Article

by Sheilar T. Shaffer1

Since the adoption of Incoterms®2010, there has been considerable comment on the relationship of Incoterms and L/C operations. Although Incoterms deal only with the relation between sellers and buyers under the contract of sale, a particular Incoterm, once chosen by traders and incorporated in their L/Cs, should be correctly expressed in the presented documents and be consistent with the UCP/ISBP. In fact, Incoterms and the ISBP have a shared impact on the beneficiary's documentation under L/Cs. This article is an analysis of how these two ICC products are relevant to each other in documentation and in what respects the ISBP may be compatible with Incoterms practice.

Since the creation of Incoterms by ICC in 1936, these international trade terms have been regularly updated to keep pace with developments in international trade. Several provisions of the terms are relevant to documentation for L/Cs.

Documents electronically signed

The recognition of electronic communication/documents is one aspect of Incoterms®2010 that has a clear impact on documentation. Articles A1/B1 of the rules state that "any document referred to in A1-A10 may be an equivalent electronic record or procedure if agreed between the parties or customary." This provision is a step forward from Incoterms 2000, which specified the documents that may be replaced by an equivalent electronic data interchange (EDI) message. Incoterms®2010 recognizes a broader sense of electronic means of communication, not limited to EDI messages, as having the same effect as the traditional paper one. This new language is not surprising given the rise of e-commerce during the past decade.

By comparison, the ISBP has one provision concerning "electronic documents", i.e. paragraph 39, which states that "a signature need not be handwritten. Facsimile signatures, perforated signatures, stamps, symbols (such as chops) or any electronic or mechanical means of authentication are sufficient." The question raised by this wording is, how can documents be "electronically signed and authenticated" for presentation if an L/C is subject to UCP 600 rather than the eUCP?

For example, is ISBP paragraph 39 applicable to documents "electronically signed and authenticated" and then downloaded from a PC and printed as a paper document for presentation? In Banking Commission Opinion TA 737rev, the certificate of origin was downloaded from a website but incorporated the verify ID and the address of the website. The question was whether documents so produced could be recognized as "original". The Commission said that reference to the website should be disregarded and considered the document original on other grounds. But confusion still prevails on this point.

In recent operations, we have witnessed a new trend of signatures in which a document bears no visible sign of a signature but contains a statement that "this document has been signed by an electronic method of authentication." Would this qualify as "signed by electronic means of authentication"? In our experience, the answer could go either way. If we cite a discrepancy claiming that "the document is not signed", presenters often quote UCP 600 article 3 and ISBP paragraph 39 in response. However, there is room for doubt as to whether the document has been "signed" or simply printed with the statement serving as a signature. These cases above have raised the wider issue of the ISBP's definition of "electronic signature". They reflect the fact that the evolution of documentary practice has created new methods of signature, and the lean wording of "any electronic means of authentication" in the ISBP is not clear enough for guidance. To avoid further confusion, the revision of ISBP needs to consider the evolution in electronic signing and perhaps align itself more closely with the Incoterms®2010 language.

Invoices

According to Incoterms®2010, a commercial invoice is the mandatory document the seller must provide. Since most L/Cs incorporate a particular Incoterm in the "commodity description" of the L/C, the same Incoterm should be correctly expressed in the invoice, because ISBP 681 provides that the description of the goods in the invoice must correspond with the description in the credit.

Nonetheless, in L/C documentation the invoice is one of the most troublesome documents and one that often generates discrepancies. One source of refusal lies in the construction of costs in the invoice. ISBP 681 paragraph 61 states that "charges and costs must be included within the value shown against the stated trade term in the credit and invoice. Any charges and costs shown beyond this value are not allowed." This wording links the costs/charges with the value and the stated trade term, which I personally believe will cause unwelcome disputes.

For example, in an L/C indicating "Commodity A, CFR xxx port Incoterms®2010 Rules, total value USD100,000", if the invoice shows the same as well as a breakdown of costs/ charges that include an inspection fee, does this constitute a discrepancy?

In fact, Incoterms®2010 have different cost allocations for different classifications and do not prohibit a modification of a particular Incoterm. It seems inappropriate for a document checker to judge whether a particular charge (e.g., the inspection fee) corresponds with the trade term. Instead, if this charge is within the stipulated credit value, it should be acceptable. As there seems to be no precise linkage between charges/costs and the trade term, to avoid ambiguity I would suggest deleting the linkage between them. To say that "any charges and costs shown beyond this value are not allowed" is sufficient.

Documents for string sales

In commodity trade, multiple sales down a chain are very common. If the seller is in the middle of the string sale, performance of its obligation does not involve shipping cargo, but rather "procuring" goods that have been shipped. Incoterms®2010 acknowledge this trade pattern and include the obligation of "procuring shipment" as an alternative to actual shipment. The wording "procure" may include a scenario where the seller is not necessarily the shipper named on the transport documents.

In L/C operations, the beneficiary or the applicant can be an intermediary in a string sale. We sometimes come across documents indicating that 1) a third party supplier is shipping the goods and that party is to be shown as the shipper; or 2) a third party is the ultimate buyer and is shown as the consignee. What happens if this information appears in some of the documents while the transport documents indicate the consignee as "to order" or "to the order of the issuing bank"? Would this constitute a risk of inconsistency and cause the documents to be refused?

Consider the following case:

- The B/L is consigned to order of the issuing bank;

- The certificate of origin and packing list are consigned to Company C (a third party other than the applicant).

Is there an inconsistency in the documents? In our experience, some banks would claim that "the consignee in the packing list is inconsistent with that of the B/L." ISBP 681 paragraph 84 states: "Consignee information, if shown, must not be in conflict with the consignee information in the transport documents.

However, if a credit requires a transport document to be issued 'to order', 'to the order of the issuing bank' or 'consigned to the issuing bank', the certificate of origin may show the applicant or another party named therein as consignee."

Although this provision solves the problem of difference in consignees between the transport document and certificate of origin, the problem between the transport documents and other documents is still open. Perhaps we should question whether this principle should be extended to other documents. I suggest that the practice highlighted in ISBP paragraph 84 concerning the consignee fields on a certificate of origin should be equally applicable to other documents and expressly spelled out in the next ISBP. This would also in line with ICC Opinion2 TA 607 and, by implication, with Incoterms®2010.

Conclusion

Although ISBP has proved to be a valuable aid for those engaged in L/C documentation, it cannot remain static in a changing trade environment. The Banking Commission has recognized this in calling for a revision of the ISBP. When it is revised, it would be wise for the drafters to coordinate some of its provisions with Incoterms®2010 to make for more efficient documentation.

Sheilar Shaffer's e-mail is sheilar@sina.com

1 Special thanks to Phill Doran, partner of www.freighttraining. co.za for his encouragement and support in this article.

2 I CC Publication No.697