L/C payment case study: learn the rules

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On April 11, 1994, a company in China (JS for short) concluded an export contract with a GT company in Hong Kong. It was a contract for 4950dz of 45x45/110x70 T/C yarn-dyed shirts with long sleeves, with contract number of No.94JS-GT102, 5% more or less allowed. The unit price was USD28.20/dz CFR Hong Kong, and total amount of USD 139,590.00, shipping before the end of August, 1994. The payment term was by 100% irrevocable L/C to be available by 30 days after date of B/L.

After constant urging, JS finally received the L/C numbered as 6753/80210 from Banca Commercial Italy, Naples Branch at the end of May. The applicant of L/C was CIBM SRL, a company of Italy and the port of destination was changed to Naples, Italy with the latest date for shipment being August 30, 1994. Meanwhile, they appointed Marvelous International Container Lines (MICL) to be the carrier. The validity date for L/C was September 15, and it would be effective to negotiate in China.

After receiving the L/C, JS company, without raising any objections, organized production immediately. Because the yarn-dyed fabrics used for shirts were supposed to be supplied by Beijing GH yarn-dyed fabric factory as GT appointed, while the factory failed to supply in time as JS required and the quantity was also in shortage, JS could not ship the goods by required latest date, which is August 30. Therefore, the GT company issued a letter of guaranty saying that the buyer will pay the bill in time when receiving documents. With the guaranty, JS shipped 4700 dozens of shirts (total payment: USD 132,540.00) through MICL and got a B/L (NO.: GM/ANP-11773). The date of B/L was September 12, 1994.

September 14, JS prepared the complete set of documents as L/C required and handed to negotiating bank. But soon, they received a notification of protest of payment. The reason was short in quantity and exceeding the latest date for shipment. Thereafter, JS had tried several times to get in touch with GT and CIBM SRL but got no result.

On October 19, the issuing bank sent a letter requiring canceling of the L/C, but JS refused at once.

November 1, JS received a fax from CIBM SRL claiming that there were quality problems with the goods and requesting for 20% discount. JS inferred from the fax that CIBM SRL had picked up the goods, which was assured by MICL. And as MICL told, CIBM SRL picked up goods with original B/L. thus, JS immediately required Banca Commercial Italy, Naples Branch to return the documents, and called several times urging for giving back the documents thereafter.

November 15, Banca Commercial Italy, Naples Branch claimed that they had already mailed the complete documents of both original and copied ones under 6753/80210 L/C to JS’s negotiating bank. But the negotiating bank has only received a set of copied documents.

JS learned that the Banca Commercial Italy has an office in Shanghai, so they contacted and negotiated with the people in charge in Shanghai office and pointed out solemnly that as a bank with certain status in the banks world internationally, Banca Commercial Italy’s behavior of arbitrarily giving B/L to buyer violated UCP500 and international practice. They hoped Banca Commercial Italy, Naples Branch could handle the issue properly; otherwise, JS would seek legal means to protect their own rights.

December 12, General Manager of CIBM SRL, L. Calabrese, offered to come to China and negotiate the solution of the issue. December 5, a three-member team of JS went to Shanghai to meet L. Calabrese. After confirming the fact that CIBM SRL had taken the original B/L from bank and had picked goods up, the process of discussion appeared smooth. During negotiation, the counter party has required certain discount for quality and quantity problems existing in the goods, but got no return.

December 10, JS received all payment for goods from CIBM SRL.

Analysis

Reading through the above case, we found it worth learning that JS successfully recovered total payment thanks to the L/C regulations.

When JS met with protest of payment and was trying to negotiate with related parties, they all avoided. But when JS was at their wits end, a fax from the consignee, CIBM SRL proposing a 20% discount for the quality problems of goods told the truth. Thus JS inferred that the consignee probably had picked up the goods. Then JS confirmed the inference from carrier and leaned that consignee got original B/L. because it also could be that the carrier deliver the goods without B/L.

According to related regulations in UCP500, if issuing bank decides to reject the documents, it should notify the negotiating bank in 7 bank working days after receiving the documents. The notification should include all the discrepancies basing on which it refuse to accept documents, and also clarify if the bank will keep the documents for further instruction. It indicates that the issuing bank has no right to deal with the documents by themselves. Based on this term, the issuing bank in this case should keep the complete set of documents waiting for beneficiary’s instruction.

Once JS had assured that it was the issuing bank who arbitrarily provide B/L to consignee, they immediately request the bank to return the B/L, while the bank at that time didn’t have any original B/L to return, thus forced the bank to push out consignee to solve the dispute. Banks see reputation as their lives, so the issuing bank would not take risks anymore and stand with consignee. Seizing this handle against the bank, JS, who also made some mistakes in the process of carrying out the contract, recovered all the payment as agreed.

JS made two mistakes during the process: one is that they did not raise any objections or doubts when the port of destination changed, for its changing to Italy from Hong Kong would at least add their cost of freight; the other is that when raw materials could not be supplied in time, they failed to request buyer for mending of L/C but believed easily on buyer’s guaranty letter instead.



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Comments

1 Responses to " L/C payment case study: learn the rules "

  1. murtaza ali on  JAN   24th , 2012 5:6 AM

    dear sir,
    ist of all the l.c.accepted was payment tobe made after 30 days from bill should not have accepted,which must be within 30 days and in the l.c.it should have been mentioned the l.c.opening bank must cofirm the payment maturity date after receipt of the shipiong documnts,possible there is misisng this point in the l.c.further descrpencies documents should not have sent to the buyer banker.
    however, there is lot of negligences on the factory or shipper account therefore the buyer and buyer banker get the opportunity to reject and refuse the payment.regards.murtaza ali.amazon,dhaka.bangladesh.our e.mail.amazon@agni.com.

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