guidelines for international trade finance for bankers (india); how to check international trade...

GUIDE LINESFOR

INTERNATIONAL TRADEFINANCE FOR BANKER’S

(INDIA)

HOW TO CHECK INTERNATIONAL TRADE

DOCUMENTS & FAQs

By

Amit Bhushan

Guide Lines For International Trade Finance Banker’s (India) By- Amit BhushanThe Author is working in Transaction Banking Team of an MNC bank in India

INDEX

SECTION 1 BASICS OF INTERNATIONAL TRADE 5 What is International Trade? Advance Payment or Cash with Order Documents against Payment (DP) Documents against Acceptance (DA) Letter of Credit Open Account Terms of Payments (INCOTERMS)

- FOB- C & F- CIF

SECTION 2 TYPES OF EXPORTERS 14 Definition of an Exporter Export Zones Exports of Service Types of Exporters Export finance

- Pre-Shipment Finance:- Post Shipment Credit

SECTION 3 TRADE DOCUMENTATION 17 Purchase Order Invoice Transport Documents Marine Insurance Bill of Exchange NTR Export Declaration Forms Shipping Bill Certificate of Origin Manufacturers Certificate G.S.P. Certificate Packing List/Note Certificate of Inspection Transshipment Bill Mate’s Receipt

SECTION 4 BASICS OF INTERNATIONAL FACTORING 31 Origins of International Factoring Growth Of Factoring Definition of International Factoring

2 | P a g eGUIDELINES FOR INTERNATIONAL TRADE FINANCE FOR BANKER’s (INDIA); HOW TO CHECK DOCUMENTS & FAQs by Amit Bhushan Contact: [email protected]

What does factoring cover? How Does International Factoring Work? What does it cost the seller? What is the Credit Protection Service? How does Factoring benefit the seller? Differences between domestic and international

factoring International Factoring with Credit Insurance

SECTION 5 FCI RULES FOR INTERNATIONAL FACTORING 38 FCI - A Brief History FCI Structure Why Use FCI? The Two-Factor System In Operation Why Belong To FCI? Two-Factor System Versus Direct Import/Export

Factoring Basic Framework Of FCI Why FCI Has A Code The Principles Of The Code Main Responsibilities Of Export Factor And Import

Factor Communications Selecting Correspondents International Factoring Communications Pricing - The Import Factor Commission FCI Representation

SECTION 6 FOREIGN EXCHANGE MARKETS 55 The exchange rate system in India Balance of trade and balance of payment Convertibility of Indian rupee Foreign Exchange Market Factors determining the Exchange Rate of a currency Types of Exchange Rates How are Forward rates calculated? How are Premium / Discount quoted? Forward Contract Option Forward Nostro / Vostro Accounts LIBOR Foreign Exchange Management in India Authorised Dealers Authorised Moneychangers Obligations of an Authorised Dealer


SECTION 7 MISCELLANEOUS 66 BRC - Bank Certificate of Exports & Realisation FIRC - Foreign Inward Remittance Certificate EEFC - Exchange Earners Foreign Currency Account ECGC - Export Credit Guarantee Corporation

SECTION 8 REFERENCES 69

SECTION 9 OTHER GUIDELINES & FAQs 70


SECTION 1

BASICS OF INTERNATIONAL TRADEWhat is International Trade?

In simple terms, International Trade means export and import of merchandise goods between countries. In earlier days, the barter system existed and goods were exchanged for goods or gold. When the domestic markets began to saturate, countries tried to expand beyond international boundaries and sought foreign markets. Trading between two countries has many difficulties like language barriers, time zones, country laws, market practices, etc. Over a period of time the trade of goods between countries has been standardized and the purchase and sell of goods have more or less fixed patterns regarding rules, regulations, terms and conditions. We give below some of the most commonly used ways of exporting merchandise goods.

Advance Payment Documents against Payment Documents against Acceptance Letter of Credit Open Account

Advance Payment

These terms mean that the seller is paid before he ships the goods.

India USA

SellerBuyer


1. Places order and makes payment

2. Ships goods after receipt of payment

Such type of transaction occurs when seller is strong or when it is seller’s market.

Seller’s view Buyer’s viewMost secure form of trading Least secure form of tradingReceives money in advance for shipment, thus covered from risk of non- payment by the buyer.

Pays money in advance and hence carries risk in case the seller fails to honour the sale contract and ship goods. He must have complete confidence in the seller.

Has good cash flow Drains his cash flowCan use the money for manufacturing the goods.

Agrees to this method if the goods are not available from any other source.

Documents against Payment (DP)

In this type of transaction, the buyer pays before he takes possession of the goods.

India USA

Seller Buyer

Seller’s Bank Buyer’s Bank

Such type of transaction occurs when seller is strong or when it is seller’s market. Greater degree of risk for buyer as he has to pay before getting delivery of goods.6 | P a g eGUIDELINES FOR INTERNATIONAL TRADE FINANCE FOR BANKER’s (INDIA); HOW TO CHECK DOCUMENTS & FAQs by Amit Bhushan Contact: [email protected]

1. Places Order

2. Ships the goods

3. submits Shipping documents to bank

4. Forwards the shipping documents

5. Ask importer to make payment

7. Releases shipping Documents

6. Makes Payment

8. Remits the payments

9. Makes the payment

Seller’s view Buyer’s viewMore Secure form of trading Less Secure form of tradingPayment is secure since buyer makes payment before receipt of goods

Has to make payment before receipt of goods.

The buyer may refuse to pay after the goods have reached. Goods will lie at foreign port and will be difficult to dispose off. Seller will have to search for a new buyer or sell at a discount. If the goods do not sell, he will have to bring it back, thus incurring more costs.

On risk since he cannot check goods (for quality, quantity) before making payment. Thus is depends on seller meeting the contract terms.

Has good cash flow Cash flow is drained

Documents against Acceptance (DA)

This type of transaction involves a Bill of Exchange (BOE). The documents for collection of goods are handed over to the buyer only after he signs the BOE.

India USA

Seller Buyer

Seller’s Bank Buyer’s Bank


1. Places Order

2. Ships the goods

3. submits shipping documents and Bill of Exchange to bank

4. Forwards the shipping documents and BOE

5. Ask importer to sign BOE

7. Releases shipping Documents

8. On due date ask to make payment

6. Signs BOE.

9. Makes Payment on due date

10. Remits the payments

11. Makes the payment

Such type of transaction occurs when seller is not so strong. For the buyer it is vis-à-vis DP. However seller carries risk for payment on buyer.

Seller’s view Buyer’s viewLess Secure form of trading More Secure form of tradingPayment is secure since buyer accepts BOE. There is a certainty as to when the payment will be made.

He can check the goods before making payment.

On risk in case when buyer goes bankrupt.

In case he fails to make payment, legal proceedings can be undertaken.

Export proceeds are realized only on due date hence cash flow is drained.

Gets a credit period for making payment.

The buyer may refuse to sign the BOE. Goods will lie at foreign port and will be difficult to dispose off. Seller will have to search for a new buyer or sell at a discount. If the goods do not sell, he will have to bring it back, thus incurring more costs.

Letter of Credit

A Letter of Credit (LC) is a document issued by the importer’s bank in favour of the exporter giving him the authority to draw bills up to a particular amount (as per the contract price) covering a specified shipment of goods and assuring him of payment against the delivery of shipping documents as mentioned in LC.

Parties involved in LC Seller Buyer LC Opening Bank/ LC Issuing Bank: (The bank which issues letter of credit at

the request of the importer.) LC Advising Bank LC Negotiating Bank LC Confirming Bank

How an LC Works:


Buyer is weak or there is no past track record of the buyer or country risk is high. Greater degree of risk for buyer, whilst it is a secured mode of payment for seller.

Seller’s view Buyer’s viewVery secure as an LC is a guarantee of payment by a bank.

Not Applicable

Seller need not worry about delays in payment and financial problems of the buyer as the payment is made by a bank.

Administratively cumbersome.

Not costly. High cost since he has to deposit cash margin for opening LC

On risk if there is political crisis in buyers country, unless the LC is confirmed by another bank in another country.

LC process is time consuming and there is a delay in possession of goods

Types of Letter of Credit

Following are the types of LC’s:


Documentary Letter of Credit: A Documentary Letter of Credit is simply a means of opening a credit in favour of someone, under which a payment will be made by a bank, provided certain conditions are fulfilled. The word “Documentary” means that the payment obligations by the bank will be only after production of correctly completed documents as specified in the LC. There are three types of Documentary Letter of Credits.

Revocable LC: This type of letter of credit can be amended, withdrawn or changed at any time without the consent of the exporter. It gives the buyer maximum security, but little or no security to the seller. This form of LC is seldom used in practice. A revocable letter of credit is never confirmed.

Irrevocable LC: In this type of letter of credit, none of the parties involved has a right to amend, change or withdraw the letter of credit except with the permission of ALL the parties involved. i.e. importer, exporter, importer’s bank and exporter’s bank. However, the bank can refuse its payment obligation in the event of non-compliance by the exporter with the terms of credit or in case of fraud on the part of exporter.

Confirmed IrrevocableIf the seller does not have a confidence in the LC opening bank or the country of the buyer, it may ask the LC advising bank to confirm the LC. In case the LC Opening bank does not meet its obligations to pay, the LC advising bank makes good the payment.

Clean Letter of Credit: In this type of letter of credit, bank does not put any conditions for acceptance and payment of Bill of Exchange.

Back-to-Back LC: In a back to back LC, the exporter opens an LC in favour of his supplier on the back of LC opened in his favour by importer.

Confirmed LCWhen the LC issuing/ opening bank is a weak bank or the concerned country has political problems, another bank in another country (which is either a strong bank or it is in a country which does not have political problem) guarantees payment. The bank, which gives such guarantee, is called LC Confirming bank and LC is called as Confirmed LC. In case the LC opening bank does not pay, the LC confirming bank makes good the payment.

With Recourse LC


The term ‘Recourse’ means that the BANK may direct the EXPORTER at any time, to pay to the BANK an amount equal to the amount remaining unpaid by the IMPORTER.

Thus, in recourse LC exporter is required to make payment to his bank in case importer fails to make payment.

Red Clause LC Such LC is opened to provide exporter with advance payment to enable him manufacture and purchase goods from the local suppliers. In this LC risk of non-submission of documents or non-execution of order by exporter is on LC opening bank. Since this letter of credit is printed in Red for the sake of differentiation, it is called Red Clause LC.

Green Clause LCThis type of letter of credit envisages grant of storage facilities at port over and above the pre-shipment payment to the exporter. In India opening of Green Clause LC covering import of goods in our country requires prior permission.

The operations of letters of credit have been regulated and are governed by UCPDC 500 of International Chamber Commerce, Paris.

Open Account

Open account terms means that the seller has agreed to give the buyer a certain credit period to pay (usually 30 to 90 days after the date of shipment) and the buyer has agreed to pay as per the agreed terms.

India USA

Seller Buyer

Such type of transaction occurs when buyer is strong or when it is buyer’s market. Here risk is 100% on the seller.

Seller’s view Buyer’s viewLeast Secure form of trading. He should have complete confidence that the buyer will pay.

Most Secure form of trading

On risk since buyer may not pay on due date

Can collect and use the goods before making payment


1. Places Order

2. Ships the goods

3. Pays on Due date

Should have sufficient liquidity to allow a credit period to the buyer.

Gets free credit. Their own lines from the banks are not used to fund the credit period.

Should have confidence in the government of the buyer’s country that they won’t impose any restrictions for transfer of money

It is administratively cheaper.

Should have sound knowledge of the trade practices in the buyer’s country, their language for follow-up, time zone adjustment and the laws of the country

Terms of Trade (INCOTERMS)

INCOTERMS means – international commercial terms. These are set of rules applicable uniformly to all international trade. They set out the rights and obligations of the exporter and the importer in international trade transactions.They came in to force w.e.f from 1st July 1990.

The most common ways of exporting goods are: FOB C & F CIF

FOBFOB means “Free On Board”. Here the exporter pays for all the costs till the goods are placed “On Board” the ship. Once the goods are on board, all the costs are paid by the buyer.

Seller Port On Board On Board Port Buyer

Seller Pays Transportation Warehousing

Buyer pays Freight Insurance Transportation

C & F


C & F means “Cost & Freight” Here the exporter pays for all the costs till the goods are placed downloaded at the buyer’s port. The transportation from the port to the final destination and insurance is borne by the buyer.


Seller Pays Transportation Warehousing Freight

Buyer pays Insurance Transportation

C I F

C I F means “Cost Insurance & Freight” Here the exporter pays for all the costs till the goods are downloaded at the buyer’s port including Insurance. The transportation is borne by the buyer.


Seller Pays Transportation Warehousing Freight Insurance

Buyer pays transportation

However in all the three cases, the title of the goods passes on to the buyer once the goods are shipped on board at the seller’s port.


SECTION 2

TYPES OF EXPORTERSDefinition of an Exporter

“Exporter” means a person who exports or intends to export and holds an Importer-Exporter Code Number. IEC code is unique for exporter and is registered with Director General of Foreign Trade (DGFT).

Following are the categories of exporters:

- “Manufacturer Exporter” means a person who exports goods manufactured by him or intends to export such goods.

- “Merchant Exporter” means a person engaged in trade activity and exporting or intending to export. He can also export goods manufactured by him.

Export ZonesTo build marketing infrastructure and expertise required for exports, government has categorized following:

- “EOU” means Export Oriented Unit- “EPZ” means Export Processing Zone.- “SEZ” means Special Economic Zone.

These zones are set up as enclaves and have different tariff structures compared to domestic business. This provides an internationally competitive duty free environment for export production at low cost. Thus enabling the products, to be competitive, both quality-wise and price-wise in the international markets.

Exports of Service

- “Service Provider” means a person providing:

(i) Supply of a service from India to any other country(ii) Supply of a service from India to the service consumer of any other

country, and(iii) Supply of a service from India through commercial or physical

presence in the territory of any other country.(iv) Supply of a ‘service’ in India relating to exports paid in free foreign

exchange.


Types of Exporters

When exporters, service providers achieve a specified level of exports over a period of time, they can get recognition or registration as

- Export House (EH)- Trading House (TH)- Star Trading House (STH)- Super Star Trading House (SSTH)

This status is to facilitate the development of business houses specializing in export trade. The eligibility is on basis of:

- average F.O.B. (F.O.B. Value is explained later in this section) value of goods or services in the preceding three years, or preceding year

OR- the Average net foreign exchange earning in FCY and INR in the

preceding three years or Net Foreign Exchange earned in the preceding year.

(INR)CATEGORY AVG FOB

(3 preceding years)

FOB(Preceding year)

AVG NFE(3 preceding years)

NFE(Preceding year)

EH 15 CR 22 CR 12 CR 18 CRTH 75 CR 112 CR 62 CR 90 CRSTH 375 CR 560 CR 312 CR 450 CRSSTH 1112 CR 1680 CR 937 CR 1350 CR

NFE = Net foreign exchange earned on exportsFOB = Actual invoice value after deducting all freight, Commission & Insurance payable.

EXPORT FINANCE

An exporter may require financial assistance from his bank at both pre-shipment and post-shipment stages.

Export finance is broadly classified into following two categories, depending upon what stage of export activity the finance is extended:

1. Pre-shipment Finance This type of finance is available to produce goods before it is shipped / exported. The types of pre-shipment finance are:

i) Packing Creditii) Pre-shipment Credit in Foreign Currency (PCFC)


2. Post-shipment Finance This type of finance is available after the goods are shipped / exported till the money is realized from the overseas buyer. The types of post-shipment finance are:

i) Negotiations of export documents under Letter of Credit.ii) Purchase/Discount of Export Documentsiii) Advances against Documents / Bills sent on Collection Basisiv) Advances against Exports on Consignment Basisv) Advances against Cash Incentives / Duty Drawback

Entitlementsvi) Financing Exports under Deferred Payment Arrangements,

Turnkey Projects, and Construction Contracts etc.

Some of the common and the most frequently used finance are highlighted below:

Pre-Shipment Finance:

Packing Credit:

Packing Credit advance is available for the purpose of: Purchasing raw materials for the goods meant for exports, Manufacturing them, Processing them, Warehousing them, Transporting to the seaport / airport for export, and Packing and shipping.

The maximum period for which the credit can be granted is 180 days from the date of disbursement. The period can be extended by another 90 days at the discretion of the Commercial Bank, subject to the payment of additional interest by the exporter for extended period.

Pre-shipment Credit in Foreign Currency (PCFC)

This scheme enables Indian exporters to avail pre-shipment credit in foreign currencies to finance cost of imported inputs for manufacture of export products.

The maximum credit period for an advance under PCFC is 180 days

The facility for pre-shipment credit limit in foreign currency is available only to the following categories of the exporters:-

- Export Houses, Trading Houses with annual export turnover exceeding Rs.10 crores.


- Manufacturing units with minimum export orientation of 25% of production or export turnover of Rs.5 crores, whichever is lower. For this purpose, only physical exports of commodities will be taken into account and not services. Such exports could be made either directly by the manufacturer or he can sell to a Trading House, who can then export.

Advances against Cash IncentivesAdvances against Duty Drawback Entitlements

These are not very common and can be ignored for the purpose of this training.

Post Shipment CreditPost Shipment Credit can be both, short-term (180 days) or medium to long-term (more than 180 days)

Banks give Post-shipment credit (short-term) after the shipment of goods and submission of shipping documents to banks. Following are the types of post-shipment credits given by banks.

Negotiation of Documents:Where the export is under a Letter of Credit, the banks accept the documents, check them, and if they are as per the LC terms, pay the exporter the total amount of the LC, less the bank interest and charges. This process is called negotiation of documents.

Purchase/Discount of BillsWhere bills are not covered under Letters of Credit, the exporter may ship on a Bill of Exchange Basis. i.e. DA or DP terms. In such cases also, the banks check the documents, wait for the acceptance of the BOE by the buyer, and on acceptance, pay the exporter the value of the BOE. This process is called purchase / Discount of Bills.

Documents on Collection Basis

The term ‘Collection Basis’ means that the banks send the documents to the buyer through the buyer’s bank and the exporters will receive export proceeds only after they are paid by the buyer. No payment is made to the exporter when he submits the documents.

Banks may also sometimes grant advances against invoices / bills sent on collection basis. This may be resorted to when the limit available under the Bills purchased scheme is exhausted or when, some export bills drawn under L/C have discrepancies. Such payments are usually avoided and not favoured by banks.


The period of credit will be from the date of negotiation or collection of export documents to the due date (not more than 180 days in any case) mentioned on the relative export bill or the date of realization of export proceeds from the overseas bank.

Factoring

Discussed in Section 4

Advances against Goods sent on Consignment Basis

Need for this type of finance arises where goods are exported on consignment basis at the risk of the exporter for sale and eventual remittance of sale proceeds by the agent/consignee. This type of finance is also not favoured by banks.

Advances against Cash Incentives/Duty Drawback

Where the domestic cost of production of certain goods is high in relation to international price, government may grant some incentives to the exporter so that he may compete effectively in the overseas market. The banks may at times give advances to the exporter against these incentives.

Government of India have formulated a Duty Drawback Credit Scheme under which banks are able to grant advances to exporters against their entitlements of duty drawback on export of goods, free of interest charges. The period of advances will be up to a maximum 90 days beyond which the bank may not allow the advances or may charge normal interest applicable to export credit.

Financing Exports under Deferred Payment Arrangements, Turnkey Projects, Construction Contracts etc.

Post-shipment credit (medium or long term) is given for exports on deferred payment terms for the period of over one year. Also special RBI approval or EXIM approval is required for credit period more than 180 days.

While sanctioning the post-shipment credit, the bank will first liquidate the packing credit from the bill proceeds and then convert the entire amount of the bill into post-shipment credit.


SECTION 3

TRADE DOCUMENTATIONEXPORT DOCUMENTS

Given below are the various documents involved in the export of goods.

Pro-forma Invoice

A pro forma invoice is a document that states a commitment from the seller to sell goods to the buyer at specified prices & currency and terms. It is used to declare the value of the trade. It is not a true invoice, because it is not used to record accounts receivable for the seller and accounts payable for the buyer. Sales quotes are prepared in the form of a pro forma invoice which is different from a commercial invoice. The content of a pro forma invoice is almost identical to a commercial invoice and is usually considered a binding agreement although the price might change in advance of the final sale.

Banks usually prefer a pro forma invoice to a quotation for establishment of a letter of credit or for advance payment by the importer through his bank.

Purchase Order

A Purchase Order (PO) is the next document executed. Sometimes an acceptance of the Pro forma Invoice by the buyer might be construed as an acceptance to Trade (thus an accepted Pro Forma Invoice is as good as purchase order). The Exporter and the Importer negotiate with each other to sell and purchase goods. The Exporter commits to sell the Importer :-

- certain goods - at a certain price and - at a certain date.

In the Purchase Order all this is put in writing and signed by both the parties. On signing the PO, there is a commitment on both sides and is legally binding on both sides.

PO is not only important to the exporter and importer, but it is also of concern to their respective countries, since it affects the balance of payment position of both the countries. It is, therefore, not just a matter of product, manufacturing, packing, shipment and payment but also one of the concern to licensing authorities, exchange control authorities and banks dealing in export trade.


http://en.wikipedia.org/wiki/Letter_of_credit

http://en.wikipedia.org/wiki/Binding_agreement

http://en.wikipedia.org/wiki/Sales_quote

http://en.wikipedia.org/wiki/Accounts_payable

http://en.wikipedia.org/wiki/Accounts_receivable

http://en.wikipedia.org/wiki/Buyer

http://en.wikipedia.org/wiki/Good_(economics)

http://en.wikipedia.org/wiki/Invoice

The exporter is required to produce copies of export order to various Government departments/Financial institutions for many things like - obtaining export licenses for products covered under restricted items for exports, availing pre-shipment & post-shipment finance, other incentives, dealing with inspection authorities, insurance underwriters, customs offices, exchange control authorities, etc. for various purposes.

Order Acceptance

The Order Acceptance is another important commercial document prepared by the exporter confirming the acceptance of order placed by the importer. Under this document, he commits the shipment of goods covered at the agreed price during a specified time. Sometimes, the exporter needs a copy of his order acceptance signed by the importer.

The order acceptance normally covers:

Name and address of the importer Name and address of the consignee Port of shipment Country of final destination Description of goods Quantity Price each and total amount of the order Terms of delivery Details of freight and insurance Mode of transport Packing and marking details Terms of payment

Invoice

It is a prima facie evidence of the contract of sale and purchase. The invoice should be strictly in accordance with the contract of sale (PO). It contains following details:

Name and Address of Seller Name and Address of Buyer Name and address of the consignee Description of Goods i.e Technical features, Physical features Quantity of Goods Gross Weight / Net Weight Price of Goods – unit price and total price Country of Origin Port of Loading & Port of Discharge Payment Terms


After sale service and warranty details Validity of Invoice Delivery Schedules

There are five types of invoices:

Proforma Invoice

Commercial Invoice

Consular Invoice

Legalised Invoice

Custom Invoice

1. It is an indicative quote from the exporter to the importer

It is a firm contract of sale for the shipments made. It is a receivable in the books of accounts of the exporter.

Consular Invoice is a document required mainly by countries like Philippines and South Africa.

It is required by the Middle East countries. It is also called as visaed invoice.

It is required by countries like USA and Canada.

2. It gives a clear idea to the importer in respect of terms and conditions of sale and price of goods.

It is fundamental and basic document used for commercial transactions.

It is useful at the time of payment of Import duty. Thus facilitates fast clearance of goods at customs of importers’ country.

This invoice is legalized by the consular of importing country by stamping and attesting.

Specific form is to be supplied by the consular office of the importing country.

3. Acceptance of a Proforma Invoice by the buyer is equivalent to a Purchase order duly accepted.

It gives description of the goods as per the L/C, if transaction is drawn under letter of Credit

Consular invoice is certified by Embassy or Trade Consulate of the Importer’s country stationed in exporter’s country

It is same as consular invoice except that it is not on the prescribed form.

This facilitates entry of merchandise into importing country under preferential traffic.

4. In addition to basic terms mentioned above, it includes:

The exporter has to pay to the Embassy concerned some fees for


Order and Contract No

Marks and Vessel No

Packing specifications

Terms of Sale (FOB,CIF, C&F)

Details of shipment i.e name of vessel, route, sailing date, GRI No, IE Code, Marine Insurance Reference.

the certification of this invoice.

Packing List/Note

A Packing List/Note gives description of goods exported in detail including every part, component, specifications, etc. It includes following details

1. Date of packing 2. Connecting invoice number 3. Order number 4. Port of Loading5. Port of Discharge6. Country of Destination7. Quantity of goods8. Description of goods item wise9. Gross weight and Net Weight10. Item-wise details

Transport Documents

The following documents are used in export business as transport documents:

Ways of Transport Document IssuedTransport by Sea Bill of Lading

Freight Forwarder’s ReceiptAir Freight Airway Bill/Air consignment noteRail/Road Railway Receipt/Consignment notePost Post Parcel ReceiptCourier Courier Receipt/Way Bill

Bill of Lading

It is a document of title and it is evidence of shipment.


The Bill of Lading is a document issued by the shipping company or its agent:- acknowledging the receipt of goods mentioned in the bill for shipment on

board the vessel- undertaking to deliver the goods in the same order and condition as

received, - to the consignee mentioned on the Bill of Lading.

Consignor is one who ships the goods.Consignee is one who can collect goods from shipping company.

The Bill of Lading contains details such as the: Name of the consignor Name and destination of the vessel Destination of the goods Description of goods Quantity of goods Marks and numbers Invoice number GR number Gross and Net weight Number of packages Amount of freight etc. Date and place of shipment

From the legal point of view, a Bill of Lading is:

i) A formal receipt by the ship-owner or the master of the ship acknowledging that the goods of the stated specifications, quantity and condition has been received in the custody of the ship-owner for the purpose of shipment or is on board a certain ship;

ii) A memorandum of the contract of carriage, repeating in detail, the terms of the contract which was in fact concluded prior to the signing of the bill; and

iii) A document of title of the goods enabling the consignee to dispose off the goods by endorsement.

Bills of Lading are usually made out in sets of three (or more, and the same is specified on the Bill of Lading).

The exporter should submit ALL the sets of Bill of Lading together with the mate receipt to the shipping company, which would calculate the freight amount on the basis of measurement or weight as certified by the recognized Chamber of Commerce. On payment of the freight, the shipping company returns the Bill of Lading duly signed and stamped. If required, the exporter may prepare additional copies of the Bill of Lading.


In some cases, the exporter may have the Bill made out to his own order or in the name of the Bank. The consignee or the consignor, as the case may be, may transfer the bill either by:

- an endorsement, which names the transferee to whom the delivery is to be made or

- by an endorsement in blank (i.e. without naming an endorsee).

Airway Bill/Air Consignment Note

Airway Bill or Air Consignment Note is the receipt issued by the airline company for the carriage of goods under certain terms and conditions. Airway Bill or Air Consignment Note is NOT treated as a document of title and is not issued in negotiable form. Airway Bill is generally issued in three copies. One copy each is for the carrier, consignee and the consignor.

Post Parcel Receipt

Post parcel receipt evidences the receipt of goods for exports by the post office and it is also NOT treated as a document of title.

Mate’s Receipt

Mate’s Receipt is issued by the Chief of Vessel after the cargo is loaded.

It contains Name of shipping line Vessel Name Port of loading Port of discharge Place of delivery Marks and numbers Number and kind of containers Description of goods Container status/seal number Gross weight Condition of cargo at the time of its receipt on board the vessel Shipping bill number and date.

The mate receipt is of a transferable nature and must be presented immediately at the shipping company’s office to be exchanged into Bill of Lading.

Marine InsuranceIn the International trade, when the goods are in transit, they are exposed to marine perils. Marine Insurance is intended to protect the exporter/importer against the risk of loss or damage to goods in transit due to marine perils.


In India Marine insurance is governed by the following laws:

1. The Indian Contract Act 18722. The Marine Insurance Act 19633. The Insurance Act 19384. The Insurance Rule 19395. The Indian Stamp Act 18996. Exchange Control Regulation relating to General Insurance7. Common Laws8. Marine Insurance Practice

Marine Insurance includes following types:

1. Insurance of goods in transit by various modes of transport (e.g. Sea, Land, Air, Rail etc.)

2. Insurance of Ships (e.g. merchant vessels, passenger vessels etc.)3. Insurance of ship during construction4. Insurance of ship during breakage5. Freight Insurance

In India and in majority of countries of the world the clauses drafted by institute of London underwriters (ILU) are in vogue. There are about 225 clauses in this set. There are other clauses also in world market like American Clauses or Deutsch Clauses.

For general cargo there are two types of clauses based on mode of transport.

Transit by Sea Transit by Airi) Institute Cargo Clauses(C) – ICC

(C) Institute Cargo Clauses(A) – ICC (A)

ii) Institute Cargo Clauses(B) – ICC (B)

(Excluding carriage by post)

iii) Institute Cargo Clauses(A) – ICC (A)

The scope of cover under ICC(C), ICC(B) & ICC(A)

ICC(C)

Loss or damage subject to (i) Fire or explosion(ii) Vessel or craft being stranded, grounded, sunk or capsized(iii) Overturning or derailment of land conveyance(iv) Collision/contract of vessel, craft or conveyance with external object

other than water.


(v) Discharge of cargo at port of distress(vi) General average sacrifice(vii) Jettison

ICC(B) above (i) to (vii) points plus the following:

(viii) Earthquake, volcanic eruption(ix) Washing Overboard(x) Entry of sea, lake or river water into vessel, craft, hold, conveyance,

container, lift van or place of storage(xi) Total loss of any package lost overhead or dropped whilst loading

onto, or unloading from, vessel or craft.

ICC(A) above (i) to (xi) points plus the following:

(i) Rainwater damage(ii) Piracy(iii) Malicious damage(iv) Rough handling(v) Breakage, leakage, denting, scratching etc(vi) Heating, sweating(vii) Just by external factors(viii) Country damage(ix) Theft, pilferage and non delivery(x) Hook and sling damage(xi) Contamination(xii) Oil damage(xiii) All other accidental loses/ damage to cargo

ICC(Air) is similar to ICC(A) but it does not cover General Average or Salvage Charges which are peculiar to sea transit.

Exclusions applicable to all ICC (C),(B) & (A)

1. Willful misconduct of insured2. Ordinary leakage, ordinary loss in weight or volume, ordinary wear and

tear of cargo.3. Insufficiency or unsuitability of packing or preparation of cargo4. Inherent vice or nature of cargo5. Insolvency or financial default of owners, managers, characters or

operators of the vessels. Un-seaworthiness of the vessel or craft and unfitness of vessel, craft, conveyance, containers or lift vans.

6. Deliberate damage7. Nuclear losses8. War Risk9. Strike, Riots, Civil commotion and terrorism


Insurance is mandatory when goods are shipped on CIF basis.

As soon as the goods are ready for shipment, the exporter has to buy Insurance.

Total Amount to be Insured = Invoice Value + 10%of the Invoice value

Bill of Exchange

Bill of Exchange is also known as ‘Draft’. A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a person or to the bearer of the instrument.

A bill of exchange contains an order from the creditor to the debtor to pay a specified amount to a person mentioned therein.

- ‘Drawer’ is the person who draws the bill.- ‘Drawee’ is the person who accepts the bill and agrees to pay. - ‘Payee’ is the person who receives payment.

‘Sight draft’ or ‘Draft drawn at first sight’ or ‘On demand’ or ‘On presentation’The exporter expects the importer to make immediate payment upon the presentation of the draft.

‘Usance Draft’ or ‘Usance Bill’ or ‘Demand Draft’ Draft is drawn for payment at a date later than presentation

The Bill of Exchange or Draft is drawn in a set of two. Each one bears a reference to the other. When any of the drafts is paid, the second draft becomes null and void.

NTR (Notification and Transfer of Receivables

This form is used only for factoring. All the documents are enclosed along with this form. The form is to legally notify the Export Factor of the invoices submitted for factoring.

Export Declaration Forms

As per the Exchange Control Regulations, exporters are required to submit declaration in one of the following prescribed forms to the prescribed authority before any export of goods from India is made. The prescribed forms are given below:


Form GR Exports to all countries made other than by Post. This is prepared manually.

Form SDF This is similar to GR Form except that it is issued bycertain offices of customs where electronic systems arein place.

Form PP Exports to all countries by Parcel Post, except when made on “Value Payable” or “Cash on Delivery” basis.

Form SOFTEX To be used for declaring software exports through data communication links and receipt of royalty on the software packages/products exported.

The GR form is the most important document as far as the regulators are concerned. The GR Form gives the following:

- the exact amount of Foreign Exchange coming into India at a specific date.

- Control and regulation of exports from India- To estimate the balance of Payments situation of the country

The details of the GR form are to be reported to RBI on a fortnightly basis. The GR form is to be released to RBI after the foreign currency is received into India. Authorised dealers India are not supposed to accept any documents unless the GR form accompanies the export documents.

Shipping Bill

Shipping Bill is an important document required by the Customs Authorities for allowing shipment. It is prepared by the exporter and it contains:

Name of the vessel, Master or agents, flag Port at which goods are to be discharged Country of final destination Exporter’s name and address Details about packages Number and description of goods Marks and numbers Quantity FOB price, real value as defined in the Sea Customs Act Whether Indian or Foreign merchandise to be re-exported Total number of packages with total weight Value and the name and address of the Importer.


The Shipping Bills are of following types.

i) Duty-free shipping Bill:This type of Shipping Bill is printed on white paper and used for the goods for which neither duty nor cess is applicable. It is also used for the goods manufactured out of materials imported under the duty-free import.

ii) Dutiable Shipping Bill:This type of shipping bill is used for the goods subject to export duty/cess, which is either entitled or not entitled for drawback. This shipping bill is used separately in respect of which export duty is levied on the basis of (a) market price and (b) tariff assessed value, and printed on yellow paper for all goods except mica and jute.

iii) Drawback Shipping Bill:If the export of goods is simultaneously by duty free and/or subject to export duty/cess, this type of shipping bill is compulsorily to be used whether alone or along with any other shipping bill. This type of shipping bill is printed on the Green paper.

iv) Shipping Bill for Shipment Ex-bond:In case of goods imported for re-export and kept in-bond, this type of shipping bill is used which is printed on yellow paper.

Certificate of Origin

It is issued by a recognized Chamber of Commerce, Export Promotion Council or Government Department.

It certifies that the goods are of Indian origin and are manufactured in India. It is also required by exporter to categorise its product under get concession/ exemptions on duties from the government.

Manufacturers CertificateIn addition to the certificate of origin, some countries require Manufacturers Certificate stating that:

- the goods exported by him are manufactured in India- the goods does not contain any raw material or components imported into

India from other country

G.S.P. CertificateThe EEC countries comprising France, Germany, Belgium, Netherlands, Italy, UK, Ireland, Denmark and Greece have adopted the Generalised System of Preferences (GSP). Under his system, manufacturers and semi-manufacturers


from developing countries including India will be entitled to a concessional rate of import duty in these countries.

The Government of India has authorized the Export Inspection Council of India and its various agencies to issue the GSP Certificate.

Certificate of Inspection

Certificate of Inspection is issued by the Inspection Agency concerned, certifying that the consignment has been inspected as required under the Export (Quality Control & Inspection) Act, 1963 and satisfies the conditions relating to quality control and inspection as applicable to it and is certified export worthy. In addition to this certificate, some countries need ‘Clean Report-of-findings’ under a certificate of SGS. (SGS is a company who inspects the goods and gives a certificate to that effect)

Transshipment Bill

India Singapore USA

Port of Intermediate Final Port of Loading Port Destination

In the word Transshipment - ‘Trans’ stands for transfer and ‘Shipment’ means cargo i.e. when cargo is transferred from one ship to another it is called as Transshipment. Sometimes shipping companies do not have direct ship service to the port of discharge. In such cases, goods are taken by one vessel (ship) to a port from where they are transferred to another vessel for delivery to port of discharge.

Transshipment Permit

The transshipment permit is the permission for transshipment of goods from the vessel on which the same are booked originally to another for export.


SECTION 4

BASICS OF INTERNATIONAL FACTORINGOrigins of International Factoring

Factoring as a method of trading has its origins in history. Surprisingly, International Factoring is not a new development but can be traced back for many hundreds of years. Indeed, it was the very growth of international trade, which led to the use of mercantile agents as Factors.

From the time of the 17th and 18th Centuries, there was a tremendous growth in trade between the European countries and other parts of the world, in particular, North America.

As communication was poor and at that time, no faster than the transportation of the goods by sailing ships, the exporters needed to appoint mercantile agents in their overseas markets.

The mercantile agents or “factors” had the following responsibilities:

I. They held stocks of goods (mainly textiles and clothing) for their European principals.

II. They sold the goods in their own name for the account of the principal.III. Often because of the “factor’s” better knowledge of local buyers, the

principal allowed the “factor” to sell on credit terms, the “factor” raising his own invoice (rather than purchasing invoices as we do today).

IV. As they were responsible for selling on credit, the “factor” began to assume the “del credere” risk.

V. Finance was also provided to cover port charges, duty, etc. and to pay the principal.

Growth Of Factoring

International Factoring is generally believed to have its origins in the late 17 th

Century, and was concentrated in the textile trade between England and what is now the United States. Other sources credit the Phoenicians with the idea, when they traded with other Mediterranean people.

The early growth in International Factoring was mainly along the East Coast of North America, as the great immigrant population shifted to the west in North America, the same problems of poor communication, distance and slow transport


meant that local manufacturers turned again to the use of agents or factors. This was particularly so in the textile industry.

As the economy strengthened in the USA and the political ties with Europe no longer existed, the need for factors or agents to handle import business declined, however the domestic factor handling sales within his own country frontiers had been born.

As communications and transport improved, it was no longer necessary for the manufacturers to send goods on consignment, goods could now be sold by sample through the agent and despatched to the customer direct.

However, the manufacturer retained the use of the agent/factor to make payment upon shipment, with the factor having the right to collect payment from the end buyer, the basis for modern factoring.

As factoring grew in the USA it tended to concentrate upon those industries where it was well known, textiles, clothing and furniture. While initially factoring was very much concentrated in textiles, starting in Europe and later also in other parts of the world, it was soon introduced in other sectors. Outside of the USA factoring is now to be found in a much more diverse range of industries.

Even now the original reasons for the development of factoring are still behind the growth of International Factoring, that is, transport and communications. Whilst we now have the advantage of air travel and almost instant electronic communications, credit information on local buyers is still at the heart of a business transaction, and the ability to understand the local market is key to the growth in International Factoring.

Whilst transportation is no longer such a problem as in the days of sailing ships, the fact that goods can now be delivered, if required, by air, in a matter of days, if not hours, creates immense pressures on the seller to compete in an overseas market. This can only be done if he has a good understanding of his market, either directly or via an agent or factor.

Definition of International Factoring

Factoring works on the back of Open Account transactions. International Factoring is a service that covers the financing and collection of your Export Trade Receivables along with Credit Protection up to a pre-determined limit.

What does factoring cover?

Factoring covers any two of the following four services:


Financing of Receivables up to a fixed percentage of the invoice value, usually 80%.

Collection of Receivables on the due date. Credit Protection up to 100% of the invoice value. Maintenance of Sales Ledger for all the approved buyers.

How Does International Factoring Work?

There are two stages in International Factoring:1. The Buyer Approval Stage2. The Day-to-Day Operations Stage

The Buyer Approval Stage:

Before the seller ships the goods to the buyer, details of the buyers for whom the seller wishes to avail of the factoring services is given to the Export Factor (EF). The below mentioned diagram gives you the stepwise details of how the buyer approval takes place.

Step 1. Buyer places order with the seller.Step 2. Details of the buyer are submitted to the EF.Step 3. EF forwards the details to another Factor in the buyer’s country, called

as the Import Factor (IF).Step 4. The Import Factor assesses the credit worthiness of the buyer and

grants a preliminary limit on the buyer.Step 5. Based on the limit granted by the Import Factor, a Factoring Agreement

is signed between the seller and the EF.Step 6. Once the Factoring Agreement is signed, a request is made to the

Import Factor to grant a firm limit on the buyer.


Step 7. The Import Factor grants a firm limit on the buyer.

The seller is now ready to deliver the first shipment of goods to the buyer.

Day-to-Day Operations

Once the goods are shipped to the buyer, the below mentioned diagram shows how the day-to-day operations take place.

Step 1. Goods are shipped to the buyer.Step 2. The Invoice along with the relevant documents is to be submitted to the

EF. Step 3. If the documents are in order, the EF will forward the documents directly

to the buyer and inform the Import Factor about the same.Step 4. The EF will prepay an agreed percentage (say 80%) of the invoice value

immediately to the seller.Step 5. On the due date, the Import Factor will collect from the buyer and remit

the proceeds to the EF.Step 6. The EF will then pay the balance amount (say 20%) to the seller.

The above steps are repeated every time a new shipment is made to the buyer.

What does it cost the seller?

There are two elements of pricing:


1) A Discount Charge on the prepayment amount. The Discount will start from the day the prepayment is made to the seller and will be charged on a daily balance method and applied at the end of the each month.

2) A Service Charge on the Gross Invoice Value. This will be recovered upfront by deducting from the pre payment proceeds.

What is the Credit Protection Service?

In case the buyer fails to pay the receivables on due date, the Import Factor undertakes to make payment under guarantee by the 90th day after the due date.

The Credit Protection Service is available only in case of financial inability of the buyer to make payment.

Any Commercial disputes such as quality disputes, etc are not covered under the guarantee.

How does Factoring benefit the seller?

Flexible financing which improves the seller’s cash flow and improves the profitability by financing the working capital requirements.

Financing is directly linked with the seller’s sales, which helps the seller to plan his cash flow and the company’s growth more effectively.

No collateral required as compared to other forms of finance. Credit Protection for the receivables reduces the incidence of bad debts. Collections and follow ups are handled by the Import Factor. This gives the

seller more time for his core activities. The seller saves a lot on administrative costs as Factoring is

administratively less cumbersome than any other forms of finance, like Letter of Credit.

The credit worthiness of the buyer is assessed by the Import Factor on a regular basis, which will helps continuous monitoring of the buyers.

Differences between domestic and international factoring

Many of the key components of factoring apply to both domestic and international factoring, for example:

1. Provision of finance against accounts receivables.2. Credit control and acceptance of credit risk.3. Maintenance of sales ledgers.4. Collection of outstanding sales invoices.

There are nevertheless some differences and these are described below.


(Please remember that these are general statements and may differ in specific markets).

DOMESTIC FACTORING INTERNATIONAL FACTORING

a) The Factor will operate the sales ledger in one currency only, against which advances can be made.

a) The Factor may operate in more than one currency, if that is how the seller is making sales. Advances will generally be made in the currency of the invoice.

b) The Factor can be responsible both for credit control and acceptance of credit risk.

b) Under the two-factor system (see page 7), whilst the Export Factor provides credit risk protection to the seller, this is underwritten by the Import Factor who is also responsible for local credit control.

c) It can be common for the business to be transacted on a recourse basis i.e. without the Factor assuming the credit risk.

c) Most business is transacted on a non-recourse basis with the Factor assuming credit risk on behalf of the seller.

d) The Factor, seller and buyer are all covered by one legal system.

d) The law of at least two countries will be involved in the relationship.

e) The Factor, seller and buyer will all be familiar with local trading conventions and language.

e) The local trading conventions and language will vary from country to country. The two-factor system allows the seller to make use of the local market skills of the Import Factor.

f) The Factor is responsible for collection of payments from the buyer.

f) In the two-factor system, the Import Factor is responsible for collections.


g) The quality of service provided to the seller depends upon the Factor alone.

g) In the two-factor system, the quality of service provided to the seller is to a large part dependent upon the Import Factor, which illustrates perfectly the need for an agreed set of rules or code so that both Import Factor and Export Factor can establish a consistent level of service to the seller.

International Trade Finance with Credit Insurance

International Factoring with Credit Insurance is similar to the Two Factor System, except that instead of the Import Factor, there is Credit insurance Company that is ready to absorb Credit risk. Credit Insurance company is a insurance company that undertakes to indemnify credit risk of approved buyers, whether domestic or International. Such companies usually have an approved database of companies whose credit risk can be measured by them and thus they are able to underwrite such risks based on their experience.

The differences between an IF and Credit Insurance Companies are:

An IF covers 100%, whereas Credit Insurer covers upto 90% of the invoice value.

Credit Insurer does not follow up and collect the debt. It only credit covers. You have to sell the debt to Credit Insurer, if it remains unpaid for 30 days

after the due date of the invoice. Thus, you have to put a claim to Credit Insurer to get the guarantee payment.

Credit Insurer will make Payment under Guarantee 90 days after the debt is sold to them.

The pricing for Credit Insurer are of three kinds:

o A nominal amount (USD 15 to 45) per request for the credit limit that we sought from Credit Insurer. This amount payable is for the request made. The buyer may be granted limit or refused. The payment still has to be made.

o If we want Credit Insurance company to monitor the buyer continuously, credit monitoring charges which are approximately of equal amount need to be paid. These charges are payable annually.

o Once the bank pays an advance to fund against the invoices raised (or credit sales made), they shall insist that a credit protection be available from the Credit Insurer for which a Credit Insurance charges/Fees are payable depending upon the gross invoice value. These charges are depending upon the country and the buyer rating combined.


SECTION 5

FCI RULES FOR INTERNATIONAL FACTORINGFCI - A BRIEF HISTORY

FCI can trace its foundation back to 1964 and a co-operation agreement between Shield Factors of the UK (later to become HSBC Invoice Finance (UK) Ltd) and Svensk Factoring (now known as Handelsbanken Finans) of Sweden.

In 1968 a group of independent European factoring companies decided to form FCI as an open factoring chain, allowing market forces and competition to determine the success or otherwise of its members in any country.

One of the keys to growth of FCI has been the flow of “know how” and experience from the more established factoring companies to the less experienced members. This transfer of information takes place in a number of ways, either informally through seminars, round table discussions, and members visiting each other, or more formally through the FCI Code, Constitution, and communication standards.

FCI STRUCTURE

FCI is an association registered in the Netherlands, with the following objectives: To promote the growth of International Factoring transactions. To promote the use of the Code of International Factoring Customs (The

Code). To consider all problems related to the methods of conducting the business of,

and matters that concern directly or indirectly the factoring industry.

FCI carries out its functions through a number of bodies.

- The Council - This is the highest authority of FCI and consists of representatives of all members, although associate members only have limited voting rights. The Council elects the Executive Committee and Chairman.

- The Executive Committee - The equivalent of a Board of Directors, meets on a regular basis and has the power to set up Technical Committees.

- The Secretariat


The Executive Committee appoints the Secretary General who is responsible for the day-to-day operation of the Secretariat based in Amsterdam, to carry out the decisions taken by Council and the Executive Committee.

- The Technical Committees - These are established to examine a specific issue either for a limited period or on a continuing basis. The present Committees are:The Legal Committee - Which deals mainly with the Constitution of

FCI, The Code and the Rules of Arbitration. The committee is also actively involved in representing FCI in connection with the UNIDROIT and UNCITRAL conventions on factoring.

The Communications Committee - The Communication Committee - which deals with all matters relating to the most efficient transfer of information between FCI members. The Committee has kept pace with the rapid developments in data processing and EDI and has been much occupied with the preparation of the new Internet-based edifactoring.com communication system.

The Marketing Committee - The main missions are to introduce and enhance marketing and sales techniques with the members through various means, among which is the Marketing and Sales Handbook. Also to conduct sales and marketing seminars for the membership and to produce promotional material in order to enhance the image of international factoring.

The Education Committee - The Education Committee - which has developed a long-term policy in providing FCI members with educational opportunities. Probably the most important task for the Committee is the management of the FCI Correspondence Course, an extensive learning programme leading to a diploma examination.


WHY USE FCI?

Much has been written about the merits of belonging to either an open chain such as FCI or to one of the “closed” or restricted chains. The success of FCI is shown by the fact that it is the largest worldwide factoring chain. The membership of FCI is convinced that the pressure of market forces in the countries in which our members operate, serves to deliver real value to exporters/sellers around the world.

FCI and its members are seen as authorities by both national and international governmental bodies and as such are helping to shape the future of our industry. Over recent years, FCI has been at the forefront of developing Factoring as a method of trading in all of the newly emerging markets of the world, in particular the Asia Pacific region.

The availability of more than one member in many countries, allows the exporter via his Export Factor to choose the Import Factor who is best placed to handle the business, either for geographic or industry sector reasons. By allowing more than one member per country, FCI offers the Export Factor and the exporter a choice and therefore pricing and levels of services are responsive to market forces.

In belonging to FCI and working with the members you can be assured that your relationship will be based on a code that has stood the test of time and as a result the service you receive will be of a determined standard. There is also the added advantage that you will be able to communicate with the members through Edifactoring, a system that is unique to FCI.

Through the Correspondence Course and regular seminars, FCI has a training programme that is generally recognised as a standard by itself.


THE TWO-FACTOR SYSTEM IN OPERATION

The Two-Factor System means, as the name implies, a co-operation between two factoring companies, one in the seller’s country, the Export Factor, and one in the buyer’s country, the Import Factor.

Seller Buyer

6 3 2 4 5

2

5

1. The seller delivers goods to his buyers.

2. The seller assigns his invoices through the Export Factor to the Import Factor, who assumes the credit risk (provided this has been agreed beforehand).

3. The Export Factor makes the agreed financial advance against approved invoices to the seller.

4. The Import Factor collects the outstanding invoices in accordance with the sales contract existing between the seller and the buyer.

5. The buyer pays to the Import Factor, who transfers the amount to the Export Factor.


1

ExportFactor

ImportFactor

6. The Export Factor then settles the pre-payment by remitting the remainder to the seller less the agreed charges.

The illustration on the foregoing page represents the operation in its simplest form and assumes that the preliminary negotiations have been completed. It will also be affected by many of the everyday occurrences that are seen in a domestic factoring operation, late payment by buyer, dispute by buyer, credit line withdrawn, etc.

In summary the two factor system allows a seller to take advantage of the three constituent parts of factoring:

They can obtain funding against their outstanding invoices - usually at a level of between 70 and 90%

It allows them to obtain a 100% guarantee against customer default through insolvency or inability to pay

It provides a comprehensive invoice collection and credit management service by utilising the services of fellow FCI member factors in the country of the debtors

WHY BELONG TO FCI?

In addition to the reasons identified above as being part of the values of FCI, there are specific features which come from FCI membership and which in turn create benefit to our sellers, some are detailed below.

Credit Risk Protection - where the seller has a non-recourse factoring facility, the Export Factor provides 100% credit risk protection for sales covered by either a specific individual order or by an agreed credit line. A credit line may cover a series of transactions between seller and buyer and may have either a specific expiry date or may be valid until cancelled. The credit cover is assumed by the Import Factor.

It is important to note that accounts receivable resulting from shipments made before expiry date or before cancellation, are still covered by the Import Factor’s approval.

Shipment is defined by the Code as “the goods are placed in transit to or to the order of the buyer, whether by common carrier or by the seller’s own transport”.

This is an important definition as other factoring chains and credit insurance companies have different criteria and often require the buyer to have taken delivery or possession of the goods before credit cover is active.


Some of the other limitations of credit insurance compared to factoring are: The cover is limited to 80-90% of risk compared to 100% for factoring. The seller must comply strictly with the credit policy terms. In the event

of buyer insolvency, the seller must prove the validity of his claim and that all the terms of the policy have been met, otherwise the claim will not be successful. Under the FCI Code, the Import Factor has to pay the Export Factor 90 days after due date, for approved and undisputed debts.

Even where an insurance claim is accepted, there are often delays of 6 to 9 months before payment is made.

In some cases the seller is obliged to initiate legal action himself before the credit insurance company will take over the debt.

Hidden costs e.g. first loss to be taken by the insured, aggregate annual first loss, premiums to be paid in advance etc.

Local Collection - This is a key part of the service provided by the Import Factor on behalf of the seller.

- Open Account Terms - Where the seller and buyer agree a specific credit period, without any formal guarantees. The seller must be confident that the buyer has the financial ability to pay at due date, and must be able to absorb the cost of extending credit to the buyer. In addition, the seller must maintain an efficient sales ledger and credit control operation to ensure that the buyer makes payment at the agreed time.

In the economies of North America and Western Europe, open account is the preferred method for domestic trading and it is increasingly becoming more important in the area of international cross border trade. Buyers favour it because it does not restrict their credit lines and allows them access to a greater variety of sellers, in addition, the costs are born by the seller in extending credit, and it is thus cheaper for the buyer than the other methods of financing already discussed.

It is as a result of the desire of the seller to be able to offer the advantages of open account trading to his buyers, combined with his need for the credit risks to be covered, that we have seen the growth of International Factoring.

The Import Factor will handle the collection of outstanding accounts receivable using his own local knowledge of national and trading conventions. The Import Factor will often be able to give advice to the seller on the best way of presenting information or documents that will help to avoid that the debtor raises a dispute.The fact that the Import Factor is located in the same country as the buyer will often mean that the buyer will give greater importance to making


payments on due date in order not to damage his credit standing, whereas overseas suppliers may not be considered as important. This is often the case, where the seller and buyer are separated by a number of time zones and the seller tries to handle the collection process using fax or letters.

The buyer will often find it easier to make payment within his own country to the Import Factor, than to arrange a cross border payment direct to an overseas supplier.

Language - Despite the tremendous volume of international trade, it is rare for a seller to have a completely multilingual credit control/sales ledger department with sufficient language skills to handle satisfactorily all cross border business.

It is clearly an advantage that the seller can communicate with the Export Factor in his native tongue and that the Import Factor can chase for payment in the language of the buyer. The communication of standard messages between Factors is handled within the Code and by EDIFACToring as discussed later.

Currency - As the responsibility of running the sales ledger rests with the Export Factor, the seller is relieved from the need to operate multi-currency ledgers. For those sellers who have only sold in their own currency, the ability to sell in the currency of the buyer undoubtedly provides more opportunities to enter new markets.

Legal Title to Debt - A seller may not consider the question of whether or not he has legal title to debt, often assuming that the laws of his own country will protect his position in the country of the buyer.

By using the two-factor system, the Export Factor will obtain advice from the Import Factor and enable the seller to be confident that possible counterclaims against the outstanding debt will be minimised.

TWO-FACTOR SYSTEM VERSUS DIRECT IMPORT/EXPORT FACTORING

The two-factor system necessitates a smooth functioning co-operation between the Export Factor and the Import factor.

The advantages of the two-factor system are evident. For the Export Factor it is of great importance to be able to offer his sellers expert factoring services to a large number of countries without himself having a detailed knowledge of the trading conditions of each country. It is also an advantage for the Export Factor that the Import Factor can, if necessary, handle the collections through the Courts (legal system) of the buyer’s country.


The seller, through the FCI network, receives local expertise in each of his export countries. He only need sign one Factoring Agreement, in his own language with a factor in his own country. The seller can be confident that his buyers can deal with a factoring company in their own countries and in their own language. It is also easier for a buyer to make payment to the Import Factor in his own country rather than making a cross border payment.

The disadvantages of the two-factor system are few. However, because there are more parties involved than with direct (single) factoring, occasionally the speed of response on matters such as credit lines, transfer of cash and disputes can suffer. It is for this reason that FCI has tried to regulate acceptable response times for credit decisions and has set criteria for cash transfers.

Also, it is often thought to be more expensive operating under the two-factor system, as both factors will be required to cover their costs. However, the real benefits of local collections and credit cover should not be overlooked when calculating the true cost of the service.

Direct export factoring will most frequently occur when handling exports to neighbouring countries which the seller considers as his home market and where he is only prepared to pay marginally higher commissions than for domestic factoring. In many cases credit protection will be provided by the use of a credit insurance policy, which can be in the name of the Factor or the seller.

Direct import factoring is best suited where only credit cover and collection are required, as it is uncommon for the factor to provide early payments to a supplier who is based in a foreign country, as the factor finds it difficult to establish a close working relationship and establishing a valid legal assignment of invoices may be more complicated.

BASIC FRAMEWORK OF FCI

When members join FCI, they sign an Interfactor Agreement with those factors with whom they wish to conduct business and also agree to be governed by the three linked sets of rules.

The Code of International Factoring Customs (The Code) The Interfactor EDI Rules The Rules of Arbitration

The documents can be described as the basic framework governing co-operation between members. Together they define the rights and obligations of the parties to transactions under the two-factor system.

- Interfactor Agreement


The Interfactor Agreement is the basis of the contractual arrangements between factors.

By signing this relatively simple document, members are bound to the Code, the EDI Rules and the Arbitration Rules, and two important practical requirements are met: Changes made by the Council to either the Code or the various Rules do not

require members to sign new agreements. Special conditions affecting only certain countries can be incorporated in the

bilateral Interfactor Agreements.

- Interfactor EDI Rules

The EDI Rules are binding upon members signing the Interfactor Agreement. The Rules govern how members shall communicate with each other through EDIFACToring as regards the obligations of the trading partners, matters of security, confidentiality and storage of records. Most significantly the articles establish that transactions between trading partners are validly concluded and validly formed by the exchange of EDIFACToring messages without written documentation.

WHY FCI HAS A CODE

As the members of FCI are spread all around the world and therefore subject to their own country’s rules, regulations and laws, it was recognised that a governing Code was needed to create a uniform set of rules and regulations to govern the transactions between members.

Although there have been many changes and revisions since the Code’s creation in 1969, the basic structure remains the same.

THE PRINCIPLES OF THE CODE

The Code, together with the Interfactor Agreement, is essentially a service and guaranteed contract between Export Factor and Import Factor, by which the Export Factor having taken assignment of accounts receivable from his seller, then assigns those same accounts receivable to the Import Factor (the assignment technically taking place via an EDIFACToring message).

This means that the Import Factor and Export Factor need only sign one Interfactor Agreement to cover the transactions of many sellers.


By assigning the accounts receivable to the Import Factor who assumes credit risk (subject to credit lines being granted), the Export Factor is able to offer to the seller two things: Credit risk cover Payment at a predetermined date

By doing this the Export Factor has the ability to offer cross border facilities to sellers in his own country thereby encouraging more international trade.

MAIN RESPONSIBILITIES OF EXPORT FACTOR AND IMPORT FACTOR

Export Factor

The Export Factor is responsible for establishing a good working relationship and good contact with the seller in order that the Import Factor can be confident that the seller has completed his contractual obligations in respect of assigned accounts receivable.

The Export Factor must assign all invoices of the seller to any buyer for whom credit has been approved by the Import Factor.

The Export Factor also warrants that the buyer is fully liable for the payment of the amount stated without defence or counter claim and that the buyer has been notified of the assignment to the Import Factor.

The Export Factor has an obligation to supply the Import Factor with all obtainable documents necessary to enforce the Import Factor’s claim.

Import Factor

The Import Factor provides two main services: the protection against the risk of bad debts and the collection of the accounts receivable.

The Import Factor must respond to the request from the Export Factor for a credit approval within 14 days.

When the Import Factor assumes credit risk, cover starts from the date of the request, not the date of approval.

Any payment received by the Import Factor from the buyer must be paid promptly to the Export Factor.

In the case of approved accounts receivable that remain unpaid 90 days past due date, the Import Factor undertakes to pay the Export Factor under Guarantee.


The Import Factor does not have to make payment under guarantee.

- If the buyer raises a dispute or counterclaim.- If the Import Factor can demonstrate the Export Factor has

substantially breached the Code and so prejudiced the Import Factor in his appraisal of credit risk, or prevented him from obtaining payment from the buyer.

Provided a dispute is resolved in favour of the seller within 180 days of the dispute notice being received by the Export Factor, the Import Factor must once again accept the credit risk (see Article 14 of the Code of International Factoring Customs for full details on this matter). The Import Factor will endeavour to assist in the resolution of disputes.

Both the Import Factor and Export Factor are obliged to inform each other about any fact or matter “which may adversely affect the collection of an account receivable, the credit worthiness of any buyer, or the ability of the seller to meet his contractual obligations”.

COMMUNICATIONS

Language - With a diverse membership around the world, a common language was a key requirement in the development of FCI. English is the chosen common language of FCI and all communication between members takes place in that language. In order that all parties understand their individual duties and responsibilities, FCI uses standard terms, some of which are explained in further detail in the Glossary (Page 22).

Standard Reporting - It was felt in the early days of FCI that if International Factoring was to succeed there had to be a standard method of reporting, in order to avoid duplication and costs. In addition, a standard reporting system also avoided the need for the seller to deal with different report formats from his various export markets.

This standard reporting has, over the years, changed from being paper based, to one which is computer based, and more importantly allows the transfer of information electronically between members, a system of communication known as EDIFACToring.

EDIFACToring - The Electronic Data Interchange (EDI) of standard messages in the Factoring industry.

Essentially EDIFACToring removes the need for paper messages/information, to be sent between Export Factor and Import Factor.


The system is based on a personal computer package and has been designed not only to handle information transmitted between Export Factor and Import Factor, but also between seller and Export Factor and buyer and Import Factor, although in this case the seller and buyer would need to have compatible systems.

Responsibility for Communication. Professionalism must be shown by both factors regarding their respective responsibilities. The Export Factor must remember when communicating with the seller that the Import Factor has assumed the credit risk on the buyers and any information affecting these risks must be disclosed to the Import Factor.

The Import Factor must always remember that poor performance on his own part can have damaging consequences for the Export Factor’s relationship with his seller. One inefficient Import Factor could cause the Export Factor to lose a valuable seller who may have substantial sales to other markets, as well.

SELECTING CORRESPONDENTS

The selection of a good Import Factor is essential to the success of the Export Factor in providing a service to his seller. The selection needs to be made on a combination of not only their financial standing but also their abilities in giving a high quality service.

There are many ways to gain information upon which a choice can be made:

The Import Factor Information Sheet (IFIS). This is prepared by the Import Factor. A good comprehensive IFIS will tell the Export Factor about the Import Factor’s specialisation (including specific strengths in particular industries), his special requirements, etc.

Referrals by other FCI members. These are a valuable source of information.

Visits - This is certainly the best method, as it enables the Export Factor to get first hand knowledge of the Import Factor’s way of working. Many people prefer to do business with someone they have met face to face. In addition, a visit can also be used to promote return business.

Other ways of assessing a Factor’s performance is through the annual FCI awards and by analysing the Edifactoring statistics.

Financial standing. Through reviewing the balance sheet and other financial reports.


INTERNATIONAL FACTORING COMMUNICATIONS - THE KEY STEPS

1. Seller Information

In order that the Import Factor can give a preliminary assessment of the buyers in his market, he will need additional information on the seller. This is contained within the Prospective Seller Information Message, and this will allow the Import Factor to decide if he wants to handle the business and includes:

VAT (or local equivalent) number if available

Correct Legal Style and Address of Seller

Agents Name and Authority

Nature of Business - Products/Services - A precise indication of the nature of the products helps the Import Factor establish his ability to deal with a certain industry and the risk involved. (If possible, the Export Factor should send a copy of the seller’s sales literature to the Import Factor).

Normal Terms of Delivery - For example, FOB, CIF (INCOTERMS) etc. This is important as it indicates who is responsible for transport and insurance related costs and specifies the timing of the transfer of title to the goods.

Seasonal Period

Information on Turnover - This should include total seller’s turnover, turnover to Import Factor’s market, number of buyers and number of invoices. This, together with the Terms of Payment, enables the Import Factor to determine the workload and spread of risk, and thus determine his commission.

Invoice Currencies - The Import Factor will be able to advise if the notified currency is generally acceptable to local buyers.

Charge Back Amount/Percentage - This is the level of deduction that the seller will accept without further reference to Export Factor or Import Factor.

Discount Grace Period - If discounts for prompt payment are offered by the seller, the Import Factor must know if the seller will extend the discount period by a small number of days, in case the buyer still takes the discount.

2. The Preliminary Credit AssessmentIn the process of negotiating with the Export Factor, the seller will often want to have an indication of the level of credit cover he can expect, in his export market, before completing the factoring negotiation.


The Export Factor should notify the Import Factor of a representative sample including all the largest buyers.

The preliminary credit request per buyer is used by the Export Factor to: Give the Import Factor an indication of which buyers will be involved and the

anticipated levels of cover required. Obtain from the Import Factor an indication of the level of cover that can be

expected.

For each selected name, the full name with correct trading style and address is required, together with bank details and the level of cover requested.

3. Preliminary Credit Assessment Response

On the basis of the above, the Import Factor will give his preliminary assessment.

4. Pricing Information Message

Assuming the Import Factor is prepared to accept the business, he will, at this point, indicate his import factoring commission and any other special conditions and requirements he wants to impose on the account.

5. Factoring Agreement Signed

Once the Export Factor has succeeded in signing the Export Factoring contract with the seller, he will confirm this to the Import Factor using the Factoring Agreement Signed message. This will include all details given on Prospective Seller Information message and certain items, i.e.:

Nature of business - products and services Terms of paymentwhich now become binding information and form part of the contract between Export Factor and Import Factor.

6. Establishing Credit Cover

The first step after signing the export factoring contract is to establish formally the required level of cover for all buyers.

The Export Factor will request either Line Cover or Order Cover from the Import Factor. The detailed information provided to the Import Factor includes:


Correct and full name of buyer, i.e. the legal style not just the trading name. For names that are written in characters, e.g. Chinese, Japanese, etc., a fax of the original name in character should also be sent.

Whether the seller allows the Import Factor direct contact with the buyer. This can be important in gaining financial information.

Company Registration Number and VAT (or local equivalent) number if available.

Buyer’s bank details, including branch and account if known. Buyer’s parent company, if applicable. Buyer’s invoice address - this will often differ from delivery address. Terms of payment. Amount and currency of requested credit cover.

Within 14 days, the Import Factor must respond to the request. The response may be to: Accept the request. (This binds the Import Factor). Confirm that the request is still being investigated. Approve part of the request. Turn down the request. If the Import Factor turns down a request he must

always indicate his reasons for refusal. However, the Export Factor must treat this negative information with utmost confidentiality and not disclose it to the seller, as this may cause a breach of confidentiality by the Import Factor.

By giving cover, unless otherwise agreed, cover in respect of a buyer is provided for the following accounts receivable: Those on the Import Factor’s records on the date of cover. Those arising from shipments made on or after the date of the request of

cover.

7. The Introductory Letter

Once the Export Factoring Contract has been signed and the credit cover is in place, it is necessary to send an introductory letter from the seller to each of the buyers introducing the factoring agreement and giving the buyer instructions on where to make payment. The wording is provided by the Import Factor.

The Introductory Letter may be sent by the seller, the Export Factor, or the Import Factor may require that the seller provides him with a supply of letters, which he then distributes to the buyers.

8. Invoicing

With credit cover in place, and buyers notified of the factoring arrangements, the seller now ships the goods, together with an invoice that carries the notice of assignment, the text of which is provided by the Import Factor.


The seller also provides the Export Factor with a copy of the invoice, which also carries a notice of assignment. It is the responsibility of the Export Factor to check the invoice, to ensure that the assignment notice is there and that the goods relate to the normal line of business as previously notified to the Import Factor.

The Export Factor then notifies the Import Factor of the details of the invoices without delay.

9. Remittance of Funds

The Import Factor has the obligation to collect accounts receivable from buyers and to report the information on payments collected and their allocation to the Export Factor by sending a Payment Message.

The funds should then be sent to the Export Factor without delay, and the Import Factor should inform the Export Factor by a Remittance Message which should always indicate which payments collected from buyers are included.

PRICING - THE IMPORT FACTOR COMMISSION

FCI has a standardised structure for import factoring commissions, although this does not mean standard prices. The structure helps the Export Factor to know what to expect, and assists in his marketing of the service to his sellers.

The structure has 3 elements:

A flat charge (%) of the accounts receivable value to cover the credit risk. A handling charge per invoice/credit note. Bank charges.

Each member is free to charge any combination of the three elements.

FCI REPRESENTATION

FCI has members in more than 50 countries around the world, and annual statistics on the worldwide volume of members are produced each year by the Secretariat.

It is true to say that there are some key influences on the volume of International Factoring in any particular country.

Credit risk and collection are at the very heart of a factoring relationship; it is essential that the necessary banking and financial infrastructure be in place in


any potential buyer market. The ease of access to credit and financial information is critical to the Import Factor’s ability to be able to offer an appropriate amount of credit coverage.

A well established banking infrastructure also allows for buyer payments to be made relatively easily.

The national economy of the buyer’s market needs to show stability. In those countries where rapid inflation is experienced, the Export Factor needs to take great care in his assessment of the credit risk on the Import Factor himself. In addition, rapid inflation may lead to a national government imposing currency regulations on imported goods, and therefore payments from buyers can be frozen or seriously delayed.

For International Factoring to flourish there needs to be the underlying cross border trade demand for manufactured goods, which are the main part of our business.

The credit appetite of the Factors and their commitment to marketing.


SECTION 6

FOREIGN EXCHANGE MARKETSTHE EXCHANGE RATE SYSTEM IN INDIA

BALANCE OF TRADE AND BALANCE OF PAYMENTIt is customary to classify a country’s foreign currency receipts and foreign currency payments under two broad headings

1. Current account transactions2. Capital Account transactions

Current Account TransactionsCurrent account transactions relate to export and import of trade goods taking place in the country. It also includes invisible transactions like services rendered by companies, purchase of books, subscription to foreign courses, foreign travel related expenses, etc.

The difference between all the inflows minus all the outflows on the current account is called the BALANCE OF TRADE.

It is customary to report all imports on CIF basis and all exports on FOB basis for calculating balance of trade. Invisibles comprises of items other than that of merchandise trade. Some of the more important items under this head are travel, transportation, books and periodicals, dividend payments, etc

Capital Account TransactionsCapital Account comprises of short-term and long-term international borrowings and lending. Examples are acquisition of assets in a foreign country, external borrowings, repayment of external borrowings, investment or disinvestments in shares of overseas companies, payment of interest on foreign borrowings, etc.

The difference between all the inflows minus all the outflows on the current account plus capital account is called the BALANCE OF PAYMENT.

A negative on the BoP means tells you whether a country is a debtor (owes money) or a creditor (has to receive money) vis-à-vis the rest of the world. India always had a negative BoP position since independence. India also had a negative Balance of Trade position till date. This means that the Indian Imports has always been more than its Exports.

Counter TradeCountries facing balance of payments difficulties (negative BoP i.e. deficit and growing over a period of time) encourage counter trade as a means of financing


exports. Under counter Trade, imports are paid for, not in convertible currencies but in the form of goods.

We have been invoicing all our exports to the communist countries in Non-Convertible Indian Rupees and these are used to finance our imports from those countries. In other words, counter trade can be termed to the barter system of trade. Counter Trade is said to be cost effective and loaded against the countries having balance of payment difficulties.

It was widely believed that the goods imported by the erstwhile communist countries against Rupee payment terms were sold to other countries against payment in hard currencies, thus depriving India of valuable foreign exchange. Countries requesting for country trade, who may have to import essential goods from abroad, may have to export more of their goods at cheap rates, so as to meet counter trade obligation. In reality, they may be paying much more for the same goods imported under Barter than they would have paid in free foreign exchange.

CONVERTIBILITY OF INDIAN RUPEE

A currency is said to be convertible if its holder can convert it, at any time, into any other generally acceptable foreign currency without any restriction from the monetary authorities.

Following are most commonly used, accepted currencies in India.

GBP Great Britain PoundsUSD U S DollarsEUR EuroJPY Japanese YenAUD Australian DollarsSGD Singapore DollarsCAD Canadian Dollars

Convertible on the current accountWhen you say that rupee is fully convertible on the current account, it means that for all the current account transactions, you can convert FCY into INR and vice versa freely without any restrictions / approval from the monetary authorities (RBI / Ministry of Finance).

Example: If you want to make import payments in USD, you can convert equivalent Rupees into USD and remit the amount. You need not take RBI approval for the same.


Example: Similarly, if you receive export payments in USD, you can convert the amount in USD into equivalent Rupees without any RBI approval.

In India, Rupee is fully convertible on the current account, but partially convertible on the capital account. i.e. you require prior RBI approval to remit money for capital account transactions. The restrictions are put on convertibility of rupee to ensure that it does not become a channel for flight of capital from country.

Rupee can be

Fully Convertible Partially Convertible Non-ConvertibleRupee is Fully convertible for following transactions:

Travel Business travel Travel for Medical

purpose For Education For Pilgrimage Transportation Freight on imports Freight on exports Shipping remittance by

foreign/ India companies Insurance Premium,

commission & payments Services like Bank

charges, commission, Soft/Hardware consultancy services, Computer services, Technical fees

Transfers like gifts, donation etc.

Income on NRI deposits, loans, dividends etc.

Rupee is partially convertible for Capital account transactions e.g.

Investments In Shares abroad by

residents In debt securities abroad

by residents In real estates abroad by

residents Repatriation Of foreign investments in

shares, debt markets Of foreign investments in

subsidiaries/ branches, in real estates

Repayment Long term/ Medium term

loans, NR deposits, short term loans etc.

Not Applicable

Foreign Exchange Market

To convert Rupee into foreign currency or vise-versa, exchange rate is involved. The market, which deals with exchange rate mechanism for conversion of currencies, is called Foreign Exchange Market (FOREX).

There is no physical Forex market like the Stock Exchange, but its participants and players determine it.

Participants’ purchase and sell foreign currency for the various transactions, which affect the demand/supply of FCY and Rupee. This demand and supply determines to some extent the exchange rate.


Factors determining the Exchange Rate of a currencyFollowing factors determine the exchange rate of a currency vis-à-vis another currency.

Balance of Payments Local Interest Rates Monetary Policy Exchange Control Regulations Inflation Central Bank Intervention Speculation Demand / Supply of a currency

Players in FOREX MarketFollowing are the players in a FOREX market. Participants’ purchasing and selling foreign currency for the various purposes Commercial banks, Merchant banks, Investment Banks, Co-op Banks,

Merchants, Moneychangers, tourist, etc RBI purchase and sell foreign currency to control demand/supply of FCY/

Rupee, to control rupee value compared to other currencies and for foreign currency reserves.

The Exchange rate in a Forex market is quoted for the following four types of transactions:

- For Purchase of foreign currency cash the rate quoted is called as TT Buying rate

- For Sale of foreign currency cash the rate quoted is called TT Selling Rate- Rate quoted for Negotiation of an Export Bill is called Bill Buying Rate- Rate quoted for Negotiation of an Import Bill is called Bill Selling Rate

* cash does not mean only hard currency, but also amount to be remitted out / received by way of a Telegraphic Transfer.TT Buying rate Bill Buying rate TT Selling rate Bill Selling rateQuoted when a bank pays rupee equivalent to a customer after getting FCY from him

Quoted when a bank negotiates an export bill and there is no cash transaction taking place immediately, but cash will be received at a later date.

Quoted when a bank pays FCY to a customer after getting equivalent rupees from him

This is opposite of Bill Buying where payment is made for import bills.

Types of transactions

Clean inward remittance

Conversion of

Types of transactions Purchase/discount

of bills and other instruments


Outward remittance in foreign currency


Transactions involving transfer of


proceeds of export bill realized.

Cancellation of outward TT, DD,

MT, PO

(TT/MT/ PO, DD) Cancellation of

forward contracts Bill purchased

returned unpaid Bill purchased

transferred to collection account

proceeds of

import bills.

Types of Exchange Rates

Following are the different types of Exchange Rates

Cash RateA Cash transaction is the one in which delivery of foreign exchange takes place immediately.

i.e. If you have USD with you and go to a bank for conversion into INR, the bank will convert FCY at a rate and give you INR immediately. The transaction as well as settlement is complete immediately on the same day. Such types of transactions are called as cash transaction and the rate quoted is called as cash rate.

TOM RateA TOM transaction is the one in which delivery of foreign exchange takes place the next day.

i.e. If you expect to get USD tomorrow, you may book a rate today and give USD to bank tomorrow. The Bank will give you INR tomorrow. This means that you have done the transaction today, but the settlement is done the next day. Such types of transactions are called as TOM transactions and the rate quoted is called as TOM rate.

Spot RateA Spot transaction is the one in which delivery of foreign exchange takes place the third working day.

i.e. If today is 11th June and you expect to get USD on 14th June, you may book a rate today and give USD to bank on the 14th. The Bank will give you INR on the 14th. This means that you have done the transaction today, but the settlement is done the third working day. Such types of transactions are called as spot transactions and the rate quoted is called as the spot rate.

Forward RateA Forward transaction is the one in which delivery of foreign exchange takes place at a future date, which is greater than the third working day.


Deal Date Value DateCash Rate Today TodayTom Rate Today TomorrowSpot Rate Today Third working dayForward Rate Today Any day after the third

working day

How are Forward rates calculated?

Forward Rates are calculated based on the following formula:

Forward Rate = Spot Rate +/- Margin

If Forward rate is more than Spot rate, then the local currency is quoting at a premium

If Forward rate is less than Spot rate, then the local currency is quoting at a discount

Eg: If today is 15 June and the spot rate of today is 49. You want a forward rate as of 15 July. The bank gives you 49.50. As the forward is more than the spot, rupee is quoting at a premium. The premium is 49.50 – 49.00 = 0.50. Thus the premium is 50 paise.

Eg: If today is 15 June and the spot rate of today is 49. You want a forward rate as of 15 July. The bank gives you 48.75. As the forward is less than the spot, rupee is quoting at a discount. The discount is 48.75 – 49.00 = -0.25. Thus the discount is 25 paisa.

How are Premium / Discount quoted?

Whether there is a premium or a discount depends upon the Interest rate difference between two countries to which the currency relates.

Eg India USAInterest Rate 10% p.a. 5% p.a.Difference 5%p.a.

Since USA interest rate is lower than that of the India INR is quoted at premium of 5% p.a. i.e. 42paise (0.05/12).

Lower the interest rate higher is the premium quoted.


Premium means that the FCY quoted will be more expensive and so a seller will have to pay more of his own currency. The quoted margin should be added to the spot rate to get the forward rate.

Discount means that the FCY quoted will be cheaper and so a seller will get less of his own currency. The quoted margin should be deducted to the spot rate.

par, which means there will be no change.

Forward Contract

Suppose you export today – on 15 June. Your buyer is expected to pay USD on 15 July. The forward rate as on 15 July is 49.50. However, you do not book a forward rate and the spot rate becomes 40 on 15 July. Your buyer pays you and your bank converts at 49 because you did not book a forward rate on 15 June. You loose 50 paise. If you had booked a forward rate, you would have got 49.50 and could have hedged the exchange rate risk. This booking of a forward rate is legalized under “The Indian Contracts Act” and the underlying contract is called as a Forward Contract.

Forward Contract is thus a hedging tool available to Indian corporate to safeguard against adverse movement in exchange rates. The rate at which a currency can be bought or sold at a future date can be fixed today thus effectively fixing the costs of imports or export receivables due at a future date. It thus renders debtors and creditors free from the risk arising out of exchange rate fluctuations. Authorised Dealers have been delegated powers to book forward contracts subject to the following conditions:

1. Forward facility can be extended to resident customers only.2. Forward cover can be for genuine transactions only and not for

speculative transactions.3. AD should satisfy himself that the party for whom the forward cover is

being booked is in fact exposed to exchange risk.4. While booking a forward contract, ADs should verify the necessary

documents to ensure authenticity of the transaction.5. The underlying transaction should be firm and not anticipated or

speculative in nature.6. A customer transaction can be covered in whole or in part. The period

and extent to which cover can be obtained may be left to the customer though the cover should ordinarily match the maturity of the original transaction.

Option Forward


In a forward contract, the settlement of currencies is at a fixed date in future. In our above example, if a forward contract is booked as on 15 July, the money should be delivered to the bank on the 15th. In case the money is not delivered, the contact is cancelled with some penalties. In an option forward contract a further period, of say 30 days, is given to make the settlement. i.e. you can deliver the money any time between 15 July to 15 Aug and you will get the same rate booked by you. This further period is called as an option period and the contract is called as an option forward contract.

Nostro / Vostro Accounts

Nostro AccountWhen you deal in foreign currency, the currency is required to be held in the country to which it belongs. This means that you cannot keep USD in a bank in India. USD is a local currency of United States of America and hence the USD should be kept in USA. Therefore if any bank in India wants to deal with, say, USD, the Indian bank will have to open a current account with a bank in USA, and deposit USD there. The Indian bank then can use the USD deposited in the current account of the US Bank and make transactions. This current account opened by an Indian Bank is called as a Nostro Account.

DefinitionA foreign currency account maintained by a bank in India with a foreign bank in a foreign country is called as a Nostro Account. (Our Account with You)

Eg State Bank of India, Mumbai branch opening a USD current account with Chase Manhattan Bank, New York branch is called a USD Nostro Account.

Eg Punjab National Bank, Mumbai branch opening a GBP current account with Barclays Bank, London branch is called a GBP Nostro Account.

As you may understand that a USD account cannot be opened in London as USD is not the local currency of UK.

Vostro AccountA INR Account opened by a foreign bank with an Indian bank in India is called as a Vostro Account. (Your Account with Us)

Eg Chase Manhattan Bank, New York branch opening a INR current account with State Bank of India, Mumbai branch is called a INR Vostro Account.

LIBORLIBOR means London Inter Bank Offer Rate. This is the rate at which principal banks in London offer to lend currency to one another. This rate is fixed at 11 am


London time. This rate is used as a bench mark for all international borrowings and lendings.

Eg. if you want to borrow, say, USD 1M from Standard Chartered London, they will quote you LIBOR + 2% (say).

[Nostro – Account opened by Indian bank at foreign center in foreign currencyVostro – Account opened by Foreign bank in India in Indian Rupee.]

Foreign Exchange Management in India

Foreign exchange management comes under the jurisdiction of Ministry of Finance (MOF)

M.O.F. operates in the market through the following three institutions:1. RBI2. Customs3. Enforcement Directorate

Until 31st May 2002, all foreign exchange management in India was governed by Foreign Exchange Regulation Act 1973 (FERA). On 1st June 2002, FERA was replaced by Foreign Exchange Management Act 1999 (FEMA).

Following are 4 points of difference between FERA and FEMA

FERA FEMAObjective was to conserve foreign exchange

Objective is to manage foreign exchange

Under FERA offense was punishable Under FEMA offense is compoundableUnder FEMA burden of proof was on accused

Under FEMA burden of proof is on Enforcement department

NRI was not acceptable as per IT act NRI is acceptable as per IT act as well as defined by FEMA

[According to IT act – NRI is a person who is outside India for more than 182 days out of 365 days of previous financial year for any employment or financial gain]

Under FERA/FEMA M.O.F. has instructed RBI to do foreign exchange management. RBI has delegated powers to Authorised Persons i.e Authorised Dealers and Authorised Moneychangers.

Authorised DealersAuthorised Dealers (AD’s) are those entities which are authorized by The Reserve Bank of India to deal in Foreign Currency. They are usually Banks, but can be companies like Thomas Cook, or even us.


Authorised MoneychangersIn order to provide facilities for encashment of foreign currency to visitors from abroad i.e. foreign tourist, RBI has granted license to certain established firms, hotels and other organizations permitting them to deal in foreign currency notes, coins & travelers cheques. These are of two types:

1. Full Fledged Moneychangers –They are authorized to undertake both purchase and sell transaction with public.

2. Restricted Moneychangers – They are authorized only to purchase foreign currency i.e. notes, coins and travelers cheque. These purchases/ collections has to be surrendered to an Authorised dealer/ Full Fledged Moneychangers.

Following three institutes plays important role in Foreign Exchange Management2I. FEDAI – Foreign Exchange Dealers Association in India

It is a banker’s association licensed by RBI to deal in foreign exchange

It is an advisory body to RBI. All rules governing Import- Export foreign exchange management is

decided by FEDAI. i.e RBI gives guidelines while FEDAI decides rules.

All the operational issues are discussed during association meet and put up to RBI.

It conducts educational training programs for bank officers.

2II. ICC – International Chamber of Commerce ICC was established in 1999 and its office is based in Paris It aims at standardizing rules governing operations of Documentary

Credits know as UCPDC. It works towards trade liberalization based on free and fair

competition. It maintains laison with United Nations. Enjoys the status of first category consultant with UNO.

ICC has brought all countries at a common platform of understanding on documents.

Following 3 documents of ICC are statutory requirement in India

(a) UCPDC 500 – Uniform customs and practice for documentary credit. Effective from 01-01-1994. All L/Cs are opened as per UCPDC recommendations.

(b) URC 522 – Uniform rules for Collection. Effective from 01-01-1996. e.g Bills sent on collection basis.


(c) URR 525 – [Bank to Bank transactions]. Uniform rules of reimbursement. Effective from 01-07-1996.

Obligations of an Authorised DealerRBI has stipulated various obligations as far as handling and reporting of export documents as well as dealing in foreign currency is concerned. Some of the important obligations are highlighted below:

The export documents are to be accompanied by a GR Form. The AD’s should number these forms in running sequence on a calendar year basis. These numbers should be 7 digit number prefixed by the type of finance granted. Eg If Export documents are negotiated, the serial should no. will be N0000001, etc. If Export documents are purchased, the serial should no. will be P0000001, etc.

The export documents should be submitted to the AD within 21 days from the shipment date. If not, then the exporter should give valid reason for the delay and the AD should be satisfied with the reason.

If the exporter could not ship the goods declared on the GR, then a short shipment certificate is to be attached with the GR.

The GR should mention the name of the AD through which the FCY will be received.

The GR form details is to be reported by the AD to RBI on a fortnightly basis. i.e. All documents handled by the AD in a fortnight (1st to 15th of the month and 16th to last day of the month) should be reported to the RBI within 7 days from the close of the fortnight.

The AD will release the original GR to RBI only when the full amount declared on the GR is realized. If not part payment will be reported to RBI. (Full payment means 90% of the invoice value should be realized. 10% deduction is allowable)

If the buyer pays less due to discount given to the buyer, the same should be declared on the GR before shipment. Or else the deduction becomes unauthorized.

If any commission is payable to the buyer’s agent, the same should be declared on the GR before shipment.

The full FCY value declared on the GR should be realized within 180 days from the shipment date. If not, then approval for extension in time limit is to be taken from RBI.


SECTION 7

MISCELLANEOUSBank Certificate of Exports & Realisation (BRC)

This Certificate is used by exporters to claim duty drawback benefits from the government. The exporter will get this certificate from the negotiating Bank only after the realization of the invoice in FCY. If any FCY is received by the bank for Non-Export Receivables, BRC cannot be issued.

After shipment, exporters should get their exports certified by an authorized dealer in foreign exchange. While presenting the export documents to an authorized dealer, he should fill in and give to the bank a declaration (in triplicate) in the prescribed form known as ‘Bank Certificate of Export and Realisation’. It is also called as ‘FORM NO. 1’.

Following details appear on BRC Name and Address of the licensing authority Name and Address of the exporter Invoice No & Date Export Promotion copy of S/Bill & Date Description of the goods Bill of Lading/ Post Parcel receipt/ Air Way Bill No and Date Description of Goods Bill Amount (FOB/C & F/ CIF) Freight amount as per B/L or Freight Insurance amount as per Insurance company’s Bill/ receipt in Indian

rupees Commission & Discount payable/ paid in INR. F.O.B. value actually realized in free foreign exchange/ Rupees Date of realization of export proceeds GR/PP form no Signature of the exporter Bank reference number & date with signature of Bankers (official stamp)

and full address of the Bankers.

BRC is prepared in triplicate.

1. Original Copy - Negotiating bank gives it to the exporter after realization of the export proceeds.

2. Duplicate Copy - Negotiating bank keeps with them3. Triplicate Copy - Negotiating bank sends it to licensing authority

i.e. Joint Deputy General of Foreign Trade.


FIRC – Foreign Inward Remittance CertificateIt issued by the bank receiving the FCY for all receivables other than Exports. It contains following details:

- Amount of FCY received- Exchange Rate at which FCY is converted into INR- Date of conversion- Banks Name- Purpose of remittance

A copy of the FIRC is submitted by the AD’s to the RBI as a part of the statutory reporting.

EEFC - Exchange Earners Foreign Currency Account

Sometimes, exporters need FCY for settlement of payments for imports, repayment of foreign currency loans and expenditure, etc.

For this purpose, RBI has permitted certain exporters to open current accounts in FCY abroad. These accounts are termed as EEFC Account. A fixed percentage of exports proceeds realized (currently not exceeding 50%) can be credited to EEFC Accounts abroad. This account is held in form of non-interest bearing current account. It can be only used for settlement of payments for imports, repayment of foreign currency loans and expenditure to be incurred for certain purposes approved by RBI. Funds can also be used for setting up branches/offices abroad for promotion of sales of their export goods/services.

ECGC: Export Credit Guarantee Corporation

ECGC headquarters is in Mumbai. ECGC is a government institute, which provides Insurance policy to exporter against the risk of non-realisation of export proceeds due to occurrence of the commercial and political risk involved in exports and guarantees to commercial banks against losses that the banks may suffer in granting advances to exporter. It also finds the credit-worthiness of the foreign buyer. It charges a small premium for its insurance and guarantees.

ECGC offer the following schemes:I. Standard Policy – Policy covers risks in respect of goods exported on

short-term credit. i.e. credit not exceeding more than 180 days. It is issued to exporter whose anticipated export turnover for the next 12 months is more than Rs, 50 lakhs.

II. Small Exporter’s Policy – It is same as Standard policy with certain improvements. It is issued to exporter whose anticipated export t/o for the next 12 months does not exceed Rs.50 Lakhs.

III. Specific Policies – This policy is issued on case-to-case basis for contracts of export of capital goods or construction works or turnkey project or rendering services abroad, which are not of repetitive type.


ECGC Cover exporters for following risks from the date of shipment: Buyer’s insolvency Buyer’s failure to make payment due within 4 months from the due date Buyer’s failure to accept the goods, subject to certain conditions Imposition or restriction on remittance of the buyer’s country or any

government action which may block or delay the transfer of payment made by the buyer

War, Civil war, revolution or civil disturbance in the buyer’s country Interruption or diversion of voyage outside India resulting in payment of

additional freight or insurance charges which cannot be recovered from buyer.

Any other cause of loss occurring outside India, not normally issued by general insurers and beyond control of both the exporter and the buyer.


SECTION 8

REFERENCES

Reading Material

1. FCI Communication Manual, by Factors Chain International

2. Marketing and Sales Handbook, by Factors Chain International

3. Seller Selection & Control Manual, by Factors Chain International

4. Buyer Risk Control Manual, by Factors Chain International

5. FCI Correspondence Course Material, by Factors Chain International

6. Exports, What, Where, How, by Paras Ram, Anupam Publishers

7. How to Export, by Mahajan

8. Foreign Exchange Management Manual, by D.T.Khimlani

Websites

1. Reserve Bank of India - www.rbi.org.in

2. Factors Chain International - www.fci.nl

3. EDIFACToring - www.edifactoring.com


SECTION 9

OTHER GUIDELINES & FAQs

DOCUMENTARY LETTERS OF CREDIT

GUIDELINES REGARDING

HOW TO CHECK DOCUMENTS


DOCUMENTARY LETTERS OF CREDIT - AN INTRODUCTION

A letter of credit is a written undertaking to pay money; payment is generally conditioned upon presentation of a draft or other written demand for payment, together with other specified documents. If a letter of credit requires certain documents in addition to a draft or demand for payment, it is commonly referred to as a documentary letter of credit. If the additional documents relate to a sale of goods, the letter of credit is a commercial documentary letter of credit.

Commercial letters of credit are a means of paying for goods purchased in international trade transactions. They are also used, but with far less frequency, as a means of paying for goods purchased in domestic sales transactions.

In the typical letter of credit sale, the buyer will request his bank to issue and deliver its letter of credit to the seller directly or through an intermediary bank. The letter of credit will state that, upon presentation to the bank of the letter of credit and certain other specified documents, the bank will pay the seller the sum of money specified in the letter of credit.

The letter of credit protects the buyer because he knows that the seller will not be paid until he has presented documents to the bank evidencing shipment of the merchandise. The seller is protected because he knows that he will be paid once the merchandise has been shipped and the required documents tendered to the bank.

A letter of credit transaction involves three principal parties, two traditional contracts, and one obligation or engagement; intermediary banks may he brought into the transaction.

1- The Account Party, the Issuing Bank, and the Beneficiary:

The buyer and the seller are two of the three principal parties to a letter of credit transaction. The third party is the bank that issues the letter of credit. The relationships between the buyer and the seller and between the buyer and the issuing bank are founded on contract. However, the relationship between the issuing bank and the seller is a one-way engagement or obligation from the bank to the seller.

a) The Contract Between the Buyer and the Seller.

The contract of purchase between the buyer and the seller of goods is often referred to as the underlying transaction in the letter of credit arrangement. Generally, when a letter or credit is to be used to finance the transaction, the seller’s performance under the sales contract will be conditioned on the issuance of a letter of credit.

(1) Contract of Sale

(Underlying transaction)

b) The contract Between the Buyer and the Issuer.

The buyer in a letter of credit transaction is generally referred to as the account party, or the applicant for the credit, or simply the applicant.


A bank issuing a letter of credit is referred to as the issuing bank or opening bank.

Letters of credit are traditionally issued "for the account of" the bank’s customer; thus the term "account party". Less frequently used is the phrase "by order of".

The application and reimbursement agreement for the issuance of a commercial letter of credit almost always includes a security agreement, granting the issuing bank a security interest in the documents presented under the credit and in the goods they cover (see appendix A and B for examples of application and reimbursement agreement).

When signed by the account party and accepted by the issuing bank, the application and reimbursement agreement constitutes the contract between the account party and the issuer, whereby the issuing bank is obliged to go forward with the letter of credit and the account party agrees to reimburse the issuer for amounts paid by the issuer pursuant to the letter of credit.

c) The engagement of the Issuer to the Seller.

The issuer accepts the account party’s application by issuing its letter of credit for the account of the buyer and in favour of the seller. The seller is referred to as the beneficiary.

The letter of credit constitutes the engagement or obligation of the issuer to perform as specified. The letter of credit is independent and separate from both the contract of sale between the buyer and the seller and the contract of reimbursement between the customer and the issuer.

In an international letter of credit transaction, the issuer would not deliver the letter of credit directly to the beneficiary, but would use an intermediary called an advising bank.

(i) Payment Letters of Credit and Acceptance Letters of Credit.


If the seller’s draft is drawn on the bank at sight, that is, drawn payable upon presentation, the credit is called a sight letter of credit or payment letter of credit. Once the draft is presented and paid, it constitutes a receipt for the payment made and serves no other purpose and has no other value.

On the other hand, if the draft is drawn at time, for acceptance rather than payment, the credit is called acceptance letter of credit. Under an acceptance letter credit, the bank will keep the documents tendered with the exception of the draft which is accepted by the bank and returned to the seller-beneficiary who may discount it and obtain funds immediately.

(ii) Deferred Payment Letters of Credit.

A draft is not required under a deferred payment letter of credit. A deferred payment credit generally calls for the presentation of specified documents and provides for payment to be made to the beneficiary a stipulated number of days after the presentation of the documents, or after the date of shipment or some other stipulated date. In this type of credit, the bank will issue and deliver to the seller-beneficiary a deferred payment letter of undertaking when compliant documents are tendered.

(iii) Straight Letters of Credit and Negotiation Letters of Credit.

If the letter or credit contains a commitment by the issuing bank to honor a demand for payment by the seller upon his performance of the terms and conditions of the credit, with no other commitment to any other party than the beneficiary, it is referred to as a straight letter of credit.

If the engagement of the issuing bank is extended to any bank that purchases drafts or demands for payment made under the letter of credit by the seller, it is a negotiation letter of credit. This engagement is usually made in the letter of credit by including the following phrase:

"We hereby engage with the drawer, endorsers and bona fide holders of drafts drawn under and in compliance with the terms of this credit that the same will be duly honored on due presentation."

2) The Advising Bank and the Confirming Bank.

In addition to the three main parties to a letter of credit transaction, other parties can be, and often are, brought into the transaction at various points. The two parties most often encountered are the advising bank and the confirming bank.

(a) The Advising Bank.

Quite often, rather than notifying the beneficiary directly of the issuance of a letter of credit, the opening bank will have a correspondent bank advise, or notify, the beneficiary of the credit. This bank is referred to as the advising bank or notifying bank. The advising bank takes its instructions strictly from the issuing bank, and the relationship between the two banks is that of principal and agent, the advising bank being the agent of the issuing bank.

The obligation or the advising bank is limited to the accurate transmission of the terms and conditions of the letter of credit; it assumes no other liability to the beneficiary. The


solvency of the advising bank, however, is of no concern to the beneficiary. Whether or not the advising bank fails, the beneficiary may still look to the issuing bank for payment under the letter of credit.

(b) The Confirming Bank.

For various reasons, it is often desirable to have another bank undertake the same obligations assumed by the issuer. This other bank is called the confirming bank. The beneficiary can then depend on the direct obligation of the confirming bank in addition to the liability of the opening bank.

If the confirming bank pays under the letter of credit, it ‘acquires the rights of an issuer’. Those rights include a direct cause of action against the account party for reimbursement of any amounts paid pursuant to the letter of credit, in case the issuing bank fails.

FORM OF REIMBURSEMENT AGREEMENT

To: …………… (Bank) ……………

In consideration of your opening or establishing from time to time at our request such Commercial Credits as you may think fit we hereby agree that the following agreements and conditions shall apply to all such credits:

We authorize you to accept and/or pay for our account all drafts purporting to be drawn under any such credit.

We undertake to indemnify you against all losses costs damages expenses claims and demands which you may incur or sustain by reason of your opening or establishing any such credit and to provide you with <Currency> in <City> unless otherwise agreed to meet all payments made by you or your agents and all drafts drawn or accepted by you or your agents and the amount of all charges commission and interest in connection with


such credits and in connection with the relative goods and we authorize you to debit our account with you with such moneys on receipt by you of advice of payment or at any time thereafter at your discretion.

We agree that any credit opened by you shall be subject to the Uniform Customs and Practice for Documentary Credits current at the time of any particular transaction it being acknowledged, for avoidance of doubt that the indemnity contained herein shall be interpreted in accordance with English law.

We undertake that all goods shall be fully insured against all risks that the insurance policies shall be assigned to you and that until payment by us of all amounts due to you in respect of Credits opened and of all our other indebtedness or liability to you on any account the insurance moneys payable are to be held as available to you and if received by us shall be paid to you forthwith and until so paid shall be held by us on your behalf.

All documents received by you or your agents under any such credit and the goods represented thereby shall be held by you as security for the due payment by us of all moneys due to you by us in respect of credits opened and of the moneys hereinbefore mentioned and of all our indebtedness or liability to you from time to time on any account. We agree to assign to you our rights as unpaid sellers to transfer the goods into your control and that until payment by us of such moneys due to you the proceeds of the sales of the goods are to held as available to you and if received by us shall be paid to you forthwith and until so paid shall be held by us on your behalf.

On arrival of the goods you shall be at liberty to have them warehoused in your name and insured against fire without obligation on you to so warehouse and insure and you will be in no way responsible for any loss or damage entailed through your omission to so warehouse and insure. Without prejudice to any other rights or remedies to which you may be entitled we agree that if we fail to repay on demand all moneys due by us to you from time to time as aforesaid you may without notice or further consent of any persons interested sell the goods in such manner and at such times as you may think fit and to apply the net proceeds of any such sale in or towards the discharge of such moneys and we undertake to pay you on demand the amount of any deficiency remaining after such sale together with all usual commission charges and expenses and interest at ….percent above the BLF base rate with minimum ….percent.

We agree that the rights and powers conferred by this agreement are in addition and without prejudice to any other securities which you may now or hereafter hold for our account and this agreement shall continue in force and be applicable to all transactions notwithstanding any change in the individuals composing our firm or otherwise.

GUIDELINES REGARDING THE PROPER WAY TO FILL OUT THE APPLICATION

APPLICATION FOR DOCUMENTARY CREDIT

Place ……………………..

Date ……………………..

To: BANK XYZ....., ADDRESS

According to the terms of our Agreement for the opening of Documentary Credits, please issue an irrevocable documentary credit by full text operative SWIFT, or any other teletransmission of your choice, subject to the Uniform Customs and Practice for Documentary Credits, 1993 Revision, ICC Publication no. 500 as follows:


Documentary Credit No. …………………….. (For bank use only)

Date and Place of Expiry …………………/ …………..…………………

Name and full address of applicant: ………………………………………………………………………

……………………………………………………………………………………………………………..

Name and full address of beneficiary: …………………………………………………………………...

……………………………………………………………………………………………………………..

Currency and Amount: …….. / ……………………………..

Credit amount tolerance: +/- 0 % About ( +/- 10 %) +/- … … %

Maximum

Available with: ………………………………………………………. Nominated bank)

By:

Sight Payment

Deferred Payment

Acceptance of Draft drawn on the nominated bank

Negotiation of draft drawn on the issuing bank

At … days after: date of shipment

date of acceptance of documents by the nominated bank

Partial Shipment: Not Permitted Permitted

Transshipment Not Permitted Permitted

On Board/dispatch/taking charge: …………………………………………………….

For Transportation To: ………………………………………………………………..

Latest Date of Shipment: ………………………………………………………………

Shipment Period (if any): ………………………………………………………………………………..

……………………………………………………………………………………………………………

Description of goods and/or services: ……………………………………………………………………

……………………………………………………………………………………………………………

Price: ………………………………………...

Incoterm: EXW CFR FCA CPT FOB CIF FAS CIP ……………................................

As per: Pro Forma Invoice No. … dated ……


Documents required:

Commercial invoice in 1 original (s) and 2 copies, signed by handwriting, bearing the following statement: ‘We certify that this invoice is authentic, that it is the only one issued by us for the goods described herein, that it shows their exact value without deduction of any advance payment and that their origin is …………………………….. .

The original (s) must be certified by the Chamber of commerce. The original must also be legalized by the Lebanese consulate, if available in the area of the chamber of commerce: if not available, a declaration to that effect is required on invoice.

Marine Bill of Lading issued:

To the order of BANK XYX.........

To the order and endorsed in blank

* marked: freight prepaid payable at …………………………destination

* notify: (full name and address of the applicant)

* indicating the present credit number

Evidencing that shipment is effected by ………………….. Containers

Through …………………………………………….

Mentioning shipping marks: ……………………………………………………………………

. Short form/blank back bill of lading are not acceptable.

Certificate from the carrier or its agent attesting that the vessel carrying the goods is not of Israeli nationality, will not call at any Israeli port during its voyage and is not blacklisted by Israel Boycott Committee is eligible to enter into the port of destination.

Air waybill Truck waybill consigned to Bank XYZ..............., indicating the actual date of dispatch and the present credit number, marked freight prepaid payable at destination, notify: the applicant ( his full name and address as above) ………………………………………...

Insurance policy or certificate in 2 negotiable copies, blank endorsed by beneficiary, showing ‘claims if any, payable in Lebanon’, for CIF/CIP value of the goods plus 10 %, covering the following risks without franchise :

for sea shipment: .institute cargo clauses (A) , .institute strikes clauses (cargo), .institute war clauses (cargo), transshipment risks, if any, .fire and theft in the custom house, valid for 60 days after the

discharge of goods

Certificate of origin in … original and … copy (ies) issued or certified by the Chamber of commerce.

Packing list in … original and … copy (ies) detailing the contents of each package

Health Sanitary Phytosanitary certificate issued in … original and … copy(ies) by ………………………………………………… attesting that the goods are conform to the L/C specifications ……………………………………………………………….

Certificate of inspection of the quality quantity weight …………………… issued in ….. original and … copy (ies) by ……………………………….. certifying that ………………………………………………………….

Certificate from the carrier or its agent attesting having received the following documents:


one extra original invoice certified by the chamber of commerce ……………………………………………………………….. ………………………………………………………………..

Certificate from the beneficiary supported by courier receipt evidencing beneficiary’s direct dispatch by express courier to the applicant and within … days of shipment of the following documents:

one extra original invoice certified by the chamber of commerce ……………………………………………………………….. ………………………………………………………………..

Other documents required:

…………………………………………………………………………………………………………

…………………………………………………………………………………………………………

Additional conditions:

Transport document indicating a third party as shipper is not acceptable

Documents must not show the name of the applicant but only the name of:

…………………………………………………………………………………………., as the buyer.

Applicant informs that the insurance will be arranged locally by him.

Negotiation under reserve or against indemnity is prohibited.

………………………………………………………………………………………………………….

Bank Charges:

all bank charges and commissions outside XYZ, City.... are for the account of the beneficiary

…………………………………………………………………………………………………………..

Period for presentation of documents to the nominated bank:

… Days maximum after the date of shipment but within the validity of the credit.

Confirmation instructions:

Confirm without May add (if requested by the beneficiary)

Intermediary Bank:

The Nominated Bank is requested to advise the beneficiary through: ……………………………………..

Dispatch of Documents:

By express courier in two separate covers to your Documentary Credit Central Dep.


Please debit our account no………………. of credit amount and credit same in a separate account in our name as a pledge in your favour until full settlement of the credit

Authorized signature and stamp

1- Place and Date of Making

This is the date on which the customer requests the issuing bank to open the letter of credit. The place of making may have significance in determining the law applicable to the contract between the customer and the issuing bank.

2- Letter of Credit Identification Number:

When the letter of credit is issued, the issuing bank will assign it a number that will generally be referenced in the documentation submitted to the bank in availment of the credit.

3- Issuing Bank

The name of the issuing bank is pre-printed on the form application.

4- Revocable or Irrevocable Credit:

Most letters of credit today are irrevocable. A revocable credit may be amended or revoked by the issuer without notice to or consent from the beneficiary. An irrevocable credit can be amended or revoked only with the agreement of the customer, the issuing and confirming banks and the beneficiary.

5- Method of Notification

There are three alternatives:

- Full text teletransmission: this is the fastest way to notify the beneficiary of the issuance of the letter of credit, together with all of its terms and conditions.

- Airmail : This notification method is the least expensive, but is almost the slowest.

- Airmail with a preliminary teletransmission advice: the preliminary teletransmission advice puts the beneficiary on notice that a letter of credit is on its way, but he cannot present documents for negotiation until airmail details are received.

The word ‘teletransmission’ permits the transfer of information via cable, telex, electronic mail, the SWIFT network, or other similar means and even telefax provided that the message bears correct test keys.

6- Identification of the Applicant


The applicant for the letter of credit is generally the buyer of the goods in the underlying transaction. Since the name and address inserted in this box will appear in the credit, care should be taken that the name and address are complete and correct in all respects.

7- Nominated Bank

The issuing bank will designate the nominated bank (usually a correspondent bank) which is authorized to pay, accept or negotiate drafts, unless the applicant designates a particular bank requested by the beneficiary. The applicant should be aware that under the UCP the issuing bank will not be responsible to him for any failure of the nominated bank to follow credit’s instructions. This is so even though the issuing bank may have selected the nominated bank.

8- Identification of the Beneficiary

The beneficiary is the party in whose favour the letter of credit is to be issued, and the party that must comply with the terms and conditions of the credit to be entitled to its proceeds. Generally, the beneficiary is the seller of the goods in the underlying transaction. Before the applicant instructs the issuing bank to issue its letter of credit, he should satisfy himself as to the reliability and trustworthiness of the beneficiary.

In order to properly address the letter or credit, the issuing bank must know the beneficiary’s exact name and how to contact him by mail and teletransmission and phone. In a rare case, the issuing bank may not want to issue the letter of credit if the beneficiary is not creditworthy (and, therefore, the underlying transaction is jeopardized). This would be as much for the protection of the customer as for the issuing bank

9- Allowances in Credit Amount, Quantity and Unit Price

The word ‘about’ used in connection with the amount of the credit, the quantity or the unit price stated in the credit are to be construed as allowing a difference not to exceed 10 % more or 10 % less than the amount or the quantity or the unit price to which they refer.

Unless if otherwise stated, and unless the quantity is expressed in terms of a stated number of packing units or individual items, a tolerance of 5 % more or 5 % less in quantity will be permissible

Unless above provisions are applicable and if partial shipments are prohibited and the amount is stated without mentioning any tolerance, then a difference of up to 5 % less in the amount of the drawing will be permissible, provided that the quantity, if stipulated in the credit, is shipped in full and the unit price, if stipulated in the credit, is not reduced.

10- Date and Place of Expiry

The credit must state the last possible day for presentation of documents for payment acceptance or negotiation. The expiry date should be determined in light of the circumstances of the transaction. If the time comes too soon, an extension may be required. If the date is too far distant, additional bank charges may be incurred.

If the expiry date of the credit falls on a day on which the bank to which presentation has to be made is closed for reasons other than those referred to in article 44a of the UCP 500, the stipulated expiry date shall be extended to the first following day on which such bank is open.


Unless the credit is freely negotiable, the credit must specify a place for the presentation of documents, for example: ‘at the counters of the nominated bank’. If the credit is freely negotiable, it is considered freely negotiable by any bank anywhere in the world unless the place is specified.

11- Availability and Tenor of Drafts

The UCP requires indicating clearly whether the credit is available:

· By SIGHT PAYMENT: With such type of credit, applicant may require documents without any drafts, or documents accompanied by beneficiary’s draft drawn on the nominated bank.

· By DEFERRED PAYMENT: In this case, applicant should call for documents to be presented, but not for any drafts to be drawn. He must also specify at what maturity date (other than sight) payment is to be made and how it is calculated, for example, 30 days after presentation of documents, 60 days after date of shipment, etc. Deferred payment credits are common in countries that impose stamp duties

· By ACCEPTANCE: With an acceptance letter of credit, the applicant should call for a draft drawn on the nominated bank and indicate the time period for which they should be drawn, for example : 30 days sight, or 60 days after date of shipment, etc...

· By NEGOTIATION: There are 2 kinds: (1) those restricting negotiation to a nominated bank and (2) the freely negotiable credits that allow negotiation to be effected by any bank willing to negotiate. In both cases, drafts should be called for and drawn on the issuing bank at sight or at a stated tenor.

12- Required Documents

A- Documents vs. Facts:

- Non-documentary Conditions:

Applicant should bear in mind that in letter or credit transactions, the parties deal with documents, not with the facts that the documents purport to reflect. In practice, there are a number of non-documentary conditions in every letter or credit, but which can be checked by looking at documents. Determining whether partial shipments have been made is an example. Issuing bank should not be required to determine matters of a purely factual nature, such as whether shipment is made on a conference line vessel, or the ship has actually departed the port by a specified date.

If a credit contains conditions without stating the documents to be presented in compliance therewith, banks shall deem such conditions as not stated and shall disregard them. In that regard, the application should not call for documents that the beneficiary cannot obtain.

- Stating Documents With Precision :

Deciding which documents to ask for may depend on export and import regulations, as well as other matters. If documents are known by specific names, applicant should identify those documents by such names. Clarity in description is the key.


B- Issuers of Documents:

Applicant should not use terms such as ‘first class’, ‘well known’, ‘independent’, ‘qualified’, ‘official’, ‘competent’, to describe the issuer of any document to be presented under the credit. If such subjective and ambiguous terms are used, banks will ignore them and accept the document as presented, provided that it appears on its face to be in accordance with the other terms and conditions of the credit.

If documents other than transport documents, insurance documents and commercial invoices are called for, applicant should specify by whom such documents are to be issued and their wording or data content. If the credit does not so specify, banks will accept such documents as presented, provided that their data content make it possible to relate the goods described in the document to the goods referred to in the commercial invoice presented.

- Commercial invoice:

As the invoice customarily evidences a debt owed by a buyer to a seller and states the full amount of such debt, the invoice will typically be a document required for presentation. The invoice also describes the goods that are the subject of the underlying transaction. The description will generally be more detailed than the goods description in the letter of credit. However, the description of the goods in file invoice cannot include a variety of the goods different from the variety of the goods described in the credit. For example, if the credit specifies: ‘Automobiles - Model T’, the description of goods in the invoice cannot include ‘Automobiles - Model A’. On the other hand, if the invoice added the name of the manufacturer, ‘Ford’, that would not constitute a discrepancy. If the invoice describes the goods exactly as described in the credit, but adds the phrase ‘goods are reconditioned as new’, the invoice will be rejected.

In the application, applicant should describe the merchandise as briefly as possible. It is acceptable simply to refer to the contract number or purchase order and to the type of goods purchased. A copy of the contract or purchase order should not be attached; reference is for identification purposes only.

If the description of the goods in other documents is detailed, and differs in any material respect from the description of the goods in the commercial invoice, a discrepancy may be claimed. It would be better to describe the goods in the other documents in more general terms. For example, if the goods are chemicals, and a detailed description of the particular chemicals shipped is given in the invoice, the bill of lading should describe the goods simply as "chemical products".

- Transport Document:

The transport document or bill of lading is a pivotal document in the letter of credit transaction. It serves at least 3 functions:

(1) It is evidence of a contract of carriage between the shipper and the carrier, giving the terms and conditions of carriage.

(2) it is the shipper’s receipt for the goods delivered to the carrier

(3) It is a document of title to the goods. The possessor of the original bill of lading is the only one with the right to reclaim the goods from the carrier.


Bills of lading may be negotiable or nonnegotiable. If the words ‘TO ORDER’ are included, the bill of lading is negotiable. If the goods are consigned to a specific person and the words ‘to order’ are omitted, the bill of lading is nonnegotiable and is commonly referred to as Straight Bill of Lading. The designated consignee under a straight bill of lading may take possession of the goods without presenting the bill of lading.

A straight bill of lading, does not afford any protection against non-payment because the shipper loses control over the goods when they are delivered to the carrier.

A negotiable bill of lading generally consigns the goods to the seller’s own order with the result that he is able to maintain control over the goods until his draft has been paid or accepted. The carrier will not release the goods until a negotiable copy of the bill of lading, properly endorsed by the consignee, has been delivered to the carrier. This protects not only the seller-shipper, but also all intermediary parties to the transaction.

Unless specifically authorized in the credit, banks will reject a transport document if it states that the goods are or will be loaded on deck. However, they will not reject such document if it provides only that the goods may be carried on deck. If the shipment on deck is authorized, the insurance document should provide for coverage against on deck risks, such as rust and corrosion due to exposure to salt air. When filling out the application, the customer should bear in mind that dangerous cargo, such as explosives, is normally loaded on deck and that livestock is also often carried on deck.

The words "freight pre payable" or "freight to be prepaid" or words of similar effects, if appearing on transport documents, will not be accepted as evidence of the payment of freight.

Banks will accept transport documents bearing reference by stamp or otherwise to costs additional to the freight charges, such as costs in connection with loading, unloading, or similar operations, unless the credit specifically prohibits such reference.

On occasion, the goods purchased by the buyer may be sent directly to the buyer by a third-party shipper from whom the seller-beneficiary obtained the goods. The seller-beneficiary may also send the goods to a third party, who then forwards them on to the buyer-account party. In either event, the transport document may show the third party, instead of the seller-beneficiary as the consignor of the goods. The UCP provides that banks will accept such a document indicating as the consignor of the goods a party other than the beneficiary of the credit.

- Marine/Ocean Bill of Lading:

It is a bill of lading that covers a ‘port-to-port’ shipment. When a credit calls for a marine/ocean bill of lading, banks will accept such a document if the document:

(1) Appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by the carrier or a named agent for the carrier, or the master or a named agent for the master, and

(2) Indicates that the goods have been loaded on board or shipped on a named vessel and

(3) Indicates the port of loading and the port of discharge stipulated in the credit


(4) Consists of a sole original bill or lading or, if issued in more than one original, the full set as so issued, and

(5) Appears to contain all the terms and conditions of carriage or contains some or all of such conditions by reference to a source or document other than the bill of lading, and

(6) Contains no indication that it is subject to a charter party and/or no indication that the carrying vessel is propelled by sail only, and

(7) In all other respects meets the stipulations of the credit.

Unless transshipment is prohibited by the terms of the credit, banks will accept a bill of lading which indicates that the goods will be transshipped, provided that the entire ocean carriage is covered by one and the same bill of lading. Even if the credit prohibits transshipment, banks will accept a bill of lading which indicates that transshipment will take place as long as the relative cargo is shipped in containers, trailers, or LASH barges as evidenced by the bill of lading, provided that the entire voyage is covered by one and the same bill of lading, and/or incorporates clauses stating that the carrier reserves the right to transship. This last provision recognizes the reality of modern day transportation where containers are often transshipped. This usually occurs where the goods are unloaded onto smaller feeder vessels that can navigate into the main port itself. This loading and unloading of goods may take place at a regional port with feeder vessel service from the main vessel to the regional port, insomuch as the main vessel may be too large to dock at the main port. This practice is carried on throughout the world and is not considered by the transport industry to be transshipment in the true sense.

- Charter Party Bill of Lading:

A charter party is a contract for the hiring of a ship, or part of a ship, for a given voyage (voyage charter), or a given time (time charter) to carry cargo. A charter party bill of lading is signed by the owner of the ship or his agent, or by the master or his agent. More often than not, the charterer is not as financially responsible as the owner of the ship, nor as responsive in the event of a problem concerning the shipment. As a consequence, the charter party bill of lading is not as acceptable as one issued by a known steamship company and, unless otherwise stipulated in the credit, will be rejected by the issuing bank.

- Air Waybill:

The air waybill or air consignment note serves the same function for air transport as the bill of lading does for marine and rail transport. It is evidence given by the carrier that the goods have been received by him.

Air waybills are issued only on a consigned or straight nonnegotiable basis; they are not issued to order. Unless the transaction is otherwise properly secured, or the customer is entitled to unsecured credit, the issuing bank will require that the air waybill be consigned to the bank for the account of the customer. The air carrier will contact the bank when the goods arrive, and the bank will release the merchandise to the account party only after the bank is assured that settlement is made.

UCP 500 states that if a credit calls for an air transport document, banks will accept a document, however named, which:


(1) Appears on its face to indicate the name of the air carrier and to have been signed or otherwise authenticated by the air carrier, or a named agent for the air carrier, and

(2) Indicates that the goods have been accepted for carriage, and

(3) Where the credit calls for an actual date of dispatch, indicates a Specific notation of such date, and

(4) Indicates the airport of departure and the airport of destination stipulated in the credit, and

(5) Appears to be the original for consignor/shipper even if the credit stipulates a full set of originals, or similar expression, and

(6) Appears to contain all of the terms and conditions of carriage, or some of such terms and conditions, by reference to a source or document other than the air transport document, and

(7) In all other respects meets the stipulations of the credit.

Even if the credit prohibits transshipment, banks will accept an air transport document which indicates that transshipment will or may take place, provided that the entire carriage is covered by one and the same air transport document.

- Freight Forwarder’s Receipt :

A freight forwarder is a firm or individual that arranges for the shipment of goods for others for a fee, and is often referred to as a forwarding agent or forwarder.

A freight forwarder’s receipt does not attest to the actual shipping of the goods but only to their reception by the Forwarder. It also reconfirms the shipping instructions. Obviously, the freight forwarder’s receipt does not offer the same protection to the account party or the bank as the bill of lading and thus is not as acceptable as the bill of lading. The freight forwarder’s receipt can also be negotiable in form, and thus consigned ‘to order’.

UCP 500 provides that, unless otherwise authorized in the credit, banks will accept a transport document issued by a freight forwarder if it appears to have been signed by him as a named ‘carrier’, or a multimodal transport operator, or as an agent for the carrier or the multimodal transport operator.

- Truck Bill of Lading :

A truck bill of lading designates the form of transportation the goods will take; in this case by truck. As with the freight forwarders receipt, the truck bill of lading can also be negotiable in form.

If a credit calls for a road transport document, banks will accept a document, however named, which:

(1) Indicates the name of the carrier and is signed and/or bears a reception stamp or other indication of receipt by the carrier, or by a named agent for the carrier


(2) Indicates the place and date of shipment and place of destination as stipulated in the credit.

(3) Indicates that the goods have been received for shipment, dispatch or carriage.

- Combined Transport Document:

Where the through movement of the goods involves a transfer of the goods from one mode of transport to another, as front ship to truck, it is referred to as a combined transport and the goods are said to be transshipped. Under the combined transport document the contract of carriage is for a combined transport from the place of receipt to the place of delivery. The document evidences that the goods have been ‘taken in charge’ for through carriage from the place of acceptance or receipt to the place of delivery instead of being loaded on board a named vessel.

The document may be issued by an operator that does not necessarily own the vessel used to transport the goods.

UCP 500 has new provision that applies specifically to multimodal or combined transport documents.

- Insurance certificate or Policy:

Shipping, especially across international boundaries, is a risky business. The goods may be handled at several different stages - receipt, loading, unloading, warehousing. The carriers themselves are susceptible to mechanical failures, natural disasters. To guard against the risk that goods might be damaged or lost in transit, an insurance policy or certificate should be required and must indicate the specific risks to be covered, the amount of the coverage, and how long the coverage is to last.

Insurance documents are issued by insurance companies or underwriters. Such documents consist of a policy and, if one policy covers more than one shipment (open policy), a certificate for each shipment. The policy should be dated on or before the date of shipment, be in the currency of the credit, and identify the voyage and the goods in a manner consistent with the other documents. If the insurance should be effected by the buyer-applicant, the issuing bank should obtain a loss-payable endorsement in its favour and a copy of the policy or certificate.

- Certificate or origin:

A certificate of origin is a signed statement providing evidence of the origin of the merchandise. Because of preferential tariff (duties, taxes) rates between some countries, the buyer may require a certificate of origin to certify that the goods purchased have been manufactured in the seller’s country, and not in another country which may not have preferential tariff arrangements with the buyer’s country.

Certificates of origin can also be used to prevent from the seller’s substituting second grade for the merchandise ordered. They have also been used to assure compliance with legal boycotts.

The certificate of origin must be issued or signed by an independent official organization, such as a chamber of commerce.


- Packing Lists:

A packing list often accompanies the commercial invoice. In the event the shipment includes one or more cases containing identical goods, separate packing lists are not required. The packing list enables the buyer or seller to locate a particular item if there are several packages with different contents.

- Certificate of Inspection:

A certificate of inspection may take various forms. It may be a certificate of quality, weight, analysis, or the like. Usually, the certificate of inspection is signed by an independent third party, attesting to the quality, type, number, etc., of the goods being, shipped by the seller. Requiring such a certificate offers some assurance to the buyer that file merchandise shipped is the one ordered. If the certificate or inspection is prepared by the seller, it will constitute an express warranty of its contents to the issuing bank and the buyer.

If the buyer fails to specify the content and data required in the certificate, the issuing bank will accept such document as presented, provided that their data content makes it possible to relate the goods referred to therein to those referred to in the invoice presented.

One way of definitively specifying the inspection certificate is to attach as an exhibit to the letter of credit a blank or unsigned copy of the certificate.

- Sanitary and. Phytosanitary Certificates:

Generally, for agricultural products or goods destined for human consumption, the buyer will require a certificate from all official inspectors stating that the goods meet the standards of the seller’s country or some other specifications indicated in the credit.

13- Trade Terms (INCOTERMS)

- "EXW": This designation stands for "EX WORKS (... named place). This term means that the seller fulfils his obligation to deliver the goods to the buyer, when he has made them available at his factory, mill, warehouse, plantation, etc.; in other words, the seller is not responsible for loading the goods on the vehicle provided by the buyer or for clearing the goods for export, unless otherwise agreed.

- "FCA": stands for "FREE CARRIER (... named place). It means that the seller fulfils his obligation to deliver the goods to the buyer, when he has handed them over, cleared for export, into the charge of the carrier named by the buyer at the named place or point.

When, according to commercial practice, seller’s assistance is required in making the contract with the carrier, the seller may act at buyer’s risk and expense. FCA may be used for any mode of transport, including multimodal transport.

- "FAS": "Free alongside Ship (... named port of shipment) means that the seller fulfils his obligation to deliver the goods when they have been placed alongside the vessel on the quay (or wharf) or in lighters (barges) used for loading and unloading ships, usually offshore) at the named port of shipment. This means that the buyer has to bear all costs and risk of loss of or damage to the goods from that moment. This term should not be


used if the buyer is unable to carry out, directly or indirectly, the export formalities. FAS can only be used for sea or inland waterway transport.

- "FOB": " Free On Board ( ... named port of shipment ) means that the seller fulfils his obligation to deliver the goods when they have passed over the ship’s rail at the named port of shipment- The buyer has to bear all costs and risks of loss of or damage to the goods from that point. FOB requires the seller to clear the goods for export.

This term call only be used for sea or inland waterway transport when the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.

- "CFR": "Cost and Freight (... named port or destination). The seller must in this case pay the costs and freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered on board the vessel, is transferred from the seller to the buyer when the goods pass the ship’s rail in the port of shipment. CFR requires the seller to clear the goods for export.

It call only be used for sea and inland waterway transport. When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the CPT term is more appropriate to use

- "CIF" : " Cost, Insurance and Freight ( ... named port or destination) means that the seller has the same obligations as under CFR but with the addition that he has to procure marine insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller contracts for the insurance and pays the insurance premium. CIF requires the seller to clear the goods for export.

It can only be used for sea and inland waterway transport. When the ship’s rail serves no practical purpose such as in the case of roll-on/roll-off or container traffic, the CIP term is more appropriate to use.

- "CPT": "Carriage Paid To (... named place of destination). The seller pays the freight for the carriage of the goods to the named place of destination. The risk of loss of or damage to the goods, as well as any additional costs due to events occurring after the time the goods have been delivered to the carrier, is transferred from the seller to the buyer when the goods have been delivered into the custody of the carrier.

The term "CARRIER" means any person who, in a contract of carriage, undertakes to perform or to procure the performance of carriage, by rail, road, sea, air, inland waterway or by a combination of such modes. If subsequent carriers are used for the carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier. CPT requires the seller to clear the goods for export. It may be used for any mode of transport including multimodal transport.

- "CIP": "Carriage and Insurance Paid to (... named place of destination). The seller has the same obligations as under CPT, but with the addition that he has to procure cargo insurance against the buyer’s risk of loss of or damage to the goods during the carriage. The seller contracts for insurance and pays the insurance premium. CIP requires the seller to clear the goods for export. It may be used for any mode of transport including multimodal transport.


- "DAF" : " Delivered At Frontier (… named place). The seller fulfills his obligations to deliver the goods to the buyer when the goods have been made available, cleared for export, at the named point and place at the frontier, but before the customs border of the adjoining country. The term " frontier " may be used for any frontier including that of the country of export. This term is primarily intended to be used when goods are to be carried by rail or road.

- "DES": "Delivered Ex Ship" (... named port of destination) . The seller fulfills his obligation to deliver the goods to the buyer when the goods have been made available to the buyer on board the ship uncleared for import at the named port of destination. The seller has to bear all the costs and risks involved in bringing the goods to the named port of destination. This can only be used for sea or inland waterway transport.

- "DEQ" : "Delivered Ex Quay (duty paid) ( ... named port of destination). The seller fulfills his obligation to deliver the goods to the buyer when he has made them available to the buyer on the quay (wharf) at the named port of destination, cleared for importation. The seller has to bear all risks and costs including duties, taxes and other charges of delivering the goods to this point. This term should not be used if the seller is unable, directly or indirectly, to obtain the import license. If the buyer is to clear the goods for importation and the duty, the words "duty paid "should be used instead of "duty unpaid". This term can only be used for sea or inland waterway transport.

- "DDU" : " Delivered Duty Unpaid ( ... named place of destination). The seller fulfills his obligation to deliver the goods to the buyer when the goods have been made available at the named place in the country of importation. The seller has to bear the costs and risks involved in bringing the goods to this point (excluding duties taxes and other official charges payable upon importation as well as the cost and risks of carrying out customs formalities). The buyer must pay any additional costs and bear any risks caused by his failure to clear the goods for import in time.

This term may be used irrespective or the mode of transport.

- "DDP" : " Delivered Duty Paid ( ... named place of destination). The seller fulfills his obligation to deliver the goods to the buyer when the goods have been made available at the named place in the country of importation. The seller has to bear the risks and costs, including duties, taxes and other charges of delivering the goods to this point, cleared for importation. DDP represents the maximum obligation for the seller. This term may be used irrespective of the mode of transport.

14- Shipment From and To: Latest date of shipment

The place or loading on board/dispatch/taking in charge and the place or destination should be inserted in the appropriate spaces of the application. If the port of shipment is unknown, the country or continent from which the goods will be shipped should be indicated.

Note that if a combined transport document is called for, theses spaces should not be left in blank, bill should identify either the ports of loading or discharge or the country from which and to which the goods will be shipped and delivered.

The latest date that shipment will be acceptable should be inserted in the appropriate space. When all earliest or latest date is being specified the word ‘shipment’ is understood to include the expressions "loading on board", "dispatch" and "taking in charge".


Terms such as ‘prompt’, ‘immediately’ ‘as soon as possible, and the like should not be used to specify date of shipment. If they are used, they will be disregarded.

If the term ‘on or about’ is used, banks will interpret it as providing that shipment is to be made during the period from 5 days before to five days after the specified date, both end days included.

The words ‘to’, ‘until’, ‘from’ and the like will be understood to include the date mentioned. The word ‘after’ will be understood to exclude the date mentioned. The ‘first half’ and ‘second half’ of a month will be construed, respectively, to mean from the 1st to the 15th

and from the 16th to the last day of the month, inclusive. The terms ‘beginning’, ‘middle’ or ‘end, of a month will be construed, respectively, as from the 1st to the 10th, the 11th to the 20th and 21st to the last day of the month inclusive.

If no date is shown, the issuing bank will consider the expiration date of the letter of credit to be the latest date of shipment. If a date is established, it will not be extended by reason of an extension of the expiry date of the credit.

15- Transshipment, Partial Shipments, and Container Shipment/s

- Transshipment Means a transfer and reloading during the course of carriage from one vessel or conveyance to another. Unless transshipment is prohibited banks will accept documents which indicate that the goods will be transshipped provided the entire carriage is covered by the same document. If a combined transport document is acceptable, transshipment should not be prohibited.

- Partial shipments are allowed unless the credit specifies otherwise.

- Container Shipment/s : The hull of a container ship is like a huge floating warehouse divided into ‘cells’ by vertical guide rails. The cells hold cargo in pre-packaged units called containers. The containers, usually standard sized aluminum boxes, measuring either 20 feet by 8 feet or 40 feet by 8 feet, are loaded by the seller and delivered to the dock. Giant cranes lift the containers into the cells.

- "Roll-on/Roll-off ships" carry containers mounted on a framework or wheels like a truck trailer. Dockworkers drive the containers up ramps and into a stern or side opening in the ship. Roll-On/Roll-Off Ships also carry cars, buses, house trailers, trucks and any other cargo that can be rolled aboard.

- "LASH ships" are huge freighters that carry preloaded seagoing lighters, or barges, stacked one upon the other. The lighters are loaded at upriver polls and then towed to the seaport where cranes on the ship lift the barges on board. When they reach their destination, the lighters are lowered into the harbour and towed upstream to their final port.

- Containerization is a great boom to shippers because it saves money. A container ship can be loaded and unloaded in a fraction of the time it takes for a traditional cargo vessel. Thus labour costs less, there is less breakage, and the cargo shifts less during the voyage. In addition, theft of goods is less likely, since the containers are sealed. As a result, container shipments are becoming more frequent and more often required in the letter of credit.

16- Shipping documents: Notification


If a bill of lading is issued in blank by the shipper, the carrier will not know whom to notify for retrieval when the goods arrive at destination.

The applicant must indicate whether the issuing bank, the buyer himself or some other party, such as his freight forwarder, is to be contacted when the goods arrive.

17- Time of presentation

If this space is left in blank, the issuing bank will reject documents presented more than 21 days after the date shipment. When the blank is completed, the number of days specified is generally based on the mailing time for the bill of lading from the place of shipment to the place of destination. The latest date that the documents can be presented should allow sufficient time for the bills of lading to be processed and delivered to the applicant before the goods arrive. Bills or lading that arrive after the goods -arrive are said to be stale and the unclaimed merchandise may incur storage charges.

18- Special Instructions

On this line, the applicant should indicate any instructions or conditions desired by him as part of the transaction that do not fit in any space of the application form ; for example, if bank charges are for his account or for the account of the beneficiary, or if the letter of credit is to be a revolving credit, etc.

- "Red Clause Credit ": Under certain circumstances, the buyer may allow the seller to receive all or part or the purchase funds, made available under a letter or credit, prior to shipping the goods. To accomplish this, the buyer should instruct the issuing bank to insert a special clause in the letter of credit. The clause may authorize the advising or confirming bank to provide financing to the beneficiary under the issuing bank’s guarantee, or it may authorize the beneficiary to draw under the letter or credit by draft, supported by a receipt for the funds and a promise to provide the specified documents in the future. The clause was originally written in red ink to draw attention to the unique nature of the credit and thus the instrument became known as a red clause credit.

The advising or confirming bank generally obtains repayment or the funds paid to the beneficiary, plus interest, from the proceeds due to the seller when the goods are shipped and documents presented in accordance with the terms and conditions of the letter of credit. If, however, the beneficiary fails to ship the goods and present the documents or otherwise fails to repay the funds advanced, the advising or confirming bank will look to the issuing bank for reimbursement of the amounts advanced under the ‘red clause’ plus interest charges. The issuing bank would then have recourse to the buyer.

Provision for a red clause in a letter of credit would be made under this part of the application.

- "Green Clause": Somewhat similar to a red clause credit, a green clause credit also permits advances to the beneficiary before presentation of documents evidencing shipment of the goods, but requires storage of the goods in the name of the advising or confirming bank making the advances. These credits developed in Australia and New Zealand with respect to the wool trade.

HOW TO CHECK DOCUMENTS


On the Following pages you will find sample documents frequently required in documentary Credits.

The corresponding checklists should enable you to prepare the necessary documents to meet the condition of file documentary credit.

Please note that the checklists reflect file requirements according to file new guidelines of the International Chamber of Commerce in Paris (UCPDC 500). It may be that the documentary credits in question will exclude portions of the guidelines or prescribe additional requirements. Please take these individual requirements into account when preparing your documents.

Unfortunately, we are obviously unable to provide examples of all the possible documents in this brochure. We will, however, be happy to advise you in special cases.

MARINE/OCEAN BILL OF LADING

Questions:

1- Does the name of the ship appear?

2- Are the ports of loading and discharge stated and consistent with the requirements of the documentary credit?

3- Does the bill of lading bear a date of issue?

4- Is the Issuer

a) The carrier (identifiable as file carrier) or

b) Named agent of the named carrier, or

c) The master (identifiable as the master) or

d) A named agent of the named master?

If (c) or (d) applies, the document must indicate the name of the carrier)

5- Is the bill of lading signed by the issuer?

6- Does the bill of lading bear an "on board" notation?

a) In the pre-printed wording on the bill of fading?

(The date of issue of the bill of lading is then deemed to be the date of loading on board).

b) In the form of an added "on board" notation oil the bill of lading?

(The notation must also indicate the date of loading on board but does not need to be signed).


7- Does the document indicate the number of original bills of lading Issued?

a) Is the complete set of originals present?

b) Is the bill of lading "clean", i.e. it does not bear a clause or notation declaring a defective condition in the goods and/or packaging?

8- Is the bill of lading issued to the correct order party as required by the documentary credit, i.e.:

a) To a specific order?

b) To your order? (Remember to endorse it)

Are all the other conditions required in the documentary credit such as:

9- Name/Address of the shipper

10- Name/Address of the consignee (straight bills of lading)

11- Name/Address of the notify party

12- Shipping marks

13- Number of packages

14- Description of goods

15- Weight

16- Freight notations

17- Additional notations

NON-NEGOTIABLE SEA WAYBILL

In contrast to the marine/ocean bill of lading like non-negotiable sea waybill is not a title document

Questions


2- Are the ports of lading and discharge stated and consistent with the documentary credit regulations?

3- Does the non-negotiable sea waybill bear date of issue?

4- Is the issuer:

The carrier (identifiable as the carrier), or


a) A named agent of the named carrier, or

b) The captain (identifiable as the captain), or

c) A named agent of the named captain?

If (c) or (d) applies, the document must indicate the name of the carrier.

5- Is the non-negotiable sea waybill signed by the issuer?

6- Does the non-negotiable sea waybill bear an "on board" notation

a) in the pre-printed wording of the non-negotiable sea waybill?

(The date of issue of the non-negotiable sea waybill is considered the date of loading on board).

b) Or, in the form of an added "on board" notation on the non-negotiable sea waybill

(The notation must also indicate the date of loading on board but does not need to be signed).

7- Is the non-negotiable sea waybill "clean", i.e. it does not bear a clause or notation regarding a defective condition in the goods and/or packaging?

8- Are all the other conditions required in the documentary credit such as

Name/Address of the shipper

Name/Address of the consignee

Name/Address of the notify party

Shipping marks

Number of packages

Description of goods

Weight

Freight notations

Additional notations

Please also note

- Article 31 (UCPDC 500) "On Deck", "Shipper's Load and Count" Name of Consignor

- Article 32 (UCPDC 500) Clean Transport Documents


- Article 33 (UCPDC 500) Freight Payable/Prepaid Transport Documents

CHARTER PARTY BILL OF LADING UCPDC Art. 25

Questions:


2- Are the ports of loading and discharge stated and consistent with the documentary credit regulations?

3- Does the bill of lading bear a date of issue?

4- Is the Issuer

a) the master (identifiable as the master), or

b) a named agent of file named master, or

c) the owner of the ship (identifiable as the owner), or

d) a named agent of the named owner of the Ship?

5- Is the bill of lading signed by the Issuer?

6- Does life bill of lading indicate that it is subject to a charter party?

7- Does the bill of lading bear an "on board" notation ?

a) in the pre-printed wording of the bill of lading?

(the date of issue of file bill of lading is deemed to be the date of loading on board)

b) in the form of an added "on board" notation on the bill of lading?

(the notation must also indicate the date of loading on board but does not need to be signed)

8- Does the document indicate the number of originals in which it was issued?

9- Is the complete set of originals present?

10- is the bill of lading "clean" i.e. it does not bear a clause or notation regarding a defective condition in the goods and/or packaging?

11- is the bill of lading issued to the order as required in the documentary credit, i.e,

a) to a specific order?

b) to your order? (remember to endorse it)



- Name/Address of the shipper.

- Name/Address of the consignee (for straight bills of hiding).

- Name/Address of the notify party .

- Shipping marks.

- Number of packages.

- Description of goods.

- Weight.

- Freight notation.

Additional notations.

Please also note:

Article 31 (UCPDC 500) "On Deck", "Shipper's Load and Count" Name of Consignor.

Article 32 (UCPDC 500) Clean Transport Documents

Article 33 (UCPDC 500) Freight Payable/Prepaid Transport Documents

General remarks : From a documentary Credit point of view there is no difference between the Charter Party Bill of Lading and the Marine/Ocean Bill of Lading. In accordance with ICC guidelines, however, the document has to contain all indication that it is subject to a charter party. Please note that UCPDC Art. 25 does not refer to transshipment.

MULTIMODAL, TRANSPORT DOCUMENT UCPDC Art. 26

Questions

1- Are the place of dispatch taking in charge or port of loading and place of delivery stated and consistent with the documentary credit conditions?

2- Does the document indicate the name of the carrier or multimodal transport operator?

3- Has the document been signed by

the carrier or multimodal transport operator (identifiable as the carrier or multimodal transport operator), or

a named agent of the named carrier or multimodal transport operator or

the master (identifiable as the master) or


a named agent of the named master?

4- Does the document bear a date of issue? (deemed to be the date of dispatch, taking lit charge or loading on board and date of shipment unless separately indicated in the document)

5- Does the document indicate the number of originals in which it was issued, if more than one original was issued? If applicable, is the complete set of originals present?

6- if issued in negotiable form, does the document indicate the order party required in the documentary credit, i.e. :

a- to a specific order?

b- to your orders (remember to endorse it)


Name/Address of the shipper.

Name/Address of the consignee.

Name/Address of the notify party .

Shipping marks.

Number of packages.


Weight.

Freight notations.

Please also note:

Article 27 (UCPDC 500) Air Transport Document

Article 28 (UCPDC 500) Road, Rail or Inland waterway Transport Documents

Article 30 (UCPDC 500) Transport Documents issued by Freight Forwarders

Article 31 (UCPDC 900) "On Deck", "Shipper's Load and Count" Name of Consignor

Article 32 (UCPDC 5()0) Clean Transport Documents

Article 33 0 (UCPDC 500) Freight Payable/Prepaid Transport Documents

General remarks

- The document must indicate at least two different modes of transport.


- The document may contain the term "intended" in relation to the ship, port of loading or port of discharge as long as this is not prohibited by the documentary credit.

AIR TRANSPORT DOCUMENTARY UCPDC Art. 27

Questions:

1- Are the airports of departure and destination stated and consistent with the documentary credit Conditions?

2- Is the issuer the carrier (identifiable as the carrier) or an agent of a named carrier?

3- Is the document signed by the issuer?

4- Does the document bear a date of issue? (deemed to be the flight date unless otherwise indicated with a specific notation).

5- Does the document indicate that the goods have been accepted for carriage?

6- Is the document presented the original for the consignor/shipper?




Name/Address of the notify party.

Shipping marks.

Number of packages

Description of goods.

Weight.

Freight notations.

Please also note:



ROAD, RAIL OR INLAND WATERWAY TRANSPORT DOCUMENTS UCPDC Art. 28

Questions:


1- Are the places of shipment and destination stated and consistent with the documentary credit conditions?

2- Is the Issuer

the carrier (identifiable as the carrier), or

a named agent of the named carrier?


4- Does the document bear a date of issue? (deemed to be the date of dispatch receipt or shipment, unless separately indicated).




Shipping marks.

Number of packages.

Description of goods.

Weight.

Freight notations.

Please also note:



General remarks: Banks will accept as original(s) the transport document whether marked as original(s) or not.

COURRIER AND POST RECEIPTS UCPDC Art. 29

Questions:

1- Is the name of the issuer stated?

2- Does the document bear the stamped or otherwise authenticated signature of the Issuer?

3- Does the document bear a date of receipt or dispatch? (deemed to be the (late of shipment or dispatch)




Freight notations

Place of shipment etc.

TRANSPORT DOCUMENTS ISSUED BY FREIGHT FORWARDERS UCPDC Art. 30

Questions:

1- is the named issuer (freight forwarder) acting

a) as the carrier or the multimodal transport operator, or

b) as a named agent of the named carrier or multimodal transport operator?


3- Does the document bear a date of Issue? (deemed to be the shipment date)




Name/Address of the notify party.

Places of shipment and dispatch

Shipping marks

Number of packages


Weight

Freight notations

Please also note:



INSURANCE DOCUMENT UCPDC Art. 34, 35, 36


Questions:

1- Was the insurance document issued as a policy or certificate in compliance with the documentary credit stipulations?

2- Have all issued originals of the insurance document been presented?

3- Is the insurance document issued and signed by an insurance company or underwriter or their agents? Confirmation of cover from insurance broker will be rejected by the banks.

4- Is the insurance document correctly dated and signed?

Note: The insurance document may not be issued at a date later than the date of loading on board, etc., as indicated on the corresponding shipping document, unless the insurance document specifically states that cover takes effect on the day of shipment at the latest.

5- Is the information regarding the transport route and mode of transport consistent with the documentary credit?

6- Is the amount insured sufficient and the value correct? (at least 110% of the CIF or CIP value unless a higher insurance is required by the documentary credit). See UCPDC Art. 34 f.ii., if the CIF/CIP value cannot be determined.

The insurance currency must be consistent with that of the documentary credit unless otherwise stated.

7- Does the insurance cover all risks as required in the documentary credit? If the documentary credit states "I insurance against all risks", an insurance document with the notation "all risks" is accepted even if it is stated that certain risks are excluded.

8- Does the insurance cover all additional risks resulting from the type of shipping or transport route such as reloading, "on deck" loading, storage?

9- Is the insurance certificate correctly endorsed if endorsement is required?

Please also note:

Article 35 (UCPDC 500) Type of- Insurance Cover

Article 36 (UCPDC 500) All Risks Insurance Cover

COMMERCIAL INVOICE UCPDC Art. 37

Questions:

1- Is the invoice issued by the beneficiary as stated 111 in the documentary credit?

2- Is the invoice issued to the purchaser (applicant) named lit the documentary credit?


3- Does the address lit the invoice match that lit the documentary credit?

4- Does the description of the goods correspond exactly to that stated in the documentary credit?

5- Does the value of the goods and/or unit price match that of the documentary credit as regards the amount/currency

6- Are the delivery conditions (CIF/FOB, etc.) listed in the invoice?

7- Are these consistent with the documentary credit conditions?

8- Is the Invoice signed, if required by the documentary credit?

9- Are any certifications/legalizations required in the documentary credit present?

10- Are special conditions required in the documentary credit (customs tariff number, license number, etc.) indicated on the invoice?

DRAFT (Bill of Exchange)

Questions:

1- Does the format comply with the requirements of a draft?

2- Name of the document (draft/bill of exchange) in the language in which ii is issued

3- Unconditional instruction to pay

4- Drawee

5- Expiry

6- Place of payment

7- Order notation

8- Place and date of issue

9- Signature of issuer

10- Does the draft call for payment at sight or payment at a future determinable date?

11- Are the amounts in words and figures identical?

12- Is the draft drawn on the party indicated in the documentary credit?

13- If made out to own order, is the draft endorsed?

14- Does the draft contain the notations and clauses provided for in the documentary credit, such as "drawn under documentary credit No"?.


OTHER DOCUMENTS

If documentary credits require other documents in addition to the invoice, transport and insurance documents, the text of the documentary credit should state the issuer and contents of such additional documents.

If the documentary credit does not indicate the issuer of such documents and their content, the banks will accept these documents as presented, provided that their data Content is not inconsistent with any other stipulated documents and that they do not contradict the other conditions of the documentary credit and the

Please ensure that the other documents are consistent with the documentary credit conditions in

The following points:

Name/Address of the shipper


Description of the goods

Country of origin /destination

Additional notations (e.g. number of documentary credit)

Issuer

Shipping marks

Weight, volume, number of packages

General remarks:

• Certificates must usually bear the signature of the issuer.

• Documents must be consistent with one another.

• The number of packages, gross and net weight, etc. must be the same on all documents.

FAQs

Question

Who is a Buyer?

Answer


Buyer is the drawee to whom presentation is to be made in accordance with the collection instructions. His role is to accept B/E facilitating release of documents if the terms are documents against acceptance (D/A) or to pay on presentation of documents if the terms agreed are documents against payment (D/P).

Question

Define the term ‘Presenting Bank’.

Answer

The presenting bank is the one which makes presentation of documents to the drawee for payment, if the terms are documents against payment (D/P), or for acceptance, if the terms are documents against acceptance (D/A). The presenting bank is also known as the collecting bank and it is the one which comes in direct contact with the drawee. This bank’s role is to present Bill of Exchange (B/E) and other documents for payment under D/P terms or release documents after securing acceptance of B/E in case of D/A terms, and present B/E on due date for payment. This bank must act according to the collection instructions and get the noting and protesting of a dishonoured B/E if so instructed by the remitting bank and so willing.

Question :

In relation to a case of fraud, wherein the injunction forbids the Issuing Bank to effect payment under its credit to the negotiating bank, whether

the Negotiating Bank has a recourse against the beneficiary, the Negotiating Bank has recourse against the beneficiary even if the Negotiating Bank

has confirmed the credit, and whether the Issuing Bank is still responsible to make payment to the Negotiating Bank

because the Negotiating Bank negotiated the documents in good faith.

Answer :

Article 3 emphasizes that credits are separate transactions from underlying contracts, and Article 4 stresses that in credit transactions all parties deal with documents and not with goods, and Article 10(b) and Article 14(a) state that nominated banks are entitled to be reimbursed if they have complied with the terms and conditions of the credit. However, there is an exception to these provisions in many jurisdictions, namely related to abuse of rights and frauds. It is upto the courts in various jurisdictions to fairly protect the interest of all bona fide parties concerned.

Question

Whether an expired L/C can be transferred by a Bank?

Answer

An expired L/C cannot be transferred by the Transferring bank for there is no L/C to Transfer.

Question


When an L/C is transferred for a value less than the original credit, does the second beneficiary to whom the L/C is not transferred to, get the right to negotiate the documents with the first applicant directly, bypassing the first beneficiary?

Answer

Unless the L/C provides otherwise a second beneficiary does not get the right to negotiate documents with the first applicant directly bypassing the first beneficiary.

Question

Can a transferable L/C be transferred to an overseas supplier or it has to be with the national boundaries of the first beneficiary?

Answer

There is no bar in a transferable L/C being transferred to an overseas supplier.

Question

One of the conditions of a credit is submission of Pre-shipment Inspection Certificate retarding specification, quality, quantity, packaging, marketing and all other details of the goods by M/s SGS Bangladesh Ltd/ Llyods/ Bureau Veritas or their accredited representative. The Pre-shipment Inspection Certificate is issued by M/s SGS India Ltd and a separate letter from SGS Bangladesh Ltd says that SGS India Ltd is a member of worldwide SGS Group operating out of SGS Geneva.

Will such a Certificate of Pre-shipment Inspection be acceptable or will it be considered as a discrepancy.

Answer

The supporting document should be issued as an attachment to the SGS certificate issued by SGS India and that this would be sufficient proof to determine that SGS India is an appointed agent. Issuance of the supporting document without it being an attachment to the actual Inspection Certificate would constitute an ‘additional document’ in the context of the UCP500 and would be ignored by banks for the purposes of checking.

Question

We are exporting components to a buyer in the US against irrevocable L/C. The Issuing Bank is deducting US $60 for discrepancy charges on the ground that the B/L is not signed as per UCP500. Kindly advise the correct position.

Answer

There is a trend in US in the banks to charge discrepancy fee for the handling of discrepant documents. As already indicated by the Issuing Bank these discrepancies charges are for the Bill of Lading not being signed as per UCP500. In the absence of a copy of B/L it is not really possible to know whether the Bill of Lading in question has been signed as explained above. If not, then it will be deemed to be a discrepant presentation. The Issuing Bank will certainly charge discrepancy fee for handling discrepant documents if that is their policy.


Question

An L/C has been received with the following conditions :

Documents can be negotiated any time during the validity period of the L/C irrespective of date of transport documents/LR.

Clearly the L/C waives applicability of 21 days after the date of issuance of the transport documents under Article 43 by expressly mentioning irrespective of date of transport documents. The Negotiating Bank, however, maintains that since no other specified date has been mentioned, 21 days period will apply. Kindly clarify.

Answer

The condition on the L/C by mentioning that documents can be negotiated in time during the validity period of the L/C irrespective of date of transport documents in fact waives the requirement of 21 days from the date of transport documents being applicable under Article 43. If the words ‘irrespective of date of transport documents’ were not there, the 21 days period would have been applicable.

Question

An L/C was opened on 180 days usance basis. The L/C required inter alia the following :

Material Receipt challan for the entire quantity from customer to be submitted, while negotiating documents.

Copy of certificate of origin issued by Chamber of Commerce.

The beneficiary after delivery of material by endorsing the B/L in favour of the applicant and getting the Receipt Challan as required negotiated the documents with its bankers. The certificate of origin as submitted was issued by its overseas supplier instead of Chamber of Commerce. The L/C Opening Bank, therefore, informed the Negotiating Bank of the discrepancy in that a certificate of origin issued by a Chamber of Commerce is not enclosed. The beneficiary thereupon arranged a certificate of origin issued by a Chamber of Commerce covering the entire quantity in the vessel and showing a third party as the consignee. The L/C Opening Bank thereupon refused to accept the certificate of origin as it was not as per the terms of L/C and, therefore, agreed to handle the documents on collection basis. The applicant, however, while issuing the Receipted Challan confirmed that documents are acceptable to them inspite of discrepancies and that they are requesting their bankers to release the payment of the L/C on due date. The discrepancies in the 2nd certificate of origin was that the consignee name in it differed from the notify party name in the B/L. The Opening Bank also refused to refer the matter to the applicant on the ground that it is the Opening Bank alone who could decide whether to take up the documents or not based on documents alone.

Kindly provide answer to the following queries :

Whether the L/C Opening Bank was justified in not referring the discrepancy to the customer and rejecting the documents.

Whether the L/C Opening Bank was justified in rejecting the documents inspite of clear acceptance conveyed by the customer.

If the bank is justified in rejecting the payment what course of action is available to the supplier, specially considering the fact that customer is a sick and ‘BIFR’ unit?


Whether the L/C Opening Bank was justified in appropriating the margins under the L/C towards other outstandings, while rejecting the documents under the L/C?

Answer

In terms of UCP500 it is the Issuing Bank alone who decides whether the documents are in terms of L/C or not. It may if it so wishes refer the matter to the applicant. It is not mandatory for them to refer the matter to the applicant.

The Opening Bank is fully justified in rejecting the documents inspite of clear acceptance conveyed by the applicant for if documents submitted are not in terms of L/C then the submission is discrepant and the Issuing Bank is not bound by any agreement between the applicant and the beneficiary.

This is a commercial risk which has to be borne by the beneficiary. The only course of action available to him is to file a suit for recovery of dues.

The question of appropriating the margins by the Opening Bank under the L/C towards other outstandings is on the basis of arrangement between the parties and the beneficiary has no claim against those margins.

Question

Buyers in Italy get quick stay from the Court preventing payment being effected under letters of credit. Can ICC do something about it?

Answer

ICC is continually seeking to address the issue of injunctions being obtained to stop payment under credits. Banks are expected for the sake of protecting their name and goodwill to move the courts to get the injunctions vacated. It is deplorable that not many banks do that, which is not desirable.

Question

Many times documents are dispatched directly to the beneficiary who takes delivery of goods and then has documents rejected by the Issuing Bank. What should be done in such cases? In this connection it was pointed out that it should be stipulated in the UCP that once buyer has taken delivery of goods, he must pay. Also many times documents could be corrected. The exporter should, therefore, be given an opportunity to do so. Should ICC not appoint a panel to see whether discrepancies are there or not?

Answer

If the feeling is that this type of situation arises because of documents getting refused after goods have been dispatched directly to the buyer, then the best course will be to get the credit amended. This requires greater caution even at the stage of entering into purchase-sales contract and ensuring that there is a provision of the issuance of an L/C which does not provide for goods going direct to the buyer. As regards the suggestion of making the buyer pay, if he has taken delivery of goods despite documents being discrepant, it is not feasible for how will you convert this into a documentary requirement. What type of documents will meet the requirement, who will issue it and whether it will be possible to get such a certificate, are some of the questions deserving attention.

Question


In a letter of credit issued by one of the Korean Banks the reimbursement conditions was that the Issuing Bank will reimburse to the Negotiating Bank in accordance with their instructions provided all the terms and conditions of the credit have been complied with. The Negotiating Bank negotiated documents and sent a reimbursement claim to the Issuing Bank with a request to affect payment value three working days later as per the reimbursement conditions. The Issuing Bank, however, did not meet its obligations and did not reimburse to the Negotiating Bank on value date. While the reimbursement instructions stated that the Issuing Bank will make reimbursement in accordance with the Negotiating Bank’s instructions, they have not met the value date requested. Kindly clarify what is the correct position.

Answer

If an Issuing Bank includes reimbursement instructions in their credit requiring the Negotiating Bank to claim from them and they will honour the claim according to the Negotiating Bank’s instructions this does not necessarily apply to the honouring of the claim with the value date requested by the Claiming Bank. The claim for interest, if any, would need to be based on what is deemed to be the ‘reasonable time’ for the Issuing Bank to honour the claim and not that the Claiming Bank received payment on a date later than that requested in the telex claim.

Question

Kindly clarify on the following points where airfreighting of consignments under house airway bills issued by freight forwarders are concerned.

Does the act of issue of a delivery order by a freight forwarding agent who is in control of the consignment (and the consequent authorization of delivery) to a party other than the named consignee of the airway bill without obtaining authorization from the named consignee fall under the purview of the Warsaw Convention?

If so, do the limits of liability for such an act as stipulated in Article 18 and 22 of the Amended Convention apply for such an act? Or would such an act be looked into under the framework of Article 25 and 25A which indicate the conditions under which the limits of liability are not applicable.

Is it a practice in New Delhi for Airfreight forwarding agents to hand over consignments to a party other than the named consignee of an airway bill without obtaining from such a consignee proper authorization to do so?

If it is a practice, isn’t the freight forwarder responsible for his own acts of resorting to such a practice? Is or is not the freight forwarder liable for the consequences of such an act?

Answer

The issue of a delivery order by a freight forwarding agent to a party other than the named consignee of the airway bill without obtaining authorization from the named consignee will be outside the purview of the Warsaw Convention for as explained above the provisions of Warsaw Convention get complied with as soon as the airlines has handed over the delivery to the freight forwarding agent in New Delhi.

In view of what has been stated above limits of liability as stipulated under various provisions of Warsaw Convention will not apply.

There is no practice in New Delhi for airfreight forwarding agents to hand over consignments to a party other than the named consignee of an airway bill without authorization from such a consignee.

The freight forwarder is liable for consequences of such an act.


Question

UCPDC 500 makes it mandatory that Letter of Credit should provide for Drafts/ Bill of Exchange to be drawn on the Opening Bank and not on the applicant. If such drafts (i.e. drawn on applicant) are drawn, they will be treated as extraneous documents. However, in practice several Letter of Credit come across which call for drafts drawn on the applicant. In this regard please clarify :

Whether such an L/C becomes invalid abinitio under UCPDC 500. Whether a Negotiating Bank loses protection under UCPDC 500 if it negotiates

documents containing a draft drawn on the applicant in confirmity with L/C terms. Whether a negotiation gets a protection under UCPDC 500 if it negotiates documents

containing a draft drawn on the opening bank even though the Letter of Credit calls for a drawn on applicant.

Answer

An L/C calling for draft on the applicant will not be invalid on that count. Since draft on the applicant is additional document the Negotiating Bank will loose

protection of UCP500 if it negotiates documents containing a draft drawn on the applicant only.

The Negotiating Bank will be protected under UCP if it negotiates document containing a draft drawn under Issuing Bank even though the L/C calls for a draft drawn on applicant.

Question

L/C Opening Bank under usance letter of credit sent following acknowledgment on receipt of documents from Negotiating Bank, who had instructed Opening Bank to acknowledge and advise acceptance and due date.

"We acknowledge receipt of documents which is subject to acceptance."

As the reply was not satisfactory Negotiating Bank requested Opening Bank on telephone to advise acceptance and due date, for which the reply was "Unless you hear from us documents can be treated as accepted."

Can the Negotiating Bank treat the acknowledgment letter as acceptance. If no communication is received within 7 working days it will be understand as documents are in order.

Answer

As per UCP 500 if the Issuing Bank does not communicate with 7 working days its rejection of documents that bank is precluded from refusing to take up the documents thereafter.

Question

All export documents drawn under credit has to be in foreign currency (Home currency not permitted) as per RBI/FEDAI directive/guidelines. Whether an export document under L/C negotiated by the Bank will be treated as giving value for the draft/ document when Rupee advance is given without taking foreign currency into position.


While Rupee advance is given not upto 100% of invoice value but around 80% to 90% holding balance as margin (may be to cover exchange risk/interest recovery). In such case, part disbursement/advance shall be treated as full negotiation of document under the credit.

Answer

Any Rupee advance given without taking foreign currency into account will be deemed as giving value for the draft/documents negotiated to the extent of the advance and will be subject to further adjustments later on.

Question

Contract terms stipulate "Net Cash Against a Customary Set of Shipping Documents for 98%. Balance 2% to be payable to XYZ towards commission."

Documents drawn as follows :

Invoice & Bill of Exchange drawn for 100% with separate instructions to remit 98% and pay 2% to XYZ A/C

Invoice prepared for 100% less 2% commission to XYZ net 98%. Bill of Exchange drawn for net 98%.

Which of the above two are correct?

Answer

If the term of L/C is to make payment of 98% of the proceed against shipping documents and balance 2% to be payable to XYZ towards commission, then the best course will be to prepare invoice for 100% assign 2% of the proceed in favour of XYZ and draw B/E for the balance 100%.

Question

We had negotiated some export bills under various DCs issued by the Standard Chartered Bank, Hong Kong calling for "Clean Shipped on Board Marine Bills of Lading". Documents drawn as per L/C terms were sent to the issuing bank after negotiation. The B/Ls issued by M/s Maersk India Ltd have the following clause therein :

"Received in apparent good order and condition, unless otherwise stated herein, for transportation on board the ocean vessel mentioned herein or any substituted vessel or on board the feeder vessel or other means of transportation (rail or truck) if place of receipt is named in this Bill of Lading the goods or packages or containers said to contain goods, hereinafter called "the Goods", specified herein for carriage from the port of loading named herein or place of receipt if mentioned herein, on a voyage as described and part of discharge named herein or deliver at the place of delivery if mentioned herein, such carriage, discharge or delivery being always subject to the exceptions, limitations, conditions and liberties hereinafter agreed in like order and condition at the port of discharge or place of delivery if named as the case may be, for delivery unto the Consignee mentioned herein or to his or their assigns where the Carrier’s responsibilities shall in all cases and in all circumstances whatsoever finally cease. It is further agreed that Containers may be stowed on deck without notice pursuant to Clause 16 on the reverse side of this Bill of Lading. In witness whereof the number of original Bills of Lading stated on this side have been signed one of which being accomplished the other(s) to be void".


The Standard Chartered Bank refused the documents under article 23 a(ii) of UCP 500 on the ground that the on Board notation on the B/L does not show actual vessel’s name. We believe that the discrepancy pointed out does not hold good as the printed clause mentioned on the front side of our B/L is neither a "substitution clause" nor does it represent the indication "intended vessel or similar qualification".

We would like to seek opinion of the group as to the validity of the stand taken by our bank.

Answer

This case is similar to the Query TA.18 handled by Banking Commission bearing a similar clause stating inter-alia "by the vessel named herein or any substitute at the carriers option and/or other means of transport" where the Banking Commission has held that if the B/L contains the indication ‘intended vessel or similar qualifications in relation to the vessel, loaded on board or named vessel must be evidenced by the on board notation on B/L to the date on which the goods have been loaded. Even if they have been loaded on the vessel named as the ‘intended vessel’. The Banking Commission had further added that where the pre-printed statement ‘loaded on board the vessel’ appears this should also incorporate the name of the actual vessel even if this is the same vessel which appears under the heading ‘ocean vessel’.

The same logic as in the case of Banking query TA.18 will apply to this case. Since no finality could be reached in regard to this particular query even at the Banking Commission it will be pre-mature to express any opinion. We may possibly have to wait till a unanimous opinion crystallizes in the Banking Commission on this subject. (Since handing out of this opinion the Banking Commission has decided that in the circumstances of this particular case, name of the actual vessel need not be given in the on board notation).

Question

We are manufacturer exporter of Home furnishings and Bags . Nowadays a lot of buyers are asking for FCR (forwarders cargo receipt, for sea shipment) and House Airway Bill for Air Shipment. These are normally issued by shipping/forwarding agents nominated by the buyer who have their counterparts/business partners at the other end. When they take in charge goods from the exporter they issue House Airway Bill/FCR which shows bank as the consignee but the master B/L or the Airway Bill shows their counterpart as the consignee. The nominated shipping agents handover only House Airway Bill/FCR copy to exporter. When the goods reach the port of destination, their counterpart releases the goods immediately and handover to the applicant. The importer after taking delivery of the goods if he wishes to avoid payment, simply asks his banker to engineer, and discrepancies return the documents making the exporter suffer.

Is the release of goods by these shipping agents to the buyer justified? Whether or not it is justified, what are the precautions that need to be taken for getting paid for?

Answer

This is not a UCP issue. If a House Airway Bill/FCR shows bank as the consignee and the shipping agents deliver the goods to the applicant without the House Airway Bill/FCR as presented through Bank, they are liable to recompense the beneficiary. They need to be dragged to the courts of law or to an arbitration depending upon the terms of contract of particular case between the beneficiary and the shipping agents.

Question


Bank of India, Calcutta, negotiated Sonali Bank, Dhaka’s L/C which stipulated presentation of documents within 16 days from the date of shipment. L/C was freely negotiable with any Bank in India. Shipment has been made on 30.10.98 within last shipment date of 31.10.98. The Beneficiary presented the conforming documents to Bank of India on 13.11.98 a day earlier to the last date of presentation 14.11.98. Bank of India sent the documents to Sonali Bank, Dhaka, under cover of their forwarding schedule date 17.11.98 certifying that "Documents have been disposed off in terms of Credit and all the terms and conditions have been complied with" but nowhere was there mention of presentation/negotiation date.

Sonali Bank under telex dated 23.11.98 stated we refuse "Negotiation of documents as per Article 14D(ii) of UCPDC 500" and stated discrepancy as "L/C expired and late negotiation by 3 days." Bank of India disputed the same and informed Sonali Bank under telex dated 24.11.98 that "Beneficiary has deposited captioned bill within the validity of L/C". In refusal notice Sonali Bank have only mentioned that they have referred the matter to the drawee and has not mentioned "whether they are holding the documents at the disposal of, or returning them to the presenter". Export goods in the meantime were auctioned by customs of the country of import in May 1999.

Was issuing bank correct in refusing the documents/negotiation? Any evidence was required to be submitted for timely presentation of documents by

Beneficiary? Mentioning only "refusing documents as per Article 14D(ii) responsibility of Issuing Bank

for stating that "they are holding documents at the risk of Bank of India or returning to them" is covered?

Is Issuing Bank precluded from claiming discrepancy under Article 14(e) of UCP500?

Who will be responsible for the material auctioned?

Answer

As per UCP 500 the negotiating bank has maximum of 7 days for examining documents and undertaking negotiation. In this particular case, as it is clear from the documents, negotiation was done 3 days after expiry of L/C according to the issuing bank which is well within the permitted reasonable time for examination of documents. The issuing bank, therefore, is not right in refusing the documents.- Any evidence for timely presentation of documents by the beneficiary is not needed so long as the documents have been examined by the negotiating bank and negotiation undertaken within a period of not more than 7 banking days.As per UCP 500 Article 14D(ii) a bank deciding to refuse documents has to give a notice to that effect. Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal or is returning them to the presenter. In this case, since the issuing bank failed to indicate whether it is holding the documents at the disposal of the Bank of India or returning them to that bank, the issuing bank is precluded from claiming discrepancies.

In terms of Article 14(e) if the issuing bank fails to act in accordance with the provisions of this article and/or fails to hold the documents at the disposal of or return them to the presenter, the issuing bank ..... shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the credit. As per the provisions of this particular sub-clause, the issuing bank is precluded from claiming discrepancies.

Since documents have been presented in time and negotiated, the issuing bank, in terms of Article 14(e) of UCP 500, is bound to pay to the beneficiary. As for the responsibility for the material auctioned, it is a matter between the issuing bank and the applicant for the credit.


Question

Clarification required on tolerance clause in L/CAn L/C allows for tolerance of 10% plus or minus in L/C amount The L/C also bears a clause stating that commercial invoices issued for amounts in excess of the amount permitted by the credit not acceptable.

Kindly clarify whether the advantage of the positive tolerance of 10% as allowed by the L/C can we availed.

Answer

One can certainly avail the positive advantage of 10% tolerance allowed in the L/C.

Question

Kindly clarify the following :

L/C value is $ 10000/- Tolerance allowed is +/- 10% in Quantity and Value. One of the L.C. condition states that "Documents must not be drawn in excess of the credit value". Here credit value means $ 10,000/- or $ 10,000 with variance of 10% i.e. 11000/-. Banks are objecting if we negotiate documents worth $ 10,500/-.

L/C $ 17400/- Tolerance allowed is +/- 10%. In reimbursement instructions of L/C opening bank says that "Please claim reimbursement for $ 14,400/-". Does it mean that documents for which value is more than $ 14,400/- will not be reimbursed by the opening bank? If yes what is the significance of + 10% tolerance in this regard.

L/C issuing bank address mentioned in clause 42 (A) is differing from the address mentioned in Instructions for negotiating bank column (Normally issueing bank will give their full address for forwarding the Original Documents). In such case which address to be treated as issuing bank’s correct address.

L/C says that documents to be presented within 16 days. Should we include or exclude the B/L date for the purpose of arriving last date/expiry date for negotiation.

As per U.C.P, if the B/L is signed by an Agent the words "On behalf of carrier as agents" should appear on B/L. In some of the B/Ls only name of the Carrier and the words "as agents" were mentioned but the notation "On behalf of the carrier" was not appearing. Will it be treated as discrepancy.

Last date of Shipment is 31.01.00 and expiry is 15.02.00 Bill of lading was dated 28.01.00. We have asked bank to send the documents on collection basis on 05.02.00 as it was a state bill of lading. Does Opening Bank is obligated to check for all the conditions mentioned in L/C even after sending the documents on collection basis. Opening bank has pointed out some discrepancies. Is opening bank right to raise discrepancies even after sending it on collection.?

L/C expiry is 29.02.00. As we could not get country of origin by 29.02.00 we could not negotiate on 29.02.00 but were sent on collection on 02.03.00. In this connection we would like to bring to your notice that all documents were having the L/C NO., date and opening bank name as we were thought of negotiating before expiry of the L/C.


In this case, when Negotiating Banks is requested to send it on collection are they duty bounded to check for the L/C conditions just because the L/C No. and other details are mentioned on the documents. What is the right of opening bank regarding discrepancies.

L/C requires courier receipt as a proof of couriering non negotiable copies with in 5 days of shipment. Opening Bank point out a discrepancy that the courier receipt does not mention what it contains. Is it a valid discrepancy?

Answer

Clarifications required by you are given below ad seriatim :

If the L/C stipulates documents must not be drawn in excess of the credit value, in that case tolerance will be available only in regard to quantity and not value. The specific stipulation of the credit will supercede provisions of Article 39. Hence bank’s objections seems to be all right.

As already commented in 1 above tolerance will be available only if the L/C does not specifically provide otherwise. If, however, reimbursement is limited to the credit value then that will supercede Article 39.

Address given in the L/C will be the correct address as provided in L/C for purposes of this particular question.

If L/C says documents are to be presented within 16 days then it will include the date of B/L for purposes of arriving at the last date of negotiation.

In this connection, I am sending by post a copy of the ICC Position Paper relating to B/L. It all depends upon various factors enumerated in the Paper.

As per facts mentioned by you I am unable to find the logic for sending documents on collection basis for if the last date for shipment was 31/01/00 and expiry date as 15/02/00 then a B/L dated 28/01/00 will be perfectly all right and not stale. For this reason the Opening Bank is treating documents under L/C and not under collection (URC 522) and raising discrepancies. If you intend documents to be sent on collection basis then appropriate collection instructions need to be given through your bank to the Issuing Bank.

In this particular case since documents were not sent under L/C the banks will handle collection on the basis of collection instructions.

So long as the courier receipt can be linked with the other L/C particulars, there is no need for the courier receipt to mention of what it contains. In any case at the time of receiving such courier documents courier will not know what it contains.

Question

An Indian Bank after negotiation did not pay to Beneficiary considering the non payment of earlier part bill by Foreign Bank against same L/C and also for the reason that the beneficiary had no credit limit facility with the Nagotiating Bank.


o Can Issuing Bank establish that documents were not negotiated as per Article 10b(ii)?

o After 17 months of 1st discrepancy Telex dated 23.11.98 is Issuing Bank

authorised to say now that documetns were not negotiated? o When L/C was subject to UCP 500 on which conditions law of land will apply and

is that applicable in present case?

Answer

According to UCP 500 Article 9 negotiation means "giving value". It has been clarified time and again by the ICC Banking Commission and there is also a position paper on the subject clarifying that giving of value need not be immediate. If the Negotiating Bank is requested to give the value immediately then at that time it will do minus interest; otherwise it will pay the beneficiary full amount on due date. The very fact that Indian Bank after negotiation did not pay to the beneficiary does not vitiated the negotiation process. In this connection I am faxing under separate cover a copy of the ICC Position Paper.

1. Based on the above, replies to queries are as under :In the situation enumerated in your message the Issuing Bank can not establish that documents were not negotiated as per Article 10b(ii) once the Negotiating Bank certifies that they have negotiated.

2. In view of the reply to 1 above question 2 has no validity or relevance. 3. Once the L/C is subject to UCP 500 the law of land will apply only in cases which are not

covered by UCP 500.

Question

Kindly clarify the following : o L.C states under clause no. "39a: 10/10". What does it mean =!0%(+ or -) in both

quantity and value or only in quantity?o If the L/C is silent about the negotiating bank, can we treat it as free negotiation?o Is it compulsory under a letter of credit to draw a bill of exchange. What would be

the consequences if no bill of exchange is drawn (When no clause of B/E is there in the L/C)?

o L/C states that "all bank charges outside (parties country) are to the account of the beneficiary" dies it include the reimbursement charges of the opening bank. If nothing is mentioned about the reimbursement charges, can we treat that they are to the account of the opening bank?

o Opening Bank has raised a discrepancy that "Carrier’s name not indicated on Bill of Lading" – Clarify the meaning of Carrier in this case

o If the opening bank does not come back to us or to the negotiating bank with any discrepancies with in one week from the date on which they receive the original documents, are they allowed to charge any discrepancy charges? If they have already charged, can we claim them from opening bank?

Answer

Article 39a allows a tolerance of 10% more or less than the amount or the quantity or the unit price to which they refer. It will depend as to whether the words "about", "approximately", "circa" or similar expressions are used with the quantity, amount or the


unit price and will apply to that. If they are used with both quantity and value only then it will apply to both.

According to Article 10b(i) unless the credit stipulates that it is available only with the Issuing Bank, all credits must nominate the bank which is authorised to pay, to incur a deferred payment undertaking, to accepts drafts or to negotiate. If no bank is nominated and the credit is not available with the Issuing bank then it will be deemed to be freely negotiable credit. You are, therefore, right in presuming so.

Drawing of a bill of exchange is not mandatory in respect of credits providing for sight and deferred payment. However, drafts will have to be drawn in respect of an acceptance credit where the banks have to accept drafts drawn by the beneficiary so also in respect of negotiation credit. If no bill of exchange is to be drawn then the payment will be forthcoming based on the presentation of the conforming documents.

As per Article 19e the Reimbursing Bank charges are to be for the account of the Issuing Bank. If nothing is mentioned about the reimbursement charges then surely you can treat them to be for the account of the Issuing Bank.

Article 23 dealing with the Marine/ Ocean bills of lading stipulates as one of the conditions for a bill of lading to be acceptable that it appears on its face to indicate the name of the carrier and have been signed or otherwise authenticated either by the carrier or a named agent or the master or a named agent. Carrier is the shipping company which undertakes to carry the goods to the named destination. Without indication of carriers’ name on the B/L, we would not know as to who has taken the responsibility for the carriage of goods.

Discrepancy charges are payable only if discrepancies are found and so informed the Opening Bank is not allowed to levy such charges.

Question

We had established an L/C on 2.9.99 and the tenor of the L/C was 90 days after sight. We received the documents from the negotiating bank on 18.9.1999. Owing to certain discrepancies in the documents, the payment under the L/C was refused by us on 20.9.1999 which was also conveyed to the Opener, who subsequently accepted the documents with discrepancies on 28.9.1999.

The due date was calculated from 18.9.1999 i.e., the day the bank sighted the documetns and the bill was due for payment on 17.12.1999 which was also conveyed to the negotiating bank.

The opener, however, differed and contended that the due date should have been arrived from the day he accepted the documents i.e., from 28.9.1999.

As the same documents cannot be sighted twice and moreover, the B/E is drawn on Bank, we contended that the due date as 17.12.99.

Please clarify :- o the correct due dateo whether our commitment under the L/C still continues after having refused the

documents at the first instance due to discrepancies and then conveying the openers acceptance to the negotiating bank

Answer

For a L/C at 90 days after sight, the due date is to be calculated from the sighting of document (receiving of documents by the negotiating bank i.e. 18.9.1999). That means the correct due date is 17th December, 1999.

If you have communicated to the beneficiary that the documents have been accepted by the opener and have accepted the B/E, you are liable to make payment under the L/C.


Question

We make export transactions through an Indian Bank. Till now they were computing FOB value of exports as under

FOB value of exports of the merchandise = CIF value of the merchandise – Freight – Insurance – Commission/Discount

But now their officials have changed this formula. According to them now it is as under : FOB value of exports of the Merchandise = CIF value of the Merchandise – Freight –

Insurance – Commission/Discount – Drawee Bank charges Kindly clarify whether the Drawee Bank charges should be deducted from CIF value.

Answer

As the Drawee Bank charges are after sales expenditure, it should not be deducted from the CIF value for the purposes of arriving at FOB value of exports.

Question

As per Article 13b, ‘The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting to their behalf, shall each have a reasonable time, not to exceed seven 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 it received the documents accordingly.

Kindly clarify, whether the maximum limit of 7 days as the reasonable time is for the bank concerned to send out message from their end or for the receipt of the message by the bank forwarding documents at the other end.

Answer

Sub Article 13b states "The Issuing Bank, the Confirming Bank, if any, or a Nominated Bank acting on their behalf, shall each have a reasonable time, not to exceed seven 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 it received the documents accordingly".

It can, therefore, be seen that the reasonable time (not to exceed seven banking days) following the day of receipt of the documents encompasses a period in which the following must occur :-

o an examination of the documents;o a decision to accept or reject (including any period to approach the applicant for

a waiver); and o if rejected to send a notice to the presenter.

On this basis, it the sending of the message within the seven banking days which is critical not the receipt by the presenter. For instance, it would be unfair in a situation of an issuing bank in say, New York having to ensure that their rejection notice was received by a bank in say, New Zealand within the last day – given the time difference of around 18 hours. Then consider the case if he details were the opposite.

The article can only give the requirement that the notice is sent within the seven banking days to impose on the issuing bank that they must ensure receipt by the presenter within the seven days would impose differing standard dependent upon the location of the presenter.


The answer given above pre-supposes that banks have taken the full seven banking days, where the intention is that ‘reasonable’ remains a period which is less than seven banking days.

Question

A documentary clause in a letter of credit stipulates presentation of photocopy of the special Custom Invoice with a signed visa stamp. The document is issued by the Government of India.

Another clause in the same letter of credit subjects the above document to the condition that "the unit price set forth on the visaed document must agree with the unit price set forth on the letter of credit and any superseding amendments".

The required document was presented without having the unit price declared, but it indicated the total quantity and total value. Hence, it was averred that the unit price can be calculated.

Answer

Where a document, as specified above, clearly requires the insertion of the unit price as part of the content, the beneficiary must comply. It is not the duty of the issuing or nominated banks to carry out a calculation as described to determine acceptability or otherwise. It does not necessarily follow that the total value divided by the total quantity would give a unit price that is required in the context of the credit.

The document, as described, would be discrepant without the inclusion of the unit price, even if the document showed the total quantity and total value.

Question

A letter of credit required the presentation of a full set of bills of lading. The party presented the documents to the bank together with a certificate from the shipping company certifying that the number of original bills of lading was 3. This was arranged as none of the bills of lading gave the number of originals issued.

The party’s local bank accepted the documents without discrepancy. The Issuing Bank refused to honour the documents on the ground that the number of original B/Ls should be mentioned on the B/L itself. Which Bank is correct in their interpretation?

Answer

If a certificate is to be issued, it should be issued by the carrier or their appointed agents and should be issued as an official addendum to the bill of lading i.e. indicate that the document is an integral part of B/L No……….. dated…………. As presented, the additional certificate from the shipping company was not required by the credit and therefore would not be examined in accordance with Sub-article 13a of UCP 500.

Question

In a specific instance, a foreign buyer obtained an order from the court in their country in order not to pay the bill amount on maturity. This order was given on unsound reasons after the buyer took delivery of the goods on presenting the bill of lading etc., which the bank delivered to him on accepting sellers draft for payment.


As a consequence of the court order, the Negotiating Bank did not receive the proceeds on due date. In effect the sense and spirit of the irrevocable credit became nullified. Is this a justifiable action?

Answer

This is not an issue for UCP but one for local law and banking practices prevalent in the country concerned. A good bank, however, should approach the Court to get the stay vacated for the sake of its name and fame.

Question

The issuing bank provided a reimbursement condition which stated that provided all the credit terms and conditions were complied with they would reimburse the negotiating bank in accordance with their instruments. The negotiating bank negotiated documents and sent a reimbursement claim to the issuing bank requesting payment value three working days later. The issuing bank failed to meet the required value date as they had also done on previous occasions. Whilst they are stating that they will honour in accordance with the negotiating bank’s instruments they are not meeting the value dates requested.

Answer

If an issuing bank includes a reimbursement instruction, in their credit, that requires the negotiating bank to claim from them and that they will honour the claim according to the negotiating bank’s instructions, this does not necessarily apply to the honouring of the claim with the value date requested by the claiming bank.

A claim for interest, if any, would need to be based on what was deemed to be a ‘reasonable time’ for the issuing bank to honour the claim and that the claiming bank received payment on a date later than that requested in the telex claim.

Question

In paragraph 2-3 on Page 34 of ICC Publication 550 it is mentioned that the practice of principals/remitting banks drawing drafts on the collecting/presenting banks without prior agreement of such banks was discussed and the Working Party expressed the view that unless otherwise agreed by the collecting/presenting bank, drafts must not be drawn on such banks. We seek clarification from the ICC Banking Commission, if despite this view expressed, a draft is drawn on the collecting/presenting bank without prior agreement of that bank and that bank communicates "Drafts expected to mature on XXXX date", will it be taken as acceptance of draft by the collecting bank and will that bank be responsible for payment.

Answer

If the bank agrees to handle the collection and accepts the draft which has been drawn on it, then it is obliged to effect settlement on the due date despite any contestation by their customer. With reference to the specific query, the advice of acceptance reading "expected to mature on XXXX date" is not acceptable. An acceptance constitutes the acceptors undertaking to pay at maturity and should not be qualified without the prior agreement of the remitting bank.


In any collection transaction, the collection instruction must, in addition to other pertinent information, clearly state the requirements of acceptance, advice thereof and release of documents.

Question

Submission of "Received for shipment Bill of Lading" along with a shipped on Board Certificate issued by the Shipping Line mentioned that "this is an integral part of the Bill of Lading", will the Bill of Lading be considered as ‘Clean on Board Bill of Lading?

Answer

Unless there is a reference in the Bill of Lading to an accompanying On-Board certificate, a mention in the certificate that this is an integral part of the Bill of lading will not make the Bill of Lading as a Clean on Board.

Question

A letter of credit which restricted to the counters of a bank over 1000 kms from sellers office, the seller presented the L/C to their local bank who negotiated and forwarded the documents to the issuing Bank.

The Negotiating Bank has now received a telex from the Issuing Bank stating that the buyer has rejected the shipping documents under the L/C. The telex did not specify any discrepancies other than the reference to the buyer having rejected.

As the issuing bank has not mentioned any discrepancies can they stop the payment to the seller by refusing to reimburse their bank.

Answer

If an issuing bank fails to conform to the requirements of sub-article 14(d) it is bound to honour the documents as presented, even though valid discrepancies may exist. The issuing bank, in this case, has clearly failed to provide a notice of rejection which contains a listing of the discrepancy(ies) observed and has, therefore, failed to comply with this Sub-Article.

Question

Should the word ‘BANKS’ in Article 16 of UCP be considered as all the banks involved in a credit transaction or only the issuing bank? From experience, it seemed that the issuing, negotiating and advising banks all took protection under Article 16 whenever the circumstances provided therein occurred. Almost all the issues remain unsolved to the obvious strain on either suppliers or buyers.

Answer

Use of the word ‘Banks’ in the context of Article 16 is not restrictive to the Issuing Bank. The Article equally applies to the Issuing, Advising, Transferring or Nominated Bank.

Question


If any Import Bill falls due for payment on any International holiday (Saturday/Sunday) than bank should demand or debit our account for the payment "prior or preceding day of the due date. Kindly clarify

Answer

Article 44 of UCP 500 refers to expiry date which allows extension of the expiry date to the next day following in case it happens to be a holiday.

Question

Define the term ‘Clean Collection’.

Answer

Clean collection is the collection process where the basis of the collection is the financial documents not accompanied by commercial documents. This is distinguished from documentary collections in the sense that the collection instructions in a documentary collection have to be accommodated by financial documents and commercial documents or only commercial documents not without financial documents. Thus in a clean collection operation the presenting bank presents financial documents for collection and release those documents on receiving payment. Clean collections are rarely on D/A terms.

Question :

In a case of collection, the Collecting Bank was served with a Judicial Attachment Order on June 29, 1999 by Ravenna Court in Switzerland. The Bank released the documents to the buyer on July 1, 1999 against full payment for documents. Knowing very well that they will not be able to remit proceeds in view of the attachment order, is it not unethical on the part of the Bank to have released documents to the buyer without seeking further instructions from the Indian Exporter. I would like to have your opinion in the matter.

Answer :

The documents were sent on collection presumably subject to URC522. The requirement for release of documents within the rules is for payment to be made. If payment is not made to the remitting bank then the documents should be held at the disposal of the remitting bank. To have been placed on notice of a court order, the collecting bank should have advised the remitting bank and sought instructions prior to releasing the documents. Exporter and the India bank have grounds to request that the documents be returned in their original state, failure to do so would render the collecting bank liable to honour the collection.

Question

We had exported 11 Gensets to Colombo on 90 days D.A. basis. The documents i.e. B/L, Invoice and Bill of Exchange were drawn in the Seylan Bank, Chetham Street Branch, Colombo, the Seylan Bank delivered the documents to M/s. Overseas Qualitools (P) Ltd, No. 354, Sri Sangraja Mawatha, Colombo and communicated that the drawee has accepted the Bill of Exchange. The Bill of Exchange was not honoured on due date. The Seylan Bank, Colombo, as drawee, is liable to effect the payment but till date they have neither remitted the money nor acknowledged any of our/remitting bank’s letters.


The opinion of the ICC India Grievance Redressal Cell is sought as to whether Seylan bank acted within the spirit of URC 522. If not, are they not be in breach of their obligation.

Answer

As per URC 522 the presenting bank has to act within the ambit of collection instructions. In this particular case, the B/L, invoice and the Bill of exchange were drawn on the Seylan Bank. They should either have not agreed to act as per the collection instructions. In that case they should have communicated their refusal without delay. Once they have agreed to act under collection they are bound to make payment on due date after having conveyed acceptance of B/L as per collection instructions. If the intention by the word drawee is the buyer M/s Overseas Qualitools (P) Ltd, in that case the collecting bank i.e. Seylan Bank has no right to change the collection instructions without the approval of the remitting bank/principal. In neither case the presenting bank i.e. Seylan Bank is liable for its actions.

The Seylan Bank, Colombo, must reimburse the remitting bank/principal for the collection amount because of their breach of obligation.

Question

Whether the Collecting Bank is absolved of its responsibilities under Collection instrument if the documents are stolen and used in taking delivery of the goods.

Despite repeated reminders to the party and the bank, no reply was forthcoming. Enquiries reveal that delivery orders against the B/L’s concerned were taken by manipulated discharged B/Ls.

The matter was brought to the notice of the Bank’s Head Office who responded that since documents were stolen from their branch and were used in the delivery of the goods, without their permission, by false signatures and stamps no liability or responsibility devolved on their bank. Though the documents were sent in March/April 1997, the party was only informed of their theft in September 1997 i.e. after six months.

Answer

Whilst the collecting bank have not complied with a number of the requirements of URC522, the resolution of this issue is one for local law. Hence a legal action against the Collecting Bank in its country on the basis of their Civil Law will be advisable.

BANKING QUERIES ANSWERED BY ICC INDIA

Quote

One L/C stipulated

ORIGINAL INSURANCE POLICY IN NEGOTIABLE FORM FOR DDP + I INVOICE VALUE PLUS A MINIMUM OF 10 PERCENT COVERING ALL RISKS3/3 MULTIMODAL TRANSPORT DOCUMENT EVIDENCING GOODS SHIPPED ON BOARD AN OCEAN VESSEL FOR THAT PART OF THE SHIPMENT EFFECTED BY SEA, ISSUED TO ORDER AND BLANK ENDORSED MARKED FREIGHT PAID.

The issuing bank rejected the documents citing following discrepancies:


INSURANCE POLICY DOES NOT STATE "ALL RISKS" AND SHOWS SUM INSURED AS RS7761.60

BILL OF LADING DOES NOT EVIDENCE THE CARRIER AS PER ART 23A UCP500

Now there are two questions

1) Under what article the name of vessel has to be specified even in case of a multimodal transport document.I understand as per Article 26 a (i) "...........Any signature or authentication of the carrier, multimodal transport operator or master must be identified as carrier, multimodal transport operator or master, as the case may be.........."However, Position Paper No. 4 of ICC regarding transport documents states "Where the document is signed by the carrier, it is not necessary for the word 'carrier' to appear again in the signature box when it has already been used on the front of the document to identify the party acting as carrier.2) Institute Cargo clause(A) I presume is an all risk cover.Are the discrepancies valid.

Unquote

Analysis & Conclusion

1. The discrepancy that has been stated relates to the identification of the carrier of the goods i.e. the shipping line that is taking responsibility for the carriage of goods from the point of receipt to discharge and not the name of the vessel. The UCP requires that the transport document must quote the name of the carrier within the document. This can be by way of a specific statement i.e. Carrier is XYZ Company or by way of signing the document i.e. for XYZ company the carrier or ABC company as agents for XYZ company the carrier, or similar.

The B/L that has been presented does not clearly identify the name of the carrier. The fact that Maersk may be shown in bold print within the document is not sufficient identification for the purposes of UCP. The document is discrepant. The discrepancy should have referred to Article 26 and not Article 23.

2. The UCP states that where the credit specifies "all risks" this will be satisfied by a document that contains any 'all risk' notation. In general terms this has meant the actual inclusion of the words "all risks" within the document. However, in the recently approved ICC publication "International Standard Banking Practice for the Examination of Documents under Documentary Credits" - it is stated that Institute Cargo Clauses (A) is considered an All Risk term. On the basis of the ISBP it is not a discrepancy.

Quote

An irrevocable L/C was opened in favour of an Indian company for supply of dyed yarn on deferred payment basis (85 days after B/L date). The amount of credit mentioned was Not Exceeding USD22,900/-.

Transshipment was allowed and Partial Shipment not allowed.Among documents required:

Commercial invoice (original + 3 copies) duly dated, signed and stamped by beneficiary stating that the goods regarding quantity quality and prices are as per proforma invoice


Full set Clean on Board Ocean B/L issued to the order of XYZ notifying applicant marked freight prepaid.

The documents were sent to the issuing bank and they noted following discrepancies:

Amount of documents differ from L/C

Partial shipment not allowed

Present combined transport B/L

Are the discrepancies valid as per the documents presented alongwith the copy of L/C.

Unquote

Analysis and conclusion

The nature of goods is such that it can't be shipped to the perfect tonnage. Moreover, partial shipment is also not allowed. As per Article 39(c) of UCP500, "Unless a Credit which prohibits partial shipment stipulates otherwise, or unless sub-Article (b) above is applicable, a tolerance of 5% less in the amount of the drawing will be permissible, provided that if the Credit stipulates the quantity of the goods, such quantity of goods is shipped in full, and if the Credit stipulates a unit price, such price is not reduced. This provision does not apply when expressions referred to in sub-Article (a) above are used in the Credit". In this your particular case, the credit value of goods shipped is less than the permissible limit.

The L/C condition requires 'clean on board ocean bill of lading'. However, " combined transport bill of lading " with data content of a marine bill of lading, which means that it should clearly evidence port-to-port movement of cargo, i.e. not a combined transport, despite the heading of the document, is acceptable.

This covers the practice whereby some carriers use the same document for a marine bill of lading and/or for a combined transport bill of lading, the difference being that extra pieces of information which are included when the document is used as a combined transport bill of lading.

Controlling The Letter of Credit TransactionBy Margaret L. MosesOf Counsel

Exporters expecting to be paid under a letter of credit (referred to in this article as "LC" or "Credit") may be sadly disappointed. Although an LC is considered one of the most secure means of obtaining prompt payment for sale of goods, clients who are exporting should be made to understand that they can never totally control the payment process. Documents which are required to be presented under an LC are frequently prepared by other people, and may not meet the strict compliance standards required by the banking community for payment. Sometimes banks which have not properly ensured they will be adequately reimbursed by their customer (the buyer), have very narrowly applied LC principles to deny payment. They have been regularly upheld by courts on grounds that the seller has not strictly complied with the terms of the LC.


http://www.cfg-lawfirm.com/assocs/mlm.html

There are steps, however, that a prudent exporter can take to maximize his control of the LC process, thereby greatly increasing the likelihood of being paid under the LC. This article will first look at the scope of the problem, then discuss a ways of maintaining control of the LC process, as well as the legal and economic consequences of losing control.

THE SCOPE OF THE PROBLEMIt is difficult to obtain information from banks on how often letters of credit go wrong. Since banks are selling a product, it is understandable that there is little interest on their part in letting the public know how often the product does not work. A report was put together, however, by Britain's Midland Bank International (MBI) and the Simplification of International Trade Procedures Board (SITPRO), which found that during three random weeks, one out of two of all documentary presentations against credits were rejected. It was estimated that total letter of credit business gone wrong in Britain was five billion pounds annually. ("Euromoney Trade Finance Report", April, 1985.)

In the U.S., the National Council on Trade Documentation showed initial LC failure rates of 77% in Saint Louis, 75% in San Francisco, and for four banks in New York, 40%, 55%, 70% and 50%. Major companies, with a rejection rate of 49%, were as unsuccessful in obtaining payment as small organizations. The worst record was held by companies doing business in the 50 to 100 million dollar range, with a failure rate of 63.3% on LC's.

KNOWING THE RULESTo maximize the chance for payment under an LC, a seller/beneficiary must know the rules of the game. The rules are codified in a publication sponsored by the International Chamber of Commerce ("ICC"), known as the Uniform Customs and Practice for Documentary Credits. The latest version of the rules is ICC Publication No. 500, 1993 Revision(the UCP 500), which is in force as of January 1, 1994. Attorneys who advise clients about LC's should have a good understanding of the UCP 500. (Copies of the UCP 500 are available from ICC Publishing, Inc., 156 Fifth Avenue, Suite 820, New York, N.Y. 10010, Tel.: (212) 206-1150, Fax.: (212) 633-6025)

The rules in the UCP 500 are drafted by and for the banking community. One of the major purposes is to protect the banks from liability in LC transactions. The banks are providing a service - the financing of the transaction - and they expect to be protected from getting involved in disputes between the parties as to the terms of the contract of sale. For this reason "the independence principle" is a very important concept in LC transactions. This means that the LC, and the documents required under the LC for payment, are completely independent from the underlying transaction between buyer and seller.

The bank is not concerned with whether the contract between buyer and seller is being performed according to its terms. The bank's only concern is whether the documents presented by the seller conform to the documents required under the LC, and whether the documents are presented within the required time periods. The bank employees who examine documents presented under the LC are essentially clerks. Their job is not to


make judgment calls, but simply to see if the documents presented by the seller/beneficiary comply strictly with the documents required by the LC. It is therefore very important to assist clients in understanding the rules, because a lack of knowledge will only work to their detriment.

CONTROLLING THE PROCESSChoosing the Issuing Bank

An attorney should encourage clients to try to control the payment process from the outset. This means that when negotiating with the buyer, the seller should try to get the buyer to use a bank of the seller's choice to issue the LC. The seller should find out from its own bank, preferably a bank with a substantial international presence, what corresponding bank it uses in the country of the buyer. If the buyer can have the LC issued by that correspondent bank, the process can proceed more expeditiously.

At the very least, the seller should insist that the buyer use a bank that is well-known and highly regarded by the banking community. The seller's own bank can provide information on the financial status and reputation of the foreign bank. Since a major purpose served by an LC is that the issuing bank assumes the risk of the buyer's insolvency, if the bank itself is financially weak, the LC may not serve its purpose.

Confirming the Letter of Credit

If the seller does not have confidence in the bank of the buyer's choice, or if there is any question about the political stability of the foreign country where the issuing bank is located, then the LC should be confirmed by a U.S. bank. When a U.S. bank confirms an LC issued by a foreign bank, it takes upon itself the payment obligation. Thus, if a U.S. bank confirmed an LC, and subsequently, for political or economic reasons, the foreign bank could not reimburse the U.S. bank, the U.S. bank is nonetheless on the hook to pay the beneficiary under the LC.

There is a charge for confirmation, which becomes more expensive in proportion to how big a risk the U.S. bank believes it is taking in confirming the LC. There are some situations where the risk may appear so high that a U.S. bank will not agree to confirm at all. If the bank refuses to confirm because of political instability, advise the client to try to have the LC issued outside the politically unstable area, in a country such as Switzerland. The question of who pays the U.S. bank's confirmation charges is negotiable, but if not negotiated in advance, the bank will generally charge the beneficiary for this service.

Keeping Documents Simple

The seller should negotiate with the buyer prior to the issuance of the LC exactly what documents must be presented to the bank for payment under the LC. The most important thing from the seller's point of view is to have as few documents as possible, to have as simple a description as possible, and to be sure that all documents called for by the LC


can in fact be produced. Cases have occurred where one of the documents is a certificate supposed to be issued by the foreign government, which was simply never produced. Another problem can by created if the LC requires a document to be signed by someone under the control of the buyer. The document may not be signed by the right person, or may not be signed at all.

Almost all LC's require production of a commercial invoice and a transport bill of lading. With respect to the commercial invoice, the LC will typically state the description of the goods which must be found in the invoice. If the goods are not described in exactly the same way, the seller may not be paid. In one case where payment was denied, the LC required for the commercial invoice to describe the goods as "100% Acrylic Yarn". When the invoices were presented to the bank, they described the goods as "Imported Acrylic Yarn." Even though the packing list attached to the invoice described the goods as 100% Acrylic Yarn, the court upheld the bank's refusal to pay under the LC because the documents did not strictly comply with the requirements of the LC. Courtaulds North America, Inc. v. North Carolina National Bank, 528 F.2d 802 (4th Cir. 1975).

In many cases, even if the documents do not comply exactly, the buyer will agree to waive any discrepancies in the documents, and, if the bank agrees, the payment will occur. In the Acrylic Yarn case above, however, the buyer had gone into bankruptcy, and the trustee in bankruptcy would not agree to waive discrepancies. In another case, buyer and seller sought to amend the LC to correct a discrepancy. The bank, however, having never checked the financial status of its customer, the buyer, prior to issuing the LC, and having learned in the meantime that its customer might not be able to reimburse the bank if it paid the LC, refused to amend the LC. The court held that the issuer bank had no duty to amend a letter of credit upon the request of a customer and a beneficiary. AMF Head Sports Wear v. Ray Scott's All-Am. Sports Club, 448 F. Supp. 222 (1978). For a more recent case upholding bank's right not to amend LC, see Leaseamerica Corp. v. Northwest Bank Duluth, N.A., 940 F.2d 345 (8th Cir. 1991).

These cases teach three important lessons. First, documents must be accurate. Second, if there is a mistake or a problem with the documents which the LC requires to be presented, the seller/beneficiary should not ship goods until the LC has been amended. The UCP 500 makes clear that no amendment can take place unless the issuing bank, the confirming bank, if any, and the seller, agree to it. UCP 500, Article 9(d). Unless the seller has written confirmation from the bank that the amendment to the LC has been issued, and the confirming bank has accepted the amendment, he bears the risk that the LC will not be paid.

Third, a prudent seller will not let the buyer take possession of the goods until he has been paid under the LC. The reason should be obvious. If there are discrepancies in the documents preventing payment of the LC, a buyer in possession of the goods has much less incentive to waive discrepancies so the seller can be paid. If the seller is not paid by the bank, the buyer still has a contractual obligation to pay for goods, but the difficulty of collection can make the price drop substantially, even assuming the buyer is solvent and can pay something. Particularly when the goods have been shipped to a foreign country,


the attempt to collect payment can be quite costly. The buyer, knowing this, will undoubtedly attempt to negotiate a lower price, if he pays at all.

To keep goods out of the buyer's possession, the seller should be sure to have the marine bill of lading consigned to order of the bank. Since the marine bill of lading is a title document, a consignment to order of the bank gives the bank title to the goods until they have been paid for by the buyer. Assuming proper payment, the bank transfers title to the buyer, who can then take the bill of lading and go pick up the goods. If payment is not made, the bank has an obligation to hold the documents for the seller, or return them to the seller if instructed to do so by the seller. The buyer should not be able to get the goods without the title document.

A buyer may ask the seller to have the bill of lading made out to order and blank endorsed, and to send one or more sets to the buyer within a few days of shipping the goods. This is like writing a blank check. It enables the buyer to pick up the goods, and thereby provides him with a disincentive to waive any discrepancies in documents the seller presents to the bank. Given the high failure rate of initial presentations of documents under an LC, a seller needs to know he will have the buyer's cooperation in correcting discrepancies or in waiving them. The buyer's cooperation will be more forthcoming if he cannot get possession of the goods until any problems with discrepancies have been resolved.

Meeting the deadlines

Every LC has three important dates: the date by which goods must be shipped, the date by which documents must be presented, and the expiry date for the LC. A seller should make sure that each of these dates can be met, and should allow a large margin for error. After the LC has been issued, if the seller learns that the date for shipping goods cannot be met, he should not ship any goods until he obtains an amendment to the LC permitting later shipment.

If an LC which calls for transport documents does not contain a date by which documents must be presented, does this mean the seller can wait until the expiry date to present his documents? Not if he wants to be paid. Article 43 of the UCP 500 provides that if no time period after shipment is given in the Credit for presentation of documents, banks will not accept documents presented to them later than 21 days after shipment. An exporter unfamiliar with the 21 day rule of the UCP 500 could easily miss this deadline.

The exporter should make sure that the expiry date of the LC permits sufficient time to permit correction, if possible, of any mistakes in the documents. Under the UCP 500, once the documents are presented, the bank has a maximum of seven days to let the beneficiary know if there are any discrepancies. If discrepancies can be corrected, they must be corrected and the documents resubmitted before the expiry date of the LC. Thus the exporter should make sure that the expiry date allows enough time for errors to be rectified.


CONCLUSIONClients should understand that in working with LC's, it is most important to get good advice from the outset, to learn the rules of the game, and to proceed with great care. Once mistakes have been made, too often they are irreparable and costly.

Letter of Credit (LC) - Documentary / Commercial: Note: This definition is more involved than most found in The Dictionary of Financial Scam Terms© due to the myriad ways in which swindlers misrepresent Letters of Credit and their attending terms and possibilities. A solid, basic understanding of Letters of Credit is vital to recognizing the scams. Letters of Credit became necessary when trade between countries made it impossible to simply do business by handshake. They were initially introduced by the merchant banking system in Europe, and grew out of earlier contracts such as the "chop" in Asia and the personal "house" emblem embossed in hot wax used throughout Europe and Arabia. Originally, a Letter of Credit (LC) was quite literally that - a letter addressed by the buyer's bank to the seller's bank stating that they could vouch for their good customer, the buyer, and that they would pay the seller in case of the buyer's default. They were used then, as they are now, for any transaction wherein one or more parties to the transaction requires the comfort zone of guarantee of payment by a reputable bank. One may request a Letter of Credit for a transaction involving goods or services where the parties are on the other side of the world, or just across the street. Nowadays, LC's are formatted to provide fill-in spaces for the various documentary requirements of international or domestic business. An LC is issued by a bank on behalf of one of it's creditworthy customers, whose application for the credit has been approved by that bank. The sequence of information on an LC and the trade terms used are set forth in the standards established by INTERNATIONAL CHAMBER OF COMMERCE (ICC). The rules and language are very specific and cannot be changed, and are spelled out in the ICC's Uniform Customs and Practice for Documentary Credits - ICC Publication 500, or UCP500. The parties to a Letter of Credit are

(1) the Buyer (the applicant)

(2) the Buyer's bank (the issuing)

(3) the Beneficiary (the seller/payee)

(4) the beneficiary's bank (the ADVISING BANK).

(5) the CONFIRMING BANK (often the same as the advising bank) The LC outlines the conditions under which payment (credit) will be made to a third party (the Beneficiary). The conditions are specified by the buyer and may include insurance forms, Way Bills, Bills of Lading, Customs forms, various certificates - i.e. whatever documents the Buyer feels are necessary to safeguard the integrity of the purchased product or service upon delivery.


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It is the responsibility of the issuing bank to ensure, on behalf of its client (the Buyer), that all documentary conditions have been met before the Letter of Credit funds are released. In effect, a basic Letter of Credit is a financial contract between the bank, the bank's customer, and the beneficiary, and this contract* involves the transfer of goods or services against funds. *Not to be confused with the private contract between the Buyer and Seller. The private contract between the Buyer and the Seller is not included in the list of documents that must be physically presented for approval prior to release of payment. In order to get paid, the Beneficiary must present a DRAFT, or BILL OF EXCHANGE, plus the documents specified on the LC, to the advising bank. The documents are then forwarded to the issuing bank for approval. Upon notification of approval, the advising bank pays the Beneficiary the amount due, and processes the Draft through normal banking channels back to the issuing bank who then credits the advising bank for funds disbursed, just like any check. Please understand that the LC is a contract whose terms and conditions must be met, and that it is NOT a check. While a LC may be NEGOTIABLE, TRANSFERABLE, and ASSIGNABLE, it is the Draft created against the LC that is paid, and this Draft is issued by the same bank that issued the LC. It's also important to understand, as you will see under The Scam below, that a LC can be either REVOCABLE or IRREVOCABLE. The terms and conditions of a Revocable Letter of Credit can be changed by the issuing bank at any time without notice for its own reasons, and therefore cannot be confirmed as good and payable. It's impossible to guarantee that any financial instrument whose conditions of payment can be changed without notice will be payable at any given time. Until the terms and conditions are solidified, the requirements the Beneficiary must adhere to in order to receive payment are up in the air. An LC may be written for a short period of time, covering one shipment of goods and one single payment, or may be written as a REVOLVING LETTER OF CREDIT such that it renews as periodic shipments and attending documents are received and payment is released thereon. This is useful if the shipments are to be made periodically over the term of say, a year, as agreed upon between the Buyer and Seller in their private contract. (Note: a valid Letter of Credit never carries the term "one year and one day" which is a meaningless term created by fraudsters). The maturity date on a Letter of Credit is the date on which the full value of the credit is payable. Regardless of the terms and conditions of the LC, the buyer has to either have the funds on deposit in his bank to cover the full value, or has to have made other arrangements with his bank to cover the full value. A Letter of Credit cannot be purchased for only a small percentage of the face value and then cashed across the street for the full face value, a popular form of swindle-speak (see The Scam, below). In the case where the Buyer has made arrangements to reimburse his bank - the issuing bank, at a later date for payments made by the issuing bank upon approval,


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the LC is called a DEFERRED PAYMENT or USANCE LETTER OF CREDIT, in which case the Buyer can obtain his goods and pay the issuing bank at a later specified date. In international trade, a popular method of obtaining immediate funds against a Letter of Credit, for whatever financial reason the Beneficiary may have, is FORFAITING. The term "forfaiting" is noted here because it is so often used by swindlers, as opposed to "export factoring." Again, see The Scam, below. By using a forfaiting company or the forfaiting department at his bank, a Beneficiary can turn over all claims to the LC and in turn receive an amount less than the full value of the LC at maturity. The difference between the full value of the LC at maturity and the amount the forfaiting company pays for it is called the DISCOUNT. The Discount rate is based on a bevy of conditions including the creditworthiness of the Beneficiary, that of the issuing bank, and the stability and reputation of the country in which the issuing bank is located. The Beneficiary goes on his merry way with immediate cash in hand, and the forfaiting company assumes all risks and benefits of the LC. An in-depth review of all Letters of Credit with all their attending terms and circumstances of use will eventually find it's way into this dictionary. For now, and for the immediate purposes of outlining the scams listed below, the only other two LC's you need to understand are Commercial / Documentary Letters of Credit and STANDBY

LETTERS OF CREDIT. The Scam: A scammer is always careful to stipulate that a Letter of Credit must be irrevocable, negotiable, transferable, assignable, preferably revolving, and that he be named the Beneficiary. This is so that if by any chance the victim actually does purchase a legitimate LC, it can be easily handed over to the swindler with no recourse. Once that is accomplished, the swindler has every right to present himself to the issuing bank in order to obtain a Draft; however, in most instances the swindler insists that the victim obtain and hand over the Draft as well. Supposedly, the LC will then be entered into a Trade Program (HIGH-YIELD INVESTMENT

PROGRAM or HYIP) where it will be used to generate impossibly huge profits in an impossibly short time ("impossible" because the entire planet would go broke if their claims were true, or we'd all be wheeling around wheelbarrows full of cash to buy a loaf of bread). The victim is supposed to receive around 50% of the profits, and the Trader receives 50%. From this they are each to pay their respective INTERMEDIARIES. Forfaiting: While a Letter of Credit may be forfaited (also known as export factoring, the international trade equivalent of factoring), that is not a procedure to be taken up by the inexperienced. Without an intimate knowledge of trade finance, trade law, international politics and economics, and a career-based understanding of banks and banking, you can quickly find yourself up the creek without a paddle. Fraudsters truly enjoy using the term "forfaiting." I believe that this is because, especially when the native language of their intended mark is English, the term "factoring" is too readily understood. Nothing appeals more to the psyche than an exotic term, and swindlers make full use of this all too human trait. The scam is that one can purchase Letters of Credit either from banks or from Beneficiaries for far less than the face value (value at maturity), then "forfait" them at enormous profit. Just how this is done is never really explained and any attempts at


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getting an explanation are artfully turned aside or simply fabricated, or the SECONDARY

MARKET sale is inserted into the scam. The usual swindler approach involves persuading the target that a Letter of Credit can be purchased at enormous discount in exchange for the victim's funds, and that a few weeks or months later this same financial instrument will be worth hundreds of thousands more or can be sold for hundreds of thousands more. Sometimes the numbers slip into the hundreds of millions. Another form of patter would have you believe that you can purchase a Letter of Credit at Top-euro Bank for only 25 or 45% of the full value, immediately walk across the street to Prime-euro Bank and sell it for full value, then turn around and do the same thing the following day. The reason the swindler can do this is by special contract or dispensation with Top-euro, and you can be a lucky participant because the swindler likes you so much. A favored ploy is to insert the bogus term CUTTING HOUSE into the structure of the scam. Once again, this mixes a straight out Letter of Credit scam with the High-Yield Investment scam. In this scenario, the victim is told that LC's are BANK GUARANTEES, aka BG's or PBG's (Prime Bank Guarantees). According to the swindler, Bank Guarantees are printed out in bulk by the Cutting House, an alleged establishment much like a printing company that spits out financial instruments like the Treasury prints money, and does this on demand for Top or Prime European banks such as the one with which the so-called TRADER has a contract. If the Trader has a contract with or is "connected" to the so-called Cutting House, then the victim is made to feel he has really hit the jackpot. The Trader needs your funds to purchase the bulk LC's/BG's on a FUNDS-FIRST basis so they can be SEASONED overnight (seasoning actually takes at least a year), then sold to the Secondary Market the following day. The much-used statement is that this can be accomplished 40 times a year, except for the period between November 15th and January 15th of the following year. Why? Because supposedly all trading comes to a halt during that time. Another scam is to purport to be a PROVIDER of Letters of Credit. The phony Provider has a special in with Top or Prime banks and can obtain Letters of Credit on the victim's behalf. Most of those who fall for this are victims who are not creditworthy enough to apply for an LC through regular channels, or people who have no working knowledge as to how LC's are really used and therefore believe that there is some magic way to turn them into majestic profits. In this type of scam the value of the LC is almost always in the 100's of millions of dollars. There are yet more scams involving Letters of Credit, some of which are particular to Standbys and some of which involve fraud committed by financial institutions, exporters, importers, and any entity that has access to Letters of Credit in all their formats. For every type of Letter of Credit, there is an attending scam.

1) Letter of Credit

A document issued by a bank (issuing bank) stating its commitment to pay someone a stated amount of money on behalf of a buyer so long as the seller meets very specific terms and conditions. Letters of credit are more formally called documentary letters of credit.


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Before payment, the bank responsible for making payment on behalf of the buyer verifies that all documents are exactly as required by the letter of credit.

If an United States exporter is unfamiliar with the credit risk of the foreign bank, or if there is concern about the political or economic risk associated with the country in which the bank is located, it is advised that a letter of credit issued by a foreign bank be "confirmed" by a U.S. bank. This means that the U.S. bank adds its pledge to pay to that of the foreign bank. Letters of credit that are not confirmed are called "advised" letters of credit. The local Department of Commerce district office or an international banker will help exporters determine whether a confirmed or advised letter of credit is appropriate for a particular transaction.

Types of Letter of Credit

Irrevocable (unconfirmed)- A letter of credit that cannot be amended or cancelled without prior mutual consent of all parties to the credit. Such a letter of credit guarantees payment by the bank to the seller/exporter so long as all the terms and conditions of the credit have been met. This is the most popular form of letter of credit.

Revocable (confirmed)- A letter of credit that can be cancelled or altered by the drawee(buyer) after it has been issued by the drawee's bank. Revocable letter of credits are rarely used because of security concerns.

Transferable- A letter of credit that can be redirected at the sellers request. These are used when an export broker is involved. Once all conditions on the letter of credit are met, the broker's bank receives the payment, takes out his commission, and completes the transaction as negotiated.

Sight- A letter of credit that requires payment to be made upon presentation of documents.

Time Draft- A letter of credit that states payment is due within a certain time (usually 30, 60, 90, or 180 days).

Changes made to a letter of credit are called amendments. The fees charged by the banks involved in amending the letter of credit may be paid either by the buyer or the seller, but the letter of credit should specify which party is responsible. Since changes are costly and time-consuming, every effort should be made to get the letter of credit right the first time.

An exporter is usually not paid until the advising or confirming bank receives the funds from the issuing bank. To expedite the receipt of funds, wire transfers may be used. Bank practices vary, however, and the exporter may be able to receive funds by discounting the letter of credit at the bank, which involves paying a fee to the bank for this service. Exporters should consult with their international bankers about bank policy on these issues.


Payment and Risks with Letter of Credits:

Time of Payment

Goods Available to Importer

Risk to Exporter

Risk to Importer

Irrevocable At sight of presentation of documents to issuing bank; or specified number of days after acceptance by issuing bank

After Payment Risk lies with United States confirming bank

None

Revocable Same as Confirmed

After payment Risk lies with foreign issuing bank and economic conditions of issuing bank

None

Sight When shipment is made

After payment Risk lies with local confirming bank

Assured shipment is made, but relies on exporter to ship goods described in the documents

Time Draft At maturity of draft, may or may not be discounted

Usually before payment

Risk lies with local confirming bank

Assured shipment is made, but relies on exporter to ship goods described in the documents

Red Clause A percentage of total amount before shipment. Balance is

After payment See irrevocable and revocable

The percentage of payment in advance is at total risk. Balance same


same as type of L/C

as type of L/C

Revolving Letter of Credit

Variable Variable See irrevocable and revocable

None

Standby Letter of Credit

At time shipment is received

Usually before payment

Delay in payment. Also see irrevocable

None

Back-to-back Same as irrevocable

After payment None None

Transferable Same as irrevocable

After payment Same as irrevocable

None

Assignment of Proceeds

Same as irrevocable

After payment Same as irrevocable

None

2) Cash in Advance (CIA)

Usually used only for small purchases and when the goods are built to order.

3) Draft (or Bill of Exchange)

An unconditional order in writing from one person (the drawer) to another (the drawee), directing the drawee to pay a specified amount to a named drawer at a fixed or determinable future date. May be date, sight, or time draft.

4) Credit cards

Used mainly in transactions where the dollar value of the items sold is low and shipment is to be made directly to the end user.

5) Open Account

The exporter bills the customer, who is expected to pay under agreed terms at a future date. Some of the largest firms abroad make purchases only on an open account, which is a convenient method of payment if the buyer is well established and has demonstrated a long and favorable payment record.

6) Consignment Sales

Exporter delivers goods to an agent under agreement that the agent sell the merchandise for the account of the exporter. The agent sells the goods for commission and remits the net proceeds to the exporter.


7) Countertrade/barter

Sale of goods or services that are paid for in whole or in part by the transfer of goods or services from a foreign country.

Payment Problems

The best solution to a payment problem is to negotiate directly with the customer. If negotiations fail and the sum involved is large enough to warrant the effort, obtain the assistance of your bank, legal counsel, and other qualified experts. If both parties can agree to take their dispute to an arbitration agency, this step is faster and less costly than legal action. The International Chamber of Commerce handles the majority of international arbitrations and is usually acceptable to foreign companies because it is not affiliated with any single country.

For more information on these issues, contact the U.S. Council for International Business, American National Committee of the ICC, 212-354-4480; American Arbitration Association, 212-484-4000; Trade Remedy Assistance Office International Trade Commission, 202-205-2200.

Risk Factors Influencing Payment Terms:

Letter of Credit Cash on Documents

Open Account

Customer Relationship

New Established Established

Type of Order Custom Production Production

Political Situation Unstable Stable Strong

Economic Situation Unstable Stable Strong

Competition No Yes Yes

Volatility of Price Changing Downwards for Buyer

Yes No No

Cash Flow Timing and Needs

Yes Adjustable Adjustable

382-A:5-114 Assignment of Proceeds. – (a) In this section, ""proceeds of a letter of credit'' means the cash, check, accepted draft, or other item of value paid or delivered


upon honor or giving of value by the issuer or any nominated person under the letter of credit. The term does not include a beneficiary's drawing rights or documents presented by the beneficiary. (b) A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit. (c) An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment. (d) An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor. (e) Rights of a transferee beneficiary or nominated person are independent of the beneficiary's assignment of the proceeds of a letter of credit and are superior to the assignee's right to the proceeds. (f) Neither the rights recognized by this section between an assignee and an issuer, transferee beneficiary, or nominated person nor the issuer's or nominated person's payment of proceeds to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary, or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary's rights to proceeds is governed by Article 9 or other law. Against persons other than the issuer, transferee beneficiary, or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary's right to proceeds and its perfection are governed by Article 9 or other law.

75.1010 Short title. This chapter may be cited as Uniform Commercial Code–Letters of Credit. [1961 c.726 §75.1010]

75.1020 Definitions. (1) As used in this chapter:(a) “Adviser” means a person who, at the request of the issuer, a confirmer or another

adviser, notifies or requests another adviser to notify the beneficiary that a letter of credit has been issued, confirmed or amended.

(b) “Applicant” means a person at whose request or for whose account a letter of credit is issued. “Applicant” includes a person who requests that an issuer issue a letter of credit on behalf of another if the person making the request undertakes an obligation to reimburse the issuer.

(c) “Beneficiary” means a person who under the terms of a letter of credit is entitled to have its complying presentation honored. “Beneficiary” includes a person to whom drawing rights have been transferred under a transferable letter of credit.

(d) “Confirmer” means a nominated person who undertakes, at the request or with the consent of the issuer, to honor a presentation under a letter of credit issued by another.

(e) “Dishonor” of a letter of credit means failure timely to honor or to take an interim action, such as acceptance of a draft, that may be required by the letter of credit.

(f) “Document” means a draft or other demand, document of title, investment


security, certificate, invoice or other record, statement or representation of fact, law, right or opinion:

(A) That is presented in a written or other medium permitted by the letter of credit or, unless prohibited by the letter of credit, by the standard practice referred to in ORS 75.1080 (5); and

(B) That is capable of being examined for compliance with the terms and conditions of the letter of credit. A document may not be oral.

(g) “Good faith” means honesty in fact in the conduct of the transaction concerned.(h) “Honor” of a letter of credit means performance of the issuer’s undertaking in the

letter of credit to pay or deliver an item of value. Unless the letter of credit otherwise provides, “honor” occurs:

(A) Upon payment;(B) If the letter of credit provides for acceptance, upon acceptance of a draft and, at

maturity, its payment; or(C) If the letter of credit provides for incurring a deferred obligation, upon incurring

the obligation and, at maturity, its performance.(i) “Issuer” means a bank or other person that issues a letter of credit, but does not

include an individual who makes an engagement for personal, family or household purposes.

(j) “Letter of credit” means a definite undertaking that satisfies the requirements of ORS 75.1040 by an issuer to a beneficiary at the request or for the account of an applicant or, in the case of a financial institution, to itself or for its own account, to honor a documentary presentation by payment or delivery of an item of value.

(k) “Nominated person” means a person whom the issuer:(A) Designates or authorizes to pay, accept, negotiate or otherwise give value under a

letter of credit; and(B) Undertakes by agreement or custom and practice to reimburse.(L) “Presentation” means delivery of a document to an issuer or nominated person for

honor or giving of value under a letter of credit.(m) “Presenter” means a person making a presentation as or on behalf of a beneficiary

or nominated person.(n) “Record” means information that is inscribed on a tangible medium or that is

stored in an electronic or other medium and is retrievable in perceivable form.(o) “Successor of a beneficiary” means a person who succeeds to substantially all of

the rights of a beneficiary by operation of law, including a corporation with or into which the beneficiary has been merged or consolidated, an administrator, executor, personal representative, trustee in bankruptcy, debtor in possession, liquidator and receiver.

(2) Other definitions applying to this chapter and the sections in which they appear are:

“Acceptance” ORS 73.0409“Value” ORS 73.0303,

ORS 74.2110


(3) ORS chapter 71 contains certain additional general definitions and principles of construction and interpretation applicable throughout this chapter. [1961 c.726 §75.1020; 1997 c.150 §5]

75.1030 Application of chapter. (1) This chapter applies to letters of credit and to certain rights and obligations arising out of transactions involving letters of credit.

(2) The statement of a rule in this chapter does not by itself require, imply or negate application of the same or different rule to a situation not provided for, or to a person not specified in this chapter.

(3) With the exception of this subsection, subsections (1) and (4) of this section and ORS 75.1020 (1)(i) and (j), 75.1060 (4) and 75.1140 (4), and except to the extent prohibited in ORS 71.1020 (3) and 75.1170 (4), the effect of this chapter may be varied by agreement or by a provision stated or incorporated by reference in an undertaking. A term in an agreement or undertaking generally excusing liability or generally limiting remedies for failure to perform obligations is not sufficient to vary obligations prescribed by this chapter.

(4) Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary. [1961 c.726 §75.1030; 1993 c.545 §119; 1997 c.150 §6]

75.1040 Formal requirements. A letter of credit, confirmation, advice, transfer, amendment or cancellation may be issued in any form that is a record and is authenticated:

(1) By a signature; or(2) In accordance with the agreement of the parties to the standard practice referred to

in ORS 75.1080 (5). [1961 c.726 §75.1040; 1997 c.150 §7]

75.1050 Consideration. Consideration is not required to issue, amend, transfer or cancel a letter of credit, advice or confirmation. [1961 c.726 §75.1050; 1997 c.150 §8]

75.1060 Issuance, amendment, cancellation and duration. (1) A letter of credit is issued and becomes enforceable according to its terms against the issuer when the issuer sends or otherwise transmits it to the person requested to advise or to the beneficiary. A letter of credit is revocable only if it so provides.

(2) After a letter of credit is issued, rights and obligations of a beneficiary, applicant, confirmer and issuer are not affected by an amendment or cancellation to which that person has not consented except to the extent the letter of credit provides that it is revocable or that the issuer may amend or cancel the letter of credit without that consent.

(3) If there is no stated expiration date or other provision that determines its duration, a letter of credit expires one year after its stated date of issuance or, if none is stated, one year after the date on which it is issued.

(4) A letter of credit that states that it is perpetual expires five years after its stated date of issuance, or if none is stated, five years after the date on which it is issued. [1961 c.726 §75.1060; 1997 c.150 §9]


75.1070 Confirmer, nominated person and adviser. (1) A confirmer is directly

obligated on a letter of credit and has the rights and obligations of an issuer to the extent of its confirmation. The confirmer also has rights against and obligations to the issuer as if the issuer were an applicant and the confirmer had issued the letter of credit at the request and for the account of the issuer.

(2) A nominated person who is not a confirmer is not obligated to honor or otherwise give value for a presentation.

(3) A person requested to advise may decline to act as an adviser. An adviser that is not a confirmer is not obligated to honor or give value for a presentation. An adviser undertakes to the issuer and to the beneficiary to advise them accurately concerning the terms of the letter of credit, confirmation, amendment or advice received by that person and undertakes to the beneficiary to check the apparent authenticity of the request to advise. Even if the advice is inaccurate, the letter of credit, confirmation or amendment is enforceable as issued.

(4) A person who notifies a transferee beneficiary of the terms of a letter of credit, confirmation, amendment or advice has the rights and obligations of an adviser under subsection (3) of this section. The terms in the notice to the transferee beneficiary may differ from the terms in any notice to the transferor beneficiary to the extent permitted by the letter of credit, confirmation, amendment or advice received by the person who so notifies. [1961 c.726 §75.1070; 1997 c.150 §10]

75.1080 Issuer’s rights and obligations. (1) Except as provided in ORS 75.1090, an issuer shall honor a presentation that, as determined by the standard practice referred to in subsection (5) of this section, appears on its face strictly to comply with the terms and conditions of the letter of credit. Except as provided in ORS 75.1130 and unless otherwise agreed with the applicant, an issuer shall dishonor a presentation that does not appear to comply with the terms and conditions of the letter of credit.

(2) An issuer has a reasonable time after presentation, but not later than the seventh business day after the issuer receives the documents:

(a) To honor;(b) If the letter of credit provides for honor to be completed more than seven business

days after presentation, to accept a draft or incur a deferred obligation; or(c) To give notice to the presenter of discrepancies in the presentation.(3) Except as otherwise provided in subsection (4) of this section, an issuer is

precluded from asserting as a basis for dishonor:(a) Any discrepancy if timely notice is not given; or(b) Any discrepancy not stated in the notice if timely notice is given.(4) Failure to give the notice specified in subsection (2) of this section or to mention

fraud, forgery or expiration in the notice does not preclude the issuer from asserting, as a basis for dishonor, fraud or forgery as described in ORS 75.1090 (1) or expiration of the letter of credit before presentation.

(5) An issuer shall observe standard practice of financial institutions that regularly issue letters of credit. Determination of the issuer’s observance of the standard practice is a matter of interpretation for the court. The court shall offer the parties a reasonable opportunity to present evidence of the standard practice.


(6) An issuer is not responsible for:(a) The performance or nonperformance of the underlying contract, arrangement, or

transaction;(b) An act or omission of another person; or(c) Observance or knowledge of the usage of a particular trade other than the standard

practice referred to in subsection (5) of this section.(7) If an undertaking constituting a letter of credit under ORS 75.1020 (1)(j) contains

nondocumentary conditions, an issuer shall disregard the nondocumentary conditions and treat them as if they were not stated.

(8) An issuer that has dishonored a presentation shall return the documents or hold them at the disposal of, and send advice to that effect to, the presenter.

(9) An issuer that has honored a presentation as permitted or required by this chapter:(a) Is entitled to be reimbursed by the applicant in immediately available funds not

later than the date of its payment of funds;(b) Takes the documents free of claims of the beneficiary or presenter;(c) Is precluded from asserting a right of recourse on a draft under ORS 73.0414 and

73.0415;(d) Except as provided in ORS 75.1100 and 75.1170, is precluded from restitution of

money paid or other value given by mistake to the extent the mistake concerns discrepancies in the documents or tender that are apparent on the face of the presentation; and

(e) Is discharged to the extent of its performance under the letter of credit unless the issuer honored a presentation in which a required signature of a beneficiary was forged. [1961 c.726 §75.1080; 1997 c.150 §11]

75.1090 Fraud and forgery. (1) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:

(a) The issuer shall honor the presentation, if honor is demanded by:(A) A nominated person who has given value in good faith and without notice of

forgery or material fraud;(B) A confirmer who has honored its confirmation in good faith;(C) A holder in due course of a draft drawn under the letter of credit that was taken

after acceptance by the issuer or nominated person; or(D) An assignee of the issuer’s or nominated person’s deferred obligation that was

taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and

(b) The issuer, acting in good faith, may honor or dishonor the presentation in any other case.

(2) If an applicant claims that a required document is forged or materially fraudulent or that honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant, a court of competent jurisdiction may temporarily or permanently enjoin the issuer from honoring a presentation or grant similar relief against the issuer or other persons only if the court finds that:


(a) The relief is not prohibited under the law applicable to an accepted draft or deferred obligation incurred by the issuer;

(b) A beneficiary, issuer or nominated person who may be adversely affected is adequately protected against loss that it may suffer because the relief is granted;

(c) All of the conditions to entitle a person to the relief under the law of this state have been met; and

(d) On the basis of the information submitted to the court, the applicant is more likely than not to succeed under its claim of forgery or material fraud and the person demanding honor does not qualify for protection under subsection (1)(a) of this section. [1961 c.726 §75.1090; 1997 c.150 §12]

75.1100 Warranties. (1) If its presentation is honored, the beneficiary warrants:(a) To the issuer, any other person to whom presentation is made and to the applicant

that there is no fraud or forgery of the kind described in ORS 75.1090 (1); and(b) To the applicant that the drawing does not violate any agreement between the

applicant and beneficiary or any other agreement intended by them to be augmented by the letter of credit.

(2) The warranties in subsection (1) of this section are in addition to warranties arising under ORS chapters 73, 74, 77 and 78 because of the presentation or transfer of documents covered by ORS chapters 73, 74, 77 and 78. [1961 c.726 §75.1100; 1997 c.150 §13]

75.1110 Remedies. (1) If an issuer wrongfully dishonors or repudiates its obligation to pay money under a letter of credit before presentation, the beneficiary, successor or nominated person presenting on its own behalf may recover from the issuer the amount that is the subject of the dishonor or repudiation. If the issuer’s obligation under the letter of credit is not for the payment of money, the claimant may obtain specific performance or, at the claimant’s election, recover an amount equal to the value of performance from the issuer. In either case, the claimant may also recover incidental but not consequential damages. The claimant is not obligated to take action to avoid damages that might be due from the issuer under this subsection. If, although not obligated to do so, the claimant avoids damages, the claimant’s recovery from the issuer must be reduced by the amount of damages avoided. The issuer has the burden of proving the amount of damages avoided. In the case of repudiation, the claimant need not present any document.

(2) If an issuer wrongfully dishonors a draft or demand presented under a letter of credit or honors a draft or demand in breach of its obligation to the applicant, the applicant may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach.

(3) If an adviser or nominated person other than a confirmer breaches an obligation under this section or an issuer breaches an obligation not covered in subsection (1) or (2) of this section, a person to whom the obligation is owed may recover damages resulting from the breach, including incidental but not consequential damages, less any amount saved as a result of the breach. To the extent of the confirmation, a confirmer has the liability of an issuer specified in this subsection and subsections (1) and (2) of this section.


(4) An issuer, nominated person or adviser who is found liable under subsection (1), (2) or (3) of this section shall pay interest on the amount owed thereunder from the date of wrongful dishonor or other appropriate date.

(5) Reasonable attorney fees and other expenses of litigation shall be awarded to the prevailing party in an action in which a remedy is sought under this section.

(6) Damages that would otherwise be payable by a party for breach of an obligation under this section may be liquidated by agreement or undertaking, but only in an amount or by a formula that is reasonable in light of the harm anticipated. [1961 c.726 §75.1110; 1997 c.150 §14]

75.1120 Transfer of letter of credit. (1) Except as provided in ORS 75.1130, unless a letter of credit provides that it is transferable, the right of a beneficiary to draw or otherwise demand performance under a letter of credit may not be transferred.

(2) Even if a letter of credit provides that it is transferable, the issuer may refuse to recognize or carry out a transfer if:

(a) The transfer would violate applicable law; or(b) The transferor or transferee has failed to comply with any requirement stated in

the letter of credit or any other requirement relating to transfer imposed by the issuer that is within the standard practice referred to in ORS 75.1080 (5) or is otherwise reasonable under the circumstances. [1961 c.726 §75.1120; 1997 c.150 §15]

75.1130 Successor of beneficiary. (1) A successor of a beneficiary may consent to amendments, sign and present documents and receive payment or other items of value in the name of the beneficiary without disclosing its status as a successor.

(2) A successor of a beneficiary may consent to amendments, sign and present documents and receive payment or other items of value in its own name as the disclosed successor of the beneficiary. Except as provided in subsection (5) of this section, an issuer shall recognize a disclosed successor of a beneficiary as beneficiary in full substitution for its predecessor upon compliance with the requirements for recognition by the issuer of a transfer of drawing rights by operation of law under the standard practice referred to in ORS 75.1080 (5) or, in the absence of such a practice, compliance with other reasonable procedures sufficient to protect the issuer.

(3) An issuer is not obliged to determine whether a purported successor is a successor of a beneficiary or whether the signature of a purported successor is genuine or authorized.

(4) Honor of a purported successor’s apparently complying presentation under subsection (1) or (2) of this section has the consequences specified in ORS 75.1080 (9) even if the purported successor is not the successor of a beneficiary. Documents signed in the name of the beneficiary or of a disclosed successor by a person who is neither the beneficiary nor the successor of the beneficiary are forged documents for the purposes of ORS 75.1090.

(5) An issuer whose rights of reimbursement are not covered by subsection (4) of this section or substantially similar law and any confirmer or nominated person may decline to recognize a presentation under subsection (2) of this section.


(6) A beneficiary whose name is changed after the issuance of a letter of credit has the same rights and obligations as a successor of a beneficiary under this section. [1961 c.726 §75.1130; 1997 c.150 §16]

75.1140 Assignment of proceeds. (1) As used in this section, “proceeds of a letter of credit” means the cash, check, accepted draft or other item of value paid or delivered upon honor or giving of value by the issuer or any nominated person under the letter of credit. “Proceeds of a letter of credit” does not include a beneficiary’s drawing rights or documents presented by the beneficiary.

(2) A beneficiary may assign its right to part or all of the proceeds of a letter of credit. The beneficiary may do so before presentation as a present assignment of its right to receive proceeds contingent upon its compliance with the terms and conditions of the letter of credit.

(3) An issuer or nominated person need not recognize an assignment of proceeds of a letter of credit until it consents to the assignment.

(4) An issuer or nominated person has no obligation to give or withhold its consent to an assignment of proceeds of a letter of credit, but consent may not be unreasonably withheld if the assignee possesses and exhibits the letter of credit and presentation of the letter of credit is a condition to honor.

(5) Rights of a transferee beneficiary or nominated person are independent of the beneficiary’s assignment of the proceeds of a letter of credit and are superior to the assignee’s right to the proceeds.

(6) Neither the rights recognized by this section between an assignee and an issuer, transferee beneficiary or nominated person nor the issuer’s or nominated person’s payment of proceeds of a letter of credit to an assignee or a third person affect the rights between the assignee and any person other than the issuer, transferee beneficiary or nominated person. The mode of creating and perfecting a security interest in or granting an assignment of a beneficiary’s rights to proceeds is governed by ORS chapter 79 or other law. Against persons other than the issuer, transferee beneficiary or nominated person, the rights and obligations arising upon the creation of a security interest or other assignment of a beneficiary’s right to proceeds and its perfection are governed by ORS chapter 79 or other law. [1961 c.726 §75.1140; 1985 c.676 §75.1140; 1993 c.545 §120; 1995 c.328 §68; 1997 c.150 §17]

75.1150 Statute of limitations. An action to enforce a right or obligation arising under this chapter must be commenced within one year after the expiration date of the relevant letter of credit or one year after the cause of action accrues, whichever occurs later. A cause of action accrues when the breach occurs, regardless of the aggrieved party’s lack of knowledge of the breach. [1961 c.726 §75.1150; 1997 c.150 §18]

75.1160 Choice of law and forum. (1) The liability of an issuer, nominated person or adviser for action or omission is governed by the law of the jurisdiction chosen by an agreement in the form of a record signed or otherwise authenticated by the affected parties in the manner provided in ORS 75.1040 or by a provision in the person’s letter of credit, confirmation or other undertaking. The jurisdiction whose law is chosen need not bear any relation to the transaction.


(2) Unless subsection (1) of this section applies, the liability of an issuer, nominated person or adviser for action or omission is governed by the law of the jurisdiction in which the person is located. The person is considered to be located at the address indicated in the person’s undertaking. If more than one address is indicated, the person is considered to be located at the address from which the person’s undertaking was issued. For the purpose of jurisdiction, choice of law and recognition of interbranch letters of credit, but not enforcement of a judgment, all branches of a bank are considered separate juridical entities and a bank is considered to be located at the place where its relevant branch is considered to be located under this subsection.

(3)(a) Except as provided in this subsection, the liability of an issuer, nominated person or adviser is governed by any rules of custom or practice, such as the Uniform Customs and Practice for Documentary Credits, to which the letter of credit, confirmation or other undertaking is expressly made subject.

(b) Except to the extent of any conflict with the nonvariable provisions specified in ORS 75.1030 (3), rules of custom or practice govern if:

(A) This chapter would govern the liability of an issuer, nominated person or adviser under subsection (1) or (2) of this section;

(B) The relevant undertaking incorporates rules of custom or practice; and(C) There is conflict between this chapter and those rules as applied to that

undertaking.(4) If there is conflict between this chapter and ORS chapters 73, 74, 74A or 79, this

chapter governs.(5) The forum for settling disputes arising out of an undertaking under this chapter

may be chosen in the manner and with the binding effect that governing law may be chosen in accordance with subsection (1) of this section. [1961 c.726 §75.1160; 1973 c.504 §4; 1997 c.150 §19]

75.1170 Subrogation of issuer, applicant and nominated person. (1) An issuer that honors a beneficiary’s presentation is subrogated to the rights of the beneficiary to the same extent as if the issuer were a secondary obligor of the underlying obligation owed to the beneficiary and of the applicant to the same extent as if the issuer were the secondary obligor of the underlying obligation owed to the applicant.

(2) An applicant that reimburses an issuer is subrogated to the rights of the issuer against any beneficiary, presenter or nominated person to the same extent as if the applicant were the secondary obligor of the obligations owed to the issuer and has the rights of subrogation of the issuer to the rights of the beneficiary stated in subsection (1) of this section.

(3) A nominated person who pays or gives value against a draft or demand presented under a letter of credit is subrogated to the rights of:

(a) The issuer against the applicant to the same extent as if the nominated person were secondary obligor of the obligation owed to the issuer by the applicant;

(b) The beneficiary to the same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the beneficiary; and

(c) The applicant to same extent as if the nominated person were a secondary obligor of the underlying obligation owed to the applicant.


(4) Notwithstanding any agreement or term to the contrary, the rights of subrogation stated in subsections (1) and (2) of this section do not arise until the issuer honors the letter of credit or otherwise pays. The rights in subsection (3) of this section do not arise until the nominated person pays or otherwise gives value. Until the rights in subsections (1), (2) or (3) of this section arise, the issuer, nominated person and the applicant do not derive under this section present or prospective rights forming the basis of a claim, defense or excuse. [1961 c.726 §75.1170; 1997 c.150 §20]

75.1180 Security interest of issuer or nominated person. (1) An issuer or nominated person has a security interest in a document presented under a letter of credit to the extent that the issuer or nominated person honors or gives value for the presentation.

(2) As long as and to the extent that an issuer or nominated person has not been reimbursed or has not otherwise recovered the value given with respect to a security interest in a document under subsection (1) of this section, the security interest continues and is subject to ORS chapter 79, but:

(a) A security agreement is not necessary to make the security interest enforceable under ORS 79.0203 (2)(c);

(b) If the document is presented in a medium other than a written or other tangible medium, the security interest is perfected; and

(c) If the document is presented in a written or other tangible medium and is not a certificated security, chattel paper, a document of title, an instrument, or a letter of credit, the security interest is perfected and has priority over a conflicting security interest in the document as long as the debtor does not have possession of the document. [2001 c.445 §148]

Note: For transition provisions regarding secured transactions, see notes under 79.0628.
