The so called "Conditional L/C's"

[AbdulkaderBazara]

Dimitri,

Welcome on board.

Point no. 1 & 2 of Vincent's comments are the ideal answers. If that is not possible and the bank has to issue a letter of credit due to the business relationship, I would suggest one of the following:

1) Trade terms to be DDP. Thus the beneficiary has to ship the goods, clear it from the authorities and deliver to the applicant's warehouse. There will not be an issue of shipping guarantee nor would be the requirement of presentation of bill of lading in the banks name. An beneficiary’s invoice and cargo receipt by applicant would do.

or

2) The second option is that the beneficiary has to trust the applicant to clear the goods on its behalf. Therefore, title documents to be issued in the name of the applicant and sent directly to him. Banks would not be required to endorse the bill of lading nor even handover such documents to applicant. Again the LC would be payable against beneficiary’s invoice and cargo receipt.

In this scenario the applicant should be advised that in case a shipping guarantee is issued payment would be made to beneficiary regardless of any future contestation made by applicant. Such dispute should be handled between the beneficiary and applicant outside the LC terms.

In any case these types of LC's will be restricted to only prime customers of a bank.

[edited 5/4/02 2:44:16 PM]

[larryBacon]

Abdulkader Bazara's comments about the use of the DDP term should be taken with caution. From the beneficiary's viewpoint, this incorporates the risk that any fluctuation in import duties would be payable by the beneficiary without recompense by the applicant. An equally acceptable alternative would be DDU, as this avoids the import duty risk for the beneficiary.

Laurence

[AbdulkaderBazara]

Laurence,

Agree with you on the import duties issue. If we are talking abt Saudi Arabia, the import duties are known and historically don't fluctuate much.

regards

[DimitriScoufaridis]

Abdulkader,
Thanks for the welcome note. The last few weeks have been quite busy but now I’m in a position to respond to your comments.

The first solution you’ve suggested could be used as another reasonable alternative; however, by changing the trade term you have certainly made either of the following two major assumptions:

1. The underlying contract of sale, if already concluded, could be amended to incorporate the new trade term.
2. The transaction is being structured prior to the conclusion of an agreement between the buyer and the seller.

Otherwise, a beneficiary receiving and accepting a letter of credit with a trade term different than the one mentioned in the underlying contract of sale puts a question on whether legally such a contract is considered to be automatically modified.

[AbdulkaderBazara]

Dimitri,

Agree.

regards