International Letter of Credit: What Constitutes a Discrepancy

The Uniform Customs and Practice for Documentary Credits (UCP) is published by the International Chamber of Commerce and was revised in 1993 and put into use January 1, 1994. The purpose of the UCP is to clarify gray areas that may appear in a letter of credit and to help banks interpret conditions in the letter of credit in a consistent manner.

However, as anyone who has ever worked with a letter of credit knows, there is plenty of disagreement between all parties concerned. Banks, account parties, and beneficiaries can all disagree about what complies and what does not comply when the shipping documents are checked against the terms of the letter of credit.

Sometimes the UCP just doesn’t clarify a situation the way you think it should. After all there is a huge difference between the words “will” and “may.” For instance: “Banks will accept…” versus “Banks may accept….” One is definite and the other appears to be open to interpretation. It’s not surprising confusion results.

To help address some of this confusion, a task force of the International Chamber of Commerce Banking Commission created the International Standard Banking Practice (ISBP), which was published by the ICC in January 2003.

The International Standard Banking Practice

The ISBP is not intended to amend the UCP 500. Instead, it is a guide to how the rules should be applied in a day-to-day working environment. The ISBP is laid out in a similar manner to the UCP 500; it covers the application, general principals, drafts, invoices, shipping documents, insurance and certificates of origin. In total the ISBP contains 200 guiding principals.

In reading through the publication, I sometimes thought they included information so obvious it need not be said and other times I was surprised by their interpretations. In talking with other bankers, I’m finding that I’m not alone, although I don’t know that we all feel the same way about everything that has been written. I’ve also heard that some banks are slowly accepting the ISBP as their standard method of operating.

You may find banks adopting the ISBP on their import letters of credit but going a bit more slowly when handling their export documents for fear that the issuing bank hasn’t accepted the ISBP as their standard operating procedure. As more and more banks accept and embrace the ISBP, this double standard will vanish.

The Application and Issuance of a Letter of Credit

The first section of the ISBP concerns the application and issuance of the letter of credit. It addresses the importance of completing the application accurately. The first section stresses the fact that the underlying transaction and sales contract are a separate transaction from the letter of credit and that the letter of credit should not incorporate the sales contract.

The buyer and seller should agree what documents are going to be required in the letter of credit and who should be generating those documents before the application is ever submitted to the bank. If the application for a letter of credit that is presented to a bank for issuance is unclear or ambiguous, the issuing bank has the right to adjust the application in order to make the letter of credit workable.

While many banks already have a clause either on their application form or in their security agreement that gives them this right, now under ISBP all banks have the right to make adjustments to the application.

The applicant is also required to have a full understanding of the UCP 500 to avoid a conflict of terms within the letter of credit.

Additionally, banks should not issue a letter of credit that requires documents to be either issued or cosigned by the letter of credit applicant. The beneficiary should be able to read a letter of credit and feel that they can comply with the terms by either producing the documents themselves or by having an independent third party issue the documents.

Requiring an applicant to either issue or cosign documents basically turns the letter of credit process into a collection process where payment isn’t made until the buyer gives their approval. If this is acceptable to the seller, they should just use a collection method and pay collection bank fees instead of the more expensive letter of credit fees.

Finally, the first section of the ISBP points out that if everyone spent more time up front dealing with the underlying transaction, the letter of credit application, and how it is going to be issued, the parties will encounter fewer problems at the time of examination, which results in fewer discrepancies.

Believe it or not, this is something that everyone—including the banks—looks forward to.

General Principals of a Letter of Credit

Abbreviations

As stated in the ISBP, the use of generally accepted abbreviations does not make a document discrepant. A couple of the examples offered are “LTD” instead of “Limited” or “Co” instead of “Company”. If the letter of credit uses the abbreviation and the documentation uses the complete word, no discrepancy should be called.

Further, if the letter of credit used the complete word but the documentation uses the abbreviation, again, no discrepancy should be called. I know that a number of banks require word-for-word and letter-for-letter agreement when comparing documentation against the letter of credit. A bit of leniency is now allowed, but be careful that this doesn’t lead to a totally relaxed attitude when preparing the documents.

The ISBP points out that slash marks (“/”) may have different meanings in different parts of the world and should be avoided. Instead use the word or words that are intended.

Certifications and Declarations

Let’s say that a certification or declaration is contained in another document as allowed by the letter of credit, and the document is signed and dated. If the party that is making the certification or declaration is the same party that issued the document, no further signature or dating is required.

Corrections and Alterations

In my thirty years of banking, I saw numerous documents that had been altered or corrected. Some of them were nicely done, others not so nicely done. With the introduction of the ISBP, certain standards have been implemented.

First, if a document that is issued by someone other than the beneficiary is corrected or altered, either the issuer of the document or a party designated by the issuer must authenticate the correction or alteration.

If a legalized or visaed document has been altered or corrected, the party that either legalized or visaed the document must authenticate the change. Corrections or alterations appearing in documents that the beneficiary has issued do not need to be authenticated except for any drafts that the letter of credit may require.

Documents that have different fonts or type styles or even handwriting on the document are not to be automatically considered a correction or alteration. I can imagine that this standard will generate a bit of discussion from time to time.

Dates

Something so simple as a date, or a time frame around the date, has been interrupted differently. The ISBP has eliminated some of that confusion.

Even if the letter of credit doesn’t specifically state that the draft, transport document, or insurance document needs to be dated, it should be dated. If it doesn’t include a date, a discrepancy can be called. You might want to date all documents required just to play it safe.

Documents such as a pre-shipment inspection certificate or analysis certification can be dated after the shipment date. I can see how in the past this could have been called a discrepancy. Obviously the inspection or analysis has to happen either before or on the date of shipment. The title of the document or a statement in the document should indicate this.

If the word “within” is used regarding a date, such as “within 12 days of the bill of lading date,” the date of the bill of lading is not included in the calculation. For example, if the bill of lading is dated November 15, then the time frame for whatever is being required to occur with 12 days is November 3 until November 27.

Finally, in order to avoid confusion and keep things as simple as possible, use the name of the month when identifying a specific date rather than using the number.

Documents Not Covered by the UCP Transport Articles

If you are a logistics expert, you probably know that not all documents used in the movement of goods have an underlying contract of carriage.

Documents such as delivery orders, forwarder’s certificate of receipt, and mate’s receipts are examples of documents that don’t incorporate a contract of carriage and, as a result, are not considered transport documents as defined by the UCP. Since these documents are considered additional documents instead of transport documents, any article in the UCP making reference to transport documents will not apply to them.

For example, article 43 of the UCP 500 states that every credit that calls for a transport document should specify a timeframe from the shipment date for presentation of the documents. If no timeframe is stipulated, the period for presentation defaults to 21 days after the date of shipment or the expiration date, whichever occurs first.

If you are dealing with a letter of credit calling for a forwarder’s certificate of receipt and no transport document is required, you have until the expiration date to present document.

Expressions Not Defined in the UCP

Having worked with letters of credit for many years, there are phrases commonly used that many of us take for granted. We may have the mistaken idea that everyone defines these phrases the same way. Now the ISBP defines some of these phrases:

• “Shipping documents” include all documents required by the letter of credit, not just the transport documents. The only exception to this is the draft.
• “Stale documents acceptable” means documents presented beyond the 21 days after the date of shipment are acceptable provided they are presented before the expiration date of the credit.
• “Third party documents acceptable” means that all documents, with the exception of the draft, may be issued by a party other than the beneficiary of the credit.
• “Exporting country” is the country of the beneficiary, and/or the country of origin of the goods, and/or the country where the carrier took receipt of the goods, and/or the country from which shipment is made.
• Phrases such as “well known,” “prompt,” “immediately,” “as soon as possible” and similar expressions should not be used in letters of credit. If they are used, banks can ignore them.

Inconsistency in the Documents

Documents must not be inconsistent with each other. This doesn’t mean that documents have to be a mirrored image of one another; they just can’t be inconsistent.

For example, if the invoice describes the merchandise as “blue and yellow widgets as per purchase order 2310” and the packing list shows the merchandise as “blue and yellow widgets,” that is acceptable and no discrepancy should be called. However, if the packing list shows the merchandise as “blue and green widgets,” the documents are no longer consistent and a discrepancy will be called.

The Issuer of Documents

Sometimes a letter of credit may stipulate that a specific party is to issue a particular document. If this is the case, and the document appears on that party’s letterhead, or if the document appears to have been issued and/or signed by or on behalf of that party, the document is acceptable and no discrepancy will be called.

Language

Documents issued by the beneficiary of the letter of credit should be issued in the language of the credit. If the letter of credit allows for documents to be issued in two or more languages, the nominated bank has the right when advising the credit to limit the number of acceptable languages as a condition of either its engagement in the credit or its confirmation of the credit.

Mathematical Calculations

When documents are presented, sometimes the invoice is several pages long, consisting of numerous mathematical extensions. For example, the number of units multiplied by the unit cost equals the value charged.

When an invoice includes these calculations, banks will only be obliged to check the total value against the credit and other required documents. This eliminates the time-consuming task of verifying each and every extension; it also limits the number of discrepancies called.

Misspellings or Typing Errors

If a word has been obviously misspelled or the letters in a word have been transposed, a discrepancy should not be called. Examples given include “mashine” instead of “machine” or “modle” instead of “model”. However, if the description included a part or purchase order number, and the numbers are transposed or typed incorrectly, a discrepancy will be called.

I would venture to guess that if the misspelling could be construed as possibly a different type of merchandise, a discrepancy would also be called. An example of this would be “adding machines” versus “adzing machines”, two entirely different types of merchandise with just one letter different.

Multiple Pages and Attachments

Pages that are bound together and are in numerical order or pages that contain cross references should be examined as one document. If a document contains more than one page, there has to be a way to determine just how many pages make up that document.

If the letter of credit requires a multiple-page document to be signed or endorsed, the signature or endorsement could be on any of the pages unless specifically required by the letter of credit. It is most common for a signature or endorsement to be either on the first or last page.

Originals and Copies

It seems that the more the words “originals” and “copies” are defined, the more discussion is generated. If a document is marked original or duplicate or first original, it should be considered an original document. Every document presented should include at least one original unless the credit specifically requires that copies of a document be presented.

The ISBP goes onto clarify where the credit requires:

• “Invoice”, “one invoice” or “invoice in one copy” that will be understood that one original invoice is to be presented .
• “Invoice in four copies” will mean one original invoice and the remaining number in copies.

Personally, I am a little surprised by this definition. I would have assumed that if the letter of credit were asking for either an invoice in one copy or invoice in four copies, that the credit was clearly asking for copies and no originals would be required. Apparently because the word invoice is mentioned before the number of copies required, it is requiring an original as well.

“One copy of invoice” is satisfied by the presentation of one copy of the invoice, but if an original is presented, that is also acceptable. If for whatever reason an original document is not acceptable, it must be clearly stated in the credit that original documents are prohibited.

Hopefully this will finally settle the discussion of just what an original is versus a copy.

Shipping Marks

Shipping marks help to identify the location of a specific box, crate or package that has been shipped. If the letter of credit identifies the shipping marks to be used, and the documents presented include those shipping marks but have additional detail, there should be no problem as long as the additional detail isn’t inconsistent with the credit terms.

It is also acceptable if the shipping marks contain details that wouldn’t typically be thought of as shipping marks such as “fragile, handle with care,” the net or gross weight, or a short description of the goods. If some of the documents show the excess information in the shipping marks while other documents don’t, banks should not consider the documents to be inconsistent.

Sometimes when goods have been containerized, the transport document will only show the container number while other documents will show a detailed listing of the shipping marks. When this happens, it is not considered inconsistent.

Signatures

When a letter of credit is issued and it requires drafts, certificates and/or declarations but doesn’t mention that these documents need to be signed, they do. By their nature, a signature is required. Transport and insurance documents must also be signed in accordance with the UCP.

Just because a document has a place or a box for a signature, it doesn’t necessarily mean that the document must be signed. However, if the document makes a declaration such as “This document is not valid unless signed” or similar words, a signature is then required.

A signature does not have to be handwritten. Facsimile signatures, perforated signatures, chops, symbols, or any electronic means of authentication are considered acceptable. If a photocopy of a signed document is presented as a signed original document, banks will call a discrepancy. They will also call a discrepancy for any signed document sent through a fax machine without an original signature.

If a signature appears on a company’s letterhead, the signature will be accepted as a signature of that company, and the name of the company doesn’t need to appear next to the signature.

Title of Documents and Combined Documents

According to the ISBP, document titles may exactly match the document titles described in a letter of credit, have a similar title, or include no title at all.

The old school of thought was that every document had to be titled exactly as called for by the letter of credit. Now if the credit calls for a packing list, even an untitled document satisfies this requirement as long as it includes packing details.

What is now more important is the content of the document. If the content of the document appears to fulfill the purpose of the required document, it is now acceptable. I can see where this is going to lead to judgment calls by the bank and may create additional problems.

Documents required by the credit should be presented as separate documents. The example given by the ISBP is a packing list and a weight list. Two separate documents should be presented. However, it is also acceptable if two original copies of a combined packing and weight list are presented provided both documents contain both packing and weight information.

Bank Drafts

Tenor of the Draft

When a draft is presented with documents against a letter of credit, it is the formal demand for payment. The value of the draft stipulates the amount that the beneficiary expects to be paid. The tenor of the draft stipulates when that payment should be made. In all cases, the tenor should agree with the terms of the letter of credit.

Examples of acceptable tenors include “at sight,” “30 days after sight,” and “30 days after bill of lading date.” If the tenor includes a financing period, as in the last two examples, it must always be possible to determine the maturity date by looking at the draft itself.

In the case of 30 days after sight, the date of acceptance will be shown on the draft once the draft has been accepted.

When the credit requires the tenor to be 30 days after the bill of lading date, the draft can show the tenor a number of different ways:

• “30 days after the bill of lading date, October 15, 2003”
• “30 days after October 15, 2003”
• “30 days after the bill of lading date” and somewhere on the draft it would indicate “bill of lading dated October 15, 2003”
• “30 days date” and the date on the draft would be October 15, 2003
• “November 15, 2003” which would be 30 days after the bill of lading date

The on board date of the bill of lading is always considered the date of the bill of lading. Sometimes the tenor is stated as X number of days either “from” or “after” an event, such as the bill of lading date. In either case, when determining the maturity date, the date mentioned is excluded in the calculation. For example, 30 days after or from January 1 would be January 31.

If a bill of lading has more than one on board notation, the earliest on board notation is used for the calculation for the maturity date. However, if more than one set of bills of lading are presented against a single draft, the on board date of the last bill of lading is used to calculate the maturity date.

Maturity Dates

If the draft shows a date as the tenor, the date shown has to have been calculated in accordance with the terms of the credit.

When the tenor of the draft is “X number of days sight” and the documents complied with the credit terms, or in the event of discrepant documents that have been waived, the calculation for the maturity date uses the date of receipt. In other words, if documents are received on September 1 and are determined to be in order on September 5, September 1 is the date used to calculate the maturity date.

In all the years I’ve spent dealing with letters of credit, I’ve never heard of using the date of receipt when calculating the maturity date. This is something that buyers should be aware of going forward, as it will shorten the timeframe for financing.

If the documents are non-compliant and the issuing bank refuses payment, but then eventually approves payment, the maturity date is determined from the date of approval. In all cases, the accepting bank must notify the presenter of the maturity date.

Banking Days, Grace Days, Delays in Remittance

On the maturity date, payment must be made in immediately available funds at the place where the draft is payable. If the maturity date falls on a day that the bank is closed, payment will be made on the next banking day.

There are no grace days or allowance for delays in the remittance of funds. Payment is due on the maturity date.

Amounts

If the draft states the amount in both figures and words, these amounts must be the same, and the amount must agree with the commercial invoice.

How the Draft is Drawn

The draft is to be drawn by the beneficiary on the party stated in the letter of credit.

Drafts Drawn on the Applicant

As stipulated in the UCP500, letters of credit should not be issued requiring drafts to be drawn on the applicant.

Corrections and Alterations

All corrections or alterations made to a draft must appear to have been authenticated by the drawer, the party creating the draft. If corrections or alterations to the draft are not acceptable, the issuing bank should make this known in the letter of credit.

If a letter of credit (LC) merely requires an invoice, you might be surprised by the type of invoices that are acceptable to present. When the letter of credit requires a commercial invoice, a document titled invoice will meet the terms of the LC. In addition, tax, customs and consular invoices are all acceptable documents.

Provisional and pro-forma invoices are not acceptable unless specifically called for in the LC.

Name and Address

The old rule of thumb required that the name and address of the beneficiary and applicant on the invoice had to exactly match the LC. No deviation was acceptable.

Now the invoice needs to be issued by the beneficiary named in the LC and made out in the name of the applicant. If telex or fax numbers appear as part of the address for either party in the LC, they don’t need to be mentioned on the invoice. In fact, those numbers can differ from the LC.

Description of Goods and Other General Issues

In the past, most banks required that the merchandise description on the invoice be identical to the description shown on the LC; no deviation was allowed. Now the rules have been eased.

It is no longer necessary to have a mirror image of the description on the invoice. Details of the merchandise can appear in multiple areas of the invoice and, when pulled together, correspond to the letter of credit.

If the LC authorizes partial shipments, only what is actually shipped needs to appear on the invoice. It is also acceptable if the invoice displays all the merchandise on the LC but identifies what was shipped.

The invoice must clearly state the value of the goods as well as the currency and any unit price shown in the LC. If required by the LC, any discounts or deductions also must appear on the invoice. If the invoice shows a deduction for an advance payment, this is considered acceptable even if it’s not mentioned in the LC.

When the LC describes the goods and incorporates the trade term and the source of the trade term, such as “CIF Hong Kong Incoterms 2000,” this entire description must appear on the invoice. Costs related to the term must be included on the invoice and be within the value of the LC. Costs exceeding the LC value are unacceptable.

Most times the LC will require a signed commercial invoice. However, if the LC only requires a commercial invoice, the invoice does not have to be signed or dated.

If the invoice shows the merchandise quantity, weight and/or measurements, all the documents presented must be consistent with the invoice. In addition, the invoice cannot cover merchandise not described in the LC, such as samples.

Banks have always allowed a tolerance of plus or minus five percent for the quantity of the goods. However, the tolerance does not apply if the LC states that the quantity cannot be exceeded or reduced or if it states a number of units required. Under no circumstances can the value of the LC be exceeded.

In the case of prohibited partial shipments, the invoice value may contain a tolerance of minus five percent provided that the quantity is shipped in full. If the LC doesn’t state a quantity, the invoice will be considered shipped complete.

Installment shipments must follow the schedule outlined in the LC.

Ocean and Multimodal Transportation Documents

The ISBP covers ocean/marine, charter party, and multimodal transport documents separately. Due to a number of similarities, I’m going to combine my coverage of these three transport documents while highlighting differences each may have.

Application of UCP: Article 23 Ocean/Marine

Ocean and/or marine bills of lading for port-to-port shipments are covered by Article 23 of the UCP 500. The words ocean or marine do not have to appear on the transport document to make it acceptable, but it must indicate that a port-to-port shipment has been made.

Article 25 Charter Party

Charter party bills of lading for port-to-port shipments are covered by Article 25. As long as the transport document, such as a marine document, indicates it is subject to a charter party, it’s considered a charter party bill of lading.

Article 26 Multimodal (Combined Transport Document)

When at least two modes of transportation are used, and if the transport document shows that it covers the shipment from the place of loading to the final destination as called for in the letter of credit (LC), it is considered a multimodal bill of lading even if it isn’t titled as such.

Full Set of Originals

All transport documents need to show the number of original bills of lading issued. Documents marked “first original” or “duplicate” or “third original” are all considered original documents. Bills of lading do not have to be marked original to be acceptable.

Signing of Bills of Lading

All original bills of lading must be signed and the name of the carrier identified on ocean/marine and multimodal transport documents.

When an agent signs either an ocean/marine or multimodal bill of lading for the carrier, they need to be identified as an agent. The carrier or multimodal transport operator must then be identified either at the signature line or elsewhere on the face of the bill of lading.

If the master or captain signs the bill of lading, the signature must be identified as either the captain or master. The name of the captain or master isn’t required in addition to the signature. However, if an agent signs on behalf of the captain or master, they must be identified as an agent and the name of the captain or master must be identified.

If the credit states “Freight forwarder’s bill of lading acceptable” or “Freight forwarder’s multimodal transport document is acceptable,” that document can be signed by the freight forwarder. The name of the carrier and the multimodal transport operator does not need to be shown.

On-Board Notation

If a pre-printed shipped-on-board bill of lading or charter party bill of lading is issued, the date of issue will be considered the ship date unless there is an additional dated on-board notation. If that is the case, the dated on-board notation will be considered the ship date, even if this date is before the issuance date.

The same will apply to a multimodal transport document where the issuance date is considered the on-board date or the date of dispatch. If there is a separate dated notation, that will be considered the date of shipment.

When phrases such as “clean on board,” “shipped on board,” or “shipped in good order” are used, they are considered to have the same meaning as “shipped on board.”

Port of Loading and Discharge

The letter of credit will identify a port of loading. This port should appear on the ocean/marine bill of lading in the field designated for the port of loading. However, it may also be shown in the field identified as the place of receipt. If this is the case, two things must be clear:

1. That the goods were moved from the place of receipt by vessel, and
2. That the on-board notation shows that the goods were placed on board the vessel at the place of receipt.

The letter of credit will also identify a port of discharge. One would expect to find this information on the ocean/marine bill of lading in the field identified as the port of discharge. However, it is possible that it could be in the field identified as the place of final destination. If this is the case, two things again must be clear:

1. That the goods will be transported to the place of final destination by the vessel, and
2. That there is a notation that the port of discharge is shown as the place of final destination.

If the place of receipt on the ocean/marine bill of lading is shown as a container yard or container freight station and that same place is shown as the port of loading, it should be considered the same. As a result, the port of loading and the name of the vessel would not have to be part of the on-board notation.

It’s not uncommon for a letter of credit to identify either the port of loading and/or discharge in a geographical term, such as “Any USA West Coast Port.” If this is the case, the ocean/marine bill of lading and the multimodal transport document must show the actual port of loading and discharge and, of course, it must be within the geographical area.

If a charter party bill of lading is used, the port of loading must be shown just as on the ocean/marine bill of lading. However, the port of discharge may be shown as the geographical area.

Consignee, Order Party, Shipper and Endorsement, Notify Party

When the letter of credit requires either an ocean/marine, charter party, or a multimodal bill of lading and requires a straight consignment to a named party—for example, “consigned to ABC Company”—the consignment must not use language such as “to order” or “to the order of.” Conversely, if the letter of credit requires a consignment “to the order of” or “to order,” a straight consignment is not acceptable.

If the ocean/marine, charter party, or multimodal bill of lading is issued “to order” or “to order of the shipper,” the shipper must endorse the document. It is acceptable if the endorsement indicates that it is made for or on behalf of the shipper.

If the letter of credit doesn’t require a notify party to be designated on either the ocean/marine, charter party, or multimodal bill of lading, that field can be either left blank or completed any which way.

Transshipment and Partial Shipment

Transshipment occurs when goods are unloaded from one vessel or mode of transport and reloaded onto another. This would occur from the time the goods are put on board the vessel (otherwise known as the port of loading) to the final destination (or port of discharge) as required in the letter of credit.

On ocean shipments, if this movement of goods doesn’t happen between the port of loading and discharge, it is not considered a transshipment. With multimodal shipments, if the transport document covers the entire voyage and shows that a transshipment has occurred, this will be acceptable even if the letter of credit prohibits transshipments.

When partial shipments are prohibited and the letter of credit allows shipment from more than one port, it is acceptable if multiple sets of original bills of lading or transport documents are presented showing a variety of acceptable ports of loading. This is, of course, if the goods are shipped on the same vessel and the voyage ends at the same destination.

If multiple set of bills of lading or transport documents are presented and they have different shipment dates, the latest shipment date should be used for any presentation timeframe and for determining if the documents comply with the latest ship date allowed for in the letter of credit.

A bank will consider it a partial shipment if more than one vessel or other means of transport is used to move the goods, even if done on the same day for the same destination.

Clean Bills of Lading

A clean bill of lading or multimodal transport document is one that does not contain a notation to the effect that either the goods or the packaging are defective. The word “clean” does not actually have to appear on the bill of lading or transport document even if the letter of credit is calling for a “clean on board” document.

In addition, if the bill of lading or transport document contains the word “clean” but it is crossed out or deleted, this is still acceptable provided there is no other indication that the goods or packaging is defective.

Goods Description

The merchandise description on the bill of lading or transport document does not have to be exactly as stated in the letter of credit. The description can be more general as long as it is not inconsistent with the letter of credit.

Corrections and Alterations

Any and all changes made to a bill of lading or transport document must be authenticated by the carrier or their agent for bills of lading; the owner, captain, master or their agent for charter party bills of lading; and the carrier/master or their agents for multimodal documents.

Non-negotiable copies of these documents, which bear a correction or alteration, do not need to be authenticated.

Freight and Additional Costs

The letter of credit should require freight to be either prepaid or collect, and the bill of lading must reflect this. If the letter of credit states that no charges in addition to the freight are allowed, the bill of lading cannot show charges in addition to the freight that may or might be incurred. This includes costs with the loading or unloading of the goods.

Fees that could be charged as a result of a delay in unloading goods or delays after the good are unloaded such as a fee for the late return of the container are not considered an additional cost.

Goods Covered by More than One Bill of Lading or Multimodal Transport Document

Should a bill of lading or multimodal transport document indicate that the goods in the container are covered by more than one bill of lading or transport document, all bills of lading or transport documents related to that container must be presented for the container to be released to the consignee. This is only acceptable if all the bills of lading or transport documents are presented together under the same letter of credit.

Air Transport Documents

Air bills of lading are covered by Article 27 of the UCP 500. The term “air waybill” or “air consignment note” do not have to appear on the transport document, but it must indicate that an airport to airport shipment has been made.

Original Air Waybills

An original air waybill is one that states “original for consignor/shipper” on the face of the document. If the letter of credit (LC) should require a full set of originals, this also satisfies that requirement.

Signing of Air Waybills

The identity of the party signing the air waybill and the name of the carrier must be clearly stated. If the signor of the air waybill is an agent, it must be clearly stated that they are an agent, and the name of the carrier that they are signing on behalf of.

However, if the LC allows for either a house air waybill or freight forwarders air waybill, then the freight forwarder can sign the document and be identified as the freight forwarder and not the carrier or an agent for the carrier.

Goods Accepted for Carriage, Date of Shipment, and Requirement for an Actual Date of Dispatch

The air waybill always must show that the goods have been accepted for carriage.

If the LC requires the date of dispatch be shown on the air waybill, this information must appear someplace on the document. The date of dispatch is considered the date of shipment. Any information marked as “for carrier use only” is not to be used to determine the date of dispatch.

If the LC doesn’t require the date of dispatch to be shown on the air waybill, the date of issuance will be considered the date of dispatch. If the air waybill shows the flight date or flight number but is not required by the LC, that information will be disregarded.

Airports of Departure and Destination

The airport of departure and destination must appear on the air waybill as required by the LC. It is not a discrepancy if the IATA code for the airport is used instead of the full name of the airport.

If the LC allows for shipment to or from a geographical area or region, the actual airport used within that area or region must be shown on the air waybill.

Consignee, Order Party, and Notify Party

Air waybills are not documents of title. Therefore, even if the LC requires a “to order of” air waybill, an air waybill marked “consigned to” will be accepted. An air waybill should not be issued drawn “to order of.”

If the LC does not indicate a notify party, the air waybill does not need to show a notify party or, if it does, any notify party will be acceptable.

Transshipment and Partial Shipment

The UCP 500 defines transshipment as the unloading and reloading of merchandise from one airplane to another. This would occur during the course of carriage from the airport of departure to the airport of arrival. In addition, if the letter of credit prohibits transshipment, it is allowed if the entire voyage is covered by one airway bill.

When the LC prohibits partial shipments and multiple air waybills are presented covering shipment from one or more airports of departure, no discrepancy should be called provided they cover the shipment on the same plane and the same flight and will arrive at the same airport of arrival.

When more than one air waybill is presented, it may be possible multiple ship dates will appear. If this is the case, the latest date of shipment will be considered the actual shipment date and would be used for the calculation of any presentation time period.

When shipment occurs using more than one plane—even if the planes leave on the same day for the same destination—it will be considered a partial shipment.

Clean Air Transport Documents

If there is a notation on the air waybill that indicates the goods or the packaging are defective, a bank will call a discrepancy. If a notation doesn’t indicate any kind of defect, then a discrepancy won’t be called.

he ISBP gives this example: an air waybill with the statement “packaging may not be sufficient for the air journey” is acceptable; an air waybill with the statement “packing is not sufficient for the air journey” is not acceptable.

Even though the LC may require a clean air waybill, the word “clean” would not have to appear on the document. If the word “clean” did appear but then was crossed off or deleted in some manner, the air waybill would still be acceptable as long as there is not a notation indicating the goods or packaging are defective.

Goods Description

The merchandise description that appears on the air waybill doesn’t have to be exactly as stated in the LC. If the goods are described in more general terms but are not inconsistent with the LC, it is acceptable.

Corrections and Alterations

Should a correction or alteration appear on the air waybill, either the carrier or their agent must authenticate it.

If a copy of the air waybill is presented, the copy does not need to be signed by the carrier or their agent, and any correction or alteration doesn’t need authentication.

Freight and Additional Costs

The LC will typically indicate that the air freight is to be either collect or prepaid, and the air waybill must reflect this.

If the credit stipulates that it does not allow any cost in addition to the freight charges, the air waybill must not show any additional charges. This includes any references that would indicate the cost of loading or unloading the merchandise. It is acceptable, however, if there is a clause stating that there could be a fee charged if there is a delay in unloading the goods.

If the air waybill has a place where freight charges, either prepaid or collect, may appear, it is acceptable if the LC requires freight prepaid for those charges to appear in the prepaid section of the air waybill. If the LC requires freight collect, it would be acceptable for those charges to appear in the collect section of the air waybill.

Other Transport Documents

Article 28 Road, Rail or Inland Waterway

The requirements for road, rail or inland waterway bills of lading are very similar. If the credit requires one of these documents, the document that is presented will be accepted if the following conditions are met:

• The name of the carrier, or their agent, is shown on the document. Their signature, or other means of authentication, is displayed, and an indication that the goods have been received by the carrier or their agent for shipment.
• The date of shipment is in accordance with the terms of the letter of credit. This is determined by the date on the reception stamp. In the absence of a reception stamp, the issuance date of the document would be considered the shipment date.
• Lastly, the place of shipment and destination must comply with the terms of the letter of credit, as well as any other conditions the credit may specify.

Again, the UCP 500 defines transshipment as the unloading and reloading from one means of conveyance to another using a different mode of transport, during the course of carriage, from the place of shipment to the place of destination as required by the LC.

Let’s just imagine a letter of credit where transshipments are prohibited. Let’s continue to imagine a transport document, such as a rail document, is presented. That document clearly specifies that transshipment has or might take place, but that document also clearly specifies that it cover the entire shipment using the same mode of transport. This document would be considered acceptable.

Article 29 Courier and Post Receipts

An acceptable post receipt would be one that has been stamped and dated at the place of shipment required by the letter of credit. This date is considered the shipment date.

An acceptable courier receipt would be one that shows the name and signature of the courier service. If the credit specified a particular courier service, that service obviously would have to be used. The courier receipt must also be dated and this date is considered the shipment date.

Both of these documents would also have to comply with any other conditions specified in the letter of credit to be acceptable.

Article 30: Transport Documents Issued by Freight Forwarders

Before a bank will accept a transport document issued by a freight forwarder, the document must meet certain criteria.

First the transport document must show the forwarder as either the carrier or as a multimodal transport operator. In addition, the forwarder has to sign or authenticate the document as either the carrier or as the multimodal transport operator.

If, however, the document shows the actual name of the carrier or multimodal transport operator, the freight forwarder must sign or authenticate the document on behalf of the carrier or operator as their named agent.

Article 31: On Deck, Shipper’s Load and Count, Name of Consignor

Let’s start with “on deck” notations on the bill of lading when the goods are being shipped via ocean freight.

If the bill of lading indicates that the goods are loaded on deck or will be loaded on deck, the document is not acceptable. This is due to possible salt-water damage that may occur when the goods are loaded on deck as opposed to under deck. If you know that the only way to ship your product is on deck, make sure that the letter of credit allows for this.

If a clause appears on the bill of lading that the goods may be loaded on deck, it will be acceptable as long as there isn’t any indication that the goods actually are on deck.

The phrase “shipper’s load and count” is typically seen with containerized shipments, which make up the majority of shipments today. Since the carrier has no way to verify the contents of a sealed container, they make a notation on the bill of lading that it’s the “shipper’s load and count”, not theirs.

Years ago this was always considered a discrepancy, but today with the UCP 500, it is considered acceptable.

Who can be shown as the consignor of the goods? According to the UCP 500, the beneficiary does not have to be shown as the consignor. A third-party consignor is acceptable. This is particularly helpful in the case of transferable letters of credit, which I will discuss in a future article.

Article 32: Clean Transport Documents

I’ve been asked if a clean transport document is one that isn’t smudged or dirty. Actually a clean transport document has nothing to do with either smudges or dirt. It has to do with a notation that may appear on the transport document showing that the goods or packaging may have been compromised.

When a carrier receives the goods, they will make a notation to that affect on the transport document if they notice that the goods may have been damaged. If this type of clause appears on the transport document, it is considered an unclean document and is discrepant.

Insurance Documents

Issuers of Insurance Documents

When a letter of credit requires an insurance document, banks will expect to receive a document issued by an insurance company or their agent. When reading both the letter of credit and the insurance document, it may be required that all originals be countersigned.

An insurance broker may issue an insurance document using their stationery. However, the insurance document has to be signed by the insurance company or their agent. In many cases the insurance broker will be acting as the agent for the insurance company.

Risks to Be Covered

Any and all risks mentioned in the letter of credit must be covered on the insurance document. Most letters of credit are very clear about the types of risks that need to be covered, and there can be no exceptions.

I think one area that has caused some confusion is the “all risks” clause. By its very nature, one would think that all risks would cover all risks, but in fact it doesn’t. For instance, the all risks clause does not cover strikes, riots and civil commotions.

If the letter of credit calls for all risks coverage, any notation on the insurance document mentioning all risks coverage will be accepted. Also, if there is a notation on the insurance document that it covers Institute Cargo Clauses (A), the condition for all risks coverage has been met.

It has been my experience that just one insurance document is typically presented covering the entire shipment value or the value stipulated in the letter of credit. However, it is possible that multiple insurance documents can be presented for one shipment. This can be done provided that each document clearly indicates what the individual value of cover actually is and that coverage is independent and not tied to any other insurance document.

In addition, joint liability must be stated on all multiple insurance documents, or the insurer covering the highest value must declare that it will bear 100% of the risk.

The insurance document must show coverage, at a minimum, from the port of shipment to the port of delivery as stipulated in the letter of credit.

Dates

When reading the letter of credit, more than likely it will not mention anything relating to the date of the insurance document. However, if you are familiar with the UCP 500, you already know that the insurance document must be dated on or before the on-board notation or the date of dispatch. The only exception to this is if the insurance document stipulates that coverage began on or before the on board date or the date of dispatch.

If an expiration date appears on the insurance document, it must clearly stipulate that it relates to the latest date that goods can be loaded on board or the latest date that the goods can be taken in charge, and that it has nothing to do with the timeframe for making a claim against the insurance in the event it would be necessary to do so.

Insurance—Currency and Amount

The insurance document must be in the same currency as the letter of credit. The value of the insurance coverage, at a minimum, must be as stated in the letter of credit. If no minimum coverage is mentioned in the credit, it automatically is assumed to be 110 percent of either the CIF or CIP invoice value. The UCP 500 does not address a maximum value for insurance coverage.

If the letter of credit stipulates that the insurance is to be “irrespective of percentage,” then the insurance document cannot contain any indication that it is subject to a deductible or a franchise.

Sometimes a letter of credit may be issued for only a portion of the value of the goods. This might happen when a second method of payment is being used. For example, 20 percent of the value of the shipment is handled on open account with the balance of 80 percent covered by the letter of credit.

Sometimes the invoice may show a discount or a prepayment deductible. In all cases the insurance coverage must be based on the full value of the goods and not the value of the letter of credit.

Certificate of Origin

Sometimes when dealing with a letter of credit, the best rule of thumb you can use is to present documents to the bank as called for in the letter of credit. A classic example of this is with the certificate of origin. Should a letter of credit require a certificate of origin, that requirement is satisfied when a document is presented that certifies the origin of the merchandise and is signed and dated.

To take this one step further, if the letter of credit stipulates that a document must be issued by a particular party, then that party must issue the document. This certainly holds true for the certificate of origin.

However, and this is where it can get a little complicated, if the credit requires that the beneficiary issue the certificate of origin but the document is actually issued by a chamber of commerce, it may still be acceptable. If the document identifies the beneficiary, it’s then an acceptable document.

So far we have indicated that a document that certifies the origin of the merchandise, is signed, dated and issued by the party as required by the letter of credit is acceptable. Does anything else need to be in place? There should be a brief description of the merchandise. The description can be in general terms as long as it’s not inconsistent with the letter of credit.

Finally, when preparing documents to present to the bank under a letter of credit, only include information on those documents as required by either the letter of credit or the UCP 500. If you keep your documents simple, you may eliminate the potential for discrepancies.

Final Words

This concludes my interpretation of the ISBP. I would strongly advise you to obtain a copy of the International Standard Banking Practice (ISBP) for the Examination of Documents under Documentary Credits, issued by the International Chamber of Commerce (ICC), for your reference and to draw your own conclusions.

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