Training Slides

Advanced Diploma in
Procurement&Contract
Management
ADCM-983
ADCM-983 All Rights Reserved by WISSEN-ConTra Group (www.wissengroup.com)

Session 1
CONTRACT
MANAGEMENT

Background
The International Chamber of Commerce (ICC) issued the
millennium edition of its standard trade definitions, Incoterms
2010. Beginning January 2010, these terms are being used in the
international trade contracts.
Incoterms, the cornerstone of international trade, were first
published by ICC in 1936 and since then have been updated
seven times. Incoterms precisely define the responsibilities of
buyer and seller in the international trade.
The proper understanding and correct use of these terms can
greatly reduce the risk of costly misunderstandings, legal
disputes among the importers and exporters.
Incoterms 2010 will affect Chambers of Commerce, Importers,
Exporters, Banks, Insurers, Transporters, Lawyers, Freight
Forwarders, Shippers, Government officials and departments

Inco terms 2010
Purpose: Purpose is to provide a set of international rules for
the interpretation of the most commonly used trade terms in
foreign trade. As a result of this the uncertainties of varied
interpretations of such terms in different countries can be
avoided or at least reduced to a considerable degree.
Scope: Scope is limited to matters relating to the rights and
obligations of the parties to the contract of sale with respect
to delivery of goods sold. Incoterms apply to the contract of
sale and not to any other contract, such as Contract of
carriage, Insurance and Finance.
Incoterms are not describing all the duties of buyer and seller
which they would like to incorporate in the contract

Limitations: Inco terms deal with a number of
identified obligations imposed on the parties-such
as the sellers obligations to place the goods at the
disposal of buyer or hand them over for carriage or
deliver them at destination and with the
distribution of risk between the parties in these
cases.
However, Inco terms cannot deal with:
Transfer of ownership and other property rights
Breaches of contract and their consequences
Exemption from liability owing to impediments
These questions must be resolved by other
stipulations in the contract and the applicable law

Inco Terms 2010
EXW (Ex-Works): Delivery at factory siding, further
transportation charges payable by the purchaser
---The seller makes the goods available at its premises
(works, factory, warehouse, plant) ready for
collection, on the date agreed upon.
---The buyer pays all transportation costs and also beares
the risks for bringing the goods on collecting vehicles.
---seller doesn't clears the goods for export (Export
permit)

EXW (Ex-Works) Cont: -
---since
the seller makes the goods available at his
premises, therefore Buyer must notify the
seller of specific packing requirements
----since it is buyers responsibility to
obtain export license, transportation
(inland), certificate of origin, security
clearance etc, Therefore he can request
for assistance from seller in fulfilling these
responsibilities. However this will not be
legal binding on the seller and for this
assistance seller may charge separately
outside the contract.
FCA (Free Carrier)
Seller delivers the goods, cleared for export,
to the carrier nominated by the buyer at the
named place.
If delivery occurs at the sellers premises,
the seller is responsible for loading.
If delivery occurs at any other place, the
seller is not responsible for unloading.

FAS (Free Alongside Ship)
Free Alongside Ship i.e within the reach of

the tackle of a ship.

FOB (Free on Board)
Seller delivers when the goods are placed on board
the ship, at the named port of shipment. This
means that the buyer has to bear all costs and risks
of loss or of damage to the goods from that point.
The FOB term requires the seller to clear the
goods for export. This term can be used only for
sea or inland waterway transport.
If the parties do not intend to deliver the goods
across the ships rail, the FAS term should be used.

CFR (Cost and Freight)
The seller must pay cost and freight necessary to
bring the goods to the named port of destination.
The seller has to arrange clearance of goods for
export.
Risk of loss or damage to the goods, as well as any
additional costs due to events occurring after the
time of delivery, are transferred from the seller to
buyer.
The term can be used only for sea and inland
waterway.

CIF (Cost, Insurance and Freight)
The seller must pay the costs and freight
necessary to bring the goods to the named
port of destination but the risk of loss of or
damage to the goods, as well as any
additional costs due to events occurring after
the time of delivery, are transferred from the
seller to the buyer.
The seller also has to procure marine
insurance against the buyers risk of loss of or
damage to the goods during the carriage.

CPT (Carriage Paid To)
The seller delivers the goods to the nominated
carrier and pays the cost of carriage necessary
to bring the goods to the named destination.
The seller has to arrange clearance of goods for
export.
The buyer bears all risks and other costs
occurring after the goods have been delivered.
The term may be used irrespective of the mode
of transport including multimodal transport.

CIP (Carriage And Insurance Paid
To)
The seller arranges clearance of goods for
export.
The seller delivers the goods to the nominated
carrier and pays the cost of carriage necessary
to bring the goods to the named destination.
The seller arranges insurance with minimum
risk of loss of or damage to the goods during
the carriage.
Buyer bears all risks & any additional costs
occurring after the goods are delivered.

DAF (Delivered At Frontier)
Frontier: The expression used in the agreement
may be referring to the frontier of exporting
country, therefore this should be specified, naming
the place and the point.
The seller delivers when the goods are placed at
the disposal of the buyer:
On the arriving means of transport, unloaded
At the named point and place
At the frontier
Before the custom border of the adjoining country

Seller has to arrange clearance of goods for
export
The term may be used irrespective of the
mode of transport provided the goods are to
be delivered on land frontier.

DES (Delivered Ex Ship)
The seller delivers when the goods are placed at the
disposal of the buyer on board the ship not cleared for
import at the named port of destination.
The seller bears all the costs and risks involved in

bringing the goods to the named port of destination
before discharging.
If the parties wish the seller to bear the costs and risks
of discharging the goods, then the DEQ term should
be used.

DEQ (Delivered Ex Quay)
The seller delivers when the goods are placed at the
disposal of the buyer
Not cleared for import
On the quay (wharf) at the named port of destination
The seller is to bear all costs and risks involved in
bringing the goods to quay.
The buyer is to clear the goods for in import, complete
formalities, and pay duties, charges upon import.
As per Incoterms 1990 the seller was required to
arrange for import clearance, now buyer is responsible
for this act.

DDU (Delivered Duty Unpaid)
The seller delivers the goods to the buyer, not cleared
for import, and not unloaded from any arriving means
of transport at the named place of destination.
The seller has to bear the costs and risks involved in
bringing the gods thereto, other than, where applicable,
duty (which term includes the responsibility for and
the risks of the carrying out of customs formalities, and
the payment of formalities, customs duties, taxes and
other charges) for import in the country of destination.
Such duty has to be borne by the buyer as well as any
costs and risks caused by his failure to clear the goods
for import in time.

DDP (Delivered Duty Paid)
The seller delivers the goods to the buyer
Cleared for import
Loaded on any arriving means of transport
At the named place of destination
The seller has to bear all the costs and risks in bringing the
goods thereto:
Including where applicable any duty (which term includes
the responsibility for and risk of the carrying out of customs
formalities and payment of formalities, customs duties,
taxes and others charges) for import in the country of
destination.
This term represents maximum obligations for the seller

FOR (Free on Rail)
A basis for indigenous procurement of
stores implying that stores contracted for
are to be brought to railway siding of the
named place and are to be booked to the
consignee under suppliers arrangements.

BUYERS/SELLERS RESPONSIBILITY TABLE - INCOTERMS 2000
Unload
Unload Landin Landin onto
from g g trucks Entry-
Export- Transp truckat charge Transp charge from Transp Custom Entry-
duty ortto the sat ortto sat the ortto s Duties
Loadto payme exporte origin's origin's import's importe importe destinat Insuran clearan and
truck nt r'sport port port port r'sport rs'port ion ce ce Taxes
EXW No No No No No No No No No No No No
FCA Yes Yes Yes No No No No No No No No No
FAS Yes Yes Yes Yes No No No No No No No No
FOB Yes Yes Yes Yes Yes No No No No No No No
CFR Yes Yes Yes Yes Yes Yes No No No No No No
CIF Yes Yes Yes Yes Yes Yes No No No Yes No No
CPT Yes Yes Yes Yes Yes Yes No No No No No No
CIP Yes Yes Yes Yes Yes Yes No No No Yes No No
DAF Yes Yes Yes Yes Yes Yes No No No No No No
DES Yes Yes Yes Yes Yes Yes No No No Yes No No
DEQ Yes Yes Yes Yes Yes Yes Yes No No Yes No No
DDU Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No
DDP Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
YES - indicates that the seller has the responsibility to provide the service included in the price.
NO indicates that it is the buyers responsibility.

Inco TERMS 2010
Group D - Arrival
1. The number of Incoterms(R) rules has been reduced from
13 to 11. This has been achieved by substituting two new
rules that may be used irrespective of the agreed mode of
transport DAT, Delivered at Terminal, and DAP,
Delivered at Place for the Incoterms(R) 2010 rules DAF,
DES, DEQ and DDU
2. Under both new rules, delivery occurs at a named
destination.
3. DAT (Delivered at Terminal)
The new rules make the Incoterms(R) 2010 rules DES and
DEQ superfluous. The named terminal in DAT may well
be in a port, and DAT can therefore safely be used in cases
where the Incoterms(R) 2010 rule DEQ once was

4. DAP Delivered at Place
(named destination place)
This term means that the seller delivers when the
goods are placed at the disposal of the buyer on
the arriving means transport ready for unloading
at the named place of destination. This is exactly
what the old Inco term DDU stipulated
5. DDP Delivered Duty Paid
(named destination place)
This term means that the seller pays for all
transportation costs and bears all risk until the
goods have been delivered and pays duty. The
most comprehensive term for the buyer

Risk of nonpayment
Risk of delay in delivery
Financing, how and against what?
Currency, regulatory restrictions
Documentation, mode of settlement
ICC rules, Inco terms, UCP 500/600, ICC - 522

Financing- How & Against What?
1. In international trade a contract is considered final /
confirmed, only after establishment of LC.
2. LC is opened by the bank against 100% availability of
amount equivalent to LC in the buyers account (if
new account holder in the bank), otherwise against
35% balance, LC is opened.
3. Markup is 0.25% of LC value per quarter or 1% per
annum if LC value less than Rs. 10-Million
4. If LC value is more than 10-Million then markup
0.2% per quarter or 0.8% per annum.
ICC Rules
ICC is the world business organization, a representative
body that speaks with authority on behalf of enterprises
from all sectors in every part of the world. ICC promotes
an open international trade and investment system and the
market economy, and helps business corporations meet the
challenges and opportunities of globalization. Business
leaders and experts drawn from ICCs global membership
establish the business stance on broad issues of trade and
investment policy as well as on vital technical subjects.
ICC was founded in 1919 and today it groups thousands of
member companies and associations in 130 countries.

UCP-500/600
Uniform Customs and Practices Brochure 500/600
International Chamber of Commerce rules (commonly referred
to as UCP 500/600 or ICC 500/600), that are used for Letters of
credit. These letters then become legal binding when written
into the text of the letter.

ICC-522
The ICC Uniform rules for collections were
first published by the ICC in 1956. Revised
versions were issued in 1967 and 1978. This
present revision was adopted by the Council
of the ICC in June 1995. It is issued with
the title ICC Uniform Rules for
Collections as ICC Publication No 522.

International Trade
Documents in
International Trade

Background
Transport: Bill of lading / Shipping
Invoice / Packing Invoice / Airway Bill
Financial: Letter of Credit, Telegraphic
Transfer (TT)
Commercial: Commercial Invoice
Protection: Insurance
Others: Bank Guaranties
Points to Ponder
Case # 1
EXW
After signing of contract and opening
of LC, seller request for cancellation of
contract on the plea that his government
has placed Ban on export of
contracted goods to the buyers country.
What should be the legal response of
the buyer?

Case # 2
Letters of credit and Inco terms
A local company concluded a
contract on FOB terms.
The seller now received a letter of
credit opened by the buyer specifying
the trade term as FAS
What should be his reaction?

Case # 3
FAS Delivery Period
In a FAS contract, the seller places the
goods on the quay on November 20 th,
the loading on ship is expected on 23 rd.
On November 22nd a fire destroyed the
goods.
Who must bear the risk?
Case # 4
FOB Import duty levied by sellers
customs authorities
The seller imported certain goods from a
third country and exported the same to a
buyer. The custom authorities in the
sellers country levied import duty on
these goods.
Under FOB, whether seller or buyer,
should pay this duty?
Case # 5
FOB Delay in receipt of OBL
Due to delay in receipt of OBL (Original
Bill of Lading), demurrage is imposed by
destination port authority. Buyer had to pay
for this demurrage for clearance of stores,
but later demands from seller to pay the
demurrage cost.
Do you agree with the stance of buyer?

Case # 6
CPT Delivery Order (D.O) Charges
At the time of delivery, the shipping Co.
demands D.O charges against contracted stores
packed in six containers from the buyer at the
destination port. The buyer refuses to pay these
charges on the plea that these charges are towards
seller since shipping Co. charges are already paid
to seller.
Is the stance of buyer legal. How
intelligently he can settle the issue avoiding
lengthy legal dispute / demurrage?

Case # 7
FOB Berthing and demurrage
charges
Under an FOB contract
1.Who is responsible to arrange berth
at the port of shipment
2.Who will bear the demurrage levied
on account of delay in berthing

Case # 8
CFR Transfer of risk point
1.Under CFR, is the seller at risk
during international transport of goods
to the point of discharge?
2.Is delivery date to be interpreted as
delivery at port of departure or
delivery at the port of discharge?
Case # 9
CFR Importer refusing to timely
receive the goods
In the event of CFR sales, what the
seller can do, if the importer does not
accept the goods upon arrival and
seeks to use the vessel as a floating
warehouse?
Case # 10
CIF Landed
CIF landed Karachi, does the seller
has to pay for the discharging onto the
quay, or does he also have to pay for
discharging into the warehouse?

Case # 11
CIF (Cost Insurance Freight)
Should this term be followed by the
port of loading or the port of discharge

Case # 12
DDU-CUSTOMS CLEARANCE WITHIN
RESONABLE TIME
Under DDU, is the buyer obliged to make
customs clearance possible within a
reasonable period of time? Would late
delivery be at the buyers risk? Could the
time for customs clearance be added to the
contractual time for delivery?

SESSION 2
Public Procurement
Regulatory Authority
(PPRA)
Background
Public Procurement Regularity Authority(PPRA) was
established in year 2002 with the purpose to regulate Public
procurement goods,services and works in public sectors.Rules
were formulated by this constituted body in consultation with
all the government departments.Ordinance was passed in this
regard and called as PPRA ordinance 2002 and its rules came
into force in 2004 vide SRO 432(1)/2004
PPRA was authorized to take such measurements and exercise
such powers as may be necessary for improving
governance,management,transparency,accountability and
quality of public procurement of goods,services and works in
the public sector.
Scope & Applicability
Under the powers conferred upon PPRA,the authority
may:-
Monitor application of law,rules,regulations,policies and
procedures relating to procurement.
Evaluate and recommend reformulation revision as
deemed necessary to Federal Government.
Make regulations and code of ethics and procedures.
Monitor public procurement practices and make
recommendations to improve
governance,transparency,accountability and quality of
public procurement.
Monitor over all performance of procuring agencies for
developing and improving their institutional frame
work.
Submit reports to government in respect of public
procurement activities of procuring agencies.
Call any functionary of procuring agencies to provide
assistance in its function.
Perform any other function assigned to it by federal
government.

PPRA Board
General direction and administration of the authority and its affairs shall vest in a
board.
Board shall consist of:-
1. Secretary-finance division-chairperson.
2. Secretary-ministry of industries and production member.
3. Secretary-defence production division-member.
4. Secretary-ministry of power and production-member.
5. Secretary-ministry of housing and works-member.
6. Secretary-ministry of communications-member.
7. Three members from private sector to be nominated by federal government.
8. Managing director-member.

The managing director shall act as secretary of board.
Members appointed from private sector shall hold
office for the period of three years and shall be
entitled to such term and conditions as the federal
government may determined.

PUBLIC PROCUREMENT
(Public Procurement Rules, 2004)
[Rules 1 51]

INTRODUCTON
Rule.1
Short title and commencement
Section 26, Public Procurement Regulatory

Authority Ordinance, 2002- power to make
rules.
Public Procurement Rules, 2004

S.R.O.432(1)/2004.Finance Division ,8th June,2004
Amended up to September, 2008

General Provisions
Rule 2.
Definitions
Rule,2 (1) & (2), PP Rules, 2004
Section, 2, PPRA
Ordinance, 2002 Bid/ Bidder
Public Competitive bidding
Procurement Contract
Mis-procurement Corrupt and Fraudulent
Practices
Procuring Agency
Emergency
Public Fund Lowest Evaluated Bid
Goods Repeat Order
Services Supplier
Works Value for Money

Public Procurement:-
Acquisition of goods, services or

construction of any works financed
wholly or partly out of the public
funds including funds of
enterprises which are owned or
controlled by the Federal
Government.
Misprocurement
Public procurement in
contravention of any provision of
PPRA ordinance 2002, any rules,
regulations, orders or instructions
made thereunder or any other law
in respect of ,or relating to public
procurement

Procuring Agency
i. any Ministry, Division, Department or
any office of the Federal Government;
ii. any authority, corporation, body or
organization established by or under a
Federal law or which is owned or
controlled by the Federal Government.

Public Fund
The Federal Consolidated Fund and the
public account of the Federation and
includes funds of enterprises which are
owned or controlled by the Federal
Government.

Goods
articles and objects of every kind and description
including raw materials, products; equipment,
machinery, spares and commodities in any form
and includes services incidental to installation,
transport, maintenance and similar obligations
related to the supply of goods if the value of
these services does not exceed the value of such
goods.

Works
Any construction work consisting of erection, assembly,

repair, renovation or demolition of a building or
structure or part thereof, such as site preparation ,
excavation, installation of equipment or materials and
decoration, finishing and includes incidental
services such as drilling ,mapping. satellite
photography, seismic investigations and similar
activities, if the value of those services does not exceed
that of the works themselves.

Service
Any object of procurement other than goods
or works.

Bid/Bidder:
Bid means a tender, or an offer, in
response to an invitation, by a person,
consultant, firm, company or an
organization expressing his or its
willingness to undertake a specified task at
a price
Bidder means a person who submits a
bid

Competitive Bidding:
a procedure leading to the award of a

contract whereby all the interested
persons, firms, companies or
organizations may bid for the contract
and includes both national competitive
bidding and international competitive
bidding

Contractor
a person, consultant, firm, company or an
organization who undertakes to supply
goods, services or works
supplier means a person, consultant,

firm, company or an organization who
undertakes to supply goods, services or
works

Corrupt and Fraudulent Practices :
Includes the offering, giving, receiving, or

soliciting of any thing of value to influence
the action of a public official or the
supplier or contractor in the procurement
process or in contract execution to the
detriment of the procuring agencies; or

Corrupt and Fraudulent Practices (cont..)
misrepresentation of facts in order to influence a

procurement process or the execution of a
contract, collusive practices among bidders (prior
to or after bid submission) designed to establish
bid prices at artificial, non-competitive levels and
to deprive the procuring agencies of the benefits
of free and open competition and any request for,
or solicitation of anything of value by any public
officials in the course of the exercise of his duty;

Emergency
natural calamities, disasters, accidents,

war and operational emergency which
may give rise to abnormal situation
requiring prompt and immediate action
to limit or avoid damage to person,
property or the environment

lowest evaluated bid:
A bid most closely conforming to

evaluation criteria and other
conditions specified in the bidding
document; and having lowest
evaluated cost.

Repeat Orders
Procurement of the same

commodity from the same source
without competition and includes
enhancement of contracts

Value for Money
best returns for each rupee spent in

terms of quality, timelines, reliability,
after sales services, up-grade ability,
price, source, and the combination of
whole-life cost and quality to meet the
procuring agencys requirements

Rule. 3
Scope and Applicability
Public Procurement Rules, 2004 apply to all

procurements made by all procuring agencies
of the Federal Government whether within
or outside Pakistan.

Rule. 4
Principles of Procurement
Procuring agencies, while engaging in procurements, shall
ensure;
the procurements are conducted in a fair and
transparent manner
the object of procurement brings value for money to
the agency
the procurement process is efficient and economical.

Rule. 5
International and Inter-governmental Commitments
Whenever these rules are in conflict with an obligation or

commitment of the Federal Government arising out of
an international treaty or
an agreement with a State or States, or
any international financial institution
the provisions of such international treaty or agreement to

prevail to the extent of such conflict.

Rule. 6
Language
All communication and documentation in Urdu or
English or Both.
Outside Pakistan and local procurement in local
language.
Original documentation in Urdu or English for record;
Translation in local language to be used;
Maximum economy and efficiency to be ensured.
In case of dispute original documentation shall be
referred.

Rule. 7
Integrity Pact
Procurements exceeding the prescribed financial limit
subject to an integrity pact, between the procuring agency
and the suppliers or contractors
Decision of ECC dated 23rd Sep, 2002 Declaration of

Fees, Commissions and Brokerage
Finance Divisions DO No. 687/MD(PPRA)/05 dated
14th Sep, 2005 Integrity Pact to be made a part of all
contracts worth Rs. 10 Million and above in value.

PROCUREMENT PLANNING
Rule 8
Procurement Planning
All procuring agencies to devise a mechanism,
for planning in detail for all proposed
procurements with the object of realistically
determining the requirements of the procuring
agency ,within its available resources, delivery
time or completion date and benefits that are likely
to accrue to the procuring agency in future.

Rule 9
Limitation on splitting or regrouping
A procuring agency to announce in an appropriate

manner all proposed procurements for each financial
year,
To proceed accordingly without any splitting or

regrouping of procurement so planned; and
To advertise in advance on the Authoritys website

and procuring agencys (if any) own website.

Rule 10
Specifications
to be generic without references to brand names,

model numbers, catalogue numbers or similar
classifications.
if essential to complete an otherwise incomplete

specification, such use or reference to be
qualified with the words or equivalent .

Rule 11
Approval Mechanism
All procuring agencies to provide clear

authorization and delegation of powers for
different categories of procurement and to
only initiate procurement once approval of
the competent authorities obtained.

Rule 12
Advertisement Methods
All procurements to be advertised as under:
Over Rs.100,000 Rs. 2 Million :to be advertised
on the Authoritys website in the manner and format
specified by the Authority and may also be advertised in
print media, if deemed necessary,
Over Rs.2 Million : to be advertised on the PPRAs
website and newspapers, at least two national dailies, having
wide circulation. And may also be posted on procuring
agencys own website
The information on the website must be complete and such
information shall remain available on that website until the
closing date for the submission of bids.

Rule 13
Response Time
National Competitive Bidding --not less than 15 days
International Competitive Bidding -- not less than 30 days .
All advertisement/notices to mention expressly the response
time and information for collection of bid documents,
provided no time limit for emergency.
The response time to be calculated from the date of first
publication of the advertisement in a newspaper or posting
on the website.
Where publication of such advertisements or notices has
occurred in both electronic and print media, the response
time to be calculated from the day of its first publication in
the newspapers.

Rule 14
Exceptions
Mandatory requirement to advertise all procurement
requirements exceeding prescribed financial limit,
However, following are exceptions with prior
approval of Authority;
If the procurement relates to national security and its
publication could jeopardize national security objectives;
and
If the publication of procurement in any manner, relates
to disclosure of information, which is proprietary in
nature or falls within the definition of intellectual
property which is available from a single source.

Rule 15
Pre-qualification of Suppliers/Contractors
Suitable in case of Services, Civil Works, Turnkey

Projects, Expensive Technically Complex
Equipment.
Ensure that technically and financially capable firms
having adequate managerial competency are invited.

Factors to be Considered
a) relevant experience and past performance

b) capabilities with respect to personnel, equipment,
and plant
c) financial position
d) appropriate managerial capability; and
e) any other factor that a procuring agency may
deem relevant, not inconsistent with PP Rules,
2004.

Rule 16
Pre-qualification Process
all information is required to be announced through the
pre-qualification documents for preparation and
submission of applications
Price of Pre-qualification documents not to exceed the cost

of printing and providing the documents

Responsibilities of the
Procuring Agency
Promptly notify each supplier or contractor
Intimate upon request the names of successful applicants
Only those firms / contractors / suppliers who have been

pre-qualified shall be entitled to participate further
Those not pre-qualified have to provided reasons for the

same

Rule 17
Qualification
A procuring agency, at any stage of the procurement

proceedings, may require the suppliers or contractors to
provide information concerning their professional,
technical, financial, legal or managerial competence whether
already pre-qualified or not:
Reasons to be recorded in writing by the P.A.

Rule 18
Disqualification
The procuring agency shall disqualify a
supplier or contractor if it finds, at any time,
that the information submitted by him
concerning his qualification as supplier or
contractor was false and materially
inaccurate or incomplete.

Rule 19
Blacklisting
Specify a mechanism and manner to
permanently or temporarily bar.
Such barring action shall be duly
publicized and communicated to the
Authority:
Adequate opportunity of being heard.

Rule `19 35

Rule 20
Principal method
The procuring agencies shall use open

competitive bidding as the principal method
of procurement for the procurement of
goods, services and works.

Rule 21
Open Competitive Bidding
The procuring agencies shall engage in open
competitive bidding if the cost of the object
to be procured is more than Rs.100,000.

Rule 22
Submission of Bids.-
The bids shall be submitted in a sealed

package or packages in such manner that
the contents are fully enclosed and cannot
be known until duly opened.
(2) A procuring agency shall specify the

manner and method of submission and
receipt of bids in an unambiguous and clear
manner in the bidding documents.

Rule 23
Bidding Documents
Procuring agencies shall formulate precise
and unambiguous bidding documents that
shall be made available to the bidders
immediately after the publication of the
invitation to bid.
(2) For competitive bidding, whether open

or limited, the bidding documents shall
include the following namely.-

(a) invitation to bid;
(b) instructions to bidders;
(c) form of bid;
(d) form of contract;
(e) general or special conditions of contract;
(f) specifications and drawings or performance
criteria (where applicable);
(g) list of goods or bill of quantities (where
applicable);
(h) delivery time or completion schedule;

(i) qualification criteria (where applicable);
(j) bid evaluation criteria;
(k) format of all securities required (where applicable);
(l) details of standards (if any) that are to be used in

assessing the quality of goods, works or services
specified; and
(m) any other detail not inconsistent with these rules

that the procuring agency may deem necessary.

Responsibilities of the P.A
Any information that becomes necessary after the

invitation, shall be provided in a timely manner and on
equal opportunity basis.
If notification is essential, it should be in the manner

similar to the original advertisement.
Price of Bidding Documents not to exceed the cost of

printing and providing the documents.

Rule 24
Reservations and Preference
Allow participation to all bidders without regard to
nationality
Exception only in accordance with the policy of the
Federal Government
Price preference to domestic or national bidders as per
policy of the Federal Government
Magnitude to be mentioned in bid evaluation criteria

Rule 25
Bid Security
The procuring agency may require the

bidders to furnish a bid security not
exceeding five per cent of the bid price.

Rule 26
Bid Validity
Bid validity period must be specified
Bids shall be valid for the time period specified

in the bidding documents
P.A shall process the bid within the bid validity

period
Extensions under exceptional circumstances, by

recording the reasons
All the applicants shall be asked to extend their
bid validity period
Bid Validity
Bidders who agree:-
shall also extend the validity of the bid bond or security
for the extended period of the bid validity;
shall not be permitted to change the substance of their
bids; and
Bidders who do not agree:- shall be allowed to withdraw

their bids without forfeiture of their bid bonds or
securities.

Rule 27
Extension of Time for Submission of Bids
Reasons to be recorded
Equal opportunity basis
Manner similar to original advertisement

Rule 28
Opening of bids
i. The date for opening of bids and the last date for
the submission of bids shall be the same.
ii. The bids shall be opened at least thirty minutes

after the deadline for submission of bids.

iii. All bids shall be opened publicly in the presence of
the bidders or their representatives who may
choose to be present.
iv. The procuring agency shall read aloud the unit
price as well as the bid amount and shall record the
minutes of the bid opening.
v. All bidders in attendance shall sign an attendance

sheet.
vi. All bids submitted after the time prescribed shall

be rejected and returned without being opened.

Rule 29
Evaluation criteria
i. Procuring agencies shall formulate an appropriate
evaluation criterion listing all the relevant information
against which a bid is to be evaluated.
ii. Such evaluation criteria shall form an integral part of the

bidding documents.
iii. Failure to provide for an unambiguous evaluation

criteria in the bidding documents shall amount to mis-
procurement.

Rule 30
Evaluation of Bids
i. All bids shall be evaluated in accordance with the
evaluation criteria and other terms and conditions set
forth in the prescribed bidding documents.
ii. Save as provided for in clause (iv) of clause (c) of rule 36

no evaluation criteria shall be used for evaluation of bids
that had not been specified in the bidding documents.
iii. For the purposes of comparison of bids quoted in

different currencies, the price shall be converted into a
single currency specified in the bidding documents.

iv. The rate of exchange shall be the selling rate,
prevailing on the date of opening, as notified by the
State Bank of Pakistan on that day.
v. A bid once opened in accordance with the prescribed

procedure shall be subject to only those rules,
regulations and policies that are in force at the time of
issue of notice for invitation of bids.

Rule 31
Clarification of bids
i. No bidder shall be allowed to alter or modify his bid after

the bids have been opened.
ii. The procuring agency may seek and accept clarifications

to the bid that do not change the substance of the bid.
iii. Any request for clarification in the bid, made by the

procuring agency shall invariably be in writing.
iv. The response to such request shall also be in writing.

Rule 32
Discriminatory and Difficult Conditions
i. No procuring agency shall introduce any condition, which

discriminates between bidders or that is considered to be
met with difficulty.
ii. In ascertaining the discriminatory or difficult nature of

any condition reference shall be made to the ordinary
practices of that trade, manufacturing, construction
business or service to which that particular procurement
is related.

Rule 33
Rejection of bids
i. The procuring agency may reject all bids or proposals at

any time prior to the acceptance of a bid or proposal.
ii. The procuring agency shall upon request communicate
to any supplier or contractor who submitted a bid or
proposal, the grounds for its rejection of all bids or
proposals, but is not required to justify those grounds.
iii. Notice of the rejection of all bids or proposals shall be

given promptly to all bidders.
iv. The procuring agency shall incur no liability.

Rule 34
Re-bidding
i. If the procuring agency has rejected all bids under rule 33

it may call for a re-bidding.
ii. The procuring agency before invitation for re-bidding shall

assess the reasons for rejection and may revise
specifications, evaluation criteria or any other condition for
bidders as it may deem necessary.

Rule 35
Announcement of evaluation Reports
Procuring agencies shall announce the results of bid

evaluation in the form of a report giving justification for
acceptance or rejection of bids at least ten days prior to the
award of procurement contract.

Rule 36 51

Rule 36
Procedures of Open Competitive Bidding
a. Single stage one envelope procedure.

b. Single stage two envelope procedure.
c. Two stage bidding procedure.
d. Two stage two envelope bidding procedure.

(a) Single Stage One Envelope
Procedure.
i. Each bid shall comprise one single envelop

containing, separately, financial proposal and
technical proposal (if any).
ii. All bids received shall be opened and evaluated

in the manner prescribed in the bidding
document.

(b) Single stage two envelope procedure.-
i. the bid shall comprise a single package containing

separately the financial proposal and the technical
proposal;
ii. initially, only the envelope marked TECHNICAL

PROPOSAL shall be opened;
iii. the envelope marked as FINANCIAL PROPOSAL shall

be retained in the custody of the procuring agency
without being opened;
iv. the procuring agency shall evaluate the technical

proposal first.

v. during the technical evaluation no amendments in the
technical proposal shall be permitted;
vi. the financial proposal of bids found technically non-
responsive shall be returned un-opened to the respective
bidders; and
vii. the financial proposals of bids shall be opened publicly at
a time, date and venue announced and communicated to
the bidders in advance;
viii. public opening of the financial proposals of the technically
accepted bids only.
ix. the bid found to be the lowest evaluated bid shall be
accepted.

(c) Two stage bidding procedure.-
First Stage
i. the bidder shall first submit a technical proposal

without price;
ii. the technical proposal shall be evaluated in accordance
with specified evaluation criteria and may be discussed
with the bidders regarding any deficiencies and
unsatisfactory technical features;
iii. after such discussions, all the bidders shall be
permitted to revise their respective technical proposals
to meet the requirements.

iv. The procuring agency may revise, the technical
requirements or evaluation criteria, or it may add new
requirements or criteria.
v. Provided that such revisions are communicated to all the
bidders equally at the time of invitation to submit final
bids, and sufficient time is allowed to revise bids:
vi. Allowed time shall not be less than fifteen days in the case
of national competitive bidding and thirty days in the case
of international competitive bidding;
vii. The bidders not willing to conform to the procuring
agencys technical requirements may be allowed to
withdraw from the bidding without forfeiture of their bid
security;

Second Stage
(vi) the bidders, whose technical proposals or bids have not

been rejected and who are willing to conform their bids to the
revised technical requirements of the procuring agency, shall
be invited to submit a revised technical proposal along with
the financial proposal;
(vii) the revised proposal and the financial proposal shall be

opened at a time, date and venue announced and
communicated to the bidders in advance; and

ix. The revised technical proposal and the financial
proposal shall be evaluated in the manner prescribed
above. The bid found to be the lowest evaluated bid
shall be accepted:
x. A procuring agency shall allow sufficient time to the

bidders to incorporate the agreed upon changes in the
technical proposal and prepare their financial
proposals accordingly.

(d) Two stage two envelope bidding
procedure.-
First Stage: -
i. the bid shall comprise a single package containing two

separate envelopes containing technical and financial
proposal.
ii. initially, only the envelope marked TECHNICAL
PROPOSAL shall be opened;
iii. the envelope marked as FINANCIAL PROPOSAL shall
be retained in the custody of the procuring agency without
being opened;

iv. the technical proposal shall be discussed with the bidders
with reference to the procuring agencys technical
requirements;
v. those bidders willing to meet the requirements of the

procuring agency shall be allowed to revise their technical
proposals following these discussions;
vi. bidders not willing to conform their technical proposal to

the revised requirements of the procuring agency shall be
allowed to withdraw their respective bids without
forfeiture of their bid security;

Second Stage
(viii) after agreement between the procuring agency and the

bidders on the technical requirements, bidders who are
willing to conform to the revised technical specifications and
whose bids have not already been rejected shall submit a
revised technical proposal and supplementary financial
proposal, according to the technical requirement;
(ix) the revised technical proposal along with the original

financial proposal and supplementary financial proposal shall
be opened at a date, time and venue announced in advance by
the procuring agency:

Provided that in setting the date of the submission of the
revised technical proposal and supplementary price
proposal a procuring agency shall allow sufficient time to
the bidders to incorporate the agreed upon changes in the
technical proposal and to prepare the required
supplementary financial proposal; and
(x) the procuring agency shall evaluate the whole proposal in

accordance with the evaluation criteria and the bid found
to be the lowest evaluated bid shall be accepted.

Rule - 37
Conditions
i. Single stage one envelope bidding procedure shall

ordinarily be the main open competitive bidding
procedure used for most of the procurement.
ii. Single stage two envelope bidding procedure shall be

used where the bids are to be evaluated on technical and
financial grounds and price is taken into account after
technical evaluation;
iii. Two stage bidding procedure shall be adopted in large

and complex contracts where technically unequal
proposals are likely to be encountered or where the
procuring agency is aware of its options in the market
but, for a given set of performance requirements, there
are two or more equally acceptable technical solutions
available to the procuring agency; and
iv. two stage two envelope bidding method shall be used
for procurement where alternative technical proposals
are possible, such as certain type of machinery or
equipment or manufacturing plant.
********

Rule 38
Acceptance of Bids
lowest evaluated bid to be accepted
If not in conflict with any other law, rules,

regulations or policy of Government.
Within the original or extended period of bid

validity

Rule 39
Performance guarantee
If required ,to be furnished by the
successful bidder
shall not exceed 10% of the contract

amount
should be clearly expressed in the

bidding documents.

Rule 40
Limitation on negotiations
No negotiations with the bidder having

submitted the lowest evaluated bid or
with any other bidder.

Rule 41
Confidentiality
All information regarding the bid
evaluation shall be kept
confidential
until the announcement of

evaluation report under Rule - 35

Rule 42.
Alternate Methods of Procurements.
(a) Petty Purchases
if below the limit of Rs. 25,000

exempted from the requirement of bidding or
quotation of Prices.
Should be in conformity with Principles of
Procurement prescribed under Rule 4
Financial limit of Rs. 25,000 is extendable, if
justified.

(b) Request for quotations
Below the financial limit of Rs. 100,000

Below Rs. 5oo,000 for Autonomous bodies
(required to be approved by concerned Board of
Directors)
Standard specifications
Minimum of 03 quotations required
Purchase from the supplier offering the lowest
price
Financial limit of Rs. 100,000 is extendable if
full justification is provided.

(C) Direct Contracting
A PA may engage in direct contracting if the
following conditions are met:
Acquisition of spare parts or supplementary services from
the original manufacturer or supplier if not available
from alternate sources
Only one manufacturer or supplier exists
(specification of appropriate forum for authorization )
Repeat orders not exceeding 15% of the original
procurement
In case of an emergency declared by an appropriate fora.

The Prices are fixed by the Government.
The Purchase of Motor Vehicle from Local original
manufactures or their authorized agents.

(d) Negotiated Tendering
A procuring agency may engage in negotiated tendering

with one or more suppliers or contractors with or without
prior publication of a procurement notification. This
procedure shall only be used when:
i. The supplies involved are manufactured purely for the

purpose of supporting a specific piece of research or an
experiment, a study or a particular development;
ii. For technical or artistic reasons, or for reasons connected
with protection of exclusive rights or intellectual properly,
the supplies may be manufactured or delivered only by a
particular supplier;

iii. For reasons of extreme urgency brought about by events
unforeseeable by the procuring agency, the time limits laid
down for open and limited bidding methods cannot be met.
The circumstances invoked to justify extreme urgency must
not be attributable to the procuring agency;
Provided that any procuring agency desirous of using

negotiated tendering as a method of procurement shall record
its reasons and justifications in writing for resorting to
negotiated tendering and shall place the same on record.

Rule 43
On Account Payments
Prompt Payments to
suppliers/contractors within the time
given in the conditions of the contract,
which shall not exceed 30 days

Rule 44
Entry into force of the Contract
If formal signing of a written contract is required:-
From the date of signing the contract by all parties

concerned. Or
From the date of fulfillment of certain condition(s)
Contingent Contracts.
If no formal signing of contract is required:-
From the date of the notice of the acceptance of the bid

From the date of the purchase order

Rule 45
Closing of Contract
On issuance of overall delivery certificate or taking
over certificate required to be issued within 30
days of final taking over of goods/receiving the
deliverables or completion of work.
In case of defect liability or maintenance period;
Completion certificate to be issued within 30 days of

expiry of defect liability or maintenance period (except
for unsettled claims) and payments to be made as per
condition of contract but not exceeding 60 days.

Rule 46
Record of Procuring Proceedings
To be maintained by all P.As for a minimum
period of 05 years
Detail of record obtaining of record etc. in
accordance with Regulation 4,5,6 of PP
Regulation, 2008.
Detail

Rule 47
Public Access and Transparency
A document relating to evaluation and award of
contract to be made public;
as soon as the contract is awarded
exceptions proprietary nature or against the Public Interest
Prior approval of PPRA required to withhold the information
from public disclosure
Procurement contract over Rs.50 million are required to be
uploaded on PPRA Website on specified forms (Regulation of
PP Regulation, 2008)
Detail

Rule 48.
Redressal of Grievances by the
Procuring Agency
On receipt of complaint of an aggrieved bidder prior
to the entry into force of the procurement contract
PA to Constitute a Committee
Complaints
Written complaint within 15 days after the
announcement of the bid evaluation report
Decision by the Committee within 15 days of the
receipt of the complaint
Appeal can be filed in the relevant court of
jurisdiction

Rule 49
Arbitration
only after coming into force of the procurement
contracts
method of arbitration to be provided by the
procuring agency

Rule 50
Mis-procurement
Un-authorized breach of Procurement Rules

Rule 51
Overriding Effect
Shall have effect notwithstanding
anything to the contrary
contained in any other rules
concerning public procurements

Public Procurement Regulation, 2008
4. Record to be kept.- A Procuring agency shall keep the

following record of the procurement proceedings for at least
five years from the date of completion of procurement of
contract or rejection of all bids under rules 33 of the rules,
namely:
a) A brief description of the goods or works to be procured or of the

procurement need for which the procuring agency requested proposal or
offers;
b) The names and addresses of suppliers or contractors that submitted bids,
proposals, offers or quotations and name and address of supplier or
contractor with whom the procurement contract is entered into and the
contract price;
c) The names and address of suppliers or contractor who were pre-
qualified or selected and invited to submit bids or technical proposals;

d) Information related to the qualifications or disqualifications
of suppliers or contractors who have submitted bids,
proposals, offers or quotations;
e) The price or the basis for determining the price and a
summary of the other terms and conditions of each bid,
proposal, offer or quotation and procurement contract
stipulated by the procuring agency;
f) Evaluation report prepared under rule 35 of the rules,
alongwith any reservation and preference under rule 24 ibid;
g) In case of rejection of bids pursuant to rule 33 of the rules, its
complete record;
h) In case of any other method of procurement except open
competitive bidding which does not culminate in
procurement contract, a statement to that effect and the
reasons thereof; and
i) A summary of any requests for clarification of the pre-
qualification or solicitation documents, the response thereto,
as well as a summary of any modification to those
documents.

5. Obtaining the record.-(1) After acceptance of the
bids or, as the case may be, termination of the
procurement proceedings without resulting in a
contract, any person may, on request, obtain the
records referred to in clauses (a) and (c) of regulation
4.
(2) After acceptance of the bids or, as the

case may be, termination of the procurement
proceedings without resulting in a contract any
person who submitted bids proposals, offers or
quotations or applied for pre-qualification may
obtain, on request, the records referred to in clauses
(b), (d), (e), (f) and (g) of regulation 4.

(3) The record referred to in regulation 4 may also
be made available within a reasonable time to the Auditor
General of Pakistan or any authorized officer of they Authority
or the Federal Government.
6. No liability to suppliers etc.- A procuring agency

shall not be liable to suppliers or contractors for
damages owing solely to a failure or keeping record
of the procurement proceedings in accordance with
these regulations.
Back

7. *Posting of contract awards on PPRAs Website.- All
procuring agencies whether within or outside Pakistan shall
post Contract Awards over fifty million rupees on PPRAs
website on the proformas as set out in Annexure-I and
Annexure-II to these regulations.
Provide that where any information is related to the award

of a contract is of proprietary nature or where the procuring
agency is convinced that such disclosure of information all be
against the public interest, it can withhold only such
information form uploading on PPRAs website subject to the
prior approval of the Public Procurement Regulatory
Authority.
* Issued vide Cabinet Division S.R.O. (1)/2009, dated 09-07-2009

[F.No.2/1/2008/PPRA-RA.III.]
Back

RISK MANAGEMENT
3RD SESSION

GUARANTY VS WARRANTY
1. Its strange though but according to Collins

these two words have same meaning i.e
a written promises by a company that if a
product that they sell or work that they do
has any faults within particular time, it will
be repaired, replaced or redone free of
charge

2. In British English, Guaranty Is a preferred
word, whereas in American English
Warranty is a preferred expression. As per
dictionary, although these terms share the
meaning but still both cannot be used as the
same e.g. you can not say wealth is no
warranty of happiness, rather the correct
expression is wealth is no guaranty of
happiness. Also you would not say that my
mother is not the warrantor of my loan.

3. Similarly you can not say 30 days money
back warranty. Warranty, at least in USA,
is used for talking about an obligation for a
company to repair/replace the object.
Guaranty seems to relate to abstract ideas:
like Satisfaction Guarantied, 30 days
money back guaranty.

5. With above logic in view we can very safely
say that
with the warranty, you are
guarantied to get service, repair,
replacement and redone free of charge for the
goods purchased.

Easiest Definition:
A Warranty is the, supplier will provide
replacement for loss or repair/service for damage in
certain time period.
A Guaranty is a promise for customer

satisfaction, money back guaranty and Quality
for life time period.

COMPARISON CHART
Sr.No Guaranty v s Warranty
1 Spanishword Frenchword
2 Forquality/standards Forreplacement,repairagainst
poorworkmanship/damage/loss
3 Promise(canbeverbal) Writtenassurance
4 Notimelimit Timebarred
5 Lifetimeguaranty 1,2,3yearsgenerally

Guaranty: is the actual document
containing language of assurance
Guarantor: is the entity giving the guaranty
(Bank)
guarantee: is the entity receiving the
guaranty (buyer)
Now hopefully in light of above discussion you
can clearly understand the statement below;
This PC has 12 months warranty and 30 days
money back guaranty

BANK GUARANTIES
TYPES OF BANK GUARANTIES
1-Contract Performance Bank Guaranties
2-Bank Guaranty against warranty period
3-Earnest money as bid security
4-Bank Guaranty against 100% payment of LC
Date by which Bank Guaranty is to be submitted by seller
Date by which respective Bank Guaranty is to be

released
Documents required for release of Bank Guaranty

Bank Guaranty from foreign bank or local schedule Bank.
Bank Guaranty in Foreign exchange or local currency
Specimen of bank guaranty form is to be attached with the
contract
BG is an essential tool in the hand of Procurement Agency to
ensure timely and correct supply of stores by the contractors.
It is obtained to safe guard the interest of buyer and to bind the
seller to fulfill contractual obligations.
Incase the supplier fails to abide by the contractual obligation,the
BG is liable to forfeited.

SECURITY DEPOSIT
Means any instrument asked by the purchaser from seller
in the process of finalization of an agreement/contract for
his satisfaction.
It is unconditionally encashable,at the option of Purchaser
and shall include any :-
Earnest money
Cash security deposit
Bank draft / Pay order
Bank Guaranty

TYPES OF BANK GUARANTIES
Following types of BGs will be provided by supplier, as are
applicable in the contract:-
a): BGs against contract performance:-
5 to 10% as contract performance BG
against the total value of contract. It should remain enforce
till 60 days beyond the delivery period stipulated in
the contract.
b): BG against Advance /Down payment :-
The value of such deposits shall equal to amount
being paid as Advance/down payment (same
currency).
It shall remain enforce till 60 days beyond
Delivery Period.
BG AGAINST WARRANTY
PERIOD
Should be preferably 10% of contract value.
Duration of BG against warranty clause is variable i.e:-
One year for general type of Equipment/spares.
Consumable goods - warranty period should expire

after 6 months or when the goods are fully
consumed, which ever is earlier or as per terms of
contract.

BG AGAINST PACKING
MATERIAL
Equivalent to the cost of packing material.
Provided by the purchaser for Fruits,Food/Grains

items and containers etc.

MODES/FORMS OF SECURITY
DEPOSIT/BANK GUARANTIES
The security can be furnished in either of the following forms
to the satisfaction of purchaser at the time of signing of the
Local/Foreign contract:-
Demand draft /pay order from any scheduled bank of
Pakistan.
Treasury Receipt.
Unconditional Bank guaranty from scheduled Bank of
Pakistan in the name of buyer ,incase of local contracts.
Unconditional and irrevocable bank guaranty from the
scheduled bank of SBP or through LC opening bank
incase of Foreign Contract.

Bank Guaranty shall be provided on
Judicial Stamped Paper in favour of
Buyer in accordance with the agreed
Format.

4 Session
th
Letter of Credit

LETTER OF CREDIT
MR Muhammad Bashir of Bangladesh,owns a tea estate in

Sylhet. On a holiday in Hongkong he called on a local chinese
business man Edwin Lui who is a tea merchant.
MR Lui tasted the tea samples MR Bashir had taken along with
him and was impressed.MR Lui became keen to enter into a
regular trading relationship.As a buyer and as a seller both these
individuals have concerns before entering into this trading
relationship.

MR BASHIRS CONCERNS(SELLER)
He had never exported his tea before and he

was not familiar with exports requirements.
Knew nothing of MR Lui and was concerned
whether he would be able to pay on time.
On exporting his tea he would not be paid at
all and other such circumstances will not get
his goods back.

MR LUIS CONCERNS(BUYER)
Whether MR Bashir will be able to deliver on time.
Whether the tea Mr. Bashir will sell, be of same quality as the
tea he had tasted and been impressed with.
These are the concerns most buyers and sellers have. Other
concerns that arises are:-
Whether financing would be available to him.
Currency fluctuations:-
As currency fluctuates both buyer and seller would like to
protect themselves from the possibility of the currency moving
to detriment.
The seller may be purchasing the goods from another and
selling it to buyer. He would not want the buyer to find out
who the supplier is in order to prevent the buyer from directly
contacting the supplier.
IN SHORT THE SELLER REQUIRES
An assurance that he would be paid full and on

time.
Receipt of his dues at his own bank or through
a bank in his own country.
Finance to purchase the goods that he sells.
Advise and help in handling the documents to
effect the sale.

BUYER ON THE OTHER HAND
REQUIRES
An assurance that the goods that he receives are of the same quality
as the samples that he had approved.
Confirmation that he does not need to pay for the goods until the
seller has met his commitments.
Credit to enable him to pay for the goods after he had sold them.
Guidance and help in handling complex documentation and dealing
with specific import procedures and requirements.
It is under such situations i.e when sellers and buyers need
several assurances and concerns to content with that
commercials letter of credit come into their own as the
ideal instrument to facilitate trade.

Letter of credit
What is a letter of credit (LC)?
Letter of credit is a letter written by the buyers bank to the
seller advising him that he may draw a bill of exchange upto a
particular amount for the shipment of certain goods and
assuring him of payment on his submitting certain specified
documents.
In short LC is an undertaking or a guaranty of payment by a
bank should certain conditions be met.
LC is defined by international chamber of commerce (ICC)
in uniform customs and practice(UCP) as :-
Any arrangements however named or described,
whereby a bank acting at the request and on the instructions of
customer (the applicant) or on its own behalf:-
Authorize another bank to affect such payment or accept and pay such bills
of exchange.
Authorizes another bank to negotiate against stipulated documents,
provided the terms are complied with. Branches of bank in different
countries are considered another bank.
It would be noted that trading bank will pay the beneficiary either directly
or through its correspondent bank the amount agreed to before a specific
date provided the required documents are presented before this specific
expiry date.
Documents usually required are:-
- invoices (commercial & packing invoice)
- insurance policy
- certificate of origin
- bill of lading or airway bill
- certificate of fumigation
- certificate of inspection of goods

PARTIES TO LETTER OF CREDIT
Buyer or Importer:- The buyer is a person at whose instance the

LC is opened. He is therefore called as (opener).Until the LC is
opened he is the applicant.
Buyers bank:- The buyers bank is the one, at the buyers request,
opens the LC.It is therefore known as opening bank or issuing
bank.
Seller:- The seller is called the beneficiary of the credit as he is the
one who will receive the payment on the LC.
Intermediary bank:- The opening bank does not usually
correspond directly with the beneficiary but through another bank.
The intermediary bank advises the beneficiary of the LC having
been opened and conditions contained in it.
This intermediary bank is also known as advising or
Notifying bank.
CORRESPONDENT BANK
Is a bank with which bank has business relationship.
The correspondent bank may have an account with
the bank.
The correspondent bank usefulness is evident in
situations where a LC or a guaranty has to be advised
in which the bank does not have a branch.In such
situations the bank utilizes the services of its
correspondent bank to advise a LC.

ADVISING BANK
An advising bank advises the beneficiary that the
LC has been issued in his favour.
It is also advised that LC is genuine since it is
issued by one of its own branch.
The advising bank is a bank in sellers country.
This is extremely important for seller to get the
assurance that LC that he receives,be it from USA
or NIGERIA is genuine which is confirmed by
advising bank.

CONFIRMING BANK
The beneficiary in another country is often concerned about payment.
Despite receiving genuine LC he may be worried whether he would be
paid.
There was a instance of a company in India which sold goods to
company in Nigeria.LC was opened by Nigerian bank on the
instructions of Nigerian company and also had deposit of entire
amount of LC with its bank. The goods were exported but seller was
not paid as the Nigerian government, on account of lack of foreign
exchange, did not permit the bank of Nigeria to pay the seller.
This worry of non payment is negated by a confirmed letter of credit.
A bank in sellers country confirms the LC and by doing so it takes the
position and liabilities of issuing bank. Should the documents be in
order, the bank that is the confirming bank would pay the seller.

NEGOTIATING BANK
Is the bank with whom documents may

be negotiated.
LC should specify that through which
bank LC may be negotiated or freely
negotiable through any bank.

PAYING BANK
Is a bank at whose counter the seller would be paid.
This can be a bank other than the issuing bank
This is often the case in instances such as :-
- when payment has to be made in a currency that is alien to both
the opener and beneficiary.
- when there are exchange controls regarding remittance in the
country in which the opener of LC resides.
- the undertaking or agreement of a bank to pay, to accept,
negotiate under the credit is not subject to claims by the applicant.

OPENING OF LETTER OF CREDIT.
LC issued on the instructions of buyer.

Bank follows instructions and issues credit.
It does not make any assurance on credit worthiness or
honesty of a buyer nor does the bank give any guaranty on
the quality, quantity or price of goods.
Bank merely concerns itself with documents.
The undertaking given to the seller is only conditional; the
bank undertakes to pay only if the seller meets all the
requirements of the letter of credit.

CREDIT APPLICATION
The applicant must make an application before LC is actually
issued (known as application for LC or a documentary credit
application)
The application addressed to opening bank includes following:-
- full name of seller and address
- date of application
- the amount of credit
- type of credit
(a) Revocable:- can be amended or cancelled at
any time without advising the seller.
(b) Irrevocable:- can only be amended or
cancelled with prior agreement of seller.

(C) Confirmed irrevocable:- Credits that are confirmed (for
payment) by the bank in the sellers country.
Payment terms:- how and where seller will be paid:-
a- on presentation of documents
b- on acceptance of documents
c- on negotiation.
The goods:- - details of goods being bought
- price
- marking and types
Freight:- who is to pay i.e buyer or seller.
Basis of contract i.e FOB, CFR, CIF clearly defines the
responsibility.
Documents to be presented:- documents to be presented for
rel of payment to seller to be clearly spelled out

Shipment:- Date and place at which shipment must take
place. Location where goods to be shipped (port of
discharge)
Transshipment:- Allowed or not allowed
Partial shipment:- allowed or not allowed
The period with in which documents must be presented
Date and place of expiry of LC
Transferable/non transferable
Manner in which LC is to be advised
Permission:- Government permission to be attached with
application.

APPLICATION PROCESSING
Bank checks whether applicant has LC facility and has
sufficient balance available for credit to be issued.
Application is checked for:-
- completeness
- clarity
- consistency
- legality
- problem areas are discussed
Once LC is prepared it is again checked against application
and if everything is in order it is ready to sent out

ISSUANCE OF LC
Prepared and signed LC is not handed over to buyer to send it

to seller due to following reasons:-
- seller still needs assurance that credit is genuine
- buyer may not know to whom it is to be sent and how
- it is necessary to involve banks to ensure payments
The issuing bank therefore forward the LC to the bank in
country where in the seller resides.

ADVISING LETTER OF CREDIT
The advising bank at the request of the issuing bank, advises the
beneficiary that the credit in his favor has been established
On receiving LC from its branch it checks the signatures of the
credit are properly authorized and if they are, advises the
beneficiary after allotting the number to the credit for its own
reference.
If advising bank elects to advise the credit, it shall take
reasonable care to check the apparent authenticity of the credit it
advises. If the bank elects not to advise the credit it must so
inform the issuing bank without delay.
If LC is advised through one bank all amendments must also go
through the same bank to ensure proper intimation and avoid
multiplicity of amendments.
CONFIRMING LETTER OF CREDIT
Apart from advising a credit, a branch or correspondence bank of
the issuing bank may be requested by the issuing bank to confirm
credit
What occurs? on being so requested, branch or correspondent
bank confirms the credit and thereby assumes the responsibility
of a issuing bank.
It confirms that if required documents are represented in a
manner stipulated in LC, it would pay the beneficiary for the
value of goods sold up to the amounts of credit.
There is no requirement of bank requested to add its
confirmation. A bank requested to do so normally check whether
it has a banking relationship with the issuing bank and if it is
prepared to take risk on the issuing bank as a confirmation is a
commitment to pay.
A bank should be specially requested by
issuing bank to add its
confirmation.Otherwise,a credit shouldn't be
confirmed.
A confirmed letter of credit gives a seller
additional comfort as a confirming bank is an
additional guarantor guarantying to pay.
Confirming bank is usually a bank situated in a
country the seller resides in.

AMMENDMENTS TO LETTER
OF CREDIT
LC is not cast in a stone.
After issue and advised, there may be a need to change one or a
number of terms.
The reasons may range from:-
- extending date of expiry of credit
- increasing amount of shipping documents required
- manner the goods are to be shipped
A Revocable credit can be amended by the issuing bank at any
time.

An Irrevocable credit can neither be amended nor cancelled
without the agreement of issuing bank, the confirming bank
and the beneficiary. If any one of these dont agree credit
cannot be amended.
The terms of credit remain in force until the beneficiary
communicates his acceptance of the agreement to the bank that
has advised the amendment.
A letter of advise may contain more than one amendment. In
such case all the amendments in the letter must be accepted. It
is not possible to accept some and reject others.

TYPES OF DOCUMENTARY
CREDIT
Revocable Credit
Irrevocable Credit
Irrevocable Confirmed Credit
Revolving Credit
Transferable Credit
Back to Back Credit
Red Clause Or Packing Credit
Transit Credit
Stand By Credits

REVOCABLE LETTER OF
CREDIT
A revocable letter of credit gives a conditional
undertaking to the exporter for payment. It can be
cancelled or amended anytime without prior notice to
the beneficiary. However, under uniform Customs &
Practice-500,the issuing bank must honor payment,
acceptance & negotiation made by another bank
complying with the terms & conditions of the credit
prior to receipt of notice of amendment or
cancellation.

Irrevocable LC:-
- cannot be amended by opening bank unless
acceptance is given by beneficiary.
- to pay at sight if credit provides for sight payment.
- to pay on maturity date if credit provides for deferred
payment.
- irrevocable LC are more practicable and popular as
their terms can not be changed without agreement of
all parties.

Irrevocable Confirmed LC:-
- issuing bank may request its branch or correspondent bank in
the country in which the seller resides to add its confirmation.
- when correspondent bank adds its confirmation, it becomes
confirmed LC.
- when terms and conditions of LC are met, such a confirmation
is a definite and clear undertaking by confirming bank:-
- to pay if LC allow for sight payment
- deferred payment
- no cancellation or amendment unless agreed by parties
involved.
- this is the best form of LC for seller as he is ensured for
payment by the bank in his own country.
- confirming bank may confirm credit if only requested to do so
by opening bank.
REVOLVING CREDIT
In the revolving credit under Terms & Conditions', the
amount and or time is automatically renewed or reinstated
without specific amendment to the credit. It can be revocable
or irrevocable.
It can revolve in relation to time or amount.
Incase of a credit that revolves in relation to time, e.g, which is
available for instance upto US$100,000/- per month during a
fixed period of time, e.g, one year, the credit is automatically
available for US$100,000/- each month irrespective of
whether any sum was drawn during the previous month.

Incase of a credit that revolves pertaining to
amount,the amount of the credit is reinstated
upto utilization,within a given year of
validity.For example,a credit available upto
US$100,000/- at anytime,within an overall
validity of six months,would allow
reinstatement of each and every drawing.In
such a case,credit stipulates the number of
times it can revolve.

Transferable LC:-
- LC is not transferable from one party to another because credit is

not negotiable instrument and ownership cannot be transferred.
- LC can be transferable if the opening bank specifically allows
and issues transferable LC.
- Terms such as divisible,fractionable and assignable add nothing
to the meaning of transferable.
- The benefit of transferable LC is that if beneficiary is a middle
man between the opener and manufacturer and can earn profit
without tying up his funds
- The bank charges related to the transfer are payable by first
beneficiary unless otherwise specified
- Transferable LC can be transferred only once,consequently LC
cannot be transferable at the request of second beneficiary

BACK-TO-BACK OR COUNTER
CREDIT
Under back-to-back credit, the seller as beneficiary (middle
man)of the first credit(Export LC) offers it as Security to the
advising or another bank for issuance of the second credit
(Import LC) in favour of supplier or manufacturer.As
applicant,the seller is responsible for reimbursing the bank for
making payments under Second Credit regardless of whether
or not he himself is paid under the first credit.There is
however,no compulsion for the bank to issue the second
credit.A back to back credit is a facility extended by the banks
to their valued customers.

RED CLAUSE CREDIT /
PACKING CREDIT
This type of credit is traditionally used for
payment to beneficiary (prior to shipment),
who requires an advance in order to pay cash
for the goods.In such cases,the credit contains
a Red Clause which is usually printed in red
to make it prominent,authorizing the
intermediary banker to make advance to the
seller.
It is for the applicant / buyer to decide upto
what extend and under what conditions,he will
authorize the issuing bank to authorize/allow
this facility.The Red Clause will always
specify either the outright amount to be given
as an advance or indicate the same in %
(percentage) term of the credit value.

TRANSIT CREDIT
Because of the high standing of banks of Britain among the
world financial community,they are often asked to arrange
credits in respect of trade between buyers and sellers
outside U.K. A British Bank is requested by an overseas
bank to advice or confirm a credit in favour of a
beneficiary on another overseas country in their name and
on their behalf.Other reasons for the use of a transit credit
might be that the issuing bank is not known in the
exporters country or due to political reasons ,
communication is not possible between the buyers country
and the sellers country.

STAND BY CREDIT
It is often used in lieu of performance guaranty,e.g in respect
of major construction contracts.It may be used for other
purposes also such as in the form of a guaranty by a
company,for extending loans to a subsidiary.The stand-by
credit ensures payment if and when the subsidiary fails to
repay the loan on due date.
Sometimes,a stand-by credit may be issued in favour of the

seller to ensure that if payment is not received under some
other pre-agreed method,it will be made under stand-by credit
upon the seller fulfilling his part of the stand by credit.

The stand-by credit is intended to cover a non-
performance situation instead of a performance
situation as is done in traditional documentary
credit.

CHECKLISTS FOR
LETTERS OF CREDIT
TRANSACTIONS

CHECKLIST FOR LETTER OF
CREDIT (OPENER)
PRIOR TO OPENING LETTER OF
CREDIT:-
1. There is a sales contract from the seller wherein all the terms
of sale such as price,quantity and the like have been agreed.
2. There is sufficient credit available (credit lines) with the credit
opening or issuing bank to open the letter of
credit.Alternatively ensure there is sufficient cash available.
3. The goods may be imported into the country.

4. There are no restrictions on the import and that the
required permission / license (if required) has been
obtained.
5. A proper application for the opening of the letter of credit
has been given to the bank .There must be no ambiguities
and must be consistent with the terms of sales contract.
6. All the requirements of the seller are met
(confirmation,shipment,sales etc).
7. Adequate safeguards are built in (shipment,expiry
date,authentication of goods).
8. To avoid confusion and misunderstanding,excessive
detail is not included.

COMPLETING APPLICATION
FOR A LETTER OF CREDIT
1. The correct type of credit is opened (revocable,irrevocable or
confirmed).
2. Th currency and the amount of credit is as agreed and are as
specified.
3. It is cleared who is to receive the funds (beneficiary) and that
entity's name and address is in detail and complete.
4. Address (applicant for a letter of credit) and name is correctly
stated.
5. It is clarified that who would pay the freight charges.
6.It is cleared which documents would need to be presented.

7. The maximum amount that can be paid /negotiated/accepted under the
letter of credit is stated.
8. There is a precise description of the goods including its
nature,quantity,weight,markings etc.
9. It is cleared whom the documents should be submitted for
negotiation/payment.
10.It is cleared on whom the drafts are to be drawn.
11.The place of shipment,whether or not partial and transshipment are
allowed and when the goods must be shipped in detail.
12.The manner the letter of credit is to be advised,i.e, by telex,cable or
mail.
13.It is clear (if applicable) who the confirming bank / negotiation bank
or paying bank is.
14.It is clear from whom (and the manner) payments are to be claimed.

15. The last date of shipment and the expiry
date of the credit for presentation of
documents is specified.
16. All instructions are clear,precise and free
from excessive detail.
17. All other specific requirements have been
entered.

ON RECEIPT OF LETTER OF
CREDIT
1. The letter of credit issued is in accordance

with the application made in every way.

CHECKLIST FOR EXPORTERS
(BENEFICIARIES)
On receipt of of letter of credit:-
1. Does the letter of credit conform to requirements?
Is it irrevocable?
Is it confirmed?
Is it of the special type you asked for?
Is it in agreement with the sale contract you have entered into?
2. Does it have an expiry date that is acceptable?
3. Are the payment terms acceptable?
At sight ?
At a future date ?

The paying bank ?
The place of payment ?
4. Are the items exported correct ?
In regard to the items agreed to be sold?
In regard to the value of the items sold?
5. Is the value stated on the letter of credit correct?
6. Are those changes agreed to be borne by the importer not included in the
letter of credit?
7. Is your/companys name (beneficiarys) and address stated correctly on
the letter of credit?
8. Have you agreed to the various pre-shipment requirements if applicable?
a) Packing?
b) Inspection?
c) Certificate of origin?

e. Fumigation?
f. Documents checking?
G. Insurance cover?
DOCUMENTS
1. LETTER OF CREDIT
a) The letter of credit should not have expired.
b) All conditions stipulated should have been met.
c) All documents stipulated should have been submitted.
d) All restrictions should have been met.
e) Those documents that require authentication should have been
authenticated.
f) Descriptions should be consistent and be as required.

g) There should no be spelling mistakes.
h) All documents should be dated.
2. BILL OF EXCHANGE
a) It must be dated.
B) It must be signed by the drawer.
C) It must contain the letter of credit number.
D) It should be drawn on the correct person (as stated in the letter
of credit).
E) It must be indorsed (if necessary).
F) It must be drawn for the correct amount.
G) It should be of the nature stipulated (sight or usance).
H) The figures and words must agree.
I) There must be no misspelling.

3. INVOICE
A) The invoice must be on companys letter head.

B) The invoice must be dated and signed.
C) The invoice must be in the name of the buyer and should be properly
addressed.
D) There must be no spelling mistakes.
E) There must be as many copies as stipulated.
F) The descriptions of the goods,value weight and shipping marks must be
consistent with the letter of credit,transport documents and other documents.
G) The invoice should state the letter of credit number.
H) It should be (if required) authenticated.
I) It should state (if applicable) the import license number.

4. TRANSPORT DOCUMENT
A) It should be dated and signed.

B) A full set must be submitted.
C) It must not be stale.
D) It must state the consignees name in full.
E) There should not be any spelling mistakes.
F) It must clearly adhere to terms of the letter of credit (transshipment,etc).
g) It should show the date of shipment.
h) It should be endorsed (if necessary).
i) It must be consistent with the other documents (invoice,bill of
exchange,letter of credit,etc.)

5. Insurance Documents
A) It should be dated.The date should be before that of the
transport document.
B) It should be properly addressed.
C) It should be signed.
D) It must be consistent with all the other documents.
E) It must be for the correct value.
F) It must cover all risks stipulated.
G) It should be endorsed.
H) There must be no spelling mistakes.

6. OTHERS
A) All other documents asked for in the
credit should be submitted.
B) All documents must be consistent with
each other.
C) There should be no spelling mistakes.

COMMON DESCREPANCIES IN
LETTERS OF CREDIT
GENERAL
1. Expired credit. 7. Mark and number different
between documents.
2. Late shipment.
3. Credit amount exceeded. 8. Spelling mistakes
4. Some documents called for not 9. Weight in different documents
submitted. differ.
5. Import license / permission not 10.Absence of signatures on
given. documents.
6. Documents inconsistent with each 11.Documents not signed as
other. required.

INVOICE
1. There were spelling mistakes (especially the name of the
beneficiary,the address and the name of the goods sold).
2. Amount differs with that on the bill of the exchange.
3. Description of goods differs from that on credit and other
documents

SHIPPING DOCUMENTS
1. Late shipment.
2. Claused bill of lading (e.g. three cases broken)
3. Stale bill of lading (presented after permitted time from the
date of issue of shipping documents).
4. Short shipment.
5. Goods shipped on deck as opposed to on board..
6. Freight paid stamp not on a bill of lading where credit
covered C & F & CIF.
7. Shipment made between other ports.
8. Bill of lading not properly endorsed.

9. No evidence of goods actually shipped on
board e.g received for shipment,bills of
lading than those stated in the credit.
10. Transshipment/partshipment effected
when prohibited by credit.

INSURANCE
1. Goods under insured (Goods need to be insured
100%).
2. Not endorsed correctly.
3. Insurance certificate submitted instead of policy.
4. Insurance cover expressed in a currency other
than that of credit.
5. Risks covered not being those specified in the
credit.
6. Insurance risks specified in the credit not covered.

Thank You

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Free Alongside Ship i.e within the reach of

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The seller bears all the costs and risks involved in

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Risk of delay in delivery

Financing, how and against what?

Currency, regulatory restrictions

Documentation, mode of settlement

ICC rules, Inco terms, UCP 500/600, ICC - 522

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Section 26, Public Procurement Regulatory

Public Procurement Rules, 2004

Amended up to September, 2008

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Acquisition of goods, services or

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Any construction work consisting of erection, assembly,

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a procedure leading to the award of a