CIF Cashew Shipment: Late On-Board Date, Aflatoxin, and a Refused Letter of Credit
TerraNova Foods, a California importer, contracted with Mekong Delta Agricultural JSC, a Vietnamese processor, for 400 metric tons of roasted cashews at $2.85/kg, CIF Oakland, shipment by 30 June. The contract designated the CISG, required a letter of credit confirmed by a San Francisco bank, and called for a Vietnamese phytosanitary certificate and certificate of origin among the shipping documents. Mekong loaded the goods onto a feeder vessel on 28 June for transshipment in Singapore; the ocean bill of lading shows 'on board' dated 4 July at Singapore. The phytosanitary certificate recites 399.2 metric tons. The negotiating bank refused the documents. On arrival the cashews tested at 14 ppb aflatoxin against the contract's 8 ppb maximum, and US customs detained the container pending review. TerraNova had already resold 300 tons to a snack manufacturer at $4.10/kg with a $30,000 liquidated-damages clause for late delivery, and its customer is now threatening to cancel.
1. Was the negotiating bank's refusal of the documents correct? Analyze each discrepancy.
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Standard. Letters of credit are independent of the underlying contract, and banks deal in documents, not goods. The beneficiary must present documents that comply strictly with the credit's terms; the issuing bank's undertaking is triggered only by a complying presentation.
Late shipment. The credit required shipment by 30 June. The ocean bill of lading shows an on-board date of 4 July. For a port-to-port CIF shipment, the on-board date is the shipment date, and loading onto a feeder vessel on 28 June does not control once the ocean bill of lading states a later on-board date. This is a clear discrepancy, and refusal on this ground alone is correct.
Quantity. The phytosanitary certificate recites 399.2 metric tons against 400. Under UCP 600 sub-article 30(b), a 5% tolerance in quantity is available only where the credit does not stipulate quantity as a fixed number or in packing units. A stated tonnage is usually treated as a fixed quantity, so banks may properly treat the shortfall as a discrepancy, though practice varies and some issuing banks apply the tolerance to bulk commodities. The point is arguable; the late shipment date is not.
Transshipment. A bill of lading showing transshipment is acceptable where the credit does not prohibit it and the document covers the entire carriage from the port of loading to the port of discharge. This is probably not a discrepancy.
Recourse. Mekong's remedy is to ask TerraNova to waive the discrepancies and instruct the issuing bank to amend or authorize payment. Absent that waiver, the bank's refusal stands.
2. When did risk of loss pass, and does the aflatoxin non-conformity change the analysis?
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CIF risk allocation. Under CIF terms, risk passes when the goods are placed on board the vessel at the port of shipment, not on arrival at destination. TerraNova bears transit risk and must look to the cargo insurance, which under CIF is minimum cover and may not respond to contamination claims at all.
CISG rule. Where the contract involves carriage, risk passes when the goods are handed to the first carrier for transmission to the buyer. Superficially, that means the aflatoxin problem is TerraNova's loss.
The fundamental breach exception. The risk provisions do not impair the buyer's remedies for a fundamental breach. The contract set an 8 ppb maximum and the goods tested at 14 ppb - 75% over specification. Under CISG Article 35 the goods are non-conforming. Whether the breach is fundamental under Article 25 depends on whether TerraNova is substantially deprived of what it was entitled to expect; cashews that cannot lawfully be sold as food and that customs has detained plainly approach that threshold. If the breach is fundamental, TerraNova may avoid the contract and reject the goods notwithstanding that risk had passed.
Notice and preservation. Article 39 requires notice within a reasonable time specifying the nature of the non-conformity, with a two-year outer limit. TerraNova must also take reasonable steps to preserve the goods and mitigate loss, which likely means cooperating with customs and arranging storage or resale of the conforming portion.
Regulatory versus contractual risk. Customs detention is a regulatory consequence, but the underlying breach is contractual: the goods did not meet the agreed specification.
3. What remedies can TerraNova pursue, and can Mekong invoke an exemption for the late shipment?
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Avoidance and price reduction. TerraNova may avoid the contract by notice to Mekong, which discharges both parties' obligations subject to damages, or may reduce the price proportionally for the non-conformity. Payment under the letter of credit would not waive these rights.
Damages. Under Article 74, TerraNova recovers the loss including lost profit, measured by what was foreseeable at contracting. The resale at $4.10/kg to a snack manufacturer was exactly the kind of downstream transaction a processor/exporter should foresee, and the $30,000 liquidated-damages exposure is a foreseeable consequential loss if TerraNova can prove it was actually incurred. If TerraNova buys substitute cashews, Article 75 measures the difference between the contract price and the cover price; otherwise Article 76 uses the market price at the time of avoidance.
Mitigation. Article 77 requires TerraNova to take reasonable measures to reduce the loss. It should attempt to salvage the conforming portion, negotiate with its customer, and document every step; failure to mitigate reduces the recoverable amount.
Exemption. Article 79 excuses a party only if the failure was due to an impediment beyond its control that it could not reasonably have been expected to overcome. Carrier delays, feeder connections, and transshipment congestion are ordinary commercial risks within the seller's sphere, particularly where the seller chose the routing and the carrier. Mekong cannot claim exemption for a late on-board date caused by its own logistics decisions.
Net position. TerraNova should avoid the contract, claim the cover or market differential, and pursue the liquidated-damages exposure as consequential loss, while documenting mitigation.