Export Case Study

Hello friends. Now I will discuss a very interesting story, which is a real story. Although I will not divulge the exact names of the players involved in this story, but the story is real. So, friends, this story relates to one company Malhotra exports, based in Mumbai which was in the export business, exporting high fashion ready-made garments. And they entered into an export contract for supplying fashion garments to a fashion garment importer in France, the St. Lauren company of Paris. And they supplied the goods a few years back against an agreement between the importer and the exporter for the supply of the fashion garments against the international payment system through banks, wherein the Indian bank and a French bank were involved and the payment was on DA basis. DA means – Documents against Acceptance and the acceptance period was 60 days and the value of the contract was approximately 55,000 euros. So, the Indian Bank of Malhotra Exports which was the International Bank of India, and the Credit Lyonnais is the French bank of the importer. They were the bankers in this DA payment contract.

And after the shipment was made by Malhotra Exports from Mumbai by sea of the fashion garments to the french company. They submitted all the documents as per the contract, including invoice, Certificate of Origin, insurance certificate, and freight certificate. And very importantly Bill of Exchange. In the bill of exchange, the company Indian company Malhotra Exports very clearly mentioned that the documents including the bill of lading, and transport documents are to be released to the party against the Co- Acceptance of the French bank, the meaning of which is that in any eventuality, the french bank, if he co accepts this DA terms, as per the bill of exchange, the payment will be made by and guaranteed by the french bank. So, these documents were submitted to the Indian bank by Malhotra Exports and in a very routine manner, the Indian bank forwarded these shipment documents to the french bank that is Credit Lyonnais, which further handed over these documents to the St. Lauren Company of France against acceptance of 60 days.

So, after 60 days passed, the money did not come through to the Indian company that is Malhotra Exports and they contacted their Indian counterpart Indian bank. The Indian bank sent a communication to the french bank about the payment. And the french bank replied that the St. Lauren company of France is already bankrupt, and in this case, they are unable to pay. And this reply was conveyed to Malhotra Exports by the Indian bank. In this case, the Indian company contacted the bank and said that as per the bill of exchange, the documents had to be released only against the acceptance, and co-acceptance of the french bank. And since the company that is the importer is bankrupt, money has to be paid by the french bank. The same was conveyed to the french bank by the Indian bank, the appeal of the Indian company for the payment. The French bank replied to their inability to pay in the absence of any clear instructions by the Indian bank about the co-acceptance condition for releasing the documents to the french party. Indeed, the Indian bank had not given any explicit instructions for the collection of the documents as per UCP 522 about the co-acceptance clause.

So, in this case, Malhotra Exports approached the National Consumer Forum in Delhi, with the plea that the Indian bank failed to instruct, in spite of the condition given in the bill of exchange about the co-acceptance clause by the French bank. The National Consumer forum in Delhi ruled in favor of the Indian company that is Malhotra Exports and ruled that the services of the Indian bank were indeed deficient and Indian bank is liable to pay 55,000 euros plus 15% interest to date to Malhotra Exports. So, after this ruling, the Indian bank approached with an appeal to the Supreme Court, and as per the ruling of the Supreme Court after hearing both the parties Supreme Court ruled that the Indian bank, as well as the French bank, is not liable to pay any compensation to the Indian company that is Malhotra Exports, because of the lack of any explicit instruction given by the Indian company to their Indian bank that is International Bank of India about the co-acceptance clause. And further, it ruled that there was no supporting underlying agreement or contract between the exporter that is Malhotra Exports and the bankrupt importer that is St. Lauren of France, indicating any co-acceptance clause. And neither there was any agreement between the exporter and the French bank to that effect. So, in the absence of these documents underlying documents, and the fact that there was no explicit instruction by the Indian exporter to the Indian bank, it is very, very clear that banks are not liable to go into the commercial documents submitted for the shipment. And they are only liable to follow the instructions given explicitly by the clients clearly indicating the instructions for the collection of the documents. And the same plea which was given by the French bank applied to the Indian bank also.

So, the overall result of Friends was that the Indian company lost money, they lost reputation, and they lost business. And it all was the result of the lack of knowledge about the export documentation and procedures by the Indian company. And if they would have taken the correct precautions throughout, they would not have faced this kind of situation. The possibility of the precautions was many in this particular case, starting with the explicit contract with the French importer, to the Co-acceptance clause by the French bank, and also the agreement with the French bank to this effect.

And overall even without such agreement, if they would have given very clear written instructions with a proper covering letter to the Indian bank, the documents were not to be released without the acceptance of the co-acceptance clause by the French bank. The documents would have come back in the absence of the agreement by the French bank and there would have been some recovery of the money by the Indian company that is the exporter. So, friends, this particular story very clearly indicates that it really is very important for the exporters to follow and understand entire and accurate export documentation and procedures very minutely, very diligently, and with a lot of experience.

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