International Banking and Commercial Payment - Essay Example

? International Banking and Commercial Payment By Candi s FACULTY OF LAW (This page intentionally left blank) Introduction International and cross-border trade, carried out since time immemorial, presents opportunities as well as risks and domestic saturation coupled with international demand may require firms to find new markets to remain competitive in a globalised world. 1 In addition to producing earnings from exports, international trade enables firms to acquire resources that are not available in the domestic market. However, risks increase when firms operate outside of the domestic market, despite the fact that a firm may use a number of methods for effecting export transactions. Direct export, export through an agent, or export by the establishment of branches and subsidiaries are ways in which firms export. 2 Risks of fraud, political risks, exchange risks and risks associated with recovering payment are but a few of the risks that confront exporters and importers. Thus, it is important to organise judiciously an export operation and to consider carefully international payment terms in an attempt to present smooth operations to minimise risks for exporters. 3 Although exporters may choose from open account, document collection, letter of credit or cash in advance as payment methods to optimise risks while ensuring that they give effect to an export transaction, it makes sense to exercise presale due diligence and to consider all risks carefully, including country specific risks. 4 It is possible for international trade transactions to present great dramas that may lead to disputes requiring expensive and time consuming dispute resolution procedures or expensive litigation in courts of several countries. 5 The case presented in Appendix A, below, describes an interesting situation involving the unauthorised removal of a bill of lading included with the documents for a document collection export transaction presented by Wyevale Ltd, located in the UK for Asian Traders Inc., as buyers, located in the Philippines. The discussion presented below focuses on an analysis of the facts and the legal issues related to the previously mentioned case of Wyevale Ltd exporting to Asian Traders Inc. An Analysis of Facts of the Question The situation described in the case presented in Appendix A is a typical DA (Documents against Acceptance) collection procedure for export in which the buyer is required to indicate acceptance of bill of exchange prior to the Import Bank releasing title of the goods in the form of bill of lading to the buyer. 6 7 It is important to understand that making, altering, negotiating or transferring a bill of lading with the intent to defraud is a criminal offence. 8 However, the managing director of Asian Traders Inc. may have inadvertently left the Import Bank with the bill of lading on his person without realising this, and that he had then proceeded to take an opportunity to sell the goods consigned to his firm to a third party based on possession of the bill of lading. Because the exporter, Wyevale Ltd of the UK will have a record of the correspondence with Asian Traders, and the banks will have their testimony, it is not possible for the managing director of Asian Traders to escape litigation and simply walk away without paying the exporter because he has in his possession a bill of lading. 9 However, the Import Bank employee should have been more careful. In any case, the importer, Asian Traders Inc. has five days in which to effect payment. Because Asian Traders has the bill of lading, and it has sold the goods consigned to a third party, which has paid to Asian Traders Inc., there is no reason why Asian Traders should not pay in due course, unless an intention exists to deviate from acting in good faith. Even if a bill of lading has passed on to an importer, this will not mean that the importer is in a position to take physical delivery of goods because the ship on which the goods were consigned may not have arrived in port or released its cargo. 10 Thus, it will be too early to suggest that the managing director of Asian Traders has the intent to defraud, because if Asian Trader intends to pay all will be well. When effecting an export transaction in accordance with the DA procedure, acceptance does not necessarily mean that, a buyer will pay within the stipulated time. 11 However, in this case a negotiable financial instrument in the form of a document pledging payment within a certain time is lacking due to the negligence of an Import Bank employee who should not have allowed the bill of lading to pass on to the managing director of Asian Traders Inc. Because the managing director of Asian Traders Inc. failed to return to Import Bank or to contact Import Bank on the following day, as promised, when he had completed inspection of documents, a worrying situation exists. However, Article 24 of the Uniform Rules for Collections No. 522 requires that Import Bank receive specific instructions regarding protest, or other processes in lieu of, in the event of non-payment or non-acceptance. 12 Thus, Import Bank must act on instructions received to lodge a protest with the buyer, Asian Traders Inc. if their managing director has failed to return after walking away with a bill of lading, which should not have been in his possession without a signature on a document pledging payment. Article 9 of the Uniform Rules for Collections No. 522 requires banks to act in good faith and to exercise reasonable care. 13 The case presented in Appendix A does not suggest that Export Bank in the UK, which has forwarded the documents to Import Bank in the Philippines, has any financial interest of its own in the export consignment. An Analysis of the Crucial Legal Issues An understanding exists that there is a requirement to protest bills of exchange if they are not paid and an unpaid bill of exchange will permit litigation. 14 Thus, although in this case the managing director of Asian Traders Inc. has not signed a bill exchange for payment in five days, he has removed the bill of lading and sold on the basis of this bill of lading to a third party, Charlie Enterprises Inc. in Indonesia and received payment. In addition, because Asian Traders Inc. has received payment, it is now in a position to pay to Wyevale Ltd of the UK, unless an intention exists to delay or to act fraudulently. However, it is important to understand that Asian Traders cannot easily get away with fraud. International trade transactions use banks as intermediaries for document collection because a documentary bill arrangement is open to abuse. 15 Thus, when a collecting bank releases a document without either an acceptance or payment, it is possible for the exporter to sue the collecting bank and a lack of knowledge on the part of the collecting bank about the contract arrangement is not a defence by the collecting bank because this bank acts as an agent for a seller. 16 Thus, when an onus exists on the part of the collecting bank to exercise due diligence, something that is even mentioned in Article 9 of the Uniform Rules for Collections No. 522, it is not possible for a collecting bank to act as if it cannot be held liable for negligence. In any case, the collecting bank can act to try to recover the bill of lading after attempting to clarify the intentions of the managing director of Asian Traders Inc. Because the collecting bank is in the Philippines, it is easy for the bank to contact Asian Traders Inc., and the local authorities if Asian Traders Inc. were to deny taking the bill of lading and subsequent sale. However, everything depends on the explanation presented by the managing director of Asian Traders Inc., who can accept that he had taken the bill of lading and sold to Charlie Enterprises Inc. in Indonesia, with an intention of paying the exporter Wyevale Ltd of the UK or deny any knowledge. If the managing director denies taking the bill of lading, he will become involved in criminal acts. However, Asian Traders Inc. can delay acceptance or payment within reasonable limits. If a buyer retains a bill of lading, he will be liable in conversion to the seller and if the buyer was to sell the goods exported by the seller to a third party, he will be liable again to the seller in conversion. 17 Thus, Asian Traders Inc. is legally obliged to pay Wyevale Ltd of the UK despite the fact that they may use delaying tactics. If Export Bank, Import Bank and Asian Traders Inc. refuse to own up to their legal obligations or to listen to reason, the exporter, Wyevale Ltd of the UK has no choice but to bring the matter to arbitration or litigation. This is expensive and time consuming, but no other alternative exists, and it is possible for the International Chamber of Commerce Arbitral Tribunal or a court in the United Kingdom to present an opinion for enforcement by a court in the Philippines. 18 19 Philippine law, the Civil and Commercial Code, provides for aggrieved creditors and unpaid sellers of property to seek recourse to courts for ensuring justice. 20 Perhaps, if the situation were to deteriorate with no cooperation from Asian Traders, it will be possible to persuade the collecting bank to pursue the matter in the Philippines because the seller has the capacity to sue the collecting bank for negligence. It is important to understand that if the matter were to go into litigation, this will severely damage the reputation of Asian Traders Inc. because this company will be deemed to have acted fraudulently or even in a criminal manner. Thus, it is appropriate to present protests by collecting bank and to exercise due diligence for the theft or removal of the bill of lading, including reports to the Philippine Police by collecting bank, if the managing director of Asian Traders Inc. refuses to own up to removal of bill of lading without signing bill of exchange. The collecting bank should ask the managing director of Asian Traders Inc. to sign the bill of exchange at the earliest opportunity and hand over the remaining documents when and if this is done. The Impact of Export Bank going into Liquidation The case presented in Appendix A suggests that the Export Bank has no financial interest in the export consignment. Thus, should the Export Bank go into liquidation, something that is highly unlikely because the Bank of England will jump to save it, there will be minimal material impact on the transaction. It is important to understand that the Import Bank acts as an agent of the seller, Wyevale Ltd of the UK, on a nomination by the Export Bank. 21 Thus, the exporter, Wyevale Ltd of the UK, retains the right to sue the Import Bank in Philippine without acting against Export Bank. However, in abstraction, if Export Bank were to go into liquidation, it may be more difficult to summon witnesses or to extract records of the transaction for presentation in a court or arbitral tribunal. If Export Bank was to go into liquidation, the Import Bank, which is an agent of the seller by virtue of its assignment by Export Bank, will have the opportunity to remit payment to an alternative bank. Conclusion Generally, documentary collections are far less costly than letters of credit, and they are easier to use, but documentary collections do not offer the same payment protection as letters of credit. Thus, it is best to use documentary collection only if an exporter and an importer have a well-established relationship, and an open account is too risky, while a letter of credit is unacceptable to an importer and the exporter is confident that an importing country is politically and economically stable. In this case, if the exporter and the importer have a well-established relationship, it is likely that payment will arrive in due course and the closeness of the relationship may explain the liberties of the managing director of Asian Traders Inc. Appendix A – The Facts of the Case Module: International Banking FACTS Wyevale Ltd, located in the UK, as sellers, entered into an international sale contract with Asian Traders Inc, as buyers, located in the Philippines. The contact contained the following terms relating to payment- Price $USD 3.5. million Payment Payment within 5^ days of receiving documents, including commercial invoice, export licence, certificate of origin, bill of lading, insurance document, and any others specified in the contract. Payment against acceptance of bill of exchange drawn by sellers on buyers and guaranteed by first class bank. Banks Documents to be presented by a bank/banks nominated by the sellers, Title Title to pass to the buyers on payment against documents Wyevale Ltd approached Export Bank, located in the City of London, and obtained its agreement to handle the documents and present them for payment under the terms of the ICC URC No 522. In this capacity Export Bank performed the following functions- a. prepared a bill of exchange on behalf of Wyevale Ltd b. nominated Import Bank, located in Manila, as collecting/presenting bank c. instructed Import Bank to present the documents for payment d. delivered the documents to Import Bank e. informed Import Bank of the terms of the collection instruction After receiving the documents and collection instruction Import Bank contacted the buyers, Asian Traders Inc, and informed them that they were in possession of the documents and arranged for them to visit the bank to examine the documents and make payment according to the terms of the sale contract. The managing director of Asian Traders Inc, a Mr Camile-Charles, visited the bank in accordance with the arrangements made. He was directed to a small private room where he was presented with a folder containing the documents. He was then invited to examine the documents and left alone to get on with this task. When the employee of the bank returned, about 30 minutes later, Mr Camile-Charles informed the bank employee that he was uncertain whether the documents were compliant and would have to take advice on the matter. He returned the folder to the bank employee and indicated that he would return the following day with his decision whether or notio accept and pay against the documents. What the bank employee was not aware of was that Mr Camile-Charles had removed the bill of lading from the folder and hidden it on his person. He succeeded in leaving the bank without the theft being detected. Now in possession of the bill of lading, the following day Mr Camile-Charles offered to sell the goods to Charlie Enterprises Inc, located in Indonesia. After making enquires and inspecting the bill of lading Charlie Enterprises Inc agreed to purchase the goods for $USD 3.65 million. Payment was effected immediately by inter-bank electronic transfer of funds. When a representative of Asian Traders Inc. failed to return to Import Bank and the truth of what had happened emerged, Import Bank informed Export Bank and the sellers Wyevale Ltd. Both banks involved in the collection denied any responsibility for what had happened. The claimed (i) that they were not in breach of any duty owed to the sellers, Wyevale Ltd, and therefore were not liable; (ii) they were in any event protected by the terms of ICC URC 522. ADVISE THE SELLERS, WYEVALE LTD In advising the sellers - (a) analyse all the facts of the question, and (b) analyse fully all the crucial legal issues, and also (c) consider the impact on your analysis if Export Bank went into liquidation. (This page intentionally left blank) Bibliography / References Arnaldez, Jean-Jacques. 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