We have recently received a letter of credit containing a so-called "soft clause".
This soft clause states that payment under the credit will ONLY be made once the goods have been cleared through customs or have been approved for importation by a competent authority at their destination.
Even upon the presentation of credit complying documents there is a possibility that the payment may be rejected if the applicant is to present the relative rejection notice issued by the competent authority.
Question is whether or not other banks have been confronted with similar constructions. If so, how where these dealt with and based on what grounds?
The UCP 500 state that we, as banks, may only deal with the documents pertaining to the transaction and not the goods. Art. 4.
Regards,
M. Dowse
Soft clauses
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APrins-Vendrig
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- Joined: Fri Apr 05, 2019 5:13 pm
Soft clauses
My personal views, without responsibility/liability are:
A "soft" credit is one that does not comply with sub-article 9a of UCP 500.
The main feature of such credit is that the issuing bank's undertaking is contingent upon fulfilment of a requirement other than the presentation of complying documents and which is outside of the control of the beneficiary.
For the avoidance of possible later problems, I would suggest it would be prudent for a bank advising a "soft" letter of credit to notify (in its covering letter) the beneficiary:
1. Of the shortcomings of the credit and,
2. That any documents presented to it will not be examined by the advising bank and will be forwarded to the issuing bank, under the credit, free of any payment obligation on the part of the advising bank (i.e. the advising bank should decline to perform any nominated bank role).
I would not revert to the issuing bank, per Article 12 for example, as the credit may be exactly what the beneficiary is expecting.
I personally would only consider agreeing to the issue of such a credit in the most exceptional circumstances.
[edited 1/24/02 4:46:38 PM]
A "soft" credit is one that does not comply with sub-article 9a of UCP 500.
The main feature of such credit is that the issuing bank's undertaking is contingent upon fulfilment of a requirement other than the presentation of complying documents and which is outside of the control of the beneficiary.
For the avoidance of possible later problems, I would suggest it would be prudent for a bank advising a "soft" letter of credit to notify (in its covering letter) the beneficiary:
1. Of the shortcomings of the credit and,
2. That any documents presented to it will not be examined by the advising bank and will be forwarded to the issuing bank, under the credit, free of any payment obligation on the part of the advising bank (i.e. the advising bank should decline to perform any nominated bank role).
I would not revert to the issuing bank, per Article 12 for example, as the credit may be exactly what the beneficiary is expecting.
I personally would only consider agreeing to the issue of such a credit in the most exceptional circumstances.
[edited 1/24/02 4:46:38 PM]
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Soft clauses
I presume that the L/C in question purports to be irrevocable. However the salient clause makes it no better or even worse than a revocable credit. The clause in question is an example of a non-documentary requirement. The fact that the requirement does not involve the beneficiary does not alter this. If I were advising the beneficiary, I would seek an amendment deleting this clause. In the absence of such an amendment, I would treat this as no better than a pre-advice, as the beneficiary cannot secure payment against presentation of documents in order.
Laurence
Laurence
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KarenHan_disabled
- Posts: 12
- Joined: Fri Apr 05, 2019 5:20 pm
Soft clauses
It looks like an Open Account activity rather than Letter of Credit. Shipment may be perishable goods that buyer doesn't want to take the risks. Why an LC is needed? May be it is easiler for the exporter to apply for a quota or an export license.
Would appreciate you check with the beneficiary and share with us the results.
Thanks,
Would appreciate you check with the beneficiary and share with us the results.
Thanks,
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Soft clauses
Agree this is not a letter of credit in such a sense but I have encountered several requests like this. Beneficiary sees such letter of credit as a comfort letter or a confirmed order for purchase. The applicant establishes such LC's when in doubt that the goods might not be cleared due to health issues or any other reasons.
For example, in some countries, LC's for livestock will usually have such clauses. The cargo will be cleared only after the health authorities check and approve it.
Now you would ask what should a bank do in such cases. Since payment is triggered by the health certificate issued by the health authorities at the port of destination, the LC should be payable against invoice and the health certificate issued at the port of destination. All other documents must be handled between the beneficiary and the applicant outside of the LC terms and conditions. Title documents should not be routed through the bank nor should be made out in the name of the bank. Further no shipping guarantee should be issued under such LC's to avoid dragging the bank into legal dispute between the beneficiary and applicant in case the cargo is rejected. That should be made clear to the applicant when concluding such deals. In circumstance where a shipping guarantee has to be issued payment will be made if a call is received under the guarantee regardless of the LC condition. Applicant's understanding to this must be received in writing.
Finally, I would say that such LC's are only issued for prime customers.
For example, in some countries, LC's for livestock will usually have such clauses. The cargo will be cleared only after the health authorities check and approve it.
Now you would ask what should a bank do in such cases. Since payment is triggered by the health certificate issued by the health authorities at the port of destination, the LC should be payable against invoice and the health certificate issued at the port of destination. All other documents must be handled between the beneficiary and the applicant outside of the LC terms and conditions. Title documents should not be routed through the bank nor should be made out in the name of the bank. Further no shipping guarantee should be issued under such LC's to avoid dragging the bank into legal dispute between the beneficiary and applicant in case the cargo is rejected. That should be made clear to the applicant when concluding such deals. In circumstance where a shipping guarantee has to be issued payment will be made if a call is received under the guarantee regardless of the LC condition. Applicant's understanding to this must be received in writing.
Finally, I would say that such LC's are only issued for prime customers.
Soft clauses
I forgot to mention that where the advising bank is also the nominated bank, I would recommend that the issuing bank is reminded, within the advising bank’s acknowledgement to them, that the advising bank will not be in a position to perform such a role as the credit does not constitute a definite undertaking on their part as envisaged by sub-article 9a of UCP 500, and that the beneficiary has been advised accordingly.
Soft clauses
Agreed that this does has the looks of a soft clause, but as AbdulKader suggested many a times such a clause may be the result of local government requirement. Those of you who have had dealings with Iranian banks would know that under Iranian exchange requirements payment of a discrepant document can only be made once the goods have been cleared by the custom authorities, and mind you this fact is not disclosed on the credit itself. Any one who is involved in LC business in this part of the world would vouch that percentage of clean presentations in the region is quite low. Despite this Iran continues to attract substantial business from the Middle Eastern countries. In all fairness to the Iranian business I have personally not come across any cases of default on this count. The point I am trying to make here is that it is ultimately the beneficiary who has to decide whether its worth taking the risk or not. The advising bank on its part can only advise him of the inherent risks.
regards, Khalid
regards, Khalid
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larryBacon
- Posts: 689
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Soft clauses
This discussion sems to be moving away from the initial posting topic which seems to me to be about non-documentary conditions. If the L/C contained a documentary requirement indicating proof of import, the beneficiary could decide whether or not this was acceptable, achievable or within his control. From this he could determine the ensuing risk and decide whether to utilise the L/C.
In the absence of such a document, as in this case, the issuing bank is left with a nebulous instruction concerning Customs clearance, without any indication as to what constitutes an acceptable document conferring compliance with this instruction. Indeed this instruction implies that a verbal compliance with this instruction is acceptable. In L/C terms, I tend to regard verbal compliance "only as good as the paper it is written on".
No mention has been made of the terms of shipment indicated on the L/C. From the viewpoint of control of access to the goods, only DDP would suffice, as this is the only one which includes import Customs clearance within the responsibility of the exporter. If the exporter(beneficiary) controlled import Customs clearance, he should have access to whatever documentary evidence of such clearance may be required by the L/C, in addition to maintaining title to the goods.
I suspect, however, that a term other than DDP was used, which indicates that control of importation was not retained by the beneficiary. I would appreciate clarification of this from M. Dowse (first posting).
Laurence
In the absence of such a document, as in this case, the issuing bank is left with a nebulous instruction concerning Customs clearance, without any indication as to what constitutes an acceptable document conferring compliance with this instruction. Indeed this instruction implies that a verbal compliance with this instruction is acceptable. In L/C terms, I tend to regard verbal compliance "only as good as the paper it is written on".
No mention has been made of the terms of shipment indicated on the L/C. From the viewpoint of control of access to the goods, only DDP would suffice, as this is the only one which includes import Customs clearance within the responsibility of the exporter. If the exporter(beneficiary) controlled import Customs clearance, he should have access to whatever documentary evidence of such clearance may be required by the L/C, in addition to maintaining title to the goods.
I suspect, however, that a term other than DDP was used, which indicates that control of importation was not retained by the beneficiary. I would appreciate clarification of this from M. Dowse (first posting).
Laurence
Soft clauses
Laurence,
With the greatest of respect, I think there may be a misunderstanding on your part. The issue here is not non-documentary conditions, as covered by sub-Article 13c. Rather, it is the issuing bank’s obligation to pay being (quite deliberately) contingent on an event that is in addition to the presentation of complying documents by the beneficiary. Hence, the credit does not meet the requirements of sub-Article 9a. I should mention, as indicated above, these ‘soft’ credits are not uncommon.
Regards, Jeremy
With the greatest of respect, I think there may be a misunderstanding on your part. The issue here is not non-documentary conditions, as covered by sub-Article 13c. Rather, it is the issuing bank’s obligation to pay being (quite deliberately) contingent on an event that is in addition to the presentation of complying documents by the beneficiary. Hence, the credit does not meet the requirements of sub-Article 9a. I should mention, as indicated above, these ‘soft’ credits are not uncommon.
Regards, Jeremy
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Soft clauses
Jeremy,
I take your point about the bank's obligation to pay being dependent on "an event" as you described it. What I am trying to emphasise (& not succeeding) is that there is no document mentioned in the L/C to which the issuing bank can refer to denote that this event has verifiably occurred. I would hate to be in this bank's situation :
If they are informed that the event has occurred, they should make payment. From whom should they accept this piece of information ? The applicant may have a vested interest in delaying or refusing to do it. The beneficiary also has a vested interest in passing this information to the issuing bank. No independent issuer of this information has been stipulated in the L/C. Therefore the banker could be damned if he does make payment and damned if he doesn't !
Laurence
I take your point about the bank's obligation to pay being dependent on "an event" as you described it. What I am trying to emphasise (& not succeeding) is that there is no document mentioned in the L/C to which the issuing bank can refer to denote that this event has verifiably occurred. I would hate to be in this bank's situation :
If they are informed that the event has occurred, they should make payment. From whom should they accept this piece of information ? The applicant may have a vested interest in delaying or refusing to do it. The beneficiary also has a vested interest in passing this information to the issuing bank. No independent issuer of this information has been stipulated in the L/C. Therefore the banker could be damned if he does make payment and damned if he doesn't !
Laurence