Topic 13 Bls Lcs Ucp600

MODULE 2: BILLS OF LADING

Topic 13: Bills of lading, Documentary Credits (L/Cs) and UCP 600

IntroductionIn The Stone Gemini [1999] 2 Lloyd's Rep. 255, Mr Justice Tamberlin said in the Federal Court of Australia,

“Letters of credit, which are provided for in relation to contracts for the sale of goods in international trade, are autonomous agreements in the sense that they are distinct from the contractual rights conferred by the underlying agreement for sale of the goods in question. Generally speaking the letter of credit must be honoured regardless of the rights which exist inter-se between buyer and seller in relation to the cargo itself ... Letter of credit transactions are primarily concerned with payment against documents and not with the quality or contractual terms which govern the quality or supply of the goods in question.

Letters of credit or banker's documentary credits are frequently considered in Courts in many jurisdictions and often connected with bills of lading and disputes under bills of lading. Tamberlin J. has told us one essential element of a letter of credit: it is an independent agreement and although connected with sales of goods are independent of sale contracts. They are also independent of contracts to carry the goods. However a letter of credit comes into existence mostly because of these two other contracts.

He also identified an important function of the letter of credit: payment against documents. This means that the letter of credit permits payment to the shipper once specified documents are presented to the person paying, usually a bank.

A “Bankers' Documentary Credit” or “Letter of Credit” is of very great importance in international trade and has a long history in this context, similar to that of bills of lading. In modern international trade, the use of the bill of lading as a document of title and as evidence that the goods under the bill have been actually loaded together with the documentary credit system make possible so many types of international sales and carriage of goods by sea, especially under FOB, CIF and similar terms of trade.

In the notes below we shall use “letter of credit” to include a “banker's documentary credit”.

In this Topic, we shall discuss elements of the close relationship between the bill of lading and the documentary credit. This Topic outlines various aspects involved with the settlement of payment for the export and imports of goods in international trade. The Topic deals in particular with documentary letters of credit as governed by the Uniform Customs and Practice for Documentary Credits (UCP 600) as published by the International Chamber of Commerce.

It may be true to say that in no other aspect of international trade has there been as much unification of commercial practice as with letters of credit in the twentieth century especially because of the Uniform Customs and Practice for Documentary Credits (UCP) which were first developed by the International Chamber of Commerce (ICC) in 1933. We shall discuss the latest version, UCP 600, below. In this Topic we shall focus on UCP 600, the latest version of this tool that came into effect on 01 July 2007. It has been reported by the ICC that some bogus and fraudulent versions of UCP are being promoted, especially on the Web. It is emphasised here that UCP 500 is out of date and UCP 700 is not yet published.

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When UCP 700 is published, this Topic will be amended.

When reference is made to reports of cases in Courts some will relate to UCP 500 which was in force when the transaction occurred which led top the case and legal decision. Therefore only a passing reference to UCP 500 will be made. It is suggested that if a student is interested in the details of UCP 500 relating to a case report, it may be more productive to research the law report of the case rather than try to source UCP 500.

In this Topic where references are made to contents of UCP 600, full acknowledgement is hereby given to that important source of information.

This Topic is not meant to be complete discussion of Bankers' Documentary Credits. This is best found in the book listed under “Recommended Reading” below.

Letters of credit If sellers and buyers carried out transactions face to face, the exchange of goods and payment should not create major problems. It is when the parties to a sale contract are far apart they have to use intermediaries, such as banks and carriers, to ensure the transaction has integrity and is successful and each party gets what he wants.

A letter of credit system starts with an application by a buyer to his agent, usually a bank, for the bank to issue a letter of credit to another bank to pay the seller some money for documents that represent goods. Essentially the buyer (as Principal) authorises the bank (as Agent) to pay money to the seller (through other intermediaries). The letter of credit becomes necessary when there is a substantial difference in time and place between the despatch of goods by the seller and the receipt of those goods by a buyer.

The seller delivers the goods to a carrier for shipment and has completed his part of the sale contract. He wants payment.

The buyer has not received the goods and may be reluctant to pay for them for many reasons, not least whether or not they are of the agreed quantity, quality and description.

To overcome the problems faced by these two parties, they agree to settlement of the payment through intermediaries usually in each party's country.

The letter of credit system substitutes the creditworthiness of a bank for that of a buyer.

Subject to UCP 600, a bank gives an undertaking on behalf of the buyer and at the request of an “applicant” who may be a person who is not the buyer. An “applicant” is a person who applies to a bank to issue a letter of credit to pay the shipper (the “beneficiary”) the value of the goods shipped if certain documents are submitted and if there is strict compliance with specified terms and conditions in the sale contract and in the letter of credit.

“Strict compliance” assists the bank’s duty of making payment against documents easy, efficient and quick. The bank that is required to make payment to the seller (the “advising bank” or the “issuing bank”) will carry out a thorough examination of the specified documents Therefore, if the documents tendered by the seller deviate from the language of the credit the bank is entitled to withhold payment even if the deviation is minor. A deviation is known as a “discrepancy”. Correcting discrepancies can take time and costs. The ICC also publishes a relevant International Standard Banking Practice for the examinations of documents under documentary credits (ISBP) that is supposed to lead to a significant reduction in the number of documents refused for discrepancies when the documents are first presented for payment.


Background to letters of credit The word “credit” is derived from old languages and roots of modern languages. The old Latin word “credere” which means “to believe” or “to trust” is a root. The origin of the word “credit” is said to be from early French which was derived from the old Italian “credito” or “creditum” which meant some thing entrusted to another person (for example, a loan of money or a thing).

However, the first letter of credit can be traced back to the late 1400s. Banks in Italy, such as the Medici Bank, issued these letters. They may have been originally for the purposes of assisting travellers who did not want to carry sums of money for fear of being robbed on the road. The intending traveller would pay money to a bank and the bank (an “issuing bank”) would issue a letter perhaps addressed to a bank, usually a branch of the issuing bank, in the country of destination to pay the traveller. The issuing bank would arrange to credit or pay the paying bank under some arrangement.

Just as for negotiable documents, such as “bills of exchange” similar to a cheque, so also letters of credit were developed from an early time to adapt commercial behaviour to new economic activity especially as trade developed and expanded between people in different countries with increasing complexity. The essence of these documents seems to be promises to pay perhaps guaranteed by third parties. In 1923, a Mr W Bewes wrote a book, The Romance of the Law Merchant, in which he described how the use of mercantile documents of credit similar to modern bills of exchange and promissory notes (IOUs), were recorded from as far back as the seventh century before the Common era (BCE) among the records of transactions between Phoenicians, Babylonians and Assyrians.

(Note that the CE started in the year 1 in today's yearly system. The old description was linked with the Christian celebration of Easter and was BC and AD. AD1 = CE1. Now we use BCE and CE to identify dates. 2010 is 2010 CE.)

In relatively more recent years, during the “Renaissance” in Europe, when international commercial centres were in the Italian cities of Florence, Naples and Venice and a particular family, the Medici family, became prominent business people and bankers (between 1397 and 1494), documents of credit and promissory notes and bills of exchange became commonly used. The main reason for development of these documents was commercial convenience. They were appropriate to the conditions that existed then. For example, if A and B could agree that B collects payment from C in B's country, trade between different countries was stimulated. This was a pragmatic development that worked successfully among the merchants of continental Europe.

These documents are also appropriate to the conditions of international trade that exist now.

If lawyers, in England or elsewhere, tried to curtail these convenient methods which may not have complied with strict legal principles, the restrictions did not last for long. They could not stop the desire for the documentary methods of trade simply because they were an economic reality.

In England the methods became more common and gradually accepted by lawyers and judges. By the beginning of the eighteenth century mercantile documentary credits were common and were sufficient to satisfy the needs of business people of that time and from then on. Growing demands of business prevailed to explain their acceptance rather than legal theory.

Types of letters of credit There are different accepted methods for settlement of payments for goods in international trade transactions. Documentary letters of credit are one such method and are closely related to transport documents or bills of lading that are issued for the carriage of the goods by sea. Documentary


credits are more secure for the seller and the buyer.

There are four main types of letters of credit:

Revocable credit

Irrevocable credit

Confirmed credit

Unconfirmed credit

There can be combinations, for example, an “irrevocable and confirmed letter of credit”.

Revocable credit

The “Revocable credit” gives no security protection to the seller/“beneficiary” and can be altered or cancelled at any time without the seller's consent. Although this type of credit is not recognised under UCP 600 and is not commonly used in international trade where integrity and fairness are critical, it can be found in some international sales of goods.

Irrevocable credit

UCP 600 defines “credit” as

“...meaning any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation”.

This shows that UCP 600 does not even consider any credit other than irrevocable. Indeed Article 3 of UCP 600 clearly states that

“A credit is irrevocable even if there is no indication to that effect.”

An irrevocable credit cannot be modified, amended or cancelled without the consent of the applicant/buyer or the beneficiary/seller.

In this type of letter of credit a solvent and reliable paymaster becomes absolutely obligated to pay the seller, subject to the soundness of the documents presented by the seller.

In Hamzeh Malas v British Imex Industries [1958] 2 Q.B. 127, Lord Justice said

“We have been referred to a number of authorities, and it seems to be plain enough that the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. An elaborate commercial system has been built up on the footing that bankers' confirmed credits are of that character, and, in my judgment, it would be wrong for this court in the present case to interfere with that established practice.

There is this to be remembered, too. A vendor of goods selling against a confirmed letter of credit is selling under the assurance that nothing will prevent him from receiving the price. That is of no mean advantage when goods manufactured in one country are being sold in another. It is, furthermore, to be observed that vendors are often reselling, goods bought from third parties. When they are doing that, and when they are being paid by a confirmed letter of credit, their practice is - and I think it was followed by the defendants in this case - to finance the payments necessary to be made to their suppliers against the letter of credit. That system of financing these operations, as I see it, would break down completely if a dispute as between the vendor and the purchaser was to have the effect of "freezing," if I may use that expression, the sum in respect of which the letter of credit was opened.”


This not only strongly shows that the “bargain” or contract in the documentary credit is independent from the sale contract but also that the bank takes the risks of paying even if the buyer cannot or will not pay. Of course, if the bills of lading are endorsed and delivered to the bank, the bank become a transferee, holding the bills in good faith and is entitled to claim delivery of the goods.

Confirmed credit

As Jenkins LJ said in the above report the seller is protected under a confirmed credit. This type of credit is not only irrevocable but may also be confirmed (guaranteed?) by a bank usually in the seller's country. This type of letter of credit is guaranteed payment not only by the issuing bank but also by a second bank, the confirming bank.

It is quite common for a seller to insist in a contract of sale that a letter of credit should be confirmed if the seller is not sure of the resource base of the issuing bank which is usually in the buyer's country. For example, the issuing bank may be unknown or small or even a bank owned or controlled by the buyer or a government. The seller is trying to ensure he is paid for the goods. Therefore the seller may insist on an “irrevocable, confirmed letter of credit”.

Another factor could be that if there is no confirming bank in the seller's country or port the documents will need to be examined by the issuing bank. The seller may need to send them there. If there are any discrepancies this could lead to delay in payment and/or negotiations with a foreign bank. If there is no confirming bank, it is exclusively up to the issuing bank to inspect the documents and decide if they conform wit the letter of credit.

Once the credit is confirmed, the confirming bank takes on the additional obligation of the issuing bank to pay.

In UCP 600 Article 2 contains relevant definitions:

Advising bank means the bank that advises the credit at the request of the issuing bank.

Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation.

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

To “honour” means “to pay”.

“Presentation” means “either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.

Unconfirmed credit

Credits are almost always irrevocable but may not be confirmed. This may be the case even if a nominated bank or advising bank in the seller's country is used to pay the beneficiary/seller. If a credit is not confirmed, the advising bank may pay the seller and if it does not recover the money from the issuing bank it may bring an action against the seller to recover the payment. On the other hand, if a credit is confirmed by a bank (which may be the advising bank) there is no right of recovery against the seller.

There are other types of letters of credit which the interested student may wish to research independently:


“Red Clause” letter of credit

Reciprocal or “back-to-back” letter of credit

Stand-by letter of credit

Transferable letter of credit

When can banks refuse to honour (pay) or negotiate?While an issuing bank or confirming bank has an absolute obligation to pay the seller/beneficiary, there are three main situations where a bank may refuse to pay.

The first has already been discussed above, where the documents presented by the seller do not comply strictly with the terms of the credit. The discrepancies have to be rectified, and a fee usually paid by the beneficiary to the inspecting bank.

The documents may also be presented after the expiry date of the letter of credit.

The primary reason is the the banks are acting as agents of the buyer and have no authorisation to accept documents that do not comply strictly with the credit. If the bank does accept discrepant documents the buyer may decline to accept them and may refuse to reimburse the bank/s.

The third reason for refusal to pay is where fraud may occur, for example, where statements on the documents including bills of lading, are false. In The American Accord [1982] 2 Lloyd's Rep. 1, heard in the House of Lords, and concerning fraud, the Court held that if any fraud was to allow a bank to refuse to pay, the fraud had to that of the beneficiary himself and not another person.

How the letter of credit system works The Buyer and seller agree to a sale and purchase of goods.

In the contract of sale, the seller insists on a letter of credit to guarantee payment.

The Buyer applies to a bank (“Issuing bank”), usually in his country, for issue of a letter of credit in favour of the seller (“beneficiary”) .

The issuing bank assesses credit risk of the buyer, issues and forwards the credit to its correspondent bank.

This bank may be the advising and/or confirming bank.

The correspondent bank is usually located in the same geographical place as the seller (beneficiary).

Advising bank authenticates the credit and forwards the original credit to the beneficiary.

The Seller ships the goods, then verifies and prepares or arranges for preparation of the specified documents to comply with the letter of credit.

The Seller presents the required documents to the advising or confirming bank to be inspected before payment.

The advising or confirming bank examines the documents for strict compliance with the terms and conditions of the letter of credit. This bank may use ISBP so as to avoid unreasonable delays in paying the Seller.

If the documents comply, the advising or confirming bank will claim the funds by:

Debiting the account of the issuing bank.


Waiting until the issuing bank remits, after receiving the documents.

Reimburse on another bank as required in the credit.

Advising or confirming bank will forward the documents to the issuing bank.

Advising bank will pay the seller.

Issuing bank will examine the documents for compliance. If they are in order, the issuing bank will debit the buyer's account.

Issuing bank then forwards the documents to the buyer.

Letters of credit and other contracts In a case decided in a New Zealand Court, Cruickshank v Westpac Banking Corporation [1989] 1 NZLR 114, the Court said,

“Letters of credit ...have a status all of their own. They are documents in common use in the commercial and business world particularly in international … transactions. They are regarded by the commercial and business world as sacrosanct and are documents frequently negotiated so that eventually the person who is to be paid in accordance with its terms may be far removed from the person in fact named in the original transaction … It is a well-recognised principle in contracts for the sale of goods where irrevocable letters of credit are established for payments due under such contracts, that the issuing bank of such a letter of credit has an absolute obligation to pay irrespective of any dispute which may exist between the parties in relation to these goods.”

The letter of credit is separate from and independent of (or autonomous from) the underlying contract of sale or contract of carriage (bill of lading) or other transaction. This is known as the ‘independence’ or ‘autonomy’ principle.

Other contracts may be connected with the letter of credit (interconnection) but the letter of credit is still independent of these.

In The American Accord [1982] 2 Lloyd's Rep. 1, heard in the House of Lords, Lord Diplock said,

“So the point falls to be decided by reference to first principles as to the legal nature of the contractual obligations assumed by the various parties to a transaction consisting of an international sale of goods to be financed by means of a confirmed irrevocable documentary credit. It is trite law that there are four autonomous though interconnected contractual relationships involved. (1) The underlying contract for the sale of goods, to which the only parties are the buyer and the seller; (2) the contract between the buyer and the issuing bank under which the latter agrees to issue the credit and either itself or through a confirming bank to notify the credit to the seller and to make payments to or to the order of the seller (or to pay, accept or negotiate bills of exchange drawn by the seller) against presentation of stipulated documents; and the buyer agrees to reimburse the issuing bank for payments made under the credit. For such reimbursement the stipulated documents, if they include a document of title such as a bill of lading, constitute a security available to the issuing bank; (3) if payment is to be made through a confirming bank the contract between the issuing bank and the confirming bank authorising and requiring the latter to make such payments and to remit the stipulated documents to the issuing bank when they are received, the issuing bank in turn agreeing to reimburse the confirming bank for payments made under the credit; (4) the contract between the confirming bank and the seller under which the confirming bank undertakes to pay to the seller (or to accept or negotiate without recourse to drawer bills of exchange drawn by him) up to the amount of the credit against presentation of the


stipulated documents.

In summary, the four (possibly five) contracts are:

1. contract of sale between buyer and seller

2. contract between buyer/applicant and issuing bank

3. contract between issuing bank and correspondent bank/s (advising bank and confirming bank; advising bank could also be confirming bank)

4. contract between advising bank/confirming bank and seller/beneficiary.

Contract 3 comes into existence only where the credit is confirmed. If there is no confirming bank, there would be three contracts:

sale

contract between buyer-applicant and issuing bank

contract between issuing bank and seller-beneficiary

Other independent contracts also come into play:

contracts of marine (cargo) insurance for the goods

contract/s of carriage in charter parties and/or bills of lading

If there is only one sale these processes and relationships would arise. If there are multiple sales there could be other, similar structures.

Typical documents specified under letters of credit ● Financial Documents

○ Bill of Exchange?

A bill of exchange or "draft" is a written order by the drawer to the drawee to pay money to the payee. A common type of bill of exchange is the cheque. This is a bill of exchange drawn on a banker and payable on demand. Bills of exchange are used in international trade, and are written orders by one person to his bank to pay the bearer a specific sum on a specific date.

It is essentially an order made by one person to another to pay money to a third person.

The person who draws the bill is called the drawer. He gives the order to pay money to a third party. The party upon whom the bill is drawn is called the drawee. He is the person to whom the bill is addressed and who is ordered to pay. The party in whose favour the bill is drawn or is payable is called the payee. He is the beneficiary.

A bill of exchange may be endorsed by the payee in favour of another third party, who may endorse it to another, and so on indefinitely. The "holder in due course" may claim the amount of the bill against the drawee and all previous endorsers, regardless of any counter-claims that may have disabled the previous payee or endorser from doing so. This is what is meant by saying that a bill is negotiable.

This very different from a bill of lading which may also be called “negotiable”: the bill of exchange represents money, the ownership of which can be negotiated; the bill of lading represents goods. Transfer of the bill of lading does transfer rights but a right to demand delivery of the goods.


● Commercial Documents

○ Commercial Invoice

This is the invoice issued by the seller/beneficiary to the buyer/applicant for the goods, services or performance. It usually includes a description of goods, price in the same currency as the credit and origin. The buyer and seller information must comply strictly to the description in the letter of credit. Unless the letter of credit specifically states otherwise, a generic description of the merchandise is usually acceptable in the other accompanying documents.

○ Packing List/s

● Official Documents

○ Licence

○ Embassy/Consulate authentication

○ Certificate of Origin

○ Certificate of survey

○ Certificate of analysis

○ Phytosanitary certificate (usually for agricultural commodities)

● Transport Documents

○ Bill of lading (ocean or multi-modal or charter party)

○ Airway bill

○ Lorry/truck receipt

○ Railway receipt

● Insurance documents

○ Insurance policy

○ Insurance Certificate (more than a “cover note”)

Uniform Customs and Practice for Documentary Credits (UCP)UCP was first published by the International Chamber of Commerce and approved by the ICC Banking Commissions in 1933. The purpose was to harmonise processes for examination of documents under documentary credits by banks around the world. Since then other versions have been published.

The latest version of the rules, UCP 600, was approved in October 2006. It came into force on 01 July 2007.

UCP 600 contains important changes to the existing UCP 500, especially the articles on transport and insurance. Improvements have been made to the definition of transshipment and the reference to charterparty bills of lading. UCP 600 also includes the eUCP supplement, governing presentation of documents in electronic or part-electronic form.

UCP 600 contains thirty-nine Articles that apply to any documentary credit when the text of the credit expressly states that it is subject to UCP 600. The rulkes are binding on all parties unless expressly modified or excluded in the credit document.

The following provisions may be particularly related to carriage of goods by sea including when


bills of lading are issued.

Article 5 Documents v. Goods, etc: This makes it very clerar that banks deal with documents not goods, services or performance to which the credit may relate

Article 6 d. i. A credit must state an expiry date for presentation: bills of lading presented after the expiry date will be rejected unless the credit has been extended

Article 16 Discrepant documents: if a presentation of documents does not comply with the credit the bank may refuse to honour (pay the beneficiary/seller) or negotiate

Article 19 Multimodal transport document covering at least two different modes of transport

Article 20 Bills of lading: This Article is very significant for this Topic and students should spend some time reading it in depth. When presented for examination by a bank the UCP 600 is quite precise about the type and contents of the bill of lading document/s. The bill of lading must indicate the carrier's name and must be signed by the carrier or the master or a named agent for and on behalf these two persons. The bill of lading must be a “shipped” bill of lading showing an actual on-board place and date.The date of issue of the bill will be considered to be the shipment date unless the bill contains and “on-board notation” showing a different date of shipment. The bill must indicate shipment for the load and to the discharge ports specified in the letter of credit.The bill must be the sole original bill or if issued in a set the full set must be presented. It must contain some reference to the terms of a contract of carriage.The bill must not be stated to be subject to a charter party. However, Article 22 deals specifically with charter party bills of lading. Transshipment is permitted but the entire carriage must be covered buy only one bill of set of bills.

Article 21 Non-negotiable sea waybills

Article 22 Charter party bills of lading:

Article 26 A transport document may state that goods may be loaded on deck. It cannot state that goods are or will be loaded on deck. Certain clauses such as “said by shipper to weigh” and “shipper's load and count” will not make the transport unacceptable.

Article 27 “Clean” transport documents: For this Topic this also covers a significant issue.“A bank will only accept a clean transport document. A clean transport document is one bearing no clause or notation expressly declaring a defective condition of the goods or their packaging. The word “clean” need not appear on a transport document, even if a credit has a requirement for that transport document to be “clean on board”.

How UCP 600 may affect contracts of carriage of goods by seaFor this section of this Topic full acknowledgement is given to GARD for its publication GARD News 187 of August 2007 and available on GARD's website, www.gard.no under “Sharing Knowledge” in which the following may be found.


http://www.gard.no/

Extracts from this very helpful material are included in this Topic with thanks to GARD. Footnotes have been omitted.

“Introduction… The most relevant UCP articles to those involved in the transportation of goods are the ones dealing with transport documents and it is important to be aware of the provisions. We will briefly consider here the main aspects and changes involving those articles most relevant to transportation by sea. It is apparent that the new articles could give rise to confusion as to the identity of the contractual carrier and complications for carriage of cargo on deck.

Bills of lading – GeneralUCP continues to differentiate between what might be regarded as liner bills, charterparty bills and multimodal bills.

In the case of liner and charterparty bills of lading it remains a requirement for both types to indicate that the goods have been shipped on board a named vessel on a given date and at the port of loading stated in the credit. The date of issuance of the bill will be deemed to be the date of shipment unless the bill contains an on-board notation indicating the date of shipment, in which case the date stated in that notation will be deemed the date of shipment. In the case of multimodal bills, similar requirements remain in place as for other types of bill, but the relevant date is (as it was under UCP 500) the date the goods have been dispatched, taken in charge or shipped on board at a place stated in the credit. It also remains the case with UCP 600 that shipment to the port of discharge, or in the case of multimodal/combined transport bills, the place of final destination (as stated in the credit) must also be indicated in the bill of lading.

For the three types of bill of lading, authentication of the bill, required by the previous UCP 500, is now removed, as Article 3 of UCP 600 provides that a document may be signed by handwriting, facsimile signature, perforated signature, stamp, symbol or any other method of mechanical or electronic authentication.

Liner bills of ladingArticle 20 is of great relevance to liner bills which will often cover containerised or unitised goods. It still requires:– an indication of the name of the carrier; and– signature by the carrier or a named agent for or on behalf of the carrier; or – signature by the master or a named agent for or on behalf of the master.

Under UCP 600 the master’s name need no longer appear on the bill. There does, however, remain a requirement that any signature by the carrier, master or agent be identified as that of the carrier, master or agent and that any signature by an agent must indicate whether the agent has signed for or on behalf of the carrier or for or on behalf of the master.

The position concerning transhipment (unloading from one vessel and reloading to another vessel during the carriage) does not appear to have changed much from UCP 500. Liberty clauses, which give a carrier the right to tranship, continue to be disregarded by the banks (this is now explicit under UCP 600). Like UCP 500 did, UCP 600 will allow a bill indicating that the goods will or may be transhipped, provided the entire carriage is covered by one and the same bill. A bill indicating that transhipment will or may take place is also acceptable under UCP 600, even if the credit prohibits transhipment, but only if the goods have been shipped in a container, trailer or lash barge as evidenced by the bill.

Multimodal bills of lading Article 19 applies to multimodal or combined transport documents, however named. It replaces Article 26 of UCP 500. The reference in Article 26 of UCP 500 to “multimodal transport operator” is now replaced simply with “carrier”. The signature provisions therefore read the same as those


for bills of lading under Article 20. The position regarding transhipment is also similar to Article 20, with logical differences to cover different modes of transport.

CommentIf the bill identifies as carrier somebody other than the vessel owner or demise charterer, potential confusion could arise in some jurisdictions as to the identity of the contractual carrier if the master signs the bill or an agent signs for the master. Would the contractual carrier be deemed to be the

named carrier or, by virtue of the master’s signature, the vessel owner/demise charterer?9 To avoid such confusion it would be preferable that the carrier signed the bill as carrier or an agent did so on behalf of the carrier.

As for transhipment, it remains a little unclear whether banks will accept a transhipment bill covering goods which are not in a container, trailer or lash barge, where transhipment is prohibited under the credit.

Charterparty bills of ladingArticle 22 deals with charterparty bills, which often cover bulk cargoes. As in UCP 500, the significant difference between this article and Article 20 is that charterparty bills are not required to name the carrier. UCP 600 will require:– signature by the master or a named agent for or on behalf of the master; or– signature by the owner or a named agent for or on behalf of the owner; or– signature by the charterer or a named agent for or on behalf of the charterer.

The significant change from UCP 500 is found in the last bullet point, which is a new provision. There is also a requirement that any signature by the master, owner, charterer or agent be identified as that of the master, owner, charterer or agent and that any signature by an agent on behalf of the owner or charterer must indicate the name of the owner or charterer. The other notable change from UCP 500 is that the port of discharge may now be shown as a range of ports or a geographical range, as stated in the credit.

CommentArticle 20 may increase the scope for confusion over the identity of the contractual carrier. UCP 600 now permits signature by or for/on behalf of the charterer. For example, if in accordance with UCP 600 a typical form of bill of lading (to be used with a charterparty) were signed by or for the charterer without naming the carrier, who would be identified by that bill as the contractual carrier? Under English law the bill as a whole would be considered, not just the signature, so in the example given, how would one reconcile the signature with the printed words so often seen in the attestation clause of a typical form of bill of lading (to be used with a charterparty) which read “in witness whereof the master has signed...”? Arguably, those printed words could be said to be irrelevant in the example given, because the master has not signed – the charterer has signed and has done so on his own behalf. There is English case law which suggests that an owner’s form of bill which contains nothing to suggest that the charterers signed as agents for the master or owners makes that bill a charterers’ bill. There is also English case law which suggests that if the charterer signs a bill containing the words “signed for the master” then the bill would be an owners’ bill.

The English courts will give effect to an express statement identifying the carrier providing it is clear and unambiguous. Therefore, if in the example given above the typical form of bill of lading (to be used with a charterparty) were signed “for the charterer Bulk Chartering Ltd – the carrier” that would, under English law, be taken to be a clear and unambiguous identification of Bulk Chartering Ltd as the contractual carrier regardless of pre-printed terms and conditions.

If the contractual carrier is not made clear in the bill of lading and the owner is found not to be the contractual carrier, that could result in him being exposed to a claim in tort, possibly with no contractual defences or limitations. Under English law owners may be able to rely on the terms of


the bill as bailees. However, the same may not be the case in other jurisdictions where a ship may be targeted. Many typical forms of bill of lading (to be used with a charterparty) and the relevant charterparties themselves do not contain a Himalaya clause giving owners the benefit of the bill of lading terms and conditions and/or protection from claims in tort by third parties.

If the identity of the carrier is unclear and the charterer has signed the bill, complications could also arise with demands for security for a claim against the charterer in addition to the owner.

The law of the United States is quite different. According to United States law, the vessel in rem, the owner in personam, and the charterer in personam would probably all be considered carriers regardless of who has signed the bill. The vessel would be deemed to have ratified the bill of lading when she sailed with the bill of lading cargo on board. The vessel in rem would also be bound by a signature on behalf of the master in the bill of lading. The owner would be deemed to be the carrier if it issued the bill of lading or if it authorised the charterer to issue a bill of lading. The charterer would be liable if it issued the bill of lading. There are certain exceptions to these general rules, but a shipowner and charterer would be wise to assume that the vessel, the owner and the charterer would all be considered carriers. If the claimant were to name the wrong entity as the carrier, United States courts would freely grant leave to amend a complaint to include the correct carrier. If the correct carrier would not be prejudiced by the amendment, the amendment would relate back to the time the original complaint was filed, thus preventing a time bar argument.

Given the scope for confusion it is recommended that:– Although for charterparty bills UCP 600 does not require the carrier to be identified for documentary credit purposes, conflicting provisions in the bill as to the identity of the carrier should be avoided. If the owners and charterers agree that the charterers are to be the contractual carrier, then in addition to signature by or for the charterers, a clear and unambiguous identification of charterers as the carrier is recommended.– That owners only permit charterers to issue bills in their own name or as carrier if the bill contains a clear and unambiguous identification of charterers as carrier and incorporates a suitably drafted Himalaya clause giving owners the benefit of the bill of lading terms and conditions and/or protection from claims in tort by third parties.– That charterers take care to avoid themselves being identified as carrier under a bill which they may not intend to be. Simple signature by or for the charterers on a typical form of bill of lading (to be used with a charterparty) which does not contain a clear and unambiguous identification of the carrier could be interpreted in some jurisdictions to be a charterers’ bill or indeed a bill under which both owners and charterers are deemed contractual carriers. – That owners and charterers seek to expressly agree in the charterparty how bills are to be issued, following up with clear instructions to the master/agents to check that bills are being issued correctly once signed.

Non-negotiable sea waybillAs in UCP 500, UCP 600 has a separate article (Article 21) dealing with non-negotiable sea waybills. This is now similarly worded to the new bill of lading article (Article 20) insofar as concerns signature and indication that the goods have been shipped on board a named vessel on a given date and at a port of loading stated in the credit. There is no longer a transhipment provision for sea waybills.

“On deck”, “Shipper’s load and count”It remains the case with UCP 600 (Article 26) that a transport document must not indicate that the goods are or will be loaded on deck. A clause stating that the goods may be loaded on deck remains acceptable. However, the words “unless otherwise stipulated in the Credit”, which appeared in UCP 500, have been omitted from UCP 600, which suggests that under UCP 600 the parties may not agree in their letter of credit that bills of lading are to expressly state that the cargo is to be


carried on deck. The same article also reconfirms that a transport document bearing a clause such as “shipper’s load and count” and “said by the shipper to contain” is acceptable.

CommentThe removal of the words “unless otherwise stipulated in the Credit” with regard to the acceptance of “on deck” bills would appear to create a problem if the letter of credit is subject to UCP 600 and the bills are claused “on deck”, even if the parties have agreed to “on deck” bills in their letter of credit. However, there are provisions in Articles 1 and 2 of UCP 600 which suggest that the parties to the letter of credit do have scope to agree terms that differ from the UCP rules and that the terms of the credit will take precedence over those rules. If the bank is unsure as to the position, this may result in pressure on carriers to issue bills which do not indicate that the goods are carried on deck when in fact the goods are carried on deck. If carriers agree to this, they may prejudice their P&I cover. This is because the absence of a statement in the bill that the goods are shipped on deck risks a finding that the deck carriage has been unauthorised. The potential consequences of such a finding are the loss of the carrier’s defences and limitations of liability, which would prejudice P&I cover. Under English law a general liberty to carry goods on deck (which is acceptable under UCP 600) is simply that – a liberty, or an option (available to the carrier) – and on its own is insufficient

to “authorise” deck carriage,14 since a third party transferee of the bill of lading would not be able to ascertain whether the liberty had been exercised or not. Unless there is an established custom of the trade, it is recommended that the carrier strongly resists any pressure to issue bills which do not expressly state that that the goods are carried on deck when in fact they are carried on deck.

FreightUnder UCP 600 there is no equivalent of Article 33 under UCP 500, which provided that banks would accept transport documents stating that freight has still to be paid. This implies that the banks will no longer bother with provisions regarding freight.”

Common Discrepancies in DocumentationIt is well known that about half of all documents presented under letters of credit contain discrepancies. A discrepancy is an irregularity in the documents that removes strict compliance with the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the buyer/applicant. The seller/beneficiary must prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in payment.

Commonly found discrepancies between the letter of credit and supporting documents include:

Documents presented after Letter of Credit has expired.

False statements in Bill of Lading for example, date and place of shipment.

Description of merchandise is not as stated in credit.

Inconsistent description of goods.

Ports of loading and delivery not as specified in the credit.

A document, for example, a certificate of survey, specified by the credit is not presented.

When a discrepancy is detected by the negotiating bank, a correction to the document may be allowed if it can be done quickly while remaining in the control of the bank. If time is not a factor, the exporter should request that the negotiating bank return the documents for corrections.

Banks do use a relevant International Standard Banking Practice for the examinations of documents under documentary credits published by the ICC and approved by the ICC Banking Commission. This assists in minimising rejection of documents for discrepancies.


Recommended ReadingPaul Todd, Bills of Lading and Bankers' Documentary Credits, 4th Edition (2007) London: Informa

International Chamber of Commerce, ICC Uniform Customs and Practice for Documentary Credits 2007 Revision, (2007) Paris: ICC Services


Topic 13 Bls Lcs Ucp600

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Transcript of Topic 13 Bls Lcs Ucp600