MSI' South Korean law member Ahnse Law Office recently represented a foreign client which exported certain foods to Korea and provides an insight into this particular case. The payment terms were Documents Against Payment such which are governed by the 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.
In simple terms an exporter will instruct its bank (the remitting bank) to send certain documentation to the importer’s bank (the collecting bank). The documentation sent is generally that which is required to end the shipping cycle and clear shipments through Customs. The collecting bank holds the documents pending payment to it by the importer whereupon the documents will be released directly to them.
In this case, the client exported a series of shipments to the Korean importer / distributor. The client was for some time laboring 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 importer 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 that it had done so “without omission”. This was not an entirely accurate statement.
In fact, an inspection revealed that certain food 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.
Of course, other documentation is also required for goods to be successfully imported, in particular the Bill of Lading. It seems that this document was also (illegally) “pre-released” by the local bank. Again, 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.
As an end note, 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 investigative authorities, especially in the first instance, may not be the best placed to consider complex legal documents which are written in a language which is not their own.
