A bank in the United States, First Midwestern National Bank, was approached by the principal of a company which designed, manufactured and distributed jewelry made from natural gems and stones. The company, Wisconsin Fine Jewelry (WFJ), is known to the bank, and they have had a satisfactory relationship for several years. The company has approached the bank about an opportunity to sell and transport raw precious jade mined in the U.S. and Canada to Vietnam. 

• The buyer, Saigon Jewels, has offered to provide a letter of credit from a reputable bank covering the shipment of several thousand tons of raw jade by sea. 

• Saigon is proposing payment over a three-year term. The management of WFJ is requesting assistance from First Midwestern Bank in assessing the situation and in structuring and financing the transaction. However, WFJ was not entirely forthcoming on all the details of the negotiations that had taken place to date. It did not inform the bank that in its discussions with the Vietnamese, WFJ had undertaken to buy back finished polished stones and jewelry from Saigon Jewels over the course of three years at a set, fixed price. The Raw Details The underlying transaction was to cover the sale of about 10,000 tons of raw, unfinished jade, to be shipped in one single shipment by sea. The total value of the sale was to be USD 3 million and the Incoterms® 2020 rules used were Cost Insurance and Freight (CIF). Wisconsin Fine Jewelry assured First Midwestern that it could supply the jade and had arranged for safe shipment in a special chartered vessel. WFJ sought help and advice on the terms it should insist on from the Vietnamese and it requested advice on how best to achieve immediate funding for the longer- term payment commitments. The Trade Financing Structure First Midwestern was well regarded for its trade financing skills and had a reasonable reputation in the market, locally and regionally. While the transaction was unusual and involved a country it had little experience with, the bank was anxious to impress WFJ and win the mandate to do the deal because of its size, likely revenue and the opportunity for additional future business. It proposed the following: 

• The Bank of Saigon would issue an irrevocable letter of credit, to be confirmed by First Midwestern. 

• The total value was to be USD 3 million, to be payable in three equal installments of USD 1 million: one at sight, another twelve months later and the third a year later. 

• The letter of credit was to call for three drafts (bills of exchange) to be drawn on First MidWestern, the confirming bank and accepted by it after shipment and presentation of documents to the bank in full conformity with the letter of credit. The first draft was to 2 be payable three months after final shipment of all the jade, while the second and third payments were to be due for payment in twelve-month intervals after the date of the first payment. 

• The First MidWestern bank would undertake to sell the second and third drafts (for the second and third payments) to its forfait subsidiary, thereby providing WFJ with immediate funding (less the amount of the discounted interest to maturity of the drafts), rather than having to wait for the drafts to mature. 

• The letter of credit was to include provision for an on-board bill of lading, commercial invoices, and an inspection certificate issued by an independent inspection agency to verify the quantity and quality of the jade before shipment. 

• The letter of credit was to be issued subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, version 600. Wisconsin Fine Jewelry conveyed to its Vietnamese buyers the terms required and outlined the necessary letter of credit details and terms. Three weeks later, First Midwestern received the following from Bank of Saigon: 

• An irrevocable guarantee (i.e. not a Letter of Credit) issued in favor of Wisconsin Fine Jewelry, undertaking to guarantee payment of three drafts for USD 1 million each. The first was payable at sight and the remaining two were to be due for payment in two twelve-month intervals after the first payment was made. 

• The drafts were to be drawn on the issuing bank (not the confirming bank, as advised by First Midwestern) and would be accepted by them after the delivery of the full quantity of jade and against an inspection certificate indicating that the jade was of correct quality and density. The guarantee did not indicate which party was responsible for issuing the inspection certificate. 

• The certificates and drafts were to be forwarded to the issuing bank by First Midwestern after all the jade had been shipped and it received an authenticated SWIFT message from the issuing bank that the full shipment had been successfully delivered to the buyers. 

• The issuing bank did not request the advising bank to add its confirmation. 

• The guarantee was not subject to any ICC or other universally recognized rules. Going Against Advice Against the advice of First Midwestern not to accept the guarantee and to request a documentary letter of credit along the lines it had recommended, WFJ was anxious to proceed with the transaction. The jade had been mined and had been ready for some time, and shipment had been arranged. When asked by WFJ if it would confirm the guarantee instrument if requested by the issuing bank, First Midwestern refused to confirm the instrument in its present form. It did, however, undertake to purchase and discount drafts if the shipment was completed successfully and the issuing bank accepted the drafts. The Outcome First Midwestern had suggested to WFJ that they should hire a third-party to provide an 3 independent inspection of the shipment prior to shipping. However, the seller and buyer ultimately agreed that the inspection would take place upon arrival at the buyer's location. So, Wisconsin Fine Jewelry arranged for shipping and the original copies of the Bill of Lading were sent to the buyer (to allow the shipment to be released at the port) so the jade could be delivered to the buyer's location for inspection. But after the arrival of the shipment, the Vietnamese buyer claimed that their analysis of the jade indicated not all of it was of the quality required. A heated debate and argument ensued between the buyer and the sellers, and Saigon Jewels threatened to not accept any of the shipment and to instruct its bank not to accept any of the drafts. Ultimately, the Americans arranged a subsequent small shipment of jade to satisfy the objections of the Vietnamese buyers. Despite these initial delays, accepted drafts were received by First Midwestern, and the first draft was paid immediately and reimbursement was successfully claimed from the issuing bank. The remaining two drafts for USD 1 million each were sold at a discount to First Midwestern's forfait subsidiary and WFJ was paid the full value of both drafts less interest for the term of the drafts. So WFJ, as the exporting company, was paid as they expected. However, a year later, the price for jade gems and specialized jade jewelry had significantly dropped on the world market and when First Midwestern claimed payment of the second draft on the due date, payment was refused by the issuing bank. Recall that WFJ did not inform First Midwestern that they had undertaken to buy back finished polished stones and jewelry from Saigon jewels over the course of three years at a set, fixed price. Apparently, in the face of substantially lower prices for jade jewelry on the world market, WFJ had failed to follow through on their promise. So Saigon jewels had sought and received an injunction from the highest local court instructing the issuing bank not to pay the second and third drafts. The reasons cited were that WFJ had failed to live up to its agreement to buy back the finished stones and jewelry for the price arranged in a prior agreement between the buyer and seller and that the buyer did not have the financial means to make payment for the current or future drafts. The principals at WFJ denied the existence of a side-agreement and thereafter refused to respond the calls from First Midwestern. So, although First MidWestern had already paid WFJ for all three drafts, they did not initially receive the USD 2 Million in remaining payments that they believed they were owed.

 Question # 1: Given the underlying characteristics of this transaction and the country involved, should First Midwestern Bank have been involved in the transaction and ultimately should they have purchased the drafts? 

2. What recourse or courses of action are available to First Midwestern to recover payment for the drafts?