Part 2: Letters of Credit as a form of payment in international trade

Costa is Australia's largest grower, packer and marketer of premium quality fresh produce, and grows beautiful berries in Queensland, New South Wales, Western Australian and Tasmania. Since 2010, when a partnership was formed between Costa and Driscoll's Strawberry Associates, Inc (US), Costa has supplied berries of all types throughout Australia under the Driscoll's brand name.

Berries are packed and labelled on farm before being distributed (by truck) to local markets throughout the country. Costa seeks to standardise packaging practices and quality assurance throughout its farms.

AVI Global Plast. (AVI) is India's largest supplier of plastic packaging products using recycled material.Itsrange includes tamper-evident food containers and fresh produce punnets, made from a mix of pre-consumer and post-consumer waste and certified by global certification and audit company Intertek.The company says its recycled packaging solutions are not just designed with PET waste but also incorporate ocean-bound plastic certified by Control Union and Zero Plastic Oceans. Despite being made of post-consumer waste, the company claims its offerings adhere to ESFA, REACH and USFDA standards for quality and food-contact safety.

Seeking to integrate and improve sustainable practices and materials throughout its business and supply chains, Costa decided to enter into an initial agreement with AVI for purchase of:

• 10,000 small size fresh-produce punnets with tamper-evident air-lock (US$2,000);
• 10,000 medium size fresh-produce punnets with tamper-evident air-lock (US$2,500); and
• 5,000 large size fresh-produce punnets with tamper-evident air-lock (US$2,750).

The contract provides for delivery FOB Mumbai (Incoterms 2020) before 1 February 2024. Payment is to be made by deferred letter of credit in the amount of US$10,000 due 30 days after complying presentation of documents. The issuing bank is named as Comnat Bank, Sydney and Bank of Maharashtra (BoM) is named as the advising bank. The credit is stated to be available by negotiation at any Indian bank.

A complying presentation under the credit requires the beneficiary to present beneficiary's 30-day term bill of exchange drawn on Comnat Bank of Sydney, together with the following commercial documents:

• A commercial invoice (for the goods described above);
• A full set of clean on board negotiable marine bills of lading, consigned to order and marked 'freight collect';
• 100% recycled materials Certificate issued by Intertek Global;
• USFDA certificate of polymer material food contact safety issued by USFDA- authorised safety inspection agency in India.

The goods were shipped on Monday 29 January 2024, and a full set of clean bills of lading was issued. AVI presented the 30-day term draft together with the shipping documents, including invoice, Intertek certificate and USFDA certificate to BoM on Wednesday 7 February. 48 hours later, BoM agreed to negotiate the presentation, and forwarded the documents to Comnat Bank in Sydney.

Within weeks of channelling the new packaging into its distribution chain, Costa begins discovering problems. It seems that the plastic used in the medium sized punnets is very thin, and prone to ruptures and tearing. The air-lock on the large size punnets does not click easily into place, and this is slowing down the packing process, as well as leading to spillages when punnets spring open as a result of the air-lock not being clicked securely closed.

Costa has also contacted Intertek requesting a trace on the certificate of 100% recycled materials. After tracing the issuance of certificates to AVI, Intertek advises that in nearly all cases, AVI has only every qualified for 50% recycled or 70% recycled standard certification. The only 100% recycled certificate ever issued to AVI was in relation to a delivery of school lunch boxes to a customer in America. It appears that the deputy manager responsible for Costa and other Australian customers was willing to arrange forged documents where necessary to retain a customer or boost sales. It seems almost certain that the Intertek certificate presented by AVI and now held by Costa is a forged document.

The documents presented by AVI were received by Comnat Bank in Sydney on 12 February and received by Costa on 16 February. Costa used the documents to clear the goods through customs when the ship carrying the goods arrived on 19 February.

Advise Costa. In your letter of advice:

1. Is there anything Costa can do to prevent payment being made under the letter of credit? What remedies, if any, are available to Costa in the above situation?

In your advice, you may identify any further information/ evidence missing from the information provided above that would be useful and which your client (Costa) might be able to help you obtain.