Case studies ICC Letters of Credit

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Commission on Banking Technique and Practice

Educational Opinions of the ICC Banking Commission

At the November 2009 Banking Commission meeting it was agreed that a two tiersystem of responding to queries would be introduced. The usual official opinions areto be supplemented by what will be known as educational responses. Queriessubmitted to the Banking Commission will be reviewed and placed into one of the

two categories.

Attached to this note are 8 new queries that have been designated by the Officers asbeing educational in nature. As the responses are considered to be educational, they

will not be discussed at the Orlando meeting, are provided for your information onlyand no comments are requested. The initiators remain at liberty to subsequentlyrequest an official opinion, in which event the query will be re-submitted to nationalcommittees for comment at a later meeting.

Although the intention is that these queries are not discussed, we did receivecomments from a couple of ICC offices requesting that the last paragraph of the

analysis and conclusion of TA718 be removed as they would not have the capabilityto support the pursuing of disputes with other ICC offices. As some ICC offices donot have the facilities or manpower that this may entail, the decision has been takento remove the referenced paragraph.

For your information, please find attached Educational Queries 470/TA727-734

26 July 2010/TS/wfDocument 470/1148


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Mrs. Yeliz GeriICC Turkey - ICC Trkiye Milli KomitesiExecutive Director / Mdr V.

Atatrk Bulvar, No. 149 Bakanlklar 06640Ankara,Turkey

27 May 2010

Subject: Document 470/TA.727(ED)

Dear Mrs. Geri,

Thank you for your query regarding UCP 600. Please find below the view(s) ofthe officers of the Banking Commission.

QUOTE

We have been seeing credits calling for bills of lading or multimodal transportdocuments and stating in the additional conditions field:

1) Forwarders bill of lading is not acceptable, or2) Transport documents issued by freight forwarders not acceptable, or3) Transport documents issued or signed by freight forwarders not acceptable.

Under the foregoing conditions which of the following transport documents areacceptable?

Case A: Issued on the letterhead of the carrier reading in part DEF ShippingLine .. and signed by a forwarder ABC Freight Line Co .. as agent for the carrieror for the master.

Case B: Issued on the letterhead of the carrier reading in part DEF ShippingLine and signed by the master.

Case C: Issued on the letterhead of a forwarder reading in part ABC FreightLine Co and signed by it as agent for a named carrier.

Case D: Issued on the letterhead of a forwarder reading in part ABC FreightLine Co , indicating separately the name of the carrier, signed by the forwarder asagent for the master.



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NATIONAL COMMITTEE ANALYSIS AND CONCLUSION

In respect of the conditions mentioned in item 1 and 2, the credit is prohibitingthe transport document being issued on the letterhead of the forwarder. If, however,the forwarder issues it on its letterhead and signs in the capacity of a carrier, then thedocument becomes a carrier type document and must be accepted. Similarly, if thetransport document is issued on the letterhead of the carrier and signed by theforwarder as agent for the carrier or for the master, once again the document mustbe accepted.

In respect of the condition mentioned under item 3, where a credit states that atransport document issued or signed by a forwarder is not acceptable, in additionto the comments made above as to the act of issue, the document must also besigned by a party acting as carrier or master and not a party as agent for either ofthem.

In conclusion:

1-Under a credit incorporating the condition (s) in item 1 and 2, a transportdocument issued and signed in the manner as stated in:

Case A is acceptable,Case B is acceptable,Case C is not acceptable,Case D is not acceptable.

2-Under a credit incorporating the condition in item 3, a transport documentissued and signed in the manner as stated in:

Case A is not acceptable,Case B is acceptable,

Case C is not acceptable,Case D is not acceptable.

ANALYSIS & CONCLUSION

The analysis and conclusion of the national committee is agreed.

The opinion(s) rendered on this query reflect the view(s) of the ICCBanking Commissions officers based on the facts under QUOTE above. Theydo not necessarily reflect the view(s) of the ICC Banking Commission. This

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query is considered to be of an educational nature and will not be placedbefore the next Banking Commission meeting for approval.

The reply given is not to be construed as being other than solely for thebenefit of guidance and there should be no legal imputation associated withthe reply offered.

Neither the ICC nor any of its employees, nor any member of the BankingCommission, including the Chairman, Vice-Chairmen or Technical Advisershall be liable to any person for any loss or damage arising out of any act oromission in connection with the rendered opinion(s).

Yours sincerely,

Thierry SenechalPolicy ManagerBanking Commission

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27 May 2010

Subject: Document 470/TA.728 (ED)

Dear Mrs. Geri,


QUOTE

Under a standby credit subject to UCP600, a copy of an unpaid invoice isrequired to be presented, in addition to a beneficiary's certificate. The beneficiary'scertificate complies, but the invoice is issued for an amount that is higher than that ofthe standby.

Bearing in mind that the invoice is a supporting document, please advisewhether the issuing bank or a confirming bank, if any, or a nominated bank acting onits nomination, as the case may be, must accept such invoice as with the case of sub-rule 3.08 (e) of ISP98, or do they still reserve the right to reject in line with thecontent of UCP 600 sub-article 18 (b).


Article 1 of UCP600 states in part that the rules shall apply to any documentarycredit (credit) (including to the extent to which they may be applicable, anystandby letter of credit).

Sub-article 18 (b) reads A nominated bank acting on its nomination, aconfirming bank, if any, or the issuing bank may accept a commercial invoice issuedfor an amount in excess of the amount permitted by the credit, and its decision willbe binding upon all parties, provided the bank in question has not honoured ornegotiated for an amount in excess of that permitted by the credit.



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The issue raised in the query highlights one of the many problems that can arisewhen a standby credit is issued subject to the UCP.

However, as stated in the query, the invoice in this case is a supportingdocument and a bank may not be expected to know the complete payment termsrelating to the underlying transaction on which the standby may be based.

Provided the amount of the invoice is not less than the amount demanded, theissuing bank, confirming bank or a nominated bank acting on its nomination, doesnot have any grounds to refuse the invoice.



The opinion(s) rendered on this query reflect the view(s) of the ICCBanking Commissions officers based on the facts under QUOTE above. Theydo not necessarily reflect the view(s) of the ICC Banking Commission. Thisquery is considered to be of an educational nature and will not be placedbefore the next Banking Commission meeting for approval.

The reply given is not to be construed as being other than solely for thebenefit of guidance and there should be no legal imputation associated with

the reply offered.Neither the ICC nor any of its employees, nor any member of the Banking

Commission, including the Chairman, Vice-Chairmen or Technical Advisershall be liable to any person for any loss or damage arising out of any act oromission in connection with the rendered opinion(s).

Yours sincerely,


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27 May 2010


Dear Mrs. Geri,


QUOTE

A standby credit, subject to UCP 600, stipulates instalment drawings as follows:USD50,000.00 may be drawn between 01 Jan 2010 and 01 Mar 2010. USD50,000.00may be drawn between 02 March 2010 and 01 May 2010.

Please advise whether the standby credit ceases to be available for the first andsecond instalment if the beneficiary does not draw partly or wholly under the firstinstalment between 01 Jan 2010 and 01 Mar 2010.


Article 1 of UCP 600 states in part that the rules shall apply to any documentarycredit (credit) (including to the extent to which they may be applicable, anystandby letter of credit).

Article 32 states that if a drawing or shipment by instalments within given periods isstipulated in the credit and any instalment is not drawn or shipped within the periodallowed for that instalment, the credit ceases to be available for that and anysubsequent instalment.

Therefore, article 32, by its heading and content, will apply to any credit issuedsubject to UCP 600 that contains an instalment drawing or shipment schedule. Itfollows that if the first drawing is not made partly or wholly within the periodspecified, the standby credit ceases to be available for that and the second drawing.



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It is for this reason that where an instalment drawing schedule is stated in a standbycredit subject to UCP 600, article 32 should always be excluded.







Yours sincerely,


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27 May 2010


Dear Mrs. Geri,


QUOTE

We have been seeing the following clauses on insurance documents. Pleaseadvise acceptability of these clauses according to article 28 of UCP 600.

Clause 1:

PREMIUM PAYMENTS AND POLICY ANNULMENT CLAUSE:

Unless otherwise agreed, the insurer's obligation shall in no way commenceunless the premium is paid or the down payment is made, regardless of whether thepolicy is delivered or not.

There is no marking of premium paid on the policy.

Clause 2:

In cases when it's agreed that the first installment (down payment) or all of thepremium is paid by the policy holder by credit card rather than in cash upon his/herconsent and request, and that a delay payment by credit card is granted to the policyholder, the liability of the insurer commences upon the withdrawal of the firstinstallment (down payment) or all of the premium from the credit card on the pre-agreed day. The insured shall be deemed to be in default in case he/she fails to paythe insurance premium or in cases when the parties agree to have the premium paidin installments, down payment or any one of the installments, having their final due



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dates stipulated on the policy until the due date. In case the insured is in default byfailing to pay the premium, then the provisions of the Obligations Code shall becomeapplicable and the contract shall be annulled at once without any further notice incompliance with paragraph 3 of article 107 of Obligations Code."


Clause 3:

We, ABC INSURANCE hereby agree, in consideration of the payment to us by oron behalf of the assured of the premium as arranged, to insure against loss, damage,

liability or expense to the extent and in the manner herein provided."


Clause 4:

In case of any claim payment through this policy, the assured (insured party)agrees to pay the additional premium arising from the difference between the foreignexchange rates, on the claim payment day and on the policy issuance day. The termsof the credit are CIF.


Clause 1:

The clause expressly indicates that even if the policy is issued and delivered itwill not be effective unless the premium is paid. Therefore, there should be evidencethat the premium had been paid for the insurance to be effective.

The document is discrepant.

Clause 2:

The clause expressly indicates that if any part of the premium is not paid, theinsurance is cancelled. There is no indication that the premium has been paid.


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Clause 3:

By stating "in consideration of the agreed premium paid to the Company"reference to 'the agreed premium paid' would not imply that the premium is still tobe paid.

Unless there is a statement on the document that the premium is unpaid orsimilar, the document is acceptable.

Clause 4:

Given that the terms of the credit are CIF, the insurance is contracted for by thebeneficiary and premium is paid by it.

However, the clause states that in case of any claim the assured will pay theadditional premium before being paid under the policy.






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Yours sincerely,


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27 May 2010


Dear Mrs. Geri,


QUOTE

We have been seeing the following clauses on insurance documents.

Clause 1:

This insurance does not cover any loss or damage to the property which at thetime of happening of such loss or damage is insured by or would, but for theexistence of this Policy, be insured by any fire or other insurance policy or policies,except in respect of any excess beyond the amount which would have been payableunder the fire or other insurance policy or policies had this insurance not beeneffected.

Does the above clause create a discrepancy?

Clause 2:

This policy is prepared according to the material facts disclosed by theproposer as is shown in the proposal form and is subject to the enclosed general andspecial conditions and clauses attached and the Company hereby agrees to indemnifythe Assured, against payment of the premium due, in case of a marine peril asdescribed above".

Please advise how should "enclosed general and special conditions and clausesattached" be interpreted, can we deem the indication of clauses i.e. ICC (A) as



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required by the credit and shown on the policy sufficient or must we look for generaland special conditions in these other pages to be physically attached/enclosed to theinsurance policy itself due to the wording "enclosed general and special conditions.

Clause 3:

The cover will be valid, if and only if, the transporting vessel(s) have a valid ISMCertificate and Classification Certificate (according to Institute Classification Clause01.01.2001) during the transport.

There is no data on any required document meeting the above mentioned

condition. Please advise whether this creates a discrepancy.

Clause 4

CAUTION:This policy is subject to the following mentioned conditions and warranties:

1. The vessel should be fully classed and class maintained with class societymember of IACS (including Turk Lloyd) as per Institute Classification Clause01.01.2001 as per attached wording. Therefore, the vessel being nominatedshould be complied with the stipulation stated thereof.

2.

Vessel should also be a member of a respected P & I (Protection & Indemnity)club member of International Group.3. Vessel should also be complied with the ISM requirements.4. A vessel which does not have above mentioned qualifications and are aged

over 35 and tankers aged over 15 will not be covered.

There is no data on any required document meeting the above mentionedconditions. Please advise whether this creates a discrepancy.


Clause 1:

An insurance document should cover the designated risks from the date ofshipment (at the latest) to the point where the credit may state that the insurance isto cease, or the point at which the respective Institute clauses designate as closure.

The intent of an insurance document presented under a credit is that it is astand-alone document that is capable of being claimed under following any eventthat falls under the risks that are covered.

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However, the wording implies that in the event of loss or damage, the goodswill not be covered if the risk was covered by any other policy that may be in place atthe same time for that purpose.


Clause 2:

Reference to "enclosed" can be deemed to be clauses that are referenced withinthe document itself such as ICC (A) etc. However, where it refers to "clausesattached" then there is a specific requirement for the policy to contain some form of

attachment(s) that complete the policy document.

Absent such attachment(s), the document is incomplete and discrepant.

Clause 3:

The expectation of an applicant, when calling for an insurance document, is thepresentation of a free standing document that operates in its own right and withoutit being subject to pre-conditions.

Since there is no data on any required document meeting the conditions asrequired by the clause, the insurance may be considered null and void by the insurer.


Clause 4:

Similar to the conclusion to clause no.3 the expectation of an applicant, whencalling for an insurance document, is the presentation of a free standing documentthat operates in its own right and without it being subject to pre-conditions.

Since there is no data on any required document meeting the conditions asrequired by the clause, the insurance may be considered null and void by the insurer.



The analysis and conclusions of the national committee are agreed, except inrespect of Clause 1.

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Sub-article 14 (a) requires a nominated bank acting on its nomination, aconfirming bank, if any, and the issuing bank to examine a presentation todetermine, on the basis of the documents alone, whether or not the documentsappear on their face to constitute a complying presentation. There appears to be noevidence that any other insurance has been taken out for the same shipment andtherefore the bank should examine the document on the basis that it is the soleinsurance document for the shipment at hand.

The opinion(s) rendered on this query reflect the view(s) of the ICCBanking Commissions officers based on the facts under QUOTE above. They

do not necessarily reflect the view(s) of the ICC Banking Commission. Thisquery is considered to be of an educational nature and will not be placedbefore the next Banking Commission meeting for approval.



Yours sincerely,


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27 May 2010


Dear Mrs. Geri,


QUOTE

An insurance policy shows at the bottom, in preprinted wording, "Not validunless countersigned by ABC" and underneath "Countersigned at .... (blank) Date:13/10/2009 Endorsed at... (this field is also blank)".

As is seen, the endorsement date is missing and there is no issue or effectivenessdate shown in the document. The shipment date is the same as countersignaturedate, i.e., 13/10/2009.

Is the document discrepant for the missing issuance date or the effectivenessdate, or may the countersignature date be taken as the effective date of the policyand the policy is acceptable?


Sub-article 28 (e) states that the date of the insurance document must be nolater than the date of shipment, unless it appears from the insurance document thatthe cover is effective from a date not later than the date of shipment.

Furthermore, the first sentence of ISBP681, paragraph 13 states that drafts,transport documents and insurance documents must be dated even if a credit doesnot expressly so require.



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As regards the insurance document, the notion of date mentioned in sub-article 28 (e) and ISBP paragraph 13 should not be confined merely to the issue dateof the document but rather to the date on which the document becomes effective.

In the case at hand, the date of the countersignature is the date that theinsurance becomes effective which should be examined by banks to determine thecompliance with the credit and UCP. The inclusion of the countersignature datedeems an indication or otherwise of the date of issue (endorsement date) in thedocument is not necessary.

The document is compliant.


It should be noted that Endorsed at .. is signifying the adding of a place andnot a date of the endorsement. Absent any other date, the countersignature date

would serve as evidence of the effective date of the insurance coverage.

The analysis and conclusion of the national committee is agreed subject to theabove comments.




Yours sincerely,


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27 May 2010


Dear Mrs. Geri,


QUOTE

An insurance document is issued on the insurance company's headed paper(ABC Company). However, it is signed by another company declaring itself "as agent"

without further stating "on behalf of the Insurance Company above" or "on behalf ofABC Company" or "on behalf of Insurance Company, ABC Company".

We understand from ICC Opinion R685 that the document is not acceptable.

Please advise whether the document is discrepant.


The second paragraph of sub-article 28 (a) of UCP 600 states [A]ny signature byan agent or proxy must indicate whether the agent or proxy has signed for or on

behalf of the insurance company or underwriter.

Moreover, as stated in the opinion quoted in the query, a bank needs to knowthe connection with the signing party and the insurance company/underwriter on

which the signing party has acted.

It follows therefore that the document must indicate on whose behalf the agentis signing or acting either as part of the signing process, e.g., DEF, as agent for ABCCompany or elsewhere in the document.



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Although ICC Opinion R.685 was issued in connection with a credit subject toUCP 500, the same position would prevail under UCP 600 in respect of this query.The analysis and conclusion of the national committee is agreed.





Yours sincerely,


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Mr. Wilko GunsterSecretary GeneralICC NederlandBezuidenhoutseweg 122594 AV DEN HAAGThe Netherlands

27 May 2010

Subject: Document 470/TA.734(ED)

Dear Mr. Gunster,


QUOTE

We seek an opinion on the correct interpretation of the L/C clause(s) mentionedbelow, since we recently experienced difficulties with their interpretation.

Although we realise that the clauses referred to are not subject to any specificUCP article, we believe that such clauses are so common that an opinion from theICC would be beneficial in ensuring all parties apply a uniform understanding.

The following is the exact wording of the clause in dispute and is a clause wesee in varying forms in L/Cs on a regular basis. The clause quoted appears in a L/Cissued subject to UCP 600, which requires presentation of drafts, invoices, bills oflading, packing lists and 4 different beneficiary certificates:

(Example 1)

QuoteAll documents except Bill of Lading must indicate this credit number and P.O.no. XXXXXUnquote

The problem seems to be the interpretation of the word except and whateffect it has on the clause. In our opinion, the word means that the excepteddocument does not need to comply with the instruction that follows. Only theremainder of the documents must comply.



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In this example, so long as all documents other than the bill of lading quote thecredit and P.O. numbers the clause is satisfied. The fact that the bill of lading may ormay not quote the credit and P.O numbers is not a matter of concern since thedocument is excepted by the clause. We encounter banks which are of the opinionthat the clause means that the bill of lading must not quote the credit and P.Onumbers.

We would also like to add to the argument the following (actual) clause, whichhas a reverse effect but is nevertheless of a similar nature and follows the sameprinciple.

(Example 2)

QuoteAll documents except Invoice and Drafts must not show Invoice number,Invoice value, Invoice date, unit price, contract no. name of applicant, tradeterm, L/C No., L/C issuing date and name of issuing bankUnquote

In this example, the clause points the checker not in the direction of the invoice

and drafts, since those documents have been excepted, but to all the otherdocuments to ensure they do not quote any of the forbidden information. Therefore,the invoice and drafts may or may not quote any or all of this data. In this case, somebanks are of the opinion that the wording means that the invoice and draft may showthe specified details.

Since such L/C terms are not covered by any specific UCP article, they must beapplied literally and banks should not try to second guess the reasons for theirinclusion.

We kindly ask ICC Country N to endorse our opinion.

UNQUOTE

NATIONAL COMMITTEE ANALYSIS

Example 1.

The emphasis in this condition is that all documents must indicate certain dataexcept the bill of lading. So with regard to the bill of lading there has been made an

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exception in reference to the necessity. However this condition does not prohibit thebill of lading mentioning the prescribed data.

Example 2.

The emphasis in this condition is that it is not allowed for the described data tobe mentioned in documents except for the invoice and drafts. So with regard to theinvoice and drafts there has been made an exception in reference to this prohibition.However, this condition does not demand that the invoice and drafts mention theprescribed data. One should keep in mind however that certain data must bementioned in the invoice and drafts according to a number of articles and paragraphs

of UCP 600 and international standard banking practices (ISBP).

NATIONAL COMMITTEE CONCLUSION

In case the credit demands or prohibits that certain data is mentioned indocuments, and excludes one or more documents from that demand, the excludeddocuments may or may not mention that data.


The analysis and conclusion of the national committee is not agreed in respectof example 1.

In example 1, the credit is stating all documents except the bill of lading mustindicate the credit number and P. O. number. This is a clear rule prohibiting thesenumbers appearing on the bill of lading.

For example 2, the analysis and conclusion is agreed. Unless the credit, by itsother terms and conditions, requires such data appear on the invoices and drafts,there is no requirement for all of this data to appear. However, it should be notedthat most of the information would be included in an invoice without such

requirements being specified in a credit.



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Yours sincerely,

Thierry Senechal

Policy ManagerBanking Commission

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