International Business Law – Australian mining company AUS STEEL Ltd has entered into two contracts to export coal.

International Business Law

Australian mining company AUS STEEL Ltd has entered into two contracts to export coal.

The two types of coal are not interchangeable and are mined from different sites but are to be shipped aboard the same vessel, the Iron Monarch, owned and operated by another Australian company the shipping company NATIONAL FREIGHT SOLUTIONS (NFS) as carrier. The coal is collected from the mines by AUS STEEL, and loaded into separate holds at the Australian port of Brisbane. The NFS vessel is specially adapted to the carriage of coal by sea with a state-of-the-art sprinkler system required to keep the coal sufficiently moist to prevent the risk of spontaneous combustion during the voyage without making it so wet that the coal will not burn efficiently once delivered.

The first contract is to sell 20,000 tonnes of steam coal from Queensland to a Chinese buyer, Yongsu Shebang, for use in a power station at Guangdong. The coal is sold FOB (Brisbane) and due for delivery in Qingdao, China. The contract of sale is issued in triplicate in Chinese and English, signed in Brisbane. The purchase price is to be paid by an irrevocable documentary letter of credit issued by the buyer’s bank in China and confirmed by AUS STEEL’s Australian bank. Payment is to be made in US$, payable to anAUS STEEL account in New York.
Yongsu Shebang signed the carrier’s standard contract of carriage which contained the following term:
“The carrier will exercise all reasonable care in the handling and carriage of the goods but in no circumstances will the carrier or its servants or agents be responsible for any loss, damage or injury caused to the said goods.”

The second contract is with a Japanese trading house, Sumitomo Metal Industries, to supply 20,000 tonnes of the more expensive coking coal from New South Wales for use in steel making to be delivered to Osaka. The sale is made CIF and is made in the same terms as the Chinese shipment. Except that it includes the additional term: ‘latest date of shipment March 30 ’,.The contract of sale was issued in English, signed in Sydney by the Australian subsidiary of the Japanese buyer as agent for the buyer. Payment is to be made via another irrevocable, negotiable letter of credit (L/C) in A$ to AUS STEEL’s bank in Australia. The L/C is governed by the UCP 600 and contains the following term:
“Sight draft …drawn for 100% contract value allowing for plus or minus 10% on both weight and value shipper’s load and count…”

In Brisbane the master of the Iron Monarch issued clean bills of lading in standard form for each contract of sale. The date of loading required for the second shipment was not however met (it was loaded on 22 April)
On the journey the vessel encountered severe typhoons in the South China Sea. The master of the vessel decided to divert to Yokohama, to avoid the danger. Unfortunately in this time, the coal in one of the holds caught fire due apparently to a failure in the sprinkler system. The carrier claims that the heavy seas damaged the system. The fire is eventually controlled but the useable coal is reduced by half.

On arrival in Osaka, the Japanese order is delivered.
When the ship finally reaches Qingdao, more than 3 weeks late, an independent inspection reveals that thelow-grade coal is contaminated with high grade coal. Thus the coal will not burn efficiently in the Chinese generatorsand releases excessive CO2 emissions.
The Chinese buyer claims that the misdelivery is a result of the negligence of the master and crew of the carrier in failing to clean the pump prior to the voyage. The Chinese buyer rejects the consignment at the port and complains that this short, contaminated and late delivery has interrupted its electricity production costing it thousands of Yuan in lost profits and penalty payment to suppliers.

The carrier, NFS, responds that the contamination must have occurred prior to loading, due to the fault of AUS STEEL. AUS STEEL in turn denies any liability and suspects that there was leakage from one hold to the other on the ship itself.
1. Advise the Chinese buyer, Yongsu Shebang,on their rights under each of the sales and carriage contracts:
a) Against AUS STEEL, the Seller, in relation to the shipment, which arrived on the Iron Monarch? Discuss their contractual rights in relation to the goods and appropriate remedies, if any.
b) Against the carrier Iron Monarch.

2. Can the Chinese buyer demand a refund of payment for the mis-delivered shipment from the Australian bank under the L/C payment? Explain the reasons for your answer.
3. In relation to the second shipment to the Japanese buyer:
a) What is the purpose of including the express clause in the L/C ?
“ Sight draft …drawn for 100% contract value allowing for plus or minus 10% on both weight and value shipper’s load and count…”
Explain the legal and commercial reasons for its inclusion.
b) How does the late date of shipment affect the operation of the L/C in this second shipment? How could this difficulty be overcome?
c) Explain the benefit of the “negotiable” aspect of the L/C for AUS STEEL.

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