Article

China

An irrevocable letter of credit was issued by a Chinese bank for USDXXX in favour of Edward Trading LLC for the account of a Chinese company with a draft to be drawn at sight on the issuing bank. The L/C covered shipment of 100 tons of copper cathode LME standard at USD7,070/MT FOB South American Port with shipment to be made from South American Port to China Port with latest shipment date on or before 30 April 2010. The L/C expired on 21 May 2010 and was accompanied by the following documents:

1. signed invoice in duplicate indicated the details of descriptions of goods as per L/C;

2. charter party bills of lading made out to the order of shipper and blank endorsed notifying applicant with full address marked freight to collect;

3. inspection certificate in duplicate issued by independent surveyor indicating the date of inspection and details of inspection as per L/C;

4. weight list; and

5. pre-shipment authorization issued and signed by applicant.

Shipment was made and the documents were presented to the issuing bank through the negotiating bank as per the terms and conditions of the L/C. After the issuing bank received the documents, the issuing bank sent a SWIFT message to our bank, the negotiating bank, indicating that the documents were presented with discrepancies as follows:

1. Charter party bills of lading indicated "shipped on board" on front page of charter party bills of lading and "pre-shipment" on the back of the charter party bills of lading. These terms were in contradiction with each other.

2. The issuance date on the inspection certificate was later than the bills of lading date.

We immediately rejected the claim of the so-called discrepancies found by the issuer. UCP 600 sub-articles 22 (a) and (a) (ii) state:

a. "A bill of lading, however named, containing an indication that it is subject to a charter party (charter party bill of lading) , must appear to...: ii. indicate that the goods have been shipped on board a named vessel at the port of loading stated in the credit by

- pre-printed wording, or

- an on board notation indicating the date on which the goods have been shipped on board."

Both the pre-printed words and the on board notation "shipped on board" were on the front page of the charter party bills of lading. In addition, the inspection date on the inspection certificate was earlier than the shipment date. Moreover, even if the issuance date on the inspection certificate had been later than the shipment date, this should not be regarded as a discrepancy. In my view, neither of these "discrepancies" was legitimate.

In fact, a sharp decline in copper spot and forward prices was the reason behind the claim of discrepancies. After a quick negotiation with the applicant, the discrepancies were finally accepted and payment was made. However, these kinds of issues are being constantly raised. Banks should use the UCP as a basis for examining documents and not invent discrepancies based on issues that go beyond the scope of the rules.

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

Russian Federation

Russian exporters widely use documentary credits to secure payments from their foreign buyers. Some letters of credits issued in their favour by Asian banks are available by negotiation with a named Russian bank or with any bank in Russia. A demand to negotiate usually embarrasses Russian banks. First, like many other banks in continental Europe, they are not acquainted with negotiation practices. Second, and most important, the negotiation doesn't tally formally with Russian export-import and currency regulations. In order to comply with these regulations, the Russian exporter must imperatively receive a full amount of export proceeds.

As a result, Russian banks often inform issuing banks that they are not in a position to negotiate nor to act as a nominated bank. The related credits became available with the issuing banks, and the respective beneficiaries unfairly wait for payments from abroad.

But it seems to me that this situation could be improved by a proper interpretation and practical application of the flexibility in the definition of negotiation in UCP 600. I do not share the opinion that "the UCP should be de-linked from all of financing1." By its nature, a documentary credit is a financing instrument as well as a settlement one.

A nominated bank, unless it is the confirming bank, negotiates with recourse. If a credit provides for negotiation of a draft, this negotiation may be interpreted as a type of financing by means of advancing with a probability of repayment, as it is subject to recourse against the beneficiary "as drawer of the bill because the bank has become an endorser of the bill of exchange2." If no draft is required, the negotiation may be considered as a way of advancing of funds to the beneficiary with an almost certain repayment. As such, an advance, in the absence of a draft, should be formalized by a specific credit arrangement between the nominated (negotiating) bank and the beneficiary in accordance with the provisions of applicable law.

Let us imagine that a Russian bank signs a credit arrangement with the beneficiary, advances the funds against a complying presentation (deducting discount or interest and commission), enters this operation in the bank's books, informs the issuing bank that negotiation was completed and claims a reimbursement. On receipt of funds, this Russian negotiating bank might post the full amount of the documentary remittance to the beneficiary's account and simultaneously, in the framework of the same credit arrangement, debit the beneficiary's account in repayment of a granted advance.

In my view, this proposed scheme entails no violation of current Russian regulations and, on the other hand, allows Russian banks to act properly as negotiating banks and Russian exporters to obtain export financing arising directly from the mechanism of the documentary credit.

It is no secret that up to now most documentary credits of Russian and other CIS countries' banks were accepted by foreign beneficiaries only if they have been confirmed by Western banks. Having been informed that the confirmation was added, the issuing bank as well as the applicant-importer can be sure that the respective foreign trade transaction will take place. However, some confirming banks' advices to beneficiaries contain peculiar conditions which differ from related UCP 600 provisions.

In its advice to the beneficiary sent through the second advising bank, one confirming bank indicated that "upon receipt at our counters of documents issued in strict compliance with the terms and conditions of the L/C and our SWIFT advice to the issuing bank, we ... are authorised to effect the payment value two banking days later [emphasis added] ... ". The following reply was given by the confirming bank to the inquiry of a surprised second advising bank: "UCP 600 is silent in relation to the wording of confirming bank with regard to their payment obligation. In our opinion our wording does not conflict with our under taking as confirming bank."

Another confirming bank was even more categorical in its message to the beneficiary's bank: "Payment will be effected immediately after receipt of funds, latest 30 days after maturity days [emphasis added]".

In both cases, the confirming banks linked (directly or indirectly) their payment undertaking with the receipt of funds from the issuing banks (or their willingness to pay), though both credits were available with confirming banks.

Unfortunately, this practice, which is in breach of the provisions of sub-article 8 (a) (i) (a) of UCP 600, is rather widespread. If under such credits a confirming bank also acts as a beneficiary's bank, one can suppose that, in the framework of an internal agreement, a confirming bank provides a beneficiary with necessary financing until final receipt of the funds from the issuing bank. But in the two examples above, the beneficiary's situation is more complicated.

The question is why does a beneficiary accept such a "conditional" confirmation? Is it because it has read the word "confirmation" only, having paid no attention to the specific wording of the bank undertaking? Or perhaps, for any one of a number of reasons, the beneficiary's intent was to avoid mentioning the names of certain banks or countries in its books. The second hypothesis, however, could lead to the conclusion that some credit confirmations have no strict meaning in the financial or UCP sense and that they are purely formal, i.e., "Give me your name to replace that of the issuing bank, and that's all."

In our view, when proposing or accepting such an approach, a confirming bank should be aware that it compromises the documentary credit practice of confirmation as well as UCP 600 principles, not to mention the undesirable effects that it has on international trade and settlements. In this connection, the option to expand the content of the ICC's ISBP publication "to encompass the different aspects of handling of documentary credits, i.e., issuance, advising, confirmation ... " proposed by the ICC Com mis sion on Banking Technique and Practice seems to be reasonable and necessary.

G. Kobakhidzé
Directeur, VTB Bank (France) SA, Paris
E-mail: kobakhidze@vtb-bank-france.fr

1. DCInsight Vol. 16 No. 2 April - June 2010, p. 7.

2. Schmitthoff's Export Trade, London, Stevens & Sons, 1990, p. 423.