A Guide To International Trading Professional Tools and Practice Insights For Successful Operations (Springer, 2023)

Management for Professionals
Eun Sup Lee
A Guide
to International
Trading
Professional Tools and Practice Insights
for Successful Operations
Second Edition
The Springer series “Management for Professionals” comprises high-level business
and management books for executives, MBA students, and practice-oriented busi-
ness researchers. The topics cover all themes relevant to businesses and the busi-
ness 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)

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
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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 transac-
tions in the global market and to pre-experience the trading operations with their
selected items. Upon completion of the course, when they applied for employ-
ment with the companies, they submitted their final report on the experience-based
projects to the companies with the application, which have positively been eval-
uated 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 profes-
sional 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 busi-
ness 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 Vil-
lage 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
vi 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 informa-
tion needed for their international trade operations. But the students recommended
author to make it more practice/skill- focused, for helping them make more effi-
cient 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 full-
time 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 inter-
ests, which could effectively be reflected into my classrooms having academic and
professional students. Even though Seung Woon worked as my assistant, the con-
tents 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. Hae-
Min 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 con-
tribution 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
1.1 Concepts of International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Public Regulation on International Trade . . . . . . . . . . . . . . . . . . . . . . 5
1.2.1 Multilateral Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2.2 Gatt 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
1.2.3 Technical Barriers to Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
1.2.4 Sanitary and Phytosanitary Measures . . . . . . . . . . . . . . . . . . 13
1.2.5 Customs Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2.6 Rules of Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2.7 Pre-shipment Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.2.8 Import Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.2.9 Dumping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.2.10 Subsidies and Countervailing Measures . . . . . . . . . . . . . . . 20
1.2.11 Safeguard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.2.12 Gats . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.2.13 TRIPs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.2.14 Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1.2.15 Trade and Environments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.2.16 Trade and Anti-competitive Practices . . . . . . . . . . . . . . . . . . 26
1.3 Domestic Regulation on International Trade . . . . . . . . . . . . . . . . . . . 27
1.4 Private Regulation on International Trade . . . . . . . . . . . . . . . . . . . . . . 29
1.4.1 Laws on International Sales Contracts . . . . . . . . . . . . . . . . . 33
1.4.2 Laws on Typical Trade Terms . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.4.3 Laws on Trade Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.5 General Process of International Trade Operation . . . . . . . . . . . . . . 36
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
2 Overseas Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.1 Overseas Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
2.1.1 Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.1.2 Reaching Potential Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.2 Overseas Exhibitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.2.1 Preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
vii
viii Contents
2.2.2 Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2.3 Follow-Up Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.3 Marketing Planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.3.2 Method of Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . 47
2.3.3 Credit Inquiry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.4 Verification of Domestic Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.4.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
2.4.2 Case of China as Importing Country . . . . . . . . . . . . . . . . . . 49
2.4.3 Case of Korea as Exporting Country . . . . . . . . . . . . . . . . . . 51
2.5 Application to Business Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.5.1 Selection of Market and Items . . . . . . . . . . . . . . . . . . . . . . . . 52
2.5.2 Finding/Screening Counterparts . . . . . . . . . . . . . . . . . . . . . . . 54
2.5.3 Making Business Proposals and Inquiries . . . . . . . . . . . . . 57
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3 International Trade Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.1.2 Legal Characteristics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
3.2 Conclusion of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.2.1 Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.2.2 Special Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.2.3 Counteroffers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.2.4 Withdrawal/Cancelation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.2.5 Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
3.3 Performance of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.3.1 Delivery of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.3.2 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4 Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.4.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.5 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3.6 Avoidance of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
3.6.1 Partial Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3.7 Exemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3.8.1 Entering Into Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
3.8.2 Consulting of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.8.3 Offer, Acceptance/Conclusion of Contract . . . . . . . . . . . . . 110
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
4 Terms of International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4.1.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
4.1.2 Law Sources of International Trade Contracts . . . . . . . . . 116
4.1.3 Governing Law/Jurisdiction . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Contents ix
4.2 Basic Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

4.2.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
4.2.2 Terms of Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
4.2.3 Terms of Quantity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
4.2.4 Terms of Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
4.2.5 Terms of Packaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
4.2.6 Terms of Shipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
4.2.7 Terms of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
4.2.8 Terms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
4.3 Incoterms® 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
4.3.1 Provisions of Incoterms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
4.3.2 Trade Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
4.4 Illustrated Forms of International Trade Contract . . . . . . . . . . . . . . 181
4.4.1 General International Contract . . . . . . . . . . . . . . . . . . . . . . . . 181
4.4.2 International Sales Agreement (Purchase Order
Form) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
4.4.3 International Sales Agreement (Selling Contract
Form) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
4.4.4 Plant Supply Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224
5 Payment Collection in International Trade . . . . . . . . . . . . . . . . . . . . . . . . . 225
5.1 Payment Collection Under Letter of Credit . . . . . . . . . . . . . . . . . . . . 226
5.1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
5.1.2 Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
5.1.3 Concerned Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278
5.1.4 Kinds of Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
5.1.5 Interpretation of Letter of Credit . . . . . . . . . . . . . . . . . . . . . . 291
5.1.6 Required Document . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302
5.1.7 Bill of Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340
5.1.8 Negotiation for Payment Collection . . . . . . . . . . . . . . . . . . . 344
5.1.9 Receipt of Goods by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . 384
5.1.10 Illustration of Credit by Kind . . . . . . . . . . . . . . . . . . . . . . . . . 385
5.2 Payment Collection without Letter of Credit . . . . . . . . . . . . . . . . . . . 403
5.2.1 Document Against Payment . . . . . . . . . . . . . . . . . . . . . . . . . . 403
5.2.2 Remittance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404
5.2.3 Open Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
5.2.4 Factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 411
5.2.5 Forfaiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413
5.3.1 Informing of Issuance of Letter of Credit . . . . . . . . . . . . . 415
5.3.2 Receipt of Letter of Credit for Export . . . . . . . . . . . . . . . . . 417
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425
x Contents
6 International Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427

6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428
6.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428
6.1.2 Transportation in International Trade . . . . . . . . . . . . . . . . . . 428
6.2 Means of Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
6.2.1 Maritime Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429
6.2.2 Liners/Trampers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432
6.2.3 Air Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481
6.2.4 Tariff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490
6.2.5 Combined Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491
6.3.1 Getting Export/Import Approval (If Required
by Law) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492
6.3.2 Manufacturing or Securing Contracted Items . . . . . . . . . . 494
6.3.3 Making Clearance/Arranging International
Transport and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498
7 Marine Cargo Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 499
7.1 Marine Cargo Insurance Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
7.1.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
7.1.2 Insurance Brokers in Marine Insurance . . . . . . . . . . . . . . . . 501
7.1.3 Insurable Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 502
7.2 Maritime Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
7.2.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503
7.2.2 Insurer’s Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
7.3 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 507
7.3.1 Types of Insurance Contract . . . . . . . . . . . . . . . . . . . . . . . . . . 507
7.3.2 Insurance Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510
7.3.3 Covered Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517
7.4 Cargo Insurance Under Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . 536
7.4.1 Insurance Clauses on Letter of Credit . . . . . . . . . . . . . . . . . 536
7.4.2 Insurance Documents Under Letter of Credit . . . . . . . . . . 536
7.5 Insurance Premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
7.6 Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 546
8 Foreign Exchange Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547
8.1 Foreign Exchange in International Trade . . . . . . . . . . . . . . . . . . . . . . . 548
8.1.1 Foreign Exchange Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 548
8.1.2 Foreign Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551
8.2 Exchange Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553
8.2.1 Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 553
8.2.2 Spot Rate/Forward Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 554
8.2.3 Methods to Determine Forward Rate . . . . . . . . . . . . . . . . . . 554
Contents xi
8.2.4 Forward Exchange Transactions . . . . . . . . . . . . . . . . . . . . . . . 555

8.2.5 Management of Exchange Risk . . . . . . . . . . . . . . . . . . . . . . . 559
8.3.1 Negotiation for Payment Collection with Bank . . . . . . . . 561
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
9 Electronic Commerce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 576
9.1.1 Development of EDI System . . . . . . . . . . . . . . . . . . . . . . . . . . 576
9.1.2 New Paradigm of International Trade . . . . . . . . . . . . . . . . . 577
9.2 Process of Electronic Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578
9.2.1 Selection of Target Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
9.2.2 Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
9.2.3 Negotiation and Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
9.2.4 Arrangement and Delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
9.2.5 Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579
9.3 Customer Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580
9.3.1 Method to Find Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580
9.3.2 Searching for Customers Through Websites . . . . . . . . . . . 581
10 Claim and Dispute Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583
10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584
10.2 Resolution of Trade Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584
10.2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584
10.2.2 International Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 585
10.3 Commercial Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 587
10.3.1 Alternative Dispute Resolution . . . . . . . . . . . . . . . . . . . . . . . . 587
10.3.2 Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588
10.3.3 Arbitration Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589
10.3.4 Arbitral Tribunal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 590
10.3.5 Hearing/Awarding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 591
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598
Introduction
1
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 inter-
vention. 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 character-
istic 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 1

E. S. Lee, A Guide to International Trading, Management for Professionals,
https://doi.org/10.1007/978-3-031-39977-0_1
2 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 encom-
passes the transfer of services, technology through license agreements, and even
bonds and other investment vehicles. Individual countries provide support to pro-
mote 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, compa-
nies 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 concern-
ing 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 regu-

lations 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 pay-
ments 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 safe-
guards 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 con-
tracts 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, inter-
national 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 insur-
ance contract considering the physical and seasonal characteristics of the
transported goods.
4 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 expec-
tations. 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 pro-
tected 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 drasti-
cally 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 impossi-
bility of obtaining an import or export license, legal disputes between the
concerned parties and difficulty in determining governing law and jurisdic-
tion. 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 pre-
investment in the importing market to prepare for or expand exports. If
exports actually decrease contrary to the exporters’ expectations after mak-
ing 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 inter-
national relations in the post-war world. One of the most important negotiating
processes at the time was the United Nations Conference on Trade and Employ-
ment, 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 nego-
tiations 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 imple-
ment 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 pro-
cess of steady trade liberalization through eight “rounds” of multilateral trade
6 1 Introduction
negotiations sponsored by its contracting parties, covering progressively larger vol-

umes of international trade. This process evolved with its own dynamics, through
the initial years of the Cold War, the emergence to independence of many devel-
oping 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 consoli-
dation 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 Min-
isterial 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 Mul-
tilateral 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 Organi-
zation, is included in the Final Act of the Uruguay Round of Multilateral Trade
Negotiations. It constitutes the principal result of the Uruguay Round and incor-
porates, 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 multi-
laterally undertaken. The negotiations: made improvements on GATT provisions
through understandings on GATT Articles; strengthened the institutions of the mul-
tilateral 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 valua-
tion, 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 intel-
lectual property rights protection; and further liberalized world markets through
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 negotia-
tions. 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 nego-
tiations 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 settle-
ment 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 over-
all 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 system-
atically 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.
8 1 Introduction
1.2.2 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. Pro-
visions 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 clari-
fied 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 appli-
cation, 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. [here-
inafter 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.
Regarding the interpretation of the WTO Agreement, in accordance with Article

IX of the WTO Agreement, the authority to adopt interpretations of that Agree-
ment 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 pro-
visions 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 Mem-
ber 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 conces-
sion (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 mul-
tilateral trading system. The commitment that “any advantage, favor, privilege or
immunity granted by any contracting party [now Member] to any product orig-
inating 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 free-
dom of transit,14 anti-dumping and countervailing duties,15 valuation for customs
7 WTO Agreement, Art. 9.

8 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.
10 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 govern-
ment 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 spec-
ified 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), deal-
ing 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.
17 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.
➄ Exceptions
Article XX (General Exceptions) and Article XXI (Security Exceptions) recog-
nize 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 world-
wide, 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 stan-
dards, 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 dis-
courage 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 liberal-
ization, provided a measure is “necessary.” See Eun Sup Lee, supra note 4, at 45.
29 GATT, Art. 20.
31 GATT, arts. 3, 11 and 20.
12 1 Introduction
agreement was called, laid down the rules for preparation, adoption and applica-
tion 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 prod-
uct—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 appro-
priate 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 compli-
ance.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 includ-
ing 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.
1.2.4 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, how-
ever, 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 Applica-
tion 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 pro-
tection 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 appli-
cation of sanitary and phytosanitary measures.47 The SPS and TBT Agreement are
40 See Eun Sup Lee, supra note 4, at 68–69.

41 Agreement on the Application of Sanitary and Phytosanitary Measures. 1994. Marrakesh Agree-
ment 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].
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 mea-
sures 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.
14 1 Introduction
complementary48 formally but different in their design.49 Thus, the TBT Agree-
ment 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 suffi-
cient 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 clar-
ifying 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 protec-
tion. 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 Agree-
ment. 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.
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.

Sanitary measures are those related to human or animal health, and phytosan-
itary 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 essen-
tial 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 meth-
ods 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 prod-
uct. 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 substan-
tial transformation is universally recognized, some governments apply the criterian
56 SPS Agreement, Annex A. para.1.

57 GATT, Art. 7.
58 GATT, Art. 7.1.
16 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 deter-
mine 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 coun-
tries 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 harmo-
nization 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 Infor-
mation 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].
Rules of origin are defined as those laws, regulations, and administrative deter-
minations 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 pol-
icy 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 statis-
tics 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 coun-
tries 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 nego-
tiators 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 inspec-
tion 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.

66 Id. at Art. 1.2.
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.
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 sub-

mission 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 Impor-
tation and Exportation—deals with import licensing procedures in a non-specific
manner:73 General obligation is established concerning formalities whereby Mem-
bers recognize the need for minimizing the incidence and complexity of import
and export formalities and for decreasing and simplifying import and export doc-
umentation 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, impar-
tial, 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.
72 Agreement on Import Licensing Procedures, Apr. 15, 1994, Marrakesh Agreement Establish-
ing 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.
import licensing procedures from unnecessarily hindering international trade. Dur-

ing 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 indus-
try 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 Agree-
ment.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.
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 Introduction
1.2.10 Subsidies and Countervailing Measures
The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)86

addresses two separated but closely related topics: multilateral disciplines reg-
ulating 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 contribu-
tion 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].
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.
1.2.11 Safeguard
The Agreement on Safeguards (“SG Agreement”)91 sets forth the rules for appli-
cation 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-favored-
nation, or “MFN”) basis; that they be progressively liberalized while in effect; and
that the Member imposing them generally must pay compensation to the Mem-
bers whose trade is affected. Thus, safeguard measures, unlike anti-dumping and
countervailing measures, do not require a finding of an “unfair” practice, gener-
ally 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, devel-

oping and developed alike. In a number of countries, services have been very
important for employment and employment growth, because many traditional ser-
vices, 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 tech-
nologies; 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.
22 1 Introduction
New transmission technologies have overturned traditional concepts of dis-

tance—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, interna-
tional 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 Ser-
vices (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 conclu-
sion 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. Follow-
on 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, regu-
lations requiring compliance with technical standards or qualification requirements
to ensure the quality of services and the protection of public interest are con-
sidered necessary. Multilateral negotiations have progressively liberalized GATS
regulations by removing trade barriers in service markets, while not restricting the
98 Id., at 196.
99 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.
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 (some-
times 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.
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.

24 1 Introduction
research and development activities for the development of new technology; to

stimulate and ensure fair competition; to protect consumers; to facilitate the trans-
fer 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 Set-
tlement 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 consis-
tent with the WTO agreements, and parties are encouraged to develop mutually
satisfactory solutions, even when the matter is before a panel.122 The WTO dis-
pute 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 set-
tlement 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.
115 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.
121 Id.
122 DSU, Art. 11.
124 DSU, Art. 3.4.
125 Id., at Art. 3.5.
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 accru-
ing 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 pre-
serving 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 Com-
mittee on Trade and Environment [hereinafter CTE], the WTO has been unable
to give any resolute attitude for diverse pending issues concerning environmen-
tal 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.

127 Id., at Art. 3.3.
128 Id., at Art. 4.3 or 6.1.
130 See id.
26 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 Orga-
nization (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 bar-
riers 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 improve-
ment 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 com-
petition policy. As the trade barriers among major countries have been substantially
removed, international trade institutes such as the WTO and Organization for Eco-
nomic Cooperation and Development (OECD) have recently been concentrating
on the effect of domestic competition policy on trade policy.134
131 Id., at 398.

132 Id.
133 Id.
134 Id.
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 coun-
tries’ 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 competi-
tion 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 mecha-
nisms, 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 encour-
age 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 cus-
toms 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 strate-
gic 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.
136 Id. at 399.
137 Id.
28 1 Introduction
country’s resident entities to specifically listed countries. Strategic goods are trans-
acted 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 gener-
ally 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 posi-
tively 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 recom-
mendation 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 inter-
national 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 permit-
ted 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 differ-
ent degrees of development, and accordingly, varying domestic private laws and
commercial practices.
These obvious discrepancies have led to a set of international private rules guid-
ing 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 indi-
vidual 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 compre-
hensive 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 sig-
nature 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.
30 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 com-
pany 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 defen-
dant 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 con-
tract 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 forma-
tion 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 [fed-
eral 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 Pharmaceu-
ticals 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.
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 per-
formance 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 lack-
ing 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 ambi-
guities regarding international contracts that the CISG was designed to avoid.
As a consequence, parties to international contracts would be unable to pre-
dict 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 promis-
sory 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. Con-
sequently, 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.
32 1 Introduction
These obvious discrepancies have led to a set of international private rules guid-
ing 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 indi-
vidual 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 mat-
ters such as dividing responsibilities and costs incurred between exporters and
importers, while reflecting the most advanced transportation practices and meth-
ods. 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
(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 Com-
merce 1996. The United Nations Convention on Contracts for the International
Sale of Goods 1980 (CISG) is a uniform set of trade laws enacted by UNCI-
TRAL 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 perfor-
mance 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 inter-
national 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.
34 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 def-
initions 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 prop-
erly 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.
1.4.3 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 UNCI-
TRAL 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 Conven-
tion 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 UNCI-
TRAL Arbitration Rules 1976, UNCITRAL Model Law on International Commer-
cial 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

36 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 transporta-
tion 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 37
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 deter-
mine 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 assum-
ingly 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
38 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., Mytholm-
royd
Overseas Market Research
2
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.

https://doi.org/10.1007/978-3-031-39977-0_2
40 2 Overseas Market Research
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 mea-
sured.” 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 col-
lection, 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 scien-
tific 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.
2.1 Overseas Market Research 41
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 activ-
ity 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 man-
agement 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 capac-
ity 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; situ-
ation 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 buy-

ing behavior of the target market through observation, surveys, interviews, and
pushcarts. A pushcart refers to the test-selling of one’s intended product by tenta-
tively exporting only a small amount of the item to be sold to verify the response.
Considerations in consumer research include: population, its preferences and liv-
ing 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.
(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 fac-
tors 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, dis-
tributors, 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 (distribu-
tion type, market leader, margin rate by step); research into trade practices of the
products; research into the distribution area; research into seasonality, that is, high-
demand 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 sup-

ply and demand. Considerations in researching prices are as follows: research
into the price of exports and imports within the area; price comparisons between
2.1 Overseas Market Research 43
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 pub-

licity 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 iden-
tifiable 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 meth-
ods 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.
2.2 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 pam-
phlets, 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 recog-
nized 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 par-
ticipating, whether it is to find potential buyers, to strengthen relationships with
2.2 Overseas Exhibitions 45
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 poten-
tial 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 exhibi-
tion 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 sev-
eral million visitors every year just in one country. The trend to aggressively visit
famous foreign exhibitions to better understand the movement of newly devel-

oped 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 exhi-
bition, 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 per-
sonal 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 counterpro-
ductive. 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 unrealis-
tic 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; disadvan-
tages of the products; opportunity factors of the company; threats to the company’s
2.3 Marketing Planning 47
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 export-
ing 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 con-
sidered: 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 rigor-
ously 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 mar-
ket 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 regula-
tions and laws before proceeding with export activities. In the case of exporting to
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 ver-
ifies 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 bor-
rowed 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,
2.4 Verification of Domestic Regulations 49
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 accor-

dance 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.
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 proce-
dure, 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 rele-
vant 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.
2.4 Verification of Domestic Regulations 51
2.4.2.4 Guidelines on the Naming of Cosmetics

For the guidelines on the naming of cosmetics, whether certain words and expres-
sions 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 import-
ing 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 pro-
cedure 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 computer-
ized 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.
(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 bright-
ening 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 “manufac-
turer” 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 manufac-
turers 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 sun-
screen 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
2.5 Application to Business Field 53
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, inter-
national trade bodies, countries’ economic newspapers, journals of commerce,
etc.
For the international business transaction to proceed successfully with reason-
able 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 sign-
ing 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.
2.5.2 Finding/Screening Counterparts
The exporter finds and screens the importer by searching companies, attend-
ing 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 impor-
tant 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 asso-
ciations 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 per-
sonal 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, cur-
rency, 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, con-
sidering the fact that it has been doing business very well for the past 35 years and
enjoying a good reputation in its business fields.
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 Production and commercial distribution of cosmetic products
CONTACT Name Suyeon Lee E-Mail suyeonlee@hanmail.net

POINT Overseas Business

Dept. Tel No. 82-42-863-51301
Transactions
Title manager Fax No. 82-42-864-51301
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 DACAPO-Elegante Brightening Enrich Cream
or DACAPO-Infinite Time Essence
TECHNOLOGY DACAPO-Remember Triple Balance Essential Serum
Miracle ATO-Aroma Moisture Body Wash
Miracle ATO-Pure Moisture Cream
Miracle AC-Red2 White Pore Serum
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
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
prices, transport options, and insurance requirements. Once a potential importer

has passed potential importers’ credit check standards and is selected as the com-
pany 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.
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
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
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.

Floor 8, No.388, Yang Fu Port
Management Building,
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,
Bruce Jin/Manager
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

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
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 coun-
tries, and American countries. This should focus on the most efficient
enforcement of concluded contracts depending on the particular charac-
teristics 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 inter-
national 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.
International Trade Contracts
3
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.

https://doi.org/10.1007/978-3-031-39977-0_3
64 3 International Trade Contracts
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 cur-
rency, but occasionally commodities or other goods could also be used to settle
the transaction.
3.1 Introduction 65
(2) Bilateral Contracts
Bilateral contracts (where there is a trade of goods for something else, like com-
modities 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 con-
tracts 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 con-
clusion 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 negotia-
tions 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.
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 con-
tract 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 tech-
nically 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 ulti-
mately 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 invita-
tion when it can see the advantages of the potential transactions, which could

2 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”).
3.2 Conclusion of Contract 67
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.

7 Id.
8 Uniform Commercial Code (UCC) § 2–205.
(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 pro-
ceed 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.
3.2.4 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 accep-
tance is made unconditional and unqualified to the original terms of offer of the

11 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.
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. Accep-
tance 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 coun-
teroffer 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 accep-
tance 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.
18 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/.
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.
(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 consid-
ered 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

23 Id, at 44.
24 See id.
25 See id.
26 Id.
27 Id.
28 Id.
29 See id.
30 See id, at 45.
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.
32 See id, at 46.
33 CISG, 1980, Art. 19 Formulation of reservations.
34 Id. at Art. 20.
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.
3.4 Breach of Contract 75
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), pack-
ing 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 deliv-
ery” (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.

39 Id.
40 Id.
41 Id. Art. 25.
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 pur-

chase of thermoforming line equipment for the manufacture of plastic
gardening pots together with the technology and assistance to use the equip-
ment. 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 con-
tained various covenants of the seller not to engage in selling in its equipment
and processes within the “Restricted Area,” not to disclose its technical man-
ufacturing processes to others, and not to disclose or use trade information
and customer lists of the buyer. The restricted area was not defined specifi-
cally 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.
42Case 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.
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 gar-
dening 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 Con-
vention 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 enforce-
ment 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 Con-
vention 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 enforce-
ment 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.
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 modifica-
tions 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 non-
competition 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. Ceram-
ica 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 non-
conformities (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) (dis-
cussing 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
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 obliga-
tions 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 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. 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
for the non-competition agreement is the consideration for the purchase agree-
ment. 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 non-
competition 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 techni-
cal manufacturing processes to others, and not to disclose or use trade
information and customer lists of the buyer. The non-competition agree-
ment contained no covenants for the buyer, but listed the payment of
the purchase price under the purchase agreement as the consideration.
43Shuttle 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.
The “Restricted Area” was defined as “any jurisdiction throughout the world
where the Company is, or in which seller has reason to know the Com-
pany 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 equip-
ment 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 per-
formance of the purchased equipment. In his Affidavit, Lercel catalogs a
long list of problems concerning the equipment and training. Like Ler-
cel, 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 mar-
keting of Plaintiff. Druskin worked with Jacob Tsonakis to solicit sales for
Plaintiff. Druskin claims “on information and belief” that Tsonakis solicited
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 Plain-
tiff’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 non-
competition 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 agree-
ment. Tsonakis then faxed a signed and initialed copy to Gurizzian. The copy
referenced did not include a Schedule I which described the jurisdictions ref-
erenced 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 pro-
duction 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 Plain-
tiff wrongly deducted repair costs for the machinery from contract payments
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. Further-
more, 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. Defen-
dants 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 appar-
ent 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
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 non-
competition 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 agree-
ment is unenforceable because the document failed to specify the jurisdic-
tions in which seller was required not to compete. Given the wording of the
Convention, federal courts have determined that international sales agree-
ments 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 defen-
dants not to compete as to the United States’ market. As such, the failure to
specify the precise jurisdiction does not render the agreement invalid. Defen-
dants 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
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 Injunc-
tion.
The determination about whether certain acts or omissions constitute a breach

of contract or not may generally depend on the stipulated governing law and juris-
dictions and therefore the concerned parties to the contract should be diligent in
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 anti-
coagulant 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 anticoagulant 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.

45 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/.
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”) pur-
suant 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 demon-
strate 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 consid-
ered 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
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 intrin-
sically unlawful nor violative of any other law under the circumstances, it
must be shown to be wrongful (e.g., violent, fraudulent, deceitful, or threat-
ening) 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 intention-
ally 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 compe-
tition 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 per-
tinent 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
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.
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 suf-
ficiently definite proposal under the CISG. Brantford cites to no controlling
case law concerning this issue and merely rehashes the same statutory inter-
pretation 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 dis-
missed 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 let-
ter 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.
3.5 Remedies 91
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 ref-
erence letter from ACIC/Brantford to complete its ANDA application. The
FDA requires pharmaceutical companies to identify in the ANDA the sup-
plier(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 Id.
48 Id.
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 iden-
tity 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.
51 Id.
3.6 Avoidance of Contract 93
ensuing list should be followed by the seller: ➀ claim for performance of the con-
tractual 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 deliv-
ery. 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 “retroac-
tively,” 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.

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 install-
ment 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.

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 Interna-
tional 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 judg-
ment on its counterclaim, but proceeded to trial on Schmitz’ complaint. A
bench trial took place from October 25 through 28, 1999, and on Novem-
ber 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 judg-
ment 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.
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 particu-
larly 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 pat-
terns. 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 sev-
eral 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
Schmitz shipped that amount back to Rockland. There were extended dis-
cussions 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 con-
clusions 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 pur-
pose (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 trans-
fer 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 war-
ranty 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 print-
ing. 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 warranty-
and 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
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 pro-
cess, 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 erro-
neous. 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.
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 com-
pensates 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.
3.6.1 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 consid-
erable 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 con-

tract 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.

56 Id.
57 Id. at Art. 51.2.
3.7 Exemption 101
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 imped-
iment 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.

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

P.R. China
May 10, 2023
Dr.COFFEEEXTRACT
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
The above-mailed inquiry would be followed by the reply from the exporter as
follows:
Dr.COFFEEEXTRACT
509, Innobiz Park
Daejeon, Korea
May 17, 2023

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
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
509, Innobiz Park
Daejeon, Korea
May 18, 2023

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 inter-
ested—will ask for samples in order to determine the practicality of the proposed
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:

P.R. China
May 19, 2023

Dr.COFFEEEXTRACT
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,
Bruce Jin/Manager
The exporter would suggest the price condition to the buyer as follows:
Dr.COFFEEEXTRACT
509, Innobiz Park
Daejeon, Korea
May 21, 2023

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

P.R. China
May 24, 2023

Dr.COFFEEEXTRACT
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,
Bruce Jin/manager
The following illustrates the case in which the exporter rejects the counterpart’s
suggestion to further discount the price.
Dr.COFFEEEXTRACT
509, Innobiz Park
Daejeon, Korea
May 25, 2023

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
The following illustrates the case in which the exporter accepts the counterpart’s
suggestion to further discount the price.
Dr.COFFEEEXTRACT
509, Innobiz Park
Daejeon, Korea
May 25, 2023

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
3.8.3 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 com-
munication. 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 transac-
tions 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
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 REPUBLIC OF KOREA
⑦ Shipment WITHIN 45 DAYS AFTER RECEIPT OF YOUR L/C.
⑧ Shipping Port BUSAN, KOREA
⑨ Payment Terms BY AN IRREVOCABLE AT SIGHT L/C TO BE OPENED IN OUR FAVOR.

⑩ Validity of Offer BY June 30, 2023
Item ⑪ Commodity & Description ⑫ Quantity ⑬ Unit Price ⑭ Total Amount
⑮ FOB Busan, Korea
LUVIUS Premium-Go ld Lifting Cream-50 10,000 PCS @US$ 4.1 US$41 0,000
DACAPO-Elegante Brightening Effect
Softner 1,000 PCS @US$ 9.1 US$9,1 00
DACAPO-Elegante Brightening Enrich
Cream 1,000 PCS @US$ 13.9 US$13 ,900
DACAPO-Infinite Time Essence
DACAPO-Remember Triple Balance 1,000 PCS @US$ 14.1 US$14 ,100
Essential Serum 1,000 PCS @US$ 14.5 US$14 ,500
Miracle ATO-Pure Moisture Cream 1,000 PCS @US$ 10.1 US$10 ,100
1,000 PCS @US$ 5.5 US$5,5 00
1,000 PCS @US$ 5.8 US$5,8 00
TOTA L 17,000 PCS @US$ 114 US$48 3,000
******************************************* ********** *** *************** ***************
Acce pte d by Dr. COFFEEXTRACT

Date of acce pta nc e
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 Enrich Cream US$13.9
DACAPO-Remember Triple Balance Essential 17,000pcs US$14.1 USD483,000
Serum US$14.5
M iracle ATO-Aroma M oisture Body Wash
M iracle ATO-Pure M oisture Cream US$10.1
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
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 con-
cluded 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 individ-
ual 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 transac-
tions: 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 e-
commerce 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
Terms of International Trade
4
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 pro-
cessing 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 man-
age 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.
https://doi.org/10.1007/978-3-031-39977-0_4
116 4 Terms of International Trade
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 compa-
nies 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 Draft-
ing 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 accord-
ing 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).

2 Id.
3 Id.
4 Id.
5 Id.
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.
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 condi-
tion 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 whole-
saler 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, deposi-
tions, 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 evi-
dence.” 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 demon-
strate, “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 evi-
dence 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.
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 whole-
saler alleged that it was not obligated to pay for the ribs because they failed
to conform to the contract, while plaintiff asserted that defendant whole-
saler 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
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.
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 gov-
erned 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 Mary-
land) 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 (Arti-
cle 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, com-

promise, 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.
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”) con-
firmed 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 Com-
pany (“State Street Bank”), made presentment to Sumitomo’s branch office
in New York, seeking payment on the letter of credit. Boston Hide’s present-
ment 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/.
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 Present-
ment 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 Lad-
ing consigned the goods to Andres Monetou C/O Boston Hides, instead of
Banamex as required under the letter of credit, they would not satisfy pre-
sentment. 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 Orig-
inal and Presentment Bills of Lading confirms that the Presentment Bills of
Lading were false, justifying dishonor.
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 Mas-
sachusetts 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 choice-
of-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 judg-
ment 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 sub-
mission 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
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 pre-
sentment of false documents. The plaintiff admits that the Presentment Bills
of Lading were “substitute” and not “original.” These “substitute” Present-
ment 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
defects in the Presentment Bills of Lading were not identified until approx-
imately 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 benefi-
ciary’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. Accord-
ingly, letters of credit are treated as entirely separate and distinct from the
underlying sales contract. This is called the independence principle. Accord-
ingly, 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 appro-

priate jurisdiction may enjoin honor or uphold dishonor by an issuing bank
where the bank has been advised that documents submitted pursuant to a let-
ter 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 con-
signment to Andres Monetou, not to Banamex. Accordingly, Boston Hides
failed to comply with an express condition of the letter of credit, and the Pre-
sentment Bills of Lading submitted to establish compliance were false. This
misrepresentation was significant to the letter of credit transaction. In partic-
ular, consignment to other than Banamex deprived Banamex of its security
interest in the goods and the leverage to secure payment from the Buyer, who
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” Pre-
sentment Bills of Lading pursuant to U.C.C. § 9-304(3), (5). U.C.C. §
7-402 does not sanction “substitute” documents containing false informa-
tion, 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 pur-
suant 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 vio-
lation 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 substantial-
ly” 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
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
4.2 Basic Terms 129
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 whole-
saler 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 Robin-
son, Illinois on April 25, 2001. Chicago Prime and Nationwide suggest that
9Chicago 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.
Beacon is now out of business. When the ribs were delivered, Beacon pre-
pared 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. Accord-
ing 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 exam-
ined 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, deposi-
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
4.2 Basic Terms 131
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 oppor-
tunity 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, exami-
nation 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 with-
out 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”.
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 deter-
mines 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’ con-
dition 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.
4.2 Basic Terms 133
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 com-
modity ... 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 con-
dition.” 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 determi-
nation 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 admit-
ted 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 tes-
timony 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 sub-
mitted 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 elim-
inate 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
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 Nation-
wide 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 pro-
tecting 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 regu-
lated 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.
4.2 Basic Terms 135
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. Plain-
tiff 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, con-
tending 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. Dis-
trict 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/.
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 gar-
ments 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 specifi-
cation 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 accommo-
date 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 sweat-
shirts. On January 29, 1987, Oxford received the merchandise and Texpor
received payment in full under the letter of credit for $61,036.40. Since pay-
ment 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 con-
ducted 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 unifor-
mity 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, noti-
fied 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
4.2 Basic Terms 137
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, main-
taining he merely shared office space with Liberman). After showing them
the defective goods, they agreed there was a problem. In sum, Baird specifi-
cally 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 manu-
factured 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 meet-
ing, 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
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. How-
ever, 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 Tex-
por 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 Tax-
ier 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.
4.2 Basic Terms 139
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, how-
ever, 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 attempt-
ing 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
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 contract-
ing 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 addi-
tional 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 docu-
ments presented do not strictly conform to the requirements of the letter of
credit. Among the discrepancies are a missing room number, a misdescrip-
tion 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 consider-
ably 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

4.2 Basic Terms 141
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 sam-
ple” 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 sam-
ple 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 coun-
tries. 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.
(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.

14 Id.
4.2 Basic Terms 143
(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 deliv-
ery 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.
(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 val-
uations 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).

16 Eun Sup Lee, supra noe 138 at 65.
17 UCP600, article 30(a).
4.2 Basic Terms 145
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.
(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 consider-
able flexibility both within and between categorizations such as FOB, CFR,
CIF, and Ex-Ship. For example, under the FOB terms, the seller arranges ship-
ment 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 ves-
sels 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
18Scottish & 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.
4.2 Basic Terms 147
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 other-
wise requires, “delivery” means “voluntary transfer of possession from one
person to another.” Section 32(1) provides: “Where, in pursuance of a con-
tract 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 vol-
untarily transferring possession of the goods to a carrier for the purpose of
transmission to the buyer, the seller is prima facie deemed to have voluntar-
ily 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 auto-
matically 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
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
4.2 Basic Terms 149
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 per-
formance 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 deliv-
ered 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 pay-
ment”: “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 con-
tractually 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 ear-
liest, 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
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 con-
tracts: (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 more-
over 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.
4.2 Basic Terms 151
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 state-
ments 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 doc-
uments 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 contem-
plates 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 provi-
sion 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 essen-
tially 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
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 pack-
aging 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
4.2 Basic Terms 153
(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 “no-
mark 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
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.
4.2 Basic Terms 155
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).
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 docu-
ment.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”.

25 Id. at article 31(b), stating that “presentation consisting of more than one set of transport doc-
uments 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 ship-
ment, 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).
4.2 Basic Terms 157
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 devel-
oping 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):
➀ Loss of or damage to the subject-matter insured reasonably attributable to a fire
or explosion; b stranding, grounding; c sinking or capsizing; d overturning or
derailment of land conveyance; e collision or contact of vessel craft or con-
veyance with any external object other than water; f discharge of cargo at a port
of distress.
➁ Loss or damage to the subject-matter insured caused by a general average
sacrifice;
b jettison.
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).

(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

following reasons: a fire or explosion; b stranding, grounding, sinking, or cap-
sizing; overturning or derailment of land conveyance;

c d collision or contact
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
4.2 Basic Terms 159
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.
4.2.8 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.

4.2 Basic Terms 161
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.
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 (usu-
ally 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.
4.3 Incoterms® 2020 163
(2) Allocation of Cost
Among costs occurring in the delivery of goods from production to final desti-
nation 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 trans-
port 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 conve-
niently 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).

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 desig-
nated, 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 contrac-
tual 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 obliga-
tion, 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 con-
sequence 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.
4.3 Incoterms® 2020 165
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 nar-
rowed 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 readi-
ness 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. Mon-
tefiori 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.
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 fail-
ure 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 com-
mence 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 nar-
rowed 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.
4.3 Incoterms® 2020 167
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 allow-
able 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 con-
tract. 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 con-
tracts; (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 inad-
equate 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.
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 deliv-
ery 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 contrac-
tual 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 con-
strued 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.
4.3 Incoterms® 2020 169
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
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 informa-
tion 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, mea-

sured, 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.
4.3 Incoterms® 2020 171
➂ Deliver goods to buyer by placing them at the buyer’s disposal or other-

wise 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 formal-
ities, 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.
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.
4.3 Incoterms® 2020 173
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.
35Soufflet Negoce v Bunge SA EWCA 1102: 13 October 2010. http://www.onlinedmc.co.uk/

index.php/Soufflet_Negoce_v_Bunge_SA.
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 non-
delivery. 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
4.3 Incoterms® 2020 175
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 con-
tractual 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 incor-
porated 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 Readi-
ness 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 sur-
vey. 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.
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 confor-
mity 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, autho-
rizations for the import of the goods, and comply with customs formalities
for importation whether in the country of destination or in a country of tran-
sit; 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, Insur-
ance, and Freight” means that the seller delivers the goods on board the vessel
36 Id. at 95.
4.3 Incoterms® 2020 177
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.
The buyer is required: ➀ To receive the goods at the agreed port of des-
tination 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 unload-
ing costs, including lighterage and wharfage chares, unless such costs and
charges have been included in the freight or collected by the carrying com-
pany 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)
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.
4.3 Incoterms® 2020 179
(8) Carriage and Insurance Paid to (Named Place of Destination) (CIP)
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 Id. at 41.
40 Id. at 53.
(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)
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 des-
tination, 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 181
4.4 Illustrated Forms of International Trade Contract
4.4.1 General International Contract
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 inter-
national 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 cor-
poration (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 includ-
ing Indonesia; and WHEREAS, AGENT desires to be appointed an agent
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) “KNOW-HOW” means

(a) rearrangement of machinery layout
(b) effective operation of machinery
(c) 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.
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 Agree-
ment, 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 govern-
ment of competent jurisdiction in matters relation to this Agreement or
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 per-
formance hereunder with the utmost dispatch whenever such causes are
removed.
(c) If due to any law, act, rule, regulation, order, or decision of any gov-
ernment 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.
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 super-
sedes 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.

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.

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 lit-
igation 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 exe-
cution 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.
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
(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 gen-
eral 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 stip-
ulated 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.
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.
COMMODITY & TOTAL
NO. QUANTITY UNIT PRICE
SPECIFICATION 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 :
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 ship-
ping 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.
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
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 Con-
tract, 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.
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 par-
ties 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.

4.4.3 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.
COMMODITY &
ITEM NO. QUANTITY UNIT PRICE AMOUNT
SPECIFICATION
Time of Shipment :
Port of Shipment :
Port of Destination :
Payment
AT SIGHT L/C By an irrevocable letter of credit payable at sight
USANCE 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
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 transship-
ment 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
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 ship-
ment 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 pro-
vide 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 docu-
ments 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.
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 con-
sidered 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
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
Force Majeure
Neither party shall be liable for its failure to perform its obligations hereun-
der 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 (includ-

ing Korean). In the event of any difference or inconsistency among different
versions of this Agreement, the English version shall prevail in all respects.
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 (“Sup-
plier”) 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:
(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, col-
lectively, 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 com-
mencing 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.
[“Letter of Guarantee” shall mean the irrevocable and unconditional guar-

antee 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 Pur-
chaser 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 man-
ufacture 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 sup-

plied 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 Specifica-

tions set forth in Schedule II hereto. Manufacture of the Commodities shall
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 other-
wise 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. Pur-
chaser 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

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 accor-
dance 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 Sup-
plier a prepayment premium equal to the amount of the prepayment amount
multiplied by the interest rate which means as in “the Article 1. Defini-
tions” 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 pre-
payment 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.
(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 com-
mencing 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.
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 trans-
portation 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. Sup-
plier 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 Pur-
chaser 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.
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 Commodi-
ties 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, ordi-
nance, 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 perfor-
mance 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 circum-
stances 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
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 Com-
modities will be free from defects in material and workmanship and
undertakes to repair or replace free of charge any defective parts, includ-
ing 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 sub-
contractors, (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.
➃ Disclaimer
Purchaser expressly acknowledges and agrees that the warranty contained

herein shall not extend to material which ages or deteriorates due to ordi-
nary 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 com-
pany 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 provid-
ing efficient service to its customers for the period of warranty hereunder.
Purchaser shall pay to Supplier all costs associated with such service engi-
neer including but not limited to, salary, transportation, communications, and
housing.
(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 indebt-
edness, 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,
guaranteeing or otherwise relating to indebtedness in excess of $ ooo

or its equivalent in any other currency when due or commits or per-
mits 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 reso-
lution 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 Guar-
antor 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.
(m) 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.
(n) 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.
(o) 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.
(p) Any circumstances occur which in the opinion of Supplier give reason-
able 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.
(q) Supplier fails to manufacture the samples to the satisfaction of Pur-

chaser 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 Install-
ment 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.
(10) Arbitration
All disputes arising between the parties in connection with this Agree-
ment which cannot be settled by mutual agreement shall be finally settled
by arbitration in accordance with the Rules of Conciliation and Arbitra-
tion of the International Chamber of Commerce before a board of three
arbitrators, consisting of one member to be appointed by each of Pur-
chaser 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 com-
bination 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. Notwith-
standing 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.
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, trade-

mark, 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, work-
ing 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 Agree-
ment 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
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.
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 proper-
ties 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, attach-
ment 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.
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 par-
ties 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 lan-
guage 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] [SUPPLIER]
By : οοο Company By : οοο Company

Name : οοο Name : οοο
Title : οοο Title : οοο
Source Korea Eximbank, http://www.koreaexim.go.kr
The following is an example of the general terms and conditions to be made

between Dr. COFFEEEXTRACT and Chinese Marine Trading Co., Ltd.
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
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
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,

For and on behalf of,
By
By
Typed Name
Typed Name
Title
Title
The following is the purchase order made by Chinese Marine Trading Co., Ltd
to Dr. COFFEEXTRACT.

P.R. China
PURCHASEORDER
Messrs. Your Ref : KN110525
Dr.COFFEEXTRACT Our Ref : CMT20110503

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 Enrich Cream
DACAPO-Remember Triple Balance Essential 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 @U$5.8/PCS
AMOUNT TOTAL US$483,000

INSURANCE POLICY/CRETIFICATE BLANK ENDORSED FOR 110% OF C.I.F VALUE WITH
INSURANCE
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 NON-
NEGOTIABLE 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
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 rang-
ing 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 com-
petitive 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

Payment Collection in International
Trade 5
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; how-
ever, 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 transac-
tions.
https://doi.org/10.1007/978-3-031-39977-0_5
226 5 Payment Collection in International Trade
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 documen-
tary 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 obli-
gations 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, con-
versely, would prefer for payment collection beforehand to cover the costs of the
exportations and to insure that the payment is made fully and punctually. Export-
ing 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.

2 Id.
5.1 Payment Collection Under Letter of Credit 227
(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 par-
ties, 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, pro-
viding 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 (benefi-
ciary), 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.
4 Id.
5 UCP 600, Art. 2.
6 Id.
The letter of credit or performance bond is to function as the guaranty

of payment collection in accordance with the underlying commercial transac-
tion, 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 perfor-
mance 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
7In 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.
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 expe-
rience, 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.
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 sum-
mary 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 Dis-
trict 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/.
III. Background
A. The Underlying Agreement Giving Rise to the Dispute
Ocean Rig is a Norwegian company, based in Oslo, engaged in the off-

shore oil drilling business. This corporation’s principals, Ocean Rig AS 1
and Ocean Rig AS 2 (“Owners”), each own one offshore drilling rig. Own-
ers, 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 Mar-
itima 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 com-
pensate 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 signa-
tures 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 final-
ized it. Safra issued the letter, LOC No. S-0612, on November 19, 1998.
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 con-
tracts for Owners, triggering Ocean Rig’s right to present the Standby Letter
of Credit and Demand Letter to Safra. On February 8, 1999, Tore Valder-
haug, 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 dis-
crepancies 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.
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 sig-
nature 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, pro-

viding 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 dis-
honor 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 relation-
ship 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).
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 inter-
pretation. The principle of contract interpretation frequently applied to guide
or supplement the strict compliance rule is the familiar one preferring con-
structions “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 una-
mended 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 incorpo-
rate 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 com-
pliance 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 S-

0612, 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 Let-
ter of Credit is to be drawn. This conforms with the agreement between
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 per-
taining 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 sig-
nature 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 sig-
natures. 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 rel-
evant 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 val-
idation: 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 com-
pliance 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

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 par-
ties’ 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 con-
tracts. 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. Sum-
mary judgment is granted to the plaintiff on its third and fourth causes of
action. Plaintiff’s sixth cause of action, seeking punitive damages and attor-
neys’ 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

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 Cham-
ber 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 develop-
ment 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 appli-
cable 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 avail-
able, upon the drafts of appellee (Courtaulds North America), certain sums
of money to cover purchases of acrylic yarn from appellee. Appellee (benefi-
ciary) 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.

10 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.
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, appel-
lant 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. Cus-
tomer 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 involve-
ment 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 inter-
pretation 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 pack-
ages 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
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 discrep-
ancies 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

14 See id.
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 Over-
seas Chinese Commercial Banking Corporation (“Overseas Bank”) (Interna-
tional 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 trans-
ferred to Integrated Measurement. Integrated Measurement now moves for
summary judgment against both Banks. For the reasons stated in this mem-
orandum 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 Mea-
surement 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 negoti-
ating 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 Measure-
ment 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/.
In reliance on the Advice of Transfer issued by International Bank, Inte-

grated Measurement sent the goods described in the Advice of Transfer via
United Airlines from Portland to O’Hare on March 2. On March 9 Inte-
grated 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 docu-
ments 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 com-
mercial 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 Air-
way 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 addi-
tional 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 them-
selves.” 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 docu-
ments may relate. Therefore, banks must deal only in documents and cannot
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 Inter-
state 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 argu-
ment. 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 Trans-
fer. 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 indicat-
ing L/C No. 9MH1/00100/IBCCH and import permit no. 77BH1-054487,”
and those requirements were met. Finally, Banks’ third stated reason for dis-
honor—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 pack-
aging. 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.
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 “ac-
companied 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 dis-
claimed 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 assert-
ing, 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 possi-
ble, by other expeditious means, to the bank from which it received the
documents (the remitting bank), or to the beneficiary, if it received the docu-
ments 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 Arti-
cle ... 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 dis-
honor 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 Interna-
tional Bank’s examination, the other timing requirement of notice “without
delay” was violated here as a matter of law. As for the meaning of “reason-
able 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
the expiration of the letter of credit was enough time to examine the docu-
ments. 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 assert-
ing 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 Measure-
ment 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, Inter-
national 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 speci-
fied 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 unreason-
able. 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
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 Cross-
Complaint 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, includ-
ing 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 pur-
pose would be served by extending the analysis here to explore any possible
difference in the scope of Bank’s respective liabilities to Integrated Measure-
ment. Now that International Bank’s liability to Integrated Measurement has
been established, that is the end of it. Indeed, the existence of the indemni-
fication 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.

17 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.
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
19First 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.
President of the Bank at that time. The June 8 letter of credit was substan-
tially 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 Lad-
ing 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 deter-
mined. 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 bene-
ficiary. 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 pre-
sented. This has come to be known as the “independence principle” because
of the independence of the letter of credit from the underlying commer-
cial 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
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 wrong-
ful 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 commer-
cial purposes of the letter of credit. Adoption of a substantial compliance
standard on grounds that the result will more likely meet the parties’ expec-
tations 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 doc-
uments 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
and consular invoice” to be forwarded to the Bank. Having presented “non-

negotiable” 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
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 com-
plies 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 benefi-
ciary 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 sat-
isfy 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 tech-
nical or trade terms and where the bank has performed exactly as requested
by its customer.
Consequently, if Diamond Plastics could not possibly fulfill the require-
ments 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
the letter of credit amended so that the documents generated by the trans-
action would suffice under the requirements of the letter of credit, Diamond
Plastics cannot now complain of its inability to comply with the terms so pro-
vided. 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 com-
pliance 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 doc-
trines 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 con-
tained 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 pre-
sentment 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 disad-
vantage. 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 Dia-
mond Plastics detrimentally relied on Bank’s previous conduct. The resulting
question as to whether Bank is estopped from demanding strict compliance
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 enti-
tled 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 con-
verted 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.” Steen-
bergen 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 Plas-
tics is entitled to damages for wrongful dishonor. The conversion of funds
claim is dependent upon Diamond Plastics having a personal property inter-
est 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. How-
ever, 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 pay-
ment 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.
In many countries with national banking associations, the general standard con-
ditions 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 let-
ter 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 docu-
mentary transaction under the letter of credit must be respected.
The following is the case to make it clear that the fraud in underlying com-
mercial transactions is separated from the documentary transaction under the
letter of credit if the parties of the documentary transactions including the doc-
ument 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.
21 http://www.swift.com; SWIFT stands for Society for Worldwide Interbank Financial Telecom-
munications.
23 See, id.
24 Id. at 123.
25 Id.
26 Id.
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 commer-
cial 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 Cred-
ito 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. Accord-
ing 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 dif-
ficulties. 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 dis-
covered 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.
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 pre-
sentation 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 exis-
tence, 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 let-
ter 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 com-
pany 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, includ-
ing 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 com-
ply 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
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 care-
less 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. Sec-
ondly, 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 “un-
der 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 circum-
stances 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 com-
mitted 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 sta-
tus 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
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 seri-
ously 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 let-
ter 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 deliv-
ered 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 doc-
uments 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. Notwith-
standing 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, mate-
rial. 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 Prac-
tice 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.
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 pro-
vided under the letters of credit did not comply with the terms thereof, and
BCCC may not compel payment. Equally significant is the BCCC’s appar-
ently active role in obtaining the revisions of the documents, particularly
after it was confirmed with definite proof of Gonchecol’s financial instabil-
ity 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 mat-
ters 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 defen-
dant 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 Raif-
feisenboerenleenbank 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
$2,530,250, including taxes, against defendant Rabobank Nederland, dis-

missed 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, unani-
mously 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 defen-
dant 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 cross-
claims 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 superfi-
cially 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 so-
called 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.
documentary credit.30 Banks are only required to examine the contents of the doc-
uments 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 con-
tractual 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 benefi-
ciary—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.

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.
35 Id.
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 read-
ing “We hereby certify that monies are due us under the purchaser, Thomas L.
Windham’s, reservation or purchase agreement….” and the submitted state-
ment 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 judg-
ment 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 cus-
tomer, 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,
36N & 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.
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: IC-
7139 TO: GULF SOUTH CORRIDOR PROPERTIES, INC. P.O. BOX 86
DESTIN, FLORIDA 32541
RE: PURCHASE OF CONDOMINIUM UNIT FROM EAST PASS TOW-
ERS 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 COMPLI-
ANCE WITH THE TERMS OF THIS CREDIT, THAT SUCH DRAFTS
WILL BE DULY HONORED UPON PRESENTATION AND DELIV-
ERY OF DOCUMENTS AS SPECIFIED TO AMSOUTH BANK, N.A.,
BIRMINGHAM, ALABAMA. THIS LETTER OF CREDIT IS SUBJECT
TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMEN-
TARY 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.
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 Van-
guard 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 “Birming-
ham, 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 per-
form 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.
“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 let-
ter 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 con-
tracts 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 prop-
erly 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 state-
ment 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.
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 agree-
ment. “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 origi-
nal 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 compli-
ance. 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 Id.
38 Id.
majority of litigated cases.39 The doctrine of strict compliance was judicially inter-
preted 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.
40 Id.
41 Far Eastern Textile, Ltd. v. City National Bank and Trust Co. No. C-2-75-603 United States Dis-
trict Court, S.D. Ohio, Eastern Division. April 20, 1977 430 F. Supp. 193; 1977 U.S. Dist. LEXIS
16283.
The clothing company had entered into a contract with plaintiff to purchase
a quantity of men’s clothing to be manufactured by plaintiff. The defen-
dant 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 representa-
tion 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 sig-
natures provided on the inspection certificates and original purchase orders.
Plaintiff manufacturer filed an action, and defendant bank moved for sum-
mary 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
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 con-
struction 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 ‘sub-
stantial 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.
The court concludes that an Ohio court confronted with this question
would adopt the New York rule. The court adopted a strict compliance stan-
dard 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 conform-
ing 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 dif-
ference between amending otherwise unambiguous terms of a letter of credit
through the introduction of evidence relating to an alleged agency relation-
ship 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 Cour-
taulds 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 judg-
ment 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.
Case42
Plaintiffs Dessaleng Beyene and Jean M. Hanson appeal from a final judg-
ment 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 (“Irv-
ing”) 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 con-
ditions. 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 con-
tinued 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.
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
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 “sub-
stantial compliance rule” instead of the “strict compliance rule,” in the letter
of credit transaction, in case that the presenter of documents satisfies non-
commercial 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 cler-
ical 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 Dis-
trict, Austin. November 8, 1989. 780 S.W.2d 313; 1989 Tex. App. LEXIS 2949; 10 U.C.C. Rep.
Serv. 2d (Callaghan) 1352.
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 insur-
ance 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 appel-
lant 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
loan officer involved in arranging the transaction instructed the certificate-

of-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 orig-
inal 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 “Ir-
revocable 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 autho-
rization, the cable was misdirected and finally arrived—by mail—several
days later. When the error was eventually corrected a week later, the appel-
lant 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, complain-
ing 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 ambigu-
ous; 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 dis-
crepancy 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 cor-
rect credit number prominently displayed. Accompanying documents may
be considered in determining whether the presentment made by the benefi-
ciary 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, pru-
dent 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 condi-
tions as “strict compliance” means something less than absolute, perfect
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 com-
plied 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 promis-
sory 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 dis-
honored 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 per-
cent 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 recov-
ery 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 affi-
davit 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 judg-
ment 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 trans-
action 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
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.
44In 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.
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 ship-
per’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 deter-
mine 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 construc-
tion 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 obliga-
tion 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 gen-
eral 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.
Appellant also asserts that it is inequitable to make appellant assume

the risk of non-payment since appellant tried to shift that risk by requir-
ing 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 obvi-
ate 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 sugges-
tion, 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.
5.1.3 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 let-
ter of credit.
The following case is to confirm again the strict compliance rule in docu-
mentary 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, effi-
cient, 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.
46 Id.
47 Id.
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 respon-
dent bank refused to honor appellant’s demand for payment on a letter of
credit because appellant presented an altered photocopy instead of the orig-
inal. 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 sub-
stantially, 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 let-
ter 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
48AIRLINES 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.
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 pay-
ment 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, depo-
sitions, 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 dis-
trict 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:
[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.
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 applica-
tion 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.
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 inter-
est 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 con-
firming 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 non-
compliance, 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 Manufactur-
ers 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 “Uni-
form 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.
51 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.
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 cus-
tomer, Vishwa Niryat (Pvt.) Ltd. (“Vishwa”), and defendant through the use
of an irrevocable letter of credit issued for the benefit of St. Lucia Enter-
prises, Ltd. (“St. Lucia”). In India, Vishwa requested plaintiff to issue an
international letter of credit for the purchase of 1000 metric tons of alu-
minum 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 sup-
porting 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 doc-
uments 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
the terms and conditions of the credit, it could claim that payment by defen-
dant 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 non-
compliance 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 doc-
uments 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; rejec-
tion 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.
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 pay-
ment, 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 Id.
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 docu-
ments.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 autho-
rized 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 let-
ter 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 pay-
ment 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 negoti-
ating 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.
55 Id.
56 Id.
57 Id.
58 Id.
59 Id.
60 Id.
61 Id. at 128.
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 benefi-
ciary’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.
63 Id.
64 Id.
65 UCP600, Art. 7.
67 Id.
confirming bank (in case of the confirmed letter of credit) all agree that modifica-
tion 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 con-
firmed 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 situa-
tion, 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
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
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 guar-
antees, 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 receiv-
ing 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 gov-
erning 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 par-
ties’ time and money. The ambiguous wording as follows, for example, should be
avoided: ➀ Concerning insurance coverage: usual risks, customary risks, insurance
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.
69 Id. at Art. 3.
70 Id. at Art. 38(b).
71 Id. at Art. 30(a).
72 Id. at Art. 30(b).
(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 doc-
ument 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.
74 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 ship-
ment 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.”
Because of this, almost all installment letters of credit allowing installment ship-
ment 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,” doc-
uments 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 them-
selves 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. Partic-
ularly, 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 meaning-
ful 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.
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’ recom-
mendations 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 Decem-
ber, 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 “de-
clined 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
that the highest court of the state would decide otherwise.” There is, there-
fore, 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 opin-
ion 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 pub-
lication. According to Paribas, the state supreme court’s steadfast refusal to
publish Kerr suggests that the court considered it “unworthy” to be prece-
dential. 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 cor-
rectly 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 fur-
ther 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 publica-
tion 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.
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 subdivi-
sion 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 bene-
ficiary 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 constru-
ing 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
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 construc-
tion, 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 sev-
eral 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. Accord-
ingly, 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 pro-
visions 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 control-
ling 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, there-
fore, 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
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 mislead-
ing 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 rea-
sonable only if it were established that, as a matter of law or of commercial
practice, beneficiaries like Exxon have the primary responsibility for iden-
tifying and avoiding ambiguities in letters of credit as well as for initiating
negotiations to eliminate them. Absent some such rule placing the risks asso-
ciated 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.
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 regard-
less 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 Art. 20(a)(ii).

81 Id. at Art. 23 & 25.
82 Id. at Art. 23(a)(iii).
83 Id. at Art. 23(a)(iii) & (25).
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.

85 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.
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 lad-
ing, 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).
93 Id. at 136.
94 Id.
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 sub-
mitted 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 obliga-
tion; 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, includ-
ing a note, stock, treasury stock, bond, debenture, evidence of indebtedness,
certificate of interest or participation in a profit-sharing agreement, collat-
eral trust certificate, pre-organization certificate or subscription, transferable
95 Id.
96 Id.
97 UCP 600, Art. 17(b).
98 Id. at Art. 17(c).
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 some-
thing 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, self-
improvement 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 ‘secu-
rity’” 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 doc-
trine 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

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 “purport-
edly” 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 sub-
mitted 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 accom-
panying 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,
100Barnett 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/.
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 presen-
tation of the photocopy of it is not enough to meet the strict compliance rule.
101 Id.
102 Id.
103 Id.
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 doc-
ument 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 Distribut-
ing 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 guaran-
tee of Bender. In return, Bisker received Irrevocable Letter of Credit No.
1791(LOC) issued by Sovran Bank/DC National, the predecessor in inter-
est of appellee NationsBank. Bisker was also to receive a new promissory
note in the amount of $800,000 which was non-recourse and secured exclu-
sively 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.
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 require-
ments” 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 require-
ments 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
conditions specified in the credit. A credit may be either revocable or irrevo-

cable. 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 doc-
uments and is wholly independent of the underlying transaction in goods [or
credit].” Confeccoes Texteis de Vouzela v. Riggs Nat’l Bank. Unless other-
wise 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 docu-
ments 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 imme-
diate 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 con-
cepts 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 over-
whelming 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.
of New York v. Dawson Partners, Ltd.. This standard, which treats the issu-
ing 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 deter-
mine 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 ben-
eficiary 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 judg-
ments as to that which constitutes compliance would be inconsistent with
the need to maintain a high level of predictability in commercial transac-
tions. 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 com-
pliance 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 attrac-
tive and useful may well be undermined, with the result that banks may
become reluctant to assume the additional risks of litigation.
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 stip-
ulates 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 orig-
inal, 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 impor-
tant, it disregards the essential nature of the letter of credit as a document
transaction in which the issuer, performing the “ministerial” duty of check-
ing documents for conformity, is not charged with knowledge of the peculiar
features of the underlying agreement between beneficiary and customer.
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 present-
ment.
➃ Time Period for Examination

The bank shall have a fixed maximum number of days—five banking days follow-
ing 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.

106 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).
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 Com-
pany of Chicago (“Continental Illinoi”) issued seven Irrevocable Standby
Letters of Credit on the account of Bill’s Coal Company. According to Rod-
ney 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 “ben-
eficiary,” 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
110OCCIDENTAL 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/.
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 amend-
ment 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 pre-
miums) 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 Occi-
dental 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 repu-
diation, 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
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 Liquida-
tor 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 con-
forming language. Nevertheless, as the last Occidental attorney to review
the certifications accompanying the March 25 draw, he knowingly or reck-
lessly 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 Depart-
ment, 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
the language required by the letters of credit. Perez discussed this discrep-
ancy 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. Con-
tinental Illinois made no attempt to contact Occidental or the Liquidator on
March 27, 1987.
On March 30, 1987, Perez informed Occidental by telephone that Conti-
nental 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. Follow-
ing Perez’s telephone call to Occidental, Livers and/or Eason relayed the
substance of the Perez conversation to Foley. Later on that same day, Shan-
non 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 tele-
phonic 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 con-
taining 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 dishonor-
ing 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
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 Cham-
ber 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 Con-
tinental Illinois acted with reasonable speed in this case. The bank did not
decide to dishonor the March 25 draw or delay unduly in notifying Occiden-
tal 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 Occi-
dental 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 dis-
honor 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 dis-
honor 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 present-
ment 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
contesting Continental Illinois’ motion for summary judgment, but neverthe-

less 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 con-
sent. 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 Occiden-
tal 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 non-
conforming 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 doc-
uments may be issued by “any party other than a carrier, owner, master, or
charterer” provided that the transport document complies with the requirements for

112 Id.
113 UCP600, Art. 16(b).
multimodal transport documents,115 bills of lading,116 sea waybills,117 air trans-

port 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 (mul-
timodal 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,

116 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).
• 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 refer-
ence 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-to-
port 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

128 Id.
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

master.
ii. indicate that the goods have been shipped on board a named vessel at the
port of loading stated in the credit by
• 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 simi-
lar 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.

130 Id.
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 con-
veyance 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

132 UCP600, Art. 21(a).

134 Id.

master.
port of loading stated in the credit by:
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.
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.
blank back non-negotiable sea waybill). Contents of terms and conditions
of carriage will not be examined.
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 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.
port of loading stated in the credit by
135 UCP600, Art. 22(a)(i).

136 Id. at Art. 22, See Eun Sup Lee, supra note 138, at 144.
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.
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 desti-
nation 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

• 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).

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

142 UCP 600, Art. 24(c).
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 num-
ber 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.
ii. A road, rail or inland waterway transport document indicating that trans-
shipment 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 consti-
tute 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 Main-
taining 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 Id. at Art. 32.

144 Id. at Art. 25(a).
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 contain-
ers, 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 car-
ried 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).

146 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).
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 discrepan-
cies: (1) Original Letter of Credit No. 65469 not presented as required. (2)
Documents inconsistent with one another: Invoices reference Letter of Credit
153OSTEN 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.
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 sub-
stantial 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 commer-
cial 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 stan-
dard 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
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 discrep-
ancy 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 6-
8, 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 pro-
cessing 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 let-
ter 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 refus-
ing 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
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 cer-
tain 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 nota-
tion. 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 sub-
mitted. 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
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 sub-
mitted a certificate stating that enclosed invoices were due and unpaid along
with invoices, some of which were stamped “Void.” The United States Dis-
trict 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 benefi-
ciary 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 can-
not be read in conjunction with other submissions but must comply with the
requirements of the letter of credit on their face. Under this standard, plain-
tiff’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 affi-
davit 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 refer-
ence 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
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 con-
form 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 rejec-
tion 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 com-
plaint. 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.
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 accept-
able,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 ship-
ment 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

156 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.
accept the insurance documents as presented by the seller and bears no responsi-
bility 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 cer-

tificate 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).

162 Id. at Art. 28(h).
163 Id. at Art. 14, See Eun Sup Lee, supra note 138, at 150.
(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 sev-
eral 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 certifi-
cate.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 bank-
ing days following the day of presentation to determine if a presentation

165 Id.
166 UCP 600 at Art. 14(e), See Eun Sup Lee, supra note 138, at 152.
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.
c. A presentation including one or more original transport documents sub-
ject 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.
d. 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.
e. 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.
f. If a credit requires presentation of a document other than a transport
document, insurance document or commercial invoice, without stipulat-
ing 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 func-
tion of the required document and otherwise complies with subarticle 14
(d).
g. A document presented but not required by the credit will be disregarded
and may be returned to the presenter.
h. If a credit contains a condition without stipulating the document to indi-
cate compliance with the condition, banks will deem such condition as
not stated and will disregard it.
i. A document may be dated prior to the issuance date of the credit, but
must not be dated later than its date of presentation.
j. 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 bene-
ficiary’s and the applicant’s address will be disregarded. However, when
the address and contact details of the applicant appear as part of the con-
signee 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.
k. The shipper or consignor of the goods indicated on any document need
not be the beneficiary of the credit.
I. 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).
Even though some latitude is allowed in the description of the goods in the doc-
uments 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

168 Id.
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 pre-
sented to the issuing bank, which is not in compliance with the letter of credit
requirements.
Case169
The decisive question in this case is whether an issuing bank rightfully dis-
honored 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 Corpo-
ration). 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 plain-
tiff, 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 defendant issued an irrevocable letter of credit in favor of the plain-
tiff. 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 Com-
pany (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.
169Armac 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.
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 defen-
dant 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 sig-
nificant 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.
5.1.8 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. Nego-
tiations 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 present-
ment due to the discrepant documents or other reasons the negotiating bank
is required to notify the non-payment to the beneficiary within the reason-
able 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 non-
payment 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
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 plain-
tiff 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 some-
times 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 Vipa-
NY 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.
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 mort-
gaged 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
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 state-
ment’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 dam-
age 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 equi-
table 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. dis-
missed, 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 dishonor-
ing 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 ship-
ment of goods would be estopped from later claiming it did not have to
pay additional charges included under the letter of credit because the ship-
ment 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).
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 authoriza-
tion 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 stric-
tures of the letter of credit transaction. The letter of credit contract between
Vipa-Cal, the customer, and Community Bank, the issuing bank, is com-
pletely 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 look-
ing at the documents submitted as a whole instead of passing on each piece
of paper in isolation. However, plaintiff’s documentation did not simply con-
tain 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 5.11-5.5-
5.112 of the Georgia Code because it failed to give notice of dishonor within
the required time period. Defendant bank argues that notice was irrelevant
because plaintiff admits that it could never have produced the two miss-
ing documents no matter how much time it was given. The bank further
contends that plaintiff breached its presentment warranty under Section 5.11-
5.5-5.111. Because plaintiff knowingly presented non-conforming documen-
tation, 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 eval-
uation 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 con-
cluded that when a beneficiary knowingly tendered non-conforming drafts,
the beneficiary could not later recover on the ground that it received inad-
equate 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 “know-
ingly” presented non-conforming documents. The fact that defendant bank
had access to the missing documents and had paid for two previous ship-
ments with non-conforming documents, although not sufficient to constitute
a waiver of the non-conformities, would certainly raise a reasonable infer-
ence 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 time-
liness 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
action for non-payment of a letter of credit. The court found that defen-
dant’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 sub-
mitted 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 incur-
ring 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
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) reimburse-
ment 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 docu-
ments 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 con-

clusions: 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 pre-
fect 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 “in-
dependence 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 Commis-
sion, 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)).
171 UCP600, Art. 14(a).

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, authen-
ticity, 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. How-
ever, 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 docu-
ments, 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 desig-

nated 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 doc-
uments, 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 issu-
ing bank requesting reimbursement of payment and urge payment of
collection. (UCP600 Article 13).
➄ A negotiating bank must review the documents thoroughly in mak-
ing negotiation. Generally speaking, when a negotiating bank receives a
notice of “unpaid” from an issuing bank, the negotiating bank sends the
“unpaid” notice to the beneficiary and requires him to handle it in per-

son 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.
172EXOTIC 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/.
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 irrevo-
cable 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 cross-
claimed 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 cer-
tificate 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 num-
ber, 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
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 pre-
sented 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.
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 docu-
ments 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
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 transac-
tion. 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 exces-
sive 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 per-
centage 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 defen-
dant 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 doc-

uments 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 amend-
ments. 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 pre-

sented document, the timely notice must be given to the presenter to make
corrections, etc.
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 com-
pliance 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 adher-
ence 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
173 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).
goods. As issued, the letter of credit guaranteed payment upon the presen-
tation 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 cer-
tificate 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 car-
rying 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, deposi-

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.
The problem with Mellon’s argument is that neither World nor its agent
ever agreed to the shipping and expiry date changes. Pennsylvania law rec-
ognizes 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 origi-
nal 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 par-
ties 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 amend-
ment 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
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 pre-
sentation 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 “substan-
tial 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 dis-
crepancies 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 docu-
ment, 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 Lab-
oratories, 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 regard-
less 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.
Mellon received World’s demand on April 27 and communicated its dis-

honor 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 Mel-
lon 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 docu-
mentation, 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 par-
ties’ 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 dis-
crepant 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 non-
conformity 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
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 pay-
ment 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
174WESTERN 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/.
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 let-
ters of credit incorporating the UCP. The issues presented are (1) whether a
facsimile is an original under UCP Article 22c; and (2) whether UCP Arti-
cle 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 com-
pliance” 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 prac-
tice 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:
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 docu-

ments 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 fac-
simile was, Western observes, produced by an “automated or computerized
system,” was marked as an original, and “appears to have been authenti-
cated.” 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 authenti-
cation 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 documen-
tation. 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
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 dif-
ference. 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 com-
merce. 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 “acknowl-
edged 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.
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 eas-
ily 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 sub-
stantial 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 ben-
eficiary 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 inter-
preted 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.
In this case, the court reveals its opinion, about the contradictory interpre-
tation 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 obliga-
tions 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 Dis-
trict 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 oper-
ated 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 facil-
ity 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 col-
lecting 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 discrepan-
cies: (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
175ALASKA 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.
strictly conform to the credits; and (3) the airway bill lacked a “notify par-
ty” designation. Junior informed Alaska of these discrepancies, at least one
of which, late presentation, was incurable. Undeterred, Alaska directed Mer-
chants 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,” Mer-
chants 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 essen-
tially 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. Nonethe-
less, 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.
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 presenta-
tions 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 with-
out any further responsibility for payment.” The Commercial Court rejected
this contention, holding: These then were the clear instructions which the
issuing bank received with the documents, and they admit of only one pos-
sible 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 doc-
uments 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 ren-
dered 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 exis-
tence 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 doc-
uments 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
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 bene-
ficiary 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.
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 circum-
stances. 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 docu-
ments 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 sensi-
ble 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 doc-
uments “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
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 docu-
ments 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 inconsisten-
cies after reviewing the documents, it should do so within seven working
days from the next working day after receiving the documents. Further-
more, 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 dis-
putes. (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
sight letters of credit” (payment can be made once documents have been sub-
mitted, 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 pay-
ment, the bank should pay the price plus interest accrued until the date of
payment. Particularly, if payment is not made seven days after the docu-
ments 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 neg-
ligence 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:
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 pay-
ment. 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 automat-
ically 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 manu-
facturer, 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.
176Id. Art. 16(b).

177DBJJJ, 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.
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 docu-
ments 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 dis-
crepancies 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 negotia-
tion 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.
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 discrepan-
cies 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 prac-
tice, 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.
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 interpre-
tation 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
reasonable where a bank seeks a waiver from an applicant, an incorrect argu-

ment. 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 com-
pliance 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 provi-
sions 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 doc-
uments.” 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 docu-
ments, seek a waiver, and notify seller (or WSB) was unreasonable. A mere
description of the rule of preclusion is insufficient.
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. There-
fore, 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 inde-
pendence 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 docu-
ments, 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 discrep-
ancies in the documents or that Bank and buyer made a joint decision on the
documents.
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 docu-
ments 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 unilat-
erally 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 issu-
ing bank from considering whether the applicant would waive discrepancies.
If it did, the permission to seek a waiver under Article 14(c) would be mean-
ingless. 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.
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, noti-
fies 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).

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).
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
FEDERATION(NH BANK)
RECEIVER : WPACAU2SXXX WESTPAC BANKING CORPORATION
(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 31C: 2022-12-22
APPLICABLE RULES 40E: UCPURR LATEST VERSION
*Date *Place
DATE AND PLACE OF EXPIRY 31D: 2023-01-25 Australia
APPLICANT 50 : ABC CORPORATION
CHUNG-KU, SEOUL, KOREA
BENEFICIARY 59 : BBC PTY LIMITED
1. LOCK WAY RIVERVIEW QUEENSLAND 4303 AUSTRALIA
*Currency *Amount
CURRENCY CODE AMOUNT 32B: USD 79,650.00
PERCENTA GE CRDT AMT TOLERANCE 39A: 05/05
AVAILABLE WITH..BY..-NAM E/ADDR 41D: ANY BANK BY NEGOTIATION
DRAFTS AT... 42C: AT SIGHT
DRAWEE 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 44B: ICHEON WAREHOUSE
LATEST DATE OF SHIPMENT 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.
+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
(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
: 16:45:59-2022/ 12/29-NACFKRSEXXX-6388-623215
MESSAGE HEADER
--
FEDERATION(NH BANK)
RECEIVER : ICBKCNBJTSN INDUSTRIAL AND COMMERCIAL BANK OF
CHINA
(TANGSHAN CITY BRANCH)
MESSAGE TEXT
---
FORM OF DOCUMENTARY CREDIT 40A: IRREVOCA BLE
DOCUMENTARY CREDIT NUMBER 20 : M0301012NS00712
APPLICABLE RULES 40E: UCP LATEST VERSION
*Date *Place
DATE AND PLACE OF EXPIRY 31D: 2022-04-25 China
BENEFICIARY 59: BBC METALLURGICA L ROLL CO. LTD.
TANGSHAN CITY, HEBEI PROVINCE,CHINA
*Currency *Amount
DRAFTS AT... 42C: SIGHT
DRAWEE 42A: NACFKRSEXXX NATIONAL
AGRICULTURA L COOPERATIVE
FEDERATION(NH BANK)
TRANSSHIPMENT 43T: PROHIBITED
PORT OF LOADING/AIRPORT OF DEPARTURE 44E: Tianjin
PORT OF DISCHARGE/AIRPORT OF DESTINATION 44F: Busan
+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
+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

+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
---
(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 nego-
tiation, 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.
TRANSMISSION
---
SEND TO : SWIFT
MESSAGE ID : 20221215M0000188
: 15:30:27-2022/ 12/15-NACFKRSEXXX-6378-601829
MESSAGE HEADER
--
FEDERATION(NH BANK)
RECEIVER : MHCBJPJTXXX MIZUHO CORPORATE BANK, LTD.
MESSAGE TEXT
---
FORM OF DOCUMENTARY CREDIT 40A: IRREVOCABLE
DOCUMENTARY CREDIT NUMBER 20 : M0301012NU00299
APPLICABLE RULES 40E: UCPURR LATEST VERSION
*Date *Place
DATE AND PLACE OF EXPIRY 31D: 2022-02-28 JAPAN
BENEFICIARY 59 : BBC CORPORATION 103-0027,JAPAN
*Currency *Amount
PERCENTA GE CRDT AMT TOLERANCE 39A: 10/10
DRAFTS AT... 42C: 120 DAYS AFTER SIGHT
DRAWEE 42A: SCBLHKHHXXX
STANDARD CHARTERED BANK
(HONG KONG) LIMITED

PORT OF LOADING/AIRPORT OF DEPARTURE 44E: JAPANESE PORT
PORT OF DISCHARGE/AIRPORT OF DESTINATION 44F: KOREAN ANY PORT
+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
+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
+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

REIMBURSEM ENT CHARGES AND POSTAGE
OUTSIDE KOREA ARE FOR ACCOUNT OF BENEFICIARY
SHIPMENT BUT IN ANY EVENT WITHIN
THE VALIDITY OF THE CREDIT.
REIMBURSING BANK 53A: SCBLHKHHXXX
STANDARD CHARTERED BANK
(HONG KONG) LIMITED
+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
---
(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.
TRANSMISSION
---
SEND TO : SWIFT
MESSAGE ID : 20221217M0000301
: 16:59:08-2022/ 12/17-NACFKRSEXXX-6380-606660
MESSAGE HEADER
---
FEDERATION(NH BANK)
RECEIVER : LUMIILITTLV BANK LEUMI LE ISRAEL B.M.
(TEL-AVIV MAIN BRANCH)
MESSAGE TEXT
---
FORM OF DOCUMENTA RY CREDIT 40A: IRREVOCA BLE
DOCUMENTARY CREDIT NUMBER 20 : M0397012NU00025
APPLICABLE RULES 40E: UCP LATEST VERSION
*Date *Place
DATE AND PLACE OF EXPIRY 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
DRAFTS AT... 42C: 60 DAYS AFTER B/L DATE
DRAWEE 42A: NACFKRSEXXX
NATIONAL AGRICULTURA L
COOPERATIVE FEDERATION
(NH BANK)
PORT OF LOADING/AIRPORT OF DEPARTURE 44E: ISRA ELI PORT, ISRA EL
PORT OF DISCHA RGE/AIRPORT OF DESTINATION 44F: BUSA N PORT, KOREA
+HS-CODE: 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
+SIGNED COMMERCIA L INVOICE IN 3 FOLD(S)
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)
+T/T REIM. CLAIM PROHIBITED
DEDUCTED FROM THE PROCEEDS OF EACH PRESENTATION
OF DOCUMENTS WITH DISCREPANCY(IES)

FOR PAYMENT/REIM BURSEM ENT UNDER THIS LETTER OF CREDIT.
REIMBURSEM ENT CHARGES AND POSTAGE OUTSIDE
KOREA ARE FOR ACCOUNT OF BENEFICIA RY
+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
---
(5) Guarantee
A guarantee is similar to a standby letter of credit, under which the benefi-

ciary 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).
TRANSMISSION
--
MESSAGE ID : 20220110G0000001
MESSAGE HEADER
---
FEDERATION(NH BANK)
RECEIVER : NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE
FEDERATION(NH BANK)
MESSAGE TYPE : MT760 [ GUARANTEE ]
MESSAGE TEXT
--
TRANSACTION REFERENCE NUMBER 20 : G03Y7101XD00018
FURTHER IDENTIFICATION 23 : ISSUE
DATE 30 : 230110
APPLICABLE RULES 40C: OTHR/THE LAWS OF TOKYO, JAPAN
DETAILS OF GUARANTEE 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.
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)

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 commer-
cial 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 com-
pliance, 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 HEL-
LENIC DEFENSE ATTACHE LETTERHEAD PURPORTEDLY SIGNED
BY AN AUTHORIZED OFFICER OF EMBASSY OF GREECE, HEL-
LENIC DEFENSE ATTACHE.” Nevertheless, plaintiff submitted a statement
on the letterhead of “EMBASSY OF GREECE, DEFENSE AND MIL-
ITARY ATTACHE” signed by “Lt. Col. Constandinos Bairaktaris, Ass.
Defense and Military Attache.” As the IAS Court correctly noted, defen-
dant 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 plain-
tiff’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
179HELLENIC 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
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 pro-
viding 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.
TRANSMISSION
SEND TO : SWIFT
MESSAGE ID : 20221229G0000007
: 16:51:50-2022/ 12/29-NACFKRSEXXX-6388-623220
MESSAGE HEADER
--
FEDERATION(NH BANK)
RECEIVER : NACFKRSEXXX NATIONAL AGRICULTURA L COOPERATIVE
FEDERATION(NH BANK)
MESSAGE TYPE : MT760 [ GUARANTEE ]
MESSAGE TEXT
---
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 403
5.2 Payment Collection without Letter of Credit
5.2.1 Document Against Payment
“Document against payment” (D/P) means that when presenting shipping docu-
ments 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 pay-
ment 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 obli-
gation 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.
5.2.2 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 trans-
fers 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, let-
ter 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 financ-
ing 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 con-
cerned 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:
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 defen-
dants. 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 Cor-
poration, 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 con-
tract with which the court is concerned is the time charter on an amended
New York Produce Exchange form dated May 2, whereby the claimant own-
ers 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.
180Transpacific 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.
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
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 nei-
ther 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 con-
tract, 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 trans-
ferred 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
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, notwithstand-
ing 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
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 state-
ment 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 dis-
posed 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. Agar-
wal 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.
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 negoti-
ated. 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 Kane-
matsu 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.
5.2.3 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 par-
ties 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 col-
lection 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 plausi-
ble, international organizations of factors were created, the most notable of which
is Factors Chain International (FCI). Based in the Netherlands, FCI created inter-
national rules for factoring called the “Code of International Factoring Customs”
and “Rules of Arbitration.” Essentially, these “factors” replace banks in interna-
tional 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 import-
ing, 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.
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 accord-
ing 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 categori-
cally 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 con-
tract 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.
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 advance-
ment—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. Fac-
toring 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
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 guar-
antee 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.
5.3.1 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:

P.R. China
May 29, 2023

Dr. COFFEEXTRACT
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,

Bruce Jin/Manager
Export License (Application)

(The format and contents are different among governments. This is the case of the Korean
government.)
Handling Time : 1 Day
(1) (4) Buyer or Principal of Contract

671110
(Exporter) (notification No) Chinese Marine Trading Co., Ltd.
Name of firm, Address, Name of Rep.

Dr. COFFEEXTRACT
(5) L/C or Contract No.
ILC100 51234 567
509, Innobiz Park,
Daejeon, Korea
(2)
(Reque ster) (Business No.) (6) Total Amount
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 (9) Port of Arrival HAIKOU , CHINA
(10) HS Code (11) Description/Siz e (12) Unit/Qua ntity (13) Unit Price (14) Amount
LUVIUS Premium-Gold Lifting

33O4.99.1000 Cream-50 17,000PCS US$41 USD483,000
DACAPO-Elegante Brightening
Effect Softner US$9.1
Enrich Cream US$13.9
DACAPO-Remember Triple US$14.1
Balance Essential Serum
Miracle ATO-Aroma Moisture US$14.5
Body Wash
Miracle ATO -Pure Moisture Cream US$10.1
Miracle AC-Red2 White Pore

US$5.5
Serum
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:
APPLICATION FOR IRREVOCABLE DOCUMENTARY CREDIT
1.Advising Bank: Woori Bank BIC CODE
2. Credit No. I 10 234567
3. Applicant Chinese Marine Trading Co., Ltd.
4. Beneficiary Dr. COFFEEXTRACT

509, Innobiz Park
Daejeon, Korea
5. Amount (Tolerance +10 /

USD483,000
-10 )
6. Expiry Date 07/31/2023 7. Latest date of shipment 06/31/2023

8. Tenor of Draft ■ At Sight (■Reimburse □Remittance)
□Usance days
of the invoice value (Usance L/C only □Banker's

9. For % □ Shipper's □ Domestic)
DOCUMENTS REQUIRED (46A )

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 in
13. □ Certificate of analysis in
Triplicate
14. Packing List in Triplicate 15. □ Certificate of weight in

16. Certificate of origin in issued by
17. □ Inspection certificate n issued by

18. □ Other documents(if any)
19. Description of goods and/or services (45A:) (Price Term)
Commodity Description Quantity Unit Price Amount
LUVIUS Premium-Gold Lifting 10,000 PCS USD41 USD410,000

Cream-50
DACAPO-Elegante Brightening 1,000 PCS USD9.1 USD9,100
Effect Softner
DACAPO-Elegante Brightening 1,000 PCS USD13.9 USD13,900
Enrich Cream
DACAPO-Infinite Time Essence 1,000 PCS USD14.1 USD14,100
DACAPO-Remember Triple
Balance Essential Serum 1,000 PCS USD14.5 USD14,500
Miracle ATO-Aroma Moisture Body
Wash 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
Country of Origin Korea Total USD483,000

20. Shipment Busan, Korea Shipment To: Haikou, China
From:
21. Partial □Allowed 22. Trans shipment: □Allowed

Shipment: ¦Prohibited ¦Prohibited
23. □
Confirmation:
Confirmation charges:□Beneficiary, □Applicant
24 Transfer: □Allowed (Transferring)

Bank:
25. Documents must be presented within days after the date of shipment of B/L or
other transportation documents.
Additional Conditions (47A:)

□ All banking charges(including postage, advising and payment commission, negotiation

and reimbursement commission)
□ outside Korea are for account of □Beneficiary
¦ □Applicant
□ Stale B/L AWB acceptable □Charter Party B/L is acceptable
□ □Third party B/L acceptable
□ Third party document acceptable □Combined shipment B/L is acceptable
□ T/T Reimbursement: □Allowed
□ □Prohibited
□ Bills of lading should be issued by
(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
SWIFT Message Type for issuing letter of credit

(MT700 Issue of Documentary Credit)
M/O Tag Field Name Content/Options
M 27 Sequence of Total 1n/1n
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 [/34x]4* 35x
M 32B Currency Code, Amount 3a 15number
O 39A Percentage Credit Amount Tolerance 2n/2n
O 39B Maximum Credit Amount 13x
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

O 47A Additional Conditions 50* 65x
O 71B Charges 6* 35x
O 48 Period for Presentation 4* 35x
M 49 Confirmation instructions 7x
O 53a Reimbursement Bank A or D
O 78 Instructions to the Paying/Accepting/Negotiating Bank 12* 65x
O 57a "Advise Through" Bank A, B or D
O 72 Sender to Receiver Information 6* 35x
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

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
: ANY BANK
/41D : available with by name, address
BY NEGOTIATION
/42C : drafts at : AT SIGHT
: WOORI BANK, KOREA(ADDR

/42A : drawee 26-8, JUNG-DONG, DONG-GU ,DA EJEON ,
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

LUVIUS Premium-Go ld Lifting Cream-50

DACAPO-Elegante Brightening Enrich Cream
DACAPO-Remember Triple Balance Essential 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 CHARGES INCLUDING
/71B : charges 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
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
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
International Transportation
6
Learning Objectives
Recently, due to the climate change, the international weather condition has
been very unstable and unexpectable, which has made the international trans-
port 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.
https://doi.org/10.1007/978-3-031-39977-0_6
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 inter-
national 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 oper-
ations 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 natu-
ral 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 uti-
lizes 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 trans-
portation 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 compet-
itive 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

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 transport-
ing companies for the shipping of their goods. Under such circumstances, freight
forwarders, specialists in shipping, have served for the shippers. The freight for-
warder 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 for-
warder, 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, han-
dling, 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 ini-
tiation through continuous technical innovations, such as development of ship-
building, and development of electronics and information networks. The utilization
of containers in shipping goods has expedited multimodal transport and reduced
transportation costs.
(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 logis-
tics 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 mechani-
cal 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:
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 insur-
ance 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
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 con-
tainers. 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 container-
ization 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 com-
panies 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.
(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, tram-
pers 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 con-
tract 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 Accor-
dance 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 unsuc-
cessful respondents to arbitration proceedings brought by Andre et Cie SA
2Universal 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 Com-
mercial Court www.shippinglaw.ru/upload/iblock/d76/588.rtf.
(“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 LOAD-
ABLE 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.
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 bro-
kers 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 con-
tract 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 lay-
can 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 own-
ers 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.
“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 wrong-
fully 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 ves-
sel ‘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 per-
formance 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.
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 obli-
gation. 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 lay-
can 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 pro-
ceeded 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 rela-
tionship 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?
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 con-
tract 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 ‘mer-
cantile’ 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 indi-
cate 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 lay-
can 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.”
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’ obli-
gation 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 ear-
lier, 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 quot-
ing 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 advanta-
geously 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.
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 whatso-
ever 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.
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 respon-
sibility 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.
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.
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 mis-
delivery 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.
(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 ship-
ping 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).

6 Id.
7 Id.
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 con-
tract 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 dec-
laration 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.
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

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).

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.
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 multi-
ple carriers and multiple modes of transport may be used. The former carrier is
responsible for connection to the next carrier.
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 doc-
uments, 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).
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 lad-
ing. 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 incorpo-
rated 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, Posei-
don 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 corre-
spondents 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 lad-
ing. 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.
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 what-
soever 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 relation-
ship 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 lan-
guage 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 incor-
porated 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
nothing shown on the back of the actual sheet as it emerged from the fac-
simile 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 misdeliv-
ery 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 doc-
uments 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 doc-
uments. 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
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 relat-
ing 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 con-
tent 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 con-
ditions 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 com-
mercial 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 for-
warding 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
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 per-
mitted 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 protec-
tion 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 submis-
sions 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,
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.
Shipper: SHORT FORM UK Customs B/L No.

BILL OF LADING 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 The contract evidenced by this Short Form Bill of
stated above) 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 unification of certain rules relating to Bills of Lading dated
by* by Pre-Carrier* 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
contain a Clause giving effect to the Hague Visby Rules
Port of Place of Delivery
Otherwise except as provided below the said Standard
Discharge by On-Carrier*
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.
Marks and Container Number and Description of Gross Weight: Measurement:

No.: No. kind of 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).
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 partic-
ulars 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 car-
rier against all loss, damage, expenses, liability, penalties, and fines arising
or resulting from inaccuracy thereof.
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 char-
acters 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 cap-

tain 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 mil-
itary 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
extra charges and expenses if any, for returning, discharging, lightering, han-
dling, 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 com-
mencement of the voyage resulting from any cause whatsoever, whether due
to negligence or not, for which, or for the consequence of which the car-
rier 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 aver-
age nature that may be made or incurred and shall pay salvage and special
charges incurred in respect of the goods.
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 car-
rier.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 sig-
nature 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

13 Id.
14 Id.
15 Id.
16 Id.
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 cal-
culation 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 gov-
erning 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.
17Nigerian 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.
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 con-
tainers 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 con-
tainers 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.
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 consider-
ations 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 consid-
ered 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 specif-
ically declared, the limit of liability would be attached to the package itself.
Applying this principle, where packages were put inside a container, the con-
tainer 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 intro-
duced affected a radical change in the limitation regime. Mr. Russell further
submitted that to describe a container as a package was to strain the nat-
ural 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 sensi-
bly related to the unit in which the shipper packed the goods and described
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 con-
tents 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
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 con-
tents 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 identifica-
tion 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 liabil-
ity. If the parties are permitted to agree their own definition of “packages,”
shipowners will, by applying that definition to containers, succeed in evad-
ing 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.
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.
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 com-
munity 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 oth-
ers, 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

19 Id.
20 Id.
21 Id.
22 Id. at 206.
23 Id.
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:
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
master.
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
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.

blank back bill of lading). Contents of terms and conditions of carriage
will not be examined.
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 trans-
shipped 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

Straight Bill of Lading

(1)Shipper (3) Destination:
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 Weight Subj. to (14) Class or (15)
Packages Marks and Exceptions Correction Rate Charges
Total:
Hazardous Material (16) C.O.D. Shipment: (17)Shipment Declared Value:
Emergency Contact: □ 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).
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: Trailer Loaded Freight Counted
□ By Shipper □ By Shipper
Shipper Signature/Date: Driver: □ 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.
(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 sepa-
rate entry must be used for each type of package. Enter any special package
markings, special handling requirements, and delivery instructions. For haz-
ardous 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 depen-
dent 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 Ship-
ping 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 con-
cerned 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.
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 ante-
dated bill of lading to London bankers, Standard Chartered Bank “SCB” (the
claimant), under a letter of credit issued by Incombank of Vietnam and con-
firmed 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 (Contrib-
utory 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 suf-
fered 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 Admi-
ralty Law Reports.
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 there-
of” (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 defen-
dant’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.
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 Contrib-
utory 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
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 Associ-
ated 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 fea-
ture 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 negli-
gence or something akin to negligence. The words are wide enough to cover
torts intentionally committed. For my part, I would not disallow apportion-
ment 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 contrib-
utory 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 consti-
tuted 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 "neg-
ligence" 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
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 mis-
representation 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
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 pay-
ment 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.
6.2.3 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 mini-
mized 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.

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 calcu-
lated 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 col-

lected 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
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: CAR-
RIER’S LIABILITY WHERE SUCH CONSIGNMENT IN FACT CAR-
RIED AND NOT DELIVERED: CMR CONVENTION: WHETHER CON-
TRACT 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 ware-
house 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 probabili-
ties,” 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 Con-
vention. 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.
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 com-
puter 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.” Pur-
suant 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 high-
value” 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 con-
cluded 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.
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 pre-
senting 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 pack-
age 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 neces-
sary 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 involv-
ing 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 will-
ful misconduct point but felt it unnecessary to press this doubt to the point
of dissent.
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 con-
clusion 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 knowl-
edge 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.
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 trans-
ported 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.
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

29 Id.
30 Id. at 213.
Airway Bill
NON- SCAC
NEGOTIABLE
B/L NO.
WAYBILL
Shipper 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
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
Above particulars as declared by Shipper, but without responsibility

of or representation by Carrier.
Freight & Charges Rate Unit Currency Prepaid Collect
Carrier's Receipt. Place of Issue Shipped, as far as ascertained by reasonable means of
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 inter-
national 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.
The rate had traditionally been determined through different methods and proce-
dures 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 car-
riage. 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 prop-
erly 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.
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 trans-
port 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.
6.3.1 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.
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. 671110 (5) Consignor
Nameof Firm, Address, Name of Rep.
Name of firm, Address, Name of Rep.

Dr.COFFEEXTRACT
Chinese Marine Trading Co., Ltd 1646, Yuseong-daero, Yuseong-gu
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 Business No. (6) Total Amount US$ 483,000
Name of firm, Address, Name of Rep. (7)Period of Payment AT SIGHT
(Signature)
(8)Terms of Price FOB BUSAN
(3)Origin REPUBLIC KOREA (4)Port of Loading BUSAN, KOREA

(12)
(9) H.S Code (10) Description/Size (11) Unit/Quantity (13)Amount
Unit Price
33O4.99.1000 LUVIUS Premium-Gold Lifting 17,000PCS US$41 US $483.000
Cream-50
DACAPO-Elegante Brightening US$9.1
Effect Softner
DACAPO-Elegante Brightening US$13.9
Enrich Cream
DACAPO-Infinite Time Essence US$14.1
DACAPO-Remember Triple
Balance Essential Serum US$14.5
Miracle ATO-Aroma Moisture
Body Wash US$10.1
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.
6.3.2 Manufacturing or Securing Contracted Items
The exporter manufactures or secures the finished products for export. In manu-
facturing 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.
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 mer-
chandise 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-zone-
DFZ.html#ixzz165Rqtknq
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
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 MADE IN KOREA
Vessel/Voyage
Port of Loading Export Reference No.
HANJIN MALTA
BUSAN PORT KOREA
0026W
Port of Discharge Place of Delivery

Final Destination
HAIKOU PORT, HAIKOU PORT,
CHINA CHINA
Container No. /Seal No. No. of Kind of Package Total Total Meas.
Marks & No. package Description of Goods G.Weight(kg) (CBM)
41CTNS IN A TOTAL
17,000PCS OF
LUVIUS Premium-Gold Lifting
HJCU7143514/435541 Cream-50 561KG 2CMB
C/W 19,800kg DACAPO-Elegante Brightening
MEA 31 CBM Effect Softner
Enrich Cream
․ DACAPO-Infinite Time Essence
․ China Marine Trading DACAPO-Remember Triple Balance
Essential Serum
․
Miracle ATO-Aroma Moisture Body
․
Wash
Shipment to Haikou
Miracle AC-Red2 White Pore
C/N 1-2
Made in Korea Serum
DETAILS ARE AS PER P/O NO.
CMT20130503
L/C NO. : ILC10051234567
FOB BUSAN
Dr.COFFEEXTRACT
509, Innobiz Park
Daejeon, Korea
June 10, 2023
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

1. Communications and discussions with the concerned parties for the effi-
cient 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
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
Marine Cargo Insurance
7
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 par-
ties. 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 interna-

tional trade.
https://doi.org/10.1007/978-3-031-39977-0_7
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 mar-
itime 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).

2 Id.
4 Id.
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 medi-
ate 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

6 Id. at 220.
7 Id.
8 Id.
9 Id. at 221.
10 Id.
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.
12 Id.
13 Id.
14 Id.
15 Id.
16 Id.
17 Id.
18 Id.
19 Id. at 222.
20 Id.
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 insur-
able 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:
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 accord-
ing 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 orig-
inal 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 pre-
serving 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

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 accor-
dance 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.
23 Id.
24 Id.
25 Id. at 222.
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 subject-
matter 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.
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 impor-
tance. 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 per-
cent 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.
29 Id. at 227.
30 Id.
31 Id.
32 Id.
33 Id.
34 Id.
35 Id.
36 Id.
37 Id.
policies may cover a period exceeding 12 months, and they often contain the “con-
tinuation 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 par-
ticulars 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 “de-
clare” 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 insur-
ance 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 Via
. Marks Description of Goods CIF Value
Insured Value
Please send cover note to us.
38 Id.
39 Id. at 228.
40 Id.
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.
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
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 devel-
oped, 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 Confer-
ence 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 Interna-
tional 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.”
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 subject-
matter 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

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 com-
pany. 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.


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 mea-
sures as may be reasonable for the purpose of averting or minimizing a loss
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’ Represen-

tatives 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 them-

selves 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 insur-
ance, 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.
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 destina-
tion.
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 exhaus-
tively 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 non-
disclosure 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.
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 (“Baom-
inh”), 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
42Garnat 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.
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 infor-
mation 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 demon-
strate 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 induce-
ment) 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 demon-
strate 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).
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 rea-
sons 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 poli-
cyholder 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
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 subject-
matter insured but shall in no case be deemed to extend to cover loss
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 notwith-
standing 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 reason-
ably 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 underwrit-
ers 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, ware-
housing 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.”
(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.”
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.”
(3) Exemption Risks Under Institute Cargo Clauses

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

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 prepa-
ration is carried out by the assured or their employees or prior to the
attachment of this insurance (for the purpose of these Clauses “pack-
ing” 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 subject-
matter 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 insur-
ance 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 seawor-
thiness of the ship and fitness of the ship to carry the subject-matter
insured to destination.
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)

and tear of the subject-matter insured
ration is carried out by the assured or their employees or prior to the
matter insured
2 above)
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
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.”
5.1. “In no case shall this insurance cover loss, damage, or expense
arising from
therein
the assured or their employees and they are privy to such
insured to destination.”
6.2. capture seizure arrest restraint or detainment, and the consequences
thereof or any attempt thereat
7. Strikes Exclusion Clause

commotions
7.4. caused by any person acting from a political, ideological, or religious
motive.”
Excluded Risks Under ICC (C)

and tear of the subject-matter insured
ration is carried out by the Assured or their employees or prior to the
matter insured
2 above)
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
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.”
5.1. “In no case shall this insurance cover loss, damage or expense
arising from
therein
the Assured or their employees and they are privy to such
insured to destination.”
6.2. capture seizure arrest restraint or detainment, and the consequences
thereof or any attempt thereat
7. Strike Exclusion Clause

commotions
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
X (clause X (clause X (clause X (clause

Unseaworthiness X (clause 4.1 )
4.1) 5.1) 5.1) 5.1)
X (clause X (clause X (clause
War ○ X (clause 3.10)
6 ) 6 ) 6 )
Terrorists ○ ○
7.3) 7.3) 7.3)
Strikes ○ ○
7 ) 7 ) 7 )
Shortage of Labor ○ X (clause 3.7) ○ ○ ○
(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.
In conditions other than ICC (A) and A/R, it can be compensated for if a TPND
Theft, Pilferage &
clause is added. Herewith, theft means general stealing, pilferage means partial
Non-Delivery
loss by burglary, and non-delivery occurs when all of the cargo does not arrive
(TPND)
at a destination
Damage from fresh water and rain can be covered additionally with this
Rain and/ or Fresh
coverage. ICC (B) only covers “damage caused by sea water, lake water and
Water Damage
river water into storehouses in a ship, barge or hold”. Rain must be insured
(RFWD)
against separately additionally to ICC (B) or ICC (C).
Breakage Fragile cargo including glass must be insured separately
Damage caused by sweating of moisture in pier, or heating moisture of the
Sweating &
products including grain due to poor ventilation could be insured against
Heating Damage
additionally.
Herewith, leakage means the damage caused due to liquid or gas leaking from
its containers, and the shortage means reduction of weight or short quantity.
Leakage /
However, ordinary linkage and shortage of the products including grain and
Shortage
liquid cargo are not usually covered, and thus leakage and storage must be
extraordinary for being covered.
Jettison & Jettison and washing over deck can be insured against when the cargo is
Washing Overboard allowed to be shipped on the deck.
Denting / Bending Dented or bent due to shock in transport can additionally be insured against
Spontaneous
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.
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 insur-
ance” 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 Claus-
es” 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 cov-
ered 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 insur-
ance 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.

44 Id.
45 Id.
7.5 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 pre-
mium 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 cus-
tomer 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 deci-
sion 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 inci-
dents 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 plat-
form 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 com-
mencement 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.”
46Global 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.
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 submis-
sion 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 gener-
ous 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 eventu-
ality 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
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 sen-
tences, 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 empir-
ically 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 con-
signment 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 US$4050.00
partial loss of 1 carton out of 10 cartons)
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.
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
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:
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 or «From(interior port or place of * INSTITUTE CARGO CLAUSE(A) 1982

Conveyance * CLAIMS ARE PAYABLE IN AMERICA
loading)
IN
Ship or Vessel called the Sailing on or about THE CURRENCY OF THE DRAFT.
HANJIN MALTA JUNE 30, 2023
at and from 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
1. Communications and negotiations with (assumed) marine insurance com-

pany, 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.
Kouladis N, Fellmeth AX (2009) The law of international business transactions. West
Foreign Exchange Risks
8
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 for-
eign 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 interna-
tional trade operations through avoidance of the foreign exchange risks, and,
at the same time, for assuming deliberately the risks to secure the posi-
tive 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 trans-
actions 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.
https://doi.org/10.1007/978-3-031-39977-0_8
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 experi-
enced and well-established trading companies may prefer to take the deliberate
assumption of exchange rate risk to shoot at making greater profits from fluctua-
tions.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 par-
ties from countries whose currencies’ exchange rates fluctuate substantially, under
which uncertainty exists.6 Transaction risk is faced by each of the trading counter-
parts 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 prac-
tices. 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

2 Id.
3 Id.
4 Id. at 256.
5 Id.
6 Id.
7 Id.
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’ 40-
year 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 econ-
omy 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 soy-
bean 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.
9 Id.
10 Id.
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 compa-
nies are too small to move into the global market on their own, but with
federal support, they could significantly raise American exports. For maxi-
mum 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 compa-
nies 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 econ-
omy, 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 orig-
inates 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 inter-
national 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 cer-
tain 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 cur-
rency 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 dif-
ferent, 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 pay-
ments, 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 col-
lection. 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.
12 Id.
13 Id.
➀ Remittance
Remittance is defined as “the transfer of funds, usually from a buyer to a dis-

tant 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 commit-
ted, 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 remit-
tance 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 for-
eign 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 sta-
bility, 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 bid-

ding 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, ¥).
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 deter-
mined 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.
(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 for-
ward 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 there-
after for forward exchange. The foreign exchange contract will state the currency
being traded, the currency being bought, the amount, the value date, and the for-
ward 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 work-
ing 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.
(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.
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 assum-
ing 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” prof-
its 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$/¥118, and the specu-
lator concludes a contract to buy US$, 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$, the speculator only has to pay ¥118. By using a forward exchange
transaction, he will have made a profit of 2¥ per 1US$. 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 sell-
ing 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 strength-
ened 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.

➁ Overbought/Long Position
To enter a long position means that an investor is purchasing a currency, commod-

ity, 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 cur-

rency 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.
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 for-
eign 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 multina-
tional enterprises and trading companies and is not a viable option for small-sized
companies or individuals. Centralized risk management occurs when the two par-
ties 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.
(4) Leading/Lagging
Leading and lagging refer to altering the timing of cash flows within a firm (inter-
company), 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. Sub-
sidiaries 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.
8.3.1 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.
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
Dr.COFFEEXTRACT
Dr.COFFEEXTRACT
Dr.COFFEEXTRACT
Dr.COFFEEXTRACT
Dr.COFFEEXTRACT
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
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:
Under the sales contract followed by the issuance of credit in previous chap-
ters, 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
Electronic Commerce
9
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 tar-
get 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 commu-
nication 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 trans-
actions 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.
https://doi.org/10.1007/978-3-031-39977-0_9
576 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 conjunc-
tion 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 organiza-
tions 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, auto-
mated 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.”
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 indus-
try. 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 elec-
tronic 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 e-
Documents
“Electronic documents in future commercial life will be very active accord-
ing to the vision of ICC—International Chamber of Commerce at the
beginning of 2000. In this year, a working group was formed for the elec-
tronic 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.
However, many banks in the world still are not ready to execute trans-
actions with electronic documents. This happens despite the fact that
technological advances in Internet technologies and even legal infrastruc-
ture 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 agen-
cies, 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. Unfortu-
nately, 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 impor-
tant 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 poten-
tial 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 579
9.2.1 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 e-
mail, 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 partic-
ipate 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 pay-
ment to the exporter as specified. Telegraphic transfer is generally used when the
contract amount is small or the importer is credible, and payment through collec-
tion 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.
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, I-
Trade, Tradecompass, etc.
9.3 Customer Research 581
9.3.2 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 cus-
tomers 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 mate-
rial. 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.
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 circum-
stance 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.
Claim and Dispute Settlement
10
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 arbi-
tration 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.
https://doi.org/10.1007/978-3-031-39977-0_10
584 10 Claim and Dispute Settlement
10.1 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 com-
mitted 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 CISG 1980, Art. 38.

2 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 litiga-
tion, 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 flex-
ibility, 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 unpre-
dictable 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.

4 Id.
5 Id.
6 Id.
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 exam-
ple, 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.”
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.
8 Id.
9 Id.
10 Id.
11 Id. at 280.
12 Id.
13 Id.
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).
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.”
The mediation and conciliation processes make a neutral, independent, and

unbiased third party become involved in the dispute resolution process.15 Con-
cerned parties try to resolve the disputes without resorting to formal dispute
resolution procedures including litigation or arbitration.16 Mediation and concili-
ation 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

15 Id.
16 Id.
17 Id.
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 aber-
rant or deviant. That impression is false. Litigation is a relatively rarely
used process of dispute resolution. Alternative processes, especially nego-
tiation, 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.)
10.3.2 Arbitration
(1) Concepts
Arbitration differs from litigation in that it is a consensual dispute resolution pro-

cess 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.
19 Id. at 282.
20 Id.
21 Id.
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 Arbi-
tral 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 speak-
ing, 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 coun-
tries. 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 espe-
cially 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.
23 Id.
24 Id.
25 Id. at 283.
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 arbitra-
tion 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 princi-
ple 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 ful-
fillment 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 provi-

sionally 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 tri-
bunal 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.

(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, refer-
ences, 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.
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 con-
sists 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 single-
trial 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 includ-
ing the New York Convention have made enforcement of arbitration awards
concluded in the Convention’s member countries effective in their domestic
domicile.
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 con-
tained 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 prohib-
ited, the company still had a third periodical under publication, in which
the material of the USA magazine could have been published. Moreover,
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 roy-
alties was temporarily suspended—which the arbitrator considered as uncer-
tain—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.
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 prod-
ucts, 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:

P.R. China
July 2, 2023
Dr.COFFEEXTRACT
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,
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.
Dr.COFFEEXTRACT
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
1. Under the presumption that your counterpart raised complaints against

the breach of contract, for, example, relating to the quality specifica-
tion, 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 diffi-
culties, inconveniences, and economic inefficiencies to be indemnified
through the arbitration award, compared with the costs paid and invest-
ments made for the more complete risk management by your company
during the process of preparing for exports.
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

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Management for Professionals

Eun Sup Lee

ISSN 2192-8096 ISSN 2192-810X (electronic)

1st edition: © Springer-Verlag Berlin Heidelberg 2012

Paper in this product is recyclable.

Since the first edition of Management of International Trade was published in

Busan, Korea (Republic of) Eun Sup Lee

4.2 Basic Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

6 International Transportation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427

8.2.4 Forward Exchange Transactions . . . . . . . . . . . . . . . . . . . . . . . 555

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 1

1. Public and private regulations on international business transactions.

1.1 Concepts of International Trade

International trade, in the present context, refers to international or global trading

exchange banks. Additionally, compliance with foreign countries’ public regu-

Risks in Doing International Trade

Effective risk management is very important in doing international trade.

jurisdictional risks could be minimized by drafting a commercial arbitration

1.2 Public Regulation on International Trade

1.2.1 Multilateral Regulation

negotiations sponsored by its contracting parties, covering progressively larger vol-

market access negotiations on all products, including agricultural products and

1.2.2 Gatt 1994

(2) Main Features

Regarding the interpretation of the WTO Agreement, in accordance with Article

7 WTO Agreement, Art. 9.

purposes,16 fees and formalities,17 marks of origin,18 quantitative restrictions,19

1.2.3 Technical Barriers to Trade

In recent years, the number of technical regulations and standards adopted by

1.2.4 Sanitary and Phytosanitary Measures

40 See Eun Sup Lee, supra note 4, at 68–69.

sures deal with plant health. WTO, SPS Agreement. http://www.wto.org/english/thewto_e/eol/e/

Sup Lee, supra note 4, at 72.

1.2.5 Customs Valuation

Customs valuation is a customs procedure applied to determine the customs value

1.2.6 Rules of Origin

56 SPS Agreement, Annex A. para.1.

of tariff classification, the criterion of the ad valorem percentage, or the criterion

http://www.wto.org/english/tratop_e/roi_e/roi_info_e.htm. Accessed Dec. 11, 2022 [Hereinafter,

1.2.7 Pre-shipment Inspection

65 Id. at Art. 1.1.

1.2.8 Import Licensing

Import licensing can be defined as administrative procedures requiring the sub-

import licensing procedures from unnecessarily hindering international trade. Dur-

Dumping is defined in the Agreement on Implementation of Article VI of GATT

1.2.10 Subsidies and Countervailing Measures

The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”)86

Services production is a core economic activity in virtually all countries, devel-

New transmission technologies have overturned traditional concepts of dis-

individual governments’ authority to maintain and develop necessary regulations

patents, see Eun Sup Lee, supra note 4, at 236.

research and development activities for the development of new technology; to

1.2.14 Dispute Settlement

The dispute settlement system of the WTO is a central element116 in providing

1.2.15 Trade and Environments

126 Id., at Art. 3.7.

for instance, the proper utilization of trade-related environmental measures with

1.2.16 Trade and Anti-competitive Practices

131 Id., at 398.

The main purpose of the international discussions on the effect of competition

1.3 Domestic Regulation on International Trade

While international trade among states is internationally governed by multilateral

1.4 Private Regulation on International Trade