Bid bond, standby letter of credit, performance bond, charter party bill of lading, conference vessel, Incoterm®, FOB
An exporter submitted a bid to supply soybeans for approximately $6.5 million to a buyer in the Middle East. To fulfill a condition often required in these transactions, the exporter had to post a bid bond equal to 2 percent of the bid amount, or about $130,000. Since the buyer in the Middle East agreed to accept a standby letter of credit in lieu of a bid bond, the exporter asked a bank to issue the standby letter of credit. The bank agreed, and the exporter received the contract.
The terms of the contract required the exporter to post a performance bond equal to 10 percent of the contract. Again, the bank issued a standby letter of credit, this time for $650,000. The standby letter of credit was payable against the buyer’s statement that the exporter had failed to complete the transaction according to the terms of the contract.
The buyer, in turn, opened a letter of credit for $6.5 million to the exporter payable against a charter party bill of lading. A charter party bill of lading represents a bill of lading issued by a shipping company that contracts to ship the goods from point A to point B. The vessel does not have a schedule of ports or dates as a conference vessel does. In most cases, the chartered vessel carries only one shipment; in this case, filled with soybeans for the buyer.
The parties agreed to the Incoterm® FOB New Orleans. After shipment, the exporter presented the required documents and received payment of $6.5 million from the letter of credit. One month later the buyer demanded payment of $650,000 from the standby letter of credit (performance bond). He claimed the goods did not meet the specifications of the contract. Later, the seller discovered the goods had deteriorated in quality. The exporter denied responsibility because he claimed the goods met specifications at the time they arrived at the port, but deteriorated while in storage at the dock. The vessel, chartered by the buyer, arrived two weeks late. If the buyer had scheduled the vessel to arrive on the date agreed, the exporter argued, the goods would not have deteriorated.
Who was at fault? This is an example of the use of an Incoterm® which required the exporter to bear the responsibility of loading the goods (FOB) but no responsibility for contracting the vessel. Only after the intervention of a dedicated bank officer, who made a trip to the Middle East on behalf of the exporter, the buyer agreed to retract their demand for payment on the standby letter of credit.