Importer receives sub-standard goods!!!!!

An importer wanted to source components for a new product being put into production. An Asian supplier was found at a trade fair they attended and it was agreed to purchase the necessary goods from this company. As the supplier had no previous business dealings with the importer, it was indicated that they would only grant 30 days credit from the date they invoiced the importer. The supplier would produce the goods, ship them and forward the shipping documents directly to the importer, including the invoice due for payment 30 days from its issuance date.

As production was to begin shortly, the importer agreed to the payment terms and a contract was drawn up. The component being imported needed specific requirements in order to comply with Irish safety standards. The two parties verbally agreed slight changes to the contract to cover these requirements and the importer felt sure that they would receive goods in accordance with their order.

The invoice and bills of lading were received directly from the Asian supplier and payment was made on the due date even though the goods had not yet arrived. The ship arrived six weeks later but the goods, which had not been inspected prior to shipment, did not meet the safety standard requirements. Unfortunately for the importer the supplier had been paid and refused to take back the goods.

Can the Importer gain more control in this situation?

The first step any importer must take when faced with a situation as outlined above, is to check the suppliers performance capability in the market. The supplier's offer of 30 days credit to a new customer may seem generous, but the importer overlooked the fact that goods can take 6 to 8 weeks to be shipped from Asia. Even if the suppliers references were good, the importer had still paid for the goods before they had actually arrived. In order to minimise their risk the importer needed to obtain greater control over the Asian supplier's performance.

The importer could have offered to pay for the goods by means of a Letter of Credit issued by the importers bank in favour of the Asian supplier. The Letter of Credit could have been established to ensure that the goods were tested, prior to shipment, to ensure they complied with the Irish Safety Standard and that the Asian supplier provided documentary evidence for this. The documentation required could have been an Inspection Certificate issued by a reputable inspection agency. The importer would have had less concern in paying the supplier whilst the goods were in transit in these circumstances.

How the Letter of Credit gives the Importer more control!

Letters of Credit would make payment to the Asian supplier conditional upon the correct documents being presented that evidence shipment of the goods.

• The importer can link the contract to the payment process through the requirement to present specific documentation.
• Letters of Credit ensure that the importer's supplier payments are linked to the receipt of the shipping documents evidencing performance by the supplier.
• The importer can impose specific performance criteria that the Asian supplier must comply with before they are paid, e.g. the presentation of the inspection certificate or the inclusion of a specific latest shipment date.

Conclusion

Importing can be difficult particularly when dealing with new suppliers or distant markets. One of the importers main concerns is the ability of their supplier to perform their contractual obligations. Letters of Credit enable importers to link the suppliers contractual obligations to the payment process in order to minimise the risks of non-performance by the supplier.

For further information on Letters of Credit visit our Diagrams and Product/Services section on this website.

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