Summary

Case of Disappearing Carpets

Introduction

In this case, we will be looking at the risk of using FOB for an Exporter.

Let us take a look at the facts of the case in the next slide.

Summary of Case

1. An Importer in Atlanta entered into a sales & purchase contract with the Exporter, a
Manufacturer of fine woven carpets in India for US$700,000 on FOB basis. The method
of payment is by D/P.

2. When the goods was ready, the Importer requested the Exporter to pass the container
load of goods to his NVOCC in Mumbai. (NVOCC stands for Non Vessel Operating
Common Carrier is a common carrier that holds itself out to the public to provide
ocean transportation, issues its own house bill of lading or equivalent document, and
does not operate the vessels by which ocean transportation is provided.)

3. After the Exporter transferred the goods to NVOCC1, it issued an NVOCC Bill of Lading
(also commonly known as House Bill of Lading or Freight Forwarder’s Bill of Lading) to
the Exporter.

4. The Exporter prepared a Collection Instruction and attached the NVOCC BL together
with other documents such as Invoice and Packing List and submit it to his Remitting
Bank.

5. The Exporter request the Remitting Bank to send the documents to the Importer in
Atlanta and collect payment on their behalf. The Remitting Bank forwarded the
documents to the Collecting /Presenting Bank for it to collect payment from the
Importer.

6. Meantime the NVOCC1 ships out the container through a shipping agent in Mumbai.

7. Once the container of goods are loaded onto the vessel, the Shipping Agent issued an
Ocean BL which list the NVOCC1 as the Shipper and NVOCC2 in Atlanta as the
Consignee.

8. Subsequently, NVOCC1 forwards the Ocean BL to NVOCC2.

9. When the goods landed in Atlanta, it was released by the port to the NVOCC2 using
the Ocean BL that was forwarded by NVOCC1 and the Importer has taken possession
of the goods.

10. When the documents arrived at Atlanta, the Collecting Bank was unable to contact the
Importer, as the Importer has apparently gone missing. The Collecting Bank informed
 the Remitting Bank who notified the Exporter that they were not able to contact the
Importer.

11. The Exporter also tried to contact the Importer but to his horror the importer is not
picking up his call. The Importer had gone missing! The Exporter subsequently made
investigations and found out that the goods which has landed in Atlanta had been
released by the port through the Ocean BL which was released by NVOCC2 to the
Importer who had taken possession of the goods. The Importer was a fraudster. He
had set up a non-existent NVOCC with the purpose of perpetuating fraud. The
Importer had built up the relationship with the Exporter over the last 6 months buying
small quantities and always made advance payment to build up the confidence of the
Exporter. He then convinced the Exporter to sell him a huge order using D/P under
FOB. The Exporter could only claim a US$50,000 bond posted by the NVOCC with the
Federal Maritime Commission in USA.

So this case is to alert Exporters that are selling on FOB basis using DP terms can be
very risky. In fact a participant who attended our recent public Incoterm course had
lamented that to us that they had been cheated in a similar situation. For huge orders
and for new customers, the Exporter should sell using LC and ideally on CFR or CIF
terms.