Article

Reports from three countries

Pakistan

Article 39 of UCP 600 is a short article that deals with the important concept of assignment of the proceeds of a credit. The article provides that if the credit is not stated to be transferable, it does not affect the right of the beneficiary to assign any proceeds to which it may be or may become entitled under the credit, and that assignment shall be in accordance with the provisions of applicable law.

This article has limited its scope by stating that it relates only to the assignment of proceeds and not to the assignment of the right to perform under the credit. The words "assignment of proceeds" are easy to understand, but they are often misunderstood as including the idea that the assignment of proceeds means the assignment of contract. The term, "assignment", has been defined in Black's Law Dictionary, Eighth Edition as follows: "Assignment is a transfer or setting over of property or of some right or interest therein, from one person to another".

It is an established principle of law that, unless otherwise provided, the duties and obligations under a contract cannot be assigned; however, the benefits under the contract can be assigned without the consent of other contracting party. In assignment, the assigner assigns only the benefits to which it may be entitled under the contract. But the assignee, by virtue of assignment, does not become party to 18 Volume 18 No 1 the contract, and the main contracting parties remain the same. This concept can be easily understood by a simple example: if A engages B to provide services in consideration of $10, in this case the benefits accruing to A under the contract are the provision of services by B, and its obligation and liability under the contract is to pay $10 to B. In this example, A can assign its benefits, which are services to anyone, without the consent of B, but it cannot assign its obligation to pay $10 to B.

The assigner is required to give notice of assignment to make a valid and legal assignment of proceeds; however, it is not a mandatory legal requirement and, if the notice is not given, the assignment becomes an equitable assignment. The main difference between legal and equitable assignment is that the latter does not give assignee any independent right to claim the benefits to which it becomes entitled under the credit and leaves the assignee totally dependent on the assigner in the event of any refusal or dispute.

UCP 600 article 39 has rightly limited its scope only to the assignment of proceeds, because if the parties agree to an assignment of right to perform under the credit, then the contract will be novated (novation is the act of replacing an obligation to perform with a new obligation or replacing a party to an agreement with a new party). And in that scenario, it may become subject to article 38, which deals with transferable credits.

Irfan Munawar Gill
Legal Advisor
National Electric Power Regulatory of Pakistan
E-mail: irfangill@hotmail.com

The views expressed, including any errors and omissions, are attributable to writer only and do not necessarily reflect the views or the policy of NEPRA.

South Korea

Reccently we had a discussion among international bankers as to whether it would be a good idea to further simplify the types of credits presently mentioned in the UCP. I presented the types of letter of credit we issue in Korea to the group, offered some thoughts on how the UCP revision process has taken place so far and what direction it may take in the future.

We issue two types of letters of credit: one sight and the other usance L/Cs. Both are available with any bank by negotiation. And there is always a draft required in the letter of credit.

For the usance letter of credit, we often use the banker's usance credit where the negotiating bank is paid at sight and there is refinancing by the reimbursing bank. The principal amount and interest is paid by the applicant at the maturity date of the usance period. We receive letters of credit from all over the world. I was interested in finding out the frequency of deferred payment credits available with the issuing bank, so I asked our L/C advising section to print out one-day's worth of the credits that had been advised that day. In the printout, there were about 450 of these from all countries.

To my pleasant surprise, there were not many deferred payment credits available with the issuing bank; most of the L/Cs were either sight or usance and available with any bank by negotiation. Our bank was clearly following the majority practice.

Most of the L/Cs coming to us from Europe do not require a draft. In letter of credit transactions, the draft is not essential, and the said credits are handled without any problem. The UCP rules are revised from time to time to reflect changes in the marketplace. Bank practice in L/Cs does not change overnight, and the rules, although revised over time, maintain a certain structure which remains intact with each revision.

In any case, I do not believe the UCP can be changed quickly enough to adjust to the realities of the marketplace. Although changes are necessary and inevitable, incremental changes are advisable in most cases.

In each country, considerable bank practice concerning L/Cs has been accumulated over time, which cannot be changed overnight. In addition, there is case law supporting bank practice in the market, which has to be considered when making changes to the rules.

Simplicity is the goal in any field of endeavour, but there will always be experts who are familiar with the basic structure and the changes that have been made over the years. By contrast, a layman or a novice will not generally be familiar with them. They have to learn, and only after a reasonable period of training will the L/C become familiar to them and simple to handle.

Of course, bank customers do not have to be experts in L/Cs. The experts are there to make the issues comprehensible to them. L/C transactions are handled by bankers, not by customers directly; customers only need to understand the basic workings of the L/C.

In the next revision of the UCP which may come along in 8-10 years, many of the opinions expressed by each country's experts can be reflected in the final draft.

Chang-Soon Thomas Song
Attorney at Law (Arizona)
First Expert, International Dispute Resolution (Letters of Credit)
Trade and Services Division
Korea Exchange Bank
Seoul.
E-mail: thomas@keb.co.kr & Thomas.Song@azbar.org

Switzerland

Unlike articles 20 and 21 of UCP 600, article 22 makes no reference to transhipment. One must therefore look to the latter articles when construing the manner in which transhipment under a charter party is to evidence when it may, or will, occur.

In the recent past, we have had discussions with two different international trade finance banks regarding the correct way of evidencing transhipment on a transhipped charter party (C/P) bill of lading. Whilst the banks had their own views, these were at variance with ours and that of the vessel owner.

To summarize the issues:

- We had two separate transactions secured by separate B/Ls. The goods were shipped in Gdynia, Poland, under the one B/L respectively Kotka, Finland. Under the other, transhipment was to take place in Rotterdam for discharge in Jiangyin resp. (respectively) Ningbo. Both ports are in China.

- Under both B/Ls, the same vessel owner was responsible for both the vessels used as well as the entire carriage from the load ports to the ultimate ports of discharge. The B/Ls presented were those issued after transhipment had taken place. Originally, the place and date of issue showed Gdynia resp. Kotka on 25 January resp. 12 November. Transhipment took place for both cargoes on two different, named vessels on a given date in Rotterdam

- on 28 January respectively 17 November, to which both B/Ls expressly referred.

To recap, there were two separate cargoes involving entirely different B/Ls which were handled by two different trade finance banks.

We and the owner wanted to show Gdynia resp. Kotka as the load port as well as the actual port of discharge, and to make reference in the body of the document to the transhipment. The banks objected to this format, because they held that at the time of issuance deduced from the date of the B/L on its face, the issuing party could not with certainty state that transhipment would take place on the named vessels on the dates stated. (Note that B/Ls are frequently issued after the actual date of shipment for logistical reasons, e.g., the difficulty of concluding all the formalities on the same date, the date of shipment.) This is not unreasonable, for it is quite possible that various cargoes furnished by sundry shippers will be loaded during a given day, taking place from morning until evening. Hence, the practical difficulty of finishing all of the formalities within the same time span.

We had some sympathy for the banks' view (being ex-bankers ourselves), which the owner did not share, and we tried to explain to the banks that the B/Ls were issued AFTER transhipment had taken place, which is why the second vessel (loaded in Rotterdam) could be stated with certainty and, with equal certainty, the port of discharge.

Notwithstanding this, the banks declined to accept the draft C/P formats presented, and the owner was obliged to show the entire transit. He also insisted on evidencing the second vessel in the box under "Onboard the Vessel ... ", because at the time of issuing the B/L, this was indeed the vessel on which the goods had been shipped for further shipment to the port of discharge.

What we had suggested was a B/L indicating the actual ports of loading and discharge with a statement in the body of the text indicating "transhipment to take place in Rotterdam". However, the owner declined to accept this, as it would, in his view, "hide" the vessel and date of transhipment occurring in Rotterdam.

The banks wanted the B/Ls to show Rotterdam as the port of loading in order to evidence that transhipment actually took place there on the named vessel, and the B/L to be dated as of the date of transhipment. They declined to take up and pay for the shipping documents unless this could be achieved.

The vessel owner, on the other hand, wanted to have the actual port of loading evidenced (in the "Port of Loading" box) and the B/L to be issued as of this date, as this was the point at which the owner's liability as carrier commenced. But he also wanted to have the second vessel shown in the "Onboard the Vessel" box to prove that the second leg of the transit had also started.

The banks' insistence on showing the transhipment port (Rotterdam) in the "Port of Loading" box raised two important issues: first, the risk of the "on board" date for such a "shipped" bill of lading being outside the latest date of shipment permitted in the L/C; and second, the legal obligation for the owner to evidence when and where his carrier obligations begin.

Ultimately, we found the following solution: Rotterdam was shown as the port of loading, and the C/P B/L was dated as of the date of transhipment. The banks accepted an additional clause in the B/Ls stating both the original port of loading and the date the goods were shipped on board, which further ensured that there was no late shipment discrepancy. This also achieved consensus with regard to the deferred payment date, which was, as often the case, linked to the date of shipment.

We trust the above is instructive of the problems that traders sometimes have when trying to balance the demands of banks and third parties, whilst still being able to present L/C compliant documents that meet the requirements of the L/C issuing bank and the L/C applicant, the latter of which will refer also, if not primarily, to the underlying commercial contract for the purposes of compliance.

Peter Sproston LLM, BSc (Hons), ACIB, MIEx (Grad).
E-mail: sproston@bluewin.ch