Interpretation and Application of UCP 600 – Part 3 XXV Latin American Foreign Trade Congress - CLACE Guatemala June 3-5

1. Interpretation and Application of UCP 600 – Part 3 XXV Latin American Foreign Trade Congress - CLACE Guatemala June 3-5, 2009 Gary Collyer Collyer Consulting LLP

2. Corporate view of UCP 600: Easier to read, follow and apply; Clearer rules that leave little room for banks to “manipulate” or interpret to their liking; Widespread adoption by banks together with application of the ISBP publication; Need for applicant’s to grasp that the UCP 600 does not only benefit the beneficiary; The content and structure of UCP 600 should encourage more usage of the documentary credit as a means of payment ; An opportune time to review current practices and look for better documentary credit structures; Use the impetus of UCP 600 to seek out new buyers and suppliers; and A reduction in discrepancy rates has been seen in many countries. First Experiences with UCP 600 to July 2008

3. Bank view of UCP 600: Easier to read, follow and apply; Clearer rules that leave little room for issuing banks to “manipulate” or interpret to their liking; Widespread adoption by banks together with application of the ISBP publication; Increased usage of documentary credits already seen in markets such as Asia and Middle East. For example, China is now number 1 issuer of documentary credits globally and the Middle East is projecting increases in usage of around 15-20% per annum; Banks are now promoting documentary credits as an offering whereas in the past it was not a ‘priority’ product; An opportune time to review current practices and look for better documentary credit structures and guidelines; A reduction in discrepancy rates has been seen in many countries. First Experiences with UCP 600 to July 2008

4. Corporate views now: “The fees are too high and impossible to anticipate” “It takes weeks to get paid when it should only take days” “The banks are too picky when checking my documents” “The banks are inconsistent in what they consider discrepancies” “I can’t get my L/Cs routed through my preferred bank” Applying UCP 600 and ISBP

5. Corporate views now: “I can’t get my L/Cs confirmed by a bank acceptable to me” “Getting answers to my questions is like pulling teeth” “The information that I receive is awful” “The bankers and I do not understand one another” “There are just too many banks involved and I can’t keep track” Applying UCP 600 and ISBP

6. When certain rules of UCP 600 are expressly modified or excluded by the credit for material items, such as the period for making a refusal as per article 16, then what is the sanctity of UCP? Answer: The sanctity of the UCP remains to the extent that exclusions are not used to abuse the process. If exclusions or modifications are made that worsen the position of the beneficiary or nominated bank then it is for those parties to determine whether or not they can act under those conditions. If not, an amendment should be sought. It is often the case that modifications and, in particular, exclusions are made due to a misunderstanding of the meaning and intent of the rule. Article 1

7. An issuing bank accepts a complying presentation and communicates the maturity date to the nominated bank, post which the nominated bank negotiates, is this covered under the definition of negotiation? Answer: Article 2 refers to negotiation being the purchase of drafts and/or documents under a complying presentation. Sub-article 12 (c) states that the receipt or examination and forwarding of documents by a nominated bank do not constitute negotiation. If, at the time of presentation, a nominated bank is not willing to act on its nomination, which in this case is to negotiate a complying presentation, then they should request the issuing bank in their covering schedule to authorise their negotiating on receipt of an advice from the issuing bank that documents have been accepted by them. Article 2

8. Branches of a bank in different countries are considered to be separate banks. What does this mean? Can I understand that branches of a bank in the same country are considered to be the same bank? Answer: Branches of a particular bank are able to perform different functions as envisaged by the UCP provided they are based in different countries. For example, if a bank in London issues a letter of credit, its branch in Manchester cannot confirm it as they are both in the same country and, therefore, considered to be the same bank. However, if the same bank in London issues a letter of credit and its office in Dubai were requested to add its confirmation then this is acceptable under article 3, (but not necessarily acceptable to the beneficiary) as the branches are in different countries. Article 3

9. How should the nominated bank act if they receive a letter of credit which has a copy of the underlying contract as an integral part of the credit? Answer: Ideally, they should revert to the issuing bank requesting the removal of this condition and referring them to the contents of article 4. If the nominated bank is willing to act under the credit i.e., review the documents against that contract, then they need take no further action. The rule is designed to protect a nominated bank that does not wish to (or should not) be burdened with additional, and often unnecessary, examination requirements. Article 4

10. Should a bank review documents such as inspection documents, certificates of analysis etc. to ensure that there are no derogatory comments regarding the goods? Answer: No. This is not the responsibility of a bank. Sub-article 14 (a) emphasises that banks examine a presentation on the basis of the documents alone as to whether or not they appear on their face to constitute a complying presentation. If the applicant requires that documents not contain any adverse comments or that documents should bear specific statements as to the quality or standard of the goods, this must form part of the terms and conditions of the credit. Article 5

11. Credit states that it is available with the issuing bank by payment or deferred payment. However, in field 31D of the MT700, it states the place of expiry is the country of beneficiary. Our opinion is that the credit should expire at the counters of the issuing bank and not the country of the beneficiary. Does our opinion seem correct or not? Answer: Ideally, the place of availability and the place of expiry should match. In the example that you have given, the credit is only available for presentation of documents in the country of the beneficiary. Provided the documents are presented to the named bank (or any bank if that option is stated) within the expiry date and otherwise comply when they reach the counters of the issuing bank, the issuing bank must honour even if the credit had expired by the time that they received the documents. If the beneficiary required a nominated bank to act under the credit then they must seek an amendment to make the credit available with a nominated bank by honour or negotiation. Article 6

12. MT700 sent at 9.00am on 10 October 2008 and MT799 sent at 3pm on 10 October 2008. The content of MT799 is to correct information in the MT700. Both of them are issued on the same day. Can we treat the MT799 as an amendment? Answer: Sub-article 7 (b) states that the issuing bank is irrevocably bound as of the time that the credit is issued. Unless the content of the MT799 is critical to the structure of the MT700 representing a workable credit that is acceptable under the UCP, it will be considered to be an amendment. Article 7

13. Does a confirming bank only undertake its confirmation obligations in respect of documents that are presented to that confirming bank? Answer: This will depend on the wording of the confirmation advice. If the wording states that the confirmation applies to the extent that complying documents are presented to the confirming bank in accordance with the terms and conditions of the credit, then the obligations only arise against a presentation so made to the confirming bank. If the advice states something like “we confirm this credit” and it is available with any bank, the confirmation will also stand for presentations made to another nominated bank (see sub-article 8 (a) (i) (b-e)). Article 8

14. How to define the advising bank’s responsibility in respect of “advice accurately reflects the terms and conditions of the credit or amendment received”? Answer: Sub-article 9 (b) for the advising bank and sub-article 9 (c) for the second advising bank, recognise the responsibility of such banks to ensure that all the details of a credit or amendment are advised to the beneficiary. It can happen that when photocopying a credit or amendment that has been received, part of the message is not copied due to the folding of the document to accommodate the photocopier. The rules require the bank to ensure that all the details of a credit or amendment that are relevant to the beneficiary are sent to the beneficiary. There may be information that appears in a credit or amendment that is between the two banks e.g., financing requests, interest details or bank account numbers etc. that are of no concern to a beneficiary. These may be conveyed to a beneficiary or deleted from the advice that is sent to the beneficiary. Article 9

15. The beneficiary is entitled to express his acceptance or refusal of an amendment by presenting documents. If the amendment is about fees, say “discount charges payable by the applicant” changed to “discount charges payable by the beneficiary”, does a presentation by the beneficiary mean that the beneficiary has accepted the amendment, or how must the beneficiary express its acceptance or refusal of this amendment? Answer: This is a form of amendment that examination of the documents will not determine acceptance or rejection. Enquiries must be made of the beneficiary to determine whether or not they have accepted the amendment, before proceeding with the honour or negotiation of the documents. Article 10

16. If an issuing bank issues a pre-advice of a credit can they subsequently advise that they are cancelling the credit? Answer: No. The rule in sub-article 11 (b) is quite clear – the issuing bank is irrevocably committed to issue the operative credit. If a bank has any doubt as to whether a credit will be issued, no pre-advice should be sent. Article 11

17. A nominated bank receives documents from a beneficiary under a deferred payment credit and forwards the documents to the issuing bank without providing an undertaking to the beneficiary (nor does it give any commitment to do so on a future date). If the bank discounts the same set of documents after acceptance by the issuing bank, does the bank enjoy the same position as a bank which had provided an undertaking prior to forwarding documents to the issuing bank? Answer: In order to “discount” under the deferred payment, the nominated bank would be wise to request the agreement of the issuing bank to incur their deferred payment undertaking and then to prepay thereunder. Discounting, by a nominated bank, of the issuing bank’s deferred payment undertaking is not covered by sub-article 12 (b). Article 12

18. Why is article 13 split into sub-articles (a) and (b)? Do not the conditions specified in sub-article (b) apply to all bank-to-bank reimbursement arrangements? Answer: Ideally, all banks would use the ICC’s rules on bank-to-bank reimbursements. However, this is not the case. There is therefore a need for UCP to state if the bank- to-bank reimbursement rules are to apply then those provisions will prevail. For those transactions not subject to URR the content of sub-article 13 (b) will prevail. The conditions expressed in the bank-to-bank reimbursement rules are far more comprehensive and detailed than those in sub-article 13 (b), so as to encourage usage of URR. Article 13

19. Very often credit’s will require presentation of a Forwarders Certificate of Receipt (FCR). Why did ICC not take this trend into consideration whilst drafting UCP 600 and include coverage of a requirement for an FCR? What date do we take as shipment date in the case of an FCR - cargo received date, issue date or sailing date (if indicated)? Answer: Basically, very few ICC national committees raised this as a requirement for inclusion as a “new” item for UCP 600. It should be remembered that a FCR is not a transport document, it is a receipt. A credit should not require a FCR to include a shipment date or details of shipment. If that is the requirement of an applicant then a bill of lading, air waybill, multimodal type transport document, road or rail transport document etc. should be called for as those are the documents that evidence receipt and shipment of goods. Article 14

20. Five banking days is the maximum time for banks to examine documents. What is the maximum time for banks to pay the proceeds to a beneficiary under a sight credit? Answer: When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determine that the documents comply they must either honour or negotiate. The maximum time for honour or negotiation will be affected by the reimbursement conditions that are stated in the credit. For example, if a credit states that the confirming bank is to claim reimbursement value 3 working days following the determination of compliance of the documents, then the settlement to the beneficiary will be with a value date that matches the value that the confirming bank expects to be reimbursed. Article 15

21. LC states: USD500 will be deducted for documents that contain discrepancies. Issuing bank checks the documents and finds discrepancies. The applicant and issuing bank decide to waive the discrepancies and pay the proceeds within the 5 banking days and the issuing bank deducts a USD500 discrepancy fee. Is this correct? Answer: Firstly, a fee of USD500 for discrepancies seems quite exorbitant. The situation that you highlight reflects a number of transactions i.e., where the issuing bank identifies discrepancies but before a refusal is sent the applicant provides their waiver. The presenter is unaware of the discrepancies but has a deduction for a discrepancy fee. In an ideal world the bank would deduct the fee and outline the discrepancies that had been observed and waived. In this way, the nominated bank could question the validity of them, if applicable. The fact that the issuing bank has not advised the discrepancies, does not stop the nominated bank seeking a subsequent advice of them for their consideration. Article 16

22. In sub-article 17 (a) it says that the presenter must present at least one original document. In case one original must be presented to the applicant direct, can I present a copy? Answer: If the credit specifically states that an original of all or certain documents must be sent to the applicant, this would be seen as a modification of the rule unless the document was issued in more than one original in which case it would still be possible for an original to be presented. Article 17

23. Sub-article 18 (c) – ‘corresponds’ means mirror image or not on the invoice? Answer: Reference to “corresponds” does not mean a mirror image, although in most instances the beneficiary will repeat the goods description word for word so as to avoid any possible dispute on the wording. Use of ‘corresponds’ allows for the goods description to appear in a number of places on the invoice (not necessarily in one place or field) and to reflect what has actually been shipped rather than the quantities that may be shown in the credit. For example, in a credit allowing partial shipments and a goods description of 20 cars, 20 taxis and 20 vans, the beneficiary may only ship 15 cars in the first shipment. The invoice for this presentation would only make reference to the 15 cars that were shipped. It is not a mirror image but the description ‘corresponds’. Article 18

24. Credit requires an ocean BL with port of discharge ‘any USA port’. Documents presented: B/L shows port of discharge: Los Angeles Place of delivery: Ontario (an inland waterway Depot) Should this transport document be checked under article 19 of UCP 600? Does the ocean BL stipulation in the credit comply with a transport document covering at least 2 modes of transport? Answer: The document would be examined under article 20. The document covers a port to port shipment with an inland final destination that is beyond the requirements of the credit. Article 19

25. A Bill of Lading shows in its heading or in the top right hand corner “XYZ Ltd.” It is signed by “XYZ Ltd as carrier” instead of XYZ Ltd, the carrier” Can it be deemed as correctly signed? Answer: Yes, a bill of lading that is signed “as carrier” indicates the party signing is the carrier of the goods. Article 20

26. What is the basic difference between a non-negotiable sea waybill and a bill of lading? Answer: A non-negotiable sea waybill is, as the title suggests, a non-negotiable document and therefore not a document of title. This type of document is not issued “to order” of a named party, it is straight consigned. The consignee is not normally required to present an original of the non-negotiable sea waybill in return for their goods. A bill of lading is capable of being a document of title when issued “to order” of a named party. The “order party” is normally required to submit one of the original bills of lading in return for their goods. Article 21

27. Is a bill of lading stating “Freight payable subject to charter party”, a charter party bill of lading? Answer: This is one of the ways in which a bill of lading would indicate that it is subject to a charter party. Article 22

28. Air waybill showing under description of goods, a notation ‘Flight no: MH108, Flight date: 07 Sep 2007’ Will it be acceptable? Can we take the flight date as shipment date or we must look for wording like ‘Actual Shipment date’ or Actual date of dispatch’? Answer: If a notation is shown and it is under the goods description field it will be acceptable and the date will be taken as the date of shipment. In bills of lading, it is often the case that the on board notation appears in the area reserved for the goods description etc. There is no requirement for the word “actual” to appear. It is taken that the date shown in a notation indicates the ‘actual’ date of shipment. Article 23

29. LC is asking for truck consignment note. Is it necessary that it should be issued on the transport company letterhead? If we issue the truck consignment note on beneficiary letterhead will it be acceptable? Answer: Sub-article 14 (l) states that a transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23 or 24 of UCP 600. Any party would include the beneficiary. Article 24

30. A credit required a non-negotiable set of documents to be sent to the applicant and a courier receipt was to accompany the documents. Should the courier receipt be checked according to article 25? Answer: No. Article 25 covers the despatch of goods by courier service not the sending of documents to an applicant. Article 25

31. A bill of lading includes a field with the pre-printed wording “particulars furnished by the shipper”. In this field there is a goods description plus a freight paid stamp and an on board notation. Can it be deemed that the freight paid stamp and on board notation were “furnished by the shipper” and not the carrier or their agent? Answer: The pre-printed wording needs to be observed in the context of the bill of lading prior to the insertion of any data. The wording relates to the heading in that particular field, i.e., goods description and any packing details. It does not relate to other forms of data that may be stated later e.g., indications of freight paid or collect, on board notation or statements of goods being loaded on deck. Article 26

32. A bill of lading bears the words “clean on board” but the word “clean” has been deleted and this deletion has been authenticated by the agent of the carrier. Does this make the document discrepant? Can it be deemed to be ‘unclean’? Answer: No. As mentioned in question 27.1, most carriers and their agents will not allow the word “clean” to appear on the transport document. The fact that the word ‘clean’ was added and then deleted does not make the document unclean unless it contains a clause or notation that expressly declares a defective condition of the goods or their packaging. Article 27

33. If an insurance policy indicating covering ICC (A), excludes ICC (A) it does not meet the credit requirements, if it asks for an insurance policy covering ICC (A). If the insurance policy states covering ICC (A) excluding clause xx (ICC (A) has a number of different clauses) does it meet the requirement of the credit? Answer: Yes, sub-article 28 (i) allows for the exclusion of any clauses in an insurance document. The intent is that the entire risk i.e., ICC (A) is not excluded. Article 28

34. In relation to sub-article 29 (b) many banks print the sentence “all terms and conditions are complied with” in their covering schedule (despite the fact that many presentations contain discrepancies) and the date of the covering schedule is often much later than the expiry date (i.e., in some case more than 1 or 2 months). Can an issuing bank reject the documents for the reason of late presentation despite the presenting banks declaration? Answer: This is not really an issue that is covered by sub-article 29 (b). If a schedule is dated some time after the expiry date of the credit – especially 1 or 2 months – the issuing bank would be entitled to seek an explanation for the delay in sending the documents. Hopefully, the wording now included in article 15 will stop the practice of banks holding on to documents for a period of time. Article 29

35. For the purpose of sub-article 30 (b) what types of quantities or goods are considered as individual items or packing units? Answer: 1000 Computers, 1500 Tyres, 10,000 Pens would be types of individual items. 500 boxes or 50 pallets would be types of packing units. 5,000MT of Rice, 10,000 Gallons of Oil would not be types of packing units or individual items. Article 30

36. A credit stipulates that partial shipments are not allowed. The beneficiary presents five sets of charter party bills of lading. The contents of the bills of lading are almost identical, except the quantity and date. On the bills of lading the vessel, port of loading and port of discharge are the same but the shipped on board date varies over a period of 3 or 4 days. Is this a partial shipment or not? Answer: No. The goods are on the same vessel, for the same journey, voyage and destination. This is not a partial shipment provided the quantity evidenced on the five sets of charter party bills of lading meets the requirements of the credit and article 31. Article 31

37. According to article 32, if a beneficiary does not ship the goods within the period allowed for an instalment, the credit will cease to be available for that and any subsequent instalment. If an instalment is missed and the beneficiary requests the applicant to amend the credit in respect of the shipment schedule, is the credit still available for that and any subsequent instalment? Answer: Yes, the applicant may request that the issuing bank issue an amendment to reinstate the schedule and the credit. Article 32

38. If the bank puts the date and time of presentation on a document of the presenter (i.e., a receipt), and if the time is after banking hours, can the documents be presumed received the next day? Answer: The bank would be well advised to qualify the receipt that although signed for today they are received for the work of the following banking day. A receipt signed after banking hours of one day could be seen as the bank agreeing to accept the documents for that day’s work despite the content of article 33. Article 33

39. Is it part of a bank’s responsibility to ensure that for documents issued by parties other than the beneficiary, that they have been issued by the stated company and signed by an authorized person of that company? Answer: Banks have no responsibility with regard to the creation and signing of documents or the data that appears therein. Sub-article 14 (a) and article 34 make it clear that banks determine, based on the documents alone, whether or not, on their face, the documents comply with the terms and conditions of a credit. Article 34

40. Where the documents have been lost in transit between the nominated bank and the issuing bank, which bank is responsible? Answer: Provided the nominated bank has acted on its nomination by examining the documents and determining compliance (whether or not they have honoured or negotiated) and sent the documents to the issuing bank in the manner that may be described in the credit (i.e., in 2 mails, by courier etc.) then the issuing bank is bound to honour if the documents did comply. Article 35

41. A bill under a credit is due on 05.02.2008. Issuing bank employees announce a strike on 05.02.2008. In this circumstance, when will the bill be settled - on 04.02.08 or 06.02.08? Answer: As the bank is closed on the date that the payment is due it would be payable on the next working day. However, in most cases the settlement of the bill would require action at some point prior to the due date in order that the funds were received in the place of payment by the due date. In which case, the fact that the issuing bank was closed on the due date would not affect the settlement to the nominated bank or beneficiary on the due date. Article 36

42. A nominated bank receives a presentation of documents and effects honour thereunder, deducting certain fees. They realise a short while later that they have forgotten to deduct their advising fee. Are they able to claim from the issuing bank citing sub-article 37 (c)? Answer: No. The nominated bank had an opportunity to deduct the fees from the presentation and failed to do so. They are not afforded any protection under sub-article 37 (c) for the fees that they failed to collect from a presentation that was made to them. Article 37

43. Could the 1st beneficiary substitute documents (other than the invoice and draft) for those of the 2nd beneficiary? Answer: Sub-article 38 (h) provides for the 1st beneficiary to substitute their own invoices and drafts, if any. Substitution of any other documents will be with the agreement of the transferring bank. The transferring bank is under no obligation to allow substitution of any other documents. Article 38

44. Must the bank that gives a notice of assignment endorse the original credit? Answer: There is no requirement for this to occur but a number of banks do complete such an endorsement. Banks will usually cover their position by sending a separate notice to the assignee in which it is stated that the assignment will only be fulfilled if documents are presented to that bank, that the documents comply with the credit and that honour or negotiation occurs. In this way, the bank protects itself should there be (a) no presentation, (b) a presentation is made but is discrepant and the applicant refuses to provide a waiver, and (c) that the documents comply but for one reason or another honour or negotiation does not occur. Article 39

45. Thank You Contact : Gary Collyer, Collyer Consulting LLP Email : gary@collyerconsulting.com Applying UCP 600 and ISBP