The CIF Shipment, the Letter of Credit, and the Rejected Documents
Arbor Foods Ltd., a Canadian buyer, contracts to buy 500 tonnes of lentils from Sable Grain Exporters on CIF terms to the port of Montreal. Payment is by irrevocable letter of credit issued by Northbank, requiring a clean on-board bill of lading, a commercial invoice, and a certificate of quality. Sable ships 500 tonnes, but the carrier's bill of lading is marked 'shipped on deck' and is dated three days after the shipment deadline in the credit. The invoice describes the goods as 'lentils, Grade 2,' while the credit requires 'Grade 1.' Sable presents the documents on day 20; the credit expires on day 21. Northbank rejects the documents on day 25, citing the on-deck notation and the grade discrepancy.
1. Was Northbank entitled to reject the documents, and was its rejection timely?
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Northbank was entitled to reject on the grade discrepancy and probably on the on-deck notation, but its timing is problematic. Letters of credit are governed by strict compliance: documents must conform exactly to the credit's terms, and banks deal in documents, not goods. An invoice stating 'Grade 2' where the credit requires 'Grade 1' is a clear discrepancy and justifies rejection. A bill of lading marked 'shipped on deck' is also non-conforming, because a clean on-board bill must not indicate that the goods are loaded on deck; on-deck carriage exposes cargo to weather and is treated as a material deviation.
The late shipment date is a separate discrepancy: the bill is dated three days after the credit's shipment deadline, so the documents are non-conforming on their face regardless of the on-deck issue.
Timing is the weak point for Northbank. Under the standard rules, an issuing bank must examine documents and give notice of refusal within a short, fixed period-typically five banking days-and the notice must state each discrepancy. Presentment on day 20 and rejection on day 25 is at or beyond the outer limit and may be too late if the five banking days ran earlier. A late or defective refusal can preclude the bank from asserting the discrepancies and may obligate it to pay. The exam answer should separate the substantive right to reject from the procedural loss of that right.
2. Who bears the risk of loss during the sea carriage, and does the on-deck stowage change the answer?
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Under CIF, risk passes to the buyer when the goods are shipped on board at the port of shipment, not when they arrive. Arbor therefore bears the risk of loss during the voyage, subject to the documents and insurance. The seller's obligation is to ship conforming goods, procure a contract of carriage to the agreed destination, and tender a proper bill of lading, invoice, and insurance document. Risk transfer and documentary compliance are distinct questions: the goods may be at the buyer's risk even though the documents are non-conforming.
On-deck stowage changes the analysis in two ways. First, it makes the bill of lading non-conforming, so Sable has not performed its documentary obligation and Northbank may refuse to pay. Second, it may affect insurance coverage: standard marine cargo policies often exclude or restrict deck cargo, so Arbor may find itself bearing an uninsured loss. If the carrier stowed on deck without authorization, the carrier may be liable for deviation, which can strip the carrier of limitation and exemption defenses.
Arbor's practical position: it can reject the documents and refuse to pay through the credit, but if it has already accepted the goods or if risk has passed, it may still owe the price. The exam point is that CIF risk rules and documentary strict compliance operate independently, and the buyer must decide quickly whether to reject documents or accept the goods and claim damages.
3. What are Sable's options after rejection, given the credit expires the next day?
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Sable's options are narrow and time-sensitive. First, it can attempt to cure the documents before expiry: obtain a corrected invoice if the grade designation was a clerical error, and ask the carrier to reissue a conforming bill of lading. But a corrected bill cannot change the fact that shipment occurred after the deadline; the shipment date is a fact, not a document error, so cure cannot fix the late shipment. The grade discrepancy may be curable if the goods truly are Grade 1 and the invoice was misdescribed.
Second, Sable can request an amendment to the credit, but the applicant (Arbor) must agree, and an amendment after shipment cannot retroactively cure a late shipment unless the credit is amended to extend the shipment date. Arbor has little incentive to agree if it wants to reject.
Third, Sable can present again before expiry if it can assemble conforming documents, but the on-deck and late-shipment defects are substantive.
Fourth, if the credit fails, Sable retains its rights under the underlying sale contract. It can demand payment from Arbor directly if Arbor has accepted the goods or if risk has passed, and it can sue on the contract. It should also consider a claim against the carrier if the on-deck stowage was unauthorized. The exam answer should recognize that the letter of credit is independent of the sale contract: failure under the credit does not extinguish the buyer's payment obligation if the goods were conforming and risk passed.