Soft clauses
Posted: Fri Feb 01, 2002 12:00 am
First of all most of these LC's are issued in either FOB, C&F or CIF terms and not DDP terms. The beneficiary or its agent is not obligated to clear the goods nor are they able to get hold of the health certificate because they don't, usually, have physical presence in the importer's country.
Therefore, to have the goods inspected at the port of destination, relative title documents have to be released to applicant. Once this is done, applicant will ideally take possession of the goods. If the goods are then rejected, payment will not be made and the issuing bank will be in hot waters because it, now, does not have possession of the goods nor the documents. The following question will then be raised:
1) How long would it take the bank to take control of the cargo?
2) Who will pay for any demurrage charges?
3) If insurance & storage is required who will be responsible and who will pay the cost?
4) If the cargo is livestock or perishable goods who will give them adequate protection?
5) If the cargo has to be returned to the beneficiary, who will pay for the cost applicable?
6) Would the issuing bank accept to do the above on behalf of the beneficiary?
I know of a similar case where the issuing bank was forced to pay the beneficiary for a rejected cargo just because it released the relative documents to the beneficiary. To circumvent this situation, some issuing banks started putting a clause in the LC’s that would allows the issuing bank release documents to the applicant free of payment. The question I would ask then is if the documents are to be released free of payment, is it necessary to have them be routed through the bank? Despite the question raised, the additional clause does not work because, usually, the instructions received from the beneficiary or its bankers along with documents don't explicitly authorize the bank to release the shipping documents free of payment. The covering letter usually requires payment or acceptance of Bill of Exchange, as the case maybe, against release of the documents. What makes things worst is when the cargo arrives before the documents and the applicant applies for a shipping guarantee. If the goods are then rejected and the documents received later bear instructions to release documents against payment or acceptance, the bank will be in terrible situation despite the usual protection given to the bank in the shipping guarantee application.
I agree that neither the applicant nor the beneficiary has control of the situation. The question I would ask then is why would a bank want to participate in this type of uncertain situation which, I believe, is only ideal for open account deals. If the service of the bank is still required, the best thing to do is to stay away of the shipping documents. As recommended before, the documents required for payment under the LC should be limited to an invoice, a health certificate and if applicable a Bill of Exchange. The beneficiary has to figure out how to get hold of the certificate. He may trust the applicant to do that job for him. Since in this type of LC's, both the applicant and the beneficiary are aware of the risk and are willing to take it, they, alone, should bear the consequence.
[edited 2/2/02 10:08:09 PM]
Therefore, to have the goods inspected at the port of destination, relative title documents have to be released to applicant. Once this is done, applicant will ideally take possession of the goods. If the goods are then rejected, payment will not be made and the issuing bank will be in hot waters because it, now, does not have possession of the goods nor the documents. The following question will then be raised:
1) How long would it take the bank to take control of the cargo?
2) Who will pay for any demurrage charges?
3) If insurance & storage is required who will be responsible and who will pay the cost?
4) If the cargo is livestock or perishable goods who will give them adequate protection?
5) If the cargo has to be returned to the beneficiary, who will pay for the cost applicable?
6) Would the issuing bank accept to do the above on behalf of the beneficiary?
I know of a similar case where the issuing bank was forced to pay the beneficiary for a rejected cargo just because it released the relative documents to the beneficiary. To circumvent this situation, some issuing banks started putting a clause in the LC’s that would allows the issuing bank release documents to the applicant free of payment. The question I would ask then is if the documents are to be released free of payment, is it necessary to have them be routed through the bank? Despite the question raised, the additional clause does not work because, usually, the instructions received from the beneficiary or its bankers along with documents don't explicitly authorize the bank to release the shipping documents free of payment. The covering letter usually requires payment or acceptance of Bill of Exchange, as the case maybe, against release of the documents. What makes things worst is when the cargo arrives before the documents and the applicant applies for a shipping guarantee. If the goods are then rejected and the documents received later bear instructions to release documents against payment or acceptance, the bank will be in terrible situation despite the usual protection given to the bank in the shipping guarantee application.
I agree that neither the applicant nor the beneficiary has control of the situation. The question I would ask then is why would a bank want to participate in this type of uncertain situation which, I believe, is only ideal for open account deals. If the service of the bank is still required, the best thing to do is to stay away of the shipping documents. As recommended before, the documents required for payment under the LC should be limited to an invoice, a health certificate and if applicable a Bill of Exchange. The beneficiary has to figure out how to get hold of the certificate. He may trust the applicant to do that job for him. Since in this type of LC's, both the applicant and the beneficiary are aware of the risk and are willing to take it, they, alone, should bear the consequence.
[edited 2/2/02 10:08:09 PM]