The Bank of the Elena on Request of Don - Research Paper Example

Introduction It is a matter of general knowledge that to incorporate any INCOTERMS 20001, there must be a particular reference in the contract. Themain purpose of the INCOTERMS is to remove the ambiguities and uncertainties in the interpretation of international trade or shipping terms.2 However it must be noted that just to reach an agreement to transact using the INCOTERMS will not by itself amount to the conclusion of a trading transaction. Since INCOTERMS do not have the ability to cover all the aspects of an international sale of goods contract, the parties should include specific terms in the contract of sale covering the transfer of title to goods, remedies for breach of contract, conditions for exoneration from liability, and any other duties the buyer or seller wishes the other to perform under the contract3. This would facilitate the execution of a smooth contract. The parties have the further choice of incorporating an INCOTERM as well as providing for any other conditions concerning the sale connected with the carriage of goods like contract of insurance and local delivery in the country of import. Salient Features of FOB Contract Being one of the popular and important international commercial terms, 'FOB' is used very widely in the international commercial transactions. 'FOB' is one of the F group terms denotes 'Free on Board' where the element of freight is undertaken to be paid by the buyer and the risk on the goods is deemed to pass to the buyer at the point where the goods are delivered to the specified carrier. The term FOB was originally developed with an intention to specify the responsibilities and liabilities of the parties under the contract4. In the case of Pyrene v Scindia5 three different variations of the FOB Contracts have been established. Under 'Classic FOB' contract the buyer is given the responsibility to nominate the vessel and the seller is to draw up the contract of carriage. As has been laid down in El Amira &El Amina6 it is possible for the seller to act as the principal shipper. In Wimble Sons v Rosenberg and Sons7 it has been held that sometimes the seller ships the goods as a favour to the buyer but is not obligated to do so. The second variation involves the seller taking the responsibility for arranging the shipping and insurance on the buyer's account. But still the responsibility for nominating the vessel is left with the buyer. The third variation is the one which is presently in practice, where the vessel is nominated by the buyer and also the buyer makes the contract of carriage.8 As a consequence in a FOB contract if the buyer fails to advise his nomination of a specific vessel within the time stipulated under the contract the contract can be terminated by the seller. With this repudiation of the contract the seller reserves the right to sell the goods to any other third party and also to recover any resultant loss from the buyer. FOB is being used as one of the important commercial term for the past two centuries and because of the familiarity traders do not wish use other terms while formulating the sales contracts. However this has resulted in using the term FOB wrongly as FOB Factory or FOB Plant which is an incorrect usage as stated by the International Chamber of Commerce According to the Chamber the term implies only 'Free on Board'.9 Thus under the FOB contract the seller need only to place the goods on board the ship which is nominated by the buyer. However as specified in Para B7 of Incoterms 2000, the buyer is obligated to give the seller sufficient notice of the vessel he has nominated. The buyer must advise the seller the name of the vessel, loading point, and required delivery time. According to the provisions of Para B7 of the Incoterms 2000 the FOB buyer having already nominated a vessel will not necessarily permitted to substitute another ship, unless the sale contract so provides and the seller may refuse to load the substituted vessel. This principle has been laid down in Cargill U.K Ltd v Continental U.K Ltd 10 Sometimes it may so happen that the FOB buyer is forced to cancel the earlier nomination and find a replacement for some reason or other. As per law the buyer is entitled to nominate a substitute vessel so long as the date of shipment is within the time stipulated under the sale contract. However it is usual for the FOB contracts to contain provisions requiring the buyer to nominate an acceptable vessel by giving a minimum period of notice to the seller. So long as the substituted nomination meets the stipulated notice period requirements and the ship is an acceptable one, the seller can not reject the revised nomination. For all practical purposes the substitute nomination will be treated as a new nomination.11 If the substitution is not made by the buyer with the contracted notice period the seller has the right to reject it and cancel the contract as confirmed by the Court of Appeal in Cargill U.K Ltd v Continental U.K Ltd. Based on the above settled law, since Bob made the nomination of the first vessel on the 25th July, he can not make the second nomination of another vessel for the 30th July, unless the sale contract provides for such a nomination. The fact that the first vessel is not 'seaworthy' makes no difference in the nomination. The fact of the seaworthiness should have been checked by Bob before nominating the vessel. Hence the second nomination by Bob will be treated as a new nomination and since Sam feels that there is no enough time to load she is at liberty to refuse loading on the 30th vessel. She can move the court to prevent the bank from parting with the 5% performance guarantee amount. The fact that Bob has mentioned a wrong contract number in his claim of the guarantee amount is immaterial as far as the position of Sam is concerned. 2. Applicability of UCP 600 The transaction between Sam and Don is covered by UCP 600 in so far as it relates to the presentation and acceptance of the documents under the documentary letter of credit. The Uniform Customs and Practices for Documentary Credits 2007 Revision ICC publication no 600 (UCP 600) which came in to effect from 1st July 2007 is applicable to any documentary credit when the text of the letter of credit expressly mentions that the credit is subject to these rules.12 However since the transaction takes place before the UCP takes effect it is to be considered whether the UCP 600 becomes applicable to the transaction. "Letters of credit opened prior to 1st July 2007 will continue to be governed by UCP 500 and it is unlikely that they will be amended to change to UCP 600"13 For the purpose of this presentation it is assumed that although the transaction takes place during June 2007 the UCP 600 becomes applicable as the text of the documentary credit mentions so. It is also assumed that the letter of credit expires well after 1st July 2007 - the date on which the UCP 600 takes effect - and hence the rules as prescribed by UCP 600 becomes applicable to the transaction. Advise of the Letter of Credit Article 2 of the UCP defines a banking day as "a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed" Hence the advise of the letter of credit by Sam's Bank on the 30th April at 4.30 pm can be construed as a valid advice of the incoming documentary letter of credit since the act is performed on a banking day even though Sam's office is closed at that time. Article 11 further states that an authenticated tele-transmission of a credit can be deemed to be an operative instrument. Irrevocability Under UCP 600 a documentary credit will be treated as irrevocable even when there is no indication to that effect in the text of the instrument.14 Under the earlier version UCP 500 it is mandatory that the operative credit instrument clearly mentions whether the letter of credit is a revocable or irrevocable one. Article 6 of the UCP 500 gives the right to the opener to open the documentary credit either as revocable or irrevocable. Under Article 8 of the UCP 500 a revocable letter of credit can be revoked at any time even without notice to the seller. The UCP 600 has removed this requirement and all operative instruments opened and advised in accordance with the express provisions of UCP 600 shall be deemed to be irrevocable by the opener. Bill of Lading According to Article 27 of the UCP 600, the bank will accept only a clean transport document. A clean transport document implies that the document should not bear any express clause or notation declaring the goods or the packaging as defective. However there is no requirement that the words 'clean' need to appear on the Bill of Lading or other transport document. This is the case even where the documentary credit specifically states that the transport document should state 'clean on board'. Hence Sam need not worry about the refusal of the carrier to issue a 'clean bill of lading'. 15 As regards the mentioning of 'the cables of are showing signs of rust and have brittle ends' in the bill of lading does not indicate that the goods are defective as it is usual for the used cables to have some rust and brittle ends. Since it is the quality of the merchandise the mention of these words on the bill of lading does not make the document invalid. With respect to the words 'Shipped on deck where convenient' - Article 26 of the UCP 600 provides that a clause on the transport document mentioning that the goods may be loaded on deck is acceptable. Similarly Article 26 accepts the wording 'shipper's load and count' and 'said by shipper to contain'. However there is no express provision to prohibit the use of the words 'quantity unknown'. It is usual for the bill of lading to state quantity 'said to contain'. But this unusual notation in the bill of lading may amount to a discrepancy subject to the waiver of the opener of the letter of credit. Originality of the Documents Under UCP 500 several issues arose as to whether the banks could insist on the original documents and also which documents constitute 'original'. These issues arose on the interpretation of Article 20 (b) of the UCP 500 which deals with the 'original' documents. These issues were resolved by the Article 17 of the UCP 600. Under Article 17 of the UCP 600 it is mandatory that at least one original of every document mentioned in the documentary credit must be presented. In this case the bank is authorized to treat as original any document bearing a signature that is apparently original. If the document itself claims that it is not original then the bank may not accept it as original. In the instant case the survey report issued by the surveyor is a photocopy. However since the surveyor has signed it in ink it can be treated as original for the purpose of presentation of documents under the letter of credit. It does not matter that the document is not marked as original.16 Date of Shipment The date of issue of the Bill of Lading shall be deemed to the date of shipment in all cases, unless there is any indication in the bill of lading to the effect of 'Shipped on Board' with the indication of the date of shipment.17 In the instant case the bill of lading states 'shipped 31st May' without clearly indicating 'shipped on board'. This implies that the vessel has not sailed on the 31st May as claimed by Sam. As a normal practice the carrier issues an 'on board' bill of lading only after the vessel actually sails from the port of loading. In this case the date of the bill of lading shall be taken as the date of shipment. In case if the bill of lading is dated after 31st May it gives rise to a discrepancy subject to the waiver of Don through his bank. Acceptance of the Documents under the Letter of Credit When Don accepts the documents through his bank the act implies that all the discrepancies in the documents in the documents including the date of shipment are waived by him. Hence once he prefers to accept the documents his right of claiming through a legal process on the basis of the discrepancy in the date of shipment is lost. However Don can still retain the right to sue Sam for the substandard quality of the merchandise. But this claim will be outside the transaction relating to the letter of credit and can fall under the applicable provisions of the international sale of goods which govern the quality of the goods supplied and the samples provided. Once the opener accepts the documents presented under a documentary credit it tantamount to his acceptance of all the discrepancies and there can be no conditional acceptance. The only other choice is to issue a notice of discrepancy within the stipulated five banking days (Article 14 of the UCP 600) and return the documents thereafter. The issues arising out of discrepant documents, waiver, and notice are dealt with by Article 16 of the UCP 600. According to Article 16 there are four options available to the paying banker that issues notice of the discrepant documents. (i) "holding the documents pending instructions from the presenter and (ii) returning the documents to the presenter, (iii) an issuing bank may seek and accept a waiver of discrepancies from the applicant, and release the documents to the applicant unless it has received prior instructions from the presenter (iv) a bank may act on instructions previously received from the presenter"18 Resale to Elena Since the documents will be presented to the bank of the Elena on request of Don the same conditions will become applicable to the presentation of the documents for payment. Elena as a holder in due course of the bill of lading has to decide whether to accept the discrepancy in the date of shipment or to reject the documents and send back to the beneficiary. Under this situation Elena's bank will have the four options mentioned in Article 16 of the UCP 600. In case she decides to accept the documents and proceed to make the payment she will loose the right of proceeding under the discrepancy of the letter of credit clause. But as a holder in due course she reserves the right to proceed for the quality of the goods shipped on a separate legal suit under the International commercial law but not for any discrepancy under the letter of credit. Read More