Article

by Sheilar T. Shaffer

In a letter of credit transaction, the requirements concerning transport documents are core issues. The wording in the credit dealing with the transportation requirements is key to the beneficiary's understanding of these documents.

Seven articles of UCP 600 (articles 19-25), as well as two-thirds of the revised ISBP paragraphs, concern transport documents. In keeping with the implementation of UCP 600, SWIFT updated its MT7nn messages with the extension of transportation field 44. All of these efforts were expected to provide helpful guidance and a more precise description of the transportation requirements associated with L/Cs.

However, looking back at the year following approval of the revised UCP, we find few visible signs of improvement in presented transportation documents. In fact, they remain a source of confusion. And new problems, especially concerning the correct completion of SWIFT's MT7nn (i.e., MT700, MT710 & MT720), have emerged.

This article, based on the author's handling of export documents under UCP 600, aims to highlight some of the causes. Case studies will be used to illustrate the point.

Case study 1

In November 2007, beneficiary A received an L/C with the following information:

- 40 E: UCP latest version

- 44A: (place of receipt) Yantian, China

- 44B: (place of delivery) Valencia, Spain

- Documents required: full set of ocean bill of lading

The presented B/L indicated:

- Place of receipt: Yantian, China

- Port of loading: Yantian, China

- Port of discharge: Rotterdam, The Netherlands

- Place of delivery: Valencia, Spain

The B/L was refused by the issuing bank, which stated: "B/L showing port of discharge as Rotterdam instead of Valencia as required in L/C". This puzzled the beneficiary; since the credit specified Valencia as the place of delivery and the B/L so indicated, why was there a discrepancy?

Obviously, the transport details written in the MT700 field 44A (place of receipt) and 44B (place of delivery) were actually the issuing bank's intended "port of loading" and "port of discharge".

The purpose here is not to debate whether this was a valid discrepancy, but to draw attention to the causes which led to the beneficiary's misunderstanding of the transportation requirement.

SWIFT format problems

For the answer, we first need to consider the most relevant factor, the L/C text issued via SWIFT MT700.

The SWIFT formats were updated in November 2006. Previously, field 44 only had two options: 44A (loading on board/ dispatch/taking in charge) and 44B (for transportation to) to show the transportation route. As reflected in ICC Banking Commission Opinion TA 195 in ICC Publication No.6601, the old version of field 44 didn't specify any differences with regard to the mode of shipping. Therefore, it was hard for the beneficiary to tell whether the particulars indicated in field 44 concerned a place or a port. To some extent, this limited the issuing bank's expression of its intent concerning the transport details; accordingly, this caused confusion.

This problem seemed to vanish with the new L/C format. Field 44 was extended to include four options with more specificity: 44A (place of receipt), 44E (port of loading), 44F (port of discharge) and 44B (place of delivery)2. Theoretically, this not only significantly changed the structure of field 44, but also differentiated among the options: 44A & 44B were now only confined to places; 44E & 44F referred to seaports or airports. In general, this addition of further options was a welcome change for banks in that it helped to reflect the different shipping modes according to the principles of the transportation articles in UCP 600.

However, banks don't seem to have made good use of this new format. Instead, poor performance in this respect has made many L/Cs confusing and defective.

In the case study above, since the L/C required an ocean B/L, UCP 600 article 20 would be applicable. According to subarticle 20 (a) (iii), the B/L must indicate the port of loading and port of discharge as stated in the credit. In other words, when the L/C calls for an ocean B/L, the credit is expected to stipulate the port of loading and port of discharge in its text, i.e., to fill out the transport details in 44E (port of loading) and 44F (port of discharge). But after a careful review of the L/C text above, we found a contradiction in that the L/C issuer required an ocean B/L, while it wrote information concerning the port of loading and port of discharge in fields 44A and field 44B (even though now 44A and 44B are deemed to be places as per the SWIFT standards). This expression of transportation requirements was contrary to the issuer's real intention.

Unfortunately, the beneficiary could not easily understand this; he may have just read the L/C on its face. Moreover, in order to make the B/L comply, he therefore placed the transport details mechanically in the column of "place of receipt" and "place of delivery" in the B/L.

This is an instance showing how the beneficiary has been misled. Clearly, the L/C issuer's careless and improper use of the transport options in field 44 resulted in the beneficiary's misunderstanding of the transportation articles.

As the presenting bank, we have repeatedly seen L/Cs issued with such mistakes, with beneficiaries misunderstanding the format in the same way. Moreover, we repeatedly receive refusal advices from issuing banks for the same reason, which is highly annoying.

One of the consequences of L/Cs issued in such a way is to make the credit ambiguous. When the credit calls for an ocean B/L (i.e., port-to-port B/L), but only stipulating a place of receipt and a place of delivery, how can the B/L satisfy such requirements?

Case study 2

In this case, addressed in Banking Commission Opinion TA 6293, the L/C indicated:

44E: (port of loading) Umea, Sweden

44F:(port of discharge) Port Jebel Ali, Dubai by vessel requiring a marine B/L with an additional condition "multimodal transport document acceptable". The document showed Umea as the place of receipt without an on board notation

The issuing bank refused the document, stating that the B/L didn't show the port of loading as required. However, the ICC Banking Commission Opinion ruled that the refusal was not justified, because the beneficiary chose to present a multimodal transport document.

Once again, this credit was issued full of ambiguities. On one hand, it stipulated a transport route between two ports; on the other, it allowed for a multimodal transport document, which must involve at least two different modes of transport as per UCP 600 article 19. Therefore, in the case of a multimodal transport document showing the last leg by sea, Umea had to be shown as the "place of receipt", although this contradicted L/C field 44E.

This ultimately led to another question: when the L/C is issued ambiguously, who should be liable for the consequences? The ICC Opinion analyzed it this way: "In such circumstances, it can only be the issuing bank (and ultimately, the applicant) that bears the risk of such ambiguity provided the document covers the routing that is stated in the documentary credit ... ."

Perhaps the result was contrary to what the issuing bank expected. But it taught the bank a lesson: if a bank expects to have a workable L/C, it must write it correctly, especially with regard to the transportation requirements.

Conclusion

As indicated, bankers' indifference to the alterations in the SWIFT L/C format and their improper use of field 44 have led to current disputes involving transportation documents. To minimize confusion, issuing banks should pay attention to the points below:

1. In the L/C structure, the options contained in transportation field 44 should be a logical match with the required transport documents. The case studies above requiring an ocean B/L with the transport details in fields 44A & 44B, or the requirement of a multimodal transport document with the transport route reflected in fields 44E & 44F, are technical mistakes, which will result in the L/C being ambiguous.

2. A sound understanding of the principles of the UCP transport articles and a good knowledge of the requirements of field 44 are essential for a proper description of the transportation requirements in the credit. For example, since UCP 600 article 20 underlines the nature of a port-toport shipment, 44E and 44F should be mandatory in the L/C text if such a B/L is required. Similarly, as per the criteria in UCP 600 article 19, a multimodal transport document must cover at least two different modes of transport. The L/C, therefore, should not show the options in field 44, which involve only one mode of transport4.

In any case, precise wording is key to making the L/C workable and effective for all parties involved.

Sheilar T. Shaffer is Documentary Manager of Import/ Export Documents, International Department of Agricultural Bank of China, Shantou Br. Her e-mail is sheilar@sina.com

1. ICC Banking Commission Unpublished Opinions 1994-2004 (ICC Publication No. 660).

2. S WIFT Standards, Standards Release Guide - February 2007.

3. ICC Document 470/TA 629 (UCP 600). ICC meeting, October 2007.

4. L C Monitor, Volume 10, Issue 1, Jan.-Mar.2008 "The Infamous From and To Fields"(by Kim Christensen).