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British Exporters Association

The BExA Guide to Letters of Credit


UCP600 – Update
The BExA Guide to Letters of Credit - UCP600 – Update

Contents

Foreword

Introduction to the 2007 UCP600 updated guide

Chapter 1 What is a letter of credit?


Chapter 2 Why letters of credit are used and their limitations
Chapter 3 What the exporter wants
Chapter 4 What the exporter should look out for
Chapter 5 Amendments, How to Avoid Them and
How to Obtain Them
Chapter 6 Presentation of documents
Chapter 7 What to do if presentation fails
Chapter 8 And finally, commercial realities … … …

Appendix 1 A checklist
Appendix 2 Swift Codes
Appendix 3 Contact details
Appendix 4 Introduction to the 2003 (UCP500) guide

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Foreword
The British Exporters Association has for many years prided itself on the
work which it has done as a champion of the British exporting community.
Much of this work has taken the form of lobbying successive Governments
with the aim of ensuring that UK exports are effectively promoted - to the
ultimate benefit of the balance of payments and hence the British taxpayer.
From time to time, however, the Association likes to do something for its
members that does not require any input from Government. This guide
represents one such opportunity.
There are any number of glossy brochures published on the subject of
letters of credit. Most of them have one thing in common - they are
published by banks! Now, there is nothing wrong with this; banks provide a
service which traders require, and their brochures are excellent sources of
information on this difficult subject. However, there does tend to be a
certain slant to the advice which is offered in those brochures, perhaps not
surprisingly.
It is my hope that this guide, written with the advice of bankers but essentially
by exporters for exporters, will provide a clear and helpful reference work
for those of our members who have an interest in getting paid through the
mechanism of letters of credit. It is not a book of rules but more a summary
of experience, much of it learned the hard way. It is offered to our members
in the hope that reference to it will avoid others having to learn the same
lessons in the same way!

Sir Richard Needham


President of BExA
October 2003

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Introduction to the 2007 UCP600 updated guide


Since the original BExA Letter of Credit guide was published in 2003 it has
gained acceptance amongst users of letters of credit as a practical and
readable introduction to a payment mechanism that is believed to be used
to support about £350 billion of trade each year. If it has gained more readers
amongst importers and exporters (the applicant and the beneficiary of the
letter of credit) than amongst bankers that is probably because bankers
(who are paid to operate letters of credit) tend to be better trained in their
operation than most other users of them. Of course, speaking from the
point of view of the British exporter, this is something to be applauded.
Whilst importers and exporters might develop a degree of competence in
the subject, the bankers are the professionals and we should be grateful for
their expertise; it is something for which we pay, after all.
So, why an updated guide? The International Chamber of Commerce has
for some time been working on a revision of UCP500. It has been a major
undertaking and is now published as Uniform Customs and Practice for
Documentary Credits 2007 Revision (UCP600). It comes into effect on 1
July 2007 and the British Exporters’ Association decided to bring our original
guide up to date, to reflect what will become the new standard rules for the
handling of letters of credit. Much of what was contained in the original
guide continues to be true. Principles of prudence and common sense are
not affected by a change in rules, after all. However, there are a number of
changes which we felt should be incorporated in the guide and a complete
revision and re-publication was thought to be the most effective way of
doing this. Much of what has changed in UCP concerns the banks rather
than the applicant or the beneficiary directly. Indeed, in many respects the
changes will only be apparent to the banks. Nonetheless, on the principle
of ‘better to be up to date than out of date’ we decided to re-issue the
guide.

Why the change?


UCP600 is the latest version of the rules for the handling of letters of credit
published by the ICC. The first was published in 1933. A major driver has
been to simplify the rules and to reduce the scope for ambiguity in
interpretation and avoid simple misunderstanding. Also, in view of the
continuing high proportion of non-compliant first presentations there is a
need to assist beneficiaries to prepare ‘better’ documents. To the extent
that simplification and added clarity reduce the number of rejections of
documents as discrepant, that would obviously be welcome.
More than half of the questions formally answered by the ICC in connection
with UCP500 related to seven articles, as follows:
Liability of Issuing and Confirming Banks
Standard for Examination of Documents
Discrepant Documents and Notice
Unspecified Issuers or Contents of Documents
Marine/Ocean Bill of Lading
Commercial Invoices
Transferable Credits
The articles covering these subjects have received particular attention in the
revision.

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When does this happen?


UCP500 will continue to apply to letters of credit issued up to and including
30 June 2007. Letters of credit issued on or after 1 July 2007 should be
subject to UCP600. It will be possible, but not necessary, to have a letter of
credit that has already been issued subject to UCP500 amended to
incorporate UCP600. This would be by means of a formal amendment (see
Chapter 5). However, unless there are particular reasons to have the letter
of credit amended, it would probably be better to allow current letters of
credit to run off under UCP500.
A letter of credit issued ‘subject to: UCP current edition’ or similar will
continue to be governed by the version of UCP that was current at the date
of issue; if that was UCP500 the letter of credit will not automatically
become subject to UCP600 on 1 July 2007.

Contributors
The 2003 guide was written with contributions from those named in the
Introduction to the 2003 (UCP500) guide at Appendix 4 and most of what
they wrote remains valid. This edition was revised with the assistance of:
Russell Brown of Deutsche Bank
John Clegg of ABC International Bank
David Meynall of Deutsche Bank
Susan Ross of Aon Trade Credit
David Silverwood of RBS
Ray Webb of Aon Forfaiting
and I am grateful to them for their patience and understanding.
Three other BExA guides may also be found useful:
• 2004 Guide to On-Demand Contract Bonds
For exporters who are obliged to provide bank bonds to support their
export contracts. The guide covers the obligations and risks of the
parties, includes sample wordings and offers advice in the event that
the bond is called.
• 2005 Retention of Title
Getting our goods back if the buyer does not pay is a practical issue
and our ability to do so depends upon the detail of the contract. The
guide offers practical advice about retaining title and obtaining payment
in difficult circumstances.
• 2007 Credit Insurance
Export credit insurance. This guide will be published in October 2007.
Richard Hill
BAE SYSTEMS plc
Chairman, BExA
June 2007

Copyright & disclaimer


All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted, in any form or by other means, electronic, mechanical, pho-
tocopying or otherwise without the prior permission of the British Exporters Association.

Whilst every reasonable effort has been made to ensure accuracy, information con-
tained in this publication may not be comprehensive and readers should not act upon it
without seeking professional advice from their usual professional advisers.

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Chapter 1 - What is a letter of credit?

Intention
A letter of credit is a written undertaking given by a bank on behalf of the
customer to pay the exporter an amount of money within a specified time
frame provided that the exporter complies strictly with its terms and
conditions. Payment will depend on the exporter presenting documents
that conform to the terms laid down in the letter of credit. The customer’s
aim is that he should get the goods that he has ordered, and the exporter’s
aim is to receive payment for them.

Security
Generally speaking, a letter of credit is a safer way of obtaining payment
than relying on open account payment terms. The essential point is that the
payment undertaking is moved from the customer to a bank. It is commonly
thought that this represents a more secure source of payment.
It is important to bear in mind that a letter of credit:
• Is separate from the contract to which it relates
• Requires that all parties deal only in documents
• Is not a contract between buyer and seller
• Is not a guarantee that the seller will definitely receive payment
• Is not a guarantee that the buyer will receive the goods he ordered

Confirmation
Confirmation of a letter of credit is an additional undertaking from another
bank, the confirming bank (usually the advising bank), to pay the exporter on
presentation of correct documents in conformity with the letter of credit. To
have value to the exporter the confirming bank should be a bank based in
the UK; it thus removes the political risk of waiting for payment from an
overseas bank or one of its branches.
There are a number of advantages to the exporter in having a letter of credit
confirmed:
• He has the undertaking of two banks to pay
• The credit risk is reduced to that of the UK bank
• Country risk is eliminated after conforming documents have been
presented (NB pre-delivery risk is still an issue; can the exporter
produce the documents required?)
The principal disadvantage to the beneficiary is the extra cost in the form of
the confirmation fee (which is generally paid by the exporter). The
confirmation of the letter of credit only adds to the security for the exporter
if the documents (at step 10 below) can be produced.

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How does it work?


The working of a letter of credit can probably best be explained by a
diagram:
1
Exporter Customer
5
9

4 5 8 10 12 14 6 2

13
Exporter’s bank Customer’s bank
11
(Advising bank) (Issuing bank)
(Confirming bank) 7
3

NB This assumes that payment will be made by the advising bank (ie it is
‘available’ with the advising bank by sight payment)
1 Contract between the exporter and the customer in which the need for
a letter of credit is specified
2 Customer requests bank to issue letter of credit
3 Customer’s bank issues letter of credit via advising bank
4 Advising bank passes on terms of the letter of credit to the exporter
5 Exporter nearly always requests amendments to the letter of credit
and copies request to advising bank (if no amendments required ignore
5 to 8)
6 Customer requests issuing bank to issue amendment
7 Amendment issued
8 Amendment advised to exporter (repeat 5 to 8 until letter of credit is
acceptable to exporter)
9 Goods despatched
10 Documents required by the letter of credit presented to the advising
bank
11 Issuing bank’s account with advising bank debited (or reimbursement
is claimed)
12 Payment made by the advising bank to the exporter
13 Documents passed to issuing bank
14 Documents passed to customer (enabling him to use the bill of lading
to obtain the goods if sent by sea) and payment made by customer to
customer’s bank
It is the documents at step 10 which drive the transaction. If the letter of
credit calls for documents that the exporter cannot provide or sets out
conditions that the exporter cannot meet the exporter will not be paid from
the letter of credit.

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Whilst some of the documents required by the letter of credit will be


produced by, and hence be within the control of, the exporter it is important
to remember also those third party documents which are most commonly
required, that is, those which are not produced by the exporter. These are
generally (but there could be others):
• Transport documents, commonly bill of lading or air waybill
• Insurance document (policy or certificate)
• Certificate of Origin (which may require certification and/or legalisation
by an independent body such as a Chamber of Commerce or foreign
embassy)
• Inspection Certificate
These are discussed in Chapter 6.

UCP600
Reference has already been made to UCP600. The whole document is
important and should be considered essential reading for anyone working
with letters of credit. Do not think of it as just something that the banks
have to know. What follows is a brief commentary on some of the articles.
Article 1 - Application of UCP
UCP600 applies to any letter of credit where it is specifically included in the
text of the letter of credit. The rules are binding on all parties unless
expressly modified or excluded by the letter of credit.
Article 2 - Definitions
Provides definitions of common letter of credit language, including definition
of ‘honour’ and ‘negotiation’. It is worth noting that negotiation (ie the bank
advancing value to the exporter before payment is due under the letter of
credit) can be with or without recourse to the exporter – it is a matter for
agreement between them in each case.
Article 3 - Interpretations
A letter of credit is irrevocable even if there is no indication to that effect.
A document can be signed by handwriting or by any mechanical or electronic
method of authentication.
Branches of a bank in different countries are considered to be separate
banks (but it would be unwise to have, for example, a London branch of the
overseas opening bank confirm the letter of credit).
Article 4 - Credits v Contracts
The letter of credit is a separate transaction from the contract of sale to
which it relates. The banks will not be concerned with performance of the
contract of sale and the performance of their undertakings will not be subject
to claims by the customer regarding the contract of sale.
Article 5 - Documents v Goods/Services/Performances
Banks deal with documents, and not with goods, services and/or other
performances to which the documents may relate.
Article 7 - Issuing Bank Undertaking
Provided that the correct documents are presented the issuing bank must
honour the letter of credit if a nominated bank (ie the bank with which the
letter of credit is available, see Article 12 below) does not do so. In fact, the
issuing bank is irrevocably bound to honour the letter of credit at the time it

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is issued (hence ‘irrevocable’ letter of credit). Further, the issuing bank is


obliged to reimburse the nominated bank; this is separate from its obligation
to the beneficiary.
Article 8 - Confirming Bank Undertaking.
A confirming bank has similar obligations to the beneficiary and to another
nominated bank. If a bank is authorised or requested by the issuing bank to
confirm a letter of credit but is not prepared to do so it must inform the
issuing bank without delay and may advise the letter of credit without adding
its confirmation.
Article 9 - Advising of Credits and Amendments
By advising the letter of credit or an amendment the advising bank signifies
that it has satisfied itself as to the authenticity of the letter of credit or
amendment and that the advice accurately reflects the terms of the letter of
credit or amendment, unless it specifically advises the beneficiary that it has
not been able to satisfy itself of the authenticity thereof.
Article 10 - Amendments
A letter of credit cannot be amended or cancelled without the agreement of
the issuing bank (and confirming bank, if any) and the beneficiary.
The terms of the original letter of credit will remain in force until you
communicate your acceptance of an amendment to the advising bank. If
you present documents which comply with the letter of credit and any not
yet accepted amendment you will be accepting the amendment.
Partial acceptance of an amendment is not allowed and would be regarded
as rejection of the amendment. You must accept or reject an advice of
amendments in whole; you cannot, for example, accept items 1 and 3 but
reject item 2.
A provision in an amendment saying that it will become effective unless
rejected within a certain time limit would be disregarded. However, a clause
in the original letter of credit to the effect that any amendments issued shall
become effective if not rejected within x days might be a way around this.
You would be wise to reject such a clause in a letter of credit.
Article 12 - Nomination
By nominating a bank to accept a draft or incur a deferred payment
undertaking, an issuing bank authorises that nominated bank to prepay or
purchase a draft accepted or a deferred payment undertaking incurred by
that nominated bank.
Article 14 - Standard for Examination of Documents
Banks must examine a presentation of documents to determine, on the
basis of the documents alone, whether or not the documents appear on
their face to constitute a complying presentation.
A document presented but not required by the credit will be disregarded and
may be returned to the presenter.
Data in a document, when read in context with the credit, the document
itself and international standard banking practice, need not be identical to,
but must not conflict with, data in that document, any other stipulated
document or the credit.
In documents other than a commercial invoice the description of the goods
or services, if stated, may be in general terms not conflicting with their
description in the credit. (See Article 18 – Commercial Invoice).

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The banks (issuing and advising/confirming) each have up to five banking


days, following the day of receipt of the documents, to examine the
documents and determine whether to take up or refuse the documents and
to inform the party from which they received the documents accordingly. It
used to be the case that the bank had to do this within a reasonable time,
not to exceed to seven banking days. Of course, a reasonable time would
sometimes be less than seven or five banking days, but now the concept of
a reasonable time has gone.
Unless otherwise specified in the letter of credit presentations of documents
which include transport documents, eg bill of lading, air waybill, must be
made no later than 21 days following the date of shipment as described in
those documents (but not later than the expiry date of the letter of credit, ie
the expiry date stands regardless of the 21 days allowed for presentation of
transport documents).
The addresses of the beneficiary and the applicant need not be the same as
those shown in the letter of credit but must be in the same countries as
those shown in the letter of credit. The exception is when the address of
the applicant is to appear as part of consignee or notify party details on a
transport document. Contact details (fax, telephone, email and the like)
stated as part of the beneficiary’s and the applicant’s address will be
disregarded.
Article 16 - Discrepant Documents, Waiver and Notice
If a nominated, confirming or issuing bank refuses to honour or negotiate a
presentation of documents it must give a single notice to the presenter of
the documents.
The notice must state:
i. that the bank is refusing to honour or negotiate;
ii. each discrepancy; and
iii. what the bank is doing with the documents (holding them, requesting a
waiver from the applicant or further instructions from the presenter, returning
them or acting in accordance with instructions from the presenter).
This notice must be given by telecommunication or by other expeditious
means, no later than the fifth banking day following the day of
presentation.
If the issuing or confirming bank fails to comply with the terms of Article 16
it cannot then claim that the documents are discrepant.
Article 18 - Commercial Invoice
The invoice:
• must appear to have been issued by the beneficiary,
• must be made out in the name of the applicant,
• must be in the same currency as the letter of credit, and
• need not be signed.
The description of the goods or services must correspond with that appearing
in the letter of credit.
Article 20 - Bill of Lading
Even if the letter of credit prohibits transhipment, banks will accept a bill of
lading which indicates that transhipment will take place as long as the

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relevant cargo is shipped in a container, a trailer or LASH barge as evidenced


by the bill of lading, provided that the entire ocean carriage is covered by the
same bill of lading.
Article 27 - Clean Transport Document
Banks will only accept a clean transport document ie one that does not
contain any reference to a defective condition of the goods or their packaging.
The word ‘clean’ does not need to appear, even if the letter of credit requires
the transport document to be ‘clean on board’.
Article 28 - Insurance Document and Coverage
These must be issued and signed by an insurance company, an underwriter
or their agents or their proxies. Cover notes will not be accepted.
An insurance document may contain reference to any exclusion clause.
Article 32 - Instalment Drawings or Shipments
If drawings and/or shipments by instalments within given periods are
stipulated in the letter of credit and any instalment is not drawn and/or
shipped within the period allowed for that instalment, the letter of credit
ceases to be available for that and any subsequent instalments.

Bank inspection of documents


Finally, a few words on what has become known as the doctrine of strict
compliance. UCP600 says that banks must examine all documents stipulated
in the letter of credit to ascertain whether or not they appear, on their face,
to be in compliance with the terms and conditions of the letter of credit.
Further, data in a document, when read in context with:
• the letter of credit,
• the document itself, and
• international standard banking practice,
need not be identical to, but must not conflict with, any other document or
the letter of credit (Article 14). You should bear in mind that the concept of
international standard banking practice is wider than that enshrined in ICC
publication no 645, ‘International Standard Banking Practice (ISBP).
ICC publication no 645, ‘International Standard Banking Practice (ISBP) for
the examination of documents under documentary credits’ was published in
January 2003 with the aim of explaining how the rules set out in UCP500
were to be applied. Its Foreword says that the result of the use of ISBP
‘should be a significant reduction in the number of documents refused for
discrepancies on first presentation’. ISBP is to be updated to bring it into
line with the substance and style of UCP600.
In the meantime, whilst it is not uncommon for exporters to complain that
examining banks are unthinking in their consideration of the documents
presented, we should not lose sight of who is to benefit from presenting
documents which comply with the terms of the letter of credit – the exporter.
It therefore is in our interest to do everything that we reasonably can to
make sure that our documents are accepted on first presentation. Our fate
is in our own hands and one purpose of this guide is to try to improve our
success in this regard.

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Chapter 2 - Why letters of credit are used and their limita-


tions

Why use letters of credit


Your customer promises to pay you – why do you want a letter of credit?
Now, your customer may have every intention of paying you but, when
payment is due, be unable to do so. Of course, he may not have every
intention of paying you. So, we have two good reasons why you might want
a letter of credit. Other possibilities include:
• It may be that it is the normal practice of your customer’s country to
provide (and require) letters of credit for overseas payments.
• It may be that the establishment of a letter of credit is the only way in
which your customer can obtain foreign currency with which to pay
you. In this case it is quite possible that the central bank of your
customer’s country will require a local currency payment to be made
by your customer to buy the supply of foreign currency, or to satisfy
another requirement, perhaps to obtain an import licence.
• A letter of credit provides a good way of demonstrating the customer’s
commitment that an overseas payment is to be made (and, incidentally,
the contract in respect of which the letter of credit is opened can
usefully demonstrate that there is a genuine reason for your
customer’s purchase of foreign currency).
• It is not unknown for some countries to require the involvement of a
local bank in the payment mechanism for a significant import. This
might be for no other reason than to provide fee income for that bank.
Where you use credit insurance to protect your export contracts, you will
find from time to time that your credit insurer will require you to obtain a
letter of credit to secure payment as a condition of approving cover on a
customer with a low credit rating or perhaps for any customer in a particular
country. The essential point is that the letter of credit represents a payment
undertaking issued by a bank rather than the customer. The bank probably
represents a better credit risk than your customer and should have an
interest in maintaining its good name for meeting its obligations. It is likely,
therefore, to pay you in accordance with the terms of the letter of credit.
What a letter of credit provides, in short, is risk mitigation. It does not
remove risk. It offers a more secure means of payment, in most cases, than
relying on your customer’s promise to pay. It does not guarantee that you
will be paid. It is not a guarantee of payment. Receipt of the advice that a
letter of credit has been issued in your favour is merely a stage in the
process, not the time for heaving a sigh of relief that all is well.

Their limitations
It would be as well to mention some of the reasons for this note of caution.
Exporters working with an experienced customer, through two respected
banks, do not obtain total protection. It is not ‘buyer beware’ but the exporter
who must be continually alert to the fact that his working capital remains
exposed until payment is irrevocably made to his bank account. This section
considers some of the issues which can frustrate payment and what might
be done to lessen their impact or prevent these difficulties arising. It does
not address clerical or documentary errors which remain the greatest source
of delays in ensuring that payment is made under a letter of credit.

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You might have a perfectly good letter of credit and still not be paid, because,
for example:
• the letter of credit is opened by a bank in your customer’s (or other
overseas) country and political events or shortage of hard currency
might prevent the bank paying you
• the opening or advising bank becomes insolvent and cannot pay you
• the opening bank refers your documents to your customer for approval
before paying you
• you present documents to the bank which do not comply with those
required by the letter of credit
• you present documents to the bank which do comply with those
required by the letter of credit but you are too late in presenting them
• you are unable to present documents to the bank which comply with
those required by the letter of credit
There are circumstances outside the control of all the parties to a letter of
credit which may frustrate the contract and the ability of the customer to
honour its legal obligations. An exporter might face the risk of an export
embargo being enforced either by its own government or the United
Nations.

During the Argentinian invasion of the Falkland Islands, the British government imposed
an export embargo on goods to Argentina. Similarly, it was agreed through the United
Nations that exports to both Kuwait and Iraq should be suspended after the invasion of
the former by the latter in 1990. Exporters were faced with the prospect of payments
to be made under letters of credit being frozen by the Argentinian and Iraqi authorities.
Those companies which had not shipped their goods were unable to do so and there-
fore were not in a position to present the correct documentation to the advising bank to
secure payment even under a letter of credit which had been confirmed.

Similar situations can arise when the customer’s country imposes an import
embargo which might be a reflection of economic and political instability.
Exporters can only really protect themselves against the losses arising from
such events by insuring their contract from the date of contract.
From the perspective of a British exporter the risk of the advising bank’s
insolvency should be very much a theoretical risk only, unless the branch of
an overseas bank is used as the advising party. The failure of the advising
bank though would mean the customer having to cancel the existing letter
of credit and making new arrangements for it to be advised by a new bank.
In dealing with the branch or subsidiary of an overseas bank which fails, the
exporter will be faced with problems similar to that of the failure of an
opening bank and will not be protected in the event that the letter of credit
has been confirmed by it.

Remember BCCI? A British exporter was left out of pocket when BCCI, the advis-
ing bank for a letter of credit from Taiwan, stopped trading during the period between
presentation of the documents (and after it had received funds from the Taiwan bank)
but before the exporter had been paid.

It is important not to accept confirmation by the branch or subsidiary of the


opening bank. Confirmation only makes sense if credit enhancement takes
place and that is unlikely when a branch confirms its parental undertaking.
Confirmation
You can avoid the worst effects of some of these potential problems by
having the letter of credit confirmed, in the UK or, perhaps, in the EU. This

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adds the confirming bank’s commitment to pay you. It is perfectly possible


to have, say, a bank in Germany confirm a third country letter of credit – the
disadvantage in doing so in comparison to a UK confirmation is that you are
merely replacing one political risk with another, not removing the political
risk. Now, it may be argued that the political risk of having a German bank
confirm the letter of credit for a UK company is much less than the political
risk of the third country bank being able to pay; this is probably so. In that
you can be fairly selective in which bank you ask to confirm we can perhaps
disregard the risk that the confirming bank will also become insolvent
(though there is still that risk).
The exporter can also arrange ’silent confirmation’ of the letter of credit.
This is a third party undertaking to pay given by a bank or other financial
institution not involved in issuing or advising the letter of credit. Such an
arrangement is not contemplated by UCP600, and although most banks will
be prepared to consider such a ‘confirmation’, you should be aware that
each request will be considered on a case by case basis. If agreed, the
silent confirmation will be designed to reflect the specific terms and
conditions of the letter of credit to which it relates.
With a confirmation the exporter might assume that all that is now required
is for the necessary documentation to be presented to the bank for payment
to be made. It is important to remember that if an amendment is requested
the confirming bank is not bound to confirm that amendment, whether the
amendment is originally requested by the exporter or the buyer.
We are therefore left with those issues which could be outside your control
(and remain so, notwithstanding that you might have had the letter of credit
confirmed). For example, if one of the documents which you are required
to present in order to be paid out of the letter of credit is a bill of lading
demonstrating shipment of your goods to the customer’s country and you
are unable to ship, a UK bank confirmation will be of no value to you. You
will not be paid.
The FOB trap
In contracts concluded on FOB terms (Incoterms 2000) the customer may
have advised that it has nominated a vessel to which the goods are to be
delivered. Up to this point the exporter will have incurred manufacturing
costs, local transportation costs and will now incur warehousing and other
costs until such time as the goods are moved. It is important to remember
that contractually the exporter, having signed an FOB contract, is clearly
responsible for costs until the goods pass over the ship’s rail at the port of
shipment of the nominated vessel. What happens if the vessel either arrives
later than the last date for shipment permitted in the letter of credit, or does
not arrive at all?

This ‘FOB trap’ has been exploited effectively by government buyers in the past which
have insisted on FOB terms but then failed to provide the vessel as contracted.

It is worth noting that UCP600 now provides for the possibility of a charterer
to sign a charter party bill of lading (Article 22ai), thus creating another
opportunity for your customer to interfere with your payment mechanism.
Credit insurance
It is possible to remove the political risks relating to inability to ship (eg a UN
resolution preventing despatch, or the ceasing of diplomatic relations and
closure of an embassy prior to the signature of a certificate which was to
have been issued by the embassy) by insuring your export contracts with a

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credit insurer (eg AIG, Atradius, Coface, Ducroire Delcredere, Euler Hermes,
Exporters). These are termed pre-delivery risks and you would need to buy
cover from the date of contract or the date of receipt of the letter of credit,
not just from the date of despatch. Thus, if you are unable to ship for political
reasons, whilst you would still not be able to draw on the letter of credit you
would be able to claim on your insurance for the net costs (ie after resale of
your goods) you have incurred in manufacturing the unshipped equipment.
Open account terms
There are circumstances when open account terms (eg 30 days from the
date or the end of the month of despatch) are, for practical reasons, a more
sensible option than payment out of a letter of credit. For example:
• Short delivery times might not allow the time necessary for the
procedures related to a letter of credit
• Low margins might not be able to absorb the costs associated with a
letter of credit or those costs would make your terms uncompetitive
• Long manufacturing times will add considerably to the cost of a letter
of credit opened at the start of the process – it might be an option to
have the letter of credit opened when the exporter notifies the
customer that the goods will be ready for shipment in the near future
(of course this carries the risk that the letter of credit will not be
opened)

There is no such thing as total protection


It has to be recognised that it is not possible to protect against every
contingency. However, by ensuring that the original contract is unambiguous,
that solvent and competent banks are involved in the letter of credit
transaction and that insurance is applied effectively, an exporter will minimise
the risk of loss when working beneath the umbrella of a letter of credit.
There are times when the exporter will feel very exposed with no help
available from his bank or insurer but, by contracting prudently and seeking
advice, these occasions should be rare.
It should not be thought, after reading the last few paragraphs, that a letter
of credit has no value. It is a very valuable tool but it does not exist in
isolation from the world around it. In most cases you will depend upon
other documents and the actions of third parties to make it work. Making it
work as you require involves considerable care and attention on the part of
the exporter. That means that when the advice of the letter of credit arrives,
the next stage of the work begins.
What happens if your buyer goes bust before despatch? Can you still draw
down on the letter of credit? In theory ‘yes’ because the letter of credit is
an independent instrument. In practice, you may not be able to access this
benefit. If the terms of delivery are FOB, this means that your customer is
obliged to nominate the vessel and pay the freight. Which carrier will agree
to provide a shipping service to a company that is already bust? Similar
problems will be apparent with all delivery terms except DDP – and even
DDP will require signature confirming delivery, and this assumes that the
insolvency practitioner managing your customer’s affairs is continuing to
trade. The letter of credit only really covers the insolvency risk of your
customer from the moment that documents are successfully presented.

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Chapter 3 - What the exporter wants

The exporter’s interests


It is a useful rule to bear in mind that no one will look after the exporter’s
interests like the exporter. The customer will have his own interests at
heart (which may or may not coincide with the exporter’s) and it would be
unwise to expect the banks involved to put the exporter’s interests above
their own. In short, if you want a job doing properly, you have to do it
yourself.
It is not enough simply to receive a letter of credit. You need to ensure that
it is written in such a way that you will be in a position to provide the
documents required by the letter of credit, and which comply with its terms,
to receive payment from the paying bank. It is important that the number of
documents required by the letter of credit which are to be produced by third
parties is kept to a minimum (and ideally all documents, except the transport
and insurance documents, should be capable of being produced by the
exporter).

To confirm or not to confirm?


Probably the first decision for the exporter when negotiating a contract
where payment is to be by letter of credit is whether he wants the letter of
credit confirmed. There are two points of view here.
The case for confirmation
For the best security, it is essential for the letter of credit to be confirmed by
a UK based bank and payable in the UK. This ensures that you can deal
directly with the bank responsible for checking the documents and, if in
order, paying you. A letter of credit available with the advising bank but not
confirmed by them will enable the advising bank to check the documents
but only pay the exporter if it holds funds of the issuing bank which could be
debited or receives funds from a named reimbursing bank. The documents
would have to be presented through the advising bank to the overseas
issuing bank for them to check the documents and pay, or not, as the case
may be. Once you have made the decision to require a letter of credit, it is
much simpler and more efficient to deal with a paying bank in London than
a bank in the customer’s country, although the confirmation of a letter of
credit will result in an additional cost to you.
It is essential that you select the right confirming bank for the letter of credit.
Different banks have different appetites for risk. Some are very cautious
and others more bullish. If the advising bank or your house bank will not
confirm a letter of credit, you may be able to arrange a silent confirmation
with a third party bank or financial institution.
Whilst talking to prospective confirming banks, you should ask them which
local banks in your customer’s country would be acceptable to them as
issuing banks. There are many issuing banks that do not represent an
acceptable risk to UK confirming banks. It is important to identify a local
bank with which both your customer and the prospective UK confirming
bank can work. Good correspondent relations between the opening bank
and the advising/confirming bank can be very important in the operation and
success of a letter of credit transaction, and may significantly affect the
bank charges. It will often be the case that the customer will have only one
bank; that bank will probably only be willing to use one of its usual

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correspondent banks to advise letters of credit – it may have only one


corresponding bank in the UK. If feasible (and acceptable to your customer)
you should investigate using a reputable and reliable banking group with
offices in both the UK and your customer’s country: this can lead to
advantages in terms of speed and efficiency, and may even mean a reduction
in the overall charges payable by you and your customer.
Sometimes the issuing bank will not be willing to request a bank to confirm
its letter of credit. You should check this possibility with a UK bank with
branches or other presence in your customer’s country. If this proves to be
the case your bank may well be able to advise you how to overcome the
problem and whether you should request any specific wording to be included
in the letter of credit when issued to ensure you can still enjoy the advantage
of a confirmation, albeit ’silent’ in this case. With a silent confirmation, the
issuing bank is unaware of the existence of the confirming bank. The
confirming bank contracts with you to pay you only if the issuing bank does
not honour its agreement to pay – eg within 30 days of acceptance of
conforming documents. In all probability, the letter of credit would need to
be available by negotiation by any bank.
The case against
That is the case for confirmation; get the documents right and to the UK
bank in time and you will be paid by the UK bank. The other point of view is
that confirmation is not necessary, or is necessary only in some
circumstances. Either the extra cost of the confirmation is too much to bear
in the price or perhaps the fact that you will be asking a UK bank to confirm
your customer’s bank’s undertaking to pay will not be regarded favourably
by your customer. In any case, there will be confirmation fees to pay.

Credit insurance
One method of mitigating the risks of non-payment under an unconfirmed
letter of credit is to insure your export receivables. In the UK the main
export credit insurers are AIG, Atradius, Coface, Ducroire Delcredere, Euler
Hermes and Exporters. They offer insurance of export contracts either from
the date of contract (pre-credit risk) or from the date of despatch and invoice
of the goods or invoicing for the services (credit risk). They tend to look for
a spread of risk (wanting to cover all your exports rather than only those to
the more risky markets of the world) but this does not necessarily mean that
the insurance cost need be prohibitive. The premium rate per £100 of
business will tend to fall if a good spread of business is insured; the insurer
earns enough on the ‘good’ markets to allow for the lower overall premium
rate also to be applied to the more challenging markets.
The terms of cover vary between insurers. Some offer full non-payment
cover, treating the letter of credit as a means of payment (which it is), while
others provide only political risk cover (such as for shortage of foreign
exchange) in letter of credit transactions. You are recommended to seek
advice from an insurance broker as to the best option for your export trade.

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If insurance starts at the date of contract then you would be protected from
the risks associated with your inability to produce the documents necessary
to allow you to be paid from a letter of credit because of events outside your
control which occur before you ship. This cover is generally suitable for
exporters who make goods to order; a claim is calculated after the goods are
re-sold or otherwise disposed of. Unless your customer is a government,
pre-credit risk insurance would not protect you against the failure by your
customer to have the letter of credit opened. If your goods are not made to
order then you may feel comfortable with this risk – if you are unable to
supply the goods to your customer they can be used for another order.
The insurer will usually be content to exclude from cover the payment risk
where you hold a confirmed letter of credit. This allows the exporter to
choose when to seek confirmation and to compare the confirmation fee
with the insurance premium for the credit or payment risk.

When to ask for a letter of credit


How do you know whether payment by means of a letter of credit should be
requested? This will depend upon:
• The territorial conditions – eg as advised by Croner’s, D&B, Coface@
rating, your bankers.
• Any credit insurer’s security requirements for the country.
• The creditworthiness of your customer (and/or your credit insurer’s
view of your customer).

Getting the letter of credit right


Regardless of whether the letter of credit is confirmed you will need to
ensure that the letter of credit reflects the terms of the export contract.
The letter of credit should be valid for the duration of the despatch period
under the contract plus the agreed time for presentation of the documents.
The contract of sale should stipulate the documents to be presented and the
letter of credit terms should reflect the contract’s requirements. This is
important; in the case of a discrepancy between the terms of the contract
and those of the letter of credit the exporter will have a contractual obligation
to fulfil, but the bank (advising, opening or confirming) will refer only to the
terms of the letter of credit. There should be no conflict between the two.
Sight or tenor?
You will normally want to be paid immediately following presentation of
compliant documents – at sight – unless you have agreed otherwise with
the customer. The letter of credit will show clearly whether or not payment
is at sight. If the letter of credit states ‘payment at 30 days from the date of
the bill of lading’ for example, you will have to wait 30 days before you are
paid. On the other hand, a confirming bank may agree to discount the
amount due and pay you immediately. Check this possibility with the banks
at an early stage. At the same time, check the banks’ costs for this discount;
they can vary considerably and they will come out of your profit margin
unless you are able to build them into your contract price (together with the
other letter of credit fees). It pays to shop around with the confirming or
advising bank and with other banks, financial institutions or forfaiters.
When do you want the letter of credit?
You will certainly want the letter of credit to be issued, with terms and
conditions acceptable to you, well before shipment, particularly if you are

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exporting to a new customer. If you have to start a manufacturing process


shortly after contract signature but before the letter of credit is issued in
order to meet a shipping deadline, you must think very carefully about the
implications of undertaking costs which may not be recoverable from the
customer, under a contract for which you have no means of payment in
place.
Expect the unexpected
Bear in mind that despite all forward planning, a letter of credit is rarely
issued with all terms and conditions acceptable first time around. There is
nearly always something that needs changing. The point is, all this takes
time and you should take this into account when setting the date you want
the letter of credit in your hands and in good order.
Begin at the beginning
Leading exporters advise that the time to start making sure that the letter of
credit is right is at the time of quotation. We all know that only a proportion
of quotations end up as firm contracts, but it is important for this stage to be
right – what value is a contract if there is no hope of getting paid?
Your sales team will need to have a requirement written into their procedures
that they should check with the credit department before making quotations
for export sales. They will need to offer the potential customer a price that
will reflect the payment terms (to include the cost of credit and any risk
protection premium/fee as well as the freight and insurance and other
overhead costs).
The quotation must clarify:
• the time period for making delivery,
• the terms of delivery,
• the credit period (including when the credit period starts), and
• any security for payment such as a letter of credit.
It is important that, at the stage of quotation, the responsibilities for payment
for any changes or extensions to the letter of credit are clear. The person
who will have responsibility for ensuring that the funds are drawn from the
letter of credit will need to be given the opportunity to comment on any
quotation where payment is to be by letter of credit. This person must have
the tools and authorities for getting the letter of credit into a workable
document.
Will you get the transport documents you need?
When supplying goods to unfamiliar countries, it is imperative that your
forwarding agent and/or shipping line has sight of the letter of credit in its
entirety at the earliest opportunity. It may be that the shipping line is unable
to comply with one or more of the documentary requirements, in which
case you might need either to change your shipping line, or request an
amendment. Your shipping line’s clear understanding of the terms of the
letter of credit and its conditions is critical to the success of your presentation
of documents and hence being paid.
It all takes time
It is important to know something about your customer’s country and its
requirements. The salesman is likely to have discussed with the production
manager and shipping department how much time is needed for production
and delivery. It would be wise to spend time at this stage thinking about
what sort of documentation will be needed to fulfil the terms of any quotation

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that becomes a firm contract. Documents that require any form of


authentication by a Chamber of Commerce or similar authority will add to
your costs.
For example, inspection by SGS or Cotecna may be necessary for the
customer’s country – you can check this in Croner’s. Even if you do not
make reference to either body, or provision for pre-export inspection in your
contract, it will be necessary in order for you to be able to be paid from the
letter of credit. You may wish to consider, therefore, subscribing to Croner’s
export guide in order to maintain your knowledge of which countries require
what.

Many African and South American countries require inspection, and some Far Eastern
countries are increasingly requiring it.

It is important that, when the letter of credit arrives, you have planned to be
able to produce the documents required.

In Bangladesh and India, experienced exporters will know that a customer paying using
a letter of credit will often require a number of documents which we might believe to be
excessive. These may take some time to assemble and will add to your costs.

The letter of credit wording should reflect the terms stated in the contract
of sale (and possibly follow the wording of the quotation). This will need to
be checked.

What part does the sales contract play?


One of the main purposes of a written contract is to set out, clearly and
unambiguously, what each party to it is supposed to do, and when, in order
to get the job done to everyone’s satisfaction. There is no reason why the
contract should not also set out the requirement for a letter of credit and its
contents. There are a vast number of possibilities as to what a letter of
credit can say; the wording is crucial for its successful use so it is clearly
necessary to spell out in the contract exactly what should appear in the
letter of credit. It may be that there are commercial pressures operating
against the wish to include the details (and even a specimen of the wording)
of the letter of credit in the contract – we can imagine the salesman’s
response ‘… but we don’t want to upset the customer by spelling out the
details of the payment arrangement…’. It may be that your negotiations
with the customer in the course of settling the wording of the contract have
been particularly long and stressful. In these circumstances there is usually
everything to be said for spelling out the details. Remember, you have a
right to be paid.
It may be easier said than done to get the right things agreed but it would
be foolish to hope that the customer or his bank, or even the exporter’s
bank, will look after the exporter’s interests. Only the exporter can be truly
responsible for ensuring that he is paid; he is neglecting his duty (and his
shareholders) if he does not try his best to achieve this.
The exporter should therefore arrange for at least the following items to be
spelled out in the contract:
Names and addresses of the banks which will issue and advise the letter of
credit
Details of the proposed opening bank should be cleared with the exporter’s
bank just in case there are any problems between the two. It is useful if the

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two banks have a “correspondent” relationship. The exporter’s bank will


expect the letter of credit to state that it is governed by UCP600. In order
to ensure more speedy and efficient processing it is beneficial if the letter of
credit is issued using SWIFT: the Society for Worldwide Interbank Financial
Telecommunications, a secure system for passing messages, payment
instructions, etc., between banks internationally.
When the letter of credit is to be opened
Many exporters leave it too late before requiring the letter of credit to be
opened, with the result that there is too little or no time to correct the
inevitable mistakes, and the value of the letter of credit is largely lost. The
surest way in which to require a letter of credit to be opened is to have a
clause in the contract called an effectiveness clause and to include a
reference to the letter of credit in it. Such a clause delays the coming into
effect of the signed contract until the items specified in the clause have
been complied with. If one such item is receipt of a letter of credit with the
details as specified in the contract (or in a form approved by the exporter)
then the customer has an incentive, when requested by the exporter, to
correct the mistakes which will inevitably appear.
All dates in the contract will need to be expressed as periods from the date
of contract effectiveness to ensure that pressure on the parties is maintained.
Other items which can be referred to in the effectiveness clause might
include issue of an export licence, an import licence and receipt of a down
payment. There will need to be an end-stop date so that if any of the items
is not procured by then, either party will have certain rights, one of which
may be the ability to get out of any obligations early before further problems
arise.
If you are using credit insurance, take care to read any conditions requiring
letter of credit security: is the letter of credit required to be opened “before
despatch” or must it be ’at date of contract’?
Documents: who issues them and who signs them
The law books are full of cases involving the use of documents which one
side says were wrong. Several principles should be followed by the exporter
to reduce the risk of becoming the latest interesting case for debate in the
courts.
The best arrangement is for the documents to be produced and signed by
the exporter only, because they are then within his control. If they are to be
provided by an independent third party, it is necessary to ensure by checking
first that the documents as specified can be made available within the
requisite time-scale.
The worst arrangement for the exporter is for a document to be provided or
signed by the customer or someone acting for him because this removes
the safeguard to the exporter which a letter of credit can provide, and gives
the customer the chance to delay payment for his own reasons which may
have nothing to do with the exporter’s performance of the contract. ISBP
article 4 states that a credit should not require a document that is to be
issued or countersigned by the customer, but if it does, the exporter must
bear the risk of failure.
Safe achievability of dates
A letter of credit must specify certain dates and periods such as the expiry
date for presentation of documents. If the period for presentation of
shipping documents is not specified UCP600 sets a maximum of 21 days

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from the date of shipment (Article 14c). It therefore makes sense for the
exporter to propose his own dates and periods for agreement with the
customer and inclusion in the contract so that they can then appear in the
letter of credit. Delays, particularly by third parties, are common so safety
margins should always be included when agreeing dates. It should be
remembered that short journeys by sea can be completed before the
paperwork is ready – a delay in presenting the bills of lading and other
documents to the bank (even within the 21 days) could lead to the goods
being held at the port of discharge with costs of storage (demurrage) being
incurred for the consignee. In these circumstances it is worth considering
avoiding sea transport (where the original bill of lading has to be presented
by the consignee in order to take delivery) and instead choosing alternative
methods of transport such as road transport.

Attention to detail
The purpose behind getting all the details clearly spelled out in the contract
is that these will provide a firm basis for getting the letter of credit put right
when it is issued. Once the exporter accepts the letter of credit, it must be
remembered that to be paid he has to comply exactly with its requirements
even if they are wrong or even impossible. The English Courts have
developed the doctrine of ’absolute compliance’ with the requirements of
the letter of credit. ‘Almost’ right will not do, so even the most trivial of
differences between the wording of the letter of credit and the wording of
documents could permit a bank to withhold payment. This is not to say that
exact literal compliance in all circumstances is required, but to be safe the
exporter should work on the basis of providing documents which do comply
absolutely with the terms of the letter of credit.
Some exporters believe that their relationship with their bank will ensure
that this harsh doctrine will not be applied in their case. They should not rely
on this belief because the interests of the bank and the exporter are different,
and the bank will expect the exporter to comply with the wording of the
letter of credit.

One British exporter received a letter of credit covering the 10% advance payment
under the contract as well as payments for the balance of the contract price. The docu-
ments required for the advance payment were:
• Commercial invoice for the value of the advance payment, and
• Copy of customer’s receipt for the advance payment guarantee.
Now, whether it was wise for the exporter to provide the customer with the advance
payment guarantee before the advance payment was received might provide the mate-
rial for a separate discussion. The advance payment guarantee was given for a value of
£12,800,000.00. The contract price was £128,000,032.00.
The bank initially refused to pay the advance payment because the advance payment
guarantee was not for the same amount as the advance payment (£12,800,003.20).
They agreed to pay after the exporter pointed out that the letter of credit did not require
the advance payment guarantee to be for the same amount as the advance payment.
The point is that for the sake of £3.20 a payment of £12.8 million nearly failed.

There is no substitute for the most intense attention to detail:


• when setting out the requirements in the contract,
• when approving the letter of credit at the beginning,
• when preparing the documentation for presentation and payment.

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Summary
• Request a confirmed letter of credit (or arrange confirmation yourself)
or consider insuring the payment risk
• Consider insuring the pre-credit risk
• Choose the right UK bank to confirm or consider silent confirmation
• Pay very close attention to all the conditions of the letter of credit – the
banks will
• Make sure the letter of credit works for you
• Ensure the letter of credit payment terms reflect those in the export
contract
• Are you happy with deferred payment terms? Can you discount for
cash on a non-recourse basis?
• Have you included ALL letter of credit costs in your price?
• Identify which local banks are acceptable to your confirming bank
(remember that if the same banking group handles the transaction at
both ends this may be quicker and cheaper)

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Chapter 4 - What the exporter should look out for

Before the letter of credit is issued


Fees
There is no rule as to who (exporter or customer) pays for the cost of the
letter of credit. The only certainty is that the banks involved will request
fees for opening, advising (the original and any amendments), confirming
and paying. The most common arrangement is that the customer will pay
the costs of the opening bank and the exporter will pay the costs of any
other bank involved.
Confirmation charges
The largest single letter of credit cost for the exporter is the fee charged by
the confirming bank for confirming the letter of credit. The custom is for the
confirmation fee to be charged from the date the letter of credit is advised
to you, to the date the final drawing is paid. The bank may calculate this fee
on the value of the letter of credit, but more commonly calculates it quarterly
on the undrawn balance outstanding at the beginning of each period; the fee
may be charged either in advance or in arrears.
Some banks may agree to charge confirmation fees for the first quarter and
then monthly thereafter. Always consider the timing of your deliveries as to
whether or not they may run into a new quarter by a small margin of days,
as this could have a significant effect on your confirming fees.
One way to reduce this fee is to shop around when selecting a confirming
bank – fees will vary one from another. This might not always be possible;
certainly your ability to drive a bargain with a confirming bank will to a degree
depend upon the size of your business. You may find it is the case that a UK
bank with a long standing and mature presence in the country or region of
your customer will tend to charge less than another bank with less experience
in the country. On the other hand, however, it might be the case that you
will get a better deal overall if you put all your letter of credit confirmations
to one bank.
Another way to reduce the confirmation fee is to delay the point at which
your UK bank adds its confirmation until close to the date of shipment. This
runs the risk, of course, that by that time the circumstances of the customer’s
country or the bank’s relationship with the opening bank may have
deteriorated such that the cost of confirmation has risen from the estimate
at the time of the contract or that it is no longer possible to obtain a
confirmation, at any price. This might suggest that it would be unwise to
delay the confirmation; if it is needed it should be obtained as soon as
possible.
The important thing in all of this is always to seek to understand your risks
so that you can manage them properly and cost effectively. Although you
can’t afford to take unnecessary or unacceptable risks, neither can you
afford to incur unnecessarily high costs. You will often find that there is a
balance to be struck between the cost and the value of the service you
receive from the confirming bank.
The preferred local bank
Your customer may resist your suggestions for acceptable local banks to
issue the letter of credit. You should try to give him as wide a range as
possible, and, if you are to have the letter of credit confirmed, this may
require you to go to a number of UK banks acceptable to you, who between

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them cover four or five local banks. You will find the Bankers Almanac
helpful in this respect. If you are not going to seek confirmation then the
decision is one for you (or your credit insurer): are you content to take the
risk on the local issuing bank? If the customer insists on a particular bank
opening the letter of credit and you cannot find a UK bank willing to confirm
that bank’s letter of credit you should think very carefully indeed as to why
this might be and consider the risk of taking the letter of credit without
confirmation. If your credit insurer also is unwilling to give cover on the
basis of a letter of credit issued by that bank you have a very clear indication
that you should not be willing to take the risk.
In doing so, you would have to be able to answer the question:
’What do I know about this bank that makes me comfortable with their risk
when my bank (and credit insurer) is not?’
Extraneous documents
Your customer may require you to provide a document under the letter of
credit that you have never heard of. Check with your bank if they are familiar
with it and if there is anything for you to worry about. Such documents, for
example a Phytosanitary Certificate issued by the UK Forestry Commission
stating that the packing materials do not contain disease, are difficult (nearly
impossible) to obtain and should not be a requirement of the letter of credit.
You may of course agree to send your customer this certificate separately
as it is required in certain countries to demonstrate satisfactory treatment of
wooden packing materials, and your agreement to do so may be included in
your contract. In this case a satisfactory compromise could well be that you
agree to include in the documents to be presented under the letter of credit
your written statement confirming that the relevant certificate has been or
will be sent to the importer. It is quite easy to draft such a document but it
is advisable to seek guidance from your bank to ensure that it is
acceptable.

When the letter of credit should be issued and what


happens if it isn’t
You should make clear at the earliest stage, (include it in your bid), your
requirements for the timing of the issue of the letter of credit. You should
generally want it, with terms and conditions acceptable to you, shortly
following contract signature. Thirty days is quite reasonable and is the
period of time that is typically given for the issue of any related advance
payment guarantees. This is where the effectiveness clause of the contract
comes into play.
A contract signed without a payment structure in place will lead to difficulties
later on. Furthermore, unless you have included an effectiveness clause in
your contract (that relieves you from the obligation to do anything under the
contract until the letter of credit is in place), you may be obliged to begin
work on the contract, spend money, and manufacture perhaps specifically
for this customer, without an acceptable payment structure in place. If the
letter of credit does not materialise and you have manufactured goods
specifically for this customer with limited or no potential to be sold
elsewhere, what do you do? Do you ship and hope he pays you effectively
on open account terms because you have been assured everything will be
put right (in which case why didn’t the letter of credit appear?), or do you sit
tight?

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Bear in mind that the customer may hold your advance payment bond or
performance bond and cash it if you fail to perform even though the letter of
credit has not been opened or is in an unacceptable format. This illustrates
the need for any bond wording to state that the bond comes into effect only
when the contract comes into effect (or when a satisfactory letter of credit
has been received if there is no proper effectiveness clause in the contract).
Just as the letter of credit is separate from the contract of sale, so is the
bond separate.
It may be that sitting tight or lack of action is the best option in these grim
circumstances. If the customer really needs your equipment, he will find a
way to pay for it and while the goods are under your control, you have a
degree of leverage.
In straightforward contracts which do not require export and import licences,
down payments or bonds etc, a simpler alternative to an effectiveness
clause is to state in the proforma invoice that delivery time is calculated as
x weeks from receipt of an acceptable letter of credit. This may be more
acceptable to your customer. In addition this option would enable the
exporter to include less of a margin in his delivery time, possibly making his
quotation more attractive in terms of delivery. Comparisons between
competitors are often made on this basis.
Expiry date of the letter of credit
Some customers are renowned for trying to get exporters to agree to accept
a letter of credit with a shorter expiry date than is required to cover the
payment plan. They will often quote their ’rules’ and ‘procedures’ as
justifications. Again, be very careful before agreeing to this. You would be
taking a significant risk by not insisting that all your payments are covered by
the letter of credit. Clearly, however, there is a balance to be struck between
insistence and losing your competitive edge by quoting an unrealistic
delivery time that compares badly with that of your competitors.
Third party shippers
During contract negotiation you should ascertain whether or not all the
equipment you are proposing to supply is to be shipped by you or whether
another company will ship some of it direct to the customer. In these cases
it may be important for your customer to understand that equipment will be
exported from a country other than the UK. This may have import licence
and customs duties implications and the letter of credit will need to recognise
this fact. In particular, it should not specify shipment only from a UK port if
the third party is an overseas company.
Beneficiary of the letter of credit
The exporter is the beneficiary of the letter of credit. When the letter of
credit is issued the beneficiary’s details will probably be extracted from the
contract by the customer and made available to the issuing bank. It is a
good idea to ensure always that the letter of credit includes any specific
reference that would help the letter of credit, when it arrives at your
company’s offices, to reach the right person in your organisation as quickly
as possible.
Whilst in smaller companies this may not be an issue, in larger companies
with many different departments, the company’s standard address may not
be sufficient to guarantee prompt arrival on the right person’s desk.
Therefore request your customer to include the appropriate contact name in
the details together with a telephone number.

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Very shortly after the letter of credit is issued


Letter of credit terms and conditions
Do these agree with what the contract says? If not, make a list of the
differences with a view to requesting amendments from the customer. You
should tell the advising and the confirming bank (if there is one).
Shipment/expiry dates and third party shippers
Check the shipment date, expiry date and clauses that allow third parties as
shipper and more than one shipment, if you are not intending to ship
everything in one go. UCP600 provides (Article 32) that if there is to be
more than one shipment, each with related dates for presentation of
documents, and any one date is missed then the letter of credit ceases to
be available for that and all subsequent shipments and drawings. If you
have a series of shipping dates you may wish to have the following words
‘Article 32 of UCP600 does not apply to this credit’ added as a condition of
the letter of credit. This would have the effect of removing the provisions
of Article 32.
Mode of transport
Check that the letter of credit requires you to ship by the appropriate means
of transport: sea, overland or air, or in some cases a combination. A ‘by air’
option can be useful if you are unable to ship everything by sea and need to
make a second shipment which must arrive quickly. This should be
discussed at contract negotiation.
If you have agreed a third party as shipper, you must obviously be allowed
to make partial shipments, as well as from the third party shipper’s port of
loading, but check the letter of credit just in case this has not been followed
through. You may be manufacturing or sourcing from several locations and
in any case, the shipping department will have a view.
One last point on shipment. Check that the destination port is attainable
from the UK. Some ocean vessels cannot reach smaller ports and not all
intercontinental flights land at every airport in a particular country.
Seek advice
Speak to your bank for guidance on what they will expect to see on the
shipping documents based on the letter of credit’s clauses and, if necessary,
your freight forwarder who can advise on the appropriateness of the
destination ports and what information can be included on the relevant
shipping document to satisfy the letter of credit.
Typing errors
Check the letter of credit for typing errors, particularly with respect to your
details as beneficiary, your customer and such key information as the
description of the goods. If there are any discrepancies, check with your
advising/confirming bank to ascertain if the discrepancies will necessitate an
amendment to the letter of credit. One way to avoid an amendment is to
include the information in all documents exactly as spelt in the letter of
credit, even if incorrect, but this can cause further problems; having to
perpetuate spelling mistakes in a series of documents can not only be
tiresome, it can lead to inconsistencies and other errors. It is not always
necessary to have amendments for typing errors that are not material, but it
would be a commercial decision as to whether to insist on an amendment
or not; some customers do not take favourably to requests for long lists of
largely irrelevant amendments. Your bank should advise on whether the
error is material for payment in their view.

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Documents issued/signed by third parties/end-users


If under the contract an end-buyer will have to sign or issue a certificate,
does the letter of credit give the end-buyer’s name or refer only to “end-
buyer”? If the latter, check with your advising/confirming bank for guidance.
Some banks like the name to be included in the letter of credit so that the
name in the relevant document tallies. Clearly, this provides a further
opportunity for inconsistency and error.
21 days for presenting shipping documents?
Check whether or not you have been given at least 21 days to present
shipping documents. Although Article 14c of UCP600 is clear that a time
limitation of 21 days is the norm (but in any event not later than the expiry
date of the letter of credit), poor wording in the letter of credit may create a
doubt as to whether or not the intention of the issuing bank is to change this
condition. Therefore, check with your advising/confirming bank for guidance.
If the time for presentation is less, or the expiry date is the same as the
latest shipment date, this may not necessitate an amendment, but would
require the exporter to be more efficient and timely with presentation of
documents. Again, this will be down to logistics and commercial decision-
making.
Bills of exchange
Check how the letter of credit requires the bills (called ’Drafts’ in UCP600)
to be drawn: at sight, or at a specified number of days from the bill of lading
date. Does your contract state the same payment terms? Are you required
to draw a sole bill or two bills? Whilst the bills should be drawn on the
issuing bank (if the letter of credit is available with the issuing bank) or the
advising bank (if available with the advising bank) – in any event not on the
customer - does the letter of credit make it clear who the bank is? This may
seem a strange thing to check but nowadays with communications largely
through SWIFT, the issuing bank’s name may have to be detected through
the SWIFT code. The address given in the letter of credit for the advising/
confirming bank to send the documents to is not necessarily the address of
the bank on which to draw the bills. Once again, check with your bank. It is
quite common for bills not to be required at all.
Values of drawings
Check that the value of the letter of credit and the total value of all drawings,
particularly when expressed as a percentage either of the letter of credit or
the contract, agree. If the letter of credit refers to an amount being a
percentage of the invoice value, query with your bank how they would want
you to draft the invoice to show this, as well as the contract value. This is
often difficult, particularly as the invoice value is not necessarily the shipment
value.
Exporter is both beneficiary and manufacturer
Under the letter of credit you are described as the beneficiary. Some letters
of credit require a certificate e.g. certificate of origin to be signed by the
manufacturer. If you are the manufacturer then you should sign in the
capacity of beneficiary/manufacturer. If you are not, then the manufacturer
must sign the certificate, not you. However you should be responsible for
drafting it to ensure it conforms to the letter of credit. Once again, if you
have any doubts, speak to your bank.
Can you meet the packing conditions requirement?
Countries around the globe are becoming increasingly concerned about
importing disease, particularly through wooden packaging. Import

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restrictions sometimes require an exporter to provide certification of


treatment to wooden packaging materials.
You must make sure that the letter of credit does not call for a certificate or
statement that you cannot procure. For example the letter of credit may
require you to certify that wooden packaging materials have not been used,
or non-coniferous materials have not been used. If you do use them and
cannot change, then you will have to negotiate with your customer a
different form of certification. This is a topic that is easily overlooked and
should really be addressed at contract negotiation rather than after the letter
of credit is issued.

Managing the letter of credit


It is useful to go through a written checklist immediately on arrival of the
letter of credit. You will find an example at Appendix 1. Then circulate both
the letter of credit and the checklist to relevant team members, eg
representatives from the Sales Department, Production, Shipping, Accounts,
Credit. Within two to three days (shorter if there is time pressure), arrange
a meeting of all these personnel. All parties should have the opportunity to
say if they can or cannot comply with the terms of the letter of credit. You
may find that you will encounter more assistance if minutes are taken of the
meeting.
Any items that cannot be complied with should be listed. It should be clear
in the minutes who is responsible for going back to the customer to arrange
for the changes to be made. When a third party is required to make changes
(eg to a transport document), that party should be given clear instructions as
to the alteration to be made, plus the time-scale for producing the corrected
version. Similarly, when amendments are received the team should have
sight of them and if necessary a further meeting called.
It really does help to have a good rapport with your UK bank(s). Time spent
in developing a relationship with the bank’s documentary credits department
will provide you with the opportunity to discuss anything about the letter of
credit that is not clear.

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Summary
• Ensure that the issuing bank is acceptable not only to your customer
but to your confirming bank (See if your customer will accept the use
of the same UK banking group for both functions)
• Make sure the confirming bank provides you with the cover you need,
not what it wants to charge you for
• You must be clear when you plan to ship, how, and where to. Make
sure this is clear in your contract and that the letter of credit, when
issued, reflects the contract
• Check every detail of your letter of credit when it is received
• Will a typing error stop you from being paid?
• Maintain regular contact with the advising/confirming bank
• You must be able to meet every condition of the letter of credit to
ensure that you are paid
• If appropriate to your business check with other specialist departments
in your company regarding packing restrictions, shipments by third
parties etc
• If you do not have the necessary experience in house, consider
outsourcing the letter of credit management to a competent third party

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Chapter 5 - Amendments, How to Avoid Them and How to


Obtain Them

It takes time
Receiving a letter of credit can appear to take a long time. With modern
forms of communication such as SWIFT, where messages are sent from
computer to computer, one would expect that a letter of credit could be
opened within a few hours of the asking. However, with the intervention of
man, the customer’s budgetary constraints and priorities, local legislation,
credit lines etc, the time scale can be days if not weeks (or months). Once
in-country issues are overcome, the main reason for delay is the fact that
although the SWIFT system connects banks instantly, it is occasionally the
Head Offices that are connected instantly. The message has to be relayed
to the Head Office from the customer’s bank branch, then the message
input on the computer system, sent to the Head Office of the exporter’s
bank, who then advises it to the exporter (although this is not always the
case).
Another reason for delays in the exporter receiving the credit is the fact that
the customer will not wish to incur expense or to tie up his credit lines
unnecessarily. As banks charge by the day or month that a credit is open,
the longer the customer delays the opening, the lower the bank charges. It
is usual for banks to count the value of a letter of credit against the importer’s
credit line. Therefore it is common for the customer to seek to delay
requesting the opening of a credit until just before shipment or the date
when a payment is due to the exporter. If your customer adopts this
approach there will be little time before shipment is due, or the credit
expires, for any amendments to be arranged. This may be accidental or the
customer might have a good reason (from his point of view) for arranging for
you to have too little time to have the letter of credit amended.

How to Avoid Amendments


The motivation for your customer in raising a letter of credit is to ensure that
he gets the goods he has ordered (as evidenced by the documents) and that
he receives the required documentation to clear the goods through customs.
Ideally the letter of credit should be simple, with requests for excessive
numbers of documents resisted.
Sample wording
It is advisable to include in the contract a sample of the wording of the letter
of credit to be issued, thus ensuring both parties know what is expected.
Samples of simple letters of credit can be requested from your bank.
Incorporating the wording of a letter of credit in the contract will require your
sales or other personnel to be actively involved in negotiating the terms and
conditions of the letter of credit before signing the contract.
The fewer documents the better
The basic documentation needed under a letter of credit is an invoice, a
transport document (such as bill of lading) and, where necessary, eg for a
CIF delivery, the insurance certificate (preferably not the insurance policy).
A packing list is commonly required. Some countries require Certificates of
Origin, but documentation beyond that should be kept to a minimum. The
more documents that are required, the greater is the risk of discrepancies
and therefore rejection of a presentation. All documentation requested

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should be in a format that can be evidenced on the face of the document


without further investigation.
We don’t like surprises
When the letter of credit is received it should be checked carefully – do not
file it until needed. If there are conditions that cannot be met then an
amendment must be sought. However you should bear in mind that not all
variations from the specimen in the contract will need to be amended; it will
often be the case that you will be able to live with them. Check with your
bank which errors, mistakes or ‘confusions’ in the letter of credit can be
resolved by clarification from the issuing bank.
If you have managed to negotiate in the contract that the costs of any
amendments are to be borne by the applicant, that is, the customer, then it
is more likely that the letter of credit will be issued correctly first time. On
the other hand, you might meet more resistance from the customer when
you do need an amendment.

How to Obtain Amendments


For those errors with which you cannot live you will have to liaise with the
customer and request him to instruct the issuing bank to issue an
amendment. It is at this point that you will feel the benefit of having
negotiated clear and precise letter of credit payment terms in your contract.
You are in a strong position with regard to your customer if you are requesting
an amendment to the letter of credit to bring it into line with the contract of
sale which he has signed. Conversely, if your contract lacks precision, you
may have greater difficulty persuading him that the amendment is
necessary.
Explain why without jargon
Think clearly about why the amendment is important to you. Normally the
reason is that without it you would be forced to submit discrepant documents
which would prevent you from being paid. Make this clear to your
customer.
Present a coherent and well-structured reason for the amendment.
Remember, your customer may not be an expert on UCP600, so explain the
rules to him if they are relevant to your argument.

For example, the letter of credit may stipulate 14 days for presenting documents follow-
ing shipment. Rather than just ask for 21 days, explain why you need the extra days,
the time it takes to prepare the documents, the time it takes your bank to check them
and the need for a few extra days to be able to correct any mistakes and re-present the
relevant documents, all within the 21 calendar day time-scale normally permitted by
UCP600.

By taking this approach you will improve the prospect that your customer
will co-operate with you. If, however, he does not you should think carefully
what his reasoning is and about the implications for you if the amendment
is not made. The decision in this situation is rarely to acquiesce with your
customer’s argument; you will probably have to dig your heels in and
continue to insist. You might be able to remind him that the contract states
it is not effective until the letter of credit is received, in terms acceptable to
you. Therefore delivery delays could occur which would not be subject to
any penalty payments since they would be a result of the unavailability of an
acceptable letter of credit.
Remember that English is possibly not your customer’s or his banker’s first

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language and spelling out the actual wording needed might avoid the
amendment needing amending.
Once the amendment arrives, the original document should be checked to
incorporate the amendment. The amended letter of credit should be treated
as a brand new letter of credit, and another meeting convened with the
involved parties. You need to know that everyone in your company who will
have contact with the letter of credit is content with it.

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Chapter 6 - Presentation of documents

Be prepared
This process should really start as soon as the letter of credit is received
when you examine it for errors and/or terms that would prevent you being
paid. For documents that are new to you, a certificate of conformance for
example, you should make sure that you could produce what the letter of
credit requires and with which the bank is happy.
About a month before the planned shipment date, prepare a list of all the
information and data in the letter of credit that each document will have to
include. Identify each piece of information or data with a heading such as
those listed below. Also, make a list of each document and indicate, heading
by heading, exactly what information is to be included.
For example, probably every document will have to have the details of you,
the beneficiary of the letter of credit. Therefore in the list include your
details, extracted from the letter of credit under the heading ’Beneficiary’,
and for each document in which your details have to appear, simply list
’Beneficiary’, together with the other relevant headings. Your customer will
be described as the ’Applicant’. Therefore include his details under that
heading. The list can be quite extensive but typically includes:
• Applicant
• Beneficiary
• Letter of credit number
• Letter of credit date
• Expiry date
• Shipping terms
• From Port/To Port
• Description of goods/services
• Abbreviated description of goods/services (agree with bank)
• Latest shipment date
• Contract number
• Unique wording required on specific documents including signatures
• Description of packing
If you work on the basis that every document except for the bill of exchange
will have details of the applicant, beneficiary, description or abbreviated
description of the goods, shipping terms, letter of credit number and date
and contract number, you can’t go far wrong – unless, of course, the letter
of credit contains specific provisions to the contrary.
Consistency is everything
Circulate this list to all departments/personnel in your company who are
responsible for preparing the different documents. With all personnel
working off exactly the same information, the risk of errors and inconsistencies
in documentation is very much reduced. Thus for example, you avoid your
company’s name as beneficiary being written in different ways in different
documents which would most likely result in discrepant documentation
being rejected by the bank. Working from an electronic document and using
“copy” and “paste” not only speeds up the process but also helps to
eliminate discrepancies. Your bank should be able to provide an electronic

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copy of the letter of credit which would help this procedure.


You should check with all involved that they understand and can comply
with the instructions. The engineer in the field (maybe literally) needs to
understand exactly what information he has to include in a site acceptance
certificate for example when he completes and presents it to the customer
for signature. He needs to know that it will not be the same as the previous
one because each certificate will probably require unique information. You
may find that it is helpful to develop your own checklist of documents that
may be required.
Checklist
Following is a list of the most common documents required. You should
refer to UCP600 in relation to documentary requirements. You should start
preparing these about a week before the shipment is due to leave your
factory.

Invoice
This document will include most of the core information taken from the
letter of credit. It will of course have your company’s details included, but
they must be as described in the letter of credit – refer to UCP600 Article
14j. The easiest way to accommodate this, bearing in mind that the
information may be slightly different for each letter of credit, is to design
your invoice based on computer spreadsheet software. It will also include
your customer’s details, again in accordance with the letter of credit and
UCP600 Article 14j.
The invoice will include most of the core information taken from the letter of
credit. It will of course have your company’s name included, which must be
exactly as described in the letter of credit and must be made out in the
name of the applicant, but when the addresses of the beneficiary and the
applicant appear in the invoice or any other stipulated document, they need
not be the same as those stated in the credit or any other stipulated
document, but they must be within the same country as the respective
addresses mentioned in the credit. Contact details (telefax, telephone and
the like) stated as part of the beneficiary’s and the applicant’s address will be
disregarded (Article 14j of UCP600).
The full description of the goods and services to be provided is very
important. Some letters of credit have a very brief description, others
include almost everything. Some descriptions can be lengthy to say the
least, but the solution is not to abbreviate it, but to use a smaller font size.
The invoice must also show the shipping terms. If the letter of credit states
’shipped on board UK seaport’, when you draft the invoice you must state
the name of that seaport.
The invoice should also contain the shipment value. This may be required
by your importer for customs duty purposes and you may require it if one of
the documents to be presented is an insurance certificate. If its value will
be a percentage of the shipment value then that value must be clear in your
documentation.

If your standard invoice includes your company’s normal payment terms, e.g. payable
at 30 days yet the letter of credit says you will be paid at sight (on presentation of your
documents) then you would do well to delete any reference to the 30 day terms as it
might create confusion.

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Bills of lading/air waybills/road transport documents


These documents are prepared by the carrier or your freight-forwarder.
They will usually work from a copy of the letter of credit but it is strongly
recommended that they be included in the distribution list for the information
you extracted earlier from the letter of credit and be requested to use that.
Most freight-forwarders will be happy to co-operate. They have a lot of
experience in completing shipping documents for letters of credit, but you
must remember that each letter of credit is different and each bank will have
its own particular preferences for how certain information is presented and
you must be guided by the bank, not the freight-forwarder. It is, after all, the
bank that will pay you.
Ask the carrier or freight-forwarder to prepare a draft document for you to
check before the shipment takes place. You may find a number of
discrepancies, some quite small. Have them changed. Leave nothing to
doubt.
Make sure the carrier has your details (you are the Shipper on this document)
and the Applicant’s details exactly right, also the goods description. The
Applicant on the bill of lading or air waybill is usually the ’Notify Party’. For
this document and all others except the invoice you can use the abbreviated
description of goods and services if the original is rather long. However, ask
your bank to confirm that it will accept the abbreviation before you distribute
it to everyone.

When the actual document is issued following shipment, make sure that if the freight is
payable at destination then the freight charges have been printed in the correct box, ie
not the freight pre-paid box.

Letters of credit often state that the bill of lading should show ‘Consignee:
to order’. That means that each of the (typically 3) original bills of lading
must be endorsed in blank on the reverse by the ‘order’ party – with the
company rubber stamp and a signature. Bills of lading issued ‘to order’
without a named party are really issued to the order of the shipper or
consignor (as detailed on the bill of lading) and need to be endorsed by the
same party. This would not be a requirement for air waybills or road transport
documents.

Bill of lading
A bill of lading is a document of entitlement to the goods and a transport
document issued by the carrier (or his agent) or the master of the vessel (or
his agent) evidencing a contract for the carriage of goods from one port to
another. For it to be accepted by the banks it must be strictly in accordance
with the terms of the letter of credit and:
• contain the terms of carriage
• indicate that the goods have been loaded on board a named vessel
• indicate the port of loading
• indicate the port of discharge
• be presented in full (generally 3 out of 3 originals) and include the
number of non-negotiable copies called for by the letter of credit
• indicate the name of the carrier
• not carry a notation regarding damage
• be signed by :

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– the carrier or
– the carrier’s agent or
– the master or
– the master’s agent
(if the letter of credit specifies who is to sign the bill of lading the
documents will not be accepted by the bank – and the exporter will not
be paid – unless the bill of lading carries that signature)
The most common discrepancies relating to bills of lading tend to be:
• the bill of lading does not either state that the issuer is the carrier or
clearly name the carrier
• consignee’s name not as specified on the letter of credit
• party to be notified of arrival of goods not as specified on the letter of
credit
• port of loading not as specified on the letter of credit
• port of discharge not as specified on the letter of credit
• transhipment allowed when prohibited by the letter of credit (except
where containerised)
• transhipment allowed and the bill of lading does not cover the entire
route
• merchandise description is inconsistent with the letter of credit
A bill of lading will be regarded as discrepant and thus not complying with
the requirements of the letter of credit if:
• there is no ’on board’ notation (that is, the goods are loaded on board)
when required
• the ‘on board’ notation is not dated when required to be dated
• the ‘on board’ notation is dated after the last shipment date allowed
• there is no evidence freight has been paid, when required
• the goods are shown to be shipped ‘on deck’ (unless allowed by the
letter of credit)
• there is a clause or notation that expressly declares a defective
condition of the goods or their packaging ie an unclean bill of lading
• a full set of signed originals is not presented where required

Air waybill
An air waybill is a transport document issued by the carrier (or his agent)
evidencing a contract for the carriage of goods from one airport to another.
It differs from a bill of lading in that it is not a document of entitlement to the
goods. Whereas your customer should be required to present to the master
of the ship an original of the bill of lading in order to gain possession of the
shipped goods your customer will not need to present an air waybill to take
possession of the goods from the airport.
For it to be accepted by the banks it must:
• contain the terms of carriage
• indicate that the goods are accepted for carriage
• indicate the airport of departure
• indicate the airport of destination

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• indicate the name of the carrier


• indicate the actual date of issue (this date will be taken as the date of
shipment unless an actual date of shipment is noted)
• be signed by the carrier or the carrier’s agent

Road transport document


This is a receipt for the goods taken for carriage by road. It is not a document
of title, nor is it negotiable. The following should be shown:
• name of the carrier
• either
o the signature of the carrier or of his agent, or
o an indication of receipt of the goods by signature, stamp or notation
• the date of shipment or the date the goods have been received for
shipment
• the place of shipment and place of destination
It must appear to be the original for the consignor or shipper or bear no
marking for whom it has been prepared.

Packing list
This document may require some statement that the packing meets certain
standards. This will be referred to in the letter of credit and a good rule of
thumb is to incorporate precisely the wording from the letter of credit into
your statement. Make sure the list includes the container/reference details
the freight-forwarder included in the shipping document.

Also, very importantly, make sure that if you have used a spreadsheet for this docu-
ment because of the need to show weights and sizes, you have not fallen victim to the
rounding up trap! If you have weighed your boxes in pounds but included a formula
to convert to kilos, make sure that any rounding up the formula does for you does not
result in the total weight being different from the total if you were to simply add up the
numbers printed out on the packing list. Even a discrepancy of 1 kilo, no matter how
heavy the overall shipment may be, will result in a discrepancy.

Check that the weights and number of packages shipped shown on the
shipping documents are the same as the packing list.
Make sure the numbering of each package is sequential and that for some
reason you have not inadvertently missed out or repeated a number.

Inspection Certificate
This document may have to be prepared by an independent inspection
agency, such as Cotecna or SGS, as a requirement of the contract. The
requirement is likely to arise from the customer’s wish to know that what is
said to be shipped is actually the goods which have been ordered. When
selling to some countries the customer will wish to have the goods inspected
to ensure that they have not been over-priced. The inspection agency may
need to examine your company’s books to check the mark-up on bought in
goods. This sort of inspection should not be left until the time of shipment.
It is best to get price comparison documentation agreed early. Care should
be taken that the inspection agency has the required wording well in
advance, as the wording of the certificate must comply with the terms of
the credit. In particular:

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• the certificate should state exactly the scope of inspection as stated in


the letter of credit
• it should be signed by the inspector or his representative
• the date of inspection should be stated as prior to or the same as the
date of shipment (for a pre-shipment inspection)
• banks’ views may vary here, but some will require that it should be
‘clean’, ie the goods must pass the inspection in all respects and there
should be no notations on the certificate

Acceptance test certificates


These can come in various guises and are commonly required for
manufactured goods that must be subjected to some form of testing
procedure to demonstrate performance, reliability, output etc.
In addition to the core information extracted from the letter of credit, these
certificates will have to include wording covering the test or acceptance
procedure. The letter of credit may specify the words required and they
should be incorporated in the certificate.

Thus, if the letter of credit says ‘..certificate showing that goods have been tested in
accordance with the contract…’, this phrase must be part of the certification.

Check carefully that the certificate is issued and signed in accordance with
the letter of credit. For example, if the letter of credit requires that the
certificate be issued by the importer and/or end-user, then the certificate
should not be printed on your company note-paper. Since the letter of credit
will require that your customer signs it, it is safer to put his name at the top
of the certificate. If an end-user/end-buyer is identified, then their name
should be there as well as in the core information in the certificate.
If a certificate has to be signed by the importer or end-buyer and is therefore
not under your control, when it is returned to you, check for any errors that
may have crept in. These could create a discrepant document which would
not be accepted by the bank. Remember the risks of late presentation or
presentation of non-compliant documents which this arrangement can
involve.
It should be remembered that if the customer or his agent has to produce a
document in order for you to be paid you are effectively granting open
account payment terms to the customer. You are putting the customer in
the driving seat in the transaction, introducing the very risk that the letter of
credit is designed to avoid.

Certificates of quantity/quality
Again, when you prepare these certificates, use the exact wording from the
letter of credit in order to avoid producing a document which might be
rejected by the bank.

Certificate of origin
This is normally a relatively straightforward document, unless it has to be
notarised or consularised by an Embassy, usually in London. Its purpose is
to declare the country of manufacture of the exported goods to the client
and/or the receiving country’s customs officials. Not all letters of credit
require such a document but when this document is called for special care

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should be taken to ensure that you are able to comply with the rules and
regulations of the receiving country’s authorities. This will have been
considered when you first examined the letter of credit. If that is the case
you should have ascertained how long the process takes to ensure the
certificate is back in your hand, in good order, and in time to present to the
bank. It is usually prepared by the exporter, but may need to be certified by
the exporter’s Chamber of Commerce or another specified Chamber of
Commerce and legalised by the appropriate Embassy. The issue here is not
usually one of content but, in the case of consularisation, one of time;
opening times and overseas public holidays can be important elements
here.
The main points to remember, as always, are the importance of including
the core information from the letter of credit, and, most likely with this
certificate, for the signatory to be the manufacturer. In most cases that will
be you the exporter, the letter of credit Beneficiary. Therefore your details
on this document should be titled: ‘Beneficiary and Manufacturer’ and after
the name of your company, above the authorised signature of the company,
it is wise to print ‘manufacturer’.
Particular difficulties with Certificates of Origin can be:
• the certificate of origin must generally be certified and legalised in the
manufacturing country (this may not be the exporter’s country) and the
Chamber of Commerce of the manufacturing company may not be
prepared to certify the certificate in the name of a UK company
• the cost of such a document may be prohibitive, and such costs should
be taken into consideration at the time of quotation
• the time required to certify and legalise a certificate can be several
weeks; it therefore should be prepared well in advance of shipment
• the certificate may need to be translated into a foreign language
• the exporter should be aware that the certificate may require that the
manufacturer’s name needs to be divulged

Insurance certificate/policy
It is the exporter’s duty to insure the shipment when the terms of delivery
as defined in Incoterms 2000 are CIF or CIP. The insurance document may
be the actual policy or, preferably from the point of view of the exporter, a
certificate of insurance. For it to be accepted by the banks it must:
• appear to be issued and signed by an insurance company, an
underwriter or agent or proxy
• be presented in full
• be dated no later than the date of shipment, unless it appears from the
document that the cover started from a date no later than the date of
shipment
• indicate the amount of coverage
• be in the same currency as the letter of credit
• if the letter of credit does not specify the value to be insured, cover at
least 110% of the CIF or CIP value of the goods (if the CIF or CIP value
cannot be determined then cover should be for at least 110% of the
invoice value or 110% of the amount of the drawing, whichever is
greater)

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The most common discrepancies relating to insurance documents tend to be:


• it is not issued by an insurance company or underwriter – a cover note
is unacceptable
• the currency of insurance is not as shown on the letter of credit
• the merchandise description conflicts with the letter of credit
• port of loading not as shown on the transport document and
inconsistent with the letter of credit
• port of discharge not as shown on the transport document and
inconsistent with the letter of credit
• the effective date of coverage is later than shipment (on board date,
taken in charge date, etc.)
• if the letter of credit calls for all risk (any ‘all risk’ notation is acceptable)
and ‘all risk’ notation is missing
• if the letter of credit states that the insurance must be issued
irrespective of a franchise (deductible), insurance document is subject
to a franchise or excess deductible
• it is inconsistent with other documents (marks and numbers, weight,
etc.)
Be sure that the cargo insurance provides the cover required by the letter of
credit. Cargo cover is standardised under Institute Cargo Clauses A, B and
C. ICC A is ‘All Risks’ while B and C are limited perils only. Cover may be
required for additional perils. Many letters of credit used to facilitate
payment for exports to non-OECD countries use out of date terminology for
cargo insurance. Instead of using internationally defined Institute Cargo
Clauses A, B and C, the bank clerk drawing up the letter of credit may
instead list a host of specific risks (that are in fact included in the ICC
clauses). If you are using a means of transport that allows for transhipment
and a wait at an overseas port, be sure that your insurance allows for this.
Remember that even though you may have arranged insurance to comply
with the requirements of the letter of credit, this may not cover your
exposure to the risk of loss in transit or in storage. You should seek
professional advice concerning your risks and the extent of your cover.
Many exporters buy ‘shippers interest’ and ‘stock throughput’ cover in
respect of their own exposures.
A final point: a policy is acceptable in lieu of a certificate, but not the other
way round. Don’t forget that a cover note will not do.
Bills of exchange
The letter of credit will sometimes call for bills of exchange. If the letter of
credit does not specifically state ‘sole’ bill of exchange, then you can assume
that two bills should be drawn.
Original/copy documents
Books have been written about court cases devoted entirely to arguing
about whether or not documents submitted were original or copies. Whilst
life is more complicated now with many documents computerised and as
many ‘copies’ being printed as takes one’s fancy, there is in fact a simple
rule, which if followed, should avoid any problems for you.
If the letter of credit asks for three original and three copy invoices, print six
invoices, all identical and with a red ink rubber stamp, stamp three of them
in large letters at the top ‘ORIGINAL’ and the other three stamp ‘COPY’.

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Sign each invoice with an original signature (and all other documents where
appropriate), for and on behalf of [name of your company].
This way, there is absolutely no doubt whatsoever what is an original and
what is a copy. Apply the same procedure to certificates and packing lists.
Bills of lading, air waybills and insurance certificates are already printed
‘original’ or ‘copy’. Bills of exchange are either ‘sole’ or issued as a pair, so
‘original’ and ‘copy’ do not apply.
The letter of credit will often call for different numbers of originals and
copies for each document. Just because three original invoices are needed
does not mean to say three originals of every other document will be
required. Life is not as straightforward as that.
UCP600 is quite good when it comes to originals and copies. Article 17
says:
• at least one original of each document required by the letter of credit
must be presented to the bank
• unless the document indicates that it is not an original a bank will treat
it as an original if
o it bears an original signature, stamp or mark of the issuer of the
document; or
o it appears to be written, typed, perforated or stamped by the issuer
of the document; or
o appears to be on the issuer’s original stationary; or
o states that it is original, unless the statement appears not to apply to
the document
• originals can be presented in lieu of copies
• if the letter of credit requires presentation of multiple documents eg ‘in
duplicate’ then at least one original with the remainder in copies will be
accepted, unless the document itself indicates otherwise
Shipment date
By the time the day for despatch arrives, although you will not have the bills
of lading or the air waybill, you should have collated all other documents.
You should by now have checked each one several times, and you should be
perfectly happy that you would be able to submit compliant documents to
your bank.
A word of warning about the issue of the transport documents. Check with
your shipper that they will be released immediately following shipment, ie
within 48 hours. Check whether or not you will be required to pay any
freight, storage or other costs before the documents are released. The
shipper or freight forwarder may have a lien on the goods until the charges
are paid. The freight-forwarder should release the documents to you
promptly but, as always, it is you, the exporter, who has the principal interest
in assembling and presenting the set of documents, and your goods are
already on their way to the customer (or if sent by air, they have probably
arrived).
Documents should be checked against the letter of credit and UCP600. If
they comply with the terms of the letter of credit and are consistent with
each other then they can be presented to the advising/confirming bank. It is
desirable to have two independent checks within your company before
presentation. It is surprising how often we read what we want to read –

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the cost to your company if the presentation fails because of an oversight


will be much more than the cost of an employee’s time in carrying out the
second check.
Presenting documents to the bank
As soon as possible after the shipment date, collate all the documents and
advise your bank you will be presenting them within the next 48 hours.
Send them to the bank with a covering letter listing every document required
by the letter of credit including the numbers of originals and copies, and do
not forget to include also the original letter of credit and all amendments.
Request the bank to advise that documents are either in order or discrepant
(and if discrepant, how) so that you can take the necessary steps to correct
the errors and send replacement documents.
Remember, the clock is now ticking. Even if you succeeded in negotiating
the full 21 calendar days allowance for presentation, a few days will already
have passed, and the advising/confirming bank is allowed to take up to a
maximum of five working days to check the documents. If the documents
are not in order, you could have only a few days to sort the problem out.
Compliant documents (not just the first presentation) have to be presented
within the time period allowed, and within the validity of the letter of
credit.
Every day of delay now means a day when the proceeds will not be in your
bank account.
Other general points:
• The gross and net weights on each type of document should tally
• Any arithmetic (eg adding weights) has to be accurate
• Each document type must show the same number of packing cases
and be marked as directed in the letter of credit
• Any bills of exchange may need (according to your company’s rules) to
be signed off by an authorised signatory for your company. It is
important to know the whereabouts of the authorised signatories so
that you do not need to wait for their return from business trips in
order to obtain their signature

Common pitfalls
Multiple shipments
In the past, mistakes crept in where each document was typed out
individually (with carbon paper). Technology has moved on and the facilities
available now allow the same set of information to be used in a variety of
documents. This means that multiple shipments should not now be a
problem; in fact if the first shipment was drawn satisfactorily, confidence
builds that the subsequent shipments will also be paid for. However it can
be easy to forget to change the weights for each shipment, the values, flight
numbers etc.
Letters of credit issued in Taiwan frequently have liquidated damages
clauses – if shipment is later than the dates stated in the letter of credit,
then damages apply. These are deducted from the payment made to the
beneficiary. You may be able to have this clause deleted if liquidated
damages do not form part of the contract of sale.
Inspection agency
If there is an appreciable time between the letter of credit being issued and

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the date of shipment it is possible that your customer may have stopped
using the inspection agency by the time you are ready to ship. In these
circumstances your customer may not have remembered to have the letter
of credit amended to remove the requirement for an inspection certificate to
be presented with the other documents; in that case you will be caught by
the letter of credit requiring a document which the customer no longer
wants and which you are incapable of providing. If the letter of credit is not
amended your presentation of documents without the certificate would be
regarded as discrepant.

Letters of credit issued in Taiwan frequently have liquidated damages clauses – if ship-
ment is later than the dates stated in the letter of credit, then damages apply. These
are deducted from the payment made to the beneficiary. You may be able to have this
clause deleted if liquidated damages do not form part of the contract of sale

Advance payment bonds


If your contract is structured so that you are required to deliver a bond in
order to draw down from a letter of credit the advance payment that makes
a contract effective, you need to be sure that you can produce the bond in
compliance with the letter of credit. They often have reduction mechanisms
providing for the value of the bond to be written down in proportion to the
value of goods delivered.

It took one major British exporter nearly two years to get his customer to agree to the
removal of an inspection certificate from the list of documents to be presented for pay-
ment following the customer deciding not to continue to use the inspection agency.

Partial payments
If your contract includes, say, a 20% advance payment or stage payment,
clearly your invoice on despatch of goods will be for the 80% of the value of
the goods. The letter of credit should allow for this. If terms of delivery are
CIF or CIP, the insurance certificate will, none-the-less still show 110% of
the value of the goods.
Advance payments
These should be deducted from each invoice proportionately.

If you are being paid out of a letter of credit issued by the same bank that issues the
contract bonds then that payment mechanism can provide a useful method of notifying
the bank of the shipment and the reduction in the value of the bond that is required.

Geography
Your shipping department or forwarding agent will be able to advise on the
extent of each port.

For example, the ‘Port of London’ covers a number of different ports. It extends to
Southend Pier. If your goods are loaded downstream of Southend Pier, they will not be
deemed to have been loaded in the Port of London.

Packages are not cases


Documents may not be accepted by the bank if, for example, on the invoice
you list 534 packages and on the packing list 534 cases, even if the weights
and contents are clearly the same. Consistency is everything.
If you can’t present documents in order within the deadline, your bank will
ask whether you wish to have the documents returned to you or to have the
bank send the documents to the issuing bank on a ‘collection basis’. In that
case you have lost any benefit of security of the letter of credit or any
confirmation. Also, your credit insurance would not respond in the event of

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loss because you will effectively be changing from letter of credit terms to
open account terms after contract signature.

Summary
• Start preparing for presentation of documents well in advance of the
planned shipment date
• Extract from the letter of credit all relevant core and specific
information to be included in each document
• Distribute this list to all relevant personnel in your company and to your
freight-forwarder. Check for any queries or problems
• Ensure each document is prepared strictly in accordance with your
instructions
• Liaise regularly with your bank for clarification and recommendations
as to how to present the information in the documents to ensure they
will be in order when presented
• Advise your bank when you expect to present the documents to them
• Present documents to the bank under a covering letter listing all
documents in the order they are listed in the letter of credit. Include
the original copy of the letter of credit and any amendments

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Chapter 7 - What to do if presentation fails

Don’t panic!
The chances are that if you have followed the earlier guidelines, any
discrepancy will be minor and easily rectifiable. Re-issue the document with
the correct number of originals and copies, signed and re-submit.

IWhatever you do, do not tear up any documents if they are incorrect. This advice ap-
plies especially to the bills of lading in view of the fact that they are documents of title.

If the bill of lading or air waybill is discrepant, call your freight-forwarder,


explain the problem to him and get agreement to issue replacement
documents. There may be a small charge and you will be required to return
the original documents. This will normally involve the use of couriers but
provided the distances are not too great, a change of documents can be
achieved in 24 hours. Liaise with your bank so that the exchange of
documents can take place directly between the bank and the freight-
forwarder to save time.
The only document with which you are likely to have a real problem is a
certificate that has been signed by your customer or an end-buyer. You
would have to send it out by courier for re-signature and return within the
timescale allowed under the letter of credit. Provided your customer co-
operates this could be feasible within a 21 day time limit.
There is the possibility that your bank may feel the discrepancy simply
requires a clarification from the issuing bank, although such problems should
have been identified and dealt with much earlier in the process. This
alternative course of action would only be relevant in the event it were not
possible for you to correct the error yourself. The risk is that the issuing
bank either does not respond in the required timescale or does not give the
reply you need.
In the event that documents are discrepant and cannot be remedied, the
advising/confirming bank will ask if you are content for them to send them
to the issuing bank on a collection basis. In such circumstances, you should
immediately contact your customer and explain the discrepancy. You should
emphasise that you have shipped the goods as required under the contract
and that you are not in breach of the contract but because of the discrepancy
– it could be a word or phrase omitted from a document – you cannot be
paid unless your customer instructs the issuing bank to waive the
discrepancy, which you are requesting him to do.
The risks in this situation are twofold. Firstly, by sending the documents to
the issuing bank, it too has up to a maximum of five working days to check
them and may claim more discrepancies than the UK bank identified.
Secondly, your customer may not be in a great hurry to pay you and now has
the opportunity to use this to his advantage to extract some concession or
other out of you.
Whilst you would hope your customer would not have access to any goods
sent by sea, (the bills of lading now reside with the issuing bank), things do
not always go according to plan and he may be able to get hold of the goods.
Of course he may not actually be interested in buying them any more. If the
shipment is a commodity and the price has dropped, he may want to find an
excuse not to pay you and buy elsewhere at a reduced price. You will also
need to address the cargo insurance for the goods. Normal transit cover

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may have terminated on arrival at the overseas port.

Summary
• Don’t panic!
• Organise replacement documents as quickly as possible, remember
the limitations in the letter of credit regarding its expiry date and the
period for presenting documents
• Can the problem be sorted with a clarification from the issuing bank?
• If a waiver from your customer is necessary explain the full facts and
seek his co-operation.

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Chapter 8 - And finally, commercial realities … … …


Having offered what we hope is valuable advice in the matter of documentary
credits, this final chapter will suggest that it is sometimes necessary to
break the rules. When dealing with letters of credit we recognise that they
are designed primarily to assist the exporter to secure payment and to assist
the free flow of trade. However, we must not lose sight of the fact that they
are designed as a facilitator of trade, and that they should never become an
impediment to it.
Our competitors in Europe and the rest of the world are always keen to
erode our market share, just as we seek to appropriate some of theirs. You,
the UK exporter, have overcome this very stiff competition and won an
export order - now you should do everything you can to make the
documentary credit system work for you.
This may mean that it is necessary to compromise in particular areas but
while doing so be careful not to give up your security of payment. Best
practice is not always the only option, as long as we can cover ourselves and
ensure that we are not putting our company at risk.

UK confirming banks v European confirming banks


Presenting documents at the counters of a bank in the UK is probably the
most desirable method of getting paid under a letter of credit. However, we
should not be put off if a letter of credit is advised through a reputable bank
in Europe. If the advising bank happens to be in Switzerland for example,
this may be for a number of reasons: the customer or the customer’s
country may have exceptional relations with the bank in Switzerland, or the
Central Bank of your customer’s country may have large deposits or excellent
credit lines with the Swiss banks. If we go by the rulebook, the advising
bank in Switzerland would have to advise the letter of credit to your chosen
bank in the UK, who would then add their confirmation. This adds one more
bank to the chain which firstly means that there will be an added cost to the
transaction, but secondly also means that there is one more party to work
through and the exporter is one more step away from the heart of the
transaction, that is, the customer.
Some banks have niche roles in niche markets, and you can benefit from
their understanding of your customer’s country. They will know the person
to call at the opening bank by name; they will recognise the nuances of the
banking practices in that country, and will be able to help you if you have a
problem. This information may not be available with a UK based bank. The
reputable bank on the continent should not be avoided simply because it is
a flight away (subject, of course, to the margin on your contract bearing the
additional cost). Documents can be hand carried if there is a time constraint,
and most European banks will welcome meeting you face-to-face.
Niche markets often require a niche service, and if you can’t find it in London,
consider looking for it elsewhere. If a German bank commonly handles
letters of credit for a particular country, you may find its pricing is more
competitive. In the case of all non-UK banks, using a London branch can
help to ease problems of administration.

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Letters of credit and contracts


We would all like our letters of credit to match precisely the contract terms
we have negotiated. Unfortunately this is not always possible. In some
countries, it is not the practice to sign contracts. Your proforma invoice
coupled with the letter of credit may constitute the contract. The wording
of the letter of credit is often a standard format which must be accepted,
rejected or subsequently amended. In these cases, the likelihood of the
letter of credit matching the exact terms of the contract or proforma invoice
is very small.
This raises the question: does the exporter go back to the customer and ask
for three pages of amendments, or does he go back and ask for three critical
amendments and otherwise work within the framework of the letter of
credit as written? Think carefully about the message that the former can
send to the customer: rigidity, pedantry, lack of acceptance of the country’s
accepted methods of doing business, mistrust. Is this really what you want
to say to your customer? Is this the way your competitors deal with the
letters of credit they receive, or are you going to be perceived as a suspicious
hair-splitter? Consider what your competitors are offering to the customer
– they may have been supplying to that customer for many years and be
willing to accept many of the terms that ordinarily you do not accept; where
will the customer place his next piece of business?
The root of the problem for the exporter often lies with the doctrine of
absolute compliance which is implemented with vigour by the banks. If the
bank is going to split hairs on the wording of the letter of credit the exporter
may have no choice and can explain this to his customer. It can be worthwhile
to query a bank’s unfavourable interpretation of the wording by escalating
the problem up the bank’s management chain.

Complicated documents
Do not take flight in the face of adversity. If your letter of credit looks more
like War & Peace than the short and succinct payment instrument you were
expecting, do not view it negatively. Certain markets expect you to comply
with various documentary requirements which are accepted by experienced
exporters to that country. In order to be an acceptable and competitive
supplier, you might need to fall into line with that country’s accepted
practices. There are several steps that can be taken to ensure that your
documentary presentation will not fail:
First
Ask the advising/confirming bank to check the terms of the credit. If they
are familiar with the market, they will be able to point out any notable
peculiarities of which the exporter should be aware, and advise you on the
conventions of that particular market. If there are any obvious amendments
that will be required, your bank should advise you (eg marine bill of lading
showing goods delivered to Kitwe, Zambia - a landlocked country).
Second
Show the letter of credit to your shipping line or freight forwarder and instruct
them to check its terms and conditions thoroughly and to draft a rough bill of
lading in accordance with its terms. This will focus them on the documentary
requirements, and they will soon tell you if there is anything they can’t put in
the bill of lading that is required by the letter of credit.
Third

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At an early stage, draft each document as required by the letter of credit.


Check that they match the terms of the letter of credit, and then check that
they match each other. If documents are required from third parties such as
bills of lading or inspection or insurance certificates, ask the relevant parties
to draft the documents (using the text of the letter of credit that you will
have sent to them); check them to be in accordance with your requirements,
have them amended if necessary, write in all the areas on the copies where
you expect the documents to be stamped and dated (eg on the draft
certificate of origin or on the bill of lading), and have a “dress rehearsal”.
Send them to the bank for checking on a “without responsibility” basis.
They will probably charge you for this service, but it will be well worth the
money.
By holding a ‘dress rehearsal’, each party will know exactly what their
document needs to look like, the bank can see what each document is going
to look like and can point out any areas which need attention, eg ensure that
the bill of lading is endorsed, or any other requirement that the bank may
feel should be addressed before the actual preparation and presentation of
documents. The exporter may be preserving his integrity in front of the
customer in several ways: not asking for a ream of amendments is a good
test passed; getting a documentary presentation right first time is much
appreciated, since the acceptance of discrepant documents invariably
means that the exporter is expecting a person who works for the customer
to take personal responsibility that the exporter has indeed supplied
correctly, which may not be appreciated at all. Worse, the customer may
have to have a board or committee meeting to decide whether to accept the
discrepant documents.
Not only do these factors affect the decision-making process of the
customer, and the prospect of the exporter obtaining future orders, but of
course, they can disrupt the exporter’s cash flow. These can be overcome,
99 times out of 100. Good preparation and information is the key – use the
organisations around you, particularly the confirming bank and your shipping
line.
Remember that whilst the letter of credit is primarily a financial instrument,
it is designed to facilitate the commercial relationship between the exporter
and the customer.

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Appendix 1 – A checklist
The initial checking should be undertaken when the letter of credit arrives.
It is important to go through it line by line. You should consider the
following:
• Does it comply with the contract?
• Does its validity period and your calculation of timings for production,
shipment/delivery, inspection, production and examination of
documents match?
• Is the latest shipment date acceptable and are partial shipments
allowed?
• Where is payment to be made? At the advising/confirming bank’s
counters in the UK, or at the opening bank’s counters abroad? Do you
have to present documents in the UK or at the counters abroad?
• Who pays for extensions/amendments to be made to the letter of
credit?
• Is your company’s name correct?
• What are the documentation requirements? Are you able to meet
these, and at what cost? Are all the required documents within your
control? If not, how will you manage their preparation?
• Are particular markings required on cases?
• Loading port, off-loading port – are these physically possible? Are you
manufacturing/sourcing from several locations?
• Are the definition of delivery, the mode of transport and the documents
needed in accordance with the obligations as defined in Incoterms
2000?
• Drafts – are these needed? Sole or in duplicate? Drafts need to be
drawn in accordance with the provisions contained in the letter of
credit. Are they required to be endorsed?
• Is payment to be made on sight of documents, or is it to be made at
some point in time from the ‘on board date’? If it is deferred, who
retains the draft (if there is one) and represents it for payment at
maturity?
• Is anything required to make the letter of credit operative, e.g. bonds/
guarantees?
• When and where is the letter of credit payable?
• Is the opening bank a good risk, and its country a good risk? Where
there is a concern about the opening bank or the potential for a
shortage of foreign exchange, it is wise to seek confirmation from a
bank local to you.
• Do the terms of the letter of credit comply with the requirements of
your credit insurance? Does your credit insurer need to agree the
opening bank?
• Do you fully understand what the letter of credit says? If not, ask.

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Appendix 2 - Swift Codes


This is a short explanation of the rather odd numbers that you will see in
many letters of credit as they are advised to you by your bank.

Field number Field name Definition


27 Sequence of If only one message has been sent: 1/1
total If several messages have been sent:
1/3, 2/3, 3/3 etc
40A Form of Specifies the type of letter of credit
documentary
credit
20 Documentary The reference which as been assigned
credit number by the sender eg 20:Z87654/IMP
23 Reference to If the letter of credit has been pre-
Pre-Advice advised, this field must contain the
word PREADV followed by a slash ‘/’
and a reference to the pre-advice (eg
the date)
31C Date of Issue Specifies the date on which the issuing
bank (the sender) considers the letter
of credit as being issued. The absence
of this field implies that the date of
issue is the date on which the
message is sent
31D Date and Place Specifies the latest date for
of Expiry presentation under the letter of credit
and the place where documents must
be presented
51a Applicant Bank Specifies the bank of the applicant
(your customer), if different from the
issuing bank (the sender)
50 Applicant Specifies the party on whose behalf
the letter of credit is being issued (your
customer)
59 Beneficiary Specifies the party in favour of which
the letter of credit is being issued (the
exporter)
32B Currency Code, Contains the currency code and
Amount amount of the letter of credit eg:32B:
CHF100000
39A Percentage Specifies the tolerance relative to the
Credit Amount letter of credit amount as a percentage
Tolerance plus and/or minus that amount. The
first subfield specifies a positive
tolerance, the second subfield specifies
a negative tolerance eg:39A:02/02
39B Maximum Credit Further qualifies the letter of credit
Amount amount by using one of the following
terms: ‘UP TO’, ‘MAXIMUM’ OR ‘NOT
EXCEEDING’

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39C Additional Specifies any additional amounts


Amounts covered, such as insurance, freight or
Covered interest
41a Available With … Identifies the bank authorised to pay,
By … accept or negotiate the credit by its
Bank Identifier Code or name and
address. It will be followed by how the
credit is available - one of the following
terms must appear in the second
subfield:
BY PAYMENT
BY ACCEPTANCE
BY NEGOTIATION
BY DEF(ERRED) PAYMENT
BY MIXED PYMT
If the credit is to be freely negotiable
by any bank, Option D ‘any bank in
..(city or country)’ will be used
42C Drafts at … Specifies the terms of drafts to be
drawn under the letter of credit.
Eg:42C:Draft at 120 days from Bill of
Lading date
42a Drawee Identifies the drawee of the drafts to
be drawn
42M Mixed Payment Specifies the payment dates, amount
Details and/or method for their determination
in a letter of credit which is available by
mixed payment (related to field 41a)
42P Deferred Specifies the payment date or method
Payment Details for its determination in a letter of credit
which is available by deferred payment
only (related to field 41a)
43P Partial Shipments Specifies whether or not partial
shipments are permitted
43T Transhipment Specifies whether or not transhipments
are permitted
44A Loading on Specifies the place of dispatch or
Board/Dispatch/ taking in charge of the goods or loading
Taking in Charge on board
at/from…
44B For Specifies the final destination of the
Transportation to goods

44C Latest Date of Specifies the latest date for loading on
Shipment board / despatch / taking in charge
44D Shipment Period Specifies the period of time during
which the goods are to be loaded on
board / despatched / taken in charge

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45A Description of Contains a description of the goods


Goods and/or and/or services.
Services
46A Documents Specifies the documents required
Required under the letter of credit. When the
ultimate date of issue of a transport
document is specified, it is to be
specified with the relative document in
this field
47A Additional Specifies any additional conditions that
Conditions will apply to the letter of credit
71B Charges This field may only be used to specify
charges to be borne by the beneficiary.
In its absence, all charges, except
negotiation and transfer charges, will
be borne by the applicant.
The code words listed below may be
used, followed by the currency code
and amount:
/AGENT/ Agent’s commission
/TELECHAR/ Teletransmission
charges
/COMM/ Our commission
/CORCOM/ Our correspondent’s
commission
/DISC/ Commercial Discount
/INSUR/ Insurance Premium
/POST/ Our postage
/STAMP/ Stamp duty
/WAREHOUS/ Wharfing and
warehouse
48 Period for This field specifies the period of time,
Presentation expressed in number of days, after the
date of the issue of the transport
document(s) within which the
documents must be presented for
payment, acceptance or negotiation.
The absence of this field means that
the presentation period is the usual 21
days

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49 Confirmation Contains the confirmation instructions


Instructions for the receiver as follows:
CONFIRM: The receiver is
requested to confirm
the credit
MAY ADD: The receiver may add its
confirmation to the
credit
WITHOUT: The receiver is not
requested to confirm the
credit
53a Reimbursement Specifies the name of the bank which
Bank has been authorised by the sender to
reimburse drawings. With the
exception of a letter of credit valid for
negotiation, if there is a single direct
account relationship, in the currency of
the letter of credit, between the sender
and the receiver, the absence of this
field 53a means that this account
relationship will be used for
reimbursement
78 Instructions to Instructions to the receiving bank
the Paying/
Accepting/
Negotiating Bank
57a ‘Advise Through’ Specifies the name of the bank, if
Bank different from the receiver, through
which the letter of credit is to be
routed / advised / confirmed to the
beneficiary
72 Sender to Any information between sender and
Receiver receiver
Information
Notes
1) Either field 39A or 39B, but not both, may be present.
2) When used, fields 42C and 42a must both be present.
3) Either fields 42C and 42a together, or field 42M alone, or field 42P
alone, may be present. No other combination of these fields is
allowed.
4) Either field 44C or 44D, but not both, may be present.

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Appendix 3 - Contact details

BExA
The British Exporters Association is an independent trade association
representing all sectors of the export community. Established in 1940 as
the National General Export Merchants Group, it became the British Export
Houses Association in 1961. With the admission of manufacturers into
membership, it assumed its present name in 1988.
Membership is open to all companies and other organisations resident in
the United Kingdom who export goods or services, or who provide assistance
to such companies in the promotion and furtherance of export activities.
The Association
• lobbies for exporters at Westminster and in Brussels
• influences the decision makers
• provides an information exchange for members
• provides an informed forum for British exporters.
The Association is also geared to the requirements of British export houses
i.e. non-manufacturing exporters. It brings together the export interests of
manufacturers, export houses, bankers and export credit insurers.
The British Exporters Association
Broadway House
Tothill Street
London SW1H 9NQ
Tel: 020 7222 5419
Fax: 020 7799 2468
bexamail@aol.com
www.bexa.co.uk

AIG
AIG is one of the world’s leading international insurance and financial
services organisations, with operations in approximately 130 countries and
jurisdictions. AIG member companies serve commercial, institutional and
individual customers through the most extensive worldwide property-
casualty and life insurance networks of any insurer. AIG’s financial services
businesses include aircraft leasing, financial products, trading and market
making.
With over 50 years of experience in the UK market, AIG currently protect
over half of the UK top 1,000 companies, as well as many smaller
businesses.
Trade Credit and Political Risks Insurance protects businesses against a
wide range of risks associated with business operations. This could include
non-payment of debts from a customer, defaulted or repudiated contracts
and changes in foreign economic stability or regulation such as a cancellation
of import/export licences. In addition it can provide cover for risks associated
with stock or manufacturing abroad, equity investments and international
joint ventures.

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AIG Europe (UK) Limited


The AIG Building
58 Fenchurch Street
London EC3M 4AB

Tel: 020 7954 7000


Fax: 020 7954 7001
enquiries.london@aig.com
www.aig.com

Aon Forfaiting
Aon Forfaiting offer a broad range of trade finance solutions. A company’s
ability to offer attractive payment terms to its buyers, or accept the conditions
demanded by them, can have a significant effect on its competitiveness and
success. Aon Forfaiting provide trade finance solutions which enable
companies to sell on extended credit terms and accept reduced payment
security, whilst maintaining cash flow and avoiding credit and political risk.
Aon Forfaiting specialise in non-recourse discounting of domestic and export
receivables, based on the purchase of bills of exchange, promissory notes
and invoices. They also have particular expertise in letters of credit, including
confirmation, discounting and document checking. Their aim is to provide
sellers with cash on delivery and certainty of payment, at the same time
allowing them to trade on aggressive terms. They provide facilities for
countries where financing capacity is limited or insurance protection is
unavailable.
Being independent of banks, insurance companies and other financial
institutions, they offer easy access to the trade and export finance market,
together with unbiased objective advice.

Aon Trade Credit


Aon Trade Credit create receivables management solutions for companies
that give trade credit. They work for a diverse range of domestic and
exporting companies, and use unparalleled technical knowledge to negotiate
the most appropriate and competitive solutions for their clients.
These solutions enable their clients to evaluate and manage their portfolio
of customers and:
• avoid the impact of bad debt,
• avoid political and economical loss,
• convert receivables into cash, and
• raise cost-effective funds for the business.
They offer a range of services including credit and political risk insurance,
trade finance, invoice finance, credit management consultancy, outsourced
policy management and “pay-as-you-use” business information.
Their principal areas of expertise include:
• Protection
• Trade credit insurance
• Political risk insurance
• Supplier default

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• Finance
• Invoice finance
• Receivables finance
• Factoring
• Distributor finance
Susan Ross Amy Slayford
Tel: 020 7882 0365 Tel: 020 7882 0146
atc@aon.co.uk

Atradius
Atradius credit insurance can protect business against the risks inherent in
the sale of goods and services, both at home and around the world.
By insuring commercial transactions, they safeguard against the potentially
devastating effects of a loss caused by the insolvency or protracted default
of one or more customers. For international trade, external factors such as
import and trade restrictions can also interfere with the successful
completion of a contract of sale. Atradius’ policies protect the exporter
against a wide range of commercial and political risks.
Atradius, one of the world’s leading credit insurance and credit management
companies, protects EUR300 billion of world trade (including £53.5 billion of
UK business) annually against the risks of non-payment. Headquartered in
Amsterdam, the group has 90 offices and a presence in over 40 countries
on five continents, employing around 3,500 people.
Atradius are currently number two in the world credit insurance market, and
have a total turnover of about EUR1.3 billion, giving them a 25 per cent
market share. Atradius has a stand-alone rating of A from Standard & Poor’s
and A2 from Moody’s.
Atradius Credit Insurance
3 Harbour Drive
Capital Waterside
Cardiff CF10 4WZ
Tel: 0800 212131
Fax: 02920 487721
cmc@atradius.com
www.atradius.com/uk/

Bankers’ Almanac
The Bankers’ Almanac book has been an important banking reference for
over 150 years. Published twice a year, in January and July, it is a helpful
tool for processing payments, conducting credit analysis or financial
research.
It contains
• full address and telecoms details for up to 4,000 international banks
plus up to date information on head office personnel, bank
correspondents, SWIFT and national bank codes
• comprehensive information on over 250,000 bank offices arranged in
alphabetical order

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• details such as central banks, associations, languages, public holidays


and time zones
• address and telecoms details for over 19,000 non-international banks
authorised by their central bank or monetary authority
• contact details of over 4,400 owners of international banks and 1,200
lawyers specialising in banking law
• additional information such as bank name changes, liquidations,
associations, institutions, telegraphic addresses and coins and notes of
the world.
It is possible to search for banks located in over 82,000 towns and 209
countries.
Bankers’ Almanac
Windsor Court
East Grinstead House
East Grinstead West Sussex
United Kingdom RH19 1XA
Tel: 01342 335722
Fax: 01342 335977
customerservices@bankersalmanac.com
bankersalmanac.com

COFACE
COFACE are a leading player in the UK trade credit protection and solutions
market and part of the COFACE Group, the world’s largest export credit
insurance group. With a presence in the UK dating back to 1993, COFACE
can provide exporters with a range of solutions for trade credit for trading in
the UK domestic as well as the export market.
COFACE aim to service the diverse trade credit management needs of
today’s UK and international business environment by providing a full
package of products and services ranging from straightforward credit
insurance policies to credit assessment and comprehensive collections
management services.
A leading player in the UK trade credit protection and solutions market,
COFACE aims to service their clients’ diverse credit management needs by
providing a full package of products and services. They provide UK-based
companies with:
• Straightforward credit insurance policies
• World beating credit assessment
• Comprehensive collections management
• Flexible receivables finance
COFACE
15 Appold Street
London EC2A 2DL
Tel: 020 7325 7500
Fax: 020 7325 7699
enquiries@cofaceuk.com
www.cofaceuk.com

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Cotecna Inspection SA
Cotecna is one of the world’s leading trade inspection, security and
certification companies. They have been a global authority in the inspection
industry for over 30 years. Cotecna combines state-of-the-art technology
and knowledge transfer with innovative, tailor-made services to improve
and secure trade environments around the world.
Cotecna Inspection Limited have been working in the inspection, verification
and certification industry within the UK since 1984
Their range of inspection and verification services include:
• commercial pre-shipment inspection for importers and exporters,
• textile inspections in Asia,
• bulk cargo inspection,
• loading and discharge draught surveys,
• laboratory testing and analysis services,
• health and safety risk assessments, and
• disabled access audits.
Cotecna Inspection Limited
One Lampton Road
Hounslow
Middlesex TW3 1JB
Tel: 020 8277 7700
Fax: 020 8277 7805
comm.insp@cotecna.co.uk
www.cotecna.com

Croner’s
Croner’s Reference Book for Exporters is a comprehensive guide to
exporting to 162 countries. For over 50 years it has helped subscribers get
things right first time, thus avoiding costly delays in delivery and payment.
At the core of the package is the loose-leaf manual, which is split into two
sections. Section one provides general guidance on exporting procedures
including export control, customs procedures, export payments and
certificates of origin. Section two of the manual provides individual country
information, from Afghanistan to Zimbabwe. It provides vital information
including principal port, currency, local Chamber of Commerce, banks and
documentation requirements.
All of the information in the loose-leaf manual is also provided online and on
CD-ROM.
Updates, newsletters and the monthly Trade International Digest help
subscribers to stay informed of any new developments. Bulletins provide
analysis of specific topics of interest.
Croner’s
145 London Road
Kingston upon Thames
Surrey KT2 6SR
Tel: 020 8547 3333 info@croner.co.uk
Fax: 020 8547 2637 www.croner-uk.co.uk

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Ducroire Delcredere
Ducroire Delcredere SA NV was formed in 2004 by ONDD, the Belgian
national Export Credit Agency. They undertake the short term credit and
political risk business for Belgian exporters and for other companies based
in the European Union and in Switzerland.
Ducroire Delcredere specialise in emerging markets and are able to agree
open account terms in more than 200 countries. They have considerable
experience in riskier markets having a history in these markets from 1921.
They rate each country in terms of credit and political risk and the ratings can
be found on their website. They tailor policies for exporters, whether for
commodities sales or for those on contracting terms. Contact with the
company is through specialist brokers and the UK Director is Mr Andrew
Strong.
Tel: 01932 268442
a.strong@ducroiredelcredere.eu
www.ducroiredelcredere.eu

Dun & Bradstreet


D&B, a leading provider of business information, has been enabling business-
to-business commerce for 160 years. D&B’s information and technology
solutions help businesses reduce credit risk and find profitable customers
efficiently. They have the largest company database available, with
information on 75 million businesses and branches worldwide.
Businesses also use D&B’s information and technology to authenticate and
verify potential trading partners online, increasing their trust and confidence
in e-commerce transactions.
Tel: 0800 001234 www.dnb.com

EULER HERMES
Trading on credit terms has its risks - customer insolvency, commercial
risks, political risks, overdue accounts, bad debts. Whatever your business’
size, whether you trade in the UK or overseas, they can help reduce such
risks, help you target profitable customers and help you manage your trade
receivables. Their principal products include:
• Credit insurance of commercial risks and political risks to provide
accounts receivable cover and bad debt protection should a customer
become insolvent or default on payment,
• Credit opinions backed by unique information on 40 million companies
worldwide, to assess the creditworthiness of your customers and
target quality prospects, thereby enhancing your credit control
activities, and
• Commercial debt collection providing a professional service to help
recover overdue accounts in the UK and overseas.
Euler Hermes is present in 48 countries and has a 36% share of the world
credit insurance market. Its mission is to help companies grow by insuring
them against the risk of buyer insolvency - whatever their size, sector or
country of origin. Through its primary activity of credit insurance, Euler
Hermes has developed a comprehensive range of services for the
management of companies’ trade receivables.

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As a member of the Allianz Group, and a subsidiary of AGF, Euler Hermes


benefits from their financial solidity to provide long-term support for clients.
Euler Hermes employs 5,500 staff members worldwide.
Euler Hermes
1 Canada Square
London E14 5DX
Tel: 020 7512 9333
www.eulerhermes.com

Exporters
Exporters is an association of manufacturers, trading companies and
financial institutions with the common objective of managing commercial
and political risks in their global operations. They are a group captive insurer,
domiciled and licensed in Bermuda and issuing policies of insurance to their
members, their designees, and other eligible insureds.
They offer a broad range of export credit and political risk policies, but their
ultimate value lies in the ability to tailor their products to the unique
requirements of their members. Through innovative policies, quick
turnaround and an emphasis on risk management, they help their members
expand their international reach within prudent levels of risk assumption.
Membership is open to all qualified firms that purchase Capacity Entitlement
Certificates from Exporters.
EXPORTERS INSURANCE COMPANY (EUROPE) LTD
37-39 Lime Street,
London EC3M 7AY
Tel: 020 7256 3920
Fax: 020 7626 4693
gkent@exportersinsurance.com

ICC
The International Chamber of Commerce
ICC Uniform Customs and Practice for Documentary Credits (UCP600) is a
practical and comprehensive set of 39 rules that address the major issues in
documentary credit usage. The rules become effective on 1 July 2007 and
are essential reading for anyone involved in handling letters of credit.
ICC publication no 645, ‘International Standard Banking Practice (ISBP) for
the examination of documents under documentary credits’ was designed to
clarify the interpretation of UCP 500. It fills the gap between the general
principles and the work of the letter of credit practitioner and is to be updated
to follow the changes introduced with UCP600.
Incoterms 2000 ICC Publication No.560
Incoterms 2000, the latest update of ICC’s standard standard reference
book for parties involved in international trade transactions, came into force
on 1 January 2000. It describes and interprets the meaning of the 13 basic
terms used in international sales contracts. These terms are regularly
incorporated into sales contracts and have become part of the daily language
of international trade.

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ICC Publishing SA,


38 Cours Albert 1er
75008 Paris
France
ICC UK,
12 Grosvenor Place,
London
SW1X 7HH
Tel: 020 7823 2811
Fax: 020 7235 5447
www.iccwbo.org
www.iccbooks.com

SGS – Societe Generale de Surveillance


The SGS group provides verification, testing and monitoring services for
international trade in a wide range of sectors.
SGS Société Générale de Surveillance S.A.
1 place des Alpes
P.O. Box 2152
1211 Geneva 1
Switzerland
Tel: 00 41 22 739 91 11
Fax: 00 41 22 739 98 86
www.sgs.com

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Appendix 4 – Introduction to the 2003


(UCP500) guide

Introduction
‘Documentary Letter of Credit’, ‘ILC’, ‘L/C’, ‘Credit’, letter of credit, ‘doc
credit’. These are only some of the more common names for an instrument
that has been in use in international trade for centuries. The term used by
the generally recognised rules for the handling of letters of credit is ‘Credit’.
This guide uses ‘letter of credit’ as the term commonly used by exporters.
Whatever it might be called it is still the staple of the export trade. In its
absence it is difficult to imagine the world of international trade having
developed as it has. It is the mechanism by which, to this day, enormous
values of international trade are paid for. Over time it has developed from a
simple payment mechanism to a basis for financing contracts and into an
alternative to contract guarantees and bonds.
Purpose of this guide
The purpose of this guide is to offer to members of the British Exporters
Association a reference work for use in the office. Ideally, members will find
it to be readily accessible and of practical use; we will have failed in our
purpose if it is cursorily read and then put on a shelf to gather dust. Our
intention is that the guide should provide practical advice to those involved
in the use of letters of credit as British exporters. Whilst much could be
gained from the guide from the point of view of the export customer it is
written with the British exporter in mind.

Terminology
In preparing this guide I, as editor, have tried to maintain a degree of
consistency with regard to terminology.
The ‘exporter’ is fairly self-explanatory (bearing in mind that the guide is
written from the point of view of a company in the UK exporting goods or
services to a country overseas with the intention of receiving payment for
that export from overseas).
Where it appears, ‘you’ means the exporter.
In the context of this guide the ‘beneficiary’ is the exporter.
The ‘customer’ is the exporter’s counter-party, the purchaser of the goods
or services (notwithstanding that the exporter is a customer of a bank).
The ‘opening bank’ or the ‘issuing bank’ is the bank which opens or issues
the letter of credit at the request of the customer (after being prompted to
do so by the exporter). It may be the customer’s clearing bank.
The ‘advising bank’ is the bank in the UK which advises the exporter of the
arrival of the letter of credit and of its terms. It will be one of the correspondent
banks of the opening bank and may be the exporter’s clearing bank.
The ‘confirming bank’ is the bank which adds its confirmation (an undertaking
to pay which is independent of the opening bank’s obligation to do so) to the
letter of credit. It will generally be the advising bank but not necessarily
so.

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Other reference material


This guide is not designed to be the last word on letters of credit. The
International Chamber of Commerce has produced a series of documents
the purpose of which is to regulate the use of letters of credit in international
trade. These are essential reading for anyone involved in handling letters of
credit. Letters of credit used in international trade should be issued subject
to the terms of Uniform Customs and Practice for Documentary Credits
(UCP), but a specialised form, the Standby letter of credit, which has much
in common with a guarantee, may be subject to International Standby
Practices (ISP), which sets out the rights and obligations of the various
parties. The latest versions of these documents, UCP500, eUCP
(accommodating electronic documentation) and ISP are available from the
International Chamber of Commerce. The aim of the ICC is to make it easier
for companies in different countries to trade with each other, thus
contributing to the expansion of international commerce.
All comments in this guide relate to letters of credit which have been issued
subject to UCP500. It would be unwise to accept a letter of credit which is
not subject to UCP500 if you are asked to do so.
The exporter should also familiarise himself with Incoterms 2000 (also
available from ICC Publishing). These are the internationally recognised
terms of delivery. They define which party is liable for which transport costs
and at which point responsibility for risk in - and hence the need to insure -
the goods passes from one party to another.

Contributors
Most of the work involved in the production of this guide has been done by
others, in particular:
Malcolm Booth of BExA
John Brown of Bank of Scotland
Bob Bruce of Raytheon
Russell Davenport of Credit Lyonnais
David Donnelly of Alstom
Alan Findlay of BNP Paribas
Jonathan Hardesty of RBS
Tim Hardy of Barlow, Lyde and Gilbert
Peter Litherland of RBS
John Lodge of Marconi Selenia Communications Holdings (UK)
Andrea Manning of Wallace Shipping Services
David Meynell of Deutsche Bank
Andrew Neill of Newstead International Limited
Michael Possener, Export Consultant
Susan Ross of Aon Trade Credit
Robert Scallon of Thales
Jeremy Smith of LloydsTSB
Sue Walton of Rolls-Royce
Phil White of BNP Paribas
Michelle Wienburg of Alperton.
Any value which it might have is attributable to them and to their contributions.
All views expressed are personal.
Bearing in mind these caveats, the guide is offered to you in the hope that
it will assist in securing your export receivables. Much of what follows

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revolves around preparation for the avoidance of problems before they arise.
If the advice which it offers helps achieve payment for an export, which
might not otherwise have been received, it will have done the job which we
intended.
Richard Hill
BAE SYSTEMS plc
Chairman, BExA Industry Section
October 2003

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