Should bankers neglect the inconsistency due to application

[T.O.Lee]

Laurence,

You may still be able to “team up” with us although you represent the Irish National Committee. You may do so by pointing out in the beginning that whatever you say is your personal opinion only and that will be OK. You still have your freedom of speech provided you highlight your identity first.

In the ICC Minute, it is the practice to name the speaker as Laurence Bacon or T. O. Lee and not as a representative of Irish or Canadian National Committee. So you are quite safe in this regard.

We always respect the intelligence of the participants and think that they should be competent enough to handle the Incoterms 2000 v. UCP 500 dispute nicely to bring us all to a greater depth, with combined knowledge and experiences. This is the best training opportunity for them as well as for the facilitator of the workshop.

It is OK provided the facilitator sets the scene nicely and tells them that this ICC opinion is still in the drafting stage and only yet voted by members of the National Committees.

Would other members voice their views here?

www.tolee.com

[edited 8/27/02 3:00:02 PM]

[T.O.Lee]

This morning, we have finally received an acknowledgement of receipt from Professor Charles Debattista regarding our fax making comments on the Incoterms 2000 v. ISBP Rev3 issue.

www.tolee.com

[edited 8/27/02 4:56:57 PM]

[KarenHan_disabled]

There always a reason for the applicant to call for FOB terms but freight charges (prepaid) are settled outside the LC terms. It may be a back-to-back trade where the middle man is responsible for the freight charges.

Incoterms, ISBP, UCP are all used to faciliate trade and we should let the buyer and seller determine what they want.

Same as Jeremy, if recommendation by ISBP reduces the discrepancy ratio, we should support it.

[larryBacon]

If we support a proposition solely on the basis that it is likely to reduce the discrepancy ratio, the ultimate conclusion to this is to accept all documents presented as acceptable, which is nonsensical.

The intrinsic value for exporters & importers (remember the guys who pay your bills !) in using a DC, is the expertise applied by the banks in determining documentary compliance. If we are to "dumb down" this by accepting any old rubbish presented, it detracts from the value of using a DC.

Laurence

[T.O.Lee]

Laurence,

We support your posting on 28 August 2002.

WE CANNOT BREAK THE GROUND RULES TO ACHIEVE AN END

Mr. Lau from Hong Kong

To reduce discrepancies is always an important objective of ICC Banking Commission but this must be done on the basis of

(i) consistency amongst different ICC Rules (which is supported by the Secretary General of ICC, Maria Cattuai) and

(ii) respect of quoted Rules (Incoterms 2000) in a DC subject to UCP 500.

You cannot throw away these backbone doctrines just to achieve an end.

CDCS EXAM INCLUDES TEST OF INCOTERMS 2000 KNOWLEDGE

If you are a CDCS, you should be aware that the Incoterms 2000 is within the scope of knowledge expected by the CDCS examination board. Then how can you, after passing the CDCS, allow such inconsistency in the documents?

Similarly, can your bank pay out cash against a crossed cheque or accepting a draft stating “payment on condition that the Beneficiary delivers the goods before shipment deadline”?

For example, in Hong Kong, the Government is doing a lot of things after 1997 that are criticized for achieving an end by breaking all the ground rules. We hope your own thinking is not affected by such improper influences.

EXAMPLE OF AN ULTIMATE MEANS TO REDUCE DISCREPANCIES FOR MR. LAU AND JEREMY

If you are keen to reduce discrepancies, we may recommend you to the following clause found in DCs used in a "Solo" class fraud case from Korea.

“All discrepancies are acceptable provided the correct number of copies of stipulated documents is presented”.

In fact, they used DCs for borrowing money from banks at a much cheaper rate and it is much easier to get approval of loans.

If you two agree to incorporate this clause in your DCs, then we can introduce a lot of new customers to you as we receive from time to time email enquiries asking us to introduce banks and law firms to them as they have troubles and disputes out of discrepancies.

BANKERS ADDED LIABILITIES UNDER THE ANTI-MONEY LAUNDRY LAWS

Now bankers have to check documents with more reasonable care than is otherwise required by the UCP 500. Under local laws for stopping money laundering, bankers have legal liabilities to detect and report such activities. This is a criminal offence in most of the countries. So bankers cannot relax in examination of documents although some of them would like to do so.

www.tolee.com

[edited 8/29/02 4:10:38 PM]

[vobrien]

There is no conflict – unless you really want to create it, and in turn create unnecessary discrepancies, costs and delay.

When the seller and buyer agree FOB terms it means that the buyer must contract at his own expense for the carriage of the goods.

However, all of us who deal these transactions on a day to day basis will know that sometimes the carrier will not ship the goods without the freight amount being paid before shipment of the goods.

So, it can easily happen that the seller contracts on an FOB basis with the BL marked ‘freight paid’ but the freight in respect of the carriage will actually have been paid directly by the buyer before shipment of the goods.

The freight being paid by the buyer before or at shipment, and 'freight paid' mark or stamp on BL is fully consistent with the obligation of the buyer to contract at his own expense for the carriage of the goods from the named port of shipment as per Incoterms 2000.

[PavelA]

This is quite commonplace especially in the current economic climate as carriers try to avoid risk of non payment of freight after they have shipped the goods to the port of discharge.

Pavel Andrle

[T.O.Lee]

Hello Vin and Pavel,

We wish to make a couple of points on your postings.

(1) Incoterms are created for the purpose of standardizing the trade terms and conditions to avoid confusions and disputes. If FOB is used with freight prepaid, then this may create confusions and disputes in examination of documents based on “on its face” doctrine. A banker is not allowed and not obligated to find out the facts behind the scene to see if the documents are compliant “in fact” or not (rather than “on the face”).

(2) Incoterms allow the parties to chose the trade term that most suits their trade terms and conditions. If a FOB buyer is informed that the carrier insists to receive the freight before the goods can be shipped, then the parties should change the Incoterms from FOB to CFR. If they do not do this, they are creating confusions and disputes as the Incoterm used in the contracts no more reflects the facts or actual trade terms and conditions. In a DC, we need an amendment to reflect the changes. Then why shouldn’t the parties do the same in Incoterrms? As lecturers, should you encourage such practice or malpractice to be exact?

(3) Some countries, due to shortage of foreign exchange, do not allow an import BL to bear “freight prepaid” markings and those customs or government officials may determine on the face of the BL as well. The freight prepaid BL may be seen as inconsistent with the FOB import licence. And the importation may face troubles and delays.

(4) So the problem is not as easy as it appears. The more you know, the more you don’t know.

(5) As a lecturer, should you two gentlemen have the duty to educate the parties to change the Incoterm FOB in their contracts to CFR if it no more reflects the facts or the changes?

(6) For Vin, we appreciate your goodwill act trying to play the role of a mediator and to encourage us “to love and not to make wars” (just to create some jokes here, please don’t get serious over this). However, the Discussion Forum expects us to make wars for the pursuit of truth, provided we respect each other even if we disagree. That is why we often end up with Jeremy in “agree to disagree” manner.

(7) When it is “all quiet on the western front”, we would post some controversial queries here just to create the wars! And we have to create an opponent (not an enemy, but a friend that happens to disagree with us) just to bring forth the truth, as nobody is perfect. Jeremy and maybe Pavel who is always on Jeremy's side, are not enough.

www.tolee.com

[edited 9/5/02 4:00:38 PM]

[larryBacon]

Vincent appears to assume knowledge to which he is not entitled. He cannot assume that a B/L marked freight prepaid indicates a payment of freight by the buyer. Similarly, a DC checker cannot assume such knowledge, as he is required to check documents at face value only. An FOB B/L by definition does not include payment of freight. If a seller contracts to sell on FOB basis under a DC, he typically must present a full set of original B/L to the bank in compliance with the details within the DC. He is therefore compelled to instruct the carrier in detail on his requirements for the completion of the B/L, and to ensure that the originals are issued directly to him. If within such instructions, he includes a requirement for a prepaid B/L, he is in breach of the agreed FOB contract and takes upon himself the onus to pay the carrier, and by definition changes it to a CFR B/L. If he instructs the carrier to issue the B/L on a freight collect basis, the carrier is required to do so. A carrier who fails to do so is in breach of the contract of affreightment, regardless of whether or not another party (e.g. buyer) arranges to pay the freight. The carrier is within his rights not to accept cargo on a freight collect basis, but this is a separate issue. Although it is possible for the buyer to pay for the freight, the party instructing the carrier on the issue of the B/L (here the seller) takes upon themselves the concomitant rights and obligations of the contract with the carrier, including the obligation to pay the carrier for freight if the instructions sent to the carrier includes a requirement for a freight prepaid B/L. This obligation of the seller to pay the carrier holds true whether or not the buyer has paid the carrier or claims to have paid the carrier.

It is pointless to suggest that a freight prepaid B/L is consistent with FOB under Incoterms 2000 as Incoterms 2000 does not directly address the relevant documentary requirements. Similarly, a dirty B/L is consistent with Incoterms 2000, but is also likely to be rejected by a DC checker. "Incoterms 2000" is rarely cited in DCs, and DC checkers cannot impute a reference to them, unless specifically required to do so.

If we were to accept Vincent's proposition, then by the same reasoning, we should accept Freight Collect Bs/L on CFR contracts. I would find it difficult to imagine any issuing bank attempting to justify to an applicant the acceptability of a freight collect B/L on a CFR contract & CFR DC, despite this being consistent with Incoterms 2000.

Laurence

[T.O.Lee]

We do not intend to go into the technicality of a BL as most of the members are bankers who may not want to know it, such as our friend “Rocky J” (our respectable friend J who is not a judge but a banker who knows laws. He is well known here for his objection to the idea that bankers should know some basic transport and insurance knowledge and he holds this position as solid as a rock. We intend to create some humours in a dry discussion forum. Since most Englishmen (or UK men if he is not English), can take humours, we hope he would not mind this nickname).

But since Laurence has started to go into the “marine/ocean” BL as an evidence of a contract of carriage, or part of a contract of carriage, we may add something cream to the cake.

A BUYER (APPLICANT) IS NOT A PARTY IN A ‘TO ORDER’ BL AT TIME OF PREPAYMENT OF FREIGHT

Unless the BL is a straight BL (consigned directly to the applicant instead of “to order” or “to order of an issuing bank”), the applicant buyer is not a party to the BL at the time of prepayment of freight and hence the carrier should not accept payment of freight from him, as he is not an obligator for the sea freight. The beneficiary shipper is the obligator, at least from theoretical side. In practice, it depends on the size of the carrier. If it is a big carrier, it will hesitate to receive freight from the applicant buyer as this may bring the carrier into problems in case of disputes between the shipper and the buyer or between the buyer and the carrier.

As Laurence has rightly pointed out, only the shipper beneficiary can pay freight as the contract of affreightment is between the shipper and the carrier in a “to order” “marine/ocean” BL.

A CARRIER WHO RECEIVES FREIGHT FROM THE BUYER MAY BE PLACED AT A CROSSROAD IN CASE OF DISPUTES AMONGST THE PARTIES

From our experience in resolving BL disputes, the problem would not stop right here. If the buyer wishes to change the port of discharge, as the ultimate buyer so instructs him, but the shipper objects to this, then whom the carrier should listen to?

From our exposure to BL disputes, things may go more complicated. How about the shipper instructs the carrier to change the consignee in a straight BL? But freight has already been prepaid by the original consignee buyer.

From contract of affreightment point of view, the carrier should listen to only one voice, and that is the voice of the shipper. But the trouble is that the carrier has already accepted payment from the buyer. The lawyers representing the buyer would consider the payment of freight as a “consideration” to enable the buyer to enter into the picture of the “marine/ocean” BL.

So the carrier would be placed at a crossroad. Listening to any one side would trigger on claims from the other side.

GOOD EXAMPLE WHY BANKERS NEED TO KNOW TRANSPORT DOCUMENTS

This is another good example to inspire bankers such as our beloved friend Rock J that in order to avoid risk, they should know more about transport and insurance documents.

The more you know, the more you don’t know. Then the more you want to know, to stop the fears after knowing a little bit more. That describes our learning process. We simply can't stop from learning.

If the BL is a charter party BL, the Pandora Box will be even bigger. But this topic is not suitable for the Discussion Forum, as it needs a basic knowledge on “marine/ocean” BL to understand what we are talking about.

We are going to retire in five years time to pursuit Buddhism. So there is not much time left for those who wish to pick up more from us.

www.tolee.com

[edited 9/5/02 5:12:49 PM]