Payments and inance by Use - Case Study Example

NB: The wants line spacing of 5 which has been provided wants 4000 words - excess will be penalized. Payments and Finance case study Part A Advise Delta whether it has made the payment of '50,000 and, if not, whether it can take action against any of the banks if Alpha cancels the contract. Assume English law applies to all aspects of the question. Although Delta's bankers, Grande Bank may have debited Delta's bank account by a sum of '50,000, the corresponding credit in the account of seller, Alpha's Mega Bank UK plc (Mega Bank), Moorgate Branch, London, Sorting Code 17-24-76, account Number 31323879 has not been made. This is because a bank staffer at the receiving Mega Bank misplaced the credit advice document, as a result of which no credit could be made available to seller's abovementioned bank account. Thus, for all practical purposes, the payment has not been forthcoming, and seller has not received advance amount of '50,000, which was supposed to be credited to his account as advance payment, against the shipment to be made to the seller, within seven days from the signing of the contract between seller and buyer, viz. by July 07, 2009 as per terms of contract between Alpha and Delta. This case is akin to the case of The Honorable Society of the Middle Temple v.Lloyds Bank Plc, and Another (1999) I All ER (Comm) 193, in which, the English agent of a foreign bank partook of a robbed crossed cheque and credited the proceeds into the account of a third party instead of the payee. This agent was held to have acted in negligence. The learned Court, distinguishing between the duties the agent owed to the third party vis-'-vis what it owed to its principal, especially when the agent was duty bound, under the ordinary course of business to take cognizance of its principals' instructions. Thus, under this case, the agent was held negligible for failing to take steps to protect the payee's interests. As the Court observed, "This was not so where the loss arose from the agent's negligence in the actual performance of the collecting bank's request." 1 Similarly, in this case too, Mega Bank could be held responsible for not having credited the proceeds to its client account, when it had received direct instructions for doing so, and that too, within predetermined timeframe. The instructions from Royal Bank to Mega Bank were to credit Alpha's account with the advance money within a day and yet this was not done. The advance payment forms an integral part of the agreement between the seller and buyer, and the inability of the buyers to meet this clause, could, at the option of the seller, lead to cancellation of the contract. As a matter of fact, the entire contract hinges, at the initial stage of the contract, on the release of the advance payment of the contract down payment of '50,000 on the part of the buyers, and the inability on the part of the buyers to effectuate and confirm this payment by July 07, 2009 could, at the option of the seller, lead to nullification of the contract. The contract could be rendered void by seller due to non-receipt of the advance payment within stipulated time that is within July 07, 2009. In this case the contract does not stipulate when the buyer should pay in the money, but stipulates that it should be received by the seller within 7 days of the contract. In other words, it mandates the minimum time within which the payment has to be effected and before the time, after which the contract may lapse. "The moment the agreed period of deferral came to an end, the requirement to pay arose." (Litigation letter, 2004, para.1). In the event the sellers, Alpha, cancels the contract, the buyers, Delta is at liberty to proceed against the bank that has committed the error, that is Mega bank. From the point of view of the Grande Bank in Paris they have acted according to instructions of the buyer client, Delta. They had debited the buyer's account and had, at the same time also sent a Payment Advice through SWIFT to its correspondent bank in UK, Royal Bank Plc. This advice instructed it to make an inter-bank transfer to Mega Bank in British Pound sterling for being credited to the seller, Alpha's bank account. Even Royal Bank had acted swiftly on these instructions and sent the payment advice to Mega Bank on July 6th, with instructions to credit Alpha's account on July 7th, but apparently, due to the lapses on the part of clerical staff of Mega Bank this was not effectuated, which resulted to losses, due to non-receipt of the said advance amount of '50,000 in Alpha's bank account with Mega Bank. Thus, in the event the contract is rendered void by the sellers, Delta on its part could take action against Mega Bank. 2 But whether this could be done directly by the buyer or through the party to the contract, that is the seller, remains a debatable point since the buyer does not have any direct dealings with the payee bank, and it may be needed to be routed through the seller. It is not only necessary under English Common Law for the payee to receive the payment from the payer but it is also important that the payee bank is convinced that the amount need to be credited to the said account and also receives and passes on the notification to this effect. The transaction of payment could only be said to have been rendered complete when the instructions have been carried out and the payee bank instructs and confirms that indeed the said advice has been thoroughly met. Thus, it could be said that with regard to this part of the case study in the event the seller and buyer companies are not able to enter into a negotiated settlement, the contract could be nullified at the instance of the seller, who remains the unpaid seller. Buyer could proceed legally against the defaulting bankers for enforcement of contract or for revoking the contract with ensuing damages and costs. Under English common law, it would be incumbent on the part of the defaulting bank to prove that it has not acted negligently, and that its failure to meet payment commitments on the due date was inadvertent. In any case, it is for the banks to sort out the matter as it is now proposed to enter the next more critical part of this case study. Part B Advise Alpha and Mega Bank as to their respective rights and obligations. Assuming that Mega Bank must pay Alpha, advise whether it can claim reimbursement from Grand Banque. Alpha's - Seller's Rights: Under CIF Contract, as the present one, risk and possession of the goods passes as soon as cargo is placed on board vessel for onward shipment to the buyer, and transfer of documents from agents of seller to the buyer's agent takes place. In this case, Alpha has the right to claim the payment under the documentary letter of credit procedure. But the main aspect that needs to be considered is whether the bill of lading that has changed hands from seller to buyer constitutes a valid document of title to the goods. It is quite possible that the seller could retain title to the goods even after goods have physically left the shores of the seller's country, and would not become a proof of title for the buyer, until all requirements are met, for instance confirmation from the presenting bank. Thus, under this CIF contract, Alpha, the seller is very well entitled to his payment of the amount due after adjusting the advance amount of '50,000 paid to the buyer. viz. ('150,000 - '50,000 = '100,000). Assuming that this is a case of an irrevocable and confirmed letter of credit, which, in effect cannot be revoked, the seller is bound to receive his payment, provided he has tendered all the documents correctly. In the event the documents were forged or duplicate, the buyer is at liberty to reject the documents, the cargo, or both, as the case may be, as was seen in the case of Panchand Freres S.A. vs Etablissment General Grain Co., (1970) But, if the buyer has constructive knowledge of the forgery and still accepts the cargo, he is estoppeled from later on rejecting the goods. In the case of Kwei Tek Chao v. British Traders & Shippers Ltd. (1954), the Bill of lading was fraudulently altered to show that the dispatch was done during earlier period. The buyers, alleged involvement of the sellers in the fraud and sought to claim value of the goods. However, the Courts held that "defendants were innocent of fraud or of any complicity in the fraud and that plaintiffs were not therefore entitled to the return the sum paid but could only pursue their remedy in damages; and that plaintiffs' damages were not limited to the difference between the market prices in October (the date of the bills of lading) and November (when the goods were shipped)." 3 Thus, in this case, it is seen that the main issue that could arise would be with regard to the following: The certification of a single expert was taken instead of a team of experts. Thus, there are reasons for suspicion that misrepresentation could have been used by the sellers to claim the needed certificate as occurred in the case of Equitable Trust Co. Of New York vs Dawson Partners Ltd. (1926) Duties of the seller: Under a CIF contract, the duties and responsibilities of the seller are more onerous than that against FOB, especially with regard to insurance of the goods and forwarding the insurance policy in favour of the buyer. This is because, unlike a FOB contract, wherein the seller retains possession and risk until he received his payment from the buyer, in the case of CIF, the risk and possession gets transferred as soon as the documents are made in favour of the buyer. The other duties and responsibilities of the seller are: 1. Arranging for lifting on to the vessel, the cargo at the port of loading in terms of the goods of the description contained in the contract 2. Arranging for receiving of a contract of carriage of goods by sea and seeing to it that the goods are destined properly as per contract with the buyer 3. Making arrangements for contract of insurance on the current terms for cargo to be shipped and correctly recording all relevant facts regarding it 4. Preparing invoices for the goods and seeing to it that it is as per contractual terms including freight 5. Undertaking to pay all freight, insurance and other costs as per terms of agreement 6. Ensuring a clean Bill of lading is issued at current date and that entries on the bill of lading match with those found in physical goods. The bill of lading should correctly state the description of the goods; otherwise the buyer is at liberty to reject the goods and claim damages and costs 7. Certificate of origin documents 8. Any other document or records that need to be delivered as per contractual terms of the agreement between the seller and the buyer. The terms of the contract between Alpha, the seller and Delta, the buyer is critical in payment of this sort, and would override any general terms. Moreover, it is also seen that in this case the clauses of ICC Uniform Customs and Practice on Documentary Credits (UCP 600) were also applicable in this case. The main idea of this is to "take into account developments in banking, transportation and insurance - review the wording of the UCP to avoid differing interpretations and applications." 4 In this case, there are both material and immaterial errors. It would next be discussed while taking up the matter of bank's liability. "If the issuing bank defaults, the seller can sue it in the country where the bank has a seat. In some circumstances, the seller can sue the issuing bank in his own country if there is a branch office. From the point of view of the seller, this type of letter of credit is a more valuable method of payment than a revocable and unconfirmed letter of credit." 5 Rights of Mega Bank: In the case of Equitable Trust Co of New York vs Dawson Partners Ltd. (1926) 24 Ll L Rep 261; (CA) 25 Ll L Rep 90; (HL) 27 Ll L Rep 49; the Courts held that "The bank acts as the buyer's agent and has no authority to pay against documents which do not strictly comply with the instructions received by the bank." 6 Fundamentally speaking, the physical goods are represented by the bill of lading, which in cases could be construed to be documents of title to goods and could also be used to gain finance against the transaction. In the leading case of TD Bailey, Son & Company v Ross T Smyth & Company Limited (1940) 56 LTR 825 per Lord Wright at 828 the Court held "The general course of international commerce involves the practice of raising money on the documents so as to bridge the period between the shipment and the time of obtaining payment against documents." 7 Thus, in order to obviate the need for a long wait for the seller to negotiate the cumbersome process of sending the goods to the buyer, making sure that it is realized in good condition and then getting payment from the buyers, the banks act as intermediaries in order to facilitate both the buyers and sellers. But, the role and scope of the bank needs to be clear. While an issuing bank needs to be clear that the seller has acted according to the contractual terms of the contract, and good faith and equity in the event the clauses are silent over a certain aspect that becomes critical. In this case, it is seen that there are both material and immaterial errors and misrepresentation bordering on fraud that could vitiate the contract and induce the buyer to refuse either to accept the documents, the goods or both. The facts are as below: Serial Condition as per contract What actually transpired Material or immaterial Repercussions 1. Original copy of Certificate of Quality attested by experts ( more than one) Equitable Trust Co. Of New York vs Dawson Partners Ltd. (1926) Duplicate copy attested by only one expert Material defect Buyer could rescind the contract at his option 2, Supply Grade 7 quality product Supplied lower grade than asked for Immaterial defect Bank is interested in documents not in the goods 3. Bill of lading evidencing shipment in Oct 09 BOL not properly stamped and not identifying goods separately Material defect In case of unascertained goods, buyer may reject goods in toto 4. Insurance contract to comply with ICC Uniform Custom of Practice on documentary credit (UCP 600) Original policy to be tendered ( Diamond Alkali v. Bourgeois (1921) case ) The insurance certificate does not comply with the terms of UCP Article 28.e; Material defect. If insurance is not proper, buyer cannot raise claim on goods in any event of loss, destruction, etc Buyer could rescind the contract and claim damages/cost 5. Country of origin should be from an EU country Country of origin not of EU origin but of Tunisia Immaterial If buyer accepts the certificate of Tunisia there seems to be no problem. Obligations of Mega Bank: As such, the presenting bank Mega Bank needs to ensure that the seller has fulfilled all the terms and conditionalties of the order from the buyer. But, it is seen in this case that Mega bank had discounted the irrevocable LC and had initially credited the account of the buyer with '95,000 after commission, although there was no commission clause in the contract. However, it took the presenting bank, Grande Bank, Paris to point out the defects in the said transaction and instruct to hold payment against the seller. "The rule of strict documentary compliance requires not only that the tendered documents appear on their face, upon reasonably careful examination, to conform to the terms and conditions of the letter of credit but that they also appear to be consistent with one another, particularly in the sense that they refer to the same shipment of goods." 8 However, assuming this to be an irrevocable letter of credit and thus the presenting bank, Mega Bank is under obligation to pay the seller, but there is one clause with regard to the regularity of documents. In this case it is seen that even the insurance policy in favour of the buyer does not comply with Article 28e of UCP 600 which stipulates that "Unless otherwise stipulated in the Credit, or unless it appears from the insurance document that the cover is effective at the latest from the date of loading on board or dispatch or taking in charge of the goods, banks will not accept an insurance document which bears a date of issuance later than the date of loading on board or dispatch or taking in charge as indicated in such transport document." 9 Thus, it is seen that in the event that the presenting banker rejects the documents, the buyer has the following options: 1. He could accept the goods, waiving the conditionalities, or authorize that all errors or discrepancies be rectified. 2. He may also reject the goods and claim recompense for interest and costs. Thus, speaking in terms of the issuing bank, it would need to make payment to the seller since it is an irrevocable LC, but could proceed legally to claim the amounts disbursed and compensated even though the goods are not taken in by the buyer. These are some of the advantages of CIF contracts in which not only is the buyer entitled to reject the goods on inspection but according to terms, the contract may be enforced even if the buyer is not in physical possession of the said goods. Obligations of Mega Bank: The main responsibility and obligations of bank would be as follows: 1. Autonomy 2. Strict compliance with the norms and contractual obligations 3. Banks deal with documents not with goods 4. Nature and enforcement of bank's promise. 1. Autonomy: The bank needs to maintain its professionalism and suzerainty in dealing with the customers, especially in the case of Alpha and Delta business. It is seen that in most cases, the issuing bank would be acting as the agent of the buyer, and would thus need to protect his interests at all costs. However, it is seen that as an outcome of global contract, the issuing bank has no right to hold back payment to the seller due to apparent defect in the goods. In a leading case of Hamzeh Malas v. British Imex Industries [1958] 2 QB 127, the buyers and sellers contracted to buy a large quantity of steel through two installments against two Letters of Credit. The Letters of Credit were opened and the first shipment went without a hitch. When the question of the second shipment arose, the applicants complained about low quality of the first shipment and claimed stay order for payment against the second LC. "According to this principle, the letter of credit is separate from and independent of the underlying contract in respect of which it is issued. This means that claims or defenses arising under the underlying contract do not affect the bank's undertaking to pay." 10 Thus, applying the rule of autonomy, the applicants could not get a restraining order enforcing payment for this case. However, the autonomy principle is not applicable where fraud or illegality is feared. When autonomy is vitiated by the principles of these two gross irregularities, it may not be enforceable or the converse may be enforceable. 2. Strict compliance with the norms and contractual obligations Banks, especially the issuing bank (buyer's bank) need to observe the rules very strictly and ensure that all material terms in the contract in as far as they concern the documents are correct. If the issuing bank fails to inculcate such safety measures, it would lose its right for legal action. In many decided cases it was held that the laxity or negligence on the part of the issuing bank, could lead to a lot of detriment. The strict compliance would be in terms of checking the actual documents with the LC guidelines, check list and also the provisions of ICC Uniform Custom. In this case, it is seen that there are obvious material errors like lack of Experts' certificate, correct country of origin certificate, defective bill of lading, insurance contract not in accordance with predetermined norms, etc. Thus, it could be said that there should be no letdown in application of relevant rules, regulations, norms and guidelines with regard to the checking of the LC. However, the banks need not go deep enough to check the authenticity of the LC itself- it is only the governing clauses and the presence of documents like BL, Insurance, Certificate of Origin, Invoices, Certification of Experts, etc that it need to verify and certify. Common mistakes could be like 1) Alteration in the BL - "United City Merchants (Investments) Ltd and Glass Fibres and Equipments Ltd v Royal Bank of Canada & Ors (The American Accord) considered in (QB Com Ct) [1979] 1 Lloyd's Rep 267; (CA) [1979] 2 Lloyd's Rep 498; [1981] 1 Lloyd's Rep 604; [1982] QB 208; (HL) [1982] 2 Lloyd's Rep 1;" 11 2) Bill of Lading did not conform to the relevant clause of contract "Westpac Banking Corp and Commonwealth Steel Co Ltd." 12 3) Bank claims defects in shipping documents and rejects the same. "Seaconsar Far East Ltd -v- Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438" 1 Lloyd's Rep 236; 13 Thus, it could be seen that the major aspects in international trade could be in terms of compliance with the contractual obligations and terms of the contract in as far as the bank is the agent of the buyer and needs to protect his interests against any fraud, misrepresentation or negligence on the part of the seller. 3. Banks deal with documents not with goods: The third aspect is that the bank is not concerned with the goods as such, but with the documents of title to the concerned goods. The banks are not supposed to be technical experts who would be in a position to inspect and comment upon the performance or otherwise of the goods, etc. They need to be clear that the documents are as per the contract and are perfect in all respects. If this is done, it could give clearance for the payment. 4. Nature and enforcement of bank's promise: It is evidenced that every LC is a contract, and like every other contract, there are promises and commitments flowing from both sides. From the side of the seller, it is with respect to supply of defect free and clear shipping documents and goods as per the quality and other standards demanded by the seller; from the buyer's point of view it would be in terms of honoring the LC upon its presentation and paying for the goods delivered. Both the issuing and presenting banks need to keep up their part of the contract enunciated by their respective principals. Conclusion: In this case, it is seen that Mega Bank had not taken proper precautions in order to ensure that the contract was free of material errors. Under such circumstances, it is believed that they would have been in a much better position to enforce a claim against Grande Banke, Paris, or its correspondent bank in London, if they had exercised due discretion to ensure that the documents were free from material defects and errors. But in its absence, it is perhaps felt that they may not be able to enforce a claim against Grande Bank but could rather prefer to lodge a claim against the insurance company for recompense to be made to them on this subject contract. A critical aspect in this case is that the seller needs to be paid by the buyer. In the event the buyer cannot pay, the buyer's bank will have to make the payment. After paying off the buyer, it may be possible for Mega Bank to claim the amount either from the insurance company, or through a natural process of law as recompense. Reference List --'Banking-1999' (Swarb.co.uk: Law Forum, Law Books, 2009) accessed 31 December 2009 --'Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1997] I.S.C.R. 59: The Rule of Documentary Compliance' (Judgments of the Supreme Court of Canada, 1987) accessed 31 December 2009 --'Chapter 12: Global Marketing, Logistics-Access and Documentation: Letters of Credit' (FAO Corporate Document Repository) accessed 31 December 2009 --'Commentaries and Case Notes' MLAANZ Journal accessed 31 December 2009 --'Kwei Tek Chao (t/a Zung Fu Co) v British Traders & Shippers Ltd (Costs)' (2002) accessed 31 December 2009 --'Letters of Credit: Doctrine of Strict Compliance' accessed 31 December 2009 --'Litigation Practice-1993' (Swarb.co.uk: Law Forum, Law Books, 2009) accessed 31 December 2009 --'Lloyd's Maritime and Commercial Law Quarterly' (I-Law.com: An Informa Business, 2006) Read More