19704135 the BExA Guide to Letters of Credit UCP600 Update 2007

British Exporters Association

The BExA Guide to Letters of Credit

UCP600 – Update

The BExA Guide to Letters of Credit - UCP600 – Update

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Contents

Foreword

Introduction to the 2007 UCP600 updated guide

Chapter 1 What is a letter of credit?

Chapter 2 Why letters of credit are used and their limitations

Chapter 3 What the exporter wants

Chapter 4 What the exporter should look out for

Chapter 5 Amendments, How to Avoid Them and How to Obtain Them

Chapter 6 Presentation of documents

Chapter 7 What to do if presentation fails

Chapter 8 And fi nally, commercial realities … … …

Appendix 1 A checklist

Appendix 2 Swift Codes

Appendix 3 Contact details

Appendix 4 Introduction to the 2003 (UCP500) guide


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Foreword

The British Exporters Association has for many years prided itself on the work which it has done as a champion of the British exporting community. Much of this work has taken the form of lobbying successive Governments with the aim of ensuring that UK exports are effectively promoted - to the ultimate benefi t of the balance of payments and hence the British taxpayer. From time to time, however, the Association likes to do something for its members that does not require any input from Government. This guide represents one such opportunity.

There are any number of glossy brochures published on the subject of letters of credit. Most of them have one thing in common - they are published by banks! Now, there is nothing wrong with this; banks provide a service which traders require, and their brochures are excellent sources of information on this diffi cult subject. However, there does tend to be a certain slant to the advice which is offered in those brochures, perhaps not surprisingly.

It is my hope that this guide, written with the advice of bankers but essentially by exporters for exporters, will provide a clear and helpful reference work for those of our members who have an interest in getting paid through the mechanism of letters of credit. It is not a book of rules but more a summary of experience, much of it learned the hard way. It is offered to our members in the hope that reference to it will avoid others having to learn the same lessons in the same way!

Sir Richard NeedhamPresident of BExAOctober 2003


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Introduction to the 2007 UCP600 updated guide

Since the original BExA Letter of Credit guide was published in 2003 it has gained acceptance amongst users of letters of credit as a practical and readable introduction to a payment mechanism that is believed to be used to support about £350 billion of trade each year. If it has gained more readers amongst importers and exporters (the applicant and the benefi ciary of the letter of credit) than amongst bankers that is probably because bankers (who are paid to operate letters of credit) tend to be better trained in their operation than most other users of them. Of course, speaking from the point of view of the British exporter, this is something to be applauded. Whilst importers and exporters might develop a degree of competence in the subject, the bankers are the professionals and we should be grateful for their expertise; it is something for which we pay, after all.

So, why an updated guide? The International Chamber of Commerce has for some time been working on a revision of UCP500. It has been a major undertaking and is now published as Uniform Customs and Practice for Documentary Credits 2007 Revision (UCP600). It comes into effect on 1 July 2007 and the British Exporters’ Association decided to bring our original guide up to date, to refl ect what will become the new standard rules for the handling of letters of credit. Much of what was contained in the original guide continues to be true. Principles of prudence and common sense are not affected by a change in rules, after all. However, there are a number of changes which we felt should be incorporated in the guide and a complete revision and re-publication was thought to be the most effective way of doing this. Much of what has changed in UCP concerns the banks rather than the applicant or the benefi ciary directly. Indeed, in many respects the changes will only be apparent to the banks. Nonetheless, on the principle of ‘better to be up to date than out of date’ we decided to re-issue the guide.

Why the change?

UCP600 is the latest version of the rules for the handling of letters of credit published by the ICC. The fi rst was published in 1933. A major driver has been to simplify the rules and to reduce the scope for ambiguity in interpretation and avoid simple misunderstanding. Also, in view of the continuing high proportion of non-compliant fi rst presentations there is a need to assist benefi ciaries to prepare ‘better’ documents. To the extent that simplifi cation and added clarity reduce the number of rejections of documents as discrepant, that would obviously be welcome.

More than half of the questions formally answered by the ICC in connection with UCP500 related to seven articles, as follows:

Liability of Issuing and Confi rming Banks

Standard for Examination of Documents

Discrepant Documents and Notice

Unspecifi ed Issuers or Contents of Documents

Marine/Ocean Bill of Lading

Commercial Invoices

Transferable Credits

The articles covering these subjects have received particular attention in the revision.


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When does this happen?

UCP500 will continue to apply to letters of credit issued up to and including 30 June 2007. Letters of credit issued on or after 1 July 2007 should be subject to UCP600. It will be possible, but not necessary, to have a letter of credit that has already been issued subject to UCP500 amended to incorporate UCP600. This would be by means of a formal amendment (see Chapter 5). However, unless there are particular reasons to have the letter of credit amended, it would probably be better to allow current letters of credit to run off under UCP500.

A letter of credit issued ‘subject to: UCP current edition’ or similar will continue to be governed by the version of UCP that was current at the date of issue; if that was UCP500 the letter of credit will not automatically become subject to UCP600 on 1 July 2007.

Contributors

The 2003 guide was written with contributions from those named in the Introduction to the 2003 (UCP500) guide at Appendix 4 and most of what they wrote remains valid. This edition was revised with the assistance of:

Russell Brown of Deutsche BankJohn Clegg of ABC International BankDavid Meynall of Deutsche BankSusan Ross of Aon Trade CreditDavid Silverwood of RBS Ray Webb of Aon Forfaitingand I am grateful to them for their patience and understanding.

Three other BExA guides may also be found useful:

• 2004 Guide to On-Demand Contract BondsFor exporters who are obliged to provide bank bonds to support their export contracts. The guide covers the obligations and risks of the parties, includes sample wordings and offers advice in the event that the bond is called.

• 2005 Retention of TitleGetting our goods back if the buyer does not pay is a practical issue and our ability to do so depends upon the detail of the contract. The guide offers practical advice about retaining title and obtaining payment in diffi cult circumstances.

• 2007 Credit InsuranceExport credit insurance. This guide will be published in October 2007.

Richard HillBAE SYSTEMS plcChairman, BExAJune 2007

Copyright & disclaimer

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by other means, electronic, mechanical, pho-tocopying or otherwise without the prior permission of the British Exporters Association.

Whilst every reasonable effort has been made to ensure accuracy, information con-tained in this publication may not be comprehensive and readers should not act upon it without seeking professional advice from their usual professional advisers.


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Chapter 1 - What is a letter of credit?

Intention

A letter of credit is a written undertaking given by a bank on behalf of the customer to pay the exporter an amount of money within a specifi ed time frame provided that the exporter complies strictly with its terms and conditions. Payment will depend on the exporter presenting documents that conform to the terms laid down in the letter of credit. The customer’s aim is that he should get the goods that he has ordered, and the exporter’s aim is to receive payment for them.

Security

Generally speaking, a letter of credit is a safer way of obtaining payment than relying on open account payment terms. The essential point is that the payment undertaking is moved from the customer to a bank. It is commonly thought that this represents a more secure source of payment.

It is important to bear in mind that a letter of credit:

• Is separate from the contract to which it relates

• Requires that all parties deal only in documents

• Is not a contract between buyer and seller

• Is not a guarantee that the seller will defi nitely receive payment

• Is not a guarantee that the buyer will receive the goods he ordered

Confi rmation

Confi rmation of a letter of credit is an additional undertaking from another bank, the confi rming bank (usually the advising bank), to pay the exporter on presentation of correct documents in conformity with the letter of credit. To have value to the exporter the confi rming bank should be a bank based in the UK; it thus removes the political risk of waiting for payment from an overseas bank or one of its branches.

There are a number of advantages to the exporter in having a letter of credit confi rmed:

• He has the undertaking of two banks to pay

• The credit risk is reduced to that of the UK bank

• Country risk is eliminated after conforming documents have been presented (NB pre-delivery risk is still an issue; can the exporter produce the documents required?)

The principal disadvantage to the benefi ciary is the extra cost in the form of the confi rmation fee (which is generally paid by the exporter). The confi rmation of the letter of credit only adds to the security for the exporter if the documents (at step 10 below) can be produced.


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How does it work?

The working of a letter of credit can probably best be explained by a diagram:

Exporter1

5

9

Customer

4 5 8 10 12 14 6 2

Exporter’s bank(Advising bank)(Confi rming bank)

13

11

7

3

Customer’s bank(Issuing bank)

NB This assumes that payment will be made by the advising bank (ie it is ‘available’ with the advising bank by sight payment)

1 Contract between the exporter and the customer in which the need for a letter of credit is specifi ed

2 Customer requests bank to issue letter of credit

3 Customer’s bank issues letter of credit via advising bank

4 Advising bank passes on terms of the letter of credit to the exporter

5 Exporter nearly always requests amendments to the letter of credit and copies request to advising bank (if no amendments required ignore 5 to 8)

6 Customer requests issuing bank to issue amendment

7 Amendment issued

8 Amendment advised to exporter (repeat 5 to 8 until letter of credit is acceptable to exporter)

9 Goods despatched

10 Documents required by the letter of credit presented to the advising bank

11 Issuing bank’s account with advising bank debited (or reimbursement is claimed)

12 Payment made by the advising bank to the exporter

13 Documents passed to issuing bank

14 Documents passed to customer (enabling him to use the bill of lading to obtain the goods if sent by sea) and payment made by customer to customer’s bank

It is the documents at step 10 which drive the transaction. If the letter of credit calls for documents that the exporter cannot provide or sets out conditions that the exporter cannot meet the exporter will not be paid from the letter of credit.


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Whilst some of the documents required by the letter of credit will be produced by, and hence be within the control of, the exporter it is important to remember also those third party documents which are most commonly required, that is, those which are not produced by the exporter. These are generally (but there could be others):

• Transport documents, commonly bill of lading or air waybill

• Insurance document (policy or certifi cate)

• Certifi cate of Origin (which may require certifi cation and/or legalisation by an independent body such as a Chamber of Commerce or foreign embassy)

• Inspection Certifi cate

These are discussed in Chapter 6.

UCP600

Reference has already been made to UCP600. The whole document is important and should be considered essential reading for anyone working with letters of credit. Do not think of it as just something that the banks have to know. What follows is a brief commentary on some of the articles.

Article 1 - Application of UCP

UCP600 applies to any letter of credit where it is specifi cally included in the text of the letter of credit. The rules are binding on all parties unless expressly modifi ed or excluded by the letter of credit.

Article 2 - Defi nitions

Provides defi nitions of common letter of credit language, including defi nition of ‘honour’ and ‘negotiation’. It is worth noting that negotiation (ie the bank advancing value to the exporter before payment is due under the letter of credit) can be with or without recourse to the exporter – it is a matter for agreement between them in each case.

Article 3 - Interpretations

A letter of credit is irrevocable even if there is no indication to that effect.

A document can be signed by handwriting or by any mechanical or electronic method of authentication.

Branches of a bank in different countries are considered to be separate banks (but it would be unwise to have, for example, a London branch of the overseas opening bank confi rm the letter of credit).

Article 4 - Credits v Contracts

The letter of credit is a separate transaction from the contract of sale to which it relates. The banks will not be concerned with performance of the contract of sale and the performance of their undertakings will not be subject to claims by the customer regarding the contract of sale.

Article 5 - Documents v Goods/Services/Performances

Banks deal with documents, and not with goods, services and/or other performances to which the documents may relate.

Article 7 - Issuing Bank Undertaking

Provided that the correct documents are presented the issuing bank must honour the letter of credit if a nominated bank (ie the bank with which the letter of credit is available, see Article 12 below) does not do so. In fact, the issuing bank is irrevocably bound to honour the letter of credit at the time it


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is issued (hence ‘irrevocable’ letter of credit). Further, the issuing bank is obliged to reimburse the nominated bank; this is separate from its obligation to the benefi ciary.

Article 8 - Confi rming Bank Undertaking.

A confi rming bank has similar obligations to the benefi ciary and to another nominated bank. If a bank is authorised or requested by the issuing bank to confi rm a letter of credit but is not prepared to do so it must inform the issuing bank without delay and may advise the letter of credit without adding its confi rmation.

Article 9 - Advising of Credits and Amendments

By advising the letter of credit or an amendment the advising bank signifi es that it has satisfi ed itself as to the authenticity of the letter of credit or amendment and that the advice accurately refl ects the terms of the letter of credit or amendment, unless it specifi cally advises the benefi ciary that it has not been able to satisfy itself of the authenticity thereof.

Article 10 - Amendments

A letter of credit cannot be amended or cancelled without the agreement of the issuing bank (and confi rming bank, if any) and the benefi ciary.

The terms of the original letter of credit will remain in force until you communicate your acceptance of an amendment to the advising bank. If you present documents which comply with the letter of credit and any not yet accepted amendment you will be accepting the amendment.

Partial acceptance of an amendment is not allowed and would be regarded as rejection of the amendment. You must accept or reject an advice of amendments in whole; you cannot, for example, accept items 1 and 3 but reject item 2.

A provision in an amendment saying that it will become effective unless rejected within a certain time limit would be disregarded. However, a clause in the original letter of credit to the effect that any amendments issued shall become effective if not rejected within x days might be a way around this. You would be wise to reject such a clause in a letter of credit.

Article 12 - Nomination

By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorises that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.

Article 14 - Standard for Examination of Documents

Banks must examine a presentation of documents to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

A document presented but not required by the credit will be disregarded and may be returned to the presenter.

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 confl ict with, data in that document, any other stipulated document or the credit.

In documents other than a commercial invoice the description of the goods or services, if stated, may be in general terms not confl icting with their description in the credit. (See Article 18 – Commercial Invoice).


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The banks (issuing and advising/confi rming) each have up to fi ve banking days, following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which they received the documents accordingly. It used to be the case that the bank had to do this within a reasonable time, not to exceed to seven banking days. Of course, a reasonable time would sometimes be less than seven or fi ve banking days, but now the concept of a reasonable time has gone.

Unless otherwise specifi ed in the letter of credit presentations of documents which include transport documents, eg bill of lading, air waybill, must be made no later than 21 days following the date of shipment as described in those documents (but not later than the expiry date of the letter of credit, ie the expiry date stands regardless of the 21 days allowed for presentation of transport documents).

The addresses of the benefi ciary and the applicant need not be the same as those shown in the letter of credit but must be in the same countries as those shown in the letter of credit. The exception is when the address of the applicant is to appear as part of consignee or notify party details on a transport document. Contact details (fax, telephone, email and the like) stated as part of the benefi ciary’s and the applicant’s address will be disregarded.

Article 16 - Discrepant Documents, Waiver and Notice

If a nominated, confi rming or issuing bank refuses to honour or negotiate a presentation of documents it must give a single notice to the presenter of the documents.

The notice must state:

i. that the bank is refusing to honour or negotiate;

ii. each discrepancy; and

iii. what the bank is doing with the documents (holding them, requesting a waiver from the applicant or further instructions from the presenter, returning them or acting in accordance with instructions from the presenter).

This notice must be given by telecommunication or by other expeditious means, no later than the fi fth banking day following the day of presentation.

If the issuing or confi rming bank fails to comply with the terms of Article 16 it cannot then claim that the documents are discrepant.

Article 18 - Commercial Invoice

The invoice:

• must appear to have been issued by the benefi ciary,

• must be made out in the name of the applicant,

• must be in the same currency as the letter of credit, and

• need not be signed.

The description of the goods or services must correspond with that appearing in the letter of credit.

Article 20 - Bill of Lading

Even if the letter of credit prohibits transhipment, banks will accept a bill of lading which indicates that transhipment will take place as long as the


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relevant cargo is shipped in a container, a trailer or LASH barge as evidenced by the bill of lading, provided that the entire ocean carriage is covered by the same bill of lading.

Article 27 - Clean Transport Document

Banks will only accept a clean transport document ie one that does not contain any reference to a defective condition of the goods or their packaging. The word ‘clean’ does not need to appear, even if the letter of credit requires the transport document to be ‘clean on board’.

Article 28 - Insurance Document and Coverage

These must be issued and signed by an insurance company, an underwriter or their agents or their proxies. Cover notes will not be accepted.

An insurance document may contain reference to any exclusion clause.

Article 32 - Instalment Drawings or Shipments

If drawings and/or shipments by instalments within given periods are stipulated in the letter of credit and any instalment is not drawn and/or shipped within the period allowed for that instalment, the letter of credit ceases to be available for that and any subsequent instalments.

Bank inspection of documents

Finally, a few words on what has become known as the doctrine of strict compliance. UCP600 says that banks must examine all documents stipulated in the letter of credit to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the letter of credit. Further, data in a document, when read in context with:

• the letter of credit,

• the document itself, and

• international standard banking practice,

need not be identical to, but must not confl ict with, any other document or the letter of credit (Article 14). You should bear in mind that the concept of international standard banking practice is wider than that enshrined in ICC publication no 645, ‘International Standard Banking Practice (ISBP).

ICC publication no 645, ‘International Standard Banking Practice (ISBP) for the examination of documents under documentary credits’ was published in January 2003 with the aim of explaining how the rules set out in UCP500 were to be applied. Its Foreword says that the result of the use of ISBP ‘should be a signifi cant reduction in the number of documents refused for discrepancies on fi rst presentation’. ISBP is to be updated to bring it into line with the substance and style of UCP600.

In the meantime, whilst it is not uncommon for exporters to complain that examining banks are unthinking in their consideration of the documents presented, we should not lose sight of who is to benefi t from presenting documents which comply with the terms of the letter of credit – the exporter. It therefore is in our interest to do everything that we reasonably can to make sure that our documents are accepted on fi rst presentation. Our fate is in our own hands and one purpose of this guide is to try to improve our success in this regard.


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Chapter 2 - Why letters of credit are used and their limita-

tions

Why use letters of credit

Your customer promises to pay you – why do you want a letter of credit? Now, your customer may have every intention of paying you but, when payment is due, be unable to do so. Of course, he may not have every intention of paying you. So, we have two good reasons why you might want a letter of credit. Other possibilities include:

• It may be that it is the normal practice of your customer’s country to provide (and require) letters of credit for overseas payments.

• It may be that the establishment of a letter of credit is the only way in which your customer can obtain foreign currency with which to pay you. In this case it is quite possible that the central bank of your customer’s country will require a local currency payment to be made by your customer to buy the supply of foreign currency, or to satisfy another requirement, perhaps to obtain an import licence.

• A letter of credit provides a good way of demonstrating the customer’s commitment that an overseas payment is to be made (and, incidentally, the contract in respect of which the letter of credit is opened can usefully demonstrate that there is a genuine reason for your customer’s purchase of foreign currency).

• It is not unknown for some countries to require the involvement of a local bank in the payment mechanism for a signifi cant import. This might be for no other reason than to provide fee income for that bank.

Where you use credit insurance to protect your export contracts, you will fi nd from time to time that your credit insurer will require you to obtain a letter of credit to secure payment as a condition of approving cover on a customer with a low credit rating or perhaps for any customer in a particular country. The essential point is that the letter of credit represents a payment undertaking issued by a bank rather than the customer. The bank probably represents a better credit risk than your customer and should have an interest in maintaining its good name for meeting its obligations. It is likely, therefore, to pay you in accordance with the terms of the letter of credit.

What a letter of credit provides, in short, is risk mitigation. It does not remove risk. It offers a more secure means of payment, in most cases, than relying on your customer’s promise to pay. It does not guarantee that you will be paid. It is not a guarantee of payment. Receipt of the advice that a letter of credit has been issued in your favour is merely a stage in the process, not the time for heaving a sigh of relief that all is well.

Their limitations

It would be as well to mention some of the reasons for this note of caution. Exporters working with an experienced customer, through two respected banks, do not obtain total protection. It is not ‘buyer beware’ but the exporter who must be continually alert to the fact that his working capital remains exposed until payment is irrevocably made to his bank account. This section considers some of the issues which can frustrate payment and what might be done to lessen their impact or prevent these diffi culties arising. It does not address clerical or documentary errors which remain the greatest source of delays in ensuring that payment is made under a letter of credit.


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You might have a perfectly good letter of credit and still not be paid, because, for example:

• the letter of credit is opened by a bank in your customer’s (or other overseas) country and political events or shortage of hard currency might prevent the bank paying you

• the opening or advising bank becomes insolvent and cannot pay you

• the opening bank refers your documents to your customer for approval before paying you

• you present documents to the bank which do not comply with those required by the letter of credit

• you present documents to the bank which do comply with those required by the letter of credit but you are too late in presenting them

• you are unable to present documents to the bank which comply with those required by the letter of credit

There are circumstances outside the control of all the parties to a letter of credit which may frustrate the contract and the ability of the customer to honour its legal obligations. An exporter might face the risk of an export embargo being enforced either by its own government or the United Nations.

During the Argentinian invasion of the Falkland Islands, the British government imposed an export embargo on goods to Argentina. Similarly, it was agreed through the United Nations that exports to both Kuwait and Iraq should be suspended after the invasion of the former by the latter in 1990. Exporters were faced with the prospect of payments to be made under letters of credit being frozen by the Argentinian and Iraqi authorities. Those companies which had not shipped their goods were unable to do so and there-fore were not in a position to present the correct documentation to the advising bank to secure payment even under a letter of credit which had been confi rmed.

Similar situations can arise when the customer’s country imposes an import embargo which might be a refl ection of economic and political instability. Exporters can only really protect themselves against the losses arising from such events by insuring their contract from the date of contract.

From the perspective of a British exporter the risk of the advising bank’s insolvency should be very much a theoretical risk only, unless the branch of an overseas bank is used as the advising party. The failure of the advising bank though would mean the customer having to cancel the existing letter of credit and making new arrangements for it to be advised by a new bank. In dealing with the branch or subsidiary of an overseas bank which fails, the exporter will be faced with problems similar to that of the failure of an opening bank and will not be protected in the event that the letter of credit has been confi rmed by it.

Remember BCCI? A British exporter was left out of pocket when BCCI, the advis-ing bank for a letter of credit from Taiwan, stopped trading during the period between presentation of the documents (and after it had received funds from the Taiwan bank) but before the exporter had been paid.

It is important not to accept confi rmation by the branch or subsidiary of the opening bank. Confi rmation only makes sense if credit enhancement takes place and that is unlikely when a branch confi rms its parental undertaking.

Confi rmation

You can avoid the worst effects of some of these potential problems by having the letter of credit confi rmed, in the UK or, perhaps, in the EU. This


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adds the confi rming bank’s commitment to pay you. It is perfectly possible to have, say, a bank in Germany confi rm a third country letter of credit – the disadvantage in doing so in comparison to a UK confi rmation is that you are merely replacing one political risk with another, not removing the political risk. Now, it may be argued that the political risk of having a German bank confi rm the letter of credit for a UK company is much less than the political risk of the third country bank being able to pay; this is probably so. In that you can be fairly selective in which bank you ask to confi rm we can perhaps disregard the risk that the confi rming bank will also become insolvent (though there is still that risk).

The exporter can also arrange ’silent confi rmation’ of the letter of credit. This is a third party undertaking to pay given by a bank or other fi nancial institution not involved in issuing or advising the letter of credit. Such an arrangement is not contemplated by UCP600, and although most banks will be prepared to consider such a ‘confi rmation’, you should be aware that each request will be considered on a case by case basis. If agreed, the silent confi rmation will be designed to refl ect the specifi c terms and conditions of the letter of credit to which it relates.

With a confi rmation the exporter might assume that all that is now required is for the necessary documentation to be presented to the bank for payment to be made. It is important to remember that if an amendment is requested the confi rming bank is not bound to confi rm that amendment, whether the amendment is originally requested by the exporter or the buyer.

We are therefore left with those issues which could be outside your control (and remain so, notwithstanding that you might have had the letter of credit confi rmed). For example, if one of the documents which you are required to present in order to be paid out of the letter of credit is a bill of lading demonstrating shipment of your goods to the customer’s country and you are unable to ship, a UK bank confi rmation will be of no value to you. You will not be paid.

The FOB trap

In contracts concluded on FOB terms (Incoterms 2000) the customer may have advised that it has nominated a vessel to which the goods are to be delivered. Up to this point the exporter will have incurred manufacturing costs, local transportation costs and will now incur warehousing and other costs until such time as the goods are moved. It is important to remember that contractually the exporter, having signed an FOB contract, is clearly responsible for costs until the goods pass over the ship’s rail at the port of shipment of the nominated vessel. What happens if the vessel either arrives later than the last date for shipment permitted in the letter of credit, or does not arrive at all?

This ‘FOB trap’ has been exploited effectively by government buyers in the past which have insisted on FOB terms but then failed to provide the vessel as contracted.

It is worth noting that UCP600 now provides for the possibility of a charterer to sign a charter party bill of lading (Article 22ai), thus creating another opportunity for your customer to interfere with your payment mechanism.

Credit insurance

It is possible to remove the political risks relating to inability to ship (eg a UN resolution preventing despatch, or the ceasing of diplomatic relations and closure of an embassy prior to the signature of a certifi cate which was to have been issued by the embassy) by insuring your export contracts with a


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credit insurer (eg AIG, Atradius, Coface, Ducroire Delcredere, Euler Hermes, Exporters). These are termed pre-delivery risks and you would need to buy cover from the date of contract or the date of receipt of the letter of credit, not just from the date of despatch. Thus, if you are unable to ship for political reasons, whilst you would still not be able to draw on the letter of credit you would be able to claim on your insurance for the net costs (ie after resale of your goods) you have incurred in manufacturing the unshipped equipment.

Open account terms

There are circumstances when open account terms (eg 30 days from the date or the end of the month of despatch) are, for practical reasons, a more sensible option than payment out of a letter of credit. For example:

• Short delivery times might not allow the time necessary for the procedures related to a letter of credit

• Low margins might not be able to absorb the costs associated with a letter of credit or those costs would make your terms uncompetitive

• Long manufacturing times will add considerably to the cost of a letter of credit opened at the start of the process – it might be an option to have the letter of credit opened when the exporter notifi es the customer that the goods will be ready for shipment in the near future (of course this carries the risk that the letter of credit will not be opened)

There is no such thing as total protection

It has to be recognised that it is not possible to protect against every contingency. However, by ensuring that the original contract is unambiguous, that solvent and competent banks are involved in the letter of credit transaction and that insurance is applied effectively, an exporter will minimise the risk of loss when working beneath the umbrella of a letter of credit. There are times when the exporter will feel very exposed with no help available from his bank or insurer but, by contracting prudently and seeking advice, these occasions should be rare.

It should not be thought, after reading the last few paragraphs, that a letter of credit has no value. It is a very valuable tool but it does not exist in isolation from the world around it. In most cases you will depend upon other documents and the actions of third parties to make it work. Making it work as you require involves considerable care and attention on the part of the exporter. That means that when the advice of the letter of credit arrives, the next stage of the work begins.

What happens if your buyer goes bust before despatch? Can you still draw down on the letter of credit? In theory ‘yes’ because the letter of credit is an independent instrument. In practice, you may not be able to access this benefi t. If the terms of delivery are FOB, this means that your customer is obliged to nominate the vessel and pay the freight. Which carrier will agree to provide a shipping service to a company that is already bust? Similar problems will be apparent with all delivery terms except DDP – and even DDP will require signature confi rming delivery, and this assumes that the insolvency practitioner managing your customer’s affairs is continuing to trade. The letter of credit only really covers the insolvency risk of your customer from the moment that documents are successfully presented.


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Chapter 3 - What the exporter wants

The exporter’s interests

It is a useful rule to bear in mind that no one will look after the exporter’s interests like the exporter. The customer will have his own interests at heart (which may or may not coincide with the exporter’s) and it would be unwise to expect the banks involved to put the exporter’s interests above their own. In short, if you want a job doing properly, you have to do it yourself.

It is not enough simply to receive a letter of credit. You need to ensure that it is written in such a way that you will be in a position to provide the documents required by the letter of credit, and which comply with its terms, to receive payment from the paying bank. It is important that the number of documents required by the letter of credit which are to be produced by third parties is kept to a minimum (and ideally all documents, except the transport and insurance documents, should be capable of being produced by the exporter).

To confi rm or not to confi rm?

Probably the fi rst decision for the exporter when negotiating a contract where payment is to be by letter of credit is whether he wants the letter of credit confi rmed. There are two points of view here.

The case for confi rmation

For the best security, it is essential for the letter of credit to be confi rmed by a UK based bank and payable in the UK. This ensures that you can deal directly with the bank responsible for checking the documents and, if in order, paying you. A letter of credit available with the advising bank but not confi rmed by them will enable the advising bank to check the documents but only pay the exporter if it holds funds of the issuing bank which could be debited or receives funds from a named reimbursing bank. The documents would have to be presented through the advising bank to the overseas issuing bank for them to check the documents and pay, or not, as the case may be. Once you have made the decision to require a letter of credit, it is much simpler and more effi cient to deal with a paying bank in London than a bank in the customer’s country, although the confi rmation of a letter of credit will result in an additional cost to you.

It is essential that you select the right confi rming bank for the letter of credit. Different banks have different appetites for risk. Some are very cautious and others more bullish. If the advising bank or your house bank will not confi rm a letter of credit, you may be able to arrange a silent confi rmation with a third party bank or fi nancial institution.

Whilst talking to prospective confi rming banks, you should ask them which local banks in your customer’s country would be acceptable to them as issuing banks. There are many issuing banks that do not represent an acceptable risk to UK confi rming banks. It is important to identify a local bank with which both your customer and the prospective UK confi rming bank can work. Good correspondent relations between the opening bank and the advising/confi rming bank can be very important in the operation and success of a letter of credit transaction, and may signifi cantly affect the bank charges. It will often be the case that the customer will have only one bank; that bank will probably only be willing to use one of its usual


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correspondent banks to advise letters of credit – it may have only one corresponding bank in the UK. If feasible (and acceptable to your customer) you should investigate using a reputable and reliable banking group with offi ces in both the UK and your customer’s country: this can lead to advantages in terms of speed and effi ciency, and may even mean a reduction in the overall charges payable by you and your customer.

Sometimes the issuing bank will not be willing to request a bank to confi rm its letter of credit. You should check this possibility with a UK bank with branches or other presence in your customer’s country. If this proves to be the case your bank may well be able to advise you how to overcome the problem and whether you should request any specifi c wording to be included in the letter of credit when issued to ensure you can still enjoy the advantage of a confi rmation, albeit ’silent’ in this case. With a silent confi rmation, the issuing bank is unaware of the existence of the confi rming bank. The confi rming bank contracts with you to pay you only if the issuing bank does not honour its agreement to pay – eg within 30 days of acceptance of conforming documents. In all probability, the letter of credit would need to be available by negotiation by any bank.

The case against

That is the case for confi rmation; get the documents right and to the UK bank in time and you will be paid by the UK bank. The other point of view is that confi rmation is not necessary, or is necessary only in some circumstances. Either the extra cost of the confi rmation is too much to bear in the price or perhaps the fact that you will be asking a UK bank to confi rm your customer’s bank’s undertaking to pay will not be regarded favourably by your customer. In any case, there will be confi rmation fees to pay.

Credit insurance

One method of mitigating the risks of non-payment under an unconfi rmed letter of credit is to insure your export receivables. In the UK the main export credit insurers are AIG, Atradius, Coface, Ducroire Delcredere, Euler Hermes and Exporters. They offer insurance of export contracts either from the date of contract (pre-credit risk) or from the date of despatch and invoice of the goods or invoicing for the services (credit risk). They tend to look for a spread of risk (wanting to cover all your exports rather than only those to the more risky markets of the world) but this does not necessarily mean that the insurance cost need be prohibitive. The premium rate per £100 of business will tend to fall if a good spread of business is insured; the insurer earns enough on the ‘good’ markets to allow for the lower overall premium rate also to be applied to the more challenging markets.

The terms of cover vary between insurers. Some offer full non-payment cover, treating the letter of credit as a means of payment (which it is), while others provide only political risk cover (such as for shortage of foreign exchange) in letter of credit transactions. You are recommended to seek advice from an insurance broker as to the best option for your export trade.


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If insurance starts at the date of contract then you would be protected from the risks associated with your inability to produce the documents necessary to allow you to be paid from a letter of credit because of events outside your control which occur before you ship. This cover is generally suitable for exporters who make goods to order; a claim is calculated after the goods are re-sold or otherwise disposed of. Unless your customer is a government, pre-credit risk insurance would not protect you against the failure by your customer to have the letter of credit opened. If your goods are not made to order then you may feel comfortable with this risk – if you are unable to supply the goods to your customer they can be used for another order.

The insurer will usually be content to exclude from cover the payment risk where you hold a confi rmed letter of credit. This allows the exporter to choose when to seek confi rmation and to compare the confi rmation fee with the insurance premium for the credit or payment risk.

When to ask for a letter of credit

How do you know whether payment by means of a letter of credit should be requested? This will depend upon:

• The territorial conditions – eg as advised by Croner’s, D&B, Coface@rating, your bankers.

• Any credit insurer’s security requirements for the country.

• The creditworthiness of your customer (and/or your credit insurer’s view of your customer).

Getting the letter of credit right

Regardless of whether the letter of credit is confi rmed you will need to ensure that the letter of credit refl ects the terms of the export contract.

The letter of credit should be valid for the duration of the despatch period under the contract plus the agreed time for presentation of the documents. The contract of sale should stipulate the documents to be presented and the letter of credit terms should refl ect the contract’s requirements. This is important; in the case of a discrepancy between the terms of the contract and those of the letter of credit the exporter will have a contractual obligation to fulfi l, but the bank (advising, opening or confi rming) will refer only to the terms of the letter of credit. There should be no confl ict between the two.

Sight or tenor?

You will normally want to be paid immediately following presentation of compliant documents – at sight – unless you have agreed otherwise with the customer. The letter of credit will show clearly whether or not payment is at sight. If the letter of credit states ‘payment at 30 days from the date of the bill of lading’ for example, you will have to wait 30 days before you are paid. On the other hand, a confi rming bank may agree to discount the amount due and pay you immediately. Check this possibility with the banks at an early stage. At the same time, check the banks’ costs for this discount; they can vary considerably and they will come out of your profi t margin unless you are able to build them into your contract price (together with the other letter of credit fees). It pays to shop around with the confi rming or advising bank and with other banks, fi nancial institutions or forfaiters.

When do you want the letter of credit?

You will certainly want the letter of credit to be issued, with terms and conditions acceptable to you, well before shipment, particularly if you are


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exporting to a new customer. If you have to start a manufacturing process shortly after contract signature but before the letter of credit is issued in order to meet a shipping deadline, you must think very carefully about the implications of undertaking costs which may not be recoverable from the customer, under a contract for which you have no means of payment in place.

Expect the unexpected

Bear in mind that despite all forward planning, a letter of credit is rarely issued with all terms and conditions acceptable fi rst time around. There is nearly always something that needs changing. The point is, all this takes time and you should take this into account when setting the date you want the letter of credit in your hands and in good order.

Begin at the beginning

Leading exporters advise that the time to start making sure that the letter of credit is right is at the time of quotation. We all know that only a proportion of quotations end up as fi rm contracts, but it is important for this stage to be right – what value is a contract if there is no hope of getting paid?

Your sales team will need to have a requirement written into their procedures that they should check with the credit department before making quotations for export sales. They will need to offer the potential customer a price that will refl ect the payment terms (to include the cost of credit and any risk protection premium/fee as well as the freight and insurance and other overhead costs).

The quotation must clarify:

• the time period for making delivery,

• the terms of delivery,

• the credit period (including when the credit period starts), and

• any security for payment such as a letter of credit.

It is important that, at the stage of quotation, the responsibilities for payment for any changes or extensions to the letter of credit are clear. The person who will have responsibility for ensuring that the funds are drawn from the letter of credit will need to be given the opportunity to comment on any quotation where payment is to be by letter of credit. This person must have the tools and authorities for getting the letter of credit into a workable document.

Will you get the transport documents you need?

When supplying goods to unfamiliar countries, it is imperative that your forwarding agent and/or shipping line has sight of the letter of credit in its entirety at the earliest opportunity. It may be that the shipping line is unable to comply with one or more of the documentary requirements, in which case you might need either to change your shipping line, or request an amendment. Your shipping line’s clear understanding of the terms of the letter of credit and its conditions is critical to the success of your presentation of documents and hence being paid.

It all takes time

It is important to know something about your customer’s country and its requirements. The salesman is likely to have discussed with the production manager and shipping department how much time is needed for production and delivery. It would be wise to spend time at this stage thinking about what sort of documentation will be needed to fulfi l the terms of any quotation


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that becomes a fi rm contract. Documents that require any form of authentication by a Chamber of Commerce or similar authority will add to your costs.

For example, inspection by SGS or Cotecna may be necessary for the customer’s country – you can check this in Croner’s. Even if you do not make reference to either body, or provision for pre-export inspection in your contract, it will be necessary in order for you to be able to be paid from the letter of credit. You may wish to consider, therefore, subscribing to Croner’s export guide in order to maintain your knowledge of which countries require what.

Many African and South American countries require inspection, and some Far Eastern countries are increasingly requiring it.

It is important that, when the letter of credit arrives, you have planned to be able to produce the documents required.

In Bangladesh and India, experienced exporters will know that a customer paying using a letter of credit will often require a number of documents which we might believe to be excessive. These may take some time to assemble and will add to your costs.

The letter of credit wording should refl ect the terms stated in the contract of sale (and possibly follow the wording of the quotation). This will need to be checked.

What part does the sales contract play?

One of the main purposes of a written contract is to set out, clearly and unambiguously, what each party to it is supposed to do, and when, in order to get the job done to everyone’s satisfaction. There is no reason why the contract should not also set out the requirement for a letter of credit and its contents. There are a vast number of possibilities as to what a letter of credit can say; the wording is crucial for its successful use so it is clearly necessary to spell out in the contract exactly what should appear in the letter of credit. It may be that there are commercial pressures operating against the wish to include the details (and even a specimen of the wording) of the letter of credit in the contract – we can imagine the salesman’s response ‘… but we don’t want to upset the customer by spelling out the details of the payment arrangement…’. It may be that your negotiations with the customer in the course of settling the wording of the contract have been particularly long and stressful. In these circumstances there is usually everything to be said for spelling out the details. Remember, you have a right to be paid.

It may be easier said than done to get the right things agreed but it would be foolish to hope that the customer or his bank, or even the exporter’s bank, will look after the exporter’s interests. Only the exporter can be truly responsible for ensuring that he is paid; he is neglecting his duty (and his shareholders) if he does not try his best to achieve this.

The exporter should therefore arrange for at least the following items to be spelled out in the contract:

Names and addresses of the banks which will issue and advise the letter of credit

Details of the proposed opening bank should be cleared with the exporter’s bank just in case there are any problems between the two. It is useful if the


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two banks have a “correspondent” relationship. The exporter’s bank will expect the letter of credit to state that it is governed by UCP600. In order to ensure more speedy and effi cient processing it is benefi cial if the letter of credit is issued using SWIFT: the Society for Worldwide Interbank Financial Telecommunications, a secure system for passing messages, payment instructions, etc., between banks internationally.

When the letter of credit is to be opened

Many exporters leave it too late before requiring the letter of credit to be opened, with the result that there is too little or no time to correct the inevitable mistakes, and the value of the letter of credit is largely lost. The surest way in which to require a letter of credit to be opened is to have a clause in the contract called an effectiveness clause and to include a reference to the letter of credit in it. Such a clause delays the coming into effect of the signed contract until the items specifi ed in the clause have been complied with. If one such item is receipt of a letter of credit with the details as specifi ed in the contract (or in a form approved by the exporter) then the customer has an incentive, when requested by the exporter, to correct the mistakes which will inevitably appear.

All dates in the contract will need to be expressed as periods from the date of contract effectiveness to ensure that pressure on the parties is maintained. Other items which can be referred to in the effectiveness clause might include issue of an export licence, an import licence and receipt of a down payment. There will need to be an end-stop date so that if any of the items is not procured by then, either party will have certain rights, one of which may be the ability to get out of any obligations early before further problems arise.

If you are using credit insurance, take care to read any conditions requiring letter of credit security: is the letter of credit required to be opened “before despatch” or must it be ’at date of contract’?

Documents: who issues them and who signs them

The law books are full of cases involving the use of documents which one side says were wrong. Several principles should be followed by the exporter to reduce the risk of becoming the latest interesting case for debate in the courts.

The best arrangement is for the documents to be produced and signed by the exporter only, because they are then within his control. If they are to be provided by an independent third party, it is necessary to ensure by checking fi rst that the documents as specifi ed can be made available within the requisite time-scale.

The worst arrangement for the exporter is for a document to be provided or signed by the customer or someone acting for him because this removes the safeguard to the exporter which a letter of credit can provide, and gives the customer the chance to delay payment for his own reasons which may have nothing to do with the exporter’s performance of the contract. ISBP article 4 states that a credit should not require a document that is to be issued or countersigned by the customer, but if it does, the exporter must bear the risk of failure.

Safe achievability of dates

A letter of credit must specify certain dates and periods such as the expiry date for presentation of documents. If the period for presentation of shipping documents is not specifi ed UCP600 sets a maximum of 21 days


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from the date of shipment (Article 14c). It therefore makes sense for the exporter to propose his own dates and periods for agreement with the customer and inclusion in the contract so that they can then appear in the letter of credit. Delays, particularly by third parties, are common so safety margins should always be included when agreeing dates. It should be remembered that short journeys by sea can be completed before the paperwork is ready – a delay in presenting the bills of lading and other documents to the bank (even within the 21 days) could lead to the goods being held at the port of discharge with costs of storage (demurrage) being incurred for the consignee. In these circumstances it is worth considering avoiding sea transport (where the original bill of lading has to be presented by the consignee in order to take delivery) and instead choosing alternative methods of transport such as road transport.

Attention to detail

The purpose behind getting all the details clearly spelled out in the contract is that these will provide a fi rm basis for getting the letter of credit put right when it is issued. Once the exporter accepts the letter of credit, it must be remembered that to be paid he has to comply exactly with its requirements even if they are wrong or even impossible. The English Courts have developed the doctrine of ’absolute compliance’ with the requirements of the letter of credit. ‘Almost’ right will not do, so even the most trivial of differences between the wording of the letter of credit and the wording of documents could permit a bank to withhold payment. This is not to say that exact literal compliance in all circumstances is required, but to be safe the exporter should work on the basis of providing documents which do comply absolutely with the terms of the letter of credit.

Some exporters believe that their relationship with their bank will ensure that this harsh doctrine will not be applied in their case. They should not rely on this belief because the interests of the bank and the exporter are different, and the bank will expect the exporter to comply with the wording of the letter of credit.

One British exporter received a letter of credit covering the 10% advance payment under the contract as well as payments for the balance of the contract price. The docu-ments required for the advance payment were:• Commercial invoice for the value of the advance payment, and• Copy of customer’s receipt for the advance payment guarantee.Now, whether it was wise for the exporter to provide the customer with the advance payment guarantee before the advance payment was received might provide the mate-rial for a separate discussion. The advance payment guarantee was given for a value of £12,800,000.00. The contract price was £128,000,032.00. The bank initially refused to pay the advance payment because the advance payment guarantee was not for the same amount as the advance payment (£12,800,003.20). They agreed to pay after the exporter pointed out that the letter of credit did not require the advance payment guarantee to be for the same amount as the advance payment. The point is that for the sake of £3.20 a payment of £12.8 million nearly failed.

There is no substitute for the most intense attention to detail:

• when setting out the requirements in the contract,

• when approving the letter of credit at the beginning,

• when preparing the documentation for presentation and payment.


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Summary

• Request a confi rmed letter of credit (or arrange confi rmation yourself) or consider insuring the payment risk

• Consider insuring the pre-credit risk

• Choose the right UK bank to confi rm or consider silent confi rmation

• Pay very close attention to all the conditions of the letter of credit – the banks will

• Make sure the letter of credit works for you

• Ensure the letter of credit payment terms refl ect those in the export contract

• Are you happy with deferred payment terms? Can you discount for cash on a non-recourse basis?

• Have you included ALL letter of credit costs in your price?

• Identify which local banks are acceptable to your confi rming bank (remember that if the same banking group handles the transaction at both ends this may be quicker and cheaper)


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Chapter 4 - What the exporter should look out for

Before the letter of credit is issued

Fees

There is no rule as to who (exporter or customer) pays for the cost of the letter of credit. The only certainty is that the banks involved will request fees for opening, advising (the original and any amendments), confi rming and paying. The most common arrangement is that the customer will pay the costs of the opening bank and the exporter will pay the costs of any other bank involved.

Confi rmation charges

The largest single letter of credit cost for the exporter is the fee charged by the confi rming bank for confi rming the letter of credit. The custom is for the confi rmation fee to be charged from the date the letter of credit is advised to you, to the date the fi nal drawing is paid. The bank may calculate this fee on the value of the letter of credit, but more commonly calculates it quarterly on the undrawn balance outstanding at the beginning of each period; the fee may be charged either in advance or in arrears.

Some banks may agree to charge confi rmation fees for the fi rst quarter and then monthly thereafter. Always consider the timing of your deliveries as to whether or not they may run into a new quarter by a small margin of days, as this could have a signifi cant effect on your confi rming fees.

One way to reduce this fee is to shop around when selecting a confi rming bank – fees will vary one from another. This might not always be possible; certainly your ability to drive a bargain with a confi rming bank will to a degree depend upon the size of your business. You may fi nd it is the case that a UK bank with a long standing and mature presence in the country or region of your customer will tend to charge less than another bank with less experience in the country. On the other hand, however, it might be the case that you will get a better deal overall if you put all your letter of credit confi rmations to one bank.

Another way to reduce the confi rmation fee is to delay the point at which your UK bank adds its confi rmation until close to the date of shipment. This runs the risk, of course, that by that time the circumstances of the customer’s country or the bank’s relationship with the opening bank may have deteriorated such that the cost of confi rmation has risen from the estimate at the time of the contract or that it is no longer possible to obtain a confi rmation, at any price. This might suggest that it would be unwise to delay the confi rmation; if it is needed it should be obtained as soon as possible.

The important thing in all of this is always to seek to understand your risks so that you can manage them properly and cost effectively. Although you can’t afford to take unnecessary or unacceptable risks, neither can you afford to incur unnecessarily high costs. You will often fi nd that there is a balance to be struck between the cost and the value of the service you receive from the confi rming bank.

The preferred local bank

Your customer may resist your suggestions for acceptable local banks to issue the letter of credit. You should try to give him as wide a range as possible, and, if you are to have the letter of credit confi rmed, this may require you to go to a number of UK banks acceptable to you, who between


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them cover four or fi ve local banks. You will fi nd the Bankers Almanac helpful in this respect. If you are not going to seek confi rmation then the decision is one for you (or your credit insurer): are you content to take the risk on the local issuing bank? If the customer insists on a particular bank opening the letter of credit and you cannot fi nd a UK bank willing to confi rm that bank’s letter of credit you should think very carefully indeed as to why this might be and consider the risk of taking the letter of credit without confi rmation. If your credit insurer also is unwilling to give cover on the basis of a letter of credit issued by that bank you have a very clear indication that you should not be willing to take the risk.

In doing so, you would have to be able to answer the question:

’What do I know about this bank that makes me comfortable with their risk when my bank (and credit insurer) is not?’

Extraneous documents

Your customer may require you to provide a document under the letter of credit that you have never heard of. Check with your bank if they are familiar with it and if there is anything for you to worry about. Such documents, for example a Phytosanitary Certifi cate issued by the UK Forestry Commission stating that the packing materials do not contain disease, are diffi cult (nearly impossible) to obtain and should not be a requirement of the letter of credit. You may of course agree to send your customer this certifi cate separately as it is required in certain countries to demonstrate satisfactory treatment of wooden packing materials, and your agreement to do so may be included in your contract. In this case a satisfactory compromise could well be that you agree to include in the documents to be presented under the letter of credit your written statement confi rming that the relevant certifi cate has been or will be sent to the importer. It is quite easy to draft such a document but it is advisable to seek guidance from your bank to ensure that it is acceptable.

When the letter of credit should be issued and what

happens if it isn’t

You should make clear at the earliest stage, (include it in your bid), your requirements for the timing of the issue of the letter of credit. You should generally want it, with terms and conditions acceptable to you, shortly following contract signature. Thirty days is quite reasonable and is the period of time that is typically given for the issue of any related advance payment guarantees. This is where the effectiveness clause of the contract comes into play.

A contract signed without a payment structure in place will lead to diffi culties later on. Furthermore, unless you have included an effectiveness clause in your contract (that relieves you from the obligation to do anything under the contract until the letter of credit is in place), you may be obliged to begin work on the contract, spend money, and manufacture perhaps specifi cally for this customer, without an acceptable payment structure in place. If the letter of credit does not materialise and you have manufactured goods specifi cally for this customer with limited or no potential to be sold elsewhere, what do you do? Do you ship and hope he pays you effectively on open account terms because you have been assured everything will be put right (in which case why didn’t the letter of credit appear?), or do you sit tight?


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Bear in mind that the customer may hold your advance payment bond or performance bond and cash it if you fail to perform even though the letter of credit has not been opened or is in an unacceptable format. This illustrates the need for any bond wording to state that the bond comes into effect only when the contract comes into effect (or when a satisfactory letter of credit has been received if there is no proper effectiveness clause in the contract). Just as the letter of credit is separate from the contract of sale, so is the bond separate.

It may be that sitting tight or lack of action is the best option in these grim circumstances. If the customer really needs your equipment, he will fi nd a way to pay for it and while the goods are under your control, you have a degree of leverage.

In straightforward contracts which do not require export and import licences, down payments or bonds etc, a simpler alternative to an effectiveness clause is to state in the proforma invoice that delivery time is calculated as x weeks from receipt of an acceptable letter of credit. This may be more acceptable to your customer. In addition this option would enable the exporter to include less of a margin in his delivery time, possibly making his quotation more attractive in terms of delivery. Comparisons between competitors are often made on this basis.

Expiry date of the letter of credit

Some customers are renowned for trying to get exporters to agree to accept a letter of credit with a shorter expiry date than is required to cover the payment plan. They will often quote their ’rules’ and ‘procedures’ as justifi cations. Again, be very careful before agreeing to this. You would be taking a signifi cant risk by not insisting that all your payments are covered by the letter of credit. Clearly, however, there is a balance to be struck between insistence and losing your competitive edge by quoting an unrealistic delivery time that compares badly with that of your competitors.

Third party shippers

During contract negotiation you should ascertain whether or not all the equipment you are proposing to supply is to be shipped by you or whether another company will ship some of it direct to the customer. In these cases it may be important for your customer to understand that equipment will be exported from a country other than the UK. This may have import licence and customs duties implications and the letter of credit will need to recognise this fact. In particular, it should not specify shipment only from a UK port if the third party is an overseas company.

Benefi ciary of the letter of credit

The exporter is the benefi ciary of the letter of credit. When the letter of credit is issued the benefi ciary’s details will probably be extracted from the contract by the customer and made available to the issuing bank. It is a good idea to ensure always that the letter of credit includes any specifi c reference that would help the letter of credit, when it arrives at your company’s offi ces, to reach the right person in your organisation as quickly as possible.

Whilst in smaller companies this may not be an issue, in larger companies with many different departments, the company’s standard address may not be suffi cient to guarantee prompt arrival on the right person’s desk. Therefore request your customer to include the appropriate contact name in the details together with a telephone number.


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Very shortly after the letter of credit is issued

Letter of credit terms and conditions

Do these agree with what the contract says? If not, make a list of the differences with a view to requesting amendments from the customer. You should tell the advising and the confi rming bank (if there is one).

Shipment/expiry dates and third party shippers

Check the shipment date, expiry date and clauses that allow third parties as shipper and more than one shipment, if you are not intending to ship everything in one go. UCP600 provides (Article 32) that if there is to be more than one shipment, each with related dates for presentation of documents, and any one date is missed then the letter of credit ceases to be available for that and all subsequent shipments and drawings. If you have a series of shipping dates you may wish to have the following words ‘Article 32 of UCP600 does not apply to this credit’ added as a condition of the letter of credit. This would have the effect of removing the provisions of Article 32.

Mode of transport

Check that the letter of credit requires you to ship by the appropriate means of transport: sea, overland or air, or in some cases a combination. A ‘by air’ option can be useful if you are unable to ship everything by sea and need to make a second shipment which must arrive quickly. This should be discussed at contract negotiation.

If you have agreed a third party as shipper, you must obviously be allowed to make partial shipments, as well as from the third party shipper’s port of loading, but check the letter of credit just in case this has not been followed through. You may be manufacturing or sourcing from several locations and in any case, the shipping department will have a view.

One last point on shipment. Check that the destination port is attainable from the UK. Some ocean vessels cannot reach smaller ports and not all intercontinental fl ights land at every airport in a particular country.

Seek advice

Speak to your bank for guidance on what they will expect to see on the shipping documents based on the letter of credit’s clauses and, if necessary, your freight forwarder who can advise on the appropriateness of the destination ports and what information can be included on the relevant shipping document to satisfy the letter of credit.

Typing errors

Check the letter of credit for typing errors, particularly with respect to your details as benefi ciary, your customer and such key information as the description of the goods. If there are any discrepancies, check with your advising/confi rming bank to ascertain if the discrepancies will necessitate an amendment to the letter of credit. One way to avoid an amendment is to include the information in all documents exactly as spelt in the letter of credit, even if incorrect, but this can cause further problems; having to perpetuate spelling mistakes in a series of documents can not only be tiresome, it can lead to inconsistencies and other errors. It is not always necessary to have amendments for typing errors that are not material, but it would be a commercial decision as to whether to insist on an amendment or not; some customers do not take favourably to requests for long lists of largely irrelevant amendments. Your bank should advise on whether the error is material for payment in their view.


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Documents issued/signed by third parties/end-users

If under the contract an end-buyer will have to sign or issue a certifi cate, does the letter of credit give the end-buyer’s name or refer only to “end-buyer”? If the latter, check with your advising/confi rming bank for guidance. Some banks like the name to be included in the letter of credit so that the name in the relevant document tallies. Clearly, this provides a further opportunity for inconsistency and error.

21 days for presenting shipping documents?

Check whether or not you have been given at least 21 days to present shipping documents. Although Article 14c of UCP600 is clear that a time limitation of 21 days is the norm (but in any event not later than the expiry date of the letter of credit), poor wording in the letter of credit may create a doubt as to whether or not the intention of the issuing bank is to change this condition. Therefore, check with your advising/confi rming bank for guidance. If the time for presentation is less, or the expiry date is the same as the latest shipment date, this may not necessitate an amendment, but would require the exporter to be more effi cient and timely with presentation of documents. Again, this will be down to logistics and commercial decision-making.

Bills of exchange

Check how the letter of credit requires the bills (called ’Drafts’ in UCP600) to be drawn: at sight, or at a specifi ed number of days from the bill of lading date. Does your contract state the same payment terms? Are you required to draw a sole bill or two bills? Whilst the bills should be drawn on the issuing bank (if the letter of credit is available with the issuing bank) or the advising bank (if available with the advising bank) – in any event not on the customer - does the letter of credit make it clear who the bank is? This may seem a strange thing to check but nowadays with communications largely through SWIFT, the issuing bank’s name may have to be detected through the SWIFT code. The address given in the letter of credit for the advising/confi rming bank to send the documents to is not necessarily the address of the bank on which to draw the bills. Once again, check with your bank. It is quite common for bills not to be required at all.

Values of drawings

Check that the value of the letter of credit and the total value of all drawings, particularly when expressed as a percentage either of the letter of credit or the contract, agree. If the letter of credit refers to an amount being a percentage of the invoice value, query with your bank how they would want you to draft the invoice to show this, as well as the contract value. This is often diffi cult, particularly as the invoice value is not necessarily the shipment value.

Exporter is both benefi ciary and manufacturer

Under the letter of credit you are described as the benefi ciary. Some letters of credit require a certifi cate e.g. certifi cate of origin to be signed by the manufacturer. If you are the manufacturer then you should sign in the capacity of benefi ciary/manufacturer. If you are not, then the manufacturer must sign the certifi cate, not you. However you should be responsible for drafting it to ensure it conforms to the letter of credit. Once again, if you have any doubts, speak to your bank.

Can you meet the packing conditions requirement?

Countries around the globe are becoming increasingly concerned about importing disease, particularly through wooden packaging. Import


28

restrictions sometimes require an exporter to provide certifi cation of treatment to wooden packaging materials.

You must make sure that the letter of credit does not call for a certifi cate or statement that you cannot procure. For example the letter of credit may require you to certify that wooden packaging materials have not been used, or non-coniferous materials have not been used. If you do use them and cannot change, then you will have to negotiate with your customer a different form of certifi cation. This is a topic that is easily overlooked and should really be addressed at contract negotiation rather than after the letter of credit is issued.

Managing the letter of credit

It is useful to go through a written checklist immediately on arrival of the letter of credit. You will fi nd an example at Appendix 1. Then circulate both the letter of credit and the checklist to relevant team members, eg representatives from the Sales Department, Production, Shipping, Accounts, Credit. Within two to three days (shorter if there is time pressure), arrange a meeting of all these personnel. All parties should have the opportunity to say if they can or cannot comply with the terms of the letter of credit. You may fi nd that you will encounter more assistance if minutes are taken of the meeting.

Any items that cannot be complied with should be listed. It should be clear in the minutes who is responsible for going back to the customer to arrange for the changes to be made. When a third party is required to make changes (eg to a transport document), that party should be given clear instructions as to the alteration to be made, plus the time-scale for producing the corrected version. Similarly, when amendments are received the team should have sight of them and if necessary a further meeting called.

It really does help to have a good rapport with your UK bank(s). Time spent in developing a relationship with the bank’s documentary credits department will provide you with the opportunity to discuss anything about the letter of credit that is not clear.


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Summary

• Ensure that the issuing bank is acceptable not only to your customer but to your confi rming bank (See if your customer will accept the use of the same UK banking group for both functions)

• Make sure the confi rming bank provides you with the cover you need, not what it wants to charge you for

• You must be clear when you plan to ship, how, and where to. Make sure this is clear in your contract and that the letter of credit, when issued, refl ects the contract

• Check every detail of your letter of credit when it is received

• Will a typing error stop you from being paid?

• Maintain regular contact with the advising/confi rming bank

• You must be able to meet every condition of the letter of credit to ensure that you are paid

• If appropriate to your business check with other specialist departments in your company regarding packing restrictions, shipments by third parties etc

• If you do not have the necessary experience in house, consider outsourcing the letter of credit management to a competent third party


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Chapter 5 - Amendments, How to Avoid Them and How to

Obtain Them

It takes time

Receiving a letter of credit can appear to take a long time. With modern forms of communication such as SWIFT, where messages are sent from computer to computer, one would expect that a letter of credit could be opened within a few hours of the asking. However, with the intervention of man, the customer’s budgetary constraints and priorities, local legislation, credit lines etc, the time scale can be days if not weeks (or months). Once in-country issues are overcome, the main reason for delay is the fact that although the SWIFT system connects banks instantly, it is occasionally the Head Offi ces that are connected instantly. The message has to be relayed to the Head Offi ce from the customer’s bank branch, then the message input on the computer system, sent to the Head Offi ce of the exporter’s bank, who then advises it to the exporter (although this is not always the case).

Another reason for delays in the exporter receiving the credit is the fact that the customer will not wish to incur expense or to tie up his credit lines unnecessarily. As banks charge by the day or month that a credit is open, the longer the customer delays the opening, the lower the bank charges. It is usual for banks to count the value of a letter of credit against the importer’s credit line. Therefore it is common for the customer to seek to delay requesting the opening of a credit until just before shipment or the date when a payment is due to the exporter. If your customer adopts this approach there will be little time before shipment is due, or the credit expires, for any amendments to be arranged. This may be accidental or the customer might have a good reason (from his point of view) for arranging for you to have too little time to have the letter of credit amended.

How to Avoid Amendments

The motivation for your customer in raising a letter of credit is to ensure that he gets the goods he has ordered (as evidenced by the documents) and that he receives the required documentation to clear the goods through customs. Ideally the letter of credit should be simple, with requests for excessive numbers of documents resisted.

Sample wording

It is advisable to include in the contract a sample of the wording of the letter of credit to be issued, thus ensuring both parties know what is expected. Samples of simple letters of credit can be requested from your bank. Incorporating the wording of a letter of credit in the contract will require your sales or other personnel to be actively involved in negotiating the terms and conditions of the letter of credit before signing the contract.

The fewer documents the better

The basic documentation needed under a letter of credit is an invoice, a transport document (such as bill of lading) and, where necessary, eg for a CIF delivery, the insurance certifi cate (preferably not the insurance policy). A packing list is commonly required. Some countries require Certifi cates of Origin, but documentation beyond that should be kept to a minimum. The more documents that are required, the greater is the risk of discrepancies and therefore rejection of a presentation. All documentation requested


31

should be in a format that can be evidenced on the face of the document without further investigation.

We don’t like surprises

When the letter of credit is received it should be checked carefully – do not fi le it until needed. If there are conditions that cannot be met then an amendment must be sought. However you should bear in mind that not all variations from the specimen in the contract will need to be amended; it will often be the case that you will be able to live with them. Check with your bank which errors, mistakes or ‘confusions’ in the letter of credit can be resolved by clarifi cation from the issuing bank.

If you have managed to negotiate in the contract that the costs of any amendments are to be borne by the applicant, that is, the customer, then it is more likely that the letter of credit will be issued correctly fi rst time. On the other hand, you might meet more resistance from the customer when you do need an amendment.

How to Obtain Amendments

For those errors with which you cannot live you will have to liaise with the customer and request him to instruct the issuing bank to issue an amendment. It is at this point that you will feel the benefi t of having negotiated clear and precise letter of credit payment terms in your contract. You are in a strong position with regard to your customer if you are requesting an amendment to the letter of credit to bring it into line with the contract of sale which he has signed. Conversely, if your contract lacks precision, you may have greater diffi culty persuading him that the amendment is necessary.

Explain why without jargon

Think clearly about why the amendment is important to you. Normally the reason is that without it you would be forced to submit discrepant documents which would prevent you from being paid. Make this clear to your customer.

Present a coherent and well-structured reason for the amendment. Remember, your customer may not be an expert on UCP600, so explain the rules to him if they are relevant to your argument.

For example, the letter of credit may stipulate 14 days for presenting documents follow-ing shipment. Rather than just ask for 21 days, explain why you need the extra days, the time it takes to prepare the documents, the time it takes your bank to check them and the need for a few extra days to be able to correct any mistakes and re-present the relevant documents, all within the 21 calendar day time-scale normally permitted by UCP600.

By taking this approach you will improve the prospect that your customer will co-operate with you. If, however, he does not you should think carefully what his reasoning is and about the implications for you if the amendment is not made. The decision in this situation is rarely to acquiesce with your customer’s argument; you will probably have to dig your heels in and continue to insist. You might be able to remind him that the contract states it is not effective until the letter of credit is received, in terms acceptable to you. Therefore delivery delays could occur which would not be subject to any penalty payments since they would be a result of the unavailability of an acceptable letter of credit.

Remember that English is possibly not your customer’s or his banker’s fi rst


32

language and spelling out the actual wording needed might avoid the amendment needing amending.

Once the amendment arrives, the original document should be checked to incorporate the amendment. The amended letter of credit should be treated as a brand new letter of credit, and another meeting convened with the involved parties. You need to know that everyone in your company who will have contact with the letter of credit is content with it.


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Chapter 6 - Presentation of documents

Be prepared

This process should really start as soon as the letter of credit is received when you examine it for errors and/or terms that would prevent you being paid. For documents that are new to you, a certifi cate of conformance for example, you should make sure that you could produce what the letter of credit requires and with which the bank is happy.

About a month before the planned shipment date, prepare a list of all the information and data in the letter of credit that each document will have to include. Identify each piece of information or data with a heading such as those listed below. Also, make a list of each document and indicate, heading by heading, exactly what information is to be included.

For example, probably every document will have to have the details of you, the benefi ciary of the letter of credit. Therefore in the list include your details, extracted from the letter of credit under the heading ’Benefi ciary’, and for each document in which your details have to appear, simply list ’Benefi ciary’, together with the other relevant headings. Your customer will be described as the ’Applicant’. Therefore include his details under that heading. The list can be quite extensive but typically includes:

• Applicant

• Benefi ciary

• Letter of credit number

• Letter of credit date

• Expiry date

• Shipping terms

• From Port/To Port

• Description of goods/services

• Abbreviated description of goods/services (agree with bank)

• Latest shipment date

• Contract number

• Unique wording required on specifi c documents including signatures

• Description of packing

If you work on the basis that every document except for the bill of exchange will have details of the applicant, benefi ciary, description or abbreviated description of the goods, shipping terms, letter of credit number and date and contract number, you can’t go far wrong – unless, of course, the letter of credit contains specifi c provisions to the contrary.

Consistency is everything

Circulate this list to all departments/personnel in your company who are responsible for preparing the different documents. With all personnel working off exactly the same information, the risk of errors and inconsistencies in documentation is very much reduced. Thus for example, you avoid your company’s name as benefi ciary being written in different ways in different documents which would most likely result in discrepant documentation being rejected by the bank. Working from an electronic document and using “copy” and “paste” not only speeds up the process but also helps to eliminate discrepancies. Your bank should be able to provide an electronic


34

copy of the letter of credit which would help this procedure.

You should check with all involved that they understand and can comply with the instructions. The engineer in the fi eld (maybe literally) needs to understand exactly what information he has to include in a site acceptance certifi cate for example when he completes and presents it to the customer for signature. He needs to know that it will not be the same as the previous one because each certifi cate will probably require unique information. You may fi nd that it is helpful to develop your own checklist of documents that may be required.

Checklist

Following is a list of the most common documents required. You should refer to UCP600 in relation to documentary requirements. You should start preparing these about a week before the shipment is due to leave your factory.

Invoice

This document will include most of the core information taken from the letter of credit. It will of course have your company’s details included, but they must be as described in the letter of credit – refer to UCP600 Article 14j. The easiest way to accommodate this, bearing in mind that the information may be slightly different for each letter of credit, is to design your invoice based on computer spreadsheet software. It will also include your customer’s details, again in accordance with the letter of credit and UCP600 Article 14j.

The invoice will include most of the core information taken from the letter of credit. It will of course have your company’s name included, which must be exactly as described in the letter of credit and must be made out in the name of the applicant, but when the addresses of the benefi ciary and the applicant appear in the invoice or any other stipulated document, they need not be the same as those stated in the credit or any other stipulated document, but they must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone and the like) stated as part of the benefi ciary’s and the applicant’s address will be disregarded (Article 14j of UCP600).

The full description of the goods and services to be provided is very important. Some letters of credit have a very brief description, others include almost everything. Some descriptions can be lengthy to say the least, but the solution is not to abbreviate it, but to use a smaller font size.

The invoice must also show the shipping terms. If the letter of credit states ’shipped on board UK seaport’, when you draft the invoice you must state the name of that seaport.

The invoice should also contain the shipment value. This may be required by your importer for customs duty purposes and you may require it if one of the documents to be presented is an insurance certifi cate. If its value will be a percentage of the shipment value then that value must be clear in your documentation.

If your standard invoice includes your company’s normal payment terms, e.g. payable at 30 days yet the letter of credit says you will be paid at sight (on presentation of your documents) then you would do well to delete any reference to the 30 day terms as it might create confusion.


35

Bills of lading/air waybills/road transport documents

These documents are prepared by the carrier or your freight-forwarder. They will usually work from a copy of the letter of credit but it is strongly recommended that they be included in the distribution list for the information you extracted earlier from the letter of credit and be requested to use that. Most freight-forwarders will be happy to co-operate. They have a lot of experience in completing shipping documents for letters of credit, but you must remember that each letter of credit is different and each bank will have its own particular preferences for how certain information is presented and you must be guided by the bank, not the freight-forwarder. It is, after all, the bank that will pay you.

Ask the carrier or freight-forwarder to prepare a draft document for you to check before the shipment takes place. You may fi nd a number of discrepancies, some quite small. Have them changed. Leave nothing to doubt.

Make sure the carrier has your details (you are the Shipper on this document) and the Applicant’s details exactly right, also the goods description. The Applicant on the bill of lading or air waybill is usually the ’Notify Party’. For this document and all others except the invoice you can use the abbreviated description of goods and services if the original is rather long. However, ask your bank to confi rm that it will accept the abbreviation before you distribute it to everyone.

When the actual document is issued following shipment, make sure that if the freight is payable at destination then the freight charges have been printed in the correct box, ie not the freight pre-paid box.

Letters of credit often state that the bill of lading should show ‘Consignee: to order’. That means that each of the (typically 3) original bills of lading must be endorsed in blank on the reverse by the ‘order’ party – with the company rubber stamp and a signature. Bills of lading issued ‘to order’ without a named party are really issued to the order of the shipper or consignor (as detailed on the bill of lading) and need to be endorsed by the same party. This would not be a requirement for air waybills or road transport documents.

Bill of lading

A bill of lading is a document of entitlement to the goods and a transport document issued by the carrier (or his agent) or the master of the vessel (or his agent) evidencing a contract for the carriage of goods from one port to another. For it to be accepted by the banks it must be strictly in accordance with the terms of the letter of credit and:

• contain the terms of carriage

• indicate that the goods have been loaded on board a named vessel

• indicate the port of loading

• indicate the port of discharge

• be presented in full (generally 3 out of 3 originals) and include the number of non-negotiable copies called for by the letter of credit

• indicate the name of the carrier

• not carry a notation regarding damage

• be signed by :


36

– the carrier or

– the carrier’s agent or

– the master or

– the master’s agent(if the letter of credit specifi es who is to sign the bill of lading the documents will not be accepted by the bank – and the exporter will not be paid – unless the bill of lading carries that signature)

The most common discrepancies relating to bills of lading tend to be:

• the bill of lading does not either state that the issuer is the carrier or clearly name the carrier

• consignee’s name not as specifi ed on the letter of credit

• party to be notifi ed of arrival of goods not as specifi ed on the letter of credit

• port of loading not as specifi ed on the letter of credit

• port of discharge not as specifi ed on the letter of credit

• transhipment allowed when prohibited by the letter of credit (except where containerised)

• transhipment allowed and the bill of lading does not cover the entire route

• merchandise description is inconsistent with the letter of credit

A bill of lading will be regarded as discrepant and thus not complying with the requirements of the letter of credit if:

• there is no ’on board’ notation (that is, the goods are loaded on board) when required

• the ‘on board’ notation is not dated when required to be dated

• the ‘on board’ notation is dated after the last shipment date allowed

• there is no evidence freight has been paid, when required

• the goods are shown to be shipped ‘on deck’ (unless allowed by the letter of credit)

• there is a clause or notation that expressly declares a defective condition of the goods or their packaging ie an unclean bill of lading

• a full set of signed originals is not presented where required

Air waybill

An air waybill is a transport document issued by the carrier (or his agent) evidencing a contract for the carriage of goods from one airport to another. It differs from a bill of lading in that it is not a document of entitlement to the goods. Whereas your customer should be required to present to the master of the ship an original of the bill of lading in order to gain possession of the shipped goods your customer will not need to present an air waybill to take possession of the goods from the airport.

For it to be accepted by the banks it must:

• contain the terms of carriage

• indicate that the goods are accepted for carriage

• indicate the airport of departure

• indicate the airport of destination


37

• indicate the name of the carrier

• indicate the actual date of issue (this date will be taken as the date of shipment unless an actual date of shipment is noted)

• be signed by the carrier or the carrier’s agent

Road transport document

This is a receipt for the goods taken for carriage by road. It is not a document of title, nor is it negotiable. The following should be shown:

• name of the carrier

• eithero the signature of the carrier or of his agent, oro an indication of receipt of the goods by signature, stamp or notation

• the date of shipment or the date the goods have been received for shipment

• the place of shipment and place of destination

It must appear to be the original for the consignor or shipper or bear no marking for whom it has been prepared.

Packing list

This document may require some statement that the packing meets certain standards. This will be referred to in the letter of credit and a good rule of thumb is to incorporate precisely the wording from the letter of credit into your statement. Make sure the list includes the container/reference details the freight-forwarder included in the shipping document.

Also, very importantly, make sure that if you have used a spreadsheet for this docu-ment because of the need to show weights and sizes, you have not fallen victim to the rounding up trap! If you have weighed your boxes in pounds but included a formula to convert to kilos, make sure that any rounding up the formula does for you does not result in the total weight being different from the total if you were to simply add up the numbers printed out on the packing list. Even a discrepancy of 1 kilo, no matter how heavy the overall shipment may be, will result in a discrepancy.

Check that the weights and number of packages shipped shown on the shipping documents are the same as the packing list.

Make sure the numbering of each package is sequential and that for some reason you have not inadvertently missed out or repeated a number.

Inspection Certifi cate

This document may have to be prepared by an independent inspection agency, such as Cotecna or SGS, as a requirement of the contract. The requirement is likely to arise from the customer’s wish to know that what is said to be shipped is actually the goods which have been ordered. When selling to some countries the customer will wish to have the goods inspected to ensure that they have not been over-priced. The inspection agency may need to examine your company’s books to check the mark-up on bought in goods. This sort of inspection should not be left until the time of shipment. It is best to get price comparison documentation agreed early. Care should be taken that the inspection agency has the required wording well in advance, as the wording of the certifi cate must comply with the terms of the credit. In particular:


38

• the certifi cate should state exactly the scope of inspection as stated in the letter of credit

• it should be signed by the inspector or his representative

• the date of inspection should be stated as prior to or the same as the date of shipment (for a pre-shipment inspection)

• banks’ views may vary here, but some will require that it should be ‘clean’, ie the goods must pass the inspection in all respects and there should be no notations on the certifi cate

Acceptance test certifi cates

These can come in various guises and are commonly required for manufactured goods that must be subjected to some form of testing procedure to demonstrate performance, reliability, output etc.

In addition to the core information extracted from the letter of credit, these certifi cates will have to include wording covering the test or acceptance procedure. The letter of credit may specify the words required and they should be incorporated in the certifi cate.

Thus, if the letter of credit says ‘..certifi cate showing that goods have been tested in accordance with the contract…’, this phrase must be part of the certifi cation.

Check carefully that the certifi cate is issued and signed in accordance with the letter of credit. For example, if the letter of credit requires that the certifi cate be issued by the importer and/or end-user, then the certifi cate should not be printed on your company note-paper. Since the letter of credit will require that your customer signs it, it is safer to put his name at the top of the certifi cate. If an end-user/end-buyer is identifi ed, then their name should be there as well as in the core information in the certifi cate.

If a certifi cate has to be signed by the importer or end-buyer and is therefore not under your control, when it is returned to you, check for any errors that may have crept in. These could create a discrepant document which would not be accepted by the bank. Remember the risks of late presentation or presentation of non-compliant documents which this arrangement can involve.

It should be remembered that if the customer or his agent has to produce a document in order for you to be paid you are effectively granting open account payment terms to the customer. You are putting the customer in the driving seat in the transaction, introducing the very risk that the letter of credit is designed to avoid.

Certifi cates of quantity/quality

Again, when you prepare these certifi cates, use the exact wording from the letter of credit in order to avoid producing a document which might be rejected by the bank.

Certifi cate of origin

This is normally a relatively straightforward document, unless it has to be notarised or consularised by an Embassy, usually in London. Its purpose is to declare the country of manufacture of the exported goods to the client and/or the receiving country’s customs offi cials. Not all letters of credit require such a document but when this document is called for special care


39

should be taken to ensure that you are able to comply with the rules and regulations of the receiving country’s authorities. This will have been considered when you fi rst examined the letter of credit. If that is the case you should have ascertained how long the process takes to ensure the certifi cate is back in your hand, in good order, and in time to present to the bank. It is usually prepared by the exporter, but may need to be certifi ed by the exporter’s Chamber of Commerce or another specifi ed Chamber of Commerce and legalised by the appropriate Embassy. The issue here is not usually one of content but, in the case of consularisation, one of time; opening times and overseas public holidays can be important elements here.

The main points to remember, as always, are the importance of including the core information from the letter of credit, and, most likely with this certifi cate, for the signatory to be the manufacturer. In most cases that will be you the exporter, the letter of credit Benefi ciary. Therefore your details on this document should be titled: ‘Benefi ciary and Manufacturer’ and after the name of your company, above the authorised signature of the company, it is wise to print ‘manufacturer’.

Particular diffi culties with Certifi cates of Origin can be:

• the certifi cate of origin must generally be certifi ed and legalised in the manufacturing country (this may not be the exporter’s country) and the Chamber of Commerce of the manufacturing company may not be prepared to certify the certifi cate in the name of a UK company

• the cost of such a document may be prohibitive, and such costs should be taken into consideration at the time of quotation

• the time required to certify and legalise a certifi cate can be several weeks; it therefore should be prepared well in advance of shipment

• the certifi cate may need to be translated into a foreign language

• the exporter should be aware that the certifi cate may require that the manufacturer’s name needs to be divulged

Insurance certifi cate/policy

It is the exporter’s duty to insure the shipment when the terms of delivery as defi ned in Incoterms 2000 are CIF or CIP. The insurance document may be the actual policy or, preferably from the point of view of the exporter, a certifi cate of insurance. For it to be accepted by the banks it must:

• appear to be issued and signed by an insurance company, an underwriter or agent or proxy

• be presented in full

• be dated no later than the date of shipment, unless it appears from the document that the cover started from a date no later than the date of shipment

• indicate the amount of coverage

• be in the same currency as the letter of credit

• if the letter of credit does not specify the value to be insured, cover at least 110% of the CIF or CIP value of the goods (if the CIF or CIP value cannot be determined then cover should be for at least 110% of the invoice value or 110% of the amount of the drawing, whichever is greater)


40

The most common discrepancies relating to insurance documents tend to be:

• it is not issued by an insurance company or underwriter – a cover note is unacceptable

• the currency of insurance is not as shown on the letter of credit

• the merchandise description confl icts with the letter of credit

• port of loading not as shown on the transport document and inconsistent with the letter of credit

• port of discharge not as shown on the transport document and inconsistent with the letter of credit

• the effective date of coverage is later than shipment (on board date, taken in charge date, etc.)

• if the letter of credit calls for all risk (any ‘all risk’ notation is acceptable) and ‘all risk’ notation is missing

• if the letter of credit states that the insurance must be issued irrespective of a franchise (deductible), insurance document is subject to a franchise or excess deductible

• it is inconsistent with other documents (marks and numbers, weight, etc.)

Be sure that the cargo insurance provides the cover required by the letter of credit. Cargo cover is standardised under Institute Cargo Clauses A, B and C. ICC A is ‘All Risks’ while B and C are limited perils only. Cover may be required for additional perils. Many letters of credit used to facilitate payment for exports to non-OECD countries use out of date terminology for cargo insurance. Instead of using internationally defi ned Institute Cargo Clauses A, B and C, the bank clerk drawing up the letter of credit may instead list a host of specifi c risks (that are in fact included in the ICC clauses). If you are using a means of transport that allows for transhipment and a wait at an overseas port, be sure that your insurance allows for this.

Remember that even though you may have arranged insurance to comply with the requirements of the letter of credit, this may not cover your exposure to the risk of loss in transit or in storage. You should seek professional advice concerning your risks and the extent of your cover. Many exporters buy ‘shippers interest’ and ‘stock throughput’ cover in respect of their own exposures.

A fi nal point: a policy is acceptable in lieu of a certifi cate, but not the other way round. Don’t forget that a cover note will not do.

Bills of exchange

The letter of credit will sometimes call for bills of exchange. If the letter of credit does not specifi cally state ‘sole’ bill of exchange, then you can assume that two bills should be drawn.

Original/copy documents

Books have been written about court cases devoted entirely to arguing about whether or not documents submitted were original or copies. Whilst life is more complicated now with many documents computerised and as many ‘copies’ being printed as takes one’s fancy, there is in fact a simple rule, which if followed, should avoid any problems for you.

If the letter of credit asks for three original and three copy invoices, print six invoices, all identical and with a red ink rubber stamp, stamp three of them in large letters at the top ‘ORIGINAL’ and the other three stamp ‘COPY’.


41

Sign each invoice with an original signature (and all other documents where appropriate), for and on behalf of [name of your company].

This way, there is absolutely no doubt whatsoever what is an original and what is a copy. Apply the same procedure to certifi cates and packing lists. Bills of lading, air waybills and insurance certifi cates are already printed ‘original’ or ‘copy’. Bills of exchange are either ‘sole’ or issued as a pair, so ‘original’ and ‘copy’ do not apply.

The letter of credit will often call for different numbers of originals and copies for each document. Just because three original invoices are needed does not mean to say three originals of every other document will be required. Life is not as straightforward as that.

UCP600 is quite good when it comes to originals and copies. Article 17 says:

• at least one original of each document required by the letter of credit must be presented to the bank

• unless the document indicates that it is not an original a bank will treat it as an original if

o it bears an original signature, stamp or mark of the issuer of the document; or

o it appears to be written, typed, perforated or stamped by the issuer of the document; or

o appears to be on the issuer’s original stationary; or

o states that it is original, unless the statement appears not to apply to the document

• originals can be presented in lieu of copies

• if the letter of credit requires presentation of multiple documents eg ‘in duplicate’ then at least one original with the remainder in copies will be accepted, unless the document itself indicates otherwise

Shipment date

By the time the day for despatch arrives, although you will not have the bills of lading or the air waybill, you should have collated all other documents. You should by now have checked each one several times, and you should be perfectly happy that you would be able to submit compliant documents to your bank.

A word of warning about the issue of the transport documents. Check with your shipper that they will be released immediately following shipment, ie within 48 hours. Check whether or not you will be required to pay any freight, storage or other costs before the documents are released. The shipper or freight forwarder may have a lien on the goods until the charges are paid. The freight-forwarder should release the documents to you promptly but, as always, it is you, the exporter, who has the principal interest in assembling and presenting the set of documents, and your goods are already on their way to the customer (or if sent by air, they have probably arrived).

Documents should be checked against the letter of credit and UCP600. If they comply with the terms of the letter of credit and are consistent with each other then they can be presented to the advising/confi rming bank. It is desirable to have two independent checks within your company before presentation. It is surprising how often we read what we want to read –


42

the cost to your company if the presentation fails because of an oversight will be much more than the cost of an employee’s time in carrying out the second check.

Presenting documents to the bank

As soon as possible after the shipment date, collate all the documents and advise your bank you will be presenting them within the next 48 hours. Send them to the bank with a covering letter listing every document required by the letter of credit including the numbers of originals and copies, and do not forget to include also the original letter of credit and all amendments. Request the bank to advise that documents are either in order or discrepant (and if discrepant, how) so that you can take the necessary steps to correct the errors and send replacement documents.

Remember, the clock is now ticking. Even if you succeeded in negotiating the full 21 calendar days allowance for presentation, a few days will already have passed, and the advising/confi rming bank is allowed to take up to a maximum of fi ve working days to check the documents. If the documents are not in order, you could have only a few days to sort the problem out. Compliant documents (not just the fi rst presentation) have to be presented within the time period allowed, and within the validity of the letter of credit.

Every day of delay now means a day when the proceeds will not be in your bank account.

Other general points:

• The gross and net weights on each type of document should tally

• Any arithmetic (eg adding weights) has to be accurate

• Each document type must show the same number of packing cases and be marked as directed in the letter of credit

• Any bills of exchange may need (according to your company’s rules) to be signed off by an authorised signatory for your company. It is important to know the whereabouts of the authorised signatories so that you do not need to wait for their return from business trips in order to obtain their signature

Common pitfalls

Multiple shipments

In the past, mistakes crept in where each document was typed out individually (with carbon paper). Technology has moved on and the facilities available now allow the same set of information to be used in a variety of documents. This means that multiple shipments should not now be a problem; in fact if the fi rst shipment was drawn satisfactorily, confi dence builds that the subsequent shipments will also be paid for. However it can be easy to forget to change the weights for each shipment, the values, fl ight numbers etc.

Letters of credit issued in Taiwan frequently have liquidated damages clauses – if shipment is later than the dates stated in the letter of credit, then damages apply. These are deducted from the payment made to the benefi ciary. You may be able to have this clause deleted if liquidated damages do not form part of the contract of sale.

Inspection agency

If there is an appreciable time between the letter of credit being issued and


43

the date of shipment it is possible that your customer may have stopped using the inspection agency by the time you are ready to ship. In these circumstances your customer may not have remembered to have the letter of credit amended to remove the requirement for an inspection certifi cate to be presented with the other documents; in that case you will be caught by the letter of credit requiring a document which the customer no longer wants and which you are incapable of providing. If the letter of credit is not amended your presentation of documents without the certifi cate would be regarded as discrepant.

Letters of credit issued in Taiwan frequently have liquidated damages clauses – if ship-ment is later than the dates stated in the letter of credit, then damages apply. These are deducted from the payment made to the benefi ciary. You may be able to have this clause deleted if liquidated damages do not form part of the contract of sale

Advance payment bonds

If your contract is structured so that you are required to deliver a bond in order to draw down from a letter of credit the advance payment that makes a contract effective, you need to be sure that you can produce the bond in compliance with the letter of credit. They often have reduction mechanisms providing for the value of the bond to be written down in proportion to the value of goods delivered.

It took one major British exporter nearly two years to get his customer to agree to the removal of an inspection certifi cate from the list of documents to be presented for pay-ment following the customer deciding not to continue to use the inspection agency.

Partial payments

If your contract includes, say, a 20% advance payment or stage payment, clearly your invoice on despatch of goods will be for the 80% of the value of the goods. The letter of credit should allow for this. If terms of delivery are CIF or CIP, the insurance certifi cate will, none-the-less still show 110% of the value of the goods.

Advance payments

These should be deducted from each invoice proportionately.

If you are being paid out of a letter of credit issued by the same bank that issues the contract bonds then that payment mechanism can provide a useful method of notifying the bank of the shipment and the reduction in the value of the bond that is required.

Geography

Your shipping department or forwarding agent will be able to advise on the extent of each port.

For example, the ‘Port of London’ covers a number of different ports. It extends to Southend Pier. If your goods are loaded downstream of Southend Pier, they will not be deemed to have been loaded in the Port of London.

Packages are not cases

Documents may not be accepted by the bank if, for example, on the invoice you list 534 packages and on the packing list 534 cases, even if the weights and contents are clearly the same. Consistency is everything.

If you can’t present documents in order within the deadline, your bank will ask whether you wish to have the documents returned to you or to have the bank send the documents to the issuing bank on a ‘collection basis’. In that case you have lost any benefi t of security of the letter of credit or any confi rmation. Also, your credit insurance would not respond in the event of


44

loss because you will effectively be changing from letter of credit terms to open account terms after contract signature.

Summary

• Start preparing for presentation of documents well in advance of the planned shipment date

• Extract from the letter of credit all relevant core and specifi c information to be included in each document

• Distribute this list to all relevant personnel in your company and to your freight-forwarder. Check for any queries or problems

• Ensure each document is prepared strictly in accordance with your instructions

• Liaise regularly with your bank for clarifi cation and recommendations as to how to present the information in the documents to ensure they will be in order when presented

• Advise your bank when you expect to present the documents to them

• Present documents to the bank under a covering letter listing all documents in the order they are listed in the letter of credit. Include the original copy of the letter of credit and any amendments


45

Chapter 7 - What to do if presentation fails

Don’t panic!

The chances are that if you have followed the earlier guidelines, any discrepancy will be minor and easily rectifi able. Re-issue the document with the correct number of originals and copies, signed and re-submit.

IWhatever you do, do not tear up any documents if they are incorrect. This advice ap-plies especially to the bills of lading in view of the fact that they are documents of title.

If the bill of lading or air waybill is discrepant, call your freight-forwarder, explain the problem to him and get agreement to issue replacement documents. There may be a small charge and you will be required to return the original documents. This will normally involve the use of couriers but provided the distances are not too great, a change of documents can be achieved in 24 hours. Liaise with your bank so that the exchange of documents can take place directly between the bank and the freight-forwarder to save time.

The only document with which you are likely to have a real problem is a certifi cate that has been signed by your customer or an end-buyer. You would have to send it out by courier for re-signature and return within the timescale allowed under the letter of credit. Provided your customer co-operates this could be feasible within a 21 day time limit.

There is the possibility that your bank may feel the discrepancy simply requires a clarifi cation from the issuing bank, although such problems should have been identifi ed and dealt with much earlier in the process. This alternative course of action would only be relevant in the event it were not possible for you to correct the error yourself. The risk is that the issuing bank either does not respond in the required timescale or does not give the reply you need.

In the event that documents are discrepant and cannot be remedied, the advising/confi rming bank will ask if you are content for them to send them to the issuing bank on a collection basis. In such circumstances, you should immediately contact your customer and explain the discrepancy. You should emphasise that you have shipped the goods as required under the contract and that you are not in breach of the contract but because of the discrepancy – it could be a word or phrase omitted from a document – you cannot be paid unless your customer instructs the issuing bank to waive the discrepancy, which you are requesting him to do.

The risks in this situation are twofold. Firstly, by sending the documents to the issuing bank, it too has up to a maximum of fi ve working days to check them and may claim more discrepancies than the UK bank identifi ed. Secondly, your customer may not be in a great hurry to pay you and now has the opportunity to use this to his advantage to extract some concession or other out of you.

Whilst you would hope your customer would not have access to any goods sent by sea, (the bills of lading now reside with the issuing bank), things do not always go according to plan and he may be able to get hold of the goods. Of course he may not actually be interested in buying them any more. If the shipment is a commodity and the price has dropped, he may want to fi nd an excuse not to pay you and buy elsewhere at a reduced price. You will also need to address the cargo insurance for the goods. Normal transit cover


46

may have terminated on arrival at the overseas port.

Summary

• Don’t panic!

• Organise replacement documents as quickly as possible, remember the limitations in the letter of credit regarding its expiry date and the period for presenting documents

• Can the problem be sorted with a clarifi cation from the issuing bank?

• If a waiver from your customer is necessary explain the full facts and seek his co-operation.


47

Chapter 8 - And fi nally, commercial realities … … …

Having offered what we hope is valuable advice in the matter of documentary credits, this fi nal chapter will suggest that it is sometimes necessary to break the rules. When dealing with letters of credit we recognise that they are designed primarily to assist the exporter to secure payment and to assist the free fl ow of trade. However, we must not lose sight of the fact that they are designed as a facilitator of trade, and that they should never become an impediment to it.

Our competitors in Europe and the rest of the world are always keen to erode our market share, just as we seek to appropriate some of theirs. You, the UK exporter, have overcome this very stiff competition and won an export order - now you should do everything you can to make the documentary credit system work for you.

This may mean that it is necessary to compromise in particular areas but while doing so be careful not to give up your security of payment. Best practice is not always the only option, as long as we can cover ourselves and ensure that we are not putting our company at risk.

UK confi rming banks v European confi rming banks

Presenting documents at the counters of a bank in the UK is probably the most desirable method of getting paid under a letter of credit. However, we should not be put off if a letter of credit is advised through a reputable bank in Europe. If the advising bank happens to be in Switzerland for example, this may be for a number of reasons: the customer or the customer’s country may have exceptional relations with the bank in Switzerland, or the Central Bank of your customer’s country may have large deposits or excellent credit lines with the Swiss banks. If we go by the rulebook, the advising bank in Switzerland would have to advise the letter of credit to your chosen bank in the UK, who would then add their confi rmation. This adds one more bank to the chain which fi rstly means that there will be an added cost to the transaction, but secondly also means that there is one more party to work through and the exporter is one more step away from the heart of the transaction, that is, the customer.

Some banks have niche roles in niche markets, and you can benefi t from their understanding of your customer’s country. They will know the person to call at the opening bank by name; they will recognise the nuances of the banking practices in that country, and will be able to help you if you have a problem. This information may not be available with a UK based bank. The reputable bank on the continent should not be avoided simply because it is a fl ight away (subject, of course, to the margin on your contract bearing the additional cost). Documents can be hand carried if there is a time constraint, and most European banks will welcome meeting you face-to-face.

Niche markets often require a niche service, and if you can’t fi nd it in London, consider looking for it elsewhere. If a German bank commonly handles letters of credit for a particular country, you may fi nd its pricing is more competitive. In the case of all non-UK banks, using a London branch can help to ease problems of administration.


48

Letters of credit and contracts

We would all like our letters of credit to match precisely the contract terms we have negotiated. Unfortunately this is not always possible. In some countries, it is not the practice to sign contracts. Your proforma invoice coupled with the letter of credit may constitute the contract. The wording of the letter of credit is often a standard format which must be accepted, rejected or subsequently amended. In these cases, the likelihood of the letter of credit matching the exact terms of the contract or proforma invoice is very small.

This raises the question: does the exporter go back to the customer and ask for three pages of amendments, or does he go back and ask for three critical amendments and otherwise work within the framework of the letter of credit as written? Think carefully about the message that the former can send to the customer: rigidity, pedantry, lack of acceptance of the country’s accepted methods of doing business, mistrust. Is this really what you want to say to your customer? Is this the way your competitors deal with the letters of credit they receive, or are you going to be perceived as a suspicious hair-splitter? Consider what your competitors are offering to the customer – they may have been supplying to that customer for many years and be willing to accept many of the terms that ordinarily you do not accept; where will the customer place his next piece of business?

The root of the problem for the exporter often lies with the doctrine of absolute compliance which is implemented with vigour by the banks. If the bank is going to split hairs on the wording of the letter of credit the exporter may have no choice and can explain this to his customer. It can be worthwhile to query a bank’s unfavourable interpretation of the wording by escalating the problem up the bank’s management chain.

Complicated documents

Do not take fl ight in the face of adversity. If your letter of credit looks more like War & Peace than the short and succinct payment instrument you were expecting, do not view it negatively. Certain markets expect you to comply with various documentary requirements which are accepted by experienced exporters to that country. In order to be an acceptable and competitive supplier, you might need to fall into line with that country’s accepted practices. There are several steps that can be taken to ensure that your documentary presentation will not fail:

First

Ask the advising/confi rming bank to check the terms of the credit. If they are familiar with the market, they will be able to point out any notable peculiarities of which the exporter should be aware, and advise you on the conventions of that particular market. If there are any obvious amendments that will be required, your bank should advise you (eg marine bill of lading showing goods delivered to Kitwe, Zambia - a landlocked country).

Second

Show the letter of credit to your shipping line or freight forwarder and instruct them to check its terms and conditions thoroughly and to draft a rough bill of lading in accordance with its terms. This will focus them on the documentary requirements, and they will soon tell you if there is anything they can’t put in the bill of lading that is required by the letter of credit.

Third


49

At an early stage, draft each document as required by the letter of credit. Check that they match the terms of the letter of credit, and then check that they match each other. If documents are required from third parties such as bills of lading or inspection or insurance certifi cates, ask the relevant parties to draft the documents (using the text of the letter of credit that you will have sent to them); check them to be in accordance with your requirements, have them amended if necessary, write in all the areas on the copies where you expect the documents to be stamped and dated (eg on the draft certifi cate of origin or on the bill of lading), and have a “dress rehearsal”. Send them to the bank for checking on a “without responsibility” basis. They will probably charge you for this service, but it will be well worth the money.

By holding a ‘dress rehearsal’, each party will know exactly what their document needs to look like, the bank can see what each document is going to look like and can point out any areas which need attention, eg ensure that the bill of lading is endorsed, or any other requirement that the bank may feel should be addressed before the actual preparation and presentation of documents. The exporter may be preserving his integrity in front of the customer in several ways: not asking for a ream of amendments is a good test passed; getting a documentary presentation right fi rst time is much appreciated, since the acceptance of discrepant documents invariably means that the exporter is expecting a person who works for the customer to take personal responsibility that the exporter has indeed supplied correctly, which may not be appreciated at all. Worse, the customer may have to have a board or committee meeting to decide whether to accept the discrepant documents.

Not only do these factors affect the decision-making process of the customer, and the prospect of the exporter obtaining future orders, but of course, they can disrupt the exporter’s cash fl ow. These can be overcome, 99 times out of 100. Good preparation and information is the key – use the organisations around you, particularly the confi rming bank and your shipping line.

Remember that whilst the letter of credit is primarily a fi nancial instrument, it is designed to facilitate the commercial relationship between the exporter and the customer.


50

Appendix 1 – A checklist

The initial checking should be undertaken when the letter of credit arrives. It is important to go through it line by line. You should consider the following:

• Does it comply with the contract?

• Does its validity period and your calculation of timings for production, shipment/delivery, inspection, production and examination of documents match?

• Is the latest shipment date acceptable and are partial shipments allowed?

• Where is payment to be made? At the advising/confi rming bank’s counters in the UK, or at the opening bank’s counters abroad? Do you have to present documents in the UK or at the counters abroad?

• Who pays for extensions/amendments to be made to the letter of credit?

• Is your company’s name correct?

• What are the documentation requirements? Are you able to meet these, and at what cost? Are all the required documents within your control? If not, how will you manage their preparation?

• Are particular markings required on cases?

• Loading port, off-loading port – are these physically possible? Are you manufacturing/sourcing from several locations?

• Are the defi nition of delivery, the mode of transport and the documents needed in accordance with the obligations as defi ned in Incoterms 2000?

• Drafts – are these needed? Sole or in duplicate? Drafts need to be drawn in accordance with the provisions contained in the letter of credit. Are they required to be endorsed?

• Is payment to be made on sight of documents, or is it to be made at some point in time from the ‘on board date’? If it is deferred, who retains the draft (if there is one) and represents it for payment at maturity?

• Is anything required to make the letter of credit operative, e.g. bonds/guarantees?

• When and where is the letter of credit payable?

• Is the opening bank a good risk, and its country a good risk? Where there is a concern about the opening bank or the potential for a shortage of foreign exchange, it is wise to seek confi rmation from a bank local to you.

• Do the terms of the letter of credit comply with the requirements of your credit insurance? Does your credit insurer need to agree the opening bank?

• Do you fully understand what the letter of credit says? If not, ask.


51

Appendix 2 - Swift Codes

This is a short explanation of the rather odd numbers that you will see in many letters of credit as they are advised to you by your bank.

Field number Field name Defi nition

27 Sequence of total

If only one message has been sent: 1/1

If several messages have been sent: 1/3, 2/3, 3/3 etc

40A Form of documentary credit

Specifi es the type of letter of credit

20 Documentary credit number

The reference which as been assigned by the sender eg 20:Z87654/IMP

23 Reference to Pre-Advice

If the letter of credit has been pre-advised, this fi eld must contain the word PREADV followed by a slash ‘/’ and a reference to the pre-advice (eg the date)

31C Date of Issue Specifi es the date on which the issuing bank (the sender) considers the letter of credit as being issued. The absence of this fi eld implies that the date of issue is the date on which the message is sent

31D Date and Place of Expiry

Specifi es the latest date for presentation under the letter of credit and the place where documents must be presented

51a Applicant Bank Specifi es the bank of the applicant (your customer), if different from the issuing bank (the sender)

50 Applicant Specifi es the party on whose behalf the letter of credit is being issued (your customer)

59 Benefi ciary Specifi es the party in favour of which the letter of credit is being issued (the exporter)

32B Currency Code, Amount

Contains the currency code and amount of the letter of credit eg:32B:CHF100000

39A Percentage Credit Amount Tolerance

Specifi es the tolerance relative to the letter of credit amount as a percentage plus and/or minus that amount. The fi rst subfi eld specifi es a positive tolerance, the second subfi eld specifi es a negative tolerance eg:39A:02/02

39B Maximum Credit Amount

Further qualifi es the letter of credit amount by using one of the following terms: ‘UP TO’, ‘MAXIMUM’ OR ‘NOT EXCEEDING’


52

39C Additional Amounts Covered

Specifi es any additional amounts covered, such as insurance, freight or interest

41a Available With … By …

Identifi es the bank authorised to pay, accept or negotiate the credit by its Bank Identifi er Code or name and address. It will be followed by how the credit is available - one of the following terms must appear in the second subfi eld:

BY PAYMENT

BY ACCEPTANCE

BY NEGOTIATION

BY DEF(ERRED) PAYMENT

BY MIXED PYMT

If the credit is to be freely negotiable by any bank, Option D ‘any bank in ..(city or country)’ will be used

42C Drafts at … Specifi es the terms of drafts to be drawn under the letter of credit.

Eg:42C:Draft at 120 days from Bill of Lading date

42a Drawee Identifi es the drawee of the drafts to be drawn

42M Mixed Payment Details

Specifi es the payment dates, amount and/or method for their determination in a letter of credit which is available by mixed payment (related to fi eld 41a)

42P Deferred Payment Details

Specifi es the payment date or method for its determination in a letter of credit which is available by deferred payment only (related to fi eld 41a)

43P Partial Shipments Specifi es whether or not partial shipments are permitted

43T Transhipment Specifi es whether or not transhipments are permitted

44A Loading on Board/Dispatch/Taking in Charge at/from…

Specifi es the place of dispatch or taking in charge of the goods or loading on board

44B For Transportation to …

Specifi es the fi nal destination of the goods

44C Latest Date of Shipment

Specifi es the latest date for loading on board / despatch / taking in charge

44D Shipment Period Specifi es the period of time during which the goods are to be loaded on board / despatched / taken in charge


53

45A Description of Goods and/or Services

Contains a description of the goods and/or services.

46A Documents Required

Specifi es the documents required under the letter of credit. When the ultimate date of issue of a transport document is specifi ed, it is to be specifi ed with the relative document in this fi eld

47A Additional Conditions

Specifi es any additional conditions that will apply to the letter of credit

71B Charges This fi eld may only be used to specify charges to be borne by the benefi ciary. In its absence, all charges, except negotiation and transfer charges, will be borne by the applicant.

The code words listed below may be used, followed by the currency code and amount:

/AGENT/ Agent’s commission

/TELECHAR/ Teletransmission charges

/COMM/ Our commission

/CORCOM/ Our correspondent’s commission

/DISC/ Commercial Discount

/INSUR/ Insurance Premium

/POST/ Our postage

/STAMP/ Stamp duty

/WAREHOUS/ Wharfi ng and warehouse

48 Period for Presentation

This fi eld specifi es the period of time, expressed in number of days, after the date of the issue of the transport document(s) within which the documents must be presented for payment, acceptance or negotiation. The absence of this fi eld means that the presentation period is the usual 21 days


54

49 Confi rmation Instructions

Contains the confi rmation instructions for the receiver as follows:

CONFIRM: The receiver is requested to confi rm the credit

MAY ADD: The receiver may add its confi rmation to the credit

WITHOUT: The receiver is not requested to confi rm the credit

53a Reimbursement Bank

Specifi es the name of the bank which has been authorised by the sender to reimburse drawings. With the exception of a letter of credit valid for negotiation, if there is a single direct account relationship, in the currency of the letter of credit, between the sender and the receiver, the absence of this fi eld 53a means that this account relationship will be used for reimbursement

78 Instructions to the Paying/Accepting/Negotiating Bank

Instructions to the receiving bank

57a ‘Advise Through’ Bank

Specifi es the name of the bank, if different from the receiver, through which the letter of credit is to be routed / advised / confi rmed to the benefi ciary

72 Sender to Receiver Information

Any information between sender and receiver

Notes

1) Either fi eld 39A or 39B, but not both, may be present.

2) When used, fi elds 42C and 42a must both be present.

3) Either fi elds 42C and 42a together, or fi eld 42M alone, or fi eld 42P alone, may be present. No other combination of these fi elds is allowed.

4) Either fi eld 44C or 44D, but not both, may be present.


55

Appendix 3 - Contact details

BExA

The British Exporters Association is an independent trade association representing all sectors of the export community. Established in 1940 as the National General Export Merchants Group, it became the British Export Houses Association in 1961. With the admission of manufacturers into membership, it assumed its present name in 1988.

Membership is open to all companies and other organisations resident in the United Kingdom who export goods or services, or who provide assistance to such companies in the promotion and furtherance of export activities.

The Association

• lobbies for exporters at Westminster and in Brussels

• infl uences the decision makers

• provides an information exchange for members

• provides an informed forum for British exporters.

The Association is also geared to the requirements of British export houses i.e. non-manufacturing exporters. It brings together the export interests of manufacturers, export houses, bankers and export credit insurers.

The British Exporters Association

Broadway House Tothill Street London SW1H 9NQ

Tel: 020 7222 5419 Fax: 020 7799 2468

[email protected]

AIG

AIG is one of the world’s leading international insurance and fi nancial services organisations, with operations in approximately 130 countries and jurisdictions. AIG member companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. AIG’s fi nancial services businesses include aircraft leasing, fi nancial products, trading and market making.

With over 50 years of experience in the UK market, AIG currently protect over half of the UK top 1,000 companies, as well as many smaller businesses.

Trade Credit and Political Risks Insurance protects businesses against a wide range of risks associated with business operations. This could include non-payment of debts from a customer, defaulted or repudiated contracts and changes in foreign economic stability or regulation such as a cancellation of import/export licences. In addition it can provide cover for risks associated with stock or manufacturing abroad, equity investments and international joint ventures.


56

AIG Europe (UK) Limited

The AIG Building58 Fenchurch Street London EC3M 4AB

Tel: 020 7954 7000 Fax: 020 7954 7001

[email protected]

Aon Forfaiting

Aon Forfaiting offer a broad range of trade fi nance solutions. A company’s ability to offer attractive payment terms to its buyers, or accept the conditions demanded by them, can have a signifi cant effect on its competitiveness and success. Aon Forfaiting provide trade fi nance solutions which enable companies to sell on extended credit terms and accept reduced payment security, whilst maintaining cash fl ow and avoiding credit and political risk.

Aon Forfaiting specialise in non-recourse discounting of domestic and export receivables, based on the purchase of bills of exchange, promissory notes and invoices. They also have particular expertise in letters of credit, including confi rmation, discounting and document checking. Their aim is to provide sellers with cash on delivery and certainty of payment, at the same time allowing them to trade on aggressive terms. They provide facilities for countries where fi nancing capacity is limited or insurance protection is unavailable.

Being independent of banks, insurance companies and other fi nancial institutions, they offer easy access to the trade and export fi nance market, together with unbiased objective advice.

Aon Trade Credit

Aon Trade Credit create receivables management solutions for companies that give trade credit. They work for a diverse range of domestic and exporting companies, and use unparalleled technical knowledge to negotiate the most appropriate and competitive solutions for their clients.

These solutions enable their clients to evaluate and manage their portfolio of customers and:

• avoid the impact of bad debt,

• avoid political and economical loss,

• convert receivables into cash, and

• raise cost-effective funds for the business.

They offer a range of services including credit and political risk insurance, trade fi nance, invoice fi nance, credit management consultancy, outsourced policy management and “pay-as-you-use” business information.

Their principal areas of expertise include:

• Protection

• Trade credit insurance

• Political risk insurance

• Supplier default


57

• Finance

• Invoice fi nance

• Receivables fi nance

• Factoring

• Distributor fi nance

Susan Ross Amy Slayford

Tel: 020 7882 0365 Tel: 020 7882 0146

[email protected]

Atradius

Atradius credit insurance can protect business against the risks inherent in the sale of goods and services, both at home and around the world.

By insuring commercial transactions, they safeguard against the potentially devastating effects of a loss caused by the insolvency or protracted default of one or more customers. For international trade, external factors such as import and trade restrictions can also interfere with the successful completion of a contract of sale. Atradius’ policies protect the exporter against a wide range of commercial and political risks.

Atradius, one of the world’s leading credit insurance and credit management companies, protects EUR300 billion of world trade (including £53.5 billion of UK business) annually against the risks of non-payment. Headquartered in Amsterdam, the group has 90 offi ces and a presence in over 40 countries on fi ve continents, employing around 3,500 people.

Atradius are currently number two in the world credit insurance market, and have a total turnover of about EUR1.3 billion, giving them a 25 per cent market share. Atradius has a stand-alone rating of A from Standard & Poor’s and A2 from Moody’s.

Atradius Credit Insurance

3 Harbour Drive Capital WatersideCardiff CF10 4WZ

Tel: 0800 212131 Fax: 02920 487721

[email protected]/uk/

Bankers’ Almanac

The Bankers’ Almanac book has been an important banking reference for over 150 years. Published twice a year, in January and July, it is a helpful tool for processing payments, conducting credit analysis or fi nancial research.

It contains

• full address and telecoms details for up to 4,000 international banks plus up to date information on head offi ce personnel, bank correspondents, SWIFT and national bank codes

• comprehensive information on over 250,000 bank offi ces arranged in alphabetical order


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• details such as central banks, associations, languages, public holidays and time zones

• address and telecoms details for over 19,000 non-international banks authorised by their central bank or monetary authority

• contact details of over 4,400 owners of international banks and 1,200 lawyers specialising in banking law

• additional information such as bank name changes, liquidations, associations, institutions, telegraphic addresses and coins and notes of the world.

It is possible to search for banks located in over 82,000 towns and 209 countries.

Bankers’ Almanac

Windsor CourtEast Grinstead HouseEast Grinstead West SussexUnited Kingdom RH19 1XA

Tel: 01342 335722 Fax: 01342 335977

[email protected] bankersalmanac.com

COFACE

COFACE are a leading player in the UK trade credit protection and solutions market and part of the COFACE Group, the world’s largest export credit insurance group. With a presence in the UK dating back to 1993, COFACE can provide exporters with a range of solutions for trade credit for trading in the UK domestic as well as the export market.

COFACE aim to service the diverse trade credit management needs of today’s UK and international business environment by providing a full package of products and services ranging from straightforward credit insurance policies to credit assessment and comprehensive collections management services.

A leading player in the UK trade credit protection and solutions market, COFACE aims to service their clients’ diverse credit management needs by providing a full package of products and services. They provide UK-based companies with:

• Straightforward credit insurance policies

• World beating credit assessment

• Comprehensive collections management

• Flexible receivables fi nance

COFACE

15 Appold StreetLondon EC2A 2DL

Tel: 020 7325 7500 Fax: 020 7325 7699

[email protected] www.cofaceuk.com


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Cotecna Inspection SA

Cotecna is one of the world’s leading trade inspection, security and certifi cation companies. They have been a global authority in the inspection industry for over 30 years. Cotecna combines state-of-the-art technology and knowledge transfer with innovative, tailor-made services to improve and secure trade environments around the world.

Cotecna Inspection Limited have been working in the inspection, verifi cation and certifi cation industry within the UK since 1984

Their range of inspection and verifi cation services include:

• commercial pre-shipment inspection for importers and exporters,

• textile inspections in Asia,

• bulk cargo inspection,

• loading and discharge draught surveys,

• laboratory testing and analysis services,

• health and safety risk assessments, and

• disabled access audits.

Cotecna Inspection Limited

One Lampton Road Hounslow Middlesex TW3 1JB

Tel: 020 8277 7700 Fax: 020 8277 7805

[email protected] www.cotecna.com

Croner’s

Croner’s Reference Book for Exporters is a comprehensive guide to exporting to 162 countries. For over 50 years it has helped subscribers get things right fi rst time, thus avoiding costly delays in delivery and payment. At the core of the package is the loose-leaf manual, which is split into two sections. Section one provides general guidance on exporting procedures including export control, customs procedures, export payments and certifi cates of origin. Section two of the manual provides individual country information, from Afghanistan to Zimbabwe. It provides vital information including principal port, currency, local Chamber of Commerce, banks and documentation requirements.

All of the information in the loose-leaf manual is also provided online and on CD-ROM.

Updates, newsletters and the monthly Trade International Digest help subscribers to stay informed of any new developments. Bulletins provide analysis of specifi c topics of interest.

Croner’s

145 London RoadKingston upon ThamesSurrey KT2 6SR

Tel: 020 8547 3333 [email protected]: 020 8547 2637 www.croner-uk.co.uk


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Ducroire Delcredere

Ducroire Delcredere SA NV was formed in 2004 by ONDD, the Belgian national Export Credit Agency. They undertake the short term credit and political risk business for Belgian exporters and for other companies based in the European Union and in Switzerland.

Ducroire Delcredere specialise in emerging markets and are able to agree open account terms in more than 200 countries. They have considerable experience in riskier markets having a history in these markets from 1921. They rate each country in terms of credit and political risk and the ratings can be found on their website. They tailor policies for exporters, whether for commodities sales or for those on contracting terms. Contact with the company is through specialist brokers and the UK Director is Mr Andrew Strong.

Tel: 01932 268442

[email protected] www.ducroiredelcredere.eu

Dun & Bradstreet

D&B, a leading provider of business information, has been enabling business-to-business commerce for 160 years. D&B’s information and technology solutions help businesses reduce credit risk and fi nd profi table customers effi ciently. They have the largest company database available, with information on 75 million businesses and branches worldwide.

Businesses also use D&B’s information and technology to authenticate and verify potential trading partners online, increasing their trust and confi dence in e-commerce transactions.

Tel: 0800 001234 www.dnb.com

EULER HERMES

Trading on credit terms has its risks - customer insolvency, commercial risks, political risks, overdue accounts, bad debts. Whatever your business’ size, whether you trade in the UK or overseas, they can help reduce such risks, help you target profi table customers and help you manage your trade receivables. Their principal products include:

• Credit insurance of commercial risks and political risks to provide accounts receivable cover and bad debt protection should a customer become insolvent or default on payment,

• Credit opinions backed by unique information on 40 million companies worldwide, to assess the creditworthiness of your customers and target quality prospects, thereby enhancing your credit control activities, and

• Commercial debt collection providing a professional service to help recover overdue accounts in the UK and overseas.

Euler Hermes is present in 48 countries and has a 36% share of the world credit insurance market. Its mission is to help companies grow by insuring them against the risk of buyer insolvency - whatever their size, sector or country of origin. Through its primary activity of credit insurance, Euler Hermes has developed a comprehensive range of services for the management of companies’ trade receivables.


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As a member of the Allianz Group, and a subsidiary of AGF, Euler Hermes benefi ts from their fi nancial solidity to provide long-term support for clients. Euler Hermes employs 5,500 staff members worldwide.

Euler Hermes

1 Canada SquareLondon E14 5DX

Tel: 020 7512 9333www.eulerhermes.com

Exporters

Exporters is an association of manufacturers, trading companies and fi nancial institutions with the common objective of managing commercial and political risks in their global operations. They are a group captive insurer, domiciled and licensed in Bermuda and issuing policies of insurance to their members, their designees, and other eligible insureds.

They offer a broad range of export credit and political risk policies, but their ultimate value lies in the ability to tailor their products to the unique requirements of their members. Through innovative policies, quick turnaround and an emphasis on risk management, they help their members expand their international reach within prudent levels of risk assumption.

Membership is open to all qualifi ed fi rms that purchase Capacity Entitlement Certifi cates from Exporters.

EXPORTERS INSURANCE COMPANY (EUROPE) LTD

37-39 Lime Street,London EC3M 7AY

Tel: 020 7256 3920 Fax: 020 7626 4693

[email protected]

ICC

The International Chamber of Commerce

ICC Uniform Customs and Practice for Documentary Credits (UCP600) is a practical and comprehensive set of 39 rules that address the major issues in documentary credit usage. The rules become effective on 1 July 2007 and are essential reading for anyone involved in handling letters of credit.

ICC publication no 645, ‘International Standard Banking Practice (ISBP) for the examination of documents under documentary credits’ was designed to clarify the interpretation of UCP 500. It fi lls the gap between the general principles and the work of the letter of credit practitioner and is to be updated to follow the changes introduced with UCP600.

Incoterms 2000 ICC Publication No.560

Incoterms 2000, the latest update of ICC’s standard standard reference book for parties involved in international trade transactions, came into force on 1 January 2000. It describes and interprets the meaning of the 13 basic terms used in international sales contracts. These terms are regularly incorporated into sales contracts and have become part of the daily language of international trade.


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ICC Publishing SA,

38 Cours Albert 1er75008 ParisFrance

ICC UK, 12 Grosvenor Place, London SW1X 7HH

Tel: 020 7823 2811Fax: 020 7235 5447

www.iccwbo.org

www.iccbooks.com

SGS – Societe Generale de Surveillance

The SGS group provides verifi cation, testing and monitoring services for international trade in a wide range of sectors.

SGS Société Générale de Surveillance S.A.

1 place des AlpesP.O. Box 21521211 Geneva 1Switzerland

Tel: 00 41 22 739 91 11Fax: 00 41 22 739 98 86

www.sgs.com


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Appendix 4 – Introduction to the 2003

(UCP500) guide

Introduction

‘Documentary Letter of Credit’, ‘ILC’, ‘L/C’, ‘Credit’, letter of credit, ‘doc credit’. These are only some of the more common names for an instrument that has been in use in international trade for centuries. The term used by the generally recognised rules for the handling of letters of credit is ‘Credit’. This guide uses ‘letter of credit’ as the term commonly used by exporters.

Whatever it might be called it is still the staple of the export trade. In its absence it is diffi cult to imagine the world of international trade having developed as it has. It is the mechanism by which, to this day, enormous values of international trade are paid for. Over time it has developed from a simple payment mechanism to a basis for fi nancing contracts and into an alternative to contract guarantees and bonds.

Purpose of this guide

The purpose of this guide is to offer to members of the British Exporters Association a reference work for use in the offi ce. Ideally, members will fi nd it to be readily accessible and of practical use; we will have failed in our purpose if it is cursorily read and then put on a shelf to gather dust. Our intention is that the guide should provide practical advice to those involved in the use of letters of credit as British exporters. Whilst much could be gained from the guide from the point of view of the export customer it is written with the British exporter in mind.

Terminology

In preparing this guide I, as editor, have tried to maintain a degree of consistency with regard to terminology.

The ‘exporter’ is fairly self-explanatory (bearing in mind that the guide is written from the point of view of a company in the UK exporting goods or services to a country overseas with the intention of receiving payment for that export from overseas).

Where it appears, ‘you’ means the exporter.

In the context of this guide the ‘benefi ciary’ is the exporter.

The ‘customer’ is the exporter’s counter-party, the purchaser of the goods or services (notwithstanding that the exporter is a customer of a bank).

The ‘opening bank’ or the ‘issuing bank’ is the bank which opens or issues the letter of credit at the request of the customer (after being prompted to do so by the exporter). It may be the customer’s clearing bank.

The ‘advising bank’ is the bank in the UK which advises the exporter of the arrival of the letter of credit and of its terms. It will be one of the correspondent banks of the opening bank and may be the exporter’s clearing bank.

The ‘confi rming bank’ is the bank which adds its confi rmation (an undertaking to pay which is independent of the opening bank’s obligation to do so) to the letter of credit. It will generally be the advising bank but not necessarily so.


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Other reference material

This guide is not designed to be the last word on letters of credit. The International Chamber of Commerce has produced a series of documents the purpose of which is to regulate the use of letters of credit in international trade. These are essential reading for anyone involved in handling letters of credit. Letters of credit used in international trade should be issued subject to the terms of Uniform Customs and Practice for Documentary Credits (UCP), but a specialised form, the Standby letter of credit, which has much in common with a guarantee, may be subject to International Standby Practices (ISP), which sets out the rights and obligations of the various parties. The latest versions of these documents, UCP500, eUCP (accommodating electronic documentation) and ISP are available from the International Chamber of Commerce. The aim of the ICC is to make it easier for companies in different countries to trade with each other, thus contributing to the expansion of international commerce.

All comments in this guide relate to letters of credit which have been issued subject to UCP500. It would be unwise to accept a letter of credit which is not subject to UCP500 if you are asked to do so.

The exporter should also familiarise himself with Incoterms 2000 (also available from ICC Publishing). These are the internationally recognised terms of delivery. They defi ne which party is liable for which transport costs and at which point responsibility for risk in - and hence the need to insure - the goods passes from one party to another.

Contributors

Most of the work involved in the production of this guide has been done by others, in particular:

Malcolm Booth of BExAJohn Brown of Bank of Scotland Bob Bruce of RaytheonRussell Davenport of Credit LyonnaisDavid Donnelly of AlstomAlan Findlay of BNP ParibasJonathan Hardesty of RBS Tim Hardy of Barlow, Lyde and Gilbert Peter Litherland of RBS John Lodge of Marconi Selenia Communications Holdings (UK) Andrea Manning of Wallace Shipping ServicesDavid Meynell of Deutsche Bank Andrew Neill of Newstead International LimitedMichael Possener, Export Consultant Susan Ross of Aon Trade CreditRobert Scallon of ThalesJeremy Smith of LloydsTSBSue Walton of Rolls-RoycePhil White of BNP ParibasMichelle Wienburg of Alperton.

Any value which it might have is attributable to them and to their contributions. All views expressed are personal.

Bearing in mind these caveats, the guide is offered to you in the hope that it will assist in securing your export receivables. Much of what follows


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revolves around preparation for the avoidance of problems before they arise. If the advice which it offers helps achieve payment for an export, which might not otherwise have been received, it will have done the job which we intended.

Richard HillBAE SYSTEMS plcChairman, BExA Industry SectionOctober 2003

19704135 the BExA Guide to Letters of Credit UCP600 Update 2007

Documents

Transcript of 19704135 the BExA Guide to Letters of Credit UCP600 Update 2007