UCP 600 Handling of LCs

1
nterpretation and Application of

UCP 600 Part 2
XXV Latin American Foreign Trade Congress - CLACE
GuatemaIa
June 3-5, 2009
Gary CoIIyer
CoIIyer ConsuIting LLP
2
Applying UCP 600 and SBP
Handling of Discrepant Documents
3
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. n 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 5
th
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
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 5
th
banking day following the day of presentation.
5
$tandard for Examination of Documents - UCP 600 sub-articIe 14 (d)
eneral 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
UCP 600 articIe 14 - $tandard 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
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
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
Sub-article 14 (e):
n 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.
ssue:
No application or requirement for a form of "linkage under UCP 600.
10
UCP 600 articIe 16 - Discrepant Documents, Waiver and Notice
ssuing bank may still approach applicant for waiver but available time
reduced due to new maximum of 5 banking days;
f 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
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
Basic requirements for a refusal notice:
T734 list of discrepancies and status of documents;
T799, 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 T734 (Hold, Return,
Notify, Previnst) in all other advices they must be stated in full.
13
Typical telephone conversation (John/Bank, ary/Beneficiary):
Hello ary, 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.
ary oh not again (!) 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 refusaI, where was the Iist of the discrepancies and
where is the indication of status? (maybe you couId argue that "Okay"
means we wiII be acting in accordance with your instructions!!)
14
andIing 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 probabIy the order in which a decision shouId be made on
discrepant documents.
15
andIing Discrepant Documents (beneficiary options)
An opinion to be considered at the CC Banking Commission meeting in
arch 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 .
t 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
andIing 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.
t 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. n this case, the bank must take up the documents
according to the credit terms. f 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
andIing Discrepant Documents
$ituation: 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.
ssuing 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. ssuing bank provide a valid
refusal notice to the nominated bank. The nominated bank advises the
beneficiary on February 5 at 4:15pm. 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
#eIease of goods against deIivery order, indemnity or bank guarantee
t is often the case that goods arrive prior to the receipt of the
documents that will allow their release from customs. n 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.
f 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
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
Current experiences with the handling
of LCs
21
ExampIes of reported spurious and doubtfuI discrepancies:
rade of steel mentioned in ills Test Certificate is not as per
clause No. 4 of field 46A of the L/C. Field 46A of the LC stated
"ills 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
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
shipper's risk, carrier not responsible ..). The gap was not
completed with any quantity. (USD1.7m)
23
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
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)
ills Test Certificate is issued by a party other than the
beneficiary. LC did not indicate the issuer. (USD3.4m)
25
Commercial nvoice 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
ExampIes of reported spurious and doubtfuI discrepancies -
Iatest occurrence:
LC provides a goods description (field 45A) that includes "partial
shipment to be allowed and "goods will be carried under deck.
Commercial nvoice presented showing the goods description as
per field 45A but without the two statements in quotation marks
as above. ssuing bank refuses for absence of data. (USD5.1m)
27
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
stablishing Best Practices
ssuance:
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
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
ExampIe of an amendment not catering for aII the terms and conditions of
the LC and Ieaving an eIement of ambiguity.
LC requires shipment from Singapore to Rotterdam and requires
presentation of bills of lading. ncoterm 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. ncoterm is unchanged.
s 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
eneficiary 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 SBP 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 CC publication 681. nternational standard banking practice also
includes the opinions and DOCD decisions that are not in the publication plus
other functions and acts performed by banks on a daily basis.
33
AppIication 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
any 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
Corrections and AIterations
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 CC Opinion TA.657 where the
date of issuance and receipt of goods shown on a CR 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
Documents for which the UCP 600 transport articIes do not appIy
Paragraph 19
Some documents commonly used in relation to the transportation of
goods, e.g., Delivery Order, Forwarder's Certificate of Receipt,
Forwarder's Certificate of Shipment, Forwarder's Certificate of
Transport, Forwarder's Cargo Receipt and ate's 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). n any
event, documents must be presented not later than the expiry date for
presentation as stated in the credit.
36
Documents for which the UCP 600 transport articIes do not appIy
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
Issuer of documents and signatures
Paragraphs 22, 37 and 40
f 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. t 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.
ven 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
TitIe 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. f 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
$ettIement:
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.
$0ttl0m0nt
f documents comply when do you honour or negotiate? For example,
you finish the examination on onday afternoon. When would you
expect to honour or negotiate?
40
Documents should be examined in accordance with international standard
banking practice, as stated in the UCP 600 and as articulated in the SBP.
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 CC Opinion, DOCD
Decision or paragraph of the SBP was used to understand how the practices
of the UCP were applied.
41
Alternative forms of Documentary
Credits
42
Alternative forms of Documentary Credits
Advance Payment;
Red / reen Clause;
Revolving / Reinstatement;
nstalment;
Transferable;
Back to Back; and
Assignment of Proceeds.
43
Advance Payment (#ed CIause)
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 beneficiary's 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
#ed CIause 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 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.
ssuing 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
Green CIause 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. f the seller fails to
present the documents, the issuing bank's or buyer's reimbursement
obligations can be recovered through enforcement of the security.
46
#evoIving and #einstatement 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
#evoIving 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
#einstatement 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
f 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
UCP 600 articIe 32 - InstaIment Drawings or $hipments
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 arch
1000 Pens to be shipped by 31 arch
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 arch, 1000 Pens between 16 and
31 arch.
Article 32 is to be excluded under a Standby DC where instalments occur.
50
UCP 600 articIe 38 - TransferabIe Credits
(a) states that no bank is under an obligation to transfer;
(b) provides definitions of
TransferabIe 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
UCP 600 articIe 38 - TransferabIe Credits
(e) No longer a requirement for "irrevocable instructions regarding
amendments;
(f) f 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) f first beneficiary fails to substitute or fails to correct substituted
documents (where the 2
nd
beneficiary documents complied), 2
nd
beneficiary documents may be utilised; and
(k) documents must be routed through transferring bank.
ssues:
Changing additional terms and conditions
Substituting more than the draft and/or invoice
52
$ub-articIe 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.
n 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. n such circumstances, the transferring
bank should inform the issuing bank of this action.
53
ack-to-ack 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.
n 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.
ost banks are willing to handle transferable credits as there is protection
under UCP in the event of failure on the part of the 1
st
beneficiary. Under a
back to back credit each credit is independent and failure of the 1
st
beneficiary
may put the bank at risk of receiving proceeds to cover their payment to the
supplier.
54
ack-to-ack Credits
ssues 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
UCP 600 articIe 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
Thank You
Contact : ary Collyer, Collyer Consulting LLP
mail : gary@collyerconsulting.com

UCP 600 Handling of LCs

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