• 20 Marks

ITF – APR 2023 – L3 – Q4 – Johnson Company Ltd Contract Negotiations

Identify and explain two bank products to overcome problems in negotiations between Johnson Company Ltd and Al Watany Ltd for generator export.

You are the manager of Merchant Bank Ltd, which maintains the account of Johnson Company Ltd (JCL.) a local generator dealerships JCL’s Managing Director. Kingsley Arthur, has advised you today that the company has decided to purchase new generators from manufacturers in Europe because the terms of local suppliers are no longer favourable to their business.

Mr. Arthur informs you that he is in negotiations with a new Egyptian buyer. Al Watany Ltd for the export of the generators to Cairo for a total cost of USD 500, 000,00.

Some of the contract details are that the Egyptian buyers would have to make an advance payment of 20% upon signing the contract. Again, the buyers. Al Watany Ltd, should pay the last 10% immediately after shipment of the generators. Mr. Arthur is facing two major problems in the negotiations:

a) Since it is a new trading relationship, Al Watany Ltd is reluctant to agree to the 20% deposit when the contract is signed. Al Watany Ltd is concerned that the money could be lost if the contract did not work out as expected. b) Al Watany Ltd also insists on paying the final 10% of the contract price two months after shipment, so that they can check the generators are in good and acceptable condition on arrival in Cairo. Mr. Arthur is worried that the delay in payment will adversely affect the company’s cash flow.

Required: i. Identify two bank products that would help to overcome the problems in the commercial contract negotiations between Johnson Company Ltd and Al Watany Ltd. [5 marks] ii. Explain how each of these products would operate and advise the companies of the possible effects on their businesses by using these products. [15 marks]

[Total Marks 20]

i. Two bank products:

  • Advance Payment Guarantee (for problem a).
  • Performance Bond or Warranty Guarantee (for problem b).

ii. Explanation and effects:

Advance Payment Guarantee:

  • Operation: JCL’s bank issues a guarantee to Al Watany Ltd for 20% (US$100,000), payable on demand if JCL fails to deliver as per contract. Al Watany pays the advance to JCL, protected by the guarantee under URDG 758. The bank may require collateral from JCL.
  • Effects on businesses: For JCL, improves cash flow from advance but increases costs (fees 1-2% p.a.) and ties up credit lines; risk of wrongful call, but builds trust for future deals. For Al Watany, reduces risk of loss, encouraging the deal, but they pay upfront with recourse. In Ghana, aligns with BoG directives for export support, as seen in similar AfCFTA trades.

Performance Bond or Warranty Guarantee:

  • Operation: JCL’s bank issues a bond for 10% (US$50,000), callable if generators are defective post-shipment. Al Watany pays full on shipment, but has 2-month protection under ISP98 or URDG. Bank examines claim before payment, with JCL providing indemnity.
  • Effects on businesses: For JCL, accelerates cash flow (full payment on shipment), improving liquidity, but incurs fees and potential claims impacting reputation; encourages quality control. For Al Watany, provides post-delivery assurance without delaying payment, reducing inspection costs, but requires monitoring. Practically, this facilitated trades post-2019 banking cleanup, enhancing cross-border trust under Egyptian and Ghanaian laws.
Back to all questions

Pick a Form

Professional Tutor Application Form
Academic Tutor Application Form
Student Tutor Application Form