Article

China

Edward Trading LLC received an irrevocable documentary credit no. xxx issued by a Chinese bank for the account of a Chinese buyer through our bank, the advising bank, in our favour for USDxxxxx available with any bank by negotiation with a draft at sight to be drawn on the issuing bank. The L/C expired on 15 April 2012 in the beneficiary's country, and shipment was to be made on or before 31 March 2012 from USA airport to China airport covering one set of medical equipment with details as per contract no. xxxxxxx accompanied by the following documents:

1. signed commercial invoice in duplicate;

2. packing list in duplicate with weight and measurement to be indicated;

3. manufacturer's inspection certificate indicating the commodity described herein was in conformity with the contract, and that the marking requirements have duly complied with the contract;

4. air waybill consigned to and notifying the applicant with the full address indicated "freight to collect", stating that the commodity described herein was in conformity with the description in the contract, and that the marking was also in conformity with the contract;

5. shipping advice to the applicant prior to the flight date, containing the contract number, credit number, description of goods shipped, flight number, place of departure and destination, and flight date and estimated arrival date;

6. one copy of the performance bond stipulated in this letter of credit.

We shipped the goods on 30 March 2012 and presented the documents to the issuing bank for payment through our bank on 8 April 2012 However, the documents were rejected because of the following discrepancies:

• The manufacturer's inspection certificate did not indicate all details of the medical equipment inspected. The issuance date was later than the shipment date.

• The air waybill did not indicate the actual name of the medical equipment that needed to clear Customs. A standby L/C was presented instead of a performance bond and indicated two L/C numbers.

Because of the complex nature of medical equipment, it is difficult to give a full description of the goods inspected on the inspection certificate, the details of which cover many pages in the contract. It should be sufficient to provide a general description of the goods in the certificate as per the L/C, including some important details. In addition, the fact that the inspection date was earlier than the issuance date should be adequate to certify that the goods were inspected prior to shipment. Therefore, in my view discrepancy 1 above is not valid. As to discrepancy 2, we put 'medical equipment' in the air waybill, which was per the L/C terms. In the US, we can only provide a standby L/C to serve as a performance bond, a substitution that has been widely accepted worldwide.

Although after negotiation, payment was made a month later, the tactics used by issuing banks to claim such unfounded discrepancies in order to refuse making payment is all too common. This continues to raise serious doubts concerning how issuing banks in China follow UCP 600 when examining documents. l

Simon Jian is Chairman, Edward Trading LLC.His email is E-mail: simonjian@edwardtrading.com

United Arab Emirates

Over the past few years, ICC has made a number of efforts to clarify the nuances of transferable credits. These efforts are reflected in the elaborate provisions in the UCP on transfers and the various ICC Opinions issued in response to clarifications sought by members from time to time. In addition, ICC also issued a paper on transferable credits that embodied a summary of major Opinions on the application of UCP 500 article 48 and transferable credits in general.

Despite all these efforts, transferable credits continue to be a challenge for the parties involved. One comes across raging debates on many social media relating to the subject. Surprisingly, there still seems to be considerable confusion on the question of the transferring bank's being allowed to incorporate conditions that go beyond the provisions of UCP. Does it make sense for the transferring bank to obtain blank documents from the first beneficiary to facilitate substitution should the first beneficiary not be around to substitute his invoice and drafts? One banker even mentioned that he obtained blank documents from the first beneficiary as part of his bank's customer service initiative to avoid delay in substitution.

I believe the reason for this uncertainty is two-pronged: a lack of understanding

a) on the structure of transfers, since many bankers try to use a transfer in the same manner as a back-to-back; and

b) the risk associated with both the structures.

There is a major difference between the two structures. While a transfer is governed by extensive provisions in the UCP and allows the transferring bank to amend certain changes in the original credit, a back-to-back structure has no provision in the UCP and relates to a subsidiary letter of credit being issued for the customer, based upon and supported by the master credit, and which is considered to be an extension of the terms and conditions of the master. Although this may be the effect, the back-to-back is a separate and independent credit. It creates new relationships independent of the relationships created in the master letter of credit. Operationally, however, despite the mirroring of the master, it is imperative that there be a substitution of invoices/drafts to trigger the issuer's obligation.

This is where a back-to-back differs from a transfer credit, the latter of which is not dependent on the substitution to trigger the issuers' obligation. Hence, even though the master credit is vital as a source for repayment under the back-toback, it cannot be considered as security or collateral for the latter.

From the risk perspective, another key factor is that a transfer credit must accurately reflect the terms and conditions of the credit (original) with the exception of permissible changes under sub article 38 (g). Many banks, however, risk ignoring the UCP provisions and allow for a substitution of additional documents and an alteration of the original credit on the premise that substitution will cure the resulting inconsistencies. But what if the first beneficiary is not on hand to substitute the additional documents?

Clearly, the transferring bank's failure to comply with the UCP provisions in deleting/altering the stipulations of the original L/C will cause the second beneficiary(ies) to be unaware of the original requirement(s) and, as a result, the second beneficiary(ies) may fail to present complying documents. From the legal perspective, the transferring bank''s behaviour may be construed to be an infringement of the lawful interests of the second beneficiary, preventing him from receiving payment under the L/C.

UCP sub-article 38 (i) allows the transferring bank to deliver the documents received under the transferred credit to the issuing bank, including the second beneficiary's(ies') invoice(s) and draft(s), if the first beneficiary fails to substitute his invoice and draft on first demand. Some banks allow for substitution of invoices in case of changes other than the amount of the invoice.

In my view, the UCP allows for substitution of invoice(s) only for the amount; no other change in data content of the invoice is permissible. A transferring bank, by allowing other changes, may unknowingly be exposing itself to charges of being a party to fraud, facilitating the falsification of documents.

By allowing for alterations/substitution beyond the UCP provision, a bank assumes risks that are not inherent in the structure of transferable credits. l

Khalid Iftikhar is Vice President, Mashreq Bank Dubai.
His e-mail is KhalidI@mashreqbank.com