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How Does a Bill of Exchange Work?

Ozgur Eker (CDCS)
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How Does a Bill of Exchange Work?

Bill of exchange, which is also known as draft, is a financial document commonly used in international trade transactions.

According to UK’s Bill of Exchange Act (1882), the bill of exchange defined as an “unconditional order in writing, addressed by one person to another, signed by the person giving it (drawer), requiring the person to whom it is addressed (drawee) to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person (payee), or to bearer”.

Parties to a Bill of Exchange:

  • Drawer of a Bill of Exchange / Draft: Is the party that issues a Bill of Exchange in an international trade transaction; usually the seller or exporter.
  • Drawee of a Bill of Exchange / Draft: Is the recipient of the Bill of Exchange for payment or acceptance in an international trade transaction; usually the importer or importer’s bank.
  • Payee of a Bill of Exchange / Draft: Is the party to whom the Bill is payable; usually the seller or his bank.

How Does a Bill of Exchange Work in the Documentary Collections?

Documentary Collection (D/C) is a payment method in international trade. Documentary collection is also known as Cash Against Documents (CAD).

There are two payment options available in the documentary collections: Documents Against Payment (D/P) and Documents Against Acceptance (D/A).

Under the documents against payment option, it is not advisable to use a bill of exchange. The importer should make the payment at sight against the documents.

Under the documents against acceptance (D/A) payment option, it is advisable to use a bill of exchange payable at a future date (time draft).

Bill of Exchange Workflow in the Documentary Collections:

The bill of exchange workflow under documents against acceptance (D/A) payment option is as follows:

The exporter issues a bill of exchange payable at a future date (time draft) along with other shipping documents and sends it to the importer via his bank on collection basis.

The importer applies to his bank, accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.

How Does a Bill of Exchange Work in the Letters of Credit?

There are four payment options available in the letters of credit: Sight payment, acceptance, deferred payment and negotiation.

It is not possible to use a bill of exchange in the letters of credit, which are available by deferred payment.

On the other hand, every letter of credit that is issued available by acceptance must demand presentation of a bill of exchange along with other shipping documents.

Under sight payments and negotiation, the bill of exchange may or may not be used.

Bill of Exchange Workflow in the Letters of Credit:

The bill of exchange workflow in the letters of credit available by sight payment, acceptance or negotiation is as follows:

Sight Payment:

After making the shipment, the exporter collects all the shipping documents and issues an at sight bill of exchange to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.

If the bank determines that the presentation is complying, then pays the credit amount to the beneficiary.

Acceptance:

After making the shipment, the exporter collects all the shipping documents and issues a time draft (bill of exchange payable at a future date) to make the presentation to the issuing bank or confirming bank or nominated bank, as applicable.

If the bank determines that the presentation is complying, then accepts the time draft and pays the credit amount to the beneficiary at maturity.

Negotiation:

The letters of credit available by negotiation can be payable at sight or usance.

If the letter of credit requires an at sight bill of exchange, the process will be the same as the sight payment.

If the letter of credit requires presentation of a time draft, the process will be the same as the acceptance.

Conclusion:

  1. Bill of exchange plays an important role in commercial and financial cycles not only as a method of payment or a way of providing credit, but also as security for payments. (1)
  2. Bill of exchange mainly used in documentary collections and letters of credit.
  3. Under the documentary collections, the bill of exchange can be used only when Documents Against Acceptance (D/A) payment option is chosen.
  4. Under the documentary collections, the bill of exchange payable at a future date (time draft) drawn on the importer. The importer accepts the bill of exchange, receives the documents, clears the goods from the customs and makes the payment at the maturity date of the bill of exchange.
  5. If the importer does not pay the bill of exchange amount at maturity, the exporter tries to use his legal rights that is stem from the bill of exchange.
  6. Under the documentary collections, the importer’s banks has no payment obligation unless the bill of exchange has been avalized by the importer’s bank.
  7. Under the letters of credit, the bill of exchange can be used with at sight, acceptance and negotiation payment options.
  8. Under the letters of credit, the bill of exchange can be issued at sight or payable at a future date (time draft).
  9. Under the letters of credit, the bill of exchange must be drawn on a bank that is specified in the credit.
  10. Under the letters of credit, the bill of exchange does not give additional payment guarantee to the beneficiary, whereas the situation will be different for the banks. Bill of exchange may change the payment obligation between the nominated bank and the issuing bank; the confirming bank and the issuing bank etc.

References:

  1. Bills of Exchange, A Guide to Legislation in European Countries, Dr. jur. Uwe Jahn, ICC Publication No 531 (E), 1996, P:3

Is It Possible to Get Partial Payments When Making Partial Shipments?

Ozgur Eker (CDCS)
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Is It Possible to Get Partial Payments When Making Partial Shipments?

Partial shipments, partial drawings and partial payments are very closely related terms in letters of credit transactions.

A beneficiary can make partial shipments, if the letter of credit allows partial shipments explicitly; or else it is silent in regards to the partial shipments.

If a letter of credit disallows partial shipments, this means that the beneficiary can not make any partial shipments under that letter of credit.

After reading this article, you should understand the connection between partial shipments, partial drawings and partial payments under letters of credit.

Example:

A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:

  • 32B: Currency Code, Amount
    Currency : USD (US DOLLAR)
    Amount : #300.000,00#
  • Field 43P: Partial Shipments: Allowed
  • Field 43T: Transhipment: Not Allowed
  • Field 45-A: Description of Goods: 3 Pcs of Olive Oil Processing Machinery
  • Field 46A: Documents Required:
    • 1 original signed commercial invoice and 1 copy.
    • 1 original packing list and 1 copy.
    • Full set of original bill of lading clean on board marked freight collect made out to the order of Issuing Bank, notify applicant.

Analysis:

The beneficiary has to ship 3 olive oil processing machinery under this sample letter of credit.

Shipping only 1 olive oil processing machinery is a partial shipment.

After shipping 1 olive oil processing machinery, the beneficiary collects the shipping documents and makes the presentation to the issuing bank.

The beneficiary demands 100.000,00 USD from the issuing bank. This is the partial drawing as the beneficiary demands not the full credit amount.

The issuing bank checks the documents, and if the documents are complying then the issuing bank pays 100.000,00 USD to the beneficiary, which is the partial payment.

Conclusion:

It is possible to get partial payments under the letters of credit, when partial shipments have been effected. Actually it is why partial shipments exist at the first place.

Partial Drawings and Partial Shipments: What is the Difference?

Ozgur Eker (CDCS)
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Partial Drawings and Partial Shipments: What is the Difference?

Partial shipment and partial drawing terms are usually used with the same meaning in export and import transactions.

But this is not necessarily the case especially in standby letters of credit and bank guarantees.

On this post you can find the definitions of both partial drawings and partial shipments, as well as the differences between partial shipments and partial drawing via examples.

Definition of a Partial Drawing: A presentation which is made for less than the full amount available will be defined as a partial drawing.

Definition of a Partial Shipment: If a beneficiary under a letter of credit ships the credit amount in a single lot, which is corresponding to the whole credit amount, loaded with a single means of conveyance; then this can be defined as a complete shipment.

All other shipments, which are not complete and/or loaded with more than one means of conveyance, can be defined as partial shipments.

Example:

A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:

Important Note: The letter of credit is silent about the partial shipments and transhipments.

Field 45A-Description of Goods: Quantity: 2,000 M/Ts Material: Hot Rolled Steel Plates -Size: -20.00MM x 2000 MM x 1000 MM – 500 M/Ts 25.00MM x 2000 MM x 1100 MM – 1500 M/Ts

Field 46A: Documents Required:

  • 1 original signed commercial invoice and 1 copy.
  • 1 original packing list and 1 copy.
  • 1 original forwarder’s certificate of receipt issued to the name of the issuing bank bearing a clause that goods have been assumed control by the named forwarder with irrevocable instructions to be forwarded to the consignee and marked freight payable at destination.

Analysis:

The letter of credit is silent in regards to the partial shipments and partial drawings.

In these kinds of situations, where the L/Cs are silent about the partial shipments and partial drawings, we need to look at the latest letter of credit rules.

UCP 600, which is the latest set of letter of credit rules, tells us that the partial shipments and partial drawings are allowed if the letter of credit is silent in this regard.

In the above example, it is understood that the letter of credit is requesting a FCR (Forwarder’s Certificate of Receipt).

According to the letter of credit rules, FCR is not a transport document. It is not possible to make partial shipments under the letters of credit, which do not demand a transport document.

However, it is possible for the beneficiaries to demand partial drawings from the issuing banks.

Conclusion:

Partial shipment is related to the transport documents. If the letter of credit do not request a transport document, then technically you can not make a shipment.

Which means that it is not possible to make a partial shipment under the letter of credit, that do not request a transport document.

However, it is possible to demand less than the full letter of credit amount from the issuing banks under such circumstances. Which is called the partial drawings.

Most of the stand-by letters of credit and bank guarantees do not require presentation of an original copy of the transport document.

What are the Consequences of not Allowing Partial Shipments?

Ozgur Eker (CDCS)
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What are the Consequences of not Allowing Partial Shipments?

Normally the letter of credit rules allow partial shipments.

UCP 600 Article 31 states that partial drawings or shipments are allowed.

If an applicant does not want to permit partial shipments, he must give clear instructions to the issuing bank to this effect, when opening the letter of credit.

Why Would Applicants Prohibit Partial Shipments?

Applicants would like to prohibit partial shipments for technical and commercial reasons:

  • Technical Reasons to Disallow Partial Shipments: Shipping of goods in partial may not be meaningful.

For example, if an exporter should be dispatching one piece of Offset Printing Machine under a letter of credit, shipping the machine dismantled via partial shipments would be meaningless.

As a result, an importer needs to disallow partial shipment under such a scenario.

  • Commercial Reasons to Disallow Partial Shipments: Under some circumstances, commercial conditions may make partial shipments unsuitable for the importers.

Generally, importers are not the end buyers in international trade transactions. They are big wholesalers.

They import the goods in to their countries and then they will distribute them to smaller distributors or end customers.

If importers need specific amount of goods within a specific periods of time, they may forced to prohibit partial shipments under the letter of credit transactions.

What are the Consequences of Prohibiting Partial Shipments?

If partial shipments are not allowed under a letter of credit, issuing bank, confirming bank and nominated bank should check the presented documents very carefully in order to make sure that documents do not evidence a partial shipment.

Not allowing partial shipments under letters of credit would result below consequences:

  • Exporters could not make short shipments, except allowed tolerance limits, if any, under letters of credit where partial shipments are prohibited.
  • Exporters could not make partial drawings and could not get partial payments from the banks.
  • Exporters who act on the contrary may face discrepancies and non-payment risks.

Comparison Between the Partial Shipment and Transshipment

Ozgur Eker (CDCS)
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Comparison Between the Partial Shipment and Transshipment

Definition of Transshipment: Transhipment means unloading from one means of conveyance and reloading to another means of conveyance during the carriage as enrouted in the letter of credit.

Definition of Partial Shipment: If a beneficiary under a letter of credit ships the credit amount in a single lot, which is corresponding to the whole credit amount, loaded with a single means of conveyance; then this can be defined as a complete shipment.

All other shipments, which are not complete and/or loaded with more than one means of conveyance, can be defined as partial shipments.

What are the Important Points of Transshipment?

  • Transshipment is not regulated under cash in advance payment, open account or documentary collections rules.
  • Letter of credit rules have special articles covering transshipments.
  • Air transportation mostly requires couple of transshipments before the cargo arrives to the airport of destination. Prohibiting transshipment in air transportation may result undesired consequences.
  • Multimodal transportation must require at least one transhipment. Prohibiting transhipment in multimodal transportation should be avoided.

What are the Important Points of Partial Shipments?

  • Partial shipment is not regulated under cash in advance payment, open account or documentary collections rules.
  • Letter of credit rules have special articles covering partial shipments.
  • Disallowing partial shipments may huge impact on exporter’s shipment flexibility, as a result it must be used very carefully.
  • If letter of credit amount can not be shipped in a single truck and requires more than one truck usage, partial shipment should not be prohibited when road transportation will be used.

Why Transhipment is not Allowed by Banks?

Transhipment is getting more important for the importers and banks when they are dealing with sanctions, embargoes and trade restrictions. Importers and banks may want to prevent the cargo entering any unwanted country, seaport, airport etc by prohibiting the transshipment.

Other than that the importers may try to prohibit transshipments for their own commercial interests.

Why Partial Shipment is not Allowed by Banks?

Partial shipment will be prohibited by banks mainly on commercial basis. Most of the times the importers request from the issuing banks not to allow partial shipments.

Conclusion:

Both partial shipments and transshipments are important concepts in their own way of effecting the process of letters of credit transactions.

Importers should refrain prohibiting both partial shipments and transshipments as long as legal or commercial conditions dictates so.

What is a Partial Shipment?

Ozgur Eker (CDCS)
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What is a Partial Shipment?

On this post, I would like to explain partial shipments in letters of credit.

You can find detailed explanations regarding the definition and conditions of the partial shipments.

Definition: If a beneficiary under a letter of credit ships the credit amount in a single lot, corresponding to the whole credit amount, loaded with a single means of conveyance, then this can be defined as a complete shipment.

All other shipments, which are not complete and/or loaded with more than one means of conveyance, can be defined as partial shipments.

Partial Shipments and Partial Drawings:

If a partial shipment is effected under a letter of credit, then the drawing amount must match the shipped goods.

Partial shipment must correspond to the partial drawing.

Let us assume that a beneficiary makes two partial shipments under a commercial letter of credit. 1st shipment is for the amount of 200.000 USD and 2nd shipment is for the amount of 300.000 USD.

The beneficiary demands 200.000 USD from the issuing bank for the 1st shipment and 300.000 USD for the 2nd shipment.

This mechanism is called partial drawings. Both drawings are independent from each other. For example, 1st drawing may be clean without any discrepancies, but 2nd drawing may be rejected based on a discrepant presentation.

Partial Shipments and Partial Drawings
Letter of Credit Example: Partial Shipments and Partial Drawings

What are the Conditions of a Partial Shipment?

In certain situations it would be a very tricky job determining whether a partial shipment has been effected or not.

Things are getting complicated especially if more than one set of transport documents have been presented under the same presentation.

For this reason it would be better to explain partial shipment definitions under two conditions:

  • Determining partial shipments when only one set of original transport documents have been presented:

It is comparatively straight forward determination of the partial shipment if only one set of original transport documents have been presented and they are evidencing shipment on one means of conveyance within the same mode of transport.

Checking the shipment quantity and drawings would be enough.

If the letter of credit amount has not been drawn in full and documents are showing that the goods have not been loaded completely, you can reach to the conclusion that partial shipment has been effected.

Important Note: Please kindly keep in mind that the letter of credit rules allow some tolerances even when partial shipments are prohibited.

How to determine partial shipment when presentation consisting of one set of transport documents?

Example 1: A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:

Letter of Credit Conditions

Field 43P: Partial Shipments: Not Allowed

Field 43T: Transhipment: Allowed

Field 45A: Description of Goods and or Services: Frozen Seabass and Seabream. Frozen Seabass Price: 6 USD/KGS Frozen Seabream Price: 7USD/KGS Quantity: 5000 KGS seabass and 5000 KGS seabream 10.000 KGS in total. Delivery Terms: CIF Rotterdam Seaport Netherlands Incoterms 2010.

Field 46A: Documents Required:

  • 3 original signed commercial invoices and 3 copies.
  • Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating South African origin of the goods.
  • Insurance certificate or policy in assignable form and endorsed in blank for 110% CIF commercial invoice value covering all risks showing claims payable in Netherlands in commercial invoice currency.
  • Full set of original bill of lading shipped on board established to the order of Bank Nederlandse Gemeenten notify applicant company marked freight prepaid.

The beneficiary presented one set of original bills of lading among other documents with the following data:

Bill of Lading and Conclusion: 

partial shipment example

  • Determining partial shipments when more than one sets of original transport documents have been presented:

If more than one sets of original transport documents have been presented under the same letter of credit presentation, you can not determine whether partial shipment has been effected by simply comparing the actual shipment quantity and amount with the letter of credit quantity and amount.

You have to check couple of additional variables in order to reach the correct conclusion.

How to determine whether partial shipment has been effected when the presentation consisting of more than one sets of transport documents:

  • Step 1 : Checking the total quantity and amount shipped: If total quantity and amount less than what letter of credit states you can say that partial shipment has been effected.

If actual shipment amount and quality equals to the letter of credit requirements, then you further need to check the transport documents.

  • Step 2 : Checking the transport documents: If the transport documents evidencing shipment commencing on the same means of conveyance and for the same journey, provided they indicate the same destination, will not be regarded as covering a partial shipment, even if they indicate different dates of shipment or different ports of loading, places of taking in charge or dispatch.

If the transport documents evidencing shipment on more than one means of conveyance within the same mode of transport, this will be regarded as covering a partial shipment, even if the means of conveyance leaves on the same day for the same destination.

Example 2: A letter of credit has been issued in SWIFT format, subject to UCP latest version, with the following details:

Letter of Credit Conditions

Field 43P: Partial Shipments: Not Allowed

Field 43T: Transhipment: Allowed

Field 45A: Description of Goods and or Services: Frozen Sliced Red Peppers and Frozen Sliced Potatoes. Frozen Sliced Red Peppers Price: 2 USD/KGS Frozen Sliced Potatoes Price: 1,5 USD/kgs Quantity: 10000 kgs peppers and 10000 kgs potatoes 20.000 KGS in total. Delivery Terms: CIF Dammam Seaport Kingdom of Saudi Arabia Incoterms 2010.

Field 46A: Documents Required:

  • 3 original signed commercial invoices and 3 copies.
  • Certificate of Origin issued and certified by the Chamber of Commerce in Beneficiary’s country indicating South African origin of the goods.
  • Insurance certificate or policy in assignable form and endorsed in blank for 110% CIF commercial invoice value covering all risks showing claims payable in Kingdom of Saudi Arabia in commercial invoice currency.
  • Full set of original bill of lading shipped on board established to the order of AlAhli Bank notify applicant company marked freight prepaid.

The beneficiary presented two sets of original bills of lading among other documents with the following data:

partial shipment example 2

Conclusion of the Example 2: Letter of credit amount shipped in full. 10000 kgs frozen sliced red peppers and 10000 KGS frozen sliced potatoes have been loaded which makes 20.000kgs in total as the same as letter of credit requested, but presentation consisting of more than one set of bills of lading, which means that we have to look at the bills of lading in order to determine whether partial shipment effected or not.

First bill of lading shows the vessel name “Sea Voyager” voyage number “IV”. Second bill of lading shows the vessel name ” Blue Bird” voyage number “1337 “. There are two means of conveyances (two different vessels) have been utilized on this shipment, as a result partial shipment has been effected.

What Does Full Set of Bills of Lading Mean?

Ozgur Eker (CDCS)
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What Does Full Set of Bills of Lading Mean?

Under an ordinary letter of credit, the issuing bank demands a full set of clean shipped on board ocean bills of lading from the beneficiary.

But what is a full set of bill of lading according to the letter of credit rules? How does a beneficiary make sure that he presents a full set of bills of lading?

Most of the transport documents, that is subject to international transportation, issued in more than one originals.

For example, a CMR road consignment note is issued in 3 original copies. The first copy for the exporter, the second to accompany the goods; and the third for retention by the carrier. (1)

Understanding the Reasons Behind the Issuance of Multiple Original Transport Documents:

International transport documents can be classified under two main groups: Negotiable transport documents and non-negotiable transport documents.

 

Multiple Original Transport Documents

Negotiable transport document is a title of goods, such as an original bill of lading, which can be transferred to another party by endorsement.

At least one original negotiable transport document must be surrendered to the carrier by the consignee at the place of destination to collect the goods.

Negotiable transport documents are issued in more than one originals in order to prevent lost of documents.

Non-negotiable transport document is a not a title of property and the consignment is placed at the disposal of the stipulated consignee against a proof of identity without further need to surrendering any original transport document.(2)

Non-negotiable transport documents are issued in more than one originals mainly for operational purposes as some of the original copies of these documents are traveling with the goods.

Full Set of Ocean Bills of Lading Under a Letter of Credit

According to the letter of credit rules, a bill of lading is to indicate the number of originals that have been issued and all of the originals stated on the bill of lading have to be presented by the beneficiary to the issuing bank, unless otherwise indicated in the credit.

For example, container carriers issue bills of lading in a set of 3 original and 3 copies as an established tradition for decades.

The letter of credit rules taking into account only the original bills of lading as a transport document by disregarding the non-negotiable copies.

Example:

  • A letter of credit issued asking for a full set of clean ”shipped on board” negotiable bill of lading showing freight prepaid made out/endorsed to the issuing bank, notifying the issuing bank and the applicant with full address.
  • The bill of lading indicated that it has issued in 3 originals.
  • The beneficiary has presented all of the 3 originals as a full set of bills of lading.

Important Note: The beneficiary could have presented 3 originals and 3 copies of the bills of lading without any problem.

Letter of Credit Rules:

UCP 600 – Article 20 – Bill of Lading
iv- Be the sole original bill of lading or, if issued in more than one original, be the full set as indicated on the bill of lading.

ISBP 2007 – Full set of originals Paragraph 93
As per UCP 600 article 20 transport document must indicate the number of originals that have been issued. Transport documents marked “First Original”, “Second Original”, “Third Original”, “Original”, “Duplicate”, “Triplicate”, etc., or similar expressions are all originals. Bills of lading need not be marked “original” to be acceptable as an original bill of lading. In addition to UCP 600 article 17, the ICC Banking Commission Policy Statement, document 470/871(Rev), titled “The determination of an ‘Original’ document in the context of UCP 500 sub-Article 20(b)” is recommended for further guidance on originals and copies and remains valid under UCP 600. The content of the Policy Statement appears in the Appendix of this publication, for reference purposes. (Please keep in mind that ISBP 2007 has been updated and is not the effective version as of July 2013.)

References:

  1. The CMR Convention, The British International Freight Association (BIFA) Website, Retrieved: 21.06.2018
  2. Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page:50

Correct Addresses of the Beneficiary and the Applicant

Ozgur Eker (CDCS)
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Correct Addresses of the Beneficiary and the Applicant

When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit.

Laura from Germany is asking a question regarding the beneficiary’s address.

She would like to know whether banks can control the address indicated in the letter of credit by comparing it with their internal systems. Below you can find her question and my answer respectively.

Question:

Good day,

I would like to know whether you can advise what responsibility the bank would have if they receive an L/C for their client, to the correct NAME of the beneficiary BUT the address indicated in the L/C does not match with the address in the registry of the bank (customer’s address).

Is the bank supposed to recheck this information BEFORE accepting the L/C?

Also, when the bank receives the shipping documents from their client, again the address in the invoice, packing list, etc. is NOT the same address as they one they have in their registry.

Would very much appreciate your comments.

Thanks / regards

Laura

Answer:

Dear Laura,

“Wrong name and address of the beneficiary or applicant” is one of the most common discrepancy types under l/c transactions.

A beneficiary of the letter of credit has to present discrepancy free documents in order to get his payment from the issuing bank.

The issuing bank has to follow the letter of credit rules when checking the documents.

Related article of the letter of credit rules is mentioned below:

Article 14 – Standard for Examination of Documents

j: When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone, email and the like) stated as part of the beneficiary’s and the applicant’s address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document subject to articles 19, 20, 21, 22, 23, 24 or 25, they must be as stated in the credit.

k. The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

As it is seen from above quotes, neither the address of the beneficiary or the address of the applicant has to match the addresses stated in the letter of credit. Only exception of this rule is the the consignee or notify party details on the transport documents.

Additionally, according to the letter of credit rules the shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

Which means that 3rd party documents are acceptable.

But in some situations, the issuing bank do not allow presentation of 3rd party documents by adding special conditions to the letter of credit.

As a result it is advisable to use both beneficiary and applicant names on the documents as stated in the letter of credit.

Also try to copy the correct addresses of the beneficiary and the applicant to the documents from the letter of credit without making any mistake.

There is no ground for a bank to check a beneficiary’s address with his internal system, as long as the letter of credit do not indicate so.

I assume the issuing bank may have suspected from a fraudulent transaction.

Means of Conveyance and Mode of Transport

Ozgur Eker (CDCS)
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Means of Conveyance and Mode of Transport

Modes of Transport is a term used to distinguish substantially different ways to perform transport.

The most frequently used modes of transport in international trade are air transportation, land transportation, rail transportation, sea transportation and multimodal transportation.

Means of Conveyance is a term describing something that serves as a means of transportation, such as a vessel, truck, aircraft etc.

On this page, I will try to explain two important logistics terms: modes of transport and means of conveyance and their applications under the letter of credit rules.

Modes of Transport in Letters of Credit:

Modes of transport term used in connection with the determination of the multimodal transport documents under the letter of credit transactions.

Multimodal transportation is the movement of one unit load from origin to destination by several modes of transportation under one document without breaking up the unit load. (1)

According to the letter of credit rules, if a transport document covers at least two different modes of transport, then it is regarded as a multimodal bill of lading.

The title of the transport document is not important.

UCP 600 Article 19 – Transport Document Covering at Least Two Different Modes of Transport
a. A transport document covering at least two different modes of transport (multimodal or combined transport
document), however named,…

Example: A letter of credit asks for a full set of shipped on board multimodal ocean bills of lading marked freight payable at destination made out to the order of issuing bank marked notify applicant.

Transport Document: The bill of lading shows port to port sea shipment between a German port to Djibouti Port and a land or rail transport between Djibouti Port to Modjo Dry Port. The presented document is a multimodal bill of lading according to the letter of credit rules, regardless of the title of the transport document.

Means of Conveyance in Letters of Credit:

Means of conveyance term used in connection with the determination of the transshipment and partial shipments under the letter of credit transactions.

Transshipment:

According to the letter of credit rules transhipment means unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport) during the carriage that takes place between the route indicated in the credit.

For example, under sea shipments transhipment means unloading from one vessel and reloading to another vessel during the carriage from the port of loading to the port of discharge stated in the credit.

According to the letter of credit rules transhipment can be occurred only if,

  • happened during the carriage that takes place between the route indicated in the credit.
  • cargo is unloading from one means of conveyance and reloading to another means of conveyance (whether or not in different modes of transport).

Partial Shipments:

According to the letter of credit rules, a presentation consisting of one or more sets of transport documents evidencing shipment on more than one means of conveyance within the same mode of transport will be regarded as covering a partial shipment, even if
the means of conveyance leave on the same day for the same destination.

References:

  1. Shipping and Incoterms, Practice Guide, UNDP Practice Series, Page: 6

Partial Acceptance of Amendments

Ozgur Eker (CDCS)
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Partial Acceptance of Amendments

According to the letter of credit rules, the beneficiary should communicate its acceptance of the amendment to the bank that advised such amendment.

The beneficiary should give notification of acceptance or notification of rejection of an amendment.

If the beneficiary fails to give such notification of acceptance, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment.

As of that moment the credit will be amended.

But, what happens if a beneficiary of a letter of credit partially accepts an amendment?

Real Life Example: Kuldeep is Asking This Question From India

case study:Partial Acceptance of Amendments

Question: We have opened a confirmed 100% irrevocable lc at sight to our supplier in China on 28.January.2014 from our local bank in India.

Just after the issuance of the letter of credit our supplier contacted us for demanding more shipment period.

We amend the letter of credit by extending the latest date of shipment and expiry date.

One month later, our supplier, who is the beneficiary of the commercial letter of credit, got in touch with us again and requested another extension of the shipment period. We agreed and amended the letter of credit second time.

However the exporter again demanded from us more time to shipment. This time we add additional conditions to our amendment in addition to extension of latest date of shipment and date of expiry of the credit.

The seller accepted some clauses in the 3rd amendment and rejected others.

We have warned our supplier that partial acceptance of amendments is not allowed according to the UCP 600.

We told him that partial acceptance of amendments means the rejection of that particular amendment altogether. Our supplier denied our requests and insisted on his stance.

What we would like to know is that whether our letter of credit expired or not? You can find latest date of shipment dates and expiry dates corresponding to our amendments on above figure.

Answer: Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment.

The beneficiary neither accepted the 3rd amendment nor they have made any shipment before the latest date of shipment or presented the documents before the expiry date.

The letter of credit has expired on 21.June.2014.

What is the effectiveness date of an amendment?

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