Shipments by instalments

[larryBacon]

As T.O. Lee suggests, I am trying to emphasise the difficulty of the document checker in this type of situation. He may be aware that a first shipment has been made within the permitted schedule, even though the first presentation has been rejected. I am suggesting that if the Negotiating bank is aware that the first shipment has been made on time, regardless of whether or not the first presentation has been rejected, the presentation for shipment of the subsequent period should be allowed, because Article 41 only deals with the situation where drawings OR shipments are not made in time. It does not deal with presentation for each shipment, which as T.O. Lee says is a separate issue.

[AbdulkaderBazara]

If documents are presented with discrepancies and have rightly been rejected, whether the discrepancies is in the shipment schedule or otherwise, it is considered that the beneficiary has not performed as required by the LC terms and conditions. Therefore, the LC will cease to be available for that rejected shipment and any subsequent ones.

[hatemshehab]

I’m very cautious about the statement of Mr. AbdulkaderB regarding the cessation of any subsequent shipments if the first shipment is rejected due to ANY discrepancy. I believe that if we have the following schedule of installment shipment

1. 500 tonnes of …. Not later than 31/7/2000
2. 500 tonnes of …. Not later than 15/8/2000
3. 500 tonnes of …. Not later than 31/8/2000
4. 500 tonnes of …. Not later than 15/9/2000

If the first shipment is effected within the permissible period but the documents contained the following discrepancies

1. Commercial invoice is not issued in the name of applicant.
2. B/L is signed by an agent without indicating the capacity of the agent or on whose behalf he is signing.

In this case the bank may, at its own discretion, reject the documents but it cannot apply the article 41 because shipment was effected as per shipment schedule. The first shipment ceases to be available unless there is a waiver of discrepancies, but the issuing / confirming bank is not relieved from its obligations to honour other shipments unless they are discrepant to L/C terms and conditions.

I would appreciate if Mr. AbdulkaderB can refer us to a specific article in UCP 500 that permits the bank to cease any subsequent shipments if documents are presented not in compliance with L/C terms and conditions other that not complying with the shipment period?

[AbdulkaderBazara]

The intention of article 41 is not to cover shipment schedule as stipulated in Mr. Hatem’s example. Refer to the Unpublished Queries 15 1099 by using the search key under the ICC Opinions section, search for article 41 and then click on Sub-Article 9(b): Article 41, look at the response to query # 2 to get a clear picture.

To answer the question raized by Mr. Hatem on the discrepancies I’m quoting below a script of Mr. T.O.Lee’s comments dated June 15 stated here above

Quote
The underlying purpose of Article 41 is for the situation that the goods covered by the LC are to be shipped in a systematical order with each shipment for a specified quantity and specification of the goods to support a project, such as building a bridge.
Unquote

Now if shipment is rejected for any reason the purpose is defeated and the project may be stopped, delayed etc. Thus it doesn’t make difference to the applicant if the shipment was made on time, have arrived or not if he would not take delivery of the goods. The reasons for discrepancies could vary. It could be specification problem, wrong merchandize, legalization, short shipment etc. and the document examiner should not make any judgement.

I would take performance by beneficiary as complying with all terms and condition and not splitting it into meeting one term and not meeting the other.

[larryBacon]

The Unpublished Queries 15 1099 under the ICC Opinions section, article 41 mentioned by AbdulkaderB makes reference to the fact that a first instalment shipment must be made before a second would be permitted under the L/C. However, it makes no reference to the distinct presentation of documents in order for the first instalment as a condition for the presentation of documents for the second instalment.

Thus if a bank accepts that the B/L presented for the first instalment evidences compliance with the L/C, this alone satisfies the condition under Article 41 for shipment of the first instalment. If other documents submitted with the first presentation are discrepant, unless they conflict with the evidence of shipment provided by the B/L, they do not alter the fact that there is documentary evidence held by the bank that shipment in compliance with Article 41 has been made for the first instalment. Therefore a presentation of documents for a second instalment should not be prevented on the basis alone of non-shipment of the first instalment ref. Article 41, because this Article only deals with non-shipment.

[AbdulkaderBazara]

In any case a beneficiary would not be consider as complying with the shipment terms if the documents are found to be discrepant. The shipment made will be ineffective and invalid.

The fact that Mr. Laurence is now comparing the B/L with the rest of documents is a proof that a discrepancy other than the shipping date could exist to stop the credit from being available for subsequent shipments.


[edited 7/26/01 12:11:37 PM]

[hatemshehab]

QUOTE
IN REPLY TO QUESTION A), THE CREDIT STIPULATED A SHIPMENT SCHEDULE, WHICH IN ACCORDANCE WITH ARTICLE 41 REQUIRES THAT EACH SHIPMENT BE EFFECTED IN ACCORDANCE WITH THE SCHEDULE. FAILURE TO SHIP ONE OR MORE OF THE SHIPMENTS WITHIN THE GUIDELINES WOULD INVALIDATE THE CREDIT FOR ANY FURTHER SHIPMENT(S) UNLESS OTHERWISE STATED IN THE CREDIT OR COVERED BY A SUBSEQUENT AMENDMENT. WHILST THE ISSUING BANK AUTHORIZED PAYMENT OF THE FIRST SET OF DOCUMENTS, IT IS NOT CLEAR WHETHER OR NOT IT "REINSTATED" THE CREDIT FOR THE FURTHER SHIPMENTS. THE ACCEPTANCE OF THE 2ND AND 3RD SHIPMENTS AND, IN PARTICULAR THE THIRD, CAN ONLY INFER THAT THE ISSUING BANK AND/OR THE APPLICANT APPROVED THE FURTHER SHIPMENTS UNDER THE CREDIT.
UNQUOTE

1)
For the purpose of clarity I have quoted the response of the ICC commission on shipment schedule. I have found nothing in this response to support the opinion of Mr. AbdulkaderB. If the issuing bank accepted any subsequent shipment this does not mean that the issuing bank is not entitled to cease the remaining shipments if the schedule is not complied with.

If the intention of article 41 is not to cover shipment schedules then what else does it cover? The whole article deals with shipment by installments within given periods and if that schedule is not respected then any further shipments will cease to be available.

Quoting T.O. Lee does help in understanding the underling contractual relationship between the applicant and the beneficiary that has originally gave birth to the L/C. it is natural that systematic order of shipment will support the project, but does any other discrepancies that may arise be arbitrarily treated under the article 41. If the case is so, then if we have a partial shipment L/C (with no schedule for shipment) and documents are presented for partial quantities, then can the issuing / confirming bank consider the remaining portion of the L/C as cancelled? Isn’t partial shipment in interest of the applicant’s project?

2)
NOW IF SHIPMENT IS REJECTED FOR ANY REASON THE PURPOSE IS DEFEATED AND THE PROJECT MAY BE STOPPED, DELAYED ETC. THUS IT DOESN’T MAKE DIFFERENCE TO THE APPLICANT IF THE SHIPMENT WAS MADE ON TIME, HAVE ARRIVED OR NOT IF HE WOULD NOT TAKE DELIVERY OF THE GOODS. THE REASONS FOR DISCREPANCIES COULD VARY.

May be this is true for the applicant, but this does not change the fact that this may not be true for the issuing / confirming bank. If the applicant is willing to accept or reject documents that’s up to him but our discussion is whether the bank may perform his duties in respect of L/C from the applicant business strategies. If so then there is no need to argue for an independent and fiduciary role of banks and best banking standards and practice!

3)
IT COULD BE SPECIFICATION PROBLEM, WRONG MERCHANDIZE, LEGALIZATION, SHORT SHIPMENT ETC. AND THE DOCUMENT EXAMINER SHOULD NOT MAKE ANY JUDGEMENT.

This is a very serious remark. What is the duty of the document examiner? Is it just to pinpoint discrepancies and forward them to the applicant without having a clear decision of what to be done with respect of those documents? Is it always prudent to think like that and simplify the document checking process to this extent? Don’t we have many cases where the interest of the issuing / confirming bank lies in rejecting documents even if the applicant is ready for a waiver? This is a banking practice governed and protected by both UCP 500 Article 14 b & c and the contractual relationship established between the issuing bank and the applicant.




[edited 7/26/01 4:20:10 PM]

[AbdulkaderBazara]

Below is the ICC Opinion I was refering too. I have not in any place indicated that article 41 is not to cover a shipment schedule. The schedule give by Mr. Hatem in his example is the one I was commenting on which is similiar to the example 1 given below:

UCP 500 Article 41 instalment shipments/drawings is applicable if drawings and/or shipments by instalment within given periods are stipulated in the credit. We wish to know which of the following examples should be considered as within given periods.
Total quantity of shipment required under the credit is 30,000kgs
Example 1. Shipment schedule
10,000kgs latest on 31 Oct. 1997
10,000kgs latest on 30 Nov. 1997
10,000kgs latest on 31 Dec. 1997

Response of ICC for Example one:

Example No. 1 gives three "latest" shipment dates for which 3 x 10,000kgs may be shipped. In reality, 30,000kgs could be shipped by 31 October, OR, one shipment of 10,000kgs made by 31 October and the balance of 20,000kgs either shipped as one shipment by 30 November, OR, otherwise split to ship at least an additional 10,000kgs by 30 November. While this is not the requested wording that was intended by Article 41 , nevertheless, if at least 10,000kgs is not shipped by 31 October the credit would cease to be available for all further shipments. Likewise, if at least 10,000kgs is shipped by 31 October but a total of 20,000kgs is not shipped by 30 November, the credit would cease to be available for any remaining merchandise.

Similarly, I have not said that the bank would simply refers the discrepancies to the applicant and would not exercise its right. As stated in article 14b the bank would decided whether a document is discrepant or otherwise. I don't want to divert to other issues. In addition, there is difference between partial shipment and shipment schedule where shipment has to be made in certain sequence. I am still of the opinion that if documents are rejected due to discrepancies then it makes that shipment ineffective.

[T.O.Lee]

HOW A COURT OF LAW DECIDES GREY AREAS

In a court of law, if a judge cannot decide based on the contract and/or the related legislations due to grey areas and other reasons (expert's opinions biased, inconsistent or evidences from witnesses not acceptable or contradictory), he would look to the intention of the parties to determine which party is right or wrong.

Since the members of DC PRO here cannot convince others of their different opinions based on the UCP 500 Articles alone, shall we try to decide the issues based on the intention of the parties as reflected by Article 41.

DETERMINE BY REFERRING TO THE INTENTION OF THE PARTIES

Artcle 41 imposes a very serious "sudden death" penalty on the beneficiary in order to protect the applicant after an instalment shipment not made according to the DC shipment schedule. It enables the applicant to void the DC immediately and to buy from other more reliable sources, without the need to dispute further with the beneficiary on the validity of later shipments.

"DRAWINGS" IN ARTICLE 41 TO MEAN "PRESENTATIONS FOR PAYMENT" FOR COMMERCIAL AND STANDBY CREDITS

With this intention agreed, then we may interpret "DRAWINGS' in Article 41 to mean "PRESENTATIONS FOR PAYMENT" under both standby letters of credit and commercial documentary credits.

With such interpretation of the word "drawings", then an instalment shipment would not comply with Article 41 if

(i) it is performed not according to the shipment schedule stipulated in the DC and/or

(ii) there is material discrepancy(ies) in the documents that may trigger rejection or payment dishonour.

A shipment with discrepant documents is equivalent to untimely or no shipment at all, since the goods cannot be accepted and used in the project, such as building a bridge or a turnkey plant.

The consequences are the same. The applicant has to look for alternative supply sources. And he may also face claims from the government, NGO or tender board for delays and/or defaults on performance.

PROBLEM AND SOLUTION

If the documents of the second instalment shipment are presented and received earlier than those of the first instalment shipment, then it may be difficult to determine whether the second instalment shipment is valid or not, because the details of the first instalment shipment are still unknown.

To avoid such awkward situation, we recommend an applicant and its issuing bank to specify clearly in the DC that presentation of ANY instalment shipment cannot be earilier than that of a previous instalment shipment(s).

We enjoy the healthy, although heated arguments from members of the DC PRO that have enlightened all of us on the interpretation of Article 41.

We are from http://www.tolee.com

[edited 4/2/02 10:30:38 PM]

[larryBacon]

T.O. Lee's suggestion of a clause in the L/C restricting presentation to the same sequence of instalment shipments would make the work of the Bank's document checker much easier, but could be inequitable for the beneficiary if payment is based on sight and presentation could be made out of sequence. It would not be unusual for such presentations to be made out of sequence where shipment is permitted from different ports in different countries such as "shipment from European port".