Questions PresentedMr. DeRosa is asking for the set of substantive rules that would apply to the current situation including charging him 20% more than the contract price. As well as he has also asked

Questions Presented 

Mr. DeRosa is asking for the set of substantive rules that would apply to the current situation including charging him 20% more than the contract price. As well as he has also asked that whether there is any missing significant provision in the letter of credit and is it complete to make all of the parties binding on it?

Short Answer

It has been given in the information that such price hike is justified in the law of Paraguay so that such price hike could be charged from Mr. DeRosa. Such price hike could be much more than 20% and therefore it includes material part of determining the maximum part otherwise Ms. Cruz could charge any percentage hike. Therefore such matter should be taken to Court of Kansas as per Clause 4. There are also other methods, through such dispute could be solved and such methods are the popular one in EXIM sector.

Facts of the Case

For the given case, Ms. Cruz has been a supplier to Mr. DeRosa and she has never asked for payment through the letter of credit. And through such unusual communication, the letter of credit which has been drafted by Mr. DeRosa is also to be reviewed as they are not having any prior experience with such letters. Buyer is of the opinion that order is much larger than before and that is why Ms. Cruz has asked for payment through documentary credit.

As in the case, there are two most significant questions involved for determination of structured provisions that would govern the contract as well as whether the letter is accompanied with important wordings or not.

As Mr. DeRosa is not having any experience with LC, that is why such letter needs to be thoroughly reviewed as per Mr. Hiram so that any mistake could not let Mr. DeRosa be in unfavorable situation.

Discussion

In the given case, it has been given that two questions are to be addressed which are of real concern for Mr. DeRosa. Mr. DeRosa has been dealing with Ms. Cruz for past many years and for now both of them are in between some of significant issues. As depicted by information, it can be seen that Ms. Cruz has never asked for payment through other mediums which denotes making payment in advance or through letter of credit. Ms. Cruz is practicing of shipping goods followed by asking for payments through a suitable medium and this is the first time Ms. Cruz has asked for payment through documentary credit. Such unusual demand is reflecting that Ms. Cruz is not having trust in Mr. DeRosa for the receipt of payment.

Alongside such matter, Ms. Cruz has also asked Mr. DeRosa for excess payment of 20% over and above the FOB price of $11,000 for the all the materials to be supplied. Ms. Cruz is saying that cost of material had risen that is why such hike is justified as per prudential norms as well as legal norms in view of Paraguay Export and Import Rules. But the most important part is that, such 20% excess payment could be more as price of any commodity is uncontrollable and so that selling price could also rise significantly. Vagueness of such provision is to be dealt with as per the provisions of the contract or more popular International Conventions for settling such disputes. The reason why Ms. Cruz is asking for payment through LC this time may be to demand such hike instead of huge order.

For the very first question for settling disputes, the matter should be either settled in courts or through popular methods such as Arbitration, Mediation, conciliation which has their own exclusive advantages. The opinion of Mr. DeRosa would likely prevail in such matter as such sudden increase in price is not a matter of concern for them, seller should be careful of such matter. Seller should tackle such problems through hedging or some risk management techniques. What if, seller was saying that, price had risen by 100% and it is unjustifiable as seller is not attempting any type of risk management technique to prevent himself from rise in price of material?

Mr. DeRosa and Ms. Cruz should approach Arbitration authority to settle down such dispute as such method has its own advantages such as Privacy, Choice of Arbitrator, Promotes Goodwill, Cost-effective, quickness.

Hence the popular method of settling disputes between Importer and Exporter would govern such contract as this is the first time when both parties are in problem. Such matter should not be dealt in Court as it would repudiate the relation, expensive, time consuming and many more. Hence it is advised to avoid Court litigation Cell and approach through Arbitration methods.

Letter of Credit Completeness

Coming through first question, it has also been asked to review the draft of LC through Mr. DeRosa for payment to Ms. Cruz. The reason being why it should be reviewed that Mr. DeRosa is not having prior experience with LCs. First of all, it should be determined that on what terms and conditions dealing has been in operation since origin.

Following are the discrepancies that are to be dealt with in Letter of Credit as follows:

1. Name and address of the Beneficiary on the letter of credit is missing that stipulates that buyer has to fill up the initial necessary details in the LC.

2. Shipment details such as shipment from and shipment to is missing on the letter of credit.

3. It can be seen from LC that latest estimated date of shipment receipt at buyer place is also missing that is very important and should be mentioned on the LC.

4. As commercial invoice is to be attached with other documents to verify that complete details has been mentioned in the invoice. But in the letter of credit too, all the materials with all their quality, quantity, price and all other relevant properties should be mentioned in the letter of credit. That should be dealt with accordingly.

5. It has been mentioned that it is an FOB transaction, and all the selling expenses should be incurred by seller and other expenses to make available the goods at buyer’s place would be borne by buyer. Such important provision is also missing and it should be stated to declare the importance of contract type whether CIF or FOB or other variants.

6. Not any endorsement provision in case of default of beneficiary bank has been made to such LC such as if the Beneficiary bank denies to pay the amount then other bank would take responsibility to pay the amount. Such subrogation could only be possible through endorsement provision which is missing in such LC.

7. Relevant reimbursement instructions are also to be mentioned on the LC so that it is also understood that all expenses which would make available the goods at the buyer’ place would be borne by buyer only and if seller bears any of them then seller should be reimbursed. Such settlement should be governed by a separate instructional provision which is to be state in the LC.  

8. One of the most important significant disclaimers should also be stated in the LC that is the most popular convention for nowadays to prevent the wrong interpretation of LC.

It is phrased in way as “All apparent spelling mistakes/mistakes in LC documents, which do not alter meaning/ specification/ description/ Quantity/ value of goods are acceptable and will not count as a discrepancy.”

9. Documents Required Section should be drafted carefully as the buyer is drafting the LC. Buyer should take care of the quantity, quality, price and all other relevant material features of goods with which goods should be shipped as per the requirement. All the details such as quantity inspected, boarded on vessel and inspected by Custom Officer and so on.

10. If at the discretion of buyer, additional instructions as well as conditions can also be stated in LC so that both of the parties would not be stuck with any issue.

After accounting for all the above relevant material facts in the LC, the letter should also be reviewed once so that post amendment discrepancy could also be found out.

Conclusion

Hence it can be concluded that matter of unusual demand of price hike through letter of credit can be dealt with through popular method of arbitration. And after accounting the above facts in the LC, letter could be amended to solve the purpose amicably.