ICC Digital Library Forum

Your opinions and comments are sought on the following clauses / payment terms inserted in letters of credit issued in Saudi Arabia for the purpose of foodstuff or livestock imports.

Quote
Since the goods subject of this L/C are subject to inspection by the Saudi Ministry of Commerce via its Quality Control Laboratory to ensure that they are fit for human consumption and comply with the Saudi Standard Specification, Beneficiary hereby confirms that in case the authorities reject the goods, for any reason whatsoever, the Beneficiary of the L/C hereby assumes any and all liability for the re-export the goods and will bear all expenses whatsoever which have been incurred by the opener and reimburse them outside the L/C.

Payment terms
The payment will be effected provided that one of the following two conditions is fulfilled:
1) Receipt by the issuing bank of letter from the opener, within forty (40) days from Vessel/Ship arrival date (as indicated in the vessel agent’s notice, copy of which shall be submitted to the issuing bank by the opener) confirming the approval/clearance of the goods by the Saudi Ministry of Commerce via its Quality Control Laboratory. In case of rejection by such authority, the opener shall confirm such rejection to the issuing bank within the same period, in which case (rejection) no payment shall be due at all under this credit.
2) Failure of the opener to submit any letter (confirming approval or rejection to the issuing bank, as the case may be), as above required, within the 40-days specified period.
Therefore, it is a condition of this L/C that the issuing bank, upon arrival of the shipping documents or the carrying vessel, whichever is earlier, shall without any risk or responsibility on the part of the issuing bank, endorse and deliver the shipping documents or issue a shipping guarantee to enable the consignee to process clearance for inspection & free of payment or engagement on the issuing bank’s part.
Unquote

Problems / Questions / Remarks
A. Payment term no. 1 makes the applicant take control of the transaction by playing the role of the beneficiary, thus, defeating the purpose of the L/C (Article no. 2 of UCP 500). Similar market practice exists in Saudi Arabia with local L/C’s (domestic trade transactions) whereby delivery notes or invoices have to be counter-signed by the applicant of the credit.

B. As per point no. 2 of the payment terms, the goods are cleared free of payment without any engagement on the issuing bank’s part. How could the issuing bank be relieved from its definite undertaking and primary liability? Certainly it cannot. (Article no. 9 of UCP 500).

C. The issuance of a shipping guarantee (banker’s guarantee for delivery of goods) means that the applicant takes possession of the goods; therefore, he forfeits his rights under the transaction by automatically providing a waiver of the discrepancies; moreover, by having the issuing bank sign the shipping agent’s form, the bank undertakes to tender the original B/L and meet the receiver’s (client) obligation in case of failure, thus, relieving the shipping agent from any legal consequences due to the release of goods without an original B/L. In short, the issuing bank’s liability under the shipping guarantee issuance remains.

D. Wouldn’t the issuing bank’s position weaken if later on the beneficiary claimed that such conditions were imposed upon him?

E. These L/C’s have been named “Conditional L/C’s”. I have never seen a documentary credit that does not contain terms and conditions (Article no. 2 of UCP 500).

There is no official definition for “Conditional DC”. Use of such terms, like third party documents, would only give rise to confusions and disputes.

Certain famous DC experts taking part in drafting the UCP 400 and UCP 500 that we have met consider that a DC asking for a certificate to be signed or counter-signed by the applicant should be binding to the beneficiary if he does not ask for an amendment, although such practice is discouraged (but not prohibited) by the ICC BC.

www.tolee.com

[edited 4/30/02 9:55:25 PM]

Since most documentary credits are based upon payment against presentation of documents issued or obtained by the beneficiary in advance of receipt of the goods by the applicant, a variation whereby the bene depends on receipt of a document from the applicant after receipt of the goods, places the bene in the invidious position of surrendering title before the question of payment has been settled. If the bene accept such terms, one must ask why employ DC, as he relinquishes the security of payment usually afforded by DC.

Laurence

My thoughts on the query, without responsibility, are:

A & B. The credit would appear to be a ‘soft’ credit, i.e. pay’t is not contingent on presentation of complying documents alone. Thus, it does not meet the definition in Article 2 or contain an engagement per Article 9. As Article 1 says: “The Uniform Customs and Practice for Documentary Credits …… are binding ……, UNLESS OTHERWISE EXPRESSLY STIPULATED in the Credit”.

However, I would not regard a credit that required the beneficiary to present an applicant issued/counter-signed document as a soft credit.

C. With respect to the beneficiary, the issuing bank would seem to have removed the risk of arranging release of the goods by the applicant in the provisions of the credit (subject to D below). However, the indemnity (for release of the goods in the absence of bladings) would be a separate undertaking and the issuing bank would not be able to escape liability to the CARRIER under it.

D. I imagine the beneficiary’s rights against the issuing bank would depend on whether or not it could be shown the beneficiary had expressly or impliedly consented to the arrangements set out in the credit. For example, presenting documents under the credit would -I anticipate- be considered to show such consent.

E. I imagine the reference to ‘conditional’ is short hand for ‘conditional on events other than presentation of documents’ or similar.

Finally, I would be curious to know how it would be envisaged the provision “the Beneficiary …… hereby assumes any and all liability for the re-export the goods and will bear all expenses whatsoever which have been incurred by the opener and reimburse them outside the L/C” could be enforced, unless it was also contained in the underlying sales contract.

[edited 5/1/02 11:28:00 AM]

JSmith,
I agree with you that the shipping guarantee as a separate undertaking would not relieve the issuing bank from its liability to the carrier but not only this. Its issuance would become contrary to any subsequent rejection of the goods, thus, further complicating the issuing bank’s position. I also agree with you concerning your doubt on the enforcement of the provision related to bene’s liability to re-export the goods, as it does not seem to be contained in the underlying sales contract. It is the issuing bank, which strongly recommends to the applicant the insertion of this clause and the applicant simply agrees.

Your case is reminiscent of what I refer to as “USFDA” credits issued by US banks some years ago. In my scenario, US banks were asked to issue LCs that would protect the importer in the event that goods (foodstuffs subject to inspection by the US Department of Agriculture Food & Drug Administration”) failed to pass a government inspection and therefore could not enter the country.
As I recall there were three ways we addressed that concern:
1. issue a commercial LC payable at sight requiring presentation of the usual commercial and transport documents but including presentation of a special insurance policy called “rejection insurance”. You can fill in the blanks detailing the coverage and amount of that policy.
2. issue a commercial LC payable at sight requiring presentation of the usual commercial and transport documents but including presentation of a standby LC in favor of the applicant/importer. You can fill in the blanks detailing the terms and conditions and amount of that standby.
3. issue a commercial LC with special payment terms. That LC had characteristics similar to those discussed but slight differences which addressed the LC integrity issues raised.

From my experience, Banks would only issue such credits for reputable food import customers and only where the bank was assured that USFDA (a government agency) inspection was a necessary requirement. In addition, the LC required the beneficiary to present a document authorizing the issuer to release the documents to the importer free of payment against the importer executing a special “trust receipt” document spelling out the purpose, i.e., to arrange inspection and clearance of goods by USFDA. Finally, the LC provided that payment would be made on a specified date, usually 45-60 days after the date of shipment (the parties would estimate and agree on the time required for shipment and inspection) UNLESS the importer notified the issuer prior to that date that the goods were rejected by USFDA in which case the importer was required to present the issuer with an official document to that effect. Issuers might charge more for these credits due to the additional processing, tracking and risk involved.

Vincent

Welcome to DC-PRO

I like your analogy to the FDA. Would you agree, however, that decisions of the FDA and similar organisations in other countries, may sometimes be at least partially politically influenced. This, of course, has a bearing on the risk involved.

Laurence

Vincent,
I like your suggestion of the trust receipt. One more complexity here is the requirement of a copy of the vessel agent’s notice by the applicant which if not presented, then the payment date (40 days from vessel arrival date) cannot be determined.

Remember, my scenario is based on a given set of circumstances for a particular transaction. I am not trying to create a solution for this transaction. For this discussion, I am simply sharing a similar experience.
In my case, the bank had no concerns re political motivation by the government agency to reject certain goods. Additionally, the payment date was fixed by the shipping/on board date not by the arrival date. The bank’s position was that most commercial parties could estimate the arrival date, they do that today, and factor in additional time required for government inspection. This was a condition precedent to the bank issuing such a credit and clearly a time period that the beneficiary could negotiate. Accordingly, the payment date was determinable by the beneficiary and the issuing bank, and importantly, was not contingent on the applicant’s approval. If warranted, the applicant could prevent payment by presenting a named government document in accordance with the terms and conditions of the credit. I hope this helps clarify.

Hello Vin,

Welcome to the party!

Our mutual friend, Kenneth Lee of Bank of China, Manhattan Branch, told me before I moved to Toronto that there is no such thing as “Trust Receipt” in USA. Hence, we wish you to clarify whether “Trust Receipt” proposed by you work in the same way as “T/R” in the Farm East, which is basically a kind of import financing provided by the importer’s bank. By using brackets with such words, we assume that they are different. Please elaborate more or members from the Far East may get confused.

TRUST RECEIPT OR CASE-OF-NEED?

The “T/R”, and its derivatives, would give the importer actual possession of the goods, which may give rise to a lot of problems if the importer is not an honest merchant. He may make a thousand excuses to negotiate a discount with goods already in his hand. From our consultancy experience, those goods that need FDA approval are mostly perishables, such as agricultural or dairy products, meats, fruits, cheeses etc. that cannot wait. The exporter has to say, “Yes” most of the time or the goods would be only fitted as “food for the mad cow”.

We still remember that in Hong Kong, a box of high grade US prime beef on sale in a gourmet food store has a certificate packed inside issued by the FDA to authenticate the US origin.

Famous steak houses (such as the Harbour 60 Steak House in Toronto where one may have the opportunity to meet the players from US in ice hockey and basket ball) use prime beef (not bank) imported from USA that has been left for curing (ageing) for 45 days or more to let the proteins break down for better taste and texture.

Hence, to avoid such risk, we would recommend appointing a “Case-of-Need” to handle the FDA inspection. Under such arrangement, the goods are in the hand of the exporter’s agent in the importing country, a loyal friend that he can trust. If case of payment dishonour, he may arrange warehousing, insurance extension, and re-sale to a third party. This would increase the chips of the exporter in a game with the importer. What do you think? And the bank charges may be even less. However, the "Case-of-Need" approach (a URC 522 practice) should be modified for use under the UCP 500 environment - a lateral thinking exercise?

For your information, we were one time approached by a Chinese merchant from New York to be his group’s “Case-of-Need” in Toronto for computer chips recycling business, and they never met us before, only in the Internet, being a visitor of our DC website. Although we considered this an honour but we had to say “No” because we did not understand their group’s background.

Now we come to understand that a lot of poisonous materials would be released to the air to pollute the environment as well as causing serious diseases for those people that come into contact with these chips. In China, this problem is surfacing. Fortunately we refused such appointment a couple of years ago.

www.tolee.com

[edited 5/2/02 8:26:37 PM]