Letters of Credit

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What is Letter of Credit? How is it useful to trade?

Letter of Credit (LC) is a conditional undertaking to pay a certain amount of money, given by a bank, at the request of an applicant, to a beneficiary, upon presentation of specified documents. Therefore, it is also called a Documentary Letter of Credit.

In a trade transaction, the buyer wants to be sure that the seller will ship/dispatch the goods of specified quantity and specifications by a certain date by the mode of shipment/dispatch as agreed. The seller wants to be sure that he will get the payment if he has shipped/dispatched the goods as agreed. Quite often the seller and buyer may be in different countries and may not know much about the competence, commitment and standing of the other. So, they bring in a third party, usually a bank (called an issuing bank) to assure payment to the seller, provided that he performs as per the conditions specified by the bank in the Letter of Credit. Usually, the conditions include presentation of certain documents that will ensure that the goods are shipped as required by the buyer.

Typically, after a sales contract has been negotiated, and the buyer and seller have agreed that a LC will be used as the method of payment, the Applicant i.e. the buyer will contact a bank to ask for a LC to be issued. Once the issuing bank has assessed the buyer's credit risk – i.e. that the Applicant will be able to pay for the goods – it will issue the LC, meaning that it will provide a promise to pay the seller upon presentation of certain documents. Once the Beneficiary (the seller) receives the Letter of Credit, it will check the terms to ensure that it matches with the contract and will either arrange for shipment of the goods or ask for an amendment to the LC so that it meets with the terms of the contract. The LC is limited in terms of time, the validity of credit, the last date of shipment, and in terms of how much late after shipment the documents may be presented to the Nominated Bank. Once the goods have been shipped, the Beneficiary will present the requested documents to the Nominated Bank. This bank will check the documents, and if they comply with the terms of the Letter of Credit, the LC issuing Bank is bound to honor the terms of the LC by paying the Beneficiary.

This way, the seller is assured of payment if he tenders the documents specified in the LC and the buyer is sure that the seller will get payment only if he presents the documents specified in the Letter of Credit. Usually the documentation requirements are so spelt out that they evidence performance of as per the contract. However, it must be noted that LCs are different from the underlying sale-purchase contracts.

The International Chamber of Commerce (ICC) has developed certain disciplines, termed ‘Uniform Customs and Practices for documentary Credits (UCP) that all parties to a LC should follow. The latest version of the UCP is the UCP600 effective July 1, 2007. Since the UCP are not laws, parties have to include them into their arrangements as normal contractual provisions. UCP 600 is almost universally accepted and followed.

Thus the LC mechanism enables easy flow of trade by bringing much needed certainty to the seller and buyer and even intermediaries or other beneficiaries, especially in international trade. The LC also enables the parties to raise finance by linking payment to performance and by specifying obligations of the parties.

Parties to a Letter of Credit

Essentially, there are three parties to a letter of credit – the applicant, the issuing bank and the beneficiary.

Applicant is the person at whose request the issuing bank opens a letter of credit. Usually, he is the buyer of goods or services. So, it is for him to give proper instructions to the issuing bank stating the documents against which payment can be made to the beneficiary. He also has to give a suitable assurance to the issuing bank that in case payment is made against presentation of documents specified in the letter of credit, he will reimburse the issuing bank for the amount paid.

Issuing bank is the entity that gives an irrevocable undertaking to the beneficiary to make payment of the specified amount upon presentation of the documents mentioned in the letter of credit.

Beneficiary is the person who receives the payment if he presents the documents as specified in the letter of credit.

Other parties can be added as considered necessary to carry out the transaction smoothly.

When an issuing bank sends the letter of credit to its correspondent bank in the importing country and requests it to advise the letter of credit to the beneficiary, the bank acting on such instructions, verifies the authenticity of the letter of credit and then transmits it to the beneficiary, it becomes a party to the letter of credit as the advising bank.

When an issuing bank authorizes presentation of documents under letter of credit to a named bank and requests that bank to receive the documents so presented and that bank agrees to do so, it becomes party to the letter of credit as the nominated bank.

When an issuing bank does not nominate any bank and makes the letter of credit freely negotiable, any bank that gives value for the documents to the beneficiary becomes a party to the letter of credit as the negotiating bank.

When an issuing bank requests its correspondent bank to undertake payment on its behalf against presentation of the documents and the bank acting on its instructions gives such an undertaking, it does so by adding its confirmation to the letter of credit and thus becomes a parry to the letter of credit as the confirming bank

When an issuing bank requests its correspondent bank to, on its behalf, pay the negotiating bank or the confirming bank and that bank so requested agrees to do so, it becomes a party to the letter of credit as the reimbursing bank.

In a transferable letter of credit, when an issuing bank requests and authorizes its correspondent bank to, at the request of the first beneficiary, transfer the letter of credit to a second beneficiary and that bank agrees to do so and acts on the request, it becomes a party to the letter of credit as the transferring bank.

In a transferable letter of credit, when the second beneficiary acquires rights claim payment against presentation of documents specified in the transferred letter of credit, he becomes a party to the letter of credit as the second beneficiary.

It may be noted that some of the banks mentioned above may take on the functions of one or more banks under letter of credit. For example, an advising bank may take on the additional role as the nominated bank and/or negotiating bank and/or the confirming bank and/or the confirming bank.

The Uniform Customs and Practices for Documentary Credits (UCP) published by the Interactional Chamber of Commerce (ICC) clearly spells out the rights and obligations of the parties to letter of credit.

Types of Letters of Credit

Letter of Credit (LC) is a conditional undertaking given by an LC issuing bank, at the request of an applicant to a beneficiary to pay a certain amount of money subject to presentation of specified documents. This undertaking is irrevocable i.e. the issuing bank cannot go back on its commitment to pay without the consent of the beneficiary. So, it is known as irrevocable LC. Since presentation of documents is an essential condition for payment, it is also known as irrevocable documentary credit.

A situation where the issuing bank can go back on its commitments without the consent of the beneficiary is so rare that UCP 600 does not deal with it. However, the earlier version UCP 500 had a reference to revocable LC.

If a correspondent of an issuing bank, at the request of the issuing bank, adds its confirmation, the LC is referred to as a confirmed LC. Under a confirmed LC, the beneficiary gets the irrevocable commitment of the confirming bank, in addition to that of the issuing bank, that payment will be made upon presentation of documents specified in the LC. Essentially, it is still an irrevocable LC.

Sometimes, a sale contract envisages repeated shipment of certain goods of certain quantity at a certain price. Instead of opening an LC for each shipment, an arrangement may be made whereby every time the issuing bank makes payment to the beneficiary or any intermediary, the LC amount gets reinstated and the beneficiary can present the documents again under the LC and claim payment. In such cases, the terms and conditions of the LC remain unchanged. Only the face value of LC gets reinstated. Such an LC is known as a revolving LC and it is an irrevocable LC. Since it is only a convenient arrangement, UCP 600 makes no special mention about revolving LC.

A transferable LC is one where a bank designated by the issuing bank as the transferring bank can, at the request of the first beneficiary, transfer the LC to a second beneficiary, who gets the right to present the documents to the transferring bank and claim payment under the LC. The Article 38 of UCP 600 deals with transferable LCs.

A standby LC is one where shipping documents or documents evidencing some performance by the beneficiary are not called for. Instead, the LC calls for presentation of a statement or declaration from the beneficiary of non-performance by the applicant or a specified third party. As the name states, it is a standby where the main arrangement as per underlying contract fails due to default by one of the parties. Usually, it is issued in lieu of a guarantee. UCP 600 applies to standby LCs.

Where LC restricts presentation of documents to a nominated bank, it is called a restricted LC. Where an LC issuing bank allows presentation of documents to any bank and undertakes to reimburse the bank that negotiates the documents i.e. gives value for the documents, it is called a freely negotiable LC. An LC where the payment will be made immediately upon presentation of documents is called a sight LC. Where the undertaking of the issuing bank is to make payment after lapse of a certain number of days, it is called a deferred payment LC. UCP 600 makes no mention about such LCs separately.

Red clause and green clause LCs refer respectively to credits where certain amount is advanced to the beneficiary, as unsecured credit or against presentation of warehouse receipts. UCP 600 makes no reference to such credits, as these are merely trade practices.

UCP 600 -Introduction

International Chamber of Commerce (ICC) was established in 1919 with the objective of facilitating the flow of international trade. It developed the first version of Uniform Customs and Practices for Documentary Credits (UCP) in 1933 with the aim to create set of contractual rules that would establish uniformity in practice, so that practitioners would not have to cope with a plethora of often conflicting national regulations. Revised versions of UCP were issued in 1951, 1962, 1974, 1983 and 1993. The latest version is UCP 600 introduced in 2006. It has near universal acceptance.

One of the structural changes in UCP 600 is the introduction of articles covering definitions (article 2) and interpretations (article 3). By providing definitions of the roles played by the banks and specific terms and events, the UCP 600 avoids the repetitive text to explain their interpretation and application. Similarly, the article covering interpretations aims to take the ambiguity out of vague and unclear language that appears in letters of credit and to provide a definitive elucidation of other characteristics of the UCP or the letter of credit.

UCP 600 has 39 articles. It is supplemented by 12 articles of e-UCP in order to accommodate presentation of electronic records alone or in combination with paper documents. UCP 600 is complemented by a compilation of practices adopted by banks for examination of documents. The latest version of such compilation is ISBP 745 published in April 2013. It gives the International Standard Banking Practices (ISBP) for examination of documents under UCP 600. This document does not amend UCP 600 but explains how practices articulated in UCP 600 are to be applied by documentary credit practitioners.

Article 2 defines issuing bank, advising bank, nominated bank, negotiating bank, confirming bank, applicant and beneficiary. It defines a complying presentation as a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice. Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation. Honour means to pay at sight if the credit is available by sight payment, to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment and to accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance. There are definitions for presentation, presenter, negotiation and banking day also.

Article 3 gives fourteen interpretations to clarify what is meant by first half, second half, beginning, middle, and end of a month, how to interpret words such as until, to, till, from, between, from, after, before etc. It says that words such as prompt, immediately, or as soon as possible must be disregarded. The term ‘shipment’ used in stipulating an earliest or latest date for shipment includes expressions such as loading on board, dispatch, taking in charge, accepted for carriage, date of post receipt or date of pick-up. A document maybe signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other mechanical or electronic method of authentication. Branches of a bank are considered to be separate banks. A requirement of a document to be legalized, visaed, certified or similar will be satisfied by any signature, mark, stamp or label on the document which appears to satisfy that requirement. Words in singular include the plural and vice-versa.

All practitioners in documentary letters of credits should familiarize themselves with these definitions and interpretations at articles 2 and 3 of the UCP 600.

Credits Vs. Contracts

Letter of Credit is a conditional undertaking to pay a certain amount of money given by an issuing bank, at the request of the applicant, to a beneficiary, against presentation of documents specified in the letter of credit. The undertaking is irrevocable in the sense that it cannot be revoked without the consent of the beneficiary.

Thus, in a documentary credit transaction, the banks deal in documents and not with the goods or performance to which the documents may relate. Once the documents presented are in conformity with the terms and conditions of the letter of credit, the issuing bank or the confirming bank is obligated to honour its commitment, no matter whether the goods or performance are deficient in any way.

It follows, therefore, that a documentary credit, is by its very nature, a separate transaction from the sale or other contract on which it may be based. The letter of credit must be seen essentially as a tool to facilitate the process of payment against performance as evidenced by the documents presented. It cannot be a substitute for the sale or other contract that gives rise to the transaction in the first place.

Quite often, the applicants require documents that make a reference to the underlying contract. For example, it may be a requirement that the invoice shows the contract number and date. In such cases, the banks will only ensure that payment is made against an invoice that shows the contract number and date. However, banks will not be in anyway concerned with or bound by the terms and conditions in the contract, even where any reference to it is included in the letter of credit.

Consequently, the undertaking of an issuing bank or confirming bank to honour, to negotiate or fulfil any other obligation under the letter of credit is independent of the relationship between the applicant and the beneficiary. It is also independent of the relationship between the applicant and the issuing bank. Naturally, it cannot be subject to any claims or defences by the applicant based on his relationship with the issuing bank or the beneficiary.

Also, the beneficiary cannot under any circumstances invoke any rights based on issuing bank’s relationships with the other banks or with the applicant. In a documentary credit, the beneficiary’s rights can flow only from the terms and conditions of the letter of credit and the obligations that the banks specifically undertake. His right to claim payment can arise only through presentation of documents complying with the terms and conditions of the letter of credit, the applicable provisions of the UCP 600 and international standard banking practices.

An issuing bank should, therefore, discourage or reject any attempt by the applicant to include excessive details of the contract in the letter of credit. Equally, any attempt by the applicant to include, as an integral part of the credit, copies of the underlying contract, proforma invoice and the like should be discouraged or rejected by the issuing bank.

Availability of Credit, Expiry Date and Place for Presentation

A letter of credit (LC) is a conditional undertaking to pay the beneficiary, given by the issuing bank. The condition is presentation of documents in accordance with the terms and conditions of the LC. Naturally, the beneficiary is entitled to present the documents to the issuing bank and claim payment. So, the LC is always available for presentation with the issuing bank.

However, it may not be very practical for the beneficiary located in another country to present the documents to the issuing bank. So, the issuing bank nominates a bank, usually, its own correspondent in the beneficiary’s country to whom the beneficiary can present the documents. In that case, the LC is available for presentation with the nominated bank, in addition to its availability with the issuing bank.

Sometimes, the issuing bank may allow documents to be presented with any bank. In that case, the LC is available with any bank and any bank is a nominated bank. In any case, the LC must state the bank with it is available or whether it is available with any bank.

The LC must state whether it is available by sight payment, deferred payment, acceptance or negotiation. In an LC available by sight payment, the obligation to pay arises immediately upon presentation of documents. In an LC available by deferred payment, the issuing bank incurs a deferred payment undertaking and the obligation is to pay on the maturity date. If the LC is available by acceptance, the issuing bank undertakes to accept a bill of exchange (draft) drawn by the beneficiary and pay on the maturity date. In an LC available by negotiation, the issuing bank undertakes to reimburse any nominated bank that negotiates (i.e. gives value for) the documents and/or drafts under a complying presentation. However, an LC must not be issued requiring a draft to be drawn on the applicant.

Every LC must state an expiry date for presentation. An expiry date stated for honour or negotiation will be deemed to be an expiry date for presentation. Where an expiry date is mentioned, the documents must be presented by or on behalf of the beneficiary on or before the expiry date. The only exception for this Rule, as per article 29 (a) of UCP 600, is when the expiry date falls on a date when the bank to which presentation is to be made is closed for reasons other than force majeure such as acts of God, riots, civil commotion, insurrections, wars, terrorism, strikes, lockouts or any other causes beyond the bank’s control.

In a situation where an expiry date falls on a date when the bank to which presented is to be made is closed for reasons other than force majeure, the expiry date will be automatically extended to the first following working day. If the presentation is made on the first following banking day, a nominated bank must provide the issuing bank or a confirming bank that the presentation is made within the time extended in accordance with article 29(a) of UCP 600.

The place for presentation of documents is the place of the bank with which the LC is available. If a bank is nominated, the place of presentation is that of the nominated bank. If the LC is available with any bank, the place of presentation is that of any bank. As the LC is always available for presentation with the issuing bank, a place for presentation other than that of the issuing bank is in addition to that of the place of the issuing bank.

Issuing Bank Undertaking

A letter of credit (LC) is a conditional undertaking to pay a specified amount of money, given by an issuing bank to the beneficiary. The condition, usually, is presentation of documents specified in the LC. This undertaking is irrevocable, in the sense that it cannot be revoked without the consent of the beneficiary. An issuing bank is bound to honour as of the time it issues the LC.

If the documents stipulated in the LC are presented by or on behalf of the beneficiary to the issuing bank and the presentation is a complying presentation (i.e. the presentation is in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international standard banking practice) , it must honour its commitment i.e. pay at sight if the LC is available by sight payment or incur a deferred payment undertaking and pay at maturity if the LC is available by deferred payment or accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the LC is available by acceptance.

It may so happen that the issuing bank may have nominated a bank with whom LC is made available or may have made the LC available with any bank. In such cases, the issuing bank will not be relieved of its irrevocable commitment to honour a complying presentation. Thus, if the LC is available by sight payment with a nominated bank and that nominated bank does not pay against a complying presentation, the issuing bank must still honour its irrevocable commitment.

Similarly, if the LC is available by deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking against a complying presentation or having incurred a deferred payment undertaking does not pay at maturity, the issuing bank will not be relieved of its obligation to incur its deferred payment under taking or pay at maturity.

Also, if the LC is available by acceptance with a nominated bank and the nominated bank does not accept a draft drawn on it or having accepted a draft drawn on it, does not pay at maturity, the issuing bank must honour the complying presentation by way of acceptance and/or payment at maturity.

Likewise, if the LC is available by negotiation with a nominated bank and that nominated bank does not negotiate (i.e. give value for the documents), the issuing bank must honour a complying presentation.

However, if the nominated bank has honoured or negotiated a complying presentation, the issuing bank must reimburse the negotiating bank. It must be noted that the issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.

Sometimes, it is possible that in an LC available by deferred payment or acceptance, the negotiating or nominating bank may pay the beneficiary before the due date. That cannot bind the issuing bank to reimburse before maturity. Whether or not the nominated or the negotiated bank prepaid or purchased before maturity is not at all a consideration for the purpose of reimbursement by the issuing bank to the nominated or negotiating bank. Reimbursement by the issuing bank for the amount of complying presentation under an LC available by acceptance or deferred payment is due only at maturity.

Confirming Bank Undertaking

A letter of credit (LC) is a conditional undertaking to pay a specified amount of money against presentation of documents specified in the LC, given by an issuing bank to the beneficiary. This undertaking cannot be revoked without the consent of the beneficiary. An issuing bank is bound to honour as of the time it issues the LC. This commitment is independent of whether another bank confirms the LC.

Sometimes, the beneficiary may not like to rely only on the assurance of the issuing bank. In that case, he may insist that the LC must be confirmed by another bank, usually in his own country and whose standing and reputation he is more confident about. In that case, at the request of the applicant, the issuing bank may authorize or request its correspondent, usually in the beneficiary’s country to add its confirmation to the LC. The bank so requested or authorised may confirm the LC but if it is not prepared to confirm the LC, must so inform the issuing bank promptly. When a bank confirms the LC, it undertakes irrevocably to honour a complying presentation under the LC as of the time it adds its confirmation to LC. Of course, the issuing bank will reimburse the confirming bank for any payment made against complying presentation.

If the documents stipulated in the LC are presented by or on behalf of the beneficiary to the confirming bank and the presentation is a complying presentation (i.e. the presentation is in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international standard banking practice) , it must honour its commitment i.e. pay at sight if the LC is available by sight payment or incur a deferred payment undertaking and pay at maturity if the LC is available by deferred payment or accept a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the LC is available by acceptance.

It may so happen that the issuing bank may have nominated a bank with whom LC is made available or may have made the LC available with any bank. In such cases, the confirming bank will not be relieved of its irrevocable commitment to honour a complying presentation. Thus, if the LC is available by sight payment with a nominated bank and that nominated bank does not pay against a complying presentation, the confirming bank must still honour its irrevocable commitment.

Similarly, if the LC is available by deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking against a complying presentation or having incurred a deferred payment undertaking does not pay at maturity, the confirming bank will not be relieved of its obligation to incur its deferred payment undertaking or pay at maturity.

Also, if the LC is available by acceptance with a nominated bank and the nominated bank does not accept a draft drawn on it or having accepted a draft drawn on it, does not pay at maturity, the confirming bank must honour the complying presentation by way of acceptance and/or payment at maturity.

Likewise, if the LC is available by negotiation with a nominated bank and that nominated bank does not negotiate (i.e. give value for the documents), the confirming bank must honour a complying presentation.

However, if the nominated bank has honoured or negotiated a complying presentation, the confirming bank must reimburse the negotiating bank. It must be noted that the confirming bank’s undertaking to reimburse a nominated bank is independent of the confirming bank’s undertaking to the beneficiary.

Advising Credits

An issuing bank may send the Letter of Credit (LC) directly to the beneficiary. However, the beneficiary, say in a different country, may not be able to ascertain the authenticity of the LC. So, usually the issuing bank sends the LC to its correspondent (with whom it has arrangements to send, receive and verify the authenticity of the messages or documents), usually in the country of beneficiary, and request it to advise the LC. The bank so requested may send the LC to the beneficiary after verifying the authenticity of the LC. When it does so, it is called the advising bank. In other words, an advising bank is a bank that advises the LC at the request of the issuing bank.

An advising bank advises the LC and any amendments to LC without any undertaking to honour or negotiate, unless it is also the confirming bank. By advising the LC or amendments, the advising bank only signifies to the beneficiary or any intermediaries that it has satisfied itself as to the apparent authenticity of the LC or amendments and that the advice accurately reflects the terms and conditions of the LC and the amendments received.

It is possible that the advising bank may utilize the services of another bank (a second advising bank) to advise the LC or any amendments. The second advising bank, by advising the LC or amendments, signifies that it has satisfied itself as to the apparent authenticity of the LC or amendments and that the advice accurately reflects the terms and conditions of the LC and the amendments received.

When any bank utilizes the services of an advising bank or second advising bank to advise the LC and that bank acts on the request, all amendments to the LC should also be advised through the same advising bank or second advising bank.

It may so happen that the bank requested to advise the LC may choose not to advise the LC. In that case, it must so inform, without delay, the bank from which the LC, amendment or advice was received.

It may also happen that the advising bank or second advising bank is unable to satisfy itself about the apparent authenticity of the LC or the amendments or the advice. In that case, it must so inform, without delay, the bank from which the instructions appear to have been received. However, the advising bank or second advising bank may still decide to go ahead and transmit the LC or amendments. In that case, it must inform the beneficiary or the second advising bank that it has not been able to establish the apparent authenticity of the LC or the amendment or the advice.

When an issuing bank wants another bank to confirm the LC, it should invariably advise the LC and amendments through that bank. If an issuing bank intends to nominate a bank with which the LC is available, it should prefer to advise the LC and amendments through that bank.

Amendments to Credits

Many times the terms and conditions of an LC may be required to be amended. For example, the applicant may want to amend any terms or conditions of the LC and at his request, the issuing bank may amend the LC. It may so happen that the beneficiary is unable to ship the goods in time and he contacts the applicant and requests for amendment to the LC extending the last date for shipment. If the applicant agrees and requests the issuing bank to amend the LC accordingly, the issuing may issue an amendment to the LC. However, this amendment cannot become effective unless the beneficiary accepts the amendment.

An issuing bank is irrevocably bound by any amendment as of the time it issues the amendment. A confirming bank may agree to extend its confirmation to the amendment or not. Unless the confirming bank specifically extends its confirmation to the amendment, it will not be bound by the amendment. If it extends its confirmation to the amendment, it shall be irrevocably bound to honour the documents presented in accordance with the amended terms and conditions. Its confirmation of the amendment will operate from the time it advises the amendment. The confirming bank may choose to advise the amendment without extending its confirmation to the amendment. If the confirming bank decides not to confirm the amendment, it must so inform the issuing bank and the beneficiary, without delay.

When the beneficiary receives the amendment, he should either accept or reject the amendment and give notice of his acceptance or rejection of the amendment to the advising bank. If he accepts the amendment, the terms and conditions of the original LC and the accepted amendments will remain in force. If he rejects the amendment, the terms and conditions of the original LC and the previously accepted amendments, if any, will remain in force. The advising bank or the second advising bank must inform the bank from which it received the amendment of any notice of acceptance or rejection of the amendment.

It may so happen that the beneficiary fails to give notice of acceptance or rejection of an amendment. In that case, the amendment cannot take effect automatically. Any provision in an amendment to the effect that it shall enter into force unless rejected by the beneficiary within a certain time limit will not be of any effect and shall be disregarded.

When a beneficiary fails to give notice of acceptance or rejection of an amendment, he may present documents complying with the terms and conditions of the original LC and the previously accepted amendments, if any. In that case, the amendment not accepted will be deemed to be rejected. However, if he presents the documents complying with the terms and conditions of the original LC and previously accepted amendments (if any) and the amendment not yet accepted, it will be deemed that he has accepted the amendment as of that moment of presentation of the documents.

An amendment cannot be partially accepted. For example, if the amendment extends the last date for shipment and also enhances the value of LC, only acceptance of the last date of shipment shall not be allowed. Partial acceptance of an amendment will be deemed to be notification of rejection of the amendment.

Nomination of banks

When an issuing bank authorizes presentation of documents under letter of credit to a named bank and requests that bank to receive the documents so presented and that bank agrees to do so, it becomes party to the letter of credit as the nominated bank.

When an issuing bank does not nominate any bank and makes the letter of credit freely negotiable, any bank that gives value for the documents to the beneficiary becomes a party to the letter of credit as the negotiating bank.

So, a nominated bank is the bank with which the LC is available for presentation of document. In a freely negotiable LC or in case of an LC available with any bank for presentation, any bank is a nominated bank.

Where a nominated bank has not added its confirmation to the LC, merely an authorisation from the issuing bank in favour of the nominated bank to honour or negotiate a complying presentation imposes no obligation on the nominated back to honour or negotiate a complying presentation, unless the nominated bank expressly agrees to do so and communicates its readiness to do so to the beneficiary.

Normally, the role of a nominated bank is to receive examine and forward the documents to the issuing bank. A nominated bank may simply act as a collecting bank, that is, merely receive, examine and forward the documents to the issuing bank. In that case, receipt or examination or forwarding of documents by a nominated bank that is not a confirming bank does not make that bank liable to honour or negotiate a complying presentation. Nor does such receipt, examination or forwarding of documents by a nominated bank constitute honour or negotiation of a complying presentation.

Sometimes a nominated bank may accept a draft (bill of exchange) or incur a deferred payment undertaking against a complying presentation on the basis of an authorisation from the issuing bank. The payment becomes due only on the due date. Even so, the nominated bank may decide to pre-pay or purchase a draft or a deferred payment undertaking. It can very well do so because where an issuing bank nominates a bank to accept a draft or incur a deferred payment undertaking, it authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank. The issuing bank is bound to reimburse the nominated bank.

A nominated bank has the option to honour or negotiate a complying presentation. If it does so, the issuing bank is bound to reimburse the nominated bank. A nominated bank that is not a confirming bank always negotiates (i.e. gives value for the documents) with recourse to the beneficiary. In case it fails to secure reimbursement from the issuing bank, it can always ask the beneficiary to give back the amount paid. This is so, because the irrevocable undertaking to pay is that of the issuing bank and the confirming bank but not of the nominated bank.

Bank to Bank Reimbursement Authorisations

When it issues a letter of credit (LC), the issuing bank can name a reimbursing bank from whom the nominated bank or a negotiating bank can claim reimbursement.

For example, a bank in India may issue a freely negotiable LC favouring a beneficiary located in another country in the currency of say US dollars and indicate in the LC that the negotiating bank may claim reimbursement from a named bank in United States. (Usually, the reimbursing bank will be a bank with whom the issuing bank has formal arrangements under correspondent relationship agreement).

In that case the issuing bank must request the reimbursing bank to honour the claim of the negotiating bank and provide enough funds to the reimbursing bank to enable it honour the claim. The reimbursing bank that agrees to the request will honour the claim of the negotiating bank by using the funds made available by the LC issuing bank.

For the disciplines that the banks should follow in such cases, the International Chamber of Commerce (ICC) has developed Uniform Rules for Bank to Bank Reimbursement, ICC Publication 725 (known as URR 725).

If an LC states that reimbursement is to be obtained by a nominated bank (claiming bank) claiming on another party (reimbursing bank), the LC must state if the reimbursement is subject to the ICC rules for reimbursements in effect on the date of issue of the LC.

If an LC does not state that the reimbursement is subject to the ICC rules for bank to bank reimbursements, the following disciplines must be followed:

  • The issuing bank must provide the reimbursing bank with a reimbursement authorisation.
  • The reimbursement authorisation must conform with the availability stated in the LC.
  • The issuing bank should not require the claiming bank to supply the reimbursing bank with a certificate of compliance with the terms and conditions of the LC.
  • If the reimbursing bank does not provide reimbursement to the claiming bank on first demand, the issuing bank will be responsible for any loss of interest and also with any expenses incurred by the claiming bank.
  • The charges of the reimbursement are for the account of the LC issuing bank. However, if such charges are for the account of the beneficiary, it is the responsibility of the issuing bank to so indicate in the LC and in the reimbursement authorisation.
  • Where the charges of the reimbursement bank are for the account of the beneficiary, they will be deducted from the amount due to the claiming bank when the reimbursement is made.
  • If, for any reason, the reimbursement is not made (say for failure of issuing bank to make funds available to the reimbursing bank), the charges of the reimbursing bank remain the obligation of the LC issuing bank.

If for any reason, the reimbursing bank does not make reimbursement to the claiming bank on first demand, an issuing bank will not be relieved from any of its obligations.

Standard for Examination of Documents (1)

Letter of Credit (LC) is a conditional undertaking to pay a certain amount of money, given by an issuing bank, at the request of an applicant, to a beneficiary, upon presentation of specified documents. Therefore, it is also called a Documentary Letter of Credit.

Thus the essence of LC is payment against a complying presentation of documents. As per UCP 600 ‘presentation’ means either the act of delivering documents under an LC to the issuing bank or nominated bank or the documents so delivered. Also, a ‘complying presentation’ means a presentation that is in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and the international standard banking practice.

Therefore, it follows that nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, as to whether the documents on their face constitute a complying presentation. Since this is a critical activity, the banks must exercise due diligence in examination of the documents presented.

The banks, however, have to examine the documents and determine whether the presentation is a complying presentation within a maximum of five banking days following the day of presentation. The time limit of five banking days is available to each of the banks i.e. a nominated bank acting on its nomination or a confirming bank, if any, and the issuing bank. This period of five banking days will not be curtailed or otherwise affected by the occurrence of any expiry date (of say shipment) or last day of presentation, on or after the date of presentation. In other words, once the presentation is made, the said time limit of five days will start ticking from the next day.

A presentation including one or more original transport documents covering at least two different modes of transport, bill of lading, non-negotiable sea-way bill, charter party bill of lading, air transport document, road, rail or inland waterway document, courier, post receipts or certificate of posting must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in UCP 600, but in any event not later than the expiry date of the LC. It must be noted that the word ‘after’ denotes that the date mentioned in the transport document will be excluded.

It is not necessary that the data in a document, when read in the context of the LC, the document itself and international banking practice must be identical to with the data in that document, any other document stipulated or the LC. However, the data in a document, when read in the context of the LC, the document itself and international banking practice must not be in conflict with the data in that document, any other document stipulated or the LC. This provision should not be treated as permitting any laxity in the preparation of documents.

The description of the goods, services or performance shown on the commercial invoice must invariably correspond with the description shown in the LC. The description shown in the commercial invoice should also reflect what has actually been shipped, delivered or provided. In documents other than the commercial invoice, the description of the goods, services or performance, if stated, may be in general terms but the description stated should not be in conflict with their description stated in the LC.

The banks will disregard the documents presented but not called for in the LC and may return them to the presenter.

Standard for Examination of Documents (2)

The documents presented under a Letter of Credit (LC) must be in accordance with the terms of conditions of the LC, the applicable provisions of UCP 600 and international standard banking practice. So, the issuing bank must clearly stipulate the documents to be presented and should ensure that any LC or any amendment is not ambiguous or conflicting its terms and conditions. The applicant bears the risk of any ambiguity in its instructions to issue or amend an LC.

Sometimes, an LC may require presentation of a document, other than a transport document, insurance document or commercial invoice, without stating by whom the document is to be issued. For example, an LC may merely call for an analysis certificate, without stating by whom it is to be issued. In that case, the banks will accept the document as presented, so long as its content appears to fulfill the function of the required document and the content in the document, read with the LC, the document itself and international standard banking practice, does not conflict with the data in that document, other documents stipulated in the LC or the LC.

Where an LC contains a condition without stipulating a document to indicate compliance therewith (non-documentary condition), the banks can deem such condition as not stated and disregard it. However, data contained in a stipulated document must not be in conflict with the non-documentary condition. For example, when an LC indicates ‘packing in wooden cases’, without stating that such data is to appear on any stipulated document, a statement in any stipulated document indicating a different type of packing will be considered to be a conflict of data.

A document may be dated prior to the issuance of the date of the LC but must not be dated later than the date of presentation. However, when an LC requires a document to evidence a pre-shipment event (for example, ‘pre-shipment inspection certificate), that document, either by its title, content or date of issuance, must indicate that the event (for example, inspection) took place on or prior to the date of shipment. Also, sometimes, a document indicates a date of issuance and bears a signature dated later. In such cases, the document is deemed to have been issued on the date of signing.

Invariably, the issuing bank states the address of the applicant and beneficiary in the LC. It is not necessary that the same address must appear in all the documents. Even different addresses of the applicant and beneficiary in different documents are acceptable. However, it is absolutely necessary that the addresses of the applicant and beneficiary mentioned in the documents must be in the same country as that mentioned in the LC. Banks will disregard contact details such as telefax, telephone, email and the like stated as part of beneficiary’s and the applicant’s address in the LC. However, when the address and contact details of the applicant appear as part of the consignee or notify party on a transport document (i.e. multimodal transport document, bill of lading, no-negotiable sea-way bill, charter party bill of lading, air document, road, rail or inland waterway transport document), they must be exactly as stated in transport the LC.

It is not necessary that the shipper or consignor of the goods indicated on any document must be the beneficiary of the LC.

A transport document may be issued by any party other than a carrier, owner, master or charterer provided the transport documents meet the requirements stated in the relevant articles 19, 20, 21, 22, 23 and 24 of UCP 600.

Complying Presentation, discrepant documents, waiver and notice (1)

Letter of Credit (LC) is a conditional undertaking to pay a certain amount of money, given by an issuing bank, at the request of an applicant, to a beneficiary, upon presentation of specified documents. So, the presentation of documents specified is the essential condition for triggering the payment obligation.

A complying presentation means a presentation that is in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international banking practice. The banks are bound to honour a complying presentation. That is the essence of the irrevocable undertaking under an LC. Honour means to pay at sight if the LC is available by sight payment or to incur a deferred payment undertaking and pay at maturity if the LC is available by deferred payment or to accept a bill of exchange drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

When the documents are presented, a nominated bank acting on its nomination or a confirming bank, if any or the issuing bank must examine the documents and determine on the basis of the documents alone as to whether the documents presented are found to be in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international banking practice. When an issuing bank determines that a presentation is complying, it must honour. When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank. When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or the issuing bank.

Sometimes, the presentation is not complying i.e. the presentation is not in accordance with the terms and conditions of the LC, the applicable provisions of UCP 600 and international banking practice. When a nominated bank acting on its nomination or a confirming bank or an issuing bank determines that the presentation is not complying, it may refuse to honour or negotiate but it must without delay give a single notice of its refusal to the presenter. The notice must state the following:

  • a. That the bank is refusing to honour or negotiate
  • b. Each discrepancy in respect of which the bank refuses to honour or negotiate
  • c. That the bank is holding the documents pending further instructions from the presenter or that the bank is returning the documents or that the bank is acting in accordance with the instructions previously received from the presenter.

There is Another option open to the issuing bank, when it determines that a presentation does not comply and that is to, in its sole judgment, approach the applicant for a waiver of the discrepancies. In other words, it can ask the applicant whether he is willing to authorize payment even though the presentation is not complying. In that case, the issuing bank must give notice to the presenter that it is holding the documents until it receives a waiver from the applicant and agrees to it or receives further instructions from the presenter prior to agreeing to accept a waiver. It means that even where the applicant grants a waiver, the issuing bank has an option to agree to it or not. Secondly, even when the issuing bank approaches the applicant for waiver, the presenter has the option to instruct disposal of documents in any other way but such instructions must reach the issuing bank before it receives a waiver from the applicant and agrees to it.

Complying Presentation, discrepant documents, waiver and notice (2)

When an issuing bank determines that a presentation is not complying, it may, in its sole judgment approach the applicant for a waiver of the discrepancy. It must be noted that it is the option of the issuing bank to approach the applicant for waive fo discrepancy. It may very well decide not to do so. If it does decide to approach the applicant, some time may elapse before the applicant makes a decision. However, such a reference to the applicant and elapse of time cannot result in extension of the stipulated time limit of five banking days following the day of presentation, for the issuing bank to determine whether the presentation is complying or not, based on the waiver of discrepancy from the applicant or otherwise. In other words, the issuing bank must take a decision on refusal to honour or otherwise within the stipulated time limit of five banking days.

When a nominated bank acting on its nomination or a confirming bank or an issuing bank determines that the presentation is not complying, it may refuse to honour or negotiate but it must without delay give a single notice of its refusal to the presenter. This notice must be given by telecommunication or, if that is not possible, by any other expeditious means but this must be done not later than the close of fifth banking day following the day of presentation. In other words, the banks must determine whether a presentation is complying within five banking days following the day of presentation.

A nominated bank acting on its nomination or a confirming bank or an issuing bank is under no obligation to hold the documents when it has given a notice of refusal to honour or negotiate, even if it has conveyed that it is holding the documents pending further instructions of the presenter or until receives a waiver of discrepancies from the applicant. It may, after providing the notice, return the documents to the presenter at any time. The reason is that it is the issuing bank that has given the irrevocable undertaking to honour a complying presentation to the beneficiary and its right to determine whether the presentation is complying and how to deal with discrepant documents or a presentation that is not complying cannot be circumscribed by the decision of the applicant on whether to waive the discrepancies.

If an issuing bank or the confirming bank fails to determine whether the presentation is complying within the stipulated five banking days or having determined that the presentation does not comply, fails to give notice of refusal to honour within the stipulated five banking days, it shall be precluded from claiming that the documents do not constitute a complying presentation. In such cases, it will be forced to honour the presentation.

Sometimes, it so happens that the nominated bank or the confirming bank may determine that the presentation is complying and claim reimbursement from the reimbursing bank. Later, the issuing bank or the confirming bank may discover some discrepancy. When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given a notice to that effect, it shall then be entitled to claim a refund with interest, of any reimbursement made.

Original documents and copies

If a document bears an apparently original signature, mark stamp or label of the issuer of the document, banks shall treat such a document as original. The exception is when the document itself indicates that it is not an original. A document marked as original is an original document.

With the advent of technology, most documents are generated by computers and not signed. Therefore, unless a document itself indicates otherwise, a bank will accept a document as original, if it appears to be written, typed, perforated or stamped by the document issuer’s hand or appears to be on the document issuer’s original stationery or states that it is original, unless that statement appears not to apply to the document presented.

At least one original of each document stipulated in the letter of credit must be presented. If an LC calls for presentation of multiple documents by using the terms such as ‘in duplicate’, in four fold or in two copies, this will be satisfied by the presentation of at least one original and the remaining number in copies.

Sometimes, an LC calls for copies of documents. In that case, it is not necessary that only copies must be presented; presentation of either originals or copies will be permitted. When an LC prohibits presentation of original document, only copies must be presented.

Transport documents such as multimodal or combined bill of lading, bill of lading, non-negotiable seaway bill , charter party bill of lading, air transport document, rail, road or waterway transport document or courier, post receipt or certificate of posting are covered by the disciplines stipulated in articles 19 to 25 of UCP 600. If an LC calls for copies of such documents, the relevant articles will not apply and such copies will be examined only to the extent expressly specified in the LC.

Copies of documents covered by articles 19-25 of UCP 600 are not subject to the default presentation period of 21 days stated at article 14(c) of UCP 600 or any presentation period stated in the LC, unless the LC expressly states the basis for determining such presentation period. Otherwise, the presentation may be made at any time but in any event, not later than the expiry date of the LC.

Any data shown on a copy of a transport document, when read in the context with the LC, the document itself and international standard banking practice need not be identical to but must not conflict with data in that document, any other stipulated document or the LC.

When an LC requires a document to be issued by a named person or entity, this condition is satisfied when the document appears to be issued by the named person or entity by use of its letterhead. When there is no letterhead, the condition is satisfied if the document appears to have been completed or signed by or for (on behalf of) the named person or entity.

When a signature or endorsement is required to be on a document consisting of more than one page and the LC or the document itself does not indicate where a signature or endorsement is to appear, the signature or endorsement may appear anywhere in the document.

Documents issued in more than one original may be marked ‘original’, duplicate’, ‘triplicate’ ‘first original’, ‘second original’ etc. None of these markings will disqualify a document as original.

Copies of documents need not be signed or dated.

The fact that a document has a box/field/space for a signature does not in itself mean that such box/field/space must be completed with a signature.

Draft/Bill of Exchange

A “bill of exchange” is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument. The maker of a bill of exchange is called the “drawer”; the person thereby directed to pay is called the “drawee”. The bill of exchange is also called a ‘draft’.

Where a Letter of Credit (LC) is available by acceptance i.e. an issuing bank, nominated bank or confirming bank undertakes to honour a complying presentation by accepting a bill of exchange (draft) and making payment at maturity, the beneficiary is required to draw a draft on the bank stated in the credit (i.e. the confirming bank, nominated bank or the issuing bank). An LC should not be issued available by a draft drawn on the applicant.

A draft should be signed by the beneficiary and must indicate the date of issuance. A draft should be drawn for the amount demanded in the presentation. The amount in words must accurately reflect the amount the amount shown in figures and must indicate the currency. If the amount in words and figures differ, the banks will take the words as the amount demanded.

The tenor stated on the draft must be in accordance with that stated in the LC. It must be possible to establish the maturity date from data in the draft itself. As far as possible, the maturity date should be mentioned on the draft itself.

When tenor refers to, for example, 60mdays after the date of bill of lading, the ‘on board’ date is deemed to be the date of bill of lading, even where the ‘on board’ date is prior to or later than the date of issuance of the bill of lading.

The words ‘from’ and ‘after’ when used to determine the dates of maturity dates of drafts signify that the calculation of the maturity date commences the day following the date of the document or the date of an event stipulated in the LC. For example, maturity date of 10 days from or after 4th May is 14th May.

When an LC requires a bill of lading and drafts to be drawn at say 60 days from the bill of lading date and a bill of lading is presented evidencing unloading and loading of the goods from one vessel to another and more than one dated onboard notation and indicating that each shipment was effected from a port (for example, ‘onboard’ from Antwerp on 14th May’ and on board’ from Rotterdam on 16th May) and within a permitted geographical area of range of ports (for example, any European port), the earliest of these dates (14th May) should be used for calculation of maturity date.

However, where an LC requires a bill of lading and drafts to be drawn at say 60 days from the bill of lading date and a bill of lading is presented evidencing shipment of goods (say in part) on the same vessel from more than one port (say on 14th May from Antwerp and 16th May from Hamburg) within a permitted geographical area of range of ports (for example, any European port), and shows more than one ‘on board’ notation, the latest date (16th May) must be used for calculation of maturity date.

When a draft states a maturity date by using an actual date, that date must reflect the terms of the LC.

The drawee bank must advise/confirm the maturity date to the presenter.

Commercial Invoice – (1)

An invoice is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices for products or services the seller had provided the buyer.

When a Letter of Credit (LC) calls for presentation of an invoice, without further description, the presentation of any type of invoice (commercial invoice, tax invoice, customs invoice) will satisfy the requirement. The requirement will also be satisfied by the presentation of a document titled ‘invoice’, even when it contains a statement that it has been issued for tax purposes. However, an invoice identified as a ‘proforma invoice’ or ‘provisional invoice’ or the like will not be acceptable.

An invoice must indicate the value of the goods shipped or delivered or services or performance provided. It must indicate unit price(s) when stated in the LC, the same currency as that shown in the LC and any discount or deduction required by the LC. However, an invoice may indicate a deduction covering advance payment, discount etc. that is not stated in the LC. Additional charges and costs, such as those related to documentation, freight or insurance costs, must be included within the value shown against the stated trade term on the invoice.

Sometimes, a trade term (Incoterms) such as CIF, FOB, etc. is stated in the LC. When such a trade term is stated as part of the description in the LC, an invoice must indicate that term. When the source of the trade term is indicated in the LC, the same source of the trade term must appear in the invoice. For example, if the LC indicates a trade term as ‘CIF Singapore Incoterms 2010’, the invoice must show the same words ‘CIF Singapore Incoterms 2010’. It should not show ‘CIF Singapore’ or ‘CIF Singapore Incoterms’. However, if the LC states the trade term as ‘CIF Singapore’ or ‘CIF Singapore Incoterms’, the invoice may show the trade term as ‘CIF Singapore Incoterms 2010’ or any other version.

A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may accept a commercial invoice issued for an amount in excess of the amount permitted by the LC and its decision will be binding on all the parties, provided the bank in question has not honoured or negotiated for an amount in excess of that permitted by the LC.

An invoice must appear to have been issued by the beneficiary or in the case of a transferred LC, by the second beneficiary. When the beneficiary or second beneficiary has changed its name and the LC mentions the former name, an invoice may be issued in the name of the new entity provided that it indicates ‘formerly known as (name of the beneficiary or the second beneficiary’) or words of similar effect.

An invoice should not show over shipment, except in accordance with the sub-article 30 (b) of UCP 600, which deals with tolerance in LC amount, quantity and unit prices in specified circumstances. It should also not show goods/services/performance not called for in the LC, even when the invoice includes additional quantities of goods/services/performances as required by the LC or samples and advertising material and are stated to be free of charge.

Commercial Invoice - (2)

The description of the goods or services or performance shown in a commercial invoice must correspond with the description that appears in the LC. There is no requirement of a mirror image. For example, details of the goods may be stated in a number of areas within the invoice, which, when read together represent a description a description of the goods corresponding to that in the LC.

The description of goods, services or performances on an invoice must reflect what has been actually shipped, delivered or provided. For example, if the LC requires shipment of 100 machines and only 50 machines have been shipment, the invoice must show shipment of only 50 machines. That is acceptable if the LC allows partial shipment.

The invoice may show additional data in respect of the goods, service or performance. However, such additional data should not appear to refer to goods of a different nature, different classification or different category of goods. For example, if the LC requires shipment of ‘jewellery’, invoice showing shipment of ‘imitation jewellery’ will not be acceptable. If the credit requires shipment of ‘hydraulic drilling rig’, invoice showing shipment of ‘second hand hydraulic drilling rig’ will not be acceptable.

Any total quantity of goods and their weight or measurement shown on the invoice must not conflict with the same data appearing in other documents. For example, if the invoice shows shipment of say a thousand (1000) units but the bill of lading or any other document shows shipment of any quantity other than 1000 units, then the invoice will not be acceptable.

The quantity of goods required in the LC may be indicated on an invoice within a tolerance of plus or minus five percent (5%). But this tolerance or variance of up to 5% does not allow the amount demanded under the presentation to exceed the amount of the LC. In other words, the tolerance of 5% is allowed in the quantity but the value limit in the LC cannot be breached.

However, the tolerance of plus or minus five percent in quantity will not be available if the LC states that the quantity is not to be reduced or increased. It is also not available if the LC states that the quantity in terms of a stipulated number of packing units or individual units. In other words, if the LC requires shipment of say 50 machines, the tolerance will not be available. The documents must show shipment of 50 machines unless a lesser number of machines are shipped, where partial shipment is permitted.

Sometimes, especially in case of bulk cargo like coal, ore etc., the LC may not mention the quantity to be shipped but mention only the value. In such cases, when no quantity of goods is stated in the LC, and partial shipments are prohibited, an invoice issued for an amount up to 5% less than the LC amount will be considered to cover the full quantity and not a partial shipment.

Multi-modal Transport Documents (1)

A transport document covering movement of goods utilizing at least two different modes of transport is called a multi-modal transport document (MTD) or a combined transport document (CTD).

An MTD should not indicate that shipment or dispatch has been effected by only one mode of transport but it may be silent regarding some or all modes of transport. It should not contain any indication that is subject to a charter party. If a Letter of Credit (LC) requires presentation of a document other than MTD or CTD but it is clear from the routing of the goods stated in the LC that more than one mode of transport is to be utilized [for example, when an inland place of receipt or final destination are indicated or port of loading or discharge field is completed but the place of receipt or delivery is, in fact, an inland container depot), banks will apply the rigors of examination applicable for MTD. The transport document presented need not be titled MTD or CTD even where the LC so names the required document.

An MTD must appear to be signed by the carrier or named agent for or on behalf of the carrier or the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master but the name of the master (captain) need not be stated. When the master (captain) signs an MTD, the signature of the master (captain) is to be identified as the master (captain) but the name of the master (captain) need not be stated. When an MTD is signed by a named branch of the carrier, the signature is considered to have been made by the carrier.

Where an LC indicates ‘Freight Forwarder’s MTD acceptable’ or ‘House MTD acceptable’ or words of similar effect, the MTD may be signed by the issuing identity, without it being necessary to indicate the capacity in which it has been signed or the name of the carrier. A stipulation in an LC ‘Freight Forwarder’s MTD not acceptable’ or ‘House MTD not acceptable’ or words of similar effect has no meaning in the context of the title, format, content or signing of MTD unless the LC provides specific requirements detailing how the MTD is to be issued and signed.

An MTD must indicate that the goods have been dispatched, taken in charge or shipped on board at the place stated in the LC by pre-printed wording or a stamp or notation to that effect indicating the date on which the goods have been dispatched, taken in charge or shipped on board. The date of issuance of the MTD will be deemed to be the date of dispatch, taking in charge of shipped on board and the date of shipment. However, if an MTD indicates by stamp or notation, a date of dispatch, taking in charge or shipped on board different from the pre-printed date, this date will be deemed to be the date of shipment.

When an LC requires the shipment to commence by sea from a port, an MTD must indicate a dated on board notation, port of loading and name of vessel. It is not necessary to indicate the country even if the LC names the country besides the place of receipt, taking in charge, port of loading or airport of departure.

Multi-modal Transport Documents (2)

When an LC indicates a geographical area or range of places of receipt, taking in charge, ports of loading or airports of departure (e.g. ‘any European country’ or Hamburg, Rotterdam, Antwerp port), an MTD should indicate the actual place of receipt, dispatch or taking in charge, port of loading or airport of departure, which should be within the geographical area or range of places but it need not indicate the geographical area.

Similarly, when an LC indicates a geographical area or range of places of final destination, an MTD must indicate the actual place or airport of final destination or port of discharge, which should be within that geographical area or range of places but it need not indicate the geographical area. When an LC requires the shipment to be effected to a port, the named port of discharge must appear in the MTD.

An MTD must appear to be the sole original document or if, issued in more than one original, be the full set as indicated in the transport document. Goods description indicated in the MTD may be in general terms not in conflict with the description given in the LC. An MTD should not include any clause or clauses that expressly declare a defective condition of the goods or their packaging.

An MTD must contain the terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back transport document). Banks will not examine the contents of the terms and conditions of carriage.

When an LC requires an MTD to evidence that the goods are consigned to a named entity, rather than ‘to order’ or ‘to order of (named entity)’, it should not contain the expression ‘to order’ or ‘to order of (named entity)’, whether typed or pre-printed. When an LC requires an MTD to evidence that the goods are consigned ‘to order’ or ‘to order of (named entity), it should not indicate that the goods are consigned straight to a named entity. The shipper must endorse an MTD s issued ‘to order’ or ‘to order of shipper’. An endorsement may be made by a named party other than the shipper, provided the endorsement is made for or on behalf of the shipper.

An MTD may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same document. Even where the LC prohibits transshipment, an MTD indicating that transshipment will or may take place is acceptable. For this purpose, transshipment means unloading from one means of conveyance to another means of conveyance (whether or not in different modes) during the carriage from the place of dispatch, taking in charge or shipment to the place of final destination stated in the LC.

Shipment on more than one means of conveyance (more than one truck, lorry, vessel, aircraft etc.) is a partial shipment. When an LC prohibits partial shipment and more than one set of original MTD are presented covering receipt, taking in charge or shipment from more than one or more points of origin (as specifically allowed or range of places stated in the LC), each set should indicate that it covers the carriage of goods on the same means of conveyance and same journey and that the goods are destined for the same destination.

When an LC requires an MTD to indicate the name, address and contact number of a delivery agent at the final destination, the address need not be the one that is located at the place of final destination.

Bill of Lading (1)

Bill of Lading (BL) is a document issued by a carrier, or its agent, to the shipper as a contract of carriage of goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking delivery at the destination. Among other items of information, a bill of lading usually contains (1) consignor's and consignee's name, (2) names of the ports of departure and destination, (3) name of the vessel, (4) dates of departure (5) itemized list of goods being transported with number of packages and kind of packaging, (6) marks and numbers on the packages, (7) weight and/or volume of the cargo, (8) freight rate and amount.

A BL serves as a proof of ownership (title) of the cargo, and may be issued either in a negotiable or non-negotiable form. In negotiable form, it is commonly used in letter of credit (LC) transactions, and may be bought, sold, or traded; or used as security for borrowing money. BL is required in all claims for compensation for any damage, delay, or loss; and for the resolution of disputes regarding ownership of the cargo. The rights, responsibilities, and liabilities of the carrier and the shipper under a BL (often printed on its back) are governed generally either by the older Hague rules, or by the more recent Hague-Visby rules.

A BL must appear to be signed by the carrier or named agent for or on behalf of the carrier or the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master but the name of the master (captain) need not be stated. When the master (captain) signs a BL, the signature of the master (captain) is to be identified as the master (captain) but the name of the master (captain) need not be stated. When a BL is signed by a named branch of the carrier, the signature is considered to have been made by the carrier.

Where an LC indicates ‘Freight Forwarder’s BL acceptable’ or ‘House BL acceptable’ or words of similar effect, the BL may be signed by the issuing identity, without it being necessary to indicate the capacity in which it has been signed or the name of the carrier. A stipulation in an LC ‘Freight Forwarder’s BL not acceptable’ or ‘House BL not acceptable’ or words of similar effect has no meaning in the context of the title, format, content or signing of BL unless the LC provides specific requirements detailing how the BL is to be issued and signed.

A BL must indicate that the goods have been shipped on board a named vessel at the port of loading stated in the LC by pre-printed wording or stamp or notation to that effect indicating the date on which the goods have been shipped on board. The date of issuance of the BL will be deemed to be the date of shipment. However, if a BL indicates by stamp or notation, a date of ‘shipped on board’ that is different from the pre-printed date, this date will be deemed to be the date of shipment.

If the BL contains the indication ‘intended vessel’ or similar qualification in relation to the name of the vessel, an on board notation indicating the date of shipment and name of the actual vessel is required.

Bill of Lading (2)

A BL must indicate the port of loading stated in the LC. When an LC indicates the port of loading by also stating the country in which the port of loading is located, the BL need not indicate the country.

When an LC indicates a geographical area or range of ports of loading (e.g. ‘any European country’ or Hamburg, Rotterdam, Antwerp port), the BL should indicate the actual port of loading, which should be within the geographical area or range of ports but it need not indicate the geographical area.

Similarly, when an LC indicates a geographical area or range of ports of discharge, the BL must indicate the actual port of discharge, which should be within that geographical area or range of ports but it need not indicate the geographical area. A BL must indicate shipment from the port of loading to the port of discharge stated in the LC.

A BL must appear to be the sole original document or if, issued in more than one original, be the full set as indicated in the BL. Goods description indicated in the BL may be in general terms, not in conflict with the description given in the LC. A BL should not include any clause or clauses that expressly declare a defective condition of the goods or their packaging. It should not be subject to a charter party.

A BL must contain the terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back transport document). Banks will not examine the contents of the terms and conditions of carriage.

When an LC requires an BL to evidence that the goods are consigned to a named entity, rather than ‘to order’ or ‘to order of (named entity)’, it should not contain the expression ‘to order’ or ‘to order of (named entity)’, whether typed or pre-printed. When an LC requires a BL to evidence that the goods are consigned ‘to order’ or ‘to order of (named entity)’, it should not indicate that the goods are consigned straight to a named entity. The shipper must endorse a BL issued ‘to order’ or ‘to order of shipper’. An endorsement may be made by a named party other than the shipper, provided the endorsement is made for or on behalf of the shipper.

A BL may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same BL. Even where the LC prohibits transshipment, a BL indicating that transshipment will or may take place is acceptable, if the goods have been shipped in container, trailer or lash barge as evidenced by the BL. For this purpose, transshipment means unloading from one vessel and re-loading to another vessel during the carriage from the port of loading to the port of discharge stated in the LC. When a BL does not indicate unloading and reloading between these two ports, it is not transshipment in the context of the LC.

When an LC prohibits partial shipment and more than one set of original BL are presented covering shipment from more than one or more port of loading (as specifically allowed or range of ports stated in the LC), each set should indicate that it covers the shipment of goods on the same vessel and same journey and that the goods are destined for the same port of discharge.

The address and contact details of consignee or notify party stated in the BL should not conflict with that stated in the LC.

Non-negotiable Seaway Bill (1)

Non negotiable seaway bill (SWB) is a transport document for sea voyage that names the consignee which is entitled to take delivery of the cargo. It is non-negotiable, which means that it is not made out ‘to order’ or ‘to order of’ any party. So, the shipper or consignee cannot endorse the SWB and transfer it to another person to take delivery of the cargo. The goods can be delivered to the person identified in the document, instead of requiring presentation of a transport document to claim the cargo. SWB only plays an evidential function and does not give title to the goods.

A SWB is a transport document issued by a carrier, master or its agent, to the shipper as a contract of carriage of goods. It is also a receipt for cargo accepted for transportation. Besides the name of the consignee, it usually contains (1) consignor's and consignee's name, (2) names of the ports of departure and destination, (3) name of the vessel, (4) dates of departure (5) itemized list of goods being transported with number of packages and kind of packaging, (6) marks and numbers on the packages, (7) weight and/or volume of the cargo, (8) freight rate and amount.

A SWB must appear to be signed by the carrier or named agent for or on behalf of the carrier or the master or a named agent for or on behalf of the master. Any signature by the carrier, master or agent must be identified as that of the carrier, master or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master but the name of the master (captain) need not be stated. When the master (captain) signs a SWB, the signature of the master (captain) is to be identified as the master (captain) but the name of the master (captain) need not be stated. When a SWB is signed by a named branch of the carrier, the signature is considered to have been made by the carrier.

Where an LC indicates ‘Freight Forwarder’s SWB acceptable’ or ‘House SWB acceptable’ or words of similar effect, the SWB may be signed by the issuing identity, without it being necessary to indicate the capacity in which it has been signed or the name of the carrier. A stipulation in an LC ‘Freight Forwarder’s SWB not acceptable’ or ‘House SWB not acceptable’ or words of similar effect has no meaning in the context of the title, format, content or signing of SWB unless the LC provides specific requirements detailing how the SWB is to be issued and signed.

A SWB must indicate that the goods have been shipped on board a named vessel at the port of loading stated in the LC by pre-printed wording or stamp or notation to that effect indicating the date on which the goods have been shipped on board. The date of issuance of the SWB will be deemed to be the date of shipment. However, if a SWB indicates by stamp or notation, a date of ‘shipped on board’ that is different from the pre-printed date, this date will be deemed to be the date of shipment.

If the SWB contains the indication ‘intended vessel’ or similar qualification in relation to the name of the vessel, an ‘on board’ notation indicating the date of shipment and name of the actual vessel is required. The description of goods in SWB maybe in general terms not in conflict with that stated in the LC.

Non-negotiaSWBe Seaway Bill (2)

A SWB must indicate the port of loading stated in the LC. When an LC indicates the port of loading by also stating the country in which the port of loading is located, the SWB need not indicate the country.

When an LC indicates a geographical area or range of ports of loading (e.g. ‘any European country’ or Hamburg, Rotterdam, Antwerp port), the SWB should indicate the actual port of loading, which should be within the geographical area or range of ports but it need not indicate the geographical area.

Similarly, when an LC indicates a geographical area or range of ports of discharge, the SWB must indicate the actual port of discharge, which should be within that geographical area or range of ports but it need not indicate the geographical area. A SWB must indicate shipment from the port of loading to the port of discharge stated in the LC.

A SWB must appear to be the sole original document or if issued in more than one original, be the full set as indicated in the SWB. It must indicate the number of originals that have been issued. A SWB should not include any clause or clauses that expressly declare a defective condition of the goods or their packaging. It should not be subject to a charter party.

A SWB must contain the terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage (short form or blank back transport document). Banks will not examine the contents of the terms and conditions of carriage.

A SWB may indicate that the goods will or may be transshipped provided that the entire carriage is covered by one and the same SWB. Even where the LC prohibits transshipment, a SWB indicating that transshipment will or may take place is acceptable, if the goods have been shipped in container, trailer or lash barge as evidenced by the SWB. For this purpose, transshipment means unloading from one vessel and re-loading to another vessel during the carriage from the port of loading to the port of discharge stated in the LC. When a SWB does not indicate unloading and reloading between these two ports, it is not transshipment, in the context of the LC.

When an LC prohibits partial shipment and more than one set of original SWB are presented covering shipment from more than one or more port of loading (as specifically allowed or range of ports stated in the LC), each set should indicate that it covers the shipment of goods on the same vessel and same journey and that the goods are destined for the same port of discharge.

The address and contact details of consignee or notify party stated in the SWB should not conflict with that stated in the LC. When an LC requires a SWB to evidence goods consigned to ‘issuing bank’ or ‘applicant’ or notify ‘applicant’ or ‘issuing bank’, a SWB must indicate the name of the issuing bank or applicant, as applicable but need not indicate their respective addresses or any contact details that may be stated in the LC.

Where an LC states that costs additional to the freight are not acceptable, a SWB should not indicate that costs additional to freight have been or will be incurred. Reference in a SWB to costs which may be levied, for example, as a result of a delay in unloading the goods, or after the goods have been unloaded (demurrage costs) or costs covering late return of containers is not an indication of costs additional to freight.

Charter Party Bill of Lading (1)

If a shipper or a group of shippers arrange to charter their goods to final destination, a vessel is chartered (hired). This chartered vessel is meant to move the goods exclusively for such shipper or shippers. In such cases, as a proof of receipt of goods and document of title to goods Charter Party Bill of Lading (CPBL) is issued. 

A CPBL is a document issued by an owner, master or charterer or its agent, to the shipper as a contract of carriage of goods. It is also a receipt for cargo accepted for transportation, and must be presented for taking delivery at the destination. Among other items of information, a CPBL usually contains (1) consignor's and consignee's name, (2) names of the ports of departure and destination, (3) name of the vessel, (4) dates of departure (5) itemized list of goods being transported with number of packages and kind of packaging, (6) marks and numbers on the packages, (7) weight and/or volume of the cargo, (8) freight rate and amount.

A CPBL serves as a proof of ownership (title) of the cargo, and may be issued either in a negotiable or non-negotiable form. In negotiable form, it is commonly used in letter of credit (LC) transactions, and may be bought, sold, or traded; or used as security for borrowing money. A CPBL is required in all claims for compensation for any damage, delay, or loss; and for the resolution of disputes regarding ownership of the cargo.

Any bill of lading, however named, containing an indication that it is subject to charter party (CPBL) must appear to be signed by the owner or named agent for or on behalf the owner or by the master or a named agent for or on behalf of the master or by the charterer or a named agent for or on behalf of the charterer. Any signature by the owner, master, charterer or agent must be identified as that of the owner, master, charterer or agent. Any signature by an agent must indicate whether the agent has signed for or on behalf of the owner or for or on behalf of the charterer or for or on behalf of the master. When the agent signs for on behalf of the owner or charterer, he must indicate the name of the owner or the charterer. However, when the agent signs for on behalf of the master (captain), the name of the master (captain) need not be stated.

A CPBL must indicate that the goods have been shipped on board a named vessel at the port of loading stated in the LC by pre-printed wording or stamp or notation to that effect indicating the date on which the goods have been shipped on board. The date of issuance of the CPBL will be deemed to be the date of shipment. However, if a CPBL indicates by stamp or notation, a date of ‘shipped on board’ that is different from the pre-printed date, this date will be deemed to be the date of shipment.

A CPBL must indicate the port of loading stated in the LC. When an LC indicates the port of loading by also stating the country in which the port of loading is located, the CPBL need not indicate the country. Where a CPBL indicates a place of receipt different from the port of loading, it must bear a dated ‘on board’ notation indicating the port of loading stated in the LC and the vessel name. That notation date will be deemed to be the date of shipment.

Charter Party Bill of Lading (2)

When an LC indicates a geographical area or range of ports of loading (e.g. ‘any European country’ or Hamburg, Rotterdam, Antwerp port), the Charter Party Bill of Lading (CPBL) should indicate the actual port of loading, which should be within the geographical area or range of ports but it need not indicate the geographical area.

Similarly, when an LC indicates a geographical area or range of ports of discharge, the CPBL must indicate the actual port of discharge, which should be within that geographical area or range of ports but it need not indicate the geographical area. A CPBL must indicate shipment from the port of loading to the port of discharge stated in the LC.

A CPBL must appear to be the sole original document or if, issued in more than one original, be the full set as indicated in the CPBL. Goods description indicated in the CPBL may be in general terms, not in conflict with the description given in the LC. A CPBL should not include any clause or clauses that expressly declare a defective condition of the goods or their packaging. When an LC states that costs additional to freight are not acceptable, a CPBL should not indicate that such costs will be or have been incurred.

Banks will not examine charter party contracts, even if LC requires presentation of such charter party contracts.

When an LC requires a CPBL to evidence that the goods are consigned to a named entity, rather than ‘to order’ or ‘to order of (named entity)’, it should not contain the expression ‘to order’ or ‘to order of (named entity)’, whether typed or pre-printed. When an LC requires a CPBL to evidence that the goods are consigned ‘to order’ or ‘to order of (named entity)’, it should not indicate that the goods are consigned straight to a named entity. The shipper must endorse a CPBL issued ‘to order’ or ‘to order of shipper’. An endorsement may be made by a named party other than the shipper, provided the endorsement is made for or on behalf of the shipper.

Shipment on more than one vessel is a partial shipment, even if each vessel leaves from the same port of loading on the same day for the same destination. When an LC prohibits partial shipment and more than one set of original CPBL are presented covering shipment from more than one or more port of loading (as specifically allowed or range of ports stated in the LC), each set should indicate that it covers the shipment of goods on the same vessel and same journey and that the goods are destined for the same port of discharge, geographical area or range of ports. In such cases, if different dates of shipment appear in the CPBLs or same CPBL, the latest of these dates is to be used for the calculation of any presentation period and must fall on or before the last date of shipment stated in the LC.

However, when LC permits partial shipment and more than one set of original CPBL are presented as part of a single presentation made under one covering schedule/letter and incorporate different dates of shipment on different vessels or the same vessel for a different journey, the earliest of these dates is to be used for the calculation of any presentation period and must fall on or before the last date of shipment stated in the LC.

The address and contact details of consignee or notify party stated in the BL should not conflict with that stated in the LC.

Air Transport Document (1)

An air transport document need not be titled ‘airway bill’ or ‘air consignment note’ or words of similar effect even when the letter of credit (LC) so names the required document. A requirement in the LC for the presentation of an air transport document, however named, covering an airport-to-airport shipment, means that UCP 600 article 23 is to be applied in the examination of that document.

An air transport document, usually called airway bill (AWB) or air consignment note (and referred to here as AWB) is a receipt issued by an airline for goods and an evidence of the contract of carriage, but it is not a document of title to the goods. Hence, it is non-negotiable. It shows the name of the consignee to whom the goods must be delivered. It covers transport of cargo from airport to airport. When an LC requires an AWB to evidence that the goods are consigned ‘to order of (named entity)’, the AWB may show that the goods are consigned to that named entity, without mentioning ‘to order of’.

An air transport document, however named, must appear to indicate the name of the carrier (airline) and be signed by the carrier or a named agent for and on behalf of the carrier. Any signature of the carrier or agent must be identified as that of the carrier or agent. Any signature by an agent must indicate that the agent has signed for and on behalf of the carrier. When an AWB is signed by a named branch of a carrier, the signature is considered to be made by the carrier.

A freight forwarder offering a consolidation service will issue its own AWB. This is called a Forwarder's or House AWB. These act as contracts of carriage between the shipper and the forwarder. The forwarder in turn enters into contracts with one or more carriers, often using more than one mode of transportation. The contract of carriage between the forwarder and carrier is called a Master AWB. A stipulation in the LC “Freight Forwarder’s AWB is not acceptable” or “House AWB is not acceptable” or words to that effect has no meaning in the context of the title, format or content or signing of an AWB unless the LC provides specific requirements detailing how the AWB is to be issued and signed.

An AWB must show that that the goods have been accepted for carriage. It must indicate the date of issuance, which will be deemed to be the date of shipment unless the AWB contains a specific notation of the actual date of shipment. In that case, the date stated in the notation will be deemed to be the date of shipment. Any other information appearing on the AWB relative to the flight number and date will not be considered in determining the date of shipment.

An AWB must appear to be the original for consignor or shipper. Even when the LC requires a full set of originals, presentation of an AWB indicating that it is original for consignor or shipper will satisfy the requirement.

An AWB must contain the terms and conditions of carriage or make reference to another source containing the terms and conditions of carriage. Banks will not examine the contents of the terms and conditions of carriage.

An AWB should not contain a clause or clauses that expressly declare a defective condition of the goods or their packaging.

A clause such as ‘packaging is not sufficient for the air journey’ or words of similar effect does not expressly declare a defective condition of the goods.

Air Transport Document (2)

The description of goods in an Airway Bill (AWB) may be in general terms not in conflict with that stated in the letter of credit (LC).

An AWB must show the airport of departure and airport of destination as stated in the LC. When an LC indicates a geographical area of departure or destination (for example, any Chinese airport or Shanghai, Beijing, Guangzhou airport), the AWB must indicate the actual airport of departure or destination, which must be within the geographical area or range of airports but it is not necessary to indicate the geographical area.

An AWB indicating that transshipment will or my take place is acceptable, even if the LC prohibits transshipment. It may indicate that the goods will or may be transshipped, so long as the entire carriage is covered by one and the same air transport document. For this purpose, transshipment means unloading from one aircraft and reloading to another aircraft during the carriage from the airport of departure to the airport of destination stated in the LC.

Dispatch of goods in more than one aircraft is a partial shipment, even if each aircraft leaves the same airport of departure on the same day to the same airport of destination.

Where an LC prohibits partial shipment and more than one AWBs are presented covering shipment from one or more airports of departure (as specifically allowed or within a range of airports stated in the LC), each AWB must indicate that it covers dispatch of goods in the same aircraft and same flight and that the goods are destined for the same airport of destination. In such cases, if different dates of dispatches are indicated in the AWBs, the latest of these dates is to be used for the calculation of any presentation period and must fall on or before the last date for shipment stated in the LC.

Where the LC allows partial shipment and more than one set of AWBs are presented as a part of single presentation made under one covering schedule or letter and indicating different dates of dispatch or different flights, the earliest of these dates should be used for the calculation of any presentation period and each of these dates must fall on or before the last date of shipment stated in the LC.

A statement appearing on an AWB indicating the payment of freight need not be identical to that stated in the LC but it should not conflict with data in that document or any other document or the LC. For example, when an LC requires an AWB to be marked ‘freight collect’, it may be marked, ‘freight payable at destination’. When an LC requires an AWB to show that freight has been prepaid, this will also be satisfied by an indication of the freight charges under the heading ‘freight charges prepaid” or words to that effect.

When an LC states that costs additional to freight are not acceptable, an AWB should not indicate that costs additional to the freight have been or will be incurred. However, references in an AWB to costs which may be levied, for example, as a result of delay in unloading the goods or after the goods have been unloaded is not an indication of costs additional to freight.

When an LC requires an AWB to evidence goods consigned to ‘issuing bank’ or ‘applicant’ or notify ‘applicant’ or ‘issuing bank’, an AWB must indicate the name of the ‘applicant’ or ‘issuing bank’ but need not indicate their respective addresses or any contact details that may be stated in the LC.

Road, Rail and Inland Waterway Transport Documents (1)

Article 24 of UCP 600 covers three separate and distinct types of transport documents - those covering road, rail and inland waterway. Of these, road transport is probably the most common with Truck Receipt (TR) - also called lorry receipt, motor transport receipt or motor carrier receipt, in some countries – issued by the carrier (i.e. the road transport company) used widely as the document required to be presented under letter of credit (LC). Similarly, a Railway Receipt (RR) issued by a railway company is also the normally used document in case of movement of goods by rail. Inland waterway transport document (IWTR) can take the form of a bill of lading but it will be examined by the banks under article 24 of UCP 600. TR and RR are not documents of title to the goods.

A TR, RR or IWTR, however named, must indicate the name of the carrier. (The term ‘carrier’ includes terms such as ‘issuing carrier’, ‘actual carrier’, ‘succeeding carrier’ and ‘contracting carrier’). It must appear to be signed by the carrier or a named agent, for or on behalf of the carrier or indicate receipt of goods by signature, stamp or notation by the carrier or a named agent for or on behalf of the carrier. Any signature or stamp or notation of receipt of the goods by the carrier or agent must be identified as that of the carrier or agent. Any signature or stamp or notation of receipt of the goods by the agent must indicate that the agent has signed for or on behalf the carrier. However, if a RR does not identify the carrier, any signature, stamp of the railway company will be accepted as evidence of the document being signed by the carrier. It may bear a date stamp by the railway company or railway station of departure. When a TR, RR or IWTR is signed by a named branch of the carrier, the signature is considered to have been made by the carrier.

A TR, RR or IWTR must indicate the place of shipment and the place of destination stated in the LC. When an LC indicates a range of places of shipment (dispatch) or destination, a TR, RR or IWTR must indicate the actual place of shipment (shipment) or destination, which must be within the geographical area or range of places but need not indicate the geographical area.

A TR, RR or IWTR must indicate the date of shipment (dispatch) or the date the goods have been received for shipment, dispatch or carriage at the place stated in the LC.

Such a transport document may contain a dated reception stamp. In that case, that date will be deemed to be the date of receipt or date of shipment (dispatch). If it does not bear such a stamp, the date of issuance of the transport document will be deemed to be the date of shipment (dispatch). In other words, unless the transport document bears a dated reception, an indication of the date of receipt or date of shipment, the date of issuance of the transport document shall be deemed to be the date of shipment (dispatch).

Goods description in a TR, RR or ITWR may be in general terms not in conflict with the goods description stated in the LC. A statement appearing on a TR, RR or ITWR indicating the payment of freight need not be identical to that stated in the LC but should not be in conflict with that stated in that document, any other document or the LC.

Road, Rail and Inland Waterway Transport Documents (2)

A RR or ITWR is to be considered as an original, whether it is so marked or not. A TR must be marked as original for shipper (copy for sender) or consignor or bear no marking indicating for whom the document has been prepared. Even when the LC requires presentation of a full set of the relevant transport document, presentation of the original for consignor or sender (copy for sender) of a TR or a duplicate RR shall suffice. In other words, a RR marked ‘duplicate’ will be accepted as original. A duplicate (often a carbon copy) of a RR, when authenticated by the signature ot stamp of the railway company or the railway station of departure, will also be considered as original. In the absence of an indication on the transport document as to the number of originals issued, the number presented will be deemed to constitute full original set.

A RR, TR or IWTR may indicate that the goods will or may be transshipped. It will be accepted provided the entire carriage is covered by one and the same transport document. Even if the LC prohibits transshipment, a TR, RR or IWTR indicating transshipment will or may take place is acceptable. For this purpose, transshipment means unloading and reloading from one means of conveyance to another means of conveyance, within the same mode of transport, during the course of carriage of goods, from the place of shipment to the place of destination stated in the LC.

Shipment on more than one means of conveyance (more than one truck, train or barge) is a partial shipment, even if such means of conveyance leaves on the same day for the same destination.

When LC prohibits partial shipment, and more than one TR, RR or ITWR are presented, covering shipment from one or more places of shipment, dispatch or carriage (as specifically allowed or within a geographical area or range of places stated in the LC), each TR, RR or ITWR must indicate that it covers the shipment, dispatch or carriage of goods on the same means of conveyance and same journey and that the goods are destined for the same place of destination. In such cases, when different shipment dates are incorporated in the documents, the latest of these dates is to be used for the calculation of any presentation period which must fall on or before the last date for shipment stated in the LC.

However, if LC allows partial shipment and more than one TR, RR or ITWR are presented, as part of a single presentation made under one covering schedule or letter, indicating different means of conveyance or same means of conveyance for a different journey, the earliest of these dates is to be used for the calculation of any presentation period which must fall on or before the last date for shipment stated in the LC.

A TR/RR/ITWR should not contain any clause or clauses that expressly declare a defective condition of the goods or their packaging, A clause on a TR/RR/ITWR such as ‘packing is not sufficient for the journey’ or words of similar effect is an example of a clause expressly declaring a defective condition of packaging. However, a clause such as ‘packaging may not be sufficient for the journey’ or words of similar effect does not expressly declare a defective condition of the packaging.

When the address and contact details of the applicant appear as part of the consignee or notify party details, they should not be in conflict with those stated in the LC.

Courier, Post Receipts or Certificate of Posting

Couriers are distinguished from ordinary  mail services by features such as speed, security, tracking, signature, specialization and individualization of express services, and swift delivery times, which are optional for most everyday mail services. As a premium service, couriers are usually more expensive than standard mail services, and their use is normally limited to packages where one or more of these features are considered important enough to warrant the cost.

Where the letter of credit (LC) calls for presentation of courier receipt, the banks will accept a courier receipt, however named, evidencing receipt of goods that appears to indicate the name of the courier service and is stamped or signed by the named courier service at the place from which the LC states the goods are to be shipped. It must also indicate the date of pick up or receipt or of wordings to that effect, which will be deemed to be the date of shipment.

The mail or post is a system for physically transporting postcards, letters and parcels, usually run by governments. National postal systems have generally been established as government monopolies, with a fee on the article prepaid. Proof of payment is often in the form of adhesive postage stamps, but postage meters are also used for bulk mailing. The Universal Postal Union (UPU) includes 192 member countries and sets the rules for international mail exchanges.

Post receipt or certificate of posting is an official document from the post office, used to prove that the item mentioned in the certificate has been accepted by the post office on a particular date for delivery to the addressee. In the event the item is lost or damaged in the mail, the stamped and signed certificate of posting can be presented along with the claim for loss.

Where the LC calls for presentation of a post receipt or a certificate of posting, the banks will accept a post receipt or certificate of posting, however named, evidencing receipt of goods for transport that appear to be stamped or signed and dated at the place from which the goods are to be shipped. This date will be deemed to be the date of shipment.

A courier receipt or a post receipt or a certificate of posting should not contain any clause or clauses or notation expressly declaring a defective condition of the goods or their packaging

'On Deck', 'Shippers load count', 'said by shipper to contain', charges additional to freight'' and Clean Transport Documents

The term ‘on deck' means that a cargo has been placed on or above the deck (top floor) of a ship, thereby exposing it to any adverse weather conditions and perils of a sea journey. This may be because the goods are too large to be placed below deck, or they contain dangerous materials. Items such lumber or live animals such as cattle are sometimes carried on the main deck of a ship, unlike the belly cargo that is stowed under (in the holds).

UCP 600 article 26 clarifies that a transport document must not indicate that the goods are or will be loaded on deck. However, a clause on a transport document stating that the goods may be loaded on deck is acceptable.

The term “shipper's load and count” or “said by the shipper to contain” is the notation on a transport document indicating that the contents of a container were loaded and counted by the shipper. This also means that the contents were not checked or verified by the transporter.

A transport document bearing such clauses as “shipper’s load and count” and “said by shipper to contain” is acceptable.

A transport document may bear a reference, by stamp or otherwise, to charges additional to freight. An indication of costs additional to freight may be made by express reference to additional costs or by the use of trade terms which refer to the costs associated with the loading or unloading of goods, such as, but not limited to Free In (FI), Free Out (FO) and Free In and Out Stowed (FIOS).

However, where the letter of credit (LC) states that costs additional to freight are not acceptable, the documents should not indicate that costs additional to freight will or have been incurred. References in transport documents to costs which may be levied, for example, as a result of a delay in unloading the goods or after the goods have been unloaded (demurrage costs), or costs covering late return of the containers (detention costs) is not an indication of costs additional to freight.

A clean transport document is one bearing no clause or clauses expressly declaring a defective condition of the goods or their packaging. Banks will only accept a clean document. The word “clean” need not appear on a transport document, even if LC has a requirement for that document to be “clean on board”. Deletion of a word ‘clean’ on a transport document does not expressly declare a defective condition of the goods or their packaging.

A clause on a transport document such as ‘packaging is not sufficient for the journey’ or words of similar effect is an example of a clause expressly declaring a defective condition of packaging. However a clause on a transport document such as ‘packaging may not be sufficient for the journey’ or words of similar effect does not expressly declare a defective condition of packaging.

Insurance Document and Coverage (1)

Insurance is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss. In international trade, the risk of damage to cargo or loss of cargo is covered through marine insurance. The insurance policy is a contract (generally a standard form contract) between the insurer and the insured, known as the policyholder, which determines the claims which the insurer is legally required to pay. In exchange for an initial payment, known as the premium, the insurer promises to pay for loss caused by perils covered under the policy language. An insurance certificate maybe issued before issuance of an insurance policy. Sometimes, the insurer covers many shipments during a period under an open cover. In such cases, the insurer may require only a declaration of details of shipment each time a shipment is made.

A requirement in a letter of credit (LC) for the presentation of an insurance document such as insurance policy, insurance certificate or declaration under an open cover means that UCP 600 article 28 is to be applied for examination of documents.

An insurance document such as insurance policy, insurance certificate or declaration under an open cover, must appear to be issued and signed by an insurance company, an underwriter (a professional authorised by the insurer who evaluates and analyzes the risks of insuring people and assets and establish pricing for accepted insurable risks) or their agent or proxy (a person with authority to represent the insurance company or the underwriter). Any signature by an agent or proxy must indicate whether the agent or proxy has signed for or on behalf of the insurance company or underwriter. When an issuer is identified as “insurer”, the insurance document need not indicate that it is an insurance company or underwriter. An insurance document may also be issued on an insurance broker’s stationery, provided the insurance document has been signed by an insurance company, an underwriter or their agent or proxy. When an insurance document requires a countersignature by the issuer, the assured or a named entity, it must be countersigned.

When LC requires the insurance document to be issued in more than one original or when the insurance document indicates that it has been issued in more than one original, all originals must be presented and must appear to have been signed.

Where LC calls for presentation of insurance certificate or a declaration under an open cover, insurance policy will be accepted but if the LC calls for insurance policy, insurance certificate or a declaration under an open cover will not be accepted. Cover notes will not be accepted in lieu of insurance documents.

An insurance document should not indicate an expiry date for the presentation of claims thereunder. The date of insurance document must not be later than the date of shipment, unless it appears from the insurance document that the cover is effective from a date no later from the date of shipment. In other words, when an insurance document indicates a date of shipment later than the date of shipment, it must clearly indicate by addition or note that coverage is effective from the date of shipment. An insurance document indicating coverage from ‘warehouse-to-warehouse’ or words of similar effect but dated after the date of shipment, does not mean that the coverage is effective from the date of shipment. In the absence of any other date stated to be the insurance date or effective date of insurance coverage, a countersignature date will be deemed to be evidence of the effective date of the insurance coverage.

Insurance Document and Coverage (2)

The insurance document must indicate the amount of insurance coverage and be in the same currency as the LC. Where the LC requires insurance coverage to be for a percentage of the value of the goods, of the invoice value or similar, that is deemed to be the minimum amount of coverage required. If the LC does not indicate the coverage required, the amount of coverage must be at least 110% of the CIF or CIP value of the goods. When the CIF or CIP value cannot be determined from the documents, the minimum insurance coverage must be calculated on the basis of the amount for which honour or negotiation is requested or the gross value of the goods as shown in the invoice, whichever is greater.

An insurance document may indicate that the cover is subject to a franchise or excess (deductible). However, when a LC requires the insurance cover to be irrespective of percentage, the insurance document should not contain a clause stating that the insurance cover is subject to a franchise or an excess (deductible); it need not state ‘irrespective of percentage’.

An insurance document must cover the risks as required by the LC. The insurance document must indicate that the risks are covered at least between the place of taking in charge and or shipment and the place of discharge or final destination as stated in the LC.

Even though LC may be explicit with risks to be covered, an insurance document may contain reference to any exclusion clause. LC must state the type of insurance required and, if any, additional risks to be covered. Imprecise terms such as ‘usual risks’ or ‘customary risks’ shall be disregarded and an insurance document will be accepted without any regard to the any risks stated to be excluded. When LC requires insurance against all ‘risks’ and an insurance document is presented containing ‘all risks’ notation clause, whether or not bearing the heading ‘all risks’, the insurance document will be accepted without any regard to the risks stated to be excluded. An insurance document indicating that it covers Institute Cargo Clauses (A) or Institute Cargo Clauses (Air) when dispatch is effected by air, satisfies the condition in LC calling for ‘all risks’ clause or notation.

An insurance document should be in the form required by the LC and where necessary, be endorsed by the entity to whose order and in whose favour claims are payable. LC should not require an insurance document to be issued to ‘bearer’ or ‘to order’. LC should indicate the name of the insured party. When the LC requires an insurance document to be issued “to order of (named entity)” the document need not indicate “to order”, provided that the named entity is shown as the insured party or claims are payable to it, and assignment by endorsement is not expressly prohibited. When LC is silent as to the insured party, an insurance document should not evidence that claims are payable to the order of or in favour of the beneficiary or any entity other than the issuing bank or the applicant, unless it is endorsed by the beneficiary or that entity in blank or in favour of the issuing bank or applicant.

Banks do not examine the general terms and conditions in an insurance document.

Any indication on an insurance document regarding the payment of an insurance premium is to be disregarded unless the insurance document itself indicates that it is not valid unless the premium is paid and there is an indication that the premium has not been paid.

Certificate of Origin (COO)

Beneficiary’s Certificate

When letter of credit (LC) calls for presentation of a COO, presentation of any signed document that appears to relate to the invoiced goods and certifies their origin will satisfy the requirement. When LC requires presentation of a specific form of COO, such as GSP form A, only a document in that specific form must be presented.

A COO must be issued by the entity stated in the LC. When the LC does not indicate the name of the issuer, any entity may issue a COO. When the LC requires presentation of COO issued by the beneficiary, the exporter or the manufacturer, presentation of a COO issued by a Chamber of Commerce or the like, such as but not limited to, Chamber of Industry, Association of Industry, Economic Chamber, Customs Authorities and Department of Trade or the like, will satisfy the requirement, provided it indicates the beneficiary, the exporter or the manufacturer. When the LC requires presentation of COO issued by a Chamber of Commerce, this requirement will be satisfied by presentation of a COO issued by Chamber of Industry, Association of Industry, Economic Chamber, Customs Authorities and Department of Trade or the like.

A COO must appear to relate the invoiced goods, for example by a goods description that corresponds to that in the LC or a description in general terms not in conflict with that stated in the LC or referring to goods description appearing in another stipulated document or in a document that is attached to and forming an integral part of the COO.

Consignee information in COO, when shown, should not conflict with that shown in the transport document. However, when LC requires a transport document to be issued ‘to order’, ‘to order of shipper’, ‘to order of issuing bank’ ‘to order of nominated bank (or negotiating bank) or consigned to issuing bank, a COO may show consignee as any entity named in the LC except the beneficiary. When a LC is transferred, the first beneficiary may be shown as consignee. A COO may indicate as the consignee or exporter an entity other than the beneficiary of the LC or the shipper as shown on any other stipulated document.

When LC indicates the origin of the goods without stipulating a requirement for presentation of a COO, any reference to the origin in any stipulated document must not be in conflict with the stated origin.

When LC requires presentation of a beneficiary’s certificate, this will be satisfied by the presentation of a signed document titled as called for in the LC, or bearing a title reflecting the type of certification that has been requested or untitled, that fulfils its function by containing the data and certification required by the LC.

A beneficiary’s certificate is to be signed by, for or on behalf of the beneficiary.

Data mentioned on a beneficiary’s certificate are not to conflict with the requirements of the LC.

The data or certification mentioned on a beneficiary’s certificate need not be identical to that required by the LC but must clearly indicate that the requirement prescribed by the LC have been fulfilled. Also, the data or certification mentioned on a beneficiary’s certificate need not include the goods description or any other reference to the credit or another stipulated document.

Analysis, Inspection, Health, Phytosanitary, Quality and Quantity Certificates

Sometimes, a letter of credit (LC) may call for certificates from the beneficiary or independent agencies or statutory authorities regarding the quality or quantity, after inspection by them that the products are compliant with the standards defined in applicable laws.

When an LC requires presentation of any of the certificates mentioned above, it will be satisfied by presentation of a signed document titled as mentioned in LC or bearing a similar title or untitled, that fulfils its function by certifying the required outcome of that action; for example, the results of the analysis, inspection, health, phytosanitary, quality or quantity assessment.

Sometimes, an LC requires presentation of a certificate regarding an action that must have taken place before shipment. In that case, the certificate must be dated no later than the date of shipment or indicate the event (e.g. pre-shipment inspection certificate) or if issued after the date of shipment but no later than the date of presentation contain wordings to the effect that the action (e.g. inspection) took place before shipment.

A certificate should be issued by the entity named in the LC. Where the LC does not indicate the name of an issuer, any entity, including the beneficiary, can issue the certificate. Sometimes an LC makes reference to an issuer of a certificate in the context of being ‘independent’, ‘official’ or ‘qualified’ or words of similar effect. In such cases, a certificate may be issued by any entity other than the beneficiary.

A certificate may indicate that only a sample of the required goods has been tested, analyzed or inspected. Or a quantity that is greater than that stated in the LC or on any other stipulated document or more hold, compartment or tank numbers than that stated on the bill of lading or charter party bill of lading.

Sometimes an LC indicates specific requirements with respect to analysis, inspection, health, phytosanitary, quantity or quality assessment or the like, with or without stipulating the document to indicate compliance with these requirements. In such cases, the data regarding the analysis, inspection, health, phytosanitary, quantity or quality assessment or the like mentioned on the certificate or any other stipulated document should not conflict with those requirements.

Sometimes an LC is silent regarding specific content to appear on a document. It may include any required standard for determining the results of analysis, inspection, and health or quality assessment. In such cases, the certificate may include statements such as ‘not fit for human consumption’, ‘chemical composition may not meet required needs’ or words of similar effect but such statements should not be in conflict with the LC and any other stipulated document or UCP 600.

Consignee information in such certificates or documents should not be in conflict with that stated in the transport documents. However, when an LC requires a transport document to be issued ‘to order’ or ‘to order of shipper’ or ‘to order of issuing bank’, ‘to order of nominated bank (negotiating bank}’ or ‘consigned to issuing bank’, a certificate may show the consignee as any entity named in the LC, except the beneficiary. Where an LC is transferred, the first beneficiary may be stated to be the consignee.

A certificate may indicate as the consignor or exporter, any entity other than the beneficiary of the LC or the shipper as shown on any other stipulated document.

A certificate may indicate a different invoice number, invoice date and shipment route to that indicate on one or more other stipulated documents, provided the exporter or consignor shown on the certificate is not the beneficiary.

Packing list; Weight list

A packing list expresses the contents of a package, along with details about the quantity, description, and weight of these contents. Content pricing is not included.

A packing list is created by the seller and sent to where the goods are located in order to have an accurate tally of the sent goods. Once the goods have been tallied and packed, the list is sent along with them to their destination. The export packing list provides the international freight forwarder and the ultimate consignee with information about the shipment, the packing details, and the marks and numbers noted on the outside of the boxes. The freight forwarder uses the packing list to prepare the bill of lading for the international carrier and to prepare export clearance documentation. It itemizes the amount and kind of merchandise contained in each individual package that is to be loaded aboard a truck, railcar, vessel or aircraft. A packing list is also used as a supporting document in the event of a dispute between the carrier and the exporter regarding the measurement and weight of the cargo. It is a means by which customs authorities in the importing country assess security and compliance. And, it is a required document to file a claim with the carrier or insurance company in the event of cargo damage or loss.

When a letter of credit (LC) requires presentation of a packing list (note or slip) or a weight list, presentation of a document so titled or bearing a similar title will meet the requirement. If the document is untitled, it will still be acceptable so long as it fulfills its function by containing any information as to the packing of the goods or the weight of the goods.

Sometimes the LC names an entity that should issue the packing list or weight list. In that case, presentation of a packing list or weight list signed by the entity stated in the LC alone will meet the requirement stated in the LC. If the LC does not state who should issue the packing list or a weight list, any document purported to be the packing list or weight list may be signed by any entity. Usually, however, the packing list or weight list is issued by the beneficiary or any party on behalf of the beneficiary, unless there is a specific requirement in the LC to present a document issued by any other party.

Sometimes an LC indicates specific packing or weight requirements, without stipulating the document to indicate compliance with the stated requirements. In such cases, any data regarding the packing or weight of the goods mentioned on the packing or weight list, if presented, should not conflict with the stated requirements.

A packing or weight list issued by the beneficiary must state the invoice number, invoice date and shipment routing to that indicated in one or more stipulated documents. However, this is not necessary, if the issuer of the packing or weight list is not the beneficiary.

Banks only examine the total values, including, but not limited to, total weights, total quantities, total measurements or total packages, to ensure that the applicable total does not conflict with the LC or any other stipulated document. In other words, Banks will not examine the details.

Clean Transport Documents

One of the essential elements of the contract of carriage is the obligation of the carrier to ensure safe transportation of the cargo without damage. The carrier is liable for any damage caused to the cargo during transit. So, the carriers examine the cargo before accepting the cargo for transportation. If they find any defective condition of the cargo or their packaging, they put a clause or notation in the transport document expressly declaring a defective condition of the cargo or their packaging. By putting such a clause, the carriers make sure that they cannot be held liable for any defective condition of the cargo or their packaging found after completion of voyage.

Shippers or consignees as well as carriers do take out insurance to cover any damage. The insurers provide cover in good faith that the cargo and their packaging are fit for the voyage. Where the goods or their packaging are found to be defective before commencement of the voyage, maintaining a claim for damage during damage will be jeopardized. So, the shippers must ensure that the neither the cargo nor their packaging are found to be defective at the time of shipment and no such clause expressing a defective condition of the cargo or their packaging appear on the transport documents.

A transport document containing a clause expressing a defective condition of the cargo or their packaging is called a ‘claused transport document’. A transport document not containing any clause expressing a defective condition of the cargo or their packaging is a called a clean transport document.

Banks will accept only a clean transport document, whether the letter of credit (LC) calls for a clean transport document or does not expressly say so. In other words, unless the LC says expressly allows it, a claused transport document will not be accepted. The word ‘clean’ need not appear on a transport document, even if the LC requires presentation of a ‘clean’ or ‘clean on board’ transport document. Deletion of the word ‘clean’ on a transport document does not expressly declare a defective condition of the goods or their packaging.

A transport document is not to include a clause or clauses that expressly declare a defective condition of the goods or their packaging. So, it follows that a clause on a transport document such as ‘packaging may not be sufficient for the sea journey’ or words of similar effect does not expressly declare a defective condition of the packaging. However, a clause on a transport document such as ‘packaging is not be sufficient for the sea journey’ or words of similar effect is an example of a clause expressly declaring a defective condition of the packaging.

Extension of Expiry, Last Date or Last Day of Presentation Force Majeure

Almost every letter of credit (LC) calling for transport document bears a last date for shipment of goods. In quite a few cases, the LC has a clause regarding the number of days from the date of shipment within which the documents must be presented to the nominated bank. In addition, every LC has an expiry date for presentation of documents. Where an expiry date is stated but the last date of shipment is not stated, the shipment may be made any time before expiry date for presentation of documents. What happens when the expiry date or the last day for presentation of documents falls on a public holiday?

Most banks remain closed for a day or two days in a week and on public holidays per the laws of the country where they operate. In India, the bank holidays are declared through notifications under the Negotiable Instruments Act, 1981.

As per sub-article 29(a) of UCP 600, where the last day for presentation of documents under a letter of credit (LC) or the expiry date of the LC falls on a day when the bank to which presentation is closed, the expiry date or the last day for presentation of documents, as the case may be, will be extended to the first following working day. For example, if the LC expiry date or the last day for presentation of documents falls on a Sunday, the banks will honour or negotiate the documents presented on Monday, the next working day. However, this relaxation is not available when banks are closed to reasons of ’Force Majeure’ i.e. due to any causes beyond the control of the banks.

A bank assumes no liability or responsibility for the consequences arising out of the interruption of it business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lock outs or any other causes beyond its control. Consequently, a bank will not honour or negotiate the documents presented upon resumption of its business, under an LC that expired during such interruption of its business.

Where the documents are presented on the day following a bank holiday (other than closure due to Force Majeure), a nominated bank must provide the issuing bank or confirming bank with a statement on its covering schedule that the presentation was made within the time limits extended in accordance with sub-article 29(a) of UCP 600.

It must be noted that the last date for shipment shall not be extended as a result of sub-article 29(a) of UCP 600. Shipment must be made within the last date of shipment mentioned in the LC.

Tolerance in Credit amount, quantity and Unit Prices

Normally, a letter of credit (LC) spells out precisely the quantity of goods to be shipped. However, there could be situations where some tolerance is required i.e. the flexibility to ship more or less than the quantity specified in the LC. This happens more in case of bulk commodities like coal, ore etc., where shipment of exact quantity is difficult. In such cases, the LC may use the words ‘about’ or ’approximately’ or words of similar effect.

Where the words ‘about’ or ‘approximately’ are used in an LC in connection with the quantity to be shipped, a tolerance not exceeding 10% more or 10% less is allowed. For example, if the LC says ‘about or approximately’ 1000 Kg, the shipment may be between 900 Kg. and 1100 Kg. Similarly, there could be a situation where the amount of the LC or unit price is not final and the words ‘about’ or ‘approximately’ are used in connection with the amount of the LC or the unit price. In such cases also, a tolerance not exceeding 10% more or 10% less is allowed in the amount or unit price stated in the LC. This is in accordance with sub-article 30 (a) of UCP 600.

Even where the words ‘about’ or ‘approximately’ or words of similar effect are not used, but only the quantity of goods to be shipped is stated in the LC, a tolerance not exceeding 5% more or 5% less than the quantity stated in the LC is allowed. However, this tolerance is not available where the LC states the quantity in terms of stated number of packing units or individual items. In any case, the total amount of drawings under the LC should not exceed the amount stated in the LC. For example, if the LC calls for shipment of 100 refrigerators, no tolerance will be available. But, if the LC calls for shipment of 100 Kg., the tolerance will be available. This is in accordance with sub-article 30 (b) of UCP 600.

It must be noted that this variance of up to plus or minus 5% in the quantity of goods does not allow the amount demanded under the presentation to exceed the LC amount. Also, this tolerance up to plus or minus 5% is not available if the LC states that the quantity is not be exceeded or reduced.

A tolerance not exceeding 5% less than the amount of LC is allowed, even where the LC does not allow partial shipments,. However, this relaxation applies only when the quantity of goods, if stated in the LC, is shipped in full and the unit price, if stated in the LC, is not reduced or that the sub-article 30 (b) of UCP 600 [i.e. a tolerance not exceeding 5% more or 5% less than the quantity stated in the LC], as explained above is not applicable. This tolerance is not applicable where the LC stipulates a specific tolerance or uses the expressions ‘about’ or ‘approximately ’or words of similar effect referred to sub-article 30 (a) of UCP 600.

An invoice should not indicate over shipment (i.e. shipment of more quantity than permitted in the LC). It is not permitted except in accordance with the sub-article 30 (b) of UCP 600, as explained above. The invoice should also not indicate goods, service or performance not called for in the LC. This applies even when the invoice includes additional quantities of goods, services or performance as required by the LC or samples and advertising material and are stated to be free of charge.

Disclaimer on effectiveness of documents, Disclaimer on Transmission and Translation

One of the tenets of documentary credits is that the banks deal in documents and not with goods, services or performances to which the documents may relate. So, the obligation of the banks is only to examine the documents presented and determine whether they conform to the terms of conditions stated in the letter of credit (LC) and then pay, accept or negotiate. It is not the job of the banks to go behind the documents to examine whether they are genuine. They also cannot sit in judgment on whether what is stated in the documents in correct.

So, banks assume no liability or responsibility for the form, sufficiency, accuracy or genuineness of any document. Also, the banks assume no liability for falsification or legal effect of any document. They also assume no liability or responsibility for the general or particular conditions stipulated in a document or superimposed therein. Further, they assume no liability or responsibility for the description, quantity, weight, quality, condition, packing, delivery, value or even existence of the goods, services or the performances represented by any document. They also assume no liability or responsibility for the good faith or acts or omissions, solvency, performance or standing of the consignor, the carrier, the forwarder, the consignee or the insurer of the goods or any other person. In other words, the banks will examine with due care as to whether the documents presented are in accordance with the terms and conditions of the LC, UCP 600 and International Standard Banking Practices but they will not go behind the documents to verify its contents or the genuineness of the issuer of the document.

However, it must be noted that where the attention of the banks is drawn to any fraud or fraudulent documents or documents that do not reflect the correct position, they would be required to exercise due diligence before deciding how to deal with the documents presented.

Banks usually transmit message to other banks through secured electronic networks. However, they may also send messages through other modes of communication (letter, telegram, cable, email etc.) to other banks, beneficiary or applicant. It may so happen that sometimes, the messages or documents get delayed or lost in transit. For such delay or losses, the banks cannot be held liable. Banks assume no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any message or delivery of letters or documents, when such documents, messages or letters are sent or transmitted according to the requirements stated in the LC. This applies even when a bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the LC. Sometimes, translation errors creep in. In such situations also banks assume no liability or responsibility. They are also not responsible for interpretation of technical terms and may transmit LC terms without translating them.

Disclaimer on Transmission and Translation, Disclaimer for Acts of an Instructed Party

Sometimes a nominated bank may determine that a presentation is complying and forward the documents to the issuing bank or the confirming bank, whether after honour, negotiation or otherwise. The documents may get lost in transit. In that case, the issuing bank or confirming bank must honour or negotiate and reimburse the nominated bank, even if the documents have been lost in transit between the nominated bank and the issuing bank or the confirming bank or between the confirming bank and the issuing bank.

Banks usually have correspondent relations with other banks for advising the LC, confirming the LC, transferring the LC and so on. Accordingly, they use the services of such banks for getting the transaction through. Sometimes, the instructions given by one bank may not be followed by the other bank or the other bank may express its inability to comply with the instructions. UCP 600 is explicit that a bank utilizing the services of another bank for the purpose of giving effect to the instructions of the applicant does so for the account and at the risk of the applicant. An issuing bank or advising bank assumes no liability or responsibility if the instructions it transmits to another bank are not carried out. This applies even if the transmitting bank has taken the initiative in the choice of that other bank.

All banks render services for a fee. When any party requests another party to perform any services, it must be prepared to pay the fees for such performance. The simple principle is ‘the instructing party pays’. So, an applicant who instructs the issuing bank to issue an LC has to bear all the costs incurred in carrying out his instructions. Likewise, a bank instructing another bank to perform services is liable for any commissions, fees, costs or expenses (charges) incurred by that bank in connection with the instructions. Of course, since the instructions are given at the request of the applicant, the issuing bank will recover the costs or charges or fees of the other banks also from the applicant. If an LC states that charges are for the account of the beneficiary and charges cannot be collected or deducted from the proceeds, the issuing bank remains liable for payment of the charges.

Sometimes, an LC may be issued stating that the advising charges are payable by the beneficiary. If the beneficiary refuses to pay the charges, the advising bank should not refuse to advise the LC. It should advise the LC and collect its charges from the issuing bank. An LC should not state that the advising is conditional upon the receipt by the advising bank or second advising bank of its charges.

Banks cannot be held responsible for obligations and responsibilities imposed by any foreign laws and usages. The applicant shall be bound by and liable to indemnify a bank against all obligations and responsibilities imposed by foreign such laws and usages.

Hours of Presentation, Force Majeure, Assignment of Proceeds

A letter of credit (LC) expires for presentation of documents on a particular day. However, the documents must be presented during the banking hours. A bank is under no obligation to accept a presentation outside of its banking hours.

Similarly, the documents must be presented when the bank is not closed for business under the local laws. If it is closed due to any reasons, even those beyond its control, on a day when no bank holiday is declared under the local laws, then that cannot have the effect of extending the last day of presentation of documents. A bank assumes no liability or responsibility for the consequences arising out of the interruption of its business by Acts of God, riots, civil commotions, insurrections, wars, acts of terrorism, or by any strikes or lockouts beyond its control. A bank will not, upon its resumption of its business, honour or negotiate under an LC that expired during such interruption of its business.

For example, let us say floods disrupt business of the banks in a particular area for a week and the banks remain closed. If bank holiday is declared under the local laws for the days that banks remain closed, the expiry date of the LC will automatically get extended for presentation of documents to the day when the banks reopen. Otherwise, the LC will expire for presentation of documents and the banks will not honour or negotiate documents presented on the day when the banks resume the business.

The beneficiary has the absolute right to assign the proceeds he is entitled to under the LC in accordance with the provisions of the applicable laws. For example, the beneficiary may present the documents under an LC and request the banks to remit the proceeds of negotiation to any other party. So long as the local laws permit that, this right is not affected by the fact that an LC is stated to be transferable or not stated to be transferable. However, this right relates only to the assignment of proceeds and not to the assignment of the right to perform under the LC. In other words, it is the beneficiary who must perform under the LC in the sense that he must present the documents stated in the LC in accordance with the terms and conditions of the LC and UCP 600.

Transferable Letter of Credit (LC) (1)

In international trade, it is not uncommon for a middleman or a broker or an intermediary to book orders and have them executed by other suppliers or suppliers. The middleman may not have the goods that the buyers want but know of the suppliers who can deliver the goods. The suppliers may be manufacturers or traders. Secondly, the middleman may not have the finances to buy the goods from the suppliers and then sell to the buyers. He may not have even enough bank facilities to open a letter of credit (LC) favouring the suppliers.

In such cases, the middleman may opt for a back to back letters of credit. Back-to-back letters of credit are actually made up of two distinct LCs, one issued by the buyer's bank to the intermediary and the other issued by the intermediary's bank to the supplier. With the original LC from the buyer's bank in place, the broker goes to his own bank and gets a second LC issued, with the supplier i.e. the manufacturer or other trader, as the beneficiary. The supplier is thus ensured of payment upon fulfilling the terms of the contract and presenting the appropriate documentation to the intermediary's bank. And then, the intermediary presents the documents under the original LC and securing his payment. That way, the transaction goes through. In some cases, the supplier may not even know who the ultimate buyer of the goods is.

As is often the case with LCs, back-to-back LCs are used primarily in international trade transactions, with the first LC serving as collateral for the second. back-to-back LC - essentially substituting the two issuing banks' LC to the buyer's and intermediary's respectively and thus helping facilitate trade between parties who may be dealing from great distances and who may not otherwise be able to verify one another's credit. In a way, the two LCs are linked and dependent on one another but it is important to note that back-to-back LCs typically mirror each other; that is, they have the same shipping, inspection, and other terms. In this way, the first LC becomes the collateral for the second LC. Even so, the bank of the intermediary runs the risk of the intermediary not presenting the documents under the first (original) LC and so, may not agree to issue the second LC favouring the supplier, without adequate other collateral securities or cash deposit. So, this option does not necessarily work well in many situations.

A practical alternative is a transferable letter of credit. It is a sort of a documentary LC which can be used in situations where a middleman is playing a certain role. Usually the middleman (first beneficiary) does not have enough capital to buy the goods from his supplier (second beneficiary) before he re-sells them to his final customers (applicant). If the final buyer finds it valuable working with a middleman for a definite foreign trade transaction, he can let the middleman benefit from his credibility by giving him a transferable letter of credit.

The middleman then has the part or all of the transferable letter of credit transferred to his supplier who gains considerable payment assurance to ship the goods. The supplier can acquire his payment portion in exchange for the complying documents stated in the LC. The middleman is entitled to substitute its own invoice for the one of the supplier and acquire the difference as his profit in transferable letter of credit mechanism. That way the interests of the intermediary, the supplier and the buyer get secured and the transaction goes through.

Transferable Letter of Credit (2)

For issue of a transferable letter of credit (TLC), the applicant must so request the issuing bank. At his request, the issuing bank can issue the TLC in an irrevocable form. The issuing bank must designate the letter of credit (LC) as transferable and designate a transferring bank to transfer the LC. Transferable LC means an LC that specifically states that it is transferable. The TLC must state the usual terms and conditions of the LC such as applicant, beneficiary, description of goods, documents to be submitted, last date for shipment expiry date etc., as in the case of any other irrevocable LC.

A TLC may be made available in part or whole to a second beneficiary, at the request of the first beneficiary stated in the LC. A TLC can be transferred to more than one second beneficiary as long as credit allows partial shipments.

The issuing bank must authorize a nominated bank or a confirming bank to transfer the TLC. A nominated bank that transfers the TLC or in a TLC available with any bank for honour or negotiation, a bank that is specifically authorised by the issuing bank to transfer and that transfers the LC is the transferring bank. An issuing bank may be a transferring bank. It must be noted that no bank is under any obligation to transfer the LC except to the extent and in the manner consented to by that bank. In other words, the bank designated to transfer the LC has the rights to express its reservations.

Once it agrees to do so, explicitly or otherwise, the job of the transferring bank is to seek instructions from the first beneficiary regarding one or more second beneficiaries to whom the TLC may be transferred and the terms and conditions of transfer. Once the first beneficiary conveys the necessary details and pays the necessary charges (unless agreed otherwise) for transferring the LC to the transferring bank, the TLC may be transferred to one or more second beneficiaries by the transferring bank, as instructed. Upon such transfer, the LC so transferred will be treated as the transferred LC. In other words, a transferred LC means an LC that has been made available to a second beneficiary. All charges incurred by the transferring bank (such as fees, commission, expenses or costs) in respect of transfer a transfer must be paid by the first beneficiary, unless agreed otherwise at the time of transfer.

The terms and conditions of the original credit must be indicated exactly in the transferred credit, including confirmation, if any. However, in order to keep the workability of the TLC, the LC amount, any unit price of the merchandise (if stated), the expiry date, the presentation period or the latest shipment date or given period for shipment may be curtailed or reduced. The first beneficiary may demand from the transferring bank to substitute his name for that of the applicant. However, if the original LC says that a document other than invoice required to be presented, must be issued in a way to show the applicant's name, that requirement must be indicated in the transferred credit.

This enables the first beneficiary - usually a middleman - keep the details of the final buyer and the terms of conditions of his contract – such as the price at which he sells the goods to the final buyer, confidential. At the same time, the second beneficiary – the supplier who ships the goods - gets the assurance of payment against submission of documents as per the terms and conditions of the transferred LC.

Transferable Letter of Credit (3)

When making the request for transfer, the first beneficiary can indicate that the transferred LC must be available at the place to which it is transferred for honour or negotiation. This will enable the second beneficiary present the documents at the place to which the credit is transferred. This is without prejudice to the right of the first beneficiary to substitute his own invoice or draft for that of the second beneficiary at the counters of the transferring bank.

The first beneficiary must also state if and under what conditions, the amendments may be advised to the second beneficiary. The transferring bank must clearly indicate those conditions to the second beneficiary.

When making the request for transfer, the first beneficiary may request for increase in the percentage of insurance cover, so as to meet the requirements in the original LC. In other words, the percentage for which insurance cover must be effected may be increased to provide the amount of cover stipulated in the LC or as indicated in the relevant provisions of UCP 600.

When an LC is transferred to more than one beneficiary, it is possible that one of the second beneficiaries rejects the amendments transmitted subsequently. That cannot invalidate the acceptance of amendments by any other beneficiaries. The amendment will apply for the second beneficiaries who accept the amendment but not for the one who rejected the amendment.

Sometimes, the second beneficiary may not be able to ship the goods or perform as required for compliance with the terms and conditions of the transferred LC. In that case, it can be transferred back to the first beneficiary. However, the transferred LC cannot be transferred once again to any third beneficiary according to the request of the second beneficiary.

Where the second beneficiary ships the goods and presents the documents, the transferring bank must inform the first beneficiary and give him the option of substituting his own invoice and draft (if any) for those presented by the second beneficiary. Upon such first demand, the first beneficiary may present his own invoice and draft for an amount not exceeding the original LC amount. Upon the first beneficiary exercising the option, he gets a right to draw under the LC for the difference between his invoice and that of the second beneficiary. The transferring bank will then send the documents to the issuing bank, as instructed in the original LC. That way, the documents stipulated in the LC will reach the issuing bank for making necessary payment. Thus, the second beneficiary will receive the payment for amount of his invoice and the first beneficiary will receive the payment for the difference between his own invoice and that of the second beneficiary, which represents his profit in the transaction.

It may so happen that the first beneficiary, upon first demand from the transferring bank fails to deliver his own invoice and draft. In that case, the transferring bank will send the invoices presented by the second beneficiary or second beneficiaries to the issuing bank without further reference to the first beneficiary. It may also so happen that the beneficiary presents his invoice and draft but they happen to be discrepant and when the transferring bank points out the discrepancy to him, he fails to correct them. In such a case also, the transferring bank will send the invoices presented by the second beneficiary to the issuing bank without further reference to the first beneficiary. That way, the second beneficiary will be entitled to payment against invoices but the first beneficiary will have to forego his margins.

International Standard Banking Practices for examination of documents under UCP 600

The Uniform Customs and Practices for Documentary Credits were first published by International Chamber of Commerce (ICC) in 1933. Revised versions were issued in 1951, 1962, 1974, 1983 and 1993. The latest version is UCP 600 that came into effect in 2007. During such reviews, it was observed that the practices of banks in examination of documents differed widely, giving rise to many disputes. It defeated the basic objective of making it easy for many entities in different countries to transact business by having banks play a meaningful role through the mechanism of letters of credit (LC).

So, it was decided by ICC to study the banking practices and bring out a document compiling standard banking practices. The first such document was brought out in 2002 and updated in 2007. The revised International Standard Banking Practices for examination of documents under UCP 600 (ISBP 745) was published in 2013. This is the latest version of ISBP.

ISBP 745 is a compilation of banking practices that are to be applied when working with documentary credits that are subject to UCP 600. It demonstrates how the principles and content of UCP 600 should be integrated into day-to-day practice by providing practitioners with detailed practices that are to be considered and applied when working with different trade documents (invoices, transport documents, insurance documents, certificates of origin etc.).It also provides coverage of documents which are not specifically mentioned in UCP 600.

It is important to note that ISBP 745 does not amend UCP 600. It explains how practices articulated in UCP 600 are to be applied by the practitioners. ISBP 745 and UCP 600 should be read in conjunction, in their entirety and not in isolation. The practices described in ISBP 745 highlight how the articles of UCP 600 are to be interpreted and applied, to the extent that the terms and conditions of the credit or any amendments thereto do not expressly modify or exclude an applicable article in UCP 600. This principle is implicit throughout ISBP 745. The examples given in ISBP 745 are solely for illustration and are not exhaustive.

ISBP 745 reflects the international standard banking practices for all parties to a documentary credit. The rights, obligations and remedies of an applicant depend up on his instructions and undertaking to the issuing bank. Similarly, the rights and obligations of the beneficiaries arise out of documents to be presented or presented. Similarly, the smooth operation of the transaction depends on a common understanding of all the parties to the credit of the various terms used, documents required, same standard of examination of the documents and timely objections under applicable provisions.

end faq