We are currently representing a foreign client which exported almonds and walnuts to Korea. The payment terms were Documents Against Payment such which are governed by the International Chamber of Commerce Uniform Rules on Collection 522 (URC 522). Documents Against Payment also known as (DAP or D/P) is of course a method of payment like Letters of Credit and TT.
The process simply is as follows: an exporter will instruct its bank (the remitting bank) to send certain documentation to the importer’s bank (the collecting bank). These include the House Bill of Lading and the Phytosanitary Certificate which are required to end the shipping cycle and clear customs. The collecting bank will hold the documents pending payment to it by the importer whereupon the documents will be released thereby facilitating the transfer of goods to them.
In this case, the client exported either shipments to its Korean distributor. The client was for some time labouring under the misapprehension that the goods were being held in the bonded warehouse whilst they awaited payment. They importuned the importer for payment as historically such had been persistently late.
They subsequently learned (to their horror) that the goods had been released through Customs without further reference to them or their bank. The distributor shortly thereafter went into liquidation. Immediately upon hearing the news, the client requested the return of the documents. The local bank did indeed return the documents stating in a SWIFT message that it had done so “without omission”. This was not an entirely accurate statement!
In fact, an inspection revealed that the Phytosanitary Certificates had not been returned. To supposedly correct their previous statement, the local bank said that these certificates had been released as it was “customary practice” so to do.
The URC 522 specifically proscribe the release documents without payment made being unless it is expressly provided otherwise. At the same time, the food certificates are actually required to be filed with the Korean Animal & Plant Quarantine Agency within a relatively short period of the goods’ arrival at the port. If those time periods are not complied with, then proceedings may be brought against the importer under the Quarantine Act. This can result in prosecution and ultimately, the goods being destroyed.
Whilst the URC 522 specifically prohibit the release of documents prior to payment, it is not entirely unheard of that this may happen from time to time. A bank may for example “form a view” on the reliability of a long standing customer.
A cursory search on the internet will reveal that this has happened in Korea (and no doubt in other jurisdictions). The writer however considers it an exception rather than the norm. It is however a noteworthy exception in this instance as it led to a very significant loss.
We should of course advise our clients on how to mitigate commercial and legal risk. In this case, this might include advice on the more preferable form of payment and an assessment of counterparty risk (commercial risk); and reviewing and amending contractual documentation to better suit a particular commercial circumstance (legal risk). This is one instance when perhaps discretion may have been the better part of the status quo.
It is relatively easy for local counsel to do basic due diligence on a potential customer. They could also advise on any suitable contractual amendments to fit the particular circumstances of a situation. Vanilla standard terms and conditions were not necessarily the most propitious solution in this case particularly as there was time pressure under local laws to release certification.
It is not always possible to prevent a fraud but it may be possible to take steps both before and after the fact to mitigate it. Also, one of the obstacles that we have faced is that the Police may not be the best placed to consider complex legal documents which are written in a language which is not their own. They may also not always be willing to make a decision in a timely manner.
As an end note to this, we have a Judgement from the ICC which is excoriating of the local Korean bank. The bank continues to defend the claim in the civil court.
