How to Work With a Letter of Credit

Shipping Marks

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shipping marks

Packages, which are subject to international transportation, must be spotted and recognized at a distance with ease.

Exporters and carriers add some sort of identification marks on to the packages in order to make sure that they are handled correctly and efficiently during the whole transportation process.

The marking, also known as “Shipping Marks”, serve two main purposes: first, as identification marks for the carriers and all those engaged in the carriage and handling while in transit, and second, for the consignee to identify the corresponding order and activity to ensure correct delivery. (1)

On this post, I will explain the shipping marks and how they are used in letters of credit payments.

What is Shipping Marks? / How to Define Shipping Marks in International Freight Transportation?

Shipping marks can be defined as a symbol, word or number that is attached on to the each package unit for easy identification and handling of the cargo.

Shipping marks are vital parts of the international freight transportation.

Why Shipping Marks are Important in International Freight Transportation?

Thanks to the rapid advances in logistics technology, the global freight transportation infrastructure could handle enormous volumes of cargo annually.

In 2008, more than $16 trillion of exported freight was transported worldwide.

Maritime vessels, airplanes, trucks, and trains transported these goods from production centers to consumption markets. (Source: Freight Transportation on: Global Highlights 2010, Page:4, Bureau of Transportation Statistics)

All operations in international freight transportation must be completed smoothly from beginning to end.

Domestic transportation and custom operations in exporting country, international cargo transportation between exporting country and importing country, custom operations and domestic transportation in importing country should be handled as fast as possible to prevent any delays and occurrences of extra costs to the exporters and importers.

In order to prevent wrong delivery, accidents, losses, customs penalties or damage resulting from improper storage or incorrect handling, each package unit must be marked with the required shipping marks correctly and completely.

Shipping Marks Example
Figure 1. Shipping Marks: Each package unit must be marked with the required shipping marks correctly and completely. Above graphic explains the usage of the shipping marks in an international freight transportation starting from the smallest package unit to the biggest package unit.

Shipping Marks Examples:

Example 1: Dispatching Food Sample from Italy to USA

An Italian food manufacturing company needs to send two pieces of 5kg Tin Fresh Pizza Sauce to an importer located in New York, United States.

Italian Food Company places two 5kg tins of Fresh Pizza Sauces in to a cardboard box. The dispatch will be made via express courier service.

  • Shipping Marks Attached on to the 5kg Tin Packages: Description of goods, lot numbers, production date, expiry date, net weight.
  • Shipping Marks Attached on to the Cardboard Box: Description of goods, origin of goods, handling information, inner package type and quantity, net weight. gross weight, consignee details.

Example 2: Dispatching 1 Container of Textiles from Morocco to France

A Moroccan textile manufacturing company wants to export one container of men’s’ underwear to an importer located in Paris, France.

Packing of the container will be as follows: 10 pcs of men’s underwear put into a carton box, then 70 cartons put on to a wooden pallet. 40ft container loaded with 21 pcs of 100cmx120cm pallets.

  • Shipping Marks Attached on to the Transparent Plastic Bags: Description of goods, lot numbers, production date, production material, label, origin of goods, washing directions etc…
  • Shipping Marks Attached on to the Carton Boxes: Description of goods, origin of goods, inner package type and quantity, net weight, gross weight, consignee details etc…
  • Shipping Marks Attached on to the Wooden Pallets: ISPM15 mark, pallet label etc…
  • Shipping Marks Related to the Container: Container size, container type, and container number, seal number, etc…

Which Documents Should Show Shipping Marks?

Almost all export documents could show shipping marks in a different scale.

Some documents may cover almost all of the shipping marks that is related to the shipment, whereas some documents may reference to one or two shipping marks.

The packing list should cover as much shipping marks as possible. In addition to the packing list; the bill of lading and commercial invoice should cover the related shipping marks.

Which Documents Should Not Show Shipping Marks?

Bill of exchange (draft) should not cover any shipping marks on it, except the letter of credit number.

Bill of exchange is a negotiable instrument and the format of the bill of exchange regulated by the local law.

Any unrelated reference in the bill of exchange may make the document void in terms of respected local law. As a result exporters must refrain to add any shipping marks on to the bill of exchange.

bill of exchange example.

How Shipping Marks Are Used in Letters of Credit?

Shipping marks can be mentioned in MT700 Swift messages in two ways:

  • Shipping marks mentioned under field 46-A Documents Required
  • Shipping marks mentioned under field 47-A Additional Conditions

Shipping Marks Mentioned Under Field 46-A: Documents Required

Examples:

  1. Beneficiary’s certificate stating that all cases are marked by black ink as follows: name and address of applicant, purchase order number, letter of credit number.
  2. Beneficiary’s certificate one original stating that shipment details including date and place of loading, name, age, nationality, IMO number of the vessel, value of the goods, gross and net weights of the goods and the reference no. of the l/c have been sent to our bank’s fax no:+33 222 600 50 10 within 2 days after shipment date for information purposes.(fax report and shipment details have been attached to this doc.)

Shipping Marks Mentioned Under Field 47-A: Additional Conditions

  1. Shipping documents must show the name and address of the buyer and the letter of credit number, packages must be marked with shipping marks and buyer’s reference. Beneficiary’s certificate stating the above has been complied with must be presented.
  2. The letter of credit number, Form “M” number and BA no must be mentioned on all shipping documents relating to this letter of credit.

What Does The Letter of Credit Rules State in Regards to The Shipping Marks?

Current letter of credit rules are silent in regards to shipping marks.

We can find related explanations in ISBP 745 between articles A32 to A34 under the heading of “Shipping Marks”.

isbp 2013 shipping marks

  1. ISBP 745 article A32 states that “When a credit specifies the details of a shipping mark, documents mentioning the shipping mark are to show those details. The data in a shipping mark indicated on a document need not be in the same sequence as those shown in the credit or in any other stipulated document.”
  2. ISBP 745 article A33 explains that “A shipping mark indicated on a document may show data in excess of what would normally be considered a “shipping mark”, or which is specified in the credit as a “shipping mark”, by the addition of information such as, but not limited to, the type of goods, warnings concerning the handling of fragile goods or net and gross weight of the goods.”
  3. ISBP 745 article A34 states that;
    a. Transport documents covering containerized goods often only show a container number, with or without a seal number, under the heading “Shipping mark” or similar. Other documents that show a more detailed marking will not be in conflict for that reason.
    b. The fact that some documents show additional information as mentioned in paragraphs A33) and A34) (a), while others do not, will not be regarded as a conflict of data under UCP 600 sub‐article 14 (d).

Suggestions For The Exporters Who Must Deal With The Shipping Marks:

  1. Shipping marks are a very loose term. As a result any symbol, word or number can be considered as a shipping mark in export and import transactions.
  2. All shipping documents could contain one or more shipping marks except the bill of exchange. Only letter of credit number can be written on in the face of the bill of exchange. Each packing unit may contain different types of shipping marks. Shipping marks used for the carton boxes may differ from the shipping marks of the container.
  3. If you are dealing with a letter of credit, you must make sure that you can supply the required documents as per letter of credit terms and conditions including shipping marks. Remember some documents will be created by official institutions according to inflexible bureaucratic methods. You may not be able to put a shipping mark on one of these documents.

References:

  1. Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:9
  2. Freight Transportation on: Global Highlights 2010, Page:4, Bureau of Transportation Statistics

What are the differences between received for shipment bill of lading and pre-printed shipped bill of lading?

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What are the differences between received for shipment bill of lading and pre-printed shipped bill of lading?

There are two types of bills of lading circulating around the globe in terms of pre-printed notifications:

  • Received for shipment bills of lading: Goods have been received by the carrier but not on board of a named vessel.
  • Shipped on board bills of lading: Goods have been received by the carrier and laden on board of a named vessel.

Received for Shipment Bill of Lading:

This bill of lading states that goods are received by the carrier in apparent good order.

Unless received for shipment bill of lading contains an additional “on board notation”, it does not confirms that the goods have been shipped on board to a named vessel.

Traditionally, received for shipment bills of lading does not give enough assurance to the banks in letter of credit, bank guarantee or standby letter of credit transactions.

Banks prefer to have a pre-printed shipped on board bills of lading.

Alternatively received for shipment bill of lading can be accepted with an “On Board Notation“.

Received for Shipment Bill of Lading Example:

Received for shipment bills of lading clause can be seen on the face of the bill of lading generally at the right bottom side of the page.

Without an additional on board notation, received for shipment bill of lading does not confirm that goods shipped on board a named vessel.

RECEIVED by the Carrier from the Shipper in apparent good order and condition unless otherwise indicated herein, the Goods, or package(s) said to contain the Goods, to be carried subject to all the terms and conditions herein.

Pre-Printed Shipped Bills of Lading:

Pre-printed shipped bills of lading not only confirm that goods have been received by the carrier, but also they have been shipped on board of a named vessel.

Banks accept pre-printed shipped bill of lading in trade finance transactions such as under commercial letters of credit, bank guarantee or standby letter of credit operations.

Pre-Printed Shipped Bill of Lading Example:

Pre-printed shipped bills of lading clause can be seen on the face of the bill of lading generally at the right bottom side of the page.

Pre-printed shipped bill of lading will be accepted by banks under most trade finance solutions.

Pre-printed shipped bill of lading confirms that goods shipped on board a named vessel as required by the letter of credit rules.

SHIPPED, as far as ascertained by reasonable means of checking, in apparent good order and condition unless otherwise stated herein, the total number or quantity of Containers or other packages or units indicated in the box entitled “Carrier’s Receipt” for carriage from the Port of Loading (or the Place of Receipt, if mentioned above) to the Port of Discharge (or the Place of Delivery, if mentioned above), such carriage being always subject to the terms, rights, defenses, provisions, conditions, exceptions, limitations, and liberties hereof (INCLUDING ALL THOSE TERMS AND CONDITIONS ON THE REVERSE HEREOF NUMBERED 1-26 AND THOSE TERMS AND CONDITIONS CONTAINED IN THE CARRIER’S APPLICABLE TARIFF) and the Merchant’s attention is drawn in particular to the Carrier’s liberties in respect of on deck stowage (see clause 18) and the carrying vessel (see clause 19).

Stale Documents

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stale documents

Some letters of credit indicate that stale documents are not acceptable. In rare circumstances letters of credit may also indicate that stale documents are acceptable.

But what is a stale document? When does a document set turn into a stale document phase as per latest letter of credit rules?

Why an issuing bank adds a phrase when issuing an l/c stating that : “stale documents are not acceptable” or “stale documents are acceptable”.

Does ICC encourage or discourage to use the “Stale Documents” term in letters of credit?

Background:

Letters of credit terminology have 3 important definitions in regards to the dates.

These definitions are

  • “Date of Shipment”,
  • “Presentation Period” and
  • “Expiry Date”.

If you want to understand “stale documents” definition, you should be familiar with these terms.

dates under letters of credit

Let me start explaining these definitions with the date of shipment.

Date of Shipment

When a pre‐printed “Shipped on board” bill of lading is presented, its issuance date will be deemed to be the date of shipment unless it bears a separate dated on board notation.

In the latter event, such date will be deemed to be the date of shipment whether that date is before or after the issuance date of the bill of lading.

date of shipment

Do you know the differences between pre-printed shipped on board bill of lading and received for shipment bill of lading?

Most commercial letters of credit demand presentation of a transport document.

According to letter of credit rules Multimodal Bill of Lading, Bill of Lading, Non-Negotiable Bill of Lading, Charter Party Bill of Lading, Air Transport Document, Road Transport Document, Rail Transport Document and Courier Receipt, Post Receipt or Certificate of Posting are considered to be a transport document.

On the other hand documents such as Forwarder’s Certificate of Receipt, Forwarder’s Certificate of Transport, Delivery Note, and Delivery Order are not considered to be a transport document under the latest version of the letter of credit rules known as UCP 600.

We can talk about the “date of shipment” term only if the letter of credit requests a transport document. Otherwise date of shipment will not be applicable.

Presentation Period 

According to the letter of credit rules a presentation by or on behalf of the beneficiary must be made on or before the expiry date.

Additionally, UCP 600 states that a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit.

These statements from the UCP 600 lead us to the definition of the presentation period.

The presentation period can be defined as a period of time which starts with the issuance of the letter of credit and ends either with the expiry date of the letter of credit or else with the expiry of the allowed period time commencing after the date of shipment in case presentation contains a transport document.

  • Presentation Period of a Letter of Credit When No Transport Document Must be Presented

If letter of credit does not require a transport document presentation, then the documents can be presented by the beneficiary any time between the letter of credit issuance date and the expiry date.

presentation period under letter of credit

  • Presentation Period of a Letter of Credit When a Transport Document Must be Presented

If letter of credit requires a transport document presentation, then the documents must be presented by the beneficiary within a certain time frame after the date of shipment.

UCP 600 defines presentation period as 21 days.

As per UCP 600, a presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment.

21 days period can be decreased or increased by the issuing banks.

Exporters must look at the “Field 48: Period for Presentation” in order to determine the exact presentation period under a specific letter of credit.

Presentation Period of a Letter of Credit

Presentation Period Examples

Presentation Period Example 1:
Field 48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN LC VALIDITY.

Presentation Period Example 2:
Field 48: Period for Presentation
21 DAYS AFTER SHIPMENT DATE BUT WITHIN CREDIT VALIDITY.

Presentation Period Example 3:
Field 48: Period for Presentation
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER ISSUANCE OF THE TRANSPORT DOCUMENT BUT WITHIN THE VALIDITY OF THIS CREDIT

Presentation Period Example 4:
Field 48: Period for Presentation
21 DAYS FROM THE DATE OF BILLS OF LADING.

Presentation Period Example 5:
Field 48: Period for Presentation
21 DAYS.

Presentation Period Example 6:
Field 48: Period for Presentation
DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS AFTER THE DATE OF SHIPMENT, BUT WITHIN THE VALIDITY OF THE CREDIT

Expiry Date

Expiry Date is the latest date for presentation of documents for payment, acceptance, or negotiation under a letter of credit transaction.

Exporters must complete their presentations before the expiry dates. After the expiry date, the letter of credit will be perish.

The issuing bank will be relieved all of its responsibilities, if no presentation has been made until the expiry date. In case of partial shipments non-utilized portion of the letter of credit will be vanish after the date of expiry.

Stale Documents Definition and Meaning:

ISBP 745 states that “stale documents acceptable” phrase should not be used in a letter of credit, as they are not defined in UCP 600.

If, nevertheless, it is used, and its meaning is not defined in the letter of credit, it shall have the following meaning under international standard banking practice:

Stale Documents Acceptable:

If “stale documents acceptable” stated in a letter of credit, then documents may be presented later than 21 calendar days after the date of shipment as long as they are presented no later than the expiry date of the credit.

This will also apply when the credit specifies a period for presentation together with the condition ”stale documents acceptable”.

ICC’s above explanation reveals that “stale documents” term should be used in conjunction with the situations in which letter of credit requires the presentation of a transport document.

Stale Documents Acceptable

Stale Documents Not Acceptable:

In most cases “stale documents not acceptable” condition can be seen in the documentary credits.

But this condition has no effect and meaning in a “letter of credit” transaction as a result issuing banks should refrain to use it.

Stale Documents Not Acceptable

Case Study: Documents Refused Due to Stale Documents

Letter of Credit
Field 46A: Documents Required

SIGNED COMMERCIAL INVOICE IN TWO ORIGINALS AND THREE COPIES INDICATING SEPARATELY FOB VALUE, FREIGHT CHARGES, INSURANCE PREMIUM AND TOTAL AMOUNT CIF JEDDAH. ORIGINAL INVOICE TO BE CERTIFIED BY CHAMBER OF COMMERCE

FULL SET CLEAN ON BOARD BILLS OF LADING MADE OUT TO THE ORDER OF NATIONAL COMMERCIAL BANK, JEDDAH MARKED FREIGHT PREPAID AND NOTIFY APPLICANT

CERTIFICATE OF ORIGIN ISSUED AND CERTIFIED BY CHAMBER OF COMMERCE STATING THE NAME OF THE MANUFACTURERS OR PRODUCERS AND THAT GOODS EXPORTED ARE WHOLLY OF DOMESTIC ORIGIN

PACKING LIST IN TRIPLICATE SHOWING DETAILS OF PACKING.

Field 47A: Additional Conditions
STALE DOCUMENTS NOT ACCEPTABLE UNLESS AUTHORIZED BY US.

Field 48: Period for Presentation
DOCUMENTS MUST BE PRESENTED WITHIN 21 DAYS AFTER ISSUANCE OF THE TRANSPORT DOCUMENT BUT WITHIN THE VALIDITY OF THIS CREDIT

Presentation and Refusal of Documents:

Beneficiary presented the documents to the nominated bank on 23rd of August.2014. The bill of lading which was presented by the beneficiary had an on board date 01.August.2014. The issuing bank refused the documents based on stale documents discrepancy, because documents have not been presented within 21 days after bill of lading date.

What does a non-documentary condition mean?

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Documentary Condition and nondocumentary condition

Non-documentary condition can be defined as any instruction or condition that is not clearly attributable to a document to be stipulated in a documentary credit. (Gary Collyer, The Guide to Documentary Credits, 3rd Edition, page.157)

Letter of credit has a unique characteristic which is described as a “documentary structure”.

We can see the definition of the “documentary structure” in article 5 of the latest version of the letter of credit rules which is known as UCP 600.

UCP 600 article 5 which is titled “Documents v. Goods, Services or Performance” states that

  • “Banks deal with documents and not with goods, services or performance to which the documents may relate.”

UCP 600 article 14 strengthen documentary structure of the letters of credit by stating that

  • “A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.”

As I have explained above banks deal only with the documents in the letters of credit transactions, when determining whether or not a presentation is complying.

This is a very straight forward and easy to understand situation.

documentary structure

Let me give some examples to the documentary conditions as follows:

  1. Documentary Condition Example:
    All documents must be issued or filled in English language.
  2. Documentary Condition Example:
    Certificate of origin issued in 1 original and 1 copy legalized by the local chamber of commerce attesting that goods are of China origin.
  3. Documentary Condition Example:
    Beneficiary certificate stating that ”the goods are delivered with wood packaging material which with HT or MB or DB-MB signs that confirm ISPM 15 standards. This mark (not sticker) is over packaging material, on two reverse sides and is not red or orange ‘or’ the goods are delivered without wood packaging material”

Things are getting complicated when a credit requires some conditions to be met, but does not specify a document relating to the condition.

Let me give some examples to the non-documentary conditions as follows:

  1. Non-Documentary Condition Example:
    Each piece of textile is labeled with a tag showing the following: brand, origin, material construction.
  2. Non-Documentary Condition Example:
    Exported goods must be Australian Origin.
  3. Non-Documentary Condition Example:
    Shipment details including date and place of loading, name, age, nationality, IMO number of the vessel, value of the goods, gross and net weights of the goods and the ref.no of the l/c have been sent to our bank’s fax no:+31 3180 633 50 12 within 2 days after shipment date for information purposes.

Documentary and Non-Documentary Conditions Examples

If a credit states a non-documentary condition, then things are getting complex not only for exporters or beneficiaries, but issuing and confirming banks as well.

In order to understand the consequences of the non-documentary conditions in a letter of credit transaction we need to have a closer look at the rules and international standard banking practices.

What Does the Letter of Credit Rules Say About the Non-documentary Conditions?

UCP 600 article 14-h indicates that

  • “If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.”

UCP 600 article 14-h non-documentary conditions

ISBP 745 paragraph A26 which is titled with “Non‐documentary conditions and conflict of data” further explains the situation and states that

  • “When a credit contains a condition without stipulating a document to indicate compliance therewith (“non‐documentary condition”), compliance with such condition need not be evidenced on any stipulated document. However, data contained in a stipulated document are not to be in conflict with the non‐documentary condition. For example, when a credit indicates “packing in wooden cases” without indicating that such data is to appear on any stipulated document, a statement in any stipulated document indicating a different type of packing is considered to be a conflict of data.”

Conclusion:

Issuing banks and applicants should be very careful not to insert any non-documentary conditions to the letter of credit.

They can achieve this by linking each condition to a document.

Beneficiaries should read the credit very well in terms of non-documentary conditions.

If they determine any non-documentary conditions in the credit, they should either have them deleted from the letter of credit or make sure that non-documentary conditions will not be creating a discrepancy during the presentation period.

Remember a data contained in any stipulated document should not to be in conflict with the non‐documentary conditions.

Otherwise banks determine that the presentation is not complying by referring related discrepancies.

Letter of Credit Discounting

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discounting a letter of credit

Letter of credit is not a cheque, but rather it is a conditional payment undertaking of the issuing bank.

As a result a beneficiary first of all needs to fulfill his obligations under a letter of credit, before considering himself to be eligible of the issuing bank’s payment.

The beneficiary can fulfill his obligations under a letter of credit by making a complying presentation.

Complying Presentation and Payment Mechanism:

Once the issuing bank receives the complying presentation from the beneficiary, it must honor, which means that;

  • to pay at sight if the credit is available by sight payment,
  • to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment,
  • to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

discounting a letter of credit

Most of the exporters think that they could discount a letter of credit as soon as they have received it from their banks.

This belief is not correct at all.

The beneficiary needs to make a complying presentation in order to receive any form of payment under the letter of credit.

No complying presentation means no payment under the letters of credit.

What Types of Letters of Credit Are Available to Discounting?

Letter of credit discounting is related to the letters of credit which are available with deferred payment, acceptance or negotiation.

At sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that beneficiary’s presentation is complying.

Some examples of letters of credit which can be subject to discounting:

EXAMPLE 1:

  • 41D AVAILABLE WITH/BY: ANY BANK BY NEGOTIATION
  • 42C DRAFTS AT: AT 90 DAYS AFTER BILL OF LADING DATE

EXAMPLE 2:

  • 41A AVAILABLE WITH/BY: DEIFUKISXXX BY DEF PAYMENT
  • 42P: DEFERRED PAYMENT DETAILS: AT 60 DAYS AFTER SHIPMENT DATE

EXAMPLE 3:

  • 41A AVAILABLE WITH/BY: EXPOUSTKXXX BY ACCEPTANCE
  • 42C DRAFTS AT: AT 120 DAYS AFTER INVOICE DATE

Understanding the Differences Between Discounting With or Without Recourse Basis:

In trade finance the letter of credit discounting and letter of credit negotiation used used in the same manner.

However they could have different meanings in regards to banking practice and commercial law.

Negotiation is defined under UCP 600 as follows: Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

Nominated banks discount the letters of credit with recourse basis. This mechanism defined as negotiation.

Confirming banks discount the letters of credit without recourse basis. This mechanism defined as forfaiting.

With forfaiting the bank cannot demand repayment of the amount in case it is not reimbursed by the issuing or the confirming bank. Nor can the bank demand payment of interest if refund is delayed. (1)

Special Hints on Letter of Credit Discounting for Exporters:

  1. Keep in mind that you cannot get any payment from banks unless you make a complying presentation under a letter of credit.
  2. Letter of credit discounting is related to the letters of credit which are available with deferred payment, acceptance or negotiation.
  3. At sight letters of credit should not require any discount mechanism as issuing banks or confirming banks must honor at sight credits as soon as they determine that beneficiary’s presentation is complying.
  4. If you would like to discount a letter of credit you should try to get discount approval from your bank before letter of credit is issued. You can get your bank’s discount approval and discount conditions by applying them with a draft letter of credit.
  5. Nominated banks discount the letters of credit with recourse basis. This mechanism defined as negotiation.
  6. Confirming banks discount the letters of credit without recourse basis. This mechanism defined as forfaiting.
  7. Confirmed letters of credit can be discounted more easily than unconfirmed letters of credit. For this reason try to have the letter of credit confirmed by your bank to ease up the discounting process.

References:

  1. Documentary credits in practice, Second edition – 2009, Reinhard Längerich, Page: 185

What Happens If a Letter of Credit Calls For a Wrong Incoterms?

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letter of credit calls for a wrong Incoterms

Daily practice shows us that Incoterms are not used in a correct way as per ICC rules.

Exporters and importers frequently use wrong incoterms in their sales contracts.

These kinds of mistakes would be very evident, especially when the parties decide to use a trade term with an unsuitable mode of transport.

On today’s post I try to explain the consequences of using a wrong incoterms under a letter of credit transaction.

Understanding the Incoterms:

Incoterms are the short form of International Commercial Terms and they are published by Commercial Law and Practice Commission of ICC.

Latest version of Incoterms rules are called Incoterms 2010 which has been in force since 01.01.2011.

According to Incoterms 2010 rules

  • FAS FREE ALONGSIDE SHIP (… named port of shipment),
  • FOB FREE ON BOARD (… named port of shipment),
  • CFR COST AND FREIGHT (… named port of destination) and
  • CIF COST, INSURANCE AND FREIGHT (… named port of destination) can only be used in a port-to-port sea transportation.

Remaining 7 seven Incoterms,

  • EXW EX WORKS (… named place),
  • FCA FREE CARRIER (… named place),
  • CPT CARRIAGE PAID TO (… named place of destination),
  • CIP CARRIAGE AND INSURANCE PAID TO (… named place of destination),
  • DAT DELIVERED AT TERMINAL,
  • DAP DELIVERED AT PLACE and
  • DDP DELIVERED DUTY PAID (… named place of destination) can be used in all modes of transport including port-to-port sea transportation.
incoterms 2010 classification
Incoterms 2010 Classification

But what happens if a letter of credit calls for a wrong incoterms such as FOB Singapore Changi Airport Incoterms 2010 or CIF Tokyo Airport Incoterms 2010?

According to ICC Banking Commission the exporter must fulfill the conditions stated in the letter of credit.

Even if a wrong Incoterms has been used in the letter of credit, the exporter should use this wrong trade term without making any corrections, otherwise issuing banks will refuse his presentation and he may be having difficulties to receive his payment under L/C.

Example 1:

Letter of Credit:

45A: Description of Goods &/or Services
CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02 DATED 03/07/2012 FOB Singapore Changi Airport Incoterms 2010

Commercial Invoice :
CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02 DATED 03/07/2012 FCA Singapore Changi Airport Incoterms 2010

Reason for Discrepancy: Trade terms stated in the commercial invoice is not consistent with the letter of credit.

Example 2:

Letter of Credit:

45A: Description of Goods &/or Services
6480CARTONS PREMIUM BRAND A10 CANNED PINEAPPLE CHUNKS IN NATURAL JUICE CIF NEWYORK PORT USA INCOTERMS 2000

Commercial Invoice:
6480CARTONS PREMIUM BRAND A10 CANNED PINEAPPLE CHUNKS IN NATURAL JUICE DAT NEWYORK PORT USA INCOTERMS 2010

Reason for Discrepancy: Trade terms stated in the commercial invoice is not consistent with the letter of credit.

Letter of Credit Currencies

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letter of credit cuurencies

Used as a medium of exchange for goods and services, currency is the basis of the trade.

It is expected that each country has its own currency.

As an example the United States Dollar is the official currency of the United States, the Japanese Yen is the official currency of Japan, the Renminbi is the official currency of the People’s Republic of China, the United Arab Emirates Dirham is the official currency of the United Arab Emirates.

EURO is an exception to national currencies, which is the currency of European Union member states.

Please keep in mind that some EU states still using their domestic currencies instead of EURO.

These countries are: Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Lithuania, Poland, Romania, Sweden, United Kingdom.

Today I would like to write about the currencies used in letters of credit transactions.

It turns out that it is both easy and hard to write about today’s post.

It is an easy to write post, because on the operational side the rules are very straightforward: You can use any currency in a letter of credit transaction as long as you are agreed on with your seller or buyer.

On the financial side, however, we should expect nothing less than a financial war between the nations, as each nation would like to use its own currency as much as possible to maximize its own benefits.

Operational Side : Choosing the Currency of the Letter of Credit

Letter of credit rules are silent in regards to which currency should be used in a specific documentary credit transaction.

As a result the buyer and seller can freely decide on which currency will be used in a specific l/c payment.

There are some points that should be take into account on operational side. Let me write down couple of them below:

  • Currency stated in the credit should be the one which is agreed by both parties on the sales contract.
  • Documents such as commercial invoice, insurance policy etc., must be issued in the same currency as that shown in the credit.
  • Especially when you issue the draft or bill of exchange, you should write the amount both in words and figures. On these occasions the amount in words is to accurately reflect the amount in figures when both are shown, and indicate the currency as stated in the credit.
  • Currencies in letters of credit should be shown in ISO 4217 format. ISO 4217 is the International Standard for currency codes. The most recent edition is ISO 4217:2008. The purpose of ISO 4217:2008 is to establish internationally recognized codes for the representation of currencies.

Financial Side : Dealing With the Currency Risk

In international trade one country’s currency is another country’s foreign currency. As a result at last one party in an international trade transaction has to work with a foreign currency.

In fact, in some cases both parties may have to be using a foreign currency.

Let me try to explain you what I mean with an example.

USD is the leading global trade finance currency for decades. Just in year 2012 USD is used as a currency more than 80% of all documentary credit transactions.

If an exporter from China selling machines to Saudi Arabia with a letter of credit issued in USD, then both parties have to bear currency exposure risk.

What Can Be Done to Prevent or Limit Foreign Exchange Risks?

  1. Try to determine the volatility of foreign exchange rates. Are there any political or financial risks on the horizon?
  2. Follow major central bank decisions. FED (The Federal Reserve), ECB (European Central Bank), BOJ (Bank of Japan) and BoE (Bank of England) decisions may fluctuate Forex markets widely.
  3. Be aware of not-fully convertible foreign currencies. Indian rupee and the Renminbi are not-fully convertible at the moment. You may have to pay extra charges when exchanging not-fully convertible currencies to your local currency.
  4. If your company is both exporting and importing at the same time you better try to make both transaction with the same currency. By doing so the matching of inflows and outflows will significantly reduce foreign exchange exposures of your company.
  5. Forward contracts, futures contracts and options are the most common techniques that used in international trade to prevent foreign exchange risks. Try to learn them.

Language of Letter of Credit Documents

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics ,
language of letter of credit documents

Banks decide whether a presentation is complying or not by only checking the documents under the letters of credit transactions.

Banks should be able to read the documents, which have been presented to them. Otherwise they can not check them.

As a result issuance of the documents with the correct language is the first requirement for a complying presentation.

On this post I will explain the language of the documents according to the ICC rules and regulations.

What Does the UCP 600 Tell Us About the Language of the Documents?

Surprisingly, latest letter of credit rules are silent in regards to the language of the documents.

For this reason, we have to look at the international standard banking practices to understand ICC Banking Commission’s perspective on this matter.

ISBP 2007 Regulations

ISBP 2007 has a very limited coverage about the language of the documents.

We can see related regulation only in article 23.

Article 23 of ISBP 2007 tells us that “it is expected that documents issued by the beneficiary will be in the language of the credit” and “when a credit states that documents in two or more languages are acceptable, a nominated bank may, in its advice of the credit, limit the number of acceptable languages as a condition of its engagement in the credit.”

It is understand from the practice that these statements are not enough to clarify the language of the documents subject.

As a result ICC banking Commission has made a significant change on this subject, when they were renewing the international standard banking practices.

ISBP 2013 Regulations

ISBP 2013 is the revised version of ISBP 2007. It has been effective since the beginning of June 2013.

Unlike previous versions, the new international standard banking practices has a detailed explanation about the language of the documents.

  • ISBP 2013 encourages issuing banks to specify the language of the credit with these wordings “when a credit stipulates the language of the documents to be presented, the data required by the credit or UCP 600 are to be in that language.” If the issuing bank would not specify the language of the credit, then the documents may be issued in any language.
  • Even if the issuing bank allows presentation of documents issued more than one language, the nominated bank or confirming bank may restrict the number of acceptable languages as a condition of their engagements in the credit.
  • For example issuing bank may allow presentation of documents issued either English or French, but the confirming bank can restrict the letter of credit for the documents only issued in English language. In such a case only the data written in English will be acceptable.
  • ISBP 2013 also states that banks do not examine data that have been inserted in a language that is additional to that required or allowed in the credit. As an example, let us assume that the credit calls for documents issued in English language only. If the exporter presents a commercial invoice issued in English language, but having additional Arabic information, banks do not control the Arabic written parts. They check the English parts only.

There is one more sub-article exists in ISBP 2013, which is clarifying the language of stamps, legalization and endorsements, however I would like to write about this subject in the near future with an example.

Case Study : What Does Commerzbank Think About the Language of the Documents?

Before finalizing this post, let me give you a real life example from Commerzbank:

“Thus it is essential that the participating banks are able to determine that the documents are complying.

Commerzbank does not believe it is reasonable to expect them to have documents translated before their conformity can be checked, a process that might result in deadlines for checking documents being exceeded.

It is for that reason that Commerzbank rejects documents which language cannot be checked or honors them under reserve only.”

How to Handle a Letter of Credit Which Contains a Joker Clause?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics
joker clause letter of credit

“A credit should not require presentation of documents that are to be issued, signed or countersigned by the applicant” says International Standard Banking Practice (ISBP 745) in its preliminary conditions section.

Sometimes importers or importers’ banks attempt to include such clauses in letters of credit.

On this page I will examine the letters of credit that request a document to be issued, signed or countersigned by the applicants.

Structure of the Letter of Credit and Why It Matters:

A letter of credit is issued by the issuing bank with the request of and instructions given by the importer. Importer also known as the applicant.

The letter of credit is issuing banks irrevocable and conditional payment undertaking.

Which means that the beneficiary of the credit will be getting paid by the issuing bank against the presentation of required documents and provided that all terms and conditions of the credit are complied with.

Under normal circumstances a beneficiary should be able to collect all of the stipulated documents without the intervention of the applicant.

This is how a reasonable and decent letter of credit works.

However, the importers include some clauses in to the credits and manipulating them in a way that they require a document which can not be presented without an action of the applicant.

In letter of credit terminology, these clauses are called as “Joker Clauses”.*

joker clause infographic

Joker Clauses can be seen either in Field 46-A Documents Required or Field 47-A Additional Conditions.

Below you can find some examples of so called Joker Clauses.

Joker Clause Examples:

Some examples of “Joker clauses” which makes presentations dependent on applicants participation:

  • Example 1: Certificate of acceptance signed by the authorized stuff of applicant
  • Example 2: Certificate of acceptance issued by the applicant
  • Example 3: Certificate of acceptance issued by the applicant’ agent
  • Example 4: Original beneficiary’s invoice duly endorsed on reverse by two authorized official’s of the applicant.
  • Example 5: Certificate of acceptance countersigned by authorized applicant’s agent.
  • Example 6: Payments can be effected only after goods have been cleared from import customs.
  • Example 7: Inspection certificate showing that goods have been inspected and delivered in good manner by an inspection company to be named by applicant after shipment.

What Should an Exporter Do After Finding One of These Joker Clauses in its Letter of Credit?

Joker Clauses disrupt the structure of the letter of credit.

ICC discourage issuing banks to include any Joker Clauses in to the credits. Despite all of these efforts, it is possible to see joker clauses in the letters of credit.

Let me try to create a road map for these situations for the beneficiaries.

  • Step 1: Read the credit very well. If you can not determine whether any joker clause have been added to the credit or not, apply for a professional assistance.
  • Step 2: If you find a Joker clause in the credit, reach to your customer. Explain your customer that the Joker clause is unacceptable for you. Demand an amendment.
  • Step 3: The amendment should be advised to you within 3-10 days, after your customer gives necessary amendment request to the issuing bank. Amendment will be advised through the same advising bank, which had advised the original credit to you.
  • Step 4: Once you received the amendment from the advising bank, you need to re-check it in order to make sure that the Joker Clause has eliminated.

Summary:

If the letter of credit contains conditions that the beneficiary (exporter) cannot fulfill without cooperation with the applicant (importer) or a party contracted by the applicant, then this is known as a conditional letter of credit or a “Joker Clause”.

Beneficiaries should delete these kind of clauses from the credits. Otherwise they will be facing a non-payment.