ICC Digital Library Forum

Are there any special issues or procedures that I need to be aware of when issuing Letters of Credit for Importing oil.

We have a client (an oil company)who wants to issue L/c' through our bank, but experience in this type of transaction is a bit thin on the ground.

Any offers of help gratefully received.

regards

Peter

Peter,
we were very active in this field of activities. Basically, oil transactions are not more complicated thant other but are very specifi. The payment terms for ex. are usually 5wd after NOR or 3wd after COD(5working days after notice of readiness or 5wd after completion of discharge)which are documents delivery by independent isnspectors and/or vessels agents at discharge port. Generally, at a first step those L/C are negotiated against few documents, generally commercial invoice, the document mentioned before and a LOI (lettrer of indemnity). In fact, it is very rare to receive the shipping documents on utilisation due to the fact that cargoes are pruchased and sold several times during the voyage. The LOI is therefore a special type of guarantee which in few words "substitute" temporarily the shipping documents and allow payment. Said guarantee will then expire with the presentation of the shipping documents which will be remitted later on.
So as you can see, nothing is impossible however I would sugget a bank entering those transactions having a least an experienced specialist in oil transactions. Last thing, those transactions run very quickly due to the amounts involved and the practice in force in the oil community. You may therefore receive documents before 10:00 a.m. which are payable with same day value. So your bank must also have the adapted structure to handle those transactions.
This reply is just a small sumarize but I hope it helps as well
Roland

The oil business is a very specific kind of business -- altho on the face of the operation (sorry Jeremy, for using face) the credits might be simple, the actual handling of them require quite a bit of experience. I would definitely suggest NOT getting into an oil transaction without having someone experienced in that field. You can get burned easily -- ask Santander -- and since the amounts are usually very high, it's not a superficial burn.

Also, when you are dealing with traders, they usually have a very small capital base, and you have very little security. BEWARE, is the best suggestion I can give.

Regards
Judith

Roland,
could you please elaborate more about LOI, i.e wordining, mechanism and whrere the bankers should be aware and stress when checking this spesific document.
Basel

Basel,
LOI are issued generally by the sellers, The text vary from company to company. The same however states that the company is unable to deliver the original documents, including the original bills of lading for the moment. However in consideration of the buyer (LOI beneficiary's) paying the full invoice price the company warrants that it has full right and possession of the product and therefore transfer same to buyers. The LOI shall expire under surrender of the origianl documents to buyers. LOI may be issued by seller's only or be countersigned by seller's bank.
Legalley speaking the LOI is a transfer of a document of title. Almost all legislations recognise a transfer of the right appearing on the document by transferring said right with the documents itselfs (by way of endorsement for ex.). The problem of the LOI has been viewed by 2 universitie4s in our country. Both opinions were completely different. The argument on one side was that the LOI is used in and specific context by s specific community and is acceptable like it is. The other one was that in view of what said before about the title documents an LOI is legally not correct and not acceptable. So now by accepting an LOI issued by sellers only your bank will have to evaluate the credit risks on that counterpart. An LOI countersing by selle's bank sounds more confortable ; what is however seller's bank responsibility ? (confort, guarantee???). Most of LOI do not have any expiring date ; in this cas how long do you keep then and are they enforceable at any time ? LOI generally are under English law ; so your L/C subject to UCP is however governed by the law of the issuing bank, the LOI under UK law and maybe the contract under another one.
This is only a small part of what has to be know about those transactions. Therefore as suggested by Judith, banks entering those transactions should have an experenced staff at disposal and the relative structure to handle this special king of business.
Roland

Roland,

My impression is that ‘oil credits’ invariably require that the LoI is addressed to the applicant, not the issuing bank, and that as a result the issuing bank cannot gain any rights under it e.g. against the beneficiary. Thus the LoI is usually completely valueless to the issuing bank in the case, for example, of default by the applicant on its ‘reimbursement’ obligations to the issuing bank. Have I got that right? Grateful if you will please clarify.

Jeremy

[edited 11/17/2005 4:02:44 PM]

Is it possible to 'discount' LoI's
in a similar fashion to Bills of Exchange?

If anyone is attending the Trade Finance Seminar in London a week on Tuesday I hope to see you there.

Regards

Peter

Just for info, I have seen LOI's issued in favour of the applicant, in favor of the Issuing Bank and in favor of "to whom it may concern" (altho the latter case only once, and I had it amended to be in favour of the applicant). I preferred to have it in favor of the applicant for the simple reason that I debited the applicant to effect payment under the L/C against the LOI, and that therefore the L/C had been executed. Consequently any subsequent presentation of the final documents were outside the scope of the L/C and no longer "concerned" my bank. I remember an opinion by the banking commission that supported this view but frankly don't have the time to look for it.

Usually the text of the LOI is given in the terms of the L/C, and is pretty standard. A major point is that, as was said by Roland, there is usually no validity date -- but there is also no real and exact amount, because the text usually states "in consideration of your paying X amount, we hold you harmless for all loss, expenses, claims, legal fees, etc...." which can bring you way beyond the value of the cargo.

Once again, unless you are dealing with a major (who has all the texts already approved by his legal dept), be extremely cautious in this difficult field.

Judith

Hi Judith,

I did a search of the Opinions and there is one (R330) that supports that view. The following is an extract from it that may be helpful:

Analysis

For letters of credit covering the shipment of oil, it is customary for the credit to request shipping documents including invoice, bills of lading, certificates of quality, etc. but in the absence of such documents the beneficiary may present an invoice (telex or hard copy) and a letter of indemnity in the wording that is quoted within the credit text.

Where the shipping documents are not available at the time a drawing is to be made, the beneficiary will provide the invoice and letter of indemnity. The presentation of these documents (in lieu of shipping documents) represents equally good tender and enables a drawing to occur.

When the shipping documents are available, they are presented to the issuing bank for cancellation and return of the letter of indemnity.

Conclusion

The presentation of the invoice and letter of indemnity constitute the presentation of documents which was subject to the provisions of UCP 500, their handling by the issuing bank being subject to, amongst others, sub-Article 14(d).

The subsequent presentation of the shipping documents, in return for the cancellation of the letter of indemnity, is outside the scope and the responsibilities outlined in the UCP.

The release of the letter of indemnity would be subject to the applicable law, in this case the law of Country E.

However, one would not expect the issuing bank to raise discrepancies in the shipping documents presented, since the credit has been fully utilized by the presentation of the invoice and LOI. The later presentation of the shipping documents is not subject to checking against the original credit terms but rather against the terms stated in the agreed LOI wording. To avoid such issues, the credit and/or LOI wording should specify clearly the basis upon which the LOI will be released, i.e. whether a straight exchange or whether certain criteria are to be met.

Hi there

I have been following this with great interest. I just have one comment to Jeremy’s posting yesterday.

You of course got it right; Usually the issuing bank can not gain any rights under the LOI. So it should not be used as a basis for issuing the L/C.

Some LOI’s will however require (as an L/C requirement) to be “countersigned by “XX bank”. So if you are “XX bank”, you should consider this carefully before swinging the stamp

Have a nice weekend.

Kim


PS. something completely different - and yet: I have always been puzzled by the fact, that almost every L/C requires a negotiable B/L – and have often asked, why they would not use a Sea Waybill consigned to the bank? The answer often is that the B/L provides the OPTION to sell the goods while at sea. Okay – then how often does that happen? Well hardly never … EXCEPT in some commodities e.g. oil. Ah ha! Here the oil is often sold many time during the voyage – so one should think that this provided a perfect match to the negotiable B/L. Well … almost, except that the oil is sold so fast, that the PAPER based B/L is unable to keep track. As a consequence, the area best suited for the negotiable B/L – can not really use it, and must therefore provide “aid” by issuing these LOI’s – some strange guarantees with no expiry date and maximum amount! (Did you once say Jeremy – that this was different in UK – that shipping actually accept expiry and maximum amount?). In any case .. a strange case when you think about it