Interpretation and Application of

1

• Interpretation and Application of
• UCP 600 Part 2
• XXV Latin American Foreign Trade Congress - CLACE
• Guatemala
• June 3-5, 2009
• Gary Collyer
• Collyer Consulting LLP

2
Applying UCP 600 and ISBP

• Handling of Discrepant Documents

3
Handling of Discrepant Documents

• Examination of Documents
• A nominated bank acting on its nomination, a
  confirming bank, if any, and
• the issuing bank are required to examine the
  documents within a maximum
• of 5 banking days following the day of
  presentation. In the event of
• discrepancies being observed, the applicable bank
  is required to provide a
• notice of refusal (according to UCP 600 article
  16) to the presenter, no later
• than the close of that 5th banking day.
• The examination of the documents takes three
  steps
• 1. examination of the documents against the
  terms of the LC
• 2. examination of the documents against the
  applicable provisions of UCP
• 3. examination of the data in the documents with
  similar data in other stipulated documents.

4
Handling of Discrepant Documents

• Conforming and non-conforming documents
• UCP 600 article 15 requires that when a bank
  determines that the
• documents represent a complying presentation that
  they honour or negotiate
• and, in the case of a confirming or nominated
  bank, forward the documents
• to the issuing bank.
• When a nominated bank acting on its nomination, a
  confirming bank or an
• issuing bank have determined that the documents
  do not comply, they must
• act according to the requirements of UCP 600
  article 16.
• A refusal notice indicating the discrepancies
  that have been determined and
• the status of the documents must be sent to the
  presenter no later than the
• close of the 5th banking day following the day of
  presentation.

5
Handling of Discrepant Documents

• Standard for Examination of Documents - UCP 600
  sub-article 14 (d)
• General principle for all documents
• Data in a document, when read in context with the
  credit, the document itself
• and international standard banking practice, need
  not be identical to, but
• must not conflict with, data in that document,
  any other stipulated document
• or the credit.
• Note
• No reference to inconsistency.
• Data need not be identical, but must not conflict.

6
Handling of Discrepant Documents

• .

• UCP 600 article 14 - Standard for Examination of
  Documents
• Sub-article 14 (a)
• A nominated bank acting on its nomination, a
  confirming bank, if any,
• and the issuing bank must examine a presentation
  to determine, on
• the basis of the documents alone, whether or not
  the documents
• appear on their face to constitute a complying
  presentation.

7
Handling of Discrepant Documents

• UCP 600 article 14 - Standard for Examination of
  Documents
• Sub-article 14 (b)
• A nominated bank acting on its nomination, a
  confirming bank, if any,
• and the issuing bank shall each have a maximum of
  five banking days
• following the day of presentation to determine if
  a presentation is complying.
• This period is not curtailed or otherwise
  affected by the occurrence on or after
• the date of presentation of any expiry date or
  last day for presentation.

8
Handling of Discrepant Documents

• UCP 600 article 14 - Standard for Examination of
  Documents
• Sub-article 14 (d)
• Data in a document, when read in context with the
  credit, the
• document itself and international standard
  banking practice, need not
• be identical to, but must not conflict with, data
  in that document, any
• other stipulated document or the credit.

9
Handling of Discrepant Documents

• UCP 600 article 14 - Standard for Examination of
  Documents
• Sub-article 14 (e)
• In documents other than the commercial invoice,
  the description of the
• goods, services or performance, if stated, may be
  in general terms not
• conflicting with their description in the credit.
• Issue
• No application or requirement for a form of
  linkage under UCP 600.

10
Handling of Discrepant Documents

• UCP 600 article 16 - Discrepant Documents, Waiver
  and Notice
• Issuing bank may still approach applicant for
  waiver but available time reduced due to new
  maximum of 5 banking days
• If a bank has provided a refusal according to (a)
  or (b) overleaf, and no instructions or waiver
  received they may return documents
• Banks must provide a single notice of refusal
• A statement of noting discrepancies or
  observing discrepancies is not a notice of
  refusal
• The discrepancies must be clear and precise. For
  example, a discrepancy such as invoice not as
  per LC is not a valid reason for refusal unless
  the wrong invoice was presented for the LC in
  question
• Refusal must state, bank is refusing, applicable
  discrepancies and one of the following statuses

11
Handling of Discrepant Documents

• UCP 600 article 16 - Discrepant Documents, Waiver
  and Notice
• Sub-article 16 (c) (iii)
• a) that the bank is holding the documents pending
  further instructions from the presenter or
• b) that the issuing bank is holding the documents
  . receives a waiver and agrees to accept it,
  or receives further instructions prior to
  agreeing to accept a waiver or
• c) that the bank is returning the documents or
• d) that the bank is acting in accordance with
  instructions previously received from the
  presenter.

12
Handling of Discrepant Documents

• UCP 600 article 16 - Discrepant Documents, Waiver
  and Notice
• Basic requirements for a refusal notice
• MT734 list of discrepancies and status of
  documents
• MT799, telephone call, fax advice, email advice
  etc indication of refusal, list of
  discrepancies and status of documents
• Stated discrepancies should be specific to what
  is actually the reason for refusal i.e., avoid
  language such as invoice not as per LC
• Status of documents can be by code word in MT734
  (Hold, Return, Notify, Previnst) in all other
  advices they must be stated in full.

13
Handling of Discrepant Documents

• UCP 600 article 16 - Discrepant Documents, Waiver
  and Notice
• Typical telephone conversation (John/Bank,
  Mary/Beneficiary)
• Hello Mary, this is John from Friendly Bank did
  you have a good weekend?
• Hi John, yes thank you pretty busy with the
  family again.
• John sorry to advise you but we have the same
  problems with the
• documents as we did with the last set, same
  discrepancies.
• Mary oh not again (!) I thought we had sorted
  this out with the shipping
• department. Send them to the issuing bank, same
  as last time and let us
• know when you get the approval.
• John Okay, thanks have a nice day!
• Where was the refusal, where was the list of the
  discrepancies and
• where is the indication of status? (maybe you
  could argue that Okay
• means we will be acting in accordance with your
  instructions!!)

14
Handling of Discrepant Documents

• Handling Discrepant Documents (beneficiary
  options)
• Options available to a beneficiary where the
  documents are discrepant
• 1. correct as far as possible
• 2. request the bank to contact the issuing bank
  to seek waiver from the applicant or
• 3. request the bank to forward the documents to
  the issuing bank for settlement despite the
  discrepancies that have been noted.
• This is probably the order in which a decision
  should be made on
• discrepant documents.

15
Handling of Discrepant Documents

• Handling Discrepant Documents (beneficiary
  options)
• An opinion to be considered at the ICC Banking
  Commission meeting in
• March refers to a number of LCs emanating from a
  particular country which
• state
• Documents must be correct on first presentation.
  Correction of documents
• is not permitted.
• Negotiating bank must certify that documents
  were correct on first
• presentation.
• Provided documents on first presentation in
  strict conformity with the LC
• terms, you are authorized to reimburse yourselves
  with
• It must be remembered that the beneficiary or
  presenter has the right to
• correct any discrepancies that may have been
  observed. This must,
• however, be concluded within the last day for
  presentation or expiry date
• whichever is the earlier.

16
Handling of Discrepant Documents

• Handling Discrepant Documents (issuing bank
  options)
• An issuing bank may seek waiver from the
  applicant for the discrepancies
• that have been determined. The issuing bank is
  under no obligation to accept
• the waiver of the applicant.
• It may be that following the sending of a notice
  of refusal that the bank is
• convinced that the discrepancy(ies) is/are not
  valid and that the documents
• do, in fact, comply. In this case, the bank must
  take up the documents
• according to the credit terms. If the bank is the
  issuing bank, they will need to
• inform the applicant that the discrepancy(ies)
  has/have been withdrawn and
• that the presentation complies.

17
Handling of Discrepant Documents

• Handling Discrepant Documents
• Situation Documents are presented to the
  nominated bank who find them
• to comply, they do not negotiate and forward them
  to the issuing bank for
• settlement.
• Issuing bank find two discrepancies (1) packing
  list does not evidence the
• type of packing used (as required in the LC) and
  (2) the invoice omits a
• certification required in field 47A of the LC.
  Issuing bank provide a valid
• refusal notice to the nominated bank. The
  nominated bank advises the
• beneficiary on February 5 at 415pm. The credit
  expires on February 6 with
• 21 calendar days occurring on February 7. Who
  should the beneficiary
• present replacement documents to
• - issuing bank?
• - nominated bank? and by when?

18
Handling of Discrepant Documents

• Release of goods against delivery order,
  indemnity or bank guarantee
• It is often the case that goods arrive prior to
  the receipt of the documents that will allow
  their release from customs. In this case, the
  applicant will request their bank to issue a
  delivery order, an indemnity or bank guarantee to
  the airline/shipping company to release the goods
  despite the fact that the goods are consigned to
  the bank or the original bills of lading are not
  available.
• If the bank agrees to such action, they should
  take an instruction from their customer to effect
  payment of the documents, when received, despite
  the fact that there may be discrepancies therein.
  This in itself may be a risk for the bank as one
  of those discrepancies could be credit overdrawn
  by a significant sum. The bank needs to consider
  such requests in line with their relationship
  with the applicant.

19
Applying UCP 600 and ISBP

• Spurious and debatable discrepancies
• - the harm that it does to the LC
• product and
• - ways to create a proper and concise LC to
  overcome these issues.

20
Applying UCP 600 and ISBP

• Current experiences with the handling
• of LCs

21
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• Grade of steel mentioned in Mills Test
  Certificate is not as per clause No. 4 of field
  46A of the L/C. Field 46A of the LC stated Mills
  Test Certificate. (USD8.8m)
• Short quantity supplied in the size 2.00x1230mm
  which is less than 10 percent which is not as per
  clause 45A of the LC terms. Field 45A gave a
  quantity of goods (5 different sizes) all subject
  to 10 /-. Quantity of size shown was less than
  -10 but LC allowed partial shipments. (USD6.4m)

22
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• Certificate of Origin does not show name of the
  consignee. The condition in the LC was
  Certificate of Origin and there was no
  requirement for the consignee to be shown.
  (USD3.6m)
• B/L shows goods shipped on deck. BL was a charter
  party BL which had pre-printed text (of which
  .. on deck at shippers risk, carrier not
  responsible .). The gap was not completed with
  any quantity. (USD1.7m)

23
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• Clean on board date not indicated on BL, wrong
  beneficiary address on documents and documents
  not presented by express mail. Standby LC
  required presentation of draft, copy invoice,
  copy clean on board BL and various certificates.
  Documents to be sent by express mail and
  beneficiary address in SBLC was stated to be Zu,
  Switzerland.
• The copy BL showed an on board date and no
  notations or clauses regarding the goods or their
  packaging. The documents were sent by courier
  service. The beneficiary address was Zug (in
  Switzerland). (USD6.7m)

24
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• Non-negotiable copies of BL not signed. These are
  not signed and LC did not request their
  presentation! (USD2.5m)
• Certificate of Origin shows as consignee a party
  other than the beneficiary. LC was silent as
  regards content of Certificate of Origin.
  (USD3.4m)
• Mills Test Certificate is issued by a party other
  than the beneficiary. LC did not indicate the
  issuer. (USD3.4m)

25
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• Commercial Invoice and Packing List show name of
  the buyer as viz. ABC Co Ltd whereas buyers
  name is ABC Co Ltd. LC stated documents in the
  name of buyer viz. ABC Co Ltd. (USD380k)
• Beneficiary declaration as per clause 5 of the LC
  is not presented. Beneficiary presented the
  required document under the title Beneficiary
  Certificate. (USD8.7m)

26
Applying UCP 600 and ISBP

• Examples of reported spurious and doubtful
  discrepancies
• latest occurrence
• LC provides a goods description (field 45A) that
  includes partial shipment to be allowed and
  goods will be carried under deck.
• Commercial Invoice presented showing the goods
  description as per field 45A but without the two
  statements in quotation marks as above. Issuing
  bank refuses for absence of data. (USD5.1m)

27
Applying UCP 600 and ISBP

• Applying the UCP 600 on a day-to-
• day basis to establish best practice
• with regard to issuance, advising,
• confirmation, amendments and
• settlement under documentary credits

28
Establishing Best Practices
Issuance Clear and precise terms and
conditions Terms and conditions that match the
form of shipment Documentary requirements that
outline the issuer (if required) and the data
content for each document (do not rely on the
effect of sub-article 14 (f)) Advising Are you
willing to accept your nomination? Do you
examine the credit for workability?
29
Establishing Best Practices
Confirmation Do you understand what you are
confirming? What is the wording of your
confirmation and what does it mean? Do
beneficiaries understand the effect of
confirmation? Amendments Does the amendment
cater for all the terms and conditions of the
LC? What effect does the amendment have on the
remaining terms and conditions?
30
Establishing Best Practices
Example of an amendment not catering for all the
terms and conditions of the LC and leaving an
element of ambiguity. LC requires shipment from
Singapore to Rotterdam and requires presentation
of bills of lading. Incoterm CFR. Beneficiary
and applicant determine that bills of lading are
the wrong form of document and agree on a
forwarders certificate of receipt. An amendment
is issued stating delete bills of lading and
insert freight forwarders certificate of receipt
issued by Acme Forwarding Company Ltd. Incoterm
is unchanged. Is the FCR to indicate shipment
from/to or just delivery at Singapore? What about
the other BL conditions consignee, notify party
and freight paid or payable?
31
Establishing Best Practices

• Beneficiary considerations
• Do you examine the LC, when received, for errors?
• Do you consult the nominated bank / advising bank
  for their views?
• Do you examine amendments when received for
  errors?
• Do you have a policy with regard to the routing
  or centralization of LCs with one bank?
• Do you have any policy with regard to requests
  for confirmation of LCs?
• Are you guilty of adding too much data to
  documents?
• Do you have an internal procedure that monitors
  the level of refusals?
• Do you know the level of refusals for your
  company?
• Have you calculated the additional cost that is
  involved when you have discrepant documents?

32
Applying ISBP Publication 681

• Article 2 of UCP 600 provides a definition of
  Complying Presentation as a presentation that is
  in accordance with the terms and conditions of
  the credit, the applicable provisions of these
  rules UCP 600 and international standard
  banking practice.
• Reference to international standard banking
  practice is not confined to the content of the
  ICC publication 681. International standard
  banking practice also includes the opinions and
  DOCDEX decisions that are not in the publication
  plus other functions and acts performed by banks
  on a daily basis.

33
Applying ISBP Publication 681

• Application and Issuance of the Credit
• Paragraph 2
• The applicant bears the risk of any ambiguity in
  its instructions to issue or amend a credit.
  Unless expressly stated otherwise, a request to
  issue or amend a credit authorizes an issuing
  bank to supplement or develop the terms in a
  manner necessary or desirable to permit the use
  of the credit.
• Paragraph 5
• Many of the problems that arise at the
  examination stage could be avoided or resolved by
  careful attention to detail in the underlying
  transaction, the credit application, and issuance
  of the credit as discussed.

34
Applying ISBP Publication 681

• Corrections and Alterations
• Paragraph 11
• The use of multiple type styles or font sizes or
  handwriting in the same document does not, by
  itself, signify a correction or alteration.
• An example of the application of this rule is in
  ICC Opinion TA.657 where the
• date of issuance and receipt of goods shown on a
  CMR were completed by
• pen where the document was completed except for
  the date which was
• shown as __-11-2007. The completion of the
  date, in pen, was acceptable
• under this practice.

35
Applying ISBP Publication 681

• Documents for which the UCP 600 transport
  articles do not apply
• Paragraph 19
• Some documents commonly used in relation to the
  transportation of goods, e.g., Delivery Order,
  Forwarders Certificate of Receipt, Forwarders
  Certificate of Shipment, Forwarders Certificate
  of Transport, Forwarders Cargo Receipt and
  Mates Receipt do not reflect a contract of
  carriage and are not transport documents as
  defined in UCP 600 articles 19 - 25. As such, UCP
  600 sub-article 14(c) would not apply to these
  documents. Therefore, these documents will be
  examined in the same manner as other documents
  for which there are no specific provisions in UCP
  600, i.e., under sub-article 14(f). In any event,
  documents must be presented not later than the
  expiry date for presentation as stated in the
  credit.

36
Applying ISBP Publication 681

• Documents for which the UCP 600 transport
  articles do not apply
• Paragraph 20
• Copies of transport documents are not transport
  documents for the purpose of UCP 600 articles
  19-25 and sub-article 14(c). The UCP 600
  transport articles apply where there are original
  transport documents presented. Where a credit
  allows for the presentation of a copy transport
  document rather than an original, the credit must
  explicitly state the details to be shown. Where
  copies (non-negotiable) are presented, they need
  not evidence signature, dates, etc.

37
Applying ISBP Publication 681

• Issuer of documents and signatures
• Paragraphs 22, 37 and 40
• If a credit indicates that a document is to be
  issued by a named person or entity, this
  condition is satisfied if the document appears to
  be issued by the named person or entity. It may
  appear to be issued by a named person or entity
  by use of its letterhead, or, if there is no
  letterhead, the document appears to have been
  completed or signed by, or on behalf of, the
  named person or entity.
• Even if not stated in the credit, drafts,
  certificates and declarations by their nature
  require a signature. Transport documents and
  insurance documents must be signed in accordance
  with the provisions of UCP 600.
• A signature on a company letterhead paper will be
  taken to be the signature of that company, unless
  otherwise stated. The company name need not be
  repeated next to the signature.

38
Applying ISBP Publication 681

• Title of Documents and Combined Documents
• Paragraph 41
• Documents may be titled as called for in the
  credit, bear a similar title, or be untitled. For
  example, a credit requirement for a Packing
  List may also be satisfied by a document
  containing packing details whether titled
  Packing Note, Packing and Weight List, etc.,
  or an untitled document. The content of a
  document must appear to fulfil the function of
  the required document.
• Paragraph 42
• Documents listed in a credit should be presented
  as separate documents. If a credit requires a
  packing list and a weight list, such requirement
  will be satisfied by presentation of two separate
  documents, or by presentation of two original
  copies of a combined packing and weight list,
  provided such document states both packing and
  weight details.

39
Establishing Best Practices
Settlement Examination Do beneficiaries assist
the examination process? What can the banks do to
help beneficiaries and reduce discrepancy
rates? A banks responsibility when examining
documents. Settlement If documents comply when
do you honour or negotiate? For example, you
finish the examination on Monday afternoon. When
would you expect to honour or negotiate?
40
Applying ISBP Publication 681

• Documents should be examined in accordance with
  international standard banking practice, as
  stated in the UCP 600 and as articulated in the
  ISBP.
•  
• Any rejection of documents should state
  discrepancies in accordance with UCP 600 article
  16.
• You reject documents because they are discrepant
  under UCP 600.
• There is no harm in explaining to another party
  which ICC Opinion, DOCDEX Decision or paragraph
  of the ISBP was used to understand how the
  practices of the UCP were applied.
•  
•  

41
Applying UCP 600 and ISBP

• Alternative forms of Documentary
• Credits

42
Alternative forms of Documentary Credits

• Advance Payment
• Red / Green Clause
• Revolving / Reinstatement
• Instalment
• Transferable
• Back to Back and
• Assignment of Proceeds.

43
Alternative forms of Documentary Credits

• Advance Payment (Red Clause)
• This is often referred to as a red clause
  credit due to the fact that the
• wording regarding the advance payment was typed
  in red ink so as to
• highlight this condition.
• Today, advance payments under credits are fairly
  rare and generally limited
• to around 80 of the credit value. The advance is
  often paid against a
• receipt from the beneficiary indicating that they
  will ship the goods as
• required by the credit and in the event that they
  fail to do so will return the
• advance or percentage thereof in respect of goods
  not shipped. Where
• there are doubts as to the beneficiarys ability
  to return the funds, the
• applicant may insist that the advance is made
  against the issuing of a bank
• guarantee covering the value of the advance.
• When the beneficiary presents their documents for
  the goods shipped, the
• invoice will be issued for 100 of the value less
  the amount of the advance
• relative to those goods.

44
Alternative forms of Documentary Credits

• Red Clause LCs
• Where a bank guarantee is to be issued to cover
  any advance payment,
• consideration should be given to include wording
  as below (or similar)
• This guarantee will automatically reduce by xx
  of the value of any invoice
• presented under letter of credit number xxxxxxx
  as part of a complying
• presentation made by the beneficiary to XXX Bank
  name of nominated
• bank. By the inclusion of this wording, the
  liability under the guarantee will
• reduce as shipments are made under the respective
  letter of credit.
• Issuing banks (and applicants) that allow the
  advance to be made against
• an undertaking of the beneficiary must appreciate
  that the nominated bank
• will have no further involvement in recovering
  the funds in the event of
• failure to ship. The ultimate risk lies with the
  applicant.

45
Alternative forms of Documentary Credits

• Green Clause LCs
• A letter of credit which contains a clause
  authorising the nominated
• bank to make advances to the seller against
  security (such as a
• payment guarantee from a third party or the
  pre-shipment storage of
• the goods in the name of the nominated bank or
  the issuing bank)
• before shipment /presentation of documents. If
  the seller fails to
• present the documents, the issuing banks or
  buyers reimbursement
• obligations can be recovered through enforcement
  of the security.

46
Alternative forms of Documentary Credits

• Revolving and Reinstatement LCs
• Revolving A revolving credit has three features
  that need to be
• addressed in a credit-
• 1. whether it is automatic or not
• 2. whether the revolvement amount is cumulative
  or non-cumulative and
• 3. the basis under which the revolvement will
  occur.
• Reinstatement A reinstatement credit has three
  features that need
• to be addressed in a credit-
• 1. the initial amount of the credit
• 2. the basis under which the reinstatement will
  occur and
• 3. the maximum amount to which the reinstatement
  will be made.

47
Alternative forms of Documentary Credits

• Revolving LC basics
• Beneficiaries prefer a cumulative, automatic
  revolving credit as they
• have a bank undertaking for the full amount of
  the value of their
• goods.
• Banks prefer a non-cumulative or cumulative, but
  non-automatic
• revolving credit as it limits the banks exposure
  to the value of one
• revolvement.
• A non-cumulative revolving credit allows the bank
  to reduce their
• liability by any undrawn balance within any
  revolvement period.
• A cumulative automatic revolving credit could,
  possibly, allow the
• Beneficiary to draw the full value in the final
  segment of the credit.

48
Alternative forms of Documentary Credits

• Reinstatement LC basics
• A reinstatement credit allows the applicant to
  limit the value of any one
• shipment by setting the value of the credit to
  that level. For example, the
• total contract price is USD100,000 but the
  maximum that would be drawn in
• any one presentation is USD15,000
• The credit will be issued for an initial amount
  of USD15,000 and state that
• the amount will be reinstated after each drawing
  to the amount of
• USD15,000 subject to a maximum of USD100,000
• If the beneficiary makes an initial drawing of
  USD12,500 the amount will
• reinstate to USD15,000 but the remaining total
  amount reduces to
• USD87,500 and so on until the full credit amount
  is drawn.
• The banks liability is for the full USD100,000

49
Alternative forms of Documentary Credits

• UCP 600 article 32 - Instalment Drawings or
  Shipments
• An instalment credit is covered by UCP 600
  article 32. Care must be taken
• when drafting an instalment credit to ensure that
  the right structure is used.
• For example, DC issued on 9 February stating-
• 1000 Pens to be shipped by 28 February
• 1000 Pens to be shipped by 15 March
• 1000 Pens to be shipped by 31 March
• is not an instalment credit unless the first
  shipment is not made. All the
• goods could be shipped before 28 February.
• An instalment credit should have specific goods
  to be shipped within given
• periods that do not overlap. For example 1000
  Pens between 9 and 28
• February, 1000 Pens between 1 and 15 March, 1000
  Pens between 16 and
• 31 March.
• Article 32 is to be excluded under a Standby DC
  where instalments occur.

50
Alternative forms of Documentary Credits

• UCP 600 article 38 - Transferable Credits
• (a) states that no bank is under an obligation to
  transfer
• (b) provides definitions of
• Transferable credit means a credit that
  specifically states it is transferable. A
  transferable credit may be made available in
  whole or in part to another beneficiary (second
  beneficiary) at the request of the beneficiary
  (first beneficiary)
• Transferring bank means a nominated bank that
  transfers the credit or, in a credit available
  with any bank, a bank that is specifically
  authorized by the issuing bank to transfer and
  that transfers the credit. An issuing bank may be
  a transferring bank and
• Transferred credit means a credit that has been
  made available by the transferring bank to a
  second beneficiary.

51
Alternative forms of Documentary Credits

• UCP 600 article 38 - Transferable Credits
• (e) No longer a requirement for irrevocable
  instructions regarding amendments
• (f) If transferred more than once, each
  transferred credit stands as an individual
  credit
• (g) No change to items that can be reduced or
  curtailed but if original credit is confirmed, so
  must the transferred credit
• (i) If first beneficiary fails to substitute or
  fails to correct substituted documents (where the
  2nd beneficiary documents complied), 2nd
  beneficiary documents may be utilised and
• (k) documents must be routed through transferring
  bank.
• Issues
• Changing additional terms and conditions
• Substituting more than the draft and/or invoice

52
Alternative forms of Documentary Credits

• Sub-article 38 (k) ICC Opinion TA. 632 approved
  October 2007
• The conclusion to this opinion includes the
  following
• When there is a 100 transfer of the credit
  amount and no substitution is
• to occur, the necessity to present the documents
  of the second beneficiary
• to the transferring bank is negated. This
  position prevails to the extent that
• the transferring bank has not added their
  confirmation to the transferred
• credit and, thereby, necessitating that documents
  are presented to that bank
• in order for the undertaking of the confirming
  bank to be fulfilled.
• In the advice of transfer, where there is a 100
  transfer, the transferring
• bank may make a modification of the rule to state
  that the documents are to
• be sent direct to the issuing bank. In such
  circumstances, the transferring
• bank should inform the issuing bank of this
  action.

53
Alternative forms of Documentary Credits

• Back-to-Back Credits
• Used where the beneficiary of a credit (middle
  man) cannot obtain a
• transferable credit or cannot arrange for their
  bank to issue a credit in their
• own name. Beneficiary of the original credit
  seeks to use that credit as
• security for a bank to issue another credit in
  favour of the supplier of the
• goods.
• In a back to back credit there are two separate
  and independent credits
• issued whereas under a transferable credit the
  transaction happens under
• the umbrella of the original credit.
• Most banks are willing to handle transferable
  credits as there is protection
• under UCP in the event of failure on the part of
  the 1st beneficiary. Under a
• back to back credit each credit is independent
  and failure of the 1st beneficiary
• may put the bank at risk of receiving proceeds to
  cover their payment to the
• supplier.

54
Alternative forms of Documentary Credits

• Back-to-Back Credits
• Issues with Back-to-Back LCs
• matching terms and conditions between credits
• aligning the settlement under both credits
• substitution by the original beneficiary and
  failure on their part to do
• so
• banks that link the settlement of one LC to
  settlement under the
• other
• safeguards?

55
Alternative forms of Documentary Credits

• UCP 600 article 39 - Assignment of Proceeds
• The fact that a credit is not stated to be
  transferable shall not affect the right
• of the beneficiary to assign any proceeds to
  which it may be or may become
• entitled under the credit, in accordance with the
  provisions of applicable law.
• This article relates to the assignment of
  proceeds and not to the assignment
• of the right to perform under the credit.
• Points to note
• - assignment of the proceeds not the right to
  perform under the credit
• - payment security to assignee exists only if
  compliant documents presented
• - bank should limit their payment obligation to
  documents being presented at their counters
• - copy of assignment notice should be sent to
  all parties and
• - clear instructions where more than one
  assignee or partial shipments.

56
Applying UCP 600 and ISBP

• Thank You
• Contact Gary Collyer, Collyer Consulting LLP
• Email gary_at_collyerconsulting.com