Three Containers at Mombasa: A Refused D/P Collection Against Outstanding Packing Credit

Disentangle the three relationships: contract of sale, collection mandate, and bank finance.

Contract of sale (exporter vs buyer)

• CFR Mombasa: the exporter arranges and pays carriage to Mombasa, and risk passes to the buyer on shipment. If the goods were compliant when shipped, a deterioration in transit is the buyer's risk - and under CFR the buyer, not the seller, insures.
• A quality dispute is therefore a contract dispute, resolved on evidence of the goods' condition at shipment, not on the buyer's assertion.

Collection mandate (URC 522)

• Banks deal in documents, not goods. The collecting bank has no obligation to take delivery of the goods, warehouse them, insure them, or litigate over them. It will act only on the principal's instructions.
• Under D/P, the buyer gets no documents until it pays. The buyer's refusal is a refusal to pay - the collection simply fails, and the collecting bank holds the documents pending fresh instructions.
• The exporter's strongest asset is the bill of lading consigned 'to order of shipper'. Title has not passed; the exporter can control discharge by controlling endorsement. This must not be given away.
• The collecting bank can be instructed to protest the bill where local law permits, and a case-of-need party can be named in the collection instruction so that someone on the ground can act for the exporter.

Bank finance (packing credit)

• The PKR 25 million is a funded exposure to the exporter, with recourse. The bank's security is the export receivable and the exporter's balance sheet - not the Kenyan buyer.
• The bank therefore has no claim on the buyer and no control over the goods; its only lever is against its own customer. That is why the packing credit is at risk regardless of who is right on quality.

Summary of risk: quality/inspection risk on the exporter (to prove conformity at shipment); credit risk on the buyer; goods-at-port risk (demurrage, storage, deterioration) on the exporter as long as title is retained; repayment risk on the exporter for the bank.

Rank by cost per day and by how much information each option buys.

The clock: demurrage is USD 90/day - about USD 2,700 a month - plus storage and a real risk of deterioration and port authority action. The buyer's ask is USD 60,000, i.e. 25% of invoice value.

1. Independent survey first (buy information). Appoint a recognised inspection agency at Mombasa to test the cargo against the contract specification. Cost is a few thousand dollars at most, and it decides everything downstream: if the cargo conforms, the buyer's position collapses and the exporter can hold the documents and demand payment; if it does not, the exporter knows it is negotiating from weakness. Never concede 25% before buying this information.
2. Hold the documents and demand payment. With a conforming survey and title retained, the exporter's position is strong. Do not release against a promise - release only against payment or a bank undertaking.
3. Negotiate a partial reduction, priced against the alternative. A 5–10% concession (USD 12,000–24,000) is cheaper than a month of demurrage plus storage plus the risk of total loss on USD 240,000. The buyer's USD 60,000 is an opening position; the survey and the demurrage clock are both sources of leverage on the buyer too, because it wants the rice.
4. Re-sell in the region. Kenya/East Africa offers alternative buyers, but re-selling requires the documents, a new contract, and often a price concession plus fresh freight - usually worse than a modest settlement if the cargo conforms.
5. Take delivery through an agent, warehouse and sell locally. Viable as a fallback, but it crystallises storage cost and makes the exporter a seller in a market it does not know.
6. Return the cargo. Ocean freight back plus handling will consume a large share of the invoice value; only rational if the goods are worthless or dangerous.
7. Abandonment / total loss. Only if the numbers above all fail - and it should be a documented decision, not a drift.

Decision rule: survey → if conforming, hold and negotiate a small concession with a deadline; if non-conforming, settle at a discount, because the alternative is a total loss on a commodity you cannot easily re-sell from Mombasa.

Bank side - protect the exposure now.

1. Confirm the documentary position. Ensure the collection is assigned/earmarked to the bank and that the bill of lading is not released without the bank's consent. Instruct the collecting bank in writing on disposal; never leave documents on 'hold pending instructions' indefinitely.
2. Take a written repayment plan linked to the collection outcome, with a deadline. Get the exporter's consent to any settlement figure in advance, so the proceeds can be applied directly.
3. Assess classification and provisioning. If the bill remains unpaid at maturity, the packing credit will move to overdue and, after the prescribed period, to a classified exposure. Start the process early rather than at the deadline.
4. Consider the exchange obligation. Export proceeds must be repatriated within the prescribed period; a shortfall requires formal regularisation with the central bank. A discounted settlement is not automatically a permitted shortfall - get the paperwork right.
5. Do not fund the shortfall automatically. Rolling the packing credit into fresh finance disguises a loss and weakens the bank's position in any negotiation.

What should have been structured differently

• Payment instrument. For a high-value, single-buyer shipment to a first-time or thin-file buyer, a confirmed documentary credit (or a standby supporting the collection) converts a buyer credit risk into a bank risk. A clean D/P collection gives the exporter no undertaking at all.
• Credit insurance / ECA cover. Absent here. Note the limits: cover typically responds to insolvency and political risk, and usually excludes pure quality disputes - so it would not necessarily have solved this case, but it would have changed the loss profile.
• Pre-shipment inspection by the buyer's nominated agency. The single cheapest way to remove a quality dispute before the vessel sails.
• Incoterms choice. CFR left insurance with the buyer; CIF would have given the exporter control over the cover and a claim in its own hands, at a modest premium.
• Contract terms. A dispute-resolution clause, an agreed surveyor and a defined specification with tolerances would have made the buyer's refusal challengeable in days rather than months.
• Credit-limit discipline. The packing credit should have been sized against the buyer's verified payment record, not against the order alone.