Case Study 1 - Documentary Credit PROTON MALAYSIA Introduction Proton Malaysia is a public limited company; they manufacture SUVs (sports utility vehicle), in technical collaboration with General Motors of USA. The company has established their manufacturing base at Shah Alam, Selangor. They have acquired an area of 250 acres and the total project cost is estimated at RM 1500 mil. As per the projections, the company is slated to achieve a 25% market share in the Malaysia market, within a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Malaysian banks. The working capital is financed by a consortium of banks in which Global bank, Selangor branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Selangor Branch. Proton Malaysia approached Global Bank, Selangor for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Circumstances Issuing Bank Global Bank, Selangor issued its irrevocable negotiable credit through its head office in Selangor since Global Bank co-ordinated all its accounting and communication functions at its head office. The Bank's head office transmitted the credit through Swift network as instructed by its Selangor branch to General Motors, Detroit, through The American Bank, New York. Advising Bank The American Bank, New York advised the credit to General Motors, Detroit on receipt of the swift transmission. Credit Along with other conditions, the credit clearly stated that the negotiating bank was to forward the documents directly to Global Bank's head office at Selangor. Beneficiary After export of the consignment, General Motors, Detroit presented the documents under the credit to The American bank, New York. Negotiating Bank The American Bank, New York, examined the documents presented by General Motors and determined that they were in compliance with the terms and conditions of the credit. The American bank negotiated the documents and forwarded the documents, as per the credit terms, to the HO of Global Bank in Selangor and claimed reimbursement from International bank, New York. Reimbursing Bank International Bank, New York honoured the reimbursement claim by crediting the current account of the American Bank, New York and debiting the account of Global Bank, Selangor, in its books. Issuing Bank Head Office Global Bank's Head Office, at Selangor, received the documents and after internal registration of the documents, forwarded the documents to its Selangor Branch by inter-office mail. Issuing Bank Branch On receipt of the documents by the Selangor branch of Global Bank, they examined the documents and determined that they were discrepant. They were (a) 60 units were shipped instead of 50 units, thereby overdrawing the credit value by USD 2000 (b) Inspection certificate by Auto Inspection Council, USA is not submitted, as per credit terms. Global Bank contacted Proton Malaysia for waiver of the discrepancies. Applicant Proton Malaysia requested for copies of the documents to be forwarded by fax and after reviewing the same, they refused to waive the discrepancies. Issuing Bank Branch Global Bank, Selangor Branch instructed its HO to transmit an authenticated swift to The American Bank, New York stating that Global Bank had rejected the documents for the noted discrepancies, requesting the American Bank's instructions as to disposal of the documents, and demanding a refund of the funds reimbursed. Issuing Bank Head Office The HO of the Global Bank sent the authenticated swift message to the American Bank, New York, as instructed by its Selangor Branch. Negotiating Bank On receipt of the swift notification advising that Global Bank had rejected the documents for the stated discrepancies, the American Bank informed Global Bank that it did not accept the rejection of the drawing since the Global Bank did not comply with UCP 600 sub-article 14 for standard examination of documents. Therefore, Global Bank was said to be stopped from dishonouring its irrevocable obligation. Issuing Bank Global Bank, Selangor Branch responded by stating that they acted in accordance with UCP article 14, since their action did not exceed five banking days following the day of receipt of the documents at their branch counters after which they scrutinised the documents and determined to refuse them. They maintained that as per article 14 of UCP 600 , they notified about the rejection of the documents, by swift, not later than the close of the fifth banking day following the day of receipt of the documents. They had pointed out all the discrepancies and had informed American Bank, New York that they were holding the documents at the latter's disposal. Negotiating Bank The American Bank, New York replied as follows:- We disagree with your position that you acted in accordance with UCP 600 article 14. Documents were delivered by courier to your HO as per the terms of the credit, on Monday, January 7, 2008. Your swift notifying rejection of the documents was not sent until Wednesday, Jan 16, 2008 that is, on the eighth banking day after receipt of the documents by your bank. Issuing Bank Global Bank, Selangor Branch, responded by stating that even though its HO received the documents on January 7,2008; the Global Bank's Selangor Branch did not receive the documents until the following Thursday, January 10, 2008, and the swift advice rejecting the documents was sent within the time period permitted in UCP article 14. Negotiating Bank The American Bank, New York, replied that it was not their concern how Global Bank's operational policy impacted on their inability to comply with UCP. The American Bank, New York stated that in accordance with the credit terms and conditions, documents were negotiated by them and forwarded to Global Bank's HO by courier. The documents were received by Global Bank on Jan 7, 2008, and any notice of rejection of the documents should have been given within the close of the fifth banking day following receipt of the documents. Global Bank's Selangor Branch failed to do so. Therefore, the American Bank, New York's position was firm relative to UCP 600 article 14 and they would not refund the funds reimbursed. Questions a) Was Global Bank, Selangor Branch correct in its argument, as the credit issuing bank? b) Was the stand taken by The American Bank, New York correct, as the negotiating bank? c) Suggest which incoterms that suitable with this industry and explain why. Case Study 1 - Documentary Credit PROTON MALAYSIA Introduction Proton Malaysia is a public limited company; they manufacture SUVs (sports utility vehicle), in technical collaboration with General Motors of USA. The company has established their manufacturing base at Shah Alam, Selangor. They have acquired an area of 250 acres and the total project cost is estimated at RM 1500 mil. As per the projections, the company is slated to achieve a 25% market share in the Malaysia market, within a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Malaysian banks. The working capital is financed by a consortium of banks in which Global bank, Selangor branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Selangor Branch. Proton Malaysia approached Global Bank, Selangor for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Circumstances Issuing Bank Global Bank, Selangor issued its irrevocable negotiable credit through its head office in Selangor since Global Bank co-ordinated all its accounting and communication functions at its head office. The Bank's head office transmitted the credit through Swift network as instructed by its Selangor branch to General Motors, Detroit, through The American Bank, New York. Advising Bank The American Bank, New York advised the credit to General Motors, Detroit on receipt of the swift transmission. Credit Along with other conditions, the credit clearly stated that the negotiating bank was to forward the documents directly to Global Bank's head office at Selangor. Beneficiary After export of the consignment, General Motors, Detroit presented the documents under the credit to The American bank, New York. Negotiating Bank The American Bank, New York, examined the documents presented by General Motors and determined that they were in compliance with the terms and conditions of the credit. The American bank negotiated the documents and forwarded the documents, as per the credit terms, to the HO of Global Bank in Selangor and claimed reimbursement from International bank, New York. Reimbursing Bank International Bank, New York honoured the reimbursement claim by crediting the current account of the American Bank, New York and debiting the account of Global Bank, Selangor, in its books. Issuing Bank Head Office Global Bank's Head Office, at Selangor, received the documents and after internal registration of the documents, forwarded the documents to its Selangor Branch by inter-office mail. Issuing Bank Branch On receipt of the documents by the Selangor branch of Global Bank, they examined the documents and determined that they were discrepant. They were (a) 60 units were shipped instead of 50 units, thereby overdrawing the credit value by USD 2000 (b) Inspection certificate by Auto Inspection Council, USA is not submitted, as per credit terms. Global Bank contacted Proton Malaysia for waiver of the discrepancies. Applicant Proton Malaysia requested for copies of the documents to be forwarded by fax and after reviewing the same, they refused to waive the discrepancies. Issuing Bank Branch Global Bank, Selangor Branch instructed its HO to transmit an authenticated swift to The American Bank, New York stating that Global Bank had rejected the documents for the noted discrepancies, requesting the American Bank's instructions as to disposal of the documents, and demanding a refund of the funds reimbursed. Issuing Bank Head Office The HO of the Global Bank sent the authenticated swift message to the American Bank, New York, as instructed by its Selangor Branch. Negotiating Bank On receipt of the swift notification advising that Global Bank had rejected the documents for the stated discrepancies, the American Bank informed Global Bank that it did not accept the rejection of the drawing since the Global Bank did not comply with UCP 600 sub-article 14 for standard examination of documents. Therefore, Global Bank was said to be stopped from dishonouring its irrevocable obligation. Issuing Bank Global Bank, Selangor Branch responded by stating that they acted in accordance with UCP article 14, since their action did not exceed five banking days following the day of receipt of the documents at their branch counters after which they scrutinised the documents and determined to refuse them. They maintained that as per article 14 of UCP 600 , they notified about the rejection of the documents, by swift, not later than the close of the fifth banking day following the day of receipt of the documents. They had pointed out all the discrepancies and had informed American Bank, New York that they were holding the documents at the latter's disposal. Negotiating Bank The American Bank, New York replied as follows:- We disagree with your position that you acted in accordance with UCP 600 article 14. Documents were delivered by courier to your HO as per the terms of the credit, on Monday, January 7, 2008. Your swift notifying rejection of the documents was not sent until Wednesday, Jan 16, 2008 that is, on the eighth banking day after receipt of the documents by your bank. Issuing Bank Global Bank, Selangor Branch, responded by stating that even though its HO received the documents on January 7,2008; the Global Bank's Selangor Branch did not receive the documents until the following Thursday, January 10, 2008, and the swift advice rejecting the documents was sent within the time period permitted in UCP article 14. Negotiating Bank The American Bank, New York, replied that it was not their concern how Global Bank's operational policy impacted on their inability to comply with UCP. The American Bank, New York stated that in accordance with the credit terms and conditions, documents were negotiated by them and forwarded to Global Bank's HO by courier. The documents were received by Global Bank on Jan 7, 2008, and any notice of rejection of the documents should have been given within the close of the fifth banking day following receipt of the documents. Global Bank's Selangor Branch failed to do so. Therefore, the American Bank, New York's position was firm relative to UCP 600 article 14 and they would not refund the funds reimbursed. Questions a) Was Global Bank, Selangor Branch correct in its argument, as the credit issuing bank? b) Was the stand taken by The American Bank, New York correct, as the negotiating bank? c) Suggest which incoterms that suitable with this industry and explain why