ICC Digital Library Forum

I seek the experts’ views. Please consider the following:

1) LC is opened for the importation of foodstuff (fresh meat, fish, etc), and calls for the usual invoices, BL and an assortment of certificates usually associated with hygiene and shipment/packing details. One such is to certify that 1/3 BL and a few other miscellaneous documents have been couriered direct to the applicant.

2) LC also has a “special condition” to the effect that Issuing Bank (IB) will pay within XX days of BL date or sooner, PROVIDED the destination’s local government food authority does not detain or reject the cargo. Though the LC does not say it explicitly, the assumption is that the 1/3 BL will be used to take delivery of the goods and subject them to the authority’s inspection. But, the LC does not state how the non-detention/non-rejection may be evidenced by documents nor the nature of such documents.

3) A further “special condition” emphasises that IB will NOT pay until and unless IB receives some sort of “Release” letter from the said gov’t agency, in the event the merchandise is detained. Unfortunately, the LC does not clarify how or from whom this “Release” letter may be obtained; and/or who actually is supposed to procure it (and presumably to present it to IB); and/or the time-frame allowed for its presentation. Note that the LC does not require this “Release” document to be tendered up-front, so to speak, together with all the LC-stipulated documents. It is only when/if the foodstuff is detained that this all-important piece of paper is needed. (To the best of my admittedly limited experience, no gov’t department has been known to, voluntarily and without any prompting, send any kind of missive to any bank unless it is to censure or inquire information.)

In short, payment under this LC appears to depend on the say-so of the local gov’t food-control body only, and to some extent the applicant’s generosity. I am assuming that the gov’t food authority will deal only with him. I can readily agree with hygienic and fit-for-consumption concerns, but it seems to me that the applicant is not all that prepared to take what I consider to be normal commercial LC risks. Instead, he appears to be using his country’s food import requirements and actual inspection as 100% mitigation – pay the LC only if the LC merchandise passes physical inspection. The seller has no control at all over this physical inspection, whether documentary or actual. But, I can also understand a seller’s willingness to accept such terms if the prevailing circumstances overwhelmingly favour a buyer’s market. He either sells on those terms or he donates his food to charity before they turn bad. (I just can’t bring myself to write “destroy good food”.)

But, from banks’ perspective, what about UCP500 Article 4 and the sacrosanct edict of pure documentary examination to determine compliance with LC terms & conditions? Even if the “Release” form is acquired, what if it is only after LC expiry? Meanwhile, the IB need not concern itself with the quality of the already submitted LC-stipulated documents? Remember, the LC does NOT call for any particular document to evidence non-detention/non-rejection.

I vaguely remember, several years ago, a certain 3rd world country used to issue LCs stating that reimbursement was contingent upon the IB receiving funds from IMF/World Bank. If I’m not mistaken, ICC (Banking Commission) took strong exception to such LC condition and wrote to that country accordingly. I think ICC advised that such LCs should not be under the aegis of UCP500 (I think it was still UCP400 – I forget). I see a certain similarity here in the sense that compliant documents alone may not be enough to guarantee LC payment. In which case, it should not be called a Documentary Letter of Credit subject to UCP500.

Your views? You might also want to take a closer look at article 13(c).

Regards and Happy Chinese New Year.
Francis Ho.

This DC falls into the dangerous (for the beneficiary) category of calling for documents issued post receipt/arrival instead of post shipment.

If I was advising the bene, first I would not agree to such terms, but if the bene wished to accept it, I would suggest that he obtain a statement from the nominated/issuing bank whether there was a documentary requirement relating to this clause. If so, such statement should include details of issuer and title or equivalent of the document. This may force clarification from the issuing bank and the bene can then decide on a course of action when in receipt of all the facts, instead of the nebulous current clause.

Laurence

If this is a Canadian credit you'll find the article on this subject in the latest DCI (not yet published on DC-PRO) of interest.

This type of credit, where payment is dependant on clearance by import authorities (particularly for foodstuffs) was and still is common in certain Middle Eastern Countries also.One of the solutions we have suggested to exporters was to negotiate with the buyers that an "anti-rejection insurance" be supplied by the buyer, and that the credit therefore become payable upon présentation of the usual shipping documents but not depending on acceptance or rejection of the goods.

Judith

Thank you for responding.

Laurence Bacon:
As you can probably guess, yes, we have discussed this matter with bene. However, applicant is one of those very favoured customers of the IB, and wields considerable clout. We believe IB proceeded with such LC solely for relationship and commercial considerations. For the bene, it’s a case of “do it applicant’s way or lose the biz” – not likely that he can get applicant/IB to change anything. Personally, I always feel that I’ve done my part if I’ve clearly explained to bene the full implications of whatever sharp or unfair LC clauses. Then, if he still wants to go ahead with it, good luck to him. My problems start only when/if he approaches my bank for discounting/negotiation/purchase of his LC documents. Sigh.

JSmith:
Thanks for the tip. Unfortunately, I don’t subscribe to DCI, separately. (I access it through DCPro.) Can I bother you to reproduce selected “interesting” excerpts here?

Judith Autie:
Yes, detention/rejection insurance is certainly an option. But, as already explained to Mr. Bacon, the applicant (the one with the bigger muscles) is not likely to cooperate. He’s already got his “insurance” in the form of the food authority, for free. Why would he want to give up such an advantageous position? For the bene, a formal insurance coverage of such nature obviously will eat into his profit margin. And, yes you probably can guess too what we’ve been telling him when/if he approaches us for an advance against his LC docs.

Your advice, as expected, is good, sound and practical. But, this sort of problems would not arise at all and there would be no need to seek any solution if in the first place applicants and issuing banks respected the philosophy behind LCs and UCP500.

Francis.

Dear Francis/Jeremy,

The new edition of DC-Insight is live on DC-PRO Focus now.

The article that Jeremy is referring to is in the 'International bulletin' section and is written by Helena Kwok.

[edited 2/10/03 2:46:40 PM]

Francis Ho,

Certainly this is a badly structured credit as presentation of documents vs. payment (Is it a sight DC?) could become problematic. Would presentation be made in two parts? What if the credit were to be confirmed by the seller’s bank? How would the confirming bank act? What if the 1/3 BL were not timely received by the applicant and a shipping guarantee (banker’s guarantee for delivery of goods) had to be issued by the issuing bank instead?

The gov’t agency’s “release” letter is meant for the goods’ acceptance and hence its presentation under the credit would lead to payment provided all terms & conditions have been complied with including the provisions of sub-Art. 42(a) & (b) on the expiry date. Such a letter would most probably be given to the importer and would not be addressed to the issuing bank.

I’m sure your client has also assessed the risks taken if the goods were to be rejected by the importing country, e.g. perishability, reshipment, etc.

You may also refer to my posting of 4/30/02 entitled The so called “Conditional L/C’s” which handled a very similar issue.

Dimitri

As an ex banker and now working in the eport freight game, I have seen both sides of the fence. I advise ALL my exporters to never accept a L/C that ask for the B/L to be sent direect to the app. Dispite all of the other issues with this L/C, this one requirement (B/L direct) alone is enough to refuse the L/C and ask for it to be amended.
Mark From Melbourne