Article

by Bob Ronai

Bob Ronai has had over 45 years' experience in international trade, starting out as a banker. He is the Managing Director of Import- Export Services Pty Ltd, a company in Sydney, Australia which specializes in export document preparation and problem solving for its clients. He is a member of both the Banking and Incoterms Committees of ICC Australia and manages four Incoterms and Trade groups on LinkedIn.

Ask any exporters if they like transacting their sales under a documentary credit (L/C), and I think you'll find that a majority of them definitely do not. That certainly is my experience over more than four decades. The reasons most often given are:

1. "They are too complicated"

2. "We had too much trouble getting the banks to accept our documents."

The second reason clearly points to the exporters' having a serious lack of understanding of the rules, currently UCP 600 and ISBP 681. But the two answers are closely linked, so the first reason needs to be examined in more detail. How is an L/C "too complicated"?

As a bank employee in a large bank's international trade department responsible for creating and signing L/Cs a very long time ago, back when we used mechanical devices called typewriters and placed the L/Cs in folded-up pieces of paper called envelopes dispatched by airmail, I was encouraged to take plain English and make it sound "official", which we referred to as "bankese". But every day now I see L/Cs with more and more unnecessary or just plain incorrect instructions especially in the Additional Conditions (47A) section.

I realize I am an idealist dreaming of a perfect world where banks issue perfectly workable L/Cs, beneficiaries understand both UCP 600 and ISBP 681 and bank document checkers too understand these rules when reading presentations. But humour me a little in my hope senior bank management might actually take notice of my plaintive pleas and grab hold of a bundle of their L/Cs to look at what their bank does that make exporters dislike them.

Examples

Here are examples of what has crossed my desk on just one day:

- "Beneficiary's manually signed commercial invoices made out in the name of applicant and in the currency of the credit required in octuplicate". Does the issuing bank not know of UCP 600 sub-article 18 (a), which makes much of this redundant? And what logical reason could there be to require eight identical copies of the document when the L/C also requires that the beneficiary email copies of the documents to the applicant? When the applicant was challenged, this was cut back to quadruplicate, showing that either the applicant or the issuing bank just plucked a number out of the air.

- "Beneficiary's certificate as per following format: We declare that copy of invoice and packing list to be affixed at the inner side of the door of the container." This does not even give the beneficiary the opportunity to use correct English, let alone recognize that it has actually carried out the required action. While this L/C was for machinery, I see the same for bulkloaded primary products, which is nonsense since the container is only weighed after being closed and sealed to determine the product weight needed on the invoice and packing list.

- "All shipments must be advised by the beneficiary by fax to XYZ insurers on the same day of shipment and copy of such shipment advice must accompany documents." What happens if the vessel leaves on a non-business day? Is someone supposed to go into the beneficiary's office to send a fax? Almost invariably the beneficiary will not know the date of shipment shown on the transport document until it receives the hard copy from the carrier. So the only way the beneficiary can comply is to backdate the document, i.e., falsify that document, hardly the kind of behaviour that should be encouraged.

- "Invoices exceeding this credit amount not acceptable". And "Documents must be presented for negotiation for full invoice value of shipment." Do these mean the net amount on the invoice or the gross amount before deductions (if any)? Why create confusion by saying this at all when ISBP 681 paragraph 60 is clear?

- "Short form/blank back bill of lading/ non-negotiable sea waybill not acceptable". Well of course they aren't, because the L/C requires presentation of a "full set of clean shipped on board ocean bills of lading", so why say anything at all about these other versions of transport documents?

- "House/forwarder's bill of lading not allowed". Neither expression is defined in UCP 600, meaning this instruction will be disregarded. When the applicant was told about this, it and/or the issuing bank simply amended it to delete the "not".

- "One set of advanced n/n documents to be faxed or sent by courier to the applicant by the beneficiary immediately after shipment". The most obvious thing about this is that it is a condition without stating the document required to evidence compliance (UCP 600 sub-article 14 (h)). But applying just another moment's thought, we have to ask how can non-negotiable (or more correctly "copy") documents which include a copy of the shipped on board transport document can be "advanced"? When I explained to the applicant that this was meaningless, it added an identical clause but substituted "email". I then asked why it wanted the copies both by fax/courier and email, so it deleted the fax/courier clause.

- "Shipping marks: ABC-XYZ FACTORY" and "Shipment by any containerized vessel" are both pointless as UCP 600 sub-article14 (h) will apply. The applicant is aware that the L/C covers large machinery sent in containers as FCLs which will be delivered to its premises, so shipping marks are unnecessary and pointless. We could also ask if it is the vessel that is containerized or just the goods.

- "B/L to state port of discharge: DEF". Why say this in 47A when it is already stated under 44F Port of Discharge?

Other L/Cs

The above are all from one L/C. It could be argued that the applicant made all these stipulations in its application to the issuing bank, but then it can equally be argued that the issuing bank has a responsibility "to supplement or develop the terms in a manner necessary or desirable to permit the use of the credit", as stated in ISBP 681 paragraph 2. This issuing bank's relevant staff obviously have not been trained in correct wording for its L/Cs.

Another L/C from another country included the following:

- "Seller to advise by fax or email of the shipment details latest ten working days from B/L date". Sounds good until we see that UCP 600 sub-article 14 (h) applies again. Even if a document was called for, the instruction fails to tell us who the beneficiary must be shown to have advised and indeed what its fax or email contact details are.

- "Third party documents (excluding commercial invoice) are acceptable." Has the issuing bank not read ISBP 681 paragraph 21 (c)?

- "Multimodal or combined transport bill of lading is allowed". The L/C states a final destination in field 44B, so clearly the bill of lading could not be anything but a multimodal transport document, with no need to re-state the obvious.

- "Minor spelling errors acceptable except errors on unit price, invoice value and quantity". Again, re-stating but modifying what is already clearly laid out in ISBP paragraph 25. How does one have a "spelling error" in numerical data like a price, value or quantity? If the issuing bank means a typographical error, then UCP 600 subarticle 14 (d) and ISBP 681 paragraph 21 would surely make the document discrepant anyway.

- "Apparent spelling mistakes/errors in the L/C are acceptable." Really? Did they mean to say "in the documents"? Another one I see on many L/Cs from India is "Shipping company's certificate that vessel is less than XX years of age". This is very strange when the transaction is on a CIP Incoterms 2010 (c) basis. The original reason for this requirement is that the applicant's insurer wants to know the age of the vessel IF it is insuring it. The pointlessness of this requirement is first, that the beneficiary is insuring it and second, that most times transhipment will occur, so the second vessel might fall out of that age span. The assumption is that banks don't know why they make such requirements, because the insurance premium rises for vessels aged over 20 years, yet L/Cs quote any of 15, 20 or 25 years. And when asked to remove this document requirement for CIP/CIF transactions, the issuing banks refuse, citing their "procedures". This is quite apart from "shipping company" not currently being referred to in either UCP 600 or ISBP 681, but the new ISBP will do so. By the way, these days vessel data are easily found on the internet.

Guidance?

Some bankers will say that all or most of the above have been included in the L/Cs to give guidance to the beneficiaries so that they can provide compliant presentations. In reality, the more "stuff" in a documentary credit the more it scares the exporters (beneficiaries). We also have to face the reality that while the vast majority of L/Cs are issued in English, this is not the first language of most of the bank employees creating them. English also may well not be the first language of the exporter's staff creating the documents for presentation, so we can see that there can be quite a problem in compliance. The obvious solution, then, is to minimize the requirements and stipulations inserted into the L/C and stick to stating in field 46A the actual documents needed for the trade transaction as agreed between the exporter and the importer, and calling for the minimum number of copies. Issuing bank staff should not insert any requirements not specified by the applicant, and they should query, then discourage, any strange requirements from the applicant, such as all of the ones I have reported above.

We need to remember that the purpose of a L/C is to act as a payment mechanism for an underlying trade contract between a seller/exporter/beneficiary and a buyer/importer/applicant. I suggest that bankers should not interfere with this process by unnecessarily complicating it to the point where they scare the parties away from documentary credits. Documentary credits are still the fairest and safest payment method for both seller and buyer, and they are a very nice revenue earner for the banks. Frightening the traders away from L/Cs exposes them to payment risk and documentary risk, with the concurrent end result that the bankers lose out on revenue.

Bob Ronai's e-mail is bobr@exports.com.au