1 Interpretation and Application of UCP 600 – Part 2 XXV Latin American Foreign Trade Congress -...

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Interpretation and Application of

UCP 600 – Part 2

XXV Latin American Foreign Trade Congress - CLACE

Guatemala

June 3-5, 2009

Gary Collyer

Collyer Consulting LLP

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Applying UCP 600 and ISBP

Handling of Discrepant Documents

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Examination of Documents

A nominated bank acting on its nomination, a confirming bank, if any, and

the issuing bank are required to examine the documents within a maximum

of 5 banking days following the day of presentation. In the event of

discrepancies being observed, the applicable bank is required to provide a

notice of refusal (according to UCP 600 article 16) to the presenter, no later

than the close of that 5th banking day.

The examination of the documents takes three steps:

1. examination of the documents against the terms of the LC;

2. examination of the documents against the applicable provisions of UCP;

3. examination of the data in the documents with similar data in other stipulated documents.

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Conforming and non-conforming documents

UCP 600 article 15 requires that when a bank determines that the documents represent a complying presentation that they honour or negotiate and, in the case of a confirming or nominated bank, forward the documents to the issuing bank.

When a nominated bank acting on its nomination, a confirming bank or an

issuing bank have determined that the documents do not comply, they must

act according to the requirements of UCP 600 article 16.

A refusal notice indicating the discrepancies that have been determined and

the status of the documents must be sent to the presenter no later than the

close of the 5th banking day following the day of presentation.

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Standard for Examination of Documents - UCP 600 sub-article 14 (d)

General principle for all documents:

Data in a document, when read in context with the credit, 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 credit.

Note:

No reference to inconsistency.

Data need not be identical, but must not conflict.

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UCP 600 article 14 - Standard for Examination of Documents

Sub-article 14 (a):A 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, whether or not the documents

appear on their face to constitute a complying presentation.

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Handling of Discrepant DocumentsUCP 600 article 14 - Standard for Examination of Documents

Sub-article 14 (b):A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying.This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation.

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Sub-article 14 (d):Data in a document, when read in context with the credit, 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 credit.

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Sub-article 14 (e):

In documents other than the commercial invoice, the description of the

goods, services or performance, if stated, may be in general terms not

conflicting with their description in the credit.

Issue:

No application or requirement for a form of “linkage” under UCP 600.

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UCP 600 article 16 - Discrepant Documents, Waiver and Notice

Issuing bank may still approach applicant for waiver but available time reduced due to new maximum of 5 banking days;

If a bank has provided a refusal according to (a) or (b) overleaf, and no instructions or waiver received they may return documents;

Banks must provide a single notice of refusal; A statement of “noting discrepancies” or “observing discrepancies” is

not a notice of refusal; The discrepancies must be clear and precise. For example, a

discrepancy such as “invoice not as per LC” is not a valid reason for refusal unless the wrong invoice was presented for the LC in question;

Refusal must state, bank is refusing, applicable discrepancies and one of the following statuses:

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Sub-article 16 (c) (iii):a) that the bank is holding the documents pending further instructions from

the presenter; or

b) that the issuing bank is holding the documents …. receives a waiver …… and agrees to accept it, or receives further instructions ……… prior to agreeing to accept a waiver; or

c) that the bank is returning the documents; or

d) that the bank is acting in accordance with instructions previously received from the presenter.

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Basic requirements for a refusal notice: MT734 – list of discrepancies and status of documents; MT799, telephone call, fax advice, email advice etc – indication of

refusal, list of discrepancies and status of documents;

Stated discrepancies should be specific to what is actually the reason for refusal i.e., avoid language such as “invoice not as per LC”;

Status of documents can be by code word in MT734 (Hold, Return, Notify, Previnst) in all other advices they must be stated in full.

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Typical telephone conversation (John/Bank, Mary/Beneficiary):Hello Mary, this is John from Friendly Bank did you have a good weekend?Hi John, yes thank you pretty busy with the family again.John – sorry to advise you but we have the same problems with the documents as we did with the last set, same discrepancies.Mary – oh not again (!) I thought we had sorted this out with the shipping department. Send them to the issuing bank, same as last time and let us know when you get the approval. John – Okay, thanks have a nice day!

Where was the refusal, where was the list of the discrepancies and where is the indication of status? (maybe you could argue that “Okay” means we will be acting in accordance with your instructions!!)

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Handling Discrepant Documents (beneficiary options)

Options available to a beneficiary where the documents are discrepant:

1. correct as far as possible;

2. request the bank to contact the issuing bank to seek waiver from the applicant; or

3. request the bank to forward the documents to the issuing bank for settlement despite the discrepancies that have been noted.

This is probably the order in which a decision should be made on

discrepant documents.

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Handling Discrepant Documents (beneficiary options)An opinion to be considered at the ICC Banking Commission meeting in March refers to a number of LCs emanating from a particular country which state:

“Documents must be correct on first presentation. Correction of documents

is not permitted.”

“Negotiating bank must certify that documents were correct on first

presentation.”

“Provided documents on first presentation in strict conformity with the LC

terms, you are authorized to reimburse yourselves with …”

It must be remembered that the beneficiary or presenter has the right to correct any discrepancies that may have been observed. This must, however, be concluded within the last day for presentation or expiry date whichever is the earlier.

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Handling of Discrepant DocumentsHandling Discrepant Documents (issuing bank options)

An issuing bank may seek waiver from the applicant for the discrepancies

that have been determined. The issuing bank is under no obligation to accept

the waiver of the applicant.

It may be that following the sending of a notice of refusal that the bank is

convinced that the discrepancy(ies) is/are not valid and that the documents

do, in fact, comply. In this case, the bank must take up the documents

according to the credit terms. If the bank is the issuing bank, they will need to

inform the applicant that the discrepancy(ies) has/have been withdrawn and

that the presentation complies.

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Handling of Discrepant DocumentsHandling Discrepant Documents

Situation: Documents are presented to the nominated bank who find them

to comply, they do not negotiate and forward them to the issuing bank for

settlement.

Issuing bank find two discrepancies (1) packing list does not evidence the

type of packing used (as required in the LC) and (2) the invoice omits a

certification required in field 47A of the LC. Issuing bank provide a valid

refusal notice to the nominated bank. The nominated bank advises the

beneficiary on February 5 at 4:15pm. The credit expires on February 6 with

21 calendar days occurring on February 7. Who should the beneficiary

present replacement documents to:

- issuing bank?

- nominated bank? and by when?

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Handling of Discrepant DocumentsRelease of goods against delivery order, indemnity or bank guarantee

It is often the case that goods arrive prior to the receipt of the documents that will allow their release from customs. In this case, the applicant will request their bank to issue a delivery order, an indemnity or bank guarantee to the airline/shipping company to release the goods despite the fact that the goods are consigned to the bank or the original bills of lading are not available.

If the bank agrees to such action, they should take an instruction from their customer to effect payment of the documents, when received, despite the fact that there may be discrepancies therein. This in itself may be a risk for the bank as one of those discrepancies could be credit overdrawn by a significant sum. The bank needs to consider such requests in line with their relationship with the applicant.

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Spurious and debatable discrepancies:

- the harm that it does to the LC

product; and

- ways to create a ‘proper’ and concise LC to overcome these issues.


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Current experiences with the handling

of LCs


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Examples of reported spurious and doubtful discrepancies:

Grade of steel mentioned in Mills Test Certificate is not as per clause No. 4 of field 46A of the L/C. Field 46A of the LC stated “Mills Test Certificate”. (USD8.8m)

Short quantity supplied in the size 2.00x1230mm which is less than 10 percent which is not as per clause 45A of the LC terms. Field 45A gave a quantity of goods (5 different sizes) all subject to 10% +/-. Quantity of size shown was less than -10% but LC allowed partial shipments. (USD6.4m)

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Certificate of Origin does not show name of the consignee. The condition in the LC was “Certificate of Origin” and there was no requirement for the consignee to be shown. (USD3.6m)

B/L shows goods shipped on deck. BL was a charter party BL which had pre-printed text “(of which ……….. on deck at shipper’s risk, carrier not responsible ….)”. The gap was not completed with any quantity. (USD1.7m)

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Clean on board date not indicated on BL, wrong beneficiary address on documents and documents not presented by express mail. Standby LC required presentation of draft, copy invoice, copy clean on board BL and various certificates. Documents to be sent by express mail and beneficiary address in SBLC was stated to be “Zu, Switzerland”.

The copy BL showed an on board date and no notations or clauses regarding the goods or their packaging. The documents were sent by courier service. The beneficiary address was Zug (in Switzerland). (USD6.7m)

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Non-negotiable copies of BL not signed. These are not signed and LC did not request their presentation! (USD2.5m)

Certificate of Origin shows as consignee a party other than the beneficiary. LC was silent as regards content of Certificate of Origin. (USD3.4m)

Mills Test Certificate is issued by a party other than the beneficiary. LC did not indicate the issuer. (USD3.4m)

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Commercial Invoice and Packing List show name of the buyer as “viz. ABC Co Ltd” whereas buyers name is ABC Co Ltd. LC stated documents in the name of buyer “viz. ABC Co Ltd”. (USD380k)

Beneficiary declaration as per clause 5 of the LC is not presented. Beneficiary presented the required document under the title “Beneficiary Certificate”. (USD8.7m)

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Examples of reported spurious and doubtful discrepancies –

latest occurrence:

LC provides a goods description (field 45A) that includes “partial shipment to be allowed” and “goods will be carried under deck”.

Commercial Invoice presented showing the goods description as per field 45A but without the two statements in quotation marks as above. Issuing bank refuses for absence of data. (USD5.1m)

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Applying the UCP 600 on a day-to-

day basis to establish best practice

with regard to issuance, advising,

confirmation, amendments and settlement under documentary credits


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Establishing Best Practices

Issuance:

Clear and precise terms and conditions

Terms and conditions that match the form of shipment

Documentary requirements that outline the issuer (if required) and the data content for each document (do not rely on the effect of sub-article 14 (f))

Advising:

Are you willing to accept your nomination?

Do you examine the credit for workability?

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Confirmation:

Do you understand what you are confirming?

What is the wording of your confirmation and what does it mean?

Do beneficiaries understand the effect of confirmation?

Amendments:

Does the amendment cater for all the terms and conditions of the LC?

What effect does the amendment have on the remaining terms and conditions?

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Example of an amendment not catering for all the terms and conditions of the LC and leaving an element of ambiguity.

LC requires shipment from Singapore to Rotterdam and requires presentation of bills of lading. Incoterm CFR.

Beneficiary and applicant determine that bills of lading are the wrong form of document and agree on a forwarders certificate of receipt. An amendment is issued stating delete bills of lading and insert freight forwarders certificate of receipt issued by Acme Forwarding Company Ltd. Incoterm is unchanged.

Is the FCR to indicate shipment from/to or just delivery at Singapore? What about the other BL conditions – consignee, notify party and freight paid or payable?

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Beneficiary considerations:

Do you examine the LC, when received, for errors? Do you consult the nominated bank / advising bank for their views? Do you examine amendments when received for errors? Do you have a policy with regard to the routing or centralization of LCs

with one bank? Do you have any policy with regard to requests for confirmation of LCs? Are you guilty of adding too much data to documents? Do you have an internal procedure that monitors the level of refusals? Do you know the level of refusals for your company? Have you calculated the additional cost that is involved when you have

discrepant documents?

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Applying ISBP Publication 681

Article 2 of UCP 600 provides a definition of Complying Presentation as “a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules [UCP 600] and international standard banking practice”.

Reference to “international standard banking practice” is not confined to the content of the ICC publication 681. International standard banking practice also includes the opinions and DOCDEX decisions that are not in the publication plus other functions and acts performed by banks on a daily basis.

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Application and Issuance of the Credit

Paragraph 2

The applicant bears the risk of any ambiguity in its instructions to issue or amend a credit. Unless expressly stated otherwise, a request to issue or amend a credit authorizes an issuing bank to supplement or develop the terms in a manner necessary or desirable to permit the use of the credit.

Paragraph 5

Many of the problems that arise at the examination stage could be avoided or resolved by careful attention to detail in the underlying transaction, the credit application, and issuance of the credit as discussed.

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Corrections and Alterations

Paragraph 11

The use of multiple type styles or font sizes or handwriting in the same document does not, by itself, signify a correction or alteration.

An example of the application of this rule is in ICC Opinion TA.657 where the

date of issuance and receipt of goods shown on a CMR were completed by

pen where the document was completed except for the date which was

shown as “__-11-2007”. The completion of the date, in pen, was acceptable

under this practice.

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Documents for which the UCP 600 transport articles do not apply

Paragraph 19

Some documents commonly used in relation to the transportation of goods, e.g., Delivery Order, Forwarder’s Certificate of Receipt, Forwarder’s Certificate of Shipment, Forwarder’s Certificate of Transport, Forwarder’s Cargo Receipt and Mate’s Receipt do not reflect a contract of carriage and are not transport documents as defined in UCP 600 articles 19 - 25. As such, UCP 600 sub-article 14(c) would not apply to these documents. Therefore, these documents will be examined in the same manner as other documents for which there are no specific provisions in UCP 600, i.e., under sub-article 14(f). In any event, documents must be presented not later than the expiry date for presentation as stated in the credit.

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Documents for which the UCP 600 transport articles do not apply

Paragraph 20

Copies of transport documents are not transport documents for the purpose of UCP 600 articles 19-25 and sub-article 14(c). The UCP 600 transport articles apply where there are original transport documents presented. Where a credit allows for the presentation of a copy transport document rather than an original, the credit must explicitly state the details to be shown. Where copies (non-negotiable) are presented, they need not evidence signature, dates, etc.

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Issuer of documents and signatures

Paragraphs 22, 37 and 40

If a credit indicates that a document is to be issued by a named person or entity, this condition is satisfied if the document appears to be issued by the named person or entity. It may appear to be issued by a named person or entity by use of its letterhead, or, if there is no letterhead, the document appears to have been completed or signed by, or on behalf of, the named person or entity.

Even if not stated in the credit, drafts, certificates and declarations by their nature require a signature. Transport documents and insurance documents must be signed in accordance with the provisions of UCP 600.

A signature on a company letterhead paper will be taken to be the signature of that company, unless otherwise stated. The company name need not be repeated next to the signature.

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Title of Documents and Combined Documents

Paragraph 41

Documents may be titled as called for in the credit, bear a similar title, or be untitled. For example, a credit requirement for a “Packing List” may also be satisfied by a document containing packing details whether titled “Packing Note”, “Packing and Weight List”, etc., or an untitled document. The content of a document must appear to fulfil the function of the required document.

Paragraph 42

Documents listed in a credit should be presented as separate documents. If a credit requires a packing list and a weight list, such requirement will be satisfied by presentation of two separate documents, or by presentation of two original copies of a combined packing and weight list, provided such document states both packing and weight details.

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Settlement:

Examination

Do beneficiaries assist the examination process? What can the banks do to help beneficiaries and reduce discrepancy rates?

A banks responsibility when examining documents.

Settlement

If documents comply when do you honour or negotiate? For example, you finish the examination on Monday afternoon. When would you expect to honour or negotiate?

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Documents should be examined in accordance with international standard banking practice, as stated in the UCP 600 and as articulated in the ISBP.

Any rejection of documents should state discrepancies in accordance with UCP

600 article 16.

You reject documents because they are discrepant under UCP 600.

There is no harm in explaining to another party which ICC Opinion, DOCDEX Decision or paragraph of the ISBP was used to understand how the practices of the UCP were applied.

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Alternative forms of Documentary

Credits

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Alternative forms of Documentary Credits

Advance Payment; Red / Green Clause; Revolving / Reinstatement; Instalment; Transferable; Back to Back; and Assignment of Proceeds.

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Alternative forms of Documentary CreditsAdvance Payment (Red Clause)

This is often referred to as a ‘red clause credit’ due to the fact that the wording regarding the advance payment was typed in red ink so as to highlight this condition.Today, advance payments under credits are fairly rare and generally limited to around 80% of the credit value. The advance is often paid against a receipt from the beneficiary indicating that they will ship the goods as required by the credit and in the event that they fail to do so will return the advance or percentage thereof in respect of goods not shipped. Where there are doubts as to the beneficiary’s ability to return the funds, the applicant may insist that the advance is made against the issuing of a bank guarantee covering the value of the advance.When the beneficiary presents their documents for the goods shipped, the invoice will be issued for 100% of the value less the amount of the advance relative to those goods.

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Red Clause LCs

Where a bank guarantee is to be issued to cover any advance payment, consideration should be given to include wording as below (or similar):

This guarantee will automatically reduce by xx% of the value of any invoice presented under letter of credit number xxxxxxx as part of a complying presentation made by the beneficiary to XXX Bank [name of nominated bank]. By the inclusion of this wording, the liability under the guarantee will reduce as shipments are made under the respective letter of credit.

Issuing banks (and applicants) that allow the advance to be made against an undertaking of the beneficiary must appreciate that the nominated bank will have no further involvement in recovering the funds in the event of failure to ship. The ultimate risk lies with the applicant.

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Green Clause LCs

A letter of credit which contains a clause authorising the nominatedbank to make advances to the seller against security (such as a payment guarantee from a third party or the pre-shipment storage of the goods in the name of the nominated bank or the issuing bank) before shipment /presentation of documents. If the seller fails to present the documents, the issuing bank’s or buyer’s reimbursement obligations can be recovered through enforcement of the security.

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Revolving and Reinstatement LCs

Revolving: A revolving credit has three features that need to beaddressed in a credit:-

1. whether it is automatic or not;2. whether the revolvement amount is cumulative or non-cumulative; and3. the basis under which the revolvement will occur.

Reinstatement: A reinstatement credit has three features that need to be addressed in a credit:-

1. the initial amount of the credit;2. the basis under which the reinstatement will occur; and3. the maximum amount to which the reinstatement will be made.

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Alternative forms of Documentary CreditsRevolving LC basics

Beneficiaries prefer a cumulative, automatic revolving credit as they have a bank undertaking for the full amount of the value of their goods.

Banks prefer a non-cumulative or cumulative, but non-automatic revolving credit as it limits the banks exposure to the value of one revolvement.

A non-cumulative revolving credit allows the bank to reduce their liability by any undrawn balance within any revolvement period.

A cumulative automatic revolving credit could, possibly, allow the Beneficiary to draw the full value in the final segment of the credit.

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Reinstatement LC basics

A reinstatement credit allows the applicant to limit the value of any one shipment by setting the value of the credit to that level. For example, the total contract price is USD100,000 but the maximum that would be drawn in any one presentation is USD15,000

The credit will be issued for an initial amount of USD15,000 and state that the amount will be reinstated after each drawing to the amount of USD15,000 subject to a maximum of USD100,000

If the beneficiary makes an initial drawing of USD12,500 the amount will reinstate to USD15,000 but the remaining total amount reduces to USD87,500 and so on until the full credit amount is drawn.

The banks liability is for the full USD100,000

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UCP 600 article 32 - Instalment Drawings or Shipments

An instalment credit is covered by UCP 600 article 32. Care must be taken when drafting an instalment credit to ensure that the right structure is used. For example, DC issued on 9 February stating:-

1000 Pens to be shipped by 28 February1000 Pens to be shipped by 15 March1000 Pens to be shipped by 31 March

is not an instalment credit unless the first shipment is not made. All the goods could be shipped before 28 February.An instalment credit should have specific goods to be shipped within given periods that do not overlap. For example: 1000 Pens between 9 and 28 February, 1000 Pens between 1 and 15 March, 1000 Pens between 16 and 31 March.

Article 32 is to be excluded under a Standby DC where instalments occur.

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UCP 600 article 38 - Transferable Credits (a) states that no bank is under an obligation to transfer; (b) provides definitions of

Transferable credit means a credit that specifically states it is “transferable”. A transferable credit may be made available in whole or in part to another beneficiary (“second beneficiary”) at the request of the beneficiary (“first beneficiary”); Transferring bank means a nominated bank that transfers the credit or, in a credit available with any bank, a bank that is specifically authorized by the issuing bank to transfer and that transfers the credit. An issuing bank may be a transferring bank; and Transferred credit means a credit that has been made available by the transferring bank to a second beneficiary.

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UCP 600 article 38 - Transferable Credits (e) No longer a requirement for “irrevocable” instructions regarding

amendments; (f) If transferred more than once, each transferred credit stands as an

individual credit; (g) No change to items that can be reduced or curtailed but if original

credit is confirmed, so must the transferred credit; (i) If first beneficiary fails to substitute or fails to correct substituted

documents (where the 2nd beneficiary documents complied), 2nd beneficiary documents may be utilised; and

(k) documents must be routed through transferring bank.

Issues:Changing additional terms and conditionsSubstituting more than the draft and/or invoice

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Sub-article 38 (k) – ICC Opinion TA. 632 approved October 2007

The conclusion to this opinion includes the following:

“When there is a 100% transfer of the credit amount and no substitution is

to occur, the necessity to present the documents of the second beneficiary

to the transferring bank is negated. This position prevails to the extent that

the transferring bank has not added their confirmation to the transferred

credit and, thereby, necessitating that documents are presented to that bank

in order for the undertaking of the confirming bank to be fulfilled.

In the advice of transfer, where there is a 100% transfer, the transferring

bank may make a modification of the rule to state that the documents are to

be sent direct to the issuing bank. In such circumstances, the transferring

bank should inform the issuing bank of this action.”

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Alternative forms of Documentary CreditsBack-to-Back Credits

Used where the beneficiary of a credit (middle man) cannot obtain a transferable credit or cannot arrange for their bank to issue a credit in their own name. Beneficiary of the original credit seeks to use that credit as security for a bank to issue another credit in favour of the supplier of the goods.

In a back to back credit there are two separate and independent credits issued whereas under a transferable credit the transaction happens under the umbrella of the original credit.

Most banks are willing to handle transferable credits as there is protection under UCP in the event of failure on the part of the 1st beneficiary. Under a back to back credit each credit is independent and failure of the 1st beneficiarymay put the bank at risk of receiving proceeds to cover their payment to the supplier.

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Back-to-Back Credits

Issues with Back-to-Back LCs:

matching terms and conditions between credits; aligning the settlement under both credits; substitution by the original beneficiary and failure on their part to do

so; banks that link the settlement of one LC to settlement under the

other; safeguards?

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UCP 600 article 39 - Assignment of Proceeds

“The fact that a credit is not stated to be transferable shall not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, in accordance with the provisions of applicable law. This article relates to the assignment of proceeds and not to the assignment of the right to perform under the credit”.

Points to note:- assignment of the proceeds not the right to perform under the credit;- payment security to assignee exists only if compliant documents presented;- bank should limit their payment obligation to documents being presented at their counters;- copy of assignment notice should be sent to all parties; and- clear instructions where more than one assignee or partial shipments.

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Thank You

Contact : Gary Collyer, Collyer Consulting LLP

Email : [email protected]

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