Contributors from three countries


Edward Trading LLC received an irrevocable documentary credit no. xxx issued by a Chinese bank for the account of a Chinese buyer through our bank, the advising bank, in our favour for USDxxx available with any bank by negotiation with a draft at sight to be drawn on the issuing bank. The L/C expired on 30 January 2013 in the beneficiary's country, and shipment was to be made on or before 15 January 2013 from USA airport to China airport covering one unit of medical equipment with details as per contract no. xxxxxxx CIF China airport accompanied by the following documents:

1. Signed commercial invoice in duplicate

2. Packing list in duplicate with weight and measurement to be indicated

3. Manufacturer's inspection certificate indicating that the commodity described therein was in conformity with the contract and that the marking requirements had duly complied with the contract

4. Air waybill consigned to and notifying applicant with full address indicated "freight prepaid", stating the effect that the commodity described therein was in conformity with the description in the contract and that marking was also in conformity with the contract

5. Insurance policy in duplicate covering all risks (air transportation risk) and war risk for 110% of the invoice value with claim, if any, payable in China in the currency of the credit

6. Shipping advice to applicant prior to flight date, which contained the contract number, credit number, description of goods shipped, flight number, place of departure and destination, flight date and estimated arrival date

7. One copy of performance bond.

We shipped the goods on 15 January 2013 and presented the documents to the issuing bank for payment through our bank on 24 January 2013. However, the documents were rejected by the issuing bank because of the following "discrepancies":

1. Insurance policy insured amount substantially more than the L/C stipulation of 110% of invoice value, and issuance date on insurance policy was 1 June 2012 and was to expire on 31 May 2013

2. Standby L/C presented instead of performance bond

We issued an umbrella policy to cover our exportation of medical equipment needed to be insured under the CIF term. Apparently, the amount was larger than the 110% of invoice value required by the L/C. Our umbrella policy covered for one-year periods that are different from other insurance policies covering individual shipments. UCP 600 article 28 does not stipulate that the amount insured over 110% of the invoice value is not acceptable. Therefore, our contention was that discrepancy 1 above was not valid. As to discrepancy 2, in the US we can only provide a standby L/C to serve as a performance bond, which has been widely accepted worldwide.

The payment still has not been made as of this writing. The tactics of claiming these unfounded discrepancies to refuse payment was stunning. This continues to raise serious doubts about how issuing banks in China follow the rules in UCP 600 to examine documents.

Simon Jian is Chairman, at Edward Trading LLC Email:


The concept of negotiation in letter of credit transactions has played an important role in trade facilitation and cross-border acceptance of documentary credits. Though it developed from the concept of negotiation under negotiable instruments law, over a period of time negotiability of drafts under letters of credit has developed as an independent discipline. In terms of article 2 of UCP 600, negotiation is "the purchase by the nominated bank of drafts and/or documents under a complying presentation by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank". This definition has made an important distinction by providing that only the nominated bank can negotiate and that the nominated bank can also negotiate documents. This is opposed to the established jurisprudence of negotiation under negotiable instruments law, which states that only drafts in a specified format and wording can be negotiated. Another distinction is that negotiation under UCP 600 subjects the purchase of drafts/documents to a complying presentation.

Under negotiable instruments law, an instrument can only be considered to be a negotiable instrument if it contains an unconditional order in writing, signed by the maker, directing a certain person to pay a certain sum of money to, or to the order of, a certain person or to the bearer of the instrument. If an instrument is subject to a certain condition, it cannot be considered as a negotiable instrument under the established jurisprudence of negotiable instruments law.

The term, "negotiation" is a defined term in the Pakistan Negotiable Instruments Act 1881 ("the Act") and as per section 14 of the Act: "When a promissory note, bill of exchange or cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated." The transfer by negotiation is the only mode of transfer recognized under the Act. Further, the transfer of a negotiable instrument payable to bearer can be effected by mere delivery, but if the negotiable instrument is payable to order, then it can only be negotiated by endorsement and delivery. To negotiate under negotiable instruments law, there is no requirement that only a person nominated specifically in a draft can negotiate, as opposed to the provision under UCP 600 that only a nominated bank can negotiate the drafts/documents.

The beneficiary of a credit under a letter of credit is not entitled to negotiate, and any negotiation by a beneficiary in this regard does not create any legal right in favour of anyone. However, an important issue concerning UCP 600 is that in many countries the UCP are still being considered as part of a contract, since they are voluntary codes of conduct rather than laws which are codified and enforced as laws of the land. This can be the reason that the concept of negotiation in UCP 600 does not receive the same level of appreciation and recognition by lawyers and courts as the established concept of negotiation under the applicable negotiable instruments laws. Therefore, there is a need to develop and elaborate the concept of negotiation in letters of credit as an independent discipline so that negotiation under letters of credit can achieve a separate status and appreciation.

Irfan Munawar Gill, LLM is Legal Advisor at National Electric Power Regulatory of Pakistan ("NEPRA") E-mail:

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

United States

The good news is that American businesses have been quick to adopt Incoterms® 2010 for international transactions. However, there are some issues particular to US business.

Revenue recognition is one such American issue. This involves the question "when does a sale become an asset?" and is an important accounting issue, particularly for publicly traded corporations which are regulated by the Securities and Exchange Commission. The answer is found in the US accounting rules titled "Generally Accepted Accounting Principles" (GAAP). While these regulations have been around for some time, what has changed is increased penalties for accounting irregularities imposed by the so-called Sarbanes Oxley law (SOX).

Specifically, GAAP rules dictate that for most sales transactions a minimum of two things must happen for revenue to be recognized: first, ownership for the contract goods must pass from the seller; second, the seller's risk for the condition of the contract goods must have ended. Incoterms® rules do not speak to ownership transfer. They leave this issue to the parties to specify elsewhere in the sales contract or, for contracts that are silent, to the applicable law. Incoterms® rules do address the risk transfer point called "Delivery" in point A4 and "Transfer of Risks" in point A5 of each rule.

Three Incoterms® rules - DAT, DAP and DDP - specify that delivery takes place when the goods arrive at the designated place. Here, the GAAP presents a problem for companies wanting to recognize revenue at the earliest possible moment, as transit times can be quite long. As DAT and DAP are popular with buyers, competitive pressure and revenue recognition goals may conflict.

This situation may occur elsewhere. The International Financial Reporting Standards (IFRS) share many similarities with GAAP and are becoming more widely used internationally.

A second issue that US users face is an apparent conflict in export clearance between the F-Group Incoterms® rules and the export reporting regulations found in the US Foreign Trade Regulations. This is important, since the US export regulations contain robust enforcement capability with both civil and criminal potential consequences. All three F-Group rules (FCA, FAS and FOB) task the seller with export clearance for the logical reason that it is usually easier to deal with one's own government. However, the US regulations state when there is a buyer-appointed forwarder, as is normal with F-Group rules, the forwarder should report the export.

Fortunately, there is a way to reconcile the conflict. Regulations permit the foreign buyer to appoint another party to report the export, including the seller, which aligns the reporting function with the seller's Incoterms® responsibility. Some very large companies are bringing these rules into their domestic purchasing operations. There are two reasons. Our beloved "FOB here, there and everywhere" shipment and delivery terms were deleted from the US Uniform Commercial Code. Probably of greater importance, savvy companies are tired of juggling two sets of often-conflicting terms between their domestic and international staffs. Whatever the motive, this is causing a ripple effect as their suppliers request the same of their vendors. Since most people in purely domestic trade have no exposure to Incoterms, considerable training is required.

Frank Reynolds is a US Delegate to the Incoterms® 2000 and 2010 Revisions. His e-mail: