Article

by Kim Sindberg

One of the main objectives of ICC is to draft rules and practices that support trade. The ongoing revision of the ISBP1 is in line with that objective, since it aims to document and develop "International Standard Banking Practice". However, this is more complicated than it sounds. Of course, this requires looking at different banking practices in different parts of the world. But the tricky part is the number of industry practices that must also be taken into account. For example, there are transport and insurance practices that overlap with banking practices. This article will focus on one area where banking and industry practice seem to collide. It will also take a look at bankers' responses to these differences.

The example

The "practice" used as example in this article is reflected in ISBP 681 paragraphs 90 and 114. Paragraph 114 reads: "If a bill of lading states that the goods in a container are covered by that bill of lading plus one or more other bills of lading, and the bill of lading states that all bills of lading must be surrendered, or words of similar effect, this means that all bills of lading related to that container must be presented in order for the container to be released. Such a bill of lading is not acceptable unless all the bills of lading form part of the same presentation under the same credit."

During the ongoing revision of the ISBP, the Drafting Group have sought to further explain this paragraph and to align it with current transport practice. The paragraph deals with the issue of "movements", often described in a transport document by using various codes, such as LCL, FCL, CFS, CY and SD. The latest ISBP Draft2 takes into account these codes, and highlights one scenario - where more than one bill of lading, related to the referenced container, must be surrendered prior to the goods being released. That is the case with "LCL/FCL"or "CFS/CY" and "Part Load".

Banking vs transport practice

This particular issue has attracted considerable attention. It was on a list prepared by the ISBP Drafting Group titled "ISBP Draft 4 - Outstanding Issues", which has been circulated to the ICC national committees asking their views. The items on the list have caused disagreements among national committees.

With regard to this paragraph the comments are quite interesting. Basically, what the draft ISBP says is that it is a standard banking practice to accept the principle above. Of course, the Drafting Group may have misunderstood the information received from the industry, but it is not productive to simply say: "We do not agree because this is not banking practice." A prudent way would have been to liaise with local transport experts in order to verify the accuracy of the paragraph - from a transport practice perspective.

The issue, in my view, is whether the ISBP should exist totally isolated from the outside world, simply disregarding other industry practices, or if it should, where relevant, attempt to align banking practice with industry practice. The latter is the right path to take, but it is also the most difficult one. In this and other cases, trade finance banks must relate to and have sufficient knowledge of other industries and must find the right balance so that the rules (in this case UCP 600) go hand-in-hand with (in this example) transport practice.

Movements

As noted, this example above takes account of "movements", i.e., how the shipper is to deliver goods to the carrier at the place or port of dispatch and subsequently how the goods are to be released to the consignee at destination. In other words, who is to load and unload the container? On the transport document this is indicated by using various codes, for example LCL/LCL. The code in front of the slash shows how the shipper delivers the goods to the carrier, while the code after the slash shows how the carrier delivers the goods to the consignee. In this case, goods are received by the carrier as LCL and delivered to the consigned as LCL. LCL means "Less than container load", so LCL/ LCL basically means that the shipper delivers the goods to the carrier as general cargo (as separate packages). The carrier releases the goods to the consignee as general cargo. With this combination, the carrier loads and unloads the container, often together with goods from other shippers to other consignees (consolidated cargo)3.

As to the controversial combinations LCL/FCL or CFS/CY, these mean that the shipper delivers the goods to the carrier as general cargo, and the carrier releases the goods to the consignee in one full container - i.e., the carrier will not unload the container, as this is to be done by the consignee. There may be many reasons for this, for example when one consignee has several suppliers in the same country and each supplier delivers its part to the carrier, which stuffs the container and ships it to the consignee who, in turn, collects the whole container and is responsible for unloading it.

This combination may also be used when shipping different consignments - each with its own bill of lading - due to be released as one full container (shipping one full container (FCL) is normally cheaper than shipping the same goods as LCL). In this case, the carrier will require all issued bills of lading to be presented before releasing the goods. This means, as one example, that if the container holds three consignments covered by three sets of bills of lading and only two are presented, the carrier will not release the container.

This may be problematic in a documentary credit context, as the beneficiary (consignee) may have paid under the documentary credit and presented the bill of lading to the carrier - but still will not be able to obtain the release of the goods.

In these cases, the carrier, in addition to the code LCL/FCL, will add an indication to the effect that this is a part load. This can be spelled out, for instance, as: "Container ABCU123456-0 is covered by B/L No. A001 and A002, and can only be released to a single merchant upon presentation of all BS/L of that merchant", or simply by saying "part load". Both are equally troublesome.

Note that it is the combination of LCL/ FCL or CFS/CY and "part load" that creates a problem, and which therefore was included in ISBP Draft 4.

Conclusion

The above illustrates that banking practice does not exist in a vacuum. The documentary credit is used in real trades, and the bankers working with documentary credits must take into account the sectors to which it is related. Knowledge about related industries is required, and the attitude that industry practice can be disregarded because banks do not consider it standard banking practice is not only wrong, it is damaging to the documentary credit as an instrument. This is why it is vital that the ISBP find the right balance between UCP 600 and related industry practices.

Kim Sindberg is a Trade Finance Consultant. His e-mail address is kim@kimsindberg.com

1.ICC publication 681: International Standard Banking Practice for the Examination of Documents under Documentary Credits, 2007 Revision for UCP 600.

2.ISBP Draft 4 June 2012.

3.Source and more information: Kim Sindberg "UCP 600 Transport Documents" published by the Institute of International Banking Law & Practice 2012. ISBN 978-1-888870-54-1.