(2) lists various reasons goods may not conform with the contract, including goods which were expressly or impliedly warranted to be fit for a particular purpose. In response, Schmitz argues that all it need show is that the goods were unfit for the particular purpose warranted-transfer printing-and that it need not show precisely why or how the goods were unfit if it can show that the

97

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transfer printing process the goods underwent was performed competently and normally. Rockland is correct that Schmitz did not provide any evidence at trial that would establish the exact nature of the defect in the Trevira fabric. The text of the CISG is silent on this matter. Under Maryland law, Rockland is correct that a plaintiff in a products liability case must show that the product in question is defective, even if the cause of action is for breach of an express or implied warranty. However, Rockland’s resort to Maryland law does not aid its argument—there is no support in Maryland law for Rockland’s claim that the plaintiff in such a case must always provide expert testimony describing the exact nature of the defect. The district court in this case did not rule that expert testimony was not required to show the nature of the problem with the Trevira fabric. Instead, the district court held that since Schmitz had submitted sufficient evidence of the competence of PMD’s transfer printing process, it was proper to infer that the fabric was not suited for that process, even without direct evidence of the precise nature of the fabric’s unsuitability. Schmitz argues that since it did submit expert testimony regarding the transfer printing process, even if such testimony is required, Schmitz has satisfied its burden, and the district court’s ruling in their favor is supported by the evidence. We agree with Schmitz. Under either the CISG or Maryland law, Schmitz may prevail on a claim that the fabric was unfit for the purpose for which it was expressly warranted (transfer printing) by showing that when the fabric was properly used for the purpose Rockland warranted, the results were shoddy—even if Schmitz has introduced no evidence as to just why or how the fabric was unfit. Schmitz has shown that the fabric was defective—the fabric’s defect was that it was unfit for transfer printing. Rockland attempts to counter this argument by claiming that this improperly shifts the burden of proof. Rockland’s concerns are misplaced—Schmitz still must prove that the transfer printing process was ordinary and competently performed and still must prove that the fabric was defective—it just permits Schmitz to do so without proving the exact nature of the defect. There was significant evidence regarding PMD’s transfer printing process presented at trial (including expert testimony), and the court’s finding that the PMD printing process was ordinary and competent is not clearly erroneous. The district court found that Rockland warranted its fabric to be fit for transfer printing, that the fabric was transfer printed in a normal and competent way, and that the resulting printed fabric was unsatisfactory. This is enough to support the district court’s factual finding in favor of Schmitz on the warranty claim—the fabric was not fit for the purpose for which it was warranted. The district court’s findings as to defect in this respect are not clearly erroneous; nor did the district court err in law in regard thereto.

3.6 Avoidance of Contract

Reliance Rockland also argues that even if the court properly found that the Trevira fabric was not particularly well suited for transfer printing as warranted, Schmitz cannot recover on such a warranty because it did not in fact rely on Rockland’s advice as required under CISG Article 35(2)(b). Rockland is correct that Article 35(2)(b) of the CISG requires that the buyer reasonably rely on the representations of the seller before liability attaches for breach of a warranty for fitness for a particular purpose. The district court explicitly found that Schmitz relied on the statements of Rockland’s representative that the Trevira fabric was particularly well suited for transfer printing. The court also found that Schmitz continued to print the fabric with the express consent of Rockland after it discovered and reported problems with the fabric. The district court’s finding that Schmitz relied on Rockland’s statements proclaiming the Trevira fabric’s suitability for transfer printing is supported by the evidence and was not clearly erroneous. Exchange Rate Rockland also argues that the district court erred in the manner in which it converted the award into German currency. The district court used the exchange rate as of the date Schmitz learned of the problems with the Trevira fabric. In contrast, the general rule is that the exchange rate as of the date of the award should be used. Some courts, however, use the exchange rate on the day of breach. The CISG is silent on this issue, and it is proper for courts to resort to private international law in such situations. As discussed above, the parties agree that private international law would apply the choice of law rules of the forum, Maryland, and that since Maryland’s choice of law rules apply the law of the place of contract, Maryland substantive law should apply. We agree that in the absence of controlling language in the CISG, Maryland substantive law applies. But unfortunately there does not appear to be any Maryland law on this topic. The one Maryland case discussing this issue applied the date of award rule, but in that case a federal district court applied admiralty law, not Maryland law. There is no clear resolution of this issue that is dictated by the CISG or by Maryland law. And, we can discern no particular equitable advantage to either of the two rules—it is not clear that either position more fairly compensates an injured party or does so under the discrete facts here. Under these particular circumstances, the district court’s decision to use the exchange rate as of the date of breach was not an abuse of discretion and we decline to disturb it. Conclusion Accordingly, the judgment of the district court is affirmed.

99

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3.6.1

3 International Trade Contracts

Partial Breach of Contract

(1) Repairs After Period of Performance The objective of extending the time period of requirements is to help facilitate the goals of the contract through mutual cooperation. When goods are not delivered on time, and an extra reasonable period of time has been allotted and once again missed, remedial action should then be taken. In some contracts, the exact period of delivery is not a vital aspect to the deal. In these cases, if the seller is able to remedy the missed delivery within a considerable length of time after the fixed date, this should not be considered a breach of contract fundamental enough for the buyer to avoid the contract. If a late delivery notice or offer to repair was sent and not responded to, it is still possible to repair. The seller then has an extended period of time in which to make delivery. During this time, the buyer is not allowed to seek remedies.55 When the seller notifies the buyer of his plans to deliver, the buyer should respond to the notice – either confirming or denying its proposal.56 (2) Partial Lack of Conformity A proper balance of interests should be attempted in deference to the idea of contract maintenance, even if the seller delivers partial goods, or part of the received goods is not consistent with the contract’s specifications. Also, the buyer can avoid a contract only if the partial non-performance for delivery or non-conformity with contract is fundamental. In this case, it is acceptable to exercise the right to claim delivery of substitute goods, the right to claim for remedies, avoidance of contract for failure to conform to contract specifications, price reduction, etc. When a partial breach of contract is fundamental enough to affect the entire contract and to cause damage, contract avoidance is allowed. When this occurs, the buyer must prove that the partial non-performance of delivery is fundamental enough to affect the entire contract.57 (3) Early/Late Delivery Delivering goods before scheduled delivering time is not always a bad thing, but can often cause logistical issues for the buyer in terms of further transportation and storage. If goods are unexpectedly delivered early, the buyer has the right to accept or reject the delivery. If the goods are accepted, the buyer may need to take

55

Id. at Art. 48.3. Id. 57 Id. at Art. 51.2. 56

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extra measures for housing and preserving the goods up to the expected time of arrival. These costs can be passed on to the seller, whose haste was the cause of the inconvenience. If the goods are rejected, the seller must remedy the situation by redelivering during the scheduled period of time. If extra goods are delivered beyond the contracted quantity, the buyer once again has the discretion to accept or reject. Furthermore, the buyer may accept some or all of the excess goods, and pay the price in proportion to the initial agreement.58

3.7

Exemption

A party may in some cases be exempt from performing contractual obligations. While a buyer has supplied raw materials to the seller (producer) to make the products into finished goods that will be sold, if the producer is unable to produce the expected products due to the willful act of the third parties, or an act of God (force majeure), that party may be exempt from his contractual obligations. If a contract cannot be fulfilled due to an impediment, the party must prove to the other that the non-performance of obligations was due to an impediment beyond his control and that the impediment was not reasonably foreseeable at the time of the conclusion of the contract or avoidable.59 Any party failing to perform its contractual obligation due to the impediment beyond its control may be exempt from damages caused by that impediment for the period during which the impediment exists.60 If it is possible to remove this impediment, the obligations of both parties will continue as planned. In the case of any partial non-performance, if neither party can use the received goods, the contract can be avoided. Once a party realizes that an impediment is beyond circumventing, it must notify the other party within a reasonable period of time. This period of time commences when the party knew, or reasonably should have known, that an impediment was going to prevent proper execution of the contract. If the other party is not notified within a reasonable period of time, the non-performing party in breach must take responsibility for any damages that resulted from the other party’s failure to notify quickly enough.

58

Id. at Art. 52. Id. at Art. 79. 60 Id. at Art. 79.3. 59

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3.8

Application to Business Field

3.8.1

Entering Into Contract

Being informed of the satisfactory credit standing of the exporter, the potential importer would begin negotiating with the exporter as follows:

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

May 10, 2023 Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Dear Ms. Lee, We thank you very much for your letter of May 1, 2023 in which you expressed your willingness to open an account with us. We are glad to learn that you are especially interested in shipping the environmental friendly cosmetic products, and in this we may say that we are specialists. We would appreciate receiving your best FOB BUSAN on cosmetic products without Ozone as well as several samples by air parcel post. If your prices are competitive and merchandise is suitable for our trade, we will be able to place large orders. We look forward to hearing from you soon. Yours truly, Chinese Marin Trading Co., Ltd. Bruce Jin/Manager

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103

The above-mailed inquiry would be followed by the reply from the exporter as follows:

Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

May 17, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, YangFu Port Management Building, YangFu Economic Development Zone, YangFu, Hainan, P.R. China Dear Mr. Jin,

Thank you very much for your inquiry of May 10. As requested, we have already dispatched our most recent catalog and the price list with several samples by DHL service. Also please refer to our website (www.drhaskin.co.kr) where you can get more information of our products. From the enclosed price list you will find that our prices are exceptionally low and such low quotation is entirely due to our recognition of the necessity for price cutting in order to develop our sales in your market. Consequently, we cannot keep the prices effective more than two weeks from the date of this letter and we wish to receive your order by return mail.

We hope that this will meet with your immediate approval. Yours truly, Dr.COFFEEEXTRACT Suyeon Lee/Manager

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The exporter will not be able to meet the requirement from the potential buyer sometimes, for example, due to lack of stock, as follows:

Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea May 18, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, YangFu Port Management Building, YangFu Economic Development Zone, YangFu, Hainan, P.R. China Dear Mr. Jin, We thank you for your inquiry of May 10, 2023. However, we regret to inform you that we are unable to quote you now, as we have no stock of these goods referred to, neither can we tell you how soon we can make delivery. We sincerely regret our inability to be of service to you in this instance. Yours truly, Dr.COFFEEEXTRACT Suyeon Lee/ Manager

3.8.2

Consulting of Terms

The exporter and the screened potential buyer consult each other about settlement currency and exchange rate, foreign exchange risk aversion, settlement method, price, quality, quantity, shipment, adoption of Incoterms® 2020, logistics charge, sending samples, tariffs, market price, traveling, and other relevant issues. Usually, before they engage in further consultation, the counterpart company—if interested—will ask for samples in order to determine the practicality of the proposed

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transaction. Market research is also vital for the importer as in the case of the exporter to prepare for the transaction and to determine the scale of transaction. The potential buyer would reply to the exporter to continue to negotiate for the trade conditions including price terms as follows:

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

May 19, 2023 Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Dear Ms. Lee, We have received your fax of May 17, 2023 with thanks. Your samples (LUVIUS, DACAPO, Miracle ATO) and other terms as shown in your catalog and specification sheet are quite acceptable to us. However, we regret that we are unable to place an order with you at this time, as the prices are so high in applying to this area. In this market, our requirements for this line are fairly large, but competition is very strict. In view of this situation, we would like to request your best revised obtainable prices.

Your earliest favorable reply would be highly appreciated. Sincerely yours, Chinese Marine Trading Co., Ltd. Bruce Jin/Manager

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The exporter would suggest the price condition to the buyer as follows: Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

May 21, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Dear Mr. Jin, We received your counter offer of May 19, 2023 and are pleased to offer you firm as follows: 1. Spec & Amount : LUVIUS Premium-Go ld Lifting Cream-50 10,000ea @ 41 Total USD410,000 DACAPO-Elegante Brightening Effect Softner 1,000ea @ 9.1 Total USD 9,100 DACAPO-Elegante Brightening Enrich Cream 1,000ea @ 13.9 Total USD 13,900 DACAPO-Infinite Time Essence 1,000ea @14.1 Total USD 14,100 DACAPO-Remember

Triple

Balance

Essential

Serum

1,000ea

@14.5

Total

USD

14,500 Miracle ATO-Aroma Moisture Body Wash 1,000ea @10.1 Total USD10,100 Miracle ATO-Pure Moisture Cream 1,000ea @5.5 Total 5,500 Miracle AC-Red2 White Pore Serum 1,000ea @5.8 Total 5,800 2. Price Term: FOB BUSAN, Korea 3. Shipment: within one month after receipt of at sight letter of credit. We hope you understand that the above quotations are final to us. The above revised is the best price and therefore we are unable to make any further discount. So, unless you accept the price terms at this figure, no further business relations surrounding this item will be established.

We await your acceptance as soon as possible

Yours very truly, Dr.COFFEEEXTRACT Suyeon Lee/ Manager

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107

The potential importer would then want to take advantage of the discounted price as follows:

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

May 24, 2023 Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Dear Ms. Lee, Thanks for your irrevocable offer of May 21, 2023. In conclusion, we can accept your above dated offer subject to granting us USD0.05 more discount. In view of the price ruling in this market, your price is rather stiff and your competitors are offering lower prices than yours. If this proposal is acceptable to you, we will instruct our bank to issue a letter of credit according to your firm offer upon which the contract was formed. It would give us great pleasure to do business with you at this time.

We are looking forward to receiving your final confirmation. Sincerely yours, Chinese Marine Trading Co., Ltd. Bruce Jin/manager

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3 International Trade Contracts

The following illustrates the case in which the exporter rejects the counterpart’s suggestion to further discount the price.

Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

May 25, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Dear Mr. Jin, We have the pleasure of acknowledging your letter of May 21, 2023, requesting us to quote the most favorable price on cosmetic products. We regret that our prices were not low enough to meet your requirements. But the previously revised one is the best price we can offer at present since the high quality of our goods cannot be maintained at lower prices. In fact, our revised price is clos ely calculated, and we shall not be able to make any further price reduction in spite of our eagerness to do business with you. We trust you will accept it without delay. Yours very truly, Dr.COFFEEEXTRACT Suyeon Lee/Manager

3.8 Application to Business Field

109

The following illustrates the case in which the exporter accepts the counterpart’s suggestion to further discount the price.

Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

May 25, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Dear Mr. Jin,

We accept and confirm your counter offer of May 24, 2023 to realize the first transaction with you. We thank you for your efforts to expedite the business between us. Please note that the revised price, however, would appear impossible to produce the quality you require without raising the price for your future orders. We shall do our best to execute this order to your entire satisfaction on receiving the advice of issuance for your letter of credit. We are looking forward to being informed of your irrevocable letter of credit as soon as possible.

Yours very truly, Dr.COFFEEEXTRACT Suyeon Lee/ Manager

110

3.8.3

3 International Trade Contracts

Offer, Acceptance/Conclusion of Contract

The exporter makes an offer, a counteroffer, negotiations, and acceptance and finally concludes a contract with the importer by using any means of communication. The exporter and the importer, concluding a contract, make, and exchange copies of the Agreement on General Terms and Conditions of Business Transactions, under which they make the specified sales contract. If the concerned parties make agreement on the main conditions of transactions including price condition, they can make the following contract documents including: offer sheet, sales contract, general terms and conditions and purchase order, for the formation of contract: The following demonstrates the offer sheet made by Dr. COFFEEXTRACT and dispatched to Chinese Marine Trading Co., Ltd.

Dr.COFFEEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

OFFER SHEET

② Messrs. Chinese Marine Trading Co., LTD. ③ Offer No. KN110525 ④ Date. May 26, 2023 Gentle m an ⑤ We are pleased to offer you the following ⑥ Origin ⑦ Shipment

REPUBLIC OF KOREA WITHIN 45 DAYS AFTER RECEIPT OF YOUR L/C.

⑧ Shipping Port ⑨ Payment Terms

BUSAN, KOREA BY AN IRREVOCABLE AT SIGHT L/C TO BE OPENED IN OUR FAVOR.

3.8 Application to Business Field

⑩ Validity of Offer

111

BY June 30, 2023 ⑪ Commodity & Description

Item

⑫ Quantity

⑬ Unit Price

⑭ Total Amount

⑮ FOB Busan, Korea

LUVIUS Premium-Go ld Lifting Cream-50 10,000 PCS DACAPO-Elegante

@US$ 4.1

US$41 0,000

1,000 PCS

@US$ 9.1

US$9,1 00

1,000 PCS

@US$ 13.9

US$13 ,900

Balance 1,000 PCS

@US$ 14.1

US$14 ,100

1,000 PCS

@US$ 14.5

US$14 ,500

1,000 PCS

@US$ 10.1

US$10 ,100

1,000 PCS

@US$ 5.5

US$5,5 00

1,000 PCS

@US$ 5.8

US$5,8 00

17,000 PCS

@US$ 114

US$48 3,000

Brightening

Effect

Softner DACAPO-Elegante

Brightening Enrich

Cream DACAPO-Infinite Time Essence DACAPO-Remember

Triple

Essential Serum Miracle ATO-Aroma Moisture Body Wash Miracle ATO-Pure Moisture Cream Miracle AC-Red2 White Pore Serum

TOTA L

******************************************* ********** *** *************** ***************

Acce pte d by Date of acce pta nc e

Dr. COFFEEXTRACT

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3 International Trade Contracts

The following is the sales contract made by Dr. COFFEEXTRACT and accepted/ countersigned by Chinese Marine Trading Co., Ltd.

Dr. COFFEEXTRACT Address : 1646, Yuseong-daero, Yuseong-gu, 509, Innobiz Park Daejeon, Korea

SALES CONTRACT Dr. COFFEEXTRACT as Seller, here by confirms having concluded the sales contract with Chinese Marine Trading Co.,Ltd., as Buyer, to sell the following goods on the date and on the terms and conditions herein-after set forth. The Buyeris hereby requested to sign and return the original attached. M ESSRS

CONTRACT DATE

CONTRACT NO.

Chinese marine Trading Co., Ltd.

May 26, 2023

KN110501

COMMODITYDESCRIPTION

QUANTITY

UNIT PRICE

AM OUNT

US$41 LUVIUS Premium-Gold Lifting Cream-50

US$9.1

DACAPO-Elegante Brightening Effect Softner DACAPO-Elegante Brightening Enrich Cream

US$13.9

DACAPO-Infinite Time Essence DACAPO-Remember Triple Balance Essential

17,000pcs

US$14.1

USD483,000

US$14.5

Serum M iracle ATO-Aroma M oisture Body Wash

US$10.1

M iracle ATO-Pure M oisture Cream M iracle AC-Red2 White Pore Serum

US$5.5 US$5.8

Time of Shipment June 30, 2017 Port of Shipment Busan, Korea Port of Destination H aikou, China Payment By an irrevocable, at sight L/C to be opened in favor of Dr. COFFEEXTRACT. Insurance To be covered ICC (A/R) with War Risks and SRCC for 110% of invoice value. Insurance Policy shall be made out in China in the currency of US Dollars. Packing 100 pieces to be packed in a carton and each piece has to be packed with carton bag Special Terms & Conditions Subject to the general terms and conditions set forth on back hereof Accepted by (Buyer) Chinese Marine trading Co., Ltd.

(Seller) Dr. COFFEEXTRACT

(Signature)

(Signature)

(Name & Title)

(Name & Titl )

Date

Date

Bibliography

113

Learning Assignments

1. Establishment of sales agreement with the students’ (actual or assumed) counterparts with the selected items focusing on the avoidance of commercial disputes with them, based on the communications and negotiations made from the previous chapters. 2. Possible remedies which could be pursued under the sales contract concluded in this chapter, assuming the various types of breach of the obligations, and principles of contracts and other statutes 3. Factors to be considered when concluding an international sales contract with a newly developed and environment-friendly product which has not yet been commercialized in the domestic market and is not especially competitive in price; even though it could be substantially attractive to high- level consumer groups, compared with the general products that the consumers are familiar with and view as competitive in price. 4. Importance of selection and establishment of the specific conditions in drafting sales contracts which would be suitable and specific to individual products based on their physical and commercial characteristics from the viewpoints of the sales promotion and avoidance of friction with the counterparts.

Bibliography DiMatteo LA, Dhooge LJ (2021) International business law—transanctional approach, 4th edn. Fellmeth AX (2020) The law of international business transactions Folsom RH, Gordon MW, Spanogle Jr. JA, Fitzgerald PL (2015) International business transactions: contracting across borders Lee ES (2012) Management of international trade. Springer, Berlin Mallor JP, Barnes AJ, Bowers T, Langvardt AW (2015) Business law: the ethical, global, and ecommerce environment, 16th edn. McGraw-Hill Murray C, Holloway D, Timsons-Hunt D, Kennelly B, Dixon G (2012) Schmitthoff export trade: the law and practice of international trade, 12th edn. Sweet & Maxwell, London Ramberg J (2008) Guide to export-import basics, 3rd edn. ICC, Paris

4

Terms of International Trade

Learning Objectives

The hands-on workers for international trade operations are required to understand the individual terms of international trade contracts as well as their conceptual issues for them to be successful in promoting their business transactions in the global market. To realize the efficient and productive processing of international business transactions, they are required to be familiar with individual terms of international trade contact. However, considering their diversity and complexity, it would not be efficient for the individual workers to be equipped with all capabilities to deal with those specific terms to perform their tasks. Instead, it would be more productive for them to equip with the capability to gather and manage the rich information and knowledge about the trade terms for making their proper decisions on concluding and enforcing the international trade contracts. Building-up the capability to gather and screen the proper information and techniques regarding the relevant issues is essential for their successful business transactions in the complexity of the global market. Based on this viewpoint, this chapter treats with the following issues. 1. Responsibilities of the concerned parties to international trade under the special terms of international trade. 2. Specific characteristics of the special terms of international trade from the viewpoints of both the seller and buyer. 3. Contractual relations between the exporter and importer under the special terms of international trade. 4. Basic conditions regulating foreign trade. 5. Passing of property between the seller and buyer under the specified terms of international trade.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_4

115

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6. Passing of the risk between the seller and buyer under the specified terms of international trade. 7. Contractual function and importance of the certification of quality and pre-shipment inspection under the international trading contracts. 8. Special problems relating to general conditions supplied by the trade associations in doing international Trade.

4.1

Introduction

4.1.1

General

International trading companies are sometimes not so diligent in making specific and detailed written1 contracts or are not familiar with the practical and legal aspects in making formal contracts.2 Even though in a particular circumstance, informal and brief means of contract may actually be applicable, trading companies are recommended to detail a specific contract to minimize the risks that might result from improper contracts.3 The main contents of international trade contracts focus on exporters’ and importers’ obligations and rights under transactions, including, for example, the obligation to make payment under documentary letter of credit and to present the required documents in compliance with the terms of credit and clean bill.4 Drafting a specific and clear contract is the first step to minimizing the uncertainty in international trade and to proceeding toward successful transactions.5

4.1.2

Law Sources of International Trade Contracts

(1) Mutual Agreement Trade contracts respect the principle of “free contract” or “parties-independent principle” which states that remediation through mutual agreement should be the first course of action. Even though traders can construct trade contracts according to mutual understanding under the principle of free contracts, parties are not allowed to violate mandatory trade laws such as foreign trade laws, customs laws, foreign exchange transaction acts, laws concerning foreign investments, or antitrust

1

Ramberg (2008, p. 48). Id. 3 Id. 4 Id. 5 Id. 2

4.1 Introduction

117

and fair trade laws. Therefore, all the provisions of the trade contract are required to be in compliance with such mandatory regulations. (2) International Practice/Customary Law A “custom” is a commonly recognized traditional pattern of behavior by a specific group of people over a long period of time. Mercantile customary law is a custom many people working in commerce recognize and observe as implied law. This law is applied just like the expressed statute among the merchants because it is highly customary and accepted in the mercantile world. Thus, any practice widely known to the contract parties in international commerce, without other agreement, is considered to be applied implicitly to the contract or the formation of contract because it is considered that parties know their terms.

4.1.3

Governing Law/Jurisdiction

(1) Governing Law When engaging in international business transactions, an agreement is required to be made between the trading partners as to which laws will apply, and those laws might need to be clarified to the contract parties. If the contract parties agree on a governing law in accordance with a mutual agreement, it is to be applied. Applicable Law: Case to Apply CISG. Instead of UCC

The contract parties are required to adopt the applicable law considering the contents and characteristics of the contract. The following case treats with applicable law to the contract. It is determined that, once the CISG applies, it pre-empts domestic sales law including the UCC that otherwise would govern the contract unless the parties have opted out of the CISG. Memorandum Opinion and Order6 Chicago Prime Packers, Inc. (“Chicago Prime” or “Plaintiff”) moved for summary judgment against both defendants, Northam Food Trading Co. (“Northam”), and Nationwide Foods, Inc. (“Nationwide”). Northam moved for summary judgment against Chicago Prime. Subsequently, Chicago

6

Case 577: CISG 1(1)(a); 38; 39. U.S. District Court, Northern District, Illinois, Eastern Division No. 01 C 4447. 28 May 2003. Chicago Prime Packers, Inc.v. Northam Food Trading Co., et al. Published in English: 2003 U.S. Dist. Lexis 9122, 2003 WL 21254261 (N.D. Ill.); http://cisgw3. law.pace.edu/cases/030528u1.html.

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Prime and Nationwide entered into a settlement, and Count II of Chicago Prime’s Amended Complaint, which was its claim against Nationwide, was dismissed with prejudice. [Dkt # 79.] Consequently, Chicago Prime’s motion for summary judgment against Nationwide is moot. Background The Plaintiff purchased from defendant meat processor (“Nationwide”) 40,500 pounds of frozen pork ribs which it immediately afterward resold to defendant meat wholesaler (“Northam”). Two and one-half weeks after the sale, a carrier (Brown Brothers, “B&B”) hired by the defendant meat wholesaler picked up the ribs at defendant meat processor’s storage facility and delivered them to a processor (Beacon Premium Meats, “Beacon”). The carrier issued a straight bill of lading stating “property above in apparent good order,” while the processor noted in its receiving log that the condition of the ribs was “good with the exception of 21 boxes that had holes gouged in them and the meat inside shows signs of freezer burn.” However, soon after it had begun processing the ribs, inspectors of the United States Department of Agriculture inspected the ribs and found that they had arrived in spoiled condition. The defendant wholesaler informed the plaintiff that it would not pay under the contract. The plaintiff sued the defendant wholesaler and the meat processor to recover the contract price. Both parties filed motions for summary judgment. Legal Standard The court may properly grant summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed. R. Civ. P. 56(c). The court “is not required to draw unreasonable inferences from the evidence.” St. Louis N. Joint Venture v. P&L Enters., Inc., 116 F.3d 262, 265 n.2 (7th Cir. 1997). The initial burden is on the moving party to demonstrate, “with or without supporting affidavits,” the absence of a genuine issue of material fact and that judgment as a matter of law should be granted in the moving party’s favor. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). It is not the duty of the court to scour the record in search of evidence to defeat a motion for summary judgment; rather, the non-moving party bears the responsibility of identifying the evidence upon which it relies. Bombard v. Fort Wayne Newspapers, Inc., 92 F.3d 560, 562 (7th Cir. 1996). “The mere existence of a scintilla of evidence in support of the [nonmoving party’s] position will be insufficient; there must be evidence on which the jury could reasonably find for the [nonmoving party].” Anderson, 477 U.S. at 252.

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119

When cross-motions for summary judgment are filed, the same standard is applied to each motion. Stimsonite Corp. v. NightLine Markers, Inc., 33 F. Supp. 2d 703,705 (N.D. Ill. 1999). This can result in the denial of both motions. Buttitta v. City of Chicago, 803 F. Supp. 213, 217 (N.D. Ill. 1992). Discussion The issue before the court was whether judgment on the seller’s claim for the price should be rendered without trial or the claim dismissed for failure to state a claim for which relief can be granted. The Court first discussed the question of the applicable law, on which plaintiff and defendant wholesaler had divergent opinions. Plaintiff argued that the transaction was governed by the Uniform Commercial Code (UCC) and defendant wholesaler argued that the transaction was governed by the Convention (Article 1(1)(a) CISG). The Court observed that when the CISG applies, it pre-empts domestic sales law that otherwise would govern the contract unless the parties have opted out of the CISG. Id. Accord Ajax Tool Works Inc. v. Can-Eng Mfg. Ltd., 01 C 5938, 2003 WL 223187 at *3. (N.D.Ill. Jan. 30, 2003) (Holderman, J.) The Court held that in the present case plaintiff did not allege that the parties had opted out of the CISG, thus the transaction was governed by the CISG. Secondly, the Court analyzed the claims of non-conformity of the goods and the reasonable time for examination and for notice. Defendant wholesaler alleged that it was not obligated to pay for the ribs because they failed to conform to the contract, while plaintiff asserted that defendant wholesaler waited an unreasonable amount of time to give notice of the defect and that the ribs had been spoiled following their transfer to the wholesaler. In its analysis of Articles 38 and 39 of the CISG, the Court stated that the determination of the reasonable time is a factual one and it involves taking into account different factors. Case law interpreting analogous provisions of Article 2 UCC may exceptionally be taken into account to the extent that the language of the relevant CISG provisions tracks that of the UCC. The Court also took into consideration the interpretation of Article 2 UCC which deals with the same matter. Moreover, the Court noted that neither party had provided evidence, such as past practices or customs in the free trade, that would support a determination of a reasonable examination period as a matter of law under the CISG or the UCC. The Court held that the materials submitted by the parties here did not eliminate a factual dispute as to what condition the ribs were in when they were picked up at defendant meat processor’s storage facility. Neither party had presented facts demonstrating that the defendant wholesaler’s rejection of the meat was or was not pursuant to an examination made “within as short a period as practicable under the circumstances” CISG, Article 38. The major portion of the evidence submitted by the parties was the report

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4 Terms of International Trade

and deposition testimony of Dr. Maltby, and this does not eliminate a factual dispute as to what condition the ribs were in when Brown Brothers loaded them on to its truck. Because neither plaintiff nor defendant wholesaler could demonstrate that there was no genuine issue of material fact about which party or entity was responsible for the conditions that caused the ribs to spoil, summary judgment is not appropriate. Conclusion The plaintiff’s motion for summary judgment and the defendant wholesaler’s motion for summary judgment are both denied. However, if there is no nominated governing law or if the declaration of the parties’ intentions is not clear, the governing law is determined according to the principle of the law of conflicts or private international law. Conflict of Law

In relation with the conflict of law, under the contract based on CISG, the domestic law of the concerned parties would be applicable only when the CISG does not provide for the solution of the issue, and the case law of the concerned domestic count would be helpful in interpreting CISG as long as referring to provisions similar to those contained in CISG. The following case treats with the conflict of law issue. Case7 An American manufacturer of fabrics (seller) and a German company (buyer) concluded a contract for the sale of a drapery fabric called Trevira. During the negotiations, the seller affirmed that the fabric was particularly suitable for transfer printing, a process for imprinting the base fabric with colors and patterns. As a result, the buyer asked to examine the fabric. Another German company, entrusted with the transfer printing by the buyer, carried out the test. After examination, the buyer informed the seller that, although there were some problems with the material, it was in general satisfied with it and,

7

Case 580: CISG 1(1)(a); 7; 35(2)(b). United States [federal court], U.S. Circuit Court of Appeals (4th Circuit) [federal appellate court] No. 00-1125. June 21, 2002. Schmitz-Werke GmbH & Co. v. Rockland Industries, Inc.; Rockland International FSC, Inc. Published in English: 37 Fed. Appx. 687; 2002 U.S. App. LEXIS 12336, 2002 WL 1357095 (4th Cir. Md); http://www.cisg.law.pace. edu/cases/020621u1.html.

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121

therefore, placed an initial order for the fabric. During the transfer printing, some additional problems were discovered but the seller urged the buyer to continue and to print the lower-quality fabric with patterns instead of colors. Subsequently, the buyer placed another order for fabric but when about 20% of it was found to be of low quality, the buyer declared its intention to return the material. A dispute arose between the parties. The first instance decision was in favor of the buyer. The appellate Court confirmed the lower Court’s decision. As to the applicable law, after confirming that the case at hand was governed by CISG (Article 1(1)(a) CISG), the Court stressed the importance of interpreting CISG taking into account its international character and the need to promote uniformity in its application and the observance of good faith in international trade (Article 7(1)CISG). Moreover, the Court pointed out that domestic law (i.e., the law of Maryland) would be applicable only if CISG does not provide for the solution of the issue, having regard to the general principles on which it is based (Article 7(2) CISG). Finally, the Court observed that case law on the Uniform Commercial Code can be helpful in interpreting CISG as long as referring to provisions similar to those contained in CISG. As to the merits of the dispute, the Court of Appeal held the seller liable for breach of warranty under Article35(2)(b) CISG. In the opinion of the Court, the seller had failed to deliver goods suitable for the use it had expressly warranted and the buyer had reasonably relied on the seller’s statement that the fabric was particularly fit to be transfer printed. In fact, the seller urged the buyer to go on with transfer printing even after the discovery of further problems in the fabric. As to the issue of the burden of proof, the Court, after stating that CISG is silent on that point, applied domestic law and found irrelevant that the buyer did not prove the exact nature of the defects of the fabric. Regarding the exchange rate to convert the damages awarded into German currency, the Court held domestic law applicable (Article 7(2) CISG), but since it could not find any Maryland precedent on the matter at issue, it found reasonable to confirm the first instance decision that had applied the exchange rate at the date when the buyer became aware of the defects of the fabric.

(2) Jurisdiction Disputes in international trade should be dealt with through discussion, compromise, mediation, or arbitration with the other party. If these methods do not produce a suitable resolution to the case, it is then important to specify which country has jurisdiction in enforcing the international sales contract.

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4 Terms of International Trade

The Adoption of the Jurisdictional Area in Drafting the International Trade Contract is Important, Which is also Relevant to the Governing Law

The following case is about the two important factual issues, to determine the discrepancies of the presented documents, and to determine the applicable law based on the standard of “primary and substantial occurrence of the activities at issue” in the specified jurisdictional area. The court makes it clear that the internal trailer number discrepancy between the invoice and bill of lading is just a “technical variance” which is not required under the terms of the letter of credit and could not mislead the banks to their detriment. The court also makes it clear that if the specified acts involved in the lawsuit at issue do not occur “primarily and substantially in the alleged jurisdictional area. The area’s local law is not applied”. Memorandum8 The present breach of contract and unfair or deceptive trade practice action arises out of the defendant banks’ dishonor of a letter of credit issued in favor of plaintiff Boston Hides & Furs, Ltd. (“Boston Hides”). Presently before the court are the plaintiff’s motion for partial summary judgment and the banks’ cross-motion for summary judgment. I. Background In late May 1992, plaintiff Boston Hides contracted to supply defendant Suelas Villegas, S.A. de C.V. (the “Buyer”) with cowhides in Laredo, Texas. Pursuant to this contract, on June 4, 1992, defendant Banco Nacional de Mexico, S.A. (“Banamex”) issued a letter of credit (the “letter of credit”) in favor of Boston Hides. Defendant Sumitomo Bank, Ltd. (“Sumitomo”) confirmed the letter of credit by advice dated June 5, 1992. On June 17, 1992, Boston Hides, through its collecting bank, State Street Bank and Trust Company (“State Street Bank”), made presentment to Sumitomo’s branch office in New York, seeking payment on the letter of credit. Boston Hide’s presentment included one commercial invoice, covering shipment of six trailer-loads of cowhides to Laredo, Texas (the “Invoice”), and six bills of lading (the “Presentment Bills of Lading”).

8

BOSTON HIDES & FURS, LTD. v. SUMITOMO BANK, LTD. No. 93-11933-Jlt. 870 F.Supp. 1153(1994). United States District Court, D. Massachusetts Published in English 1994 JUSTIA US LAW. http://law.justia.com/cases/federal/district-courts/FSupp/870/1153/1647725/.

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123

Sumitomo, and ultimately Banamex, (collectively, the “Banks”), however, refused to honor payment under the letter of credit. In support of its dishonor, Sumitomo cited a discrepancy between the identification number of a trailer used to ship one of the six cowhide loads, as contained in one of the Presentment Bills of Lading (the “Bill of Lading”), and the identification number for that same trailer contained in the Invoice. Boston Hides received notice of the rejected presentation from Sumitomo on June 18, 1992. Although Boston Hides did have until the following day to submit corrected documents, they did not do so. Subsequently, Banamex called the Buyer to get a waiver of the discrepancy. The Buyer, however, refused to provide such a waiver, and Boston Hides was never paid. Boston Hides commenced the present action on September 2, 1993. It asserted separate breach of contract claims against Sumitomo and Banamex (Counts I and II), separate Massachusetts General Laws, Chapter 93A unfair or deceptive trade practice claims against Banamex and Buyer (Count III and VI), and, lastly, a breach of contract claim against Buyer (Count IV). In defending this suit, however, the Banks uncovered information which suggests Boston Hides’ presentment included false documents. The relevant facts, reconstructed from various shipping documents, are as follows. Boston Hides shipped the cowhides to Laredo prior to any agreement to secure a letter of credit. Pursuant to the cowhide shipment, the freight company issued several bills of lading. These bills of lading, (the “Original Bills of Lading”), consigned the cowhides to Andres Monetou C/O Boston Hides & Furs LTD. Then, only after shipment was complete did the parties contemplate a letter of credit. As a condition to its release of the cowhides, Boston Hides demanded that the Buyer procure the letter of credit in its favor. On June 4, 1992, at the Buyer’s request, Banamex issued the letter of credit in favor of Boston Hides. Then, on June 5, 1992, Boston Hides released the cowhides to the Buyer. Having delivered the goods, Boston Hides sought payment under the letter of credit. But, because the Original Bills of Lading consigned the goods to Andres Monetou C/O Boston Hides, instead of Banamex as required under the letter of credit, they would not satisfy presentment. Apparently, Boston Hides then created the Presentment Bills of Lading, indicating consignment to Banamex, to comply with the terms of the letter of credit. The Banks maintain that this discrepancy between the Original and Presentment Bills of Lading confirms that the Presentment Bills of Lading were false, justifying dishonor.

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4 Terms of International Trade

Informed by these facts, the court now considers Boston Hides’ and the Banks’ cross-motions for summary judgment on Counts I, II, and III. II. Choice of Law Plaintiff contends that, in resolving this dispute, the court should apply Massachusetts law, the law of the forum. The Banks maintain, however, that New York law, the law of the place of performance, governs. Massachusetts considers “various choice influencing considerations” in making its choiceof-law determination. The court will apply Massachusetts law, the law of the forum state, to the extent it is common to both New York and Massachusetts. III. Standard for Summary Judgment “Summary judgment is warranted where the record, viewed in the light most favorable to the nonmoving party, reveals that there is no genuine factual dispute and the moving party [is] entitled to judgment as a matter of law.” Siegal v. American Honda Motor Co. “The moving party is entitled to judgment as a matter of law if the nonmoving party does not adduce enough evidence to permit a reasonable trier of fact to find for the nonmoving party on any element essential to its claim.” IV. Analysis A. Banks’ Refusal to Pay under the letter of credit (Cross-Motions for Summary Judgment on Breach of Contract Claims). The parties’ claims for summary judgment under Counts I and II hinge on two contested issues: (1) whether the trailer number inconsistency between the bill of lading and invoice in plaintiff’s presentment justified the Banks’ refusal to pay under the letter of credit, and (2) whether the plaintiff’s submission of the Presentment Bills of Lading as opposed to the Original Bills of Lading justified the Banks’ refusal to pay under the letter of credit. The court will address each issue in turn. 1. Inconsistency Between Presentment Documents Generally, a demand for payment under a letter of credit must strictly comply with the letter of credit’s terms. Accordingly, where presentment documents are not exactly as specified in the letter of credit, demand may be rejected. Discrepancies between the presentment documents themselves, as opposed to between the presentment documents and the letter of credit, are also subject to this strict compliance principle. Pursuant to the 1983 U.C.P., a bank may refuse payment under a letter of credit where the presentment documents

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submitted are facially inconsistent. This general rule of strict compliance has been moderately tempered. A bank may not dishonor payment based on a “hypertechnical reading” of the letter of credit. Instead, “a variance between documents specified and documents submitted is not fatal if there is no possibility that the documents could mislead the paying bank to its detriment.” The Banks do not contest the fact that Boston Hides’ presentment facially conformed to the letter of credit’s requirements. Instead, focusing on the internal trailer number discrepancy between the invoice and the bill of lading, the Banks claim that this variance justified dishonor. The court disagrees. The inconsistent trailer numbers were a “technical variance” which was not required under the terms of the letter of credit and could not mislead the Banks to their detriment. The Banks’ principal argument is that, “the ‘marks and numbers’ identifying the goods on the [Presentment Bills of Lading] did not match the ‘marks and numbers’ that identified the goods in possession of the freight forwarder or other custodian.” However, the letter of credit did not even require “marks and numbers” be included on the bill of lading or invoice. The court is unwilling to conclude that a minor, typographical error in such voluntarily included description defeats compliance. Moreover, the bill of lading and invoice did contain identical seal numbers, weights, and numbers of pieces. The Banks could have resolved the slight trailer number inconsistency by reference to these other numbers on the face of the documents and thereby recovered the goods. 2. Presentment of False Documents The Banks are justified in refusing payment because of the plaintiff’s presentment of false documents. The plaintiff admits that the Presentment Bills of Lading were “substitute” and not “original.” These “substitute” Presentment Bills of Lading contained information which differed from the facts as contained in the actual shipping documents. In particular, the Original Bills of Lading specified consignment to parties other than Banamex as well as different shipment dates and shipment by a party other than Boston Hides. The Banks argue that by presenting documents that were not genuine, even if they had been conforming on their face, the plaintiff breached conditions of the letter of credit, relieving the Banks of any obligation to pay. i. Preclusion The plaintiff claims that under Article 16 of the 1983 U.C.P., the Banks are precluded from raising any defects to justify dishonor other than those which they identified without delay after examining the documents. Because the

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defects in the Presentment Bills of Lading were not identified until approximately two years after dishonor, the plaintiff maintains that the Banks may not presently rely on these defects to deny payment. Plaintiff also claims that the independence principle precludes the Banks from going beyond the face of the presentment documents to uncover the asserted fraud. Article 16 of the 1983 U.C.P. provides that an issuing bank must examine a beneficiary’s documents within a “reasonable time” and notify the remitting bank, “without delay,” of any “discrepancies” on which the bank bases dishonor. Article 16’s preclusion provisions do not, however, relate to the “effect, if any, of delay on the assertion of a forgery or fraud claim or defense.” James G. Barnes. Preclusion under Article 16 is designed to both balance the beneficiary’s obligation of strict compliance under a letter of credit and give the beneficiary prompt notice of defects so it can cure them. To preclude the Banks for failure to assert such an intentional “discrepancy” which they could not have discovered “without delay” would improperly punish them for Boston Hides’ wrongful conduct and not for their own error. Although the court is hesitant in allowing assertion of a defense to payment nearly two years after dishonor, the letter of credit’s function as a “swift, fluid, and reliable financing device” would not be promoted by sanctioning the submission of false documents. It is a fundamental tenet of letter of credit law that, in commercial letter of credit transactions, banks deal in documents and not merchandise. Accordingly, letters of credit are treated as entirely separate and distinct from the underlying sales contract. This is called the independence principle. Accordingly, the independence principle is not a bar to the Banks’ assertion of fraud. The Banks are not precluded from raising fraud as a defense to payment under the letter of credit. ii. Fraud in the Documents Under Section 5-114(2) of the Uniform Commercial Code, a court of appropriate jurisdiction may enjoin honor or uphold dishonor by an issuing bank where the bank has been advised that documents submitted pursuant to a letter of credit are fraudulent. In addition, if sufficient evidence exists on which a court of appropriate jurisdiction could enjoin honor, the issuing bank, on its own initiative, may refuse payment. The plaintiff does not deny that the Original Bills of Lading specify consignment to Andres Monetou, not to Banamex. Accordingly, Boston Hides failed to comply with an express condition of the letter of credit, and the Presentment Bills of Lading submitted to establish compliance were false. This misrepresentation was significant to the letter of credit transaction. In particular, consignment to other than Banamex deprived Banamex of its security interest in the goods and the leverage to secure payment from the Buyer, who

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had already received the cowhides pursuant to the Original Bills of Lading. The Banks’ refusal to pay under the letter of credit was therefore justified pursuant to U.C.C. § 5-114(2). The plaintiff attempts to mitigate the strength of the Banks’ argument, claiming that (1) “substitute” bills of lading, such as the Presentment Bills of Lading, are expressly authorized by U.C.C. § 7-402, and (2) that Banamex maintained a valid security interest in the goods under the “substitute” Presentment Bills of Lading pursuant to U.C.C. § 9-304(3), (5). U.C.C. § 7-402 does not sanction “substitute” documents containing false information, designed to meet the terms of a letter of credit and created after the goods had been delivered to their buyer. Furthermore, Banamex did not acquire a perfected security interest pursuant to U.C.C. § 9-304(3), (5) as a result of the Presentment Bills of Lading’s consignment to Banamex. U.C.C. § 9-304(3) provides that when goods are in the possession of a “bailee” who has not executed a negotiable document for the goods, a security interest in the goods is perfected by (1) issuance of a document in the name of the secured party, (2) the bailee’s receipt of notice of the secured party’s interest, or (3) filing of a financing statement as to the goods. Because the Buyer is not a “bailee” within the contemplation of the U.C.C., Banamex would not have a perfected security interest under this provision, even if it had received the Presentment Bills of Lading from Sumitomo. In view of the falsity of the Presentment Bills of Lading, this court holds dishonor was proper. B. Chapter 93A Claim(Banks’ Motion for Summary Judgment on Count III) In Count III of its complaint, plaintiff claims that Banamex’s refusal to honor the letter of credit constituted an unfair or deceptive trade practice in violation of Massachusetts General Laws Chapter 93A, Section 11. The Banks now move for summary judgment, asserting that the actions constituting the alleged unfair or deceptive act did not occur “primarily and substantially” in Massachusetts. To maintain an action under Chapter 93A, Section 11, the unfair or deceptive act or practice must have “occurred primarily and substantially within the commonwealth.” Guided by a functional approach and the various factors enumerated by the state and federal courts, this court holds that the allegedly unfair or deceptive acts involved in Banamex’s dishonor under the letter of credit did not occur “primarily and substantially” in Massachusetts. Although Boston Hides, a Massachusetts corporation is located in Massachusetts when the Banks dishonored, and incurred any alleged losses in the commonwealth, all other relevant conduct concerning dishonor occurred outside Massachusetts. Accordingly, because virtually no

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conduct related to the letter of credit transaction occurred in Massachusetts, the plaintiff may not maintain its action under Chapter 93A. V. Conclusion The Banks’ motion for summary judgment on Counts I, II, and III is hereby ALLOWED, and plaintiff’s motion for partial summary judgment on Counts I and II is hereby DENIED.

4.2

Basic Terms

4.2.1

General

Clarification and understanding of proper terms are essential to the complete implementation of a concluded agreement. The basic conditions of foreign trade include major terms about product, shipment, quality, insurance, packaging, claims, etc. The inclusion of Incoterms in clarifying the contract terms will help to comprehensively complement a contract. For the International Trade Practitioners, It Is Very Essential to Be So Serious to Make All Issues Very Clear in the Contract for Responding to Their Contract with the Specified Product and Business Circumstances

The following is the typical case to treat with the material breach of the contract under the CISG complemented by UCC. In this case, the buyer alleges that it is not obligated to pay for the goods because they failed to conform with the contract by virtue of being spoiled at the time they were delivered. The seller, however, argues that the buyer waited an unreasonable amount of time to revoke its acceptance or that the goods spoiled following their transfer to buyer and that the buyer thus had no grounds to refuse to honor the contract. In this case, it was clearly found out that the meat deteriorated after the buyer accepted the goods, the case does not establish any particular time period in which the goods must be inspected as a matter of law, and the parties do not discuss the customs or practices of traders in the concerned industry with regard to the inspection of newly purchased goods, whether frozen or fresh. In such situation, neither party can demonstrate that there is no genuine issue of material fact about which party or entity was responsible for the conditions that caused the goods to spoil, which is followed by the court’s denial for the motion. For the international trade practitioners, it is very essential to be so serious to make all issues very clear in the contract for responding to their contract with the specified product and business circumstances. Particularly, in this case the subject-goods of the contract is the fertilized meat which is easily

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spoiled according to the climate and natural circumstances. In such case, the contract is recommended to make it clear of the reasonable period of time to give the notice of the lack of the good’s quality to the seller. Memorandum Opinion9 Chicago Prime Packers, Inc. (“Chicago Prime” or “Plaintiff”) moved for summary judgment against both defendants, Northam Food Trading Co. (“Northam”), and Nationwide Foods, Inc. (“Nationwide”). Northam moved for summary judgment against Chicago Prime. Subsequently, Chicago Prime and Nationwide entered into a settlement, and Count II of Chicago Prime’s Amended Complaint, which was its claim against Nationwide, was dismissed with prejudice. Jurisdiction Federal jurisdiction exists in this case because of diversity of citizenship. Chicago Prime is a Colorado corporation with its principal place of business in Colorado; Northam is a Canadian corporation with its principal place of business in Montreal, Quebec; and Nationwide is a Delaware corporation with its principal place of business in Illinois. The parties have consented to the jurisdiction of a Magistrate Judge. Background Chicago Prime is a wholesaler of meat products, Northam is also a wholesaler of meat products, and Nationwide (doing business as Brookfield Farms) is a meat processor. Chicago Prime purchased a quantity of pork ribs from Nationwide pursuant to an invoice dated April 6, 2001. Chicago Prime also contracted to sell 40,500 pounds of pork ribs to Northam. Chicago Prime states that it resold the ribs to Northam “within seconds” and without taking physical possession of the ribs. On or about April 23 or 24, 2001, Brown Brothers Produce Co. Inc. (“Brown Brothers”), acting for Northam, picked up 40,500 pounds of ribs that Nationwide had produced and sold to Chicago Prime from B & B Cold Storage, a storage facility that Nationwide used. When Brown Brothers picked up the ribs, it signed a straight bill of lading. The ribs were loaded from B & B Cold Storage onto a truck belonging to Brown Brothers. Brown Brothers delivered the ribs to Beacon Premium Meats (“Beacon”) of Robinson, Illinois on April 25, 2001. Chicago Prime and Nationwide suggest that

9

Chicago Prime Packers, Inc.v. Northam Food Trading Co., et al. No. 01 C 4447. 28 May 2003. U.S. District Court, Northern District, Illinois, Eastern Division http://cisgw3.law.pace.edu/cases/ 040521u1.html.

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Beacon is now out of business. When the ribs were delivered, Beacon prepared a receiving log noting that the condition of the product was “good with the exception of 21 boxes that had holes gouged in them and the meat inside shows signs of freezer burn.” On April 30, 2001, Chicago Prime paid Nationwide for the ribs. According to Northam, Beacon began processing the ribs on May 4, 2001. However, Chicago Prime denies that statement, and Northam does not cite any direct evidence of that fact. On May 4, 2001, Inspector Ken Ward of the United States Department of Agriculture (“USDA”) inspected ribs being processed by Beacon, found that they did not look good, and ordered Beacon to stop processing them. On May 23, 2001, Dr. John Maltby of the USDA examined certain of the ribs identified by Ward and ultimately ordered that all of the ribs be destroyed. Dr. Maltby concluded that the ribs in question arrived at Beacon in the spoiled condition. On May 24, 2001, Northam informed Chicago Prime of Dr. Maltby’s inspection. On June 18, 2001, Northam informed Chicago Prime that Northam would not pay under the contract. Chicago Prime then filed this lawsuit to recover the contract price from Northam, and subsequently joined Nationwide as a defendant on a second count. Chicago Prime and Nationwide contest Northam’s assertion that the ribs inspected by Inspector Ward and Dr. Maltby were the ribs delivered by Brown Brothers to Beacon. Assuming that they are the same ribs, each party denies that the ribs spoiled while under its ownership or control. Legal Standard The court may properly grant summary judgment “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c). A genuine issue of material fact exists “if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc. In determining whether a genuine issue of material fact exists, the court must construe all facts and draw all reasonable and justifiable inferences in favor of the non-moving party. The initial burden is on the moving party to demonstrate, “with or without supporting affidavits,” the absence of a genuine issue of material fact and that judgment as a matter of law should be granted in the moving party’s favor. Once the moving party has met the initial burden, the opposing party must support its contentions with admissible evidence and may not rest upon the mere allegations in the pleadings or conclusory statements in affidavits. The non-moving party must designate specific facts showing that there is a genuine issue for trial. It is not the duty of the court to scour the record in search of evidence to defeat a motion for summary judgment; rather, the

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nonmoving party bears the responsibility of identifying the evidence upon which it relies. When cross-motions for summary judgment are filed, the same standard is applied to each motion. This can result in the denial of both motions. Discussion Northam and Chicago Prime have filed cross-motions for summary judgment on Count I. Northam alleges that it is not obligated to pay for the ribs because they failed to conform with the contract by virtue of being spoiled at the time they were delivered. Chicago Prime argues that Northam waited an unreasonable amount of time to revoke its acceptance or that the ribs spoiled following their transfer to Northam and that Northam thus had no grounds to refuse to honor the contract. Northam and Chicago Prime dispute what law governs Count I. Northam argues that the contract between it and Chicago Prime is governed by the Convention on the International Sale of Goods (“CISG”). Chicago Prime argues that the transaction is governed by the Uniform Commercial Code (“UCC”). The CISG applies to “contracts of sale of goods between parties whose places of business are in different [nation] States ... when the [nation] States are Contracting States.” Usinor Indusreel v. Leeco Steel Products Inc. Under the CISG, “[a]t the time of contracting, the parties have the opportunity to opt-out, and decide that the UCC, or other domestic law, applies.” In the present case, Chicago Prime does not allege that the parties opted out of the CISG. Thus, the transaction between Northam and Chicago Prime is governed by the CISG. Article 38 of the CISG provides: (1) The buyer must examine the goods, or cause them to be examined, within as short a period as is practicable in the circumstances. (2) If the contract involves carriage of the goods, examination may be deferred until after the goods have arrived at their destination. (3) If the goods are redirected in transit or redispatched by the buyer without a reasonable opportunity for examination by him and at the time of the conclusion of the contract the seller knew or ought to have known of the possibility of such redirection or redispatch, examination may be deferred until after the goods have arrived at the new destination. Article 39 provides: “(1) The buyer loses the right to rely on a lack of conformity of the goods if he does not give notice to the seller specifying the nature of the lack of conformity within a reasonable time after he has discovered it or ought to have discovered it. (2) In any event, the buyer loses the right to rely on a lack of conformity of the goods if he does not give the seller notice thereof at the latest within a period of two years from the date on which the goods were actually handed over to the buyer, unless this time-limit is inconsistent with a contractual period of guarantee”.

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The determination of what period of time is “practicable” is a factual one. Under the UCC, “[a] buyer who accepts goods that do not conform to the contract ... forfeits any remedy unless he notifies the seller of the breach within a reasonable time ‘after he discovers or should have discovered’ it.” Hydrite Chem. Co. v. Calumet Lubricants Co., 47 F.3d 887, 893. What determines the time in which the buyer’s duty to inspect must be undertaken depends on the language of the contract and custom and trade usage. In the present case, neither Chicago Prime nor Northam has established that there is no genuine issue of material fact to be tried. In the first place, neither party has presented facts demonstrating that Northam’s rejection of the meat on May 24, 2001, was or was not pursuant to an examination made “within as short a period as practicable under the circumstances.” CISG, Article 38. In fact, the record presented by the parties does not demonstrate when the meat was first “examined” after it left the B & B Cold Storage. The first inspection referred to in the parties’ statements is that done by Inspector Ward on May 4, 2001. The record before the court fails to establish whether Northam or anyone on its behalf examined the meat prior to that date, or at any other time between May 4, 2001, and Dr. Maltby’s inspection on May 23, 2001, although that may be inferred from Dr. Maltby’s testimony that Beacon was “reworking” the meat (trying to sort the putrid ribs from the good ones) when he arrived. The major portion of the evidence submitted by the parties is the report and deposition testimony of Dr. Maltby. Dr. Maltby is a veterinarian who has been employed for the last 18 years by the USDA. At the Beacon plant, Dr. Maltby personally inspected 20 cases randomly out of the 1350 cases of ribs. Dr. Maltby stated in his report and his deposition that the ribs were spoiled when they arrived at Beacon. He stated that when frozen meat has been left to thaw there is usually “purge,” that is, blood that had seeped out and then has refrozen, and there was no evidence of purge on the boxes he saw. The ribs were all in varying degrees of purification. Some of the packaging of the ribs was damaged, possibly allowing exposure of the ribs to the outside. Dr. Maltby also stated that the ribs appeared to be from different sources because the ribs were of different sizes and in varying degrees of decomposition. The boxes also had different label numbers on them, indicating different facility locations of the same company. Dr. Maltby admitted that he has no personal knowledge of the ribs’ condition when delivered or the conditions under which they were shipped or stored prior to his arrival. He noted that there are “a lot of variables” in how long it would take meat to reach the condition in which he saw these ribs, such as the type and size of the meat and the temperature at which it was held. Dr. Maltby testified that he does not know at what point the ribs spoiled, only that he made a determination that the meat was bad.

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Chicago Prime points to the evidence, that Brown Brothers signed a bill of lading stating the ribs were in “apparent good order” and Beacon noted in its receiving log that the “condition of the product” was “good” except for some of the boxes that were “gouged” and some of the meat showing signs of freezer burn. The evidence presented by the parties simply does not eliminate a question of fact about the condition of the ribs when Brown Brothers took them from Nationwide’s storage facility or the reasonableness of Northam’s notice of rejection. Chicago Prime’s central argument is that “[a] one-month delay in the revocation of acceptance of a perishable commodity such as meat must be considered, as a matter of law, inherently unreasonable. A perishable commodity ... must be inspected on arrival, when the bill of lading is signed, or the industry cannot function.” (Pl.’s Mem. Supp. Sum. J. at 5-6). In support of that proposition, Chicago Prime cites Meat Requirements Coordination, Inc. v. GGO, in which the appellate court affirmed a judgment in favor of the seller of meat against the buyer for the contract price. In that case, however, the buyer conducted an inspection before taking delivery, and a subsequent inspection by the buyer’s buyer showed that the meat was in “excellent condition.” Based on those facts, the court found that the meat deteriorated after the buyer accepted it. That the case does not establish any particular time period in which meat must be inspected as a matter of law. Northam argues that meat sold in a frozen state cannot be analyzed as a “perishable good.” Neither party has provided evidence to support a determination of a reasonable inspection period as a matter of law under the CISG or the UCC. At oral argument on the motions, Chicago Prime’s counsel admitted that the only evidence in the record that would allow the court to decide as a matter of law that Northam’s notice was not reasonable was the testimony of Dr. Maltby. However, Dr. Maltby’s deposition and report do not discuss the custom or practice of buyers and sellers in the meat industry with regard to the inspection of newly purchased meat, whether frozen or fresh. Unlike the Meat Requirements case discussed above, the materials submitted by the parties here do not eliminate a factual dispute as to what condition the ribs were in when Brown Brothers loaded them on to its truck. Thus, it is impossible to say from the materials submitted what an inspection at that point would have shown. Northam’s sole evidence that the ribs were spoiled prior to Northam taking possession is the report and testimony of Dr. Maltby. However, Dr. Maltby’s testimony is not conclusive enough to eliminate any material questions of fact. Also, fatal to Northam’s motion is the fact that Northam provides no evidence, why, if the ribs were spoiled when they arrived at Beacon, Northam’s notice to Chicago Prime a month later was within “a reasonable time after he [the buyer] has discovered it or ought to have discovered it.” CISG, Article 39. Northam simply asserts, without citing

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any factual support or legal authority, that it could not declare a fundamental breach of the contract until the entire load of meat was condemned. Chicago Prime’s motion for summary judgment and its response to Northam’s summary judgment essentially takes the position that if Northam is correct, Chicago Prime should recover from Nationwide, and if Nationwide is correct, Chicago Prime should recover from Northam. However, to be entitled to summary judgment against a particular party, Chicago Prime must demonstrate the absence of any genuine issue of material fact about that party’s liability. It has failed to do so. Here, neither Chicago Prime nor Northam can demonstrate that there is no genuine issue of material fact about which party or entity was responsible for the conditions that caused the ribs to spoil. Thus, summary judgment is not appropriate. Conclusion For the foregoing reasons, Chicago Prime’s motion for summary judgment and Northam’s motion for summary judgment are both denied. In preparing the contract draft, it is recommended that traders focus on the agreement to be proceeded to finally be concluded, while at the same time protecting their rights from being damaged. Therefore, trade terms are surely required to be highly specific and include arbitration and resolution clauses prepared in the case of the disagreements in the future.

4.2.2

Terms of Quality

Terms of quality refer to specific details about qualitative aspects of the products to be shipped, including but not limited to number, size, shape, color, production methods, origination, and age. Age and origin might be of particular interest when dealing with perishable items, like fruit or vegetable products. Also, quality and contents of the product you are looking to import should be in compliance with importing countries’ regulations. For example, products containing pollution-creating material are generally regulated very strictly in developed countries due to health concerns, but are sometimes not regulated in other developing countries. Buying orders for the industrial goods are normally specified through prior samples or brands, while agricultural, marine, forest, and mineral products are usually agreed upon by standards and product types instead of samples. Thus, terms of quality are very important to contracting parties.

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Terms of Quality In International Trade Contract

The contract parties, in international business transactions, are required to be very serious to make the terms of quality and enforce the quality terms. The following is the case to make it clear that if the delivered goods are materially defective and not of “first quality” as the contract specified and the parties understand that term, the buyer can seek the remedy for the breach of the contract made by the seller under the CISG. This case also shows the clear rule that, under the UCC, the issuing bank of a letter of credit, unless otherwise agreed, is not a guarantor for the performance of the underlying commercial contract between the parties. That is, the customer of the letter of the credit, by entering the underlying transaction, has assumed the risks inherent in that commercial transaction, and these risks cannot be protected by the letter of credit. Introduction10 This is an action for breach of contract regarding the sale of certain cotton sweatshirts and refusal to honor a letter of credit relating to such sale. Plaintiff Texpor Traders, Inc. the seller seeks damages of $36,612., plus interest and costs from defendants Oxford Industries, Inc. (“Oxford”) the buyer, for nonpayment of delivery on shipment No. 10881 (“second shipment”) and from Trust Company Bank (“TCB”) for refusal to honor a letter of credit issued in favor of Texpor by the Bank on behalf of Oxford. Oxford, contending the merchandise was defective, counterclaims for $61,036.40 paid to Texpor under the letter of credit for shipment No. 10882 (“first shipment”) and $163,265.95 for lost profits on confirmed customer orders and potential customer orders (for both shipments) that Oxford claims it was unable to deliver because of defects in the merchandise. Findings of Fact On September 11, 1986, Oxford submitted purchase orders Nos. 10876, 10877, 10880, 10881, and 10882 to Texpor under which Oxford agreed to purchase and Texpor agreed to sell a quantity of one hundred percent French terry or knit cotton sweatshirts, pursuant to the terms and conditions set forth within the above-cited purchase orders. Each purchase order specified that

10

TEXPOR TRADERS, INC. v. TRUST COMPANY BANK and Oxford Industries, Inc. U.S. District Court, S.D. New York No. 87 Civ. 9224 (BN). 720 F. Supp. 1100 (S.D.N.Y. 1989). Published in English: 1989 JUSTIA US LAW http://law.justia.com/cases/federal/district-courts/FSupp/720/ 1100/1768418/.

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the sweatshirts, whether French terry or knit, were to be “first-grade goods,” and contained the seller’s express warranty that “all goods ... will be of first quality and merchantable and fit and sufficient for the purposes intended by the buyer.” Casimir Taxier (“Taxier”), president of Texpor, was aware that the garments to be produced in accordance with the purchase orders were intended for resale in both top quality department stores, such as Saks Fifth Ave., and specialty retail stores and boutiques. Oxford provided Texpor with specification sheets and size grades and requested prototype samples before giving Texpor the written purchase orders. The initial sample required corrections and the correct samples were approved by Oxford’s purchasing Agent, Renee Nesbitt Baird (“Baird”). In connection with the purchase orders, Oxford arranged for TCB to issue an irrevocable letter of credit in favor of Texpor in the amount of $242,448.25. This letter of credit was later amended four times, presumably to accommodate Texpor’s delay in delivery of the first and second shipments, the last amendment extending the latest shipping date for the second shipment to February 10, 1987. On January 20, 1987, Texpor shipped garments under purchase order No. 10882 (first shipment) to Oxford and issued invoice No. 101 for 6620 sweatshirts. On January 29, 1987, Oxford received the merchandise and Texpor received payment in full under the letter of credit for $61,036.40. Since payment for the first shipment was made on the same day, Oxford had no time to inspect the goods prior to payment. On February 3, 1987 Texpor shipped garments to Oxford under purchase order No. 10881 and issued invoice No. 102 for 3450 sweatshirts (second shipment) in the total amount of $36,612. Texpor, to date, has not received payment for this shipment. TCB refused to honor the letter of credit. From January 29, 1987, to February 4, 1987, Oxford conducted routine quality audits of the first shipment, and from February 12, 1987 (immediately upon receipt of the second shipment) to February 25, 1987, Oxford conducted routine quality audits of such second shipment. These quality audits revealed defects in most of the sweatshirts, defects ranging from improper stitching and holes in the fabric to soiled or dirty garments and lack of uniformity in fabric weight and color. Some of the audits even bear the auditor’s note that the garments received were damp and had an “odor.” Claudette Hayes (“Hayes”), the quality audit supervisor at Oxford for five years, notified Karen Hilton (“Hilton”), Oxford’s merchandise manager, informing her of the problem. Hilton reviewed the audits and sent samples of the defective goods to Baird in Oxford’s New York office. Baird testified in her deposition that the merchandise Oxford received under purchase orders Nos. 10882 and 10881 did not conform to the quality of the production samples that Taxier had

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shown her in Portugal during her visits. The court finds that the quality audits conducted by Oxford on the first and second shipments constitute statistically valid random samples and thus are representative of the defects in the shipments as a whole. The results of the audits revealed that in some cases as many as sixty-four percent of the garments tested were defective. Baird met up with Taxier and Leo Liberman (“Liberman”) whom Taxier represented to Baird as his partner at Texpor (Taxier denied this at trial, maintaining he merely shared office space with Liberman). After showing them the defective goods, they agreed there was a problem. In sum, Baird specifically informed Taxier that Oxford would not accept the entire shipment, was considering canceling the remaining purchase orders, and would return the garments to Portugal. Because of certain quota restrictions on goods manufactured in Portugal, Texpor allegedly could not return the sweatshirts to its Portuguese manufacturer. Consequently, Oxford via Baird offered to “dump” the goods at a discount price in order to “try to help out Texpor,” and it was agreed by Taxier that “[Texpor] would absorb the loss.” At trial, Oxford also presented a qualified expert, Fred Gerson (“Gerson”), whose uncontroverted testimony emphasized that the goods in question were not of first quality. Gerson has twenty-eight years of retail experience in men’s and women’s sportswear. Gerson testified that of the seventy garments he thoroughly examined, ninety percent had material defects such as holes in the fabric, excess puckering, and so on. He commented that many of these garments would be unacceptable as “first quality” goods. The court thus finds that the goods Texpor delivered to Oxford under purchase orders Nos. 10882 and 10881 were materially defective and not of “first quality” as the contract specified and the parties understood that term: Based on the uncontroverted testimony of defendants’ expert, the quality audits, and on the very credible testimony of Hilton and Hayes, in addition to having carefully examined the seventy or so odd garments presented as exhibits, the court cannot find otherwise. Further, Baird contends that she wrote a letter notifying Texpor that Oxford would not accept the sweatshirts. There was no evidence, however, of any such letter. In any event, Gerson testified that in all his years in the apparel industry he never gave written notice of defective goods to a seller, and that such notice was usually given by telephone. After this meeting, communications between Baird and Taxier apparently ceased. However, Baird continued to communicate with Liberman in Texpor’s New York office regarding what had to be done about the first shipment and the possibility of canceling the remaining purchase orders. The same problems occurred with the second shipment. Baird called Liberman and advised him that Oxford would not accept the goods delivered under purchase order No. 10881. At that juncture, Oxford canceled the letter of credit (the letter of credit technically had expired because the goods were

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delivered two days late). Baird attempted to cancel the remaining purchase orders but could not reach either Taxier or Liberman. Significantly, both Hilton and Baird attempted to contact Texpor regarding the second shipment but they had lost all contact with either Taxier and Liberman. Oxford had confirmed customer orders for the sweatshirts; from several highly regarded department stores, including Saks Fifth Avenue, B. Altman and Abercrombie & Fitch, and over fifty specialty shops and boutiques. However, the sweatshirt conditions were unacceptable and Oxford canceled the customer orders. Oxford presented complete and undisputed evidence of lost profits in the form of cancelations on the confirmed customer orders. Conclusions of Law Once goods have been delivered by the seller (Texpor) to the buyer (Oxford), the buyer is under a duty to accept or reject the goods. The buyer has a right to inspect the goods, and when the seller is authorized to send the goods, the inspection may occur after their arrival. Having decided that the goods Texpor delivered to Oxford were not of “first quality” and unacceptable for the intentions of and use by the buyer, the issue in this case is whether Oxford accepted or rightfully rejected the goods. Acceptance occurs when either (a) after a reasonable opportunity to inspect the goods, the buyer informs the seller that the goods are conforming or that he will retain them in spite of their non-conformity, or (b) the buyer, after a reasonable opportunity to inspect, fails to make an effective rejection. Pursuant to U.C.C. § 2-602, “[r]ejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.” In this case, purchase order agreement Nos. 10882 and 10881 states specifically that notice of defect “shall be considered timely if made by the Buyer within thirty days after the Buyer discovers or learns of such defect.” Texpor was given seasonable notice of the defects regarding the first shipment. Regarding the second shipment Baird attempted to cancel all remaining purchase orders with Texpor; however, she had lost all contact with either Taxier or Liberman. Significantly, it appears to the court that Taxier deliberately became “incommunicado.” Oxford insists that Liberman was Texpor’s agent and as such Texpor received adequate notice of the defects, and he was intimately involved in all the discussions relating to the goods. Under U.C.C. 1-201(35), a “representative” includes an agent, an officer of a corporation, or any other person empowered to act for another. Thus, even if Liberman was not acting as Texpor’s agent, for purposes of notification he most certainly was a representative. It is therefore apparent that Texpor, at the very least, had been made fully aware that there were again serious quality problems with the second shipment.

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Plaintiff argues that because Oxford failed to state with particularity any of the mentioned defects, it consequently has waived the right to reject the goods. For both shipments, plaintiff’s contention fails. Under § 2-605(1)(a), the buyer waives his rights by failing to particularize only when the seller could have cured, or under § 2-605(1)(b) the buyer waives his rights only after the seller has made a request in writing for a full and final written statement of all defects as to which the buyer proposes to rely. Neither of these circumstances is present in this case. Plaintiff additionally argues that Oxford’s rejection is ineffective because Texpor received no written notice of the defects. Plaintiff’s position, however, is untenable. First, U.C.C. § 1-201 does not require a written notice. Second, as we have seen, what constitutes reasonable notice depends on the circumstances of each case and is generally a question of fact. In the present situation, while evidence of letter from Oxford to Texpor would certainly buttress a determination that Texpor received adequate notification of the defects, nevertheless lack of such letter does not in any way detract from the certitude of the court’s finding. Continuing, plaintiff argues that the letter in which Texpor informed TCB of its intention to pursue its legal remedies against TCB if payment under the letter of credit was withheld, constituted a sufficient response to Oxford that any further communications between the parties should be had by counsel. Plaintiff maintains Oxford failed to give notice to Texpor that the goods were unacceptable until it filed its answer and counterclaim one year later. Under U.C.C. § 5-109, the issuer of a letter of credit, unless otherwise agreed, is not a guarantor for the performance of the underlying contract between the parties. Indeed, it is “the customer [who] by entering the underlying transaction has assumed the risks inherent in it.” Since Oxford’s relation to Texpor on the underlying contract is independent of Texpor’s relation to TCB regarding the letter of credit, any notice sent to TCB concerning the letter of credit is insufficient to serve as notice to Oxford of Texpor’s intention to negotiate in good faith. Under the Code, notice received for a particular transaction is effective from the time it is brought to the attention of the individual conducting the transaction, or in any event, from the time it would have been brought to his attention had he or the organization exercised due diligence. U.C.C. § 1-201(27). In the current situation, Taxier certainly cannot validly claim to have exercised due diligence with respect to the notice given to Texpor. Indisputably, Taxier made no attempt whatever to contact Oxford regarding the second shipment. A letter sent by Texpor’s attorneys to the bank attempting to collect on the letter of credit simply does not constitute a sufficient response to Oxford to negate Oxford’s rightful rejection of the goods. Oxford’s remedies for rightful rejection are governed by U.C.C. § 2-711 which reads in part: (1) Where the seller fails to make delivery ... or the buyer

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rightfully rejects ... then with respect to any goods involved, and with respect to the whole if the breach goes to the whole contract the buyer may cancel and ... may in addition to recovering so much of the price as has been paid (2) recover damages for non-delivery as provided. (3) On rightful rejection ... a buyer has a security interest in goods in his possession or control for any payments made on their price and any expenses reasonably incurred in their inspection, receipt, transportation, care, and custody and may hold such goods and resell them in like manner as an aggrieved seller. Oxford’s Counterclaim Oxford’s consequential damages include “any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise[.]” As a result of the foregoing, Oxford is entitled to lost profits from the confirmed customer orders. Oxford further requests an additional amount for lost profits on potential customer orders. However, Oxford is not entitled to such potential damages. The Letter of Credit Plaintiff argues because TCB honored the request for payment on the first shipment but when presented with identical documents refused to honor the request for payment on the second shipment. In the instant case, the documents presented do not strictly conform to the requirements of the letter of credit. Among the discrepancies are a missing room number, a misdescription of the address on the invoice and an omission of the word “Oxford” as it appears on the letter of credit evidencing shipment of purchase order No. 10881. In the current situation, the discrepancies amount to considerably more than a single misspelling. Consequently, TCB properly refused to honor Texpor’s request for payment under the letter of credit. Conclusion Oxford is entitled to recover payment for the first shipment, cancel the order for the second shipment,and recover consequential damages. Oxford is entitled to resell the goods but may not keep any profit from the resale. Generally, three aspects are intrinsically related: ➀ methods of setting standards for qualities of products; ➁ time for inspecting quality of products; and ➂ methods for inspecting quality of products.11

11

Eun Sup Lee, supra note 138, at 62.

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1. Setting Standards for Quality

(1) Sales by Sample Sales by sample are the most widely used methods for parties to set standards for the quality of products. In the case of non-standardized goods such as clothing or shoes, using slightly more vague product descriptions like “as per” or “similar to” instead of “same as” or “up to” is reasonable in order to prevent disputes, especially those relating to market claims.12 Therefore, the phrase, “Quality to be considered as being about equal to sample” is better than the expression, “Quality to be fully equal to sample” or “Quality to be the same as sample” in seeking to avoid market claims: The latter pair of terms implies that the product must be exactly equal to the sample received by the buyer, while the former term implies that the shipped documents and the sample share only to close similarities. Sellers should always keep duplicate samples of the shipped product on hand, since this will allow for simpler remediation of product inquiries or disputes. (2) Sales by Brand In instances where the item to be shipped is of an internationally known and respectable brand, such as Montblanc, Rolex, or Parker, it is normally unnecessary to send samples. Instead, the size and quality are stipulated with the brand name or trademark and are considered as the sufficient description of the product. (3) Sales by Specification/Description/Standard/Type If dispatching actually a sample is too cumbersome, such as with the purchase of heavy machinery, the product could be outlined through industry-understood “specifications.” One way to do this is to specify the sale by “grade,” or quality measurements that are determined by the entity acknowledged to be in charge of standardization internationally organized or established in their respective countries. For some products, there are uniform international standards or national standards, as in the cases of International Organization for Standardization (ISO), British Standard Specification (BSS), Korea Standard (KS), and so on. Sales by types need to consider these stipulated standards as references when measuring the quality of goods. In specified cases, certain abstract standard products are offered, and products similar to them in quality are delivered as follows:

12

Market claim means the claim raised against a very light breach of contract just for other purpose than enforcing the contract seriously.

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(1) Fair Average Quality (FAQ) Utilizing this term, parties insure that the supplier is promising to deliver average quality products among like products made in the same year and area. This term is usually adopted for commerce with regard to grain, cereal, or vegetables, and especially for transactions to be made at a future date. (2) Goods Merchantable Quality (GMQ) This term binds the seller to deliver products that, at the time of delivery, are in the best condition to be sold. Items that call for this term include timber, lumber, frozen fish, and other like products. (3) Usual Standard Quality (USQ) This term requires the supplier to deliver usual standard quality products, as assessed by publically recognized agencies in the exporting countries. This is applied to items like dry grass, ginseng, raw cotton, raw silk, and other like products. 2. Standard Time for Quality Inspection Shipping can be a slow and bumpy process, causing the quality of the shipped products to sometimes vary from the quality of the received products. Because of this potential change, it is essential to stipulate the actual time that the quality assessment will be made. An assessment before shipping is advantageous to the seller, while assessment after shipment is more beneficial to the buyer. Different inspection time has different obligations on buyers and sellers including shipped quality terms and landed quality terms.13 “Shipped quality terms” mean sellers are only responsible for the quality of goods before those goods are shipped, while “landed quality terms” put more obligations on sellers, because they bear responsibility for the quality of goods until goods are landed.14 In international trade customs, there are special terms for the transaction of cereals in respect to the time of inspection as follows: (1) Tale Quale (TQ) This quality term is a special kind of shipped terms which means that the product will be accepted “as is,” at the time of shipment irrespective of its quality at the time of arrival.

13 14

Eun Sup Lee, supra note 138, at 63. Id.

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(2) Rye Terms (RT) This quality term is a variety of the landed terms. It means that the product will be accepted according to the quality at the time of arrival of the shipped goods. (3) Sea Damaged (SD) This quality term is a mix of shipped quality and limited landed terms. Here, sellers take responsibility for products wet by seawater, freshwater, or rainwater, vapor or moisture damage, or goods corrupted by mold or germs.

4.2.3

Terms of Quantity

Quantity specifications will either be stated in a weight range (such as for a delivery of agricultural products), with a specific weight (such as for the delivery of valuable materials) or a specific quantity (such as for the delivery of automobile). It is also important to specify the point at which the quantity measurement will be made. 1. Unit of Quantity Fallows are the units and terms that are necessary to specify quantity options: (1) “Ton” • L/T=1016.1 kgs (long ton, English ton, gross ton). • S/T=907.2 kgs (short ton, American ton, net ton). • M/T=1000 kgs (metric ton, French ton, kilo ton). (2) Measurement • Liter, gallon, barrel, cubic meter, cubic foot, etc., are often used in liquid measurements. • Superfoot (SF) is often used in lumber measurements. (3) Gross • Gross=12 dozen = 12 × 12 (pcs). • Small gross=10 dozen = 10 × 12 (pcs). • Great gross=12 grosses = 12 × 12 × 12 (pcs). 2. Quantity Stipulation of Bulk Cargo Certain items including bulk cargo are simply uncountable and, for the purpose of identifying quantity, have to be dealt with differently from countable items. Some products including coal, ore, grain, petroleum, sand, cement, hay, and crude petroleum fit into this uncountable category. For these items, a contract should be made permitting for minor quantity variations by setting forth a range.

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(1) More or Less Clause (MOL) The more or less clause allows for variations of the quantity specified in writing by a maximum of 3%. This means that the seller can be slightly carefree in measuring uncountable goods or can intentionally measure to a point 3% higher or 3% lower than the quantity specified. Sending 3% less of some shipments can result in huge savings for the seller, and so this term in a contract should be used with discretion. According to Uniform Rules of letter of credit,15 as long as no statement exists in the letter of credit that declares that “more or less” will not be allowed, 5% plus or minus is considered acceptable. But, since there is no such provision in “document against payment” (D/P) and “document against acceptance” (D/A), it is advisable to include a “more or less” clause in the contract like “Quantity, unless otherwise arranged, shall be subject to a variation of 3% more or less at seller’s option” or “Seller shall have the option of shipment with a variation of more or less 3% of the quantity contracted, unless otherwise contracted.”16 (2) Approximate Quantity Terms “Approximate” quantity specifications are similar to a “more or less” clause, except that there are no specific parameters. Putting the word “approximately” or “about” in front of the quantity designated on a letter of credit,17 allows practical discretion by the seller to make a 10% error either way. If the trade is not conducted using a letter of credit, using such vague terminology will likely lead to disputes and should therefore be avoided. 3. Standard Time for Quantity Inspection Quantity inspection is either made before the ordered goods are shipped or once the ordered goods reach their destination. General terms are available to describe either method.

4.2.4

Terms of Price

It is important to clarify whether the buyer or seller is responsible for any given cost in the transaction. In clarifying these costs, it is important to keep in mind currency considerations. Different currencies, as well as constantly changing valuations in the strength of those currencies, need to be clearly explained in terms of which currency is being used, and what (by certain value or date) the exchange rate will be.

15

UCP600, article 30(b). Eun Sup Lee, supra noe 138 at 65. 17 UCP600, article 30(a). 16

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1. Price Terms in Incoterms® 2020 In Incoterms® 2020, 11 terms are divided into two groups, that is, the rules for any mode or modes of transport and the rules for sea and inland waterway transport as will be explained later in this chapter. The rules are grouped here as follows according to the allocation of cost between the concerned parties. (1) EXW The seller bears the cost required to deliver the goods out of the seller’s premise (factory, plantation, warehouse, store, etc.). (2) FCA, FAS, FOB The buyer bears the main carriage/freight fees required to deliver the goods to the destination port in the importing country. (3) CFR, CIF, CPT, CIP The seller bears the main carriage fees required to deliver the goods to the destination port of the importing country. (4) DAT, DAP, DDP The seller bears all costs required to deliver the goods from the designated port of the importing country to the buyer (consignee). 2. Other Price Terms

(1) At Station The seller bears the cost required to deliver goods from the departure station in the exporting country. (2) Loco This term is synonymous with EX on spot (Canada), FOB origin, and EX point of origin. (3) In Lighter The seller bears the cost required to deliver goods from the ship at the port of destination in the importing country to the lighter for unloading.

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(4) Variation of CIF Variation of CIF term includes CIF&C, CIF&I, CIF&C, CIF landed, CIF duty paid, CIF cleared, etc. (5) Franco This term has the same meaning as DDP. The seller bears the cost required to deliver to the buyer after carrying goods to the specified destination in the importing country. (6) Others There are other price terms including FOR/FOT, FOA (FOB airport), etc. The Contract Terms Can Internationally Be Changed from Their Typical Ones Which Are in Accordance with INCOTERMS or English Sale of Goods

When the trade practitioners adopt the terms of the contract like FOB or CIF which have been defined according to the applicable law including INCOTERMS or English Sale of Goods Act, they should be very serious to define the exact and particular terms, if they are intentionally to change the terms specific to their individual contracts. This is because there is considerable flexibility both within and between categorizations such as FOB, CFR, CIF, and Ex-Ship. For example, under the FOB terms, the seller arranges shipment and takes the bill of lading in his name as consigner, or the buyer arranges and nominates the ship and the seller ships but the buyer is named in the bill of lading as consignor. The following is the case to treat with this issue. Lord Rodger of Earlsferry18 In about April 2004, the appellants (Ghalanos), a company domiciled in Cyprus, agreed to buy 11 container loads of cider from the respondents (S & N), a company having its head office in Scotland. The contract was subject to English law. The cider was shipped at Liverpool and taken by Zim Line vessels to Limassol where Ghalanos took delivery. Ghalanos have not, however, paid for the cider and S & N now sue them for the price. It is common

18

Scottish & Newcastle International Ltd v Othon Ghalanos Ltd SESSION 2007-08. [2008] UKHL 11. EWCA Civ 1750. http://www.publications.parliament.uk/pa/ld200708/ldjudgmt/jd0 80220/scotti-1.htm.

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ground that, in terms of Article 5(1)(b) of Council Regulation (EC) No 44/ 2001, the English courts do not have jurisdiction unless, according to English law, the cider was “delivered” in England more particularly, on shipment at Liverpool. So far as relevant, Section 61(1) of the Sale of Goods Act 1979 (“the Act”) provides that, in the Act, unless the context or subject-matter otherwise requires, “delivery” means “voluntary transfer of possession from one person to another.” Section 32(1) provides: “Where, in pursuance of a contract of sale, the seller is authorized or required to send the goods to the buyer, delivery of the goods to a carrier (whether named by the buyer or not) for the purpose of transmission to the buyer is prima facie deemed to be a delivery of the goods to the buyer.” From the definition of “delivery” in Section 61(1), it follows that, in cases where Section 32(1) applies, by voluntarily transferring possession of the goods to a carrier for the purpose of transmission to the buyer, the seller is prima facie deemed to have voluntarily transferred possession of the goods to the buyer. For purposes of Article 5(1)(b) of the Regulation the place where the seller voluntarily transferred possession of the goods to the carrier would therefore be the place where the goods were “delivered” to the purchaser. Even where goods are delivered to a carrier, however, it does not automatically follow that they are deemed to have been delivered to the buyer. The subsection gives only a prima facie rule, which would have to yield if the terms of the contract between the parties indicated that the seller was to keep, rather than to transfer, possession of the goods. Similarly, it is accepted that where the carrier is the employee or agent of the seller, delivery to the carrier does not constitute delivery to the buyer. In the present case, the contract provided for S & N to send the goods to Ghalanos. But Ghalanos designated the carrier to be used: shipment was to be from Liverpool or Felixstowe “per Zim Line vessel as per attached shipping schedule….” In addition, although S & N were to pay the freight, Ghalanos told them that it was to be “at the rate of Stg £275,00 liner terms all in plus Banker Adjustment Factor (BAF) per 20’ container as agreed with the Cyprus agents of Zim Line.” In other words, the rate had already been negotiated between Ghalanos and the Cyprus agents of the designated carriers, Zim Line. Having regard to these factors and applying the approach of Lord Cottenham in Dunlop v Lambert, I would hold that the carriers, Zim Line, are properly to be regarded as the agents of Ghalanos for purposes of Section 32(1). It follows that, by shipping the containers of cider on board the vessels at Liverpool, S & N are prima facie deemed to have delivered the cider to Ghalanos in Liverpool. It seems to have been common ground that, since the terms of the contract were CFR, no distinction was to be drawn between it and a CIF contract. In the Court of Appeal Rix LJ observed, however, at para 9, that, although it

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was expressed to be CFR, the contract contemplated by the parties differed very little from a form of FOB contract. I agree. But I doubt whether it matters, for present purposes, where exactly the parties’ contract stands in the spectrum of possible contracts. What matter are the terms of the arrangement between the parties. In this case, not only were the sellers to pay the freight, but they were also to obtain the bills of lading from the carriers. This is apparent from the term providing for the documents to be forwarded to Ghalanos immediately after shipment. The bills were, however, to be made out to Ghalanos as consignee and were to be non-negotiable. Nor did S & N reserve the right of disposal of the cider. Plainly, therefore, the property in the cider had passed to Ghalanos and the consignors, S & N, were to have no continuing interest in the cider once it had been shipped. This is confirmed by the requirement that S & N were to forward the documents to Ghalanos immediately, by registered and express mail: the clear intention was that Ghalanos were to have the bills of lading and so were to be in a position to take delivery of the cider from the carriers, when they were notified that the vessels had reached Limassol. This, again, was consistent with payment of the price only being due 90 days after the vessel arrived there. In my view, all these factors combine to confirm that, under Section 32(1) of the Act S & N are deemed to have delivered the cider to Ghalanos at Liverpool. I accordingly agree with Lord Mance that, in terms of Article 5(1)(b) of the Regulation, the High Court has jurisdiction in this case. A term under which the seller is to retain the bills of lading until payment is common in both CIF and FOB contracts. Since the bill of lading is the symbol of the goods, under such an arrangement the seller or his agent not only retains possession of the bill of lading but also, thereby retains the right to possession of the goods until the price is paid. On the contrary, the intention of the parties is that the buyer is not to obtain possession of the bill of lading—and hence of the means to take delivery of the goods from the carrier—unless and until he has paid the price. In that situation, it seems to me at least arguable that the prima facie rule in Section 32(1) of the Sale of Goods Act would be displaced by the terms of the contract between the parties. Even if the goods had not been “delivered” for the purposes English law, they would none the less have been “delivered” for the purposes of Article 5(1)(b) of the Regulation gives rise to other questions which it is also unnecessary to decide on this occasion. For these reasons, I would dismiss the appeal. Lord Mance The basic rule contained in Article 5(1)(a) is that a person domiciled in a Member State may be sued in another Member State in matters relating to a contract in the courts for the place of performance of the obligation in

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question. But Article 5(1)(b) radically alters the effect of this provision by providing that, for its purpose and unless otherwise agreed, the place of performance of the obligation in question shall be, in the case of sale of goods, the place in a Member State where, under the contract, the goods were delivered or should have been delivered. Likewise, in the case of the provision of services, it is now the place where, under the contract, the services were provided or should have been provided. S&N maintain that the cider was, for the purposes Article 5(1)(b), delivered in Liverpool, where it was shipped for carriage to Cyprus under eleven bills of lading on three different vessels in late June and July 2004. All 11 proforma invoices showed the FOB price. Two of them stated expressly, in a box with the printed heading “Terms of delivery and payment”: “Free on board. Payment due 90 days from date of arrival.” The others stated “Cost and Freight Limassol. Payment due 90 days from date of arrival” (or, in three cases, “from date of invoice”), although only the FOB prices were entered on them. After shipment, final invoices were made out, each showing separately the FOB price and the freight incurred at the rate which Ghalanos had agreed with Zim Line’s Cyprus agent. Ghalanos’s primary case, on this basis, was that Limassol was the contractually agreed place of delivery under the sale contract. Mr. Richard Lord QC for Ghalanos suggested that this case gained support from the fact that Ghalanos would not in practice be able to inspect the goods until after their arrival in Cyprus and from the provision for payment 90 days after arrival. The place of delivery in the context of transport arrangements may involve an element of through or mixed transport, whereby goods discharged from a vessel or aircraft at one place might well be on-carried for delivery at another final destination. As completed with the word Limassol, the invoices merely confirmed that the transport arranged went no further than the discharge port of Limassol. The agreement for payment only 90 days after arrival was no more than a relaxed payment regime with no significance in relation to the place of delivery. In the alternative to their primary case, Ghalanos submit that the contract was on terms providing for delivery CFR Limassol and that “whilst the focus of a FOB contract is the place of shipment….the focus of a c&f or cfr/cif contract is the place of discharge.” In relation to a CFR (or C&F) contract, Ghalanos maintain that delivery should be regarded as occurring, at the earliest, when the shipping documents were forwarded to and/or received by Ghalanos. Rix LJ took a different view of the general nature of the contract. He considered that “the contract contemplated by the parties differed very little from a form of FOB contract, although it was expressed to be CFR.” It was to all intents and purposes an FOB contract, although, at Ghalanos’s request, the sum of the agreed FOB price and the freight which S&N prepaid

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on Ghalanos’s behalf led to the description CFR being applied, in the final invoices in particular. There is considerable flexibility both within and between categorizations such as FOB, CFR (or C&F), CIF, and ex-ship. The editors of Benjamin’s Sale of Goods observe at para. 20-001—quoting Devlin J in Pyrene v. Scindia—that the FOB contract has become “‘a flexible instrument,’ so much so that no really satisfactory definition of such a contract is possible.” It embraces (a) cases where the buyer arranges and nominates the ship, but the seller ships and takes the bill of lading in his own name as consignor, (b) cases where the seller arranges shipment and takes the bill in his own name as consignor and (c) cases where the buyer arranges and nominates the ship, and the seller ships but the buyer is named in the bill as consignor. Further, in cases (a) and (b), the seller may be either the only party to the bill of lading or acting as agent for the buyer as a (more or less undisclosed) principal. In either of cases (a) and (b), the seller may of course prepay the freight, and recoup himself by invoicing the buyer. However, there are three general differences between FOB and C&F contracts: (i) Firstly, an FOB contract specifies a port or a range of ports for shipment of the goods. A C&F contract specifies a port or ports to which the goods are consigned. (ii) Secondly, an FOB contract requires shipment of the goods at the port (or a port within the range) so specified; i.e., the seller cannot buy afloat. In contrast, under a C&F contract responsibility for shipment rests on the seller, and this can be fulfilled by the seller either shipping goods or acquiring goods already afloat after shipment, and moreover shipment can be at any port (unless the contract otherwise provides). (iii) Thirdly, and as a result, a C&F contract involves (subject to any special terms) an all-in quote by the seller, who carries the risk of any increase (and has the benefit of any reduction) in the cost of carriage. In contrast, under an FOB contract, although the seller may contract for and pay the freight, the buyer carries the risk (and has the benefit) of any such fluctuation. So viewed, it is clear that the present contract was and should be regarded as being in all essential respects an FOB contract. All the indicia of an FOB contract are present. Indeed, Ghalanos went further and specified in the contract the shipping line and Liverpool shipping agents, with whom S&N were to arrange for carriage to Cyprus. On the contrary, Ghalanos had made an agreement on the freight rate with the line’s Cyprus agents which the sellers were to invoke when arranging carriage; further, the sale contract specified that the invoices should show the FOB price separately from such freight, and required proforma invoices showing only the FOB prices, with final invoices showing the total FOB value and whatever freight was paid separately. The price was in other words to be FOB, with the actual freight rate to be added in the final invoices, once it was ascertained.

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S&N had no commercial interest in the goods after shipment. The bills of lading were to be and were (a) made out to the buyer as consignee and (b) non-negotiable, and were to be forwarded to the buyer “immediately after shipment.” Risk and property therefore both passed on shipment. Here, the goods were not deliverable to the order of the seller or his agent, so there was no reservation of any right of disposal within s.19(2). Both Dunlop v. Lambert and The Albazero concerned the extent to which a consignor can claim damages against a carrier in circumstances where the consignor did not retain either property or risk. Both cases contain statements affirming that the principles in s.32 may apply to documentary sales involving bills of lading where the consignor retains property and risk. Here, there is every reason, in view of the nature and terms of the sale contract, to regard S&N as bailing the goods to the carriers on behalf of Ghalanos, even if Ghalanos were not party to any contract which S&N made with the carriers. The carriers could not reasonably suggest that they thought that S&N were the only persons likely to own and be at risk in respect of the goods on or from shipment. The fact that the bills were non-negotiable and made out to Ghalanos as consignees were clear contrary indications. Ghalanos would be bound by the terms of the bills of lading qualifying the carriers’ liability in respect of the goods and their carriage. It becomes unnecessary to consider what the position might have been after the passing of property and risk on shipment if S&N had not only made a special contract with the carriers but had also, for some reason retained symbolic possession of the goods through the bills of lading until these were forwarded to and/or received by Ghalanos. Mr. Lord’s primary submission was that the “place of delivery” under Article 5(1)(b) would then be (i) nowhere, (ii) the place of shipment, Liverpool, (iii) the place where the documents were transferred, (iv) the place where the goods happened to be when the documents were transferred (at least if that was within the territory or territorial waters of a Member State), or (v) the place of destination, Cyprus. For reasons already indicated, I see no basis for possibility (v). Possibility (i) arises, in Mr. Lord’s submission, from the nature of a documentary sale, under which delivery takes place in more than one sense and may therefore take place in more than one place. It is true that Article 5(1)(c) itself contemplates that Article 5(1)(b) may not apply. However, the most obvious reason for Article 5(1)(c) is that not all contracts are for the sale of goods or provision of services, and still less for the delivery or goods or the provisions of services in any Member State. Article 5(1)(b) directs attention to a place of physical delivery of goods. The physical obligation by way of delivery which characterizes an essentially FOB contract such as the present is clearly shipment and that involves an easily identifiable physical delivery at an easily identifiable place. The transfer of documents may under some FOB sales give rise to a notional

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passing of possession in the goods. The place where possession passes, or where either the shipping documents or the goods are when it passes, is generally irrelevant under FOB contracts and under this particular contract. Further, any place with which such events might be associated could not be regarded as either easy to identify or reasonably foreseeable. I would hold that the place of delivery under the present sale contract was Liverpool and would accordingly dismiss this appeal.

4.2.5

Terms of Packaging

Beyond specifying shipment method and quantity, it is necessary to detail the packaging to meet the parties’ desires. Packaging is an important trade term because improper packaging can lead to damaged items, which may eventually lead to a huge loss, while over-packaging is obviously a waste of money and at the same time may be in breach of the contract terms. In the case of a business that deals with many international shipments, proper packaging is imperative to insure the product safety at the lowest possible cost. Along with packaging, marking or labeling of packages should also be specified. Packaging is one step in the supply chain. It is important to ensure proper packaging to save the handling costs of products. Traders, in turn, pass on these savings to customers leading to future profits for their firms. In shipments with varying products, labels will be more necessary to save time unloading, while homogeneous shipments will require less labeling. 1. Packing Unit/Material The nature of the goods in shipment will determine how many of them will packed together, what material should be used for packing, and how the goods should be packed. Specifications are once again vital to ensure proper descriptions of packaging for each individual item for both inner-packaging and outer-packaging. 2. Marking The purpose of marking shipments with special symbols or letters is to easily and efficiently identify and handle cargo. The following is a list of typical marks (1) Main Mark Abbreviaions such as trade brands are in specific symbols so that they can be easily identified. This could be a consignee’s mark

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(2) Countermark In case of potential problems associated with the use of only one main mark, abbreviations of producers or suppliers are added. (3) Case Number This means the running number of the cargo. (4) Port Mark A port of destination or other destination is often marked to avoid wrong delivery locations. (5) Weight Mark Net weight and gross weight are marked to easily understand freight, clearance, unloading, and the level of loss or damage if any occurs. (6) Origin Mark This states the origin of the product specified by the final country of production. (7) Care Mark, Side Mark, or Caution Mark These state the ways that the cargo should be carried. Common caution marks include “This Side Up,” “Stand on End,” “Do not Turn Over,” “Keep Flat,” “Keep Dry,” “Keep Cool,” “Perishable Goods,” “Liquid,” “Fragile,” “Flammable” and “Explosive,” “No Hooks.” None of the marks above are mandatory for international commerce, but a main mark, port mark, and case number are mandated. A shipment lacking a port mark which is very important for accurate delivery is known as “NM cargo,” or “nomark cargo,” and can be an expensive mistake for the consignor to remedy.

4.2.6

Terms of Shipment

1. Shipping Time Shipping, unlike what its name might suggest, includes all forms of transportation: ships, trains, airplanes, and trucks. Shipping time must be specific because it is not always a quick process, and many aspects of shipping activity might be pertinent. All aspects of the shipping process are required to be stipulated on the letter of credit. For example, let us assume the task is to import coffee from Africa. First, the coffee must be loaded onto the vessel which will carry it to our country—a

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cargo ship. Once the ship reaches our domestic port, plans must be prepared for the coffee to be moved to trucks or trains in order to get it to our warehouse. Finally, the coffee would be delivered from the trains or trucks to its final destination (a retail storefront, for example). 2. Stipulation of Shipping Time

(1) Specific Conditions and Period Terms ➀ Time-Frame Terms Shipping times can be termed generally as follows: “May shipment” means that the shipment shall be made during May. “May/June shipment” means the shipment shall be made from May to June. ➁ Shipping Time before Specified Date “Latest shipping date: May 15, 2012” means that the shipment shall be made no later than May 15, 2012. In this case, “not later than” could be substituted with “until,” or “to and by.” ➂ Fixed Shipping Period before Specified Date The shipment should be made “within two months after seller’s receipt of the letter of credit,” or “Shipment: during May/June subject to seller’s receipt of letter of credit.” (2) Period Terms Specified on UCP 60019 ➀ From, To (Until) This designation includes the relevant date. ➁ After This designation includes the relevant date.

19

UCP600, article 3.

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➂ On or About This includes a designated date, 5 days before and after the date. That is, 11 total days from the starting date to the ending date.20 For example, “on or about May 25, 2012” means to ship goods from May 20th to May 30th, 2012. ➃ First Half and Second Half of Relevant Month This includes the former (1st~15th) and the latter (16th~the end of the month). ➄ Beginning, Middle, and End of Relevant Month This includes the first ten days of a month (1st~10th), the second ten days of a month (11th~20th), and the last ten days of a month (21st~the end of a month). (3) Expiry Date of Letter of Credit and Shipping Date In a case in which the expiry date is fixed and the latest shipping date is not fixed on the letter of credit, the expiry date on the letter of credit is considered the latest shipping date. When the expiry date of the letter of credit falls on a bank holiday, such as Sunday, a national holiday, or during incidents that could require closings such as riots, civil commotions, insurrections, wars, strikes, or lockouts, the expiry date should be automatically delayed to the following first business day.21 It is, however, required that the final shipping date should not be delayed.22 Therefore, in this case, shipment should still be completed before the expiry date. (4) General Terms When the earliest shipping date available is desired from buyers, they usually include such terms as “as soon as possible,” “immediately,” “at once,” or “without delay,” which, however, are recommended not to be used as far as possible. This general expression of terms invites claims from the contracting parties. Where these general terms are used on the letter of credit, the bank dealing with the letter of credit can ignore the wording.23

20

UCP600, article 3 provides that: “The expression “on or about” or similar will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included.” 21 Id. at article 29(a): “If the expiry date of a credit or the last day for presentation falls on a day when the bank to which presentation is to be made is closed for reasons other than those referred to in Article 36, the expiry date or the last day for presentation, as the case may be, will be extended to the first following banking day.” 22 Id. at article 29(c): “The latest date for shipment will not be extended as a result of sub-article 29(a).” 23 Id. at article 38(b).

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3. Partial Shipment/Shipment by Installment

(1) Partial Shipment Depending on the situation of the market and the buyer’s intentions, shipments might be made all at once, or in separate installments over a period of time. When permitting partial shipments, it is advisable to stipulate the number of divisions desired, and the quantity and the shipping period of each division on the contract and letter of credit. Nonetheless, partial shipment is permitted as long as there is no statement of inhibition of partial shipment.24 Furthermore, when the same transportation methods are used and shipment is from the same export location and to the same destination, even if on different shipping dates, involving different shipping ports and receiving locations, it is provided that this is not considered partial shipment.25 But, where the partial issue of bill of lading or draft (bill of exchange) is not permitted, it is evident that partial shipment is not be permitted. (2) Shipment by Installment If it is desired, a buyer can stipulate that the shipment should be separated into installments—a practice that is especially helpful when storage space is limited or costly. The letter of credit can stipulate that if one of the partial shipments is not shipped, the remainder of the letter of credit becomes invalid. 4. Transshipment Transshipment means unloading from one means of transportation and reloading to another means of transportation (whether or not in different modes of transport) during the transportation from the place of dispatch, taking in charge of shipment to the place of final destination stated in the credit.26 A transport document can indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same transport document.27 A transport document indicating that transshipment will or may take place is acceptable by the bank, even if the credit prohibits transshipment.28

24

Id. at article 31(a): “Partial drawings or shipments are allowed”. Id. at article 31(b), stating that “presentation consisting of more than one set of transport documents evidencing shipment commencing on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering a partial shipment, even if they indicate different dates of shipment or different ports of loading, places of taking in charge or dispatch.” 26 Id. at article 19(b). 27 Id. at article 19(c)(i). 28 Id. at article 19(c)(ii). 25

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It is common practice to stipulate that transshipment is not allowed due to the increased chance of loss or damaged goods in transit. However, even when direct shipment such as “direct steamer by customary route” is stipulated, transshipment is allowed. That is, unless transshipment is not permitted on letter of credit, banks are mandated to accept any transportation documents stating that goods will indeed be transshipped.29

4.2.7

Terms of Insurance

The Institute Cargo Clauses (hereinafter ICC) established by the International Underwriting Association and the Lloyds Market Association is applied worldwide for marine cargo insurance. Basic clauses are found in the new policy which was implemented on January 2009, as well as the old policy of 1963. The modified documents as of 2009 are preferred by most developed countries, while developing countries sometimes use 1963 policies and sometimes use both policies interchangeably (as with Korea). 1. Institute Cargo Clauses 2009 The 2009 clauses consist of the ICC (C), ICC (B), and the ICC (A), as the principal policies. Each of these terms defines different levels of marine insurance coverage. The ICC (C) provides for the least amount of insurance coverage possible, ICC (B) is slightly less restrictive, and ICC (A) is the least restrictive, allowing for the widest range of insurance protections. Details are provided below of the specific risks covered by these clauses. (1) Institute Cargo Clauses (C) The following risks are covered by ICC (C) unless they are excluded by a general exclusion clause (making it a positive system): a fire ➀ Loss of or damage to the subject-matter insured reasonably attributable to  b stranding, grounding;  c sinking or capsizing;  d overturning or or explosion;  e collision or contact of vessel craft or conderailment of land conveyance;  f discharge of cargo at a port veyance with any external object other than water;  of distress. a general average ➁ Loss or damage to the subject-matter insured caused by  b jettison. sacrifice;  ➂ General average and salvage charges. ➃ Proportion of liability under the contract of affreightment “Both to Blame Collision” Clause.

29

Id. at article 20(c)(ii), see also article 21(c)(ii).

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(2) Institute Cargo Clauses (B) ICC (B) is for compensating the following loss and damage, excluding the general exclusion clause: ➀ Loss of or damage to the subject-matter insured reasonably attributable to the a fire or explosion;  b stranding, grounding, sinking, or capfollowing reasons:   c d collision or contact sizing; overturning or derailment of land conveyance;  of ship, craft, or conveyance with other external substance other than water;  e discharge of cargo at the port of distress;  f earthquake, eruption of volcanoes, and lightening. ➁ Loss of or damage to the cargo insured caused by the following reasons:  a general average sacrifice.  b Jettison or washing overboard;  c entry of sea, lake, or river water into vessel, craft, hole, conveyance, container, lift van or place of storage; ➂ Total loss of any package lost overboard or dropped while loading on to, or unloading from, vessel or craft. ➃ General average and salvage charges. ➄ Proportion of liability under the contract of affreightment “Both to Both Blame Collision” Clause.

(3) Institute Cargo Clauses (A) ICC (A) is designed to cover all risks of loss and damage to the subject-matter insured due to all risks other than the risks included in the general exclusion clause, the unseaworthiness and unfitness exclusion clause, the war exclusion clause, and the strike exclusion clause. This is the most commonly bought insurance in bulk deals. An example for Insurance Terms: “all shipments shall be covered subject to ICC (A) for a sum equal to the amount of the invoice plus 10 (ten) percent. War risk and/or any other additional insurance required by the buyer shall be covered at his own expense. All policies shall be made out in US dollars and payable in Busan.” 2. Institute Cargo Clauses 1963 Pertinent clauses here include ICC (FPA), ICC (WA), and ICC (A/R). FPA stands for “Free from Particular Average,” WA stands for “With Average,” and A/R for “All Risks.” The ICC clause of 1963 calls for covering risks as follows: (1) ICC (FPA) The term of “Free from Particular Average” (FPA) means, in insurance terms, that of “free from partial loss.” Here, the insurance company is not responsible for

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partial loss. FPA terms might be referred to as “Total Loss Only” terms because, in order for the insured to be compensated the damages from the insurer, a total loss of goods must be realized. Insurance, under the FPA terms, does cover perils of the sea, such as sinking or collision with an iceberg or another vessel, as well as circumstances that are generally out of human control. This coverage is often used for goods stored on the deck or as bulk cargo, and for scrap products like scrap metal or waste paper. (2) ICC (WA) “With Average” (WA) coverage is essentially the same as FPA coverage, but it is more inclusive in that it is extended to cover damage caused by heavy weather. Like FPA, this coverage can usually extend to cover damage incurred due to theft and non-delivery of the entire package insured. (3) ICC (A/R) “All risks” (A/R) coverage covers all risks excluding damage from the following: ➀ Loss from willful misconduct of the insured. ➁ Inherent vice or nature of the goods insured. ➂ Loss from delay in transit. ➃ Ordinary loss or damages not from maritime perils. ➄ Risks from war, strike, riot, and civil commotion, and loss caused by capture. 3. Extraneous Clauses

(1) War, Strikes, Riots, and Civil Commotion (W/SRCC) This clause included in maritime insurance covers risks such as hostile actions and leftover mines. The possibility of war occurring in countries such as Iraq and Afghanistan will be noticeably higher than the global average, which would increase the chance of having this clause included in an insurance policy. (2) Seizure and Capture (S&C) Coverage is sometimes warranted to protect against pirates, who will operate in parts of the world. (3) Contact with Oil or Other Cargoes (COOC) This clause covers contact with oil or other cargoes. (4) Theft, Pilferage, and Non-Delivery (TPND) This clause covers theft, pilferage, and non-delivery of the shipped cargo.

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Terms of Payment

1. Means of Payment When the parties determine and negotiate terms of payment, the means and date of the payment suitable for the purchase or sale should be indicated. (1) Bill of Exchange (Draft) General laws regulating international bills of exchange come from the Bills of Exchange Act 1882 (UK). A bill of exchange requires the person (drawee) to make payment as outlined in the form, which can be made immediately or at a specific date in the future. (2) Other Settlements ➀ Cash or Check In the cases of the terms such as “cash with order” (CWO), “cash on delivery” (COD), and “cash against document” (CAD), payments are made by cash or check without bills of exchange. ➁ Exchange Settlement This is used as advance payment or a down payment for deals that will be paid in separate installments over a period of time. Payment may be made through telegraphic transfer (T/T) or mail transfer (M/T). ➂ Checks Checks or traveler’s checks are often used. ➃ Goods In a barter agreement, trade is made with goods, not actual money.

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2. Settlement Terms

(1) Advance Payment ➀ Cash with Order (CWO) This term means that payment is settled immediately when making an order. ➁ Remittance in Advance This means that the goods are paid for before they have been exported and received. (2) Concurrent Payment ➀ At Sight Payment is made against a documentary bill that is issued by a sight letter of credit. ➁ Document Against Acceptance (d/A) Payment is made against acceptance of documents. ➂ Cash on Delivery (COD) Payment is made upon delivery of goods, delivery order (D/O), or warehouse warranty. Payment methods other than drafts are used for payments. ➃ Cash Against Document (CAD) This is made upon delivery of transport documents including the bill of lading, and the payment means are the same as with cash on delivery. (3) Deferred Payment A deferred payment would be made when the merchant obtains authorization from the bank to defer the settlement process.

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➀ Usance Basis Payment is made after the shipment against documentary bills under a usance letter of credit. “Days after sight” (D/S) base and “days after delivery” (D/D) base are most commonly used. In this context, “usance” refers to paying a bill over a period of time. ➁ Document Against Acceptance (d/A) A deferred payment is made as the payment collection without issuing a letter of credit. ➂ Escrow Account Escrow means that money will be put aside, via a third party, and will be given to the grantee only after fulfillment of the terms of the agreement. ➃ Open Account (Current Account) If the two companies export to and import from each other frequently, they can balance their trade books after each transaction, and save the necessity of making full payments to each transaction over and over again. (4) Mixed Payment Progressive payments and long-term deferred payments are often made along with an advance payment, concurrent payment, and deferred payment and are mostly made in installments according to agreement terms. For the long-term deferred payments used in major transactions of manufacturing plants, large machinery, railroads, or trains, payments by installment are made by an advance payment (usually 10%), payment by working progress, and payment in delivery. The remainder of the payment is made through deferred payments normally over several years’ duration.

4.3

Incoterms® 2020

4.3.1

Provisions of Incoterms

(1) Jurisdiction of Risk Incoterms clearly outline the burden of risk for sellers and buyers in international commerce dealings.

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(2) Allocation of Cost Among costs occurring in the delivery of goods from production to final destination and consignee, Incoterms clearly states that the seller should bear costs occurring before a certain point, after which the buyer should bear the costs. Therefore, unless otherwise stipulated in the contract, jurisdiction will follow these mandates. Determination of cost-bearing obligations is directly connected to the price of the transaction, so it affects the profit or unit price of the exports. (3) Obligation Incoterms state to whom the obligations belong and the manner of the obligations to be fulfilled. Obligations include making contract of carriage, making insurance contract, making export administrative formalities (export license, pre-shipment inspection, quarantine, export clearance), making import administrative formalities (import license, quarantine, import clearance), making different kinds of notices (goods delivery/shipment notice, carrier/ship designation notice, goods delivery place/point notice), requiring different kinds of cooperation (cooperation to offer documents, offering information of carriage/insurance), making goods delivery, taking goods, and making payments.

4.3.2

Trade Terms

Trade terms under Incoterms® 2020 are divided into two groups, that is, the rules for any mode or modes of transport and the rules for sea and inland waterway transport. The first class of the rules can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed, which include EXW, FCA, CPT, CIP, DAT, DAP, and DDP. They can be used even when there is no maritime transport at all. These rules can conveniently be used where a ship is used for only a part of the carriage. In the second class of rules, the point of delivery and the place to which the goods are carried to the buyer are both ports, hence lading “sea and inland waterway” rules. FAS, FOB, CFR, and CIF belong to this class.30 Typical Terms of the Contract like FOB Can Flexibly Be Modified Responding to the Business Circumstance, But Contract Parties Are Required to Be Careful to Make It Clear and Enforceable

The following case is to treat with FOB contract with the provision for a delivery period to be narrowed to a laycan period. The time of shipment is of the essence of the FOB contract and traders can adopt and even change traditional FOB

30

ICC, Incoterms® 2020, 7 (2020).

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contract in the course of their business responding to the factual situation faced by the parties. Case31 This appeal from Langley J [2006] EWHC 1322 (Comm) requires the court to decide whether a FOB contract which provides for a delivery period to be narrowed to a laycan period (viz a period before which laydays will not start and after which a seller may cancel the contract if the ship which is due to take the cargo has not served a notice of readiness to load) is a traditional FOB contract in which the buyer can terminate the contract if the goods are not shipped within the period originally designated for delivery. In a traditional FOB contract, time of shipment is of the essence of the contract. This means that the goods must have been placed on board the ship by the end of the shipment period. This in turn means that the buyer needs to get the vessel to the loading port in sufficient time for such loading to occur. There will often be provisions whereby, if a shipment period is designated, the buyer will have to give a certain number of days notice stating the time of probable arrival of the vessel; this is so as to enable the contractual goods to be loaded by the seller before the end of the shipment period. Just as the requirement that the goods be loaded on board before the end of the shipment period is a condition of the contract, so also a provision that a notice of probable readiness to load be given on or before a certain day is a condition of the contract. I use the word “condition” in its technical legal sense to mean that, if the relevant party does not comply with the obligation, the “innocent” party can treat the “guilty” party as being in repudiatory breach, can accept the repudiation by bringing the contract to an end and sue for damages, if he has suffered any loss. A laycan provision can operate in a not dissimilar way. The seller knows that he has to have his goods available for loading during whatever period the contract specifies but may stipulate for a narrowing of that period by requiring the buyer to nominate a shorter period within which he will make the ship available to take the goods. If, however, that period of availability is close to the end of the delivery period, that narrowing may have the consequence that, if the vessel presents toward the end of the narrowed period, the goods will not be shipped by the end of the shipment period. If this is the case, the natural conclusion might be (as the judge in this case held) that it cannot have been the parties’ intention that there would be a breach of condition if the goods have not been shipped by the end of that delivery period. That is essentially the problem in the present case.

31

ERG Raffinerie Mediterranee SPA v Chevron USA Inc (2007) EWCA Civ 494 http://www.nadr.co.uk/articles/published/Commercial/ERG%20v%20Chevron%202007.pdf.

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On or about May 11, 2005, the parties agreed a 4 day delivery period of 27th–30th May but also agreed that that period would by 21st May be narrowed by the buyers to a 2 day laycan. On that day the buyers gave a 2 day date range of May 29th/30th, 2005. The buyers say that, if notice of readiness to load was, in fact, given by such time as would permit the vessel to complete the loading of the cargo by 30th May (in other words by 06.00 h on 29th May), then it was a condition of the contract that loading should be completed by midnight on that date. By contrast, the sellers say that, since no right to cancel could arise until the end of the laycan period, the vessel could serve notice of readiness at any time up to 24.00 h on 30th May so it could not be a condition of the contract that loading had to be completed by that time, whenever it was that notice of readiness was given. In these circumstances, the sellers say that the only obligation is to deliver the cargo within the period allowed for by the laytime provisions of the contract (42 h). Laytime provisions are never considered to be conditions of the contract since demurrage is intended to compensate the buyer for delay, at any rate until the lapse of time is such as to frustrate the contract. The fact, therefore, that the sellers were unable to provide the cargo by 30th May does not mean that the buyers were entitled to terminate the contract and sail away. The buyers did in fact wait until 3rd June but then terminated the contract ordering their vessel away from the port on that day. The market was falling so the buyers suffered no loss by reason of the unavailability of the cargo on 30th May. It was the sellers who suffered loss, and they have sued the buyers for failure to take delivery. Facts At trial, there was some limited dispute about the terms of the contract which was made orally, although to some extent evidenced in writing. The judge heard evidence and then found that discussions began on 6th May when Mr. Montefiori of the claimants ERG Raffinerie Mediterranee Spa (“the Sellers”) told Mr. Patterson of the defendants Chevron USA Inc (“the Buyers”) that he had a parcel of gasoline for loading at the end of May. Mr. Patterson expressed interest in that parcel. On 11th May, Mr. Patterson suggested that they work on the basis of a previous contract known to them both; they agreed that the price of the cargo should be the average of certain Platt’s FOB quotations for the period 25th May to 1st June plus 2.25 USD per metric ton premium. On 11th May, they agreed “loading period 2730” “to be narrowed to 2 days laycan.” Other clauses were to be “as per their previous deal.” Both dealers produced their Deal Sheets, and there was no marked dissimilarity between them. Mr. Montefiori then sent a written wording, this was never expressly accepted as the contract but it was not disputed that the material terms of the wording accorded with what had been orally agreed.

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On 17th May, the Buyers nominated the vessel “LUXMAR” to load the cargo and the sellers accepted that nomination on the same day. On 20th May, the vessel gave 28th May as the expected date of arrival at Priolo. The next day the Buyers narrowed the laycan period to the two-day date range of May 29th–30th, 2004. On 26th May, the Sellers started to blend the cargo but encountered technical problems with the plant. Repairs at the plant were begun but not completed before 3rd June. On 28th May, the vessel arrived at Priolo and gave notice of readiness, but due to the problems at the plant it could not then load. There was some dispute as to the extent to which the Buyers were kept informed about the progress of repairs but the judge held that the Buyers had information on 3rd June that the vessel would probably berth on 4th June. Nevertheless on 3rd June the Buyers informed the Sellers: “We hereby accept your failure to commence loading… as repudiatory of the Sale Contract, which is hereby terminated.” and they ordered the vessel to leave Priolo. The Sellers claim that the Buyers were not entitled to terminate the contract and that it was, therefore, the Buyers who were in repudiation by their premature termination. It is not without interest that the Buyers focused on the failure to commence loading as the Sellers’ supposed repudiation. So on any view the FOB contract made between the parties in this case does not look like a traditional FOB contract. It must, of course, be construed according to its particular terms. Judgment Before the judge, the Sellers contended that the delivery obligation was to load within the contractual laytime if the vessel presented within the narrowed laycan range. If there was delay beyond the contractual laytime, that was catered for by the demurrage provisions in the contract. Laytime is never a condition of the contract so the Buyers were in breach by terminating the contract on 3rd June. The Buyers maintained that the delivery period was a condition of the contract but counsel had some difficulty in pinpointing the time when, according to the contract, non-compliance entitled the Buyers to terminate. As the Sellers had submitted, the obligation was to load the vessel within the laytime and that, although the obligation had been broken, the Buyers were not entitled to terminate the contract until a frustrating time had elapsed which by 3rd June had not occurred. He, therefore, held that the Sellers were entitled to damages for the Buyers’ unlawful termination and that the Buyers’ cross-claim for damages for failure to load within the laytime was limited to the demurrage rate.

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Submissions on Appeal Mr. Gruder QC for the Buyers submitted that the judge was wrong and that the obligation was that the Sellers should begin to load the vessel at such time as would enable the vessel to complete her loading by the end of the delivery period. Since the vessel could be expected to load within the allowable laytime of 42 h, loading had to begin at or before 06.00 h on 29th May for it to be completed by the end of the delivery period at 24.00 h on 30th May. Provided the vessel gave notice of readiness by 06.00 h on 29th May, the Sellers were obliged to complete loading by 24.00 h on 30th May and, if they did not, the Buyers could treat them as being in repudiation of the contract. Since the vessel was not loaded by that time, the Buyers were entitled to terminate at any time thereafter as they did on 3rd June. In support of this argument, Mr. Gruder emphasized the facts: (1) that times of delivery were almost invariably of the essence in mercantile contracts; (2) that the price was itself to be calculated by reference to the average of prices around the delivery date. This reflected the volatility of the market and, in particular, the risk of movement in prices, if the Buyers were to be kept waiting for delivery; the right to claim demurrage was a wholly inadequate compensation for late delivery; (3) that the delivery clause was just that. It was only the second and third paragraphs of the delivery clause that introduced the concept of the “laycan”; the judge’s construction wrongly gave overriding emphasis to the laycan aspect of the clause; (4) that the oral conversations which constituted the sale contract had expressly agreed loading dates and had then characterized those dates as the loading period. The delivery clause has to be read as a whole and, when so read, the “laycan” provisions are important. “Laycan” is a word or phrase often to be found in charterparties and, as Rix LJ observed in Tidebrook Maritime Corporation v Vitol SA, paragraphs 3839, it is a reference to: “(a) the earliest day upon which an owner can expect his charterer to load and (b) the latest day upon which the vessel can arrive at its appointed loading place without being at risk of being canceled.” He continued: “The importance of such a laycan period is to enable the charterer to know when he has to have the goods ready for loading, and to enable both parties to know when, if the vessel is late in respect of her ... expected time of arrival, the charterer can free himself by cancelation from the obligation of chartering the vessel and turn to alternative arrangements. Of course, if a vessel arrives early, the owner may permit her to be loaded before the earliest day, and if she arrives late, the charterer can still maintain the charter.” All this is elementary in a shipowner/charterer contract, such as a charterparty. It may also be important to observe that a right of cancelation is just what it says. It is a right to cancel which does not carry with it any right to damages for non-performance.

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Sometimes, as in this case, the laycan concept is used in a FOB contract. Since, in such a contract, it is the buyer who has the disposition of the vessel, it is the buyer who is in the position of the shipowner and is at risk of the vessel being canceled if she does not present before the last day of the laycan period. Similarly, it is the seller who is in the position of the charterer and is the person entitled to terminate the contract if the vessel has not arrived in time. The seller will not be bound to start loading the vessel before the period starts but will be bound to load as and when, within the laycan period, the vessel is ready to receive the cargo. The laycan provision thus gives the FOB seller a right to bring the contract to an end in circumstances in which, without a canceling provision, he may well have no right to do so. If the buyer is entitled to present the vessel at 23.00 (or even 23.59) on 30th May, the contract cannot be interpreted to mean that the seller must have completed loading by 24.00 h on that day because that would be a commercial absurdity. In that event, the seller must be entitled to load within the laytime provided for by the contract. If he does not do so, he will be in breach of contract. He will not, however, be immediately in repudiatory breach partly because terms as to time of loading a vessel are not traditionally regarded as conditions of the contract and partly because there would be great practical difficulties if the buyer were able to terminate the contract when the vessel had been partly but not fully loaded. Mr. Gruder submits that the traditional view (that time of delivery is of the essence of an FOB contract) can be retained with the laycan provision by holding that, if notice of readiness is in fact given at such time as would enable the ship to be loaded by the end of the delivery period, time of delivery will be a condition; whereas if notice of readiness is given at a later time but within the canceling period, only then would the obligation be to complete delivery within the laydays. This is an argument which it is not possible to accept. It is not sensible that an obligation relating to time of delivery should be a condition in one factual circumstance but not in another. In the context of the present contract with an entitlement on the part of the buyer to present a vessel at any time up to the last moment for contractual delivery, it cannot, in my judgment, be right to hold that the words “DELIVERY…27—30/05/2004” constitute a condition of the contract. It was these considerations that led the judge to hold that the concept of the laycan in the second paragraph of the delivery clause was an essential part of the clause as a whole and that the word “delivery” had to be construed accordingly. The use of a laydays/canceling provision in the contract (particularly a provision entitling a vessel to present at any moment up to the end of the delivery period) makes the contract a non-traditional FOB contract in that time of delivery has become an obligation which is not of the essence of the contract. That is not a surprise, since traders are constantly adapting and even changing traditional FOB contracts in the course of their business.

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If they want to rely on delivery obligations as they have been traditionally construed, they may well be advised not to employ canceling provisions but that is, as always, a matter for them. I would therefore uphold the judge on what is the main ground of the appeal. Other Matters In his skeleton argument, Mr. Gruder sought to develop arguments to the effect (1) that the buyers were in any event entitled to terminate the contract when they did since the time for loading had been substantially exceeded and (2) that the buyers could not be confined to the remedy of demurrage since their loss was considerably more substantial than that. As I have already indicated, axiomatic in charterparty law that failure to load within the laydays is not a repudiatory breach. In the events that had happened in that case, the only relevant obligation on the seller was to load within the laydays and an argument that the buyer was justified in terminating the contract because the vessel would not have loaded within that time was rejected. A provision that a vessel be loaded within a particular time is never treated as a condition of the contract in shipping cases, and there is no reason why the position should be any different in other cases where the relevant obligation is to load within the laydays. In such cases, it would be irrational to treat the obligation as a condition for exactly the same reason as it is irrational in charterparty cases; the innocent party can only terminate after what has been called a “frustrating time” has elapsed. That may in appropriate circumstances be a comparatively short time but no one has suggested that the lapse of time up to 3rd June in the present case could have been a frustrating time. As to the second argument, it has never been made clear what loss the Buyers have suffered as a result of the delay. There is no claim for loss of market which is perhaps unsurprising since the market moved in the Buyers’ favor. The judge has awarded demurrage to the Buyers as provided for in clause 10 of the contract. To the extent that the Buyers have been rendered liable to the shipowners for demurrage that is no doubt a genuine loss and that has been (or will be) compensated. The judge rightly held that, where a demurrage figure is contained in a contract it is intended to cover loss for delay and general damages for delay cannot be awarded as well. For the foregoing reasons, I would dismiss this appeal.

1. Ex Works (EXW) This rule can be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. It is suitable for domestic trade, while FCA is usually more appropriate for international trade. “Ex Works” means that the seller delivers when it places the goods at the disposal of

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the buyer at the seller’s premises or at another named place (i.e., “works,” factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the costs and risks to that point are for the account of the seller. The buyer bears all costs and risks involved in taking the goods from the agreed point, if any, at the named place of delivery. EXW represents the minimum obligation for the seller. The rule should be used with care as: ➀ The seller has no obligation to the buyer to load the goods, even though in practice the seller may be in a better position to do so. If the seller does load the goods, it does so at the buyer’s risk and expense. In cases where the seller is in a better position to load the goods, FCA basis, which obliges the seller to do so at its own risk and expense, is usually more appropriate. ➁ A buyer who buys from a seller on an EXW basis for export needs to be aware that the seller has an obligation to provide only such assistance as the buyer may require to effect that export: the seller is not bound to organize the export clearance. Buyers are therefore well advised not to use EXW if they cannot directly or indirectly obtain export clearance. ➂ The buyer has limited obligations to provide to the seller any information regarding the export of the goods. However, the seller may need this information , e.g., taxation or reporting purposes.32 If a seller wants a buyer to be responsible for loading the goods onto a particular vehicle upon delivery, this intention should be properly and explicitly stated in the agreement. If the buyer received goods at the seller’s premises but cannot clear them for export, in order to change to FCA the seller agrees that he will load at his cost and risk. If any specific drop-off within the designated place for delivery is not agreed upon, or there are several viable places available, the seller can choose a proper point to unload at his convenience. Obligations of Parties Under Ex Works

The seller is required to: ➀ Supply conforming goods, which have been weighed, checked, measured, and packed for delivery; ➁ Supply the invoice and any documents confirming conformity with terms that have been agreed by whatever method has been agreed, or by the agreed means including by electronic communication;

32

Id. at 15.

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➂ Deliver goods to buyer by placing them at the buyer’s disposal or otherwise ensuring they may be collected, at the place agreed or at the usual place for such delivery, at the time agreed, and give the buyer sufficient notice of the fact without delay. The buyer is required to: ➀ Accept delivery of and pay for the goods; ➁ Obtain appropriate licenses, authorizations for the export of the goods, and comply with customs formalities, whether in the country of delivery or in the exporting country or in a country of transit; ➂ Pay any costs incidental to the exportation of the goods including reshipment inspection costs, any official charges and the seller’s costs in rendering assistance requested by the buyer.

(2) Free Carrier (FCA) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point. If the parties intend to deliver the goods at the seller’s premises, they should identify the address of those premises as the named place of delivery. If, on the other hand, the parties intend the goods to be delivered at another place, they must identify a different specific place of delivery. FCA requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty, or carry out any import customs formalities.33 Obligations of Parties Under FCA

The seller is required to: ➀ Supply conforming goods, which have been weighed, checked, measured, and packed for delivery; ➁ Supply the invoice and any documents confirming conformity with the terms that have been agreed by whatever method they have been agreed upon, or by the agreed means including by electronic communication. ➂ Deliver the goods to the buyer by placing them in the charge of the carrier named by the buyer at the place agreed for delivery, in the manner agreed upon or which is customary

33

Id. at 23.

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for the place of delivery, or by loading them onto the carrier’s vehicle if that has been agreed. The buyer is required to: ➀ Accept delivery of and pay for the goods; ➁ Obtain appropriate licenses, authorizations for the export of the goods, and comply with customs formalities, whether in the country of delivery or in the exporting country or in a country of transit; ➂ Pay any costs incidental to the exportation of the goods and any costs incurred by the seller in giving any assistance which has been requested by the buyer including costs associated with the provision of documents or electronic messages.

(3) Free Alongside Ship (Named Port of Shipment) (FAS) This rule is to be used only for sea or inland waterway transport. “Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards. The parties are well advised to specify as clearly as possible the loading point at the named port of shipment, as the costs and risks to that point are for the account of the seller and these costs and associated handling charges may vary according to the practice of the port. The seller is required either to deliver the goods alongside the ship or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (“string sales”), particularly common in the commodity trades. Where the goods are in containers, it is typical for the seller to hand the goods over to the carrier at a terminal and not alongside the vessel. In such situations, the FAS rule would be inappropriate, and the FCA rule should be used. FAS requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty, or carry out any import customs formalities. The FAS term is frequently used in circumstances where the buyer has a matching contract CIF terms.34 Obligations of Parties Under FAS

The seller is required to: ➀ Supply conforming goods, packed appropriately or in accordance with the contract, and the commercial invoice or equivalent electronic message which has been agreed upon; ➁ Deliver the goods to the buyer by placing them alongside the vessel or the loading berth which has been notified by the buyer in the manner which is usual or customary at that

34

Id. at 79.

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port for such delivery, at the time agreed upon and without delay, giving the buyer sufficient notice of the fact; ➂ Provide any assistance requested by the buyer in respect of obtaining documents facilitating export and providing information to enable the goods to be insured. The buyer is required to: ➀ Give sufficient notice to the seller of the time and location of the delivery having, presumably, contracted for the carriage of the goods from the proof of shipment and bear any costs occasioned by his failure to do so; ➁ Obtain any appropriate licenses, authorizations for the export of the goods, and comply with customs formalities, whether in the country of delivery or in the exporting country or in a country of transit; ➂ Pay any costs incidental to the exportation of the goods including pre-shipment inspection costs, any official charges and the seller’s costs in rendering assistance request by the buyer.

(4) Free on Board (Named Port of Shipment) (FOB) This rule is to be used only for sea or inland waterway transport. “Free on Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onwards. The seller is required either to deliver the goods on board the vessel or to procure goods already so delivered for shipment. The reference to “procure” here caters for multiple sales down a chain (“string sales”), particularly common in the commodity trades. In FOB Contract, Seller Are Not Entitled to Refuse to Load on the Unclean Holds of the Vessel Nominated by the Buyer

The seller, in the FOB contract, is not interpreted to be entitled to refuse to load because the holds of the vessel nominated by the buyer were unclean. Rather, the risk of goods being damaged by shipment in unclean holds falls on the buyer. The following case treats with this issue. Case35 The English Court of Appeal held that, under an FOB contract based on the GAFTA 49 Form, the expression “in readiness to load” did not import from the context of charterparties the technical rules about Notices of Readiness.

35

Soufflet Negoce v Bunge SA EWCA 1102: 13 October 2010. http://www.onlinedmc.co.uk/ index.php/Soufflet_Negoce_v_Bunge_SA.

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It simply meant “physically and legally possible for Sellers to load,” that is, without abnormal hindrance. Therefore, an FOB seller was not entitled to refuse to load because the holds of the vessel nominated by the buyer were unclean. Rather, the risk of goods being damaged by shipment in unclean holds fell on the buyer. Background In a written contractual confirmation, Soufflet Negoce SA (“Soufflet”) agreed to sell and Bunge SA (“Bunge”) agreed to buy 15,000 metric tons of Ukrainian Feed Barley, “free from alive insects and foreign smell” FOB stowed/trimmed Nikotera, Ukraine. It was also agreed that weight, quality, and condition were to be “final” at load port as per surveyor’s certificates “Seller’s option and costs.” Under the heading “Shipping Terms,” provisions were made for laytime which expressly required the tender of a valid Notice of Readiness, and it was stated that “All other terms and conditions as per relevant C/P.” Soufflet would have to pay demurrage to Bunge if it took more than 3 days to load the cargo, but it would earn dispatch “as per Charterparty rates” if it took less than 3 days to load the cargo. All other terms and conditions, not inconsistent with these terms, were to be “as per GAFTA 49,” a standard form contract for the delivery of goods from Eastern Europe in bulk or bags on FOB terms. Clause 6 of GAFTA 49 states that: “The Sellers shall have the goods ready to be delivered to the Buyers at any time within the contract period of delivery. Buyers have the right to substitute the nominated vessel, but in any event the original delivery period and any extension shall not be affected thereby. Provided the vessel is presented at the loading port in readiness to load within the delivery period, sellers shall if necessary complete loading after the delivery period, and carrying charges shall not apply.” Bunge chartered a vessel for the purpose of the FOB contract, and the shipowners presented a Notice of Readiness to Bunge on the last day of the delivery period under the FOB contract. On the same day, Bunge’s surveyors issued a certificate of cleanliness for the vessel. However, Soufflet’s surveyors issued a certificate stating that “hoppers partly covered with coal powder (traces) at holds” and that the vessel’s cargo holds and hatches were not suitable for receiving and carrying the cargo. The Regional State Grain inspectorate also found the same and, on the next day, Soufflet declared Bunge to be in default, claiming that the vessel was not presented ready to load. The first-tier arbitration held that, as the vessel’s holds were not ready to receive cargo, Bunge was not entitled to sue Soufflet for damages for nondelivery. On appeal, the GAFTA Board of Appeal held that “in readiness to load” in Clause 6 of GAFTA 49 meant “physically and legally possible for

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Sellers to load” (Agricultores Federados Argentinos v Ampro). As the risks of loss or damage passed to an FOB buyer on loading the goods onto the vessel, such buyer was taken to have assumed the risk of the goods being damaged by loading into unclean holds. Thus, Soufflet could not excuse itself for non-delivery because the holds were not clean. On further appeal to the Queen’s Bench, David Steel J agreed with this conclusion. Soufflet further appealed to the Court of Appeal, contending that “in readiness to load” under Clause 6 of GAFTA 49 required Bunge to nominate a vessel with clean holds. Judgment The Court of Appeal dismissed the appeal, with Longmore LJ delivering the leading judgment. Longmore LJ noted the elaborate set of rules that had been developed in the charterparty context to determine whether a vessel was ready to load. These included the holds being in a state in which they could receive cargo. However, properly interpreted, the phrase “in readiness to load” in the contractual confirmation in this case did not require a Notice of Readiness to be given. It was not clear enough to incorporate the shipping rules into an FOB sale contract. Similarly, even though the sale contract expressly incorporated the technical rules relating to Notice of Readiness for the purpose of calculating laytime and demurrage, it did not mean that those rules were incorporated for all uses of the phrase “in readiness to load” in GAFTA 49. Rather, the implied intention of the parties was that a valid Notice of Readiness was only relevant for calculating laytime and demurrage, and for no other purposes. This conformed with the view of the Board of Appeal that under an FOB contract, the buyers assumed the risk of loading cargo into unclean holds. It was usually provided for in sales of this kind that quality conditions were to be final as per certificates issued at loading port by a GAFTA-approved survey. Therefore, the state of the holds was not something with which the seller should concern itself, unless there were provisions in the contract entitling the seller to inspect the holds. Thus, Bunge was entitled to damages from Soufflet for its breach of contract in failing to load the cargo before the expiry of the shipment period. FOB may not be appropriate where goods are handed over to the carrier before they are on board the vessel, for example goods in containers, which are typically delivered at a terminal. In such situations, the FCA rule should be used. FOB requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty, or carry out any import customs formalities.

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Obligations of Parties Under the FOB Contract

The seller is required to: ➀ Supply conforming goods, packed appropriately or in accordance with the contract, and any documents confirming conformity which have been agreed upon and supply a commercial invoice or its electronic equivalent; ➁ Deliver the goods to the buyer by placing them on board, that is over the rail of the vessel which has been notified by the buyer, in the manner which is usual or customary at that port for such delivery, at the time agreed upon and without delay, giving the buyer sufficient notice of the fact. The buyer is required to: ➀ Give sufficient notice to the seller of the time and location of the delivery having, presumably, contracted for the carriage of the goods from the port of shipment, bear any costs occasioned by his failure to do so and bear the risk of loss or damage to the goods from the time they pass over the ship’s rail; ➁ Obtain any appropriate licenses, authorizations for the import of the goods, and comply with customs formalities for importation whether in the country of destination or in a country of transit; ➂ Pay any costs incidental to the importation of the goods, bear the risk in those goods from the time of their delivery and bear the costs of the provision of assistance by the seller at the request of the buyer.

(5) Cost and Freight (CFR) This rule is to be used only for sea or inland waterway transport. “Cost and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. When CPT, CIP, CFR, or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract.36 (6) Cost, Insurance, and Freight… (Named Port of Destination) (CIF) This rule is to be used only for sea or inland waterway transport. “Cost, Insurance, and Freight” means that the seller delivers the goods on board the vessel

36

Id. at 95.

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or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum coverage. Should buyers wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make their own additional insurance arrangements. When CPT, CIP, CFR, or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier in the manner specified in the chosen rule and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. While the contract will always specify a destination port, it might not specify the port of shipment, which is where the risk passes to the buyer. If the shipment port is of particular interest to the buyer, the parties are well advised to identify it as precisely as possible in the contract. This is the most recognizable term associated with the export trade from which the mercantile custom has evolved.37 Obligations of Parties Under the CIF

The seller is required: ➀ To ship goods of the description contained in the contract and clear the goods for export or to buy conforming goods afloat; ➁ If the goods are not bought afloat, to procure a contract of carriage by sea under which the goods will be delivered at the destination agreed by the contract and obtain the bill of lading as evidence of having done so; ➂ To arrange, if this has not already been done, insurance on terms current in the trade which will be available for the benefit of the buyer and provide a policy or insurance document which entitles the buyer to make a claim against the insurer; ➃ To make out an invoice which normally will debit the buyer with the agreed price, or the actual cost, commission charges, freight, and insurance premium, and credit him for the amount of the freight which he will have to pay to the shipowner on delivery of the goods at the port of destination.➄ To tender these documents in the manner agreed upon whether by presentation directly, transmission by electronic means or otherwise; the bill of lading, insurance policy, and invoice to the buyer, together with any other documents which may be agreed upon between the parties and/or might be required by the customs of the trade so that he may obtain delivery of the goods or coverage for their loss, if they are lost on the voyage, and know what freight he has to pay.

37

Id. at 105.

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The buyer is required: ➀ To receive the goods at the agreed port of destination and bear, with the exception of the freight and marine insurance, all costs and charges incurred in respect of the goods in the course of their transit by sea until their arrival at the port of destination, as well as unloading costs, including lighterage and wharfage chares, unless such costs and charges have been included in the freight or collected by the carrying company at the time freight was paid; ➁ If war insurance is to be provided, to bear the cost; ➂ To bear all risks to the goods from the time when they shall have effectively passed the ship’s rail at the port of shipment; ➃ If the buyer has reserved for himself the right to determine the period within which the goods are to be shipped and/or the right to choose the port of destination, and he fails to give instructions in time, he must bear the additional costs incurred as a result and all risks of the goods from the date of the expiry of the period fixed for shipment, provided always that the goods have been appropriated to the contract, that is to say, clearly set aside or otherwise identified as the contract goods; ➄ To pay all customs duties as well as any other duties and taxes payable upon importation; ➅ To obtain and provide at his own risk and expense any import license or permit or the like which he may require for the importation of the goods at the destination.

(7) Carriage Paid to (Named Place of Destination) (CPT) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Carriage Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed upon between the parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. When CPT, CIP, CFR, or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. This rule has two critical points, because risk passes and costs are transferred at different places. The parties are well advised to identify as precisely as possible in the contract both the place of delivery, where the risk passes to the buyer, and the named place of destination to which the seller must contract for the carriage. The parties are also well advised to identify as precisely as possible the point within the agreed place of destination, as the costs to that point are for the account of the seller. The seller is advised to procure contracts of carriage that matches this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the named place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed upon between the parties.38

38

Id. at 33.

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(8) Carriage and Insurance Paid to (Named Place of Destination) (CIP) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. The rule is based on the model provided by the CIF contract. “Carriage and Insurance Paid to” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed upon between the parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. The seller also contracts for insurance coverage against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum coverage. Should the buyer wish to have more insurance protection, it will need to agree as much expressly with the seller or to make its own extra insurance arrangements. When CPT, CIP, CFR, or CIF are used, the seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination.39 (9) Delivered at Terminal (Named Terminal at Port or Place of Destination) (DAT) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered at Terminal” means that the seller delivers when goods, that have been unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes any place, whether covered or not, such as a quay, warehouse, container yard or road, rail, or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination. The parties are well advised to specify as clearly as possible the terminal and, if possible, a specific point within the terminal at the agreed port or place of destination, as the risks to that point are for the account of the seller. The seller is advised to procure a contract of carriage that matches this choice precisely. Moreover, if the parties intend the seller to bear the risks and costs involved in transporting and handling the goods from the terminal to another place, then the DAP or DDP rules should be used. DAT requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty, or carry out any import customs formalities.40

39 40

Id. at 41. Id. at 53.

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(10) Delivered at Place (Named Place of Destination) (DAP) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place. The parties are well advised to specify as clearly as possible the point within the agreed place of destination, as the risks to that point are for the account of the seller. The seller is advised to procure contracts of carriage that matches this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed between the parties. DAP requires the seller to clear the goods for export, where applicable. However, the seller has no obligation to clear the goods for import, pay any import duty, or carry out any import customs formalities. If the parties wish the seller to clear the goods for import, pay any import duty, and carry out any import customs formalities, the DDP term should be used. (11) Delivered Duty Paid (Named Place of Destination) (DDP) This rule may be used irrespective of the mode of transport selected and may also be used where more than one mode of transport is employed. “Delivered Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities. DDP represents the maximum obligation for the seller. The parties are well advised to specify as clearly as possible the point within the agreed place of destination, as the costs and risks to that point are for the account of the seller. The seller is advised to procure contracts of carriage that matches this choice precisely. If the seller incurs costs under its contract of carriage related to unloading at the place of destination, the seller is not entitled to recover such costs from the buyer unless otherwise agreed upon between the parties.41

41

Id. at 61.

4.4 Illustrated Forms of International Trade Contract

4.4

Illustrated Forms of International Trade Contract

4.4.1

General International Contract

181

The international contract is required to be sufficiently detailed and workable so as to cope with all foreseeable and unforeseeable developments of events. Making a proper and sufficient contract is the basic step to legally managing risk in international business transactions. Trade practitioners, even though they are familiar with international business transactions, are recommended to consult with a legal counselor when drafting international contracts. What follow are the basic and general formats of international contracts. O Title Headings in the agreement have been inserted for convenience and reference purposes only and are not to be used in construing or interpreting the agreement.

O Non-operative Part ➀ Date (a) ➁ Concerned Parties (b.c.d.e.f.)

THIS AGREEMENT made and entered into, in Seoul on the seventh day (a) of August 1992, by and between ABC INTERNATIONAL CORP., a corporation (b) (c) duly organized and existing under the laws of the Republic of Korea and having (d) its principal office at 937, Namdaemun-ro 2-Ga, Jung-Gu, Seoul, Korea (e) (hereinafter referred to as “PRINCIPAL”), and Mr. Henry Smith Jr. residing (c) at 10 Broadway, New York 11037, USA. (hereinafter referred to as “AGENT” (e) (f) WITNESSETH. ➂ Recitals, Whereas Clause

WHEREAS, PRINCIPAL is engaged in the business of manufacturing and exporting various Korea-made products (hereinafter referred to as “PRODUCTS”) for sale of its majority in the worldwide markets including Indonesia; and WHEREAS, AGENT desires to be appointed an agent

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to solicit orders for PRODUCTS, and PRINCIPAL is willing to make such appointment, but only subject to the terms and conditions set forth below. O Operative Part ➀ Consideration

NOW, THEREFORE, in consideration of mutual covenants and promises contained herein, both parties agree as follows. ➁ Definition

Unless the context clearly requires otherwise, the following terms in this Agreement shall have the meanings attributed to them below: (A) (a) (b) (c)

“KNOW-HOW” means rearrangement of machinery layout effective operation of machinery technical improvement of training process

(B) “TERRITORY” means the entire territory of Bangladesh. (3) Period of Agreement

The term of this Agreement shall be three (3) years from the effective date of this Agreement and shall be automatically extended for a further three (3) years provided that PRINCIPAL shall give, at least three months prior to termination, a written notice to AGENT.

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➃ Termination of Contract

In the event of a breach of this Agreement not cured within ten days from the receipt of notification when the breach consists of a failure to pay a sum due under this Agreement, or in the event of a different material breach of this Agreement not cured within thirty days from the date of notification of such breach, this Agreement may be terminated by the aggrieved party. Either party may terminate this Agreement immediately and without incurring thereby any liability to the other, by merely serving a notice of termination on the other in any of the following events: (a) if the other party is declared in Court or notoriously becomes insolvent or bankrupt; (b) if a Receiver is appointed to take possession of the business or assets of the other party and his appointment is not revoked within fifteen days; (c) if the other party closes or discontinues business operations relating to the Products for any reason, even beyond its control for more than ninety days; Termination of this agreement is without prejudice to any claim for any antecedent breach and to the right of the aggrieved party to recover damage, loss, compensation, and all sums payable hereunder. ➄ Force Majeure

Any delay or failure by either party hereto in the performance hereunder shall be excused if and to the extent caused by occurrences beyond such parties’ control, including but not limited to, acts of God, strikes, or other labor disturbances, war, sabotage, and any other cause or causes, whether similar or dissimilar to those herein specified which cannot be controlled by such party. (a) If the performance of this Agreement or of any obligation hereunder, except the making of payments under or in connection with this Agreement, is prevented, restricted, or interfered with by reason of fire, storm, explosion, flood, earthquake, war, rebellion or other casualty or accident; labor dispute, epidemics, quarantine restriction, transportation embargo, law, act, rule, regulation order, decision, or directive of any government of competent jurisdiction in matters relation to this Agreement or

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any agency thereof; or any other act or condition whatsoever beyond the reasonable control of the parties hereto, the party so affected, upon giving prompt notice to the other parties, shall be excused from such performance to the extent of such prevention, restriction or interference. (b) The party so affected, however, shall use its best efforts to avoid or remove such causes of non-performance and to cure and complete performance hereunder with the utmost dispatch whenever such causes are removed. (c) If due to any law, act, rule, regulation, order, or decision of any government or competent jurisdiction or of currency as the debtor and the creditor shall mutually agree or in default of agreement between them in the currency of the country in which the creditor is incorporated. If any agency or, for any other reason, a party hereto is unable to make payment of moneys due to another party hereto in a currency stipulated for the payment of those moneys hereunder, it may discharge the debt by making payment in such other. ➅ Assignment

(a) None of the parties of this Agreement may directly or indirectly sell, assign, or otherwise dispose of this Agreement to any third party unless it is assigned by the operation of law. (b) This Agreement and any rights or obligations arising hereunder may not be assigned by either party without obtaining the prior written consent of the other party. ➆ Arbitration

Any dispute arising out of or in connection with this contract shall be finally settled by arbitration in Seoul in accordance with the Arbitration Rules of the Korean Commercial Arbitration Board.

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➇ Jurisdiction

(a) Any Arbitration award rendered shall be final and binding upon the parties and may be enforced in any competent jurisdiction. (b) Any and all disputes arising from this Agreement shall amicably be settled as promptly as possible upon consultation between the parties hereto. The parties hereto agree that should either party have been in a position to resort to a lawsuit, injunction, attachment, or any other acts of litigation, the Seoul District Court shall have Jurisdiction. ➈ Governing Law

The formation, validity, construction, and the performance of this Agreement are governed by the laws of the Republic of Korea. ➉ Integration, Entire Agreement

This Agreement sets forth the entire agreement and understanding between the parties as to the subject-matter of this Agreement and merges and supersedes all prior discussions, agreements, and understandings of any and every nature between them, and neither party shall be bound by any condition, definition, warranty or representation other than as expressly provided for in this Agreement or as may be on a subsequent date duly set out in writing and signed by a duly authorized officer of the party to be bound.  11 Modification of Agreement

This Agreement is not changed, modified, or amended by the parties of this Agreement except as such change, modification or amendment is in writing and signed by both parties.

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 12 Notice

Any notice, request, consent, offer, or demand required or permitted to be given in this Agreement, must be in writing and must be sufficiently given if delivered in person or sent by registered airmail or by cable confirmed by registered airmailed letter addressed as follows; To; (address) Telex; Answerback; To; (address) Telex; Answerback; Notice must be deemed to have been given on the date of mailing except the notice of change of address which must be deemed to have been given when received.  13 Waiver

The failure or delay of either party to require performance by the other party of any provision of this Agreement shall not constitute a waiver of, or shall not affect, its right to require performance of such provision.  14 Severability

If any provision of this Agreement or the application of any such provision to any person or circumstance shall be determined by any arbitration or court of competent jurisdiction to be invalid or unenforceable to any extent, company may upon fifteen days notice elect to (1) terminate this Agreement or (2) continue this Agreement, in which case the remainder of this Agreement or the application of such provision to such person or circumstance (other than those which it is so determined to be invalid and unenforceable, shall not be affected thereby and each provision of this Agreement shall be valid and shall be enforced to the fullest extent permitted by law.

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 15 Indemnification

In the event, either party breaches an obligation under this Agreement or toward a third party or delays or interferes with the other party in the performance of this Agreement, it shall be liable to the other party, but neither party shall be liable to the other party for any consequential damages nor incidental damages, such as loss of profit. Each party shall pay all reasonable expenses, including the costs of litigation and attorneys’ fees, reasonably incurred by the other party in enforcing this Agreement. In the event, a third party commences any proceeding for which a party hereto intends to claim indemnification against the other party, such party shall promptly notify thereof the other party and allow equitable participation in all stages of the proceeding and settlement thereof. Failure to promptly notify thereof or allow equitable participation by the other party shall reduce the right of indemnification to the extent of actual resultant prejudice.  16 Waiver of Sovereign Immunity

This Agreement constitutes a commercial act made by the Purchaser, and the Purchaser is therefore generally subject to set off, suit, judgment, and execution and neither it nor its property has the right of immunity from setoff, judgment, attachment, or execution on the grounds of sovereignty in regard to its obligations and liabilities under this Agreement. To the extent that the Purchaser or any of its property has or hereafter may acquire any such right of sovereign immunity, the Purchaser hereby irrevocably waives all such right to immunity from legal proceedings, attachment prior to judgment, other attachment, or execution of judgment on the grounds of sovereignty in any action arising hereunder on behalf of itself and all its present and future property.

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Termination Clauses ➀ In Case of Contract Without Seal

IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate by their duly authorized representatives as of the date first above written. ➁ In Case of Contract with Seal

IN WITNESS WHEREOF, the parties have executed this Agreement by causing their corporate seals to be hereunto affixed and duly attested and these presents to be signed by their duly authorized representatives, this----day----of 2012. ➂ Signature

A & B Co., Ltd. Fred Bialeh President ➃ Sealing (i) In the case of a person

Signed, Sealed, and Delivered for and on behalf of Tom Jones by (Sign) · ······ L.S Mary Smith his duly authorized attorney in the presence of (Sign) ·········· Robert Blace

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(ii) In the case of a company

The Common Seal of A & B Co., Ltd. was hereunto affixed in the presence of (Sign) ·········· Fred Bialck Common Director Seal (Sign) ············ John Wheeler Secretary

Source The Korea Commercial Arbitration Board, http://www.kcab.or.kr.

4.4.2

International Sales Agreement (Purchase Order Form)

Practically speaking, the short form of purchase order is accompanied by the general terms and conditions providing more detailed conditions for proper business transactions as follows. Enforcement of the contract should be made in accordance with the provisions stipulated in the short form of the contract as well as those stipulated in the general terms and conditions. Trade practitioners, therefore, should always be very careful to be in compliance with the trade contract itself as well as the terms and conditions under the letter of credit which is issued based on the trade contract. This means that trade practitioners should be very careful when making trade contracts.

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MESSRS.

Date : Contract No. :

οοο Corporation as Buyer hereby confirms having purchased from you as Seller, the following goods by contract of purchase made on the above date and on the terms and conditions hereinafter set forth. Seller is hereby requested to sign and return the original and if any discrepancy be found by Seller, Buyer should be informed immediately by FAX to be subsequently confirmed by registered airmail. NO.

COMMODITY & SPECIFICATION

QUANTITY

UNIT PRICE

TOTAL AMOUNT

Time of Shipment : Origin : Port of Shipment : Port of Destination : Payment : Insurance : Packing : Special Terms & Conditions :

This contract is subject to the general terms and conditions set forth on back hereof :

Accepted by :

[οοο Corporation]

on (Seller)

(Buyer)

General Terms and Conditions The purchase specified on the face hereof shall be subject to the following terms and conditions :

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Licenses Seller, at its own expense, shall obtain any and all necessary permits or licenses to export the Goods from the country of shipment and/or to import, sell, use, or otherwise dispose of the Goods, including but not limited to the safety standard, in any countries where such Goods are imported, sold, used, or otherwise disposed of.

Shipment Time of shipment is the essence of this Contract. Should Seller delay shipping the Goods for other reasons than those set forth in Clause Force Majeure hereof, Buyer may: (a) cancel this Contract in whole or in part and/or (b) request to Seller, any Seller shall pay to Buyer, compensation for any and all damages incurred to Buyer, and any special premium transportation or other costs required for the Goods to arrive at the destination as if the Goods be shipped as schedules.

Packing Seller shall pack the Goods in strong wooden crate(s) or in carton(s), suitable for long-distance ocean/parcel post/air freight transportation and for change of climate, well protected against moisture and shocks. Seller shall be liable for any damage of the Goods and expenses incident thereto on account of improper packing and/or improper protective measures taken by Seller in regard to the packing.

Price Seller warrants that the prices sold to Buyer hereunder are no less favorable than the prices Seller currently extends to any other customer of the same Goods or similar goods and/or services in similar quantities. If Seller reduces its prices to others during the term of this Contract for such goods and/or services including but not limited to the Goods, Seller shall reduce the prices to Buyer for such Goods correspondingly.

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Extra Expenses Should the freight, insurance premium, and other expenses at the time of shipment on this Contract be raised or changed owing to unexpected changes of circumstances after this Contract is executed, such differences and/or additional expenses shall be borne by Seller.

Insurance

In the event of CIF or CIP Contract, insurance contract shall be made by seller. Such insurance will be bought at one hundred ten percent of the invoice amount and shall be issued by a first-class underwriter and cover all risks. Any insurance not set forth herein shall be arranged by Seller whenever requested by buyer at the cost of seller.

Adjustment Buyer may at any time and without any notice deduct or setoff seller’s claims for money due or to become due from buyer against any claims that buyer has or may have arising out of this or any other transaction between the parties hereto.

Parts Seller shall supply to buyer the parts so long as buyer continues to purchase the Goods pursuant to the terms and conditions of this Contract and for oo years after the last shipment of the Goods to Buyer.

Inspection Inspection of the Goods shall be carried out at the place or port of unloading at Buyer’s expense. Inspection may be done in the presence of Seller if Seller so desired. Provided, however, notwithstanding any inspection or payment made by Buyer, Buyer may without limiting its remedies reject, required corrections or refuse acceptance of the Goods which are not in conformity with the specifications or Seller’s express or implied warranty. The Goods

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not accepted by Buyer shall be returned to Seller at Seller’s account and risk or disposed of by Buyer at a time and price which Buyer deems reasonable and Seller shall reimburse Buyer any and all damage incurred to Buyer due to the Goods which are rejected.

Warranty Seller represents and warrants that all Goods to be sold by Seller under this Contract shall conform in full to the specifications, analysis, and other information furnished to Buyer and shall be merchantable, of good material and workmanship and free from any defects for at least [•] months from the date of unloading and further represents and warrants that the Goods shall be fit and sufficient for the purpose intended by Buyer and/or end users and that on delivery Buyer shall receive the title to the Goods, free and clear of all liens and encumbrances. Seller’s warranty under this Contract as stated above shall be an essential condition of this Contract and any breach of the said warranty shall give Buyer the right (a) to reject the Goods so affected, without prejudice to any right to damages for such breach or to any other right arising from such breach of this Contract and/or (b) to terminate this Contract in whole or part. Any and all warranty herein shall be in addition to any warranties express or implied by law or otherwise made by Seller and will survive acceptance and payment by Buyer.

Remedy

If Seller shall be in default of this Contract or shall fail to ship the Goods at the time scheduled, Buyer may by written notice to Seller exercise any of the following remedies: (a) terminate this Contract; or (b) terminate this contract as to portion of the Goods in default only and purchase an equal quantity of the Goods of same kind and grade and recover from Seller the excess of the price so paid over the purchase price set forth in this Contract, plus any incidental loss or expense; or (c) terminate this Contract as to any unshipped balance and recover from Seller as liquidated damages, a sum of five (5) percent of the price of the balance. Further, it is agreed that the rights and remedies herein reserved to Buyer shall be cumulative and in addition to any other or further rights and remedies available at law.

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Infringement Seller shall be responsible for any infringement with regard to patent, utility model, trademark, design, or copyright relating to the Goods in any country where the Goods are sold, used, or otherwise disposed of. In the event of any dispute with regard to the said intellectual or industrial property right, Buyer may cancel this Contract. Seller shall be responsible for and shall defend, reimburse, indemnify and hold Buyer harmless from any and all liabilities, claims, expenses, losses, and/or damages sustained thereby.

Force Majeure In the event of any prohibition of import, refusal to issue an import license, act of Goods, war, blockade, embargo, insurrection, or any other action of governmental authorities, civil commotion, plague or other epidemic, fire, flood, or any other unforeseeable causes beyond the control of a party, the party shall not be liable for any default arising therefrom in performance of this Contract.

Arbitration All disputes, controversies, or differences which may arise between the parties hereto, out of or in relation to or in connection with this Contract, shall be finally settled by arbitration in [Name of Country] in accordance with the Commercial Arbitration Rules of The [Name of Country] Commercial Arbitration Board.

Trade Terms All trade terms provided in this contract shall be interpreted in accordance with the latest Incoterms of the International Chamber of Commerce. Source Korea Eximbank, http://www.koreaexim.go.kr.

4.4 Illustrated Forms of International Trade Contract

4.4.3

195

International Sales Agreement (Selling Contract Form)

Practically speaking, the short form of a selling contract is accompanied by the general terms and conditions, providing more detailed conditions for proper business transactions, as in the case of a purchase order.

Οοο Company, as Seller, hereby confirms having sold to οοο as Buyer, the following goods by this sales contract made on the above date and on the terms and conditions hereinafter set forth.

ITEM NO.

COMMODITY & SPECIFICATION

QUANTITY UNIT PRICE

AMOUNT

Time of Shipment : Port of Shipment : Port of Destination : Payment AT SIGHT L/C USANCE

By an irrevocable letter of credit payable at sight By an irrevocable, confirmed, and unconditional letter of credit

DP

By documents against payment

DA

By bill(s) of exchange drawn on Buyer due οοo days from B/L date

DD

By D/D (Demand Draft) within οοo days after the date of B/L

TT

By T/T (Telegraph Transfer) within οοo days after the date of B/L

MT

By M/T (Mail Transfer) within οοo days after the date of B/L

Insurance : Seller to cover the CIF price plus οοο% against All Risk plus War and SRCC Risks Packing : Marking : Special Terms & Conditions : This Contract is subject to the general terms and conditions set forth on back hereof : Seller and Buyer By οοο Address οοο Title οοο Name οοο

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Quantity Quantity set forth in this Contract is subject to a variation of ten percent more or less at Seller’s option.

Shipment Date of bill of lading shall be accepted as a conclusive date of shipment. ooo days grace in shipping shall be allowed. Partial shipment and/or transshipment shall be permitted unless otherwise stated in this Contract. Seller shall not be responsible for any delay of shipment, should Buyer fail to provide a timely letter of credit in conformity with this Contract or in case the sailing of the steamer designated by Buyer is deferred beyond the prearranged date of shipment.

Packing Packing shall be at Seller’s option. In case special instructions are necessary, Buyer should notify Seller thereof in time to enable Seller to comply with the same and all additional cost thereby incurred shall be borne by Buyer. Shipping Marks shall be made as shown in the oblong of the front page of this Contract.

Insurance In case of CIF or CIP basis, ooo % of the invoice amount shall be insured, unless otherwise agreed; any additional insurance required by Buyer to be at his own expense; unless otherwise stated, insurance to be covered for marine insurance only FPA or ICC (C) Clause. Seller may, if he deems it necessary, insure against additional risks at Buyer’s expense.

Increased Costs If Seller’s costs of performance are increased after the date of this Contract by reason of increased freight rates, taxes, or other governmental charges or

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insurance rates, or if any variation in rates of exchange increases Seller’s costs or reduces Seller’s return, Buyer agrees to compensate Seller for such increased cost or loss of income. Further, if at any time Buyer requests shipment later than agreed and Seller agrees thereto, Seller may, upon completion of manufacture, store the Goods and charge all expenses thereby incurred to Buyer, plus reasonable storage charges when Seller stores the Goods in its own facilities.

Payment O At Sight L/C

An irrevocable letter of credit, without recourse, available against Seller’s sight drafts shall be established through a prime bank satisfactory to Seller within ooo days after the date of this Contract and be kept valid at least ooo days after the date of last shipment. The amount of such letter of credit shall be sufficient to cover the Contract amount and additional charges and/ or expenses to be borne by Buyer. O Usance L/C For the payment of the Contract Price specified hereof the Buyer shall provide the Seller with the irrevocable, confirmed, and unconditional letter of credit (hereinafter called “L/C”) in the amount of USD ooo at ooo months usance basis (after the date of draft issued by the Seller or bill of lading) in favor of the Seller to be opened within ooo days from the signing date of the Contract under the agreed terms and conditions by the Seller and Buyer. O DP After shipment, the Seller shall deliver at sight bill(s) of exchange drawn on the Buyer together with the required documents to the Buyer through a bank. The Buyer shall effect the payment immediately upon the first presentation of the bill(s) of exchange and the required documents, i.e. D/P. O DA After shipment, the Seller shall deliver bill(s) of exchange drawn on the Buyer, payable ooo days after acceptance, together with the required documents to the Buyer through a bank for acceptance. The Buyer shall accept the bill(s) of exchange immediately upon the first presentation of the bill of exchange and the required documents and shall effect the payment on the maturity date of the bill(s) of exchange.

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O DD The Buyer shall pay the invoice value of the goods by means of D/D (Demand Draft) within ooo days after the receipt of the required documents; within ooo days after the date of the bill of lading. O TT The Buyer shall pay the invoice value of the goods to the Seller’s account with the bank designated by the Seller by means of T/T (Telegraph Transfer) within ooo days after the receipt of the required documents; within ooo days after the date of the bill of lading. O MT The Buyer shall pay the invoice value of the goods by the Seller by means of M/T (Mail Transfer) within oo days after the receipt of the required documents; within ooo days after the date of the bill of lading. Inspection The inspection of the Goods shall be done according to the export regulation of the Republic of Korea and/or by the manufacturer(s) which shall be considered as final. Should any specific inspector be designated by Buyer, all additional charges incurred thereby shall be at Buyer’s account and shall be added to the invoice amount, for which the letter of credit shall be amended accordingly.

Warranty The Goods shall conform to the specification set forth in this contract and free from defects in material and workmanship for ooo months from the date of shipment. The extent of Seller’s liability under this warranty shall be limited to the repair or replacement as herein provided of any defective Goods or parts thereof. Provided, however, this warranty does not extend to any of the said Goods which have been: (a) subjected to misuse, neglect, accident, or abuse; (b) improperly repaired, installed, transported, altered, or modified in any way by any other party than Seller; or (c) used in violation of instructions furnished by Seller. Except for the express limited warranties set forth in this article, seller makes no other warranty to buyer, express or implied, and hereby expressly disclaims any warranty of merchantability or fitness for a particular purpose. In no event shall Seller be liable to Buyer

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under this Contract or otherwise for any lost profits or for indirect, incidental, or consequential damages for any reason.

Claims Any claim by Buyer of whatever nature arising under this Contract shall be made by facsimile or cable within ooo days after arrival of the Goods at the destination specified in the bills of lading. Full particulars of such claim shall be made in writing, and forwarded by registered mail to Seller within ooo days after such fax or cabling. Buyer must submit with particulars the inspection report sworn by a reputable surveyor acceptable to the Seller when the quality or quantity of the Goods delivered is in dispute. Failure to make such claim within such period shall constitute acceptance of shipment and agreement of Buyer that such shipment fully complies with applicable terms and conditions.

Remedy Buyer shall, without limitation, be in default of this Contract, if Buyer shall become insolvent, bankrupt, or fail to make any payment to Seller including the establishment of the letter of credit within the due period. In the event of Buyer’s default, Seller may without prior notice thereof to Buyer exercise any of the following remedies among others: (a) terminate this Contract; (b) terminate this Contract as to the portion of the Goods in default only and resell them and recover from Buyer the difference between the price set forth in this Contract and the price obtained upon resale, plus any incidental loss or expense; or (c) terminate the Contract as to any unshipped balance and recover from Buyer as liquidated damages, a sum of five percent of the price of the unshipped balance. Further, it is agreed that the rights and remedies herein reserved to Seller shall be cumulative and in addition to any other or further rights and remedies available at law

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Force Majeure Neither party shall be liable for its failure to perform its obligations hereunder if such failure is the direct result of circumstances beyond that party’s reasonable control, including but not limited to, prohibition of exportation, suspension of issuance of export license or other government restriction, act of God, war, blockade, revolution, insurrection, mobilization, strike, lockout or any labor dispute, civil commotion, riot, plague or other epidemic, fire, typhoon, flood.

Patents, Trademarks, Designs, etc. Buyer is to hold Seller harmless from liability for any infringement with regard to patent, trademark, copyright, design, pattern, etc., originated or chosen by Buyer.

Governing Law This Contract shall be governed under the laws of Korea.

Arbitration Any dispute arising out of or in connection with this contract shall be finally settled by arbitration in Seoul in accordance with the Arbitration Rules of the Korean Commercial Arbitration Board.

Language This Agreement may be executed in English and in other languages (including Korean). In the event of any difference or inconsistency among different versions of this Agreement, the English version shall prevail in all respects.

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Trade Terms All trade terms provided in the Contract shall be interpreted in accordance with the latest Incoterms® 2020 of International Chamber of Commerce.

Termination Clause Between ooo Company as purchaser and ooo Company as supplier: Dated: 2012 Source Korea Eximbank, http://www.koreaexim.go.kr.

4.4.4

Plant Supply Agreement

The following is an example of a plant supply agreement between the supplier and the purchaser. This Plant Supply Agreement (the “Agreement”), made and entered into this ooo day of 2011 by and between ooo company, a corporation organized and existing under the laws of Korea having its registered office at Seoul (“Supplier”) and ooo company, a corporation organized and existing under the laws of the United States having its registered office at New York (“Purchaser”).

Witnesseth

WHEREAS, Supplier possesses technical information and manufacturing skills with respect to ooo; and WHEREAS, Purchaser desires to purchase from Supplier on a deferred payment basis and Supplier agrees to manufacture and supply on a deferred payment basis to Purchaser, a certain quantity of ooo as more specifically described herein (the “Commodities”) upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained the parties hereby agree as follows:

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(1) Definitions

In addition to the terms defined above, as used herein the following terms shall have the meanings set forth below: “Bill of Lading” shall mean the bill of lading issued with respect to each shipment of the Commodities. “Banking Day” shall mean a day on which banks are open for business in Seoul, London, and New York. “Certificate of Acceptance” shall have the meaning set forth in Article 6.2. “Contract Price” shall mean the aggregate amount of the Installments and the Principal Amount to be paid by Purchaser to Supplier hereunder, which such amount is ooo United States Dollars (US$ ooo). “Default Rate” shall mean ooo percent (ooo %) per annum. “Dollars” and the sign “$” shall mean dollars in the lawful currency of the United States. “Effective Date” shall have the meaning set forth in Article 16. “Event of Default” shall have the meaning set forth in Article 9.1. “Factory” shall have the meaning set forth in Article 2.2. “First Installment” shall mean the first payment to be made by Purchaser hereunder which such payment shall be in the amount of ooo Dollars (US$ ooo). [“Guarantor” shall mean a first-class international bank satisfactory to Supplier.] References to “Guarantor” and “Letter of Guarantee” or “Standby Letter of Credit” and “L/C Banks” should be included in this Agreement in accordance with the kind of security required by Supplier and Exim Bank. “Installments Payable on or before the last Shipment” shall mean, collectively, the First Installment, the Second Installment, and the Third Installment ooo. If necessary, there can be more Installments according to the nature of the Agreement. “Interest Payment Date” shall mean the last day of each Interest Period. “Interest Period” shall mean the period beginning on the last Shipment Date and having duration of six months and each period thereafter commencing on the last day of the then current Interest Period and having duration of six months. “Interest Rate” shall mean ooo percent (ooo%) above Commercial Interest Reference Rate (CIRR) under the OECD Guidelines prevailing at the time of the Loan Commitment to the Supplier by the Export-Import Bank of Korea (KEXIM). “Last Shipment Date” shall mean the final Shipment Date set forth in Schedule III hereto.

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[“Letter of Guarantee” shall mean the irrevocable and unconditional guarantee to be issued by the Guarantor guaranteeing the payment of all sums due and payable under the Notes, substantially in the form of Exhibit ooo hereto and in any event in form and substance satisfactory to Supplier and its counsel.] “Notes” shall mean the promissory notes of Purchaser evidencing the Principal Amount which such notes shall be substantially in the form of Exhibit A hereto and in any event in form and substance satisfactory to Supplier and its counsel. “Payment Date” shall mean each of the ooo consecutive semiannual dates occurring on ooo and ooo of each year, the first Payment Date being ooo, 2013 and the last Payment Date being ooo, 2014. “Principal Amount” shall mean ooo Dollars (US$ ooo ) and in any event, the amount equal to ooo percent (ooo %) of the Contract Price. “Second Installment” shall mean the second payment to be made by Purchaser hereunder, which such payment shall be in the amount of ooo Dollars (US$ ooo). “Shipment Date” shall mean the date entered on the bill of lading with respect to each shipment of the Commodities. “Specifications” shall mean the specifications to be used for the manufacture of the Commodities as more specifically set forth in Schedule II. “Third Installment” shall mean the third payment to be made by Purchaser hereunder, which such payment shall be in the amount of ooo Dollars (US$ ooo). (2) Commodities ➀ Description

The description, quantity, and unit price of the Commodities to be supplied by Supplier to Purchaser hereunder shall be as set forth in Schedule I attached hereto. All prices stated herein are CIF ooo. ➁ Specification

The Commodities shall be manufactured in accordance with the Specifications set forth in Schedule II hereto. Manufacture of the Commodities shall

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occur at ooo (the “Factory”), or such other place as Supplier shall notify Purchaser. Supplier may at its own risk subcontract any part of the work undertaken hereunder without prior consent of Purchaser. ➂ Samples

Supplier shall within ooo day after the Effective Date in accordance with Purchaser’s written instructions produce such samples of the Commodities as Purchaser may reasonably require. The unit prices to be paid by Purchaser for the samples shall be determined by mutual agreement of the parties prior to the manufacture thereof. The samples may be altered, adapted or otherwise changed as Purchaser may reasonably demand to meet its requirements. Upon manufacture of the samples to the satisfaction of Purchaser, Purchaser shall notify Supplier in writing of its acceptance thereof, and thereafter full commercial production of the Commodities shall begin. (3) Payment ➀ Terms of Payment

The Contract Price shall be in an amount not exceeding ooo United States Dollars (US$ ooo) and shall be paid by Purchaser to Supplier in Dollars as follows: (a) The Installments Payable on or before the last Shipment The First Installment of ooo United States Dollars (US$ ooo) shall be paid within ooo days after the Effective Date. The Second Installment of ooo Dollars ($ooo) shall be paid upon the ooo (ooo th) Shipment Date set forth in Schedule III hereto or on ooo whichever comes earlier. The Third Installment of ooo Dollars ($ooo) shall be paid on the ooo (ooo th) Shipment Date set forth in Schedule III hereto or on ooo whichever comes earlier. Purchaser shall remit the full amount of each of the Installments in immediately available funds by telegraphic transfer to the account of the Export-Import Bank of Korea with [Name and Address of Bank] (Account Number ooo) in favor of the Supplier. (b) Principal Amount

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The Principal Amount shall be paid in ooo equal (or as nearly equal as possible) to semiannual installments one such installment being payable on each Payment Date. The last installment shall in any event be in the amount necessary to pay in full the Principal Amount outstanding. The Principal Amount and interest thereon shall be evidenced by and paid in accordance with the Notes which shall be executed and delivered by Purchaser to Supplier pursuant to Section 4.01 hereof. (c) Interest Purchaser agrees to pay interest on the Principal Amount outstanding from time to time on each Interest Payment Date for the Interest Period then ending at the Interest Rate. Interest shall accrue on the basis of the actual number of days elapsed and a year of 360 days. Interest shall accrue from and including the first day of an Interest Period to but not including the last day of such Interest Period. ➁ Prepayment

Purchaser may prepay, in whole or in part, the Principal Amount together with all interests and other amounts then due hereunder on any due date of a Note, provided that the Purchaser shall have given not less than ooo days’ prior written notice thereof to the Supplier, and shall pay to the Supplier a prepayment premium equal to the amount of the prepayment amount multiplied by the interest rate which means as in “the Article 1. Definitions” hereof and multiplied by ooo, if the remaining repayment period from the date of prepaying the said prepayment amount is three ooo years or less, or multiplied by ooo, if the remaining repayment period is between over ooo years and ooo years. Notwithstanding the foregoing, the Purchaser may prepay, without any prepayment premium, the Principal Amount if the remaining repayment period is ooo months or less. The amount of any prepayment shall be equal to the amount of an installment of repayment of Principal Amount or an integral multiple thereof. Any prepayment shall be applied to the installments of Principal Amount in inverse order of maturity.

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(4) Security ➀ Notes

Purchaser shall, within ooo Banking Days before the Last Shipment Date, duly execute and deliver to the Supplier ooo Notes respectively numbered “1” to “ooo” inclusive, evidencing the Purchaser’s obligation to pay to the Supplier the Principal Amount plus interest thereon. ➁ Guarantee Within ooo Banking Days before the Last Shipment Date, Purchaser shall furnish Supplier with the Guarantee duly executed by the Guarantor.

(5) Shipment ➀ Shipment Schedule Supplier shall cause shipment of the Commodities at any Korean port reasonably designated by Supplier not later than the end of each month commencing from ooo to ooo in accordance with Schedule III attached hereto. The Last Shipment Date shall be made not later than ooo, excluding delays due to such causes as defined in Article 7 hereof. ➁ Shipping Advice

Shipping advice shall be given by Supplier to Purchaser promptly after the onboard date of the bill of lading and shall contain such information as the contract number, loading port, brief description of the Commodities shipped, name of vessel, expected time of arrival, invoice amount of shipment, and the name of the claim settling agent (if necessary) in Korea.

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➂ Title and Risk of Loss

Title to and risk of loss of the Commodities shall pass to Purchaser when the Commodities have effectively passed the ship’s rail at the port of shipment. ➃ Packing and Marking

Commodities shall be packed in accordance with standard export packing methods and shall be marked in accordance with the reasonable instruction of Purchaser. ➄ Insurance, Freight, Export License

Supplier shall be responsible for insuring against all risks in maritime transportation from the time the Commodities effectively pass the ship’s rail at the port of shipment and shall pay freight for the maritime transportation of the Commodities. Supplier at its own expense will obtain all necessary permits or licenses to export the Commodities prior to the relevant Shipment Date thereof. (6) Inspection ➀ Time and Place of Inspection

Prior to each Shipment Date, Purchaser of its agent or representative shall at its own expense inspect the Commodities at the Factory or such other place as may be notified by Supplier to Purchaser. Supplier shall provide Purchaser with all reasonable assistance in conducting the inspection. Supplier shall give Purchaser ooo days prior notice of the date on and the place at which the relevant Commodities will be ready for final inspection. If Purchaser fails to conduct inspection at such place within ooo days from the date stated in Supplier’s notice, Supplier may conduct the final inspection without Purchaser being present, and in such case the Purchaser shall be obligated to accept such Commodities as are determined by Supplier to be in conformance with this Agreement.

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➁ Result of Inspection

Any Commodity or any accessory or part thereof failing to comply within ooo % of the Specification shall be deemed a defective Commodity and Supplier shall replace such Commodity, accessory or part with a conforming Commodity, accessory or part at its own expense. For inspected Commodities deemed to be conforming with the Specifications, Purchaser shall issue to Supplier a written certificate substantially in the form of Schedule IV to that effect (the “Certificate of Acceptance”), and such issuance shall constitute Purchaser’s final and binding acceptance of the Commodities so inspected. (7) Force Majeure ➀ Causes of Delay

If the performance of this Agreement by any party, or of any obligation under this agreement, is prevented, restricted, or interfered with by reason of war, typhoon, revolution, civil commotion, acts of public enemies, blockade, embargo, strikes, lockouts, any law, order, proclamation, regulation, ordinance, demand or requirement having a legal effect of any government, or any other act whatsoever, whether similar or dissimilar to those referred to in this clause, which are beyond the reasonable control of the party affected or its subcontractor, including weather, then the party so affected shall, upon giving prior written notice to the other party, be excused from such performance to the extent of such prevention, restriction or interference, provided that the party so affected shall use its best effort to avoid or remove such causes of non-performance, and shall continue performance hereunder with the utmost dispatch whenever such causes are removed. Upon such circumstances arising, the parties shall meet forthwith to discuss what (if any) modification maybe required to the terms of this Agreement, in order to arrive at an equitable solution. ➁ Excessive Delay

If the total accumulated time of all delays with respect to each shipment on account of the causes specified in Section (7 - 1) of this Article aggregates

4.4 Illustrated Forms of International Trade Contract

209

or can reasonably be expected to aggregate ooo calendar days or more, then in such event either party may terminate this Agreement in accordance with the provisions of Article 9 hereof. (8) Warranty ➀ Warranty Terms

Subject to the limitations set forth below, Supplier warrants that the Commodities will be free from defects in material and workmanship and undertakes to repair or replace free of charge any defective parts, including repaired or replaced parts, in the Commodities provided, however, that the parties expressly acknowledge and agree that this warranty is limited to only such defects in the commodities which are (i) due solely to defective material and/or poor workmanship on the part of Supplier and/or its subcontractors, (ii) discovered within ooo months after the shipment date of the applicable commodity, and (iii) for which notice thereof is duly given to Supplier as provided in Article 8.02 below. ➁ Notice of Defects

Purchaser shall notify Supplier in writing, or by telex confirmed in writing, within ooo days after discovery of any defects for which claim is made hereunder. Purchaser’s failure to give Supplier such notice within ooo days after discovery of the defect shall constitute an absolute, irrevocable, and unconditional waiver of any and all claims arising out of or in any way connected with such defect. ➂ Remedy of Defects

Upon receipt of notice, Supplier shall promptly deliver the replacement part(s) free of charge CIF ooo, or such other port as may be reasonably designated by Purchaser.

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➃ Disclaimer

Purchaser expressly acknowledges and agrees that the warranty contained herein shall not extend to material which ages or deteriorates due to ordinary wear and tear, or to defects or conditions caused, in whole or in part, by deficiencies in supplies, services, or facilities furnished by Purchaser. In addition, this warranty does not extend to commodities that have been altered or repaired by personnel unauthorized by Supplier, or which have been subjected to misuse, neglect, improper maintenance, accident, or improper installation or storage by Purchaser, its customers or personnel acting at Purchaser’s direction or behalf. ➄ Purchaser’s Responsibility

Purchaser shall indemnify and hold Supplier harmless against any and all claims, proceedings, losses, liabilities, suits, judgments, costs, expenses, penalties or fines for injury or damage to any property or person arising out of or in any way connected with the transportation, installation, use, or maintenance of the Commodities. For so long as this Agreement shall remain in force, Purchaser shall procure from a reputable insurance company a Comprehensive General Liability insurance policy (or its equivalent) in the minimum amount of US$ ooo, per occurrence, and shall at its own expense cause Supplier to be listed as a named insured in such policy. ➅ Service Engineer

Upon Purchaser’s request, Supplier shall dispatch a service engineer to a location reasonably designated by Purchaser to assist Purchaser in providing efficient service to its customers for the period of warranty hereunder. Purchaser shall pay to Supplier all costs associated with such service engineer including but not limited to, salary, transportation, communications, and housing.

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(9) Default ➀ Event of Default

Each of the following events and occurrences shall constitute an event of default (“Event of Default”): (a) Purchaser fails to pay on the due date any of the First Installment, Second Installment, or Third Installment. (b) Purchaser rejects any shipment of the Commodities following the issuance of a Certificate of Acceptance with respect to such shipment. (c) Purchaser fails to execute and deliver the Notes in accordance with Article 4.01 or the Guarantor fails to execute and deliver the Letter of Guarantee in accordance with Article 4–2. (d) Purchaser fails to perform any of its obligations with respect to any of the security instruments provided by it under Article 4 hereof. (e) Purchaser fails to pay on the relevant due date any payment of principal, interest, expenses, or any other amount which it is obligated to pay under the terms of the Notes. (f) Purchaser fails to perform or violates any provision of this Agreement or the Notes. (g) Any governmental consent, filing, license, or approval granted or required in connection with this Agreement or any Note expires or is terminated, revoked, withdrawn, or modified in any way or any new law or decree is issued which in Supplier’s opinion would prevent Purchaser from fulfilling its obligations hereunder or under any Note. (h) The whole or a substantial part of the assets of Purchaser is confiscated or attached. (i) Purchaser fails to pay when due any indebtedness or fails to observe or perform any term, covenant or agreement contained in any agreement by which it or its assets is bound evidencing or securing any indebtedness, and the effect of such failure is to accelerate, or to permit the acceleration of the maturity of such indebtedness. (j) Any change occurs in the ownership or control of Purchaser or Guarantor which in the reasonable opinion of Supplier constitutes a material adverse change affecting the financial condition or operations of Purchaser or Guarantor, respectively. (k) Purchaser or Guarantor suspends or discontinues its business operations, whether voluntarily or involuntarily, for a period of ooo or more days. (l) Purchaser or the Guarantor becomes insolvent or unable to pay any money due under any agreement or document evidencing, securing,

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(m)

(n)

(o)

(p)

guaranteeing or otherwise relating to indebtedness in excess of $ ooo or its equivalent in any other currency when due or commits or permits any act of bankruptcy, which term shall include (i) the filing of a petition in any bankruptcy, reorganization, winding-up, or liquidation proceeding or other proceeding analogous in purpose or effect, (ii) the failure by Purchaser or the Guarantor to have any such petition filed by another party discharged within ooo days, (iii) the application for or consent to the appointment of a receiver or trustee for the bankruptcy, reorganization, winding-up or liquidation of Purchaser or the Guarantor, (iv) the making by Purchaser or the Guarantor of an assignment for the benefit of its creditors, (v) the admission in writing by Purchaser or the Guarantor of its inability to pay its debts, (vi) the passing of a resolution by, or the entry of any court order or judgment confirming the bankruptcy or insolvency of, Purchaser or the Guarantor or approving any reorganization, winding-up or liquidation of Purchaser or the Guarantor or of a substantial portion of their respective properties or assets, or (vii) any creditor of the Guarantor exercises a contractual right to assume the financial management of the Guarantor. The Guarantor attempts to repudiate, rescind, limit or annul the Letter of Guarantee; or any legislation or regulation is proposed, enacted or promulgated the effect of which would be to repudiate, rescind, limit or annul the Letter of Guarantee; or the Guarantor fails to comply with any legislation or regulations concerning its organization; or authority or any change is made in such legislation or regulations which failure or change, in the reasonable opinion of Supplier, has a material adverse effect on the ability of the Guarantor to meet its obligations under the Letter of Guarantee. It becomes unlawful for Purchaser to perform any obligation under this Agreement or the Notes, or for the Guarantor to perform any obligation under the Letter of Guarantee. Any competent governmental authority takes (i) any action to condemn, seize, requisition, or otherwise appropriate any substantial portion of the properties or assets of Purchaser (either with or without payment of compensation), (ii) any action to dissolve, liquidate or terminate the existence of the Guarantor or to divest the Guarantor of any material portion of its properties or assets, or (iii) any action relating to Purchaser or the Guarantor which, in the opinion of Supplier, adversely affects Purchaser or the Guarantor’s ability to pay its indebtedness under this Agreement, the Notes or the Letter of Guarantee. Any circumstances occur which in the opinion of Supplier give reasonable grounds for belief that Purchaser or the Guarantor may not (or may not be able to) perform its obligations under this Agreement, the Notes or the Letter of Guarantee.

4.4 Illustrated Forms of International Trade Contract

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(q) Supplier fails to manufacture the samples to the satisfaction of Purchaser in accordance with Article 2.03 hereof within ooo days after the Effective Date. (r) Supplier fails to ship Commodities accepted by Purchaser within ooo days after Purchaser’s issuance of a Certificate of Acceptance therefore. (s) Supplier breaches any of its obligations hereunder and such breach is not cured or steps satisfactory to Purchaser have not been taken to effect cure within ooo days of Purchaser’s written notice to Supplier. ➁ Consequences of Default

(a) Upon the occurrence of any of the Events of Default specified in Article 9.01 (a) or (b), successive Shipment Dates shall be postponed until such Event of default is cured; provided, however, that if any such Event of Default continues for a period of ooo days, Supplier may, at its option, rescind this Agreement by giving Purchaser notice to such effect. In the event of such rescission, Supplier shall be entitled to retain all or any part of the Installments paid by Purchaser hereunder. (b) Upon the occurrence of any of the Events of Default specified in Article 9.01 (c)-(p), and at the option of Supplier, the obligations of Supplier hereunder shall immediately cease; Supplier may declare, by notice to Purchaser without presentment, demand, notice, or protest, all of which are hereby expressly waived by Purchaser, the principal of any Installment and the principal and accrued interest on the Principal Amount payable hereunder and all other amounts payable hereunder immediately due and payable together with Default Interest accrued on all such sums from the date of such declaration. (c) Upon occurrence of any of the Events specified in Article 9.01 (q)-(s), Purchaser may terminate this Agreement; provided, however, that all amounts then due and payable to Supplier hereunder shall have been paid in full. In the event of such termination, Supplier shall refund the Installments paid by Purchaser hereunder. (d) All expenses incurred by either party in enforcing its rights hereunder, including the fees and expenses of counsel, shall be paid by the other party.

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(10) Arbitration

All disputes arising between the parties in connection with this Agreement which cannot be settled by mutual agreement shall be finally settled by arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce before a board of three arbitrators, consisting of one member to be appointed by each of Purchaser and Supplier, respectively, and one-third member to be selected by the two members so appointed. In the event, the said two arbitrators fail to agree upon a third arbitrator within ooo days from the date of their appointment, the third arbitrator shall then be appointed by the president of the International Chamber of Commerce. The arbitration award may take the form of an order to pay a sum of money, to perform or refrain from an act, or any combination thereof. The award rendered shall be final and conclusive. No payment under this Agreement shall be delayed or withheld by Purchaser on account of any dispute of whatever nature arising between the parties hereto. (11) Assignment

Neither of the parties hereto may assign this Agreement to a third party unless prior written consent of the other party has been obtained. In the event of any assignment by Purchaser, such assignment shall further be subject to the approval of Supplier’s bank and/or the relevant Korean governmental authorities, and Purchaser shall at all times remain as the primary obligor for the due performance of all of its obligations under this Agreement. This Agreement shall inure to the benefit of and shall be binding upon the lawful successors, transferees, and assigns of either of the parties hereto. Notwithstanding the foregoing, Supplier is entitled to assign to any other party its rights under the Notes and/or the Letter of Guarantee [Standby Letter of Credit] without Purchaser’s prior consent. (12) Taxes ➀ Taxes in Korea

Supplier shall pay all taxes and duties imposed in the Republic of Korea in connection with the execution, delivery, or performance of this Agreement.

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215

➁ Taxes Outside Korea

Purchaser shall pay all taxes and duties imposed outside the Republic of Korea in connection with the execution, delivery, or performance of this Agreement except for taxes and duties imposed upon those items to be procured by Supplier for the manufacture of the Commodities. (13) Patents, Trademarks, and Copyrights

Nothing contained herein shall be construed as transferring any patent, trademark, or copyright in the Commodities or any part thereof, all such rights being hereby expressly reserved to the true and lawful owners thereof. (14) Confidentiality

Supplier shall retain all rights with respect to the Specifications, plans, working drawings, technical descriptions, calculations, test results and other data, information and documents concerning the design and manufacture of the Commodities, and Purchaser hereby agrees not to disclose the same or divulge any information contained therein to any third parties without the prior written consent of Supplier except to key employees involved in the usual operation or maintenance of the Commodities. (15) Notice

Any and all notices and communications in connection with this Agreement shall be written in the English language and (i) personally delivered, (ii) transmitted by registered airmail postage prepaid, or (iii) transmitted by tested telex to the parties at the following addresses: To Purchaser: [Address] E-Mail Address: ooo To Supplier: [Address] E-Mail Address: ooo

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Any notice given by registered airmail shall be deemed to have been received [•] days from the date of mailing, any notice personally delivered shall be deemed to have been received upon delivery and any notice sent by telex shall be deemed to have been received when sent. Any party may change its address for the purposes hereof by written notice to the other party. (16) Effective Date

This Agreement shall become effective from the date (the “Effective Date”) on which all of the following conditions have been met: (a) This Agreement has been duly executed and delivered by the parties hereto. (b) Supplier has obtained the relevant export license with respect to the Commodities from the government of the Republic of Korea. Supplier shall promptly give notice to Purchaser upon the fulfillment of each of the above conditions. This Agreement shall terminate upon payment of all amounts due to Supplier under the terms of this Agreement. (17) Miscellaneous ➂ Applicable Law

The parties hereto agree that the validity, formation, and interpretation of this Agreement, the Notes, and the Letter of Guarantee shall be governed by the laws of [Name of Country]. 2. Discrepancies

In the event that any provision contained in the Specifications is inconsistent with any provisions of this Agreement, then in each and every such event the applicable provisions of this Agreement shall prevail.

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217

3. Entire Agreement

This Agreement contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, understandings, and agreements on any subject-matter of this Agreement. 4. Severability

If any provision of this Agreement or any document executed in connection herewith shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired. 5. Waiver of Sovereign Immunity

Purchaser represents and warrants that this Agreement is a commercial rather than public or governmental act and that Purchaser is not entitled to claim immunity from legal proceedings with respect to itself or any of its properties or assets on the grounds of sovereignty or otherwise under any law or in any jurisdiction where an action may be brought for the enforcement of any of the obligations arising under or relating to this Agreement or the Notes. To the extent that Purchaser or any of its properties or assets has or hereafter may acquire any right to immunity from setoff, legal proceedings, attachment prior to judgment, other attachment or execution of judgment on the grounds of sovereignty or otherwise, Purchaser for itself and its properties and other assets hereby irrevocably waives such right to immunity in respect of its obligations arising under this Agreement, the Notes and all documents executed in connection herewith. 6. Amendment

No provision of this Agreement may be amended, modified, waived, or rescinded except by a written agreement executed by the parties hereto.

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7. Counterparts; Controlling Language

This Agreement may be executed in any number of counterparts. Any single counterpart or a set of counterparts executed, in either case, by both parties hereto shall constitute a full and original agreement for all purposes. This Agreement, all notices delivered hereunder and all documents to be delivered in connection with this transaction shall be in the English language and in the event of any conflict between the English-language version and the non-English-language version of any such notice or document, the English-language version shall prevail. 8. Independent Contractors

It is expressly understood and agreed that the relationship between the parties created by this Agreement is that of independent contractors. Nothing in this Agreement shall be construed to constitute either party as agent of the other for any purpose whatsoever, and neither party shall bind or attempt to bind the other party to any contract or the performance of any obligation nor represent to third parties that it has any right to enter into any binding obligation on the other's behalf.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized signatories as of the day and year first written above.

[PURCHASER]

By : οοο Company Name : οοο Title : οοο

[SUPPLIER]

By : οοο Company Name : οοο Title : οοο

Source Korea Eximbank, http://www.koreaexim.go.kr

4.5

Application to Business Field

The following is an example of the general terms and conditions to be made between Dr. COFFEEEXTRACT and Chinese Marine Trading Co., Ltd.

4.5 Application to Business Field

219

GENERAL TERMS AND CONDITIONS All business hereunder shall be transacted between Buyer and Seller on a principal to principal basis and both parties agree to the following terms and conditions (1) Quantity Quantity shall be subject to a variation of ( 10 )% plus or minus at Seller's option. (2) Shipment: Date of bill of lading shall be accepted as conclusive of the date of shipment.

Partial shipment and/or transhipment shall be not permitted. If shipment is prevented or delayed in whole or in party, by reason of Acts of God, or the consequence of, affecting Seller or any supplier to Seller of the goods sold hereunder or any manufacturer of the goods sold hereunder or any supplier to such manufacturer, such Acts of God to include but not limited to fire, flood, typhoon, earthquake, or by reason of riots, wars, hostilities, governmental restrictions, trade embargoes, strikes, lockouts, labor disputes, boycotting of Korean goods, unavailability of transportation or any other causes of a nature beyond Seller's control, then, Seller may, at its option, perform the contract of the unfulfilled portion here of within a reasonable time from the removal of the cause preventing or delaying performance, or rescind unconditionally and without liability this contract or the unfulfilled portion hereof. (3) Payment: Irrevocable and confirmed letters of credit negotiable at sight draft shall be established through a

prime bank satisfactory to Seller immediately after conclusion of contract with validity of at least 15 days after the last day of the month of shipment for negotiation of the relative draft. The amount of such letter of credit shall be sufficient to cover the contract amount and additional charges and/or expenses to be borne by Buyer. If Buyer fails to provide such letter of credit, Seller shall have the option of reselling the contracted goods for Buyer's account, holding the goods for Buyer's account and risk, and/or cancelling the contract and claiming for damages caused by Buyer's default. (4) Inspection: The inspection of quantity shall be done according to the export regulation of the Republic of

Korea and/or by the manufacturers which shall be considered as final. Should any specific inspector be designated by Buyer, all additional charges thereby incurred shall be borne by Buyer and shall be added to the invoice amount, for which the letter of credit stipulates accordingly. (5) Packing: Packing shall be at the Seller's option. In case special instructions are necessary the same should

be intimated to the Seller in time so as to enable the Seller to comply with it. (6) Insurance: In case of CIF or CIP basis, 110% of the invoice amount will be insured unless

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otherwise agreed. Any additional premium for insurance coverage over 110% of the invoice amount, if so required, shall be borne by Buyer and shall be added to the invoice amount for which the letter of credit shall stipulate accordingly. (7) Increased Costs: If Seller's costs of performance are increased after the date of this agreement by reason of increased freight rates, taxes or other governmental charges and insurance rates including war risk, or if any variation in rates of exchange

increases Seller's costs or reduces Seller's return, Buyer agrees to compensate Seller of such increased cost or loss of income. (8) Price: The price stated in the contract is subject to change and the actual price to be paid will be that of

Seller's current price list ruling at the time of dispatch of the goods. Seller shall notify Buyer in writing or by telex, cable or telegram of any revised price which shall be applied to goods still to be shipped, unless Buyer cancels in writing or by cable or telex the undelivered balance within 15 days from such notification. (9) Any Claim: Dispute, or complaint by Buyer of whatever nature arising under this contract, shall be made in cable within 10 days after arrival of the cargo in the destination port. Full particulars of such claim shall be made

in writing and forwarded by airmail so as to reach Seller within 20 days after cabling. Buyer must submit with such particulars as Public Surveyor's report when the quality and quantity of merchandise is in dispute. A claim made after the said 30-day period shall have no effect and Seller shall not be obligated to honor it. Seller shall not under any circumstance be liable for indirect or consequential damages. (10) Trade Terms: The trade terms used herein such as CIF, CIP and FOB shall be in accordance with Incoterms®

2020. In all other respects, this Contract shall be governed by and construed in accordance with the laws of Korea. (11) Arbitration: All disputes, controversies, or differences which may arise between the parties out of or in relation to or in connection with this contract or for the breach thereof, shall be finally settled by arbitration in Seoul, Korea in accordance with the Commercial Arbitration Rules of the Korean Commercial Arbitration Board and under the Laws of Korea. The

award rendered by arbitrator(s) shall be final and binding upon both parties concerned. (12) Deduction: Buyer may not deduct any amount from the price without Seller's advance written

authorization. (13) Patents, Trade Buyer is to hold Seller harmless from liability for any infringement with marks,

Designs, etc.: regard to patent, trademark, copyright, design, pattern, construction, stamp, etc., originated or chosen by Buyer. (14) Force Majeure: Seller shall not be responsible for non-delivery or delay in delivery resulting from causes beyond

its control. In the event of such an occurrence, Seller may at its option either postpone delivery until removal of the

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221

causes, or cancel the balance of the orderinthe Contract. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date first above written

For and on behalf of,

By Typed Name

For and on behalf of,

By Typed Name

Title

Title

The following is the purchase order made by Chinese Marine Trading Co., Ltd to Dr. COFFEEXTRACT.

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4 Terms of International Trade

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

PURCHASEORDER Messrs.

Your Ref : KN110525

Dr.COFFEEXTRACT

Our Ref : CMT20110503

1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park

Date & Place : May 28, 2017

Daejeon, Korea

Dear Sirs. We, Chinese Marine Trading Co., Ltd., as Buyer, hereby confirm our purchase of the following goods in accordance with the

terms and conditions given below. DES RIP I N LUVIUS Premium-Gold Lifting Cream-50

DACAPO-Elegante Brightening Effect Softner DACAPO-Elegante Brightening Enrich Cream DACAPO-Infinite Time Essence DACAPO-Remember Triple Balance Essential Serum Miracle ATO-Aroma Moisture Body Wash

4.5 Application to Business Field

223

Miracle ATO-Pure Moisture Cream Miracle AC-Red2 White Pore Serum QUALITY

AS PER PREVIOUS SHIPMENT.

PACKING

EACH 100 PCS. TO BE PACKED INTO AN EXPORTABLE CARTON BOX.

EXPORT STANDARD PACKING

QUANTITY 17,000 PCS. ONLY. PRICE

FOB Busan, Korea IN U.S. DOLLARS.

LUVIUS Premium-Gold Lifting Cream-50 @U$41/PCS DACAPO-Elegante Brightening Effect Softner @U$9.1/PCS DACAPO-Elegante Brightening Enrich Cream @U$13.9/PCS DACAPO-Infinite Time Essence @U$14.1/PCS DACAPO-Remember Triple Balance Essential Serum @U$14.5/PCS Miracle ATO-Aroma Moisture Body Wash @U$10.1/PCS Miracle ATO-Pure Moisture Cream @U$5.5/PCS Miracle AC-Red2 White Pore Serum AMOUNT INSURANCE

@U$5.8/PCS

TOTAL US$483,000 INSURANCE POLICY/CRETIFICATE BLANK ENDORSED FOR 110% OF C.I.F VALUE WITH

CLAIMS PAYABLE IN JAPAN IN THE CURRENCY OF THE DRAFT INSURANCE TO INCLUDE I.C.C. (A) WITH INSTITUTE WAR CLAUSES, S.R.C.C CLAUSES.

PAYMENT BY L/C AT SIGHT IN YOUR FAVOUR BY FULL CABLE. ADVISING THROUGH WOORI BANK, BUSAN, KOREA FROM THE CHINAI BANK, YANGFU. (INTEREST IS FOR SELLER'S ACCOUNT.)

SHIPMENT SHIPMENT SHOULD BE EFFECTED DIRECTLY FROM BUSAN, KOREA TO HAIKOU CHINA BY DIRECT CONTAINER VESSEL AS FOLLOWS BY JUNE/30/2017 MARKS & NO

TO BE MARKED ON BOTH SIDES OF EACH CARTON BOX AS FOLLOWS

C/NO. REMARKS

ONE ORIGINAL CERTIFICATE OF ORIGIN FORM "A" & TWO COPIES OF NONNEGOTIABLE B/L, INVOICE, PACKING LIST, INSURANCE POLICY SHOULD BE

G VEN BY YOU UNDER A CAPTAIN'S CARE FOR DELIVERY TO US.

Confirmed & accepted by

Chinese Marine Trading Co., Ltd.

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4 Terms of International Trade

Learning Assignments

1. Examine the sales contract made in Chap. 3, then modify and correct the previously made contract to produce a more complete contract which could be enforced without serious disputes with the concerned parties and, at the same time, promote and facilitate the processing of international trade contracts. 2. Communications and negotiations to make a mid-term (3 year) contract to construct a wastewater treatment plant in London with counterparts ranging from the stage of negotiation over tendering to the stage of concluding agreement. These communications and negotiations should be held under the scenario that students’ own construction companies located in their home countries are trying to export a plant to London, based on their competitive power to treat wastewater through an environmentally friendly bio-organic system. 3. Quality-inspection issues including pre-shipment inspection particularly in the case of the students’ newly developed and environmentally friendly products compared with other existing products which are comparatively easy to make quality inspection for, considering the fact that there have been numerous historical disputes among the concerned parties relating to the quality and function of environment-related products.

Reference Ramberg J (2008) Guide to export-import basics, 3rd edn. ICC

5

Payment Collection in International Trade

The Learning Objectives

For the hands-on workers of international trade operation, payment collection after making shipment of the contracted goods is one of the most critical issues to be solved smoothly considering the characteristics of international trade activities as the transactions proceeded on credit in general. For the exporters, payment collection in advance to the physical shipment of the contracted goods would be the safest and most stable method to be paid, but it would not be the best way even for the exporter, considering the commercial characteristics of the international trading to maximize the profit. It depends on the business relationship between the concerned parties, the financial situation and circumstances, and the regional customs; however, documentary transaction under the letter of credit has traditionally been accepted as the most ideal payment collection in international business transactions in terms of the safety, stability, and transaction cost. This chapter is to help the export companies secure the stable and safe payment collection focusing on the following conceptual and practical issues: 1. Importance of shipping documents which should accord with the terms of the letter of credit for the collection of payment through negotiation with the concerned banks and treatment of the shipping documents which are not in accordance with the terms of the letter of credit. 2. Function of the bill of lading and air way bill in negotiating with the bank. 3. Contractual function of commercial invoices in letter of credit transactions.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_5

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4. Nature of the bill of exchange from the viewpoint of facilitation of international trade. 5. Proceedings of transactions through bills of exchange under the documentary letter of credit. 6. Treatment of documents delivered contrary to instructions under the terms of letter of credit. Characteristics of the letter of credit from the viewpoints of the exporter and importer.

5.1

Payment Collection Under Letter of Credit

There are a wide variety of payment methods available in international trade, each with having particular advantages and disadvantages.1 In essence, if traders seek to assure a high level of security in payment, then more expensive payment methods are available. Conversely, if payment security is not an important issue, because the concerned parties trust each other, then considerably cheaper and simpler payment methods can be applied.2

5.1.1

Introduction

(1) Payment Issue in International Trade For a transaction in international trade to be carried out, an importer and an exporter are required to negotiate terms, agree to a contract, and perform their obligations to fulfill the contract. When conducting international trade, the importer needs to receive and secure the imported products, while the exporter must secure payment collection. Both parties want the deal to be executed flawlessly to obtain their goals, but they also have to compromise when it comes to the order of operations. The buyer would prefer the goods to arrive in their entirety before making payment, in order to permit full inspection for quality and quantity. The seller, conversely, would prefer for payment collection beforehand to cover the costs of the exportations and to insure that the payment is made fully and punctually. Exporting is especially precarious because of the chance that an importer with unverified credit will default on his payment. This contrast of agendas leads to thorough negotiations in efforts to create an agreement that is suitable to both parties.

1 2

See Eun Sup Lee, supra note 138, at 119. Id.

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(2) Intervention by Third Party Generally speaking, one of the obstacles hindering international trade often results from uncertainties about collecting payment. Reconciling this issue is one of the most important aspects to insuring that the deal goes through. To overcome this issue, a third party may be involved in the transaction. The purpose of the third party is to facilitate the terms of price and payment for the two trading parties, avoiding potential problems and providing for an objective assessment and conclusion. This third party is, more often than not, a bank. Large-scaled banks are often located internationally, and if not, are at least set up to do transactions overseas. Banks are equipped with the credit and financial power that the transaction might need. Banks are able to perform quick credit reviews on both parties, as well as determine their financial situations, which will help in constructing financing terms. On the other hand, banks tend to favor large-scale international transactions, because of the large commissions they earn.

5.1.2

Letter of Credit

(1) Introduction ➀ Definition A letter of credit is a crucial payment mechanism for international business. In particular, the documentary letter of credit facilitates international payments, providing the exporter with security of payment.3 The exporter is assured of payment upon presenting documentary evidence of proper shipment of the contracted items made in accordance with the terms of the credit which was issued under the buyer’s instructions.4 A letter of credit means any arrangement, however named or described, that is irrevocable and that constitutes a definite undertaking of the issuing bank to honor a duly made presentation, which is defined specifically as follows:5 “Any arrangement, however named or described, whereby a bank (issuing bank), acting at the request and on the instructions of a customer (applicant) or on its own behalf, ➀ is to make payment to or to the order of a third party (beneficiary), or is to accept and pay bills of exchange (draft(s)) drawn by the beneficiary; or ➁ authorizes another bank to effect such payment, or to accept such bills of exchange (drafts(s)); or ➂ authorizes another bank to negotiate against stipulated document(s), provided the terms and conditions of the credit are complied with.”6

3

Id, at 121. Id. 5 UCP 600, Art. 2. 6 Id. 4

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The letter of credit or performance bond is to function as the guaranty of payment collection in accordance with the underlying commercial transaction, and therefore, the beneficiary is entitled to be paid from the accountee directly, when the amount paid by the letter of credit or performance bond is not enough to cover the contract amount.

The beneficiary under the performance bond or letter of credit is entitled to account to the applicant for any excess paid or claim for damages of any shortfall between the bank guarantee and the loss actually suffered. This is because that the beneficiary’s entitlement is founded upon the contract between himself and the beneficiary, and that the amount paid under a performance bond is designed to be used in accordance with the provisions of the contract. The following case treats with this issue. Case7 In Cargill International SA Antigua Geneva Branch v Bangladesh Sugar and Food Industries Corp, the court said: I take the view that if there has been a call on a bond which turns out to exceed the true loss sustained, then the party who provided the bond is entitled to recover the overpayment. It seems to me that the account party may hold the amount recovered in trust for the bank, (where, for example, the bank had not been paid by him) but that does not affect his right to bring the claim in his own name. In the normal course of events, the bank will have required its customer to provide it with appropriate security for the giving of the bond, which would be called upon as soon as the bank was required to pay… In principle, I take the view that the account party is always entitled to receive the overpayment since his entitlement is founded upon the contract between himself and the beneficiary. The court in Cargill International SA Antigua Geneva Branch v Bangladesh Sugar and Food Industries Corp applied two Australian cases which offered some support for the view that moneys paid under a performance bond are designed to be used in accordance with the provisions of the contract and that any surplus is for the account of the party who provided the bond. The obligation to account for an overpayment is one element of the process of adjusting the financial position between the applicant and the beneficiary after the bank guarantee or letter of credit gives considerable

7

In Cargill International SA Antigua Geneva Branch v Bangladesh Sugar and Food Industries Corp (1996) 2 Lloyd’s Rep. 524. https://books.google.co.kr/books?id=7SO3WUrTNIC&pg= PA93&lpg=PA93&dq=cargill+international+s.a+v.bangladesh+sugar&source=bl&ots=TJsaEI w0d&sig=0cLD6arVaTCLBSrOeFHOKeU8OZE&hl=ko&sa=X&ved=0ahUKEwi52NDszM HLAhXOao4KHRPEAnwQ6AEINTAD#v=onepage&q=cargill%20international%20s.a%20v. bangladesh%20sugar&f=false.

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advantage to the beneficiary by providing a ready and solvent source of funds. Furthermore, the purpose of the guarantee is to secure the performance due to the beneficiary and is not a pre-estimate of the amount of damages to which the beneficiary may be entitled in respect of the breach of contract giving rise to a call on the guarantee. In commercial fairness, therefore, unless there is an express agreement to the contrary, there ought to be at some stage after the beneficiary has been paid an accounting process between the parties to the contract whereby their rights and obligations are finally determined. The beneficiary should account to the applicant for any excess paid or claim for damages for any shortfall between the bank guarantee and the loss actually suffered. The converse is that the applicant can claim for any excess and liable for any shortfall. The facts which arose in O’Sullivan v National Australia Bank were that pursuant to a contract between the applicant company and the beneficiary, a bank guarantee was issued using money provided by a third party who controlled the applicant. The court took a commonsense approach and held that the applicant could recover the surplus. It decided that a contractual obligation to furnish a security entitles that party in its own name to sue over an overpayment under the guarantee, and one should not muddy the water by looking how the required guarantee was furnished. The reasonable assumption made by the court was that there would be collateral agreements which dealt with the situation between the applicant and the person who furnished the money. When buyers and sellers are familiar with each other due to previous trade experience, letters of credit may not be needed. Without this familiarity, a buyer will be nervous of releasing the goods prior to payment. Worrying about the possibility that the buyer fails to pay, the seller will try to collect payment before the goods arrive. To remedy this situation, the buyer deposits the necessary funds to cover the goods with the issuing bank, and the issuing bank pays the seller or notifies the advising bank to pay the seller only when documents are presented within the time stipulated and in accordance with the terms stated under the letter of credit, through which the payment collection is completed. The bank’s decision to make payment has to be completely objective and cannot evaluate whether the buyer has completely or substantially agreed to stipulations. The bank’s job is really quite simple and straightforward, and it does not take on any risk.

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Even though the strict compliance and independence rules are very specific to the letter of credit transaction, these two rules are also supported by other general law principles when it is required.

The following case is very important to make it clear that where the principle of strict compliance and independence under the letter of credit transaction are not totally sufficient, they are complemented with general principles of contract interpretation. The principle of contract interpretation frequently applied to guide or supplement the strict compliance rule is the familiar one preferring constructions “that will sustain and instrument…to one that will defeat it.” In this case, when the letter of credit clause to define the documents to be presented is prohibited to be implemented due to the new legislation of the country concerned but is legally be implement by the other instituted method different from that of the letter of credit clause, such substitutively procured document is enough to meet the strict compliance and independence rule of the letter of credit. I. Introduction8 . Plaintiff Ocean Rig ASA (“Ocean Rig”) seeks redress for the allegedly wrongful dishonor by defendant Safra National Bank of New York (“Safra”) of a Standby Letter of Credit. Defendant moves to dismiss all of plaintiff’s claims under Fed. R. Civ. P. 12(b) (6) or, in the alternative, moves for summary judgment pursuant to Rule 56. Ocean Rig cross-moves for summary judgment on three of its six causes of action. II. Jurisdiction This court has both federal question and diversity jurisdiction in this case. Federal question jurisdiction arises under the Edge Act as this is a private suit against a federally chartered commercial bank. This court also has diversity jurisdiction under 28 U.S.C. § 1332, as defendant is incorporated in New York, plaintiff is a citizen of a foreign state.

8

Ocean Rig ASA v. Safra Nat. Bank of New York 72 F. Supp. 2d 193 (S.D.N.Y. 1999) US District Court for the Southern District of New York - 72 F. Supp. 2d 193 (S.D.N.Y. 1999) Published in English: 1999 JUSTIA US LAW http://law.justia.com/cases/federal/district-courts/FSupp2/72/ 193/2336127/.

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III. Background A. The Underlying Agreement Giving Rise to the Dispute Ocean Rig is a Norwegian company, based in Oslo, engaged in the offshore oil drilling business. This corporation’s principals, Ocean Rig AS 1 and Ocean Rig AS 2 (“Owners”), each own one offshore drilling rig. Owners, desiring to obtain contracts for their drilling rigs, engaged in dealings with Maritima Petroleo e Engenharia Ltda, Rio de Janeiro, Brazil (“Maritima Petroleo”). On November 18, 1998, Owners and Maritima Petroleo agreed that Maritima Petroleo would undertake to secure contracts with third parties for Owners’ drilling rigs. They further agreed that if Maritima Petroleo failed to procure such contracts on February 5, 1999, Maritima Petroleo would compensate Owners $15,000,000. Maritima Petroleo further agreed to provide security for its $15,000,000 obligation to Owners by procuring a Standby Letter of Credit in that amount in favor of the Owners. Finally, the parties agreed on the choice of law governing the Standby Letter of Credit. The agreement specified that if Maritima Petroleo failed to secure the third-party contracts by February 5, Owners could present a “Demand Letter” and the Standby Letter of Credit to the issuing bank, Safra. The Standby Letter of Credit and Demand Letter could be presented by Ocean Rig, transmitted via Chase Manhattan Bank, within a three day window no earlier than 9:00 a.m. New York time on February 8, 1999, and no later than 4:00 p.m. New York time on February 11, 1999. Additionally, the Standby Letter of Credit set forth the number of signatures required on the Demand Letter, the acceptable signatories from Ocean Rig, and the requirements for validation of the signatures. On November 18, 1998, the same day as the execution of the agreement, Maritima Petroleo caused its affiliate Maritima Overseas, Inc., of Tortola, British Virgin Islands (“Maritima Overseas”), to apply for the Standby Letter of Credit. B. The Amendment to the Agreement Owners assigned their agent, Ocean Rig, as their beneficiary of the Standby Letter of Credit. Maritima Petroleo acknowledged to Ocean Rig in writing that the Standby Letter of Credit named Ocean Rig as the beneficiary on behalf of Owners. On November 19, Maritima Overseas applied to Safra, for the Standby Letter of Credit. Bernhard Haukali, Norwegian counsel for Ocean Rig, sent Safra a draft “form” of the proposed Standby Letter of Credit. This draft was received by Safra’s employee, who modified and finalized it. Safra issued the letter, LOC No. S-0612, on November 19, 1998.

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This original letter specified, erroneously, that the Standby Letter of Credit would be drawn on the account of Maritima Petroleo. Maritima Petroleo and Safra then sought to amend letter No. S-0612 to reflect that the $15,000,000 would be drawable on the account of Maritima Overseas. Maritima Petroleo and Safra contacted Ocean Rig to apprise it of the need for this amendment. C. Circumstances Giving Rise to the Dispute By February 5, 1999, Maritima Petroleo had not secured the third-party contracts for Owners, triggering Ocean Rig’s right to present the Standby Letter of Credit and Demand Letter to Safra. On February 8, 1999, Tore Valderhaug, CFO of Ocean Rig, and Bernhard Haukali, Counsel for Ocean Rig, flew to New York, in order to present the Demand Letter (“Demand Letter 1”), original Standby Letter of Credit No. S-0612, and amendment to Chase Manhattan Bank. Chase conveyed the documents to Safra on February 8. On the morning of February 10, one day before the expiration of the Standby Letter of Credit, the assistant treasurer of Safra, Lucilia Amador, notified Chase that the payment on the letter would be made to Ocean Rig’s account and so Amador notified Chase that payment would not be made due to discrepancies between the materials submitted and the requirements set forth in the Standby Letter of Credit and the amendment. On the same day Safra sent Chase a Swift telex identifying the errors in the materials submitted by Ocean Rig and called Haukali to inform him that payment would not be made. This telephone message was received by Ocean Rig and its counsel on the 11th. On February 11, Ocean Rig notified Safra that the discrepancies it identified were correct terms used in accordance with the requirements of the original Standby Letter of Credit and amendment. Nonetheless, Ocean Rig issued a second Demand Letter (“Demand Letter 2”) with changes aimed at curing the defects protested by Safra. Five days after the expiration of the Standby Letter of Credit, Fonseca told Ocean Rig’s US counsel that Demand Letter 2 contained the same defects as Demand Letter 1 and would not be honored.

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D. The Alleged Discrepancies in the Documentation Safra alleges two discrepancies in Demand Letters 1 and 2: (a) that the Demand Letters did not conform to the amendment; and (b) that the signature validations on the Demand Letters did not conform to the signature validations clause of the Standby Letter of Credit. IV. Summary Judgment A. Legal Standard for Summary Judgment Summary judgment is appropriate as there are no disputed issues of material fact, and the issues can be decided as a matter of law. In determining whether summary judgment should be granted, the court resolves all ambiguities and draws all reasonable inferences against the moving party. B. Standard of Analysis for Letters of Credit Letters of credit serve an important function in international commerce, providing unfamiliar parties with the security necessary to deal with each other. Letters of credit accomplish this end by interposing the credit and credibility of a known, solvent institution, usually a bank, between the parties. 1. Strict Compliance The strict compliance standard means that the conditions of the letter of credit must be complied with precisely by all parties; documents that are “nearly the same” will not suffice. The Second Circuit has upheld the dishonor of letters of credit for errors such as the misspelling of the names appearing on required documents, although non-meaningful errors, such as obvious typographical errors will not justify dishonor. 2. The Independence Principle The independence principle dictates that the court consider only the relationship existing between the issuer and the beneficiary of the credit, independent of the commercial transaction and relationship giving rise to the credit. In cases of error and ambiguity in a letter of credit, the Second Circuit has applied a long-established standard of construction against the issuer (bank).

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3. Supplementation with Contract Principles Where the principles of strict construction and independence are not wholly sufficient, they are complemented with traditional principles of contract interpretation. The principle of contract interpretation frequently applied to guide or supplement the strict compliance rule is the familiar one preferring constructions “that will sustain an instrument ... to one that will defeat it,” Venizelos. C. Discussion of Alleged Discrepancies 1. Conformity of Demand Letters with Amendment On November 30, 1998, the parties agreed to amend the original Standby Letter of Credit, No. S-0612, to reflect the assignation of liability by Maritima Petroleo to Maritima Overseas. The first part of the original unamended Standby Letter of Credit was amended to read Maritima Overseas Inc., Tortola, British Virgin Islands. All other terms and conditions remain unchanged. Part 2 of the original Standby Letter of Credit requires that the Demand Letter presented to Safra recite the language appearing in Part 2. In Demand Letter 2, it uses the same language as Demand Letter 1, but Maritima Petroleo e Engenharia Ltda was replaced to Maritima Overseas Inc. a. Strict Compliance Standard Applied to the Amendment Safra asserts that Demand Letter 1 was erroneous, because it did not incorporate the changes in the amendment. Ocean Rig asserts that Demand Letter 1 was correct, because the amendment modifies Part 1 of the Standby Letter of Credit and does not modify the Demand Letter. The principle of strict compliance supports plaintiff’s reading of the amendment and the correctness of Demand Letter 1. b. Application of the Independence Principle to the Amendment Substantive factors also support the correctness of Demand Letter 1. In S0612, Part 1 identifies ‘Maritima Petroleo e Engenharia Ltda, Rio de Janeiro, Brazil” as the account holder on whose account the Standby Letter of Credit is to be drawn. Part 2 identifies “Maritima Petroleo e Engenharia Ltda” as the company party to the contract with Owners. Thus, altering the first identification indicates a change in the account on which the Standby Letter of Credit is to be drawn. This conforms with the agreement between

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Maritima Petroleo and Maritima Overseas, assigning liability to Maritima Overseas. Safra, along with Maritima Petroleo, requested that Ocean Rig accept the amendment changing the designation of the account holder in Part 1 of the Standby Letter of Credit. Based solely on the strict construction of the amendment, plaintiff’s Demand Letter 1 was correct under the terms of the amendment. Furthermore, defendant’s own knowledge and actions pertaining to the amendment undermine the reasonableness of the construction defendant now urges. 2. Conformity of Demand Letters with Signature Validation Clause of Standby Letter of Credit The second alleged discrepancy in Demand Letter 1 is the conformity of the signature validation in the Demand Letter with the requirements of the signature validation clause in the Standby Letter of Credit. This clause specified the Ocean Rig principals qualified to sign the Demand Letter, the minimum number of signatures, and the requirements for the validation of those signatures. Ocean Rig first drafted the disputed clause. Safra then incorporated that draft clause into the final Standby Letter of Credit. The draft clause in the Ocean Rig letter reads: “[S]uch signatures to be notarized by a Public Notary in Oslo, Norway, and legalized by way of Apostille, or by the relevant Norwegian authorities and the Embassy or Consulate of the United States of America in Oslo, Norway.” The clause was modified at the end by Safra to read: “…and by the Embassy or Consulate of the United States of America in Oslo, Norway.” The Safra version appears in the final Standby Letter of Credit. Ocean Rig asserts that the clause provides for alternative means of validation: that the signatures could be legalized either by Apostille, or by the Norwegian and US consulates. Safra urges that the clause imposes dual requirements, that the signatures must be legalized: (1) either by Apostille or by the Norwegian consulate and (2) by the US consulate. a. Strict Compliance Applied to the Signature Validation Clause Strict construction weighs in favor of Ocean Rig and the correctness of Demand Letter 1. The only differences that are not accorded strict compliance are those that are meaningless. The punctuation difference clearly is not meaningless, nor is there any support for the claim that the punctuation should have differed. b. Construction of Ambiguity Against Issuer or Drafter

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Safra argues that the word “by” makes the clause ambiguous. Assuming, arguendo, that there is an ambiguity, it is well settled that ambiguities will be construed strongly against the issuer. c. Federal Law Requirements and the Signature Validation Clause The last, and perhaps most important, ground for finding in favor of Ocean Rig is the regime governing the legalization of international commercial documents. Since 1966, the United States has prohibited its consulates and embassies from legalizing letters of credit where the second party belongs to a nation that will accept documents legalized by way of Apostille. Instead, federal law requires the approval of letters of credit by Apostille. In short, Ocean Rig would not have been able to legalize Demand Letter 1 or 2 through consularization, as the US and Norway are both Convention signatories. Here, Safra’s interpretation would “render meaningless the parties’ agreement to...the letter of credit,” as consularization is not available to members of countries signatory to the Convention; thus, it “cannot be tolerated.” d. Independence Principle Not Breached by Requiring Compliance with Federal Law Safra argues that under the independence principle it is not required to “be familiar with or to consider the customs of, or special meaning or the effect given to particular terms, in the trade” of the parties to the underlying contracts. While it would be sufficient to find for Ocean Rig based solely on the signature validation clause, the finding is supported as well by the general principles of contract construction. V. Conclusion Defendant’s motions to dismiss and for summary judgment are denied. Summary judgment is granted to the plaintiff on its third and fourth causes of action. Plaintiff’s sixth cause of action, seeking punitive damages and attorneys’ fees, is denied. Because this disposes of all the issues in the case, the Clerk is directed to prepare a judgment including court costs and interest running from the date of dishonor. The Clerk is further directed to close this case upon the entry of judgment.

➁ Uniform Customs and Practice for Documentary Credits

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The Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication no. 600 (UCP 600) is a set of rules issued by the International Chamber of Commerce for the purpose of applying globally unified rules to transactions necessitating documentary letters of credit.9 The intent of the rules to effect global unification has been highly successful and, through their progressive development and revision over more than 70 years,10 the UCP 600 is currently almost universally applied.11 UCP as the Applicable Law to The Letter of Credit Transaction

The concerned parties may choose the UCP or other domestic/international laws or regulations as their applicable law to regulate the letter of credit transactions. The following case is about the letter of credit transaction under the applicable law of UCC of the limited states instead of the UCP. When the issuing bank called the customer (accountee) to request a waiver of the discrepancy, the accountee was enable to waive the discrepancy of the presented documents because a trustee in bankruptcy had been appointed for new accountee. Under the UCC, the rules of construction embodied in the letter of credit are that the drawee bank is not to be embodied in disputes between the buyer and the seller, that is, the beneficiary of the credit. Case12 A letter of credit was issued by appellant (North Carolina National Bank) at the request of and for the account of its customer. Appellant made available, upon the drafts of appellee (Courtaulds North America), certain sums of money to cover purchases of acrylic yarn from appellee. Appellee (beneficiary) brought action against bank as issuer for failure to honor an irrevocable letter of credit. The United States District Court for the Middle District of North Carolina, Greensboro Division, Hiram H. Ward, J., 387 F.Supp. 92, entered judgment for beneficiary, and issuer appealed.

9

Eun Sup Lee, supra note 138, at 121. UCP 600 is the seventh version of the rules. The first issue was published in 1933, the second appeared in 1951, the third in 1962, the fourth in 1974, the fifth in 1983, and the sixth-UCP 500 in 1993. See Eun Sup Lee, supra note 138, at 122. 11 Id. 12 Courtaulds North America, Inc. v. North Carolina National Bank No. 75-1291 United States Court of Appeals, Fourth Circuit. December 30, 1975 528 F.2d 802; 1975 U.S. App. LEXIS 11245; 18 U.C.C. Rep. Serv. (Callaghan) 467.One is that credits are separate. 10

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The letter of credit prescribed the terms of the drafts to include an invoice that stated that it covered “100% acrylic yarn package dyed.” Appellee shipped the yarn and presented its draft to appellant. Upon processing, appellant found discrepancies between the drafts with accompanying documents and the letter of credit: (1) that the invoice did not state “100% acrylic yarn” but described it as “imported acrylic yarn,” and (2) “draft not drawn as per terms of [letter of credit], Date [August 13] not same as bill of lading [August 8] and not drawn 60 days after date” [but 60 days from bill of lading date 8/ 8/73]. Appellant called customer to request a waiver of the discrepancy. Customer was unable to waive the discrepancy because a trustee in bankruptcy had been appointed for customer. Appellant refused the draft. Appellee thereafter presented amended invoices that did comply with the letter of credit. However, bank refused again because the invoices were presented after expiration of the letter of credit. The federal courts apply the same law as would the courts of the State of adjudication. Here applicable would be the Uniform Commercial Code— letters of credit, Chap. 25 G.S.N.C. In utilizing the rules of construction embodied in the letter of credit—the Uniform Customs and State statute— one must constantly recall that the drawee bank is not to be embroiled in disputes between the buyer and the seller, the beneficiary of the credit. The drawee is involved only with documents, not with merchandise. Its involvement is altogether separate and apart from the transaction between the buyer and seller; its duties and liability are governed exclusively by the terms of the letter, not the terms of the parties’ contract with each other. Moreover, as the predominant authorities unequivocally declare, the beneficiary must meet the terms of the credit—and precisely—if it is to exact performance of the issuer. Failing such compliance there can be no recovery from the drawee. That is the specific failure of appellee here. Free of ineptness in wording the letter of credit dictated that each invoice express on its face that it covered 100% acrylic yarn. Nothing less is shown to be tolerated in the trade. No substitution and no equivalent, through interpretation or logic, will serve. Harfield, Bank Credits and Acceptances (5th Ed. 1974), at p. 73, commends and quotes aptly from an English case: “There is no room for documents which are almost the same, or which will do just as well.” Equitable Trust Co. of N. Y. v. Dawson Partners, Ltd., 27 Lloyd’s List Law R pts. 49, 52 (1926). Although no pertinent appellant decision has been laid before the court, in many cases elsewhere, especially in New York, the court found the tenet of Harfield to be unshaken. The Court of Appeals held that though packing lists attached to invoices accompanying draft submitted by appellee disclosed on their faces that packages contained 100% acrylic yarn as specified in letter of credit, lists could not be considered as part of invoice by reason of their being appended to

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it, nor could invoices be read as one with the lists. As it is well to revert to the distinction made in Uniform Customs, supra, between the “invoice” and the “remaining documents,” emphasizing that in the latter the description may be in general terms while in the invoice the goods must be described in conformity with the credit letter. The lower court found for appellee in its action to recover on the letter of credit. However, the court held that no substitution or equivalent was permissible beyond the expiry of the letter as well. Thus, the court reversed and remanded for final judgment. UCP 600 rules may be applied to any kind of documentary credit (including, to the extent to which they may be applicable, any Standby Letter of Credit) when it is expressly indicated in the credit that it is to be subject to these rules. That is, the rules apply to letters of credit only when the parties have expressly incorporated them in to their agreed letter of credit.13 UCP, interpreted as a contractual term, shall naturally have precedence over the general domestic laws where any discrepancies between them exist, and such domestic laws might be applicable only to the extent that the letter of credit is not subject to the UCP.14 When the letter of credit expressly incorporates the terms of UCP, those terms take precedence over the concerned party’s domestic law

The following case shows the two issues, including the UCP as the applicable law: One is that credits are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts, even if any reference whatsoever to such contracts are included in the credit. The other one is that when the letter of credit expressly incorporates the terms of UCP, those terms take precedence over the concerned party’s domestic law like the UCC in the United States. That proposition, however, is subject to the qualification that UCP terms will not apply to a transaction to the extent that those terms would vary the domestic law provisions that do not themselves permit variance. For example, the UCC provides that the act may be varied by contract, except as otherwise provided in this act and except that the obligations of good faith, diligence, reasonableness and care prescribed by the act may not be disclaimed by contract but the parties may be determine the standards by

13 14

Eun Sup Lee, supra note 138, at 122. See id.

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which the performance of such obligations is to be measured if such standards are not manifestly unreasonable. Memorandum Opinion and Order15 Integrated Measurement Systems, Inc. (“Integrated Measurement”) sues International Commercial Bank of China (“International Bank”) and Overseas Chinese Commercial Banking Corporation (“Overseas Bank”) (International Bank and Overseas Bank are collectively referred to as “Banks”) for having dishonored an irrevocable letter of credit (“LOC”) issued by Overseas Bank to Pan Oceanic Products Corporation (“Pan Oceanic”) and transferred to Integrated Measurement. Integrated Measurement now moves for summary judgment against both Banks. For the reasons stated in this memorandum opinion and order, Integrated Measurement’s motion for summary judgment is granted against both Banks. Facts In December 1988, Integrated Measurement and Illinois-based Pan Oceanic entered into a purchase and sale agreement under which Integrated Measurement agreed to sell Pan Oceanic certain electronic measurement testing equipment. Payment was to be made through an irrevocable and transferable letter of credit issued by Overseas Bank in Taiwan. On February 6, 1989, Overseas Bank issued its LOC to Pan Oceanic. International Bank in Chicago, Illinois, acted as the advising and negotiating agent for Overseas Bank on the LOC. Pan Oceanic President Joseph Lin (“Lin”) wrote a letter to International Bank asking that the LOC be transferred to Integrated Measurement with the same terms and conditions as the original LOC, except that airway was to be from Portland, Oregon to Chicago O’Hare International Airport (“O’Hare”) with the latest shipping date as March 10, 1989. On February 15 International Bank transmitted its Advice of Transfer to Integrated Measurement in Oregon through its advising bank, First Interstate Bank of Oregon, N.A. (“First Interstate”). That Advice of Transfer notified Integrated Measurement that the right to demand payment under the LOC had been transferred from Pan Oceanic as the original beneficiary to Integrated Measurement. It restated the exact terms of the original LOC with some material exceptions.

15

INTEGRATED MEASUREMENT SYS. v. INTERN. COM. BANK NO. 89 C 9019 757 F. Supp. 938 (1991) February 5, 1991. United States District Court, N.D. Illinois, E.D. Published in English: 1991 JUSTIA US LAW. http://law.justia.com/cases/federal/district-courts/FSupp/757/ 938/1648557/.

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In reliance on the Advice of Transfer issued by International Bank, Integrated Measurement sent the goods described in the Advice of Transfer via United Airlines from Portland to O’Hare on March 2. On March 9 Integrated Measurement also delivered to First Interstate all of the documents required by the Advice of Transfer and International Bank received it on March 10. At that point United States Department of Commerce (“DOC”) suspended Pan Oceanic’s export license on March 3, informing Pan Oceanic that “[n]o shipments may be made against this license until further notice”. Pan Oceanic’s license was then revoked on May 18. After the goods arrived at O’Hare (post-suspension though prior to revocation of the export license), they were seized by DOC. On March 30, five days after the expiration of the LOC, International Bank refused payment—notifying First Interstate by telex that the documents presented did not comply with the terms and conditions of the Advice of Transfer in three ways: (1) the description of the goods on the Airway bill was not consistent with that on the commercial invoice; (2) the commercial invoice did not bear the statement details per P/O No. PO/120288; (3) the flight/date, rate, and freight charge were written by hand on the Airway bill without appropriate correction stamps. On March 31, Pan Oceanic’s lawyer wrote a letter to International Bank telling it that Pan Oceanic’s export license had been revoked. Then on April 4, International Bank informed First Interstate by telex that payment on the LOC was being refused for the additional reason that the condition of obtaining a valid export license was not met. Letter of Credit Principles and Their Application Three separate agreements are involved in the issuance of an LOC for the benefit of a beneficiary: The first is the contract between the beneficiary and the customer which is the agreement underlying the letter of credit. Under the second contract, the customer procures a letter of credit, often from a bank, in return for consideration or collateral. The third agreement consists of the bank’s agreement to pay the beneficiary the amount of the letter of credit, if the beneficiary complies with the terms of the credit. The third agreement (independence principle) must be understood as entirely independent from the other two, it “prohibits the issuer of a letter of credit from looking at any material or facts other than those appearing in the draw documents themselves.” UCP Arts. 3 and 4 set out that principle in unambiguous language: Credits are separate transactions from the sales or other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the credit. In credit operations, all parties concerned deal in documents, and not in goods, services and/or other performances to which the documents may relate. Therefore, banks must deal only in documents and cannot

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look to the performance of the underlying contract between Pan Oceanic and Integrated Measurement for relief from their obligations under an LOC. Operative Credit Instrument There is a great deal of confusion between the parties as to the impact of the Advice of Transfer on the terms of the original LOC. Neither First Interstate nor Integrated Measurement saw or was shown the actual LOC in this case. Both Banks and Integrated Measurement agree that it is the usual and customary practice for a seller of goods who is to receive payment through an Advice of Transfer to rely on such advice. That being so, Banks are right in their insistence upon the proposition that the critical operative credit instrument as between Banks and Integrated Measurement is the Advice of Transfer and not the original LOC. Conformity of Documents The banks first contend that the description of the goods on the airway bill was inconsistent with the commercial invoice which was a meritless argument. On that score UCP Article 41(c) clearly states that the description of the goods in the commercial invoice must correspond with the description in the credit. In this instance, the description of the goods in the invoice matched word for word the description of the goods in the Advice of Transfer. Next the banks argued that the commercial invoice needed to include the phrase “details per P/O No. PO/120288.” Banks’ Advice of Credit (echoing the LOC) merely required “signed commercial invoice in six copies indicating L/C No. 9MH1/00100/IBCCH and import permit no. 77BH1-054487,” and those requirements were met. Finally, Banks’ third stated reason for dishonor—written notations on the airway bill without appropriate stamps is equally empty. In this litigation, though, Overseas Bank’s also claimed that the airway bill was not “clean.” As defined by UCP Article 34: A clean transport document is one which bears no superimposed clause or notation which expressly declares a defective condition of the goods and/or the packaging. Bearing no such notations, Integrated Measurement’s airway bill was in fact “clean.” Next is the additional reason for dishonor stated in International Bank’s second telex: that Integrated Measurement failed to fulfill the condition of obtaining a valid export license. Any modification or non-fraudulent breach of the underlying contract does not affect the rights and duties under the LOC. Accordingly, this court will not entertain any arguments by Banks that Integrated Measurement cannot claim payment on the LOC because procuring a valid export license was a precondition to the sale. Banks attempt to salvage the same argument by urging that the export license precondition, as stated in the purchase order, was somehow incorporated into the Advice of Transfer.

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Furthermore, Banks attempt to argue that the reference to the purchase order is ambiguous as to whether that document was being incorporated is wholly unpersuasive. What the Advice of Transfer does is to say that the $68,860 credit is available to Integrated Measurement by sight draft “accompanied with the following documents,” after which it lists only three documents. Only then does the Advice of Transfer advert to “DETAILS PER P/O NO. PO-120288,” which did not accompany the Advice of Transfer. Plainly, the purchase order reference is only a reference of the type disclaimed in UCP Article 3, one that gives no reasonable indication that all its terms were being incorporated into the operative document. There was no such explicit requirement of an export license, and the only document that even referred to such a license was not transmitted with the Advice of Transfer. Therefore, the corollary to the rule of strict compliance is that the requirements in letters of credit must be explicit. Waiver and Estoppel Integrated Measurement argues that Banks’ notice of dishonor was deficient in several respects, so that Banks have waived and are estopped from asserting, any arguments of non-conformity. Traditional elements of waiver and estoppel need not be shown in this case because the UCP provides its own preclusion formula for this situation. According to UCP Article 16: c. The issuing bank shall have a reasonable time in which to examine the documents and to determine as above whether to take up or to refuse the documents. d. If the issuing bank decides to refuse the documents, it must give notice to that effect without delay by telecommunication or, if that is not possible, by other expeditious means, to the bank from which it received the documents (the remitting bank), or to the beneficiary, if it received the documents directly from him. Such notice must state the discrepancies in respect of which the issuing bank refuses the documents.... If the issuing bank fails to act in accordance with the provisions of paragraphs (c) and (d) of this Article ... the issuing bank shall be precluded from claiming that the documents are not in accordance with the terms and conditions of the credit. As for the requirement that the notice “must state the discrepancies,” that tracks the doctrine enunciated in the case law that any grounds for dishonor not stated in the original notice are waived. Under UCP Article 16, Banks are estopped from arguing non-conformity by reason of the failure to give Integrated Measurement timely notice of the defects, so that Integrated Measurement was precluded from curing the defects. Given the unquestionable availability of a “reasonable time” for International Bank’s examination, the other timing requirement of notice “without delay” was violated here as a matter of law. As for the meaning of “reasonable time,” according to the UCC a bank has three business days to review the documents. It is clear that the ten days that International Bank had before

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the expiration of the letter of credit was enough time to examine the documents. And as for notification “without delay,” the obvious purpose of that rule is to allow the opportunity to cure the claimed defects. It is clear beyond doubt that International Bank did not timely inform Integrated Measurement. As a result, Banks are expressly precluded by UCP Article 16 from asserting non-conformity as a reason for dishonoring Integrated Measurement’s documentary draft. Liability for Inaccuracy in Advice of Transfer An LOC beneficiary can recover damages only from the issuing bank—in this case Overseas Bank, the only party in privity with Integrated Measurement on the credit agreement. By performing the service of advising the LOC, International Bank served the function of an “advising bank”—acting as the agent of the issuer, in this case Overseas Bank. Because there is no privity of contract between an advising bank and the LOC beneficiary, International Bank did not owe Integrated Measurement any direct contractual duty and is under no contractual obligation to pay. However, International Bank does owe Integrated Measurement a statutory duty, one that does not emanate from the Advice of Credit or the UCP, whose Article 8 says this about the role of an advising bank: A credit may be advised to a beneficiary through the advising bank without engagement on the part of the advising bank, but that bank will not be on the hook for payment on the LOC, but will have a limited obligation to check the authenticity of the credit. Illinois statutory law sets out still another responsibility: Unless otherwise specified an advising bank by advising a credit issued by another bank does not assume any obligation to honor drafts drawn or demands for payment made under the credit but it does assume obligation for the accuracy of its own statement. Here International Bank clearly misstated the terms of the LOC in the Advice of Transfer, so it becomes necessary to decide whether that UCC provision is applicable to this case. When an LOC expressly incorporates the terms of the UCP, those terms take precedence over the UCC’s terms and are binding on the parties. That proposition, however, is subject to the qualification that UCP terms will not apply to a transaction to the extent that those terms would vary UCC provisions that do not themselves permit variance. According to Section 5.1-5.102(3): The effect of provisions of this act may be varied by agreement, except as otherwise provided in this act and except that the obligations of good faith, diligence, reasonableness, and care prescribed by this act may not be disclaimed by agreement, but the parties may by agreement determine the standards by which the performance of such obligations is to be measured if such standards are not manifestly unreasonable. Section 5.5-5.107(1) sets out just such an obligation of “good faith, diligence, reasonableness, and care” by requiring “accuracy” on the part of

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the advising bank. Thus in Illinois, there is no reason why both the UCP and the UCC obligations cannot apply to the advising bank. Indeed, courts tend to refer to both sources even if the LOC explicitly provides that it will be subject to the UCP affirming this court’s opinion. Hence, this court finds that International Bank owed to Integrated Measurement a statutory duty to relay the terms of the credit accurately, and it is liable for any damages caused by its inaccuracy. Initially Overseas Bank filed a Cross-Complaint against International Bank, claiming that the latter’s deviation from the LOC in its preparation and transmittal of the Advice of Credit was the cause of any liability that might be imposed on the former in this action. On November 13, 1990, this court granted Overseas Bank’s motion for voluntary dismissal of that CrossComplaint because Banks had struck this deal: OCCBC [Overseas Bank] and ICBC [International Bank] have now reached agreement on a settlement of the claims between them which provides, in pertinent part, that ICBC will indemnify, save, and hold OCCBC harmless in this litigation, including undertaking OCCBC’s defense of the claims of Integrated Measurement Systems, Inc., plaintiff herein. Whether Integrated Measurement is viewed as a third-party beneficiary of that settlement agreement or otherwise, one thing is clear: No useful purpose would be served by extending the analysis here to explore any possible difference in the scope of Bank’s respective liabilities to Integrated Measurement. Now that International Bank’s liability to Integrated Measurement has been established, that is the end of it. Indeed, the existence of the indemnification agreement means victory for Integrated Measurement in this action if this opinion’s analysis is correct as to either Banks. Conclusion Banks’ dishonor of the credit was wrongful, and Integrated Measurement is entitled to damages. While in some domestic laws, the UCP does not have the effect of law of the status of trade customs and may apply only if the parties have incorporated them into their contract,16 in certain states of the United States, the provisions of the Uniform Commercial Code on letters of credit17 are replaced by the UCP where the parties have agreed to apply them or where they are customarily applicable.18

16

UCP 600, Art. 1. UCC, Art. 5; for a discussion of the interaction between the UCP and the Uniform Commercial Code see Alaska Textile Co Inc V Chase Manhattan Bank [1992] 982 Fed. 2d. 813. See Eun Sup Lee, supra note 138, at 122. 18 Id. 17

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Even though the UCP is contractually adopted by the concerned parties as the applicable law to their letter of credit transaction, other general law principle is to be applied just like other general and specific transactions

The following case is about the two important issues of the strict compliance rule in case that the fulfillment of the letter of credit’s terms is predictably impossible and about the applicability of other general law principle including the estoppel to the letter of credit transactions. Even in the case that the terms of the letter of credit were impossible to fulfill because the required documents including the negotiable bill of lading and consular invoice were not generated in the underlying transactions, this strict compliance rule is applied. This is because the beneficiary is burdened to make sure the terms of credit can be met rather than to be burdened by issuing bank which may have no knowledge of what documents will be generated by the transactions. Regarding the law principle outside the UCP, it is judicially interpreted that the common law doctrines including estoppel may be applied to the cases involving letters of credit, just like the prior cases to utilize the estoppel in determining how to resolve issues in wrongful dishonor cases. Case19 Diamond Plastics Corporation (Diamond Plastics), defendant below, appeals the summary judgment entered by the trial court in favor of The First State Bank, Ketchum, Oklahoma, (Bank), appellee, on Bank’s declaratory action regarding liability on a letter of credit. Diamond Plastics claims Bank is liable for payment under the letter of credit as well as damages for wrongful dishonor of the credit. Both parties filed summary judgment motions, and the trial court found in favor of Bank on both. The Court of Appeals reversed summary judgment for Bank and remanded with directions for the trial court to enter judgment for Diamond Plastics. FACTS In order to sell its products to Vic Klingenberg d/b/a Arkansas Irrigation and Waterworks, Diamond Plastics agreed to payment via a letter of credit arrangement with the Bank of which Klingenberg was a customer. The Bank issued two irrevocable letters of credit to Diamond Plastics, one on June 1, 1989, and one on June 8, 1989. The June 1 letter of credit was typewritten on the Bank’s letter head and signed by Don J. Thorpe, Executive Vice

19

First State Bank v. Diamond Plastics Corp. 891 P.2d 1262 66 OBJ 957 1995 OK 21 Supreme Court of Oklahoma Published in English: 1995 JUSTIA US LAW . http://law.justia.com/cases/okl ahoma/supreme-court/1995/4135-1.html.

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President of the Bank at that time. The June 8 letter of credit was substantially the same as the June 1 except for the amount and did not contain the final paragraph regarding the replacement of the May 30 letter of credit. The letters of credit were apparently sent to Diamond Plastics by facsimile machine transmission. Evidently, the goods were delivered to Klingenberg’s business. Diamond Plastics received invoices and non-negotiable Bills of Lading which it attached to a Demand Letter and sent by certified mail to the Bank on July 18, 1989, requesting payment on the letters of credit. Although the letters of credit specifically required negotiable Bills of Lading and consular invoices, Diamond failed to send either with the Demand Letter. It is important to note, however, that prior to the drafts in the case at bar, Diamond Plastics had submitted almost identical drafts on letters of credit containing the same compliance terms. Even though Diamond Plastics did not present the requisite negotiable bills of lading and consular invoices in those drafts, Bank honored the drafts and paid them. The Bank refused to honor the demand, asserting non-conformity to the requirements of the letters of credit. However, the Bank failed to return the Demand Letter and attachments to Diamond Plastics. Eventually, the Bank brought a declaratory action in the trial court to have its liability under the letter of credit determined. In turn, Diamond Plastics counterclaimed, asserting Bank wrongfully dishonored the demand upon the letters of credit and converted funds owed to Diamond Plastics. I. LETTERS OF CREDIT The issuer has no discretion in determining whether the beneficiary has met all of the requirements of the underlying contract with the customer. Indeed, the commercial vitality of letters of credit are grounded in the issuers’ lack of control over the underlying transaction or the choice of beneficiary. The issuer merely writes a letter of credit pursuant to the instructions of its credit-worthy customer and pays on it when proper demand is made, all without investigating anything other than the face of the documents presented. This has come to be known as the “independence principle” because of the independence of the letter of credit from the underlying commercial transaction. This independence facilitates payment on the letter of credit upon a mere facial examination of documents making the letter of credit “a unique commercial device which assures prompt payment.” Ward Petroleum. However, “a corollary to the strict duty of the issuer to honor proper demand” is the “broad right to ignore improper demand,” 777 F.2d at 584, and it is this right which is at the heart of this lawsuit. II. DIAMOND PLASTICS’ DRAFT DID NOT COMPLY WITH THE TERMS OF THE LETTER OF CREDIT

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A. Diamond Plastics asserts the draft it sent to Bank complied with the terms of the letter of credit. Bank counters that Diamond Plastics did not strictly comply with the letter’s terms as required by law. The Bank points to Lease America Corp. v. Norwest Bank Duluth, N.A., in support of its argument. Therein, the Eighth Circuit Court of Appeals found that the majority of jurisdictions have adopted a rule requiring strict compliance with the terms of a letter of credit when presenting it for payment. The beneficiary in Lease America brought an action against the issuing bank for wrongful dishonor when the bank refused to honor the letter of credit where the beneficiary failed to include certain documents with its draft. The appellate court affirmed the trial court’s summary judgment for the bank and rejected a standard of substantial compliance urged by the beneficiary. The court stated: “Adoption of a substantial compliance standard would place issuing banks in uncertain positions with respect to their obligations If this court were to adopt this standard, the issuing bank would be required to apply a legal or commercial analysis, often without benefit of professional advice, in every situation in which compliance was colorably ‘substantial.’ We believe that this would burden an issuing bank unduly and would fetter the commercial purposes of the letter of credit. Adoption of a substantial compliance standard on grounds that the result will more likely meet the parties’ expectations might also erode the principle that a letter of credit is independent of contracts between the bank’s customer and the beneficiary.” We agree that adoption of a standard any less than strict compliance would defeat the purpose and intended operation of a letter of credit. We, therefore, join the majority of jurisdictions which hold strict compliance with the terms of the letter of credit as the standard to be used by issuers in determining whether to honor a draft on a letter of credit. B. The court in Venizelos, S.A. v. Chase Manhattan Bank, supra, explained strict compliance as follows: “Since the bank is interested only in the documents to be presented, the essential requirements of a letter of credit must be strictly complied with by the party entitled to draw against the letters of credit, which means that the papers, documents and shipping descriptions must be as stated in the letters.” 425 F.2d at 465. Diamond Plastics points to the corollary to the rule of strict compliance that the terms and requirements set forth in letters of credit must be explicit and any ambiguity therein is construed against the issuing bank. This is so because in order to strictly comply with the requirements of the letter, the beneficiary “must know precisely and unequivocally what the requirements are.” The letter explicitly requires a “negotiable bill of lading of each set

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and consular invoice” to be forwarded to the Bank. Having presented “nonnegotiable” bills of lading and no consular invoice, Diamond Plastics’ draft did not strictly conform to the terms of the letters of credit. Diamond Plastics counters that the negotiable bills of lading and consular invoices were only required if another bank was negotiating the documents. Rather than construing the letter as Diamond Plastics reads it, we find the letter requires Diamond Plastics or any banks negotiating the letters of credit to present the negotiable bills of lading and consular invoices along with any drafts. Diamond Plastics asserts that the terms of the letter of credit were impossible to fulfill because no negotiable bills of lading or consular invoices were generated in the underlying transaction. However, we conclude that Diamond Plastics assumed the risk that it would not get paid on the letters of credit when it did not negotiate with Klingenberg on the terms of the letter of credit. If the terms of the letter of credit are not to the beneficiary’s approval, i.e., if the letter of credit requires documentation that will not be generated as in the case at bar, the beneficiary may refuse to ship the goods until a letter of credit is issued with terms with which the beneficiary can comply. If the beneficiary fails to negotiate the terms of the letter of credit, it must make sure conforming documents are generated in the underlying transaction so that it will be able to comply. The burden is thus placed upon the beneficiary to make sure the terms of the letter of credit can be met rather than upon the issuing bank which may have no knowledge of what documents will be generated by the transaction. The strict compliance rule has the intended salutary effect of requiring the beneficiary to review the credit to be certain that he can comply with it. That inquiry, which permits the beneficiary to verify that the credit complies with the underlying contract, also permits him to make timely requests for amendments and to withhold shipment or other performance if the credit does not comply with the underlying transaction or is impossible for him to satisfy. It is more efficient to require the beneficiary to conduct that review of the credit before the fact of performance than after it, and the beneficiary that performs without seeing or examining the credit should pay the piper. Similarly, a beneficiary who negligently inspects a letter of credit and thereby fails to discover that the requirements are impossible for him to satisfy should be required to “pay the piper” as well. This is especially true in a case such as this one, where the impossibility arises from the use of technical or trade terms and where the bank has performed exactly as requested by its customer. Consequently, if Diamond Plastics could not possibly fulfill the requirements of the letter of credit, i.e., present negotiable bills of lading and consular invoices, the onus of changing those terms so that compliance was possible fell upon the beneficiary, Diamond Plastics. Having failed to have

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the letter of credit amended so that the documents generated by the transaction would suffice under the requirements of the letter of credit, Diamond Plastics cannot now complain of its inability to comply with the terms so provided. The documents presented by Diamond Plastics did not strictly comply with the terms of the letter of credit. Therefore, Bank did not wrongfully dishonor the drafts unless Bank is estopped from requiring strict compliance due to its previous actions on other letters of credit. III. SUMMARY JUDGMENT WAS IMPROPER IN THIS CASE BECAUSE A MATERIAL ISSUE OF FACT REMAINS AS TO WHETHER BANK IS ESTOPPED FROM DEMANDING STRICT COMPLIANCE. Diamond Plastics pleads that Bank is estopped from requiring strict compliance with the terms of the letters of credit because Bank had previously allowed non-conforming presentment. Although Article 5 of the UCC does not specifically provide for estopped in letter of credit practice, such rules of law are not prohibited by it. Indeed, “(3) this Article deals with some but not all of the rules and concepts of letters of credit as such rules or concepts have developed prior to this act or may hereafter develop. The fact that this Article states a rule does not by itself require, imply, or negate application of the same or a converse rule to a situation not provided for or to a person not specified by this Article.” 12A O.S. 1981. Therefore, common law doctrines such as estoppel may be applied to cases involving letters of credit, and many courts have utilized estoppel in determining how to resolve issues in wrongful dishonor cases. Diamond Plastics alleges Bank honored drafts on earlier letters of credit issued to Diamond Plastics even though Diamond Plastics had failed to strictly comply with the terms of those letters of credit. The letters contained similar language and requirements as the ones at bar yet the Bank honored drafts on those letters even though Diamond Plastics did not present negotiable bills of lading and consular invoices with the drafts. Some courts have held that an issuing bank may be estopped from demanding strict compliance where it has honored non-conforming presentment of documents in past dealings with the beneficiary. Estoppel is generally understood to prevent one party from taking a legal position which is inconsistent with an earlier action that places the other party at a disadvantage. Estoppel is used to prevent injustice and promote justice and should not be used to work a positive gain to a party. Therefore, material issues of fact remain to be addressed in this action, to wit, whether Bank honored previous non-conforming drafts and whether Diamond Plastics detrimentally relied on Bank’s previous conduct. The resulting question as to whether Bank is estopped from demanding strict compliance

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in Diamond Plastic’s latest draft is the crux of the cause of action. This matter must be remanded for resolution of these issues. Hence, it was error for the district court to grant summary judgment to Bank on the issue of wrongful dishonor. We do not here decide whether Diamond Plastics is entitled to judgment as a matter of law. Rather, we remand this case for further proceedings. Conversion In its counterclaim, Diamond Plastics claimed Bank converted its funds by withholding payment on Diamond Plastics’ draft. In its brief in support of summary judgment and briefs on appeal, Diamond Plastics asserts Bank converted both the funds and the instruments submitted as a draft on the letter of credit. Conversion is “any act of dominion wrongfully exerted over another’s personal property in denial of or inconsistent with his rights therein.” Steenbergen v. First Fed. Sav. & Loan of Chickasha. Based upon this definition, we find Bank could not have converted the funds because Diamond Plastics never acquired a personal property interest in those funds. Diamond Plastics was not entitled to payment under the letter of credit until a conforming draft was made. This finding is unaffected by our holding remanding this matter for a determination of the estoppel issue. If the trial court or jury finds Bank is estopped from asserting strict compliance, such finding goes only to the wrongful dishonor claim. If Bank wrongfully dishonored the draft, Diamond Plastics is not entitled to the funds held by Bank. Rather, Diamond Plastics is entitled to damages for wrongful dishonor. The conversion of funds claim is dependent upon Diamond Plastics having a personal property interest in the funds. Such an interest never arose. Therefore, Bank was entitled to judgment as a matter of law on the conversion of funds claim. However, the same cannot be said for Diamond Plastics’ claim for conversion of instruments. Diamond Plastics contends 12A O.S. 1981 “(1) An instrument is converted when * * * * * * (b) any person to whom it is delivered for payment refuses on demand either to pay or to return it . . .” Bank counters that Diamond Plastics never made “demand” on Bank to return the instruments. This matter must be remanded for consideration of this fact issue. Conclusion The district court erred in granting summary judgment to the Bank as to the issue of whether the Bank wrongfully dishonored Diamond Plastics’ draft on the letters of credit, and this matter must be remanded for resolution of those fact questions. For the above and foregoing reasons, the opinion of the Court of Appeals is VACATED, the judgment of the district court is REVERSED, and the case REMANDED to the district court for further proceedings consistent with this opinion.

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In many countries with national banking associations, the general standard conditions applied by the members of these associations often incorporate the UCP.20 If the automated international transfer system (SWIFT)21 is used by banks in letter of credit transactions, the UCP applies to the contractual relations between the banks and between them and SWIFT.22 Even where the UCP is adopted specially or generally, the parties are free to contract out of it, or to exclude application of specific parts.23 (2) Feature ➀ Principle of Independence The letter of credit is separate from and independent of the underlying actual contract of sale or other transaction.24 A bank negotiating under the terms of credit considers whether the documents presented by the beneficiary are in compliance with the terms and conditions stipulated in the letter of credit.25 The transaction under letter of credit is thus a documentary transaction. It is irrelevant to the bank relating to the letter of credit whether the underlying contract covers the purchase of specific products or whether it covers another transaction.26 Even though there is the fraud in underlying commercial traction, the documentary transaction under the letter of credit must be respected.

The following is the case to make it clear that the fraud in underlying commercial transactions is separated from the documentary transaction under the letter of credit if the parties of the documentary transactions including the document holders or banks are in compliance with the good-faith rule. “The mere fact that the documents presented in connection with the letters of credit may have been complete forgeries and that no coffee was delivered to the trucker for export is insufficient to avoid payment under the letter of credit. What is critical is whether the bills of lading complied with the requirements of the letter of credit or whether the negotiating bank possesses actual knowledge of the fraud or otherwise acted in bad faith.” “Under the general rule the issuing bank must honor the draft when the documents presented comply with the terms of the letter of credit. But when a

20

Id. http://www.swift.com; SWIFT stands for Society for Worldwide Interbank Financial Telecommunications. 22 See Eun Sup Lee, supra note 138, at 122. 23 See, id. 24 Id. at 123. 25 Id. 26 Id. 21

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required document does not conform to the necessary warranties or is forged or fraudulent or there is fraud in the transaction, an issuing bank acting on good faith may, but is not required to, refuse to honor a draft under a letter of credit when the documents presented appear on their face to comply with the terms of the letter of credit.” Case27 Plaintiff Andina Coffee, Inc., a New York corporation, was engaged in the importation of coffee from defendant Gonchecol, Ltda., at one time a major Columbian exporter of coffee. To pay for its purchases, Andina delivered to Gonchecol letters of credit which it obtained from a number of commercial banks in New York, including defendants National Westminster Bank USA (NatWest) and Cooperatieve Centrale Raiffeisenboerenleenbank B.A. (Rabobank). As the beneficiary of the letters of credit, Gonchecol apparently used all or some of the funds to borrow money from defendant Banco Credito y Commercio de Columbia (BCCC) and other Colombian banks in order to finance its business operations. In June 1986, BCCC advanced $2,100,000 to Gonchecol in exchange for which it was to be reimbursed through a $2,100,000 check drawn on a Panamanian bank. However, Gonchecol’s check bounced, and BCCC was left with an unpaid $2,100,000 loan. According to NatWest and Rabobank, this event could only have served to confirm what BCCC had already learned from its own sources; that is, that Gonchecol had already lost millions of dollars and was experiencing severe financial difficulties. As was the situation with most of the moneys made available by BCCC to Gonchecol, the source of repayment would have to be proceeds from the letters of credit provided to Gonchecol from the issuing banks. Beginning in May of 1986, coffee financed under the various letters of credit, which were to be paid on the presentation of interior truck bills of lading, failed to materialize. Consequently, representatives of the New York banks were dispatched to Colombia in August of 1986 when it was discovered that Gonchecol had caused fraudulent truck bills of lading to be furnished for large quantities of coffee which were, in fact, never shipped, thereby resulting in substantial financial losses to New York banks. The four letters of credit involved here are the last outstanding instruments which were not drawn against prior to the disclosure of the exporter’s dishonest practices. In that regard, NatWest and Rabobank had each supplied two of

27

ANDINA COFFEE v. NATL BANK 160 A.D.2d 104 (1990) 560 N.Y.S.2d 1(N.Y.App.Div. 1990) Appellate Division of the Supreme Court of the State of New York, First Department. http://www.leagle.com/decision/1990264160AD2d104_1249/ANDINA%20COFFEE%20v.% 20NATL%20BANK.

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the letters of credit, one for $2,104,000 and the other three in the amount of $1,000,000, pursuant to which they agreed to make payment upon the presentation within a specified period of time of drafts and certain documents, among which were to be the “original railroad and/or truck bill of lading.” The bill of lading was supposed to show that the coffee was actually in existence, that it had left the control of the growers and that it was in the hands of the shipper and en route from the interior of Colombia to a seaport. On July 9, 1986, 15 days after BCCC had already advanced $2,100,000 to Gonchecol against the latter’s bad check, it received from NatWest a letter of credit in the amount of $2,104,000. The following day, almost six weeks before the earliest possible date for presentment under that instrument, BCCC accepted from Gonchecol its draft and accompanying documents. These documents included truck bills of lading which were dated August 22, 1986, almost six weeks after the date submitted to BCCC, and purported to show that 8000 bags of coffee had been delivered to a trucking company for transport to a Colombian port. BCCC sent the draft and documents to NatWest with a cover letter dated July 15, 1986. By telex dated July 22, 1986, NatWest advised BCCC that it would not pay under the letter of credit because of four enumerated discrepancies in the documents, including the fact that the draft and documents were presented prior to the earliest date mentioned in the letter of credit and that the truck bills of lading were postdated. BCCC thereupon requested that the bills of lading and other documents be returned to it by mail. It then reviewed the documents received under the other three letters of credit and perceived that the bills of lading in those instances were similarly postdated. Consequently, it sent all of the bills of lading back to Gonchecol so that the exporter could revise the dates to comply with the letters of credit. Indeed, some of the changes were made twice in an attempt to bring the documents into conformity with both the form and date mandates of the letters of credit. Thus, it appears that the documents were designed more to effect payment under the letters of credit than to reflect accurately the business transactions that they were intended to evince. In any event, by the time that the documents had been altered and realtered, the full extent of Gonchecol’s fraud had been detected, and payment was rejected by NatWest and Rabobank on the ground that, in part, the bills of lading were postdated and fraudulent. The instant appeal concerns respective motions and cross-motions for summary judgment with respect to the letters of credit. The Supreme Court, in granting BCCC’s cross-motion for summary judgment and denying the motions of NatWest and Rabobank for the same relief, was persuaded that BCCC took the drafts for value, in good faith and without any knowledge of any fraud defenses and was, therefore, a holder in due course entitled to payment under the letters of credit. In the view of the court, there is no

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evidence to support the assertions by NatWest and Rabobank that BCCC possessed actual knowledge of Gonchecol’s fraud and that it did not accept the drafts in good faith. Finally, the court concluded that the “transactions involved in this case must be considered against a background of haphazard permissive and careless negotiations and payment of prior letters of credit by the issuing banks over a year and a half period. First of all, it is not denied that the same discrepancies alleged in the documents submitted by BCCC were the same one [sic] which the banks had accepted for the aforementioned period. Secondly, it cannot be denied that the letters of credit involved are not based upon underlying arms-length transactions.” The court proceeded to criticize the issuing banks for assuming a high risk by merely demanding trucking bills of lading rather than on board bills of lading, since it “appears that the port forwarder and the trucking company were all part of Gonchecol’s enterprises and that the importer, Andina Coffee, Inc., although a separate corporate entity, belonged to the same overall organization as the exporter.” Yet, notwithstanding the questionable nature of the financing arrangement undertaken by NatWest and Rabobank, and, certainly, the record is replete with indications of dubious business judgment by the various issuing banks, the soundness of the lenders’ financial practices is not at issue here. What is crucial is whether BCCC accepted drafts drawn upon letters of credit “under circumstances which would make it a holder in due course.” As this court observed in Barclay Knitwear Co. v King’swear Enters: “The Uniform Commercial Code provides that “when documents appear on their face to comply with the terms of a credit but a required document * * * is forged or fraudulent or there is fraud in the transaction * * * the issuer must honor the draft or demand for payment if honor is demanded by a negotiating bank * * * which has taken the draft or demand under the credit and under circumstances which would make it a holder in due course”. Finally, it should be noted, disputes involving letters of credit “are well suited to determination by motion for summary judgment because they normally present solely legal issues relating to an exchange of documents.” In Barclay Knitwear Co. v King’swear Enters. (supra), relied upon by BCCC, the court found in a commercial transaction financed by a letter of credit, that the documents submitted with the draft strictly complied with the terms of the letter of credit; that, moreover, the fraud which had been committed was by an agent of the party procuring the instrument and that there was no proof that the negotiating bank therein, Bank of Communications (BOC), had knowledge of the fraud. Therefore, the court concluded: Barclay asserts that its allegations of fraud cast a shadow over BOC’s status as a holder in due course. Since proving a negative, i.e., lack of notice of the alleged fraud, is concededly difficult, if not impossible, BOC’s status as a holder in due course is beyond dispute, absent some direct evidence

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that it had notice of the alleged fraud. The reliability of commercial letters of credit as a medium of payment in international commerce would be seriously eroded if one’s status as a holder in due course could be so readily undermined by such tenuous claims. Under Section 5-114 of the Uniform Commercial Code, a holder in due course is not required to pursue other available remedies as a condition to recovery on its draft. “To draw on a letter of credit, the beneficiary need only establish that it has strictly complied with its essential requirements.” The mere fact that the documents presented in connection with the letters of credit may have been complete forgeries and that no coffee was delivered to the trucker for export is insufficient to avoid payment under the letter of credit. What is critical is whether the bills of lading complied with the requirements of the letters of credit or whether BCCC possessed actual knowledge of the fraud or otherwise acted in bad faith. Thus, according to the Court of Appeals in First Commercial Bank v Gotham Originals(supra, at 295): “Under the general rule the issuer must honor the draft when the documents presented comply with the terms of the letter of credit. But when a required document does not conform to the necessary warranties or is forged or fraudulent or there is fraud in the transaction, an issuer acting in good faith may, but is not required to, refuse to honor a draft under a letter of credit when the documents presented appear on their face to comply with the terms of the letter of credit. Further than that, a customer may also enjoin an issuer from honoring such a draft if the issuer fails to do so on its own. Notwithstanding this exception, if the person presenting a draft drawn on a letter of credit is a holder in due course the issuer must pay the draft, whether it has notice of forgery or fraud or not.” It is settled that New York law mandates strict compliance with the terms of a letter of credit. The postdating of bills of lading is not only a departure from the requirements of the letters of credit but also constitutes a form of fraudulent practice. Contrary to the Supreme Court’s characterization that the objections to the accompanying documents raised by NatWest and Rabobank were frivolous and highly technical, the discrepancies were, in reality, material. At the very least, they would have had the effect of concealing the actual shipment dates (even assuming that they had represented genuine, and not fictitious, transactions) and, in fact, did not, as required by the letters of credit, “evidence shipment” of the coffee. Further, while there is authority that by its previous acceptance of non-conforming documents, as admittedly occurred herein, the issuing bank does not waive the right to reject future defects, and the preclusion rule contained in the Uniform Customs and Practice for Documentary Credits (UCP) is by no means absolute, at most the failure to assert an objection on a previous occasion presents a question of fact as to whether there was a waiver.

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Unless the postdating was expressly allowed under the letters of credit, and there is no indication that this is the situation, or the parties’ prior course of conduct conclusively demonstrates otherwise, the documents provided under the letters of credit did not comply with the terms thereof, and BCCC may not compel payment. Equally significant is the BCCC’s apparently active role in obtaining the revisions of the documents, particularly after it was confirmed with definite proof of Gonchecol’s financial instability in the form of a bad check, raises questions of fact as to whether it was acting in good faith and without actual knowledge of the exporter’s fraud. The record of the present matter clearly presents sufficient unresolved matters precluding summary judgment as to whether BCCC participated in a scheme whereby the bills of lading were altered simply to render them in conformity with the letters of credit. Once it has been “shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he or some person under whom he claims is in all respects a holder in due course.” Since NatWest and Rabobank have demonstrated a viable defense with respect to the letters of credit, BCCC must now prove that it is a holder in due course, and, consequently, summary judgment in its favor is not warranted. Order and judgment (one paper) of the Supreme Court, New York County (Burton S. Sherman, J.), entered on August 31, 1989, which denied the motion for summary judgment by defendant National Westminster Bank USA, granted the cross-motion for summary judgment by defendant Banco Credito y Commercio against defendant National Westminster Bank USA, ordered that defendant Banco Credito y Commercio recover a total amount of $3,944,064, including interest, against defendant National Westminster Bank, dismissed the cross-claims of defendant National Westminster Bank against defendant Banco Credito y Commercio and vacated a temporary restraining order entered on August 26, 1986, barring payment upon two specified letters of credit, should be reversed, on the law, to the extent appealed from, and the cross-motion for summary judgment by defendant Banco Credito y Commercio denied, the monetary award in favor of defendant Banco Credito y Commercio vacated, the cross-claims by defendant National Westminster Bank against defendant Banco Credito y Commercio reinstated and the temporary restraining order reinstated, without costs or disbursements. Order and judgment (one paper) of the Supreme Court, New York County (Burton S. Sherman, J.), entered on August 31, 1989, which denied the motion for summary judgment by defendant Cooperatieve Centrale Raiffeisenboerenleenbank B.A. (Rabobank Nederland), granted the cross-motion for summary judgment by defendant, Banco Credito y Commercio, ordered that defendant Banco Credito y Commercio recover a total amount of

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$2,530,250, including taxes, against defendant Rabobank Nederland, dismissed the cross-claims of defendant Rabobank Nederland against defendant Banco Credito y Commercio and vacated a temporary restraining order entered on August 29, 1986, barring payment upon two specified letters of credit, should be reversed, on the law, to the extent appealed from, and the cross-motion for summary judgment by defendant Banco Credito y Commercio vacated, the cross-claims by defendant Rabobank Nederland against defendant Banco Credito y Commercio reinstated and the temporary restraining order reinstated, without costs or disbursements. Order and judgment (one paper), Supreme Court, New York County, entered on August 31, 1989, which, inter alia, denied the motion for summary judgment by defendant National Westminster Bank USA, unanimously reversed, on the law, to the extent appealed from, the cross-motion for summary judgment by defendant Banco Credito y Commercio denied, the monetary award in favor of defendant Banco Credito y Commercio vacated, the cross-claims by defendant National Westminster Bank USA against defendant Banco Credito y Commercio reinstated, and the temporary restraining order reinstated, without costs and without disbursements. Order and judgment (one paper) of said court, also entered on August 31, 1989, which, inter alia, denied the motion for summary judgment by defendant Cooperatieve Centrale Raiffeisenboerenleenbank B.A., unanimously reversed, on the law, to the extent appealed from, the cross-motion for summary judgment by defendant Banco Credito y Commercio denied, the monetary award in favor of Banco Credito y Commercio vacated, the crossclaims by defendant Rabobank Nederland against defendant Banco Credito y Commercio reinstated and the temporary restraining order reinstated, without costs and without disbursements. Only when it is surely evident that the documents, although they are superficially in order, are actually fraudulent and that the beneficiary is involved in the fraud, the bank exceptionally should refuse to pay the price authorized by the letter of credit.28 This is usually referred to as the “fraud exception.”29 Thus, banks must examine the documents presented with reasonable care to determine whether they comply completely with the requirements under the

28

United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 A.C. 168; Tukan Timber Ltd v Barclays Bank Plc [1987] 1 Lloyd’s Rep. 171 at 174. On fraud affecting letters of credit. See Eun Sup Lee, supra note 138, at 123. 29 The paying bank’s obligation is to consider the documents alone and not to take account of any other matters. The only established exception to this principle is the “fraud exception” and the socalled nullity exception forms no part of English law, Montrod Ltd v Grundkotter Flrischvertriebs GmbH [2002] 1 W.L.R. 1975. See Eun Sup Lee, supra note 138, at 123.

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documentary credit.30 Banks are only required to examine the contents of the documents and not to investigate whether the statements contained in them are in compliance with the actual transaction. Principle of Independence

“a. A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honor, to negotiate or to fulfill any other obligation under the credit is not subject to claims or defenses by the applicant resulting from its relationships with the issuing bank or the beneficiary. A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank. b. An issuing bank should discourage any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, pro forma invoice and the like.31 Banks deal with documents and not with goods, services or performance to which the documents may relate.” (Article 5 of UCP 600, Documents v. Goods, Services or Performance)

(2) Principle of Strict Compliance The legal principle that the documents presented for payment or negotiation to the bank under the letter of credit should strictly conform to the terms of the credit is generally referred to as the doctrine of strict compliance.32 The reason underlying this rule that the bank is entitled to reject the documents not in strict compliance with the terms of credit—which can sometimes be burdensome to the beneficiary—is that the negotiation or paying bank acts only as a special agent of the issuing bank33 that acts in turn as the special agent of the importer.34 If an agent with limited authority acts beyond that conferred authority, the special agency should in principle be deprived and if he cannot recover the loss resulting from such unauthorized acts he has to bear such commercial risk of the transaction.35

30

UCP600 Art. 14. See Eun Sup Lee, supra note 138, at 123. 32 Id. at 124. 33 Lloyd’s Rep. 171 at 174. On fraud affecting letters of credit. See Eun Sup Lee, supra note 138, at 124. 34 See Eun Sup Lee, supra note 138, at 124. 35 Id. 31

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The presented documents to the bank must be in strict compliance with the letter of credit terms and conditions, particularly, in case of unambiguity of the statements in the letter of credit.

The following case is to confirm the controlling that “the letter of credit must be strictly constructed and performed precisely in accordance with its terms,” particularly, when the terms of letter of credit are “unambiguous.” In this case we can see the significant variance between the required statement reading “We hereby certify that monies are due us under the purchaser, Thomas L. Windham’s, reservation or purchase agreement….” and the submitted statement indicating “The developer has certified to us that the monies from the LCs were due to N & C under Dr. Windham’s purchase agreements.” Case36 The plaintiff, N & C Properties (“N & C”), appeals from a summary judgment in favor of defendant AmSouth Bank, N.A. (“AmSouth”) that was made final pursuant to Rule 54(b), A.R.Civ.P. Plaintiff also sued Vanguard Bank & Trust Company, Dr. Thomas L. Windham, and Linda T. Windham. These defendants have filed briefs as “appellees”; however, they are not directly involved in this appeal, and we consider each of these parties to be amicus curiae. We affirm. The issue is whether AmSouth improperly refused to fund four letters of credit (referred to herein as “LCs”) presented for payment by a court-appointed successor escrow agent. On June 10, 1983, AmSouth issued two LCs at the request of a customer, Dr. Thomas L. Windham. LC 7139 was issued in the amount of $11,114.85 as earnest money for the purchase of unit 208 of East Pass Towers condominium, Destin, Florida, which was developed and sold by N & C. LC 7140, for $45,584, was issued as earnest money for unit 308 in the same condominium development. The expiration date on these LCs was August 15, 1985. On April 11, 1984, AmSouth issued two additional LCs for Dr. Windham, LC 8135, in the amount of $45,186, and LC 8136, for $28,965, as earnest monies for a third and a fourth condominium (units 307 and 102, respectively) at East Pass Towers. The expiration date on these LCs was April 30, 1985, but that date was later extended to July 30,

36

N & C PROPERTIES v. AmSouth Bank, NA 558 So. 2d 906 (1990) 88–709. Supreme Court of Alabama. Published in English: 1990 JUSTIA US LAW. http://law.justia.com/cases/alabama/sup reme-court/1990/558-so-2d-906-1.html.

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1985. Gulf South Corridor Properties, Inc. (“Gulf South”), acted as escrow agent for the project and, as such, was named as the beneficiary of all four LCs. LC 7139 appeared as follows: “DATE: JUNE 10, 1983

AMOUNT: $11,114.85

IRREVOCABLE COMMERCIAL LETTER OF CREDIT NUMBER: IC7139 TO: GULF SOUTH CORRIDOR PROPERTIES, INC. P.O. BOX 86 DESTIN, FLORIDA 32541 RE: PURCHASE OF CONDOMINIUM UNIT FROM EAST PASS TOWERS CONDOMINIUM, OKALOOSA COUNTY, DESTIN, FLORIDA. GENTLEMEN: WE HEREBY AUTHORIZE YOU TO DRAW ON THE AMSOUTH BANK, N.A., BIRMINGHAM, ALABAMA, FOR THE ACCOUNT OF THOMAS L. WINDHAM, M.D., 1521 ELEVENTH AVENUE SOUTH, BIRMINGHAM, ALABAMA 35205, UP TO AN AGGREGATE AMOUNT OF ELEVEN THOUSAND ONE HUNDRED FOURTEEN AND 85/100 U.S. DOLLARS ($11,114.85 U.S.), AVAILABLE BY YOUR DRAFT(S) AT SIGHT ACCOMPANIED BY: YOUR SIGNED STATEMENT READING WE HEREBY CERTIFY THAT MONIES ARE DUE US UNDER THE PURCHASER, THOMAS L. WINDHAM’S, RESERVATION OR PURCHASE AGREEMENT ON CONDOMINIUM UNIT # 208, SAID RESERVATION OR PURCHASE AGREEMENT BEING DATED THE 10TH DAY OF AUGUST, 1982. DRAFTS MUST BE DRAWN AND NEGOTIATED NOT LATER THAN AUGUST 15, 1985. EACH DRAFT MUST STATE THAT IT IS ‘DRAWN UNDER LETTER OF CREDIT OF AMSOUTH BANK, N.A., BIRMINGHAM, ALABAMA, NUMBER IC-7139 DATED JUNE 10, 1983,’ AND THE AMOUNT ENDORSED ON THIS LETTER OF CREDIT. WE HEREBY AGREE WITH THE DRAWERS, ENDORSERS, AND BONA FIDE HOLDERS OF ALL DRAFTS DRAWN UNDER AND IN COMPLIANCE WITH THE TERMS OF THIS CREDIT, THAT SUCH DRAFTS WILL BE DULY HONORED UPON PRESENTATION AND DELIVERY OF DOCUMENTS AS SPECIFIED TO AMSOUTH BANK, N.A., BIRMINGHAM, ALABAMA. THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1974 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 290. THOMAS L. WINDHAM ---------------------------------AUTHORIZED SIGNATURE s/Thomas L. Windham ---------------------------------- AUTHORIZED SIGNATURE” The other LCs was essentially identical in form and content, except for the dollar amounts and the condominium unit references.

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In July 1985, Vanguard Bank & Trust Company (“Vanguard”) was named as the successor escrow agent to Gulf South by order of the Circuit Court of Okaloosa County. The court ordered that Gulf South “turn over to the Vanguard Bank & Trust Company ... all funds contained in the escrow account, all letters of credit, and all documents pertaining to the escrow account.” AmSouth was notified that Vanguard had been substituted for Gulf South as the escrow agent. N & C allegedly completed construction of the four condominium units in March 1985. N & C notified Dr. Windham of completion and requested that he proceed to “close” on all four units. Dr. Windham refused to complete the transactions. On July 30, 1985, AmSouth received the following letter, dated July 29, 1985, with a sight draft from Vanguard to call LC 8135: “July 29, 1985” AmSouth Bank, N.A. “1900 5th Ave. North “Birmingham, AL 35203 “Re: Letter of Credit # 8135 dated 4/11/84 “Gentlemen: “You will find enclosed our sight draft in the amount of $45,186.00. Please pay same against the referenced letter of credit. The developer has certified to us that monies are due them under Thomas L. Windham, M.D. purchase agreement on condominium Unit # 307-N and has directed us to present said letters of credit to you for payment. “Your assistance in this matter is appreciated. “Very truly yours, “s/John B. Morrow “JOHN B. MORROW “Sr. Vice President and Trust Officer” An identical letter was sent to AmSouth respecting LC 8136 on the same date. AmSouth notified Vanguard that the calls on the LCs were insufficient. In response, Vanguard also provided AmSouth with a copy of the following letter written by the president of N & C to Vanguard: “July 29, 1985, “Vanguard Bank & Trust Company “P.O. Box 1717 “Fort Walton Beach, FL 32549 “Attention: John B. Morrow Sr. Vice President and Trust Officer “Re: AmSouth Bank, Birmingham, Alabama Letters of Credit # 8135-8136 “Dear Mr. Morrow: “This letter will serve to advise you that all obligations of the developer have been fulfilled under the above purchase contracts and the purchaser has failed to perform after being notified to perform and close his contract. Therefore, you are hereby instructed to call the above letters of credit which expire July 30, 1985. “We hereby certify that monies are due us under the purchaser, Thomas L. Windham’s reservations or purchase agreements on condominium units No. 307-N and 102-N. “Very truly yours, “N & C Properties “By: s/John W. Carner “JOHN W. CARNER, President.” However, AmSouth refused to fund LCs 8135 and 8136, and these LCs expired July 30, 1985. On August 13, 1985, Vanguard sent the following letter with sight drafts to AmSouth to call LCs 7139 and 7140: “August 13, 1985” AmSouth Bank, N.A.

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“International Department “P.O. Box 11007 “Birmingham, AL 35288 “Re: Letters of credit # IC-7139 and # 7140, Thomas L. Windham, M.D. “Dear Ms. Guin: “You will find enclosed our sight drafts in the amount of $11,114.85 and $45,584.00 to be drawn against your letters of credit # 7139 and # 7140 respectively attached. “The developer has certified to us through his agent that the monies from the aforementioned letters of credit are due him under Thomas L. Windham and Linda T. Windham’s purchase agreements for condominium units # 208N and 308N respectively. “You have on file a copy of the court order appointing Vanguard Bank & Trust Company successor escrow agent to Gulf South Corridor Properties, Inc., the original escrow agent. “Your immediate payment of these drafts will be appreciated. “Very truly yours, “s/John B. Morrow “JOHN B. MORROW “Senior Vice President and Trust Officer” AmSouth also refused to fund LCs 7139 and 7140, and those LCs expired August 15, 1985. AmSouth refused to fund the LCs because “the letter of credit specifically call[ed] for a statement signed by the beneficiary containing explicit statements set forth in each letter of credit.” In March 1986, N & C Properties sued AmSouth, Vanguard, and Dr. and Mrs. Windham, alleging that the Windhams had defaulted on all four contracts and that AmSouth had wrongfully refused to honor the LCs on the basis that the call by Vanguard was defective. Alternatively, N & C alleged that if the call was actually defective, then Vanguard was liable to it based on its negligence in making the call. Vanguard and AmSouth moved for summary judgments. N & C moved for a partial summary judgment against AmSouth and Vanguard and stated that the banks’ motions for summary judgment, taken together, were inconsistent because, N & C contended, if AmSouth was entitled to summary judgment because the LCs were not properly called, then Vanguard was liable to N & C as a matter of law for having negligently prepared the documents in making the calls. N & C argued for summary judgment against AmSouth, or in the alternative against Vanguard, as to any issue in which the trial court determined that the other bank was entitled to summary judgment. The trial court entered summary judgment for AmSouth without making findings of fact or issuing a formal opinion, and made it final pursuant to Rule 54(b), A.R.Civ.P.; N & C appealed. N & C argues that Vanguard was the proper party to call the LCs and that N & C was the proper party to make the certifications required by the LCs. AmSouth argues that the escrow agent, rather than N & C, should have made the certifications required in the LCs and that because the escrow agent failed to make the certifications AmSouth was not obligated to fund the LCs. Specifically, AmSouth contends that the language “your signed statement reading ‘we hereby certify that monies are due us’” (emphasis added) contained in the LCs referred to the escrow agent, Gulf South, and then arguably to Vanguard, and not to N & C.

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Vanguard, as the successor escrow agent to Gulf South, was the proper party to call the LCs. Although the LCs were never reissued to Vanguard in place of Gulf South, the order of the Circuit Court of Okaloosa County effectively substituted Vanguard for Gulf South as the escrow agent; that substitution gave Vanguard all the rights under the LCs previously held by Gulf South. “‘The controlling rule is that the letter of credit must be strictly construed and performed precisely in accordance with its terms.’” Bebco Distributors, Inc. v. Farmers & Merchants Bank, 485 So. 2d 330, 331 (Ala.1986); Bank of the Southeast v. Jackson, 413 So. 2d 1091, 1098 (Ala. 1982); American Nat’l Bank & Trust Co. v. Banco Nacional De Nicaragua, 231 Ala. 614, 620, 166 So. 8, 13 (1936). Alabama, with the majority of the states, follows the “strict compliance” rule governing the acceptance of letters of credit. In this case, the LCs required the escrow agent to send to AmSouth a signed statement reading. “We hereby certify that monies are due us under the purchaser, Thomas L. Windham’s, reservation or purchase agreement. “Vanguard’s call letters stated, “The developer has certified to us” that the monies from the LCs were due to N & C under Dr. Windham’s purchase agreements. The record indicates that in April 1985 the original escrow agent, Gulf South, had made this certification to AmSouth, to which AmSouth made no objection. However, that draw was later recalled. Vanguard never provided the certifications set forth in the LCs. The LCs are unambiguous, and we must apply the rule of strict compliance. The calls made by Vanguard were defective, and the judgment is due to be, and it is hereby, affirmed. In a falling market, a buyer is easily tempted to reject discrepant documents which the negotiating bank accepted even though they do not strictly conform to the terms and conditions stipulated in the letter of credit. Such things are likely to happen, because a commercial bank does not generally have expert knowledge or information on specific situations of actual business transactions.37 If the documents presented are not strictly in conformity with the terms of the credit and the bank refuses to accept them, the exporter should immediately contact his overseas customer (buyer) and request him/her to instruct the bank to accept the documents as presented.38 Refusal of the bank to accept documents and pay against even a small and apparently insignificant discrepancy not sanctioned in the instructions of the credit has been legitimated by the courts in the overwhelming

37 38

Id. Id.

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majority of litigated cases.39 The doctrine of strict compliance was judicially interpreted in the following classic passage: “There is no room for documents which are almost the same, or which will do just as well.”40 Substantial Compliance Rule has judicially been applied when it is required.

In the documentary letter of credit transactions, the strict compliance rule has been applied, but, particularly in the United States, a substantial compliance test would be applied when the issuing banks is sued by the beneficiary for wrongful payment. The following case confirms the United States case law to apply the bifurcated standard to the construction rule of the letter of credit. According to the case law, it would require strict compliance with the terms of the letter of credit when the bank is being sued by the beneficiary for requiring to honor drafts on presentment. On the other hand, it would apply a substantial compliance test when the bank is being sued by the customer for wrongful payment. In this case which was brought by the beneficiary for non-payment by the issuing bank, the strict compliance rule is applied. That is, the court found that there is the discrepancy due to the “sales director’s signature” instead of the “president’s signature,” even though the courts assume that the national sales director had the authority to act as the president’s agent and that his authority was known to the issuing bank. The court further assumes that the bank did not have the signature discrepancy in mind when it contacted the president for permission to pay the earlier draft. Case41 Plaintiff manufacturer (Far Eastern Textile, Ltd.) filed an action against defendants which failed to pay plaintiff for its shipments of men trousers to defendant clothing company in accordance with terms of on irrevocable letter of credit. Defendant bank (City National Bank and Trust Company) filed a motion for summary judgment.

39

Id. Id. 41 Far Eastern Textile, Ltd. v. City National Bank and Trust Co. No. C-2-75-603 United States District Court, S.D. Ohio, Eastern Division. April 20, 1977 430 F. Supp. 193; 1977 U.S. Dist. LEXIS 16283. 40

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The clothing company had entered into a contract with plaintiff to purchase a quantity of men’s clothing to be manufactured by plaintiff. The defendant bank issued a letter of credit to facilitate the transaction in favor of the plaintiff. The terms of the letter of credit required an “original purchase order signed by the president and accepted by seller,” and an “inspection certificate signed by the president and Harry Le Beau.” The letter of credit was amended twice, changing the terms of inspection certificate requirement to read “inspection certificate may be signed by either the president or the national sales director.” The president and national sales director of Nu-Look traveled to Taiwan to inspect the first sample manufactured by plaintiff. They found this sample unacceptable and rejected the goods. An accommodation was reached and the initial purchase order rewritten. The sales director again found plaintiff’s product unsatisfactory and consented to a partial shipment on the representation that improvements would be made, or whether he approved the product and an initial shipment of 384 pairs of pants. In any event, plaintiff shipped 384 pairs of pants to Nu-Look. Defendant bank refused to pay the plaintiff due to discrepancies in the signatures provided on the inspection certificates and original purchase orders. Plaintiff manufacturer filed an action, and defendant bank moved for summary judgment. The narrow issue presently before the court was whether an agent’s signature on behalf of his principal may constitute a signature of the principal, when that is required by the terms of a letter of credit. Preliminary, the court indicates certain factors which must govern the court’s decision and boundaries which must be placed on its application. A letter of credit transaction usually comprises three contracts: the contract between the issuing bank and its customer, the contract between the bank’s customer and the beneficiary of the letter of credit, and the contract between the issuing bank and the beneficiary. The contract between the bank and the beneficiary, which is the letter of credit itself, is entirely independent of the other two contracts. As a result, defenses which might be available in actions brought under the main contracts are often not available to a party breaching a bank-beneficiary letter of credit agreement. See Venizelos, S. A. v. Chase Manhattan Bank, 425 F.2d 461, 464-65 (2d Cir. 1970). If the beneficiary’s demand for payment conforms to the terms of the letter, then the issuer is obligated to pay irrespective of any non-conformity in goods shipped and irrespective of most defenses which the bank’s customer can separately raise against the beneficiary. Ohio Rev. Code § 1305.13 (Page 1962). See also Sisalcords do Brazil Ltd. v. Fiacao Brasileira de Sisal, S.A., 450 F.2d 419, 422 (5th Cir. 1971), cert. denied, 406 U.S. 919, 92 S. Ct. 1771, 32 L. Ed. 2d 118 (1972). This court of course recognizes that in ruling on a motion for summary judgment, “the inferences to be drawn from the underlying facts contained

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in such materials must be viewed in the light most favorable to the party opposing the motion. “United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S. Ct. 993, 994, 8 L. Ed. 2d 176 (1962). Thus, the court assumes for the purposes of this motion only, that the national sales director had the authority to act as the president’s agent and that his authority was known to the defendant bank. The court further assumes that defendant bank did not have the signature discrepancy in mind when it contacted the president for permission to pay the first draft. In deciding the motion, the court navigates between the Scylla of overly strict construction of letters of credit and the concomitant stranglehold which that could place on international commerce, and the Charybdis of loose construction with the accompanying loss of protection to the party obtaining the letter of credit. The Uniform Commercial Code failed to specify “whether strict compliance [with the terms of the letter] is necessary or whether ‘substantial performance’ will do,” although it “should have” done so. J. White & R. Summers, Uniform Commercial Code § 18–6 at 620 (1972). Pre-Code law sheds little additional light. Due in large part to regulation by the banks themselves, “there has been astonishingly little litigation on the subject of letters of credit.” Mead Corp. v. Farmers and Citizens Bank, 14 Ohio Misc. 163, 232 N.E.2d 431, 433 (C.P. 1967). New York, which supplies most of the case law in this area, would apply a bifurcated standard. It would require strict compliance with the terms of the letter when the bank is being sued by the beneficiary for refusing to honor drafts on presentment. On the other hand, it would apply a substantial compliance test when the bank is being sued by the customer for wrongful payment. See, e.g., Marine Midland Grace Trust Co. v. Banco Del Paris, S.A., 261 F. Supp. 884, 889 (S.D.N.Y.1966); White & Summers, supra, at 622. The first reported case which purports to set standards for the duty owed by an issuer of something akin to a letter of credit likened the letter to a guaranty agreement and held that its maker can be held only to the strict terms of the obligation. Palmer v. Yarrington, 1 Ohio St. 253, 260 (1853). This rule was reiterated in Mead Corp., supra, which also cited with approval the New York rule. 232 N.E.2d at 434. Such a rule might also be inferred from the (admittedly pre-Erie) decision of the Sixth Circuit in Lamborn v. Cleveland Trust Co., 29 F.2d 46 (6th Cir. 1928), in which the issuer was held estopped to assert a technical non-conformity defense because it had failed to raise it at an earlier opportunity. The defense was one which would have been available under a strict conformity standard but not under a substantial compliance standard. Arguably, the court would not have had to reach the estoppel question had it not implicitly found the non-conformity defense a viable one.

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The court concludes that an Ohio court confronted with this question would adopt the New York rule. The court adopted a strict compliance standard and held that the requirements of the letter of credit were not met, and the bank was not required to honor the draft upon presentment. Plaintiffs confused the agency powers under general contract law and under the commercial law governing letters of credit. In light of the strict compliance standard the powers of an agent in a letter of credit transaction must be much more restricted. Where the beneficiary is charging the bank with wrongful dishonor on the basis of documents which would be conforming only if an agency relationship were recognized, that agency must arise from the letter of credit itself. Moreover, permitting evidence supporting an agency relationship to be introduced under these circumstances subverts the independent nature of the contract between the beneficiary and the issuer. The court perceives little difference between amending otherwise unambiguous terms of a letter of credit through the introduction of evidence relating to an alleged agency relationship and amending such terms through evidence of an implied agreement between buyer and seller respecting one of the necessary documents. Both risk embroiling the bank in disputes between the bank’s customer and the credit beneficiary, which letters of credit are intended to avoid. See Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802, 805 (4th Cir. 1975); Venizelos, supra, 425 F.2d at 465. Thus, the court granted the defendant band’s motion for summary judgment and held that it was justified in refusing to pay the draft presented by the plaintiff because the letter of credit specifically required that an original purchase order had to be signed by the president. Practically speaking, however, the classic principle of strict compliance has been modified into a less strict rule. For example, banks are required to apply the international standard banking practice (ISBP) in reviewing documents. The ISBP adopts the principle of “essential conformity” instead of that of “strict conformity” in reviewing documents, which rule is designed to prevent transactions from being unpaid due to minor documentary mistakes. Example of Material Discrepancy: Mistyping of The Notify Party’s Name on B/L

While some discrepancies in a bill of lading might be so insignificant as not to relieve the issuing or confirming bank of its obligation to pay, the misspelling of the notify party’s name is a material variance that entitles the bank to refuse to honor the draft presented under the letter of credit transaction. The following case is about this kind of material discrepancy.

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Case42 Plaintiffs Dessaleng Beyene and Jean M. Hanson appeal from a final judgment of the United States District Court for the Southern District of New York, Morris E. Lasker, Judge, dismissing their complaint seeking damages for the alleged wrongful refusal of defendant Irving Trust Company (“Irving”) to honor a letter of credit. The district court granted Irving’s motion for summary judgment dismissing the complaint on the ground that, since the bill of lading presented to Irving misspelled the name of the person to whom notice was to be given of the arrival of the goods and thereby failed to comply with the terms of the letter of credit, Irving was under no duty to honor the letter of credit. On appeal, plaintiffs contend, inter alia, that the mere misspelling of a name should not relieve a bank of its duty to honor a letter of credit. The court agrees with the district court that the misspelling in this case was a material discrepancy that relieved Irving of its duty to pay the letter of credit, and the court affirms the judgment. Facts In March 1978, Beyene agreed to sell to Mohammed Sofan, a resident of the Yemen Arab Republic (“YAR”), two prefabricated houses. Sofan attempted to finance the purchase through the use of a letter of credit issued by the Yemen Bank for Reconstruction and Development (“YBRD”) in favor of Beyene. YBRD designated Irving as the confirming bank for the letter of credit and Irving subsequently notified Beyene of the letter’s terms and conditions. Beyene designated the National Bank of Washington (“NBW”) as his collecting bank. NBW sent Irving all of the documents required under the terms of the letter of credit. Thereafter, Irving telephoned NBW to inform it of several discrepancies in the submitted documents, including the fact that the bill of lading listed the party to be notified by the shipping company as Mohammed Soran instead of Mohammed Sofan. The NBW official contacted testified at deposition that Irving never waived the misspelling discrepancy and continued to assert that it was a discrepancy, though it undertook to request authorization from YBRD to pay the letter of credit despite the discrepancy. Such authorization was not forthcoming, and Irving refused to pay.

42

Beyene v. Irving Trust Company No. 84-7995 United States Court of Appeals, Second Circuit. May 1, 1985. 762 F.2d 4; 1985 U.S. App. LEXIS 31069; 40 U.C.C. Rep. Serv. (Callaghan) 1811.

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Plaintiffs instituted the present suit seeking damages for Irving’s failure to pay the letter of credit. Irving moved for summary judgment dismissing the complaint on a variety of grounds. The district court, in an opinion reported at 596 F. Supp. 438 (1984), granted the motion on the sole ground that the misspelling of Sofan’s name in the bill of lading constituted a material discrepancy that gave Irving the right to dishonor the letter of credit. This appeal followed. Discussion On appeal, plaintiffs contend principally that (1) the district court’s ruling is unsound as a matter of precedent and of policy, and (2) Irving should be required to pay the letter of credit on grounds of waiver and estoppel. The court finds merit in none of plaintiffs’ contentions and discusses only the first. The terms of a letter of credit generally require the beneficiary of the letter to submit to the issuing bank documents such as an invoice and a bill of lading to provide “the accredited buyer [with] some assurance that he will receive the goods for which he bargained and arranged payment.” H. Harfield, Bank Credits and Acceptances 57 (5th ed. 1974). The issuing bank, or a bank that acts as confirming bank for the issuer, takes on an absolute duty to pay the amount of the credit to the beneficiary, so long as the beneficiary complies with the terms of the letter. In order to protect the issuing or confirming bank, this absolute duty does not arise unless the terms of the letter have been complied with strictly. Literal compliance is generally “essential so as not to impose an obligation upon the bank that it did not undertake and so as not to jeopardize the bank’s right to indemnity from its customer.” Voest-Alpine International Corp. v. Chase Manhattan Bank, 707 F.2d at 683; see H. Harfield, Letters of Credit 57–59 (1979). While some variations in a bill of lading might be so insignificant as not to relieve the issuing or confirming bank of its obligation to pay, see, e.g., H. Harfield, Bank Credits and Acceptances 75–78, the court agrees with the district court that the misspelling in the bill of lading of Sofan’s name as “Soran” was a material discrepancy that entitled Irving to refuse to honor the letter of credit. The court determined plaintiffs’ misspelling of a name was a material discrepancy because it was not merely a typographical error, was not easily recognizable, and it was not a name inconsequential to the document. Accordingly, dismissal of plaintiffs’ complaint was affirmed. In the circumstances, the district court was entirely correct in viewing the failure of Beyene and NBW to provide documents that strictly complied with the terms of the letter of credit as a failure that entitled Irving to refuse payment. Plaintiffs do not contend that there was any issue to be tried as to the fact of the misspelling of Sofan’s name. Their assertions that Irving waived the

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admitted discrepancy or was estopped from relying on it were not supported sufficiently to withstand a motion for summary judgment and were properly rejected by the district court for the reasons stated in its opinion, 596 F. Supp. at 439-41. Conclusion The judgment of the district court is affirmed. Notwithstanding such practical modifications, beneficiaries seeking to insure a guarantee of payment collection should keep in mind that documents not in strict conformity with a letter of credit can still be rejected. Due diligence should therefore be taken in the preparation of the required documents to ensure their strict compliance with the terms of the letter of credit. Substantial Compliance in Case of Clerical Error

In the special case of the just clerical error in documentation, substantial compliance rule could be applied. The following case treats with the “substantial compliance rule” instead of the “strict compliance rule,” in the letter of credit transaction, in case that the presenter of documents satisfies noncommercial conditions in a credit. When, considering both the draft and the original credit together, it would be obvious to any bank document examiner, prudent or otherwise, that the discrepancy was merely a typographical or clerical error and of no possible significance, the “substantial compliance” would be applied. Herewith, the terms “strict compliance” is judicially interpreted to mean something less than “absolute, perfect compliance.” Case43 This appeal presents the question of how strictly a beneficiary of a letter of credit must comply with a condition of the credit in order to require payment by the issuer. New Braunfels National Bank (Appellant) filed suit (1) to obtain a judgment declaring that it had properly refused to honor a draft on a letter of credit it had issued and (2) to obtain an injunction prohibiting, until the parties’ rights under the credit could be determined, the account party from withdrawing its certificate of deposit which had been purchased from the appellant to guarantee reimbursement in the event the appellant

43

New Braunfels Nat. Bank v. Odiorne No. 3–88–297–CV. Court of Appeals of Texas, Third District, Austin. November 8, 1989. 780 S.W.2d 313; 1989 Tex. App. LEXIS 2949; 10 U.C.C. Rep. Serv. 2d (Callaghan) 1352.

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paid on the credit. Original defendants were (1) P.W. Bates, Superintendent of Insurance, Cayman Islands, British West Indies (Bates), the beneficiary of the letter of credit, and (2) Southern International Insurance Company, Ltd. (Southern), the account party. Bates counterclaimed to recover the amount of the credit from the appellant; Southern counterclaimed to recover the amount of the certificate of deposit. Later substituted in place of Southern was State Board of Insurance Liquidator/Receiver James T. Odiorne (Receiver), the court-appointed receiver for Southern. All parties filed motions for summary judgment. The district court granted the appellant’s motion, declaring that it had properly dishonored the draft on the letter of credit, and further granted the Receiver’s motion in part, declaring that the appellant had no security interest in the certificate of deposit and a related promissory note held by the appellant was null and void. The Bank appeals from that portion of the judgment pertaining to the CD and promissory note, while Bates appeals from that portion pertaining to the Bank’s refusal to pay on the credit. The Court of Appeals reverse and render in part, and reverse and remand in part. Jerry Goff, Southern’s president, acting on behalf of Southern, requested that the appellant issue a letter of credit payable to Bates. Southern, an insurance company chartered under the laws of the Cayman Islands, needed the credit to satisfy a regulatory requirement to provide financial security for Southern’s policyholders. The appellant finally agreed to issue the credit, but only upon certain conditions, including (1) the execution by Southern of a promissory note, (2) assignment to the appellant of a security interest in certain property belonging to Southern, and (3) the deposit in the appellant of “compensating balances” against which the appellant could exercise a right of setoff in the event it ever had to fund the letter of credit. The appellant issued its irrevocable letter of credit number 86–122–S. The “86” represented the year in which the credit was issued; the “122” represented the numerical sequence of all credits ever issued by the appellant, regardless of the year of issuance; the “S” indicated that the credit was a “standby” letter of credit. The only condition for Bates’s drawing on the credit was that any draft be marked as follows: “Drawn under New Braunfels National Bank Irrevocable Letter of Credit Number 86–122–S ” The promissory note was a contingent note, in the sense that it would not be “booked” by the appellant—and payment from Southern would not be expected—unless the beneficiary actually drew on the letter of credit. The CD was non-negotiable and stated that it could not be transferred or assigned without the appellant’s written consent. The original CD was given to Goff. Goff agreed orally that the funds represented by the CD would not be withdrawn from the appellant, so that they would be subject to “being taken” if the appellant ever had to pay on the credit. In Goff’s presence, the

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loan officer involved in arranging the transaction instructed the certificateof-deposit department of the appellant not to release the funds without his approval. One year later Bates presented to the president of the appellant a letter of introduction and instruction from Bates, a draft signed by Bates, and the original letter of credit. After some study and consultation with its lawyers, the appellant refused to honor the draft because the draft’s legend referred to “Irrevocable Letter of Credit No. 86–122–5” instead of “86–122–S.” (Emphasis added.) The appellant refused to allow to change the “5” to an “S” without written authorization from Bates. When Bates attempted to wire such authorization, the cable was misdirected and finally arrived—by mail—several days later. When the error was eventually corrected a week later, the appellant refused to honor the corrected draft on the ground that the credit had expired. Bates appeals from that portion of the trial court’s judgment declaring that the appellant properly dishonored the draft on the letter of credit, complaining that the trial court erred in granting the appellant’s motion for summary judgment and in failing to grant his own motion. None of the parties in the present case pleaded that the credit was ambiguous; accordingly, whether Bates strictly complied with the terms of the credit is a question of law for the court to decide. Westwind, 696 S.W.2d at 381. The only defect challenged by the appellant was that the required legend stated it was drawn under New Braunfels National Bank Irrevocable Letter of Credit Number “86–122–5” instead of “86–122–S.” By itself, this discrepancy might or might not be of significance. (It was undisputed that none of the reference numbers for credits issued by the appellant ended with a numeral and that appellant officers had no doubt which credit Bates was attempting to draw on.) Moreover, the draft in question was accompanied by and attached to the original letter of credit, which naturally had the correct credit number prominently displayed. Accompanying documents may be considered in determining whether the presentment made by the beneficiary has strictly complied with the terms of the credit. Temple–Eastex, 672 S.W.2d at 796; see also American Airlines, Inc. v. FDIC, 610 F.Supp. 199 (D.Kan.1985) (although draft referred to incorrect letter of credit number, cover letter which accompanied draft and which contained correct number established strict compliance). Considering both the draft and the original credit together, it would be obvious to any bank document examiner, prudent or otherwise, that the discrepancy in the present case was merely a typographical or clerical error and of no possible significance. The court held that a beneficiary may satisfy non-commercial conditions in a credit by mere “substantial compliance”; the court held such conditions as “strict compliance” means something less than absolute, perfect

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compliance. The court makes no holding with respect to defects relating to commercial conditions. In summary, the court held that presentment made by Bates strictly complied with terms of the credit and render judgment in favor of Bates, which is the judgment that the trial court should have rendered. Tobin v. Garcia, 159 Tex. 58, 316 S.W.2d 396 (Tex. 1958). However, with respect to the Bank’s appeal regarding its rights in the CD and the validity of the promissory note, the appellant did not move for summary judgment on those issues. Consequently, the court remand that portion of the cause to the trial court. The judgment of the trial court declaring that the appellant properly dishonored the draft on the letter of credit is reversed, and the court renders judgment that Bates recovers from the appellant the sum of $ 250,000, plus prejudgment interest at the rate of ten percent per annum from April 29, 1987, to the date of judgment, post-judgment interest at the rate of ten percent per annum from the date of judgment until paid, and all costs of court. In addition, in his motion for summary judgment Bates prayed for a recovery of attorney’s fees and submitted an affidavit from his attorney that the reasonable and necessary fees for handling the case were $ 12,500. The affidavit meets the standard set forth in Rule 166a(c), Tex. R. Civ. In the absence of any evidence controverting that affidavit, the court is authorized to award Bates his attorney’s fees as part of the judgment the trial court should have rendered. See Tesoro Petroleum Corp. v. Coastal Ref. & Mktg., Inc., 754 S.W.2d 764 (Tex. App. 1988, writ denied). Accordingly, the court also renders judgment that Bates recover from the appellant reasonable attorney’s fees in the amount of $ 12,500. The judgment of the trial court pertaining to the $ 250,000 CD and promissory note is reversed, and that portion of the cause is remanded for further proceedings. Reversed and Rendered in Part; Reversed and Remanded in Part. Many unpaid cases are intentionally tempted to be made due to unavoidable circumstances such as a rapidly deteriorating market. If any mistakes are found in the bank’s investigation, the buyer can choose not to pay, henceforth avoiding the deal. When this occurs, the payment will only be made when the documents are presented faultlessly; any minor mistake can be the trigger to dismiss the payment. Impossibility of Performance of Underlying Commercial Transaction due to The Improper Technical Terms In LC

Even in the case where the performance of the underlying commercial transaction is impossible due to the improper technical terms in the letter of credit, the rule of strict compliance is applied. The following case treats with the strict compliance rule of the letter of credit transaction, holding that even the

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impossibility of performance of the underlying commercial transaction, due to the use of the improper technical or trade terms in the letter of credit, does not excuse strict compliance with letter of credit. They should remember that when the beneficiary negligently inspects a letter of credit and thereby fails to discover that the requirements are impossible for him to satisfy due to the improper technical description in the letter of credit, he should be required to “pay the piper.” Case44 Tradax Petroleum America, Inc., the beneficiary under an irrevocable Standby Letter of Credit, appeals from the district court’s judgment in favor of the issuing bank, French American Banking Corp. (“FABC”), denying reformation or construction of the letter of credit. The Court of Appeals, Reavley, Circuit Judge, affirmed. Appellant (Tradax), oil trading company, contracted to sell and ship oil to Coral Petroleum, Inc (appellee). The contract imposed upon appellee the obligation of opening a Standby Letter of Credit “in a form and from a bank acceptable” to appellant. Standby Letter of Credit was opened with appellee bank. Appellee specified the documents appellant would be required to present to draw under the letter of credit and supplied to FABC the precise language to be used. The required documents were (1) a signed statement by an officer of appellant that the West Texas Intermediate was delivered to appellee, (2) an unsigned copy of the shipper’s transfer listing indicating transfer to appellee of 31,000 barrels plus or minus 5 percent of “WTNM SO or SR,” and (3) a commercial invoice describing the merchandise as 31,000 barrels plus or minus 5 percent of West Texas Intermediate crude oil. FABC issued the letter of credit exactly as requested. The parties now recognize that appellee made a mistake in designating the type of oil required in the shipper’s transfer listing. “WTNM SO or SR” refers to sour oil, while the oil appellant was to provide, West Texas Intermediate, is a sweet oil. When FABC sent the letter of credit to appellant for its approval, however, appellant failed to catch the mistake. Instead, two appellant employees reviewed the credit for possible errors and determined that it was acceptable as written. In May 1983, appellant shipped the oil to appellee.

44

In re Coral Petroleum, Inc. No. 88-2548. United States Court of Appeals, Fifth Circuit. July 28, 1989. 878 F.2d 830; 1989 U.S. App. LEXIS 10985; 9 U.C.C. Rep. Serv. 2d (Callaghan) 184.

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On June 2, 1983, appellee filed for relief under Chapter 11 of the Bankruptcy Code. Thereafter, when appellee failed to pay for the oil, appellant attempted to draw on the letter of credit. In comparing the documents called for in the letter of credit to those actually presented, FABC found that the shipper’s transfer listing which appellant submitted showed that it had delivered 31,000 barrels of “DOM SWT” to appellee rather than the “WTNM SO or SR” crude specified in the letter of credit. FABC contacted appellee to determine whether it would waive this discrepancy and authorize FABC to pay in spite of it. Appellee refused to waive the discrepancy so FABC refused to pay. Appellant brought adversary proceeding seeking reformation or construction of irrevocable Standby Letter of Credit. The United States Bankruptcy Court for the Southern District of Texas dismissed proceeding as to bank. The United States District Court affirmed the judgment of the bankruptcy court, and appellant appealed. The Court of Appeals determined that the issuing bank had no obligation to go beyond a facial examination of the credit. The terms of the letter of credit at issue were not ambiguous. Rather, the requirements ware quite explicit; “transfer listing by shipper ... indicating transfer to Coral of 31,000 barrels plus or minus 5 percent of WTNM SO or SR.” The court also held that impossibility of performance does not excuse strict compliance with letter of credit. J.F. Dolan, The Law of Letters of Credit, 6.03 at S6–3 to S6–4 (Supp.1989) (emphasis added). Similarly, a beneficiary who negligently inspects a letter of credit and thereby fails to discover that the requirements are impossible for him to satisfy should be required to “pay the piper” as well. This is especially true in a case such as this one, where the impossibility arises from the use of technical or trade terms and where the bank has performed exactly as requested by its customer. Under the general law governing letters of credit, an issuing bank is expressly exempted from responsibility for knowledge or lack of knowledge of technical or trade terms. Appellant contends that under East Girard Sav. Ass’n, the bank must know the terms of its own contract with the beneficiary and is required to ensure that the terms of the credit are internally consistent. East Girard Sav. Ass’n does not support this contention. There, the court simply wrote that “a bank must use the utmost care in drafting its letters of credit” and that “[b]anks are presumed to be cognizant of prevailing commercial practices in transacting their business.” 593 F.2d at 602–03. In this case, there has been no suggestion that FABC acted carelessly in drafting the letter of credit. Instead, the letter of credit precisely incorporates the exact terms that Coral requested. Nor is this a matter involving “prevailing commercial practices” of which FABC should have been aware.

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Appellant also asserts that it is inequitable to make appellant assume the risk of non-payment since appellant tried to shift that risk by requiring appellee to provide a letter of credit. The court disagrees for two main reasons: (1) The court disagrees that equitable considerations are relevant here, and (2) the court does not believe that a beneficiary under a letter of credit can shift all of the risk to the issuing bank simply by purporting to enter into a letter of credit transaction. In this case, FABC prepared the letter of credit exactly as its customer, appellee, requested. The terms of the letter of credit were explicit. Appellant, after it had a full and fair opportunity to examine the letter of credit, approved it as written. Thereafter, FABC’s obligations were controlled solely by the terms of the letter of credit. In attempting to draw on the credit, appellant failed to present documents which complied precisely with those terms. The district court properly entered judgment in FABC’s favor. Appellant also argues that the letter of credit should be reformed to obviate the mutual mistake of the parties. As a general rule, a plaintiff seeking reformation must prove (1) a mutual mistake of fact between the parties which (2) renders the contract unreflective of or contrary to the parties’ intent, and (3) the existence of extrinsic evidence, generally in the form of an antecedent writing, which does accurately reflect the parties’ intent. The court agrees with the district court’s determination that there was no mutual mistake. Any mistake made was made by appellant and appellee only—not by FABC. FABC, without knowledge of the meanings of the technical designations included, prepared the letter of credit precisely in compliance with appellee’s request. Appellant then failed to recognize that the letter of credit’s terms did not reflect its agreement with appellee. In addition, there is no prior agreement between FABC and appellant to which this letter of credit could be confirmed. Contrary to appellant’s suggestion, neither FABC’s internal summary of the transaction nor the underlying agreement between appellant and appellee is evidence of a prior agreement between FABC and appellant. Affirmed.

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Concerned Parties

5.1.3.1 Primary Concerned Parties (1) Applicant The applicant is the party on whose request the credit is issued.45 The applicant is the buyer of the goods, the final payer of the draft (indirect drawee), the accountee (payer), and the consignee of the shipped goods under the terms of the credit. (2) Beneficiary Beneficiary means the party in whose favor a credit is issued.46 The beneficiary is usually an exporter who collects payment once the required documents have been submitted with conformity, drawee, payee, and consignor or shipper under the terms of the credit. (3) Issuing Bank Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.47 The issuing bank was formerly known as the opening bank, but has more recently been termed an issuing bank. One method to place the issuing bank in a certain position with respect to its obligations on behalf of its customer is the strict compliance rule under the letter of credit.

The following case is to confirm again the strict compliance rule in documentary transactions under the letter of credit, the reason that “substantial compliance standard would place the issuing banks in uncertain positions with respect to their obligations and that the standard transactions the quick, efficient, inexpensive letter of credit into the lumbering and expensive performance band. In this case, the presentment of the altered photocopy of the letter of credit instead of its origin is read to be in breach of the compliance rule of letter of credit transaction, even though the bank presented it owns its computer records indicating that the letter of credit was received several weeks prior to the arrival of the altered photocopy.

45

Id. Art. 2. Id. 47 Id. 46

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That is, if the drafts drawn under the letter of credit are required to be accompanied by “this letter of credit” by the letter of credit, the drafts should be presented with the original “letter of credit” instead of the photocopy of it, even though the negotiating bank is in the situation to confirm dully the originality of the photocopy. Case48 Appellant, the holder of a letter of credit, brought this action after respondent bank refused to honor appellant’s demand for payment on a letter of credit because appellant presented an altered photocopy instead of the original. Both parties moved for summary judgment. The district court granted respondent’s motion because it found no genuine issue of material fact and concluded as a matter of law that holders of letters of credit must comply strictly with their terms, that there was no basis to estop respondent from demanding strict compliance, and that appellant had not complied even substantially, much less strictly, with the terms of its letter of credit. Because we find no issue of fact and conclude that respondent is entitled to judgment as a matter of law, we affirm. Facts Appellant Airlines Reporting Corporation (ARC), a non-profit clearinghouse which procures airline tickets for travel agents, requires the travel agents to obtain letters of credit. In 1988, appellant told Market Travel, an agency, that it needed a letter of credit in the amount of $20,000. Market Travel, a customer of The Bank Wayzata (Bank), requested Bank to issue a letter of credit for $20,000 in favor of ARC. The Bank Wayzata has since been acquired by respondent Norwest Bank. Bank duly issued letter of credit # 658, which provided that “[a]ny draft(s) drawn by you under the letter of credit shall be accompanied by this letter of credit.” Bank sent ARC a cover letter on June 29, 1988, certifying that the signature on the letter of credit was authentic and saying that the letter of credit was attached. ARC does not have the original of this letter or of the letter of credit. On June 29, 1989, Bank again wrote to ARC, this time amending the letter of credit. The amendment letter stated that “[w]hen the draft is presented, it must be accompanied by the letter of credit.” ARC does have the original of this letter. An ARC employee submitted a

48

AIRLINES REPORTING CORP. v. NORWEST BANK, N.A. NO. C5-94-2000. 529 N.W.2d 449 (1995) Court of Appeals of Minnesota. Published in English: 1995 JUSTIA US LAW. http:// law.justia.com/cases/minnesota/court-of-appeals/1995/c5-94-2000.html.

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n affidavit asserting that after ARC received the amendment letter, other ARC employees allegedly sought but could not find the original letter of credit, orally asked Bank to update its files on the letter, and received from Bank a copy of the certification letter and a copy of the letter of credit with blue ink alterations, including a traced signature. The affiant testified during his deposition, however, that he had no personal knowledge of any oral communication between any ARC employees and Bank, nor of who added the blue ink alterations to the photocopy. ARC presented this altered document to Bank with its demand for payment on December 16, 1991. Payment was refused because the original letter of credit did not accompany the demand. Issues 1. Is the Minnesota standard for letters of credit strict compliance rather than substantial compliance? 2. Was there a basis for estopping respondent from demanding strict compliance? Analysis A motion for summary judgment shall be granted when the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that either party is entitled to a judgment as a matter of law. On appeal the reviewing court must view the evidence in the light most favorable to the party against whom judgment was granted. After hearing the parties’ cross-motions for summary judgment, the district court made twelve “Findings of Undisputed Fact” and three conclusions of law. While there may be cases in which factual issues would preclude summary judgment upholding denial of payment on a letter of credit, we are convinced that there are no preclusive factual issues here: ARC’s own computer records indicate that the letter of credit was received several weeks prior to the arrival of the altered photocopy. ARC agrees that “there is largely unanimity on the factual background here,” but opposes each of the three conclusions of law: that beneficiaries of letters of credit must comply strictly with their terms, that there is no basis to estop Bank from demanding strict compliance, and that ARC did not comply strictly or even substantially with the terms. 1. The strict compliance standard The level of compliance required for the terms of letters of credit is a question of first impression in Minnesota. Lease America adopted a standard:

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[T]he weight of authority favors a rule requiring strict compliance with the terms of a letter of credit, and we adopt that rule. Where a lacuna in Minnesota law is filled by a federal court decision, we need not adopt it. Nonetheless, while we are not bound by the Lease America holding, we are persuaded by it. The eighth circuit was explicit in its rejection of substantial compliance: Adoption of a substantial compliance standard would place issuing banks in uncertain positions with respect to their obligations. * * *[T]he substantial compliance standard is not standard at all. It is an invitation to controversy. It promotes dispute. It is anathema to the effective functioning of a marvelous commercial device. It transforms the quick, efficient, inexpensive letter of credit into the lumbering, expensive performance bond. We adopt the reasoning of the eighth circuit and find a strict compliance standard for letters of credit to be appropriate. Because we conclude that it is appropriate to require a strict compliance standard, and because it is undisputed that ARC’s action in presenting an altered photocopy of a letter of credit stating that “[a]ny draft(s) drawn by you under the letter of credit shall be accompanied by this letter of credit” does not meet that standard, we do not address whether ARC would meet a substantial compliance standard. Strict compliance required in this case that any drafts drawn under the letter of credit be accompanied by “this letter of credit.” ARC did not strictly comply and Bank properly refused to honor ARC’s demand for payment. 2. Estopping Bank from demanding strict compliance ARC combines law and equity to support its argument that Bank is estopped from refusing to honor the document ARC presented to Bank, citing two UCC provisions, Minn.Stat. § 336.5-106(1)(b) (1994): Unless otherwise agreed a credit is established as regards the beneficiary when he receives a letter of credit or an authorized written advice of its issuance[,] and Minn.Stat. § 336.1-103 (1994): Unless displaced by the particular provisions of this chapter, the principles of law and equity, including the law relative to estoppel shall supplement its provisions. ARC invokes the first provision to argue that the altered photocopy was “authorized written advice” that the letter of credit was issued and that credit was therefore established, and the second provision to argue that because Bank’s actions were consistent with the extension of credit, Bank is now estopped from refusing to honor that credit.

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ARC’s equity argument is misplaced. The terms of the letter of credit constituted a clear agreement between the parties, and Bank did nothing to indicate that ARC would not be required to comply with those terms. Minn.Stat. § 336.1–103 has been construed to oppose, not to support, ARC’s equity argument: “[w]here UCC provisions are determinative, the application of equitable principles is unnecessary.” We are not persuaded that there exist any grounds for invoking equity in this strictly commercial matter. We find equally unpersuasive ARC’s argument that its offer to indemnify Bank against the holder of the original letter of credit estops Bank from insisting on compliance with the terms of the original letter. Agri Export Co-op v. Universal Sav. Ass’n, which ARC cites to show that a court has estopped a bank from refusing to honor a letter of credit when the original was not presented, is readily distinguishable on its facts. [The beneficiary] presented the original of Letter of Credit No. 70 for payment on January 23, 1987. It is undisputed that [the bank] retained the original after this presentment. [The bank’s] action, therefore, prevented [the beneficiary] from presenting the original letter of credit when requesting payment on March 2, 1987. There is no suggestion that ARC had previously presented the original letter to Bank, or that Bank had retained it. Even if this were an appropriate case for invoking equity, we would find no grounds for estopping Bank from demanding strict compliance with the terms of the letter of credit. Decision Appellant’s conduct in presenting an altered photocopy of a letter of credit which required that “this Letter” be presented with a demand for payment did not meet the strict compliance standard and there was no reason to estop respondent from demanding strict compliance. We conclude, therefore, that the district court properly granted summary judgment for respondent.

(2) Other Concerned Parties ➀ Advising Bank Advising bank means the bank that advises the credit at the request of the issuing bank.49 The issuing bank of a letter of credit in most cases notifies a beneficiary of its letter of credit through its main office, a branch, or a correspondent bank in the beneficiary’s location. It should notify an exporter by request of the issuing bank and should verify the authenticity of the letter of credit.

49

Id.

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➁ Negotiating Bank Entering negotiations with the beneficiary upon the presentation of the draft accompanied by the transport documents, the negotiating bank acts to deduct interest and commissions until the final date of payment. Due to an obvious conflict of interest, the issuing bank and paying bank cannot be the same institution. ➂ Confirming Bank (for Confirmed Letters of Credit) Confirming bank means the bank that adds its confirmation to issued credit upon the issuing bank’s authorization or request.50 Essentially, a confirmation bank is just another layer of protection and security that payment will be made. Obligation of Notice of Dishonor by Issuing Bank to the Confirming Bank

The following case treats with the obligation of notice of dishonor to the confirming bank by the issuing bank. Under the UCP, the issuing bank is required to examine the documents and determine, within a reasonable time, whether to make a claim that confirming bank’s payment is not in compliance with the terms of the credit; and, without delay and using expeditious means, to notify defendant of the specific defects and to advise the confirming bank of the disposition of the document. In this case, the issuing bank sent the confirming bank notice asserting noncompliance, but did not specify the discrepancy and did not send a notice of the disposition of documents within a reasonable period of time. The issuing bank is in breach of this obligation of notice. Case51 Bank of Cochin, Ltd. (plaintiff), the issuer of an international letter of credit, appeals from a summary judgment of the United States District Court for the Southern District of New York (Cannella, J.) entered in favor of Manufacturers Hanover Trust Company (defendant), the confirming bank. The district court held that although MHT wrongfully had paid under the terms of the letter of credit, Cochin was precluded from claiming wrongful honor because it failed to comply with the timely notice provisions of Article 8 of “Uniform Customs and Practice for Documentary Credits (1974 Revision),” Int’l Chamber of Commerce, Pub. No. 290 (the “UCP”). The Court of Appeals affirm the judgment of the district court on the ground that plaintiff’s failure to notify defendant bank of the specific discrepancies in the documents and

50

Id. Bank of Cochin Limited v. Manufacturers Hanover Trust Co. No. 85-7664 United States Court of Appeals, Second Circuit. December 24, 1986, Decided. 808 F.2d 209; 1986 U.S. App. LEXIS 36358; 3 U.C.C. Rep. Serv. 2d (Callaghan) 1489.

51

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of the documents’ dispositions “without delay,” as required by UCP 8(e), precludes plaintiff from asserting defendant bank’s non-compliance with the terms of the letter of credit. Background This dispute arises from a massive fraud perpetrated against plaintiff, its customer, Vishwa Niryat (Pvt.) Ltd. (“Vishwa”), and defendant through the use of an irrevocable letter of credit issued for the benefit of St. Lucia Enterprises, Ltd. (“St. Lucia”). In India, Vishwa requested plaintiff to issue an international letter of credit for the purchase of 1000 metric tons of aluminum melting scrap. Plaintiff issued an international letter of credit, and by its terms, the letter of credit was subject to the 1974 Revision of the UCP. Defendant made payment on the line of credit when presented with supporting documents that were in fact fraudulent. St. Lucia had not shipped any aluminum scrap to India, but had perpetrated a fraud on both banks and on Vishwa. After receiving payment on the letter of credit, St. Lucia vanished. Finding that defendant paid the letter wrongfully, the district court granted defendant summary judgment because plaintiff failed to comply with the timely notice provisions of the Uniform Customs and Practice for Document Credits, Article 8, Int’l Comm., Pub. No. 290, (UCP). Bank of Cochin Ltd. v. Manufacturers Hanover Trust, 612 F. Supp. 1533 (S.D.N.Y. 1985). On appeal, plaintiff contends that the district court erred in finding that plaintiff failed to give timely notice of the discrepancies in the documents and of the disposition of the documents. Defendant, on the other hand, counters that the district court correctly held that plaintiff’s untimely notice constituted a waiver of its right to assert the non-compliance of the documents, and argues that a substantial compliance rather than a strict compliance standard should have been used to measure the documents’ compliance with the terms of the letter of credit. Discussion Central to this appeal is the interpretation of key undefined terms in Article 8 of the 1974 version of the UCP, applicable to the international letter of credit at issue. Article 8(b) provides that payment, acceptance, or negotiation by a confirming bank, against documents that facially comport with the terms and conditions of a credit, binds the issuing bank to take up the documents and reimburse the confirming bank. In the instant case, defendant was authorized to make payment against certain documents described in the letter of credit. If defendant paid on documents that, on their face, accorded with the terms of the credit, under the Article 8(b) provision, plaintiff would be bound to reimburse defendant. However, under Article 8(c), if plaintiff determined, upon examination of the documents, that they did not facially comport with

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the terms and conditions of the credit, it could claim that payment by defendant was wrongful, thus relieving plaintiff of its reimbursement obligation as issuing bank. In order to effectuate the vital policy of promoting certainty in letter of credit transactions, the UCP provides the following safeguards in Article 8: (d) The issuing banks shall have a reasonable time to examine the documents and to determine... whether to make such a claim (of wrongful honor). (e) If such claim is to be made, notice to that effect, stating the reasons therefor, must, without delay, be given by cable or other expeditious means to the bank from which the documents have been received (the remitting bank) and such notice must state that the documents are being held at the disposal of such bank or are being returned thereto.

UCP 8(d), (e) (emphasis added). These provisions have been interpreted to incorporate a penalty against an issuing bank that does not assert the noncompliance of documents in a timely fashion: If the documents in any respect do not conform to the terms of the credit, the obligor bank must forthwith determine whether it will stand upon its rights to reject the documents or whether it will waive the defect. It will not do for bank or buyer to wait and ride the market. If it does so, it will have waived its objection to non-conformity of documents. Article 8 records the dual obligation of the obligor who believes that documents do not conform to the terms of the credit. Protest must be prompt; rejection must be unequivocal; and upon rejection the documents must either be forthwith returned or the obligor must forthwith represent that it holds them at the disposal of the presenter.

H. Harfield, Bank Credits & Acceptances 232 (5th Ed. 1974) (emphasis added); see also Marino Industries Corp. v. Chase Manhattan Bank, N.A., 686 F.2d 112, 118 (2d Cir. 1982). Thus, failure to timely notify the confirming bank of discrepancies in the documents as required by UCP 8(d) and (e) may estop the issuing bank from asserting non-compliance. An additional penalty is explicitly provided in UCP 8(f) against an issuing bank that fails either to hold the documents at the disposal of the remitting bank or to return the documents. Under these circumstances, the issuing bank is precluded from asserting a claim of non-compliance. In sum, under the Article 8 scheme, payment by defendant on the letter of credit bound plaintiff to reimburse unless plaintiff took the required action set forth in 8(d) and (e) to avoid its obligation. Plaintiff was required (1) to examine the documents and determine, within a reasonable time, whether to make a claim that defendant’s payment was not in compliance with the terms of the credit and (2) without delay and using expeditious means, to notify defendant of the specific defects and to advise defendant of the disposition of the documents.

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While plaintiff sent defendant notice asserting non-compliance, the court found that plaintiff did not specify the discrepancy and did not send a notice of the disposition of documents until 12–13 days later. The court found no rationale to justify plaintiff’s delay in informing defendant of the specific defects and of its intention to return the documents. Therefore, the court held that plaintiff’s delay in specifying the defects estopped it from asserting that the documents did not comply with the letter of credit, and that plaintiff’s two-week delay in notifying defendant of its intent to return the documents precludes the suit. The court affirmed grant of summary judgment, finding unnecessary to decide whether the district court applied the correct standard to measure the documents’ compliance with the terms and conditions of the letter of credit. ➃ Nominated Bank Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.52 It includes the paying bank when it is nominated separately by the issuing bank and the accepting bank when it is nominated separately by the issuing bank, to promptly make payment as soon as the documents are properly submitted in compliance with the stipulations set forth in the letter of credit. It also includes reimbursing bank which is to be instructed and authorized to provide reimbursement if the issuing bank makes reimbursement authorization, which is an instruction by an issuing bank to reimburse a claiming bank. ➄ Transferring Bank Transferring bank is the bank that acts to transfer the letter of credit in favor of a second beneficiary upon request of the first beneficiary. This can be performed under authorization of the issuing bank to pay, accept, or buy the presented draft.

5.1.4

Kinds of Letter of Credit

(1) Documentary Letter of Credit There are four types of payment under the credit: payment at sight, deferred payment, by acceptance, or by negotiation. The credit itself should state which of these four methods has been chosen by the parties and this issue should be settled beforehand in the contract under which the credit is issued.53

52 53

Id. See Eun Sup Lee, supra note 138, at 126.

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➀ Sight Credit If the parties have arranged a payment at sight credit, the advising bank is instructed to pay, or arrange for payment, to the seller on presentation of the draft accompanied by the transport documents. This is a case of payment against documents.54 The authority to draw the sight bill of exchange for negotiation is vested as follows: “We hereby issue in your favor this documentary letter of credit which is available by negotiation of your drafts at sight for 100% invoice amount drawn on OOO bank, Busan Brach”.55 ➁ Deferred Payment Credit If the parties have arranged a deferred payment credit, the advising bank is authorized to pay, or make arrangements for payment, at some future date determinable in accordance with the terms of the credit. The deferred payment credit may, for example, provide for payment 120 days from the date of the bill of lading.56 If the seller is to get the cash payment before the maturity date of the deferred payment credit, he can get paid through negotiating under the terms of the letter of credit. The negotiation under deferred payment credit is normally done at a discount, which reduces the payment amount of the credit conferred to the beneficiary.57 The undertaking of the issuing bank to make payment under the deferred payment letter of credit is made as follows: “We hereby engage that payment will be duly made at 60 days after bill of lading date against the documents presented in compliance with the terms of this credit.”58 ➂ Acceptance Credit The beneficiary under the acceptance letter of credit generally draws the bill of exchange as a usance draft on the negotiating bank in the specified manner.59 By accepting the bill of exchange, the bank honors its commitment to pay the face value on maturity date to the party presenting it. The bill accepted by the negotiating bank provides the beneficiary, that is, the seller, with a considerable degree of guaranty to get paid at maturity.60 If he does not want to hold the bill until the maturity date, he may turn it into cash through negotiation, e.g., by discounting it or selling it to the bank. Making negotiation, he is likely to get less than the face value in the tenor of the bill of exchange because the negotiating bank deducts a discount, interest and commission.61

54

Id. at 127. Id. 56 Id. 57 Id. 58 Id. 59 Id. 60 Id. 61 Id. at 128. 55

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Another form of acceptance credit is credit which, according to the arrangement of the parties to the contract of sale, shall be accepted by the issuing bank or by the buyer (the applicant for the credit).62 By issuing an irrevocable letter of credit, the issuing bank takes the liability to the bill of exchange to be duly accepted and paid by the buyer. By confirming the credit issued by the issuing bank, the confirming (advising) bank adds a similar guarantee additionally to the issuing bank’s commitment that the buyer shall accept the bill.63 ➃ Negotiation Credit Under the negotiation credit, the negotiating (advising) bank is only authorized to negotiate a bill of exchange drawn by the beneficiary on the buyer or the issuing bank.64 The negotiating (advising) bank will indorse the bill of exchange and negotiate it, subject to deduction of discount or interest and commission. The bill of exchange may be drawn as a sight draft or a usance draft, according to the terms of the credit.65 The negotiation credit is subject to recourse against the beneficiary as drawer of the bill because the bank has only become an endorser of the bill of exchange. If, however, the negotiating bank is the confirming bank (and the tender of the document is in order), it does not have the recourse against the beneficiary since it takes liability to the beneficiary through the confirmation.66 The concerned parties to negotiations under the negotiation credit are advised as follows under the credit: “We hereby agree with the drawers, endorsers, and bona fide holders of draft drawn under and in compliance with the terms of this credits, that such drafts will be duly honored on due presentation and on delivery of documents as specified to the drawee bank.”67 (2) Revocable/Irrevocable Letter of Credit The revocable letter of credit can be modified or canceled without the beneficiary’s consent. For that very reason, it is rarely used. The irrevocable letter of credit, however, can be modified or canceled if the issuing bank, beneficiary and

62

Id. Id. 64 Id. 65 UCP600, Art. 7. 66 See Eun Sup Lee, supra note 138, at 128. 67 Id. 63

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confirming bank (in case of the confirmed letter of credit) all agree that modification or cancelation should be made. Without this unanimous decision among the concerned parties to do so, the letter of credit is irrevocable. (3) Confirmed/Unconfirmed Letter of Credit A confirmation of letter of credit is an added level of protection for the beneficiary that is made by the confirming bank by insuring that payment shall be made under the terms and conditions of the confirmed letter of credit. If the letter of credit is confirmed, in addition to the issuing bank, another bank (selected by the issuing bank) also promises payment under the terms of the letter of credit. The promise is made in that bank’s own name. The description of confirmation of a confirmed letter of credit is as follows: “We confirm the credit and thereby undertake that all drafts drawn and presented as above specified will be duly honored by us.” The unconfirmed letter of credit is one in which only the issuing bank has confirmed payment of the letter of credit. This is often deemed acceptable because an issuing bank’s guarantee to pay rarely goes awry when the issuing bank’s credit standing has been well established. Practically speaking, when the beneficiary as the exporter could not be substantially sure about the issuing bank’s credit situation, he is recommended to ask the irrevocable and confirmed letter of credit to be issued to the buyer in advance. (4) Transferable/Non-transferable Letter of Credit When a letter of credit is designated as transferable, a beneficiary can transfer all or some of the amount of the letter of credit to a third party. The rights of the credit are passed to the transferee who must comply with the terms in order to insure payment collection. This kind of letter of credit is common when the exporter is not the manufacturer of the exported goods, but a middleperson between the buyer and seller. Before a transfer can be made, the beneficiary must first send a written request to the transferring bank, which does not have to make the transfer until it has been paid for its services. Most letters of credit are non-transferable. Under these stipulations, a letter of credit cannot be transferred, even when situations become otherwise advantageous to such a transfer. (5) Special Letters of Credit ➀ Revolving Letter of Credit When goods are going to be shipped several times continuously over a certain period of time, it is practical to use a revolving letter of credit, instead of issuing an individual letter of credit for each transaction. This letter of credit may limit

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the frequency at which the shipments can be made and allow for the beneficiary to designate amounts of money over a specified allotted shipment. ➁ Countertrade Letter of Credit (Compensation Trade Letter of Credit) A countertrade letter of credit is used when cash payments are difficult because of foreign exchange problems with the importing country. The letter of credit is made to balance the transaction for the importer and exporter. A countertrade letter of credit is subdivided into barter trade credit, compensation trade credit, parallel purchase credit, buy back credit, switch trade credit, and offset trade credit. 1. Back to Back Letter of Credit This letter of credit is often used in compensation trades in order to keep a balance between the importer and exporter. When an importer opens a letter of credit to import certain goods, this import letter of credit becomes valid only if an overseas exporter opens a letter of credit to import from the original importer’s country, which makes it a conditional letter of credit. The description of such condition is similar to the following: “This letter of credit is valid if an exporter issues a counter letter of credit in favor of an importer within a certain period of time from the date of receipt of this letter of credit.” The term “back to back letter of credit” is sometimes used when the secondary letter of credit is issued, in triangular trades, to the supplier based on the terms and conditions of the beneficiary’s original letter of credit (called the master letter of credit). This is done with the intention of helping the supplier, trader, and final buyer to complete the triangular trade smoothly. 2. Escrow Letter of Credit This letter of credit specifies that when an importer opens a letter of credit, he deposits funds in an escrow account in the name of the beneficiary without paying the beneficiary the negotiation amount of the draft issued by the letter of credit, which is one of the conditions of the letter of credit. Escrow accounts can be set up or operated through any negotiating bank, issuing bank, or any exchange transaction bank by agreement. 3. Standby Letter of Credit This type of letter of credit is a guarantee to the beneficiary against defaults of the other party in performing his commitments and is often used instead of a performance guarantee. If a party does not pay his debt, the issuing bank assumes the obligation and will make the payment to the beneficiary. With a typical letter

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of credit, an issuing bank’s obligation to payment is conditional upon presentation of the proper documents, accompanied by a Standby Letter of Credit. Payment by the bank will only be made when the debtor has defaulted on his payment. Therefore, bank payment is made very rarely under a Standby Letter of Credit. The beneficiary receiving a Standby Letter of Credit can claim payment to the issuing bank when a company financed by the letter of credit did not fulfill its obligations. The main stipulations of the standby credit are as follows: “We hereby issue our irrevocable standby letter of credit up to an aggregate security for your loan plus its interests extended to OOO for purchasing OOO as per contract underlined.” “This credit is available against your sight draft drawn on us accompanied by your signed statement certifying that the borrower has defaulted in the payment of your loan plus its interest and that in consequence the amount drawn hereunder represents their unpaid indebtedness due to you.” For practical purposes, it is critical to understand the difference between a Standby Letter of Credit and letter of guarantee (L/G). Both of them are guarantees, but a beneficiary can make use of a Standby Letter of Credit much more favorably than a letter of guarantee. The formation of a letter of guarantee is guided by “Publication 325, ICC,” and “Uniform Rules for Contract Guarantee,” but these regulations are not yet widely recognized or accepted. Many beneficiaries receiving letters of guarantee are apt to have trouble because there is no proper set of international uniform rules to regulate interpretation and application of their terms. A Standby Letter of Credit on the other hand has adopted the UCP 600 as its governing set of rules, which is widely recognized. Given this, deciding whether the UCP rules are to be applied to a standby credit is not a matter for debate.

5.1.5

Interpretation of Letter of Credit

(1) General Rules Since mutual legal relations of parties to letter of credit and interpretation of terms concerning letter of credit are decided by terms specified in the letter of credit, every word in the document must be chosen carefully in order to accomplish its intended goal. The UCP addresses this and encourages drafters to refrain from using of ambiguous words and expressions. Because the UCP is not mandatory law, any wording in the letter of credit is given precedence over any conflicting clauses in the UCP. The UCP has provided the guidelines to avoid ambiguity in the drafted contract, which will undoubtedly help avoiding conflicts in the future and save both parties’ time and money. The ambiguous wording as follows, for example, should be avoided: ➀ Concerning insurance coverage: usual risks, customary risks, insurance

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against all risks;68 ➁ Concerning shipping period: prompt, immediately, as soon as possible69 ; ➂ Concerning transferable credit: divisible, fractionable, assignable.70 (2) Increase and Decrease of Quantity

Interpretation of Terms “about,” “circa,” “approximately,” etc. If any such words are written before a unit price or quantity, their meaning must be interpreted in accordance with the following principles: ➀ The above wording is applied only to amount, unit price, and quantity, not to period of time; ➁ the above wording is only effective to the clauses in which they are present, and not to surrounding clauses. The words “about” or “approximately” used in connection with the amount of the credit or the quantity or the unit price stated in the credit are to be construed as allowing a tolerance not to exceed 10% more or 10% less than the amount, the quantity or the unit price to which they refer.71 For example, when the quantity is written as “about 1000pcs,” it means that the maximum allowed is 1,100pcs, and the minimum is 900pcs. Either amount or an amount in between is deemed acceptable. ➁ Limit to Allowance of Plus or Minus Written Amount When “about,” “circa,” or “approximately” is not Made Explicit Even when dealing with bulk cargo in which the exact amount is hard to be determined, such as ore, grain or oil, a variation of 5% is acceptable, and this is accompanied by the following stipulations and additions72 : It can be applied to items countable by packing unit. Even if shipment was done in excess, the amount of the invoice cannot exceed that of letter of credit, and the payment of the excess delivery should be handled by another method of payment. ➂ Interpretation of Terms “by” or “to” When increasing or decreasing the amount of letter of credit based on a change of condition, its interpretation could be different based on whether “by” or “to” is used. “By” means there is a net increase, and “to” refers to the total amount including the increase. For example, when an amount of letter of credit is increased from US$10,000.00 to US$300,000.00, it is increased by US$20,000.00, and it increased to US$30,000.00.

68

Id. Id. at 70 Id. at 71 Id. at 72 Id. at 69

Art. 3. Art. 38(b). Art. 30(a). Art. 30(b).

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(3) Period of Delivery ➀ Terms Not to Be Used The use of “prompt,” “immediately,” or “as soon as possible” should be avoided, but if included anyway, the bank should consider the letter of credit as having no shipping time and disregard those expressions.73 If “on or about” is used with a fixed date, it means that delivery should be made within five days of that date. If the issuing date of a bill of lading is not within that eleven-day period, payment can be rejected.74 ➁ Starting Date of Time Period When a month is used, and not a specific date, the expiration date is interpreted as one month minus one day. For example, if an opening date is May 10, and the expiration date is for one month, the deadline is June 9. When the words “to,” “until,” “’til,” “from,” etc., are written along with a specific date, this should be interpreted to count the period including the specific date.75 When “after” is used with a specific date, the specific date is excluded and the period is counted from the next day.76 The early period and the latter period of a month are specified as “first half of a month” and “second half of a month.” A month can also be specified as “beginning of a month,” “middle of a month,” and “end of a month.”77 ➂ Time Period for Document Presentation Separately from a fixed expiry date of the letter of credit, if it is specified that “transport documents must be presented within ooo days after shipment,” the actual period to present the documents under the letter of credit begins from the date of actual shipment to ooo days after the shipment within the period of expiration. If the letter of credit allows for an installment shipment, and the document presentation period is not stipulated with a special contract, the importer could experience trouble due to the delay of document presentation by exporters.

73

Id. at Art. 2. Id. “The expression “on or about” or similar will be interpreted as a stipulation that an event is to occur during a period of five calendar days before until five calendar days after the specified date, both start and end dates included”. 75 Id. “The words ‘to,’ ‘until,’ ‘till,’ ‘from,’ and ‘between’ when used to determine a period of shipment include the date or dates mentioned, and the words “before” and “after” exclude the date mentioned”. 76 Id. “The words “from” and “after” when used to determine a maturity date exclude the date mentioned.”. 77 Id. “The terms ‘first half’ and ‘second half’ of a month shall be construed respectively as the 1st to the 15th and the 16th to the last day of the month, all dates inclusive.”; “The terms ‘beginning,’ ‘middle,’ and ‘end’ of a month shall be construed respectively as the 1st to the 10th, the 11th to the 20th and the 21st to the last day of the month, all dates inclusive.” 74

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Because of this, almost all installment letters of credit allowing installment shipment contain supplemental stipulations concerning the period for presentation of the documents. When presentation period of transport documents is not specified on a letter of credit and the documents are accepted by the negotiating bank after twenty-one days from the actual date of shipment, the presented bill of lading is considered stale, which leads to cause for rejection.78 If “this office” is specified in front of “not later than” or “on or before,” documents must be presented to the issuing bank, not the negotiating bank. The beneficiary must send the documents to the issuing bank quickly so that shipping documents can arrive before the expiration. What is the reasonable approach to “irreconcilable conflicts” between the letter of credit provisions?

It would not be so often, but it is possible for the letter of credit provisions to be in conflicts each other. The following is the very special case to treat with the “irreconcilable conflicts” between the letter of credit provisions, that is, between the Document Expiry Date required in the letter of credit and the letter of credit’s Expiry Date, through the application of “interpretation rule.” According to the case, the distinctive aspects of letter of credit are of themselves irrelevant to deciding which provision of the letter should be given controlling effect. That is, any conflict in the terms of an instrument must be resolved by resorting to standard maxims of contractual construction. Particularly, in this case, the certification provision, because it states a condition precedent to the bank’s liability, is more “essential” to the contract as a whole than is the expiration provision in the letter of credit. This is very meaningful case to interpret that in this standby letter of credit the date fixed in the certification provision controls over the expiration date. Case79 In a diversity action against a bank for refusing to honor a Standby Letter of Credit, we held that the obligation of the issuing bank had terminated even though it might not have been possible for the holder of the letter to

78

Id. at Art. 14(c): “A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24, or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit”. 79 EXXON COMPANY, U.S.A. v. BANQUE DE PARIS ET DES PAYS-BAS United States Court of Appeals, Fifth Circuit. No. 87-2007. 889 F.2d 674 Dec. 8, 1989. http://openjurist.org/874/f2d/ 234/exxon-company-usa-division-of-exxon-corporation-v-banque-de-paris-et-des-pays-bas.

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present the documents required for payment before the expiry date stated in the letter. Thereafter, and before the issuance of our mandate, an intermediate state Court of Appeals rendered an unreported opinion interpreting the effect of such an impasse differently. I. This tale has two chapters. Chapter I consists of the operative historical facts developed in the proceedings below. These are fully set forth in our first opinion, Exxon I, rendered on October 8, 1987. Chapter II is the extensive litigation history. On November 17, the Amarillo, Texas, Court of Appeals, rendered an unreported opinion in Kerr Construction Co. v. Plains National Bank that arguably indicated that a Texas court might reach a different result from that which we reached in Exxon I. The Texas Supreme Court denied a writ of review. Exxon sought rehearing, asking us to consider and follow Kerr, but, in Exxon II, we refused because under Texas law an unreported opinion is not precedential. Exxon then applied to the Supreme Court for a writ. While the application was pending, the Texas Supreme Court denied a motion to publish Kerr, but the Amarillo Court of Appeals granted a similar motion, with the result that the opinion is now reported. The Supreme Court thereafter vacated our judgment and, in Exxon III, remanded the case “for further consideration in light of” Kerr. Somewhat perplexed about the Texas Supreme Court’s use of the term “writ denied,” rather than “writ refused,” in denying review of Kerr and considering the possibility that this phrase intimated that the Kerr opinion contained an error of law, we decided, in Exxon IV, to certify the question presented in this case to the Texas Supreme Court. In Exxon V, after obtaining the parties’ recommendations regarding the statement of the issue, we formulated the question as follows: When a bank issues an irrevocable Standby Letter of Credit that (i) contains a certification provision providing for payment to a beneficiary upon presentation of a signed statement certifying that the bank’s customer did not perform an underlying obligation “between September and December, 1981,” but (ii) also contains, in a subsequent paragraph, a presentation clause stating that such certification must be made “not later than October 31, 1981,” when does the obligation of the issuing bank to honor its letter of credit terminate under Texas law? In Exxon VI, the state supreme court ordered that the question be “declined without answer” because the question “was dependent upon issues of fact.” With such assistance as may be derived from this Delphic refusal, we attempt to follow the Supreme Court’s mandate. II. A federal court sitting in diversity is bound to follow decisions of the state’s intermediate appellate courts unless it is “convinced by other persuasive data

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that the highest court of the state would decide otherwise.” There is, therefore, a working presumption that state intermediate appellate court decisions represent accurate statements of state law. The Bank of Paris (Paribas) contends that Kerr misstates Texas law, resting its argument upon three interdependent contentions. First, the state Supreme Court’s denial of writs in Kerr intimates that the appellate court’s legal analysis was deficient in one or more respects. This is so, Paribas argues, because the court’s order denying the writ contained the phrase “writ denied,” a phrase indicating that the court was “not satisfied that the opinion of the Court of Appeals in all respects has correctly declared the law.” Second, although the Kerr opinion was in fact belatedly published by order of the appellate court, the state supreme court has refused to order its publication. According to Paribas, the state supreme court’s steadfast refusal to publish Kerr suggests that the court considered it “unworthy” to be precedential. As Paribas correctly notes, under Texas law the state supreme court may decline to publish lower court opinions, and unpublished opinions have no precedential value. Third, the Kerr decision is inconsistent with several state supreme court decisions concerning letters of credit. These contentions fail to convince us that the Texas Supreme Court thinks Kerr is wrong. As we noted in Exxon IV, the first certification opinion, the implications of the state supreme court’s “denial” of writs in Kerr are not clear. The authorities cited do not persuade us that the court currently uses the notation “writ denied” only when it is dissatisfied with the appellate court’s statement of the law. The Texas Supreme Court apparently uses this phrase also in those cases in which, for one reason or another, it chooses not to grant review. Even if, however, we should conclude that the state supreme court was not “satisfied” that the Amarillo appellate court had correctly stated the law “in all respects” in its Kerr opinion, it is not clear what we should make of the court’s dissatisfaction. That the supreme court was not “satisfied” might mean merely that it could not determine, without further study of the case, whether the lower court had in fact correctly stated the law. The implications of the state supreme court’s refusal to order publication of the appellate court opinion are even more indeterminate than are the implications of that court’s “denial” of writs. Further, although Paribas argues that Kerr is incompatible with several cited Texas Supreme Court cases, these cases bear only tangentially on the issue raised in Kerr. Indeed, that issue truly seems to have been res nova. The reasons that the Texas Supreme Court gave for refusing to accept certification of the question that we posed to it lends further support to the conclusion that Kerr is not to be disregarded. Were Kerr not authoritative, the resolution of this case would not turn solely upon “issues of fact.” For these reasons, we conclude that Kerr is binding on this court under the Erie rule.

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III. Paribas also argues that even if Kerr is authoritative, there are significant differences between the facts in Exxon and those in Kerr. Certainly there are differences, but precedential impact does not depend upon finding an identical, or to use the vernacular a “goose” or a “red pony,” case. With this in mind, we analyze the facts in Kerr. Cary Johnson, a subdivision developer, pursuant to an agreement with Kerr Construction, his paving contractor, obtained a letter of credit from Plains National Bank in favor of the City of Lubbock. The first paragraph of the letter authorized Lubbock to draw on the bank for Johnson’s account if Kerr should “default or fail within ten months to complete the paving improvements.” Because the letter was issued on 9/17/84, this ten-month period would expire on 7/17/85. The last paragraph of the letter, however, indicated that the letter would expire on 1/1/85, although the letter further provided that the expiration date would automatically be extended for six months unless the bank notified the beneficiary otherwise. Because the bank did not give the beneficiary such notice, the final expiration date became 7/1/85. Later, Kerr Construction defaulted. Lubbock’s effort to draw on the bank, which was made on 7/17/85, was rejected by the bank on the ground that the letter had expired on 7/1/85. On appeal, the Amarillo Court of Appeals described the “single issue” before it in these terms: what was “the due date of the letter of credit.” The court began its analysis of the problem by observing that the first and last paragraphs of the letter were in “irreconcilable conflict.” Although the court did not explain the nature of this “conflict,” it is not difficult to reconstruct what the court was intimating. The first paragraph made the bank’s liability contingent on Lubbock’s certification that Kerr had failed to complete its work by 7/17/89. Lubbock, of course, could not make this certification until this date had passed. The last paragraph, however, indicated that the bank’s exposure was to end by 7/1/89. Thus, if both paragraphs were given effect, the bank could never become liable, something the parties presumably could not have intended. Having established the existence of the irreconcilable conflict, the court then set about determining which provision should control. For this purpose, the court resorted to certain basic maxims designed to aid courts in construing contracts in general. First, the court noted the rule that when there is an irreconcilable conflict between different provisions of an instrument, the first should be given effect. Application of this rule to the facts of Kerr, the court concluded, would lead to the enforcement of the first paragraph. Second, the court cited the rule that, when different provisions of an agreement are in irreconcilable conflict, the provision that “contributes most essentially to the agreement is entitled to the most consideration.” According to the court, the first paragraph, because it “state[d] the condition precedent to the Bank’s

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liability,” was the more essential and significant provision of the letter. For these reasons, the court concluded that the first paragraph controlled over the last and, therefore, that the bank remained liable under the letter at least through 7/17/85. Several aspects of the Kerr decision are of particular significance. First, the court characterized the problem before it as one of contractual construction, a problem brought on by the presence in the agreement of mutually incompatible provisions concerning the time of performance. Second, and more important, the court resolved its interpretive problem by applying several stock rules for the construction of contracts. Absent from the opinion is any discussion of the policies implicated by the alternative constructions of the contract, for example, the need of banks and other commercial lenders for fixed and certain expiration dates in standby letters of credit and other similar security instruments. Accordingly, there is no indication whatsoever that the appellate court concluded, as a matter of policy, that the interests of financial markets would be better served by placing the risk of ambiguity in letters of credit upon the issuers rather than upon the beneficiaries. Accordingly, we too must resist the view of sound commercial policy on which we relied in part in Exxon I. Reading Kerr in this fashion, we conclude that, contrary to what we may have said in Exxon I, this case does present a problem of general contractual construction rather than the narrower problem of construing a specific kind of security instrument. The provision in the letter fixing the timing of Exxon’s certification of default by Houston (documents “certifying that Houston ... has failed to deliver ... between September and December”) and the provisions fixing the expiration date (October 31, 1981) are in “irreconcilable conflict,” as that phrase was used by the Kerr court. As the Kerr decision makes clear, the distinctive aspects of letters of credit are of themselves irrelevant to deciding which provision of the letter should be given controlling effect. Any conflict in the terms of such an instrument must, instead, be resolved by resorting to standard maxims of contractual construction. In the letter of credit at issue here, the provision setting forth the expiration date follows the provision establishing the time for certification of default. Further, the certification provision, because it states a condition precedent to the bank’s liability, is more “essential” to the contract as a whole than is the expiration provision. The interpretive maxims applied in Kerr, therefore, compel the conclusion that the date fixed in the certification provision controls over the expiration date. The distinctions that Paribas attempts to draw between the facts of Kerr and those of this case do not mandate a different conclusion. According to Kerr, resolving ambiguities in a letter of credit is a matter of contractual construction. It follows, then, that unless any of the distinctive facts of this case implicate maxims of construction that were not implicated in Kerr and

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that would compel a different interpretation of Paribas’ letter of credit, any differences between Kerr and this case are of no consequence to the question of how the ambiguity in that letter of credit should be resolved. Paribas has not brought any such maxim of construction to our attention, and we have been unable to think of one. Although the distinctive facts of this case do not, therefore, have any significant bearing on the issue of contractual construction, they do, at least at first blush, seem to have some bearing on the quite different issue of equitable estoppel, an issue not presented in Kerr. Immediately upon issuance of the letter, Exxon realized that there was a problem with the expiration date. Indeed, Exxon later tried to cover itself by twice asking Houston to obtain an extension of that date. At no time, however, did Exxon contact Paribas to clear up the ambiguity. Paribas, faced with Exxon’s silence and taking the expiration date at face value, decided to release its security when that date passed. Although these facts may evoke sympathy for Paribas’ position, they are insufficient to establish a claim of estoppel against Exxon. Under Texas law, one of the essential elements of the defense of estoppel is “reasonable or justified reliance” on the statements, silence, or conduct of the person to be estopped. Paribas had no knowledge of any of Exxon’s potentially misleading statements or actions, for example, its efforts to have Houston change the expiration date; consequently, Paribas cannot claim that it relied on those statements or actions. Although Paribas can tenably claim that it relied upon Exxon’s silence, rather than Exxon’s actions, its reliance in this regard was not reasonable. Paribas’ reliance on Exxon’s silence could be considered reasonable only if it were established that, as a matter of law or of commercial practice, beneficiaries like Exxon have the primary responsibility for identifying and avoiding ambiguities in letters of credit as well as for initiating negotiations to eliminate them. Absent some such rule placing the risks associated with ambiguities on one party or the other, the parties to an ambiguous letter of credit are in the same position as are parties to any other ambiguous contract: neither can assume from the other’s silence that the other has tacitly acquiesced in the construction of the contract that favors him. Kerr informs us that Texas law does not, as a general rule, place the risks associated with ambiguity on the beneficiary. For these reasons, we AFFIRM the judgment of the district court. Order Construing Exxon’s Motion to Remand for Attorney’s Fees as a petition for rehearing, it is DENIED. The motion is untimely.

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➃ Shipping/Issuing Date of Document Three terms “loading on board,” “dispatch,” and “taking in charge” are used for shipment in the standard form of credit on the basis of UCP 600. These mean that maritime transport, air transport and mailing, and multimodal transport are to be accepted. 1. Maritime Transport If goods are shipped by a general cargo ship, an effective transport date is the date loaded on board and it is considered the same as the issuing date of bill of lading. Therefore, if an exporter was given a received bill of lading from a shipping company, he should get an “on board notation” confirmed by the captain. The notation date is considered a valid shipping date.80 2. Air Transport and Mailing If the exporter receives an air waybill (a document made out by, or on behalf, of the shipper, delivered electronically or conventionally) on the day the exporter takes cargo to carriers (airline, post office, private delivery company), that day is considered an actual shipping date.81 But, if both the loading date of cargo and flight date are stipulated on the air waybill, the latter is considered as the shipping date.82 For mailing, since receipts are issued by parcel, even if a pile of parcels are accepted in the post office at the same time, they will arrive by different aircraft at importing locations on different days. Nevertheless, since conformity with the shipping date is judged with respect to the dispatch date on the document regardless of arriving dates, the receipt date (stamped date) is considered as the valid shipping date of the received mail.83 3. Multimodal Transport When the final destination of cargo is inland and not an airport, then the trip will likely utilize more than one means of transportation. Transshipment is often more likely to cause damage to the goods being shipped, making packaging important. In transport by container, the bill of lading is issued on the date of loading into the containers, or on the date of receipt of cargo, and this date is considered as the date of transport. This constitutes a received bill of lading, and as long as the

80

Id. at Id. at 82 Id. at 83 Id. at 81

Art. 20(a)(ii). Art. 23 & 25. Art. 23(a)(iii). Art. 23(a)(iii) & (25).

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letter of credit does not require the “on board” bill of lading, the received bill of lading is effective under the documentary letter of credit. ➄ Holidays for Banks/Transporting Companies 1. Bank Holidays When the expiration date of the letter of credit falls on a holiday of an issuing bank, the deadline is automatically extended to the next working day of the bank. In this case, the bank indicates an extension of the deadline resulting from the holiday on the cover letter, and sends it to the issuing bank.84 But, if the holiday results from a “force majeure” such as a strike, riot, or war, the deadline cannot be extended.85 2. Transporting Company Holidays In the case that the final shipping date falls on a holiday in the exporting country, an extension of the deadline is not permitted. Because of this rule,86 it is common for shipping companies to work on public holidays. If a shipping date is indicated on the letter of credit without an expiry date, the shipping and the expiry dates are assumed to be the same. If an expiry date is indicated on a letter of credit without a shipping date, that date is also assumed to be the dates of expiration and shipment. (4) Issuing or Expiring Date of Credit The contract of sale usually makes explicit provision as regards the date at which the credit has to be issued. It is sometimes stated that the credit shall be issued by a specified date, and it is also sometimes provided that it shall be issued immediately, or the issuing time of the credit sometimes depends on an act by the seller relating to the delivery of the goods, e.g., the sending of a provisional invoice87 or of an advice that the goods are, or will soon be, ready for shipment.88 The issuing

84

Id. at Art. 29. Id. at Art. 36. 86 Id. at Art. 29(c). 87 Knotz v Fairchough, Dodd & Jones Ltd [1952] 1 Lloyd’s Rep. 226. See Eun Sup Lee, supra note 138, at 135. 88 Plasticmoda SpA v Davidsons (Manchester) [1952] 1 Lloyd’s Rep. 527. See also Establishments Chao mbaux SARL v Harbormaster Ltd [1955] 1 Lloyd’s Rep. 303. See Eun Sup Lee, supra note 138, at 135. 85

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time of the credit may also depend on the seller’s providing of a performance guarantee.89 When the contract does not provide the time of the credit to be issued, it is not normally assumed that the validity of the sales contract depends on issuing of the credit by the buyer. Where the sales contract is unconditional but does not provide a date on which the credit shall be issued, the credit has to be issued within a reasonable time.90 The letter of credit must stipulate a date on or before which documents must be presented by the beneficiary (at the stipulated place of presentation). An expiry date designated for honor or negotiation is deemed to be an expiry date for presentation.91 The expiry date of the credit is conceptually different from the latest shipment date. The latest shipment date is the date stipulated in the bill of lading as the latest date to load the goods on the board which is usually to be earlier than the expiry date of the credit.92 The credit sometimes stipulates, in addition to its expiry date, that the bills of lading should be presented to the bank within a certain period of time after a date of shipment.93 In addition to stipulating an expiry date for presentation of documents, where the credit calls for the tender of transport documents, presentation must be made not later than 21 days after the date of shipment, and in any event not later than the expiry date of the credit.94

5.1.6

Required Document

(1) Document Under Letter of Credit ➀ Significance of Document Transport documents include the bill of lading, combined transport document, other shipping documents such as airway bill, postal receipt, rail bill of lading, commercial invoice, insurance document, certificate of origin, packing list, inspection certificate, and beneficiary’s certificate. Since the transaction under the documentary letter of credit is a transaction by documents on the basis of the independence principle, a negotiating bank and an issuing bank make a decision about whether to pay the amount of a letter of credit based solely on the documents presented by a beneficiary. The beneficiary under the letter of credit should be careful to prepare for the required documents

89

Cf. State Trading Corporation of India Ltd v M Golodetz Ltd; The Sara D [1989] 2 Lloyd’s Rep. 27 7; see below, para. 14-005. See Eun Sup Lee, supra note 138, at 135. 90 Sinaision-Teicher Inter-American Grain Corporation v Oilcakes and Oilseeds Trading Co Ltd [1954] 1. W.L.R. 935. See Eun Sup Lee, supra note 138, at 135. 91 UCP600, Art. 6(d)(i). 92 See Eun Sup Lee, supra note 138, at 135. 93 Id. at 136. 94 Id.

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by the letter of credit for the negotiation with the bank after the shipment of the contracted goods in accordance with the terms of the letter of credit. When the concerned parties face a question of sufficiency of documents under a letter of credit and this question cannot be resolved by reference to the instructions to the bank under the credit, they are required to turn to the UCP. It sets out in considerable detail the documents, in particular, the transport documentation which is normally acceptable to the bank.95 ➁ Document as Security The documents as the securities against the shipped products (transport documents, insurance documents, drafts, etc.) out of multiple documents should be prepared and submitted to the bank in their original state. The documents without securities (commercial invoice, packing list, inspection certificate, etc.) should also be submitted as required under the letter of credit. Out of this batch of documents, one set of documents must be original, and the remaining documents can be duplicates. The buyer is generally entitled to receive original documents.96 A document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original, will be considered as an original document.97 And banks, unless otherwise indicated, will also accept a document as original if it: ➀ appears to be written, typed, perforated, or stamped by the document issuer’s hand; or ➁ appears to be on the document issuer’s original stationery; or ➂ states that it is original, unless the statement appears not to apply to the document presented.”98 Securities

“(1) Collateral given or pledged to guarantee the fulfillment of an obligation; esp., the assurance that a creditor will be repaid (usu. with interest) any money or credit extended to a debtor. (2) A person who is bound by some type of guaranty; SURETY. (3) The state of being secure, esp. from danger or attack. (4) An instrument that evidences the holder’s ownership rights in a firm (e.g., a stock), the holder’s creditor relationship with a firm or government (e.g., a bond), or the holder’s other rights (e.g., an option). A security indicates an interest based on an investment in a common enterprise rather than direct participation in the enterprise. Under an important statutory definition, a security is any interest or instrument relating to finances, including a note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in a profit-sharing agreement, collateral trust certificate, pre-organization certificate or subscription, transferable

95

Id. Id. 97 UCP 600, Art. 17(b). 98 Id. at Art. 17(c). 96

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share, investment contract, voting trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase any of these things. A security also includes any put, call, straddle, option, or privilege on any security, certificate of deposit, group or index of securities, or any such device entered into on a national securities exchange, relating to foreign currency.” 15 USCA § 77b(1).—Also termed (in sense 4) evidence of indebtedness; evidence of debt. Cf. share (2); stock (4). “Securities differ from most other commodities in which people deal. They have no intrinsic value in themselves—they represent rights in something else. The value of a bond, note or other promise to pay depends on the financial condition of the promisor. The value of a share of stock depends on the profitability or future prospects of the corporation or other entity which issued it; its market price depends on how much other people are willing to pay for it, based on their evaluation of those prospects.” David L. Ratner, Securities Regulation in a Nutshell 1 (4th ed. 1992). “What do the following have in common: scotch whisky, selfimprovement courses, cosmetics, earthworms, beavers, muskrats, rabbits, chinchillas, fishing boats, vacuum cleaners, cemetery lots, cattle embryos, master recording contracts, animal feeding programs, pooled litigation funds, and fruit trees? The answer is that they have all been held to be securities within the meaning of federal or state securities statutes. The vast range of such unconventional investments that have fallen within the ambit of the securities laws’ coverage is due to the broad statutory definition of a ‘security’” 1 Thomas Lee Hazen, Treatise on the Law of Securities Regulation § 1.5, at 28–29 (3d ed. 1995). Source: Black’s Law Dictionary (2009)

➂ Documents Review The negotiating and issuing banks must determine, according to the principle of independence, on the basis of the submitted documents alone whether or not the documents are in compliance with the terms of the credit. According to the doctrine of strict compliance, the negotiating and issuing banks have the rights to refuse documents presented by the beneficiary when the particulars stipulated in the documents are not in compliance with the terms of the credit.99

99

See Eun Sup Lee, supra note 145, at 138.

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The spelling of the specifically nominated person under the letter of credit is considered important in deciding the discrepant document.

When the letter of credit requires the beneficiary to submit the letter “purportedly” from him, if the letter from the beneficiary indicates the different middle name while the first and last name is indicated correctly in accordance with the terms of the letter of credit, the bank can properly refuse to accept that document, due to the discrepancy between the letter of credit and the submitted document. That is, miswriting of the middle name differently from the requirements of the letter of credit is enough for the bank to dishonor the letter of credit. The following is the case to treat with such issue. On Motion for Rehearing100 The motion for rehearing is granted. The opinion of April 18, 1990, is withdrawn, and the following opinion is substituted. One of the terms of a letter of credit, in order for payment to be made, required the delivery of another letter “purportedly” from the beneficiary, Edna May Walker.” Instead, provided to the bank on the expiration date of the letter of credit, were affidavits from William Russell Walker and Charles Norwood Walker, attorneys-in-fact for Edna May Walker, accompanied by powers of attorney to them from Edna Wilson Walker. There was no accompanying written or oral substantiation to explain that Edna May Walker and Edna Wilson Walker were one and the same. One of the reasons for the bank’s refusal to honor the letter of credit was the variance in name set forth above. The trial judge, in a seven page order, found that the bank “wrongfully” refused to honor the letter of credit and while we agree with much of the reasoning of the trial court as to other alleged infirmities in the presentment, we do not agree that the dishonor was wrongful because of the middle name discrepancy. The final judgment makes no mention of the name variation other than to say that the “ambiguities concerning Edna May Walker et al. could be rectified by submitting a number of letters from all the beneficiaries.” We reverse. The successful plaintiff below claims that the bank agreed to certain oral modifications of the letter of credit reflected in the record and in the final judgment; however, we can find no waiver, oral or otherwise, concerning the name, Edna May Walker, set forth in the letter of credit. Based on the facts of this particular case, we find no reversible issue on appeal as to either oral modification (resulting in estoppel) or ambiguity. To our way of thinking,

100

Barnett Bank of South Florida, NA v. Westbrook Atkinson Realtors No. 88-3292. District Court of Appeal of Florida, Fourth District. 564 So.2d 570 July 18, 1990. https://www.courtlistener.com/ opinion/1707212/barnett-bank-of-south-florida-na-v-westbrook-atkin/.

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the dispositive issue is whether a presentation from one Edna Wilson Walker satisfies a requirement that the presentment come from Edna May Walker. We hold it does not. In this country, there must exist countless numbers of citizens by the name of Edna and countless more by the name of Walker. No doubt, the same is true if we combine “Edna” with “Walker.” The middle name, therefore, is crucial, and we disagree that the bank acted wrongfully in refusing to accept a communication relative to Edna Wilson Walker, when the letter of credit named the beneficiary as Edna May Walker. Strict compliance as to names is a must if there is any possibility that the one later identified may not be the same person as the one originally described. In Fidelity National Bank of South Miami v. Dade County, 371 So.2d 545 (Fla. 3d DCA 1979), Judge Schwartz remarked: “Compliance with the terms of a letter of credit is not like pitching horseshoes. No points are awarded for being close.” We agree. Beyond this restricted authorization, the bank is not obliged to do anything more and should not do anything more.101 Even if their legal and practical effectiveness and value appear to be insignificant, particular form of documents required by the credit might have commercial value for the buyer, and it is not the bank’s job to reason why.102 Thus, the bank is recommended to reject such discrepant documents unless it is instructed to accept them from the buyer.103 The issuing bank is only required to perform the “ministerial” duty to check documents for conformity irrespective of the knowledge of the peculiar features of the underlying agreement between the underlying commercial contract parties

The following case is to confirm again the strict compliance rule in the letter of credit transactions. As the matter of fact, in this case, it is the issue that when the letter of credit requires the presentment of the original of the promissory note, the beneficiary present the photocopy of it which was received from his partner and believed by the beneficiary to be original one. The beneficiary, contending that he strictly complies with the letter of credit terms, argues first that the letter of credit did not refer to “the original” and that a duplicate may be “an original instrument represented…a new original.” Theoretically it can be right, but, in this case it is totally different case. As shown in this case, when the letter of credit distinguished between an original and a copy, and then requires the original of the document, the presentation of the photocopy of it is not enough to meet the strict compliance rule.

101

Id. Id. 103 Id. 102

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This is true even when the practical effect of the copy is not different from the original in terms of the issuing bank’s risk to be identified. That is the essential nature of the letter of credit as a document transaction in which the issuer performing the “ministerial” duty of checking documents for conformity is not changed with knowledge of the peculiar features of the underlying agreement between beneficiary and customer. Case104 This appeal concerns the refusal of a bank which issued a letter of credit to honor a demand for payment by the beneficiary because a principal document accompanying the demand was not in compliance with the terms of the letter of credit. We join the broad majority of courts in concluding that strict compliance is necessary in this unique setting. As the compliance here did not meet that standard, we hold that the bank breached no contractual or other duty to appellant in refusing to honor presentment. I. In 1985, appellant (Bisker) entered an agreement with Beer Distributing Company (BDC) to sell BDC his interest in American-Potomac Distributing Company (AP). Bisker received a promissory note from BDC which was guaranteed by Stanley S. Bender. In exchange, Bisker relinquished his 50% interest in AP to BDC; his shares were to be escrowed until payment of the note. In 1987, a new agreement replaced the earlier one. Bisker relinquished his right to hold the AP stock in escrow, as well as the personal guarantee of Bender. In return, Bisker received Irrevocable Letter of Credit No. 1791(LOC) issued by Sovran Bank/DC National, the predecessor in interest of appellee NationsBank. Bisker was also to receive a new promissory note in the amount of $800,000 which was non-recourse and secured exclusively by the LOC. The note was executed on May 22, 1987, by Bender as maker on behalf of BDC. On or about that same day, Bisker received what he believed was the original of the note, but in fact was a photocopy. The LOC, however, required by its express terms that demand for payment on the credit must be accompanied by, inter alia, “1. Original of the promissory note executed on May 22, 1987, (‘the Promissory Note’).”

104

Bisker v. NATIONSBANK NA, 686 A.2d 561 (D.C. 1996) District of Columbia Court of Appeals Published in English: 1996 JUSTIA US LAW. http://law.justia.com/cases/district-of-col umbia/court-of-appeals/1996/95-cv-1782-6.html.

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When payment on the final balloon installment of the note was not made as promised, Bisker, on July 10, 1995, demanded payment on the LOC by NationsBank in the amount of $595,853.71, representing the outstanding principal, interest, and late penalties due. NationsBank refused the demand, asserting that the presentment did not meet the terms of the LOC because, among other things, the promissory note accompanying the demand was not the original note but instead a duplicate photocopy. After Bisker confirmed this fact through an expert document examiner, Bender, the original signator, resigned the copy of the note just above his previous signature. On August 14, 1995, Bisker resubmitted the LOC along with the re-executed note, but NationsBank again refused the demand stating: “Original of the promissory note executed on May 22, 1987, not presented.” Bisker filed suit in Superior Court alleging breach of contract and breach of the implied covenants of good faith and fair dealing by NationsBank. On November 20, 1995, Judge Hamilton granted NationsBank’s motion to dismiss on the ground that it failed to state a claim upon which relief could be granted. The judge explained: II. The issue of first impression in this jurisdiction presented by this case is whether something less than strict compliance by the beneficiary with the terms of a letter of credit is enough to require the issuing bank to honor a demand for payment. Recognizing, as have the courts and commentators, the unique role of this “quick, efficient, inexpensive” tool in commercial transactions, Lease America Corp. v. Norwest Bank Duluth, we hold that strict compliance as defined below is required. The essential features and purposes of a letter of credit dictate that answer. Article 5 of the Uniform Commercial Code (UCC) deals with letters of credit. It “treats credits as unique devices” and sets out the “formal requirements” governing them, including the relationship of the parties to the credit transaction and the duty and privilege of an issuer with respect to payment. JOHN F. DOLAN, THE LAW OF LETTERS OF CREDIT. These requirements are contained in D.C.Code §§ 28:5-101 to 28:5-117 (1996). Article 5, however, does not deal with “all of the rules and concepts of letters of credit as such rules or concepts have developed ... or may hereafter develop ” Further understanding is provided by the Uniform Customs and Practice for Documentary Credits (1983 rev.), International Chamber of Commerce Brochure No. 400 (UCP 400), referenced in the LOC in this case, and by case law. D.C.Code § 28:5-103(1)(a) defines a “[c]redit” or “letter of credit” as an engagement by a bank or other person made at the request of a customer and of a kind within the scope of this Article (Section 28:5-102) that the issuer will honor drafts or other demands for payment upon compliance with the

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conditions specified in the credit. A credit may be either revocable or irrevocable. The engagement may be either an agreement to honor or a statement that the bank or other person is authorized to honor. Besides a “customer” (a “buyer or other person who causes an issuer to issue a credit,” § 28:5- 103(1)(g)) and an “issuer” (“a bank or other person issuing a credit,” § 28:5-103(1)(c)), the third party to the typical letter of credit is a “beneficiary,” a person “entitled under [the] terms [of a credit] to draw or demand payment.” § 28:5-103(1)(d). Although historically the letter of credit was used primarily in international transactions involving the sale of goods, today it is used increasingly in domestic transactions and functions as much as a means of “standby” credit as [it does as a form] of commercial credit. A Standby Letter of Credit serves a purpose similar to that of a guaranty by providing payment to a beneficiary upon default of a party that was obliged to perform [It] serve[s], as in the present case, as a “back up” device against customer default. The unique feature of a letter of credit transaction is that it “deals in documents and is wholly independent of the underlying transaction in goods [or credit].” Confeccoes Texteis de Vouzela v. Riggs Nat’l Bank. Unless otherwise agreed, it relieves the issuer of responsibility “for performance of the underlying contract for sale or other transaction between the customer and the beneficiary,” and “for any act or omission of any person other than itself or for loss or destruction of a draft, demand or document. in the possession of others.” § 28:5-109(1)(a) & (b). The issuer’s duty, besides general “good faith and observance of any general banking usage,” is to “examine documents with care so as to ascertain that on their face they appear to comply with the terms of the credit.” § 28:5-109(2). Once the issuer determines that a draft or demand for payment “complies with the terms of the relevant credit,” it must honor the demand “regardless of whether the goods or documents conform to the underlying contract for sale or other contract between the customer and the beneficiary.” D.C.Code § 28:5-114(1). Unless otherwise agreed, the issuer is then “entitled to immediate reimbursement of ... payment made under the credit” by the customer. § 28:5-114(3). In keeping with its disavowal of “deal[ing] with all of the rules and concepts of letters of credit,” § 28:5-102(3), the District’s version of the UCC does not expressly state whether the conformity of a tender is governed by a test of strict compliance or one of lesser, “substantial” compliance. The overwhelming weight of decisional and commentator authority, however, favors strict compliance and the oft-cited maxim from a case of the House of Lords that, in letter of credit transactions, “[t]here is no room for documents which are almost the same, or which will do just as well.” Equitable Trust Co.

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of New York v. Dawson Partners, Ltd.. This standard, which treats the issuing bank’s duty to check documents for compliance as “entirely ministerial,” Insurance Co. of N. Am. v. Heritage Bank, serves two purposes: (1) providing certainty of payment to the beneficiary and (2) allowing the issuing bank to evaluate precisely its risks under the letter of credit. It is the certainty of payment that gives the letter of credit its unique value as an instrument to secure obligations of all kinds By the same token, the fact that the bank’s obligation is defined solely by the terms and conditions of the letter of credit allows the bank to evaluate precisely the extent of the risks involved in its undertaking pursuant to the letter of credit.... “These risks involve potential liability to at least two parties: The beneficiary of the credit and the party for whose account the credit is issued. Under these circumstances the issuer of a credit must know who does what and with whom, and must be sure that his expectations in that regard will not be altered.” Consolidated Aluminum Corp. v. Bank of Virginia. Focusing upon this “potential liability” of the issuing bank, one court has explained the need for strict compliance as follows: The issuer of a letter of credit has only a short period of time to determine the conformity of a tender. In case of doubt, the issuer may consult its customer for advice about whether a tender is acceptable. When the beneficiary presses for payment while the customer urges dishonor, the issuer can only protect its right of reimbursement if it is entitled to insist on strict compliance by the beneficiary. In rejecting a rule of “substantial” or “reasonable compliance,” the Supreme Court of Wyoming has stated: To adopt a rule which becomes a vehicle for purely subjective judgments as to that which constitutes compliance would be inconsistent with the need to maintain a high level of predictability in commercial transactions. Requirements placed in a letter of credit by the parties must be taken to express the intent of the parties to anticipate compliance with them. We adopt the standard of strict compliance as best fulfilling the purposes of the letter of credit. The Third Circuit has best capsulized the relevant considerations: Essential to the viability of this device is the certainty that it provides. Just as the beneficiary is induced to enter the underlying transaction because it is assured payment under specific terms agreeable to it, so too the bank assumes a primary obligation in part because its commitment is clearly defined within the four corners of the letter. If courts deviate from the rule of strict compliance and insist in certain undefined situations that banks make payments notwithstanding the fact that the beneficiary failed to comply with the terms stipulated in the letter of credit, the certainty that makes this device so attractive and useful may well be undermined, with the result that banks may become reluctant to assume the additional risks of litigation.

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At the same time, this standard leaves at least some play in the joints “some leaven in the loaf of strict construction.” Banco Espanol de Credito v. State St. Bank & Trust Co. “The cases which apply [the strict compliance] rule are not so rigid as to permit an issuer to dishonor if it finds, for example, an obvious and immaterial typographic error.” Mercantile-Safe Deposit. A variance between documents specified and documents submitted may be put aside “if there is no possibility that the documents could mislead the paying bank to its detriment.” Flagship Cruises, Ltd. v. New England Merchants Nat’l Bank of Boston. But to justify a departure from the strict compliance rule, a court must truly be able to say that the variance was “de minimis.” Vanden Brul v. MidAmerican Bank & Trust Co. III. “One manifestation of the strict compliance rule is the long-standing practice among issuers to require original documents unless the letter of credit stipulates otherwise.” Western Int’l Forest Prods. v. Shinhan Bank. In this case, the LOC expressly required that demand be accompanied by “Original of the promissory note executed May 22nd, 1987.” Bisker, in contending that he strictly complied with that term, argues first that the LOC did not refer to “the Original” and that a duplicate may be “an original instrument repeated... a new original” BLACK’s LAW DICTIONARY. In theory, although unlikely in practice, it is possible that the promissory note here was duplicated and each copy signed individually at the time of execution, thus creating duplicate “originals.” But Bisker has never asserted that the note tendered here was an original of that kind; its claim of being an original derives from the fact that Bender signed it a second time eight years after the original execution. It therefore was unmistakably a copy of the note “executed on May 22, 1987,” and that the LOC did not permit its substitution for the original is confirmed by the next paragraph of the LOC, which states that demand for payment must also be accompanied by “2. Copy of letter in the form of Exhibit B,” notifying various persons of the default. The LOC itself thus distinguished between an original and a copy, requiring production of the original promissory note. Bisker further contends that even if the note he presented was not the original, he strictly complied in that the underlying credit transaction involved a non-recourse promissory note “entirely without effect,” i.e., providing no more than “a schedule of payments”; hence the bank, having recovered the (paid) LOC, would face no risk of a second demand by a transferee holder in due course of the original note. This assertion is bold, but more important, it disregards the essential nature of the letter of credit as a document transaction in which the issuer, performing the “ministerial” duty of checking documents for conformity, is not charged with knowledge of the peculiar features of the underlying agreement between beneficiary and customer.

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The unqualified nature of NationsBank’s duty to pay upon satisfaction of the LOC’s terms relieved it of any duty to consult legal counsel about differences between recourse and non-recourse negotiable instruments in assessing its risk either of double presentment or of rebuff by its customer in demanding reimbursement after accepting a substitute for the original note. Appellant has cited no decision where a variance of this size between the required original and a copy of the very instrument for which the LOC was security has been deemed compliance with a letter of credit. We agree with the trial court that the bank properly rejected the presentment. ➃ Time Period for Examination The bank shall have a fixed maximum number of days—five banking days following the day of presentation—within which it is required to examine the documents, to determine whether or not the presentation is complying105 and to decide whether to refuse to honor or negotiate, and shall give notice of refusing “no later than the close of the fifth banking day following the day of presentation.”106 ➄ Discrepancy of Documents Regarding the procedure for refusal of documents, if the bank decides to refuse to honor or negotiate the presentation, it must make notice of rejection to the beneficiary specifying all the discrepancies.107 The required rejection notice must be given by telecommunication or, if that is not possible, by other expeditious means108 not later than the five day period prescribed and should be given to the party who has presented the documents to the bank.109 Bank’s duty to notify dishonor to the presenter of the documents in case of multiple presenters in accordance with the letter of credit

According to the USCC, a bank which is presented with the draft under letter of credit must submit its notice of dishonor to the presenter of the draft. When the draft signed by the multiple parties in accordance with the terms of the letter of credit, the bank fulfills its duty to notify the dishonor to the representor when it

105

Id. at 197. Id. 107 UCP600, Art. 16(c)(ii). 108 Id. at Art. 16(d): “The notice required in subarticle 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation”. 109 Id. at Art. 16(c). 106

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notifies it to the presenter of the draft who is one of the multiple signed parties required by the letter of credit. It is because that the term “presenter” has a specific meaning, however, it is “any person presenting a draft or demand for payment under a credit.” It is true, particularly, when the notice to one party (presenter) instead of all signed parties would incur the substantial damage or loss to the underlying contract. This case is very educative to the international trade practitioners to do their business with the letter of credit containing the complicate provisions in terms of their enforcement. The following case is to treat with the issue of notice to the representative of the multiple presenters. Findings of Fact110 This suit came before this court for trial without a jury on September 7-8, 12, and 15, 1989. The court has heard the evidence and has considered the testimony, exhibits, memoranda of law, and arguments of counsel. Occidental Fire & Casualty Company of North Carolina (“Occidental”) a corporation involved in writing surety bonds wrote 29 surety bonds for reclamation work on which Occidental was the obligor, the State of Kansas was the obligee, and Bill’s Coal Company was the principal. The aggregate amount of these bonds was $4,239,816. Occidental wrote these reclamation bonds at the request of Union Indemnity Insurance Company of New York. Union Indemnity could not issue the bonds because the State of Kansas had not licensed it as an insurer. Union Indemnity reinsured the reclamation bonds 100%. Union Indemnity also wrote other bonds for Bill’s Coal on which it was surety and in which Occidental had no interest. In April and June 1984 Continental Illinois National Bank and Trust Company of Chicago (“Continental Illinoi”) issued seven Irrevocable Standby Letters of Credit on the account of Bill’s Coal Company. According to Rodney Davis, an employee of Occidental, these letters were to approximate 45% of the amount of bonds issued by Occidental. The letters of credit required that, in the event of a draw, “you,” the “beneficiary,” must certify to the Bank that: You, as surety have executed or have procured the execution of bond(s) or undertaking(s) at the request of Bill’s Coal Company, Inc., and that you have incurred liability in an amount not

110

OCCIDENTAL FIRE & CAS. v. CONTINENTAL ILL. NAT. NO. 88 C 6264. 725 F.Supp. 383 (1989) November 17, 1989. United States District Court, N.D. Illinois, E.D. Published in English: 1989 JUSTIA US LAW. http://law.justia.com/cases/federal/district-courts/FSupp/725/ 383/1407221/.

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less than the amount of the accompanying sight draft(s), or that as of the close of business in Chicago on the day which is ten (10) days prior to the expiry date of this letter of credit you have received neither an amendment renewing this letter of credit for an additional year nor an acceptable replacement thereof. Any funds drawn under the letter of credit shall be held apart by you for the purpose of reimbursing any incurred liabilities of the aforementioned bond(s) or undertaking(s). Should funds drawn not be used by you for the satisfaction of or reimbursement of any loss, cost, claim for expenses of any nature whatsoever, incurred by you, (including unpaid premiums) on any such bond(s) or undertaking(s) as aforesaid, such amounts shall be returned directly to [Continental Bank] ... On October 29, 1984, at the request of Bill’s Coal Company, Continental Illinois issued an amendment reducing the face amount of Letter of Credit No. 6328290. Bill’s Coal asked for the reduction after the State of Kansas released Occidental’s bond No. 23252. Occidental was aware of the release of this bond. The bank’s internal memorandum, dated October 15, 1984, states that it had obtained the consent of the beneficiary to the amendment of Letter of Credit No. 6328290. It is undisputed that Union Indemnity gave its consent. From September 1984 through March 1985, Rodney Davis was in charge of the National Risk Underwriting (“NRU”) program through which Occidental wrote the Bill’s Coal bonds. Mr. Davis did not consent to or authorize the consent to the reduction in Letter of Credit No. 6328290. Cover X acted as a subagent to NRU in its bonding program. Antoinette Morabito was in charge of the collateral file at Cover X relating to the Bill’s Coal bonds, which included matters relating to the disputed letters of credit. She does not recall a request for reduction in Letter of Credit No. 6328290 and her files show no evidence of either a request or consent to reduce that letter. Her files did not contain all known materials relating to the Bill’s Coal Bonds, however. It did not contain a response to a memorandum sent by Morabito to Eason, and it did not contain correspondence from Continental Illinois reflecting extensions of its letters of credit past March 31, 1986. The first time that Occidental objected to the amendment of Letter of Credit No. 6328290, although it did not bring a claim of anticipatory repudiation, was in a complaint filed February 19, 1987, in the US District Court for the Eastern District of North Carolina. This was despite Occidental’s knowing about the amendment allegedly for the first time in March 1986. Bill’s Coal Company became insolvent in 1985 and did not complete the reclamation work which it had promised to the State of Kansas. The State of Kansas demanded that Occidental honor its obligations on its bonds. This demand resulted in an agreement between Occidental and the State of Kansas dated September 8, 1986. Bond No. 23252, which the State of

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Kansas released, was not one of the bonds which the agreement covered. Occidental has not lost any money on account of bond No. 23252. Occidental claims that it has incurred liability to the State of Kansas on the bonds in an amount exceeding the aggregate amount of the seven letters of credit. The scheduled expiration time of the letters of credit, as extended by Continental Illinois, was 5:00 p.m. on March 31, 1987. On February 6, 1987, Occidental attempted to draw unilaterally on the letters of credit. The sight drafts and certifications constituting the attempted draw did not include the signature or certifications of Union Indemnity or its Liquidator. The certificate and sight draft accompanying Letter of Credit No. 6328290 requested $733,000. On February 11, 1987, Continental Illinois notified Occidental that it would not honor the attempted draw because the draft was drawn only by Occidental and not jointly with Union Indemnity. Union Indemnity went into liquidation in 1985. The Superintendent of Insurance of the State of New York became Liquidator of Union Indemnity. In 1986 and to and including March 23, 1987, the Liquidator for Union Indemnity asserted rights and an interest in the letters of credit. During that period, the Liquidator demanded that Occidental returned the letters of credit to the Liquidator, threatened legal action against Occidental if its demands were not met, and contended that it was entitled to use the proceeds of the letters of credit for any bonds written by Union Indemnity for Bill’s Coal. On March 25, 1987 Occidental and the Liquidator attempted a joint draw on the letters of credit, the proceeds of which they hoped to place in an escrow account until they resolved their differences over the application of the proceeds. On March 23 and 24, 1987, the attorneys for Occidental and the Liquidator drafted the certifications accompanying the attempted draw of March 25, 1987. One of Occidental’s attorneys, Peter Foley, knew from an earlier draw and his firm’s internal research about the importance of having conforming language. Nevertheless, as the last Occidental attorney to review the certifications accompanying the March 25 draw, he knowingly or recklessly allowed inclusion of the non-conforming language. On March 24, 1987, Foley brought the certificates and sight drafts which the companies had prepared and the Liquidator had signed from New York to North Carolina. James Eason, an officer of Occidental, reviewed the documents. The documents were given to John Livers, President of Occidental. Livers briefly reviewed the defective certificates and signed them. Rodney Davis accompanied the documents on a flight to Chicago from North Carolina and delivered the documents to Continental Illinois on March 25, 1987. Samuel Perez, an officer in Continental Illinois’ Letter of Credit Department, received the draw documents on the afternoon of March 25, 1987 and noticed the language discrepancies. By March 26, 1987 Perez determined that the certifications were non-conforming because they did not contain

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the language required by the letters of credit. Perez discussed this discrepancy with his supervisor, Frank Mrazek. Continental Illinois did not notify Occidental or the Liquidator of the discrepancy. Mrazek and Perez discussed the discrepancies in the certification language again on March 27, 1989. Mrazek and Perez met with Robert Shannon, an attorney for Continental Illinois, that day to discuss the draws. Continental Illinois decided that it would not honor the draw of March 25, 1987. Continental Illinois made no attempt to contact Occidental or the Liquidator on March 27, 1987. On March 30, 1987, Perez informed Occidental by telephone that Continental Illinois had refused to honor the draw. Perez stated the specific reasons for refusal, including the language deviations. Perez attempted three times on March 30, 1987, to reach the responsible persons at the Liquidator’s office to inform them of the bank’s dishonor, but they were unavailable. Following Perez’s telephone call to Occidental, Livers and/or Eason relayed the substance of the Perez conversation to Foley. Later on that same day, Shannon had a telephone conversation with Foley. In that conversation, Shannon specifically told Foley that one reason for the dishonor of the March 25, 1987, attempted draw was the non-conforming language. Following Foley’s telephone conversation with Shannon, that same day Foley relayed to Eason and Livers the substance of his conversation, including the specific reasons for dishonor stated by Shannon. On March 30, 1987, Continental Illinois sent to Occidental and the Liquidator, via Airborne Express Mail, written confirmations of Perez’s telephonic notice of dishonor. Occidental and the Liquidator received those written confirmations on March 31, 1987. On March 30 and 31, 1987, Occidental and the Liquidator did not attempt to resubmit certifications containing the language “aforementioned bond(s) or undertaking(s)” and “any such bond(s) or undertaking(s) as aforesaid,” instead of “any bond(s) or undertaking(s).” The letters of credit expired by their terms at the end of business on March 31, 1987. The beneficiaries did not make a conforming draw before expiration. In 1988, the Liquidator assigned to Occidental all of Union Indemnity’s right, title and interest in the letters of credit. Conclusions of Law This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1332 (1982), and venue is proper in this court. On June 23, 1989, this court entered summary judgment in favor of Continental Illinois and against Occidental on two issues: first that Continental Illinois did not act wrongfully in dishonoring Occidental’s unilateral draw of February 6, 1987; second, that the bank had good grounds for dishonoring the attempted joint draft of Occidental and the Liquidator of March 25, 1987. This left two issues for trial: did Continental Illinois give Occidental timely and proper notice of its reason

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for dishonoring the March 25, 1987, attempted draw, and did Occidental consent to amendment of Letter of Credit No. 6328290. As noted in this court’s prior ruling, Continental Illinois had to give notice to Occidental no later than March 30, 1987, of its decision to dishonor the March 25, 1987 drafts. Notice under Article 8(c) of the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits a document which governed the letters of credit at issue in this case, includes “stating the reasons therefor” and “must, without delay, be given by cable or other expeditious means.” The court has found that Samuel Perez gave notice of dishonor and the reasons for dishonor to Occidental by telephone on March 30, 1987. Perez’s testimony was credible in all respects, and the court gives it full weight. Occidental disputes whether Continental Illinois had a duty to communicate its notice sooner. Based on the evidence presented, the court finds that Continental Illinois acted with reasonable speed in this case. The bank did not decide to dishonor the March 25 draw or delay unduly in notifying Occidental of the non-conforming language. Occidental presented no evidence that it was impossible for it and the Liquidator to avoid the problem they faced with the impending expiration date by submitting a draw sooner. Occidental argues that notwithstanding the bank’s proper notice to Occidental on March 30, 1987, it failed to notify the Liquidator, and thus its notice was defective. Occidental argues that § 5-112 of the UCC implies that a bank which is presented with a draft must transmit its notice of dishonor to the presenter of the draft. Occidental submits that the presenters in this case were it and the Liquidator, as each signed the draft documents. The term “presenter” in § 5-112 has a specific meaning, however: it is “any person presenting a draft or demand for payment under a credit.” In this case, Occidental presented the draft, not the Liquidator. The bank’s notice to Occidental thus satisfied whatever requirements are implied within § 5-112 as to the proper recipients of notice. The court now turns to the issue of whether Continental Illinois properly amended Letter of Credit No. 6328290. The court suggested that if it were to rule that Continental Illinois gave proper notice to Occidental of its dishonor of the March 25, 1987, draw, this issue would be moot, as Occidental and the Liquidator never would have made a proper demand on the bank under either the original letter of credit or the amended version. Occidental, however, directs the court to § 5-115(2) of the UCC, which states when an issuer wrongfully cancels or otherwise repudiates a credit before presentment of a draft or demand for payment drawn under it the beneficiary has the rights of a seller after anticipatory repudiation by the buyer if he learns of the repudiation in time to reasonably avoid procurement of the required documents. Otherwise the beneficiary has an immediate right of action for wrongful dishonor. Occidental did not present this authority to the court in

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contesting Continental Illinois’ motion for summary judgment, but nevertheless Occidental is entitled to a determination of the merits of its claim for anticipatory repudiation. As in any case for breach of contract under Illinois law, the plaintiff bears the burden of proving the breach. The court concludes that Occidental has not proven by a preponderance of the evidence that Continental Illinois reduced the face value of Letter of Credit No. 6328290 without its consent. Those persons who worked for Occidental on the Bill’s Coal account stated that they did not consent or could not recall giving such consent. Continental Illinois has no direct record of Occidental’s consent, although a contemporaneous internal memorandum states that consent was obtained. A reduction in the value of the letter of credit was logical. The State of Kansas had released Occidental from its bond No. 23252, and Occidental was aware of the release. Even if Occidental did not give contemporaneous consent, its subsequent acts indicate that it consented to the reduction. The certificates and drafts accompanying the abortive February 1987 and March 1987 draws ask Continental Illinois to pay the reduced amount of the letter. Only after Continental Illinois rejected the February 1987 draw did Occidental record its first objection to the amendment, and even then, Occidental did not see fit to claim anticipatory repudiation. Accordingly, the court enters judgment in favor of Continental Illinois and against Occidental on Count I of Occidental’s complaint. An issuing bank determining the documents to be discrepant may, however, exercise discretion to contact the applicant to see whether the application of a waiver of the discrepancies may be required.111 This is usually done before a notice of rejection is sent.112 If the applicant for the credit determines to waive the discrepancy, then documents will usually be taken up.113 Rejection of nonconforming documents does not preclude the beneficiary from correcting the defects and representing conforming documents provided that this is done within the period of validity of the credit.114 (2) Transport Document The most commonly required transport document under the documentary letter of credit is a bill of lading or a combined transport document. Transport documents may be issued by “any party other than a carrier, owner, master, or charterer” provided that the transport document complies with the requirements for

111

See Eun Sup Lee, supra note 138, at 139. Id. 113 UCP600, Art. 16(b). 114 See Eun Sup Lee, supra note 138, at 139. 112

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multimodal transport documents,115 bills of lading,116 sea waybills,117 air transport documents,118 road transport documents,119 rail transport documents120 or inland waterway transport documents,121 courier and post receipts, certificate of posting,122 and charterparty bill of lading.123 ➀ Combined Transport Document When transport documents cover at least two different modes of transport (multimodal or combined transport document), the documents must expressly indicate the name of the carrier and be signed by the carrier or his agent, or master or his agent.124 Even though the credit may prohibit transshipment,125 the bank will accept a transport documents indicating that transshipment will or may take place, provided the entire carriage is covered by one and the same transport documents.126 Transport Document Covering Different Modes of Transport

“a. A transport document covering at least two different modes of transport (multimodal or combined transport document), however named, must appear to i. indicate the name of the carrier and be signed by • the carrier or a named agent for or on behalf of the carrier, or • the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master. ii. indicate that the goods have been dispatched, taken in charge or shipped on board at the place stated in the credit, by

115

Id. at 201, UCP600 Art. 19. 117 Id. at Art. 20. 118 Id. at Art. 21. 119 Id. at Art. 22. 120 Id. at Art. 23. 121 Id.at Art. 24. 122 Id. at Art. 25. 123 Id.at Art. 22. 124 Id. at Art. 19(a)(i). 125 Id. at Art. 19(b): “unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage from the place of dispatch….”. 126 Id. at Art. 19(c)(i). 116

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• pre-printed wording, or • a stamp or notation indicating the date on which the goods have been dispatched, taken in charge or shipped on board. The date of issuance of the transport document will be deemed to be the date of dispatch, taking in charge or shipped on board, and the date of shipment. However, if the transport document indicates, by stamp or notation, a date of dispatch, taking in charge or shipped on board, this date will be deemed to be the date of shipment. iii. indicate the place of dispatch, taking in charge or shipment and the place of final destination stated in the credit, even if a. the transport document states, in addition, a different place of dispatch, taking in charge or shipment or place of final destination, or b. the transport document contains the indication “intended” or similar qualification in relation to the vessel, port of loading or port of discharge. iv. be the sole original transport document or, if issued in more than one original, be the full set as indicated on the transport document. v. transportation contains terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back transport document). Contents of terms and conditions of carriage will not be examined. vi. contains no indication that it is subject to a charterparty. b. For the purpose of this Article, transshipment means unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage from the place of dispatch, taking in charge or shipment to the place of final destination stated in the credit. c. i. A transport document may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same transport document. ii A transport document indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment.” (UCP600 Article 19). ➁ Bill of Lading Under the general domestic laws, a bill of lading is recognized as a negotiable document of title.127 Where a credit calls for a bill of lading covering a port-toport shipment, the following are required to be applied128 : The bill of lading must expressly indicate the name of the carrier and be signed by the carrier, master or

127 128

See Eun Sup Lee, supra note 138, at 141. Id.

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a named agent of either.129 It must also indicate that the goods have been shipped on board a named vessel at the port of loading stipulated in the credit which may be evidenced by pre-printed wording or an “on board notation” to this effect.130 Further, the bill of lading must indicate shipment from the port of loading to the port of discharge stipulated in the letter of credit.131 Bill of Lading

“a. A bill of lading, however named, must appear to i. indicate the name of the carrier and be signed by • the carrier or a named agent for or on behalf of the carrier, or • the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master. ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by • pre-printed wording, or • an on board notation indicating the date on which the goods have been shipped on board. The date of issuance of the bill of lading will be deemed to be the date of shipment unless the bill of lading contains an on board notation indicating the date of shipment, in which case the date stated in the on board notation will be deemed to be the date of shipment. If the bill of lading contains the indication “intended vessel” or similar qualification in relation to the name of the vessel, an on board notation indicating the date of shipment and the name of the actual vessel is required. iii. indicate shipment from the port of loading to the port of discharge stated in the credit. If the bill of lading does not indicate the port of loading stated in the credit as the port of loading, or if it contains the indication “intended” or similar qualification in relation to the port of loading, an on board notation indicating the port of loading as stated in the credit, the date of shipment and the name of the vessel is required. This provision applies even when loading on board

129

UCP600, Art. 20. Id. 131 See Eun Sup Lee, supra note 138, at 141. 130

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or shipment on a named vessel is indicated by pre-printed wording on the bill of lading. iv. be the sole original bill of lading or, if issued in more than one original, be the full set as indicated on the bill of lading. v. contain terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back bill of lading). Contents of terms and conditions of carriage will not be examined. vi. contain no indication that it is subject to a charterparty. b. For the purpose of this Article, transshipment means unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit. c. i. A bill of lading may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same bill of lading. ii. A bill of lading indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment, if the goods have been shipped in a container, trailer or LASH barge as evidenced by the bill of lading. d. Clauses in a bill of lading stating that the carrier reserves the right to transship will be disregarded.” (UCP600 Article 20).

➂ Non-negotiable Sea Waybill Unlike bills of lading, sea waybills are not negotiable documents of title.132 They provide evidence of the shippers’ receipt of the goods to be loaded on the conveyance and the contract of carriage to a nominated consignee.133 The provisions for non-negotiable sea waybills are substantially similar to those for bills of lading and permit a bank to accept such documents if the stipulated conditions are in compliance with the terms of letters of credit.134 Non-negotiable Sea Waybill

“a. A non-negotiable sea waybill, however named, must appear to i. indicate the name of the carrier and be signed by • the carrier or a named agent for or on behalf of the carrier, or • the master or a named agent for or on behalf of the master.

132

UCP600, Art. 21(a). See Eun Sup Lee, supra note 138, at 143. 134 Id. 133

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Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master. ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by: • pre-printed wording, or • an on board notation indicating the date on which the goods have been shipped on board. The date of issuance of the non-negotiable sea waybill will be deemed to be the date of shipment unless the non-negotiable sea waybill contains an on board notation indicating the date of shipment, in which case the date stated in the on board notation will be deemed to be the date of shipment. If the non-negotiable sea waybill contains the indication “intended vessel” or similar qualification in relation to the name of the vessel, an on board notation indicating the date of shipment and the name of the actual vessel is required. iii. indicate shipment from the port of loading to the port of discharge stated in the credit. If the non-negotiable sea waybill does not indicate the port of loading stated in the credit as the port of loading, or if it contains the indication “intended” or similar qualification in relation to the port of loading, an on board notation indicating the port of loading as stated in the credit, the date of shipment and the name of the vessel is required. This provision applies even when loading on board or shipment on a named vessel is indicated by pre-printed wording on the non-negotiable sea waybill. iv. be the sole original non-negotiable sea waybill or, if issued in more than one original, be the full set as indicated on the non-negotiable sea waybill. v. contain terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back non-negotiable sea waybill). Contents of terms and conditions of carriage will not be examined. vi. contain no indication that it is subject to a charterparty. b. For the purpose of this Article, transshipment means unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit.

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c. i. A non-negotiable sea waybill may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same non-negotiable sea waybill. ii. A non-negotiable sea waybill indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment, if the goods have been shipped in a container, trailer or LASH barge as evidenced by the non-negotiable sea waybill. d. Clauses in a non-negotiable sea waybill stating that the carrier reserves the right to transship will be disregarded.” (UCP600 Article 21).

➃ Charterparty Bill of Lading The requirements for charterparty bills of lading are essentially similar to those for standard bills of lading. A charterparty bill of lading can be signed by the master, owner or charter, or by an agent of either.135 A bank may accept a charterparty bill of lading instead of the charterparty contract itself even if a charterparty contract is required to be presented by the terms of the credit.136 Charterparty Bill of Lading

“a. A bill of lading, however named, containing an indication that it is subject to a charterparty (charterparty bill of lading), must appear to i. • • •

be signed by the master or a named agent for or on behalf of the master, or the owner or a named agent for or on behalf of the owner, or the charterer or a named agent for or on behalf of the charterer.

Any signature by the master, owner, charterer or agent must be identified as that of the master, owner, charterer or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the master, owner or charterer. An agent signing for or on behalf of the owner or charterer must indicate the name of the owner or charterer. ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by • pre-printed wording, or

135 136

UCP600, Art. 22(a)(i). Id. at Art. 22, See Eun Sup Lee, supra note 138, at 144.

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• an on board notation indicating the date on which the goods have been shipped on board. The date of issuance of the charterparty bill of lading will be deemed to be the date of shipment unless the charterparty bill of lading contains an on board notation indicating the date of shipment, in which case the date stated in the on board notation will be deemed to be the date of shipment. iii. indicate shipment from the port of loading to the port of discharge stated in the credit. The port of discharge may also be shown as a range of ports or a geographical area, as stated in the credit. iv. be the sole original charterparty bill of lading or, if issued in more than one original, be the full set as indicated on the charterparty bill of lading. b. A bank will not examine charterparty contracts, even if they are required to be presented by the terms of the credit.” (UCP600 Article 22).

➄ Air Transport Document Air transport documents are required to be signed by the carrier or a named agent acting on his behalf.137 The document must show that the goods have been accepted for carriage138 and should also show the airport of departure and destination as being stipulated in the credit.139 The date of issuance of the air transport documents is deemed to be the date of shipment unless there is a specific notation indicating the actual date of shipment in which case that date will be deemed to be the date of shipment.140 Air Transport Document

“a. An air transport document, however named, must appear to i. indicate the name of the carrier and be signed by • the carrier, or • a named agent for or on behalf of the carrier. Any signature by the carrier or agent must be identified as that of the carrier or agent. Any signature by an agent must indicate that the agent has signed for or on behalf of the carrier.

137

Id. at Art. 23(a)(i). Id. at Art. 23(a)(ii); 139 See Eun Sup Lee, supra note 138, at 145. 140 UCP600 Art. 23(a)(iii). See Eun Sup Lee, supra note 138, at 145. 138

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ii. indicate that the goods have been accepted for carriage. iii. indicate the date of issuance. This date will be deemed to be the date of shipment unless the air transport document contains a specific notation of the actual date of shipment, in which case the date stated in the notation will be deemed to be the date of shipment. Any other information appearing on the air transport document relative to the flight number and date will not be considered in determining the date of shipment. iv. indicate the airport of departure and the airport of destination stated in the credit. v. be the original for consignor or shipper, even if the credit stipulates a full set of originals. vi. contain terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage. Contents of terms and conditions of carriage will not be examined. b. For the purpose of this Article, transshipment means unloading from one aircraft and reloading to another aircraft during the carriage from the airport of departure to the airport of destination stated in the credit. c. i. An air transport document may indicate that the goods will or may be transshipped, provided that the entire carriage is covered by one and the same air transport document. ii. An air transport document indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment.” (UCP600 Article 23). ➅ Road, Rail/Inland Waterway Transport Documents The road, rail, and inland waterway transport documents govern the carriage by road, rail, or inland waterways and similar principles to marine transport documents are applied to these documents.141 In the absence of any indication on the rail, road, or inland waterway transport documents as to the numbers issued, banks will accept the transport documents presented as constituting a full set. Banks will also accept such transport documents as originals, whether or not they are marked as originals.142

141 142

See Eun Sup Lee, supra note 138, at 145. UCP 600, Art. 24(c).

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Road, Rail or Inland Waterway Transport Documents

“a. A road, rail or inland waterway transport document, however named, must appear to i. indicate the name of the carrier and • be signed by the carrier or a named agent for or on behalf of the carrier, or • indicate receipt of the goods by signature, stamp or notation by the carrier or a named agent for or on behalf of the carrier. Any signature, stamp or notation of receipt of the goods by the carrier or agent must be identified as that of the carrier or agent. Any signature, stamp or notation of receipt of the goods by the agent must indicate that the agent has signed or acted for or on behalf of the carrier. If a rail transport document does not identify the carrier, any signature or stamp of the railway company will be accepted as evidence of the document being signed by the carrier. ii. indicate the date of shipment or the date the goods have been received for shipment, dispatch or carriage at the place stated in the credit. Unless the transport document contains a dated reception stamp, an indication of the date of receipt or a date of shipment, the date of issuance of the transport document will be deemed to be the date of shipment. iii. indicate the place of shipment and the place of destination stated in the credit. b. i. A road transport document must appear to be the original for consignor or shipper or bear no marking indicating for whom the document has been prepared. ii. A rail transport document marked “duplicate” will be accepted as an original. iii. A rail or inland waterway transport document will be accepted as an original whether marked as an original or not. c. In the absence of an indication on the transport document as to the number of originals issued, the number presented will be deemed to constitute a full set. d. For the purpose of this Article, transshipment means unloading from one means of conveyance and reloading to another means of conveyance, within the same mode of transport, during the carriage from the place of shipment, dispatch or carriage to the place of destination stated in the credit. e. i. A road, rail or inland waterway transport document may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same transport document.

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ii. A road, rail or inland waterway transport document indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment.” (UCP600 Article 24).

➆ Partial Shipment/Transshipment 1. Case without Indication on Letter of Credit In most cases, it is expressly indicated on the letter of credit whether or not to allow partial shipment and/or transshipment. If there is no indication on the letter of credit, it is acceptable to make partial shipments. Since there is no indication on the letter of credit concerning transshipment, discussions about the interpretation of its omission could ensue. More often than not, an absence of “transshipment” allowance stipulated expressly on the letter of credit would lead to the conclusion that it is not allowed. 2. Partial Shipment on the Same Ship and Voyage Under the letter of credit does not cover for allowing partial shipment, for example, if the exporter shipped part of the cargo on the named ship to City A due to a manufacturing delay, and two days later he shipped the rest of the cargo to City B which was the next port, would the exporter be in breach of the provision of inhibition of partial shipment? The shipping company may issue two copies of the bill of lading, and the shipping port and shipping date may both be different, seemingly breaking the provision of inhibition of partial shipment. But, it is clear that this does not constitute partial shipment despite the different shipping date and shipping port because it is “a couple of shipments done by the same ship and the same voyage.”143 Maintaining the same ship on the same voyage is not considered partial shipment. If a shipping port is indicated on the letter of credit (in the above example, City A or City B), the problem about inhibition of partial shipment is solved, but it breaks the obligatory provision of departure from the named port, which may lead to a claim from the importing party. In terms of mailing, if several packages were sent by a post office on the same day, but delivered on different days because the packages may have been sent by different carriers, the delivery is not considered partial as long as the post office stamps indicate the same date.144

143 144

Id. at Art. 32. Id. at Art. 25(a).

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3. Special Provision of Combined Transport and Container Transshipment occurs when cargo is transferred from one transport means to another one on the way to its destination, frequently resulting in damage, loss of cargo, and additional costs. Obviously, importers prefer direct shipment to insure their imported goods to arrive safely. Debate can arise about transshipment if it is not explicitly included in the letter of credit. If the letter of credit does not specify that the shipment will be direct, goods arguably can be transshipped. When the transport means are a trailer or containers, transshipment is allowed with a special provision.145 When transshipment is not explicitly prohibited under the letter of credit, transshipment is allowed when transport documents indicate that transshipment is possible if those documents cover all aspects of the voyage.146 In the case that transshipment is explicitly disallowed on the letter of credit, the following documents should be accepted: ➀ When ”reservation of transshipment rights of shipping companies” among bill of lading clauses is included in “printed clauses”147 ; ➁ when the letter of credit allows for combined transports148 ; ➂ when indicating that goods should be carried to the final destination loaded in a container, trailer, or “lighter aboard ship (LASH)”149 which is a smaller barge on a larger vessel; ➃ when a shipping port and a destination port are indicated to container freight station(CFS) or container yard(CY) in the port concerned. (3) Invoice The commercial invoice for the shipped goods must expressively indicate that it has been issued by the beneficiary nominated in the credit.150 It should be made out to the applicant for the credit,151 and the description of the transacted items must be in compliance with the stipulations including the currency in the credit, though other documents are allowed to contain a description in general terms not inconsistent with the terms of the credit.152

145

Id. at Art. 20 & 21(a). Id. at Art. 20(b), (c) & 21(b). 147 Id. at Art. 20. 148 Id.at Art. 19(b). 149 Id. at Art 20(c)(ii) & 21(c)(ii). 150 Id. at Art 18(a)(i) & (iv). 151 Id. at Art 18(a)(ii). 152 Id. at Art 14(e). 146

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When the seller (beneficiary) makes the commercial invoice, he is required to make it strictly in compliance with the requirements from the letter of credit, particularly, considering the functional importance of it.

The following case makes it clear that proper presentation by a beneficiary of documents required under a letter of credit occurs when the beneficiary strictly complies with the terms of the credit. A beneficiary is in strict compliance if there is only a misspelling or other flyspeck discrepancy as long as the deviation from the terms of letter of credit could not possibly have misled any issuing bank. It is determined that because the notations on the invoices indicating that they had been paid were inconsistent with the statement in the affidavit that all the attached invoices were unpaid, as well as being inconsistent with the requirements of the letter of credit that the invoices be unpaid, those invoices do not conform with the consistency requirement. Case153 Plaintiff appeals from a judgment of the circuit court entered in favor of defendant on plaintiff’s claim against defendant for wrongful dishonor of a letter of credit. The essential facts are not in dispute. On May 17, 1989, at the request of its customer, Swenehart’s Zero Foods, Inc. (“Sweneheart”), defendant issued an irrevocable standby letter of credit for the benefit of plaintiff. The undersigned deposes and says: 1. Swenehart’s Zero Foods has failed to pay in full for the shipment of merchandise described in the attached invoice(s). 2. The amount of the attached sight draft is not in excess of the amount owed to Osten Meat Co. by Swenehart’s Zero Foods. The letter of credit also provided that the original of the letter of credit must be submitted whenever a partial draw on the letter of credit was requested. On or about January 25, 1990, plaintiff requested a full draw of $150,000 pursuant to the letter of credit. With the request, plaintiff submitted: 1. A sight draft in the amount of $150,000. 2. Copies of invoices from plaintiff to Swenehart’s after May 16, 1989. 3. An affidavit of Werner Osten, the president of plaintiff. In a letter dated February 5, 1990, defendant advised plaintiff that it would not honor the letter of credit because of the following discrepancies: (1) Original Letter of Credit No. 65469 not presented as required. (2) Documents inconsistent with one another: Invoices reference Letter of Credit

153

OSTEN MEAT CO. v. FIRST OF AMERICA BANK- SOUTHEAST MICHIGAN, NA NO. 145686. 205 Mich. App. 686 (1994) 517 N.W.2d 742. http://www.leagle.com/decision/199489 1205MichApp686_1809/OSTEN%20MEAT%20CO.%20v.%20FIRST%20OF%20AMERICA% 20BANK.

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Number different than sworn affidavit. (3) Invoices 57040-00 $6,076.69 marked PAID 48439-00 $24,384.26 marked PAID, Check #2248 55922-00 $7,000.00 marked PAID, Personal Money Order #501548. Plaintiff did not resubmit documents before the letter of credit expired. This dispute concerns whether the inconsistencies in the documentation supplied by plaintiff in support of its draw on the letter of credit were sufficient to warrant defendant’s dishonoring the draft. The trial court concluded that it did, while plaintiff obviously argues that the documentation was sufficient to warrant payment of the draft. To resolve this dispute, we must first determine the Michigan standard for determining whether documents submitted in conjunction with a draw on a letter of credit are sufficient. Two standards have emerged in other jurisdictions, namely (1) strict compliance with the terms of the letter of credit and (2) mere substantial compliance. This appears to present a question of first impression in Michigan. However, we are persuaded that defendant is correct that we should follow the rule of strict compliance. A letter of credit is a contract between the bank and the beneficiary of the credit that is separate and distinct from the commercial contract between the beneficiary, usually the seller, and the bank’s customer, usually the buyer. The letter of credit is not tied to or dependent upon the underlying commercial transaction, and in determining whether to pay, the bank looks only at the letter and the documentation the beneficiary presents to determine whether the documentation meets the requirements in the letter. Articles 15 and 16(b) of the UCP provide: Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. If, upon receipt of the documents, the issuing bank considers that they appear on their face not to be in accordance with the terms and conditions of the credit, it must determine, on the basis of the documents alone, whether to take up such documents, or to refuse them and claim that they appear on their face not to be in accordance with the terms and conditions of the credit. Case law outside Michigan is split on the issue. The majority position is that the standard is one of strict compliance: The papers, documents, and shipping descriptions must be as stated in the letter of credit. This standard leaves “no room for documents which are almost the same, or which will do just as well.” A minority of cases do hold that a beneficiary’s reasonable or substantial performance of the letter’s requirements will do. We are persuaded that the majority position that a letter of credit must be strictly construed and performed precisely in accordance with its terms is the appropriate rule and should be followed in Michigan. In a letter of credit transaction, the issuing bank’s duty with respect to a letter of credit is purely ministerial. The bank’s representative, who knows nothing of the parties, the underlying transaction, or the practices

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of the industry concerned, checks presented documents carefully against the requirements of the credit. Under a strict compliance standard, if the documents comply, the draft is paid. If there is a discrepancy between the requirements of the letter of credit and the submitted documents, the draft is not paid and the beneficiary is notified of the reason for the dishonor. The beneficiary then has the right to resubmit the correct documents before the credit expires. A substantial compliance standard would impose a duty on the bank to investigate the underlying transaction whenever a discrepancy is found between the documents submitted and the credit to determine whether a discrepancy is significant. Such a duty would negate the credit’s advantages, that is, its independence from the underlying transaction and the predictability and swiftness of the determination to honor or dishonor a draw request. Furthermore, we are persuaded that the strict compliance standard is not an unduly harsh burden for the beneficiary to meet. As Dolan, supra at 68, states, the capabilities of modern communications allow beneficiaries to more easily meet the strict compliance standard than may have been true in the past. Ultimately, a strict compliance standard should prove to make the processing of letter of credit transactions more efficient rather than less because a beneficiary will know precisely what documentation must be submitted in support of the draw on the letter of credit and may promptly correct any defects found in those documents. On the other hand, accepting a mere “substantial compliance” standard would cause the waters to be muddied. Each transaction would open itself to questions by the issuer of the letter of credit whether the documentation submitted was sufficient. This would result in delays because it would not be sufficient to answer the question whether there is strict compliance with the terms and conditions of the letter of credit. Rather, a determination would have to be made whether the less-than-full compliance would nevertheless be sufficient, a question that might often require the solicitation of legal advice. Similarly, such disputes might often end in litigation, further impairing the efficacy of letter of credit transactions. In the long run, we are persuaded that the majority rule of strict compliance makes sense and will make the handling of letter of credit transactions more efficient, both from a commercial and a legal viewpoint. Accordingly, for the above reasons, we choose to follow the rule that strict compliance with the terms and conditions of a letter of credit is required. We turn to the question whether the reasons cited by defendant for refusing to honor the sight draft do, in fact, demonstrate that plaintiff failed to strictly comply with the terms of the letter of credit. The failure of plaintiff to submit the original letter of credit, defendant appears to concede in its brief on appeal that that is an insufficient basis to have dishonored the letter of credit in the case at bar. Plaintiff sought a full draw on the letter of credit

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and the terms of the letter of credit only required submission of the letter of credit upon either a partial draw or a cancelation of the letter of credit. However, defendant’s dishonor of the sight draft was proper if any of the defects cited as reasons for the dishonor are appropriate. Another reason cited by defendant for dishonoring the draft was that certain invoices submitted with the draft had been marked paid, while the terms of the letter of credit allowed for a draft to be made only for payment of unpaid invoices. Thus, defendant argues, the representation in the affidavit that the invoices were unpaid and the notation on the invoices that they were, in fact, paid created an inconsistency that warranted dishonoring the draft. Plaintiff had submitted twenty-nine invoices, three of which were marked “paid,” invoices 57040-00, 55922-00, and 48439-00. Invoice 48439-00 had the further notation “Check #2248” with the figure 30384.26 below this notation. Attached to this invoice was a copy of Swenehart’s Zero Lockers, Inc., check 2248, made out to Osten Meat Co. in the amount of $30,384.26. The check was stamped “NSF” and “DO NOT PRESENT AGAIN.” The total amount of the twenty-six unpaid invoices was approximately $145,000, less than the amount of the $150,000 draft. Thus, the properly presented invoices cannot be considered alone because the draft would be defective under the terms of the letter of credit inasmuch as it would be for an amount in excess of the amount of the unpaid invoices. On appeal, the focus is on Invoice 48439-00 and for which a copy of an NSF check was attached, because that invoice, in connection with the other twenty-six unpaid invoices, would, if it were acceptable, be sufficient to raise the total of the unpaid invoices to about the $150,000 amount, notwithstanding the two remaining non-conforming invoices. Documentation in support of a sight draft can be considered sufficient, even if there are objections to some of the documentation, if the total amounts of the documents to which there were no valid objections would still be in excess of the amount of the draft. The trial court granted defendant’s motion for summary disposition. Proper presentment by a beneficiary of documents required under a letter of credit occurs when the beneficiary strictly complies with the terms of the credit. A beneficiary is in strict compliance if there is only a misspelling or other flyspeck discrepancy as long as the deviation from the letter’s terms could not possibly have misled any issuer. Plaintiff cites Atari, Inc v Harris Trust & Savings Bank, and American Airlines, Inc v FDIC, to support its argument that the submission of Invoice 48439-00, together with a copy of a bounced check, strictly complied with the requirement of the letter of credit that copies of unpaid invoices be submitted. While standing for the proposition that documents presented by a beneficiary can have a slight discrepancy and remain in strict compliance with the terms of the credit, the opinion in American Airlines, is off point

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because it discusses a circumstance where there was a typographical error in the sight draft’s reference to the letter of credit number. Atari is factually closer to the instant case. In Atari, the beneficiary submitted a certificate stating that enclosed invoices were due and unpaid along with invoices, some of which were stamped “Void.” The United States District Court held that the beneficiary’s submission of void invoices was not inconsistent with the beneficiary’s certificate because, in each instance where the beneficiary included a voided invoice, the beneficiary also presented the correcting debit and credit memorandums together with the final corrected invoice. While the facts in Atari initially resemble the facts in the instant case, an important distinction is that the beneficiary in Atari submitted a corrected invoice that was consistent with the certificate’s statement that the invoice be due and unpaid. In the instant case, plaintiff did not submit a corrected invoice indicating that the amount was unpaid. Defendant cites the opinion in Courtaulds, supra, which is factually closer to this case and which controls the result in this case. In Courtaulds, the letter of credit required the beneficiary to submit invoices stating that the packages shipped contained one hundred percent acrylic yarn. The beneficiary submitted invoices describing the goods as “imported acrylic yarn,” to each of which was stapled a packaging list that indicated that the goods were one hundred percent acrylic yarn. The bank refused to honor the letter of credit. The United States Court of Appeals held that, although the packing lists attached to invoices disclosed on their faces that the packages contained one hundred percent acrylic yarn, the lists could not be considered part of the invoice by reason of their being appended to it, nor could the invoices be read as one with the lists. Courtaulds clearly held that invoices submitted by the beneficiary cannot be read in conjunction with other submissions but must comply with the requirements of the letter of credit on their face. Under this standard, plaintiff’s submission of Invoice 48439-00 failed to comply with the requirements of the letter of credit because on its face it was marked “paid.” Because the invoice, on its face, did not strictly comply with the letter of credit, the bank did not wrongfully dishonor plaintiff’s draft. Plaintiff had the option of submitting a corrected invoice, but chose not to do so. Furthermore, while it might be argued that the sworn statement in the affidavit submitted with the documentation that all the attached invoices were, in fact, unpaid should be given precedence over an unsworn notation on the invoice that it had been paid, such discrepancies are nevertheless sufficient to warrant rejection of the documentation. The letter of credit adopted by reference the UCP, supra. Article 15 of the UCP provides as follows: Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit. Documents which appear on their face to be inconsistent with one another

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will be considered as not appearing on their face to be in accordance with the terms and conditions of the credit. Thus, the letter of credit, through its adoption of the UCP, requires that all documents submitted with the draft in support of the letter of credit be consistent on their face and that the submission of inconsistent documents is not in accordance with the terms and conditions of the letter of credit. Because the notations on the invoices indicating that they had been paid were inconsistent with the statement in the affidavit that all the attached invoices were unpaid, as well as being inconsistent with the requirements of the letter of credit that the invoices be unpaid, those invoices do not conform with the consistency requirement found in Article 15. Accordingly, they did not strictly comply with the terms and conditions of the letter of credit, and defendant acted properly in refusing to consider those invoices in determining whether there was compliance with the letter of credit. Moreover, the mere attaching of a copy of a returned check to the invoice in question on appeal is not sufficient to rehabilitate that invoice. Rather, attaching a copy of an NSF check does not cure the inconsistency on the face of the invoice caused by having it marked “paid.” This is particularly true inasmuch as the amount of the NSF check was different than the amount of the invoice to which it was attached. For the above reasons, we conclude that the trial court correctly determined that plaintiff failed to strictly comply with the terms and conditions of the letter of credit and, therefore, defendant rightfully dishonored the sight draft. Finally, plaintiff raises two arguments concerning the trial court’s rejection of plaintiff’s claim of anticipatory repudiation. However, it does not appear that plaintiff has properly preserved those issues for review inasmuch as a claim of anticipatory repudiation was not included in plaintiff’s complaint. Accordingly, we decline to address any issue involving a claim of anticipatory repudiation. A bank has discretion to reject a set of documents containing an invoice issued for an amount in excess of the amount authorized to be negotiated or honored under the credit.154 Commercial Invoice

“a. A commercial invoice: i. must appear to have been issued by the beneficiary (except as provided in Article 38);

154

Id. at Art. 18(b), See Eun Sup Lee, supra note 138, at 148.

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ii. must be made out in the name of the applicant (except as provided in subarticle 38 (g)); iii. must be made out in the same currency as the credit; and iv. needs not be signed. b. A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may accept a commercial invoice issued for an amount in excess of the amount permitted by the credit, and its decision will be binding upon all parties, provided the bank in question has not honored or negotiated for an amount in excess of that permitted by the credit. c. The description of the goods, services, or performance in a commercial invoice must correspond with that appearing in the credit.” (UCP600 Article 18).

(4) Insurance Document Insurance documents must be in compliance with the stipulations in the credit and issued and signed by the insurance company, or underwriters or their agents or proxies.155 Agents or proxies must provide an indication of the capacity in which any signature is executed. If the insurance document indicates that it has been issued in more than one original, all of the original sets must be presented.156 Unless specifically allowed under the credit, broker’s cover notes are not acceptable,157 though (unless otherwise stipulated) banks will accept an insurance policy in lieu of an insurance certificate or a declaration under an open cover.158 Cover under the insurance policy must be effective at the latest from the date of shipment and the insurance documents must be expressed in the same currency to the currency stipulated in the credit.159 The goods are required to be insured for at least their CIF or CIP value plus 10 percent. Should the bank be unable to determine the CIF or CIP value from the documents, it will accept an insurance document stating that the minimum amount of cover is 110 percent of the amount authorized to be negotiated or honored under the credit, or the gross value of the goods as shown on the invoice, whichever is greater.160 The credit should stipulate the required terms of insurance contract and any additional risks to be covered. In the absence of such stipulation, the bank will

155

See Eun Sup Lee, supra note 138, at 150. UCP600, Art. 28(b). 157 Id. at Art. 28(c). 158 Id. at Art. 28(d). 159 Id. at Art. 28(f)(i), See Eun Sup Lee, supra note 138, at 150. 160 Id. at Art. 28(f)(ii), See Eun Sup Lee, supra note 138, at 150. 156

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accept the insurance documents as presented by the seller and bears no responsibility for any risks not covered therein.161 If the credit stipulates “all risks” terms, the insurance document need not bear such a heading provided. It contains a clear “all risks” clause or notation.162 The bank is obligated to check for inconsistencies in such additional documentation.163 Insurance Document and Coverage

“a. An insurance document, such as an insurance policy, an insurance certificate or a declaration under an open cover, must appear to be issued and signed by an insurance company, an underwriter or their agents or their proxies. Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter. b. When the insurance document indicates that it has been issued in more than one original, all originals must be presented. c. Cover notes will not be accepted. d. An insurance policy is acceptable in lieu of an insurance certificate or a declaration under an open cover. e. The date of the insurance document must be no later than the date of shipment, unless it appears from the insurance document that the cover is effective from a date not later than the date of shipment. f. (i) The insurance document must indicate the amount of insurance coverage and be in the same currency as the credit. (ii) A requirement in the credit for insurance coverage to be for a percentage of the value of the goods, of the invoice value or similar is deemed to be the minimum amount of coverage required. If there is no indication in the credit of the insurance coverage required, the amount of insurance coverage must be at least 110% of the CIF or CIP value of the goods. When the CIF or CIP value cannot be determined from the documents, the amount of insurance coverage must be calculated on the basis of the amount for which honor or negotiation is requested or the gross value of the goods as shown on the invoice, whichever is greater.

161

Id. at Art. 28(g). Id. at Art. 28(h). 163 Id. at Art. 14, See Eun Sup Lee, supra note 138, at 150. 162

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(iii) The insurance document must indicate that risks are covered at least between the place of taking in charge or shipment and the place of discharge or final destination as stated in the credit. g. A credit should state the type of insurance required and, if any, the additional risks to be covered. An insurance document will be accepted without regard to any risks that are not covered if the credit uses imprecise terms such as “usual risks” or “customary risks.” h. When a credit requires insurance against “all risks” and an insurance document is presented containing any “all risks” notation or clause, whether or not bearing the heading “all risks,” the insurance document will be accepted without regard to any risks stated to be excluded. i. An insurance document may contain reference to any exclusion clause. j. An insurance document may indicate that the cover is subject to a franchise or excess (deductible).” (UCP Article 28).

(5) Documents to Be Read Together The bank is usually authorized to make finance available upon presentation of several documents in a set, and as stated, these would normally include the transport document, e.g., a bill of lading, the invoice, and the insurance policy or certificate.164 In such situations, without contrary instructions, it is sufficient if all the documents in the set, when taken together, contain the particulars required under the credit and every document in the set is not required to contain all of them.165 For example, the goods must be fully described in the invoice in accordance with the credit instructions, but in the other documents they may be described in general terms.166 Standards for Examination of Documents

“a. A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. b. A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation

164

See Eun Sup Lee, supra note 138, at 152. Id. 166 UCP 600 at Art. 14(e), See Eun Sup Lee, supra note 138, at 152. 165

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c.

d.

e.

f.

g. h.

i. j.

k. I.

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is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation. A presentation including one or more original transport documents subject to Articles 19, 20, 21, 22, 23, 24, or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit. Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. In documents other than the commercial invoice, the description of the goods, services or performance, if stated, may be in general terms not conflicting with their description in the credit. If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfill the function of the required document and otherwise complies with subarticle 14 (d). A document presented but not required by the credit will be disregarded and may be returned to the presenter. If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it. A document may be dated prior to the issuance date of the credit, but must not be dated later than its date of presentation. When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone, e-mail and the like) stated as part of the beneficiary’s and the applicant’s address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document subject to Articles 19, 20, 21, 22, 23, 24, or 25, they must be as stated in the credit. The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit. A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of Articles 19, 20, 21, 22, 23, or 24 of these rules.” (UCP600 Article 14).

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Even though some latitude is allowed in the description of the goods in the documents other than the invoice, all documents tendered to the bank must clearly and unequivocally relate to the same goods. This question of identification of the goods is different from that of their description in the documents.167 If the documents are not linked by an unambiguous reference to the same goods, the presentation is not properly made. But it is not necessary that the documents themselves be linked by mutual reference.168

5.1.7

Bill of Exchange

(1) Concepts A draft (bill of exchange) is defined as a formal instrument and negotiation tool which commits a creditor to give a certain sum to the payee or party the creditor appoints within a specified period of time at a designated place. The parties concerned to the draft as follows: ➀ Drawer: Party that issues and signs the drafts. Generally the drawer is the exporter and the beneficiary under the letter of credit; ➁ Drawee: A debtor who is trusted to repay in the future (to a paying bank), and an issuing bank of the letter of credit undertakes to make payments for the importer; ➂ Payee: Party that makes the payment, which is usually a paying or negotiating bank; ➃ Acceptor: If a draft is issued in usance (payment can immediately be made upon document presentation), it must be accepted by the drawee. “Acceptance” is completed by a drawee once the party becomes a drawee by officially declaring his intention. (2) Bill of Exchange Under Letter of Credit Letters of credit are divided into letters of credit that require drafts, and letters of credit that do not require drafts, when the beneficiary under the letter of credit presents the required documents for payment collection under the letter of credit. Negotiation letter of credit, acceptance letter of credit, and reimbursement letter of credit require presenting the bill of exchange accompanied by the shipping documents, but payment letter of credit and deferred payment letter of credit do not require any such bill of exchange. In case of the letter of credit that requires a bill of exchange accompanied by documents, drafts, that is, the bills of exchange, are required to be issued for presentation because they are expected to serve as a facilitator to negotiation and create convenience of payment. Letters of credit, sometimes, do not require a bill of exchange to be drawn because drafts are not expected to be advantageous to the

167 168

See Eun Sup Lee, supra note 138, at 153. Id.

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transactions, where a bill of exchange would only slow down the transaction and increase the transaction cost. This is especially true in European countries where high stamp duties are commonly charged for issuing drafts. “Order” Bill of Exchange: 1 May 2023 90 days after date pay to our order the sum of ten thousand USDOLLARS, value received, US$10,000 Dr.COFFEE To: Chinese Marine Trading Co. Ltd, YangFu Economic Development Zone, YangFu Hainan, P.R. China

“Bearer” Bill of Exchange: 1 May 2023 90 days after date pay to our order the sum of ten thousand USDOLLARS, value received, US$10,000 Dr.COFFEE To: Chinese Marine Trading Co. Ltd, YangFu Economic Development Zone, YangFu Hainan, P.R. China

Lack of Drawer’s Signature on the Draft

The lack of drawer’s signature on the bill of exchange under the documentary letter of credit is considered material discrepancy to make it dishonored. The following case treats with the drawer’s signature on the draft presented to the issuing bank, which is not in compliance with the letter of credit requirements.

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Case169 The decisive question in this case is whether an issuing bank rightfully dishonored a demand for payment of a letter of credit because of discrepancies between the demand and the terms of the letter of credit. Plaintiff (Armac Industries, Ltd), the designated beneficiary of an irrevocable letter of credit, brought an action against defendant (Citytrust) to recover the face amount of the credit issued by the defendant at the request of its customer (Pac Corporation). After a hearing, the trial court rendered judgment for the defendant and plaintiff appealed. The facts are undisputed. The Pac Corporation (Pac) arranged for the defendant to issue a commercial letter of credit in conjunction with Pac’s purchase of an extrusion blow molding machine from the plaintiff. The plaintiff, a manufacturer of such machines, is a New York corporation which, at the time of the sale, had its principal place of business in Westbury, New York. Pac is a Connecticut corporation whose principal place of business is in Watertown. The defendant is a Connecticut bank. The purchase price for the machine was partially paid in cash, with the remainder to be paid through the letter of credit. The defendant issued an irrevocable letter of credit in favor of the plaintiff. As subsequently amended, the credit required the beneficiary to present for payment, through a commercial bank, a draft and a signed performance statement, in accordance with detailed specifications contained in the credit. On behalf of the plaintiff, the European American Bank and Trust Company (EAB) sent a collection letter to the defendant. The collection letter referred to the letter of credit by number and contained as attachments an unsigned draft and a bill of lading. The defendant determined that it would not honor this request for payment, because it deemed the presentment not to conform to the terms of the letter of credit, and because, in the interim, it had been served with a garnishment and restraining order in an action brought by its customer, Pac, against the plaintiff. Accordingly defendant so advised EAB by telex, indicating in some detail the non-compliance of the draft with the terms of the letter of credit, and noting that the bill of lading did not satisfy the requirement for a signed performance statement. Although the letter of credit did not expire, plaintiff made no further effort to tender a timely and proper demand for payment in conformity with its terms.

169

Armac Industries, Ltd. v. Citytrust No. 13022. Supreme Court of Connecticut. May 5, 1987, Decided. 203 Conn. 394; 525 A.2d 77; 1987 Conn. LEXIS 843; 3 U.C.C. Rep. Serv. 2d (Callaghan) 1512.

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Several years later the civil action between Pac and the plaintiff ended with a judgment for the plaintiff. Upon the release of the garnishment issued in connection with that action, the plaintiff renewed its demand that the defendant honor the letter of credit. When the defendant refused to do so, the present action ensued. The trial court concluded that the plaintiff could not prevail because its demand for payment did not conform with the express terms and conditions of the letter of credit as amended. The court determined that the unsigned draft and the absence of the required performance statement constituted significant discrepancies in the plaintiff’s tender. In assessing the significance of these discrepancies, and in rejecting the plaintiff’s argument of waiver, the court attached considerable importance to the defendant’s timely notification of the plaintiff, well in advance of the expiration date of the letter of credit, and to the plaintiff’s failure to take any further timely steps to present proper documentation to the defendant. The plaintiff’s appeal from the judgment in favor of the defendant raises four issues. The plaintiff claims the trial court erred: (1) in failing expressly to define the standard of compliance that governs letters of credit; (2) in holding that the unsigned draft did not comply with the terms of the letter of credit; (3) in concluding that dishonor was justified because the tender lacked a performance statement; and (4) in failing to find waiver or estoppel with regard to the discrepancy in the size of the extruder as described in the letter of credit and the bill of lading. On appeal, the Supreme Court, Peters, C.J., held that plaintiff failed to establish wrongful dishonor on the part of defendant and failed to prove strict compliance with the terms of the letter of credit; thus, defendant was fully justified in finding discrepant both the draft and the substitute for the signed performance statement tendered by the plaintiff. The court further held that the draft presented by plaintiff was, at best, an incomplete instrument that was unenforceable, and that plaintiff’s signature on the back of the unsigned draft did not cure the absence of a drawer’s signature. Non-compliance of the unsigned draft with the terms of the credit was alone sufficient to justify defendant’s dishonor of the demand for payment. Affirming the lower court’s judgment for defendant, the court found no error, as non-compliance of plaintiff’s unsigned draft with the terms of the letter of credit was alone sufficient to justify defendant’s dishonor of the demand for payment.

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Negotiation for Payment Collection

(1) Negotiation of Documents ➀ Introduction The beneficiary should prepare all required documents to insure they are fully consistent with the terms of the letter of credit, and it is advisable to make sure all documents are in accordance with the doctrine of “strict compliance” to prevent future disputes over trivial errors. Since the UCP600 does not mention proper remedial actions to be taken when inconsistencies are found in documents, and because each country has different laws and practices, it would be difficult to settle disputes if they occur. Therefore, unnecessary descriptions in the documents should be avoided if they in no way affect the terms of the transaction. However, if there are mistakes or discrepancies in a document, it is advisable to reissue the document if circumstances allow this to be easily done. In any case, when corrections are needed, a signature or seal of the applicant is needed to approve the modification. When a bank is designated for negotiation, the negotiations must essentially be carried out through the designated bank. If negotiations are done in a bank other than the designated negotiating bank, the negotiations must be redone with the designated bank properly. Negotiations must be done within the designated time limit so that documents can be presented before the expiry date:

When the negotiating bank determines not to pay for the document presentment due to the discrepant documents or other reasons the negotiating bank is required to notify the non-payment to the beneficiary within the reasonable period of time, and is subject to the other equitable doctrine when it is judicially applied.

The following case treats with the important two issues, that is, one is of estoppel doctrine and the other one is of duty of the bank to notify the nonpayment to the beneficiary within a reasonable period of time. Although the letters of credit are subject to the UCP or to the statutory provisions of the UCC, the United States agents have recognized that equitable doctrine such as waiver and estoppel apply when the bank fails to object to them in its letter of credit and to give the beneficiary an opportunity to cure, or when the banks have given presenters of non-conforming documents no hint of the non-compliance. However, in this case, it is determined that the bank did not waive any of the discrepancies, just by paying for the other prior shipments, because the bank did not pay until it had received authorization from the accountee, and it notified the beneficiary with each check that payment was being made despite

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the specifically listed discrepancies. This is not a case in which the bank misled the presenter to its detriment. Regarding the duty of notice, when the beneficiary knowingly presented non-conforming documentation, the bank claims it was absolved its duty to honor the draft or to give timely notice of dishonor. However, it is determined that the bank’s duty to notify is in no way contingent upon its evaluation of the usefulness of the notice. Case170 Plaintiff company brought action against bank, which issued letter of credit, and its customer, which obtained the letter of credit, to recover payment under letter of credit. The United States District Court for the Northern District of Georgia, Harold L. Murphy, J., entered judgment for plaintiff and against customer under settlement agreement but granted bank’s motion for summary judgment on plaintiff’s action against defendant for its non-payment of a letter of credit. Plaintiff appealed. I. Factual Background This story really began when defendant (Vipa-NY) successfully bid on an order from the Taiwanese government for the manufacture of track wheels to be used as spare parts for tanks. In February 1982, Vipa-NY negotiated with Pro-Fab to manufacture metal discs for the track wheels. The agreement was confirmed in Pro-Fab’s telex and was soon followed by a written purchase order. Meanwhile, out on the west coast, unbeknownst to Pro-Fab, Vipa-NY consulted with long-time associate Vipa-Cal the Taiwan deal. Each sometimes served as a “consultant” to the other, and occasionally they put a deal together. Vipa-Cal put up a performance bond for the Taiwanese, and VipaNY took the lead in setting up the financing at his bank, Community Bank, in Burbank, California. Pro-Fab’s president testified that he never knew that Vipa-NY and Vipa-Cal were independent entities. Payment was to be made through a standard back to back letter of credit arrangement. The Taiwanese established an irrevocable letter of credit in favor of Vipa-Cal, issued by a Taiwan bank. Vipa-Cal in turn established an

170

Pro-Fab, Inc. v. Vipa, Inc. No. 84-8782 United States Court of Appeals, Eleventh Circuit. Oct. 3, 1985. 772 F.2d 847; 1985 U.S. App. LEXIS 23448; 41 U.C.C. Rep. Serv. (Callaghan) 1779.

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irrevocable letter in favor of plaintiff, issued by Community Bank. Defendant bank (Community Bank) played a dual role in the transaction. It was the issuing bank for plaintiff company (Pro-Fab) for payments under a letter of credit, and also an advising bank for defendant company (Vipa-Cal), not involved in this appeal. Plaintiff testified that defendant agreed to advance plaintiff $200,000 from the total contract price under the letter of credit to enable plaintiff to buy the steel and the dies, and to cover its other start-up costs. Plaintiff ordered the steel to make the dies as soon as receiving defendant’s purchase order. The promised letter of credit did not arrive until the end of April, however, and contained no provision for the $200,000 advance. The letter of credit was issued by defendant bank and stated it was “for account of Vipa, Inc.” at Vipa-Cal’s address. Plaintiff repeatedly tried to change the terms of the letter of credit, but Vipa-NY insisted that they could not be changed. The president of Vipa-Cal claimed that he knew nothing of the promised advance and would never have agreed to pay half of the money up front. Plaintiff finally received a $26,000 check from defendant bank to cover their cost. Plaintiff was unsuccessful in borrowing against the letter of credit, and because no other money was forthcoming from defendant, plaintiff mortgaged his home and business to pay his already overdue bill for the steel and to cover other start-up costs. Sometime around July 1982, Vipa-NY “got hard to find” and Vipa-Cal became directly involved in the deal with plaintiff. In fact, plaintiff was unable to locate Vipa-NY for this lawsuit. Due to numerous delays for which the manufacturers and Vipa apparently must share blame, the first letter of credit expired before a single tank wheel had been shipped. Vipa-Cal negotiated an extension from the Taiwanese, and defendant bank issued a second letter of credit to plaintiff. It was intended to cover the initial shipment of at least 2100 wheels, which Vipa-Cal had promised to ship quickly to placate the Taiwanese. Plaintiff testified that the requirements under the second letter of credit were to be the same as those under the first, but the second contained two new provisions: It required oceangoing bills of lading and it prohibited partial shipments. Plaintiff did not protest to the bank when he received the letter of credit, despite the fact that he knew that he would not be able to procure the oceangoing bills of lading. On the third of four demands, defendant bank sent plaintiff a list of nine defects in the documentation. All but three defects were cured, but defendant bank still refused payment. II. Fraud by Community Bank Although it did not make the precise claim in its complaint, plaintiff argues before the court that it proved an act of fraud by defendant bank. The court

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has recently summarized the elements of a fraud action in Georgia: Under Georgia law, the elements of a cause of action for fraud are (1) a false representation made by the defendant; (2) scienter or knowledge of the statement’s falsity at the time the statement was made; (3) an intention to induce the plaintiff to act or refrain from acting in reliance on the statement; (4) the plaintiff’s justifiable reliance; and (5) damage to the plaintiff. Wolfe v. Chrysler Corp., 734 F.2d 701, 703 (11th Cir.1984). The court agreed with the district court that plaintiff has shown no damage caused by the addition of Vipa-Cal to the contract. The court simply points out that discovering an instance of misconduct is not sufficient to establish defendant bank’s liability. Plaintiff has not demonstrated that the bank’s silence placed it in a worse position. The additional signature made an additional party liable to Pro-Fab—indeed, the only Vipa that plaintiff could sue. III. Withholding Payment on the Letter of Credit Plaintiff first argues that the district court erred in refusing to apply the equitable doctrines of waiver and estoppel. Plaintiff points out that the bank had paid for two shipments, despite the fact that it presented non-conforming documents each time. Although letters of credit are subject to the statutory provisions in Article 5 of the Uniform Commercial Code, Ga.Code Ann. §§ 11-5-101 to -117, the district court has recognized that equitable doctrines such as waiver and estoppel apply to these types of transactions. Barclays Bank D.C.O. v. Mercantile National Bank, 481 F.2d 1224, 1236-37 (5th Cir.1973), cert. dismissed, 414 U.S. 1139, 94 S.Ct. 888, 39 L.Ed.2d 96 (1974). In Barclays Bank, the fifth circuit held that Mercantile had waived the defects by failing to object to them in its letter and to give Barclays an opportunity to cure. Other cases that have used waiver and estoppel principles against dishonoring banks have arisen under similar circumstances, where banks have given presenters of non-conforming documents no hint of the non-compliance. See, e.g., Chase Manhattan Bank v. Equibank, 550 F.2d 882, 885-87 (3d Cir.1977) (if bank authorized a delayed presentation of documents, it cannot refuse payment because of expiration of letter of credit); Venizelos, S.A. v. Chase Manhattan Bank, 425 F.2d 461, 466 (2d Cir.1970) (bank that paid for shipment of goods would be estopped from later claiming it did not have to pay additional charges included under the letter of credit because the shipment was only partial); Schweibish v. Pontchartrain State Bank, 389 So.2d 731, 737-38 (La.Ct.App.1980) (where bank did not require strict compliance with terms of prior letters of credit to same beneficiary, it could not assume totally inconsistent position by insisting on strict compliance for subsequent letter of credit).

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Defendant bank’s acts do not fall into this category. It is clear that in this case Community Bank did not waive any of the discrepancies by paying for the other shipments. The bank did not pay until it had received authorization from Vipa-Cal, and it notified plaintiff with each check that payment was being made despite the specifically listed discrepancies. This is not a case in which the bank misled the presenter to its detriment. Plaintiff was fully aware of the defects before it shipped. Without Vipa-Cal’s waiver the bank properly refused payment. See Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802, 807 (4th Cir.1975). Plaintiff also argues that the court should have ordered the bank to pay because it “substantially complied” with the terms of the letter of credit. The argument was based on First National Bank v. Wynne, 149 Ga.App. 811, 256 S.E.2d 383 (1979). However, the court agreed with the district court that the circumstances are well beyond the Wynne court’s minor departure from the rule of strict compliance. The court’s decision is based on the peculiar strictures of the letter of credit transaction. The letter of credit contract between Vipa-Cal, the customer, and Community Bank, the issuing bank, is completely separate from the underlying contract between Pro-Fab and Vipa-Cal. The bank is obligated to look only to the requirements of the letter of credit, not to any other activity between the parties. See Ga.Code Ann. §§ 11-5-109 to -114. See also Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230, 235 (5th Cir.1983); Courtaulds, 528 F.2d at 805-06. The beneficiary must strictly conform to the requirements of the letter of credit, because the bank is bound to adhere to them and not look beyond the face of the documents presented. If the beneficiary does not comply, the bank is not required to pay. See Philadelphia Gear, 717 F.2d at 235-36; Courtaulds, 528 F.2d at 805-06; Venizelos, 425 F.2d at 465. Some courts, like the Georgia appellate court in Wynne, have allowed a small measure of flexibility in the general rule of strict compliance by looking at the documents submitted as a whole instead of passing on each piece of paper in isolation. However, plaintiff’s documentation did not simply contain a few clerical errors. Two documents were omitted, including the ocean bill of lading, which is the only evidence that the wheels actually went to Taiwan. IV. Wrongful Dishonor Under Section 5.11-5.5-5.112 Plaintiff’s final argument, not treated in the district court’s opinion, presents a genuine issue of material fact that precludes summary judgment. Sweat v. Miller Brewing Co., 708 F.2d 655 (11th Cir.1983). Plaintiff contends that defendant bank was guilty of wrongful dishonor under Section 5.11-5.55.112 of the Georgia Code because it failed to give notice of dishonor within the required time period. Defendant bank argues that notice was irrelevant

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because plaintiff admits that it could never have produced the two missing documents no matter how much time it was given. The bank further contends that plaintiff breached its presentment warranty under Section 5.115.5-5.111. Because plaintiff knowingly presented non-conforming documentation, the bank claims it was absolved of its duty to honor the draft or to give timely notice of dishonor. However, the bank’s duty to notify is in no way contingent upon its evaluation of the usefulness of the notice. The argument that plaintiff’s breach of the presentment warranty removed any necessity for the bank to act is a more difficult question. Under the plain language of Section 5.11-5.5-5.112, the bank’s duty appears absolute. On the other hand, it seems illogical to impose strict liability on the bank for failure to notify a beneficiary that would not be entitled to payment anyway. The fifth circuit recently considered a similar problem in Philadelphia Gear Corp. v. Central Bank, 717 F.2d 230 (5th Cir.1983). The court there concluded that when a beneficiary knowingly tendered non-conforming drafts, the beneficiary could not later recover on the ground that it received inadequate notice from the issuing bank. However, there was no question that the issuing bank had given timely notice of the deficiencies in Philadelphia Gear. In this case, there remains a question of fact whether plaintiff “knowingly” presented non-conforming documents. The fact that defendant bank had access to the missing documents and had paid for two previous shipments with non-conforming documents, although not sufficient to constitute a waiver of the non-conformities, would certainly raise a reasonable inference that plaintiff thought it was submitting enough to get paid. Thus, the first question of fact is whether the documentation for the other shipments was so similar to that for the third shipment that plaintiff could reasonably have expected it to be acceptable. If plaintiff lacked the requisite knowledge, defendant bank was not relieved of its obligation to notify plaintiff of the dishonor in timely fashion under Section 5.11-5.5-5.112. Two fact questions remain, however, in applying that section to this case. First, nothing in the record indicates when defendant bank actually received the documents from plaintiff. The court therefore cannot evaluate the timeliness of the bank’s notice. The second fact question is whether the dealings among the parties indicate that plaintiff expressly or impliedly consented to defendant bank’s delay. See Ga.Code Ann. § 11-5-112(1)(b). V. Conclusion The court affirmed in part and reversed and remanded in part the district court’s grant of summary judgment to defendant bank in plaintiff company’s

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action for non-payment of a letter of credit. The court found that defendant’s notice may have been necessary and inadequate under the Georgia Commercial Code and remanded to the district court for such determination. When the time limit to submit documents has expired, but the expiry date of the letter of credit has not passed, the deadline to submit the documents is seven days after the shipping date. Even though the expiry date could have initially been longer than seven days beyond the shipping date, documents must arrive within seven days of the shipping date. For example, if the shipping date is May 1 and the expiry date is May 10, documents must be submitted by May 8; ➁ when the time limit to submit documents exceeds the expiry date, the deadline to submit documents is ten days after the shipping date. ➁ Required Documents for Negotiation Documents are required for negotiation as follows: Agreement of documentary draft or official seal, which is required to be submitted once in the first stage of transaction, and the exporter should sign his name on the document in accordance with the bank’s instruction; draft, which is required in case of payment letters of credit and deferred payment letters of credit, but in the case of clean letters of credit it is normally not required; transport documents, which include the bill of lading, airway bill or post receipt; insurance documents which are always required in the contract in which the seller is responsible for making an insurance contract with an insurer; commercial invoice; a packing list and certificate of origin, among other documents, are often required; negotiation application; original letter of credit. (3) Negotiation Procedure Banks receiving a negotiation application from the beneficiary under the letter of credit do their business generally through the following procedural processes: 1. Review conformity of documentation with the terms of the letter of credit and any non-conformity among documents. 2. Make suggestions for non-conformity remediation when small mistakes are found in documents that can be corrected within the permissible period of time. 3. Deposits remaining balance to the exporter’s account after deducting the incurring fees, charges, and interests from the value of the letter of credit, at which time the original letter of credit is returned to the exporter after writing proof of the negotiation on its back. 4. Dispatch documents: Commonly two sets of documents will be made and mailed by air to safeguard against possible lost documents. 5. Dispatch a reimbursement request to a reimbursing bank which is actually required to pay for the value of the letter of credit. When the reimbursing

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bank is specified on the letter of credit, shipping documents should be sent to the issuing bank. When it is specified that telegraphic transfer (T/T) reimbursement is acceptable, reimbursement by T/T to a reimbursing bank is requested, but when it is not accepted, drafts are required to be conventionally mailed. If this bank is not the designated bank under a restricted letter of credit, all documents should be sent to a restricted bank, and renegotiation should be applied for.

Practice of Negotiating Bank under Documentary Letter of Credit

• Reviewing Documents ➀ The result of reviewing by negotiating bank leads to one of two conclusions: The first is to find a lack of conformity with the documents and specifications on the letter of credit, and the second is to find prefect conformity. When a lack of conformity is found, the letter of credit is handled accordingly. When the documents are perfectly in order, the bank would generally make payment to the exporter in advance, which is called a clean negotiation. ➁ A negotiating bank does not have to assess the particulars in the packing lists, invoice, or a contract of sale in accordance with the “independence of the letter of credit” (UCP600 Article 4(a)). Herewith, independence of the letter of credit means that its terms are viewed independent of sale contracts. (UCP 600 Article 4(a)). ➂ A negotiating bank and an issuing bank do not have to review the quantity and unit price in an invoice, but if a bank overlooked evident errors due to negligence, that bank can be tried in court (ICC, UCP 600, p. 74). It is necessary for banks to use proper prudence in their reviews to avoid this costly mistake. (UCP 600 Article 34). ➃ A negotiating bank must review the documents with reasonable care.171 If no evident errors are found, the bank does not have to review detailed calculations of items such as quantity, unit price, and total amount in the invoice (ICC Pub.434, Opinion Banking Commission, p.22). Nevertheless, since there is always the possibility of being involved in unnecessary disputes with customers, it is advisable to review all calculations in detail. (UCP 600 Article 14(d)).

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UCP600, Art. 14(a).

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➄ If the bank is given any documents that the letter of credit did not require, it does not have to review them, and it may return them to the party or forward them to the next party without any further responsibilities. (UCP 600 Article 14(g)). ➅ The bank bears no responsibilities for satisfaction, exactness, authenticity, forgery, or legal effects of the documents. If the bank judges the documents to be legal forms, and reviews them with reasonable care, the bank has no responsibility if later the documents prove to be forged. However, even if the documents are perfect in form, if the bank recognized they were forged the bank is then to take responsibility for the forgery. This is particularly important with B/Ls because they are more frequently forged. If the bank is located in the country in which the document was issued, it must review the documents to insure they follow the legal form mandated by that country. If the bank accepts them despite their legally imperfect form, it cannot avoid this responsibility. (UCP 600 Article 34). ➆ Issuing banks, confirming banks, or designating banks review documents, decide to accept or reject, and are allowed a reasonable length of time within seven working days from the next working day after the acceptance of documents to be made for their examination. The banks are required to inform the party submitting documents of the decision. (UCP 600 Article 14(b)). • Handling Negotiation Documents ➀ When a negotiating bank is designated, if the bank is not a designated bank, the documents can be sent to an issuing bank only through a designated bank to take proper procedures of renegotiation. ➁ If a negotiating bank finds any lack of conformity within the documents, it will return the documents to the beneficiary to allow for corrections to be made and the documents to be resubmitted if possible. ➂ When a negotiating bank sends documents on “approval basis” to an issuing bank, it must state “These documents are in accordance with UCP600” on the cover letter. If this is not done, the forward is considered to be on a “collection basis,” which means they are not protected on the basis of the UCP 600. ➃ Although a negotiating bank finds conformity and there is a clean negotiation, if an issuing bank delays payment intentionally without a convincing reason, the negotiating bank should complain to the issuing bank requesting reimbursement of payment and urge payment of collection. (UCP600 Article 13). ➄ A negotiating bank must review the documents thoroughly in making negotiation. Generally speaking, when a negotiating bank receives a notice of “unpaid” from an issuing bank, the negotiating bank sends the

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“unpaid” notice to the beneficiary and requires him to handle it in person with the applicant rather than directly solving the problem with the issuing bank. The beneficiary must contact the applicant and settle the problem as soon as possible. (UCP 600 Article 16(e)).

(2) Right of Recourse by Negotiating Bank With a payment letter of credit or deferred payment letter of credit, if a designating bank is any bank other than the issuing bank, the paying bank reimburses debts directly to an exporter (creditor). If a designating bank makes a payment, it cannot exercise recourse to an exporter even if it is unpaid from an issuing bank in the future. The payment made by the issuing bank or its designating bank is final. On the other hand, a negotiating bank may have the right of recourse in the amount of the negotiated payment plus interest from the negotiation date to the reimbursement date, because the negotiating bank including the reimbursement or issuing bank made finance available to the exporter in advance by discounting drafts before another bank made the final payment. If the negotiating bank is not reimbursed for this amount, it has the right to claim for the “dishonored amount” from the exporter. The Issuing Bank may not dishonor the payment on the basis of hypertechnical reading of the letter of credit.

The risks from the hypertechnical reading of the letter of credit may be assumed by the concerned banks themselves. The following is the case to confirm that a bank may not reject a demand for payment made in accordance with its letter of credit on the basis of a hypertechnical reading of a letter of credit. That is, a variance between documents specified in the letter of credit and documents submitted to the bank is not enough for the bank to reject the payment, if there is no possibility that the documents could mislead the paying bank to its detriment. Memorandum172 TAURO, District Judge.

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EXOTIC TRADERS FAR EAST BUYING OFFICE v. EXOTIC TR. NO. 86-2663-T. 717 F. Supp. 14 (1989) January 10, 1989. United States District Court, D. Massachusetts. Published in English: 1989 JUSTIA US LAW. http://law.justia.com/cases/federal/district-courts/FSupp/717/14/ 1584507/.

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This case involves two different contracts for the sale of goods between the plaintiff, Exotic Traders Far East Buying Office (hereinafter “seller”), and defendant, Exotic Trading USA Inc. (hereinafter “buyer”). Payment for the goods, electronic stun guns, and holsters, was secured via two irrevocable documentary letters of credit issued by BayBank Boston. BayBank’s refusal to honor demands for payment under either of the letters of credit and the buyer’s failure to pay for the goods gave rise to seller’s complaint. Buyer counterclaimed against seller for breach of contract. BayBank crossclaimed against buyer for indemnification and asserted a third party claim against Burton Kaufman, buyer’s sales agent, as guarantor of the two letters of credit. All claims were tried together without a jury. This memorandum constitutes this court’s findings of fact and conclusions of law in accordance with Fed.R.Civ.P. 52(a). I. In May 1985, seller agreed to sell to buyer 2,000 holsters. The total price was $2,200. Kaufman obtained an irrevocable documentary letter of credit from BayBank for $2,200. To obtain payment under the letter of credit, the beneficiary (originally seller) was required to present a thirty day sight draft accompanied by the following documents: (1) a signed commercial invoice; (2) a special US Customs invoice; (3) a packing list; (4) an inspection certificate signed by seller; (5) a signed air waybill; and (6) a copy of a telex sent one day prior to shipment covering the holsters, F.O.B. Seoul. The telex was required to state: The cost of goods, date of shipment, air waybill number, estimated date of arrival, airline, master air waybill number, and number of cartons. The holsters were shipped on June 13, 1985 and arrived in the United States on June 14, 1985. Buyer sold the goods in transit to Intermark Trading which is a company that Kaufman uses for importing goods so they are insured by his company’s bond and took possession of them. Neither buyer nor Intermark Trading paid for the goods. On June 21, 1985, Yakjin Corp., the manufacturer/assignee, made a demand for payment on the $2,200 letter of credit. Although the demand was accompanied by all the required documents, they varied in two aspects from the literal terms of the letter of credit: (1) the telex required by the letter of credit was sent one day after shipment of the goods, rather than one day before shipment; and (2) the commercial invoice indicated the goods had been shipped “F.O.B. Korea,” rather than “F.O.B. Seoul.” Relying on these discrepancies, BayBank refused the demand for payment. II. The second sale of goods was essentially the same as the first. In September 1985, seller agreed to sell to buyer 3000 electronic stun guns for a total price of $30,000. Kaufman obtained an irrevocable documentary letter of

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credit from BayBank for $30,000 by amending an already issued letter of credit. To obtain payment under this letter of credit, the beneficiary had to present essentially the same type of documents as were required in the first transaction. The stun guns were shipped on October 12, 1985, and arrived in the United States on October 14, 1985. Buyer again sold the goods in transit to Intermark Trading which took possession of them. Seller has not been paid for the goods. On October 17, 1985, Yakjin Corp. made a demand for payment on the $30,000 letter of credit. The demand was accompanied by all the required documents. Again, there were two discrepancies between the documents presented and the literal terms of the letter of credit: (1) the required telex was sent on the day of shipment, rather than one day prior to shipment; and (2) the telex did not contain the cost of goods sold. Because of these discrepancies, BayBank refused the demand for payment. III. Both letters of credit present the same question: May BayBank refuse to honor these demands for payment because of the variations between the documents presented and the literal terms of the letters of credit. Massachusetts requires that a demand for payment comply strictly with the terms of a letter of credit. Two decisions of this circuit, however, make clear that a bank may not reject a demand for payment on the basis of a hypertechnical reading of a letter of credit. In Banco, the letter of credit required a certificate stating that “the goods were in conformity with the order.” The certificate that was presented stated that the goods were found “conforming to the conditions stipulated on the order-stock sheets.” The court found that this discrepancy was not enough to justify the bank’s refusal to pay on the letter of credit. The court reasoned that, to foster international transactions, courts must balance the need for predictability with the need for a realistic approach. In Flagship Cruises, there were three discrepancies between the presented documents and the terms of the letter of credit: (1) the draft was drawn by the wrong entity (Flagship Cruises, Inc. instead of Flagship Cruises, Ltd.); (2) the draft did not contain a statement that the draft was in conjunction with certain collateral documents (as required by the letter of credit); and (3) the draft did not say it was drawn under “NEMNB Credit No. 18506” but rather simply identified “No. 18506.” The court held that the bank could not rely on these discrepancies to deny payment. As the court stated, we do not see these rulings as retreats from rigorous insistence on compliance with letter of credit requirements. They merely recognize that a variance between documents specified and documents submitted is not fatal if there is no possibility that the documents could mislead the paying bank to its detriment.

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Applying the teachings of Banco and Flagship Cruises, this court holds that the discrepancies between the documents that Yakjin presented were not of sufficient variance with the terms of the letters of credit to justify BayBank’s refusal to pay. None of the discrepancies in the presentment documents could have misled anyone. Each telex was to be sent the day before the goods were shipped; however, the holster and stun gun telexes were sent after or on the same day the goods were shipped. Nevertheless, both telexes indicate that they were received before the goods were due to arrive in this country. Consequently, BayBank knew that both telexes had served their intended purpose of notifying the buyer of shipment, so as to avoid the accrual of warehouse fees. The fact that the telexes were sent a matter of hours late is, therefore, of no substantive significance. All the other documents presented with the demand for payment on the holster letter of credit, including the packing list, special US Customs invoice, certificate of origin and the air waybill, indicated that the holsters had been shipped from Seoul, Korea. Moreover, even the commercial invoice indicated that the goods were loaded at the port of Seoul. Similarly, the documents presented with the demand for payment on the stun gun letter of credit, including the commercial invoice, packing list, special US Customs invoice, certificate of origin, inspection certificate, and the air waybill, indicated that the price of the goods was $30,000. Considered as a whole, and in context, the documents for each transaction complied with the terms of the respective letters of credit and could not have misled anyone. Accordingly, there was no valid reason for BayBank to refuse payment. Technical inconsistencies between the documents presented and those specified under a letter of credit do not justify the undermining of an otherwise valid commercial transaction. Consequently, BayBank is liable to seller for the full amount of the two letters of credit, $32,200. As a consequence, this court holds that buyer is liable to BayBank on the cross-claim for the full $32,200, as well as reasonable attorney’s fees, pursuant to the customer agreement. Additionally, Kaufman is liable for the same sum, in accordance with the guaranty agreement he executed. IV. Having determined that BayBank is liable to seller for the face value of both letters of credit, it remains to be seen whether buyer is jointly and severally liable for that sum, because of its failure to pay for the goods. Buyer’s defense and its counterclaims, are based on its assertion that seller breached the underlying sales contract. Specifically, buyer alleges that the stun guns that were delivered were improperly configured, and that seller breached an exclusive dealing arrangement by selling other stun guns in the

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United States. Additionally, buyer contends that the stun gun defect rate was excessive, and that seller failed to replace allegedly defective units. Kaufman testified that seller, through its agent Paul Hyman, had agreed to ship a new configuration of the stun guns prior to the $30,000 transaction. Additionally, he maintained that buyer had an exclusive right to market seller’s stun guns in the United States, an agreement that seller breached. On both these points Kaufman’s testimony was in conflict with that of Hyman. Indeed, Hyman maintained that there was no agreement either to sell buyer the new configuration or for an exclusive dealing arrangement. The two men who negotiated the deal, therefore, now differ as to its terms. The court credits Hyman’s testimony and finds that seller did not breach the contract. Finally, the evidence does not support buyer’s contention that an excessive percentage of the stun guns were defective. As a matter of fact, Kaufman could not recall the total number of stun guns that were sold, nor what percentage of them were defective. Consequently, all buyer’s counterclaims,5 and its defenses fail. We are left with a buyer who contracted for and received goods, but did not pay for them. Accordingly, buyer is liable for their full cost, $32,200. An order will issue. Order For the reasons set forth in the accompanying memorandum, judgment is hereby entered: (1) For the plaintiff, both on its claims and on defendant Exotic Trading USA, Inc.‘s counterclaims. (2) For defendant BayBank Boston, N.A., on its cross-claim against defendant Exotic Trading USA, Inc. and on its third party claim against Burton Kaufman.

(3) Discrepant Documents A clean negotiation is always preferred because those discrepancies in documents can cause various difficulties to the concerned parties. If a lack of conformity in documents is easily correctable, a negotiating bank must point out the error and request an exporter to resubmit the documents with the proper amendments. Despite the initial inconsistency, if the documents are resubmitted they can still constitute a clean negotiation. In case of dishonoring the payment due to the discrepancy of the presented document, the timely notice must be given to the presenter to make corrections, etc.

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The following case treats with the three main issue including the timely notice of discrepancy: One is that, strict compliance rule must be applied to the letter of credit transactions considering the fact that the flip-side to relaxing the strict compliance standard is the relaxation of the issuer’s strict duty to make payment upon presentation of conforming documents regardless of possible extrinsic indication of fraud or seller is in breach of contract, which means that adherence to the strict compliance standard also benefits the beneficiary under the letter of credit. Second one is that, equitable concepts of Anglo-American legal system do not lend themselves well to the letter of credit law. This is, particularly, true when both the beneficiary and the issuer are sophisticated business entities, considering the fact that equitable safeguards are seldom required to often unequal bargaining positions or levels of access to information. Third one is that when the issuing bank rejects the demand for payment due to the breach of the strict compliance standard, the issuer is required to give timely notice of credit discrepancies to the beneficiary so that it can cure them before the credit expires. This case shows that if an issuer fails to give timely notice, and if, given timely notice, the beneficiary could have eliminated the discrepancies noted, then the issuer can be estopped from dishonoring the demand. MEMORANDUM173 Plaintiff World Houseware Producing Co., Ltd. (“World”) seeks to recover $180,000 pursuant to an irrevocable letter of credit issued by defendant Mellon Bank (East), N.A. (“Mellon”) on World’s behalf. World has filed a motion for summary judgment and Mellon has responded with its own motion for summary judgment. This memorandum and order address both motions, which are denied for the reasons stated below. I. Factual Background On February 13, 1990, Mellon issued irrevocable letter of credit No. I123808 at the request of Eastern Retailers Service Corporation, a division of Ames Department Stores, Inc. (“Ames”). The letter of credit was issued in the amount of $180,000 on behalf of World, which had contracted with Ames to provide a shipment of household

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WORLD HOUSEWARE PRODUCING CO., LTD. v. MELLON BANK (EAST), N.A. Civ. A. No. 91–5067. WL 50070(E.D.Pa 1992) March 10, 1992. https://a.next.westlaw.com/Document/ Ic05c24c555eb11d997e0acd5cbb90d3f/View/FullText.html?originationContext=typeAhead&tra nsitionType=Default&contextData=(sc.Default).

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goods. As issued, the letter of credit guaranteed payment upon the presentation of certain documents, including a “certificate of origin in 1 original and 3 copies,” and a “test report or laboratory test certificate signed by a representative of Consumer Testing Laboratories, Ltd., stating the sample passed the performance and serviceability tests.” In addition, the letter of credit specified shipments dates between April 3 and April 17, and a date of expiry of May 2. This and all subsequent dates are for the year 1990. On or around February 27, World asked its agent, Barth & Dreyfuss (“Barth”), to communicate its desire to make two amendments to the letter of credit. World sought (1) to delete the requirement that the original certificate of origin be presented and (2) to change the name of the corporate entity signing the lab test certificate from “Consumer Testing Laboratories, Ltd.”, to “Consumer Testing Laboratories (Far East), Ltd.” Barth passed this request on to a representative of Ames, who then relayed it to Mellon. By the time World’s request reached Mellon, however, it contained two additional suggestions. As communicated by Ames, it was requested that the shipping dates be changed from April 3–17 to March 15–30, and that the date of expiry of the letter of credit be changed to April 15. Mellon agreed to make these modifications and informed World by cabling the Kwong On Bank, Ltd. (“Kwong On”), in Hong Kong, on March 16. World learned from Kwong On of the amended letter of credit on or around March 23. That same day it asked Barth to “correct” the amendment to the letter of credit to restore the original shipping and expiry dates. Barth again communicated World’s request to its Ames contact so that World’s request could be passed on to Mellon. However, Mellon never received word of this second request. World shipped its goods to Ames on April 9 and 10, when vessels carrying the purchased cargo left the port of Hong Kong. On April 25, World presented Mellon with a demand for payment. The documentation presented incorporated the two changes originally requested by World. By cable dated May 1 Mellon informed World, through Kwong On, that the letter of credit would not be honored based upon the following discrepancies: “letter of credit expired” and “late shipment”. Mellon’s cable also lists the fact that “invoice doesn’t state actual cost of components,” but Mellon has apparently dropped this objection, as it relies exclusively on the other two grounds for dishonor in its motion and various responses. These same discrepancies were noted in the transmittal letter sent by Kwong On to Mellon along with the letter of credit. II. Summary Judgment Standard A motion for summary judgment will be granted if “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the

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affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Upon a motion for summary judgment, a court must decide whether “there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party.” As set forth below, such factual issues do exist in this case and may affect its outcome. Thus, the motions for summary judgment must be denied. III. Discussion Mellon issued its letter of credit “subject to the Uniform Customs and Practice for Documentary Credits (1983 Revision, International Chamber of Commerce, 1983 Revision, Paris, France, Publication No. 400).” While the Uniform Customs and Practice for Documentary Credits (“UCP”) sets the international standards for letter of credit practice, it is the Pennsylvania Commercial Code which provides the substantive law of this case. Central to that law is 13 P.S. § 5114, which describes the issuer’s duty to honor the beneficiary’s demand for payment: “An issuer must honor a draft or demand for payment which complies with the terms of the relevant credit regardless of whether the goods documents conform to the underlying contract for sale or other contract between the customer and the beneficiary.” This case boils down to the question whether World’s demand for payment, namely the documentation it presented to Mellon, complied with the terms of the letter of credit issued. If it did, then World is entitled to payment. a. Operative letter of credit One of the determinative issues is which letter of credit is operative—the one originally issued by Mellon (“original credit”) or the amended credit issued on March 23 (“March 23 credit”). If the March 23 credit is operative, then that decides the case, for there is no dispute that World’s shipments were late vis-a-vis the amended credit’s shipment dates, and that the demand was presented to Mellon later than the amended credit’s expiry date. World argues that the March 23 credit is inoperative because it never consented to a change of shipping or expiry dates. Pursuant to 13 P.S. § 5106(b), “[u]nless otherwise agreed once an irrevocable credit is established as regards the customer it can be modified or revoked only with the consent or the customer and once it is established as regards the beneficiary it can modified or revoked only with his consent.” Mellon responds that World is bound by the terms of the March 23 credit because it failed to act promptly to reject the change-of-date amendments contained therein.

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The problem with Mellon’s argument is that neither World nor its agent ever agreed to the shipping and expiry date changes. Pennsylvania law recognizes three theories according to which a principal can be bound by the acts of its agent, including agency by estoppel. In each case, however, it is the act of the agent which binds the principal. Here, Mellon seeks to bind World to changes requested by Ames, and there is no evidentiary support for the proposition that Ames was World’s agent, either in fact or in appearance. Nor is there evidence that Kwong On was World’s agent. It is thus irrelevant that the transmittal letter sent by Kwong On to Mellon along with the letter of credit mistook the earlier shipping and expiry dates as the correct ones. Since the March 23 credit is not operative, the original credit controls. World argues that a third, partially amended credit is operative: the original credit, amended to reflect the certificate of origin and lab test certificate changes requested by World. World contends that because Mellon agreed to make these modifications (as well as the date-change modifications), all parties have agreed to them, and they should be incorporated into the original credit. Mellon is correct, however, in pointing out that what it agreed to was one unitary amendment including four documentation changes. Mellon only agreed to the changes requested by World in conjunction with the shipping and expiry date changes. Agreement to a lesser, select portion of the amendment communicated by Ames cannot be arbitrarily imputed to Mellon. As discussed below, this may mean that World is entitled to payment, and this possibility is sufficient to defeat Mellon’s motion for summary judgment. b. Strict versus substantial compliance Mellon argues that it is not obliged to pay World even if the original credit controls, because World’s demand for payment did not comply with the terms of the original credit. Specifically, the documentation presented did not include the original certificate of origin and included a modification in the name of the corporate entity signing the performance certificate. World responds that these discrepancies are hypertechnical and should not offer Mellon grounds for dishonoring the demand for payment. The majority of courts apply a strict compliance standard “and see any failure of the documents to conform as excusing the bank from its duty to honor the beneficiary’s draft or demand for payment.” John F. Dolan, The Law of Letters of Credit. However, a minority of courts, particularly in the First Circuit, apply a more relaxed, substantial compliance standard. These courts apply the more relaxed standard for the same equity-driven reasons that contract law in general has become less formalistic in recent decades. Equitable concepts do not, however, lend themselves well to letter of credit law. Typically, both the beneficiary and the issuer are, as here, sophisticated business entities. Equitable safeguards are seldom required

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to offset unequal bargaining positions or levels of access to information. Most important, the fundamental purpose of letters of credit is to provide quick, efficient, streamlined transfers of money based solely upon the presentation of conforming documents. The law of credit compliance must be tailored essentially to the needs and capabilities of document examiners, rather than attorneys. Bank functionaries are ill-equipped to make “substantial compliance”-type decisions about documents which pass before them. Requiring them to do so will nullify the quickness and efficiency for which letters of credit are used in the first place. The Third Circuit held that Pennsylvania’s Commercial Code mandates application of the strict compliance standard in Chase Manhattan Bank v. Equibank, and again in Banco Nacional De Desarrollo v. Mellon Bank, N.A. In the Chase Manhattan Bank decision, the court reaffirmed the principle that “[t]here is no room for documents which are almost the same, or which will do just as well.” Applying this standard to the present case, even the arguably minor discrepancies contained in the documents presented by World result in a lack of strict compliance with the terms of the original letter of credit. The absence of an original certificate of origin is a manifest discrepancy, especially given the significance that is often placed upon having the original of a document, as opposed to a copy. The alteration of the corporate entity signing the performance certificate also gives rise to a discrepancy. World knows that the addition of “(Far East)” to the corporate name “Consumer Testing Laboratories, Ltd.” is mere specification, and a document examiner may well guess that this is this case. But document examiners are not in the business of guessing—they are, rather, in the business of comparing documents and credits. They cannot be imputed knowledge which goes beyond the scope of the documents presented to them. Hence, the need to maintain the integrity of the strict compliance standard. It should be noted that the flip-side to relaxing the strict compliance standard is the relaxation of the issuer’s strict duty to make payment upon presentation of conforming documents regardless of possible extrinsic indication of fraud or seller breach of contract. In other words, adherence to the strict compliance standard also benefits sellers. c. Time to cure While World’s demand for payment does not satisfy the strict compliance standard, that does not finish the matter. Courts have required the issuer to give timely notice of credit discrepancies to the beneficiary so that it can cure them before the credit expires. These courts have held that if an issuer fails to give timely notice, and if, given timely notice, the beneficiary could have eliminated the discrepancies noted, then the issuer can be estopped from dishonoring the demand.

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Mellon received World’s demand on April 27 and communicated its dishonor and reasons therefore to Kwong On on May 1. The reasons given for Mellon’s dishonor were “letter of credit expired” and “late shipment”. Since, however, the March 23 credit does not control, the discrepancies which Mellon should have communicated are those concerning the certificate of origin and the performance certificate. Since the original credit controls, if, given timely notice, World could have cured the defects contained in its documentation, then Mellon is estopped from dishonoring World’s demand for payment. The factual issues raised, then, are (1) when, given timely notice, World would have been informed of the documentation defects, and (2) how quickly, given such notice, World could have cured the defects. Because these issues of material fact remain, both parties’ motions for summary judgment must be denied. An appropriate order follows. Order AND NOW, this 10th day of March, 1992, upon consideration of both parties’ motions for summary judgment and the responses thereto, it is hereby ORDERED that 1. Plaintiff’s motion for summary judgment is DENIED. 2. Defendant’s motion for summary judgment is DENIED. If a discrepancy in the exporter’s documents is, however, too substantial to be easily corrected, the negotiating bank must handle the situation accordingly. Major discrepancies require consultation with the importer to clarify the agreement. If an importer decides that the discrepancies will not prevent the payment of the transaction, he can demand the bank to disregard the error, and payments will go through as planned. Even in case that issuing bank decides to dishonor the payment due to the discrepant document presented,the bank can seek the waiver from the accountee and pay to the beneficiary under the assumption of risk by the accountee.

The following case makes it clear that once an issuing bank has determined that a beneficiary has presented non-conforming documents and therefore has already decided not to honor the beneficiary draft, the bank can seek a waiver from the customer (accountee) without being precluded from assenting the nonconformity as a defense in a later suit for wrongful dishonor or which might be brought by the beneficiary. This is interpretation about the seeking waiver from the customer after dishonoring is of practical value to the documentary transactions under the letter of credit, considering the fact that as many as half of the demands for payment under letters of credit are discrepant, yet in the vast majority of cases, the account party waivers the discrepancies and authorities

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the payment. Particularly, the wisdom of this rule is not undermined by the fact that the beneficiary here neither “acknowledged that its documents [were] discrepant,” nor “specifically requested that the issuer consult the account party.” Opinion174 CEDARBAUM, District Judge. Plaintiff was the beneficiary of an irrevocable letter of credit which defendant refused to honor. Both sides move for summary judgment under Fed.R.Civ.P. 56. For the reasons discussed below, defendant’s motion is granted and plaintiff’s motion is denied. Background The following facts are undisputed. In 1993, plaintiff Western International Forest Products, Inc., contracted to sell lumber to Nam Moon Co., a Korean company. The logs were shipped from Alaska to Korea. To pay for the timber, Nam Moon arranged for a Korean bank, defendant Shinhan Bank (“Shinhan Bank Korea”), to issue an irrevocable letter of credit in favor of Western. The drawee on the letter of credit was Shinhan Bank’s branch office in the City of New York. (“Shinhan Bank New York”). The letter of credit provides that it is subject to the 1983 revision of the Uniform Customs and Practices for Documentary Credits (the “UCP”). The letter of credit described one of the documents required for payment as follows: “Inspection certificate must be issued by Mr. Sam Tae Shin (passport No. DG0101712) of Nam Moon Lumber Co., in Korea.” Shin is the president of Nam Moon. On July 9, 1993 Shin inspected the logs in Alaska. He then visited Western’s offices in Portland, Oregon, and returned to Korea. Back in Korea, Shin executed the inspection certificate required by the letter of credit and faxed it to Western. The inspection certificate is dated July 26, 1993, but Western did not receive the facsimile until July 28, 1993. After receiving the facsimile inspection certificate, Western shipped the logs to Nam Moon in Korea. Someone at Western stamped the facsimile inspection certificate “original” and sent it to A.C. Wilson Co., Western’s freight forwarder. On August 19, 1993, A.C. Wilson’s senior partner, Arlene Wilson, presented documents and a payment draft to Shinhan Bank New York and requested payment under the letter of credit for Western. A Shinhan Bank New York employee, Diane Masone, examined the documents

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WESTERN INTERN. FOREST PRODUCTS v. Shinhan Bank 860 F. Supp. 151 (S.D.N.Y. 1994) US District Court for the Southern District of New York Published in English: 1989 JUSTIA US LAW. http://law.justia.com/cases/federal/district-courts/FSupp/860/151/2159932/.

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presented and noted that the inspection certificate was a facsimile and did not bear an original signature. On August 20, 1993, Masone telephoned Wilson, advised her of the problem, and told her that Shinhan Bank New York would refuse payment. Wilson asked Masone to cable Shinhan Bank Korea and request authorization to pay on the letter of credit. Masone did. Masone’s cable to Shinhan Bank Korea reads in part: DOCUMENTS RECEIVED UNDER THE ABOVE MENTIONED L/ C WITH THE FOLLOWING DISCREPANCIES: ... 1) FAX COPY OF INSPECTION CERT. WAS PRESENTED (NO ORIGINAL) PLEASE URGENTLY ADVISE IF WE MAY PAY. On August 25, 1993 Shinhan Bank Korea cabled back: PLS BE INFORMED THAT OUR CUSTOMER REFUSED TO ACCEPT MENTIONED DISCREPANCIES. Masone then told Wilson that Shinhan Bank New York refused to pay and returned the documents that had been presented the week before. Shinhan Bank argues that it is entitled to summary judgment because Western never presented an original inspection certificate and therefore violated the strict compliance rule. Western argues that Shinhan Bank is precluded from asserting a strict compliance defense because Shinhan Bank Korea consulted Nam Moon and did not decide whether to pay the letter of credit solely on the basis of the documents presented. Discussion This case presents two novel questions under the UCP. Although the UCP is not law, it is made applicable by agreement of the parties to most letters of credit. Furthermore, the New York UCC expressly does not apply to letters of credit incorporating the UCP. The issues presented are (1) whether a facsimile is an original under UCP Article 22c; and (2) whether UCP Article 16b precludes an issuer from asking a customer to waive a defect in presentment. 1. Is a Facsimile an Original? A fundamental tenet of letter of credit law is that a beneficiary must present precisely conforming documents in order to be paid. Under the “strict compliance” rule, “the terms and conditions of a letter of credit must be strictly adhered to.” As Lord Sumner stated in an oft-quoted remark, this standard leaves “no room for documents which are almost the same or which will do just as well.” One manifestation of the strict compliance rule is the long-standing practice among issuers to require original documents unless the letter of credit stipulates otherwise. The 1983 version of the UCP does not explicitly require original documents, but that rule is implicit in Article 22c:

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Unless otherwise stipulated in the credit, banks will accept as originals documents produced or appearing to have been produced: i. by reprographic systems; ii. by, or as the result of, automated or computerized systems; iii. carbon copies, if marked as originals, always provided that, where necessary, such documents appear to have been authenticated. Moreover, the ICC Group of Experts of the ICC Banking Commission has interpreted Article 22c as requiring an original document unless the letter of credit says or allows otherwise. The opinions of the Group of Experts, of course, are not law, but they are entitled to some persuasive weight in interpreting the UCP. An “originals only” rule is in keeping with the strict compliance rule. It avoids a potential uncertainty about when an issuer must honor a beneficiary’s draft. Western argues that the document Arlene Wilson presented to Shinhan Bank New York complied with the literal language of Article 22c. The facsimile was, Western observes, produced by an “automated or computerized system,” was marked as an original, and “appears to have been authenticated.” The difficulty with this argument is that Article 22c (and all of the cases and commentary that have been cited by the parties) are silent as to who must mark a document as an original and authenticate it in order for it to be considered an original. Under Western’s argument, Article 22c anticipates marking and authentication by beneficiaries. That cannot be. It cannot be that the beneficiary of a letter of credit can create conforming documents simply by marking them originals and doing something that “appears” to authenticate the documentation. For Article 22c to make sense, it must mean that only the issuer of a document can designate a copy as an original by marking it as such and authenticating the mark. Under this rule, the facsimile Western presented to Shinhan Bank New York was non-conforming. Western, not Nam Moon or Shin, marked the document “original.” Nor did Nam Moon or Shin do anything that can be construed as authenticating the facsimile. Accordingly, Western’s presentment was defective. 2. Can the Issuer Seek Waiver from the Customer? UCP Article 16b requires an issuing bank to examine documents only: If, upon receipt of the documents, the issuing bank considers that they appear on their face not to be in accordance with the terms and conditions of the credit, it must determine, on the basis of the documents alone, whether

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to take up such documents, or to refuse them and claim that they appear on their face not to be in accordance with the terms and conditions of the credit. Western argues that Shinhan Bank is precluded from asserting the defense of non-conforming documents because it did not decide whether to pay “on the basis of documents alone.” After noticing that Western had presented the facsimile, Shinhan Bank New York, at the request of Western’s freight forwarder, sought advice from Shinhan Bank Korea, which in turn consulted the account party, Nam Moon. The bank formally refused to honor Western’s draft after Nam Moon refused to waive the discrepancy. Western’s argument must be rejected, for two reasons. First, Western was not injured by the bank’s seeking advice from its customer. Before Shinhan Bank Korea consulted Nam Moon, Shinhan Bank New York had already decided not to honor Western’s draft because the documents presented were non-conforming and had so advised Western’s freight forwarder. Asking whether Nam Moon would waive the defect could only have helped Western. Second, it is a routine procedure for issuing banks to seek waivers from customers when a beneficiary presents non-conforming documents. This practice is necessary because approximately half of all presentments are defective. In some instances, the issuer consults the customer at the express request of the beneficiary. In other cases, the issuer contacts the customer without a formal request from the beneficiary. Whether an issuer consults the customer independently or at the beneficiary’s request makes no difference. Once an issuer has determined that a beneficiary has presented non-conforming documents (and therefore has already decided not to honor the beneficiary’s draft), it should be able to seek a waiver from the customer without being precluded from asserting the non-conformity as a defense in a later suit for wrongful dishonor brought by the beneficiary. As the Second Circuit held in a similar setting: The letter of credit is intended to grease the wheels of trade and commerce. As many as half of the demands for payment under letters of credit are discrepant, yet in the vast majority of cases, the account party waives the discrepancies and authorizes payment. This process is efficient, and the law should encourage it, particularly when the beneficiary has acknowledged that its documents are discrepant and has specifically requested that the issuer consult the account party. Alaska Textile Co., Inc. v. Chase Manhattan Bank, 982 F.2d 813, 824 (2d Cir.1992). That the beneficiary here neither “acknowledged that its documents [were] discrepant,” nor “specifically requested that the issuer consult the account party,” does not undermine the wisdom of this rule. Defendant is not, therefore, precluded from asserting that the documents presented by plaintiff were non-conforming. For the foregoing reasons, defendant’s motion for summary judgment is granted and plaintiff’s motion is denied.

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In the case of unchangeable discrepancy in the submitted documents, the negotiating bank can choose one of the follows: 1. Negotiation under Letter of Indemnity Indemnity means “protection or security against damage or loss” and a letter of indemnity is a letter guaranteeing that the person to whom the letter is written will not suffer a financial loss. Banks usually accept this letter because it is evident that recourse is possible in the future if the issuing bank makes a notice of “unpaid.” 2. Cable Negotiation If a negotiating bank finds a lack of conformity in the documents that is not easily fixed, the negotiating bank keeping the documents reports the inconsistency, asks an issuing bank whether to accept by cable, receives a reply of acceptance from the issuing bank, and negotiates the documents to pay the beneficiary the export price requested by the beneficiary under the letter of credit. 4. Negotiation on Approval Basis If a negotiating bank considers the inconsistency in the documents too substantial to be modified, and is uncertain whether reimbursement by the issuing bank is to be made to the beneficiary, it will discuss the problem with the beneficiary and send the documents “on approval basis or payment basis” to an issuing bank. In this case, a negotiating bank has no risk, but the beneficiary can have trouble in getting payment collection until the issuing bank receives the payment from the applicant.

When the negotiating bank sends the documents “on an approval basis” or “on a collection basis,” the bank is required to make its intention clear, because the collection can be pursued under the Uniform Rules for collection instead of the UCP.

This is the case to treat with the interpretation of the technical term “on an approval basis” in presenting the documents to the bank, which may be interpreted in the different meaning depending on the circumstances. Presentation of documents “on a collection basis” and “on an approval basis” indicates that payment is sought from the bank as principal under the letter of credit. Depending on the circumstances, however, “on a collection basis” can indicate that the documents are being sent on a basis dependent of the letter of credit, that is, for simple collection under the Uniform Rules for Collection instead of the UCP with the bank acting as the beneficiary is agent by delivering the documents to the account party against payment. In practice, documents presented to the negotiating bank which are known not to conform to the credit are sometimes sent to the issuing bank “on a collection basis” or “for collection.” These phrases are themselves ambiguous, and their meaning must be obtained from the context.

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In this case, the court reveals its opinion, about the contradictory interpretation of the technical term, that once an issuer has explicitly incorporated the Uniform Customs into its letter of credit, we will not absolve it of its obligations under the UCP without a substantial showing of cause to do so. Merely submitting the document to the issuing bank “on an approval basis” without showing any substantial explicit or implicit cause is not sufficient to make it deviate from the obligations under the UCP. Case175 Alaska Textile Co. sued Chase Manhattan Bank in the United States District Court for the Southern District of New York (Metzner, J.) for wrongful dishonor of two letters of credit that Chase had issued in favor of Alaska. Alaska conceded that its documents did not conform to the credits, but argued that Chase should be precluded from relying on the discrepancies because Chase violated the timely notice provisions of UCP Article 16(c). The district court granted judgment for Chase, holding that Alaska had waived Chase’s compliance with Article 16(c) by submitting documents “on an approval basis.” Alaska Textile Co. v. Lloyd Williams Fashions, Inc. We now affirm, not on a waiver theory, but on the ground that Chase acted on Alaska’s demand for payment on the credits within the “reasonable time” mandated by Article 16(c). Facts Plaintiff-appellant Alaska Textile Co. (“Alaska”), which is owned and operated by Amnon Kashi, is a New York-based textile company that exports fabric from India. Lloyd Williams Fashions, Inc. (“Lloyd”), a manufacturer of women’s clothing, contracted with Alaska in early 1988 to buy several thousand yards of Indian silk which were to be delivered to Lloyd’s facility in Hong Kong. To make payment, Lloyd arranged for defendant-appellee Chase Manhattan Bank to issue two letters of credit in favor of Alaska. The silk was shipped from India to Hong Kong on April 2, 1988, but Alaska, the shipper, did not forward the necessary documents to its collecting bank, Merchants Bank of New York (“Merchant”), until April 26, 1988. Merchants’s letter of credit examiner—known as Junior to all involved in this litigation—reviewed Alaska’s documents and noted three discrepancies: (1) The documents were stale, i.e., presented more than twenty-one days after the goods had been shipped, (2) the description of goods did not

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ALASKA TEXTILE CO., INC., Plaintiff-Appellant, v.CHASE MANHATTAN BANK, N.A., No. 263, Docket 92-7468. 982 F.2d 813, 815(2d Cir. 1992) 61 USLW 2394, 19 UCC Rep.Serv.2d 540 FUnited States Court of Appeals Second Circuit. http://www.freelawreporter.org/flr3d/f2d/ 982/982.F2d.813.92-7468.263.html.

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strictly conform to the credits; and (3) the airway bill lacked a “notify party” designation. Junior informed Alaska of these discrepancies, at least one of which, late presentation, was incurable. Undeterred, Alaska directed Merchants to present the discrepant documents to Chase anyway “as is, with discrepancies.” Merchants presented the documents and a form collection letter to Chase. Under a space on the form denominated “SPECIAL INSTRUCTIONS,” Merchants typed, “Documents are presented on an approval basis.” The district court found that this is an industry-accepted phrase used “to indicate that discrepancies in the documents existed, and that Alaska was asking Chase to request Lloyd to waive these discrepancies and authorize payment.” Chase examined the documents corresponding to the two letters of credit, respectively, on the third and fourth banking days following presentment. Chase noted discrepancies in the documents that justified dishonor, promptly advised Lloyd of the discrepancies, and asked whether it would waive them. While Lloyd was considering whether to waive the discrepancies, Kashi contacted Lloyd’s president to persuade him to authorize payment under the credits. Over the next two weeks, Alaska and Lloyd, both in desperate financial condition, continued to negotiate over payment for the silk. In the meantime, on May 9, 1988 (eight banking days after presentment), Chase told Junior at Merchants Bank that there were discrepancies in the documents which justified dishonor, but that Lloyd had not yet decided whether to waive them. When Chase asked how to proceed, Junior essentially instructed Chase to sit on the documents, pending Lloyd’s decision whether to authorize payment. Chase sent a telex to Merchants Bank on May 18, 1988, restating the discrepancies justifying dishonor and stating that the documents were being held at Alaska’s disposal. The record does not indicate whether Chase sent the telex at Alaska’s or Lloyd’s behest. In September 1988, Alaska sued Chase in New York Supreme Court for wrongful dishonor of the letters of credit. Discussion The district court intimated that Chase may have violated Article 16(c)’s timely notice provisions but held that Alaska “ha[d] waived its right to strict compliance with UCP’s Article 16(c)” by submitting documents on an approval basis. Chase eschews a waiver analysis, arguing instead that Article 16(c) is not even applicable to presentations made on an approval basis. The UCP says nothing about presentations made on an approval basis. Nonetheless, presentation of documents “on an approval basis”—as that phrase was defined by the district court—is the functional equivalent of presentation “on a collection basis” under a letter of credit; and there is persuasive, albeit scant, authority construing the latter terminology.

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Presentation of documents “on a collection basis” and “on an approval basis,” indicates that payment is sought from the bank as principal under the letter of credit. Depending on the circumstances, however, “on a collection basis” can indicate that the documents are being sent on a basis independent of the letter of credit, i.e., for simple collection under the Uniform Rules for Collections, (“Collections Rules”) with the bank acting as the beneficiary’s agent by delivering the documents to the account party against payment: Documents which are known not to conform to the credit are sometimes sent to the issuing bank ... “on a collection basis” or “for collection”. Such phrases are themselves ambiguous, and their meaning must be obtained from the context. The meaning may be that the documents are sent on the basis that they are being presented under the credit with what is in effect a request for the waiver of the discrepancies, such as that they be accepted out of time. In such a case the Uniform Customs will apply, and if the documents are accepted all the obligations of the issuing bank ... will become effective. Or it may be that the documents are being sent on a basis independent of the credit namely for simple collection, the bank probably being made the agent of the party sending them to collect on them from the buyer if the buyer is prepared to take them. In such a case the [International Chamber of Commerce’s] Uniform Rules for Collections are likely to apply. It appears that, if the correspondence shows that the presentation is being made under the credit, it will fall into the former category. Junior testified that by submitting the documents “on an approval basis,” Merchants, as agent for Alaska, was presenting the documents for payment under the two letters of credit. Although apparently oblivious that “on a collection basis” was susceptible of two meanings, Chase’s letter of credit examiner likewise testified that “[on an approval basis] was taken to mean the same thing as on a collection basis.” Chase’s expert, Derek Kennedy, conceded that the documents were “submitted under the letter of credit so that the bank [could] examine the documents under the rules on which the letter of credit was issued, the UCP,” although he argued that Article 16(c) did not apply. In sum, submission of documents on an approval basis is equivalent to submitting documents on a collection basis under a letter of credit. Chase’s position that UCP Article 16(c) does not apply to presentations made on an approval basis is contradicted by Harlow & Jones Ltd. v. American Express Bank Ltd., a wrongful dishonor case in which the plaintiff-beneficiary had presented discrepant documents “on a collection basis.” The defendant-issuer argued that “‘on a collection basis’ ... meant that the documents were to be sent to the issuing bank outside the letter of credit, the issuing bank being authorized to act simply as a collecting agent without any further responsibility for payment.” The Commercial Court rejected

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this contention, holding: These then were the clear instructions which the issuing bank received with the documents, and they admit of only one possible meaning: namely that the documents were forwarded under the letter of credit; that the issuing bank was to decide, no doubt in consultation with its customer, whether or not the documents were acceptable to it under the terms of the letter of credit; and, in either event, what consequences were to follow. The process was, of course, that required by Article 16 of the UCP. Thus, we agree with Harlow & Jones that the UCP, including Article 16 in its entirety, applied to Alaska’s presentation of documents for payment under the credits. Both Junior and Alaska’s expert testified that submission of documents on an approval basis neither removed the transaction from the UCP generally, nor from Article 16(c) specifically. But the testimony of Chase’s own credit examiner also does not support its contention that Alaska rendered Article 16(c) nugatory by presenting documents on an approval basis. Although she testified that the bank treated such documents differently than it would in an ordinary credit transaction, she could not say that the UCP or Article 16 did not apply, or that the bank was not obligated to act on the documents within a “reasonable time.” In fact, she conceded that Chase’s obligations “remain[ed] as set forth in the UCP.” Thus, the parties to the letters of credit did not understand that Alaska, by submitting documents on an approval basis, had removed the applicability of Article 16(c). This conclusion likewise counsels against a finding that Alaska waived Chase’s compliance with Article 16(c) by submitting documents on an approval basis. “To establish waiver under New York law one must show that the party charged with waiver relinquished a right with both knowledge of the existence of the right and an intention to relinquish it.” Voest-Alpine. Even assuming that Alaska had knowledge of its rights under Article 16(c), the record will not support a finding that it intended to relinquish those rights. The district court premised its conclusion that Alaska had waived Chase’s compliance with Article 16(c) on two facts: (1) Alaska submitted its documents on an approval basis, and (2) Kashi urged Lloyd to waive the discrepancies. Alaska requested Lloyd to waive the discrepancies is also insufficient to support a finding of waiver. This plea was no different from Alaska’s request that Chase ask Lloyd to waive; and neither is necessarily inconsistent with Alaska’s rights (more accurately, Chase’s obligations) under Article 16(c). Under UCP Article 16(c): It provides that “[t]he issuing bank shall have a reasonable time in which to examine the documents and to determine, as above, whether to take up or to refuse the documents.” If the issuer does not act in accordance with this provision, it “shall be precluded from claiming

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that the documents are not in accordance with the terms and conditions of the credit,” UCP Article 16(e), i.e., it must honor the credit. Alaska asserts that, in construing “reasonable time” under the UCP, courts have generally equated it with the Uniform Commercial Code’s (“UCC” or “Code”) requirement that the issuer act within three banking days. Courts that bother to offer a rationale for the proposition that “reasonable time” cannot exceed three days generally adopt the reasoning of the district court in Bank of Cochin: When the UCP is silent or ambiguous, analogous UCC provisions may be utilized if consistent with the UCP. The UCC provides for a period of three banking days for the issuer to honor or reject a documentary draft for payment. The “reasonable time” three-day period should be the maximum time allowable for the notification requirement. Because we find Article 16(c) to be neither silent nor ambiguous: it explicitly provides that issuers shall have a reasonable time to act on a beneficiary’s presentation of documents for payment. Under UCP Article 16(e), if an issuer does not dishonor a demand for payment within a reasonable time, it is deemed to have honored it, whether or not the documents actually conform to the terms of the credit. Thus, in an action for wrongful dishonor, the beneficiary can invoke this rule of strict preclusion to estop the issuer from relying on the documents’ non-conformity—regardless of whether the beneficiary has demonstrated detrimental reliance. An issuer that does not comply with the Code’s rigid three-day limitation, however, is deemed to have dishonored the demand for payment, but “the issuer who dishonors by inaction [under the UCC] may raise non-conformity as a defense in the beneficiary’s subsequent action for wrongful dishonor.” Barnes, supra, at 104; only if the beneficiary can satisfy the traditional requirements for estoppel (e.g., detrimental reliance) can it prevail on a wrongful dishonor claim if its documents were non-conforming. In fact, under the UCC, regardless of the issuer’s dilatory behavior, a beneficiary that knowingly presents non-conforming documents may not recover for wrongful dishonor. Thus, the consequences of an issuer’s untimely action on a beneficiary’s demand for payment are significantly different under the Code and Uniform Customs. Finally, those that would incorporate the three-day period of UCC Section 5.5-5.112(1)(a) into UCP Article 16(c) disregard subdivision (b) of Section 5.5-5.112(1), which provides that the issuer may “further defer honor if the presenter has expressly or impliedly consented thereto. Thus “Were we to accept the argument that “reasonable time” really means three days, the issuer would be left with an absolute duty to act within three days, without exception, and violation of this duty would bring down on the issuer the penalty of strict preclusion. This “rule” bastardizes both the Code and the Uniform Customs, producing a result that resembles neither. We reject it.

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What constitutes a reasonable time necessarily depends upon the nature, purpose, and circumstances of each case. In the letter of credit context, “what is a ’reasonable time’ is to be determined by examining the behavior of those in the business of examining documents, mostly banks.” Revised Article 5, supra, § 5-112(a). We hold that Chase acted reasonably under the circumstances. Until either Lloyd decided whether to waive, or Alaska requested action on its demand for payment, Chase was proceeding as it had been requested, and the matter was out of its control. To hold otherwise, and thereby impose liability on Chase for credits that were materially discrepant, would create perverse incentives for issuers. A prudent issuer acting on documents submitted on an approval basis would never risk liability by complying with the beneficiary’s request that it inquire of the account party regarding waiver. Unless the issuer could secure an immediate waiver, the most sensible course would be to dishonor the demand for payment—a result that none of the participants generally favors. Our holding applies only to presentations on an approval basis. It is one thing to say that “reasonable time” cannot—as a matter of law—exceed three banking days. It is quite another to say that—as a matter of fact—three banking days generally constitutes a reasonable time to act on a demand for payment in the ordinary letter of credit transaction. Our holding today in no way detracts from the latter proposition, which is amply supported by the case law and literature construing Article 16(c). We are not faced with the ordinary transaction, however, as evidenced by the total lack of authority construing “on an approval basis” and the scant authority interpreting “on a collection basis” under a letter of credit. Conclusion When an issuer has explicitly incorporated the Uniform Customs into its letter of credit, we will not absolve it of its obligations under Article 16 without a substantial showing of cause to do so. Merely, submitting documents “on an approval basis” is insufficient to displace the provisions of Article 16(c). Because we find that Chase complied with Article 16(c), we affirm the judgment of the district court.

4. Negotiation on Collection Basis Collection basis means that a negotiating bank does not directly negotiate the documents made inconsistently with the terms of letter of credit, but instead sends the documents to an issuing bank, waits for approval from that bank, and, if it gets paid by the issuing bank, then makes payment to the exporter. If the lack of conformity is substantial, or if a letter of credit cannot be confirmed for its authenticity, collection basis will be used. An issuing bank bears no obligation to

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the negotiating bank under collection basis, and the beneficiary is in the position where he cannot exercise the right to claim payment. But, if an issuing bank makes the payment to the negotiating bank satisfactorily to the beneficiary’s expectations, he can then exercise the right to claim payment to the negotiating bank. Works of Issuing Bank Regarding Negotiation

O How to Review Documents ➀ An issuing bank reviews documents and then decides whether to accept or reject those documents. The bank has a reasonable length of time within seven working days from the next working day after acceptance of documents to inform the party that submitted the documents of its decision (UCP 600 Article 14(b)). ➁ If the documents prove to be clean, the bank should deliver the documents to the importer upon payment from the importer. Under the usance letter of credit, the bank should do so upon receiving the documents. (UCP 600 Article 15). ➂ If an issuing bank notifies a negotiating bank of document inconsistencies after reviewing the documents, it should do so within seven working days from the next working day after receiving the documents. Furthermore, the issuing bank should notify the importer as soon as possible if the documents presented a lack of consistency. These inconsistencies are often disregarded by the importer if he is positive that the deal can still go through as planned. (UCP 600 Article 16(c)). O Handling Documents An issuing bank should try to restrain any attempts of an applicant to insert too many statements in an issuing letter of credit. (UCP 600 Article 9). The issuing bank is recommended to disallow the applicant from adding a pro forma invoice or sale contract to the issuing letter of credit. However, if it is necessary to include a pro forma invoice or sales contract, the beneficiary must review them closely and correct any differences to prevent future disputes. (Herewith, a pro forma invoice is a document made by the exporter on behalf of the importer containing minimal information such as name, quantity, and cost of goods to be traded.) (ISBP 57). ➁ In case of bankruptcy, the issuing bank is required to keep the documents and wait for the beneficiary’s directions to return them. O Obligation to Make Payment If the documents are clean, or when an importer allows them even if they are not clean, an issuing bank must make payment immediately. Under an “at

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sight letters of credit” (payment can be made once documents have been submitted, even before the applicant receives the goods), if an importer makes payment within three days from the date the documents arrived, the bank should pay the net of letter of credit price. But, if the bank delays the payment, the bank should pay the price plus interest accrued until the date of payment. Particularly, if payment is not made seven days after the documents arrived, there is an “overdue interest” fee, which further increases the transaction cost. (UCP600 Article 16(g)). ➁ The terms of letter of credit are similar to those of a sales contract, and even if letter of credit includes a clause related to the sales contracts, it is not directly connected to them. An issuing bank must make payment to a beneficiary if the documents are consistent with the terms of the letter of credit. When a buyer brings forth questions about fraud to an issuing bank, unless the questions are settled, the bank must make payment. If it is later revealed that forgery did take place, as long as the beneficiary did not get the notice but instead a third party is noticed, the bank must make payment. The issuing bank does not have to perform obligations under the letter of credit only in case that a beneficiary recognizes the fraud or gross negligence in advance and has solid evidence to prove it. (UCP600 Art. 34). Gross Negligence “Negligence is gross if the precautions to be taken against harm are very simple, such as persons who are but poorly endowed with physical and mental capacities can easily take.” H.L.A. Hart, “Negligence, Mens Rea and Criminal Responsibility,” in Punishment and Responsibility 136, 149 (1968). “Gross Negligence, as it originally appeared, means very great negligence, or the want of even slight or scant care. It has been described as a failure to exercise even that care which a careless person would use. Several courts, however, dissatisfied with a term so nebulous ... have construed gross negligence as requiring willful, wanton, or reckless misconduct, or such utter lack of all care as will be evidence thereof ... But it is still true that most courts consider that ‘gross negligence’ falls short of a reckless disregard of the consequences, and differs from ordinary negligence only in degree, and not in kind.” Prosser and Keeton on the Law of Torts § 34, at 211–12 (W. Page Keeton ed., 5th ed. 1984).

(4) Claim by Issuing Bank If an issuing bank finds any lack of conformity from reviewing documents, a claim procedure will ensue. This process is as follows:

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➀ Consultation with Importer If any discrepancy is found, it is commonly recommended to decide in consultation with an importer whether the issuing bank should make a claim to the negotiating bank. Even if the importer considers the discrepancy to be disregarded, a bank may still make a claim because it doubts the importer’s financial ability to make payment. If the issuing bank does make a claim without discussions with the importer, the claim is valid.176 An issuing bank or confirming bank can make a claim to the negotiating bank to get returned the paid amount plus the interest incurred from the date of the first payment to the date the documents were rejected. When the issuing bank seeks a waiver from the accountee, the bank should be careful to give the timely notice to the presenter of the document.

The following case is about the timely notice of dishonor of the draft presented by the beneficiary under the letter of credit, to the beneficiary. According to the UCP, the issuing bank is not precluded from contacting the beneficiary to obtain a timely cure or correction of a curable discrepancies, which does not indicate that the issuing bank is required to contact the beneficiary. But the issuing bank is required to give notice “without delay” of its refusal decision. When the issuing bank tries to seek a waiver from the applicant, it could violate the “without delay” rule if its decision to refuse documents automatically flowed from its identification of discrepancies between the documents and the terms of the credit. More importantly, when an issuing bank, under the guise of seeking a waiver, permits an applicant to participate in the decision of whether to honor or dishonor the documents, it denies the nature of letter of credit as a distinct transaction from the underlying contract. Case177 In this case, the triangular relationships included (1) an agreement for the sale of clothing between appellant, DBJJJ, Inc. (seller), a garment manufacturer, and Pennsylvania Fashions, Inc. (buyer); (2) an agreement between buyer and respondent, National City Bank (Bank) regarding the issuance of two letters of credit; and (3) two letters of credit issued by Bank, naming seller as the beneficiary.

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Id. Art. 16(b). DBJJJ, INC., Plaintiff and Appellant, v. NATIONAL CITY BANK No. B169885. October 26, 2004 Court of Appeal, Second District, Division 8. http://caselaw.findlaw.com/ca-court-of-appeal/ 1009710.html.

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Factual Background Seller and buyer entered into an agreement for the sale of clothing. Buyer applied for and Bank issued two similar letters of credit naming seller as the beneficiary. Both letters of credit required a documentary presentation. Both identified Wilshire State Bank (WSB) as the advising bank and the place of expiry. Letter of credit (LOC) No. 083 was issued October 19, 2001 and expired November 26, 2001. On November 26, 2001, either seller or Hana Financial, Inc., (HFI) seller’s assignee, presented a request for negotiation and documents to WSB. On November 30, 2001, Bank acknowledged receipt of the documents. That same day, Holly Stamos, an employee of Bank, reviewed the documents and prepared a “Negotiation Worksheet,” a form document with blank spaces to be filled in by the document examiner. On December 3, 2001, Stamos sent buyer a letter identifying the three discrepancies and seeking a waiver. The letter indicated that the “refusal date” was December 11, 2001. On December 11, 2001, buyer informed Bank that it refused to allow payment. That same day, Bank informed WSB that it was rejecting the presentation because of discrepancies in the documents. The notice to WSB listed the same discrepancies as those identified on the negotiation worksheet and described to buyer. Bank issued LOC No. 091 on October 23, 2001, and it expired on December 14, 2001. On December 6, 2001, either seller or HFI presented two separate requests for negotiation and documents to WSB. Bank acknowledged receipt of the documents on December 11, 2001. Stamos reviewed the documents the next day and prepared a Negotiation Worksheet. Stamos sent a letter to buyer noting the four discrepancies and seeking a waiver. The letter referenced a refusal date of December 20, 2001. On December 20, 2001, buyer informed Stamos that it refused to allow payment. On the same day, Bank notified WSB that Bank rejected the presentation under LOC No. 091. The notice to WSB listed the same discrepancies as those identified on the Negotiation Worksheet and described to buyer. Procedural Background Seller and Bank both moved for summary judgment. Seller primarily argued the reasons Bank provided for rejection of the documents were invalid, an issue it no longer advances on appeal. In its motion for summary judgment, Bank maintained that it timely examined and rejected seller’s presentations. In opposition, seller disputed the timeliness of Bank’s notice, the primary issue on appeal. The trial court denied seller’s motion for summary judgment. Applying the UCP 500 and California law, the trial court granted Bank’s motion for summary judgment. Seller appealed.

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Contentions This appeal concerns whether Bank is estopped from relying on the conceded inadequacy of seller’s presentation. The principal issue is whether Bank is precluded from raising discrepancies in the documents because it failed to provide timely notice of its refusal to honor the documents. Seller also argues that it is entitled to summary judgment because Bank improperly colluded with buyer in seeking a waiver of the discrepancies, that Bank was required to notify it of the discrepancies at the same time it notified. Buyer and that Bank decided to refuse the documents at the time it identified the discrepancies in the documents. Bank disputes all of seller’s contentions and argues that seller lacks standing, that Ohio law governs, and that the UCP supplants the Commercial Code. Discussion I. A. Choice of Law Bank failed to analyze, cite to, or provide Ohio law on any of the issues relevant to this appeal, it is appropriate to analyze it under California law. The California law objected to by Bank, Section 5108, is exactly the same as Ohio law. B. Applicability of the California Uniform Commercial Code The parties agree that both letters of credit are subject to the UCP 500. Bank argues “the Commercial Code is relevant only with respect to issues not addressed by UCP 500.” Section 5116, subdivision (c) provides in part: “Except as otherwise provided in this subdivision, the liability of an issuer, nominated person, or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation, or other undertaking is expressly made subject.” However, “where there is no conflict between Article 5 and the relevant provision of the UCP or other practice, both apply.” (Official Comments on U. Com. Code) Bank identifies one potential conflict between the UCP 500 and the California Uniform Commercial Code-preclusion. Aside from this one conflict, we find no other conflict relevant to issues in this appeal, and preclusion will be based only on the UCP 500.

380

5 Payment Collection in International Trade

C. Standing Bank next argues that seller lacks standing because seller assigned its interest in both letters of credit to HFI. The general rule favors permitting a party to substitute the real party in interest. If seller is not the proper party, it should have the opportunity to substitute HFI. II. Seller challenges the trial court’s conclusion that Bank “had until the close of business the seventh banking day following its receipt of plaintiff’s claim and supporting documents to send its Advice of Rejection, and because Bank complied with this seven day time period its notices of refusal were timely.” The parties agree only that the relevant provisions are found in Articles 13 and 14 of the UCP 500. The time period in Article 13(b) is “a reasonable time, not to exceed seven banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.” Bank argues “[t]he safe harbor does not extend the seven banking day period. Rather, it merely recognizes that it is reasonable for an issuing bank to have the full seven banking days if the applicant does not respond sooner to a request for a waiver (or responds on the final day).” For support Bank cites to a document that indicates a bank uses seven banking days to provide notice whenever a bank seeks a waiver from the applicant. Bank’s interpretation is inconsistent with the UCP 500 because it entirely disregards the phrase “reasonable time.” Bank’s argument also ignores the comment to the California Uniform Commercial Code Section 5108, adopted by both California and Ohio, which provides “Section 5.5-5.108(a) balances the need of the issuer for time to examine the documents against the possibility that the examiner will take excessive time to search for defects. What is a ‘reasonable time’ is not extended to accommodate an issuer’s procuring a waiver from the applicant.” This comment to the California Uniform Commercial Code is consistent with the plain language of Article 13(b). Bank cites a two-page excerpt from an Article by the United States Council on International Banking as its sole support for its argument that the full seven banking days is reasonable. It is inconsistent with the plain language and intent of the UCP 500 and the 1995 Official Comments on Uniform Commercial Code. Relying on what Bank characterizes as standard practice instead of the provisions UCP 500 would alter the terms of the letters of credit, which adopt the UCP 500. Bank’s claim was that seven banking days is always

5.1 Payment Collection Under Letter of Credit

381

reasonable where a bank seeks a waiver from an applicant, an incorrect argument. Accordingly, Bank did not show, it acted within a reasonable time, and the trial court erred in awarding Bank summary judgment. III. The next issue is whether seller is entitled to summary judgment. Seller claims Bank is precluded from arguing that the documents were not in compliance with the terms and conditions of the letters of credit. Article 14(e) provides that if the issuing bank “fails to act in accordance with the provisions of the Article the Issuing Bank and/or Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit.” The preclusion rule clearly applies to a failure to act in accordance with the provisions of Article 14. However, whether the same rule applies to a violation of Article 13(b) is ambiguous. This current ambiguity contrasts with the clarity of the former version of the UCP. Under the former UCP, the preclusion rule was found in Article 16 and applied to a violation of that Article. Former Article 16(c) provided: “The issuing bank shall have a reasonable time in which to examine the documents and to determine as above whether to take up or to refuse the documents.” Thus, under the former version of the UCP, a bank that exceeded the time period for examining documents would forfeit the ability to argue the documents presented were not in compliance with the terms of the credit. The intent of the International Chamber of Commerce demonstrates the same penalty applies under the current UCP 500. Article 14(d)(i) provides that notice must be given “without delay but no later than the close of the seventh banking day following the day of receipt of the documents” as used in Article 13(b). The time spent examining the documents dictates when the issuing bank is required to notify the beneficiary of discrepant documents. If the issuing bank does not examine the documents within a “reasonable time, not to exceed seven banking days” it cannot notify the beneficiary “without delay” as required by Article 14(d)(i). A violation of Article 13(b) results in a violation of Article 14(d)(i), which, in turn, triggers preclusion under Article 14(e). The remaining question is whether Bank failed to provide timely notice to seller (or WSB) as a matter of law. Seller’s separate statement and motion for summary judgment are insufficient to show notice was untimely as a matter of law. There are no facts in seller’s separate statement in support of its motion for summary judgment relevant to this issue. To obtain summary judgment, seller must show that the time period Bank used to examine documents, seek a waiver, and notify seller (or WSB) was unreasonable. A mere description of the rule of preclusion is insufficient.

382

5 Payment Collection in International Trade

IV. Seller states that Bank was required to notify it of the discrepancies at the same time it notified buyer. Seller relies on the following statement in the UCP 500 and 400 Compared: the fact that “the Issuing Bank is not precluded from contacting the Beneficiary to obtain a timely cure or correction of a curable discrepancy(ies).” (UCP 500 & 400 Compared p. 47.) This does not indicate that the issuing bank is required to contact the beneficiary. The permissive language “not precluded” does not create a mandatory obligation as argued by seller. The issue here is whether Bank was obligated to provide seller (or WSB) such notice. Seller fails to show any such obligation. V. Seller next argues that buyer improperly colluded with Bank. The UCP expressly authorizes the issuing bank to approach the applicant for a waiver of the discrepancies if it determines the documents “appear on their face not to be in compliance with the terms and conditions of the Credit.” (Article 14(c).) However, the issuing bank must act “as an independent and trusted paymaster and not as a conduit of the Applicant to refuse payment. Therefore, the contact with the Applicant is not justifiable if it is designed to allow the Issuing Bank and the Applicant to make a joint decision on the discrepant documents. The decision to honor or refuse the documents must be the Issuing Bank’s. The approach to the Applicant must be made solely to obtain his waiver once the Issuing Bank decides to refuse the discrepant documents.” (UCP 500 & 400 Compared at pp. 46–47.) This mandated independence safeguards the nature of the letter of credit as a distinct transaction from the underlying contract. Where an issuer, under the guise of seeking a waiver, permits an applicant to participate in the decision of whether to honor or dishonor the documents, it runs afoul of the independence rule. Such collusion was found where an applicant “repeatedly urge[d]” the bank not to comply and where the applicant hired a lawyer to find discrepancies in the documents. There is no evidence of collusion; there is no evidence that buyer identified discrepancies in the documents or that Bank and buyer made a joint decision on the documents.

5.1 Payment Collection Under Letter of Credit

383

VI. A close reading of Article 14(b) reveals an ambiguity regarding the point in time when a bank refuses to take up the documents—either immediately upon identifying discrepancies or after receiving a response to a request for a waiver. The distinction is significant because the refusal to take up documents triggers the necessity to provide notice. Under Article 14(b), a bank “may refuse” the documents if they are inconsistent with the terms of the letter of credit. Under Article 14(c), a bank may approach the applicant for a waiver of the discrepancies. However, the bank is required to give notice “without delay” of its refusal decision. Whenever a bank sought a waiver from the applicant, it would violate the “without delay” rule if its decision to refuse documents automatically flowed from its identification of discrepancies between the documents and the terms of the credit. However, identifying discrepancies and refusing the documents are two separate acts. It is difficult to imagine a circumstance where a bank unilaterally would choose to honor a non-conforming documentary presentation. Nevertheless, a bank may identify discrepancies and agree to take up the documents if it obtains a waiver from the applicant. If it decides to refuse the documents, it must then notify the beneficiary without delay. Finally, seller argues that if Bank refused the documents only after it learned of buyer’s decision not to waive the discrepancies, it violated the requirement in Article 14(b) that the issuing bank base its decision to refuse the documents based solely on the documents. It does not preclude the issuing bank from considering whether the applicant would waive discrepancies. If it did, the permission to seek a waiver under Article 14(c) would be meaningless. The issuing bank would be permitted to seek a waiver but precluded from relying on it. Conclusion Summary judgment in favor of Bank must be reversed. The case is remanded to the trial court for further proceedings consistent with this opinion. Each party to bear its own costs on appeal.

➁ Modification of Document On the basis of “notice of discrepancies,” an issuing bank that has received a notice of discrepancy returns the documents after correctly modifying them within the expiry date of letter of credit or document submitting date (shipping documents are usually required to be submitted within twenty-one days from the issuing date). In this case, the discrepancy has been fixed and the issuing bank can no longer make a claim based on that inconsistency.

384

5 Payment Collection in International Trade

➂ Notice of Claim If an issuing bank judges that it has all the requirements necessary to make a claim, it will do so with a written notice through mail or cable sent to a negotiating bank. The notice should specify in detail all discrepancies in the documents that are a cause to reject the documents. Any discrepancies that are not submitted in the first instance cannot be submitted later. The notice should reveal the location of the documents (whether an issuing bank has kept them or returned them),178 indicating, for example, “holding document at your disposal.”

5.1.9

Receipt of Goods by Buyer

In normal cases, reimbursement should be made when the issuing bank has received the documents and given them to the importer. The importer then receives an arrival notice from the shipping company, submits the received bill of lading to the shipping company, and finally receives the cargo. If something does not go as planned, special measures might be required to resolve problems. The following section will analyze such special circumstances. (1) Trust Receipt A trust receipt is required when an issuing bank has received the documents, notifies the importer that the documents have arrived, and requests the importer to take the documents against payment or acceptance, but the bank realizes that the importer is not able to make the payment. The bank cannot deliver the documents to the importer without getting paid, but it also cannot keep the documents because the bank will have to bear the responsibilities and costs of storage and risk of the cargo. This kind of problem can be solved by a special type of international financing. If an importer accepts a trust receipt (T/R) agreement, the bank can then transfer the possession of the cargo to the importer along with the shipping documents, and make payment to the issuing or paying bank after the cargo is delivered to the importer or sold. (2) Letter of Guarantee Normally, the documents will arrive at the issuing bank before the cargo arrives at the port. But, if a bank is notified by a shipping company that the cargo has arrived and the documents still have not arrived at the bank, the importer cannot receive the cargo. This is because the shipping company usually delivers the cargo in exchange for transport documents like a bill of lading. In such cases, if the letter

178

Id. at Art 14(c)(ii).

5.1 Payment Collection Under Letter of Credit

385

of guarantee (L/G) is issued by the issuing bank, the shipping company can accept the letter of guarantee in place of a bill of lading, and the shipping company can deliver the cargo to the importer. Herewith the letter of guarantee is a kind of a payment warranty or note that an issuing bank issues in favor of a shipping company with promissory statements to provide a shipping company with the bill of lading upon arrival and to take all responsibilities in respect of cargo delivery without the bill of lading. In the case of air transport, cargo normally arrives before documents, and a letter of guarantee can be issued with air transport just as in the case of marine transportation.

5.1.10

Illustration of Credit by Kind

(1) Irrevocable Letter of Credit at Sight with Reimbursement This credit is unconfirmed (see code 49) irrevocable (see code 40A) documentary (see code 46A) credit, under which the beneficiary draws the sight (see code 42C) draft on the drawee bank that acts as the reimbursement bank (see code 42A). During negotiations, the negotiating bank which is not restricted by the issuing bank (see code 41D) is required to send the draft to the drawee bank (see code 78) and the documents to the issuing bank directly (see code 78).

386

5 Payment Collection in International Trade TRANSMISSION

-SEND TO

: SWIFT

MESSAGE ID

: 20221222M0000117

MESSAGE STATUS

: SEC

MESSAGE INPUT REFERENCE : 14:31:39-2020/12/22-NACFKRSEXXX-6383-612184 MESSAGE HEADER --SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE

RECEIVER

: WPACAU2SXXX WESTPAC BANKING CORPORATION

FEDERATION(NH BANK) (FOR ALL NEW SOUTH WALES BRANCHES) MESSAGE TYPE

: MT700

[ ISSUE OF A DOCUMENTARY CREDIT ] MESSAGE TEXT

--SEQUENCE OF TOTAL

27 : 1/1

FORM OF DOCUMENTARY CREDIT

40A: IRREVOCABLE

DOCUMENTARY CREDIT NUMBER

20 : M0301012NS00484

DATE OF ISSUE APPLICABLE RULES

31C: 2022-12-22 40E: UCPURR LATEST VERSION *Date

DATE AND PLACE OF EXPIRY APPLICANT

*Place

31D: 2023-01-25 Australia 50 : ABC CORPORATION CHUNG-KU, SEOUL, KOREA

BENEFICIARY

59 : BBC PTY LIMITED

1. LOCK WAY RIVERVIEW QUEENSLAND 4303 AUSTRALIA *Currency *Amount CURRENCY CODE AMOUNT PERCENTA GE CRDT AMT TOLERANCE AVAILABLE WITH..BY..-NAM E/ADDR DRAFTS AT...

32B: USD

79,650.00

39A: 05/05 41D: ANY BANK BY NEGOTIATION 42C: AT SIGHT

5.1 Payment Collection Under Letter of Credit DRAWEE

387

42A: PNBPUS3NNYC WELLS FARGO BANK, N.A.(FORMERLY KNOWN AS WACHOVIA) (NEW YORK INTERNATIONA L BRANCH)

PARTIAL SHIPMENTS

43P: ALLOWED

TRANSSHIPMENT

43T: ALLOWED

PORT OF LOADING/AIRPORT OF DEPARTURE

44E: BRISBANE

PORT OF DISCHARGE/AIRPORT OF DESTINATION

44F: PUSAN PORT, KOREA

Place of Final Destination/ For Transportation/Place of Delivery PLACE OF FINAL DESTINATION/ FOR TRANSPOR LATEST DATE OF SHIPMENT

44B: ICHEON WAREHOUSE 44C: 2023-01-10

DESCP OF GOODS AND/OR SERVICES

45A:

+CHILLED BEEF OFFALYPS CHUCK RIB G/F MW/VACYPS SHORT RIB DEN 3 RIB G/F MW/VA +CHILLED BONELESS BEEFYPS TOPSIDE G/F IW/VACYPS EYE ROUND G/F IW/VACYPS CHUCK EYE ROLL G/F IW/VACYPS PE BRISKET D/OFF G/F IW/VACYPS SHIN SHANK G/F MW/VACYPS BOLAR BLADE G/FYPS OYSTER BLADE G/F TOTAL QUANTITY : 15MT TOTAL AMOUNT: 79,650.0 +TERMS OF PRICE : CFR +PLACE OF TERMS OF PRICE : ICHEON WAREHOUSE +COUNTRY OF ORIGIN : AUSTRALIA

DOCUMENTS REQUIRED

46A:

+SIGNED COMMERCIA L INVOICE IN 3 COPIES +FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL AGRICULTURA L COOPERATIVE FEDERATION MARKED FREIGHT PREPAID AND NOTIFY APPLICANT +PACKING LIST IN 3 COPIES +CERTIFICATE OF ORIGIN 2 FOLD ISSUED BY CHAMBER OF COMMERCE OR GOVERNM ENTAL AUTHORITY WHERE SHIPMENT IS MADE. +PHOTO COPY OF OFFICIAL CERTIFICATE WITH RESPECT TO MEAT, MEAT PRODUCTS AND EDIBLE OFFAL.

ADDITIONAL CONDITIONS

47A:

+MULTI-MODAL BILLS OF LADING ARE ACCEPTABLE +T/T REIMBURSEM ENT IS ALLOWED.

388

5 Payment Collection in International Trade +ORDER NO : L183637/1 +DISCREPA NCY FEE OF USD 60.00 OR EQUIVALENT WILL BE DEDUCTED FROM THE PROCEEDS OF EACH PRESENTATION OF DOCUMENTS WITH DISCREPANCY(IES) FOR PAYMENT/REIMBURSEM ENT UNDER THIS LETTER OF CREDIT. +INSURANCE WILL BE COVERED BY THE APPLICANT +5 PCT MORE OR LESS IN QUANTITY AND AMOUNT ARE ACCEPTABLE

CHARGES

71B: +ALL BANKING CHARGES OUTSIDE OF AUSTRALIA, INCLUDING REIMBURSING FEES, ARE FOR THE ACCOUNT OF APPLICANT. DISCREPANCY CHARGES, IF ANY, ARE FOR THE ACCOUNT OF THE BENEFICIA RY

PERIOD FOR PRESENTATION

48 : +DOCUMENTS TO BE PRESENTED WITHIN 10 DAYS AFTER THE DATE OF SHIPMENT BUT IN ANY EVENT WITHIN THE VALIDITY OF THE CREDIT.

CONFIRMATION INSTRUCTIONS

49 : WITHOUT

REIMBURSING BANK

53A: PNBPUS3NNYC WELLS FARGO BANK, N.A.(FORMERLY KNOWN AS WACHOVIA) (NEW YORK INTERNATIONAL BRANCH)

INSTRUC TO PAY/ACCPT/NEGOT BNK

78 :

+ALL DOCUMENTS SHOULD BE FORWARDED TO THE NATIONAL AGRICULTURA L COOPERATIVE FEDERATION INTERNATIONA L BANKING SERVICE CENTER, IMPORT DEPARTMENT, NONGHYUP SINCHON COMPLEX B/D 6F, 49-31 NOGOSAN-DONG, MAPO-GU, SEOUL, KOREA IN ONE LOT BY REGISTERED AIRMAIL OR AIR-COURIER. +PLEASE CLAIM REIMBURSEM ENT BY FORWARDING BENEFICIA RYS' SIGHT DRAFT OR T/T (ONLY IN CASE REIM. CLAIM IS ALLOWED UNDER THIS CREDIT) TO THE REIMBURSING BANK. END OF MESSAGE -Source: National Agricultural Cooperative Federation

5.1 Payment Collection Under Letter of Credit

389

(2) Irrevocable Letter of Credit at Sight with Remittance This credit is the same as in the case of form “irrevocable letter of credit at sight with reimbursement” except for the fact that, in making negotiations, negotiating bank, which is not restricted by the issuing bank (see code 41D), is required to send both the draft and the documents to the issuing bank (see code 78). TRANSMISSION --SEND TO

: SWIFT

MESSAGE ID

: 20221229M0000075

MESSAGE STATUS

: SEC

MESSAGE INPUT REFERENCE : 16:45:59-2022/ 12/29-NACFKRSEXXX-6388-623215 MESSAGE HEADER -SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE

RECEIVER

: ICBKCNBJTSN INDUSTRIAL AND COMMERCIAL BANK OF

FEDERATION(NH BANK)

CHINA (TANGSHAN CITY BRANCH) MESSAGE TYPE

: MT700

[ ISSUE OF A DOCUMENTARY CREDIT ] MESSAGE TEXT

--SEQUENCE OF TOTAL

27 : 1/1

FORM OF DOCUMENTARY CREDIT

40A: IRREVOCA BLE

DOCUMENTARY CREDIT NUMBER

20 : M0301012NS00712

DATE OF ISSUE

31C: 2022-12-29

APPLICABLE RULES

40E: UCP LATEST VERSION *Date

DATE AND PLACE OF EXPIRY APPLICANT

*Place

31D: 2022-04-25 China 50 : ABC CORPORATION CHUNG-KU, SEOUL, KOREA

BENEFICIARY

59: BBC METALLURGICA L ROLL CO. LTD. TANGSHAN CITY, HEBEI PROVINCE,CHINA

*Currency *Amount CURRENCY CODE AMOUNT AVAILABLE WITH..BY..-NAM E/ADDR DRAFTS AT... DRAWEE

32B: USD

98,390.00

41D: ANY BANK BY NEGOTIATION 42C: SIGHT 42A: NACFKRSEXXX NATIONAL

390

5 Payment Collection in International Trade

AGRICULTURA L COOPERATIVE FEDERATION(NH BANK) PARTIAL SHIPMENTS

43P: ALLOWED

TRANSSHIPMENT

43T: PROHIBITED

PORT OF LOADING/AIRPORT OF DEPARTURE

44E: Tianjin

PORT OF DISCHARGE/AIRPORT OF DESTINATION

44F: Busan

LATEST DATE OF SHIPMENT

44C: 2023-04-15

DESCP OF GOODS AND/OR SERVICES

45A:

+HS CODE : 8455.30.1000 ROLL FOR ROLLING MILL DETAILS ARE AS PER P/O GBT010-002-E DATED DEC. 26, 2022 CFR BUSAN +TERMS OF PRICE : CFR +COUNTRY OF ORIGIN : CHINA DOCUMENTS REQUIRED

46A:

+SIGNED COMMERCIA L INVOICE IN 3 COPIES +FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL AGRICULTURA L COOPERATIVE FEDERATION MARKED FREIGHT PREPAID AND NOTIFY APPLICANT +PACKING LIST IN 3 COPIES ADDITIONAL CONDITIONS

47A:

+DISCREPA NCY FEE OF USD 60.00 OR EQUIVALENT WILL BE DEDUCTED FROM THE PROCEEDS OF EACH PRESENTATION OF DOCUMENTS WITH DISCREPANCY(IES) FOR PAYMENT/REIMBURSEM ENT UNDER THIS LETTER OF CREDIT. +INSURANCE WILL BE COVERED BY THE APPLICANT +T/T REIM. CLAIM PROHIBITED CHARGES

71B: +ALL BANKING CHARGES INCLUDING REIMBURSEM ENT CHARGES AND POSTAGE UTSIDE KOREA ARE FOR ACCOUNT OF BENEFICIARY

PERIOD FOR PRESENTATION

48 : +DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF SHIPMENT BUT IN ANY EVENT WITHIN THE VALIDITY OF THE CREDIT.

CONFIRMATION INSTRUCTIONS INSTRUC TO PAY/ACCPT/NEGOT BNK

49 : WITHOUT 78 :

+ALL DOCUMENTS SHOULD BE FORWARDED TO THE NATIONAL

5.1 Payment Collection Under Letter of Credit

391

AGRICULTURA L COOPERATIVE FEDERATION INTERNATIONA L BANKING SERVICE CENTER, IMPORT DEPARTMENT, NONGHYUP SINCHON COMPLEX B/D 6F, 49-31 NOGOSAN-DONG, MAPO-GU, SEOUL, KOREA IN ONE LOT BY REGISTERED AIRMAIL OR AIR-COURIER. +UPON RECEIPT OF DOCUMENTS IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THE CREDIT, WE WILL REMIT THE PROCEEDS AS PER YOUR INSTRUCTIONS. +REMITTANCE COMM. AND CABLE CHARGE ARE FOR ACCOUNT OF BENEFICIARY ADVISE THROUGH BANK-BRANCH/OFF

57B: YR. TANGSHAN BRANCH

END OF MESSAGE --Source: National Agricultural Cooperative Federation

(3) Banker’s Usance Credit For the banker’s usance credit, the beneficiary draws drafts payable at 120 days after sight (see code 42C) on the drawee bank (see code 42A). The negotiating bank, which is not restricted by the issuing bank (see code 41D), begins the negotiation, sends the usance draft to the drawee bank (see code 78), and sends the documents to the issuing bank (see code 78). This credit is the banker’s usance credit under which interest for the period of 120 days will be charged to the buyer, so the draft is to be negotiated with the beneficiary on an at sight basis (see code 78). With regard to the negotiated amount, from the viewpoint of the beneficiary, usance credit is the same as sight credit.

392

5 Payment Collection in International Trade

TRANSMISSION --SEND TO

: SWIFT

MESSAGE ID

: 20221215M0000188

MESSAGE STATUS

: SEC

MESSAGE INPUT REFERENCE : 15:30:27-2022/ 12/15-NACFKRSEXXX-6378-601829 MESSAGE HEADER -SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE

RECEIVER

: MHCBJPJTXXX MIZUHO CORPORATE BANK, LTD.

MESSAGE TYPE

: MT700

FEDERATION(NH BANK)

[ ISSUE OF A DOCUMENTARY CREDIT ] MESSAGE TEXT

--SEQUENCE OF TOTAL

27 : 1/1

FORM OF DOCUMENTARY CREDIT

40A: IRREVOCABLE

DOCUMENTARY CREDIT NUMBER

20 : M0301012NU00299

DATE OF ISSUE

31C: 2022-12-15

APPLICABLE RULES

40E: UCPURR LATEST VERSION

DATE AND PLACE OF EXPIRY

31D: 2022-02-28 JAPAN

*Date APPLICANT

*Place

50 : ABC CORPORATION CHUNG-KU, SEOUL, KOREA

BENEFICIARY

59 : BBC CORPORATION 103-0027,JAPAN *Currency *Amount

CURRENCY CODE AMOUNT

32B: USD

284,700.00

PERCENTA GE CRDT AMT TOLERANCE

39A: 10/10

AVAILABLE WITH..BY..-NAM E/ADDR

41D: ANY BANK BY NEGOTIATION

DRAFTS AT...

42C: 120 DAYS AFTER SIGHT

DRAWEE

42A: SCBLHKHHXXX STANDARD CHARTERED BANK (HONG KONG) LIMITED

5.1 Payment Collection Under Letter of Credit PARTIAL SHIPMENTS TRANSSHIPMENT

393 43P: ALLOWED 43T: ALLOWED

PORT OF LOADING/AIRPORT OF DEPARTURE

44E: JAPANESE PORT

PORT OF DISCHARGE/AIRPORT OF DESTINATION LATEST DATE OF SHIPMENT

44F: KOREAN ANY PORT 44C: 2022-02-20

DESCP OF GOODS AND/OR SERVICES

45A:

+DESCRIPTION 1 . HOKUETSU 2-SIDES COATED PAPER

HI ALPHA QUANTITY: 30MT AMOUNT: USD 24,300 2 . HOKUETSU 2-SIDES COATED PAPER

ALPHA MATT QUANTITY: 330MT AMOUNT: USD 260,400 +TERMS OF PRICE : CIF (COST, INSURANCE AND FREIGHT)

+COUNTRY OF ORIGIN : JAPAN DOCUMENTS REQUIRED

46A:

+SIGNED COMMERCIA L INVOICE IN 3 COPIES +FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL AGRICULTURA L COOPERATIVE FEDERATION MARKED FREIGHT PREPAID AND NOTIFY APPLICANT +FULL SET OF INSURANCE POLICY OR CERTIFICATE, ENDORSED IN BLANK FOR 110PCT OF THE INVOICE VALUE. INSURANCE POLICY OR CERTIFICATE MUST EXPRESSLY STIPULATE THAT CLAIMS ARE PAYABLE IN THE CURRENCY OF THE DRAFT AND MUST ALSO INDICATE A CLAIMS SETTLING AGENT IN KOREA. INSURANCE MUST INCLUDE : INSTITUTE CARGO CLAUSE : ALL RISK +PACKING LIST IN 3 COPIES ADDITIONAL CONDITIONS

47A:

+10 PCT OF TOLERANCE ON AMOUNT AND TONNAGE TO BE ALLOWED +THIRD PARTY B/L ACCEPTABLE +NO COMMERCIAL VALUE IS ACCEPTABLE +T/T REIM. CLAIM ALLOWED +DISCREPA NCY FEE OF USD 60.00 OR EQUIVALENT WILL BE DEDUCTED FROM THE PROCEEDS OF EACH PRESENTATION OF DOCUMENTS WITH DISCREPANCY(IES) FOR

394

5 Payment Collection in International Trade

PAYMENT/REIMBURSEM ENT UNDER THIS LETTER OF CREDIT. CHARGES

71B: +ALL BANKING CHARGES INCLUDING REIMBURSEM ENT CHARGES AND POSTAGE OUTSIDE KOREA ARE FOR ACCOUNT OF BENEFICIARY

PERIOD FOR PRESENTATION

48 : +DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF SHIPMENT BUT IN ANY EVENT WITHIN THE VALIDITY OF THE CREDIT.

CONFIRMATION INSTRUCTIONS

49 : WITHOUT

REIMBURSING BANK

53A: SCBLHKHHXXX STANDARD CHARTERED BANK (HONG KONG) LIMITED

INSTRUC TO PAY/ACCPT/NEGOT BNK

78 :

+ALL DOCUMENTS SHOULD BE FORWARDED TO THE NATIONAL AGRICULTURA L COOPERATIVE FEDERATION INTERNATIONA L BANKING SERVICE CENTER, IMPORT DEPARTMENT, NONGHYUP SINCHON COMPLEX B/D 6F, 49-31 NOGOSAN-DONG, MAPO-GU, SEOUL, KOREA IN ONE LOT BY REGISTERED AIRMAIL OR AIR-COURIER. +DRAFT IS TO BE NEGOTIATED AT SIGHT BASIS. ACCEPTANCE COMM. AND DISCOUNT CHARGES FOR BUYER'S ACCT. NEGOTIATING BANK SHALL OBTAIN REIMBURSEM ENT BY SENDING BENF'S TIME DRAFT TO DRAWEE OR T/T (ONLY IN CASE T/T REIM. CLAIM IS ALLOWED UNDER THIS CREDIT) WITH INFORMATION ABOUT B/L DATE, COMMODITY, LOADING PORT AND DESTINATION, NAME OF THE APPLICANT, NAME OF THE BENEFICIARY, VESSEL NAME.

END OF MESSAGE --Source: National Agricultural Cooperative Federation

(4) Shipper’s Usance Credit Shipper’s usance credit is the same essentially in form as “banker’s usance credit,” except for the fact that the issuing bank and the drawee bank are one and the same (see code 42A), and under this credit interest for a period of 60 days will be charged to the beneficiary (see code 78). The drafted amount is therefore to be discounted through negotiations. With regard to the negotiated amount, from the viewpoint of the beneficiary, shipper’s usance credit is different from the case of a banker’s usance credit.

5.1 Payment Collection Under Letter of Credit

395

TRANSMISSION --SEND TO

: SWIFT

MESSAGE ID

: 20221217M0000301

MESSAGE STATUS

: SEC

MESSAGE INPUT REFERENCE : 16:59:08-2022/ 12/17-NACFKRSEXXX-6380-606660 MESSAGE HEADER --SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE

RECEIVER

: LUMIILITTLV BANK LEUMI LE ISRAEL B.M.

FEDERATION(NH BANK) (TEL-AVIV MAIN BRANCH) MESSAGE TYPE

: MT700

[ ISSUE OF A DOCUMENTARY CREDIT ] MESSAGE TEXT

--SEQUENCE OF TOTAL

27 : 1/1

FORM OF DOCUMENTA RY CREDIT

40A: IRREVOCA BLE

DOCUMENTARY CREDIT NUMBER

20 : M0397012NU00025

DATE OF ISSUE APPLICABLE RULES

31C: 2022-12-17 40E: UCP LATEST VERSION *Date

DATE AND PLACE OF EXPIRY

*Place

31D: 2022-02-16 IN THE BENEFICIARY COUNTRY

APPLICANT

50: ABC. CO.,LTD KIMHAE-CITY, KYONGNAM, KOREA 82 55 342 9058 (82 54 973 1021)

BENEFICIARY

59: BBC LTD.

*Currency *Amount CURRENCY CODE AMOUNT AVAILABLE WITH..BY..-NAM E/ADDR DRAFTS AT... DRAWEE

32B: USD

74,277.00

41D: ANY BANK BY NEGOTIATION 42C: 60 DAYS AFTER B/L DATE 42A: NACFKRSEXXX

396

5 Payment Collection in International Trade NATIONAL AGRICULTURA L COOPERATIVE FEDERATION (NH BANK)

PARTIAL SHIPMENTS

43P: ALLOWED

TRANSSHIPMENT

43T: ALLOWED

PORT OF LOADING/AIRPORT OF DEPARTURE

44E: ISRA ELI PORT, ISRA EL

PORT OF DISCHA RGE/AIRPORT OF DESTINATION

44F: BUSA N PORT, KOREA

LATEST DATE OF SHIPMENT

44C: 2022-02-01

DESCP OF GOODS AND/OR SERVICES +HS-CODE:

45A:

3105901000

COMMODITY DESCRIPTION QUANTITY UNIT PRICE

AMOUNT

................................................................. POTASSIUM NITRATE GREENHOUSE GRADE

56.70

975.00

55,282.50

POTASSIUM NITRATE GG PHAST 18.90 1,005.00

18,994.50

................................................................. TOTAL

75.60MT

USD74,277

+PRICE TERM : CIF BUSAN PORT, KOREA +COUNTRY OF ORIGIN : ISRAEL DOCUMENTS REQUIRED 46A: +SIGNED COMMERCIA L INVOICE IN 3 FOLD(S) +FULL SET OF CLEAN ON BOARD OCEAN BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL AGRICULTURA L COOPERATIVE FEDERATION MARKED 'FREIGHT PREPAID' AND 'NOTIFY APPLICANT' +FULL SET OF INSURANCE POLICY OR CERTIFICATE, ENDORSED IN BLANK FOR 110PCT OF THE INVOICE VALUE. INSURANCE POLICY OR CERTIFICATE MUST EXPRESSLY STIPULATE THAT CLAIMS ARE PAYABLE IN THE CURRENCY OF THE DRAFT AND MUST ALSO INDICATE A CLAIMS SETTLING AGENT IN KOREA. INSURANCE MUST INCLUDE : INSTITUTE CARGO CLAUSE : ICC(A) +PACKING LIST IN 3 FOLD(S) ADDITIONAL CONDITIONS

47A:

+T/T REIM. CLAIM PROHIBITED +DISCREPA NCY FEE OF USD 60.00 OR EQUIVALENT WILL BE DEDUCTED FROM THE PROCEEDS OF EACH PRESENTATION

5.1 Payment Collection Under Letter of Credit

397

OF DOCUMENTS WITH DISCREPANCY(IES) FOR PAYMENT/REIM BURSEM ENT UNDER THIS LETTER OF CREDIT. CHARGES

71B: +ALL BANKING CHARGES INCLUDING REIMBURSEM ENT CHARGES AND POSTAGE OUTSIDE KOREA ARE FOR ACCOUNT OF BENEFICIA RY

PERIOD FOR PRESENTATION

48 : +DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF SHIPMENT BUT IN ANY EVENT WITHIN THE VALIDITY OF THE CREDIT.

CONFIRMATION INSTRUCTIONS

49 : WITHOUT

INSTRUC TO PAY/ACCPT/NEGOT BNK

78 :

+ALL DOCUMENTS SHOULD BE FORWARDED TO THE NATIONAL AGRICULTURA L COOPERATIVE FEDERATION INTERNATIONA L BANKING SERVICE CENTER, IMPORT DEPARTMENT, NONGHYUP SINCHON COMPLEX B/D 6F, 49-31 NOGOSAN-DONG, MAPO-GU, SEOUL, KOREA IN ONE LOT BY REGISTERED AIRMAIL OR AIR-COURIER. +INTEREST IS FOR ACCOUNT OF BENEFICIARY. +UPON RECEIPT OF DOCUMENTS IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THE CREDIT, WE WILL REMIT THE PROCEEDS AS PER YOUR INSTRUCTIONS AT MATURITY. +REMITTANCE COMM. AND CABLE CHARGE ARE FOR ACCOUNT OF BENEFICIARY.

---

END OF MESSAGE

Source: National Agricultural Cooperative Federation

(5) Guarantee A guarantee is similar to a standby letter of credit, under which the beneficiary is guaranteed by the issuing bank that he gets payment on demand of up to US$42,023.00 in the event of the applicant failing to fulfill the terms and conditions of the contract (NO. 93528156).

398

5 Payment Collection in International Trade TRANSMISSION

-MESSAGE ID

: 20220110G0000001

MESSAGE STATUS

: SEC MESSAGE HEADER

--SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE FEDERATION(NH BANK)

RECEIVER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE FEDERATION(NH BANK)

MESSAGE TYPE

: MT760

[ GUARANTEE ] MESSAGE TEXT

-SEQUENCE OF TOTAL

27 : 1/1

TRANSACTION REFERENCE NUMBER FURTHER IDENTIFICATION DATE

20 : G03Y7101XD00018 23 : ISSUE

30 : 230110

APPLICABLE RULES DETAILS OF GUARANTEE

40C: OTHR/THE LAWS OF TOKYO, JAPAN 77C:

.

TO: BBC LTD IBARAKI 300-0013. DATE: 2023.01.10. OUR GUARANTEE G03Y7101XD00018. WE UNDERSTAND THAT YOU HA VE ENTERED INTO A CONTRA CT NO 93528156 WITH ABC OF 502-1, OSIKDO-DONG, GUNSA N, JEONBUK, KOREA 573-540 FOR THE SUPPLY OF AIR COOLER HEAT EXCHANGERS AND THAT UNDER THE CONTRA CT THE APPLICANT MUST PROVIDE A BA NK WA RRA NTY GUARA NTEE FOR A N AMOUNT OF USD 42,023.00, BEING 10PCT OF THE VALUE OF THE CONTRACT. WE, NATIONAL A GRICULTURA L COOPERATIVE FEDERATION (NH BA NK) HEREBY GUA RANTEE PA YM ENT TO YOU ON DEMA ND OF UP TO USD 42,023.00(SA Y, IN WORDS USD FORTY TWO THOUSAND TW ENTY THREE DOLLA RS) IN THE EVENT OF THE APPLICANT FAILING TO FULFIL THE TERMS AND CONDITIONS OF THE CONTRACT.

5.1 Payment Collection Under Letter of Credit

399

THIS GUA RANTEE SHA LL EXPIRE ON MA Y 5TH 2013. ANY CLAIM HEREUNDER MUST BE RECEIVED IN WRITING AT THIS OFFICE BY HAND, BY REGISTERED POST OR BY COURIER BEFORE EXPIRY A CCOM PANIED BY THIS ORIGINAL GUA RANTEE AND YOUR STATEM ENT (BEA RING YOUR ORIGINA L HANDWRITTEN SIGNATURE) THAT THE APPLICANT HAS FA ILED TO FULFIL THE CONTRACT. SUCH CLAIM AND STATEM ENT SHALL BE ACCEPTED AS CONCLUSIVE EVIDENCE (A ND A DMISSIBLE AS SUCH) THAT THE AMOUNT CLAIMED IS DUE TO YOU UNDER THIS GUARANTEE. CLAIMS, DOCUM ENTS A ND STATEM ENTS AS AFORESAID MUST BEAR THE DATED CONFIRMATION OF YOUR BANKERS THAT THE SIGNATORIES THEREON ARE AUTHORISED SO TO SIGN. ANY CLAIM AND STATEM ENT HEREUNDER A CCOM PANIED BY THE ORIGINA L OF THIS GUA RANTEE DOCUM ENT M UST BE RECEIVED AT THIS OFFICE BEFORE EXPIRY. AFTER EXPIRY THIS GUA RANTEE SHA LL BECOM E NULL AND VOID WHETHER RETURNED TO US FOR CANCELLA TION OR NOT A ND A NY CLA IM OR STATEM ENT RECEIVED AFTER EXPIRY SHALL BE INEFFECTIVE. THIS GUA RANTEE IS PERSONA L TO YOURSELVES AND IS NOT TRANSFERABLE OR ASSIGNABLE. THIS GUARA NTEE SHA LL BE GOVERNED BY AND CONSTRUED IN A CCORDANCE WITH THE LAWS OF TOKYO, JAPAN AND SHA LL BE SUBJECT TO THE EXCLUSIVE JURISDICTION OF THE TOKYO, JAPAN COURTS.

FOR AND ON BEHA LF OF NATIONA L A GRICULTURA L COOPERATIVE FEDERATION (NH BANK) (Source: National Agricultural Cooperative Federation)

400

5 Payment Collection in International Trade

Strict compliance rule of the letter of credit is also applied to the standby letter of credit

The following is the case to treat with the strict compliance rule in standby letter of credit. Just like this case, when the parties of the underlying commercial contract make negotiations to determine the terms and conditions of the letter, particularly, about the documents issued and signed by the third public organizations, they are required to be very careful to confirm whether their designed documents can exactly be issued in terms of substantial contents as well as of procedural matters including signature. This issue is very important because, sometimes the public organizations’ administration is not so flexible to respond to the contractual requirements between the private parties. Case179 In this action to recover damages for alleged wrongful dishonor of a Standby Letter of Credit, the IAS Court, relying on the standard of strict compliance, properly held that the discrepancies in plaintiff’s letter of credit documents justified dishonor. Even slight discrepancies in compliance with the terms of a letter of credit justify refusal to pay. Here, the letter of credit required a “SIGNED STATEMENT ON EMBASSY OF GREECE HELLENIC DEFENSE ATTACHE LETTERHEAD PURPORTEDLY SIGNED BY AN AUTHORIZED OFFICER OF EMBASSY OF GREECE, HELLENIC DEFENSE ATTACHE.” Nevertheless, plaintiff submitted a statement on the letterhead of “EMBASSY OF GREECE, DEFENSE AND MILITARY ATTACHE” signed by “Lt. Col. Constandinos Bairaktaris, Ass. Defense and Military Attache.” As the IAS Court correctly noted, defendant could not be expected to determine from the face of the documents that “DEFENSE AND MILITARY ATTACHE” is the same as “HELLENIC DEFENSE ATTACHE” and this constitutes a material discrepancy. The documents submitted by plaintiff also did not strictly comply with the requirements of the Standby Letter of Credit because the total amount drawn was in excess of the face amount thereof. Summary judgment was properly denied to defendant inasmuch as the IAS Court also correctly held that a material issue of fact exists as to whether defendant acted within a “reasonable time” under Uniform Customs and Practices for Documentary Credits (UCP) Article 16 (c) to examine the plaintiff’s documents and determine not to pay. “What constitutes a reasonable time necessarily depends upon the nature, purpose, and circumstance of each case; no New York court has held that the three-day banking rule set forth

179

HELLENIC REPUBLIC v. STANDARD CHARTERED BANK 219 A.D.2d 498 (1995) 631 N.Y.S.2d 320 September 19, 1995 Appellate Division of the Supreme Court of the State of

5.1 Payment Collection Under Letter of Credit

401

in UCC 5-112 (1) is controlling. Moreover, and contrary to the IAS Court’s conclusion, we also find an issue of fact as to whether defendant’s notice of dishonor was made “without delay” under UCP Article 16 (d). Keeping in mind that courts have held that the expiration date of a letter of credit is a relevant factor in determining whether there was unreasonable delay in providing notice of dishonor, a question of fact exists as to whether defendant’s notice fifteen minutes prior to the bank’s closure on the expiration date of the letter of credit was unreasonable under the circumstances.

(6) Performance Bond Performance bonds are popularly used in international construction contracts, under which the beneficiary is guaranteed to get payment of US$79,000 (in the example set out below) against the sight draft accompanied by the beneficiary’s statement when the applicant fails to fulfill his obligation under the contract (NO. THFSC 12-030)

New York, First Department. http://www.leagle.com/decision/1995717219AD2d498_1605/HEL LENIC%20REPUBLIC%20v.%20STANDARD%20CHARTERED%20BANK.

402

5 Payment Collection in International Trade TRANSMISSION

SEND TO

: SWIFT

MESSAGE ID

: 20221229G0000007

MESSAGE STATUS

: SEC

MESSAGE INPUT REFERENCE : 16:51:50-2022/ 12/29-NACFKRSEXXX-6388-623220 MESSAGE HEADER

-SENDER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE FEDERATION(NH BANK)

RECEIVER

: NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE FEDERATION(NH BANK)

MESSAGE TYPE

: MT760

[ GUARANTEE ] MESSAGE TEXT

--SEQUENCE OF TOTAL

27 : 1/1

TRANSACTION REFERENCE NUMBER

20 : G03NR012XD00032

FURTHER IDENTIFICATION

23 : ISSUE

DATE

30 : 221229

APPLICABLE RULES

40C: OTHR/UCP 600

DETAILS OF GUARANTEE

77C:

WE ISSUE OUR IRREVOCA BLE LETTER OF CREDIT FA VORING FOREIGN TRADE DEPA RTM ENT OF ABC, SEOUL, KOREA FOR A CCOUNT OF BBC AND FEED CO., LTD. IN AN A GGREGATE AMOUNT OF USD 79,000.00 (U.S. DOLLA RS SEVENTY NINE THOUSAND ONLY) REPRESENTING PERFORMANCE BOND. THIS LETTER OF CREDIT IS A VAILA BLE BY BENEFICIARY'S SIGHT DRAFT DRAWN ON US A CCOM PANIED BY THE BENEFICIARY'S STATEM ENT STATING THAT THE BBC AND FEED CO., LTD. HA S FAILED TO FULFILL ITS OBLIGATION UNDER THE CONTRA CTS NO. THFSC12-030 FOR 4,000M/T 5PCT M ORE OR LESS OF CHINESE CORN GLUTEN FEED TO BE SHIPPED AT C AND F FREE-OUT AT SOUTH KOREAN PORT(S). THIS CREDIT EXPIRES ON MA Y 14, 2011 IN BORAME TOW N BRANCH, NATIONA L AGRICULTURA L COOPERATIVE FEDERATION (NH BANK), SEOUL, KOREA AND SUBJECT TO U.C.P FOR DOCUMENTARY CREDIT (2007 REVISION) ICC PUB 600. END OF MESSAGE (Source: National Agricultural Cooperative Federation)

5.2 Payment Collection without Letter of Credit

5.2

Payment Collection without Letter of Credit

5.2.1

Document Against Payment

403

“Document against payment” (D/P) means that when presenting shipping documents to the bank, the bank can hand over documents to the importer after the bank gets paid by the importer. It allows for simultaneous exchange of documents and payment collection, so the collecting bank cannot release the cargo unless the importer has made payment. For the document against payment transaction, the exporter makes and submits a collection-requesting form (in a fixed form) to a bank specified in the contract to send documents for payment collection. The bank then requesting payment on behalf of the exporter confirms whether the documents submitted with the collection-requesting form are consistent with the submitted document lists and then sends the documents to a collecting bank in the importing country. If the importer confirms his acceptance of the document and pays for the exported goods, the bank hands over the documents to the importer. The collecting bank transfers the payment from the importer to the bank requesting payment, and the bank requesting payment makes payment to the exporter. Special D/P

O D/P Usance Irrespective of “D/P at sight” or D/P usance,” when the documents arrive at the collecting bank of the importing country, the bank must collect the payment from the importer and deliver the documents. In case of “D/P usance,” even though the documents are delivered after getting paid by the importer, the payment to the exporter is to be made within a specified length of dates after the document is presented for payment collection. O D/P negotiation Since the bank requesting collection on behalf of the exporter has no obligation to negotiate documents under the terms of payment by collection, the bank transfers the documents from an exporter to the collecting bank for payment collection without reviewing them and does not have to pay the exporter in advance. In this case, the exporter bears the burden of funds for a certain period of time until the collecting bank gets paid from the importer and sends it to the exporter. At this time, the exporter can request financing in advance, as in the case of an L/C, to the bank requesting collection on behalf of the exporter, which may or may not accept such request.

404

5.2.2

5 Payment Collection in International Trade

Remittance

(1) Outline In the case of the terms of remittance, the exporter sends the goods directly to the importer, and the importer makes payment directly to the exporter. Therefore, the exporters or importers should assume the credit risk by themselves. If remittance is made before the goods are delivered, the risk is on the importer due to the possibility that the goods are never shipped, or are damaged during transportation. Conversely, if the remittance is made after shipping the goods under the condition of “cash or collect on delivery” (COD) or “cash after delivery” or “cash after documents” (CAD), the exporter must hope that the importer is faithful to his promises. Payment means are usually determined under the contract, which includes demand drafts (D/D) or demand transfer (D/T), mail draft (M/D) or mail transfer (M/T), and telegraphic transfer (T/T). A demand draft is payable upon demand by the presenter. A telegraphic transfer is also called a wire transfer. Telegraphic transfers are mainly completed through the “Society for Worldwide Interbank Financial Telecommunication” (SWIFT). A SWIFT transaction is only possible when both banks have access to the system, and it is often used for remittance, collection, letter of credit issuing, and other financial services because of its cheap and speedy service. (2) Remittance in Advance This method means that the payment collection is made, under the term “cash with order” (COW), before the exporter ships goods after conclusion of a contract. This is safe for exporters but very risky for importers because importers assume the risk that goods will not be shipped after making payment to exporters overseas in advance. If the letter of credit is established just for the preferential rate of financing not for negotiating, this kind of credit cannot function as the payment guaranty on behalf of the accounted.

The following is the special case to treat with the issue of the payment in advance under the letter of credit. In the case it was submitted that the cargo had in fact been prepared on the basis of a running account between the concerned parties, which included cash payment in advance. Under this contract, it was submitted that the letters of credit were not established with a view to negotiation, but to provide the beneficiary with favorable pre-shipment credit, which is interpreted very unusual in the general letter of credit transaction. It was judicially found out that the payment by way in advance payments into a running account is simply not credible based on the main grounds:

5.2 Payment Collection without Letter of Credit

405

The suggestions that all the letters of credit in respect of all parcels of cargo were established not for the purpose of negotiation but in order to obtain some strange, and in some incomprehensible manner, preferential rates from the bank are somewhat undermined by the fact that the documents were in fact negotiated for some of the parcels of cargo; and similarly, if the letter of credit was for financing purpose only, there might be no purpose to making arrangement for amendment of the letter of credit to allow documents to be negotiated. Case180 In this action, the owners of a vessel called the ANTARES III, the claimants, in effect seek interpleader relief. The shipowners are faced by two rival claims by parties holding different bills of lading in respect of a part cargo on board their vessel. The two rival claimants are the first and second defendants. The owners are anxious to deliver the cargo to the person entitled to it, subject to the assertion of a lien. The background is somewhat complicated. By a contract of sale dated March 2001, the first defendant, Kanematsu Corporation, agreed to purchase a quantity of Indian yellow tested soya bean extraction meal and flake from Siligan Private Ltd. (“Siligan”). The first defendants opened a letter of credit on 25 April, and payment appears to have been made by the first defendant’s bank in May in the sum of just over $2 million. A company called Narayan Trading Co. had had a course of dealing with the sellers under the contract which I have just mentioned, Siligan, and by a contract of sale dated April Narayan agreed to sell 4500 metric tonnes of soya bean meal to Siligan, terms FAS Bedi. Payment was to be made against a letter of credit. In due course an associate company, Vinsari Fruitech Ltd., the second defendant, was substituted as a seller in place of Narayan. Those are the two sale contracts with which this court is concerned. The third contract with which the court is concerned is the time charter on an amended New York Produce Exchange form dated May 2, whereby the claimant owners chartered their vessel to M & S Shipping for a time chartered trip for a voyage from West Coast, India, to Singapore. A feature of the charterparty was that M & S had authority to issue and sign bills of lading on the owner’s behalf in conformity with mates’ receipts. M & S appears to be an associate company of Siligan, and Mr. Manish Agarwal appears to be the principal behind both M & S and Siligan.

180

Transpacific Eternity S.A. v Kanematsu Corporation & Anor 2001 WL 1135067 (2002) 1 Lloyd’s Rep. 233 High Court of Justice Queen’s Bench Division Commercial Court Published in English: 2001 Westlaw.

406

5 Payment Collection in International Trade

The vessel arrived at Bedi on May 9 and commenced loading the next day. Loading was completed, the entire cargo being some 10,450 metric tonnes of soya bean extraction, on May 19, whereupon the vessel sailed. Various bills of lading were issued, including a bill called “Bedi 1,” dated May 10, in respect of 4,999 metric tonnes, albeit at the date of that bill only 240 metric tonnes had actually been loaded on the vessel. This bill of lading identified the second defendant, Vinsari, as the shipper, and was made out to its order. Vinsari, however, encountered a problem because the letter of credit that had been opened in their favor by Siligan provided for shipment up to and including April 30, and, although the validity of the letter of credit was extended, the amendment in regard to shipment was only that it should be effected on or before May 8. To seek to cope with this the second defendant, Vinsari, requested the charterer’s agent, Shakti, to issue a replacement bill of lading, which was duly accomplished on May 8. This in due course was exchanged for yet another bill issued by another company associated with Siligan and M & S, namely MKI. Both these latter two bills of lading identified Vinsari as the shipper and were made out to its order. The second replacement bill, namely the MKI bill, was presented under the letter of credit to the Bank of Hawaii in Singapore, the bank with whom Siligan had opened their letter of credit, but it was rejected. On May 15, yet a further bill of lading, called for convenience the “switch bill,” was issued in respect of the entire cargo, including the parcel with which we are concerned. The switch bill named Siligan as the shipper and the first defendant, Kanematsu, as the notifying company. Pursuant to M & S’s orders for and on behalf of the charterers, the vessel proceeded to Kagoshima in Japan. The first defendant, Kanematsu, presented the switch bill, and the owners commenced discharge on about the June 8; but shortly afterward the owners learned of Vinsari’s claim to part of the cargo, and thereafter the vessel continued discharge at Kagoshima and other ports, albeit leaving on board sufficient tonnage to cover the disputed part cargo. With the ship acting as an involuntary warehouse, this court made an order on July 11 that the balance of the cargo be discharged and be placed in storage pending the court’s further order, and the court also ordered that there be an expedited trial which has duly commenced on the appointed date, August 6, with an estimate of one-and-a-half days. In the event, it has only proved possible to complete submissions on one issue, namely whether the first defendant, Kanematsu, or the second defendant, Vinsari, are the owners of the cargo presently sitting in the warehouse. Albeit only that issue has been the subject of completed argument, it is in fact the central issue in the case, and once resolved will dispel any further impediment to the disposal of the cargo pending resolution of disputes as to who is entitled to lien the

5.2 Payment Collection without Letter of Credit

407

cargo or its proceeds, and thus removing the justification, or at least the requirement, for any expedited hearing of the remaining issues. It was, or became at least, common ground between the parties that neither of the bills of lading relied upon by the first and second defendants in seeking to obtain delivery from the shipowners were valid, and accordingly the central issue is as I have indicated, the resolution of which would afford the claimant shipowners a decision as to who it was appropriate to make delivery to, subject to the existence or otherwise of any lien. So far as the identity of the appropriate owner was concerned, the claimant’s position was entirely neutral. It was the second defendants’ submission that they were the owners of the cargo, because property had never passed to Siligan under its sale agreement, and since Siligan had never owned the cargo accordingly Kanematsu, the first defendant, did not, and indeed could not, have obtained title. It was the submission of Vinsari that it was intended by the parties that property in the cargo should only pass upon payment by Siligan to Vinsari and, in this context, reliance was placed in particular on the bills of lading which named Vinsari as the shipper and were marked to their order, thus, it was suggested, preserving a right of disposal and making it plain that the ownership would not be transferred until the condition to that reservation of right, namely payment, was effected. As I understood Kanematsu’s case, it was put in an alternative form, the first being that the presumption relied upon by Vinsari was displaced in all the circumstances of the case, in particular in the context of an FAS contract, where the mate’s receipts had named Siligan as consignee. Thus, it was submitted, it was the intention of the parties, as derived from all the circumstances of the case, that property should pass at the ship’s rail. This intention was confirmed and to be inferred also from the fact that Vinsari sought to stop loading, or stop the process of loading, on May 16, an attempt only consistent, it was submitted, with Vinsari believing and intending that property should pass when the cargo crossed the rail. Kanematsu’s alternative submission was in rather stark contrast, that the cargo had in fact been prepaid on the basis of a running account between Siligan and Narayan, which included cash advances made by Siligan early in the soya bean growing season. In this context, it was submitted that the letters of credit were not established with a view to negotiation, but to provide Narayan with favorable pre-shipment credit. As to the presumed intention of the parties, the starting point must be the Sale of Goods Act, which provides in s.17: “(1)Where there is a contract for the sale of specific or ascertained goods the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred. “(2)For the purpose of ascertaining the intention of the parties regard shall be had to the terms of the contract, the conduct of the parties

408

5 Payment Collection in International Trade

and the circumstances of the case.”18: “Unless a different intention appears, the following are rules for ascertaining the intention of the parties as to the time at which the property in the goods is to pass to the buyer. “Rule 5(1) Where there is a contract for the sale of unascertained or future goods by description, and goods of that description and in a deliverable state are unconditionally appropriated to the contract, either by the seller with the assent of the buyer or by the buyer with the assent of the seller, the property in the goods then passes to the buyer; and the assent may be express or implied, and may be given either before or after the appropriation is made. “(2)Where, in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or other bailee or custodier (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is to be taken to have unconditionally appropriated the goods to the contract.” 19: “(1)Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are fulfilled; and in such a case, notwithstanding the deliver of the goods to the buyer, or to a carrier or other bailee or custodier for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled. “(2)Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or his agent, the seller is prima facie to be taken to reserve the right of disposal.” Against this background, given the terms of the bill of lading, it is not surprising that Kanematsu were disposed to accept the presumption that property was not to pass until payment, and that is why they advanced three arguments as to why that presumption was to be displaced in this case. First, as I have already indicated, they placed reliance on the fact that this was an FAS contract. For my part, it is sufficient, it seems to me, to assert in terms, and again it may not be controversial, that the presumption which emerges from s.19 of the Sale of Goods Act remains valid for the purposes of an FOB contract. In support of that, it is necessary to do no more than refer to the decision of the Court of Appeal in Mitsui & Co. Ltd. v. Flota Mercante Grancolombiana. I cannot subscribe to the proposition that the terms of the mate’s receipt can be replied upon to alter the construction of the contracts of carriage. Indeed, the mate’s receipts were expressly subject to exchange for the bills of lading. In addition no inference can, in my judgment, be drawn from the intent to stop loading. Indeed, they were expressed to be for the purpose of encouraging payment under earlier contracts. In any event, the action is equally consistent with the intention to retain possession and not title. It

5.2 Payment Collection without Letter of Credit

409

follows, in my judgment, that the submission of Kanematsu that the usual presumption must be displaced in this case must fail. This leaves the submission that payment was in fact made out of advances. To some extent Kanematsu suggested that they were hindered in advancing this case by the fact that Siligan was the third party. Nonetheless, a statement had been obtained from Agarwal dated on August 2. I refused the first defendants leave to put that statement in evidence. This was because it was produced at a very late stage. In my judgment, it could only be admitted fairly on terms of an adjournment to allow the Vinsari interest to carry out further investigations and to adduce, if appropriate, additional disclosure. The call for an expedited hearing was largely occasioned by Kanematsu’s stance that it was the owner of the cargo, and that no sale should take place outside its control. Consistent with that attitude, Kanematsu was not disposed to press their application for the statement of Mr. Agarwal against those conditions. In support of their submission that the cargo had in fact been paid for, Kanematsu relied on various contemporary communications with Mr. Agarwal himself, together with parts of a statement from the claimant’s solicitor as to responses that he obtained from Mr. Agarwal in the course of his, that is to say the solicitor’s, investigations after the vessel’s arrival. I am bound to say that the suggestion that the cargo had been financed by Siligan by way of advance payments into a running account is simply not credible. There are four fundamental reasons why I say that: Firstly, there is no document evidencing any payment into or any state of a running account. Indeed even the contract itself is markedly silent on this very topic. Secondly, the purpose of opening a letter of credit in the event that there had already been pre-payment remains, at least to me, incomprehensible. The explanation advanced on behalf of Kanematsu was a suggestion that in April “Mr. Garg Narayan approached Mr. Agarwal and requested that letters of credit be established for all four parcels of cargo in order that Narayan could use the letters of credit in order to procure favorable pre-shipment credit at preferential rates from their bank which could be made available on the security of the letter of credit with a view to not actually drawing down on the letters of credit but employing the credit in order to assist the short-term cash flow difficulties.” I have to say that I did not understand the nature of this arrangement, nor was I any the wiser or clear-headed about it following submissions on Kanematsu’s behalf. The suggestion that all the letters of credit in respect of all parcels of cargo were established not for the purposes of negotiation but in order to obtain some strange, and in some incomprehensible manner, preferential rates from the bank is somewhat undermined by the fact that the documents were in fact negotiated for some of the parcels of cargo.

410

5 Payment Collection in International Trade

It is also to be noted, and I only take one example almost at random, that any suggestion emanating from the Narayan and Vinsari camp that there was a need for amendment to the letter of credit and/or the waiver of discrepancies was not met by any response from Mr. Agarwal or Messrs. Siligan that the second defendants and Narayan were under some complete misapprehension as to the nature and purpose of the letters of credit. Thirdly, and it is perhaps the same point, if the letter of credit was for financing purposes only, there was no purpose to making arrangements for amendment of the letter of credit to allow documents to be negotiated. Fourthly, not a word of complaint was raised by Siligan when Vinsari sought to present documents under the letter of credit, albeit on Siligan’s case Vinsari was acting dishonestly. To the contrary, in May Siligan actually requested Vinsari to forward the documents, albeit to a different bank, “for payment.” In these circumstances, the alternative case advanced by Kanematsu must also fail. It is appropriate to make a declaration that the second defendants are the owners of the cargo, and I make that declaration, and I will now deal with any subsidiary directions as to the future conduct of the trial.

(3) Remittance upon Performance of Contract This term means that payment will come from the foreign exchange bank upon delivery of goods, or within a certain period of time after delivery of goods. This remittance method is divided into “cash on delivery” (COD) and “cash against documents” (CAD). With CAD, payment is made within a certain period of time after the shipping date, or a certain period of time after the arrival date. This method can usually be used when an exporter ships goods and presents shipping documents to an importer’s branch or agent in the exporting country, at which point the importer takes the shipping documents and makes payment. Typically, the importer’s agent in the exporting country will inspect the manufacturing process and make a pre-shipment inspection. This method can usually be used when an exporter’s company has branches or agents in the importing country. The exporter sends his goods to this branch, and the importer makes payment promptly after inspecting the goods for conformity with the agreement. In this case, it is possible for the importer to write in the contract that he has the right to renegotiate the price if the goods are not up to his expectations, adding safety for the importer, and at the same time adding risk for the exporter.

5.2 Payment Collection without Letter of Credit

5.2.3

411

Open Account

An open account is used when the parties involved continue business transactions, and should only be used when the parties are familiar with each other and have built a solid business relationship based on trust. An open account means that parties do not have to calculate the price with every deal, and, instead, the books are balanced after each transaction. This is more efficient for partners who frequently engage in commerce because it allows them to cut down on fees relating to making payments. The exporter sends shipping documents to the importer without issuing a bill of exchange. When the importer notifies the exporter of shipment, the amount on the commercial invoice is written in credits for the exporter. This is a kind of sale on credit, and since it solely depends on an importer’s credit, it is commonly used when both parties are related to each other through a main office and its branch.

5.2.4

Factoring

(1) Outline Factoring is used where the exporter wants a letter of credit to insure a safe collection of payment, but the importer does not want to use a letter of credit because of concerns about the quality of the traded goods, and when the exporter wants “at sight” payment, but the importer wants to buy on credit. Factoring is a combination of letter of credit and non-letter of credit transactions. Factoring is “the business of purchasing and collecting accounts receivable or of advancing cash on the basis of accounts receivable.” To make factoring plausible, international organizations of factors were created, the most notable of which is Factors Chain International (FCI). Based in the Netherlands, FCI created international rules for factoring called the “Code of International Factoring Customs” and “Rules of Arbitration.” Essentially, these “factors” replace banks in international negotiations. Instead of the importer, it is the export factor that buys at sight account receivables, lessening the risk to the importer. The import factor lends credit to the importer. Factoring companies offer further assistance to help facilitate trade, such as researching a company’s credit standing. They also accept the credit risk, serve as a collection agency, deal with accounting, and so on. These services reduce concerns about the payment collection followed by credit-based export when the exporter needs to be financed in exporting before collecting. In the case of importing, the importer can reduce transaction costs by making usance payment available backed by the guarantee of the factoring company instead of issuing a letter of credit. International factoring can utilize open account credit terms, open account, “document against acceptance” and “document against payment”, but cannot use letters of credit or cash.

412

5 Payment Collection in International Trade

By using international factoring, exporters can capitalize on export account receivables upon shipment while performing a trade on credit, and importers can conveniently purchase goods on credit. Depending on the recourse, factoring may be grouped into factoring with recourse and factoring without recourse. The export factor can also make a payment in advance discounting account receivables according to requests and the credit of the exporter, or make payment after payment collection made by the import factor. (2) Features Exporters and importers can, through the use of factoring, get finance only by credit without security. When the export factor buys account receivables from the exporter, it does not require security. Instead, the notice of credit approval for the importer serves as security. Furthermore, the import factor does not require any security when the importer gets goods on credit, and compensates for it if the importer goes bankrupt. Thus, the most important aspect in factoring transactions is the credit standing of the exporters and importers. Inquiring into receiving proof of credit is categorically required before entering a trade agreement with another party. Factoring can make the negotiation much more favorable to exporters and importers than is the situation with a letter of credit, “document against payment”, or “document against acceptance.” This financing method is, particularly, advantageous to small and medium-sized companies to expand their export markets with their newly developed products, because their credit standings do not have to be revalued with every transaction. Procedures of Factoring Transactions

The factoring service is usually carried out as follows: ➀ Consultation with export factoring and conclusion of an export factoring contract. ➁ Applying credit approval: After consultation with the potential exporter, a Credit Approval Request (CAR) is dispatched to the import factor. ➂ Determining credit line after credit inquiry—An import factoring contract is concluded after consultation concerning a credit line and terms between the importer and the import factor. ➃ Notification of credit approval—The import factor forwards an answer in the form of the CAR to the exporter through the export factor after reviewing the credit line or individual credit approval (ICAR), approved amount, and settlement period.

5.2 Payment Collection without Letter of Credit

413

➄ Issuing a credit approval notice—The export factor issues a credit approval notice to the exporter upon accepting the notice. ➅ Formation of sale contract by factoring—Specifications on the export contract concerning settlement conditions between the exporter and the importer must be made under the credit approval condition. If necessary, export approval should be given by a relevant organization. ➆ Shipment of goods by exporter. ➇ Requesting negotiation of shipping documents and offering advancement—The exporter can get an advancement within the export bond amount after presenting the proper documents; inducing a negotiation form of export bonds, export permit, commercial invoice, copy of B/L, etc. ➈ Dispatching shipping documents and transferring export bonds. ➉ Delivering shipping documents to the importer.  11 Settlement of import price—The importer must deposit payment to the import factor upon maturity of the contract. If the importer delays the payment, the exporter bears the interest for the delay. The importer then remits the price with the interest rate in accordance with the terms of the exporter’s contract.  12 Remitting import price.  13 Balancing after calculating the export price and advancement.

5.2.5

Forfaiting

Forfaiting has many similarities to factoring, but is distinctively different in the dealing amount, recourse, interest rate, and the method of payment involved. Factoring is a firm-based operation, while forfaiting is a transaction-based operation, meaning that it is merely a debt instrument: note, bond, promissory note, or draft. Forfaiting is made when an exporter’s accounts receivable, which is the amount the importer owes to the exporter, are purchased by a third party at a discount because the payment is made in cash. The forfaiter, that is, the entity that purchased the account receivables, then becomes the entity to whom the importer must make payments. By purchasing account receivables, the forfaiter relieves the exporter of the burden of credit, and eliminates the risk that payment might not be realized. On the other side of the transaction, the importer has been given up the ability to purchase goods that it cannot immediately pay for. Forfaiting was first introduced in 1950s to the world when Credit Suisse in Switzerland started doing business with companies throughout Western Europe. For extremely costly imports such as of machinery, plants and ships, the importer will naturally want to pay on a deferred payment system. But, if the credit of the importing party, his country, or the letter of credit opening bank is not stable, it

414

5 Payment Collection in International Trade

is likely that the exporter will require payment immediately to avoid the risk of taking a huge loss. There is also the risk of foreign exchange fluctuations. The forfaiter eliminates such risks of the buyer, the issuing bank, and foreign exchange fluctuations. Since the forfaiter’s payment is being discounted on the condition that recourse to long-term accounts receivable (usually 1–5 years, sometimes 10 years or more) will not occur, the forfeiter is able to set a reasonable discount rate by evaluating the importer’s credit risk, the issuing bank’s credit, and the reliability of business relations with that country. If credit history is not obtainable, the forfaiter will likely require an aval from the importer’s bank or a third bank. An aval is a guarantee made by a third party who insures that the payment will be made in the case that the nominated entire defaults on his payments. Under the terms of forfeiting, the seller does not take responsibility if the buyer (or issuing bank) goes insolvent or is delayed on maturity, because the forfaiter does not exercise recourse, and the seller does not assume the fluctuations of exchange rates or interest rates because payment is made upon shipmen Procedures of Forfaiting Transaction

Forfeiting procedures are generally as follows: ➀ The seller, under the terms of forfeiting, ships and delivers goods to the buyer in accordance with the contract. ➁ The buyer requires to submit a draft that the seller issued in favor of himself, or the promissory note that the buyer issued to the bank so it can be guaranteed. ➂ The importer’s bank (payment guaranteeing bank) sends the draft or the payment guarantee after it marks “Aval” on the back of the draft or makes another payment guarantee. ➃ The seller makes a forfaiting contract with a forfeiter. ➄ The seller hands over the payment guarantee or aval from the bank in contract to the forfeiter. ➅ The forfaiter pays a discounted price to the seller after receiving the drafts. ➆ On maturity, the forfaiter presents an aval from the seller or the payment guarantee from the bank to the guaranteeing bank. ➇ When the guaranteeing bank pays the price to the forfaiter, the deal is closed.

5.3 Application to Business Field

415

5.3

Application to Business Field

5.3.1

Informing of Issuance of Letter of Credit

The importer would inform the exporter of the issuing of a letter of credit, which would be followed by the preparation for exportation including export license as follows:

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

May 29, 2023 Dr. COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Gentlemen; We would like to thank you for your fax of May 25, 2023, enclosing our purchase order No. CMT20130503. We are very glad to comp lete the first contract for mutual benefit and would like to ask you to do everything possible to ensure punctual shipment.

In order to cover this order, we have instructed our bank to issue an irrevocable at sight credit in your favor for the amount of this order and you will be duly advised it through the Woori Bank Busan. Please info rm us by return when you have completed the shipment and please sign this order and return it to us as an acknowledgement.

Sincerely yours,

Chinese Marine Trading Co., Ltd. Bruce Jin/Manager

416

5 Payment Collection in International Trade

Export License (Application) (The format and contents are different among governments. This is the case of the Korean government.)

Handling Time : 1 Day (1) (Exporter) (notification No)

(4) Buyer or Principal of Contract

671110

Chinese Marine Trading Co., Ltd.

Name of firm, Address, Name of Rep. Dr. COFFEEXTRACT

(5) L/C or Contract No.

1646, Yuseong-daero, Yuseong-gu

ILC100 51234 567

509, Innobiz Park, Daejeon, Korea (2)

(6) Total Amount

(Reque ster) (Business No.)

US$ 483,000 (7) Period of Payment (Name of firm, Address, Name of Rep.)

AT SIGH T

(Signature)

(8) Terms of Price FOB BUSAN, KOREA

(3)Origin

R.O.K

(10) HS Code

(9) Port of Arrival

(11) Description/Siz e LUVIUS

(12) Unit/Qua ntity

Premium-Gold

17,000PCS

US$41

Brightening US$9.1

Effect Softner DACAPO-Elegante

(13) Unit Price

Brightening

Enrich Cream

US$13.9

DACAPO-Infinite Time Essence DACAPO-Remember

Triple

US$14.1

Balance Essential Serum Miracle

ATO-Aroma

Body Wash

(14) Amount

Lifting

33O4.99.1000 Cream-50 DACAPO-Elegante

HAIKOU , CHINA

Moisture

US$14.5

USD483,000

5.3 Application to Business Field Miracle ATO -Pure Moisture Cream

417 US$10.1

Miracle AC-Red2 White Pore Serum

US$5.5

US$5.8 (15)Remarks to be filled out by an Approval Agency (16)Period of Approval (17)Approval

No.

(18)No. of Approval Agency (19)The undersigned hereby approves the above-mentioned goods in accordance with Article 14(2) of the Foreign Trade Act and Article 26(1) of the Enforcement Decree of the said Act.

5.3.2

Receipt of Letter of Credit for Export

To prepare for the letter of credit issuing, the importer should negotiate with the issuing bank, inter alia, to set a ceiling of credit extended to the importer. The importer should write all the conditions in the letter of credit application according to the sales contract terms (method of payment, loading port, arrival port, shipping period, expiration period, etc.) to submit to letter of credit issuing bank. The letter of credit issuing banks should promptly notify exporters of letter of credit opening through advising banks as it issues the letter of credit. If the buyer issues and informs the letter of credits through the bank, the exporter reviews the letter of credit focusing on the safety of payment collection, whether it is the same as specified by the contract, whether there are poisonous Articles, and the credit status of issuing banks. In accordance with the sales contract, the importer would make application to issue the letter of credit and the issuing bank would inform of letter of credit issuing through SWIFT format to the advising bank located in the exporter’s country as follows:

418

5 Payment Collection in International Trade APPLICATION FOR IRREVOCABLE DOCUMENTARY CREDIT Woori Bank

1.Advising Bank: 2. Credit No.

I

10

BIC CODE

234567

3. Applicant

Chinese Marine Trading Co., Ltd.

4. Beneficiary

Dr. COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

5. Amount

(Tolerance

USD483,000

6. Expiry Date

-10

07/31/2023

8. Tenor of Draft

■ At Sight

7. Latest date of shipment (■Reimburse

□Usance

%

□Remittance)

□Banker's □ Domestic)

□ Shipper's

DOCUMENTS REQUIRED (46A 10.

06/31/2023

days

of the invoice value (Usance L/C only 9. For

+10 /

)

)

Full set of clean on board ocean bills of lading made out to the order of WOORI BANK mal "Freight Collect

and notify (¦Accountee, □Other:

Air Waybills consigned to THE

BANK OF CHI

marke

"Freight

and "notify Accountee" 11.

Insurance Policy or certificate in duplicate endorsed in blank for 110% o f the invoice value, stipulating that claims are payable in the currency of the draft and also indicating a claim setting agent in Korea. Insurance must include: the institute Carg o Clause

12.

Signed

commercial

invoice

Triplicate 14.

Packing List in

Triplicate

16.

Certificate of origin in

17. □

Inspection certificate

in

13. □ Certificate of analysis in 15. □ Certificate of weight in issued by

n

issued by

5.3 Application to Business Field 18. □

419

Other documents(if any)

19. Description of goods and/or services (45A:) Commodity Description

Unit Price

Amount

Lifting 10,000 PCS

USD41

USD410,000

Brightening 1,000 PCS

USD9.1

USD9,100

Brightening 1,000 PCS

USD13.9

USD13,900

1,000 PCS

USD14.1

USD14,100

1,000 PCS

USD14.5

USD14,500

1,000 PCS

USD10.1

USD10,100

Miracle AC-Red2 White Pore Serum 1,000 PCS

USD5.5

USD5,500

1,000 PCS

USD5.8

USD5,800

Total

USD483,000

LUVIUS

Premium-Gold

Quantity

(Price Term)

Cream-50 DACAPO-Elegante Effect Softner DACAPO-Elegante Enrich Cream DACAPO-Infinite Time Essence DACAPO-Remember

Triple

Balance Essential Serum Miracle ATO-Aroma Moisture Body Wash Miracle ATO-Pure Moisture Cream

Country of Origin 20.

Korea

Shipment Busan, Korea

Shipment To: Haikou, China

From: 21.

Partial □Allowed

Shipment:

¦Prohibited

23.

□

22. Trans shipment: □Allowed ¦Prohibited

Confirmation: Confirmation charges:□Beneficiary, 24 Transfer:

□Applicant

□Allowed (Transferring) Bank:

25. Documents must be presented within other transportation documents. Additional Conditions (47A:)

days after the date of shipment of B/L or

420

5 Payment Collection in International Trade □

All banking charges(including postage, advising and payment commission, negotiation and reimbursement commission)

□

outside Korea are for account of

¦

□Applicant

□

Stale B/L AWB acceptable

□

□Third party B/L acceptable

□

Third party document acceptable

□

T/T Reimbursement:

□

□Prohibited

□

Bills of lading should be issued by

□Beneficiary □Charter Party B/L is acceptable □Combined shipment B/L is acceptable □Allowed

(House) Air Waybills should be issued by (

) % More or less in quantity and amount to be acceptable

The number of this credit must be indicated in all documents Other conditions: Drawee Bank (42A): Reimbursement Bank(53A): Except so far as otherwise expressly stated, This Documentary credit is subject to the Uniform Customs and Practice fo r Documentary Cred its (1993 Rev ision) International Chamber o f Commerce Publication N . 500

Address : Floor 8, No.388, Yang Fu Po rt Management Bu ild ing, Yang Fu Econo mic Develop ment Zone, Yang Fu, Hainan, P.R. China Applicant : Chinese Marine Trading Co., Ltd

5.3 Application to Business Field

421

SWIFT Message Type for issuing letter of credit (MT700 Issue of Documentary Credit) M/O

Tag

Field Name

M

27

M

40A

Form of Documentary Credit

24x

M

20

Documentary Credit Number

16x

O

23

Reference to Pre-Advice

16x

O

31C

Date of Issue

6n

M

31D

Date and Place of Expiry

6n29x

O

51a

Applicant Bank

A or D

M

50

Applicant

4* 35x

M

59

Beneficiary

M

32B

Currency Code, Amount

O

39A

Percentage Credit Amount Tolerance

O

39B

Maximum Credit Amount

O

39C

Additional Amounts Covered

4* 35x

M

41a

Available with … By …

A or D

O

42C

Draft at…

3* 35x

O

42a

Drawee

A or D

O

42M

Mixed Payment Details

4* 35x

O

42P

Deferred Payment Details

4* 35x

O

43P

Partial Shipment

1* 35x

O

43T

Transshipment

1* 35x

O

44A

Loading on Board/Dispatch/Taking in Charge at/from…

1* 65x

O

44B

For Transportation to…

1* 65x

O

44C

Latest Date of Shipment

6n

O

44D

Shipment Period

6* 65x

O

45A

Description of Goods and/or Services

50* 65x

O

46A

Documents Required

50* 65x

Sequence of Total

Content/Options 1n/1n

[/34x]4* 35x 3a 15number 2n/2n 13x

422

5 Payment Collection in International Trade O

47A

Additional Conditions

50* 65x

O

71B

Charges

6* 35x

O

48

Period for Presentation

4* 35x

M

49

Confirmation instructions

O

53a

Reimbursement Bank

A or D

O

78

Instructions to the Paying/Accepting/Negotiating Bank

12* 65x

O

57a

"Advise Through" Bank

O

72

Sender to Receiver Information

Case of issuing letter of credit through the format of SWIFT MT780 Application header block : : Input/Output Identifier

: I Outgoing Message

: Transaction Type

: 700 issue of a documentary credit

: Transaction Priority

: n Normal

: From

: THE BANK Of CHINA, YANGFU

: To

: WOORI BANK DAEJE ON BRANCH. KOREA

7x

A, B or D 6* 35x

5.3 Application to Business Field

423

Text Block : /27 : sequence of total

: 1/1

/40A : form of documentary credit

: IRREVOCABLE

/20 : documentary credit number

: ILC10051234567

/31C : date of issue

: 23/06/24

/31D : date and place of expiry

: 23/07/31 KOREA

/50 : applicant

: CHINESE MARIN E TRADING CO., LTD

/59 : beneficiary

: Dr. COFFEEXTRACT

/32B : currency code amount

: USD 483,000

/39A : pct credit amount tolerance

: 10/10

/41D : available with by name, address /42C : drafts at

: ANY BANK BY NEGOTIATION : AT SIGHT : WOORI BANK, KOREA(ADDR

/42A : drawee

26-8,

JUNG-DONG,

KOREA) /43P : partial shipment

: NOT ALLOWED

/43T : transshipment

: NOT ALLOWED

/44A : on board/Disp/ta king charge

: BUSAN, KOREA

/44B : for transportation to

: HAIKOU, CHINA

/44C : latest date of shipment

: 23/06/30

/45A : descr goods and/or services

DONG-GU ,DA EJEON ,

424

5 Payment Collection in International Trade

LUVIUS Premium-Go ld Lifting Cream-50 DACAPO-Elegante Brightening Effect Softner DACAPO-Elegante Brightening Enrich Cream DACAPO-Infinite Time Essence DACAPO-Remember Triple Balance Essential Serum Miracle ATO-Aroma Moisture Body Wash Miracle ATO-Pure Moisture Cream Miracle AC-Red2 White Pore Serum FOB BUSAN, KOREA /46A : documents required +SIGNED COMMERCIA L INVOICE IN TRIPLICA TE +PACKING LIST IN TRIPLICA TE +FULL SET OF CLEAN ON BOARD OCEAN BILL OF LANDING MADE OUT TO THE ORDER OF THE BANK OF CHINA MARKED FREIGH T COLLECT AND NOTIFY APPLICA N T +CERTIFICA TE OF ORIGIN /47A : additional conditions ALL DOCUMENTS MUST BEAR OUR CREDIT NUMBER ILC10051234567 T/T REIMBURSEM ENT NOT ALLOWED OUAN TITY 10PCT MORE OR LESS ALLOWED +THIRD PARTY DOCUM EN TS ACCEPTABLE : ALL BANKING COMMISSIONS AND /71B : charges

CHARGES

INCLUDING

REIMBURSEM ENT CHARG ES OUTSID E KOREA ARE FOR ACCOU N T OF BENEFICIARY

/49 : confirmation instructions

: WITHOUT : WOORI BANK, KOREA(ADDR

/53A : reimbursem ent bank

26-8,

JUNG-DONG,

DONG-GU,

DAEJEON,

KOREA) /78 : instructions to the pay/acc/neg bk DRAFTS MUST BE SENT TO DRAWEE BANK FOR YOUR REMBURSEMENT AND ALL DOCUMENTS TO US BY COURIER SERVICE IN ONE LOT : THIS CREDIT IS SUBJECT TO U.C.P(1993 /72 : sender to receiver information

REVISION) I.C.C. PUBLICAT ION NO. 600

Bibliography

425

Learning Assignments

1. Create a confirmed irrevocable letter of credit in accordance with the final sales contract made by students in Chap. 4, and indicate the reasons why the letter of credit is to be issued as an irrevocable letter of credit from the viewpoints of risk management of the exportation. 2. Comparative study between bank guarantees procured by the buyer and bank guarantees procured by the seller from the viewpoints of ensuring security in international business transactions.

Bibliography Carr I (2007) International trade law, 3rd ed. Cavendish Publishing DiMatteo LA, Dhooge LJ (2005) International business law—transactional approach, 2nd edn. West Folsom RH, Gordon MW, Spanogle JA Jr, Fitzgerald PL (2020) International business transactions: contracting across borders. West Fellmeth AX (2009) The law of international business transactions. West Honnold JO (2006) Sales transactions: domestic and international Law, 3rd ed, Foundation Press Kouladis N (2006) Principles of law relating to international trade. Springer Wilson JF (2010) Carriage of goods by sea, 6th ed. Pearson Longman

6

International Transportation

Learning Objectives

Recently, due to the climate change, the international weather condition has been very unstable and unexpectable, which has made the international transport of traded goods very critical to the successful business in the global market. Whenever the hands-on workers of international business are to take part in the international trade activities, they should be very careful to make the proper legal and contractual management of international transport as well as the commercially strategic management. Hands-on workers should also consider their products’ physical and chemical characteristics. For example, he products like the cosmetics are very sensitive to the smell and perfume penetrated from other neighboring cargoes or the transport equipment and tools. This chapter treats with the following issues. 1. Importance of carriage of goods in export transactions. 2. Course of business in the carriage of goods by sea. 3. Contractual and statutory effect of bills of lading and other transportation documents in international maritime transportation.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_6

427

428

6 International Transportation

6.1

Introduction

6.1.1

Concepts

Transport in international business transactions has a direct impact on such key sales contract elements as price, speed of delivery and risk of loss or damage.1 Transport means “to carry, move or convey from one place to another.” In international business transactions, the purpose of transport is to improve the effective value of the goods being moved and in turn, create advantageous situations and profits for both the buyer and seller. Under the circumstances that the world market is becoming smaller and closer, internationally high competition has forced companies to streamline their operations and supply chains to insure that the products can be sold at competitive prices through the reduction of operating costs. Global integration that has been accelerated provides companies with availability to one country’s cheap natural resources, another’s cheap labor, and another’s advanced technology, through which the international enterprise may establish a comprehensive global supply claim system. International transport involved in international business transactions often utilizes international marine and aircraft navigation but can also use railroads and trucks when the countries are connected to each other as in the case of Europe. Combined transport is often utilized for the international commerce because it can improve transport logistics.

6.1.2

Transportation in International Trade

Punctual delivery according to the trade terms and conditions through proper transportation means is essential for the successful business transactions. If the goods are not delivered on time due to poor selection of transport means, or if a claim for transported cargo occurs due to improper packing or unloading, the results can be fatal to the exporter. Proper transportation planning can create notable competitive advantage for a company over others in the industry by finding the fastest and cheapest method of delivery and reducing costs due to prompt and precise planning and actions. The shipper, under the transactions with letter of credit, usually the exporter, seeking proper transportation, is to obtain shipping documents required by the letter of credit for the preparation of negotiation with the negotiating bank, and the consignee, usually the importer, is to take the shipping documents through the issuing bank and receive the imported goods when they arrive at the final destination. Even though transportation is under the charge of professional carrying

1

Eun Sup Lee, supra note 138, at 187.

6.2 Means of Transportation

429

companies under transport contract, the shipper as the user of the transport services is recommended to have a sufficient understanding of the transport documents, including bill of lading, in use, the responsibilities of the carrier, and proper actions to take if the carrier breaches the contract.

6.2

Means of Transportation

There are three kinds of transport including land transport, maritime transport, and air transport. Recently, transport markets are complicated and competitive, which means shippers find it sometimes difficult to seek out the proper transporting companies for the shipping of their goods. Under such circumstances, freight forwarders, specialists in shipping, have served for the shippers. The freight forwarder is generally an entity carrying out transport logistics or transporting actions for a shipper without possession of his own transporting means. The forwarder is a middleman who provides service of a carrier to a shipper and service of a shipper to a carrier. The “freight forwarder” is commonly associated with an ocean freight forwarder, but air freight forwarders also exist. The freight forwarder’s responsibility is to provide door-to-door transportation between the exporter and importer. The forwarder gives one quoted price to the exporter which includes shipping, handling, import and customs duties, and other transport expenses that may be applicable. A combined transport bill of lading is issued under the forwarder’s liability.

6.2.1

Maritime Transportation

Since maritime transport allows for shipping of large volumes of cargo at one time, which is more economical than other methods, most international transport depends on marine transportation. It is not only cheaper but also an internationally competitive and important strategic industry because ships can set sail freely from any port in any country. The safety in marine transportation has improved dramatically since its initiation through continuous technical innovations, such as development of shipbuilding, and development of electronics and information networks. The utilization of containers in shipping goods has expedited multimodal transport and reduced transportation costs.

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(1) Ships The ships used in international trade are naturally gargantuan vessels designed specifically for carrying cargo. One of these ships is either a tanker designed for liquids like oil or a dry cargo ship designed more for solid cargo. Ships are measured by their weight and volume. Weight can be measured by displacement ton, which is a measure of the water displaced by the ship, and is therefore affected by the cargo on board. Another means to measure weight is by “deadweight ton” (DWT), which is the maximum weight of cargo that can be loaded on the ship. Volume can be measured by gross ton (G/T) which is known as a long ton, or net ton(N/T) which is the measure of the parts of the ship that are directly used for carrying cargo. Either measurement will be subject to port charges, canal tolls, and tariffs. (2) Ports Ports were previously considered just a place to load or unload cargo, however, as they have emerged as outposts for exporting and importing, and as logistics bases, their significance in international trade has vastly increased. Ports are mainly divided into two groups, that is, exclusive ports for contained cargo and conventional ports which handle general cargo not in containers. Ports need to be equipped with the proper transportation methods to quickly, easily and safely move, load, unload, and store cargo. Besides this, facilities must be available for inspection, weighing, appraising, employing safety measures, cleaning, oiling, and repairing containers. Ports have evolved into a one-stop shop to ease the burdens of transport. (3) Container Terminals These are short-term storage facilities where cargo containers can be transshipped between different transport vehicles. This transshipment may occur between ships and land vehicles, or two land vehicles. Inland container terminals are often located in or near major cities, with easy access to trains, trucking routes, etc. One of the main objectives of container terminals is to standardize cargo completely in order to save the transporting time by handling it by mechanical facilities, not by people. These terminals often supply other services, such as container installation, collection, repair, and cleaning. The attached facilities to the container terminal are as follows:

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➀ Berth This is a docking place equipped with facilities located inside a port, which usually has a facility to dock one average-sized ship. ➁ Apron This place is a part of the yard alongside the pier and the nearest point to the ocean, normally 30–50 m wide, and equipped with gantry crane, where containers are loaded and unloaded. ➂ Marshaling Yard Usually located near to the apron, this is a large place to arrange containers that were unloaded or prepared for loading. It occupies much of the container yard and is an important part in operating any container terminal. ➃ Container Yard This is a place to accept, deliver, and store containers. The container yard often encompasses the marshaling yard, apron, and cargo freight station as well. It usually occupies about 65% of the entire area. ➄ Cargo Freight Station This is a place to accept, deliver, and store cargo that is not large enough to fill an entire container, that is, “less than container load cargo” (LCL cargo). ➅ Control Tower This is a control center positioned at a high place to oversee the entire container yard. It is responsible for planning, directions, and supervision of operations. (4) Containers Today, containers are a major transportation means in international trade due to the convenience of standardization that they provide and are fastly growing to be used at ports worldwide. They enable the fast and easy packing, storing, loading, and transporting of goods because their standardization allows the cargo to be moved efficiently. Containers reduce packing costs, marine transport fees, land transport fees, and cargo-working costs. Other costs that decrease with the use of containers are insurance premiums, labor costs, and office costs. Besides a huge potential for cost savings, containers also provide high productivity that lessens the transport time due to easy handling and simple shipping documents. A further advantage that

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shippers may enjoy is that it prevents the loss and damage of goods, which means that they are less likely to be charged with mishandling goods.

6.2.2

Liners/Trampers

(1) Liners Regular liners sail in accordance with fixed schedules and usually carry general cargo including finished products or half-finished products. A company running regular liners is often referred to as a “line shipping company.” A liner can be a container ship, conventional ship, multipurpose ship, or “roll on/roll off” including a car ferry ship (RO/RO) which is designed specifically to load and unload cargo using ramps so that cargo does not have to be lifted. Container ships are divided into full containers and semi-containers which accommodate smaller cargo loads. Full container ships have no equipment to load or unload containers, but semi-container ships should come with a crane to load and unload cargo. A conventional ship, on the other hand, is not made to carry containers. A multipurpose ship is made with the functions of both a general cargo ship and a bulk ship. Thus, it is available to both regular and irregular voyages. A shipping conference means that more than two regular liner companies make agreement for the purpose of standardizing different aspects of their businesses such as freight, piling capacity, wiring, and the bunker adjustment factor. The purpose of standardizing these items is to avoid unnecessary competition that will cause all of the companies to get less profit. The conferences may create flexible rates but in a way were initially intended to impose or keep high rates. Most companies adopt these rate agreements, sailing agreements, and pooling agreements domestically and conduct various contract systems to bind shippers in the conference. By doing this, the shipping companies of a particular country can strengthen their businesses and be more competitive against outside carriers. As intermodal transport is becoming active due to a rapid progress in containerization and shipping companies are more commonly offering door-to-door service, shipping conferences that are serving port to port needs would lose their market share. From the mid-1980s, around the routes like the Pacific route, the Europe route and the Atlantic route, they have increased their “around the world services” and “pendulum services” more positively, making it difficult of the shipping companies to participate in those particular conference specialized in a certain route, which caused those conferences to lose much of their power. Pendulum routes are routes that consist of a set of ports that are structured as a continuous loop and designed for container transport.

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(2) Trampers The term “tramper” means to walk aimlessly. A tramp steamer, naturally, is a ship that is not confined to certain ports of call, or even has a fixed schedule, but instead, a tramp steamer, also known as a tramp freighter or tramper, trades on the spot market and can ship at the time and route that the shipper desires. Early in the maritime industry, trampers were highly common, but their use has decreased as regular liners have increased due to shipbuilding development. Typically, a tramper’s cargo is in bulk such as oil, iron ore, coal, grain, and cement. Since these ships can change their routes according to demand, trampers have a global market. Any tanker’s individual market share is, therefore, understandably small because of which shipping conferences are difficult to be established for trampers. Unlike contracts of carriage for a regular liner, a shipper makes a charter contract with a ship he wants by making charterparty considering the shipping place, unloading place, transporting time, and terms of voyage. The charterparty means the contract for the lease of the vessel. Charterparty contracts are formed as a time charterparty, voyage charterparty, and a bareboat charter (demise charter), out of which the voyage charter is largely used by shippers. It is the Shipowners’ Basic and Important Duty to Nominate the Vessel in Accordance with the Charterparty

The following case is to treat with the arbitration awarding the compensation for damages for repudiatory breach of the charterparty on the part of the vessel owners which was accepted by the charters. The breach was a refusal to nominate a vessel in accordance with the charterparty. The majority of arbitrators found that the charters’ failure to narrow the laydays conferred no advantage on the owners so it just cannot be “self-evident” that the provision for laydays to be narrowed was designed to enable the owners to arrange their affairs more advantageously to themselves than in the absence of any such narrowing. These findings are accepted by the court. Case2 Universal Bulk Carriers Private Limited (“the owners”) were the unsuccessful respondents to arbitration proceedings brought by Andre et Cie SA

2

Universal Bulk Carriers Pte Ltd v Andre et Cie SA [2001] EWCA Civ 588. In the Supreme Court of JudicatureCourt of Appeal (Civil Division) On Appeal From Commercial Court www.shippinglaw.ru/upload/iblock/d76/588.rtf.

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(“the charterers”) arising out of a charterparty made on October 3, 1996, between the owners “as disponent owners” and the charterers whereby the charterers chartered a vessel to be nominated for the carriage of a cargo of heavy grain, soyas, or sorghums (“HSS”) from the US Gulf Mississippi River to West Malaysia. By their award made and published on May 11, 1999, the arbitrators awarded and directed that the owners should pay the charterers the sum of US$304,425 together with interest and costs. The award was for damages for repudiatory breach of the charterparty on the part of the owners which was accepted by the charterers. The breach was a refusal to nominate a vessel in accordance with the charterparty. The owners appealed against the award with the permission of Aikens J on three issues. On January 18, 2000, Longmore J (“the judge”) dismissed the appeal. He granted the owner’s permission to appeal to this court on the following question which he certified to be of general public importance, namely whether a clause narrowing laycan in a voyage charterparty is, in the absence of words to the contrary, always a condition precedent to an obligation to nominate a vessel. The two other issues argued at the hearing before the judge pursuant to the permission granted by Aikens J were not the subject of permission to appeal to this court and have not been pursued in this appeal. Although the certified question is formulated in general terms, the issue which arises between the parties on this appeal depends on the true construction of clause 42 of the charterparty. Charterparty The charterparty, which was dated October 3, 1996, was for a vessel to be nominated and was on an amended Baltimore berth grain Form C of 1913. Clauses 8 to 42 were additional typed clauses. The relevant terms were as follows: Ie lines 7–10. “That the vessel shall with all convenient speed sail and proceed to 1/2 safe berth(s), 1 safe port [US Gulf excluding Brownsville] or Charterers’ option 1/2 safe berth(s) Mississippi River and there load a full and complete cargo of bulk HSS. Clause 8: PERFORMING VESSEL TO BE NOMINATED 13 DAYS PRIOR ETA LOADPORT DURING EUROPEAN WORKING HOURS, TOGETHER WITH FULL ITINERARY AND APPROXIMATE LOADABLE CARGO QUANTITY. Clause 40: On above-mentioned cargo charterers to have the option to ’wash out’ the nominated voyage, which is to be declared by charterers latest on the day when narrowing of laycan is due. In case of such occurrence, settlement is to be made without penalties for both parties, and a commission of 1.25% on 55,000 metric tons to be paid to broker and equally shared between both parties.

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Clause 42: Laycan on first half December to be narrowed to 10 days spread 32 days prior of the first layday.” Facts Like the judge, I can take the facts essentially as they are set out in the award in tabular form. “The charterparty was negotiated and concluded by Mr. Alberto Molaschi, the chartering broker employed by the charterers in Switzerland, and Mr. Andrea Molaschi, a broker employed by the ship brokers Pacific Dragon Co. Ltd. in Hong Kong (“Pacific Dragon”) and Mr. Raza Taqi, the chief executive of the shipowners in Singapore. It was made for the charterers to fulfill obligations undertaken by them under a sale contract dated December 14, 1995, which was for shipments of cargo during the period December 1–31, 1996. Charterers sent a telex to Pacific Dragon narrowing the laycan to December 1–10, 1996, on October 24, 1996, but Pacific Dragon failed to pass the message on due to some technical problem, perhaps with the owners’ telex machine. Whatever the explanation, no laycan narrowing notice was received by the owners at that time or indeed by 12 noon November 4, 1996, the last possible day. On November 20, 1996, Mr. Alberto Molaschi telephoned his brother Andrea Molaschi at Pacific Dragon to ask when the charterers could expect to receive the owners’ nomination for vessel and what its estimated time of arrival was. Andrea Molaschi then telephoned Mr. Raza Taqi and apparently informed him that the laydays were December 1–10 and asked that the owners nominate a vessel to perform the fixture. The owners refused to accept the notice of narrowing and contended that they were no longer obliged to nominate a vessel because the charterers had failed to comply with the contractual laycan narrowing provision. The owners relied on November 22 noting that the dates mentioned on the telephone were not dates for narrowing laycan and rejecting the charterers’ contention as to the continuing 15 days spread. The charterers replied the same day that if the owners were not willing to comply with the charterers’ request for the nomination of the vessel with a laycan of December 1–10, the owners were nevertheless bound to nominate a vessel within a laycan of December 1–15, and they requested confirmation that the owners would perform accordingly, failing which they would consider the owners to be in breach of the charterparty. On November 25, 1996, the owners maintained their position and contended that the giving of the notice of narrowing of laydays was a condition precedent to the requirement that they nominate a vessel.” Like the judge, I can omit certain exchanges which take the matter no further.

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“On November 29, 1996, the charterers purported to remind the owners that they had not yet received the nomination of the vessel and warning them that they had until latest midnight on December 2 in which to nominate, failing which they would be in repudiatory breach. They again asked the owners to confirm that they intended to comply with their obligations. On December 2, the owners replied, maintaining that it was the charterers who were in breach of the charterparty in failing to give the owners the required contractual notice to enable the owners to nominate a suitable vessel under the charterparty. They purported to accept that repudiation. On December 3, 1996, the charterers replied saying: (a) that it was clear that the owners had no intention of nominating a vessel and performing their obligations under the charterparty; (b) that the owners were wrongfully claiming that the charterers were in repudiatory breach of charterparty; and (c) that the owners had without any grounds unilaterally terminated the contract and that this itself was a repudiatory breach which the charterers accepted.” “On the same day, December 3, the charterers chartered the vessel ‘MARIA BOTTIGLIERI’ to carry the cargo in question at a higher rate of freight with a laycan of December 10–15, 1996. She completed loading on December 29, at which point freight was payable under the charterparty for that vessel. The charterers claim the loss of $304,425, which the majority of the tribunal awarded to them.” It was not argued before the arbitrators that the charterers at any stage gave a notice narrowing the laycan spread under clause 42. The Decisions of the Arbitrators and the Judge The question which gives rise to this appeal was whether the giving by the charterers of a notice narrowing laycan under clause 42 was a condition precedent to the nomination of a vessel by the owners and thus to the performance of the charterparty. The judge held that clause 42 did not give the charterers an option but imposed an obligation upon them to narrow the spread 32 days before the first layday, but that performance of that obligation was not a condition precedent to the owners’ obligation to nominate a vessel under clause 8. He held that the term was not a condition of the contract. Issues on the Appeal It follows that the questions for decision on this appeal are whether clause 42 gave the charterers an option to narrow the laycan or whether it imposed an obligation to do so and, if so, whether or not that obligation was a condition of the charterparty. It has been common ground throughout that, whether clause 42 conferred an option or imposed a duty, in either case it did so on the charterers and not the owners.

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Option or Obligation? In paragraph 2 of his dissenting opinion, Mr. Gaisford said this: “In my view the giving of the laycan narrowing notice referred to in clause 42 is an obligation. It is clear that the parties were quite able to express a provision as an option if they wished to but clause 42 contains no words which might fairly be regarded as pertaining to an option but, on the contrary, states that the laycan is ‘to be narrowed.’ It is silent as to which party is to do the narrowing but it was common ground that whether it was an obligation or an option, it was that of the charterers. The fact is that the parties agreed that such notice would be given and, having so agreed, the timing of the laycan narrowing notice must assume considerable importance to the parties in arranging their affairs.” The judge agreed with Mr. Gaisford for the reasons which he gave. On this appeal, the charterers served a respondents’ notice asserting that the majority arbitrators were correct and that the clause conferred an option on the charterers. Mr. Davey submitted that the clause was inserted into the charterparty entirely for the charterers’ benefit and that the parties must have intended that the charterers should have an unfettered choice whether to narrow the laycan spread to ten days, failing which the spread would remain “on first half of December.” I do not think that clause 42 was drafted in such a way as to confer an option on the charterers. As the judge correctly pointed out, the parties were able to provide expressly for an option if they wished to do so. Most strikingly, they did so in clause 40 which provided for the charterers to have the option to “wash out” the nominated voyage, in which event they were to declare the exercise of the option “on the day when narrowing of laycan is due.” In these circumstances, I agree with the judge that clause 42 imposes a duty on the charterers. Whose Duty? I have already indicated that it is and was common ground that, if clause 42 imposes a duty, it does so on the charterers and not the owners. Having regard to the common ground and to the basis upon which the argument proceeded before the arbitrators, before the judge and before us, I shall assume that the clause imposed a duty on the charterers and not the owners. I should perhaps observe in this regard that no one suggested the contrary during the exchanges between the parties which I set out earlier and, indeed, the relationship between clauses 40 and 42 perhaps suggests that, just as it would be for the charterers to exercise the option in clause 40, so it would be for them to discharge the duty in clause 42. Is Clause 42 a Condition?

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Relevant Principles The judge referred to the well-known decision of the House of Lords in Bunge Corporation v Tradax Export. As the judge observed, Lord Roskill expressly approved the following extracts of volume 9 of the 4th edition of Halsbury’s Laws of England, 1975: “481. The modern law, in the case of contracts of all types, may be summarized as follows. Time will not be considered to be of the essence unless: (1) The parties expressly stipulate that conditions as to time must be strictly complied with; or (2) the nature of the subject-matter of the contract or the surrounding circumstances show that time should be considered to be of the essence; or (3) a party who has been subjected to unreasonable delay gives notice to the party in default making time of the essence. 482. Apart from express agreement or notice making time of the essence, the court will require precise compliance with stipulations as to time wherever the circumstances of the case indicate that this would fulfill the intention of the parties. Broadly speaking, time will be considered of the essence in ‘mercantile’ contracts and in other cases where the nature of the contract or of the subject-matter or the circumstances of the case require precise compliance.” Lord Roskill added: “… the need for certainty in mercantile contracts is often of great importance and sometimes may well be a determining factor in deciding the true construction of a particular term in such a contract.” Lord Wilberforce too expressly approved those paragraphs from Halsbury: “in particular by asserting (1) that the court will require precise compliance with stipulations as to time whenever the circumstances of the case indicate that this would fulfill the intention of the parties and (2) that broadly speaking time will be considered of the essence in ‘mercantile’ contracts.” Application of the Principles to the Facts Given that the charterparty could be performed in accordance with its terms whether or not the charterers discharged their obligations to narrow the laycan spread in accordance with clause 42, it does not seem to me to be likely that the parties intended that clause 42 was a condition of the contract such that any breach of it would entitle the owners to treat the charterparty as at an end. It makes no commercial sense to hold that the parties intended that the owners should be able to treat the whole contract as at an end if the charterers served a notice, say, two days late. It seems to me to make much better sense to hold that in such circumstances the owners had a choice. The choice was either to treat the notice as contractual, with the consequence that the laycan spread would be narrowed to ten days in accordance with the notice, or to treat the notice as non-contractual, with the consequence that the laycan spread was not narrowed but remained 15 and a half days “on first half December.”

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This is not a case in which there was a natural interdependence between clause 42 and clause 8. Nor was the performance of the charterers’ obligation to narrow in clause 42 of importance to the owners. Indeed, it is difficult to see why they were not likely to be better off if the charterers failed to narrow the laycan spread because of the greater flexibility which would be available to them from a 15-and-a-half-day spread instead of ten days’ spread. Moreover, the conclusion reached by the judge did not make the position in any way uncertain because, for the reasons which I gave earlier, the position would be quite clear by 1200 on the last day for the giving of a notice, namely 1200 on November 4. It would then be clear whether the spread would remain at 15 and a half days or become ten days, and, if so which ten days they would be. The judge concluded his judgment on this point in this way, after quoting part of the passage from the judgment in Hyundai Merchant Marine Co. Ltd. v Karander Maritime Inc (The “Niizuru”) which I have just cited. “Here, by contrast, it is actually found by the majority of the arbitrators that the charterers’ failure to narrow the laydays conferred no advantage on the owners so it just cannot be ‘self-evident’ that the provision for laydays to be narrowed was designed to enable the owners to arrange their affairs if by that one means, as I think one must, arrange their affairs more advantageously to themselves than in the absence of any such narrowing. In these circumstances, I do not think that clause 42 can have been intended to be a condition any breach of which would entitle the owners to terminate the charter.” I entirely agree. Conclusion I would dismiss the appeal.

➀ Trip/Voyage Charterparty A charterparty is a legal instrument to specify a contract between a shipowner and a merchant, for which a ship is hired to transport goods on a particular voyage. A charterparty is generally contracted for transportation of goods, sometimes a ship is hired to transport passengers. Route, cargo, period of contract, etc., are determined by the agreement of parties. In this case, a shipowner bears all responsibilities and costs for equipment for the ship and voyage, and its freight is determined by quantity of cargo.

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Exemption Clause of Carrier’s Liability Under the Bill of Lading is Not Applied to the Case of Misdelivering the Goods by the Charters to Issue the Bill of Lading. And Therefore the Shipowners of the Ship Should be Very Careful to Nominate the Contractual Charters

The bill of lading’s terms exempting the carriers from any liability for the goods after discharge are judicially interpreted that it does not extend to include misdelivery of the goods by the defendants out of their possession whether in the absence of any bill of lading or the absence of an original bill of lading. This interpretation implies that, considering the general fact that in modern shipping practices, the owners of the ship are forced to delegate authority to their charters to issue and sign the bill of lading, the owners should make a value judgment when they delegate such authority to their charters and so must live with this and that the injustice created by this does not outweigh the potential injustice to the true owner of the cargo. The following case treats with this issue. Case3 The English High Court was recently asked to consider where liability should rest when a shipowner delivers cargo against presentation of a fraudulent bill of lading (Motis Exports Ltd. v Dampskibsselskabet AF 1912 Aktieselskab and Aktieselskabet Dampskipsselskabet Svendborg). The facts of the case were as follows. The plaintiff, Motis Exports Ltd., was the shipper of various consignments of goods under a number of Maersk Line bills of lading at ports in China and Hong Kong in July and August 1996 and January 1997. The bills stated that consignees were to order and contained the following clause: “5. CARRIER’S RESPONSIBILITY … 3. Carriage to and from Countries other than the USA … (b) Where the carriage called for commences at the port of loading and/ or finishes at the port of discharge, the carrier shall have no liability whatsoever for any loss or damage to the goods while in its actual or constructive possession before loading or after discharge over ship’s rail or if applicable, on the ship’s ramp, however caused.”

3

Motis Exports v. Dampskibsselskabet AF 1912 (1999) 1 Lloyd’s Rep. 837. https://www.steamshipmutual.com/publications/Articles/Articles/Delivery_Cargo_2.asp www. simic.net.cn/upload/2010-06/20100607152917548.pdf.

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The goods were carried to Cotonou and Abidjan in West Africa. The vessels concerned with were owned by the two defendants Dampskibsselskabet AF 1912 Aktieselskab, and Aktieselskabet Dampskibsselskabet Svendborg who together run a liner service under the name of Maersk line. The case raises the issue whether the defendants are liable for the loss of the goods after discharge from their vessels, where the cause of the loss is the use of forged bills of lading to obtain delivery orders in respect of, and thus delivery of, the goods at the discharge ports. The plaintiff says that the defendants are liable for delivery up of the goods without production of original bills of lading. The defendants say that they are just as much the victims of fraud as the true owners of the cargo and that they are protected by a clause in the bills of lading which exempts them from any liability for the goods after discharge. The defendants’ agents thereupon issued delivery orders in the belief that the bills of lading which had been presented were genuine and the goods were delivered to the fraudsters. The plaintiffs advanced their case on the proposition that the defendants had delivered the goods without production of the original bills of lading. The defendants also argued that a shipowner who innocently delivers cargo against presentation of a fraudulent bill of lading intends to perform his obligations and should not lightly be found to be in breach of them. The defendant also countered this by asserting that the carrier’s responsibility clause in the bills of lading operated to exempt them from liability after the goods were discharged over the ship’s rail. The clause relied on in this case by the defendants is cl. 5.3.b.: Paragraph 7 of the defense reads as follows: If the goods were lost to the plaintiff, the losses occurred sometime after the goods had been passed over the ship’s rail at the port(s) of discharge when they were delivered against the aforesaid delivery orders as a result of the criminal deception and fraud practiced upon the defendants’ agents. In the premises, the goods having been lost by such deception and/or theft, by virtue of clause 5.3.b of the bills of lading the defendants are under no liability whatsoever in respect of such loss of goods. Paragraph 8 of the defense continues: Further or alternatively, if the goods were misdelivered, such misdeliveries were the acts of the persons in whose possession the goods were being held at the time when the goods were released against the aforesaid delivery orders. It is denied that such persons so acted as agents of the defendants.

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The court restated the proposition that a shipowner is both entitled and bound to deliver cargo against production of an original bill of lading and that he delivers cargo without such production at his peril. If an original bill of lading cannot be produced, the master cannot be obliged to deliver the goods unless the owners have already bound themselves in contract to do so. Failing this, the true owner of the goods must come to an accommodation with the owners to obtain delivery of the goods (usually by offering an indemnity) or make an application to the courts. The court then considered whether a fraudulent bill of lading was as good as a genuine bill of lading for the purposes of delivery of the goods. The court expressed the view that this is clearly not the case if the bill of lading is known to be fraudulent or if the owners are on notice of the possibility that it is fraudulent. In such circumstances, the owners could be neither entitled to nor forced to deliver the cargo against the fraudulent bill of lading. The court then considered the situation which would arise if the owners for some reason refused to deliver the cargo against production of a bill of lading which was fraudulent in circumstances where they were unaware of the fraud. The conclusion drawn by the court was that the owners could not be in a worse position than if they had been aware that the bill of lading was fraudulent or were on notice of the possibility that it was fraudulent. Based on this logic, the court held that the only way in which owners could have a defense to a claim based on the innocent delivery of cargo against production of a fraudulent bill of lading was if there was a term implied into the bill of lading contract to this effect. In the judgment of the court, it was neither reasonable nor necessary to imply such a term which would both favor the owners at the expense of the true owners of the goods and undermine the essential role of the bill of lading as the key to a floating warehouse. The court was comforted in reaching this conclusion by the fact that the owners control the form, signature and issue of the bills of lading and so are best placed to prevent delivery of cargo against production of fraudulent bills of lading, although the court did acknowledge that it is common for owners to delegate these functions to their charterers. In addition, the court took account of the fact that the owners were under an obligation to care for the cargo entrusted to them and to deliver it in accordance with the bill of lading contract. It was, therefore, better for the loss to fall on the innocent shipowner than on the innocent holder of a valid bill of lading who expects to receive the goods upon presentation of it.

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In considering whether the owners were liable for conversion, the court held that the provision of a delivery order to the party producing a fraudulent bill of lading and delivery of the cargo against this amounted to an intentional act which was inconsistent with the true owner’s rights. Whether or not this was done in ignorance of and without intending to challenge the true owner’s rights, this amounted to conversion in the judgment of the court. As regards the defendants’ reliance upon the carrier’s responsibility clause, the court held that it was not drafted in terms of a cesser of liability. On a natural reading of the clause, the court found that it did not extend to include misdelivery of the goods by the defendants out of their possession whether in the absence of any bill of lading or the absence of an original bill of lading. Had this been intended by the parties, they could easily have provided for it. The court, therefore, found in favor of the plaintiffs. This case highlights an area of particular concern for owners because it is an indisputable fact of modern shipping that owners are forced to delegate authority to their charterers to issue and sign bills of lading. It was somewhat disingenuous of the court, therefore, to place such reliance upon control over the form, signature and issue of bills of lading being vested in the owners. The truth of the matter would seem to be that the court felt that owners make a value judgment when they delegate such authority to their charterers and so must live with this and that the injustice created by this did not outweigh the potential injustice to the true owners of the cargo. This decision was upheld by the Court of Appeal.

➁ Time Charterparty Under a time charterparty, the ship is rented for a certain period of time, not for a certain voyage. The owner still manages the vessel but takes orders from the charter until the expiry date. Shippers use this contract when they need to transport bulk cargoes during a certain period of time. ➂ Bare Boat Charter (Demise Charter) This is a subtype of a time charter under which the vessel is not under the guidance of the shipowner, but instead the charter takes all responsibilities of sailors, port duties, repair costs, voyage costs, hull premium, etc. The personnel and materials needed for the voyage are all responsible to the charterer. The charterer assumes all legal responsibilities with relation to the vessel operation.

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(3) Freight The measurement of freight is by the weight of shipped cargo, not by container as it is with regular container ships. The amount of freight is not stable as with regular liners because of extreme fluctuations according to market conditions. Generally speaking, freight under the charterparty is grouped into lump sum freight, dead freight, and long-term contract freight: Lump sum freight is calculated on the basis of trip or voyage, or a ship’s space regardless of number, weight or measurement of cargo. What is actually boarded upon the ship is irrelevant; Under the terms of dead freight, when the actual shipping quantity is less than agreed upon by contract, a shipper who is a charterer pays for the shortage; when concluding a long-term contract of carriage to carry materials or goods repeatedly, they can make contract under the terms of long-term contract freight. (4) Bill of Lading ➀ Concepts A bill of lading (B/L) is defined as “a written receipt given by a carrier for goods accepted for transportation.” The bill is issued by a carrier, acknowledging that cargo has been received on board and that a certain place is named for delivery. In today’s international commerce world, settlement of payment is often made with a documentary bill of exchange accompanied by shipping documents including bill of lading, commercial invoice, insurance policy, etc. The bill of lading, in general cases, contains the particulars including the leading marks necessary for identification of the shipped goods, the number of packages or pieces, the quantity or weight of the goods, the apparent order, and condition of the goods.4 Bills of lading are usually issued in sets by an agent of the shipowner (or a ship master). Each bill of lading in the set is sufficient and valid to induce delivery of the goods5 : One is kept on board the vessel while the others will be remitted to consignees of goods or issuing banks of documentary credit for the goods.6 The bill of lading contains usually a clause to the effect that once one in the set have been presented to demand delivery of the goods, the others are to “stand void.”7

4

Hague-Visby Rules, art. III(3). Eun Sup Lee, supra note 138, at 195. 6 Id. 7 Id. 5

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➁ Types 1. Shipped or Shipped on Board Bill of Lading and Received for Shipment Bill of Laing Shipped or shipped on board bill of lading is issued after a shipping company ships on board the received cargo from a shipper. When the Date of Loading on Board in Different from Signing Date of the Bill of Lading, Which Date Would Be Considered the Legal Date of the Shipped Bill of Lading?

Regarding the bill of lading’s date, when the date of loading on board is different from the date of signing the master bill of lading, the date of signing the bill is, judicially the correct date for the bill, because on that date it becomes the shipped bill of lading. The following case is to treat with this issue. Abstract8 Under a voyage charter for the carriage of oil, the charterer, D1, had the right to require the master to sign “lawful bills of lading in such form as charterers shall direct.” Between January 18–20, 1993, 900,000 barrels were loaded as a single bulk cargo by a consortium consisting of seven shippers whose practice was to present seven bills of lading for signature, each representing their proportionate share in the consortium. The cargo was substantially loaded between January 18–19, although some 20,000 barrels remaining were loaded on the 20. The master signed the bills on the 20, although all were dated the 19. The shippers genuinely considered that this was the appropriate date. D2 bought the oil and sold it to D3 under a contract where the price differed materially between the 19 and 20. Shortly after shipment, all the parties realized that there might be a problem concerning the correct date for the bills. The shipowner, P, applied to the court for a declaration as to the proper dating of the bills and, in particular, as to whether the date could be amended, or fresh bills issued. It was accepted that, as the bills had not yet been negotiated, P only had contracts of carriage with D1, under the charterparty, and the shippers (who were not parties to the action), under the bills of lading.

8

Mendala III Transport v Total Corp (Queen’s Bench Division) [1993] 2 Lloyd’s Rep. 41 22 February 1993.

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Held, that (1) nothing could be done to amend or cancel the existing bills, or to issue substitute bills, without the consent of the shippers and D2 and D3 would only have rights under the Carriage of Goods by Sea Act 1992 when the bills were tendered; (2) as D1 had not required the master to sign bills in a particular form, it could not complain about the form in which the bills were issued and signed and the master was justified in issuing bills to the shippers under Art. III, r. 3 of the Hague–Visby Rules; (3) the bills should all have been dated the 20, the date on which they became shipped bills; (4) the rights of D1 under a voyage charter could only be exercised before the bills had been signed and issued, and D1 was not entitled unilaterally to recall them or require the issuing of fresh bills; (5) D1 did not have the right to forbid P to correct the erroneous dates, provided that P did not issue fresh bills and do so in a form inconsistent with the charter or any instructions given by D1; (6) inaccuracy of date was not a matter of form over which D1 could properly give directions under the charter; (7) accordingly, without incurring any breach of the charter, P were entitled either to correct the dates if requested by the shippers (and to acknowledge the change by signature or initial), or to issue a separate document recording the inaccuracy and to make this available to interested parties; and (8) the original bills could be canceled, and substitute bills issued, with the agreement of the shippers, P and D1 “Shipped” or “shipped on board” is indicated on the bill of lading. Received for shipment bill of lading is issued before shipment is made after a shipping company receives cargo when a designated ship is waiting on the berth, or when a ship is designated even though it is not yet in the port. If a shipping company writes a date and signs after shipment and thereby the “on board notation” is written on the bill, it is valid as shipped or shipped on board bill of lading. Currently, according to UCP 600, unless the letter of credit specifically requires a shipped on board bill of lading, banks will accept a received bill of lading. 2. Clean Bill of Lading and Foul or Dirty Bill of Lading A clean bill of lading is issued when there are no mistakes indicated in the remarks column of the bill of lading in relation to the status of cargo shipped on board. “Shipped on board in apparent good order and condition” may be indicated on the policy. The effect of a clean bill of lading, as far as the carrier is concerned, would be that the carrier is estopped from claiming that the goods were damaged at the time of shipment unless the damage was such that it would not have been apparent on reasonable examination at that time.9 A foul or dirty bill of lading

9

Eun Sup Lee, supra note 138, at 196.

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is issued when a bill of lading indicates something wrong with the status of the goods for shipping at the time of shipment. The bank will refuse to negotiate on this type of imperfect bill of lading.10 Thus, as soon as the exporter discovers something wrong with the cargo, it must replace or repack it immediately to resolve the problem. If this is impossible due to time restraints, the exporter submits a letter of indemnity and can then be given a clean bill of lading. Indemnity

“1. A duty to make good any loss, damage, or liability incurred by another. 2. The right of an injured party to claim reimbursement for its loss, damage, or liability from a person who has such a duty 3. Reimbursement or compensation for loss, damage, or liability in tort; esp., the right of a party who is secondarily liable to recover from the party who is primarily liable for reimbursement of expenditures paid to a third party for injuries resulting from a violation of a common law duty.” (Source Black’s Law Dictionary, 2000) The shipping company can be exempt from the responsibilities for the improper cargo if the letter of indemnity is received by the exporter in exchange for issuing a clean bill of lading for the improper cargo shipped.

10

UCP 600, art. 14(b).

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Letter of Indemnity L.O.I. for Non-Presentation of Bill of Lading LETTER OF INDEMNITY (FOR CARGO DELIVERY WITHOUT ORIGNAL BS/L) TO: THE OWNERS OF THE MV ............................................. DATE............ DEAR SIRS, SHIP: LOADING PORT : DISCHARGING PORT : CARGO: BILL OF LADING: The above goods were shipped on the above vessel by ….. and consigned to….. for delivery at the port of ………, but the bill of lading has not arrived and we, ………, hereby request you to give delivery the said cargo to ……… without production of the original bills of lading. In consideration of your complying with our above request, we hereby agree as follows: 1. To indemnify you, your servants and agents and to hold all of you harmless in respect of any liability, loss, damage or expenses of whatsoever nature which you may sustain by reason of delivering the cargo in accordance with our request. 2. In the event of any proceedings being commenced against you or any of your servants or agents in connection with the delivery of the cargo as aforesaid, to provide you or them on demand with sufficient funds to defend the same. 3. If, in connection with the delivery of the cargo as aforesaid, the ship, or any other ship or property in the same or associated ownership, management or control,, should be arrested or detained or should the arrest or detention thereof should be threatened, or should there be any interference in the use or trading of the vessel (whether by virtue of a caveat being entered on the ship’s registry or otherwise howsoever), to provide on demand such bail or other security as may be required to prevent such arrest or detention or to secure the release of such ship or property or to remove such interference and to indemnify you in respect of any liability, loss, damage or expense caused by such arrest or detention or threatened arrest or detention or such interference, whether or not such arrest or detention or threatened arrest or detention or such interference may be justified.. 4. If the place at which we have asked you to make delivery is a bulk liquid or gas terminal or facility, or another ship, lighter or barge, then delivery to such terminal, facility, ship, lighter or barge shall be deemed to be delivery to the party to whom we have requested you to make such delivery.

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5. As soon as all original bills of lading for the above cargo shall have come into our possession, to deliver the same to you, whenever our liability hereunder shall cease. 6. The liability of each and every person under this indemnity shall be joint and several and shall not be conditional upon your proceeding first against any person, whether or not such person is party to or liable under this indemnity. 7. This indemnity shall be governed by and construed in accordance with English Law and each and every person liable under this indemnity shall at your request submit to the jurisdiction of the High Court of justice of England. YOURS FAITHFULLY

YOURS FAITHFULLY

Charterers

Receivers

(insert name of requestor)

(insert name of requestor)

(insert name /title)

(insert name /title)

3. Straight Bill of Lading and Order Bill of Lading A straight bill of lading is a bill of lading indicating a certain consignee on the bill, which is meaningless to others in relation with the document of title unless the indicated consignee transfers it to them, in which case it is unable to be negotiated. An order bill of lading indicates “to order,” “order of shipper,” or “order of ‘OOO’ Bank” without indicating any specified consignee. 4. Third-Party Bill of Lading Generally, a shipper on a bill of lading is the beneficiary of the letter of credit, but a third party can be the beneficiary with the use of a third-party bill of lading, also known as a neutral party bill of lading. It is usually used as a transit trade, and, unless otherwise specified on the letter of credit, it is accepted by banks. 5. Through Bill of Lading This bill of lading means that in carrying cargo to its final destination multiple carriers and multiple modes of transport may be used. The former carrier is responsible for connection to the next carrier.

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6. Multimodal Transport Bill of Lading This bill of lading is a single contract used when at least two separate modes of transport will be used. The multimodal transport operator (MTO) is the person who is named on the face, concludes the contract, and acts as carrier. 7. Short Form Bill of Lading This is a bill of lading with all of the necessary schedules, but it omits the terms and conditions on the back of the bill of lading. When the Contract Parties Make Communication Through Fax Machine, They Should Be Very Careful to Send the General Standard Terms Stated Usually on the Back Page of the Document to the Correspondent

The following is important case to deal with the communication of the documents, particularly, through fax machine. Generally, the bill of lading and other transport documents contain the particulars of the carriage contract on the front page of the document and the general and standard terms and conditions on the back. When the contract parties send this document to their contract partners through the fax machine, they have to send the general terms stated on the back page, or reference is required to be made to the terms stated on the bank. Otherwise, just like in the case, the standard terms stated on the back are not incorporated into the relevant contract. Case11 The plaintiffs and the defendants were both freight forwarding companies. Between 1991 and 1993 under a mutual agency relationship, each company agreed to act for the other as its agent to discharge and deliver goods at the port of discharge with a 50:50 profit-sharing arrangement. The plaintiffs acted as correspondents and agents for the defendants in Taiwan in relation to eastbound shipments. The defendants similarly acted for the plaintiffs in this country as correspondents and agents in relation to westbound shipments.

11

Poseidon Freight Forwarding Co Ltd v Davies Turner Southern Ltd & Anor [1996] C.L.C. 1264 [1996] 2 Lloyd’s Rep. 388 [1996] C.L.C. 1264 [1996] 2 Lloyd’s Rep. 388 [1996] C.L.C. 1264. (Cite as: [1996] C.L.C. 1264). Court of Appeal (Civil Division).

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In July 1992, the defendants misdelivered two consignments of electronic chassis assemblies shipped from Taiwan by Poseidon. The consignments were delivered by the defendants without obtaining surrender of bills of lading. The company retaining the original bills, dated June 1992, had received no payment for the goods and obtained judgment against the plaintiffs in September 1993. The plaintiffs brought an action against the defendants on November 23, 1993. The trial judge held that the defendants had not given the plaintiffs reasonable notice of the standard terms which were therefore not incorporated into the relevant contract and gave judgment for the plaintiffs. The defendants appealed. JUDGMENT Leggatt LJ: The defendants, Davies Turner Southern Ltd and Davies Turner & Co. Ltd., appeal from the judgment of Judge Diamond QC of August 14, 1995, whereby the judge gave, judgment for the plaintiffs, Poseidon Freight Forwarding Co. Ltd. I shall refer to the defendants indifferently as “Davies Turner,” since it is accepted on their behalf that one or other or both of them is liable in the event that the plaintiffs succeed in establishing liability. Relied on by Davies Turner are the terms of business which they claim were so made part of the dealings between the parties as to be binding upon the defendants upon the occasions with which this action is directly concerned. For a period between 1991 and 1993, Poseidon acted as correspondents and agents for Davies Turner in Taiwan in relation to eastbound shipments; and Davies Turner acted similarly as correspondents and agents for Poseidon in this country in relation to westbound shipments. In July 1992, the consignments were misdelivered by the defendants to a company called Visionglen without obtaining surrender of bills of lading. Those goods had in each case been shipped by a Taiwanese company under two combined transport bills of lading issued by Poseidon bearing dates in June 1992. Poseidon was the contractual carrier under the bills. It later appeared that Skardin was unable to obtain payment for the goods and had retained the original bills. Unfortunately, Poseidon was not asked to return the goods until March 15, 1993, and it was then that it was discovered that they had been misdelivered by Davies Turner. Skardin took proceedings against Poseidon in Taiwan in May 1993 and obtained judgment against them in September.

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The proceedings in this country were not begun against either of the Davies Turner companies until November 23, 1993. The second such company was later added. It is accepted on behalf of Davies Turner that they are liable for the loss unless they can show that their standard terms were applicable. That term upon which they could rely, if the terms as a whole applied, was cl. 30(B) which provides that: “Notwithstanding the provisions of subparagraph (A) above the company shall in any event be discharged of all liability whatsoever howsoever arising in respect of any service provided for the customer or which the company has undertaken to provide unless suit be brought and written notice thereof given to the company within nine months from the date of the event or occurrence alleged to give rise to a cause of action against the company.” It is obvious that, having regard to the chronology that I have indicated, the plaintiffs would have been out of time in instituting their proceedings were they to be subject to that condition. On behalf of Davies Turner, Mr. Kenny argues, as he did before the judge, that the defendants’ terms were successfully incorporated into the relationship between the parties, either initially by means of documents transmitted by Davies Turner to Poseidon or, alternatively, by a course of dealing. What in particular it is said was added by a course of dealing was the actual language of the terms which it is acknowledged were not known at the outset to Davies Turner or any of their representatives. The judge began by referring to the commercial arrangement made between the parties that they would work together to develop their respective freight forwarding businesses in the carriage of containerized goods between the UK and Taiwan. The essence of it was that each would use the other as its agent to perform the usual duties of a freight forwarder. The judge also recorded the undisputed fact that, in the ensuing shipments with which the parties were concerned, there were many more westbound shipments than eastbound shipments. The judge told how the goods which are the subject of the action had been misdelivered. Having set out the terms of the particular exempting condition relied upon, the judge said that it was agreed that, if the BIFA terms are not incorporated into the contract, then Poseidon’s claim must succeed against Davies Turner. The judge turned to the course of dealing and set out in a little detail the exchange of documents between the parties by which the relationship between them was instituted. The judge focused, in particular, upon the fax of June 3 from Davies Turner, to which, in his oral submissions before us, Mr. Kenny has invited our attention. The judge set out the substance of that document. The judge remarked that it was important to note that this letter for the first time was on stationery which contained at the foot of the page a printed note saying: “NOTE: The only conditions on which we transact business are shown on the back.” Since it was a fax message, there was

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nothing shown on the back of the actual sheet as it emerged from the facsimile machine of Poseidon. But there was no attempt made to send the 1989 edition of the BIFA terms, which may be supposed to have been on the back of the document. The judge recorded that it was common ground that the BIFA terms were on the back and they were not transmitted to Poseidon. That was what the judge described as the first stage in the relationship between Poseidon and Davies Turner. He said, in what seems to me to have been a fair summary of the position: “It is possible, but I do not have to decide this, that by this stage a binding contractual agreement had been concluded under which Poseidon and one of the Davies Turner companies would cooperate in the manner I have described under which each company would act for the other as its agent to discharge and deliver goods at the port of discharge and under which there would be a 50–50 profit-sharing arrangement.” The judge then sought to summarize the large number of documents brought into being between June 1991 and June 1992 when the misdelivery took place. The judge said that most of the documents which he had categorized consisted of facsimile exchanges and he found that, in course of them, the BIFA terms which may have been on the back of documents sent in this way by Davies Turner, were not supplied to Poseidon. Turning to eastbound shipments, the judge found: “… that Davies Turner would have sent to Poseidon in each case, first, a form of instruction called a way bill, second a bill of lading, third an invoice, fourth a credit note and sometimes, five, a letter; all these documents would have borne the BIFA terms on their reverse.” The plaintiffs admitted in the pleadings that they had received seven documents from Davies Turner before June 1992 which bore the BIFA terms on the back of them. They were to be contrasted with the faxes to which I earlier referred and of which there appear to have been at least 69. None of them bore any such terms, although many of them, on their face, bore the note which I have earlier mentioned. When the judge considered the witnesses, he said of Mr. Liu, who had conducted business on behalf of Poseidon, that, although he was responsible for it, he had not himself dealt with all the administrative work relating to individual shipments. The judge recorded this passage from his witness statement: “If my memory serves me, I was not aware of any reference to the BIFA terms and was not aware of their terms: I was aware that there were standard terms on the back of the Davies Turner bills of lading and some other documents. I had not read them and assumed that they would apply to contract of carriage with cargo where Davies Turner Southern had shipped under one of their own bills. In the same way when we ship from Taiwan to the UK, we would issue our own bill of lading which would govern the contractual

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relationship with cargo. It never occurred to me that the terms on the Davies Turner bill of lading on other documentation may govern the relationship between Davies Turner Southern and Poseidon.” The judge recorded that Davies Turner did not challenge the genuineness of the assumption made by Mr. Liu, and he expressly found that he accepted that Mr. Liu’s assumption was genuine. Turning to Mr. Tong, the director of Davies Turner responsible for their relevant business, he recorded this passage from his written statement relating to the note at the foot of their stationery: “I therefore believe that the contract with Poseidon was on Davies Turner standard conditions BIFA and that Eddy Chou of Poseidon was aware of this. I assumed that he was content for the agreement to be governed by our standard terms as even though he had not at that point seen the actual conditions he replied to my fax on June 4 and did not object to the conditions or their application.” The judge referred to Mr. Tong’s evidence and said that he had agreed that, if the conditions were not specifically pointed out, it might be possible that the agents might think that they were not agreeing to those conditions. He also said that, to be safe, he would wish to point out that Davies Turner was trading on those conditions. The judge considered the arguments of the parties, and crystallized in this way the critical question which he said is: “… whether the notice given by the defendants that they did business subject to conditions was sufficient to indicate to a foreign forwarding agent such as Poseidon as reasonable commercial men that as and when the defendants acted as agents for Poseidon in arranging for the discharge and delivery of the goods they would do so subject to the BIFA [terms].’” The judge contrasted the relevant relationship of the parties with that in another case which I shall consider, where a forwarding agent contracts with a shipper in relation to the export of his goods, saying that that situation seemed to him to have little in common with the situation where two freight forwarders have entered into a cooperation and agency agreement. The judge discounted the eastbound documents as not throwing a great deal of light as to the contractual position where Davies Turner was acting as Poseidon’s agents in performing Poseidon’s duty with regard to the discharge and delivery of the goods at the port of discharge. The judge reformulated the question when he said: “One has to ask whether the whole conduct of the defendants including the notices given by them were sufficient to lead Poseidon as reasonable men to understand that the defendants were only willing to act as Poseidon’s agents on the basis that the BIFA capacity.” He answered his question by saying later on the same page that it seemed to him that: “… the position was far from clear and would not indeed have been clear to any commercial man who might have been dealing with [Davies Turner] on the basis of the documents which came into existence in the present

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case.” The judge said that he was not persuaded of the construction sought to be put on the language of the note by Davies Turner that the meaning that it would have conveyed to a foreign forwarding agent who was seeking and had obtained a mutual cooperation and agency agreement, was that the terms would apply to such a relationship. It was the judge’s view that the concept of transacting business could well appear to him that the relationship of principal and agent under the overall cooperation agreement could well seem to fall outside the concept of transacting business as set out in the note, that is, it would appear in that light to a recipient, such as Poseidon, of the documentation relied on. So it was that the judge held the standard terms relied on by Davies Turner not to have been rendered applicable. Mr. Kenny has sought in this court to revitalize those arguments that failed before the judge. Mr. Kenny, similarly, showed us the documents he relied upon as having brought a contract into being between the parties by which the so-called mutual agency relationship was constituted. Mr. Kenny permitted himself the reflection that one doubts whether the terms would have come out clearly on the fax. If the attempt had been made, then it would have indicated an intention on the part of Davies Turner that the terms should be rendered applicable between the parties. Mr. Kenny made the obvious point that the terms would have been included on the back of documents relating to eastbound transactions where a similar note would have occurred. All one can say about that is that the fact that in certain instances, namely in relation to eastbound sales, the terms were included, is to be contrasted with what occurred in relation to the westbound transactions. He reminded the court that there are numerous situations in which freight forwarders may act in relation to the carriage of goods. He submitted that in relation to all of them, the freight forwarder concerned would wish to enjoy that protection which he would be afforded by rendering standard trading conditions applicable. Mr. Kenny referred us to the report of the expert witness, Mr. O’Brien, which he said, went to the expectation to be attributed not only to Davies Turner but also to Poseidon, about such attempts as Davies Turner made to render their terms applicable. Mr. Kenny concluded his thorough submissions by contending that commercial men would have concluded that in the circumstances of this case, the terms that were intended to apply had been successfully rendered applicable. I have referred to Mr. O’Brien’s report. His evidence was principally directed to the point which in this court has played no part, that terms such as those of BIFA are neither unusual nor unusually onerous. Incidentally, he made references in course of his report, as well as in his evidence, to what might have been expected to be the attitude of either of the freight forwarders concerned to the course of dealing between them. But the essential point is that, whatever their respective expectations,

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no terms could have become contractual unless reasonable notice of them had been given. In this case, the principal dealings by Davies Turner were with cargo owners in cases where Davies Turner shipped under their own bills of lading. That is to be contrasted with the arrangement under which Davies Turner and Poseidon were prepared to act as, what they might have called, “agents” for each other. That was a relationship of cooperation with regard to which the judge accepted that Mr. Liu genuinely assumed that the standard terms of Davies Turner were not intended to apply. The judge was entitled to find that the assumption that these terms applied, as they did, and applied only to contracts of carriage where Davies Turner shipped goods under their own bills of lading, was a reasonable assumption in the circumstances. This case is an example of a party whose terms are in issue doing nothing, probably because his representatives did not think about it. It is a case where, on documents sent by fax, reference is made to terms stated on the back, which are, however, not stated or otherwise communicated. I would dismiss the appeal. Instead, the bill of lading will reference other documents where the details are contained. It is used in several areas, including the USA.

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Shipper:

SHORT FORM BILL OF LADING

UK Customs

B/L No.

Assigned No. Shipper’s Reference F/agent’s Reference

Consignee(if “Order state Notify Party

Name of Carrier:

and Address) Notify Party and Address (leave blank if stated above)

The contract evidenced by this Short Form Bill of Lading is subject to the exceptions, limitations, conditions and liberties (including those relating to pre-carriage and on-carriage) set out in the Carrier’s Standard Conditions applicable to the voyage covered by this Short Form Bill of Lading and operative on its date of issue. If the carriage is one where the provisions of the Hague Rules contained in the International Convention for

Pre-Carriage

Place of Receipt

by*

by Pre-Carrier*

unification of certain rules relating to Bills of Lading dated Brussels on 25th August, 1924, as amended by the Protocol signed at Brussels on 23rd February, 1968 (the Hague

Vessel

Port of Loading

Visby Rules) are compulsorily applicable under Article X, the said Standard Conditions contain or shall be deemed to

Port Discharge

of

Place of Delivery by On-Carrier*

contain a Clause giving effect to the Hague Visby Rules Otherwise except as provided below the said Standard Conditions contain or shall be deemed to contain a Clause giving effect to the provisions of the Hague Rules. The Carrier hereby agrees that to the extent of any inconsistency the said Clause shall prevail over the exception, limitations, conditions and liberties set out in the Standard Conditions in respect of any period to which the Hague Rules or the Hague Visby Rules by their terms apply Unless the Standard Conditions expressly provide other wise neither the Hague Rules nor the Hague Visby Rules shall apply to this contract where the goods carried hereunder consist of live animals or cargo which by this contract is stated as being carried on deck and is so carried. Notwithstanding anything contained in the said Standard Conditions the term Carrier in this Short Form Bill of Lading shall mean the Carrier named on the front thereof. A copy of the Carrier's said Standard Conditions applicable hereto may be inspected or will be supplied on request at the office of the Carrier or the Carriers' Principal Agents.

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and

Container

Number and

No.

kind

Description of of

Gross Weight:

Measurement:

Goods

packages: Freight Details; Charges etc.

RECEIVED FOR CARRIAGE as above in apparent good order and condition, unless otherwise stated hereon, the goods described in the above particulars. IN WITNESS whereof the number of original Bills of Lading stated below have been signed, all of this tenor and date, one of which being accomplished the others to stand void.

Ocean Freight Payable at

Place and Date of Issue

Number of Original Bs/L

Signature for Carrier; Carrier's Principal Place of Business Printed by The Cariton Berry Co. Ltd.

Authorized and licensed by the General Council of British Shipping.

8. Stale Bill of Lading This is not a particular kind of bill of lading, but any bill of lading can turn stale if it is presented to the bank for negotiation when the letter of credit has already expired, or if it reaches the consignee after the arrival of cargo. If this occurs, the buyer may be involved in legal or administrative complications as well as being liable for additional costs resulting from the delay. When it is not specified to be acceptable on the letter of credit, if bill of lading or other shipping documents are presented to a negotiating bank for negotiation after a period of time that a bank allows from an issuing date, the bank refuses to accept the document unless the notation "stale bill of lading acceptable" is indicated on the letter of credit. 9. Transshipment Bill of Lading This is a bill of lading showing that when there is no direct service between ports, the cargo will be transferred to another ship during transporting on its route. 10. Master Bill of Lading and House Bill of Lading A master bill of lading is issued by the operator (a shipping company), while a house bill of lading is issued by a non-vessel operating common carrier (NVOCC).

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➂ Main Clauses

1. Negligence Clause With respect to faults in navigation and management of the vessel, the carrier is generally free from damages resulting from “any faults about technical actions of a ship necessary for control of ship and safe voyage” by captain, sailor, coast pilot, or employees of a shipping company. With respect to the commercial fault, however, the carrier is generally liable for any damage resulting from shipping, preparing, storing, discharging, or delivering caused by the commercial fault. 2. Potential Repair Clause Warranty of seaworthiness of a ship is imposed on the carriers by the laws of each country, however, if the seaworthiness of the ship is evidenced to be secured through the pre-departure inspection, ensuing unavoidable damage or technical defects to the hull, engine and other areas are free from the liability of the carrier. 3. Off-Route Clause Deviations from the routine course of navigation for the reasons of rescue of life and property, refuge, etc. are free from the carrier’s liability. 4. Unknown Clause In making shipment, a shipping company does not have to inspect the details of its cargo and can indicate “we ship cargo in good condition by appearance and deliver it in a similar way as it was received” on the bill of lading. This shows that the shipping company is not responsible for the cargo’s weight, measurements, quantity, quality, type, or price. Unknown Clause

Any reference on the face hereof to marks, numbers, description, quality, quantity, gauge, weight, measure, nature, kind, value, and any other particulars of the goods is as furnished by the merchant, and the carrier shall not be responsible for the accuracy thereof. The merchant warrants to the carrier that the particulars furnished by him are correct and shall indemnify the carrier against all loss, damage, expenses, liability, penalties, and fines arising or resulting from inaccuracy thereof.

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5. Breakage and Leakage (Cargo’s Inherent Nature) Breakage, leakage, decomposition, death of live animals, fish and shellfish, fruit, perishable cargo, etc. are free from the carriers’ liability. 6. Valuables When a consignor ships the cargo, if he does not state the type of cargo, quality, price, and other details, or if freight is not calculated, due to the specific characters of the goods, by closing rate, a shipping company is just responsible for compensating a minimum amount for probable damage. Clause on Valuables

The carrier shall not be responsible for valuable goods, such as specie (coins), bullion (paper money), precious stones, bonds, or other negotiable documents, until such goods are delivered to and receipted for by the master or the officer on duty personally.

7. Dangerous Goods If a consignor fails to report the dangerous character of goods in shipping, a captain can create a special contract to dispose of them as he deems worthy, such as discharging or jettisoning when the cargo could become dangerous. This rule applies for any goods that are illegal to export or import. Clause on Dangerous Goods

Goods known to be of a dangerous or hazardous nature must not be tendered for shipment unless written notice of their nature and the name and address of the merchant have been previously given to the carrier and the nature is distinctly marked on the outside of the package. A special stowage order giving consent to shipment must also be obtained from the carrier. Any goods that are in fact or may be considered by any civil or military authorities or the carrier inflammable, explosive, noxious, hazardous, or dangerous, shipped without such full disclosure, or if shipped with the knowledge and consent of the carrier as to their nature and character, shall become a danger to the vessel or those aboard, the goods or other property, or any part thereof, may at any time or place be landed, thrown overboard, destroyed, or rendered innocuous without compensation to the merchant, and

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extra charges and expenses if any, for returning, discharging, lightering, handling, caring for, disposing of or otherwise occasioned by such goods shall be borne by the merchant. If at any time the goods, whether ashore or afloat, are, in the judgment of the carrier or of the health or other authorities, spoiling, decayed, injurious, offensive, unfit for further carriage or storage, or dangerous to health or other property, of if the goods are condemned or ordered to be destroyed by any such authorities, or if the goods are contraband or prohibited by any laws or regulations of the port of shipment, discharge, call or any place during transit, the goods may, forthwith and without notice, be thrown overboard, destroyed, discharged, returned, stored, put ashore at any place or aboard lighters or craft or otherwise disposed of by the carrier, at the sole risk and expense of the merchant, when the carrier’s responsibility shall cease, and the carrier shall not be liable for any loss or damage whatsoever. In any event, the merchant shall be liable for and fully indemnify the carrier and to hold it harmless in respect to any injury or death of any person and loss of or damage to the vessel, cargo, or other property which may arise from the dangerous or hazardous nature of the goods carried hereunder.

8. General Average Clause It is agreed that each country follows the York Antwerp Rules of 1950, excluding their domestic laws and customs concerning general average clause. The general average clause states that, concerning maritime insurance, the insurers of different interests should voluntarily share the portion of losses incurred to save the voyage. General Average Clause

General average shall be adjusted, stated, and settled in Tokyo or any other port or place at the carrier’s discretion according to York Antwerp Rules, 1974, and as to matters not provided for by the rules, according to the laws and usages of the port or place of adjustment, and in the currency selected by the carrier. The general average statement shall be prepared by the adjusters, if necessary, appointed by the carrier. In the event of accident, danger, damage, or disaster, before or after commencement of the voyage resulting from any cause whatsoever, whether due to negligence or not, for which, or for the consequence of which the carrier is not responsible by statute, contract or otherwise, the goods and the merchant, jointly and severally shall contribute with the carrier in general average to the payment of any sacrifices, losses or expenses of general average nature that may be made or incurred and shall pay salvage and special charges incurred in respect of the goods.

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If a salving ship is owned or operated by the carrier, salvage shall be paid for in full and in the same manner as if such salving ship or ships belonged to strangers.

➃ Legal Characteristics

1. Bill of Lading as Receipt The bill of lading as a receipt is an acknowledgment made by the carrier that the goods have been shipped or received for shipment as the case may be.12 This acknowledgment will also contain statements as to the apparent condition of the goods, the quantity, markings, and other relevant information known to the carrier.13 In practice, the shipper or his freight forwarders would usually fill in the particulars in the bill of lading, and the shipmaster (the carrier’s agent) makes signature on it.14 The shipmaster should indicate on the bill of lading whether the goods have been merely received for shipment or have been actually loaded on board the vessel. In the case of the former, only a “received for shipment” bill of lading may be issued.15 From the viewpoint of the shipper, the bill of lading as a receipt is prima facie evidence that the shipper has performed his obligation under the contract to the extent that the goods have been duly shipped.16 From the Viewpoints of the Risk Management in International Transport, the Shipper (Exporter) is Required to be Careful to Adopt the “Said to Contain” Statement on the Bill of Lading about the Shipped Amount. This is Because the Statement Cannot be Used as the Reliable Evidence to Show the Exact Amount Shipped on Board the Vessel

When shipping casually occurred, the consignees or consignors are to make claims for the damages based on the weight, quantity and numbers of the packaged goods shipped, and, herewith, the verification of the quantity shipped and the manner of calculating the limit of the shipowners’ liability under the Hague–Visby Rules are crucial for compensation for the loss when the Rules are adopted as the governing law to the bill of lading. In fact, these rules were incorporated into the domestic legislation of a large number of seagoing

12

Eun Sup Lee, supra note 138, at 205. Id. 14 Id. 15 Id. 16 Id. 13

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nations and became widely used as the terms which governed the international carriage of goods by sea. Regarding the verification of the shipped quantity based on which the calculation of the damage should be made, the words “said to contain” stated on the bill about the shipped quantity are judicially interpreted to have the same effect as the words “weight, number, and quantity unknown.” Regarding the unit of packages for limit of carriers’ liability, it is the governing principle that the shipowners limit of liability under the Hague–Visby Rules falls to be calculated on the number of packages that are proved to have been loaded within the containers and not upon the number of containers. The following is the case to treat with these issues. Case17 On February 26, 1989, a disastrous shipping casualty occurred. The “River Gurara” was on a laden voyage from Africa to Europe, when she suffered an engine breakdown. She stranded on the coast of Portugal and subsequently broke up with a loss of life and a total loss of cargo. Consignees of the cargo have sued on the bills of lading. Those bills were subject to the Hague Rules and the issue raised on this appeal is the manner of calculating the limit of the shipowners’ liability under those rules. The Bills of Lading The bills of lading were on the form of the UK West Africa Line. Under that form, the carriage of the goods was, by a clause paramount, made subject to the Hague Rules if they formed part of the law of the place of shipment. Clause 9(B) of the bills of lading provides: Shipper packed containers, if a container has not been packed or filled by or on behalf of the carrier (B) notwithstanding any provision of law to the contrary the container shall be considered a package or unit even though it has been used to consolidate the goods the number of packages or units constituting which have been enumerated on the face hereof as having been packed therein by or on behalf of the merchant and the liability of the carrier shall be calculated accordingly.

17

Nigerian National Shipping Line Ltd v Owners Of Cargo Lately Laden On Board Ship “River Gurara” [1997] Int.Com.L.R. 07/15 International Commercial Law Reports. [1997] EWCA Civ 2105 1 CA.

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It is the shipowners’ case that the containers in any event constitute the package or unit for the purpose of calculating the Hague Rules limit but that, should there be any doubt about this, Clause 9(B) resolves it in their favor. It is cargo owners’ case that, on the true interpretation of Article IV rule 5 it is the items within the containers that constitute the relevant packages or units and that Clause 9(B) is rendered ineffective by Article III rule 8 of the Hague Rules, which provides: Any clause, covenant, or agreement in a contract of carriage relieving the carrier or ship from liability for loss or damage in connection with goods arising from negligence, fault, or failure in the duties and obligations provided by this Article, or lessening such liability shall be null and void and of no effect. On the application of the cargo owners, an order was made for the trial of the following preliminary issues: (a) Whether clause 9 of the UKWAL form of the bill of lading is contrary to Article III r.8 of the Hague Rules and hence void; (b) if the answer to (a) is no, whether the burden of proving that any particular container is “shipper packed” rests upon the plaintiffs or the defendants; (c) in circumstances where a container or pallet has been used to consolidate goods and the bill of lading states not only the number of containers and/or pallets but also quantifies the number of goods loaded therein or thereon, whether the defendants are entitled to limit their liability pursuant to Article IV, r.5 of the Hague Rules by referenced to (a) the number of containers or (b) the number of pallets or (c) the number of goods described by the bill of lading as having been loaded therein or thereon. To answer issue, (a) it is necessary first to address issue (c) in order to see whether there is any conflict between Clause 9 of the bills of lading and Article III rule 8. That was the approach adopted by the trial Judge, Coleman J. He held that it was the number of items described by the bill of lading as being within the containers, rather than the number of the containers themselves, that was the basis for calculation of the limit. He further held that, insofar as Clause 9 provided to the contrary, it was contrary to Article III rule 8 and therefore void. In those circumstances, issue (b) did not arise. The shipowners now appeal against the judge’s decision. In the course of argument, it became apparent that there was an important issue between the parties as to the effect of the description of the goods in the bill of lading. The bill of lading would normally be of evidential value, whether simply as prima facie evidence or as a result of estoppel, as to what was loaded, but it was not necessarily conclusive. This issue goes to the root of the approach to the calculation of the limit in this case for which Mr. Kay contends.

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The approach to the construction of the Hague Rules The Hague Rules were incorporated into the domestic legislation of a large number of seagoing nations and became widely used as the terms which governed the international carriage of goods by sea. Two considerations follow from this. First, it is legitimate when construing the rules to have regard to their objects, as disclosed by the travaux preparatoires of the Convention. Second, particular respect should be paid to decisions of other jurisdictions in respect of the meaning of the rules, for the stated object of the Convention was the unification of the domestic laws of the contracting states relating to bills of lading. The objects of the limitation provisions of the Hague Rules are considered in a number of the United States authorities. For present purposes, it is helpful to note that: “one of the main purposes of limitation was to benefit cargo owners—The intention of the Hague Rules was to give cargo a liberal limit of liability so as to preclude shipowners from inserting clauses in their bills of lading purporting to limit liability to ridiculously low figures”—“The Hague–Visby Rules” by Anthony Diamond Q.C. Mr. Kay did not seek to gainsay this purpose of limitation. He contended that one of the objects underlying the rules was to ensure that the shipowner was able to verify the extent of his liability. Where the nature and value of the goods inside a package were not specifically declared, the limit of liability would be attached to the package itself. Applying this principle, where packages were put inside a container, the container was the appropriate package for limitation purposes. Coleman J. was not attracted by this argument, nor am I. Mr. Russell submitted that, when the Convention was concluded in 1924, a figure of £100 represented a fair figure for the average value of a package shipped. To apply the same figure to a huge container stuffed with many packages would defeat the object of preventing shipowners from limiting their liability to sums that were absurdly low by reference to the average values of cargoes shipped. If Mr. Kay is correct, the change in the method of stowing and carrying cargo that occurred when containerization was introduced affected a radical change in the limitation regime. Mr. Russell further submitted that to describe a container as a package was to strain the natural meaning of that word. With this also I agree. A huge metal container stuffed with goods which will normally themselves be made up in individual packages is not naturally described as a package. The “Mormaclynx,“ in a passage of his judgment, Chief Judge Friendly, sitting in the United States Court of Appeals, Second Circuit, said at p. 486: Still we cannot escape the belief that the purpose of Section 6.4(5) of COGSA was to set a reasonable figure below which the carrier should not be permitted to limit his liability and that “package” is thus more sensibly related to the unit in which the shipper packed the goods and described

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them than to a large metal object, functionally a part of the ship, in which the carrier caused them to be “contained.” The preference for the packages, rather than the containers in which they are stuffed, at least where the bill of lading states the number of each, has been shown, not merely by the courts of the United States, but by those of Canada, Australia, France, Holland, Italy, and Sweden. The effect of the description of the cargo in the bill of lading Shipowners’ Submissions Mr. Kay’s submission is that whether the containers or the packages within them provide the basis for calculating the limit of liability depends upon the agreement of the parties, as embodied in the bills of lading. In the present case most of the bills of lading itemize the contents of the containers but are subjected to the qualification of “stc” (“said to contain”). Mr. Kay submits that the effect of this qualification is to rob the statement of the contents of the containers of all evidential significance, so that all that the bills of lading do is to enumerate the containers. It follows that it is the number of containers which forms the basis for computing the limit of liability. The United States Authorities The United States enacted the relevant Hague Rules limit of liability in S.4 (5) of the US Carriage of Goods by Sea Act 1936 in the following form: “Neither the carrier nor the ship shall in any event be or become liable for any loss or damage to or in connection with the transportation of goods in an amount exceeding $500 per package lawful money of the United States, or in the case of goods not shipped in packages, the customary freight unit.” In 1968, a Protocol was agreed by a number of the States which had enacted the Hague Rules in an attempt to resolve the very problem with which this appeal is concerned. The rules, as amended by this Protocol, are known as the Hague–Visby Rules. The material provision is Article IV rule 5(c), which provides: “where a container, pallet or similar Article of transport is used to consolidate goods, the number of packages or units enumerated in the bill of lading as packed in such Article of transport shall be deemed the number of packages or units for the purpose of this paragraph as far as these packages or units are concerned. Except as aforesaid such Article of transport shall be considered the package or unit.” The United States did not enact this Protocol but, as will become apparent, it had some influence on some of the relevant decisions nonetheless. Other foreign decisions

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In Comesmar v. Carniti, a decision of the Court of Cassation of April 27, 1984, No. 2643, the court held: “The container, if used by the carrier, is, in fact, only a limitation of space used to organize the on board goods— packaged or loose—and is equivalent to loading in a hold. If, as in this case, the shipper uses a container there are two possibilities: either the packages contained in it will be indicated, in which case the packages will be the unit of measurement; or there will be no indications, and in this case according to the ratio of the Convention regulations, the unit of measurement will not be the container, understood as a “package,” but the freight unit of the goods contained in it.” Coleman J’s conclusions were as follows: I therefore hold that where: (i) separately packed items have been loaded into a container by the shipper or his agents and the carrier has had no opportunity to tally or verify the contents of the container; and (ii) the carrier or his agent signs a bill of lading which, as here, describes under the heading “container No.s” the identification numbers of the various containers received and stages under the heading “Number and Kind of Packages; Description of Goods” words such as “1 × 20” container stc: 8 cases” of goods. Moreover, if the contents of the container are described by words which leave it unclear whether they are separately packed for transportation, the container will be the package and not the individual items. If the contents of the container are described in the bill of lading as said to contain so many separately packed items which in turn are said to contain a specified number of separately packed items, the number of packages will be the smallest category of separately packed items so described. The correct approach is clearly to treat the bundles as the packages under Article IV rule 5. Once the verification principle has been rejected and it is accepted, following the authorities to which I have referred, that it is the intention of the parties as expressed in the bill of lading which is the main determinant of what is to be treated as a package. Conclusions I am unable to accept that the basis of limitation under the unamended Hague Rules depends upon the agreement of the parties as to what constitute the relevant “packages,” as represented by the description of the cargo on the face of the bill of lading. My reasons echo those of Judge Beeks in the Aegis Spirit: (1) The Hague Rules limitation provisions were designed to prevent shipowners imposing on shippers unrealistically low limits of liability. If the parties are permitted to agree their own definition of “packages,” shipowners will, by applying that definition to containers, succeed in evading the minimum limit of liability that the Hague Rules aimed to secure. (2) Statements in a bill of lading describing the cargo shipped do not constitute an agreement between the parties as to the identity of that cargo.

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The Effect of the Bill of Lading Under the Hague Rules, an unqualified description of the goods in the bill of lading does not constitute a binding agreement between the shipper and the carrier that the goods have been shipped as stated, but merely prima facie evidence of that fact. It is important to bear in mind that, before any question of limitation of liability can arise, the onus is on the cargo owner to prove his loss. Where he does so by reliance on the bill of lading as prima facie evidence of what is shipped, the description of the goods in the bill of lading will also form the basis of calculation of the Hague Rules limit of liability. Where, however, the shipowner discharges the heavy onus of displacing the evidential effect of the bill of lading, or the cargo owner establishes his claim to damages by reference to evidence extrinsic to the bill of lading. If the shipowner finds himself exposed to a greater limit than that which would have resulted from the goods as described in the bill of lading, he may have a claim for breach of warranty against the shipper under Article III Rule 5. The Effect of Qualifying the Description in the Bill of Lading Under the proviso to Article III Rule 3 of the Hague Rules, the carrier is not required to state on the bill of lading the number of packages received when he has had no reasonable means of checking this. The proviso plainly applies in relation to packages stuffed in containers by the shipper or his agent. In such circumstances, it is commonplace for the bill of lading to state the number of packages as furnished by the shipper, but to qualify the statement with the words “weight, number and quantity unknown.” Where the bill of lading is so qualified, it does not even constitute prima facie evidence that the goods detailed by the shipper have been shipped. In such circumstances, the onus is on a claimant to prove by extrinsic evidence the shipment of any goods which he claims have been lost or damaged. In the present case, Mr. Kay submitted that such a qualifying as “stc” has the same effect as qualifying the description of the goods “weight, quantity, number unknown.” Where the shipper gives details of the packages shipped and the carrier clauses the bills of lading to indicate that he does not accept those details, the bills of lading manifestly do not indicate any agreement at all as to the description of what has been shipped. The Effect of “stc” Coleman J. proceeded on the basis that the words “said to contain” had no effect on the evidential status of the bills of lading. For the purposes of resolving the preliminary issues brought before the court, the governing principle is that the shipowners limit of liability under the Hague Rules falls to be calculated on the number of packages that are proved to have been loaded within the containers and not upon the number of containers.

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Clause 9(B) of the Bill of Lading Clause 9(B) of the bill of lading was rendered ineffective by virtue of Article III Rule 8 of the Hague Rules. Order: Appeal dismissed.

For the consignee or endorsee of the bill of lading, it functions as conclusive evidence that the goods have been shipped as per contractual conditions reflecting the accuracy of documents in documentary transactions.18 2. Bill of Lading as Evidence of Contract The bill of lading through the usage and customs of the international trade community has long been recognized as not only being evidence of contract of carriage but as being that contract itself.19 The terms contained in the bill of lading may therefore in some situations be effectively the terms of the contract or in others, merely evidence of the actual terms.20 The distinction is significant to the extent that as a primary and negotiable document, it is treated by law as the actual contract once it has been endorsed by a third party.21 That is, while the bill of lading is kept in the hands of the shipper, the bill of lading functions merely as the evidence of the contract, and the parties to the contract are free to modify and amend the contract as they so desire, however, once it has been transferred or endorsed to a third party, the bill of lading should not be treated as simply the evidence of the contract of carriage but should be treated as the contract itself to bind the concerned parties.22 3. Bill of Lading as Document of Title The bill of lading can only be treated as a document of title when it is made clear on its face that it is negotiable, that is, it must be issued as an “order” bill of lading which is in contrast with a “straight” bill of lading. The former is made out to a named consignee or to his “order or assigns.”23 This means that, in case of the “order” bill of lading, the named consignee could transfer or assign the bill of lading to any third party simply by delivery or endorsement, which, in case of

18

Eun Sup Lee, supra note 138, at 205. Id. 20 Id. 21 Id. 22 Id. at 206. 23 Id. 19

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the “straight” bill of lading, the bill of lading is impossible to be transferred to the third party once it has been delivered to the designated party.24 Bill of Lading

a. A bill of lading, however named, must appear to: i. indicate the name of the carrier and be signed by: • the carrier or a named agent for or on behalf of the carrier, or • the master or a named agent for or on behalf of the master. Any signature by the carrier, master, or agent must be identified as that of the carrier, master, or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master. ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by: • pre-printed wording, or an on board notation indicating the date on which the goods have been shipped on board. The date of issuance of the bill of lading will be deemed to be the date of shipment unless the bill of lading contains an on board notation indicating the date of shipment, in which case the date stated in the on board notation will be deemed to be the date of shipment. If the bill of lading contains the indication ‘intended vessel’ or similar qualification in relation to the name of the vessel, an on board notation indicating the date of shipment and the name of the actual vessel is required. iii Indicate shipment from the port of loading to the port of discharge stated in the credit If the bill of lading does not indicate the port of loading stated in the credit as the port of loading, or if it contains the indication ‘intended’ or similar qualification in relation to the port of loading, an on board notation indicating the port of loading as stated in the credit, the date of shipment and the name of the vessel is required. This provision applies even when loading on board or shipment on a named vessel is indicated by pre-printed wording on the bill of lading. iv. Be the sole original bill of lading or, if issued in more than one original, be the full set as indicated on the bill of lading

24

Id.

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v. contain terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back bill of lading). Contents of terms and conditions of carriage will not be examined. vi. contain no indication that it is subject to a charterparty. b. For the purpose of this Article, transshipment means unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit. c. i. A bill of lading may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same bill of lading. ii A bill of lading indicating that transshipment will or may take place is acceptable, even if the credit prohibits transshipment, if the goods have been shipped in a container, trailer or LASH barge as evidenced by the bill of lading. d. Clauses in a bill of lading stating that the carrier reserves the right to transship will be disregarded.” (UCP 600 Article 20).

➄ Illustration of Bill of Lading Form

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6 International Transportation Straight Bill of Lading (3) Destination:

(1)Shipper Name: Street Address:

(4)Agent’s No.:

City. ST ZIP Code: FAX:

TEL: (5) B/L No. and Date:

(2) Consignee

(6) Notify Party

Name:

Name:

Street Address:

Address:

City. ST ZIP Code: FAX:

TEL:

(7) Port of Loading:

(8) Port of Discharge:

(9) Route:

(10) Vehicle Car No.

(11)No.

(12) Description of Articles, Special

Packages

Marks and Exceptions

Weight Subj. to Correction

(14) Class or

(15)

Rate

Charges

Total: Hazardous

Material

Emergency Contact:

(16) C.O.D. Shipment:

(17)Shipment Declared Value:

□ Prepaid □ Collect

□ Third Party DECLARED VALUE Where the rate is dependent on value, shippers are required to state specifically in writing

The carrier shall not make delivery

the agreed or declared value of the property as follows:

of this shipment without payment of

The agreed or declared value of the property is specifically

freight and all other lawful charges.

stated by the shipper to be not exceeding per

Shipper

Signature NOTE Liability Limitation for loss or damage in this shipment may be applicable. See 49 U.S.C. – 14706(c)(1)(A) and (B).

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RECEIVED, subject to individually determined rates or contracts that have been agreed upon in writing between the carrier and shipper, if applicable, otherwise to the rates, classifications and rules that have been established by the carrier and are available to the shipper on request. The property described above, in apparent good order, except as noted (contents and condition of contents of packages unknown), marked, consigned and destined as shown above, which said carrier agrees to carry to destination, if on its route, or otherwise deliver to another carrier on the route to destination. Every service to be performed hereunder shall be subject to all bill of lading terms and conditions in the governing classification on the date of the shipment. Shipper hereby certifies that he is hereby familiar with all the bill of lading terms and conditions in the governing classification and the said terms and conditions are hereby agreed to by the shipper and accepted for himself and his assigns. This is to certify that the above named materials are properly classified, described, packaged, marked, labeled and in proper condition for transportation according to the applicable regulations of the Department of Transportation. (18) Shipper Company Name:

Carrier:

Shipper Signature/Date:

Driver:

Trailer Loaded Freight Counted □ By Shipper

□ By Shipper

□ By Driver

□ By Driver/pallets said

to contain □ By Driver/pieces

The contents to fill in the above bill of lading are explained below: (1) Shipper: Enter the company name and address of the shipper (consignor). (2) Consignee: Enter the full of the final recipient of the shipment, the ultimate consignee, if different than destination, for carrier notification purposes. (3) Destination: Enter the street address, city, and zip code where the carrier will make delivery to the consignee in Field 2. (4) Agent’s Number: Enter carrier’s control number, if known or required. (5) B/L No.: Enter the bill of lading issuing number made by the shipping company. (6) Notify Party: Enter the name of the company which will take initial control of the shipment and oversee its delivery to the consignee. (7) Port of Loading: Enter the name of port where the shipment is made. (8) Port of Discharge: Enter the name of port where the shipped cargo is discharged. (9) Route: If applicable, enter the route the carrier will take to the consignee. This field may also be used to specify docks, warehouses, etc., and to specify any intermediate carriers. (10) Vehicle/Car No.: Enter any vehicle identifying numbers or initials, if applicable. (11) No. Packages: Enter the total number of packages per line item; if the packages are consolidated on a pallet or in an outer container, note this information on a second line. Ex: 112 PKGS 3 Pall.

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(12) Description of Shipment: Enter the description of each line item, noting the type of package (carton, barrel, etc.) and the quantity per package. Since the correct freight classification is essential in describing an item, there must be a separate line item for each different freight classification description. If more than one type of packaging is used per freight classification, a separate entry must be used for each type of package. Enter any special package markings, special handling requirements, and delivery instructions. For hazardous material items, special provisions must be met in completing this field. (13) Weight: Enter the total gross weight, in pounds, for each line item. For bulk shipments, the tare (weight of packaging) and net weights should also be referenced in the description field. For package shipments, include the weights of pallets and skids. The total weight of the merchandise should be shown after the last line item, with pallet and dunnage weights shown separately. (14) Class or Rate: Enter the 5-digit class (per the Uniform Freight Classification or the National Motor Freight Classification) or a two-digit class rate (a percentage of the first class 100 rate) per line item. This information may be determined with the carrier. (15) Charges: Enter the freight amount by packages. (16) C.O.D. Shipment: First, check whether the freight charges are prepaid (the carrier bills the shipper) or collected (the carrier deducts the freight charges from the amount collected from the consignee). Second, enter the amount to be collected for the merchandise itself—be sure to include the freight charges. Third, enter any collection fees, if applicable. Enter total charges to be collected by the carrier. (17) Shipment Declared Value: When the weight charged by the carrier is dependent upon the value of the shipment, the dollar value per unit of measure (ex: $100/pound) must be stated by the shipper—enter this information in field 14. (18) Shipper Company Name: Enter the company name of the shipper. (19) Date: Enter the date of the shipment; that is, the date the carrier took control of the merchandise.

In the Business Course of International Trade, Sometimes, the Concerned Parties Ask the Shipping Company to Issue the Antedated Bill of Lading, but the Shipping Company Must Fully Be Liable for This Kind of Falsely Antedated Bill of Lading

Under the bill of lading which is issued falsely antedated, even when the concerned parties under the letter of credit get the damages due to the other parties’ negligent activities, all the damages are judicially to be liable to the issuer of the bill, not to be apportioned to the concerned parties of negligent activities. The following is the case to treat with this issue.

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Material Facts25 Shipowners Pakistan National Shipping Corporation “PNSC” (the defendant) issued a bill of lading which to their knowledge gave a false shipment date. They knew also that the date stated in the bill of lading would or might be relied upon as the date of actual shipment by banks or other persons to whom the bill of lading might be presented under a letter of credit transaction, against payment for the goods. Mr. Mehra on behalf of his company Oakprime presented the falsely antedated bill of lading to London bankers, Standard Chartered Bank “SCB” (the claimant), under a letter of credit issued by Incombank of Vietnam and confirmed by SCB. SCB relied upon the bill of lading date as being accurate, and it follows that PNSC is liable to them in damages for the tort of deceit in respect of any loss they suffered in consequence of doing so. The shipping documents included not only the bill of lading, but also survey certificates which were not presented to SCB until after the letter of credit expired. So they were not obliged to pay the amount of the credit to Oakprime, and it was outside the scope of their authority from the issuing bank, Incombank, to do so. Issue Are the damages due to the claimant liable to be apportioned because of the claimant’s own negligence in failing to notice the discrepancies and/or in their attempted deception of the issuing bank? Statutory Framework The case turns upon the proper construction of the Law Reform (Contributory Negligence) Act 1945. Section 6.1(1) provides: “Where any person suffers damage as a result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for that damage.” Four elements fall for consideration: 1. damage, 2. causation, 3. fault, and 4. just and equitable apportionment. Firstly damage: as the opening words indicate the damage with which the section is concerned is the damage suffered by the claimant. In this case, the damage was suffered by making payment to Oakprime. That damage is the only damage with which the

25

Standard Chartered Bank v Pakistan National Shipping Corp [2000] Int.Com.L.R. 07/27 Admiralty Law Reports.

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section is concerned. So: (a) that damage must be suffered partly as a result of the claimant’s own fault and partly of the fault of the defendant; (b) the claim “in respect of that damage” is not defeated by the fault of the person suffering it (that damage); (c) but the damages recoverable “in respect thereof” (i.e., in respect of that very same damage) may be reduced; (d) having regard to the claimant’s share in the responsibility for “the damage” which he has suffered. Secondly causation: the opening clause makes it plain that the combined fault of claimant and defendant must cause the claimant’s damage. Thirdly, fault: there must be fault on the claimant’s own part as well as fault on the defendant’s part. Fourthly, apportionment: the claim will be reduced to the extent it is just and equitable to do so having regard to the claimant’s share “in the responsibility for the damage he suffered. “Responsibility” has a different connotation from “fault.” So far, so good; but difficulties arise out of the meaning to be given to “fault.” “Fault” This is defined in Section 6.4 as follows: “Fault” means negligence, breach of statutory duty, or other act or omission which gives rise to a liability in tort or would, apart from this act, give rise to the defense of contributory negligence.” If I were allowed to approach the matter afresh and untrammeled by authority, I would construe Article 4 as follows: 1. It breaks into two parts. Fault means:- Either (i) negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort, or (ii) negligence, breach of statutory duty or other act or omission which would, apart from the act, give rise to the defense of contributory negligence. Thus, the first part covers the defendant’s fault and the second part covers the claimant’s own fault. So construed it adapts well to the separate notions of claimant’s fault and defendant’s fault which must be separately assessed for Section 6.1 purposes; 2. I do not read it to mean: (a) negligence, (b) breach of statutory duty, or (c) other act or omission which gives rise to a liability in tort, or (d) other act or omission which would apart from the act give rise to the defense of contributory negligence. To limit that which apart from the act gave rise to the defense of contributory negligence only to some other act or omission seems an unnaturally confined qualification.

[2000] EWCA Civ 230 1 CA on appeal from Commercial Court (Mr Justice Cresswell). http:// www.nadr.co.uk/articles/published/CLR/Standard%20Chartered%20v%20Pakistan%202000.pdf.

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Fault as Construed by the Authorities There seems to be universal agreement that the definition is indeed in two parts, the first part referring to the fault of the claimant which Professor Glanville Williams calls “contributory fault” and the second part referring to the defendant’s fault which he calls “original fault.” This was the view of Prichard J. in Rowe v Turner Hopkins and Partners: “To my mind, the act provides its own interpretation if it is acceptable to regard the definition of “fault” in Section 6.2 as comprising two limbs—the first referable to the defendant’s conduct, the second to the plaintiff’s conduct. Section 6.2 defines “fault” as meaning “negligence, breach of statutory duty, or other act or omission which gives rise to a liability in tort” (the first limb). It then goes on to include any act or omission which “would, apart from this act, give rise to the defense of contributory negligence” (the second limb). In my view, the first limb relates to the plaintiff’s cause of action. The act only applies when the plaintiff’s cause of action is in respect of some act or omission for which the defendant is liable in tort. The second limb of the definition is concerned with and is referable only to the conduct of the plaintiff. It relates not to any cause of action but to conduct which, prior to the act, would give rise to the defense of contributory negligence and which is now to be regarded as that conduct on the part of a plaintiff which will lead not to a complete defense but to a reduction in damages. In Forsikringsaktieselskapet Vesta v Butcher, O’Connor L.J. in preferring the construction of the act given to it by Prichard J. said that “for practical purposes (it) coincides with my own.” In Barclays Bank Plc v Fairclough Building Ltd. Beldam L.J. said: “It is generally agreed that the first part of the definition relates to the defendant’s fault and the second part to the plaintiff’s.” There is a clear preponderance of authority in favor of the view that section 6.4 must be broken into two parts. The Nature of the Defendant’s Fault This cannot be admitted of much doubt. It consists of negligence which gives rise to a breach of statutory duty or a liability in tort. The Nature of the Claimant’s Own Fault I have stated my preference to be “negligence, breach of statutory duty or other act or omission which would, apart from this act, give rise to the defense of contributory negligence.” That I believe is the considered view of no less an expert than Professor Glanville Williams, Joint Torts and Contributory Negligence (1951), page 318. It is also the judgment of the Australian High Court in Astley v Austrust Ltd. (1999): “When first used in s. 27A(3), the “fault” is that of the plaintiff and the term “fault” identifies “negligence, breach of statutory duty or other act or omission” which would, apart from

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the Wrongs Act, “give rise to the defense of contributory negligence.” When used for the second time in s.27A(3), the “fault” is that of the defendant and the term “fault” identifies the “negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort.” Was the Defendant at Fault? On behalf of the claimant, Mr. Gruder Q.C. submits that: “Before the 1945 Act, contributory negligence was only a defense to claims in negligence or claims which were considered to be akin to negligence such as breach of statutory duty.” In support of that submission he refers to the Law Revision Committee’s 8th Report at page 18 and to Caswell v Powell Duffryn Associated Collieries which was an action in respect of injuries caused by a breach of statutory of duty which Lord Wright at p. 178 classified as follows: “The cause of action is sometimes described as statutory negligence and it is said that negligence is conclusively presumed.” I do not doubt that historically something akin to negligence was a feature of the pre-1945 approach but that does not help to answer whether the act has made a difference. Since the act has come into force, it has been applied to breaches of statutory duty where no negligence was proved. It is not necessary to confine that tortious liability to torts which involve negligence or something akin to negligence. The words are wide enough to cover torts intentionally committed. For my part, I would not disallow apportionment under the act in a claim for damages for deceit simply on the basis that the deceitful defendant is not at "fault" within the meaning of the act. Was the Claimant also at Fault? I deal firstly with the bank’s negligence. It is common ground that contributory negligence does not depend on a breach of duty by the claimant to the defendant or a liability to him in tort. Contributory negligence is constituted by the claimant’s failure to take reasonable care to look after himself and that is a different concept from the negligence in the first part which is negligence giving rise to a liability in tort. It may be pointed out that in the Law Reform (Contributory Negligence) Act, 1945, the UK Parliament, the contrast between the two meanings is recognized, for that act, which provides for a sharing of responsibility for damage where a person suffers damage as a result partly of his own fault and partly of the fault of any other person or persons, defines “fault” as “negligence, breach of statutory duty or other act or omission which gives rise to a liability in tort or would, apart from this act, give rise to the defense of contributory negligence.” It would seem to me that the failure to notice the discrepancies was "negligence" in the sense that the bank ought reasonably to have foreseen that, if it did not act as a reasonably prudent bank, it might miss the discrepancies

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and so miss the opportunity to refuse payment, thereby avoiding its loss. If I am bound by authority to say that the word “negligence” does not fall within the second part of the definition, then it seems to me it must still amount to “some other act or omission” on the bank’s part which, if it qualifies as a defense, will lead to apportionment. The next and much debated question is whether deceit can constitute such an act or omission. That seems to me to be conclusively answered by Reeves v Commissioner of Police of the Metropolis. The police were at fault being in breach of a duty of care to take reasonable steps to look after the prisoner in their custody. He committed suicide. There was a plea of contributory negligence and the question was whether “fault” within the meaning of the act could include intentional acts of the claimant as well as negligence. The late Professor Glanville Williams, in his book Joint Torts and Contributory Negligence (1951), p. 199, expressed the view that “contributory intention should be a defense.” In Reynell v Sprye, Lord Cranworth said at p. 710: “However negligent the party may have been to whom the incorrect statement has been made, yet that is a matter affording no ground of defense to the other.” This is such a powerful statement that one cannot readily accept the appellant’s submission that the remarks have to be understood in the context of, and limited to, the next sentence of his judgment to the effect that: “No man can complain that another has too implicitly relied on the truth of what he himself has stated.” For my part, I cannot regard the case to be authority for no more than the limited proposition that only a negligent failure to check on the accuracy of that which was fraudulently represented amounts to no defense whereas negligence in some other respect may well afford a defense. Lord Cranworth had made it plain that this is a matter of causation saying at p. 708: “Where, therefore, in negotiation between two parties, one of them induces the other to contract on the faith of the representations made to him, any one of which has been true, the whole contract is in this court considered as having been obtained fraudulently. Who can say that the untrue statement may not have been precisely that which turned the scale in the mind of the party to whom it was addressed?” If one is induced by misrepresentation to enter into a contract which causes loss, then the loss is caused by the misrepresentation. If the misrepresentation was a form of “fault,” then the fault caused the loss. In cases of deceit, the authorities show that the deceit is held to be the only cause of the loss. In his skeleton argument Mr. Young, counsel for PNSC suggested that the approach should revert to the simple one: “as a matter of fact, did the “fault” of both defendant and plaintiff contribute to the loss or its causation?” Unfortunately, I do not think it is as simple as that because the answer is not only a matter of fact but a matter of law as well. Causation has assumed its

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special character in deceit as I have attempted to analyze. As a matter of law it seems to me, the sole cause of the damage is the defendant’s deceit and any reason operating on the plaintiff’s mind which causes him to act as he did pales into legal irrelevance. If that analysis is right then the claimant’s own fault has no causative effect upon his suffering his loss. Thus, the defendant fails to establish that the claimant is a person who “suffers damage as a result partly of his own fault.” In any event, it is incumbent upon the defendant to show that the claimant’s fault caused the loss which the claimant has suffered. The loss the bank suffered was their payment to Oakprime. The simple fact is the Bank paid because it thought it would get its money back: It is not a case of paying up because it was negligent. Turning to the attempted deceit of Incombank, the question is whether that fraudulent conduct caused the payment to Oakprime. That deceit would have given rise to wholly different damage. I prefer to look at it in terms of causation of damage rather than to focus, as some of the argument before us did solely on whether or not the duty not to deceive was owed to the claimant or to Incombank. Apportionment I have accepted that the claimant does not emerge as a shining innocent. Nevertheless, it is necessary to focus on the extent to which its loss suffered as it was by the defendant’s deceit should be apportioned for its share in the responsibility for the damage. In my judgment, the responsibility for the damage is wholly that of the defendant. It was the defendant who set out to deceive and succeeded in deceiving. The mixed motives of the claimant do not mitigate that dishonesty. Commercial fraud must be condemned. It can only be properly condemned by an award of the whole of the damage which the defendant intended to cause. Highwaymen in commerce forfeit the right to just and equitable treatment. In my judgment in the law of deceit, there is to be no apportionment. If the parties were in pari delicto, then the claimant would fail to recover anything. In this field, it is all or nothing. In my judgment, the claimant is entitled to recover all its damage and I, too, would dismiss the appeal.

6.2 Means of Transportation

6.2.3

481

Air Transportation

(1) Introduction Air cargo is either shipped: along with luggage in passenger planes; in hybrid aircraft with special compartments for cargo, or in cargo aircraft.26 Technological innovations have recently allowed the size and weight of most mechanical goods to shrink considerably, under which light-weight products could be transported via air transport, which has proven to be particularly advantageous for high-value emergency goods to be delivered fast in comparison with marine transport. Air transport offers advantages over marine transport in the shipping of certain items. Air transport is both faster and safer than maritime or land transportation, and it makes it is possible to reduce inventory costs and cost of capital through just-in-time delivery of cargo. Just-in-time delivery means that goods are ordered promptly before they are needed, and only by an amount that will be quickly demanded. By utilizing this method, the need for storage facilities may be minimized and buyers can make smaller purchases that require less financing. Finally, aircraft are rarely if ever subject to damage or burglary, but with ships, such complications are not so uncommon. (2) Preparation for Transportation ➀ Packing Packing is extremely important due to the fact that aircraft has a minimal amount of space for cargo and because extra weight will cause fuel costs to be increased. Because of this, packing must be done like a puzzle, leaving no extra unused air space, and appropriate, light-weight materials must be used. ➁ Transport Inquiry It is just to ask a consignor if he carries cargo to an airline agent directly. If so, there is no need to make a formal document besides a signed air waybill, which can be done immediately. This airway bill can then be presented along with the shipper’s other mandated documents which may include a declaration for dangerous goods, shipper’s certification for live animals, a commercial invoice, or other documents required by the customs authority of the concerned country.

26

Eun Sup Lee, supra note 138, at 210.

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➂ Restricted Items With air transport, it is necessary to provide a precise description of the cargo, and to specify that consignors are required to submit documents accompanied with the cargo. This allows authorities to make the proper decisions concerning whether the cargo is legal for transport. Restricted items include live animals, arms (weapons), ammunition, other war paraphernalia, human remains, alcohol and other flammable goods such as canned air, and machinery. ➃ Gross Weight The weight of cargo must be calculated exactly when being accepted and calculated under the supervision of employees of the airline or agent appointed by the airline. If the weight of cargo is uncertain in flight, the exact rate to charge will not be accurate, and the shipper cannot claim appropriately when items have been missed. ➄ Prepaid Freight A consignor should designate whether the payment of freight is prepaid or collected by a consignee. With prepayment there is not a problem, but if the payment should be later collected from a consignee, complicated problems could potentially arise: ➅ Declared Value for Carriage The term “declared value for carriage” is defined as the “value of a shipment as declared by its shipper to serve as the basis for computing freight charges, and for limiting the carrier’s liability for damage, loss, or delay.” Limit of carrier’s Liability is not Fixed in Application but Can Judicially Be Nullified in the Specific Situation, Particularly, Under CMR Convention

Regarding the restriction of public carriers’ liability, UPS conditions also state that UPS does not offer carriage of packages which do not comply with the restrictions of value. But, the fact that a carrier’s standard terms entitled it to refuse to carry packages over a certain value is not judicially interpreted that it does not mean there is no contract of carriage where packages accepted for carriage later turned out to be over the value limit. It is particularly interpreted so under the CMR Convention system, under which terms purporting to exclude

6.2 Means of Transportation

483

liability for goods of excess value were rendered null and void. The following case treats with this issue. Case27 CARRIAGE OF GOODS BY ROAD: CARRIER’S TERMS EXCLUDE CARRIAGE OF CONSIGNMENTS ABOVE A CERTAIN VALUE: CARRIER’S LIABILITY WHERE SUCH CONSIGNMENT IN FACT CARRIED AND NOT DELIVERED: CMR CONVENTION: WHETHER CONTRACT EXISTS TO WHICH CMR APPLIES: WHETHER CARRIER ENTITLED TO LIMIT LIABILITY UNDER CMR: WHETHER LOSS DUE TO CARRIER’S “WILFUL MISCONDUCT” RENDERING LIMIT OF LIABILITY INAPPLICABLE: APPROACH OF APPELLATE COURTS IN CASES WHERE NO DIRECT EVIDENCE ON THE CAUSE OF THE LOSS Summary In the context of the loss of high value goods at or from the carrier’s warehouse in the course of carriage by road, the House of Lords confirmed the judgment of the Court of Appeal to the effect that there was a contract of carriage between the consignor and the carrier, even though the consignment in question had a value in excess of the limit set out in the carrier’s standard terms and conditions of business. The fact that a carrier’s standard terms entitled it to refuse to carry packages over a certain value did not mean there was no contract of carriage where packages accepted for carriage later turned out to be over the value limit. Further, that contract was subject to the CMR Convention, under which terms purporting to exclude liability for goods of excess value were rendered null and void by Article 41.1. The House of Lords also upheld the Court of Appeal in finding that the cause of the loss was theft by the carrier’s employee(s). Although cargo interests had the burden of proving liability “on the balance of probabilities,” this principle did not mean that they had to identify specifically which employee(s) had committed the theft. Theft of the goods by the employee(s) of the carrier amounted to willful misconduct under Article 29(1) of the Convention. That in turn meant that the carrier could not take advantage of the limitations of liability provided in Article 23(3) and was accordingly liable to pay the full value of the loss. The House also approved the approach of an appellate court to findings and inferences of fact made by a judge at first instance as set out in the case of Assicurazioni Generali SpA v. Arab Insurance Group.

27

Datec Electronic Holdings Ltd v United Parcels Service Ltd [2007] UKHL 23: 16 May 2007 http://archive.onlinedmc.co.uk/datec_electronic_holdings_v_ups_(hofl).htm.

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Facts Datec and UPS had in place a framework contract for carriage services which UPS provided to Datec on a regular basis. When Datec booked via computer the carriage for the consignment in question, it had to click on a box expressly confirming its acceptance of the UPS conditions. Clause 3(a), first sentence, stated that “UPS does not offer carriage of packages which do not comply with the restrictions of value in paragraphs (i) to (iv) below.” Pursuant to clause 3(a)(ii) “The value of any package may not exceed the local currency equivalent of USD 50,000.” Clause 3(c) provided that, if it came to UPS’ attention that any package did not meet such restriction, UPS could refuse to transport it or, if carriage was in progress, suspend carriage and hold it to the shipper’s order. Clause 3(e) provided that UPS would not meet any losses that the shipper might suffer arising out of UPS carrying packages that did not meet the above restrictions. The claim between the parties concerned the carriage of three packages of computer processors, first by road from Milton Keynes in the UK to Luton Airport, then by air from Luton to Cologne in Germany, and finally by road from Cologne via the UPS Amsterdam hub to the consignee at Schipol South East in the Netherlands. These packages were typical “low-weight highvalue” cargo, weighing just 25 kg, 25 kg, and 17 kg, respectively, but in total worth some £241,241. The value of each of the three packages exceeded the amount specified in clause 3(a)(ii) of the UPS conditions. Datec claimed that the three packages never arrived at their destination at Schipol and alleged that they were stolen while in UPS’s custody, probably at the UPS Amsterdam hub. UPS did not dispute that the three packages were handed over for carriage to a UPS driver in the UK but contended that, by reason of the value of the packages exceeding the amount set out in clause 3(a)(ii), the parties had not reached sufficient consensus for a contract of carriage to have come into existence between them. At first instance, Mr. Justice Andrew Smith held that the parties had concluded a CMR contract for the carriage of the three packages. Although the three packages had been handed over to UPS and had not been delivered to the consignee, Datec had failed to establish that the packages had been stolen by UPS employees. Without willful misconduct on the part of UPS or their employees, Datec’s compensation was limited to a mere £658.

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485

The Court of Appeal, reversing the judgment of Mr. Justice Andrew Smith, held that employee theft was the most likely cause of the disappearance of the three packages and, as this amounted to willful misconduct on the part of UPS, held UPS liable for the full value of the computer processors. Judgment of the House of Lords In its judgment of May 16, 2007, the House of Lords unanimously upheld the Court of Appeal judgment. The House of Lords backed the finding of the courts below that between Datec and UPS, a CMR carriage contract came into existence, even though UPS, when concluding the contract, was unaware that the goods exceeded the agreed value limit of US$50,000. The UPS terms expressly set out in clause 3 the consequences of the shipper presenting packages that did not meet UPS’ restrictions and conditions. Clause 3 did not provide that there would be no contract of carriage if such a package was presented and accepted. On the contrary, subclause 3(c) provided that the effect of the shipper presenting a package that did not meet the restrictions was that UPS had the right to refuse to carry it or, if carriage was in progress, to suspend carriage. The implication was that unless and until UPS exercised their right, there was a contract that UPS would carry the package. Clause 3 provided, therefore, a contractual regime governing carriage of non-conforming goods. Lord Mance conceded that the issue whether a carriage contract came into existence was “not an easy one,” but concluded: “(…) the harsh, but clear-cut position will be that, where a carrier contracts unwittingly to carry non-conforming goods and chooses to perform internationally by road, CMR applies with its benefits and burdens, and that the carrier’s restrictions will be relevant only if and in so far as they may assist the carrier to avoid liability under Article 17(2).” So far as clause 3(e) purported to remove UPS’ liability for loss, damage or delay that UPS would otherwise incur under that Article, it was null and void by virtue of Article 41 of the CMR Convention. As to the cause of the loss, Lord Justice Richards in the Court of Appeal had provided a systematic and meticulous analysis on the causation of loss in a situation without any direct evidence. He had concluded that theft by one or more UPS employees was the probable cause of the loss and that Datec had proved its case on the balance of probabilities. It was not necessary for them to identify the particular UPS employee(s) responsible for the theft. In the House of Lords, Lord Mance quoted large parts of Lord Justice Richard’s judgment and found that the reasons given by him for reversing Mr. Justice Andrew Smith were “compelling.” Lord Mance concluded: “I share, without hesitation, the view which he formed overall that theft involving a UPS employee was shown on a strong balance of probability to have been the cause of the loss.” Lord Walker expressed reservations on the willful misconduct point but felt it unnecessary to press this doubt to the point of dissent.

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The House of Lords confirmed that, in reversing the findings of the first instance judge, the Court of Appeal had not exceeded its proper role in reviewing the judge’s conclusions as to the cause of the loss. As the headnote to the case says: “The essential issue related to the inferences to be drawn from primary facts which were not in dispute. The situation was one where the Court of Appeal was entitled to reconsider for itself the judge’s findings as to what should or should not be inferred regarding causation from the primary facts found by him. The Court of Appeal was entitled to reverse the judge’s finding on causation. None of the possibilities mentioned by the judge afforded any plausible explanation of the disappearance of the three packages.” The correct approach, said Lord Mance, in an appellate court to findings and inferences of fact made by a judge at first instance after hearing evidence, was as stated by Clarke LJ in the case of Assicurazioni Generali SpA v. Arab Insurance Group. Comment All judges in the three courts which judged Datec v UPS came to the conclusion that the parties concluded a carriage contract. For instance in the Court of Appeal Lord Justice Richards said: “in my view there was plainly a contract of carriage, concluded at the latest when the UPS driver accepted the goods. It may be that the UPS driver would have declined to take the goods had he known that they exceeded the value limit, but the fact remains that he accepted them.” In the House of Lords, Lord Hope and Lord Mance also emphasized the importance of the physical acceptance of the goods. UPS had not presented the “no contract” argument from the very outset of proceedings, and was unable to argue misrepresentation and/or mistake. Lord Mance felt it was “at least arguable” that their conditions would enable UPS to cross-claim in respect of any excess exposure above US$50,000 per package, had UPS been permitted to raise new allegations of fact. Another carrier who finds himself in UPS’s situation of carrying without its knowledge excess value goods may want to exploit arguments of “no contract,” misrepresentation and/or mistake fully. This may mean that on this point Datec v UPS might not be as important as it appears at first sight.

6.2 Means of Transportation

487

Yet Datec v UPS is without any doubt highly significant for its approach to a claim without any direct evidence on the causation of the loss, in particular on account of Lord Justice Richard’s seminal judgment. It is true that Datec v UPS confirmed once again that the relevant test in cargo claims is “on the balance of probabilities” and that the burden to establish this balance rests on the claimant cargo interests, but Datec v UPS also illustrated the limits of this principle, because Datec did not need specifically to identify the responsible employee or employees. It was somewhat paradoxical that evidence gained from UPS’s surveillance equipment was used in court to its disadvantage. A consignor must give an accurate price for the cargo, or write “no value declared” (NVD) in the column of declared value for carriage. If it exceeds a certain price (set by the airline) per airway bill, the consignor must discuss it with the airline before carrying. ➆ Declared Value for Customs The term “declared value for customs” is defined as the “value of a shipment as declared by its shipper to serve as the basis for computation of duties and taxes. It usually reflects the selling price of the shipment, and is equal to or higher than the declared value for carriage.” A tariff is imposed on the declared value that is marked in the price column. If it is not mandatory to write down the declared value according to the laws of the importing country, it is acceptable to be indicated “no customs declared” (NCD). (3) Air Waybill ➀ Concepts An air waybill is a type of bill of lading used specifically when goods are transported via airplanes. It serves both as a receipt of goods by an airline (carrier), and as a contract of carriage between the shipper and carrier. The airline industry has adopted a formal standardized air waybill for simplicity, which is accepted domestically and internationally. Air waybills are not negotiable but only function as a means of receipt. Also unlike a bill of lading, an air waybill does not specify when the goods will reach their final destination, or on what airplane goods will be transported. It does specify a carrier’s limits of liability, description of goods, and accompanying charges. The contract of carriage is valid from the time that the air waybill is issued, and it expires when the cargo is delivered to the consignee.

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➁ Function The air waybill is the most basic shipping document guaranteeing the distribution of cargo. The bill guarantees transport from departure to destination, regardless of distance, number of airlines engaged in the transport, and even local transport. Its various functions include: a receipt that cargo is entrusted for transport; written evidence of a conclusion of contract of carriage; a freight bill; proof of insurance when a consignor takes out a shipper’s insurance; a customs declaration; and a guideline of cargo transport (handling, transit and delivery, etc.). The air waybill or the cargo receipt is prima facie evidence of the conclusion of the contract, of the acceptance of the cargo and the contents of the contract but it is not a document of title.28 The statements in the waybill relating to the weight, dimensions and packaging of the cargo, and to the number of packages, are prima facie evidence of the facts stated.29 Those relating to the quantity, volume and condition of the cargo, however, do not constitute evidence against the carrier unless the waybill or cargo receipt states that the carrier had actually examined the goods in respect of these issues at the presence of consignor or relates to the apparent condition of the goods.30

28

Eun Sup Lee, supra note 138, at 212. Id. 30 Id. at 213. 29

6.2 Means of Transportation

489

Airway Bill NONNEGOTIABLE WAYBILL Shipper

SCAC B/L NO.

Booking No. Export references

Consignee

This contract is subject to the terms and conditions, including the law & jurisdiction clause and Notify Party

limitation of liability & declared value clauses, of the current Maersk Line Bill of Lading (available from the carrier, its agents and at www.maerskline.com), which are applicable with logical amendments (mutatis mutandis). To the extent necessary to enable the Consignee to sue and to be sued under this contract, the Shipper on entering into this contract does so on his own behalf and as agent for and on behalf of the Consignee and warrants the he has the authority to do so. The shipper shall be entitled to change the Consignee at any time before delivery of the goods provided he gives the Carrier reasonable notice in writing. Delivery will be made to the Consignee or his authorized agent on production of reasonable proof of identity (and, in the case of an agent, reasonable proof of authority) without production of this waybill. The Carrier shall be under no liability whatsoever for mis-delivery unless caused by the Carrier's negligence. Onward inland routing (Not part of Carriage as defined in clause 1. For account and risk of Merchant)

Vessel

Voyage

Place of Receipt. Applicable only when document used as Multimodal Waybill

490

6 International Transportation Port of Loading

Port of Discharge

Place of Delivery. Applicable only when document used as Multimodal Waybill

PARTICULARS FURNISHED BY SHIPPER Kind of Packages; Description of goods; Marks and Numbers;

Gross

Measuremen

Container No. /Seal No.

Weight

t

Prepaid

Collect

Above particulars as declared by Shipper, but without responsibility of or representation by Carrier. Freight & Charges

Rate

Unit

Carrier's Receipt.

Place of Issue

Shipped, as far as ascertained by reasonable means of

Currency

Total number of

of Waybill

checking, in apparent good order and condition unless

containers or

otherwise stated herein the total number of quantity of

packages received by

Containers or other packages or units indicated in the

Carrier.

box opposite entitled "Carrier's Receipt"

Shipped on Board

Date Issue of

Date

Waybill

Declared Value Charges (see clause 7.3 of the Maersk Line Bill of Lading) for Declared Value of US$

Signed for the Carrier A.P. Moller-Maersk trading as Maersk Line

As Agent(s) for the Carrier

6.2.4

Tariff

A tariff is a list of fares, freight charges and rates applied to goods that cross international borders. A rate means that the fee is calculated by unit weight and unit container of freight collected, and it is usually calculated in kilograms. Charges refer to extra costs such as transport facilities, handling costs, pick-up service expenses, costs for handling dangerous goods, settlement fees, etc.

6.2 Means of Transportation

491

The rate had traditionally been determined through different methods and procedures outlined by the country’s government, not by airlines, but, recently, following some deregulation in the air freight field, airlines increasingly decide their own tariffs and rates, creating a more liberalized market for international shipment. International tariffs take effect by approval of both countries, but since a lot of air routes are connected through various airlines and different cities and countries, an international forum called IATA Cargo Tariff Coordinating Conference was created to discuss the tariff issues and prevent excess tariff competition.

6.2.5

Combined Transport

6.2.5.1 Concepts Combined transport is made when cargo is transported door to door through at least two different transportation means, but on the basis of a single contract of carriage. Combined transport has the following advantages compared with the single transport: First, reduction of operation costs occurs at a point of contract such as the inspection of transshipment and allows for a smoother operation and improvement of discharging productivity. Second, transportation formalities are simplified due to containerization such as a simple confirmation of cargo and documents. Third, unification is made because the task is being completed via a team effort, and therefore, claims can be applied and settled jointly as well. Fourth, the cargo tracking system is easy because cargo is handled by a single carrier. The combined transportation has also the following distinguished characters compared with other single transportation: First, since a combined carrier is in position to plan the entire transport, to properly connect transport sections, to adjust the transport smoothly by supervision, as well as acting as a party to contract to a consignor with his name and property, and to take responsibility for the whole transpiration. Second, the combined transport bill of lading is issued as a combined carrier’s document to cover all transporting segments of the trade. Third, the combined carrier sets the “through rate” as a reward of service for the entire service, not in installments, and offers it to the shipper.

(2) Combined Transport Bill of Lading The combined transport bill of lading is a bill stating that cargo was accepted through combined transport, and is to be delivered in accordance with the contract. The bill of lading was designed specifically only for marine transport, and is not suitable for combined transport by land, sea, and air.

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6 International Transportation

The combined transport bill of lading was made to address the following needs: The combined transport bill of lading covers all transporting sections with liability for the loss or damage of cargo. Unlike a basic bill of lading, it can be issued by forwarders as well as carriers. It is issued when cargo is entrusted or taken by the combined carrier before shipment is made on board. Its security functions are the same as with a normal bill of lading. The special forms of combined transport bill of lading are as follows: Combined transport bill of lading with bill of lading includes combined transport bill of lading which is a “multimodal transport bill of lading” and “intermodal transport bill of lading” comprised of the existing bill of lading along with the name of combined transporters. A FIATA bill of lading established by FIATA is normally used just like a normal bill of lading; other types are issued by name of actual carriers such as marine carrier, air carrier, ground carrier, and by freight forwarder—a combined carrier.

6.3

Application to Business Field

6.3.1

Getting Export/Import Approval (If Required by Law)

Exporter checks whether the items are prohibited to be exported and, if it is required, should get approval of export from concerned authorities.

6.3 Application to Business Field

493

The importer would get the import license from the concerned authority, if it is legally required, as follows:

Import License (Application)

Handling Time : 1Day (1)Importer Notification No.

(5) Consignor

671110

Nameof Firm, Address, Name of Rep. Name of firm, Address, Name of Rep. Dr.COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu

Chinese Marine Trading Co., Ltd

Floor 8, No.388, YangFu Port M nagement 509, Innobiz Park Building,YangFu Economic Development Zone, Daejeon, Korea YangFu, Hainan, P.R. China (2) Requestr

(6) Total Amount

Business No.

AT SIGHT

(7)Period of Payment

Name of firm, Address, Name of Rep.

(Signature) (3)Origin

US$ 483,000

(8)Terms of Price

REPUBLIC KOREA

FOB BUSAN

BUSAN, KOREA (12) (11) Unit/Quantity (13)Amount Unit Price 17,000PCS US$41 US $483.000 (4)Port of Loading

(9) H.S Code (10) Description/Size 33O4.99.1000 LUVIUS Premium-Gold Lifting Cream-50 DACAPO-Elegante

Brightening

US$9.1

Brightening

US$13.9

Effect Softner DACAPO-Elegante Enrich Cream DACAPO-Infinite Time Essence DACAPO-Remember Balance Essential Serum Miracle

ATO-Aroma

US$14.1

Triple US$14.5 Moisture

Body Wash

US$10.1

Miracle ATO-Pure Moisture Cream

Miracle AC-Red2 White Pore

US$5.5

Serum US$5.8 (14)Remarks to be filled out by an Approval Agency (15)Period of Approval (16)Approval No. (17)No. of Approval Agency

(18) The undersigned hereby approves the above-mentioned goods in accordance with Article 14(2) of the Foreign Trade Act and Article 26(1) of the Enforcement Decree of the said Act.

494

6.3.2

6 International Transportation

Manufacturing or Securing Contracted Items

The exporter manufactures or secures the finished products for export. In manufacturing or securing the contracted products, the employee in charge of export of the items is recommended to communicate efficiently and seriously with the manufacturing or securing section of the company to secure the products which are in accordance with the description and quality expressed and contracted under the sales contract and the letter of credit. Securing the proper products that are in the sales contract is the basic condition to be satisfied to avoid the trade disputes with the counterparts and to continue successfully to do business with the items.

6.3.3

Making Clearance/Arranging International Transport and Insurance

Arranging transportation and insurance contract with logistics companies and insurance companies, the exporter, in the case of maritime transportation, carries export goods to the Container Yard (CY) or Container Freight Station (CFS) in bonded areas for shipment, get the export permits from the customs authority after clearance, and get bill of lading before or after loading on board, negotiating with logistics companies and marine insurance companies. Meanwhile the importer, for receipt of the imported goods, secures required import permission or license (as seen in above stage) to legalize the transaction, and get pre-approval or recommendation from the proper authorities if it is required by the law concerned.

6.3 Application to Business Field

495

Container Yard (CY)

Port facility at which containers are accepted for loading on board ships, and off- loaded containers are delivered to the consignees. Source http://www.businessdictionary.com/definition/container-yard-CY. html#ixzz165P6rKYU Container Freight Station (CFS) Port facility for loading and unloading containerized cargo to and from ships. Also called container terminal. Source http://www.businessdictionary.com/definition/container-freight-sta tion- CFS.html#ixzz165PjKX12 Bonded Area Bounded or bonded area means the designated place where foreign merchandise is brought in without import duties, for further processing or re-exporting. Import-duty must be paid on these goods if they are released in the local market. Source http://www.businessdictionary.com/definition/duty-free-zoneDFZ.html#ixzz165Rqtknq

496

6 International Transportation

The exporter would make application for the shipment to the transporting company and inform the importer of the shipment as follows:

Shipping Request Shipper/Export

L/C No. (or Contract No.)

Dr.COFFEEXTRACT

ILC10051234567

1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Forwarding Agent

Consignee To the order of Bank of China, Yang Fu, China Notify Party

Another Notify Party

Chinese Marine Trading Co., Ltd Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, YangFu, Hainan, P.R. China Place of Receipt

Pre-Carriage by

Country of Origin

HAIKOU, CHINA Vessel/Voyage HANJIN

MALTA

0026W

MADE IN KOREA Port of Loading

Export Reference No.

BUSAN PORT KOREA

Port of Discharge

Place of Delivery

HAIKOU

HAIKOU

PORT,

PORT,

Final Destination

CHINA

CHINA Container No. /Seal No.

No.

Marks & No.

package

of

Kind of Package

Total

Total Meas.

Description of Goods

G.Weight(kg)

(CBM)

41CTNS IN A TOTAL 17,000PCS OF LUVIUS

Premium-Gold

HJCU7143514/435541

Cream-50

C/W 19,800kg

DACAPO-Elegante

MEA 31 CBM

Effect Softner DACAPO-Elegante

Lifting 561KG

Brightening Brightening

Enrich Cream ․ ․ China Marine Trading ․ ․

Shipment to Haikou C/N 1-2 Made in Korea

DACAPO-Infinite Time Essence DACAPO-Remember Triple Balance Essential Serum Miracle ATO-Aroma Moisture Body Wash Miracle ATO-Pure Moisture Cream

Miracle AC-Red2 White Pore Serum DETAILS ARE AS PER P/O NO. CMT20130503 L/C NO. : ILC10051234567 FOB BUSAN

2CMB

6.3 Application to Business Field

497

Dr.COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea June 10, 2023 Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China Dear Mr. Jin, Shipment: Purchase order No. CMT20110503 We are pleased to inform you that we have shipped the above today by the m/s Hanjin Malta 0026w of Hanjin shipping Co., Ltd. leaving Busan. According to your request, we enclose a copy of complete set of non-negotiable documents as shown in the credit. We trust that they will reach you in good order and give you full satisfaction so that you may place us with repeat orders.

Yours

very

truly, Dr.COFFEEXTRACT Suyeon Lee/ Manager

498

6 International Transportation

Learning Assignments

1. Communications and discussions with the concerned parties for the efficient transportation contract from the factory or warehouse of the items previously screened for export to the final destination in the importing country. 2. Special factors to be considered to make transportation contracts with the environmentally friendly products which are particularly easy to be damaged or open to depreciation in value during the international transportation, for example, due to heavy weather conditions.

Bibliography Chauah JCT (2009) Law of international trade : cross-border commercial transactions, 4th edn. Sweet & Maxwell Folsom RH, Gordon MW, Spanogle JA Jr, Fitzgerald PL (2009) International business transactions: contracting across borders. West Fellmeth AX (2009) The law of international business transactions. West DiMatteo LA, Dhooge LJ (2005) International business law—Transactional approach, 2nd edn. West Kouladis N, Fellmeth AX (2009) The law of international business transactions. West

7

Marine Cargo Insurance

Learning Objectives

Considering the instability and uncertainty in proceeding the international transport, the available method to ensure the safety is to cover the risk by the international cargo insurance contract. The legal and contractional issues in (marine) cargo insurance are very unique compared with other contractual areas. Sometimes the literally same technical terms in marine cargo insurance are interpreted differently from those in other fields of contract, and it is not so simple and clear to interpret those technical terms in applying to the contract and business field. The fact that it is difficult to understand and interpret the terms of cargo insurance means it would not be so easy for the hands-on workers of international trading to make and enforce the cargo insurance contract itself. For example, the technical term “warranty” in marine cargo insurance contract is interpreted legally different from that in general commercial contact. While other areas of international business transactions are regulated by the internally agreed or accepted agreements or rules, international marine insurance contracts are universally regulated by England Marine Insurance Act 1906 as the applicable law adopted discretionally by the concerned parties. Under such contract, the concerned parties adopt the traditional Lloyd’s marine insurance policy which has been officially established and modified by Lloyd’s corporation from the eighteenth century. Considering such characteristics of marine cargo insurance contract, this chapter treats with practical issues on marine cargo insurance focusing on the following issues: 1. Function and importance of marine insurance contracts in doing international trade.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_7

499

500

7 Marine Cargo Insurance

2. Risks covered and risks not covered (“or excluded”) under the variable marine insurance terms made by ICC. 3. Comparative analysis between the terms under Lloyd’s Marine Policy and the Institute Cargo Clauses A, B, and C. 4. Process to make claims under the marine cargo insurance.

7.1

Marine Cargo Insurance Contract

7.1.1

Concepts

(1) Definition The term “marine cargo insurance contract” means a “contract whereby, for a consideration, that is, premium, stipulated to be paid by one party, that is, the policyholder or insured, interested in shipped cargo that is subject to the risks from or incidental to the maritime navigation, another party, that is, the insurer or insurance company, undertakes to indemnify him against some or all of loss or damage caused by those risks during a certain period of time or voyage.” Briefly speaking, obtaining marine insurance policy means that you are paying a fee to someone that will in turn make payments to cover any accidents if they occur during transportation. The insurance company is to bet that there will be far much more transports without damage than transports with damage and to cover the few transports that will have to enforce its insurance contract. Even though it is termed “marine insurance,” the contract of marine insurance can, by agreement of the parties or international trade customs, be extended so as to protect the assured against losses on inland waters or land which are incidental to the maritime transportation.1 In international business transactions covered by marine insurance policies are made frequently in order to cover not only the maritime transportation but also the transportation of goods from the warehouse of the seller located in inland to that of the overseas buyer.2 The contract of marine insurance must relate to marine losses, that is to say, losses are to be “from or incidental to” maritime navigation.3 Maritime perils, that is, the perils consequent on or incidental to the navigation of the sea include: “perils of the seas, fire, war, war perils, pirates, rovers, thieves, captures, seizures, restraints and detainments of princes and peoples, jettisons, barratry, and any other like perils.”4

1

Marine Insurance Act 1906, §.2(1). Id. 3 Eun Sup Lee, supra note 138, at 219. 4 Id. 2

7.1 Marine Cargo Insurance Contract

501

(2) Concerned Parties In marine cargo insurance contracts, there are parties concerned including: insurer, assurer, underwriter, or insurance company, who promise to pay the claim amount to an insured, who is given a premium for the risks taken by him/her. the policyholder, who buys insurance contracts and promises to pay a premium according to a conclusion of insurance contract with an insurer; the insured or assured, who files a claim and is compensated for damage by the insurer in case of the loss caused by the risks covered under the insurance contract. insurance agent whose job is to conclude insurance contracts on behalf of the insurer or to mediate the insurance contracts between the policyholder and the insurer as an independent merchant; and insurance broker whose job is to mediate an insurance contract between insurer and policyholder on behalf of the policyholder and at the same time the unspecified insurer, as an independent merchant. In an international business transaction, the terms of the sale’s contract normally provide whether the costs to effect insurance contract shall be assumed by the seller or by the buyer.5 If the products are sold on FOB terms, these costs have to be paid by the buyer, and this is true even when seller, by request of the buyer, has made an insurance contract.6 If the products are sold on CIF terms, it is the duty of the seller to make the insurance contract and pay the costs of insurance.7 In CFR terms, the seller is not obliged to insure, and the buyer is not obliged to do so either, unless the CFR contract contains a clause “insurance to be effected by the buyer” or a clause in similar terms.8 Under the CFR terms, if the clause is indicated “insurance to be effected by the buyer,” the obligation to insure is thereby put into reverse, and the buyer is required to make the insurance contract which the seller would have been obliged to do so if it had been a CIF contract.9

7.1.2

Insurance Brokers in Marine Insurance

In the ordinary course of international business transactions, the exporter, who wishes to have his products insured, sometimes, does not approach the insurer directly but instructs an insurance broker to effect insurance on his behalf.10 Where the exporter is the regular client of an insurance broker, he forwards his instructions

5

Eun Sup Lee, supra note 138, at 219. Id. at 220. 7 Id. 8 Id. 9 Id. at 221. 10 Id. 6

502

7 Marine Cargo Insurance

on a form supplied by the broker and gives the required particulars.11 The broker, who is usually authorized to place the insurance within certain limits as to the rates of premium, writes the essentials of the proposed insurance in customary abbreviations on a document called “the slip,” which he takes to a marine insurance company.12 An insurer, who is prepared to accept part or all of the risk, writes on the slip the amount for which he is willing to insure and adds his initials; this is known as “writing a line,” and the insurer who insures goods and adds his initials is called as underwriter.13 The act of “writing a line” constitutes a marine insurance contract between the parties. That is, writing each line on a slip gives rise to an immediately binding contract between the underwriter and the assured.14 The broker then takes the slip to other insurers who successively write lines until the whole risk is accepted and underwritten by the underwriters.15 The broker then sends the assured a memorandum of the insurance bought, that is, the cover note, which is usually executed on a duplicate form of the instructions.16 Herewith the cover note means a written statement by an insurance agent confirming that coverage is in effect and is distinguished from a binder, which is prepared by the insurance company.17 The memorandum assumes the form of a closed or open cover note. A closed cover note contains full particulars as to cargo and shipment and the insurance has thus been made definite.18 An open cover note contains just general and indefinite terms and further particulars defining the cargo, voyage, or interest shipped under the insurance are to be declared before each shipment.19 The open cover note is issued where the assured requires an “open cover” or a “floating policy.”20

7.1.3

Insurable Interests

(1) Definition With relation to the term “insurable interest,” every person has an insurable interest who is interested in maritime transportation: For the object to be insurable interest, it should have legality, economic efficiency, determinacy of the loss or accident, and possibility of loss.

11

Id. Id. 13 Id. 14 Id. 15 Id. 16 Id. 17 Id. 18 Id. 19 Id. at 222. 20 Id. 12

7.2 Maritime Loss

503

In particular, a person is interested in marine navigation where he stands in any legal or contractual relation to the navigation or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss or by damage thereto, or by the detention thereof, or may incur liability in respect thereof. It should be noted that with regard to the insurable interest, the marine insurance contract covers not the actually shipped products but a relationship to those products. (2) Insurable Value Insurance value is an amount rated by economic value of the insurable interest. In marine insurance contract on goods or merchandise, the insurable value is the prime cost of the insured property, plus the expense of and incidental to shipping and the charges of insurance as a whole. It is customary to insure for an agreed value as a fixed insurable value which is about 110% of the CIF value of the property insured in order to cover incidental loss and out-of-pocket expenses as well as the CIF value of the goods when the loss occurs. (3) Insured Amount Insured amount is the amount actually insured in conclusion of insurance contract on the basis of insurable value. In respect of the relation between the insurable value and insured amount, the following relations are established: Full insurance means the case where the insured amount is equal to the insurable value. Under insurance means the case where insured amount is more than the insurable value. Over insurance means the case where insured amount is more than the insurable value. Co-insurance means the case where several insurers buy parts of an insurance policy so that the total amount insured does not exceed the insurable value. Double insurance means the case where more than two insurance contracts are concluded with the same period of insurance for the same insurable interests, the total of which exceeds the insurable value.

7.2

Maritime Loss

7.2.1

Concepts

Loss in a marine insurance contract is realized when the insurable interest of an insured is lost or injured due to any of the perils of the sea commonly ensured for, or perils that are specifically covered by the insurance contract. When goods are not lost but merely damaged, the assessment of the claim amount to be paid is generally determined by the cost of restoring the damaged cargo. If the cargo is lost, the claim payment would be the amount that costs to recover or replace the cargo. The insured’s entitlement to the claim amount is dependent on the type of loss he has suffered. The type of loss could be grouped as follows:

504

7 Marine Cargo Insurance

Loss is divided into direct loss and indirect loss according to whether the loss relates to the insurable interest directly or indirectly. A direct loss comes from actual damage to the insurable interest. This type of loss is normally the object of the insurance contract. An indirect loss is a financial loss incurred incidentally to a direct loss. In terms of cargo insurance, an indirect loss can be incurred, for example, when the delivery is delayed and therefore sales and profits are lost. Indirect losses are not typically included in insurance policy, but can be insured if they are specifically requested and covered by the general or specific terms of insurance policy. When the indirect loss is covered under the marine insurance, the insurance premium will be adjusted to a higher rate to cover their additional risk. Losses are grouped into physical or property loss and expenditure loss according to whether the actual loss or the expenditure loss occurred to the subject-matter insured. A physical loss is an actual loss incurred to the subject-matter insured which is physically damaged or lost. A cost loss is incurred to the insured being resulted by the covered risk that the insurer takes, which is same to the indirect loss. Losses could also be grouped into total loss and partial loss according to the degree of occurred loss. Total loss could further be divided into actual total loss and constructive total loss, and partial loss is further divided into general average and particular average. (1) Actual Total Loss Actual total loss occurs where the subject-matter insured is actually lost, the original nature of the subject-matter insured altered or lost and the insured ship or cargo is missing for a substantial period of time. (2) Constructive Total Loss Constructive total loss occurs when a total loss of subject-matter insured is highly likely to be inevitable but not definite. For example, ➀ the control of the insured subject-matter is lost and is not likely to be restored, or when even though it can be restored, the resorting cost is expected to exceed the price of cargo, or ➁ the cost to be spent for repairing and carrying to the destination exceeds the value of cargo in arrival. Constructive total loss is contractually constituted by duly abandoning the subject-matter insured to an insurer, but if it is not abandoned, it is only treated as a partial loss. Abandonment occurs when, although it is not a total loss caused by to a certain accident, the total loss is likely to be inevitable, the insured transfers all rights to the subject-matter insured to the insurer, and then makes a claim for total loss under the insurance contract.

7.2 Maritime Loss

505

(3) Particular Average Particular average occurs when the partial loss is incurred fortuitously to the insured himself. This includes direct harm to the ship or cargo, and the insured has to assume all of it. Thus, particular average is a partial loss caused by a peril insured against which rests on the insured himself/herself and is, not distributed over the whole of the interests at risk in the common adventure, which is different from general average. The common form of particular average is maritime loss not amounting to total loss. For example, the partial loss caused by the perils insured against, e.g., collision or fire, is the particular average. It does not necessarily follow that all particular average caused by a peril insured against is recoverable from insures. The insurance policy may be expressed not to cover partial loss under the terms of, e.g., “against total loss of vessel only.” (4) General Average Regarding the definition of general average, there is a general average act, when, and only when any extraordinary sacrifice or expenditure is internationally and reasonably made or incurred to secure the common safety for the purpose of preserving from imminent risks upon the property involved in a common maritime adventure. Herewith the term “general average” is quite separate from the marine cargo insurance; that is, the general average is based upon a relationship between the shipowner and all the shippers who have cargo shipped on the ship. At the moment, when a particular shipper’s cargo has to be sacrificed for the common safety against imminent risks to the navigation parties, the act of general average is declared by the master and then the shipowners and the other shippers whose cargoes have arrived safely are called upon to contribute toward the sacrificed cargo in proportion to the value of the ship and the shipped cargo. Herewith, the particular interest which has suffered the loss due to the general average act is entitled to a contribution from the other interest, which is called a general average contribution.21 General average is divided into two types, that is, “general average expenditure” and “general average sacrifice.” General average expenditure can occur when a ship runs aground and needs to pay a tug to refloat the vessel in order to deliver the cargo to the destination. General average sacrifice is a sacrifice of cargo by jettisoning cargo overboard to ensure that the ship can float and to reduce draft. Where the assured assumes a general average expenditure, according to the cargo insurance contract, he may be indemnified by the insurer in respect of the

21

Eun Sup Lee, supra note 138, at 224.

506

7 Marine Cargo Insurance

proportion of the loss attributing to him.22 When the assured has faced a general average sacrifice, he may recover from the insurer in respect of the whole loss without having enforced his right of contribution from the other party who is liable to contribute.23 Where the assured has paid or liable to pay a general average contribution in respect of the subject-matter insured, he may be indemnified that amount from the insurer.24 (5) Expenditure Loss Expenditure losses that might be incurred include salvage charges, particular charges, sue and labor charges, and survey fees. ➀ Sue and Labor Charges Sue and Labor charges are costs incurred by the insured or his agent to prevent damages or relieve cargo from damage occurring due to an insured risk, in accordance with his obligation to avert or minimize the loss. Also, this charge must be incurred only to insure the profits of the relevant subject-matter insured. Thus, costs spent for common profits of the interested parties belong to general average, not to sue and labor charges. All sue and labor charges are particular charges, but the former must be incurred by the insured or his agents and, in the case of goods, must be incurred before they are arrived at destination, while no such restriction applies to the particular charges. Thus, the term “particular charges” is more comprehensive, embracing certain disbursements which are not, strictly speaking, included in sue and labor charges. Warehousing costs of the insured cargo incurred at the refuge port before the cargo arrives at the destination would be sue and labor charges and the reconditioning charges at destination would be the particular charges. The nature of sue and labor charges differs from salvage charges in that while the former is incurred by the insured and/or his agents, for example, the master of the ship, the latter occurs out of the efforts of independent parties in minimizing loss to the subject-matter insured.25 ➁ Salvage Charges A salvage charge is a fee paid by the owner of the ship whose ship was at risk. The fee covers the costs of securing the vessel from an impending peril. The cost of a salvage fee is set before the vessel is rescued.

22

Id. Id. 24 Id. 25 Id. at 222. 23

7.3 Insurance Policies

507

➂ Particular Charges A particular charge is a fee incurred by or for the insured party to insure the safety or preservation of the subject-matter insured. It is a separate cost to general average and salvage costs. This is not included in a particular charge in the particular average; it needs to meet certain requirements. That is, the reason for the cost must be from insured risks, and it must be fortuitous charge; that is, it must not be an ordinarily incurred expense. ➃ Survey Fee When damage does occur, the reason of the damage and its extent are thoroughly investigated. In order to make the investigation, a fee called a survey fee will be charged.

7.2.2

Insurer’s Compensation

The insurer takes on the responsibility of compensating for any direct loss that is incurred during the period of risk, but does not have to compensate for indirect losses unless otherwise specifically described on the governing insurance contract. The insurer takes also on the responsibility of compensating for property loss, but not for expenditure losses other than salvage charges, particular charges, sue and labor charges, and survey fees, which are provided for in insurance contract clauses and laws. The insurer compensates the insured with the amount covering the property loss and expenditure loss, and, in principle, within the insured amount. Therefore, after salvage or general average has occurred, if cargo is totally lost, the maximum amount compensated from the insurer is limited to the insured amount. For sue and labor charge, however, if the total physical loss and sue and labor charges exceed the insured amount, it is additionally compensated by the insurer.

7.3

Insurance Policies

7.3.1

Types of Insurance Contract

(1) Valued Policies A valued policy is a policy which specifies the agreed value of the subjectmatter insured, while an unvalued policy26 states merely the maximum limit of the amount insured and leaves the insurable value to be ascertained subsequently.27 In

26

Unvalued policies are sometimes called open policies. This term should not be confused with the open cover. 27 Eun Sup Lee, supra note 138, at 226.

508

7 Marine Cargo Insurance

practice, valued policies are usually used and unvalued policies are rarely used.28 The main difference between these two types of policy is that in the case of a valued policy the value fixed by the policy is, in the absence of fraud and gross negligence, conclusive as the insurable value of the insurable interest, while in the case of an unvalued policy, the value of the insurable interest has to be ascertained by the production of invoices, vouchers, estimates, and other evidence.29 The difference between valued and unvalued policies is of great practical importance. In a valued policy, the buyer’s expected profits are normally included in the declared value, that is, insurable value, by adding a percentage of 10 or 15 percent to the invoice value and the incidental shipping and insurance charges of the goods. In an unvalued policy, the buyer’s expected profits are not included in the insurable value.30 The “insured value” is the agreed value (if any) specified in the policy; the “shipping value” is defined in identical terms with the definition of insurable value for unvalued policies. If there is the possibility of rising market prices during the transit of the goods, the assured who has covered the goods under an ordinary policy can obtain a so-called increased value policy.31 (2) Voyage Policies Policies are also classified as voyage, time, and mixed policies. Under a voyage policy, the subject-matter is insured in transit from one place to another.32 It is usual for the traded goods to be insured for a particular maritime voyage, but considering the combined transport and convenience, traders can take a mixed land and marine policy to cover the land or inland water parts of the carriage.33 In practice of international trade, under the Institute Cargo Clauses A, B, and C, insurance coverage is provided from warehouse to warehouse and, hence, the transit clause extends marine insurance to land risks incidental to the sea voyage.34 Under a time policy the subject-matter is insured for a fixed period of time. The policy will specify the period of time to cover the insurance.35 Under a mixed policy, the subject-matter is insured both for a particular voyage and, at the same time, a certain period of time.36 In the past, time policies were rarely used in international business transactions but are recently found more frequently.37 These

28

Id. Id. at 227. 30 Id. 31 Id. 32 Id. 33 Id. 34 Id. 35 Id. 36 Id. 37 Id. 29

7.3 Insurance Policies

509

policies may cover a period exceeding 12 months, and they often contain the “continuation clause” under which the parties agree that: “should the vessel at the expiration of this policy be at sea, or in distress, or at port of refuge or of call, she shall, provided previous notice be given to the underwriters, be held covered at a pro rata monthly premium to her port of destination.”38 (3) Floating Policies The floating policy lays down the general conditions of insurance, but not the particulars of the individual consignments intended to be covered. Floating policies operate in a very similar way to open coverage, except that an actual policy is in existence.39 These particulars are usually unknown to the assured when obtaining insurance. Notwithstanding this element of uncertainty, the floating policy covers automatically all shipments made thereunder and the assured is obliged to “declare” the individual shipments to the insurer promptly.40 Under a floating policy, the insured amount of each voyage is deducted from the total value of the insurance contract and the insured amount is automatically renewed after each voyage is completed.

Form of Declaration Please insure the following under the open policy in the name of Messrs Vessel From

To

. Marks

Description of Goods

Via CIF Value Insured Value

Please send cover note to us.

38

Id. Id. at 228. 40 Id. 39

510

7 Marine Cargo Insurance

7.3.2

Insurance Policies

(1) Outline The mother of insurance policies now used in the marine insurance market is Lloyd’s SG Policy, which is provided in the first appendix of the Marine Insurance Act 1906 of England. The SG policy as such was first adopted in 1779. It would appear that at the time of the policy form as adopted by Lloyd’s in 1779, separate forms were used for ship and goods, respectively, the former bearing the cipher “S” and the latter the cipher “G,” but after a short lapse of time a common form (SG) was prescribed.41

HULL

No The Institute of London Underwriters SPECIMEN FOR INFORMATION ONLY / POUR INFORMATION UNIQUEMENT

Companies Combined Policy Be it known that as well in their own Name, as for and in the Name and Names of all every other Person or Persons to whom the same doth, may, or shall appertain, in part or in all, doth make Assurance, and cause themselves and them and every of them, to be insured lost or not lost at and from

upon the body, Tackle, Apparel, Ordnance, Munition, Artillery, Boat and other Furniture, of and in the good Ship or Vessel called the

whereof is Master, under God, for this present Voyage, or whosoever else shall go for master in the said Ship, or by whatsoever other Name or Names the same Ship, or the Master thereof, is or shall be named or called, beginning the Adventure upon the said Ship, upon the said Ship, &c, as above,

and shall so continue and endure, during her Abode there, upon the said Ship, &c ; and further until the said Ship, with all her Ordnance, Tackle, Apparel, &c, and shall be arrived at as above, and until

41

Id. at 228.

7.3 Insurance Policies she hath moored at Anchor in good Safety : and it shall be lawful for the said Ship, &c, in this voyage to proceed and sail to and touch and stay at any Ports or Places whatsoever without Prejudice to this insurance. The said Ship, &c, for so much as concerns the Assured, by agreement between the Assured and Assurers in this policy are and shall be valued at

TOUCHING the adventures and Perils which we the Assurers are consented to bear and to take upon themselves in this Voyage, they are, of the Seas, Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves, Jettisons, Letters of Mart and Countermart, Surprisals, Takings at Sea, Arrests, Restraints and Detainments of all Kings, Princes and People, of what Nation, Condition or Quality soever, Barratry of the Master and Mariners, and all other Perils, Losses and Misfortunes, that have or shall come to the Hurt, Detriment or Damage of the subject matter of this Assurance : and in case of any Loss or Misfortune, it shall be lawful to the Assured, their Factors, Servants and Assigns, to sue, labor, and travel for, in and about the Defense, Safeguard and Recovery of the said subject matter of Assurance, without Prejudice to this Insurance ; to the Charges whereof the Assurers will contribute, each company proportionally according to the amount of their respective subscriptions hereto. And it is especially declared and agreed that no acts of the Assurer or Assured in recovering, saving, or preserving the property Assured, shall be considered as a waiver of acceptance of abandonment. And it is agreed by us, the Assurers, that this Writing or Policy of Assurance shall be of as much Force and Effect as the surest Writing or Policy of Assurance heretofore made in Lombard Street, or in the Royal Exchange, or elsewhere in London.

Warranted free of capture, seizure, arrest or detainment, and the consequences thereof or of any attempt thereat : also from the consequences of hostilities or warlike operations, whether there be a declaration of war or not : but this warranty shall not exclude collision contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of the nature of the voyage or service which the vessel concerned or, in the case of a collision, any other vessel involved therein, is performing) by a hostile act by or against a belligerent power and for the purpose of this warranty “power” includes any authority maintaining naval, military or air forces in association with a power. Further warranted free from the consequences of civil war, revolution, rebellion, insurrection, or civil strife arising therefrom or piracy.

NOW THIS POLICY WITNESSETH that we, the Assurers, the Companies whose names are set out overleaf, take open ourselves the burden of this Assurance each of us to the extent of the amount underwritten by us respectively and promise and bind ourselves, each Company for itself only and not the one for the other and in respect only of the due proportion of each Company, to the Assured, their executors, Administrators and assigns for the true performance and fulfillment of the Contract contained in this Policy in consideration of the person or persons effecting this Policy promising to pay a premium at and after the rate of IN WITNESS whereof, the assurers, have subscribed our

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Names and Sums Assured in London As hereinafter appears, and the Manager and Secretary of the Institute of London Underwriters has subscribed his name on behalf of each of us. N.B: The Ship and Freight are warranted free from Average under three pounds per cent, unless general, or the Ship is stranded, sunk or burnt.

Signed……………………………………………………… …… General Manager and Secretary The Institute of London Underwriters

Note: This policy must bear the seal of the Institute of London Underwriters Policy Department.

Since the SG Policy was officially adopted in 1779, as marine trade has developed, covered risks, and clauses of the SG Policy have become insufficient. To address this problem, the Technical & Clauses Committee representing Lloyd’s Underwriters’ Association and the insurance company’s market in London formed the special cargo insurance clauses in 1912, which has been used among the insurance-related parties. Such clauses were generalized, standardized, and added to the SG Policy. These clauses include Institute Cargo Clause “Free from Particular Average” (FPA), Institute Cargo Clause ”With Average” (WA), and Institute Cargo Clause “All risks” (A/R). These clauses were revised multiple times and finally revised in 1963 to a version that was world-widely used. Despite the amendments and modifications of these clauses, the rules were still not satisfactory to many parties concerned and public opinion was that it needed to be revised in order for general traders to easily understand the terms of the cargo insurance because the contents and expression of the clauses were quite difficult to understand even though the SG Policy had been in use over 200 years. In 1979, a report about marine insurance was made by United Nations Conference on Trade and Development (UNCTAD), and on the basis of this, the Institute Cargo Clauses A, B, and C were enacted in 1982. These Institute Cargo Clauses were updated by the Joint Cargo Committee made up of members of the International Underwriting Association and the Lloyds Market Association in 2008 and implemented from 2009. Institute Cargo Clauses (A) provides coverage for all risks of loss or damage to cargo, except those excluded by a few specific standard exclusions, such as the willful misconduct of the insured or ordinary wear and tear. The words “all risks” should be understood in the context of the “A” clause to cover “fortuitous loss,” but not “loss that occurs inevitably.”

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Institute Cargo Clauses (B) provide not only all of the cover that is available under Institute Cargo Clauses (C), but also covers loss of or damage to the subjectmatter insured if it can be “reasonably attributable to” earthquakes, lightening, washing overboard, etc. Institute Cargo Clauses (C) covers loss or damage to the subject-matter insured when it can be “reasonably attributable to” fire or explosion, a stranded, grounded, or capsized vessel, collision, or a discharge of cargo at a port of distress. Essentially, ICC (C) provides major casualty coverage during land, air, or water transport. (2) Illustration of Insurance Policy Form

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The contents to fill in the above policy are explained below: ➀ Policy No.: A serial number which the insurer specifies to the specified contracts. ➁ Name of insured (policyholder): Normally the exporting/importing company. In CIF export, unless there is no agreement or direction about the assured, the exporter nominated as the insured transfers the status of the insured to the importer or bank through the blank endorsement. ➂. Reference No.: Number insurer designates for his convenience in referring to the policy. ➃. Insured amount: The amount of coverage the policyholder obtains, and the maximum amount the insurer pays as claim amount when covered accidents occur. The insured amount is fixed by the agreement of both parties but must not be more than the insurable value. The currency used must be the same as that indicated on the letter of credit unless otherwise directed. ➄ Conditions and warranties: The covering scope should be determined by the agreement of the parties to the insurance contract, which should be based on the insurance terms on the letter of credit. ➅ Place of payment of claim amount: This is the place for the claim amount to be requested to the insurer. In export, the final destination port is generally indicated. In import, the relevant insurer is generally indicated. ➆ Notify party: This is the party to be notified of the insured accident when the losses are incurred by the accident insured against. In export, the name or address of an agency of the insurer in the final destination port is indicated. In import, the insurer’s name is indicated. ➇ & ➈ Local vessel, From: When the place of shipment is different from the loading location, that place is indicated here. “Local Vessel or Conveyance” is the local means of transporting. ➉ Ship or Vessel called the: Name of the ship to load the cargo is indicated here.  11 Arrived at: Month, date, and year loaded and departed, or is expected to be departed, are indicated here. Especially with export, indication herewith must be the same as specified on the bill of lading.  12 Port of shipment: The port to make the shipment of the cargo is indicated here.  13 Port of transshipment, if any: The port to make the transshipment, when the transshipment is required, is indicated here.  14 Port of discharging: The port to discharge the shipped cargoes is indicated here.  15 Final destination and transporting means: When the discharging port is different from the final destination because the final destination is inland, the final destination and transporting means are indicated according to transport clauses in insuring the cargo from the departing place to the final destination.  16 Statement of cargo insured: Name of cargo, quantity, and brand are indicated as those indicated on the letter of credit or bill of lading.

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 17 Place of issuance and date of insurance policy: The issuance date of the

insurance policy must be before that of bill of lading.  18 Number of issuance of insurance: Usually, the original policy is issued by duplicate. If an insurer pays-off by the first policy, the second policy automatically becomes invalid.  19 Signature of Insurer: A marine insurance policy must be signed by an insurer or his agent. But, if the insurer is corporate, the seal of the corporation will suffice.  20 Text clause: It is about the governing law, other insurances, contract, and deposition.  21 Marginal clause: It provides all the various actions and procedures that the insured must take, which is called an “important clause.” An example of the “text clause” is given as follows: “Notwithstanding anything contained herein or attached hereto to the contrary, this insurance is understood and agreed to be subject to English law and practice only as to liability for and settlement of any and all claims. This insurance does not cover any loss of or damage to the property which at the time of the happening of such loss or damage is insured by or would but for the existence of this Policy be insured by any fire or other insurance policy or policies except in respect of any excess beyond the amount which would have been payable under the fire or other insurance policy or policies had this insurance not been effected. We, hereby agree, in consideration of the payment to us by or on behalf of the Assured of the premium as arranged, to insure against loss damage liability or expense to the extent and in the manner herein provided. Whereof, I, the Undersigned of On behalf of the said Company have subscribed my name in the place specified as above, of the same tenor and date, one of which being accomplished, the others to be void, as of the date specified as above.”

An example of an “important clause” is as follows: “Important Procedure in the Event of Loss or Damage for Which Underwriters May Be Liable; Liability of Carriers, Bailees, or Other Third Parties

It is the duty of the assured and their agents, in all cases, to take such measures as may be reasonable for the purpose of averting or minimizing a loss

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and to ensure that all rights against carriers, bailers, or other third parties are properly preserved and exercised. In particular, the assured or other agents are required: 1. To claim immediately on the carriers, port authorities, or other bailees for any missing packages. 2. In circumstances, except under written protection, to give clean receipts where goods are in doubtful condition. 3. When delivery is made by container, to ensure that the container and its seals are examined immediately by their responsible official. If the Container is delivered damaged or with seals broken or missing or with seals other than as stated in the shipping documents, to clause the delivery receipt accordingly and retain all defective or irregular seals for subsequent identification. 4. To apply immediately for survey by carriers’ or other bailees’ Representatives if any loss or damage be apparent and claim on the carriers or other bailees for any actual loss of damage found at such survey. 5. To give notice in writing to the carriers or other bailees within 3 days of delivery if the loss of damage was not apparent at the time of taking delivery. Notice: The Consignees or other agents are recommended to make themselves familiar with the Regulations of the Port Authorities at the port of discharge. Instructions for Survey In the event of loss of damage which may involve a claim under this insurance, immediate notice of such loss or damage should be given to and a Survey Report obtained from the company office or agents specified in this Policy of Certificate. Documentation of Claims To enable claims to be dealt with promptly, the assured or their agents are advised to submit all available supporting documents without delay, including when applicable: 1. Original policy or certificate of insurance. 2. Original or certified copy of shipping invoices, together with shipping specifications and/or weight notes. 3. Original or certified copy of bill of lading and/or other contract of carriage.

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4. Survey report or other documentary evidence to show the extent of the loss or damage. 5. Landing account and weight notes at port of discharge and final destination. 6. Correspondence exchanged with the carriers and other parties regarding their liability for the loss of damage. In the event of loss or damage arising under this Policy, no claims will be admitted unless a survey has been held with the approval of this Company’s office or agents specified in this policy.”

7.3.3

Covered Risks

When choosing a marine cargo insurance policy, there are basically two options, that is, an insurance policy to cover the exhaustively illustrated risks by the terms of insurance contract only or to cover all risks. Under the policy to cover exhaustively illustrated risks, the insured is protected only against certain kinds of risks specifically indicated in the policy. These terms have been adopted by WA, FPA, ICC (B), and ICC (C). The burden of proof of casual relationship between the risk insured against and the caused loss goes to the insured and the insured must demonstrate the fact that the damage or loss of subject-matter insured was caused by the covered risks. The applicants for the marine cargo insurance as well as the insurer are required to be very careful in communicating of the material circumstances to the covered risks, in the course of fulfillment of applicant’s duty to disclose the material facts

In making marine cargo insurance contract, insured is required to disclose all material circumstance in measuring the covered risks to the insurer, and nondisclosure is the failure to communicate a material fact within the knowledge of the insured which the insurer has not the means of knowing or is not presumed to know surrounding the issue of the communication of the material facts, there have been disputes whether the material facts have been disclosed or not disclosed due to the lack of evidence about the communication. It means that it is important for the insurer to review very carefully the documents provided by a policyholder as part of the proposed process, asking appropriate questions, and recording important conversation in writing. The following case treats with this issue.

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Abstract42 . In Garnat Trading & Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation, marine insurers were unsuccessful in an appeal against a first instance decision of Mr Justice Christopher Clarke. The first instance judge had rejected the insurer’s defense to an insurance claim for the total loss or total constructive loss of a floating dock on the basis of non-disclosure and/ or unseaworthiness. The appellant’s case required the Court to exercise its limited powers to disturb findings of fact made by the first instance judge. Having considered the evidence available to Christopher Clarke J, the Court of Appeal found he had been entitled to make the determinations he had made and rejected the appeal. Background By way of recap, Garnat Trading & Shipping (Singapore) Pte Ltd (“Garnat”) owned a floating dock that was to be towed from Vladivostok to Cai Mep Port in Vietnam. Garnat was insured for the tow by a hull policy (apparently governed by English law) with Baominh Insurance Corporation (“Baominh”), a company based in Vietnam and specializing in marine insurance risks. During the course of a program to ready the floating dock for the tow a Towage Plan was prepared that included limitations as to the force of wind and height of wave that the floating dock was certified to withstand. Following the completion of the work, the floating dock sailed on June 23, 2006. On July 9, 2006, the floating dock had a close encounter with a typhoon and experienced wind and waves well in excess of the limitations specified in the Towage Plan. However, the floating dock escaped without significant damage. Subsequently, on July 12, 2006, the floating dock was caught by a near direct hit from a tropical storm. Again, the wind and waves were well in excess of the limitations specified in the Towage Plan, and on this occasion the floating dock sank. First Instance Decision It was Baominh’s case that Garnat had failed to disclose the section of the Towage Plan detailing the maximum permissible wind speed and wave height for the tow, and that these were material facts relied upon by Baominh in

42

Garnat Trading Shipping (Singapore) Pte Ltd v Baominh Insurance Corporation (2011) EWCA Civ 773 http://www.lexology.com/library/detail.aspx?g=ae8abd32-e589-4abc-9a16-78e 238b917f6.

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entering into the marine insurance contract. It was accepted by all parties and the Court that, pursuant to Section 18(1) of the Marine Insurance Act 1906 (“MIA”) non-disclosure is the failure to communicate a material fact (i.e., a fact relevant to a hypothetical prudent insurer when assessing the risk) within the knowledge of the insured which the insurer has not the means of knowing or is not presumed to know. Compliance with that duty requires a fair and accurate presentation of the risk, such that a prudent insurer is able to form proper judgment, and does not require minute disclosure of every material circumstance. Following a detailed review of the evidence, Christopher Clarke J accepted Garnat’s argument that the Towage Plan and the technical information contained therein had, in fact, been disclosed to Baominh and that there had been a fair presentation of the risk. Whether Baominh had paid any attention to the information, as was incumbent on them, was a different question. As a result of that finding of fact, it was unnecessary for Christopher Clarke J to provide a detailed analysis of other arguments put forward by Garnat although his judgment is a useful recap of some important principles. In short: 1. Pursuant to MIA Section 18(3)(c), an insured is not required to disclose information waived by the insurer (including where an insurer receives information that would prompt a reasonably careful insurer to make further inquiries and fails to do so). 2. Pursuant to MIA Section 18(3)(d), absent inquiry, there is no duty to disclose facts that are superfluous by reason of an express or implied warranty covering the same ground. 3. Even if there is non-disclosure of a material fact, an insurer must demonstrate that if disclosure had taken place, it would not have entered into the contract of insurance at all or at least not on the terms upon which it did enter into the contract (the requirement for an insurer to prove inducement) by the insurer (including where an insurer receives information that would prompt a reasonably careful insurer to make further inquiries and fails to do so). 4. Pursuant to MIA Section 18(3)(d), absent inquiry, there is no duty to disclose facts that are superfluous by reason of an express or implied warranty covering the same ground. 5. Even if there is non-disclosure of a material fact, an insurer must demonstrate that if disclosure had taken place, it would not have entered into the contract of insurance at all or at least not on the terms upon which it did enter into the contract (the requirement for an insurer to prove inducement).

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The insurer’s alternative argument was that, pursuant to MIA Section 39(1) there was an implied warranty that the floating dock would be seaworthy for the purpose of the contemplated voyage and by Section 39(4) a ship is deemed seaworthy if she is reasonably fit in all respects to encounter the ordinary perils of the voyage at the time of sailing on it. Baominh contended that the dock was unseaworthy at the time it sailed. There was no dispute as to the relevant legal principles. Christopher Clarke J analyzed the factual evidence in detail and was assisted by expert evidence, before concluding that the floating dock was, in all respects, seaworthy at the commencement of the voyage. Court of Appeal As an appeal principally on the facts, the Court made clear that it would be very cautious in overturning findings made by a first instance judge. Further, under Civil Procedure Rule 52.11, an appeal court is limited to a review of the decision of the lower court and is not permitted to rehear the case. Insurers faced an additional difficulty in the present case as their appeal required the Court to find that a fax and e-mail used in evidence by Garnat were fabrications manufactured to support its case (contrary to the findings of Christopher Clarke J). The appeal was rejected with the Court unconvinced by the numerous reasons put forward by insurers as to why findings of fact should be overturned. In particular, the Court found that the judge had been entitled to conclude that the principal witness on behalf of Garnat had been an honest witness. Further, the Court emphasized the fact that serious allegations relating to the alleged fabrication of the fax were neither pleaded nor put to the relevant witness, who never had the opportunity to rebut the allegations. Thus the Court was clearly of the view that if Baominh had not had the courage of its convictions to advance the case on that basis at trial, it was unattractive for the points to be taken on appeal. Comment Both the first instance and appeal decisions are very much confined to their unusual facts. The lack of written records by underwriters of key meetings and discussions proved fatal to the case at first instance (in light of other evidence available), and an appeal on the facts will always be a difficult prospect, even leaving aside that the insurer’s case required the court to find (an unpleaded) fraud on the part of Garnat. The case serves as a reminder to insurers of the importance of reviewing documents provided by a policyholder as part of the proposal process, asking appropriate questions, and recording important conversations in writing. The policy with the terms of all risks covers all risks without specifying the risks in the policy and may exclude only risks that are expressively excluded in

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the policy. It is also called a general risk policy and has been adopted by the terms of A/R and ICC (A). The burden of proof of casual relationship, under the terms of “all risks” or ICC (A), goes to the insurer. As long as any loss or damage is not demonstrated to have happened by a reason under the exemption clauses, the insurer must compensate the insured for the loss resulted from fortuitous external risks. The charts below will further clarify the differences of covered risks and excluded risks under these clauses. (1) Covered/Excluded Risks Under Institute Cargo Clauses (FPA, WA, and A/R)

Covered Risks Clause of ICC (A/R)

“This insurance is against all risks of loss of or damage to the subjectmatter insured but shall in no case be deemed to extend to cover loss

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damage or expense proximately caused by delay or inherent vice or nature of the subject-matter insured. Claims recoverable hereunder shall be payable irrespective of percentage.”

Covered Risks Clause of ICC (WA)

“Warranted free from average under the percentage specified in the policy, unless general, or the vessel or craft be stranded, sunk or burnt, but notwithstanding this warranty the underwriters are to pay the insured value of any package which may be totally lost in loading, transshipment or discharge, also for any loss of or damage to the interest insured which may reasonably be attributed to fire, explosion, collision or contact of the vessel and/ or craft and/or conveyance with any external substance (ice included) other than water, or to discharge of cargo at a port of distress. This clause shall operate during the whole period covered by the policy.”

Covered Risks Clause of ICC (FPA)

“Warranted free from particular average unless the vessel or craft be stranded, sunk, or burnt, but notwithstanding this warranty the underwriters are to pay the insured value of any package or packages which may be totally lost in loading, transshipment, or discharge, also for any loss of or damage to the interest insured which may reasonably be attributed to fire, explosion, collision or contact of the vessel and/or craft and/or conveyance with any external substance (ice included) other than water, or to discharge of cargo at a port of distress, also to pay special charges for landing, warehousing and forwarding if incurred at an intermediate port of call or refuge for which underwriters would be liable under the standard form of English Marine Policy with the Institute Cargo Clauses (WA) attached. This clause shall operate during the whole period covered by the policy.”

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(2) Covered Risks Under Institute Cargo Clauses (A)(B)(C)

Covered Risks Under ICC (A)

1. Risks Clause “This insurance covers all risks of loss of or damage to the subject-matter insured except as provided in Clauses 4, 5, 6, and 7 below.”

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Covered Risks Under ICC (B)

1. Risks Clause “This insurance covers, except as provided in Clauses 4, 5, 6, and 7 below, 1.1. Loss of or Damage to the Subject-Matter Insured Reasonably Attributable to 1.1.1. fire or explosion. 1.1.2. vessel or craft being stranded grounded sunk or capsized. 1.1.3. overturning or derailment of land conveyance. 1.1.4. collision or contact of vessel craft or conveyance with any external object other than water. 1.1.5. discharge of cargo at a port of distress. 1.1.6. earthquake volcanic eruption or lightning. 1.2. Loss of or Damage to the Subject-Matter Insured Caused by 1.2.1. general average sacrifice. 1.2.2. jettison or washing overboard. 1.2.3. entry of sea lake or river water into vessel craft hold conveyance container or place of storage. 1.3. Total Loss of Any Package Lost Overboard or Dropped While Loading on to, or Unloading from, Vessel or Craft.”

Covered Risks Under ICC (C)

1. Risks Clause “This insurance covers, except as provided in Clauses 4, 5, 6, and 7 below, 1.1. Loss of or Damage to the Subject-Matter Insured Reasonably Attributable to 1.1.1. fire or explosion. 1.1.2. vessel or craft being stranded grounded sunk or capsized. 1.1.3. overturning or derailment of land conveyance. 1.1.4. collision or contact of vessel craft or conveyance with any external object other than water. 1.1.5. discharge of cargo at a port of distress, 1.2. Loss of or Damage to the Subject-Matter Insured Caused by 1.2.1. general average sacrifice. 1.2.2. jettison.”

7.3 Insurance Policies

(3) Exemption Risks Under Institute Cargo Clauses

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Excluded Risks Under ICC (A)

4. General Exclusion Clause “In no case shall this insurance cover 4.1. loss damage or expense attributable to willful misconduct of the assured

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4.2. ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject- matter insured 4.3. loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses “packing” shall be deemed to include stowage in a container and “employees” shall not include independent contractors) 4.4. loss damage or expense caused by inherent vice or nature of the subjectmatter insured 4.5. loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above) 4.6. loss, damage, or expense caused by insolvency or financial default of the owners managers charterers or operators of the vessel where, at the time of loading of the subject-matter insured on board the vessel, the Assured are aware, or in the ordinary course of business should be aware, that such insolvency or financial default could prevent the normal prosecution of the voyage 4.7. loss, damage, or expense directly or indirectly caused by or arising from the use of any weapon or device employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter.” 5. Unseaworthiness and Unfitness Exclusion Clause 5.1. In no case shall this insurance cover loss, damage, or expense arising from 5.1.1. unseaworthiness of vessel or craft or unfitness of vessel or craft for the safe carriage of the subject-matter insured, where the assured are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein 5.1.2. unfitness of container or conveyance for the safe carriage of the subject-matter insured, where loading therein or thereon is carried out prior to attachment of this insurance or by the assured or their employees and they are privy to such unfitness at the time of loading 5.2. Exclusion 2.1.1 above shall not apply where the contract of insurance has been assigned to the party claiming hereunder who has bought or agreed to buy the subject-matter insured in good faith under a binding contract 5.3. The insurers waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination.

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6. War Exclusion Clause “In no case shall this insurance cover loss damage or expense caused by 6.1. war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power 6.2. capture seizure arrest restraint or detainment (piracy excepted), and the consequences thereof or any attempt thereat 6.3. derelict mines torpedoes bombs or other derelict weapons of war.” 7. Strikes Exclusion Clause “In no case shall this insurance cover loss damage or expense 7.1. caused by strikers, locked-out workmen, or persons taking part in labor disturbances, riots, or civil commotions 7.2. resulting from strikes, lock-outs, labor disturbances, riots, or civil commotions 7.3. caused by any act of terrorism being an act of any person acting on behalf of, or in connection with, any organization which carries out activities directed toward the overthrowing or influencing, by force or violence, of any government whether or not legally constituted 7.4. caused by any person acting from a political, ideological or religious motive.”

Excluded Risks Under ICC (B)

4. General Exclusion Clause “In no case shall this insurance cover 4.1. loss damage or expense attributable to willful misconduct of the assured 4.2. ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject-matter insured 4.3. loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses “packing” shall be deemed to include stowage in a container and “employees” shall not include independent contractors)

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4.4. loss damage or expense caused by inherent vice or nature of the subjectmatter insured 4.5. loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above) 4.6. loss, damage, or expense caused by insolvency or financial default of the owners managers charterers or operators of the vessel where, at the time of loading of the subject-matter insured on board the vessel, the assured are aware, or in the ordinary course of business should be aware, that such insolvency or financial default could prevent the normal prosecution of the voyage 4.7. loss, damage, or expense directly or indirectly caused by or arising from the use of any weapon or device employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter 4.8. deliberate damage to or deliberate destruction of the subject-matter insured or any part thereof by the wrongful act of any person or persons.” 5. Unseaworthiness and Unfitness Exclusion Clause 5.1. “In no case shall this insurance cover loss, damage, or expense arising from 5.1.1. unseaworthiness of vessel or craft or unfitness of vessel or craft for the safe carriage of the subject-matter insured, where the assured are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein 5.1.2. unfitness of container or conveyance for the safe carriage of the subject-matter insured, where loading therein or thereon is carried out prior to attachment of this insurance or by the assured or their employees and they are privy to such unfitness at the time of loading 5.2. Exclusion 2.1.1 above shall not apply where the contract of insurance has been assigned to the party claiming hereunder who has bought or agreed to buy the subject-matter insured in good faith under a binding contract 5.3. The insurers waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination.” 6. War Exclusion Clause

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“In no case shall this insurance cover loss damage or expense caused by 6.1. war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power 6.2. capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat 6.3. derelict mines torpedoes bombs or other derelict weapons of war.” 7. Strikes Exclusion Clause “In no case shall this insurance cover loss damage or expense 7.1. caused by strikers, locked-out workmen, or persons taking part in labor disturbances, riots, or civil commotions 7.2. resulting from strikes, lock-outs, labor disturbances, riots, or civil commotions 7.3. caused by any act of terrorism being an act of any person acting on behalf of, or in connection with, any organization which carries out activities directed toward the overthrowing or influencing, by force or violence, of any government whether or not legally constituted 7.4. caused by any person acting from a political, ideological, or religious motive.”

Excluded Risks Under ICC (C)

4. General Exclusion Clause “In no case shall this insurance cover 4.1. loss damage or expense attributable to willful misconduct of the assured 4.2. ordinary leakage, ordinary loss in weight or volume, or ordinary wear and tear of the subject-matter insured 4.3. loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses “packing” shall be deemed to include stowage in a container and “employees” shall not include independent contractors) 4.4. loss damage or expense caused by inherent vice or nature of the subjectmatter insured

7.3 Insurance Policies

531

4.5. loss damage or expense caused by delay, even though the delay be caused by a risk insured against (except expenses payable under Clause 2 above) 4.6. loss, damage, or expense caused by insolvency or financial default of the owners managers charterers or operators of the vessel where, at the time of loading of the subject-matter insured on board the vessel, the Assured are aware, or in the ordinary course of business should be aware, that such insolvency or financial default could prevent the normal prosecution of the voyage 4.7. loss, damage, or expense directly or indirectly caused by or arising from the use of any weapon or device employing atomic or nuclear fission and/or fusion or other like reaction or radioactive force or matter 4.8. deliberate damage to or deliberate destruction of the subject-matter insured or any part thereof by the wrongful act of any person or persons.” 5. Unseaworthiness and Unfitness Exclusion Clause 5.1. “In no case shall this insurance cover loss, damage or expense arising from 5.1.1. unseaworthiness of vessel or craft or unfitness of vessel or craft for the safe carriage of the subject-matter insured, where the assured are privy to such unseaworthiness or unfitness, at the time the subject-matter insured is loaded therein 5.1.2. unfitness of container or conveyance for the safe carriage of the subject-matter insured, where loading therein or thereon is carried out prior to attachment of this insurance or by the Assured or their employees and they are privy to such unfitness at the time of loading 5.2. Exclusion 2.1.1 above shall not apply where the contract of insurance has been assigned to the party claiming hereunder who has bought or agreed to buy the subject-matter insured in good faith under a binding contract 5.3. The insurers waive any breach of the implied warranties of seaworthiness of the ship and fitness of the ship to carry the subject-matter insured to destination.” 6. War Exclusion Clause

532

7 Marine Cargo Insurance

“In no case shall this insurance cover loss damage or expense caused by 6.1. war civil war revolution rebellion insurrection, or civil strife arising therefrom, or any hostile act by or against a belligerent power 6.2. capture seizure arrest restraint or detainment, and the consequences thereof or any attempt thereat 6.3. derelict mines torpedoes bombs or other derelict weapons of war.” 7. Strike Exclusion Clause “In no case shall this insurance cover loss damage or expense 7.1. caused by strikers, locked-out workmen, or persons taking part in labor disturbances, riots, or civil commotions 7.2. resulting from strikes, lock-outs, labor disturbances, riots, or civil commotions 7.3. caused by any act of terrorism being an act of any person acting on behalf of, or in connection with, any organization which carries out activities directed toward the overthrowing or influencing, by force or violence, of any government whether or not legally constituted 7.4. caused by any person acting from a political, ideological, or religious motive.”

(4) Covered/Excluded Risks Under Institute Cargo Clauses (A)(B)(C) by Comparison

7.3 Insurance Policies

533

534

7 Marine Cargo Insurance X (clause

Unseaworthiness

4.1)

X (clause 4.1 )

War

○

X (clause 3.10)

Terrorists

○

○

Strikes

○

○

Shortage of Labor

○

X (clause 3.7)

X (clause

X (clause

X (clause

5.1)

5.1)

5.1)

X (clause

X (clause

X (clause

6 )

6 )

6 )

X (clause

X (clause

X (clause

7.3)

7.3)

7.3)

X (clause

X (clause

X (clause

7 )

7 )

7 )

○

○

○

(5) Additional Coverage By buying an insurance policy with AR in ICC 1963 or ICC (A) in ICC 2009, the insured can get indemnification against the loss resulting from all risks under the insurance terms. The insured, however, can make use of additional coverage against additional insurance premiums to an insurer under the ICC (WA) and ICC (FPA) in ICC 1963, and ICC (B) and ICC (C) in the ICC 2009. The following additions can be made in insurance agreements to provide for more comprehensive coverage.

7.3 Insurance Policies

Theft, Pilferage & Non-Delivery (TPND)

Rain and/ or Fresh Water Damage (RFWD) Breakage Sweating & Heating Damage

535

In conditions other than ICC (A) and A/R, it can be compensated for if a TPND clause is added. Herewith, theft means general stealing, pilferage means partial loss by burglary, and non-delivery occurs when all of the cargo does not arrive at a destination Damage from fresh water and rain can be covered additionally with this coverage. ICC (B) only covers “damage caused by sea water, lake water and river water into storehouses in a ship, barge or hold”. Rain must be insured against separately additionally to ICC (B) or ICC (C). Fragile cargo including glass must be insured separately Damage caused by sweating of moisture in pier, or heating moisture of the products including grain due to poor ventilation could be insured against additionally. Herewith, leakage means the damage caused due to liquid or gas leaking from

Leakage / Shortage

its containers, and the shortage means reduction of weight or short quantity. However, ordinary linkage and shortage of the products including grain and liquid cargo are not usually covered, and thus leakage and storage must be extraordinary for being covered.

Jettison & Washing Overboard Denting / Bending

Spontaneous

Jettison and washing over deck can be insured against when the cargo is allowed to be shipped on the deck. Dented or bent due to shock in transport can additionally be insured against

It can additionally been insured against.

Combustion Mold & Mildew

It can be insured against in case of damage by mold and mildew. Damage of rust due to seawater or fresh water can additionally be insured

Rust

against. Damage caused by any hook and hole in discharging can additionally be insured

Hook and Hole

against.

536

7 Marine Cargo Insurance

7.4

Cargo Insurance Under Letter of Credit

7.4.1

Insurance Clauses on Letter of Credit

Insurance terms on letters of credit are as follows, for example: INSURANCE POLICY/CERTIFICATE IN DUPLICATE COVERING INSTITUTE CARGO CLAUSES (A), INSTITUTE STRIKE CLAUSES, INSTITUTE WAR CLAUSES BLANK ENDORSED FOR 110 PCT OF CIF VALUE, CLAIMS PAYABLE AT DUBAI WAREHOUSE TO WAREHOUSE.

With regard to the term “certificate,” the policyholder concludes an “open insurance” policy with an insurance company for a long-term period of time, and on the basis of this insurance contract a certificate is issued. It has the same validity as an actual insurance policy. In many cases of cargo insurance, shipments are not insured individually; instead, it is common for a merchant to arrange for his broker to implement a long-term insurance contract (termed “open cover”) against which all shipments can be declared and certificates of insurance are issued. Usually in insurance terms on letters of credit, basic conditions, for example, ICC (A), should be specified, and additional conditions (e.g., “Institute War Clauses” and “Institute Strike Clauses”) that are usually excluded from insurer’s liability should also be specified. The additional risks require an additional insurance premium to be insured against. “Blank endorsed 110% of CIF value” means that the insured amount is the invoice amount plus 10%. The 10% can be considered the expected profit resulting from the transaction at issue. The terms “to order of endorsee” or “blank endorsed” means that the right to make claim is not affixed to a specified person and the endorsed person can make claim for the compensation to the insurer when the loss occurs from the covered risks. The term “claim payable at Dubai” means that if an occurred accident is covered under the insurance policy, the place of payment will be at Dubai. The term “warehouse to warehouse” means that the coverage of the policy should begin when cargo leaves the exporter’s warehouse for ocean transportation and continues until cargo arrives at the importer’s warehouse. The insurance will also terminate if the cargo has been unloaded for sixty days, regardless of whether it is warehoused.

7.4.2

Insurance Documents Under Letter of Credit

Insurance documents are required as follows under documentary letter of credit: ➀ They must be issued and signed by an insurance company, underwriter, or agent.

7.4 Cargo Insurance Under Letter of Credit

537

➁ If it is specified that more than two sets of original documents were issued, all sets of originals must be presented unless the letter of credit authorizes otherwise. ➂ Unless the letter of credit authorizes, cover notes issued by the insurance broker are not accepted. ➃ Certificates on the basis of blanket insurance are accepted. ➄ Unless there is another agreement on the letter of credit, the currency on insurance documents must be the same as specified in the letter of credit. ➅ Unless there is another agreement on the letter of credit, the minimum insured amount specified on the insurance documents must be CIF or CIP plus 10%. ➆ Unless there are other terms on letter of credit, the insurance policy is valid from loading on board, dispatch, or trust, and banks do not accept the insurance document specifying a later issuing date than the on board date, dispatch, or trust for shipment. In fact, in export cargo insurance, exporters sometimes obtain insurance after the shipping date. But, since this is a cause to reject to pay the claim amount, the insurance company should indicate a contract date not later than the shipping date on the policy, and indicate “warranted no loss reported as of… (actual date of contract).” If there was an accident before the date the insurance was enacted, and the insured was not aware of it, it should be compensated for by the coverage. ➇ The letter of credit must provide the kinds of insurance required and, if necessary, additional risks to be insured against. An insurance document will be accepted without regard to any risks that are not covered if the credit uses imperfect terms such as “usual risks” and “customary risks.”43 ➈ Unless there is another agreement on the letter of credit, banks accept the document indicating that it is subject to “franchises” or “excess” clauses. For example, for grain it is sometimes necessary to add specifications of “shortage.” For example, in the cargo insurance premium table, a contract is allowed to specify “in excess of 1%”or “in excess of 5%.” Despite such specifications, the bank accepts the document as it is stated.44 ➉ If the letter of credit includes the term “all risks,” the bank assumes any risk that is not specifically insured without liability, regardless of the “all risks” specification.45

43

UCP600 art. 28. Id. 45 Id. 44

538

7.5

7 Marine Cargo Insurance

Insurance Premium

An insurance premium is the cost of obtaining insurance coverage, paid as a lump sum, or in installments throughout the period of an insurance contract. If the premium fails to be paid, the coverage will automatically be canceled, but can be restored if it is paid within a certain grace period after cancelation. Rate of premium means the proportion of the premium to the insured amount. Factors affecting the computation of a cargo insurance rate include features of cargo including kinds of cargo and condition, voyage including route, departure, and destination, insurance conditions, transporting means, level of ship, damage percentage, etc. Each insurance company has its own formula to determine premium rates, and because of this, it is recommended to the shipper to shop around for the best rates for the coverage desired.

7.6

Claims

Under certain terms of the trade contract including CIF terms, the exporter arranges insurance, procures the appropriate policy or certificate, and sends it to his customer with other relevant documents such as the bill of lading and the commercial invoice. Typical actions that the insured is required to take before making claims to the insurer are all appropriate steps to minimize damage, and the sue and labor clause may entitle him to make payment for any expenses involved in carrying out such operations. The insured, as soon as he becomes aware of loss or damage, should send written notice to the insurance company or their agent in order to arrange a survey and obtain the necessary survey report. The Corporation of Lloyd’s for insurance has their agents in major cities throughout the world, and it is the usual practice for policies to state that, in the event of loss or damage, settlement of claims will be facilitated if Lloyd’s agents are called in to hold a survey. Inherent vice and nature of the subject-matter insured as the excluded risk under the ICC(A)

To exempt the insurer’s liability from loss caused by the inherent vice and nature of the subject-matter insured under the ICC(A)’s exception clauses, evidence will be required to establish the sea state at the time of the loss does not merely fall within the scope of what was reasonably foreseeable but was such as would be considered relatively benign on the voyage being undertaken. Considering the judicial interpretation, it may be very complicated for insurers to rely upon an inherent vice and nature exclusion. The following case treats with this issue.

7.6 Claims

539

Marine Insurance46 (All risks insurance) In Global Process Systems Inc & Anr v Syarikat Takaful Malaysia Berhad, the Court of Appeal has dealt a blow to insurers by narrowing the scope of the “inherent vice exclusion” and in so doing cast doubt on the decision in Mayban General Insurance v. Alstom Power Plants. The Court of Appeal, reversing the first instance decision of Mr Justice Blair, discussed in the August 2009 issue of Insurance Law Monthly, has found that the crucial question is not what might be reasonably foreseeable as the ordinary incidents of a sea voyage but what would be bound to occur in the course of a voyage of the type being undertaken at the time that the loss eventuates. The case is discussed by David Turner QC and Clare Dixon of Four New Square. Global Process Systems: the Facts The Cendor MOPU was an offshore oil rig. It consisted of a working platform which could be raised and lowered on the rig’s three legs according to the depth of the sea in which the rig was positioned. The legs each weighed about 404 tons and were about 300 feet in length. In July 2005, the rig began a journey from Texas to Malaysia. A few days after the rig departed from a stop in South Africa one of the legs broke off. The following day, the other two legs broke off. The technical explanation for the failures was common ground: fatigue cracking propagated to a critical point, so that when a “final straw” event occurred (when roll angle, direction of motion, and the location of the crack all converged) the leg gave way. It was also common ground that the weather and sea conditions encountered during the tow were within parameters which were reasonably foreseeable. The Policy and the Dispute The claimants obtained all risks insurance to cover the rig from the commencement of loading operations in Texas to the completion of discharge in Malaysia. The policy incorporated ICC(A) terms and, therefore, included an exclusion which stated: “In no case shall this insurance cover…loss, damage or expense caused by inherent vice or nature of the subject-matter covered.”

46

Global Process Systems Inc v Syarikat Takaful Malaysia Bhd (The Cendor Mopu). (2001) Lloyd’s Rep. I.R.302 www.4newsquare.com/content/Publications/85.pd.

540

7 Marine Cargo Insurance

The First Instance Decision The trial judge, Mr Justice Blair, considered two issues: (i) fortuity and (ii) inherent vice and proximate cause. On the basis of expert evidence it was found that each leg was subject to a 99.6% risk of failure in the course of the voyage. Notwithstanding this, the Judge found that risk of one or more of the legs breaking was a fortuity and not an inevitability. This was because, while it was highly probable that the legs would break in the course of the voyage, it was not inevitable and the legs would not have failed without the intervention of a “final straw event.” On the second issue, the Judge found against the insured. He said: “I felt that the defendant’s expert Mr Colman came closest to expressing the view of a “business or seafaring man” (Noten B.V. v. Harding, …, per Bingham LJ). As he put it—“I don’t think that these legs were ever going to make it round the Cape.” That in my opinion is the reality of this case.” He therefore concluded that the legs failed because they were not capable of withstanding the ordinary incidents of the voyage and, as such, there was never any real chance that the legs would survive the voyage. Therefore, the proximate cause of the loss was the inherent vice of the legs themselves. The Arguments on Appeal There was no appeal from the decision on fortuity and so the appeal focused entirely upon whether the proximate cause of the loss was an inherent vice in the legs themselves such that the loss was excluded from cover. The insured argued that if the sea was in any way a cause of the loss then the proximate cause of the loss was the perils of the sea and not inherent vice in the legs. In making this submission the insured relied upon the decision in The Miss Jay Jay *1985+ 1 Lloyd’s Rep 264. The Miss Jay Jay was a vessel which was found to be unseaworthy by reason of latent defects in its design. Despite this, Mustill J. (as he then was) found that an exclusion in the policy relating to latent defects in design or construction did not apply because the immediate cause of the loss was the bad (but not exceptional) weather conditions. His decision was upheld on appeal ([1987] 1Ll Rep 32) although on slightly different grounds: the Court of Appeal considered that both the vessel’s lack of seaworthiness and the adverse sea conditions were proximate causes of the loss (rather than just the latter); since the adverse sea conditions were an insured peril, and lack of seaworthiness was not excluded, the policy responded to the loss.

7.6 Claims

541

In the present case, insurers’ argument was summarized by Waller LJ as follows: “if the actions of the sea are no more than would reasonably have been contemplated on that particular voyage, then the cause of the loss must be inherent vice or the nature of the subject-matter.” In making this submission insurers found support in the decision Moore-Bick J (as he then was) in Mayban that: “If the conditions encountered by the vessel were more severe than could reasonably have been expected, it is likely that the loss will have been caused by the perils of the sea… If, however, the conditions encountered by the vessel were no more severe than could reasonably have been expected, the conclusion must be that the real cause of the loss was the inherent inability of the goods to withstand the ordinary incidents of the voyage.” The decision in Mayban had been the subject of trenchant criticism by academic commentators: Professor Bennett suggested, in the 2nd edition of his book “The Law of Marine Insurance” that the effect of the decision was that “that cover under the Institute Cargo Clauses (A), the most generous standard cargo cover, is confined in respect of bad weather damage to wholly exceptional adverse conditions.” The Decision on Appeal In finding for the insured, Lord Justice Waller (who gave the leading judgment) made three central findings. First, that inherent vice can be a proximate cause even though there is another factor which contributes to the loss. He cited an example given by Byles J in Koebel v Saunders of calves which are unfit to bear the agitation of the sea: if the calves die or are injured at sea then there are two causes of that loss: the constitution of the calves themselves (inherent vice) and the agitation of the sea. In such circumstances, the proximate (but not the sole) cause of the loss would be the constitution of the calves and the policy would not respond. Second, inherent vice may not be a proximate cause if there is an eventuality or accident from without that causes the loss. Thus, in the current case, case, the insurance contemplated that the condition of the legs was such as they would suffer from fatigue. That was always likely to be a cause if the legs snapped but the fact that it was a cause could not have been understood by the parties to exclude cover altogether. Finally, the correct question to ask was: “Was the cause an inability to withstand the ordinary incidents of the voyage?” Waller LJ considered that the answer was not to be found by reference to what might be reasonably foreseeable as the ordinary incidents of that voyage, but by reference to wind or wave which, it would be the common understanding, would be bound to occur as the ordinary incidents on any normal voyage of the kind being undertaken. Waller LJ said that this was not to equate inherent vice with certainty, but recognized that an insurer would not cover damage to cargo

542

7 Marine Cargo Insurance

flowing from the motion of a vessel in such seas, even if it was not certain to occur. (If the reader of this article is confused by the preceding two sentences, such confusion is understandable: our analysis is that Waller LJ was drawing a distinction between what ordinary seafaring people would expect to be bound to occur on the one hand; and what was scientifically or empirically certain on the other.) Waller LJ thus considered the test applied by Moore-Bick J in Mayban to be too wide in scope. In the present case, he considered that the “final straw” event (or the “leg-breaking wave”) was not bound to occur in the way that it did on any normal voyage of the type being undertaken by the rig. As a result, it was a risk against which the rig owners had insured. End Note The Court of Appeal expressed some uncertainty as to whether there was sufficient evidence for them to resolve the appeal, applying the correct test. Ultimately, they decided that there was no need for the case to be remitted and that they could conclude that the inherent vice defense failed. The Court of Appeal’s decision will undoubtedly make it harder for insurers to rely upon an inherent vice exclusion. In the context of marine insurance, evidence will be required to establish that the sea state at the time of the loss did not merely fall within the scope of what was reasonably foreseeable but was such as would be considered relatively benign on the voyage being undertaken. The insured will be concerned with claiming for the loss under three basic headings, namely partial loss, total loss, or constructive total loss. The first two are self-explanatory. Constructive total loss applies, for example, when the consignment may not be completely damaged, but is in such a state that it would cost more than putting it back in its original form and it might therefore have to be sold for scrap. For total loss of part of the cargo, the claim calculation would be simple, like the following example: 10 cartons of products, which should have A gross arrived value of

US$5,000.00

Actual consignment arrived has a value of (owing to total loss of 1 carton)

US$4,500.00

Amount of loss

US$ 500.00

Amount of loss = US$500 or 10% Therefore claim based upon 10% of insured value, say 10% of US$5,000.00 = US$500.00

7.6 Claims

543

An example of partial loss, if 1 carton was totally lost and 1 carton was not lost but was in fact damaged, might be as follows: Gross arrival value should be

US$5000.00

Totally damaged 1 carton

US$500.00

Actual arrival value of 8 cartons which is sound

US$4000.00

Damaged amount of 1 carton (i.e., damaged carton realizes US$50)

US$450.00

Actual consignment arrived has a value of (owing to total loss of 1 carton and partial loss of 1 carton out of 10 cartons)

US$4050.00

Amount of partial loss of 1 carton = US$450.00 or 9% of gross arrived value Total Amount of Loss (total loss of 1 carton + partial loss of 1 carton) = US$950.00 or 19% of gross arrived value US$5,000.00

Claims should be filed with the insurance company at its nearest agency as soon as possible. The insured should verify the terms of policy or certificate to see if any express instructions pertaining to claims are contained therein, but he would normally be expected to send the following documents: ➀ Insurance policy or certificate suitably endorsed. ➁ Survey report. ➂ Possibly and outturn report. ➃ Master’s protest-usually a formal statement commenting on the conditions and causes relating to the loss. ➄ Bill of lading. ➅ Invoice. ➆ Accounts sales if there are proceeds of sales. ➇ Any correspondence with shipowner or other third parties. ➈ Letter of Subrogation which transfers any rights of claimant against carriers to the insurer.

544

7 Marine Cargo Insurance

Letter of Subrogation

Vessel: Voyage: Sum Insured:

In consideration of your paying us for a total loss on the under-mentioned goods insured with you (in virtue of which payment you will become subrogated to all our property, rights and interests in the said goods and in any monies payable or recoverable in respect thereof on account of general average, salvage, or otherwise howsoever) we hereby authorize you to make use of our name for the purpose of any proceedings or measures, legal or otherwise, which you may think fit to take in respect of the said goods, and we declare that we were the owners thereof at the time of the loss, and we undertake to furnish you with all the papers and correspondence in our possession or control relating thereto, and to make any affidavits and to give any oral evidence which we can properly make or give, and generally to render to you any such assistance as you may from time to time reasonably require, in connection with any such proceedings or measure, you indemnifying us against all liability costs charges and expenses incurred in connection therewith and with the use of our name therein.

Dated

day of

Description of Goods

7.7

Application to Business Field

With a marine insurance company or its agent, or through the insurance broker such as Lloyd’s broker, the exporter would make the marine cargo insurance contract as follows:

7.7 Application to Business Field

545 LG Insurance Co., Ltd.

CERTIFICATE OF MARINE CARGO INSURANCE Assured(s), etc

Dr.COFFEEXTRACT

Certificate No.

002599A65334

Ref. No. Invoice No. 1005 L/C No. ILC10051234567

Claim, if any, payable atʁ Claims are payable in

Amount insured USD 531,300 (USD483,000 XC 110%)

Survey should be approved by

Conditions

THE SAME AS ABOVE Local

Vessel

Conveyance

or «From(interior port or place of * INSTITUTE CARGO CLAUSE(A) 1982 * CLAIMS ARE PAYABLE IN AMERICA loading) IN

Ship or Vessel called the

Sailing on or about

HANJIN MALTA at and from

THE CURRENCY OF THE DRAFT.

JUNE 30, 2023 BUSAN, transshipped at

KOREA arrived at

HAIKOU,

thence to

CHINA Goods and Merchandises

Subject to the following Clauses as per back

LUVIUS Premium-Gold Lifting Cream-50

hereof institute Cargo Clauses Institute War

DACAPO-Elegante Brightening Effect Softner

Clauses(Cargo) Institute War Cancellation

DACAPO-Elegante Brightening Enrich Cream

Clauses(Cargo)

DACAPO-Infinite Time Essence

Institute Strikes Riots and Civil Commotions

DACAPO-Remember Triple Balance Essential Serum

Clauses

Miracle ATO-Aroma Moisture Body Wash

Institute Air Cargo Clauses (All Risks)

Miracle ATO-Pure Moisture Cream

Institute Classification Clauses

Miracle AC-Red2 White Pore Serum

Special Replacement Clause (applying to machinery)

17,000PCS

Institute

Radioactive

Contamination

Exclusion Clauses Co-Insurance Clause Marks and Numbers as

546

7 Marine Cargo Insurance

Learning Assignments

1. Communications and negotiations with (assumed) marine insurance company, or its agent, to make a cargo insurance contract under the terms of the sales contract and the letter of credit made and issued in Chaps. 4 and 5, respectively. 2. Special factors to be considered to make the cargo insurance contracts with the environment-friendly made products which are particularly easy to be damaged or open to depreciation in value during the international transportation, for example, due to weather conditions. 3. Factors to be considered in making contract of insurance from the viewpoint of risk management in doing international trade.

Bibliography DiMatteo LA, Dhooge LJ (2005) International business law—transactional approach, 2nd edn. West Dover V (1982) A handbook to marine insurance, 8th edn. Witherby & Co. Ltd. Fellmeth AX (2009) The law of international business transactions. West Folsom RH, Gordon MW, Spanogle JA Jr, Fitzgerald PL (2009) International business transactions: contracting across borders. West Kouladis N, Fellmeth AX (2009) The law of international business transactions. West

8

Foreign Exchange Risks

Learning Objectives

For the companies to be successful in proceeding with their international business transactions, they should make the proper management of foreign exchange risks. The companies should be very careful to examine the foreign exchange market considering the unexpected fluctuation of the foreign exchange rate between exporting country’s currency and importing country’s currency. The hands-on workers are required to maintain the stability in international trade operations through avoidance of the foreign exchange risks, and, at the same time, for assuming deliberately the risks to secure the positive profit from the fluctuation of the foreign exchange market. The workers should also be serious to make the positive management of foreign exchange risks, because it can create the value-added to the main business transactions or can cause a loss to the physically successful business transactions. They should also consider their partner’s contractual situation relating to foreign exchange risks trying to share the partner’s risks, particularly, when they are so critical to their sustainability. They should always remember that without the respect to their business partner’s commercial or contractual situation, they could not be successful in doing their business with them. It is recommended for the workers in doing international business transactions to share the contractually unilateral benefit or loss with their partners for the successful business in the end. This chapter treats with the following issues: 1. Function of foreign exchange transactions viewed from the international business transaction. 2. Importance of forward exchange transactions from the viewpoint of risk management of companies involved in international trade.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_8

547

548

8 Foreign Exchange Risks

3. Necessity to do forward exchange transactions in international trade; particularly, in the case of long-term transaction contracts. 4. Foreign exchange position, and management of foreign exchange risks.

8.1

Foreign Exchange in International Trade

8.1.1

Foreign Exchange Risks

Almost all companies involved in international trade face exchange rate risk. Under the uncertainty of foreign exchange markets, companies failing to hedge exchange rate risk are inevitably exposed to financial difficulties.1 Exchange rate risk is necessarily related to profit or loss possibilities: Financial profits can be secured if changes in the exchange rate are in compliance with the trader’s expectations, while losses can be realized if changes in the exchange rate are in contrast with expectations.2 Thus, international trading companies have opportunities to make additional profits from exchange rate fluctuations, and, at the same time, they can face the possibility of losing money from these fluctuations.3 International trading companies without experience and industry know-how may prefer simply to avoid exchange rate risk altogether and thereby give up the possibility of making supplemental profits from fluctuations, while experienced and well-established trading companies may prefer to take the deliberate assumption of exchange rate risk to shoot at making greater profits from fluctuations.4 Foreign exchange risks are generally divided into three categories, that is, transaction risk, translation risk, and economic risk.5 Transaction risk occurs when international business transactions involve parties from countries whose currencies’ exchange rates fluctuate substantially, under which uncertainty exists.6 Transaction risk is faced by each of the trading counterparts when the exchange rate has the chance of moving toward a disadvantageous direction between the time the price is contracted and the time payment is made or collected.7 Translation risk is incurred from the periodic nature of accounting report practices. A trade transaction will periodically need to be stated on its balance sheet, by a particular reporting currency, assets and liabilities that may be denominated in

1

Eun Sup Lee, supra note 138, at 255. Id. 3 Id. 4 Id. at 256. 5 Id. 6 Id. 7 Id. 2

8.1 Foreign Exchange in International Trade

549

another currency.8 In between two reporting periods, the relative values of the two currencies may have changed.9 To some extent, the exposure to translation risk can be said to be a strategic risk factor, which should be considered when measuring the potential costs and benefits associated with foreign business transactions.10 The Yen’s Lesson for the Yuan

By JOSEPH A. MASSEY and LEE M. SANDS “Among the many points of tension between the United States and China, perhaps the single greatest one concerns exchange rates. For more than a decade, Beijing has kept the value of the renminbi, also known as the yuan, more or less constant to the dollar, a strategy that critics say increases the price of American exports to China and fuels the rapidly growing trade deficit with Beijing. Despite its decision to let the yuan rise 21% against the dollar between 2005 and 2008, China has remained a favorite target of Congress. Democrats and Republicans have consistently called for punitive action against China, including sanctions on imports, unless it completely de-links the two currencies. Lost in the noise, however, is the question of whether de-linkage would actually have any effect on the trade deficit. On this, the United States’ 40year history of pressuring Japan to let the yen appreciate against the dollar is instructive. It indicates that de-linking the yuan would make barely a dent in America’s trade deficit. Luckily, this history also points to a different, more effective way for the United States to benefit from China’s economic growth. The Japanese story began in August 1971 when, with the American economy under strong inflationary pressure, President Richard Nixon took the dollar off the gold standard, letting its value fall. At the same time, with our trade and current-account balances going from surplus to deficit because of rapid export growth in Germany and Japan, President Nixon began pushing the other industrialized countries to allow their currencies to appreciate. With Japan—whose yen was fixed at 360 to the dollar—Nixon played hardball, temporarily imposing a 10-percent surcharge on imports and banning soybean exports to the country. The strategy worked. That December Japan and nine other countries agreed to let their currencies fluctuate against the dollar within a narrow range of exchange rates. The yen shot up to 315 by the end of the month. Still our trade deficit with Japan continued to grow. At the end of 1970, it stood at $1.2 billion; by the end of 1972, with the yen at 302 to the dollar, it

8

Id. Id. 10 Id. 9

550

8 Foreign Exchange Risks

was $4.1 billion. Thanks to changes in the global economy, the multilateral currency agreement soon failed, and this allowed the value of the yen to continue rising. By 2006 it stood at 119 to the dollar—more than three times as expensive as in 1971—and yet the deficit hit an all-time high of $90 billion. What happened? Whatever effect yen revaluation might have had was outweighed by two far more potent forces: American consumers’ insatiable demand for Japanese products and Japanese producers’ ability to cut their costs and stay competitive. There is no reason to believe that things would be any different with Chinese goods today. So, might it work to instead use tariffs to make American goods more competitive in China? Probably not. The problem is that the United States lacks the domestic industry to make many of the things we currently buy from China. And China would retaliate with tariffs of its own, hurting our exports to the country, which have recently been growing faster than those to anywhere else. Fortunately, there are other ways to deal with our trade deficit with Beijing. For one, America could substantially increase its exports, a goal embraced by the Obama administration’s National Export Initiative, which calls for doubling American exports in five years. This initiative focuses on the 99% of American companies that do business exclusively within the domestic market. Many of them are in sectors where our technology leads the world—like biomedical and clean-tech products. Many of these companies are too small to move into the global market on their own, but with federal support, they could significantly raise American exports. For maximum effectiveness, President Obama should pair his export initiative with a push for China and other countries to increase their direct investment in the United States. Here again, our history with Japan is instructive. As Japan’s surplus with America ballooned during the 1970s and 1980s, its companies began building factories and making other substantial investments in the United States as a hedge against protectionist measures—after all, tariffs would not apply to products made by Japanese companies here. This was a boon for the American economy: Through 2007, Japan had invested almost $260 billion, supporting more than 600,000 jobs. Chinese companies should be persuaded to do the same today. American purchases of Chinese goods have helped create vast pools of Chinese capital, and we should do all we can to bring that money back home. Fighting China over the yuan is a losing battle. There are better ways to use the global economy, and China’s rapid growth, to put money into the pockets of American workers.” Source http://www.nytimes.com/2010/08/24/opinion/24massey.html?_r= 1&ref=yen Economic risk comes from the fluctuations of currencies’ exchange rates over a certain length of time, and thus also comes from strategic selection, which originates from an international trader’s commitment over a certain period of time

8.1 Foreign Exchange in International Trade

551

to particular partner countries and their currencies.11 Economic risk from international business transactions cannot be avoided through simple management of foreign exchange. For example, an exporter can transfer transaction risk to the importer by collecting payment in the exporter’s currency.12 However, over a certain period of time, if the exporter relies to a great deal on that particular market, he will inevitably be affected by substantial exchange rate fluctuations between the two base currencies.13

8.1.2

Foreign Exchange

Foreign exchange is succinctly defined as “any currency other than the local currency which is used in settling international business transactions.” The exchange needs to facilitate a transfer of money from one currency to another and therefore requires the intervention of a bank or financial institution. In foreign exchange transactions, there is no central paying institution like a central bank for the case of domestic transactions. Furthermore, because currencies of each country are different, the structure of these transactions becomes more complicated. Thus, to settle each transaction, each bank has a respective exchange transaction practice and method. Foreign exchange transactions are related to the balance of international payments, which is closely affected by the overall economic situation of a given country. To avoid a speculative and short-term movement and flight of foreign currency, most countries control the supply and demand of foreign currencies and transactions. (1) Foreign Exchange Transaction Foreign exchange transactions are divided into remittance in advance and collection. The former is a way to transmit the funds, which is also called circular exchange, and the latter is a way to claim by collection and receive funds, which is also called adverse exchange. If foreign exchange is considered as a product, a bank functions as the buyer and seller of the foreign exchange. Foreign exchange is divided into selling exchanges and buying exchanges. With selling exchanges, there are both outward remittance and inward collection; with buying exchanges, there are both inward remittance and outward collection.

11

Id. Id. 13 Id. 12

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8 Foreign Exchange Risks

➀ Remittance Remittance is defined as “the transfer of funds, usually from a buyer to a distant seller.” Inward remittance means that the creditor’s or the beneficiary’s bank accepts a certain amount of funds remitted by an overseas remitter through its corresponding bank, and transfers it to the domestic payee. Outward remittance refers to when a bank remits a certain amount of foreign exchange to the payee at the request of the customer. There are three ways to use remittance in exchange transactions: demand draft (D/D), mail transfer (M/T), and telegraphic transfer (T/ T). ➁ Payment Collection Collection is an adverse exchange transaction in which a creditor claims payment collection, which is opposite to remittance. When the commercial bank is committed, the commercial bank buys checks or bills whose place of payment is overseas from the creditor and then gets paid directly from the paying bank or through the correspondent bank. A creditor’s commercial bank collects checks or bills through one of two methods, that is, bills purchased or bills sold. Bills purchased means to make payment to a customer in advance, and bills sold means to make payments after being required to make payment. A significant proportion of movement of international funds is made through collection by foreign exchange bills. Bills purchased are made when an exporter is paid in advance by the bank before collecting checks or bills are presented from the oversea bank. The bank gets paid by requesting collection to the paying bank later. With this method, the commercial bank assumes a significant amount of risk due to the possibility of failure of payment. Because of this, payment in advance must be made when checks or bills are required to be paid from the paying bank, and the beneficiary must have ample collateral or a good credit standing. ➂ Correspondent Arrangement In order for a commercial bank to conduct foreign exchange services like remittance and collection and notice of letter of credit internationally, there must be a foreign exchange brokering bank in the other country. If the bank has a branch in other countries, exchange transaction can be simplified and done through that branch. It is convenient and effective for banks to be internationally established, but if not, banks can make contracts to facilitate foreign exchange transactions with foreign countries’ local banks and serve customers with economic efficiencies. This arrangement is known as a “correspondent arrangement,” and the counterpart bank is termed the correspondent bank. A bank that opens a deposit account with the

8.2 Exchange Rates

553

correspondent bank in its name to make payments along with a foreign exchange transaction is called as a depositary correspondent bank.

8.2

Exchange Rates

8.2.1

Concepts

An exchange rate is a price at which one currency can be converted into another currency, that is, the exchange rate is the price that a bank charges to transfer the submitted currency into the currency requested by the customer who is to pay his foreign trading partner, i.e., the price of foreign exchange. Factors influencing exchange rates include interest rates, inflation rates, trade balance, political stability, transparency of a country’s legal and administrative organizations, and the general state of the economy. When you come into a bank, you might see a board that lists the exchange rates of major world currencies, and the rates often change minimally day-to-day and throughout the day. But, how exactly is this exchange rate decided? If you consider foreign currency as a product, the exchange rate is decided by its supply and demand. Since foreign currency is a means of international settlement, an international balance of payment reflects supply and demand of foreign currency, and thereby an exchange rate is decided. If your exchange is done through a bank, the ratio from one currency to the other will not exactly be the price of exchanging the currency back to the original currency. The reason is that one is a bid rate, and the other one is an offer rate. The difference in the two rates is the bank’s profit for the transaction. The bid rate (price) is the exchange rate at which the dealer is willing to buy a currency, and the offer (asking) rate (price) is the exchange rate at which the dealer is willing to sell the currency. The midpoint price is the overall of the bid and offer price. Suppose a dealer provides the following quotes: Quote in the US

Bid

Offer

Direct (US$/Euroe)

US$ 0.9836

US$ 0.9839

Indirect (Euroe/US$)

Euroe 1.0164

Euroe 1.0167

Offering a US$ 0.9839/Euroe (asking rate) is equivalent to a counterparty bidding 1/0.9839 = Euroe 1.0167 per US dollar. Another way to describe exchange rates is that it is the purchasing power to buy foreign goods and services with domestic currency. For example, we might assume that the value of the Japanese Yen is quoted as 120 Yen per US dollar. In other words, one dollar (US$) can be exchanged in the foreign exchange market for 120 Japanese Yen (JPY, ¥).

554

8 Foreign Exchange Risks

Currently, the value of one Japanese Yen in terms of US dollars is given by the reciprocal of 120, which is worth one US dollar. Thus, it is defined as ¥/US$ as the number of Japanese Yen per US dollar and US$/Yen as the number of US dollars per Japanese Yen: ¥/US$ = 120 and US$/¥ = 0.0833. Quotations for the yen are usually indicated for 100 Yen rather than one Yen. The difference between a bid rate and an offer rate is called the bid-offer spread, and it is the exchange profit the specified bank will make, that is why this spread can be slightly different among different banks. The width of the spread is determined according to the demand to convert the currency, that is, the spread rate will be higher when conversation is strongly or immediately demanded. For example, the spread in a bank located in the airport would be bigger than that of a bank located downtown.

8.2.2

Spot Rate/Forward Rate

A spot rate is the foreign exchange market price at which a currency is delivered on a spot date. The spot date is the date within two days from the date the transaction is concluded, and at that date that the currency sold must be delivered. The spot rate is the starting point for all foreign exchange transactions. A forward rate, on the other hand, is the exchange rate to be applied for a future’s date. The forward rate is used for a transaction that will take place at some point set in the future (e.g., six months).

8.2.3

Methods to Determine Forward Rate

Methods to determine the forward exchange rate include forward outright rate, premium rate, or discount rate (by year), and forward differential. (1) Forward Outright Rate This is the actual foreign exchange rate used in a forward contract. It is used to determine the outright price to be applied to forward exchange transaction as is done with spot rates. It exists exclusively for customers like trading companies, not for banks. A forward rate is decided by the spot rate plus a premium or discount of forward exchange to the spot rate, and so the premium margin or discount margin is more important than forward rate itself. In practice, a premium margin or discount margin is fixed per one day while the spot rate changes constantly even during one day, and therefore, it is inconvenient to announce the newly determined forward outright rate whenever it changes.

8.2 Exchange Rates

555

(2) Premium/Discount Rate The premium rate or discount rate of forward exchange is determined annually. Since it can be used as a determining indicator of interest arbitrage transaction by contrasting the interest rate gap (annual rate) of both countries’ currencies, companies and small banks prefer this method. It is not used in banks but is a computing basis of the “forward differential.” (3) Forward Differential Forward differential or forward margin indicates and determines the premium or discount of forward exchange to the spot rate by decimalization and is used by dealers in foreign exchange markets and banks. The last decimal point of the forward differential is called the “point” or “pip.” The euro is indicated down to four decimal places and the yen down to two decimal places. The forward differential is indicated by units of this point (pip). Bids and offers of banks are generally announced at the same time, so it is sometimes indicated just as a premium or discount, or P (or +) or D (or -), but more generally a premium without discount or only forward differential is announced. When the spot rate and forward rate are the same, it is indicated as "flat.”

8.2.4

Forward Exchange Transactions

(1) Concepts A foreign exchange transaction is a type of exchange transaction in which a certain amount in one currency will be swapped for the value of that amount in another currency at a fixed (forward) exchange rate within a certain period of time thereafter for forward exchange. The foreign exchange contract will state the currency being traded, the currency being bought, the amount, the value date, and the forward rate. The value date refers to the date that the transaction is made, and the accounts are settled. For a spot exchange, the value date will be within two working days after the agreement of the transaction, while for a forward exchange, the value date will be within a certain period of time, for example, one month or three months.

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8 Foreign Exchange Risks

(2) Object of Forward Transactions ➀ Exchange Risk Coverage (Hedging) The major objective in utilizing forward exchange is to avoid exchange risk caused by exchange rate fluctuations between the contract date and value date by agreeing on a certain exchange rate to be applied to the settlement of foreign exchange. Hedging is a term that is used to describe the action of minimizing risk by taking a certain exchange position. The importer, exporter, debt owner, and asset owner can hedge through the forward exchange transaction as follows. 1. Importer Let us assume that the spot rate is US$/¥120, an import contract is concluded, and its value date is three months later. On the value date if the exchange rate has moved up, then a foreign exchange loss occurs. To avoid the risk, the importer can make a contract to buy the US dollars utilizing a forward rate with a maturity of three months. By doing this, the buyer knows exactly the rate that will be applied to buy the exchange, irrespective of the spot rate three months later from the dealing date. For example, if the selling forward exchange rate of three months is US$/¥118, three months later, the importer makes a payment of the import price by buying US$ by the rate of US$/¥118 regardless of the actual spot rate on the value date, for example, US$/¥122. 2. Exporter Let us assume that the spot rate is US$/¥120, an export contract is concluded, and its collection date is three months later. If at that time the exchange rate falls, a foreign exchange loss occurs. To avoid the risk, the exporter makes a selling contract utilizing the forward rate of a maturity of three months. If the buying forward exchange rate of 3 months is US$/¥117, three months later, the exporter can make up for the loss by selling US$ by US$/¥117 according to the forward contract, regardless of the actual spot rate on the value date, for example, US$/ ¥115.

8.2 Exchange Rates

557

3. Foreign Currency Debt Owner For such companies, if an exchange rate rises a foreign exchange loss occurs and if the exchange rate falls a foreign exchange profit occurs. To make up for the loss caused by the rise of exchange rate a company can make a buying contract with a forward exchange rate. If an exchange rate rises, exchange rate loss will occur due to the rise of foreign currency debt, but the loss can be made up for by making forward exchange transactions (buying foreign currency). On the contrary, if the exchange rate falls, profit would be incurred due to the fall of foreign currency debt, but such chances to get profits will be offset through the forward exchange transactions (in selling foreign currency). 4. Foreign Currency Asset Owner For such companies, profits can be made when the value of currencies held is rising (the exchange rate is rising favorably) against the domestic currency, and losses could be realized when the value of currencies held is dropping against the domestic currency. To reduce asset depreciation by a drop in the exchange rate, the company can form a selling contract of domestic currency by implementing a forward exchange transaction. In the case of such forward transactions, irrespective of the whether the foreign currency’s exchange rate rises or falls later, the assets will remain the same to those valued at the forward contracting date. 5. Speculation While importers and exporters make forward exchange contracts to avoid assuming risk caused by exchange rate fluctuation, speculative dealers may deliberately assume the same risk to utilize forward exchange transactions to make profits from the exchange rate fluctuations. Dealing with currency exchange allows investors to make a highly leveraged margin account. This means that they can borrow more money from the broker than in trading normal stocks, and invest it with their own funds to create a greater chance of high profits or deep losses. If the speculator having debt in US$ expects the exchange rate to rise, he can purchase that currency through a forward exchange transaction and “lock in” profits if the currency actually does go to the way he expects. Let us assume that the current forward rate for a maturity of three months is US$/¥118, and the speculator concludes a contract to buy US$, expecting the value of US$ to increase. If in three months the exchange rate has risen to 1¥ = 120, instead of paying ¥120 for 1 US$, the speculator only has to pay ¥118. By using a forward exchange

558

8 Foreign Exchange Risks

transaction, he will have made a profit of 2¥ per 1US$. On the other hand, if he speculates incorrectly, he could easily make a loss on his bet. If the speculator expects the rate of US$ to ¥ will drop, he can make a selling forward exchange contract to take advantage of the depreciating US$. Let us assume the forward rate of three months is US$/¥ = 120. If in three months the spot rate has changed to US$/¥ = 117, the speculator can then make a profit of 3¥ per 1US$. Another simple way for speculators to try to make gains in foreign exchange markets is to simply purchase a currency that they believe to be strengthened by spot exchange. Then, the speculator will hold the currency until he thinks it has risen to its peak and try to sell the currency at that point to earn a profit. (3) Value Date of Forward Exchange Transactions The maturity date of a forward exchange transaction can be set as standard or nonstandard. A standard rate means that the value date (maturity) is set and agreed on by calendar month (1 month, 3 months, 12 months, etc.), which bankers often use. A nonstandard or broken-term rate means that the terms are not stated in months, but simply in number of days (7 days, 50 days, etc.), and this type of rate is used more commonly for customers. Maturity dates or valued dates extending beyond one year are becoming more common, and for good bank customers, a maturity extending out to five and even as long as ten years is possible.14 (4) Foreign Exchange Position In a financial institution or trading company, a foreign exchange position is defined as the difference in the selling value of a foreign currency and the buying value of a foreign currency for a certain period of time, as well as the difference between foreign currency assets and debt for a certain period of time. There are three basic kinds of foreign exchange positions, that is, flat position, long position, and short position. ➀ Square/Flat Position A perfectly flat position is the same as a perfect hedge, which means the investor has eliminated all of the potential risk, and therefore, eliminated all of the potential profit as well, which is a rare occurrence. This position is defined as “a situation where cash inflows match cash outflows in a given period of time.” If an investor has a forward exchange position, he will have the exact opposite position to get rid of the change of risk.

14

Eun Sup Lee, supra note 138, at 264.

8.2 Exchange Rates

559

➁ Overbought/Long Position To enter a long position means that an investor is purchasing a currency, commodity, share, or financial instrument in anticipation that the value of that currency will rise. An investor with a long position can also be called a “bull investor” for that particular currency. If the foreign currency depreciates during the period of time that it is held, the long investor will take a loss. ➂ Oversold/Short Position This is exactly the opposite of a long position and is taken by “bear investors” who are anticipating that the currency they are investing in will go down. As can be imagined, if the currency value depreciates, the investor will earn profits, but if the value increases, the investor will take a loss.

8.2.5

Management of Exchange Risk

International trading companies and financial institutions maintaining foreign currency and debt nominated in foreign currency can have exchange losses or profits depending on their investment decisions and on exchange rate fluctuations. In order to minimize risk, investors and traders tend to hedge their portfolios, often by taking out positions in the futures or options markets. (1) Option Making a futures contract is agreeing to buy or sell a currency at a specific future date at a certain price. Options are similar, but the movement of the currency has to be quite drastic to reach a break-even point or the point at which the investor can start making money. An option is a contract giving the owner the right, but not the obligation, to buy or sell a given quantity of an asset at a specified price at some time in the future. An option to buy the underlying asset is a “call,” and an option to sell the underlying asset is “put.” Buying or selling the underlying asset via the option is known as “exercising the option.”641 A “call” option is made when it is predicted that the currency will rise in value (like going long), and a “put” option is made when it is predicted that the currency will fall (like taking a short position). In the case of the option for importers, for example, after buying a “call” option of foreign currency equivalent to the import price, the importer buys the foreign currency by exercising the option upon maturity if the exchange rate rises and then pays the exporter. If the exchange rate falls, the importer will give up his option, take a loss, and purchase the currency by the spot market price to pay the exporter.

560

8 Foreign Exchange Risks

In the case of the option for exporters, for example, after buying a “put” option of the foreign currency equivalent to the export price, the exporter sells the import foreign currency by exercising the option upon maturity if the exchange rate falls. But, if the exchange rate rises, the trader will take a loss, give up his option, and sell the export amount at the spot market rate. (2) Management of Foreign Currency Balance Let us take as an example a foreign exchange position that is in an overbought position, that is, the foreign currency debt subtracting the foreign currency balance is positive, which means that the investor holds a surplus of the currency and an aggregate long position. In such cases, in order to end the surplus to avoid the exchange risks, they can make a forward exchange selling contract, buy “put” options, or take a selling position through a futures or forward contract. Let us take as an opposite example that of a foreign exchange position that is in an oversold position, being simply the opposite of the overbought position, which results in a net debt nominated by a foreign currency. To take a square position to avoid the exchange risks, they may buy currency through spot exchange and actually reimburse debts to the creditor, enter foreign exchange buying forward contracts, take buying positions in the futures exchange, or buy “call” options. Thus, a foreign exchange in an overbought or in an oversold position can be managed by keeping a square position. (3) Matching The matching strategy means that an investor will buy one liability (asset) in order to offset the risk of another asset (liability). For example, if a firm is open to a foreign exchange risk in a US$ receivable, it can be offset by buying goods from the United States to create an offsetting payable. This is typically utilized by multinational enterprises and trading companies and is not a viable option for small-sized companies or individuals. Centralized risk management occurs when the two parties engage in ongoing trade and continually need to transfer one currency into another. When it comes to the matching strategy, two types exist: natural matching and parallel matching. Natural matching is done in accordance with the times and costs of imports, while parallel matching is based on cash balances of payments in other currencies. The former is ideal and can achieve almost perfect hedging; in the case of the latter; however, perfect hedging is impossible as long as the fluctuations of the currencies are different.

8.3 Application to Business Field

561

(4) Leading/Lagging Leading and lagging refer to altering the timing of cash flows within a firm (intercompany), or between companies (intracompany), in order to offset risk to foreign exchange exposures. Leading and lagging are more common when the firms are related, because they are more likely to embrace a common set of goals. Subsidiaries would like to ask their parent company to lag the payment, because the subsidiary is essentially to borrow the funds from the parent company for free. With regard to the leading, if a parent firm is in short position of US$, it can accelerate its collection of US$ payments from its subsidiaries. By doing this, its US dollar account will start to level-out, resulting in less currency risk. With regard to the lagging, if a parent firm is in long position of US$, it can delay US$ collection from its subsidiaries. By doing this, its foreign currency, US dollar, account will start to level-out, resulting in less currency risk.

8.3

Application to Business Field

8.3.1

Negotiation for Payment Collection with Bank

The exporter prepares transport documents required by the terms of the letter of credit, reviews consistency between documents and the requirements under the letter of credit, and finally submits the documents accompanied by the bill of exchange to the bank for the payment collection. The letter of credit opening bank receives the transportation documents and reviews for consistency between the letter of credit terms and the document terms and sends the arrival notice of documents to importers. If in the case that imported goods arrive earlier than transport documents as they may come from neighboring countries or by air, the importer can receive cargo from the shipping company against the submission of a letter of guarantee (L/G), or air cargo delivery acceptance when exporters need clearance to release the cargo to the buyer. Importers receive transportation documents, make payment immediately on sight in case of the “sight” drafts, or make a payment on the due date in case of the “usance” drafts. The importer presents the bill of lading to the shipping company, carrying imported goods in bonded areas, and reports the import to the authority concerned through an electronic system or physically in person. After making import declarations, importers submit delivery order (D/O) in order to pay import duties, process the import clearance, submit the clearance permission or delivery order (D/O) to the concerned authority, and carry out imported goods from bonded areas.

562

8 Foreign Exchange Risks

The exporter (beneficiary) would prepare for the negotiation with the bank for the collection of payment, securing the transportation documents required under the terms of letter of credit including bill of lading, commercial invoice, packing list, certificate of inspection, certificate of quality/quantity/weight, certificate of origin, etc., as follows:

Dr.COFFEEXTRACT

8.3 Application to Business Field

563

564

Dr.COFFEEXTRACT

8 Foreign Exchange Risks

8.3 Application to Business Field

565

566

8 Foreign Exchange Risks

Dr.COFFEEXTRACT

8.3 Application to Business Field

Dr.COFFEEXTRACT

567

568

8 Foreign Exchange Risks

8.3 Application to Business Field

Dr.COFFEEXTRACT

569

570

8 Foreign Exchange Risks

Dr.COFFEEXTRACT

8.3 Application to Business Field

571

The exporter (beneficiary) would make negotiation for payment collection by submitting the following bill of exchange accompanied by the above-prepared transport documents to the bank concerned.

Dr.COFFEEXTRACT

572

8 Foreign Exchange Risks

The importer (applicant) would get the transportation documents including the bill of lading to receive the imported goods from the shipping company, but, if the transportation documents would not arrived yet even though the importer completed payment to the bank, the importer can claim the goods from the shipping company against the submission of the letter of guarantee issued by the importer and guaranteed by the bank, as follows:

Learning Assignments

Under the sales contract followed by the issuance of credit in previous chapters, try to manage the exchange position grouping into speculation in pursuit of the positive profit and hedge in pursuit for the stability and safety in foreign exchange transactions.

Bibliography

573

Bibliography Eun CS, Resnick BG (2009a) International financial management. Mc Graw-Hill Eun CS, Resnick BG (2009b) International financial management, 4th edn. Mc Graw-Hill Wright B (2001) The law of electronic commerce: Edi, fax, and e-mail. Assn of Records Managers

9

Electronic Commerce

Learning Objectives

Examining the characteristics of the target market of their specified products, the company is required to consider the electronic commerce as well as the conventional business transactions to penetrate the market. For the hands-on workers to be successful in doing their electronic commerce in their target market with their specified products, first of all, they should establish the external creditability relating to their business practices and products’ quality. For this, this chapter treats with the practical issues on international electronic commerce focusing on the following issues: 1. Development and Practical Use of Electronic Data Interchange (EDI) in International Business Transactions. 2. Importance and functions of standardization of EDI methods of communication from the viewpoints of promotion of facilitation in conducting international trade. 3. Function and Importance of UNCITRAL Model Laws and Conventions to Promote International Electronic Commerce. 4. Factors to be considered in doing international electronic business transactions in comparison with the case of off-line transactions. 5. Efficiency and productivity in doing international electronic commerce compared with off-line commerce. 6. Factors to be considered in making transportation and cargo insurance contracts in international trade through electronic commerce compared with the case through off-line transactions.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_9

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9 Electronic Commerce

9.1

Introduction

9.1.1

Development of EDI System

In the past two decades, e-commerce has emerged as an important issue in conjunction with improvement of national competitiveness under free trade of the WTO. Governments, academies, and companies in developed and developing countries have been making efforts to settle e-commerce databases. International organizations especially concerned with settling international e-commerce regulations are the WTO, OECD, UNCITRAL, APEC, etc. Sharp increases in online transactions regardless of borders have propelled many countries into the age of e-commerce. E-commerce is commonly understood as commerce conducted strictly over the Internet, but its scope is actually much broader: “Business conducted through the use of computers, telephones, fax machines, barcode readers, credit cards, automated teller machines (ATM) or other electronic appliances (whether or not using the Internet) without the exchange of paper-based documents.” It includes activities such as procurement, order entry, transaction processing, payment, authentication and non-repudiation, inventory control, order fulfillment, and customer support. When a buyer pays with a bank card swiped through a magnetic-stripe-reader, he is participating in e-commerce. The e-trade that is of particular concern to international trade is trade facilitated by the Internet, in which overseas buyers freely purchasing products from around the world. E-commerce has provided small and mid-sized companies with the means to make international trade negotiations without having a physical overseas network. E-commerce has not completely replaced conventional means of trade but is simply a new alternate means in which considerable time and money can be saved. International trade had been simplified due to the creation of standard forms by the representative establishment of UCP and Incoterms from the 1960s. Trade-simplifying projects have internationally and domestically been promoted to further simplify the trading process through expansion of deregulation on the basis of various standard forms from the 1970s–1980s. In the mid-1980s, the foundation of e-commerce began to be established with the predecessor of electronic data interchange (EDI) system to e-commerce: EDI globally connected large firms to a computer network independent of the Internet. EDI proved to eliminate errors due to the necessity of retyping data, improved circulation time, and made just-in-time delivery possible. The principles of EDI have been applied to the Internet and other means of e-commerce. EDI Agreement

“Electronic data interchange agreement; an agreement that governs the transfer or exchange of data, such as purchase orders, between parties by computer. Electronic data transmitted under an EDI agreement is usually formatted according to an agreed standard, such as the American National Standards Institute ANSI X12 standard or the U.N. EDIFACT standard.”

9.1 Introduction

577

Source Black’s Law Dictionary (2019)

9.1.2

New Paradigm of International Trade

The digital revolution has been evaluated to dramatically transform the lives of human beings, constituting the third revolution after those of agriculture and industry. The speed and scope with which the Internet has transformed the world has unprecedently been increased and widened. But, the Internet alone is not sufficient to facilitate major trade deals, and a major IT infrastructure must continue to be developed worldwide for the continuous facilitation and cost-down of international trade. The global economy is evermore becoming the Internet-based global economy, which demonstrates great developments in eliminating boundaries of time, money, commercial customs, and culture. The development of the Internet has accelerated the globalization of business activities and caused a shift in the trade paradigm by fundamentally changing the basic methods applied to trading activities. The Internet is capable of bearing the responsibilities of marketing, consulting, contract making, payment, and specifying details of delivery and transportation without the conventional limitations of time and space. With VAN/EDI, paper documents were replaced with more standardized electronic documents. This can be considered a change in processing tools and methods of international trade transactions rather than a fundamental change in the process of trade. The Internet, on the other hand, has also fostered a fundamental change in international trading processes, such as the simplification of issuing a letter of credit to distribution of goods and settlement of payments—and, needless to say, the paper letter of credit of old has been replaced with an electronic letter of credit. eUCP; What is the Last Case?

Integration is the Most Important Prerequisite for Active Use of eDocuments “Electronic documents in future commercial life will be very active according to the vision of ICC—International Chamber of Commerce at the beginning of 2000. In this year, a working group was formed for the electronic submission of documents attached to letters of credit. As a result eUCP (Supplement to UCP 600 for Electronic Presentation), brochure went into effect as of April 1, 2002. This development was considered to have come at the right time for investments in electronic commerce and as a good signal for the widespread use of e-Documents submitted under letters of credit.

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9 Electronic Commerce

However, many banks in the world still are not ready to execute transactions with electronic documents. This happens despite the fact that technological advances in Internet technologies and even legal infrastructure in many countries allow for the use of e-Documents. Why actually we cannot use e-Documents effectively is a question that deserves consideration. Perhaps, the answer is this: Foreign trade operations represent a multilateral process. Importers, exporters, banks, insurance companies, customs agencies, transport companies, inspection companies, etc., are the parties included in a standard foreign trade transaction. Legal and technical problems may arise during an operation carried out with e-Documents. So as to solve these problems, all the parties participating in the transaction should use the same system and a single reference format from the beginning to end. Unfortunately, today, a global system (Internet-based) to meet these needs does not exist. That is the basis of all these problems. Today, the number of institutions using e-Documents for foreign trade transactions is far less than expected. This case does not constitute an encouraging business environment. The reason for this situation needs to be examined. One reason for this slow transition to e-Documents is that International standards for paperless trade are as of yet unspecified. But the main reason is that there is not an integration system between institutions participating in a given foreign trade transaction. Another reason deserving mention is that coverage of eUCP is limited to letter of credit transactions. Consequently, an integration system like trade points is the most important prerequisite for active use of e-Documents.” Source http://www.emrecivelek.com/eUCP-Supplement_to_UCP600_% 20for_Electronic_Presentation.html

9.2

Process of Electronic Trade

The first step for selling of a product utilizing electronic systems is making potential customers aware of the product, and so exporters promote exports to potential buyers through various means. The second step is to engage in communication regarding a possible transaction in which parties agree on details about products, price, method of payment, transportation of delivery and insurance. If the consultation progresses positively, the third step is taken for the terms agreed between the parties to be confirmed and binding. If a contract is concluded, both parties must take their respective steps in organizing delivery and payment. Typically, a bank issues a letter of credit and under e-trade the letter of credit is issued and informed of electronically. A series of logistic operations such as shipment, transportation, discharging, inspection, and clearance must be conducted physically, while registration and tracing can be done online. More details are as follows:

9.2

Process of Electronic Trade

9.2.1

579

Selection of Target Market

Before the advent of the Internet and the information age, it was common to use catalogs or promotional materials through trade fairs and conventions or to make business trips to obtain important information about potential trading partners. Now, companies can easily and rapidly collect information about new products or customers and select the target markets domestically and internationally through traveling on the website.

9.2.2

Marketing

Similar to collecting information, business trips and catalogs or other promotional materials have traditionally been used for marketing activities, but now exporters can send their web catalogs via the Internet, do marketing activities through email, create informative websites, and quickly contact mailing lists about new advancements and products. Conventional marketing and credit inquiry are still important for many businesses, but the Internet has allowed entrepreneurs to participate in international business transactions, and screen the potential buyer through the credit inquiry by e-mail, etc. without a massive financial support for physical activities.

9.2.3

Negotiation and Agreement

E-trade has made negotiations and other points of contact more efficient and cheap through cyber-conferencing, chat rooms, and e-mail.

9.2.4

Arrangement and Delivery

After a contract is made, the exporter must secure and deliver the contracted goods to the importer as specified. Digital products like e-books, music, and software can be downloaded to the importers at any time according to contract specifications.

9.2.5

Payment

In order for the importer to fulfill his contractual obligations, he must make payment to the exporter as specified. Telegraphic transfer is generally used when the contract amount is small or the importer is credible, and payment through collection is used when the contract amount is large and the importer is credible. With e-trade, new methods including electronic letter of credit or trade cards can be utilized.

580

9.2.6

9 Electronic Commerce

Follow-Up Management

The contract terminates when the payment is made and all shipments of goods have arrived to the importer. After termination is made, data-based marketing is needed for follow-up management, and trade disputes, if arise, will need to be resolved. Continuing management of trade partners will help any exporter grow a steady business by modifying products to tailor specifically to importers’ needs. Long-term business relationships will save time and money in searching importers and marketing in the future.

9.3

Customer Research

9.3.1

Method to Find Customers

(1) Using Trade-Related Organization Specified trade-related organizations including each country’s importers’ and exporters’ associations can expedite a search for partners. Utilizing these sources, one can collect general information by looking through trade statistics, market trends, company directories of each country, and specific country’s market data issued by export-and-import-related banks or institutes. Potential importers can also be found through materials from government agencies, foreign diplomatic offices, or overseas official organizations like World Trade Center and International Chamber of Commerce. (2) Advertisement Through Overseas Media To find customers, they can make catalogs for overseas promotion and distribute them to potential customers, or use domestic or international advertising media. (3) Use of Cyber-Marketplace The cyber-marketplace is an efficient place to promote business transactions with products and find customers. It is a comprehensive information system providing information related to trade and supporting promotion, customer sourcing, and product information. Specific organizations providing cyber-market place that can be advantageous to traders are Alibaba, Eceurope, Globalsources, Swissinfo, ITrade, Tradecompass, etc.

9.3

Customer Research

9.3.2

581

Searching for Customers Through Websites

(1) Concepts This is a way for trading companies to promote themselves and their products around the world using the website, and at the same time finding customers by searching or viewing information stored through website registrations. The websites supporting these functions are called e-marketplaces or trade sites, and various sites from trade-related organizations and private companies are developed and operated, which are avoidable to anyone who needs the specified conditions. To use e-market places trading companies become members of the sites, post their home pages and product catalogs to appear themselves to the potential customers in their databases. A single site will likely have members from the domestic and foreign markets, further facilitating international traders’ searching activities. (2) Process The first step is to actually have the Internet, and then a company should develop an easily navigable homepage whose address can be attached to marketing material. Promotion can be done by making e-catalogs and by mutually linking websites, exchanging free advertisements with foreign websites, and searching world-famous e-market places. Learning Assignments

1. Making the scenario to enforce international trade contract which was formatted in previous Chaps. 3 and 4, through the electronic method of commerce, and make assessment of this electronic commerce compared with conventional off-line commerce, considering the fact that circumstance of international electronic commerce would be basically different from that of domestic commerce. 2. Checking lists to be considered when you enforce the international business transactions through electronic commerce and electronic data interchange focusing on the difference from the case of off-line physical transactions with the exporting items selected by the students.

10

Claim and Dispute Settlement

Learning Objectives

As the follow-up management of the international trading, the management of claim and dispute settlement is important to maintain the stability and sustainability in doing their business in the global market. Even though the company’s products are well organized and certified as the very qualified products, mainly due to their own characteristics as the specified products, as well as other variable situation, the company is apt to get the claims from the customers directly or indirectly through its trade partners. Preparing for the claims and disputes, the hands-on workers are required to secure the stable and systematic structure to treat with the issues. This chapter treats with those issues focusing on international commercial arbitration as an alternative to judicial system due to its physical convenience and low cost compared with the typical legal system, focusing on the following issues: 1. Difficulties and costs to pursue the enforcement of foreign judgments and arbitral awards in doing international trade. 2. Contractual element of arbitration with relation to the international trade contract. 3. Judicial element of arbitration with relation to the international trade contract. 4. Legal framework of arbitration with relation to the international trade contract. 5. Ad hoc and institutional arbitration with relation to the international trade contract.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 E. S. Lee, A Guide to International Trading, Management for Professionals, https://doi.org/10.1007/978-3-031-39977-0_10

583

584

10.1

10 Claim and Dispute Settlement

Introduction

A trade-related claim is legal demand or assertion by one party for compensation, payment, or reimbursement for a loss or damage incurred due to the negligence or breach of the contract terms committed by the other party. The contents of a complaint are not only price reduction, contract avoidance and compensation for damage, but also include discrepancies, arguments, and disputes. Because of the wide range of possible claims, it is important to outline what claims are acceptable under the contract, and how the claims are to be made. Creating a clear path for claims is necessary, particularly for the risk management in international trade. This path should clearly specify the period of time to present the official claim, causes for which claims are to be brought, and how to bring a claim. One type of claim that could take an exporter by surprise is termed the “market claim.” This is the claim that the importer asks for damage compensation ostensibly due to only minor discrepancies in products delivered from those contracted, but the real cause of the claim is a decrease in market price of the imported products. The buyer inspects the goods to insure that they are in accordance with the contract and clear discrepancies are not found. If any discrepancy is found or the delivered quantity is short of the contracted quantity, the buyer should notify the problem to the seller immediately. The inspection and notification is the buyer’s obligation. If he neglects this process, he loses the right to make legal claims. It is advisable that the buyer inspects goods within as short a period as he can as far as circumstances permit,1 as if he fails to send notification within a reasonable period of time despite a discrepancy, he loses the right to claim.2

10.2

Resolution of Trade Claims

10.2.1

Introduction

Trade claims are solved either amicably by parties or by intervention of a third party. The former solutions are made by waiver of claim, amicable settlement, or compromise. When the contract party gets loss due to breach of contract committed by the other party, the damaged party does not exercise the right to claim, or simply gives up the claim, meaning that the damaged party will assume the incurred loss by himself. Amicable settlement or compromise is a solution found through compromise by independent negotiation and agreement. As a solution by intervention of a third party, talks could be grouped into intercession or recommendation, conciliation or mediation, and arbitration and litigation:

1 2

CISG 1980, Art. 38. Id. at Art. 39.

10.2 Resolution of Trade Claims

585

In the case of intercession or recommendation, a third party has intervened in the dispute according to the request of one or both parties in order to suggest solutions or advice to determine a fair and unbiased compromise; in the case of conciliation or mediation, an unbiased conciliator is selected according to a mutual decision, and this third party suggests a compromise. If both parties agree to the compromise, the claim is resolved; in the case of arbitration, according to a mutual arbitral agreement, a fair arbitrator (not by legal action) is appointed and an arbitral tribunal takes place. Then, the arbitral award is submitted to both parties unconditionally. The decision is irrevocable and nonnegotiable. Approval and enforcement of foreign arbitration are generally recognized among the countries. In the case of litigation, the dispute is ruled by a judge, which resolves the claim according to the concerned country’s law and judicial system. Out of the dispute resolution, the simplest solution to a contract dispute is to contact and negotiate with the other party. With patience, understanding and flexibility, one can often solve conflicts to the satisfaction of both sides. If, however, negotiations fail and the sum involved is large enough to warrant the effort, a company should obtain the assistance and advice of its legal counsel and other qualified experts. If both parties can agree to take their dispute to an arbitration institute, this step is preferable to legal action because arbitration is often faster and less costly.3 Particularly, in Asia area including Japan and Korea, dissatisfied parties do not like to visit the court for litigation, and therefore, sometimes, they would rather like to assume the damage than to bring the legal action to the court, which comes from the cultural feature of this area. In such cultures, arbitration may prove “a ‘face-saving’ approach to dispute resolution.” From a more practical perspective, litigation is an expensive process likely to permanently damage the business4 relationship and is inherently unpredictable as to result. International litigation is often unduly delayed because of a lack of uniformity in procedural rules. For example, the liberalized nature of the United States investigation rules often meets with hostility in foreign courts.5

10.2.2

International Litigation

Dispute resolution through the recourse to public courts or tribunals is generally the slowest, most costly, and most confrontational out of the various options to solve the disputes, which is the reason why the experienced trading companies try to avoid this approach by negotiating for the inclusion of alternative dispute resolution(ADR) or arbitration clauses in their contracts.6 It is technically difficult

3

Eun Sup Lee, supra not 138, at 279. Id. 5 Id. 6 Id. 4

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10 Claim and Dispute Settlement

and often requires specialized professional counsel.7 In addition, there exists a risk of court bias when the court decision has to be enforced in the country of the party having the same nationality as the state court before whose enforcement is sought.8 With relation to the jurisdiction referring to the proper courts of the proper country where the claim can be brought to, if a contract is silent on the country of the proper court, the parties in a dispute case may want to invoke the jurisdiction of the national courts which maybe favorable to, or the courts which are convenient for them, which is known as “forum-shopping”.9 In order to avoid these problems, parties of the international trade contract are recommended to include a forum selection or choice of forum clause.10 Forum Shopping

“The practice of choosing the most favorable jurisdiction or court in which a claim might be heard. A plaintiff might engage in forum-shopping, for example, by filing suit in a jurisdiction with a reputation for high jury awards or by filing several similar suits and keeping the one with the preferred judge.” Source Black’s Law Dictionary (2019) The parties may freely choose the governing law to their contract so long as it is not contrary to the public policy of the country where the legal action is brought.11 If the contract does not specify the applicable law, or if the choice of law is unreasonable or contrary to public policy, then the court that hears the case will have to choose the applicable law, according to the principles of “conflict of laws.”12 According to the general and basic rules of conflict of laws the court will primarily look to the place where the contract was negotiated and/or signed, the place where it is to be performed and the domiciles of the parties involved.13 Conflicts of Laws

“1. A difference between the laws of different states or countries in a case in which a transaction or occurrence central to the case has a connection to two or more jurisdictions.—Often shortened to conflict. Cf. choice of law.

7

Id. Id. 9 Id. 10 Id. 11 Id. at 280. 12 Id. 13 Id. 8

10.3 Commercial Arbitration

587

2. The Body of Jurisprudence that Undertakes to Reconcile Such Differences or to Decide What Law is to Govern in These Situations; the Principles of Choice of Law.—Often Shortened (in Sense 2) to Conflicts.—Also termed (in international contexts) private international law; international private law. ‘The phrase [conflict of laws], although inadequate, because it does not cover questions as to jurisdiction, or as to the execution of foreign judgments, is better than any other.’” Thomas E. Holland, The Elements of Jurisprudence 421 (13th ed. 1924). Source Black’s Law Dictionary (2019)

10.3

Commercial Arbitration

10.3.1

Alternative Dispute Resolution

Alternative dispute resolution (ADR) clause includes mediation, negotiation, conciliation, mini-trail, and expert determination clause.14 Conciliation

“1. A settlement of a dispute in an agreeable manner. 2. A process in which a neutral person meets with the parties to a dispute and explores how the dispute might be resolved; esp., a relatively unstructured method of dispute resolution in which a third party facilitates communication between parties in an attempt to help them settle their differences. Some jurisdictions, such as California, have Family Conciliation Courts to help resolve problems within the family.—Also termed (in sense 2) facilitation; conciliation procedure. CF. MEDIATION; ARBITRATION.” Source Black’s Law Dictionary (2019) The mediation and conciliation processes make a neutral, independent, and unbiased third party become involved in the dispute resolution process.15 Concerned parties try to resolve the disputes without resorting to formal dispute resolution procedures including litigation or arbitration.16 Mediation and conciliation are sometimes distinguished by the methodology used by mutual agreement upon the third party that will act as mediator or conciliator in the dispute:17

14

Eun Sup Lee, supra note 138, at 281. Id. 16 Id. 17 Id. 15

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10 Claim and Dispute Settlement

If the third party uses his skills to meet with each party on a separate basis and transmit and interpret their respective positions to others occasionally suggesting proposals for resolution of the issues, then the third party is acting as a mediator; however, if the third party is not only expected to perform this mediating role but also to provide a formal written report of the issues and the successes or failure of their resolution, the process is usually referred to as conciliation.18 Alternative Dispute Resolution

“ADR can be defined as encompassing all legally permitted processes of dispute resolution other than litigation. While this definition (or something like it) is widely used, ADR proponents may object to it on the ground that it advocates litigation by giving the impression that litigation is aberrant or deviant. That impression is false. Litigation is a relatively rarely used process of dispute resolution. Alternative processes, especially negotiation, are used far more frequently. Even disputes involving lawyers are resolved by negotiation far more often than litigation. So ADR is not defined as everything-but-litigation because litigation is the norm. Litigation is not the norm. ADR is defined as everything-but-litigation because litigation, as a matter of law, is the default process of dispute resolution.” Stephen J. Ware. Alternative Dispute Resolution § 1.5, at 5–6 (2001.) Source Black’s Law Dictionary (2019)

10.3.2

Arbitration

(1) Concepts Arbitration differs from litigation in that it is a consensual dispute resolution process made by an agreement between the parties to refer their disputes to arbitration, and choose a neutral party to resolve the dispute.19 The agreement may be set out in a clause of the main contract or may be an entirely distinct contract.20 The procedure adopted to resolve the dispute can, to a large extent, be chosen by the parties, but most national laws and international agreements provide that the procedure must contain a minimum requirement of due process.21

18

Id. Id. at 282. 20 Id. 21 Id. 19

10.3 Commercial Arbitration

589

The culmination of the process of arbitration is the resolution of the dispute between the parties by means of a decision of the tribunal.22 The binding nature of the award made by the arbitral tribunal may be seen as a consequence of the parties’ agreement to arbitrate and is often respected by national law or the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Award of 1958(The New York Convention).23 An award, however, may not be binding in circumstances where it was made without jurisdiction or if the process by which the award was made was somehow defective or unfair.24 (2) Feature Even though an arbitration panel can be composed of a tribunal of people who are not legal counsels and may likely judge the issues based on their own experience and ideas, judgments may be imperfect from the viewpoint of legality, and there can be a lack of predictability, arbitration that has the advantages compared to the litigation as follows: First, peaceful atmosphere and informal procedure can be maintained by a civil arbitrator; second, arbitration is a single-trial system, and so cases can be settled promptly; third, since arbitration does not require lawyers, comparatively speaking, it is very cheap to be processed; fourth, arbitration is not publically open like court hearings, and therefore parties’ confidentiality can be maintained; fifth, results of arbitral award are always binding, which are mandatorily enforced by foreign courts. The New York Convention specifies mandatory enforcement in foreign countries. One of the most important and advantageous features of arbitration is that arbitrators are to be chosen by the concerned parties, which means that the dispute can be decided by panelists with specialized knowledge of a particular trade and commercial practice. This common framework of reference boosts the confidence and trust of businessmen in the proceedings and the resulting award. This is especially important in international commerce where parties come from different legal cultures.25

10.3.3

Arbitration Agreement

Arbitration agreements are mutual agreements to solve part or all of a dispute that already occurred, or is to occur about a certain legal relationship. There must be an arbitration agreement incorporated generally into the contract to solve disputes by arbitration. The objects to be treated by arbitration can be existing disputes

22

Id. Id. 24 Id. 25 Id. at 283. 23

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or future disputes. A “submission agreement” is to be made for the arbitration about the existing disputes, an “agreement to refer” is an agreement to solve future disputes, and the arbitration agreement is generally made by incorporating arbitration clauses into the Agreement on General Terms and Conditions of International Business or Sales Contracts. Standard arbitration is an arbitral agreement (as mandated) in writing. Oral agreements do not satisfy the conditions of a valid standard arbitral agreement. Arbitration law in the England and New York Convention outlines the principle that agreements must be in writing. Regarding the legal effect of arbitration agreements, certain legal systems including the New York Convention admit the "prohibition of direct suit," and so if there is an arbitration agreement, the dispute must be resolved through arbitration and shall not be resolved through litigation.26 Arbitration Agreement

“Any dispute arising out of or in connection with this contract including any question regarding its existence, validity, or termination shall be referred to and finally resolved by arbitration under the Rules of the London Court of International Arbitration which Rules are deemed to be incorporated by reference into this clause.” “If any dispute should arise in connection with the interpretation and fulfillment of this contract, the same shall be decided by arbitration in the city of Singapore and shall be referred to a single arbitrator to be appointed by the parties hereto. If the parties cannot agree upon the appointment of the single arbitrator, the dispute shall be settled by three arbitrators, each party appointing one arbitrator, the third being appointed by …”

10.3.4

Arbitral Tribunal

(1) Concepts An arbitral tribunal is a single arbitrator or a group of arbitrators organized provisionally for the purpose of hearing and ruling, and acts similarly to a court tribunal. As a court consisted by a judge and a collegiate group of judges, the arbitral tribunal is composed of a single arbitrator and a collegiate group of arbitrators. The type of tribunal selected—single or group—is dependent on the seriousness of the situation in terms of the financial amount in question. In typical cases, a tribunal is composed of three people, one of which is elected as the arbitrator in chief.

26

New York Convention, Art.2.

10.3 Commercial Arbitration

591

(2) Selection of Arbitrators First, the arbitrators must not be selected when they have any kind of legal or economic interests to the arbitrating outcome. When they have conflicts of interest with the disputes, their decisions could be severely biased and unfair. Arbitrators should also have a good understanding of the industry, and the items involved in the dispute. Arbitrators can be selected as specified in the parties’ agreement, by a secretariat of the arbitration board, or by a court. The selection can generally be made by the parties when they mutually agree on the selections. If parties fail to select the arbitrator, the secretariat of the arbitration board will assume the job of selecting. This process can also meet obstacles if both parties reject the selection, or if the arbitrator cannot do the job for any reason. In this case, an arbitrator is designated in order of the list of arbitrators kept by the secretariat of the board. The last resort is for a party to turn to a court for selection.

10.3.5

Hearing/Awarding

(1) Place of Arbitration Selection of the place to carry out the arbitration is very important because it is a standard in selecting an arbitrator and deciding which procedures and governing laws to be applied. General arbitration laws and regulation decide the place to make arbitration considering various conditions of the case concerned including the concerned parties’ convenience. (2) Method of Hearing The most important aspect of the procedure is the actual hearing. In the hearing, an arbitral tribunal should give an arbitral award after reviewing statements, references, and other pertinent information. The process often involves both a written hearing and an oral hearing. Both methods are recommended, but they are not mandated. If parties do not agree as to whether the hearing should be written, oral, or both, the arbitral tribunal will decide upon it. When the parties do not agree, the tribunal will necessitate at least an oral hearing, as it is considered the most important and informative. For speedy and exact procedures, an arbitral tribunal will often request parties to submit statements about arguments, evidence, and defending comments. It is a standard practice to present and inspect evidence while all parties are present. The arbitrators then judge the credibility of submitted evidence with their discretion.

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An arbitral tribunal will decide the date, place, and method for the hearing. If the tribunal has a satisfactory reason, it can delay or expedite the hearing on his authority or by a party’s request. (3) (Presentation It is each party’s right and obligation to be present at the time of the hearing. If the arbitral tribunal determines that the procedure cannot promptly be undertaken because the applicant did not specify the purpose of application, or present the reason for application and verification method, or if it determines the procedure cannot be continued, it can terminate the hearing. This is considered a hearing termination due to concerned party’s negligence. If one of party is absent or refuses to participate in the hearing in presence, the hearing can still proceed. However, if both parties are absent more than twice or refuse to attend the hearing in presence, the tribunal can declare the hearing terminated. (4) Termination The arbitral tribunal cannot only terminate a hearing due to negligence of one or both parties but can also make termination when it determines that the parties conducted all their arguments and verification properly. If summary statements are required, the tribunal considers the termination at the final date to submit the documents. The tribunal can resume the hearing at any time before the arbitration award completed on its own authority, or if one applies for resumption. In the case of hearing resumption, the termination is made at the terminated date of the hearing. (5) Arbitral Award The award should be granted within a certain period of time after the hearing termination, but can be delayed by the tribunal. A statement of arbitral award consists of requests and reasons to justify the specific issues awarded. If an arbitration award is fixed, its validity is the same as an irrevocable judgment in court and is therefore a binding and enforceable determination. Since arbitration is a singletrial system, a party cannot apply for arbitration in the same country or overseas to reassess the decision. When the arbitration award is completed, then the enforcement of arbitration is an extremely important issue. Arbitration, as a dispute settlement process, is rendered meaningless if it is not possible to enforce an award rendered by an arbitration tribunal. In international business transactions, the issue is whether an award made abroad is enforceable domestically and whether an award made domestically is enforceable abroad. A number of international conventions including the New York Convention have made enforcement of arbitration awards concluded in the Convention’s member countries effective in their domestic domicile.

10.3 Commercial Arbitration

593

Arbitration Award

Award Made in Case no. 000 in 2011 Arbitrator: Dr. Bruce Mckee (Australia) Parties: Claimant: Kamas Nara Co. Ltd (USA) Respondent: Marine Trading Co, Ltd (Korea) Subject-matter: Rescission of contract -Force majeure Facts In a contract made in 2006, Kamas Nara Co. Ltd. (hereafter Kamas Nara) granted to Marine Trading Co. Ltd. (hereafter Marine) the exclusive rights to reproduce, edit and distribute in Korean language the materials used in their USA magazine. The contract, concluded for the duration of five years, stated that the royalties to be paid by the Marine to Kamas Nara amounted to 5% of the turnover of the Korean edition, with a minimum guarantee of approximately US$5,000 a month. The contract declared also if, with the exception of force majeure, the royalties were not paid within twenty days after the date of publication of an issue, Kamas Nara would have the right to rescind the contract without prejudice to its right to claim damages. Although Kamas Nara several times sent materials to Marine, the Marine never paid the royalties. The latter used the materials, but it appeared that Marine had prohibited publication for some time. In 2007 Kamas Nara requested Marine to pay the royalties and damages. Marine answered that the Korean version of the USA magazine had never been distributed in Korea. It recognized, however, that it owed some money, for various minor items, the total amount of which was approximately US$150,000. This answer did not satisfy Kamas Nara, and on the basis of the arbitral clause contained in the contract of 2006, it initiated arbitration, claiming approximately US$210,000. The Court of Arbitration of the ICC designated an Australian national as sole arbitrator. The arbitration took place in Australia. Notwithstanding many notifications from the arbitrator, Marine did not participate in the arbitration. The arbitrator therefore proceeded in his absence. Award 1. The arbitrator held first of all that Kamas Nara had not exercised its right of rescission, because it had asked for performance of the contract, failing which it would resort to arbitration. The royalties to be paid as well, as the damages, could therefore be taken account of during the entire contractual period of five years. 2. The arbitrator found further that no event of force majeure had occurred. Although the publication of two periodicals of Marine had been prohibited, the company still had a third periodical under publication, in which the material of the USA magazine could have been published. Moreover,

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10 Claim and Dispute Settlement

the Marine had declared in a letter to Kamas Nara that the prohibition would be temporary. The arbitrator also found that Marine had published materials of the USA magazine. In addition, Marine had not supplied any proof that, because of non-performance of Kamas Nara or force majeure, it was unable to publish materials in the years 2009–2010. The arbitrator concluded that even if the obligation of Marine to pay royalties was temporarily suspended—which the arbitrator considered as uncertain—this obligation was entirely reestablished thereafter. Consequently, the arbitrator awarded to Kamas Nara the total amount claimed and condemned Marine to pay the costs of the arbitration.

(6) Prohibition of Lawsuit A party cannot file a lawsuit after disobedience, but if there are any errors or discrepancies in the process or any breaches of the arbitration-related rules, a party can ask for relief by filing a suit of arbitral award avoidance.

10.4

Application to Business Field

10.4.1

Follow-Up Management

If the buyer raises claims, the exporters should respond to such claims. The importer makes a claim for the loss caused by the damaged or defective products, and/or quantity inaccuracies. Solutions could be made through meditation, conciliation, arbitration, or lawsuits. Trade claims can be made in a couple of different scenarios. First, a claim can be brought if there is a suspected breach of principles of good faith and diligence. Second, a claim can be brought if there is a delay in the performance of the contract, a rejection of performance, an impossibility of performance, incompletion of performance, or a delay of acceptance by creditors. The first efforts to settle the dispute are through amicable negotiations between the parties. This path is both the fastest and cheapest for the parties concerned. If these negotiations do not render a solution, mediation, conciliation, arbitration, or litigation might be needed. If the Received Goods Are not in Accordance with the Contract Terms, the Importer Would Bring Claims as Follows:

10.4 Application to Business Field

595

Chinese Marine Trading Co., Ltd. Floor 8, No.388, Yang Fu Port Management Building, Yang Fu Economic Development Zone, Yang Fu, Hainan, P.R. China

July 2, 2023 Dr.COFFEEXTRACT 1646, Yuseong-daero, Yuseong-gu 509, Innobiz Park Daejeon, Korea

Dear Ms. Lee,

41 containers of Cosmetic products for our Order No. CMT20130503 have reached us, but we regret to have to inform you that their quality is inferior to the samples for which we placed the order.

Enclosed find sample from the goods we received. You will admit that your shipments do not come up to the quality of the sample.

We hope that you will correct the matter at once and let us know by return mail.

Yours truly,

Chinese Marine Trading Co., Ltd.

Brue Jin/Manager

If the contracting parties fail to make an amicable agreement to solve the claim dispute, then other solutions are to be sought. The following is for the case of requesting arbitration made by the exporter against the importer for the payment collection.

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10 Claim and Dispute Settlement

Dr.COFFEEXTRACT

10.4 Application to Business Field

597

The Respondent did not pay the amount. Accordingly, the Claimant requested arbitration to be conducted by the Korean Commercial Arbitration Board as set forth in the Purport. Method of Proof

Exhibit A-1 : Sales Contract Exhibit A-2 : Certificate of outstanding payment to Dr.COFFEEXTRACT Exhibit A-3 : Letter Exhibit A-4 : Fax dated August 15, 2017 Exhibit A-5 : Mailing letter dated August 31, 2017 Exhibit A-6 : Fax dated September 3, 2017

Dr.COFFEEXTRACT

Suyeon Lee/ Manager

Learning Assignments

1. Under the presumption that your counterpart raised complaints against the breach of contract, for, example, relating to the quality specification, based on the contract established in Chap. 4 and followed by the issuance of credit in Chap. 5, proceed to communicate and negotiate with your counterpart to resolve the complaints. You may choose to resolve them through the compromise, commercial arbitration or legal litigation according to the provisions concerned under the sales contract. 2. Actual cases of recognizing and enforcing arbitration awards made by arbitral tribunals relating to international trade, and find out the difficulties, inconveniences, and economic inefficiencies to be indemnified through the arbitration award, compared with the costs paid and investments made for the more complete risk management by your company during the process of preparing for exports.

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Bibliography Carr I (2007) International trade law. Cavendish Publishing Dimatteo LA, Dhooge LJ (2005) International business law, 2nd edn. South-Western College Fellmeth AX (2009) The law of international business transactions. West Publishing, Eagan Folsom RH, Gordon MW, Spanogle JA, Fitzgerald PL (2009)International business transactions: contracting across borders. West Publishing, Eagan Kouladis (2006) Principles of law relating to international trade. Springer, Berlin Nelson SC (1989) Alternatives to litigation of international disputes. Int Law 23 Willes JH, Willes JA (2005) International business law. Mc Graw-Hill Nicholas