Credit covered goods to be shipped in 2 instalments.
First shipment was short-shipped but applicant accepted discrepancy.
Is the LC still available for the second shipment or does it require reinstatement?
Thank you for your comments.
Shipments by instalments
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serenachang
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AbdulkaderBazara
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Shipments by instalments
Agree with you that article 41 does not elaborate above situation, but the generally acceptable practice is that unless the issuing bank clearly and specifically states in the notice of acceptance of the discrepancy (short-shipment) that the LC ceases to be available for 2nd shipment, it is assumed that 2nd shipment amount is automatically reinstated.
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larryBacon
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Shipments by instalments
I agree with AbdulkaderB's comments about article 41.
Depending on the nature of the description of the goods, short shipment may not have been a discrepancy under the provisions of Article 39.
Laurence A. J. Bacon
Depending on the nature of the description of the goods, short shipment may not have been a discrepancy under the provisions of Article 39.
Laurence A. J. Bacon
Shipments by instalments
We agree with the comments from Mr. Abdul Kader.
If the short shipment is accepted by the applicant and the issuing bank without any statement that the LC is to be rendered ineffective, then
(i) the short shipment is not deemed to be a short shipment and
(ii) that the applicant and the issuing bank have no intention to apply the sanction under Article 41 of the UCP 500.
Therefore, the beneficiary should be allowed to make a second shipment within the validity of the LC.
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 specificatiion of the goods to support a project, such as building a bridge.
Failure to effect a timely shipment or short shipment may have serious consequences to the progress of project. The applicant/builder may face heavy claims from the government or the tender board for delays and other penalties. Hence the "sudden death" (to borrow a soccer term) sanction under Article 41 is there to ensure that the beneficiary would not fail his duty.
Any other subsequent shipments may not save the day. Automatic expiry of the LC under Article 41 can facilitate the applicant/contractor to buy from other more reliable supply sources.
Failure to perform any shipment should also render the supply contract null and void. Therefore the LC has to match the "sudden death" condition in the supply contract.
Since the parties have accepted the short shipment, it means that the short shipment does not cause any harm to the applicant. Hence this is not a situation under which Article 41 is intended for and therefore it should not be applicable.
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[edited 4/2/02 10:47:10 PM]
If the short shipment is accepted by the applicant and the issuing bank without any statement that the LC is to be rendered ineffective, then
(i) the short shipment is not deemed to be a short shipment and
(ii) that the applicant and the issuing bank have no intention to apply the sanction under Article 41 of the UCP 500.
Therefore, the beneficiary should be allowed to make a second shipment within the validity of the LC.
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 specificatiion of the goods to support a project, such as building a bridge.
Failure to effect a timely shipment or short shipment may have serious consequences to the progress of project. The applicant/builder may face heavy claims from the government or the tender board for delays and other penalties. Hence the "sudden death" (to borrow a soccer term) sanction under Article 41 is there to ensure that the beneficiary would not fail his duty.
Any other subsequent shipments may not save the day. Automatic expiry of the LC under Article 41 can facilitate the applicant/contractor to buy from other more reliable supply sources.
Failure to perform any shipment should also render the supply contract null and void. Therefore the LC has to match the "sudden death" condition in the supply contract.
Since the parties have accepted the short shipment, it means that the short shipment does not cause any harm to the applicant. Hence this is not a situation under which Article 41 is intended for and therefore it should not be applicable.
We are from www.tolee.com
[edited 4/2/02 10:47:10 PM]
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hatemshehab
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Shipments by instalments
Article 41 is focused on timely shipments by installment and is not meant for other discrepancies as short shipment. If the issuing bank accepted or even did not accept the discrepancy of short shipment this does not entitle it to cease other installments that are due. Short shipment is different from shipment that is not effected as per the schedule stipulated in the letter of credit. In my opinion short shipent is just like "commercial invoice is not legalized as as per L/C requirements" discepancy.
If the issuing bank in his waiver advice keeps silent about the cessation of other future installments and if after sometime feels the urgency of relieving itself the burden of the L/C then in the light of responses given it may argue that it did not intend to accept other installments, while in fact it is not entitled in whatsoever circumstances to be released from dishonoring other shipments unless and until the documents are discrepant to the l/C terms and conditions.
If the issuing bank in his waiver advice keeps silent about the cessation of other future installments and if after sometime feels the urgency of relieving itself the burden of the L/C then in the light of responses given it may argue that it did not intend to accept other installments, while in fact it is not entitled in whatsoever circumstances to be released from dishonoring other shipments unless and until the documents are discrepant to the l/C terms and conditions.
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AbdulkaderBazara
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Shipments by instalments
The consequence of short shipment has clearly been explained by Mr. T.O. Lee’s comments; therefore, I tend not to agree with rationale given by Mr. Hatem Shehab.
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larryBacon
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Shipments by instalments
Although not stated, we assume that this is not a revolving credit. In which case, each shipment in a schedule stands on its own merits.
Let me demonstrate by example :
If two shipments are permitted, one each in subsequent months, this permits shipment on the last day of month one & first day of month two.
If presentation of the second shipment is made before the first, does the bank reject on the basis that the first shipment has not been negotiated ? Of course the answer is no & this is similar to the original question posed where the first presentation was rejected. It could happen that the presentation for the second shipment was made after rejection of the first, but documents could have been corrected for the first shipment and re-presented after presentation of the second shipment.
Therefore if we put ourselves at the time when the bank examines presentation for the second shipment, having rejected the presentation of the first, should it also reject the presentation for the second shipment on the basis that the first had been rejected ? Again I suggest the answer is no.
Let me demonstrate by example :
If two shipments are permitted, one each in subsequent months, this permits shipment on the last day of month one & first day of month two.
If presentation of the second shipment is made before the first, does the bank reject on the basis that the first shipment has not been negotiated ? Of course the answer is no & this is similar to the original question posed where the first presentation was rejected. It could happen that the presentation for the second shipment was made after rejection of the first, but documents could have been corrected for the first shipment and re-presented after presentation of the second shipment.
Therefore if we put ourselves at the time when the bank examines presentation for the second shipment, having rejected the presentation of the first, should it also reject the presentation for the second shipment on the basis that the first had been rejected ? Again I suggest the answer is no.
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hatemshehab
- Posts: 220
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Shipments by instalments
“IF DRAWINGS AND/OR SHIPMENTS BY INSTALLMENTS WITHIN GIVEN PERIODS ARE STIPULATED IN THE CREDIT AND ANY INSTALLMENT IS NOT DRAWN AND/OR SHIPPED WITHIN THE PERIOD ALLOWED FOR THAT INSTALLMENT, THE CREDIT CEASES TO BE AVAILABLE FOR THAT AND ANY SUBSEQUENT INSTALLMENTS, UNLESS OTHERWISE STIPULATED IN THE CREDIT”.
The example given by Mr. Laurence applies perfectly to installment shipments where specific shipment schedule is stipulated in the letter of credit.
If the letter of credit stipulates that “shipment to be effected in two separate consignments one each in subsequent months” then the bank should not negotiate the second shipment before the first one. If the bank has already rejected the first shipment on the grounds of the article 41 then the second shipment ceases to be available.
The word SUBSEQUENT is important in the example of Mr. Laurence. It means that the shipment date for the first shipment is not later than ie; 31/7/2000 and the shipment for the second consignment is not later that ie; 31/8/2000 but it should not be shipped in July therefore if no shipment is effected in July then there should be no room for the second one.
The second word is MONTH. Isn’t MONTH a period and therefore it should be treated in the light of article 41?
If the documents have been corrected and re-presented for the first shipment then the second one can be negotiated in this case.
[edited 7/24/01 2:51:29 PM]
The example given by Mr. Laurence applies perfectly to installment shipments where specific shipment schedule is stipulated in the letter of credit.
If the letter of credit stipulates that “shipment to be effected in two separate consignments one each in subsequent months” then the bank should not negotiate the second shipment before the first one. If the bank has already rejected the first shipment on the grounds of the article 41 then the second shipment ceases to be available.
The word SUBSEQUENT is important in the example of Mr. Laurence. It means that the shipment date for the first shipment is not later than ie; 31/7/2000 and the shipment for the second consignment is not later that ie; 31/8/2000 but it should not be shipped in July therefore if no shipment is effected in July then there should be no room for the second one.
The second word is MONTH. Isn’t MONTH a period and therefore it should be treated in the light of article 41?
If the documents have been corrected and re-presented for the first shipment then the second one can be negotiated in this case.
[edited 7/24/01 2:51:29 PM]
Shipments by instalments
PRESENTATION AND SHIPMENT PERFORMANCE ARE TWO SEPARATE ISSUES
To illustrate the intention of Article 41 for instalment shipments, Mr. Bacon has given an example that the documents for the second shipment are presented earlier than those of the first shipment (provided the presentation of documents in the first shipment complies with expiry dates under sub Article 43 (a) and/or the DC).
We would like to remind Mr. Bacon that presentation and shipment performance are two separate issues.
For compliance with PRESENTATION, the document checker will only need to check the dates of presentation to ensure compliance with the expiry dates stipulated under sub Article 43 (a) and/or the DC.
For compliance with SHIPMENT PERFORMANCE, the document checker will look into the data content (i.e.shipment dates or shipped on board dates in Bs/L) of the transport documents for compliance with Article 41 and/or the DC.
ARTICLE 41 DOES NOT DEAL WITH PRESENTATION DATES
Article 41 for instalment shipments has nothing to do with the presentation dates. The presentation dates would not change the material facts of shipment performance as required in the DC.
Article 41 only refers to "shipments" and "drawings". The word "presentation" is not found in this Article. For commercial DC, "shipments" are to be made. For standby letters of credit, no shipments may be made but "drawings" against payment defaults are provided.
If an instalment shipment is made according to the shipment schedule stipulated in the DC, and presented within the expiry dates under sub Article 43 (a) and/or the DC, that shipment will comply, regardless of whether it is presented on or before the documents from another separate instalment shipment. We believe this is what Mr. Bacon is trying to convey.
COMPLIANCE WITH ARTICLE 41 IS BASED ON SHIPMENT PERFORMANCE
Hence the document examiner should not adjudicate compliance of Article 41 by the presentation dates of the instalment shipments. He should determine compliance of Article 41 solely based on the data content of the transport documents presented within expiry dates.
In practice, due to 21 days presentation expiry in sub Article 43 (a), the presentation of documents for a particular instalment shipment cannot be delayed for too long, since adequate time has to be reserved for correction of discrepancies and re-presentation.
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[edited 4/2/02 10:37:20 PM]
To illustrate the intention of Article 41 for instalment shipments, Mr. Bacon has given an example that the documents for the second shipment are presented earlier than those of the first shipment (provided the presentation of documents in the first shipment complies with expiry dates under sub Article 43 (a) and/or the DC).
We would like to remind Mr. Bacon that presentation and shipment performance are two separate issues.
For compliance with PRESENTATION, the document checker will only need to check the dates of presentation to ensure compliance with the expiry dates stipulated under sub Article 43 (a) and/or the DC.
For compliance with SHIPMENT PERFORMANCE, the document checker will look into the data content (i.e.shipment dates or shipped on board dates in Bs/L) of the transport documents for compliance with Article 41 and/or the DC.
ARTICLE 41 DOES NOT DEAL WITH PRESENTATION DATES
Article 41 for instalment shipments has nothing to do with the presentation dates. The presentation dates would not change the material facts of shipment performance as required in the DC.
Article 41 only refers to "shipments" and "drawings". The word "presentation" is not found in this Article. For commercial DC, "shipments" are to be made. For standby letters of credit, no shipments may be made but "drawings" against payment defaults are provided.
If an instalment shipment is made according to the shipment schedule stipulated in the DC, and presented within the expiry dates under sub Article 43 (a) and/or the DC, that shipment will comply, regardless of whether it is presented on or before the documents from another separate instalment shipment. We believe this is what Mr. Bacon is trying to convey.
COMPLIANCE WITH ARTICLE 41 IS BASED ON SHIPMENT PERFORMANCE
Hence the document examiner should not adjudicate compliance of Article 41 by the presentation dates of the instalment shipments. He should determine compliance of Article 41 solely based on the data content of the transport documents presented within expiry dates.
In practice, due to 21 days presentation expiry in sub Article 43 (a), the presentation of documents for a particular instalment shipment cannot be delayed for too long, since adequate time has to be reserved for correction of discrepancies and re-presentation.
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[edited 4/2/02 10:37:20 PM]
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hatemshehab
- Posts: 220
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Shipments by instalments
The explanation of Mr. T.O Lee is perfectly clear. If we talk about presentation as a separate issue than shipment performance then I need not disagree with Mr. Bacon.
In my example of the two subsequent months for the two shipments, the issue of presentation should be as follows
1. Not later than 31/7/2000 presentation may be until 21/8/2000 as per article 43 A
2. Not later than 31/8/2000 presentation may be until 15/9/2000 as per article 43 A
3. Let us assume that letter of credit expiry date is 15/9/2000.
If we visualize further, presentation in light of a stipulated installment shipment can be troublesome. What will be the position of the document checker if he receives the documents of the second shipment say on 8th of August when he did not yet receive the documents for the first one? The checker has seven business days to decide the compliance of such presentation with L/C terms and conditions. Will the document checker be able to ascertain that first shipment performance has been complied with in view of article 41? He will not. Can he wait until 21rst of August? What will happen if the B/L for the first shipment is dated 5/8/2000? What will be the position of the issuing bank against his applicant in view of the above?
Yes presentation is separate from shipment performance but they can be correlated at the same time.
In my example of the two subsequent months for the two shipments, the issue of presentation should be as follows
1. Not later than 31/7/2000 presentation may be until 21/8/2000 as per article 43 A
2. Not later than 31/8/2000 presentation may be until 15/9/2000 as per article 43 A
3. Let us assume that letter of credit expiry date is 15/9/2000.
If we visualize further, presentation in light of a stipulated installment shipment can be troublesome. What will be the position of the document checker if he receives the documents of the second shipment say on 8th of August when he did not yet receive the documents for the first one? The checker has seven business days to decide the compliance of such presentation with L/C terms and conditions. Will the document checker be able to ascertain that first shipment performance has been complied with in view of article 41? He will not. Can he wait until 21rst of August? What will happen if the B/L for the first shipment is dated 5/8/2000? What will be the position of the issuing bank against his applicant in view of the above?
Yes presentation is separate from shipment performance but they can be correlated at the same time.