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GUIDE LINES

FOR
INTERNATIONAL TRADE
FINANCE 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 Bhushan
The 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 1 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 1 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

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SECTION 1 BASICS OF INTERNATIONAL FACTORING 31
 Origins of International Factoring
 Growth Of Factoring
 Definition of International Factoring
 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 1 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 1 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
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 Authorised Moneychangers
 Obligations of an Authorised Dealer

SECTION 1 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 1 REFERENCES 69

SECTION 2 OTHER GUIDELINES & FAQs 70

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SECTION 1
BASICS OF INTERNATIONAL TRADE
What 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 1. Places order and makes payment


USA

2. Ships goods after receipt of payment

Seller
Buyer

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

Seller’s view Buyer’s view


Most secure form of trading Least secure form of trading
Receives money in advance for Pays money in advance and hence
shipment, thus covered from risk of carries risk in case the seller fails to
non- payment by the buyer. honour the sale contract and ship
goods. He must have complete
confidence in the seller.
Has good cash flow Drains his cash flow
Can use the money for manufacturing Agrees to this method if the goods are
the goods. 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 1. Places Order


USA

2. Ships the goods

Seller Buyer
3. submits 5. Ask importer
Shipping 9. 6. Makes to make
documents Makes the Payment payment
to bank payment
7. Releases
shipping
Documents

4. Forwards the shipping documents

8. Remits the payments

Seller’s Bank Buyer’s Bank

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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.

Seller’s view Buyer’s view


More Secure form of trading Less Secure form of trading
Payment is secure since buyer makes Has to make payment before receipt of
payment before receipt of goods goods.
The buyer may refuse to pay after the On risk since he cannot check goods
goods have reached. Goods will lie at (for quality, quantity) before making
foreign port and will be difficult to payment. Thus is depends on seller
dispose off. Seller will have to search meeting the contract terms.
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.
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 1. Places Order


USA

2. Ships the goods

Seller Buyer 5. Ask importer to


3. submits sign BOE
shipping 11. 6. Signs BOE.
documents and Makes the 7. Releases
Bill of payment 9. Makes shipping
Exchange to Payment on due Documents
bank date
8. On due date
ask to make
payment
4. Forwards the shipping documents and BOE

10. Remits the payments

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Seller’s Bank Buyer’s Bank

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 view


Less Secure form of trading More Secure form of trading
Payment is secure since buyer accepts He can check the goods before making
BOE. There is a certainty as to when payment.
the payment will be made.
On risk in case when buyer goes In case he fails to make payment, legal
bankrupt. proceedings can be undertaken.
Export proceeds are realized only on Gets a credit period for making
due date hence cash flow is drained. 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

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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 view


Very secure as an LC is a guarantee of Not Applicable
payment by a bank.
Seller need not worry about delays in Administratively cumbersome.
payment and financial problems of the
buyer as the payment is made by a
bank.
Not costly. High cost since he has to deposit cash
margin for opening LC
On risk if there is political crisis in LC process is time consuming and
buyers country, unless the LC is there is a delay in possession of goods
confirmed by another bank in another
country.

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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 Irrevocable
If 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 LC
When 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.
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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 LC
This 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 3. Pays on Due date


USA

1. Places Order

2. Ships the goods

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 view


Least Secure form of trading. He Most Secure form of trading
should have complete confidence that
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the buyer will pay.
On risk since buyer may not pay on Can collect and use the goods before
due date making payment
Should have sufficient liquidity to allow
Gets free credit. Their own lines from
a credit period to the buyer. the banks are not used to fund the
credit period.
Should have confidence in the It is administratively cheaper.
government of the buyer’s country that
they won’t impose any restrictions for
transfer of money
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

FOB
FOB 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
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 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 Port On Board On Board Port Buyer

Seller Pays
 Transportation
 Warehousing
 Freight

Buyer pays
• Insurance
• Transportation

CIF

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 Port On Board On Board Port 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.

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SECTION 2
TYPES OF EXPORTERS
Definition 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 Zones
To 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.
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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 FOB AVG NFE NFE
(3 preceding (Preceding (3 preceding (Preceding
years) year) years) year)
EH 15 CR 22 CR 12 CR 18 CR
TH 75 CR 112 CR 62 CR 90 CR
STH 375 CR 560 CR 312 CR 450 CR
SSTH 1112 CR 1680 CR 937 CR 1350 CR
NFE = Net foreign exchange earned on exports
FOB = 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 Credit
ii) Pre-shipment Credit in Foreign Currency (PCFC)
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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 Documents
iii) Advances against Documents / Bills sent on Collection Basis
iv) Advances against Exports on Consignment Basis
v) Advances against Cash Incentives / Duty Drawback
Entitlements
vi) 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.

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– 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 Incentives


Advances against Duty Drawback Entitlements

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

Post Shipment Credit


Post 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 Bills
Where 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.

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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.

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SECTION 3
TRADE DOCUMENTATION
EXPORT 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.

The exporter is required to produce copies of export order to various Government


departments/Financial institutions for many things like - obtaining export licenses
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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
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There are five types of invoices:

Proforma Commercial Consular Legalised Custom


Invoice Invoice Invoice Invoice Invoice

1. It is an It is a firm Consular It is required It is required


indicative contract of Invoice is a by the Middle by countries
quote from sale for the document East like USA and
the exporter shipments required countries. It Canada.
to the made. It is a mainly by is also called
importer receivable in countries like as visaed
the books of Philippines invoice.
accounts of and South
the exporter. Africa.
2. It gives a It is It is useful at This invoice Specific form
clear idea to fundamental the time of is legalized is to be
the importer and basic payment of by the supplied by
in respect of document Import duty. consular of the consular
terms and used for Thus importing office of the
conditions of commercial facilitates fast country by importing
sale and transactions. clearance of stamping and country.
price of goods at attesting.
goods. customs of
importers’
country.
3. Acceptance It gives Consular It is same as This
of a Proforma description of invoice is consular facilitates
Invoice by the goods as certified by invoice entry of
the buyer is per the L/C, if Embassy or except that it merchandise
equivalent to transaction is Trade is not on the into importing
a Purchase drawn under Consulate of prescribed country under
order duly letter of the Importer’s form. preferential
accepted. Credit country traffic.
stationed in
exporter’s
country
4. In addition to The exporter
basic terms has to pay to
mentioned the Embassy
above, it concerned
includes: some fees for
 Order the
and
Contract certification
No of this
 Marks invoice.
and

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Vessel
No
 Packing
specifica
tions
 Terms of
Sale
(FOB,CI
F, C&F)
 Details
of
shipmen
t i.e
name of
vessel,
route,
sailing
date,
GRI No,
IE Code,
Marine
Insuranc
e
Referen
ce.

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 Loading
5. Port of Discharge
6. Country of Destination
7. Quantity of goods
8. Description of goods item wise
9. Gross weight and Net Weight
10. Item-wise details

Transport Documents

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

Ways of Transport Document Issued


Transport by Sea Bill of Lading
Freight Forwarder’s Receipt
Air Freight Airway Bill/Air consignment note
Rail/Road Railway Receipt/Consignment note
Post Post Parcel Receipt
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Courier 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
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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.

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Marine Insurance
In 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 1872


2. The Marine Insurance Act 1963
3. The Insurance Act 1938
4. The Insurance Rule 1939
5. The Indian Stamp Act 1899
6. Exchange Control Regulation relating to General Insurance
7. Common Laws
8. 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 construction
4. Insurance of ship during breakage
5. 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 Air


i) Institute Cargo Clauses(C) – ICC Institute Cargo Clauses(A) – ICC (A)
(C)
ii) Institute Cargo Clauses(B) – ICC (Excluding carriage by post)
(B)
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
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(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 insured


2. Ordinary leakage, ordinary loss in weight or volume, ordinary wear and
tear of cargo.
3. Insufficiency or unsuitability of packing or preparation of cargo
4. Inherent vice or nature of cargo
5. 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 damage
7. Nuclear losses
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8. War Risk
9. 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:
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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 by


certain offices of customs where electronic systems are
in 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.

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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 Certificate
In 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. Certificate
The 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.
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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.

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SECTION 4
BASICS OF INTERNATIONAL
FACTORING
Origins 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 17th
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
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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%.
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➢ 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 Stage
2. 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

Exporter
1. Places Order Buyer
(Yourself)
5. Fact. Agreement
2. Buyer Details

3. Buyer Details

4. Prelim. Limit

6. Firm Approval Request

GTF 7. Firm Approval Import Factor

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.
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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

Exporter Buyer
(Yourself)
1.Ships Goods
4. Prepayment
2. Documents

5. Payment
s
ent
6. Balance

c um
Do
3.

3. Invoice details

5. Remittance
GTF Import Factor

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:

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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.

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

DOMESTIC FACTORING INTERNATIONAL FACTORING

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

b) The Factor can be responsible both b) Under the two-factor system (see
for credit control and acceptance of page 7), whilst the Export Factor
credit risk. 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 c) Most business is transacted on a


to be transacted on a recourse basis non-recourse basis with the Factor
i.e. without the Factor assuming the assuming credit risk on behalf of the
credit risk. seller.

d) The Factor, seller and buyer are all d) The law of at least two countries
covered by one legal system. will be involved in the relationship.

e) The Factor, seller and buyer will all e) The local trading conventions and
be familiar with local trading language will vary from country to
conventions and language. 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 f) In the two-factor system, the


collection of payments from the buyer. Import Factor is responsible for
collections.

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g) The quality of service provided to g) In the two-factor system, the
the seller depends upon the Factor quality of service provided to the
alone. 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:

○ 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.
○ 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.
○ 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.

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SECTION 5
FCI RULES FOR INTERNATIONAL
FACTORING
FCI - 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

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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?


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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

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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 1 Buyer

6 3 2 4 5

2
Export Import
Factor 5 Factor

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.

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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.

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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
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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
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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.

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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

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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.
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 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
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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:

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• 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 Assessment


In 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.
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• 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 payment
which 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.
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• 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.

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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
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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.

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SECTION 6
FOREIGN EXCHANGE MARKETS
THE EXCHANGE RATE SYSTEM IN INDIA

BALANCE OF TRADE AND BALANCE OF PAYMENT


It is customary to classify a country’s foreign currency receipts and foreign
currency payments under two broad headings

1. Current account transactions


2. Capital Account transactions

Current Account Transactions


Current 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 Transactions


Capital 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.

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Counter Trade
Countries 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 Pounds


USD U S Dollars
EUR Euro
JPY Japanese Yen
AUD Australian Dollars
SGD Singapore Dollars
CAD Canadian Dollars

Convertible on the current account


When 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).

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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-Convertible


Rupee is Fully Rupee is partially Not Applicable
convertible for following convertible for Capital
transactions: account transactions e.g.
 Travel  Investments
 Business travel  In Shares abroad by
 Travel for Medical residents
purpose  In debt securities abroad
 For Education by residents
 For Pilgrimage  In real estates abroad by
 Transportation residents
 Freight on imports  Repatriation
 Freight on exports  Of foreign investments in
 Shipping remittance by shares, debt markets
foreign/ India companies  Of foreign investments in
 Insurance Premium, subsidiaries/ branches,
commission & payments in real estates
 Services like Bank  Repayment
charges, commission,  Long term/ Medium term
Soft/Hardware loans, NR deposits, short
consultancy services, term loans etc.
Computer services,
Technical fees
 Transfers like gifts,
donation etc.
 Income on NRI deposits,
loans, dividends etc.

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.

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• 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 currency


Following 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 Market


Following 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 rate
Quoted when a Quoted when a bank Quoted when a bank This is opposite of
bank pays rupee negotiates an export pays FCY to a Bill Buying where
equivalent to a bill and there is no customer after payment is made
customer after cash transaction getting equivalent for import bills.
getting FCY from taking place rupees from him
him immediately, but cash
will be received at a
later date.

Types of Types of transactions Types of Types of


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transactions • Purchase/discount of transactions transactions
bills and other
 Clean inward
instruments
• Outward remittance in • Transactions
remittance foreign currency involving transfer of
 Conversion of (TT/MT/ PO, DD)
proceeds of import
proceeds of • Cancellation of forward
export bill contracts bills.
realized. • Bill purchased
 Cancellation of returned unpaid
outward TT, DD, • Bill purchased
transferred to
MT, PO
collection account

Types of Exchange Rates

Following are the different types of Exchange Rates

Cash Rate
A 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 Rate
A 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 Rate
A 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.

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Forward Rate
A 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 Date


Cash Rate Today Today
Tom Rate Today Tomorrow
Spot Rate Today Third working day
Forward 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 USA
Interest 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.

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• 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,
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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 Account
When 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.

Definition
A 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 Account
A 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.

LIBOR
LIBOR 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.

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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 currency


Vostro – 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. RBI
2. Customs
3. 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 FEMA
Objective was to conserve foreign Objective is to manage foreign
exchange exchange
Under FERA offense was punishable Under FEMA offense is compoundable
Under FEMA burden of proof was on Under FEMA burden of proof is on
accused 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 Dealers
Authorised 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 Moneychangers
In 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,
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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 Management


2.I. 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.

2.II.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 Dealer

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RBI 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.

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SECTION 7
MISCELLANEOUS
Bank 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 them
3. Triplicate Copy - Negotiating bank sends it to licensing authority
i.e. Joint Deputy General of Foreign Trade.
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FIRC – Foreign Inward Remittance Certificate
It 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 turn- key
project or rendering services abroad, which are not of repetitive type.

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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.

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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

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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.

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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.

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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

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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.

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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.
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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: ………………………………………...

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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

• ………………………………………………………………..

• ………………………………………………………………..

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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.
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- 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.

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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
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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

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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
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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.

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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.

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- 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.

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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

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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 1 st 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

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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.

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- "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?

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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
1- Does the name of the ship appear?
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

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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:
1- Does the name of the ship appear?
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)
12- Are all the other conditions required in the documentary credit such as
- Name/Address of the shipper.
- Name/Address of the consignee (for straight bills of hiding).
- Name/Address of the notify party .
- Shipping marks.
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- 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)
7- 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.

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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?
7- 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.
Please also note:
Article 32 (UCPDC 500) Clean Transport Documents
Article 33 (UCPDC 500) Freight Payable/Prepaid Transport Documents
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

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the carrier (identifiable as the carrier), or
a named agent of the named carrier?
3- Is the document signed by the issuer?
4- Does the document bear a date of issue? (deemed to be the date of dispatch receipt
or shipment, unless separately indicated).
5- Are all the other conditions required in the documentary credit such as
Name/Address of the shipper.
Name/Address of the consignee.
Shipping marks.
Number of packages.
Description of goods.
Weight.
Freight notations.
Please also note:
Article 32 (UCPDC 500) Clean Transport Documents
Article 33 (UCPDC 500) Freight Payable/Prepaid Transport Documents
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)
4- Are all the other conditions required in the documentary credit such as
Name/Address of the consignee
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?
2- Is the document signed by the issuer?
3- Does the document bear a date of Issue? (deemed to be the shipment date)
4- Are all the other conditions required in the documentary credit such as
Name/Address of the shipper.
Name/Address of the consignee

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Name/Address of the notify party.
Places of shipment and dispatch
Shipping marks
Number of packages
Description of goods
Weight
Freight notations
Please also note:
Article 32 (UCPDC 500) Clean Transport Documents
Article 33 (UCPDC 500) Freight Payable/Prepaid Transport Documents
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?
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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
Name/Address of the consignee
Description of the goods
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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.

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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 :

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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

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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.

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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.

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• 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 :

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"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
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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

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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/C


An 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
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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.
○ Can Issuing Bank establish that documents were not negotiated as per Article
10b(ii)?
○ After 17 months of 1st discrepancy Telex dated 23.11.98 is Issuing Bank
authorised to say now that documetns were not negotiated?
○ 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

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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 :
○ L.C states under clause no. "39a: 10/10". What does it mean =!0%(+ or -) in both
quantity and value or only in quantity?
○ If the L/C is silent about the negotiating bank, can we treat it as free negotiation?
○ 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)?
○ 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?
○ Opening Bank has raised a discrepancy that "Carrier’s name not indicated on Bill
of Lading" – Clarify the meaning of Carrier in this case
○ 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’

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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 :-
○ the correct due date
○ 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

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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 :-
○ an examination of the documents;
○ a decision to accept or reject (including any period to approach the applicant for
a waiver); and
○ 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

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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.
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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
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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.

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• 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 RISKS
3/3 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

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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:

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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 Transaction


By Margaret L. Moses
Of 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.
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 PROBLEM
It 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
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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 RULES
To 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 PROCESS
Choosing 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.
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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

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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

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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.
CONCLUSION
Clients 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.

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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.

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

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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,
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

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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
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

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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.
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).
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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 Goods Risk to Risk to


Payment Available to Exporter Importer
Importer

Irrevocable At sight of After Payment Risk lies with None


presentation of United States
documents to confirming
issuing bank; bank
or specified
number of days
after
acceptance by
issuing bank

Revocable Same as After payment Risk lies with None


Confirmed foreign issuing
bank and
economic
conditions of
issuing bank

Sight When shipment After payment Risk lies with Assured


is made local shipment is
confirming made, but
bank relies on
exporter to ship
goods
described in the
documents

Time Draft At maturity of Usually before Risk lies with Assured

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draft, may or payment local shipment is
may not be confirming made, but
discounted bank relies on
exporter to ship
goods
described in the
documents

Red Clause A percentage After payment See irrevocable The percentage


of total amount and revocable of payment in
before advance is at
shipment. total risk.
Balance is Balance same
same as type of as type of L/C
L/C

Revolving Variable Variable See irrevocable None


Letter of Credit and revocable

Standby Letter At time Usually before Delay in None


of Credit shipment is payment payment. Also
received see irrevocable

Back-to-back Same as After payment None None


irrevocable

Transferable Same as After payment Same as None


irrevocable irrevocable

Assignment of Same as After payment Same as None


Proceeds irrevocable irrevocable

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.
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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 Open Account


Documents

Customer New Established Established


Relationship

Type of Order Custom Production Production

Political Situation Unstable Stable Strong

Economic Situation Unstable Stable Strong

Competition No Yes Yes

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Volatility of Price Yes No No
Changing
Downwards for
Buyer

Cash Flow Timing Yes Adjustable Adjustable


and Needs

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
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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
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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

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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.

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(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

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(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)
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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.

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(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
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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.
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(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.

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