Question from a relative newbie (non-banker) ...

[GavinM]

I wondered if anyone could give an opinion on the legal stance of the following. I am not a banker, so please bear with me


----------------------------------A German buyer purchases product from an Indian supplier on a CIP Frankfurt airport basis. Payment is by documentary collection, with D/A 60 days.

The product arrives at the airport before the drafts arrive for acceptance, and the buyer takes up the product and moves it to his warehouse. This is made possible as the airwaybill is of course non-negotiable, and the buyer has moved the goods on a faxed copy of the airwaybill.

While in the warehouse the drums are heated, and they leak. The packaging is not suitable and a condition of the purchase contract is broken by the supplier. The buyer decides to reject the goods. The buyer then receives the draft for acceptance .....

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Am I corrcet in saying :

(1) The buyer has not yet accepted the bills of exchange. However he does still have to accept the draft regardless of the product being rejected. This is because the buyer has already taken up the goods and this action constitutes acceptance of the documentary collection should matters go to court.

(2) If the bills of exchange are accepted, i assume that the buyer cannot then refuse to pay for the goods on the due date due to the rejection. My reason is that once a bill of exchange has been acepted, payment has to be made (unless a court order is issued, and even then this is a grey area ..?). The rejected product problem would have to be resolved via other means outside of the finance contract / bill of exchange act rules.

Am I wrong on this, and if so could anyone point me right?

Much appreicated

Gavin

[KimChristensen]

Dear Gavin,

Welcome to the forum. Always nice to hear from non-bankers.

I think that your question is very simple and very tricky.

So my personal view without liability / responsibility.

First off all, you mention that this is a documentary collection. I would then assume, that it is made subject to URC 522 (ICC Uniform Rules for collections)

The main principle when handling collections (as in fact documentary credits), is that it is independent from goods and services to which the documents may relate.
From your question it also seems, that the documents are to be released to the drawee (buyer) against his acceptance of the draft. The fact that the goods are already released, does not constitute an “acceptance” of the draft, and the drawee is free to refuse to accept the draft.
It seems to me, that this is a “risk” that the drawer (seller) has “accepted” when issuing the air way bill directly to the buyer. Had it been issued to the bank, it would have taken a “release of goods” from the bank, which would have changed things.

(There is a string in the forum dealing with release of goods that may interest you:
http://focus.dcprofessional.com/Dcpro-L ... cator=7.10 )

Anyway – looking at it strict from a collection point of view, the buyer can choose not to accept the draft regardless of his taken possession of the goods.

So far so good: I am not a lawyer, but in refusing to accept the draft while taking the goods, I would assume that there is a risk that the buyer is in beach of the commercial contract. At the same time, there is the issue of the “Packing condition” of the goods. I am sure that these matters would be taken into account, if this case ended up in court – and I do not dare to guess the result
I am sure that someone in this forum can elaborate further here.

Best regards
Kim

[larryBacon]

I agree with Kim. Since delivery is made by air, there is no document of title and therefore the acceptance of the draft is not necessary, as delivery can be made without the documentation in this collection.
The risk is with the seller and payment in my opinion is not dependent on the URC rules, but on the agreed terms and conditions within the purchase contract (which should have included collection under URC).

Since Gavin says that a condition of the contract has been broken with regard to packaging, the buyer is entitled to reject the goods. this does not mean that he has to reject the goods. If the goods are immediately salvageable, this may be more in the interests of the buyer as it allows him to satisfy an immediate need. Suitable alternatives may be too late for the purposes, or more costly.

If salvage is considered, since the goods are insured, the insurance claims agent should be agreeable to a limited claim for salvage, agreed in advance of payment, as opposed to a full claim which could only be made on the basis of payment for the goods.

I hope this helps.

Laurence

[AbdulkaderBazara]

Just to get more flavor on taking possession of goods / release of goods and later on challenge its settlement, you may also refer to "Expert View" on Shipping Guarantees and Discrepant Documents by Soh Chee Seng.