CASE LAW, CASE STUDIES QUESTIONS AND ANSWERS

Operation under documentary credits raise a number of problems for practicing managers in both industry and banking circles. The matter is given under heads arranged in alphabetical order. This chapter lists:

Case Law                      : 31

Case Law                      : 51

Question and Answers  : 78

Total                                       : 160

The case law illustrated actual disputes and the taken by the judges. This does not mean that the view point is final. There are many approaches  to an issue, those taken by the judges are considered views but are not the final truth or answer in the matter.

In the case studies section, readers should apply their mind as to the  possible solution of the points raised. The case studies deal with the practical problems which arise in a day to day trade transaction.

Most of the queries in the question and answers section have been considered at the biggest level in international chamber of commerce on banking technique and practice.

The author welcome contribution based on actual experience. These will be acknowledge personally and carried in the name of the contributor in the next edition.

Acceptance under reverse (case law)

On august 9, 1985 at the request of Jai hind mills company the canara bank opened a letter of credit in favour of defaudent no.4 and on the same date a telex message was sent by canara bank by swiss bank corporation defendant which was negotiating bank or a confirming bank. By the telex message, swiss bank was informed that the letter of credit is available for the aggregate sum of and it is open for the swiss bank to accept the draft payable at 120 days from the date of bill of lading provided the following documents are presented by defendant no. of or their bankers

a.     Signed commercial invoices;
b.    Certificate of origin certifying that the goods are of Turkish origin;
c.     Bills of lading showing freight prepaid made out to the order of canara bank or to order;
d.     Insurance policy in a negotiable form;
e.     Combained certificate of phytosanitory and fumigation certificate issued by authorized institution;
f.      Certificate of weight and quality issued by SGS or their correct spondent in turkey at the port of loading;and
g.     Packing list in triplicate.

The letter of credit also provided for the following additional conditions;

a.     Documents must be presented for negotiation within 21 days from the date of shipment;
b.   Latest date for negotiation is September 29, 1985.

The date of shipment was subsequently modified as September 30,1985 from September 7 ,1985  while the latest date for negotiation was advanced to October 21, 1985, the later of credit specially recited that swiss bank should accepted the document provided that a all the terms and conditions of the credit are strictly compiled with and then to accept the draft and then reimbers from the account of the canara bank available with bankers trust company the credit was subject to UCP 400.

On October 21, 1985, credit bank forwarded documents and remittance advice to swiss bank accepted the draft or bill of exchange payable to the credit bank 120 days from the date of bill of lading that is on January 28 1986, the bill of exchange was drawn by defendant no 4 and was accepted by the swiss bank. The commercial as well as the shipping documents from forwarded by the swiss bank to the canara bank on. October 23 1985, and were received by the foreign trade department of the canara bank on October 25 1985, it appears that till November 14, the foreign department did not take any action in respect of the document and only thereafter forwarded it to the mandvi branch of canara bank for acceptance canara bank dispatched a telex message to swiss bank informing the latter of that the documents are not that the documents are not accepted on account of discrepancy in this certificate as the certificate did not describe the merchandise specification as per items 3 of the letter of credit. The swiss bank rejected to the objection raised by  canara bank and there  upon on November 19, forwarded to the documents to the plaintiffs requesting informed canara bank that the documents should be rejected as there are several discrepancies and there upon canara bank sent another telex message to swiss bank retairing were verified and found to be in complaint with the terms oof letter of credit.

The representatives of the plain tiffs alleged and fraud by presenting documents which were not geinue and subject to a permanent iinjuction.. an ad interim injuction was granted by the single judge.

Swiss bank claimed that canara bank cannot be restraining the paying the amount to swiss bank nor can swiss bank can restried from realizing the amount from the bank in newyork and such in injuction would completely upset the international transaction between bank and bank. Swiss bank denied that documents were accepted in viaolation of the terms of the letters of credit or that the documents are did not conform to the requirement of the letters  of credit.

The single judge granted the injuction sought for holding that the plaintiffs have made out a prima facie case of fraud against defendant no. 4. It was also held that the swiss bank had knowledge of the fraud at the time of accepting the documents and also at the time of making the payment. The knowledge of the swiss bank was held established on the ground that there were discrepancies in the documents trendered by defendaunt no.4 and the payment  was made by swiss bank in spite of the parties agreeing for extension of time to make payment and the fact of alleged payment was with held from canara bank and from all the concerned parties  till December 13,1986. It was added that the documents were negotiated beyond the stipulated date under the letter of credit and therefore the action of swiss bank of grave suspicion.

On a careful scrutiny of the arguments advanced two questions came for determination whether swiss bank negotiated the documents in accordance with the terms of letter of credit. And whether the documents tendered were fraudulent and whether swiss bank ad knowledge of that  at the time of acceptance of documents or at the time of payment . the plain tiffs would be entitled to grant of injuction if the finding on their of these in the affairmative.

The court in its judgement said that as it has come to the conclusion that the  documents were negotiated and the bill of exchange was accepted in violation of condition of the letter the result was that swiss bank could not claim reimbursement from canara bank and consequently canara bank could not doubt the account of the plaintiffs . the court did not find in necessary to investigate the question  as to whether the documents tendered on behalf of defendant no.4 were fradulant and if so, whether swiss bank had knowledge of the fact.

In the result both the appeal and  the cross objection were dismissed with costs.

(Swiss bank corporation v. hind oil mills company and others (1989) comp.cas 241).

31.2 accidents – goods sunk- buyer to pay (case law)

At the request of the defendant m/s hira lal & sons , the plain tiffs bank lakshmi commercial bank ltd.delhi opened a letter of credit in favour of m/s. palmex enterprises  Singapore for us dollors 205992.51 to supply plamex pvc resin suspension which was adviced through manufactures hanover trust co., Singapore.

The seller shipped the goods on 30th august 1979, and tendered the documents negotiated by the negotiating the bankers. Who got reimsumberd by the issuing bank. The buyers refused to reimsbers the issuing bank and it resulted in a suit against the buyers.

The ship carrying consignment sank. The buyer logged a claim with the insurance and instead of paying to the plaintiff bank it wanted to it get payment from the insurance company. The plaintiff bank replaid that the buyer were liable to make payment to them.

The buyers did not complain that the plaintiffs bank had not acted during 7 day period they did not point out any discrepancy in the documents in the documents which could have been  a ground to avoid the liability. on the expiry of seven days the liability of buyers to the  pay the amount to the bank became absolute. The buyers could not turn round and say that  the plaintiff bank had not strictly observed the terms of the letter of credit. During this crucial period of even days, the buyers could have pointed out of the discrepancy if there was one in honoring the letter of credit.

The court observed that immediately  on payment, the negotiating banker sent the advise to the plaintiff bank. The plaintiff bank is on 10th  September,1979, asked the buyers to make  payment within seven days. This seven days was the critical period. The buyers were obligated to make to payment to the plan tiff bank. If they wanted to dispute their liability, they should have informed the plain tiff bank within seven days that it had not performed the mandate because did not fulfil strictly the conditions of  credit for any reason. The buyers did nothing of the kind.

If the ship sinks it is the buyers business to purpose the claim against the insurance company. The buyers are liable to pay to the plain tiff bank the amount which had been debited to their  account by the negotiating banker.

This is classic case of waiver. Both the issuing banker and his correspondent bank  have to make quick decision as to whether a document tendered by the seller complies with the requirements of a credit. Otherwise, they incur liability to one or other of the parties to the transaction if the decision is wrong. Therefore the buyer at whose instance the letter of credit is establish ought to raised objection when the documents are presented if he finds that the banker has accepted non-complying documents of the seller. The banker cannot take objection after a long time. The buyer must act promptly. The issuing banker has to indemnify the paying banker. Delay is disastrous. Iff the buyer does not make any complaint with in a responsible period, the right to raise objection on the score of non-compliance of the conditions of credit is gone once for all. This right cannot be exercised at any time one chooses. To allow the buyers to repudiate the liability after seventh months of representation of documents is to do injustice to the plan tiff-bank. The buyer must, therefore, be bound by their waiver.

That the ship has sunk is not a defense to the suit.  The   plan tiff – bank had opened   a letter of credit. It is true that the policy of   insurance is in the name of the buyers as well as the plan tiff   - bank. But the primary obligation   the  party  is of the buyers.

The lower court, therefore, declined to grant leave. The high court, however, held that the refusal to grant leave. To the appellant to defend the suit is a harsh one. It, therefore, set aside the judgment of the single   judge and granted leave to the defend to the suit to the appellant.

Additional documents

Q. in a credit where it is stipulated that the terms of the credit are complied with the and additional copy of documents goes to the buyer direct and the buyer maintains that the terms have not been complied with, how should be issuing bank go about it? Similarly if a certificate from beneficiary has been given that the terms of the credit have been complied with, which turns out to  be incorrect.

A. you have to go strictly by the documents. The danger  is that one original is sent to the applicant who can take possession of the goods and then go to the court to take injuction  to stop payment. A negotiable copy  of  the document does not make any material difference and it does not make the position of the buyer any better. Similarly where a full set of  negotiable documents goes directly to the buyer and he receives the goods and there is a certificate from the beneficiary that all the terms of the credit have been complied with even if that certificate later on turns out to be  incorrect, the position does not change. However, it had to be noticed that anyone accepting a credit where he can-not obtain the documents is exposing himself to a grave risk. We come across credits where one of the conditions is certificate to be provided by the buyer. Now that is a dangerous document. If that is not available, the beneficiary will not get his money and if the condition does not suit the buyer you are very unlikely to get it.

Q. in this particular case, the advising  bank should request to the opening bank to authorize it to confirm  the credit as requested by the beneficiary, if it is so willing only then the advising bank will be entitled to the protection available under UCP for  getting the reimbursement later. If, however, because of its relations with the beneficiary, the ad visiting bank is willing to  the conform   the credit even otherwise it would be doing so as to it own risk. The protection / reimbursement of the issuing bank on submission of complaint documents may not be available.

Agency commission in credit

An Indian exporter entered into a sales contract with a merchant importer in Singapore for export of gift items. One of the condition of the contract was that the Indian exporter would give a commission of 10% of the CIF value of goods exported to a nominee of importer. As Singapore party was not very well known to the Indian exporter, they insisted on a letter of credit.

Accordingly a credit was opened and which one of the documents stipulated. A certificate from Indian bank that 10% of CIF value of invoice has been remitted to the nominee of the importer.

While presenting documents the exporter feared that if payment does not come, he would not get back the money that he pays as 10 % commission and did not instruct the bank to pay the commission.

The documents were refused on  the ground that bank certificate as required   was not enclosed. The exporter is in a dilemma. If he pays brokerage even before he receives his money, and the documents are rejected on some other ground, he would lose this 10% . if, however, he does not pay, the importer is refusing to honour the credit.

In the circumstances what should be the remedy available to the exporter?

In such a case the beneficiary should ask for an amendment requiring a certificate from negotiating bank that 10% of proceeds are being  kept in reserve and would be remitted to the named party on  receipt of proceeds. This would have taken care of this dilemma and ensured compliance with the credit without resulting in loss for him.

Banks deals in documents not goods

An Indian firm entered into a contract with a Russian firm for the supply of  machinery and opened a confirmed irrevocable letter of credit with the bank of India. The Indian firm after sometime complained about the unsatisfactory performance of the machinery and fields a suit seeking injuction to restrain the Russian firm from realizing the amount payable in terms of letter of credit.

The supreme court held that the autonomy of an irrevocable letter of credit is entitled to protection and the lower courts should refrain from interfering: an irrevocable letter of credit is a mechanism of great importance in international trade. Any interference with the mechanism is bound to have repercussion on the international trade. Except under very exceptional circumstances, the courts should not interfere with that mechanism. Further it held the opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods, which imposes upon the  banker an absolute obligation to pay, irrespective of any dispute there may be between the parties as to whether the goods are up to contract or not. The letter of credit is independent of and unqualified by ‘ the contract of sale or underlying transaction’.

Banker obligation – documents in compliance with letter of credit terms

M/s Godrej soaps ltd., entered into a contract to supply  to the Bihar state foods and civil supplies corporation ltd. One thousand metric tones of sizola brand pure mustard oil’ the total value of which  was approximately Rs. 86 Lakhs, packed in brand new leak proof 62,040 tins of net 16  kg. each at the rate Rs. 137 per tin. The united commercial bank opened a letter of credit for the said amount, which available on submission of :

a.     Signed detailed invoice in duplicate;
b.    Railway receipts consigned to or endorsed in favour of united commercial bank marked ‘freight to pay’ evidencing dispatch by railway of the merchandise as stated above; signed delivery order on your godown at fvg. United commercial bank covering the delivery of the above-mentioned merchandise.
c.      Insurance policies or certificates covering usual transit risks and rail issued in duplicate and endorsed in blank by transit insurance at the cost of openers not exceeding one per cent of value of goods to be effected by the beneficiary and to be included in the invoice;
d.    Railway receipts/ delivery order must be dated not later than 13.7.1978;
e.      Bills of exchange must be dated and negotiated not later than 20.7.1978.

The united commercial bank refused payment ‘except under reserve’ on submission of documents due to ‘discrepancies’. The main discrepancy was that the goods were described in the railway receipt as ‘sizola  brand pure mustard oil’  ‘ unrefined’. The plain tiffs accordingly in structured their bankers, the bank of india, to accept payment of  Rs. 36,52,960 against the first lot of documents ‘under reserve’ . this fact was duly noted by the bank of India on submission of  second lot of documents with the same discrepancies. RR was also found to be stale. The issuing bank, therefore, refused payment of  this lot and asked for refund for the earlier lot. The plan tiffs maintained that the term ‘ un refund’ was used to get lower freight.

The plain tiffs, being apprehensive that their bankers, the bank of India, would be bound to refund Rs. 36,52 lakh, filed suit for grant of a perpetual injuction against the appellant. It was declined on a demand for refund. The plain tiffs moved the single judge did as an interim measure, which was made absolute later. The appellant, therefore, filed an appeal.

The court deliberated on the issue in detail and quoted many important judgments on the subject. Based thereon, the supreme court opined that the high court should have granted a temporary injunction, to restrain the appellant from making a recall of the amount of Rs. 85,84 456 from the bank of  India in terms of sthe letter of guarantee or indemnity executed by it.  The courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit or a bank guarantee between one bank and another. If such temporary injunction is granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment is made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail.

It is only in exceptional cases that the courts will interfere with machinery of irrevocable obligations assumed by banks. They are the life blood of  international commerce. Such obligations are regarded as colaterial to the underlying rights and obligations between the merchants at either end of the  banking chain. Except possibly in clear case of fraud of which the banks have notice, the courts will leave the merchants to settle their disputes  under the contracts by litigation or arbitration as available to them or as stipulated in the contracts. The courts are not concerned with their difficulties to enforce such claims; these risks of the unconditional wording of the guarantees. The machinery and commitments of banks are on a different level. They must be allowed to be honoured free from interference by the courts. Otherwise, trust in international commerce could be irreparably  damaged.

The court observed that the appellant was under a duty to its constituent, the Bihar corporation, to scrutinize the documents, and could not be compelled to make payment particularly when thje description in the document did not tally with that in the letter of credit. It was fully entitled to exercise its judgment for its own protection. When the appellant, against the first lot of 20 documents, refused payment  except  ‘under reserve’, the remedy of the plain tiffs was to approach the ‘openers’ , i.e., the Bihar corporation , to instruct the appellant to effect a change in the description of the goods  from “ Sizola brand pure mustard oil” to “sizola brand pure  mustard oil refined” in the letter of credit instead the plain tiffs instructed their bankers, the bank of India, to execute a letter of guarantee or indemnity. When dishonored  on presentation on august 3, 1978, the legal consequences followed between the appellant and the bank of India. The inevitable chain of events could not be prevented by the grant of an injunction.

The appellant presumably knew little or nothing about mustard oil. Bankers are not dealers in mustard oil, but dealers on document only. The appellant as the issuing bank was presented with documents and asked to pay a very large sum of  money in exchange of them. Its duty was not to go out and determine by physical examination of the consignments, or employment of experts, whether the goods actually  conformed to the contract between the buyer and the seller, nor even determine from either its own or expert advice, whether the documents called for the goods which the buyer would be bound to accept. The banker knows only the letter of credit which is the only authority to act, and the documents which are presented under it. If these documents conform to the letter of credit, he is bound to pay. If not, he is equally not bound to pay. The letter of credit called for “sizola brand pure mustard oil” while the railway receipt carried the description  “sizola brand pure mustard oil” un refined and it was not with in the province of the appeal to say that the latter description meant identically the same thing as the former.

The court, therefore, held that the grant of  temporary injunction by the high court appears to be wholly unwarranted. For reasons already stated, the appellant was well within its rights in making a recall of the amount of Rs. 85,84,456 paid  “ under reserve” and / or in terms of the letter of guarantee or indemnity. The court dis favoured the grant of temporary injunction. The appeal was, therefore, allowed with costs.

Bank and their duties

The duty of the bank to examine the documents is dependent upon the precise description of the documents to be checked. The bank is concerned only with the lack of conformity of the documents and not the actual intension of the parties to contract, or even to the express terms of sales contract unless that contracts form part of the credit.  A bank is not responsible for the legal consequences for the geneuisess of the documents presented if these appear on their face to be genuine. The bank’s function is to eliminate the credit risk and not to insure the mercantile risk taken by every person engaging in the sales of goods.

These principles  are upheld in many court cases. In the case of guarantee trust co. of New York vs. van den berghs the credit was opened for the supply of a cargo of manila coconut oil, but the bill of lading  was not required to show it as such.  The bank, therefore, honoured presentation which was accompanied,, among other things, by a certificate of  origin showing manila  coconut oil. The applicant field a suit against the bank for reimbursing him for bill of described the the goods, as “coconut oil” and not “ manila coconut oil” the court held that since there was no specific requirement in the credit for the bill of lading to show the cargo as “manla coconut oil” and the certificate of origin does show it, the bank had sufficiently complied with the credit requirement.

What is the liability of a ship owner  if he fails to disclose the fact relating to the condition of the packages received by him for carriage by sea was the subject matter in the case of the ellerman & bucknall steamship  co.ltd. vs. sha bhagajee son mull. The court held the banks- both issuing bank and paying bank- are under obligation to pay only if the documents against which they pay are what the letter of credit calls for. In still another case is it was held that the bank must protect his customers interest the purchaser of the goods represented by the documents, they must be usual documents required in the particular trade and must be merchandable.

Banks obligations

The Allahabad bank opened a letter of credit for 56,500 valid up to june 1985 in favour of M/s vinmar impex inc., Singapore who dispatched 100 M.T.HDPE  granules on board vessel, “Ganga pioneer” packed in four containers and covered by four bills of  lading. The vessel reached Calcutta on or about june 5,1985. It failed to forward through the bank the original bills of lading, marine insurance policy, signed invoices etc., to enable the  appellant to take delivery. The shipping company refused to release cargo for want of original documents.

Respondent no. 1 instructed the shipping company to release the cargo up on the appellant furnishing bank guarantee for release of goods in lieu of the original documents. The Allahabad  bank at the instance of the appellant executed four letters of guarantee and each document was signed by the appellant in favour of the shipping company. There after shipping company delivered the goods to the appellant with out the original documents. Later, the shipping company made a demand on the Allahabad bank to honour the letter of indemnity. The bank called up on the appellant to pay the amount due. The appellant sought temporary injunction alleging breach of contract by sending goods of inferior quality than contracted.

The supreme court held that the banks obligation for payment under the letter of indemnity conferred on the appellant was absolute and one a demand being made the bank could not refuse payment as the bank is not concerned with any controversy between the buyer and the seller.

Beneficiary rights under freely negotiable lc

A.   The questions concerns article 49 which acknowledges a beneficiary’s right to assign proceeds. The questions asks whether or not an advising bank could take instructions; this cannot be answered as local law will determine the advising bank scope for action. In some countries, an advising bank could not refuse to take notice whether it wanted to or not. We are not sure what issue is implied by saying that the LC is freely negotiable; if the beneficiary assigns proceeds with one bank but then elects to use the services of another to secure such proceeds then the assignment is presumably meaningless and a problem more for the assignee to consider than the advising bank.
Bills of lading
The eastern bank ltd. Opened credits through its correspondent in new York requiring, inter alia,, clean bills of lading. The sellers delivered consignments to the shipping company in used fibre drums and the receipts mentioned that. The seller, however, could prevail on the shipping company to issue bills of lading specifying that goods were received in drums apparently  goods order and  condition on the strength of an indemnity from the seller against any resulting loss. The bills of exchange presented were negotiated by the new york bank under the letter of credit. The buyer found that the drums contained coal dust and factory shavings. The buyer sued the shipping company and the bank for recovery of net loss, charged the shipping company of misrepresentation and breach of duty by not specifying in the bill of lading that the which were not clean. In the case of one credit the bill of lading did not even show shipment of entire quantity contracted for.
It was held that the bill of lading being a document of title, its ship owner is duty to specify correctly therein the condition of the goods received. The goods being on sea, the bankers, traders etc. who negotiate the bill depend only the on the statement contained in the bill of lading. The ship owner  while not guaranteeing the contents of the packages should not all external effects noticeable on on inspection of goods or their packing etc., at the time of receiving. Failure on the part of shipping company to disclose the fact that the drums used were reused drums enabled the seller to obtain money under the credit and the shipping company should be held liable for the loss. As for the point whether the ship owner can proceed against the seller against the letter of indemnity, the court placed reliance on the judgment in brown jenkinson &co.ltd.vs. percy Dalton in which it had been held that the shipper was not liable under this indemnity to the ship owner.
Bill of lading
The buyer/ plain tiff established an irrevocable letter of credit through the new bank of India ltd., defandent no.3, for a sum not exceeding a total of us $600,050 and the same was adviced to defendant no.1 bentrax & company through chase manhattan bank , Singapore. Accordingly, defendant no.1 shipped a consignment of cloves on board the vessel ‘OH DAL ‘ on 3rd September, 1979, and the document of shipping, inter-alia, comprising bill of  lading ,  invoice and a draft for the price of the goods, viz., us$  60,800 odd, were duly sent to the issuing bank viz., defendant no.3.
On 13th September, 1979, the plain tiff received non – negotiable copies of some of the these documents. On inspection it found that the said documents were discrepant and contrary to the conditions embodied in the letter of credit opened by them in favour of defendant no.1 so they requested the issuing to intimate by means of a telex / cable to the negotiating bank at Singapore to with hold payment against the documents relating to the letter of credit covering the goods in question, which the issuing bank did pointing out discrepancies. The latter explained the correct position, and asked the issuing bank to honour their commitment promptly. Accordingly the issuing bank called up on the plain tiff to make payment of the bill immediately, inter-alia, starting that the discrepancies observed by them in the documents received  under the above letter of credit were not justifiable.
The plain tiff instituted suit for a declaration that the bill of lading dated 3rd September, 1979, as also the quality certificate of even date were defective and was not in conformity with the agreement of sale between the parties and prayed for a permanent injunction.
The credit provided for drafts to be drawn in duplicate payable at sight on the buyer without resources and were to accompanied by, inter alias full set of clean on board bill of lading evidencing current shipment signed by the shipping company marked freight pre-paid made out to the order of the new bank of india or shippers order and endorsed in blank. It then called for weight and quality certificate  from independent surveyors , and the cloves to be of first grade and first quality of sri lanka Indonesia, African country.
The court observed that B/L was unclean on account of the discrepancies pointed out. He also found no substances in the contention that rubber stamps has to be intialled , signed or dated separately by the carier or his agent.
The court ruled that the defendant bank is not obliged to take note of the alleged defect in the packing of goods and defendant no.1 is not answerable to defendant no. 3 on that account even though the sale contract between the plain tiffs and defendant no.1 stipulated that the goods were to be packed in polythene coated gunny bags. For, unless the sale contract on which the credit is based is in some measure incorporated therein, the credit contract is independent of it and the banks are not normally concerned with the sale contract.
In the instant case even the requirement of law of the B/L being properly signed is completely missing inasmuch as the secretary of defendant no.1 who signed the bill of exchange, has nowhere indicated that the she signed it as an agent or in representative capacity. Hence the document apparently suffers from obscurity / ambiguity in this respect which may legimately give rise to some kind of litigation regarding the liability of the person making it.
From the conspectous of the foregoing facts and the legal position, the court refused to interdict defendant no.3 from paying to defendant nos. 1 and 2. It is for defendant no.3 to make up its own mind whether to pay the seller beneficiary under the letter of credit or to hold the shipping documents and the bill of exchange on collection basis or to pay the amount of the draft under reserve indemnity. However, on account of apparent flaws in the certificate of quality and the bill of exchange the plain tiffs can legimlately ask for the restrant order against restraint defendant no.3 from having resources to the margin money and other deposit, etc., ling with it in connection with the letter of credit after furnishing it security and indemnity. Hence, the court confirmed,  the expert injunction granted, subject to the condition that the plain tiff furnishes security/ indemnity bond for reimbursing defendant no.3 in full with interest, etc.,  in respect of this letter of credit within a fort night  to the satisfaction of the registrar.
Bill of lading date
As a matter of fact, under certain circumstances the expression ‘B/L date’ may prove to be an unclear term. This is the case where a bill of lading bears, in addition to the dates of its issuance, an  on board  notation which gives the date on which gives the date on which the goods have been loaded on board, both dates being different from each other. That such a situation will arise is usually not known beforehand when the credit is issued.
In this context, it has also to be realized that in practice for stipulating the tenor of a draft quite often the expression << x days after B/L date  >> is issued, and that the under ucp 500 sub- article 23 (a) (ii) the date of issuance of the bill of  lading will be deemed to be the date of shipment, unless the bill of lading requires an on board notation on which case the date of the on board notation will be deemed to be the date of shipment.
Under these circumstances there is justification for saying that in situation where the bill of lading bears an on board notation is to be considered the << B/L date>>.
For the purpose of fixing the maturity date of a draft to be drawn  under a credit which stipulates such draft to be drawn <<x day after B/L date >> irrespective of whether the date of the on board notation is later or earlier than the date of issuance of the bill of lading.
Conclusion
The commission discussed the issue presented in the case. The group of experts had ruled that For the purpose of fixing the maturity date of a draft to be drawn under a credit which stipulates such draft to be drawn x days after B/L date the date of a documentary  letter of credit should describe the documents that the beneficiary is required to present to the paying bank to obtain the credit benefit.
It should also be noted that the beneficiary must also review the contents of documents for presentation from the point of view of their consistency with each other for UCP 500 article 13 enjoins that documents which appear on face to be inconsistent with one another will be considered as not appearing on their face to be in accordance with the terms and conditions of the credit. For instance, the courts held in the case of voest –alpine international corporation vs. chase manhatten banks NA that document presented had irreconcilable inconsistencies and where thus not in terms of the credit.
Non compliances with the principle of exact name of the beneficiary could be a serious matter as was revealed from the case of the temple estates inc. vs. the presentation was dis honoured on ground that it was not signed by an officer of the stated beneficiary. Though uploading this principle the texas supreme court held that under the facts of the case the bank was not justified in dishonouring on this ground. This fact has also been recoganised by UCC in article 113 but UCP is silent.
31..44 Discrepancies (minor) (case study)
An exporter is in dispute with the issuing bank concerning a credit against which negotiation made under reserve. Because of the following insignificant discrepancies:

Ø Applicants notify address on bill of lading without the letter “G” in street name;

Ø No square box in shipping marks on documents the simple solution would  have been to rectify the documents but the exporter considered the negotiating bank panicky and asked that negotiation be made under reserve.

Ø When the documents were refused on the ground of the discrepancies, the exporter took the following action within the validity of the credit.

Ø To authorize the carrier through the negotiating bank to call on the issuing bank to rectify the B/L.

Ø To authorize our agent through the negotiating bank to call on the issuing bank to rectify the other documents as necessary.

However, the agent oof the exporter was refused access to the documents, to an and considered a non- concerned party.

The exporter asks you the following questions:

Ø Do you consider the discrepancies to be of such a material nature as to be classed as discrepancies?

Ø Should a negotiating bank mentioned the discrepancy when forwarding documents?

Ø Was the issuing bank within its rights to refuse exporters agent accesses  to the document which were held at the disposal of the negotiating bank?

Ø The box around the shipping marks in the LC is link in the without any authorization . it is then valid?

Ø The discrepancies mentioned by the issuing bank are of material nature and make the documents discrepant;

Ø The negotiating bank is not under obligation to mention the discrepancies while forwarding the documents;

Ø The issuing bank was not right in refusing access to documents to the beneficiary’s agent as he has been authorized by the negotiating bank;

Ø A shipping mark in the letter of credit in ink witout any authorization is valid.

Discrepancies in document

If documents contain several discrepancies but the issuing bank states only one of them in its notice of refusal and if that discrepancy turns out to be invalid, can the issuing bank then legitimately  raise other discrepancies to refuse the documents?

According to article 14.d if the paying bank decide to refuse the documents, it must give notice to that effect by the telecommunications or other expenditures means and that such notice must state all discrepancies in respect of the which the bank refused the document. If it has not pointed out a discrepancy in such a notice, later on it cannot refuse to take up documents if any other discrepancy is found later.

Discrepancy-first report- article 14 of UCP (case study)

In an export transaction , an Indian bank received a cable from the credit opening bank starting that it “observed certain discrepancies” but not stated that documents are held at this disposal or returned. They sent another cable stating that documents are refused by the applicant and would return if they do not hear within 48 hours. The Indian bank quoted article 14 stating that they , at the first instance, failed to either hold or return to the documents. The opening bank rejected this contention.

According to article 14.b and 14.e, if a bank decides to refuse to take up documents, it must give a notice to this effect  by the telecommunication or any other expeditious means. Such notice must state all discrepancies in respect of which the bank refuses the documents and that if fails to act in accordance with the provisions of this article and / or fails to hold the documents at the disposal of the presenter, the issuing bank and / or confirming bank shall be precluded from claiming that the documents are not in compliances with the terms and conditions of the credit.

Discrepancy- non conformity of bill of lading (case law)

In other case, there was a contract for the sale of beans, containing the clause “shipment made or to be  made, and bill or bills of lading dated or to be dated during December 1909 and/ or January 1910” and that “bill of lading to be considered proof of date of shipment in the absence of evidence to the contrary. The court held that these are the essential conditions for shipment being accepted. In this case the bills of lading did not conform to  that term, and the buyer rejected them.”

The sum and substance of the case- the banker’s duty is to examine documents tendered to him, and, if found genuine he is at liberty to pay, for he does not vouch the authenticity or nature of  documents. This principle was held in the case of bassee & selve vs. bank of Australia where the was authorized to advance a sum against certain documents. The beneficiary wanted to ship worth less more , and in the bill of lading it was described as p.m. 2680 bags containing 100 tons cobaltore. The analysis submitted or was rejected by the bank for it did not refer to the bill of lading goods. The beneficiary marked the sample as described the to analysis and obtained another report which was found satisfactory by the bank and the bank paid on its production. Later the beneficiary  was convicted of obtaining money by fraudulent presentation. The court, however, held that the bank is entitled to rely on the analysis.

Beneficiary: after having effected two shipments under the credit and obtaining payment there under, the beneficiary made a final shipment fully utilizing the value of the credit. The beneficiary presented his documents to bank a for negotiation.

Negotiating bank: bank a examined the documents and negotiated. Bank a forwarded the documents two bank by and requested reimbursement.

Issuing bank: bank I , up on receipt of the documents, determined that they are discrepant for the following reason:

The bill of lading presented “received for shipment” bill of lading with a superimposed clause reading “clean and board”. The on board clause typed on the bill of lading and not dated as required by UCP 500 sub –article 23(a) (ii).

In order to facilitate the transaction, and as authorized in UCP 500 sub-article 14©, bank I notified the applicant of the discrepant presentation and asked for a waiver of the discrepancy and authorization to pay the documents as presented. The applicant refused to waive the discrepancy or authorize payment of the discrepant documents.

Issuing bank : bank I immediately notified bank a by telex of the rejection of the documents due to the noted discrepancy and requested instructions as to the disposal of the documents.

Negotiating bank : bank a notified the beneficiary of the rejection of the documents by bank i. bank a, as instructed by the beneficiary, offered its indemnity against payment  of discrepant documents. However, since the indemnity is offered to bank I and the applicant refused to authorize the payment of the discrepant documents, the indemnity is not accepted.

Beneficiary : the beneficiary made a formal demand for payment of the documents covering the third shipment effected under the credit. The beneficiary stated that the bill of lading resented was in order in the exact form as presented in the previous two shipments. Those bills of lading previously accepted by bank A, bank I and the applicant, without any statement as to their discrepant nature.

Negotiating bank : bank a informed bank I of beneficiary’s  comments relatives to the previous documentary presentations and the acceptance of a similar type of bill of lading without any objection by bank i.

Issuing bank : bank I stated that any previous action taken by them with respect to the documents presented under the credit was independent of this presentation. Therefore, bank I still considered the documents as discrepant and said that it would continue to hold the documents as the disposal of bank. The matter remained unsettled with bank I refusing to copy, the applicant refusing to waive the discrepancy or authorize payment, and the beneficiary demanding full payment for the value of the documents.

Carrier: eventually, the merchandise is sold by the carrier due to the freight remaining unpaid.

Ø Was bank I correct to reject the documents as no-compliance with UCP 500 sub –article 23(a) (ii)?

Ø Was bank I ought in rejecting the offer of an “indemnity” to induce the bank to pay discrepant documents.

Ø Did bank I act fully in accordance with UCP 500 sub- article 14 © and 14 (d) (i) and (ii)?

Ø Should bank I, either in its best interest or that of bank a, have taken title to the goods, effected clearance, aand warehoused the goods pending settlement of the disputes?

Ø Would the fact that bank I had accepted a similar  bill of lading in the previous shipments after consulting the applicant, who waived the same discrepancy, have any bearing on their rejection f the bill of lading and their refusal to pay?

Ø Yes. The credit required a full set of clean on board ocean bills of lading. UCP 500 sub-article (a)(ii) requires that the bill of lading indicate that the good have been loaded on board, or shipped on a named vessel. The sub article further states that loading on board or shipment on a named vessel may be indicated by pre-printing wording on the bill of lading that the goods have been loaded on board a named vessel or shipped on a named vessel, in which case the date of issuance of the bill of lading will be deemed to be the date of lading on board and the date of shipment.

Alternatively, the bill of lading must evidence that the goods are on board on a named vessel, by a notation on the bill of lading that gives the date on which the goods have been loaded on board notation will be deemed to be the date of shipment.

In this particular case, the bill of lading did not bear a notation that indicated the date of shipment.

Ø Bank I had already contacted the applicant and determined that the applicant refused  to accept the discrepant documents. UCP 500 sub-article14(f). places a certain responsibility on the issuing bank when payment has been made under reserve or against an indemnity in respect of discrepancies. This sub-article requires the issuing bank to comply with all the provisions of article14. Therefore,  the offer of the indemnity had no value.

Ø In this particular case, bank I acted in accordance with UCP 500 sub-articles 14© and 14 (d) (i) and (ii). Sub-article 14© allows the issuing bank to approach the applicant for a waiver of the discrepancies, while sub-articles 14(d) demand that if the issuing bank decides to refuse the documents, it must give notice to that effect by tele commission, without delay, but no later than the close of the seventh banking day following the day of receipt of the documents. Such notice shall be given to the bank from which it received the documents, or to that beneficiary, it received the documents directly from him.

Ø In this case and for the presentation question, bank I adhered to the conditions of the credit. However, the position may not be the same with regard to the two previous presentations. See comments re point(5) below.

Ø No. if a bank decides to take that unilateral action to take title to the goods, effect clearance, and warehouse the goods, such action is based on the bank’s policy relative to its own position in the transaction and its relationship with the correspondent bank as well as with the applicant.

Ø In this case, the issuing bank had noted the same discrepancy on the two previous presentations. It had approached for a waiver of the discrepancy and eventually paid the documents 

Advising bank bank a

Advised the credit to the beneficiary.

Credit : among other conditions, the credit clearly stated that the negotiating bank was to the forward document directly to bank head office.

Beneficiary : the beneficiary presented the documents required by the credit to bank a.

Negotiating bank

The negotiating bank examined the documents presented by the beneficiary and determined that the were in compliance with the terms and conditions of the credit. Bank a negotiated a documents forwarded them as instructed to the head office of bank I and claimed reimbursement from bank r.

Reimbursing bank

Bank r honoured the reimbursement claim by crediting the current account of bank bank a and debiting the account of bank I in its books.

Issuing bank head office

Bank I,s head officer received the documents and after concluding with the internal registration related to the credit, forwarded the documents to its branch xxxby inter-office mail.

Issuing bank branch

Bank I, branch xxx received the document through the inter office mail examined them and determined that they were discrepant bank I, branch xxx contacted the applicant for a waiver of the discrepancies.

Applicant

Applicant asked for copies of the documents to be forwarded by fax. After reviewing the copies of the document. The applicant refused to waived the discrepancies.

Issuing bank branch

Bank I, branch xxx, instructed its head office to transmit an authendicated telex to bank stating that bank I had rejected the documents for the noted discrepancies, requesting bank interesting  instruction as to the disposal of the documents and demanding a refund of the  funds reimbursed.

Circumstances

Issuing bank (bank i)

Issued its irrevocable and confirmed documentary credit in favour of the beneficiary and advised it through beneficiary and advised it through bank A.

Confirming bank (bank A)

Advised the credit  to the beneficiary adding it confirmation.

Beneficiary

After shipping the merchandise, the beneficiary presented his documents to bank A.

Confirming bank (bank A)

Examined the documents and determined that they were discrepant due to the following discrepancies.

? late shipment

? late presentation

Bank a informed the beneficiary by telephone of the discrepancies and requested instruction.

Beneficiary

The beneficiary instructed bank A to forwarded the documents to bank I for approval and payment under the credit.

Issuing bank

Upon receipt of the documents, bank I reviewed them and determined that the two discrepancies noted were not acceptable to them and informed the applicant of the presentation. The applicant did not waive the discrepancies and rejected the documents.

Your documentary credit remittance under our credit xix for frf …… refused due to late presentation and late shipment. We are holding the documents at your disposal. We have contacted the applicant for instructions. They have informed us that they will contact the beneficiary directly. Please instruct.

conforming bank

bank a notified the beneficiary upon receipt of the formal rejection by bank i.

beneficiary

the beneficiary informed bank a to telex bank I requesting that bank I hold the documents at the disposal of bank a pending further instructions as to their disposition.

Confirming bank

Bank a telexed bank I as instructed by the  beneficiary.

Stand by credits – points to remember

A standby credit should be consistent with the terms of the underlying contract between the applicant and the beneficiary. To ensure consistency the applicant, the beneficiary and-the issuer- should agree to the terms and conditions of the credit during negotiations. It is important for a standby letter of credit, that the applicant and the beneficiary work out the presentation requirements including the drawing languages and insert it as a draft in to the letter of  credit application. The applicant should send a copy of the draft application with that language to inserted to which the beneficiary has agreed if the bank objects to any of the draft provisions. Further negotiation will a obviously be necessary .if the banks objects to any of the draft provisions, further negotiation be necessary. If the bank agrees to the credit draft, a copy of that draft should be attached to the agreement etween the applicant and the beneficiary. The applicant is obligated to have the bank deliver to the beneficiary the agreed credit as a condition to execute or otherwise close the agreement with the applicant. And the beneficiary is obligated to accept the credit.

If the beneficiary decides not to accept the credit, he should advise both the applicant and the issuing bank the details for rejection.  In Exxon the letter of credit laid down conditions which were prima facie difficult to fulfill before the expiry date of the standby credit.

The beneficiary can refuse a credit that is not consistent with the credit terms agreed. The beneficiary can refuse a credit by listing its objection to the terms of the credit. If the beneficiary fails to perform the contract without having communicated its refusal to credit, to expose himself to grave risk in apex oil which provided for a stand by letter of credit that could be negotiated at a bank in Laredo texas, the standby issued to archem was not negotiable at the Laredo, texas, but archem waived this point and transaction.

Stand by credit and docdex decision

Dispute: is docdex available in connection with any dispute related to standby letters of credit? Is a copy of CMR complaint if a discrepancy contained therein cannot be ascertained from the SLC and the documents? Is a copy of a compensation invoice complaint if it appears to be signed by the beneficiary? What are the implication of the amount “o” on a compensation invoice? These were some of the issues involved in the first case.

Facts

Ø The respondent issued to standby letters of credit by order of the same applicant which are subject to UCP 500 and available by payment at sight the counters of the respondent in favour of different beneficiaries;

Ø Each of the  two initators upon request of the respondent, advised on of the SLC is to the respective beneficiaries;

Ø Each of the beneficiaries presented through the respective advising bank several demands under the respective SLC;

Ø The respondent rejected such demands as non-complaint.

Ø Each of the beneficiaries requested the respective initraor or to trace payment and to respond to the objections made by the respondent;

Ø The initiators claim that, after discussing the discrepancies and sending additional and corrected documents by order of the beneficiaries, the respondent still maintains the following discrepancies.

The copy of  CMR : with regard to the CMR, it is indicated in the SLC, among others, that it must be signed by the addressee indicated in the purchase order, consequently it is necessary to obtain the purchase order and verify, on the purchase order, the name of the addressee.

Copy of compensation invoice: one of the copy of the  compensation invoices concerns cost of the return of goods it is therefore, necessary to furnish the compensation invoice issued by the applicant concerning the said goods.

The copy of compensation invoice is not correct. The amount on this document should have been zero. Otherwise, in the event that the amount is identical to shown on the copy of the commercial invoice and in respect of the drawing the buyer would owe nothing.

The initiators regard these as ill founded as the these SLCs are subject to are separate transaction from the sales or other contracts on which they may be based, and banks are in no way concerned with or bound by such contracts, even if any reference to such contracts is included in the credit., the purchase order was not an integral part of any of these SLCs and these SLCs did not call for special requirements concerning “ data content of compensation invoice” which therefore, should be accepted as presented.

Respondents case

The respondent refused to request, or submit to, a DOCDEX decision with the argument that disputes concerning SLCs lie outside the scope of DOCDEX rules.

Before considering the issue the experts addressed the first the question as to whether DOCDEX is applicable to any disputes relating to SLCs a reference to article 1.1 of the DOCDEX rules reveals that DOCDEX related to dispute in a documentary credit incorporating the uniform custom & practice for documentary credit. The two SLCs in question are subject to UCP 500. UCP 500 article two define the expressions documentary credit and standby letter of credit referred to a and throughout  the rest of the UCP 500 the term credit is used.

Expert opinion

The experts opined that the reference to a documentary credit in article 1.1 of DOCDEX rules includes a reference to SLCs. Having settled to this issue the experts   felt   that in the light of documents presented under the standby credit, which, inter alia, were not as complete and precise as the respondent and initiators would like to understand them.

The CMRs  to be signed by the addressee indicated in the purchase order, none of these SLCs indicate that the purchase order is attached thereto or that it requires the presentation of a purchase order.

The copies of CMRs presented under these SLCs, the initiators and the respondent do not seem to disagree that the addressee designated in the purchase order does not appear to have signed by the CMRs.

Pursuant to article  13 UCP 500 the respondent as must examine all documents stipulated in the SLCs to ascertain whether compliance with the terms and conditions and has to deem conditions which donot state the document to be presented in compliance therewith, as not stated and has to disregards the same.

Because the addressee indicated in the purchase order is not named in such SLCs and the respective purchase order required to be presented there under, this conditions lies outside the terms and conditions of these SLCs and the applicable UCP 500 rules regarding documentary conditions.

Banks are not concerned or bound by sales or other contracts on which SLCs may be based. Therefore, the respondent may not step outside the terms and conditions of these SLCs but must determine solely on the basis of documents stipulated therein, whether or not they appear on their face to be in compliance with such terms and conditions. This will determine whether the respondent may take up such copies of CMRs.

These SLCs required, inter alia, presentation of a copy of unpaid invoice, and one copy of unpaid compensation invoicing related to the goods of the commercial invoice to which the drawing relates. Thus besides any copy of unpaid invoices copy of relating to the goods of the were to be presented without any further specification such as to their data contents signaters . since copy of one or more commercial invoices which have not been paid must be presented under the first quoted item. The compensation invoice and, therefore, are documents which would fall under article 21 of UCP 500. That is why such compensation invoice must be accepted by these respondent as presented, provided that they appear to relate to the goods of the respective commercial invoice and that their data content is not inconsistent with any other stipulated document presented.

Several copies of the compensation invoices presented concern cost of return of goods and appear to be signed by the respective beneficiary. In standby letter of credit operations, the banks deal with documents, and not with goods service and or other performances or to which the documents may relate. These SLCs do not stipulate the invoices need to be issued or signed by or for and on behalf of any specific person. Therefore, copies of compensation invoice and by deducting from the latter the former figure one arrives at a different of “O”.

According to article 21 the data content of compensation invoices must not be inconsistent with other stipulated document presented. If the sum shown in such compensation invoices is zero. And if the drawing is for the amount of the copy of the commercial invoice presented in connection there with then there is no inconsistency between the data contentcy between the data contents of the compensation invoice and the copies of the commercial invoice or with the drawing.

Ø A copy of a CMR is complaint, if any discrepancy there of cannot be ascertained from the terms and conditions of the standby letter of credit and the documents alone.

Ø A copy of a compensation invoice that sows return of goods is complaint if it appears to be signed by the beneficiary , and;

Ø A copy of a compensation invoice that show the sum as zero is not inconsistent with a drawing in an amount identical to the amount shown in the copy of the respective commercial invoice presented therewith.

Standby LC in bank network

q. can branches of a bank issue standby letter of credit to each other within its network?

a. as per UCP branches of a bank is considered another bank for purposes of documentary credit operations. It can, therefore, issue as much standby letter of credits sass any other credit.

Time limit for document examination

Q. our client exported a lading of bicycles under an irrevocable credit to his client in Belgium. The Belgian bank opened the credit under the UCP 500 rules.

After receipt of the document the bank confirmed the payment at due date.

On 26.4.1996 -13 banking days after the receipt of the documents, the bank protested the documents, saying that the boat left Indian on 16.04.1996, where as the letter of credit had stipulated 10.04.1996 as the latest date of shipment.

But our client handed over the container on a train on the 27th march and on 16th april on the MV.. the same day the sip left Bombay and arrived in Antwerp on the 9th may.

In the letter of credit was asked for “a full set clean on board marine /ocean bill of lading”; it is no multimodal transport.

A.   After receipt of the goods on 13th may the Belgian buyer has claimed some defects on the bicycles and has gone to court asking to block the payment for reasons for fraud. This became a positive judgement on 24 may. On that day the bank faxed the message to our client in India that the decision of the Belgian judge makes it impossible to pay;

Q. we now have the following questions

1. does a judge have the competence to taken in consideration the examination of the documents by the bank after the seven day limit.

2. can a judge block the payment if the bank first has accepted the documents and only two weeks later protested the documents?

What is the sense of the seven day limit for the banks given the bank can go to court after the above mentioned period.

A1. Yes

2. according to local law

3. according to local law

The 7 banking day rule is not indented to be abused by banks and is there as an outer guideline to the responsibilities of the banks who are liable to effect payment- the issuing or confirming bank.

Transfer and funds

Q. which bank is authorized to transfer where art.48 of UCP stipulates that the transferring bank is the bank authorized to pay, to accept or to incur a deferred payment undertaking?

A. ICC publication 511, page 125, section “ transferring bank”. The NCs considered it prudent to require a restriction on who can act as transferring bank at a prevent transfers , resulting in negotiations and multiple negotiations.

By the clear  wording of UCP 500 sub -  article 48 if a bank is stated in the credit to be the nominated bank for payment. Incurring a deferred payment undertaking acceptance are negotiation or in the case of the a freely negotiable credit the bank specifically authorized in the credit as a transferring bank that bank is authorized to affect transfer to the credit, even although it is NOT the confirming bank. However, it is  should be noted that according to sub- article such bank may not be willing to act as a transferring agent and is entitled to refuse effect a transfer of the credit.

Beneficiary

Requested that applicant to have the issued alloing transfers to effected by more than one bank. The reason was that the beneficiary may or may not have been a customer of the issuing banks designated correspondent advising bank.

For this reason, the beneficiary wished to have the credit available for transfer and negotiation by either the issuing bank correspondent advising bank or one of his banks, Bank T.

Advising bank

Since bank a was not a confirming bank and the credit was freely negotiable bank a advised the credit to the beneficiary with the stipulation that either bank A or bank T may  consider accepting the beneficiary instructions regarding transfer of his rights to perform under the credit to a second beneficiary in accordance with UCP 500 article 48.

INCO TERMS

Parties to a contract are often unaware of the different trading practices in their respective countries. This can cause mis understandings, resulting in unnecessary disputes and litigation. To avoid such a situation the international chamber of commerce first published in 1936 a set of international rules for the interpretation of trade terms known as inco terms 1936. Amendments and additions were later made in 1953,1967,1976,1980,1990 and  recently in 2000. Inco terms 2000 is the revised  and latest  version of the ICC Inco terms that incorporates changes in international trade practices over the years.

The scope of Inco terms is limited to matters relating to the rights and obligations of the parties to the contract of sale with respect to the delivery of goods sold. 

Inco terms are frequently misunderstood as applying to the contract to carriage rather than to the contract of sale. Also they are sometimes mistakenly assumed to provide for all the duties which parties may wish to include in a contract of sale. But inco terms deal oly with the  relation between sellers and buyer.

EXW-EX Works

The sellers obligation to deliver the goods under this terms is complete when  he places the goods at the disposal of the buyer at his own premises or another place  named there in i.e works factory, warehouse etc. not cleared for export and not loaded for on any collecting vehicle. This terms thus enjoins the minimum obligation on the seller. The buyer has to bear all costs and risks. This term should therefore not be used if the buyer can not carry out the export formalities himself. The FCA  term will be the best option. If the parties however agree in the contract of sale by their explicating wording the seller could be made responsible for the loading of the goods on departure and bear the risk and the cost of the such loading.

FCA –Free Carrier

Here the sellers obligation to deliver the goods is complete when he delivers to the carrier nominated by then named place cleared for export. If a person, other than the carrier is nominated the sellers obligations to deemed to have been fulfilled when the goods are delivered to the person. If the choosen place for delivery is the sellers premises then he is responsible for loading. If it occurs at any place the seller is not responsible for unloading. This terms can be used for any mode of transporting including multi modal transport.

FAS – Free Alongside Ship

The term fas has been modified in incoterms 2000. Under the new term in the seller clears the goods for  export which is reversal from the previous inco terms version requiring to the buyer to arrange for exports clearance. Under the term FAS the seller delivers the goods by placing them alongside the vessel. At the named port of shipment. The buyer bears all cost  and risks of loss of or damage to the goods from that moment.. this term can be used only for sea or inland waterway transport.

FOB-Free On Board

Under this term, the seller fulfills his obligation of delivery when the goods pass the ship rail at the named port of shipment. From that point onwards the buyer bears all costs and risks. The seller clears the goods for exports. If the intension is not to deliver the goods across the ship rail the fca terms should bee used. Thus term can be used only for sea or inland waterway transport.

CFR – Cost and Freight

In CFR also obligation of delivery is fulfilled when the goods pass just as in fob the ship rail in the port of shipment. The only addition is that the seller also pays freight necessary to bring the goods to the named port of destination but the risk of loss of or damage to the goods as also any additional costs occurring after the time of delivery are transferred from the seller to the buyer. Under this terms the seller clears the goods for export. This term can be used only for sea or inland waterway transport. If the parties do not intent to deliver the goods across the ship rail the cpt term should be used.

CIF- Cost Insurance and Freight

Here again the delivery point is the goods passing the ship rail in the port of shipment.the seller, however, pays the cost and freight necessary to the named port of destination and contracts for insurance premium. The risk of loss of or damage to the goods and additional costs occurring after the time of delivery are transferred from the seller to the buyer. The seller obtain insurance only for minimum cover. Should the buyer wish to have a greater cover he would either need to agree with the seller expressly or to make his own extra  insurance arrangements. Clearance of goods for export is the responsibility of the seller under this term as well. It can be used for  sea and inland waterway transport. If the parties do not intend to deliver  the goods across the ship rail the cip term should be used.

CPT- Carriage Paid To

Cpt denotes that the seller delivers to the goods to the carrier nominated by him. If subsequent carriers are used the risk passes when the goods have been delivered to the first carrier,. The seller must in addition pay the cost of the carriage to the goods to the named destination. The buyer bears all risks and any costs occurring after the goods have been so delivered. Here too obtaining export clearance is the responsibility of the seller. It can be used for any mode of the transport including multimodal transport.

CIP –Carriage and Insurance Paid To

This term corresponds to cpt except that under cip the seller also has to procure insurance against the risk of loss of or damage to the goods during the carriage . the seller has therefore to obtain insurance and pay the insurance premium for a minimum cover. For any additional cover the buyer need to either have express arrangements. Here again if subsequent carriers are used to the risk passes when the goods have been delivered to the first carrier and clearance of goods or export is the responsibility of the seller. The term can be used for any mode of transport including multimodal transport.

DAF- Delivered at Frontier

Under this term the seller delivers by placing the goods at the disposal of the buyer on the arriving means of transport not unloaded cleared for exports but not cleared for import at the named point/ place at the frontier but before the customs border at the adjoining country. Since the term frontier includes the frontier of country of export, naming the point and the place in the term is of vital importance. For making the seller responsible for the unloading of the goods and to bear the risk and cost therefore explicit wording to this effect need to be included in the contract. The term can be used for any mode of transports when goods are to be delivered at a land frontier. When delivery is to take place in the port of destination on board a vessel or on they quay the DES or DEQ terms should be used.

DES-Delivered Ex Ship

This term implies that the seller delivers the goods by placing them at the disposal of the buyer on board on the ship not cleared for import at the named port of destination. The seller bears all the costs and risk involves in bringing the goods to the named port of destination before their discharge. If the parties intend the seller to bear and te costs and bear of discharging goods in the DEQ term should be used. This term can be used for sea or inland waterway or multimodal transport on a vessel in the port of destination.

DEQ-Delivered Ex Quay

The point of delivery under this term moves to the quay not cleared for import at the named  port of destination. The seller bears the cost of discharging the goods at the quay in addition to the cost and risk involved as per the term DES. The term DEQ has been modified in inco terms 2000 and is a total reversal from the previous incoterms version in that under the modified DEQ term the buyer clears the goods for import and pays for all formalities, duties, taxes  and other charges. If the buyer still wants the seller to under take import clearance it be made clear by adding an explicit wording. This term can be used only when the goods are to be delivered by sea or inland waterway or multimodal transport on discharging from a vessel on to the quay in the port of destination. If the parties intended include in the sellers obligation the risk and cost of the handling of the goods from the quay to another place in or outside the port, the DDU or DDP terms should be used.

DDU- Delivered Duty Unpaid

This term can be used irrespective of the mode of transport but when delivery is to take place in the port of  destination on  board the vessel or on the quay the DES or DEQ term should be  used. Under this term the seller delivers the goods to the buyer not cleared for import but not unloaded from any arriving means of transport at the named place of destination. The responsibility, risk and cost for unloading or reloading will depend upon whether the chosen place of delivery is under the control of the buyer or the seller.

DDP – Delivered Duty Paid

Under this term the seller delivers the goods to the buyer cleared for import but not unloaded from any arriving means of transport at the named place of destination. Thus all the cost and risks involved in bringing the goods thereto including, where applicable, any duty for import in the country of destination. Thus this term represents the minimum obligation to the buyer and the maximum obligation to the seller. it should, therefore, not be used if the seller is unable to obtain the import clearance. If the parties wish the buyer to bear all risks to and cost of the import, the DDU term should be used.

Making proper use of inco terms

In order for the seller to get paid under the documentary credits, he has to deliver documents to the buye to prove that the he has fulfilled his obligations. To get best out of documentary credits, therefore, proper use of inco terms is important. Only then the buyer will be obliged to pay him. To be able to do that the parties have to ensure that:

Ø The instructions given by the buyer to the bank undertaking the documentary credit are fully compaitable with the requirements under the contract of sale;

Ø The seller is offered  the opportunity in advance and well before the handing over the goods for carriage, to check the terms;

Ø Inconsistency between the requirements under the documentary  credits and the requirements under the contract of sale avoided since the buyer may be in  breach of his payment obligation if the seller cannot get paid under the documentary credit when his documents conform with the contract of sale, and;

Ø The buyer does not instruct the bank to pay against the transport document which does not control the disposition of the goods and whichwould, therefore, not prevent the seller fro m sending the goods to  someone else after the he has been paid. In practice, problems often arise as sellers and buyers fail to ensure that the instruction given to  the issuing bank conform with the terms of the contracts of sale.

Documents and modes of transports


Types of documents                             

Bill of lading

Transferable documents of title allowing buyer to sell or pledge goods while in transit by transferring the documents at any rate where made out to order.

Multi modal transport document

Known by many names combained transports  document transports

Sea way bill

Knon by many names seller may after delivery directions until discharge unless the SWB contains a NODISP clause preventing such change.

Mates receipts

Sometimes given to shipper when selling FOB or FCA to be tendered to buyer instead of bill of lading.

Air way bill

Sometimes also known as air consignment note.

Consignment note

Also sometimes known as CMI or CMR consignment note or way bill.

Water house warrant

Comments transferable document used when the goods are ware housed for collection by buyer at sellers end or at buyers end.

Freight- forwarders documents

Important to identify whether the forwarder is undertaking responsibility for the carriage of the goods as carrier or as agent of the carrier.

Sea. Also frequently used for multimodal transport.

Transit involving carriage by at least two different modes of transport.

Sea

Non- transferable

Document providing proof of delivery to a carrier.

Air

Land

Made of transport land and sea.

Sea, air, land.

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