ICC Digital Library Forum

I have received an email from a large retail importer that I thought would be interesting to share with you.
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(paraphrased)

This importer does a lot of trading under LC. If, when they receive the goods, they are not to their exacting standards they bill the exporter/beneficiary for the amount of the "faulty" goods (has been up to 15% of the LC amount).

They have always been successful in recouping their money but there is a lot of paperwork and some time delays involved.

They have asked their bank if there is a more efficient way to deal with these "chargebacks" within the LC.

Their issuing bank has suggested putting the following clause into the LC:

"The issuing bank may reduce the amount available for settlement under the Credit by an aggregate of 15% of the credit value but not more than 25% of the face value of any one drawing in respect of chargeback/deductions."

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My questions..

Has anyone seen a clause like this before?
What do you think of the clause?

I have not seen clauses like this before, but I have seen instances where both sides acknowledge that it is impossible to get 100% perfect product and they agree on a % such as 1 or 2 % FOC goods to be despatched with the goods. This is one option.

Another approach which I am surprised has not been adopted is to have goods independently examined before shipment. Agreement can be made that representative samples will determine the % credit note to be supplied in relation to the shipment.

We have not been told if this is a payment or acceptance credit, or if the determination of the % difference is made within the term of the draft.

If it is a payment credit, payment must be made before determination of % difference of supposedly faulty goods. How is the credit payment claimed and made ?

If differences are regularly of the order of 15-25%, I suspect insurance scams.

With the two-way flow of moneys, there may also be serious AML implications.

Laurence
[edited 11/5/2004 9:53:06 PM]

Leo,
I was tempted just to say ‘No. Rubbish.’, but wiser councils prevailed.

I have to say I do not like the idea of this clause one bit, as a matter of principle. It apparently allows the applicant – issuing bank unilaterally to reduce the amount of the beneficiary’s drawing. Also, it would seem to exclude the credit being available with a nominated bank (NB), as the NB could not know if a deduction was going to be made by the issuing bank at the time documents were presented to the NB.

Setting aside the question of principle, the proposed clause does not seem to indicate what the applicant must do to trigger the deduction (e.g. the document(s) to be presented by the applicant to the issuing bank and by when it has to be presented).

The best I would be able to offer an applicant is that the credit allows the beneficiary’s invoice to show deductions in respect of previously supplied sub-standard goods. Obviously, if the beneficiary chooses not to make them that’s the applicant’s problem.

On a more important note, the West Midlands’ premier rugby team, the PERTEMPS BEES, is playing Orrell in the 4th round of the Powergen Cup this afternoon. Unfortunately, I won’t be able to make it as I’m off to Lyon this afternoon (and killing some time before hand). If anyone out there ever has an idle moment, do not hesitate to visit www.beesrugby.com to find out more about them.

I would suggest a clause into the L/C retaining 15 % of each invoice amount to be paid to the benef 30 days of B/L date of last shipment, of which a deduction for faulty goods may be made in case of the issuing bank informing the nominated bank before the maturity of applicant's claim for such deductions.

Regards - Antoine Samaha