Rare Gems Dont Shine Brightly in Vietnam

A bank in the United States Mid-West, First Midwestern National Bank (First Midwestern) 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 (Wisconsin) 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 United States and Canada to Vietnam. The buyers, Saigon Jewels (Saigon) have offered to provide a letter of guarantee from a respectable Vietnamese 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 Wisconsin is requesting assistance from First Midwestern Bank in assessing the situation and in providing help in structuring and financing the transaction.

However, Wisconsin was not entirely forthcoming on all the details of the negotiations that had taken place to date and did not inform the bank that in their discussions with the Vietnamese, Wisconsin had undertaken to buy back finished polished stones and jewelry from Saigon over the course of three years at a set, fixed price.

First Western and Wisconsin were in for a few surprises.

Review the following and consider what either party could have done differently.

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 US$3 million, and the terms of sale were CIF (Cost Insurance and Freight.). Wisconsin assured First Midwestern that they could supply the jade and had arranged for safe shipment in a special chartered vessel. Wisconsin sought help and advice on the terms they should insist on from the Vietnamese and they requested advice on how best to achieve immediate funding for the longer-term payment commitments.

First Western was well regarded for their trade financing skills and had a reasonable reputation in the market, locally and in the region. While the transaction was unusual and involved a country, they had little experience with, the bank was anxious to impress Wisconsin and win the mandate to do the deal because of its size, likely revenue and the opportunity for additional future business.

The bank proposed the following:

A letter of credit to be issued by Bank of Saigon to be advised (guaranteed) through First Midwestern Bank with a request to add their confirmation.

The total value was to be $3 million to be payable by the buyer in three equal installments of $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 the advising bank to be accepted by them after shipment and presentation of documents to the bank in full conformity with the letter of credit. The first draft was to be payable three months after final shipment of all the jade, the second and third payments were to be due for payment in twelve- month intervals after the date of the first payment. (Refer to pg. 67 for workflow)

First Midwestern undertook to confirm the D/C (documentary collection) if requested by the issuing (buyers) bank.

The letter of credit was to include provision for on-board Bills of Lading, commercial invoices, and for inspection certificates issued by an independent inspection agency to verify 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 Practices for Documentary Credits, version 600. The buyers and foreign bank deliver their instruments Wisconsin conveyed to their Vietnamese buyers the terms required and outlined the necessary letter of credit details and terms.

Three weeks later Mid Western Bank received the following from Bank of Saigon:

A guarantee issued in favor of Wisconsin Fine Jewelry undertaking to guarantee payment of three drafts for $1 million dollars each. The first was payable at sight and the remaining two were to be due for payment in two 12-month intervals after the first draft was paid.

The drafts were to be drawn on the issuing bank 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 jade had been shipped and they 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.

The deal unfolds

Against the advice of First Midwestern, Wisconsin not to accept the guarantee and to request a documentary letter of credit along the lines they had recommended. Wisconsin 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 Wisconsin if they would confirm the guaranteed instrument if requested by the issuing bank, First Midwestern refused to confirm the instrument in its present form. They did however undertake to purchase and discount drafts if shipment was completed successfully, and the issuing bank accepted the drafts.

What happened a rocky ride and an unpolished delivery

Wisconsin proceeded to ship the jade. After arrival of the first shipment, the Vietnamese 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 the Vietnamese threatened to not accept any of the shipment and to instruct their bank not to accept any of the drafts. Ultimately, the supplier 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 successfully claimed from the issuing bank. The remaining two drafts for $1 million each were purchased at a discount and Wisconsin was paid the full value of both drafts less interest for the term of the drafts. The drafts were subsequently sold by First Midwestern to another bank. A year later the price for jade gems and specialized jade jewelry had dropped significantly on the world market. Meanwhile, when First Midwestern claimed payment of the second draft on the due date, payment was refused by the issuing (sellers) bank. The reasons given were that the buyers had sought and received an injunction from the highest local court instructing the issuing bank not to pay. The reasons cited were that the seller, Wisconsin, 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 Wisconsin denied the existence of a side-agreement and thereafter refused to respond the calls from First Midwestern.

Case Study Discussion

In light of the entire transaction, answer the following:

1. It doesnt appear that Wisconsin Fine Jewellery or First Mid-Western Bank conducted a risk assessment on the deal. Please do this, considering the following risks: country, economic, bank, currency and industry. Make a recommendation for Wisconsin and their bank whether to proceed or not. What sources did you use to conduct the assessment? 10 points
2. It doesnt appear that an international trade contract was drafted. If one had been drafted, what elements should have been included? Explain. Be specific. 10 points
3. Create a purchase order on behalf of Saigon that could have been issued to Wisconsin. 5 points
4. What other sources/tools should the parties have used to ensure a better end result? Explain. 10 points
5. Give two (2) ways that Wisconsin and its bank could have protected themselves from the price decrease of the gems? Explain. 5 points

Bonus Question: How could have Wisconsin better structured the buy back of finished gems, so it didnt affect the original agreement? 5 points