Trade Services Update

8/17/2019 Trade Services Update

1/15

TRADE SERVICES UPDATE

In This Issue

Features:

An Alternative on Statusof Documents UnderSub- Article 16(c) (iii) (b) (p.3)

UCP 600 vs ISP98 (p.5)

L/C Quiz (p.6)

ISBP 745 Revisited

ISBP 745—Paragraph

by Paragraph (v) (p.8)

Discussion Corner

Charter Party B/L vs.

Marine Insurance (p.10)

Irrevocable

ReimbursementUndertaking IRU (p.12)

News from the Trade

World, (p.15)

From the Editor

There is something special about working lifeafter the summer holiday. It is like the wholeworld has been shut down for 2 months – andthen it all just kick-starts in a crazy sprint. Whewriting this editorial, I am part of this sprint. Itcan be tiresome – but also really rewarding.Some of the issues that go on include:

Compliance, compliance and compliance …. it has all gone crazy. I thougthat the maximum of craziness had been reached; but I have been provedwrong about that. The good thing is that it does seem that the area is matuing – and that the involved parties take a serious and realistic approach to

The L/C Monitor is part of a very ambitious “compliance initiative.” I cannoshare more at this point of time – you have to wait to the next issue.

ICC Opinions: There has been a lot of fuss about Opinions TA.814rev and

TA.820rev that was withdrawn following the “final” versions. We now awaithe “final final” versions; but what remains is a somewhat shaky image of tICC Banking Commission. I truly hope we will avoid such situations in thefuture.

And for the future; the new Draft Opinions are just out. It is a 45 page bunof 13 Opinions (TA828-TA840).

Otherwise a lot of questions about guarantee expiry versus local law that dnot “respect” expiry date. I must admit those are issues I fail to comprehenI can however comprehend this much that those are issues that are causinlots of problems for counter guarantors and applicants.

But above all – I have been working on this issue. There is a great featureby Nesarul Hoque. Really thought provoking.

And then there is a quiz! And there is a prize ……

Happy reading and take care out there …

Kind regards,

Kim Sindberg / Editor in Chief / Trade Services Update / [email protected]

Covering practical aspects of payment instructions in international trade

Volume 17, Issue 3, July — September 2015


2/15

Editors

Trade Services Update is published quarterly by

GlobalTrade Corporation. Views expressed herein are solely

he views of the authors of each article and do not necessarily

reflect the official positions of their employers or organizations

with which they are associated. This publication is designed

o provide accurate and authoritative information with regard

RL: www.tradeservicesupdate.com Email: [email protected] Tel: +1 416-661-

Editor in Chief: Kim Sindberg Assistant Editor: Zahoor N. Dattu Executive Editors: Jacob Katsman & Nick Pachnev

Legal Editors: Robert M. Parson, Partner Reed Smith LLP, U.K. Robert M. Rosenblith, Attorney at Law, U.S.A. George F. Chandler III, Hill Rivkins & Hayden, U.S.A. Saibo JIN, Beijing Commerce & Finance Law Offices, China.

Contributing Editors: Robert Ronai, Import-Export Services Pty Ltd, Australia Heinz Hertl, LC Trainer, Austria Christopher Gregory, BBK, Bahrain

ATM Nesarul Hoque, Mutual Trust Bank Ltd., Bangladesh T.O. Lee, T.O. Lee Consultants Ltd., Canada Wang Xuehui (Ofei), Anhui Agricultural University, China Radek Dobáš, Česká spořitelna, Czech Republic Ken Nyberg, SEB Merchant Banking, Finland David Meynell, Germany

Vijaya Kumar , RBS Services LTD, India Giuseppe Ricchiuti, Sidel Holding Italia Spa, Italy Mohammad Sohail Hussain, Abu Dhabi Islamic Bank, Pakistan Muhammad Jawad Iqbal Khan, Bank Alfalah Limited, Pakistan Jee Meng Chen, Ernst & Young, Singapore

Andreu Vilà, Banco Sabadell, Spain Ingrid Fornt Sesmilo, CaixaBank - LA CAIXA, Spain

Alan C.Y. Liu, EnTie Commercial Bank, Taiwan Hasan Apaydin, HSBC, Turkey Ron Wells, BarrettWells Credit Research, U.K. Danielle Austin, LC Advisor, U.S.A. Wu Yihai, AHCOF Holdings Co., Ltd.

About Trade Services Update

TSU Country Editors: Australia and New Zealand, Hari Janakiraman, Atralia and New Zealand Banking Group Ltd Austria, Karl Mayrl, ERSTE BANK Bahrain, Pradeep Taneja, ICC Bahrain Trade FinaForum Bangladesh, Shahriar Masum, Mutual Trust BankBelgium, Emile Rummens, Senior Risk Manager, Bank NV Canada, Vincent Barboza, RBC Financial Group Chile, Rodolfo Guzmán Bastidas,

China, Sheilar Shaffer(Shi Xiaoling), Agricultural Bof China Czech Republic, Pavel Andrle, Banking CommissICC Denmark, Jakob Ingerslev, Nykredit Bank Estonia, Age Valgepea, Swedbank Estonia Germany, Markus Wohlgeschaffen, UniCredit GroIndia, Rupnarayan Bose, Director of the Institute oBank Studies (I) Indonesia, Saul Daniel Rumeser Iran, Hamid Farrokhi , Bank Tejarat Iraq, Prasad Gadwal, Trade Bank of Iraq Ireland, Vincent O'Brien, The electronic BusinessSchool International

Israel, Sarah Younger , Bank Leumi Le- Israel B.MLatvia, Inna Smaļe, AS DnB NORD Banka Lebanon, Joseph Rizk, SGBL Malaysia, Tang Seng Fatt, EON Bank Berhad Nigeria, Hedgar Ajakaiye, Zenith Bank Group Pakistan, Ahmir Mansoor , MCB Bank Ltd. Romania, Bogdan Ilie, Romanian Commercial BanSaudi Arabia, Abdulkader A. Bazara, Samba FinaGroup Singapore, Soh Chee Seng, DCTrade ConsultantSouth Korea, Chang-Soon Thomas Song, Korea change Bank Spain, Xavier Fornt, Professor at High School for national Trade

Sweden, Fredrik Lundberg, Business School in Stholm Switzerland, Daniel Devahive, Turkey, Ali Polat, Turkiye Finans Katilim Bankasi Ukraine, Lyudmyla Yeremenko, Public JSC Kreditprombank, Kiev United Kingdom, Abrar Ahmed, Crown Agents BaU.A.E., Laxmanan Sankaran, Commercial Bank ofbai U.S.A., Glenn D Ransier , American Express BankVietnam, Nguyen Huu Duc, Vietcombank Danang

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3/15

An Alternative on Statusof Documents UnderSub-Article 16 (c) (iii) (b) By: ATM Nesarul Hoque

Introduction:

The journey of “Principle of Irrevocability” with theUCP has been started from the very earliest ver-sion (UCP82) and continued to the very latestversion (UCP600). Earlier the L/C had to stipulate“irrevocability”- in its condition in order to estab-lish the L/C as irrevocable.But, with the expansionof international trade and the involvement of moreand more people in the trading process, the limi-tations of the revocable L/C became evident to

traders, bankers and other practitioners. In time, itfell into relative disuse, and the irrevocable L/C asan instrument of international trade settlement,with its own features, received recognition in UCP500, giving it more importance than a revocableL/C. And now under UCP600, an L/C is by defini-tion irrevocable. This “Principle of Irrevocability” isnot just a rule or provision but act as basis pointfor allocation of various risks and/or responsibili-ties among the parties like issuing bank, confirm-ing bank, nominated bank and of course, the ben-eficiary. This goes for other provisions of theUCP600 as well. Sometimes policy makers areoverwhelmed with L/C practices in the lifetime ofany version of UCP and incorporated these prac-tices as recognition of standard L/C practice intosubsequent versions as provision. One of the pro-visions like above, is sub-article 16 (c) (iii) (b) ofthe UCP 600. This provision permits the issuingbank to state the status of the documents i.e.“that the issuing bank is holding the documentsuntil it receives a waiver from the applicant andagrees to accept it, or receives further instructions

from the presenter prior to agreeing to accept a

waiver”. The objective of this article is to analysethe provision of sub-article 16(c) (iii) (b) under thparameter of “Principle of Irrevocability” and offea solution as an alternative to it.

Historical background of provision of sub-article16(c) (iii) (b):

During the lifetime of UCP500, the L/C practition

started to incorporate a new disposal instructionoutside the mandate of UCP 500 to the effect th“the issuing bank has the right to seek the appli-cant’s waiver and release the documents to theapplicant after providing a notice of refusal [if anwithout prior permission from the presenter” orsimilar”. The practice was evident in two differenformats. One is; first incorporated– the same coditions as L/C condition which effectively modifying the status of the documents when subject tonotice of refusal and the remaining was only pratices in notice of refusal without having any indic

tion in the L/C. Drafting of UCP 600 recognizedthe practice and incorporated as one of the op-tions available under sub-article 16 (c) (iii) and inthis regard the Commentary of UCP 600 says,“The wording contained in sub-article (c) (iii) (b)will not be new to a large number of documentarcredit practitioners. This wording, or wording of similar nature, was used in a considerable num-ber of notices of refusal given under UCP 500.The problem was that the wording did not reflectthe options that were available under UCP 500sub-article 14 (d) (ii), i.e., that the documents are

being held at the disposal of, or being returned tthe presenter. In reality, the wording that was in-corporated into those notices of refusal reflectedthe practice of banks as opposed to the require-ments of UCP 500sub-article 14 (d) (ii). That pratice has now been recognized and incorporatedas one of the options available under sub-article(c) (iii).”

An unresolved question:

Arguably, there are two contrary positions while

applying the mentioned status of documents in anotice of refusal. In one hand, it is internationalstandard documentary credit practices that oncepresentation is refused, documents relevant tothis notice of refusal, are belong to the presenteat this point of time to further action. On the oter hand, in corporation of this provision offers fleibility to the issuing bank to seek applicant waive(without having any ownership) even after send-ing notice of refusal. Hence, the rule is actuallyprioritized flexibility in operation over the“irrevocable right” of the presenter.

Bio: http://www.tradeservicesupdate.com/editor_hoque


4/15

An Alternative:

The challenges to set up an alternative to the ex-isting provision that the alternative must offer atleast similar kind of flexibility in operation and ofcourse, it must be done without hampering pre-senter’s irrevocable right”

As a first step into the alternatives, we need toreconsider the pre-waiver provisions of UCP 600in sub-article 16 (b) as under:

When an issuing bank determines that a presentation does not comply, it may in itssole judgement approach the applicant for awaiver of the discrepancies. This does not,however, extend the period mentioned in sub-

article 14 (b).

The issuing bank must sent a “status report” not later than close of fifth bankingday only mentioning the discrepanciesthat the issuing bank convey to the applicant or similar.

By this provision, the presenter will be aware onwhat ground the presentation is discrepant [withinnot later than close of fifth banking day], whichwill ultimately give the presenter better position to

further communicate its instruction, if contrary.This “status report” is not a notice refusal but anupdate on outcome of issuing bank examinationand its further course of action. If the presenter isnot satisfied with the reasons of “status report”,the presenter may provide contrary instruction tothe issuing bank.

In continuation of above provision, Sub-article 16(c) may be remained intake except sub-article16 (c) (iii) (b) i.e.

When a nominated bank acting on its nomina-tion, a confirming bank, if any, or the issuingbank decides to refuse to honour or negotiate,it must give a single notice to that effect to the

presenter.

The notice must state: i. that the bank is refusing to honour ornegotiate; and

ii. each discrepancy in respect of which thebank refuses to honour or negotiate; and

iii. that the bank is holding the documents pending further instructions from the present-er; or

b) that the bank is returning the docu-

ments; or

c) that the bank is acting in accordancewith instructions previously received fromthe presenter.

Since, issuing bank may have already engaged inpre-waiver process under sub-article 16 (b) (ii) [asmentioned in this article], the time limit for sending“notice of refusal” under sub-article 16 (d) shouldbe divided into the following two ways, i.e. one isfor the nominated bank acting on its nomination

and the confirming bank if any and the remainingis solely for the issuing bank.

(i) Nominated bank acting on its nominationand confirming bank and the issuing bank(not acting under sub-article 16(b)), if anymust give t he notice required in sub-article16 (c) by telecommunication or, if that is no

possible, by other expeditious means nolater than the close of the fifth banking dayfollowing the day of presentation or similar

(ii) The issuing bank acting under subarticle 16(b) must give the notice required in sub- article 16 (c) by telecommunication or, if that is not possible, byother expeditious means no later thanthe close of the tenth banking day following the day of presentation or similar.

Conclusion:

This article is an attempt to eliminate an unjustgap between L/C practice and presenter’s irrevo-cable right that inherited UCP600 through incorpo-ration of sub-article 16 (c) (iii) (b). As a part of allo-cation of risk while eliminating the gap, this articleallocate the risks and/responsibilities to the issuingbank in the form of status report and to the benefi-ciary giving the issuing bank extended time limitfor not later than close of tenth banking days forsending notice of refusal.

An Alternative on Status of Documents (continued)


5/15

UCP 600 vs ISP98 By Xavier Fornt

Reading article 1 of UCP 600, we may see thatthis set of rules is also applicable to stand by doc-umentary credits.

However, this “type” of documentary credits, alsohave their own rules i.e, ISP98. Reading thescope and application of the ISP98, we see in theGeneral Provisions, Rule 1.01, that they are in-tended to be applied only to stand by letters ofcredit.

No reciprocity.

But, what happens really on the market? I honest-

ly think that even the majority of the documentarycredits are submitted to UCP 600, we see someof them subject to ISP 98.

And can this situation originate some conflicts?

Theoretical no, but let’s analyze some differencesbetween documentary credits (normally subject toUCP 600) and standby’s letters of credit (normallysubject to ISP98).

The main idea of the beneficiary of a documen-

tary credit is to use them (i.e. present the requireddocuments after goods being shipped), while theprimary idea (or hope) of the beneficiary of astandby documentary credit is not to use them(i.e. only to draw if the counterpart defaults – i.e.does not pay at the agreed time).

A documentary credit requires original docu-ments, while a stand by letter of credit normallyrequires copies, except the demand.

A documentary credit is not intended to be re-newed, while the ISP98 makes it possible.

Under UCP 600 beneficiary may have up to 21days after goods being shipped to present documents, while under ISP98 presentation must bemade without delay.

Documentary credits my be silent respect to thelanguage, but in standby letters of credit under

ISP 98 the language must be that of thestandby.

Under UCP 600 is not necessary to present adocument demanding payment, while in ISP 98it is necessary to present a demand for payment

In documentary credits, banks have up to 5 daysbusiness days to review documents while inISP98 between 3 and 7 business days.

Documentary credits usually does not precise aexactly hour for presentation, while standby let-

ters of credit under ISP 98 may show a time ofday of expiration.

UCP 600 does not include a syndication possi-bility, but this possibility is included in ISP98.

To conclude, let me say that UCP are Rules ofThe Banking Commission and ISP are rules ofthe International Banking Law and Practice en-dorsed by the Banking Commission.

So far, so close.

Bio: http://www.tradeservicesupdate.com/editor_xavier


6/15

L/C Quiz By Kim Sindberg

The following quiz is made by Kim Sindberg. An-swers can be sent via e-mail [email protected].

Deadline for sending an answer is 20 November2015. After that two winners will be picked fromthe correct answers. The winners will receive onefree copy of Kim Sindbergs book “The CheatersHandbook to Documentary Credits.” More infor-mation about the book:

http://kimsindberg.dk/the-cheaters-handbook-to-

documentary-credits-2014-2/?lang=en

The winners will be contacted directly, and will beannounced in the next issue – along with the cor-rect answers.

Global International Bank (GIB) has been request-ed to issue an L/C by its customer Loop TradingLtd in favour of Overseas Exporters.

The L/C is advised via First Traders Bank (FTB) –being available and confirmed with them.

The L/C is issued available by negotiation 90 daysafter bill of lading.

The L/C is issued subject to UCP 600.

Tick off the appropriate box:

Question 01:

FTB is:

1. advising and confirming bank but not nominat-ed bank

2. advising bank but not confirming bank or nomi-nated bank

3. advising, confirming and nominated bank

4. confirming bank and nominated bank but notadvising bank

Question 02:

As an advising bank FTB must:

Question 03:

As a confirming bank FTB must:

Question 04:

Overseas Exporters presents documents toFTB. The L/C calls for a bill of lading. The dateof issue on the bill of lading is 15 October 2014.The bill of lading indicates that the goods areshipped on board at the port required by the L/Con 20 October 2014...

1. satisfy itself as to the workability of the L/Cand that the advice accurately reflects theterms and conditions of the documentary cred-

it

2. satisfy itself as to the apparent authenticityof the L/C and that the advice accurately re-flects the terms and conditions of the docu-mentary credit

3. satisfy itself as to the apparent authenticityof the L/C and that the advice accurately re-flects the terms and conditions of the underly-ing contract

4. ensure that the L/C is authentic and exactlyreflects the terms and conditions of the L/C

1. negotiate a complying presentation with re-

course to the applicant

2. negotiate a complying presentation with re-course to the beneficiary

3. negotiate a complying presentation withoutrecourse to the applicant

4. negotiate a complying presentation withoutrecourse to the beneficiary

Bio: http://www.tradeservicesupdate.com/editor_kim

mailto:[email protected]:[email protected]://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enhttp://kimsindberg.dk/the-cheaters-handbook-to-documentary-credits-2014-2/?lang=enmailto:[email protected]


7/15

When is the maturity date?

Question 05:

The bill of lading presented is issued as signed by“ABC Forwarders Ltd” as carrier.

Which is correct?

1. 13 January 2015

2. 14 January 2015

3. 16 January 2015

4. 18 January 2015

1. A bill of lading must never indicate the word“forwarder”

2. If the documentary credit does not includeanything about freight forwarders – a freightforwarder may issue and sign the transportdocument as long as it is done according to

UCP 600 article 20(a)(i)

3. When a documentary credit prohibits a “billof lading issued by a freight forwarder” thename of the issuer must not include word“forwarder”

4. When a documentary credit allows for a “billof lading issued by a freight forwarder” the billof lading must be signed by the freight for-warder “as carrier”

Question 06:

The documentary credit includes a “sanctionsclause.”

Which is correct?

Question 07:

Which way of signing is not acceptable on a bill

of lading presented under the documentary credit?

1. Trade Finance banks should not concernthemselves with sanctions, as the L/C is inde-pendent of the underlying transaction

2. The UCP 600 always override any sanctionsregime

3. Sanctions may restrict a bank’s ability to per-form under UCP 600

4. When a sanctioned part appears in a docu-ment presented under an L/C, the issuing bankmust refuse the presentation according to UCP600 article 16.

1. Mitsui O.S.K.Lines, Ltd. as Carri-er” (preprinted text) By Amity Shipping UkraineLtd, As Agents

2. Header: Mitsui O.S.K.Lines, Ltd. Signed by Amity Shipping Ltd, As Agents for the carrier

3. Header: Mitsui O.S.K.Lines, Ltd., carrierSigned by Amity Shipping Ukraine Ltd, As Agents for the carrier

4. [Signed by] Mitsui O.S.K.Lines, Ltd. as Carri-er

L/C Quiz (Continued)


8/15

Question 08:

The L/C includes the following requirement “UCP600 article 14 (k) does not apply to this documen-

tary credit” What is the consequence of this?

Question 09:

The documentary credit calls for a certificate oforigin issued by local chamber of commerce and

legalized by the embassy in the exporting country. Who must authenticate a correction to the certifi-cate of origin?

1. The requirement is ambiguous and must bedisregarded

2. The shipper in the bill of lading must be thebeneficiary mentioned in the documentary credit

3. The shipper in the bill of lading must be theapplicant mentioned in the documentary credit

4. The shipper in the bill of lading may be anyparty

1. Only the beneficiary

2. The beneficiary and the chamber of commerce

3. The beneficiary, the chamber of commerceand the embassy

4. The chamber of commerce and the embassy

Question 10:

The banks define a clean bill of ladingdocument as:

ISBP 745 —

Paragraph by Paragrap

(Paragraph iv)

Following the last issue we here coverparagraph iv of ISBP 745:

ISBP 745 Paragraph v – The credit and amenment application, the issuance of the credit anany amendment thereto

Relevant references:

Official Opinion R638 / TA629 (An ambiguous quirement for a transport document)

Official Opinion TA704rev (An ambiguouscondition in a L/C)

Official Opinion R634 / TA638rev(On exclusions in a L/C that makes the credit abiguous)

1. One that includes the word “clean”

2. One that does not include handwriting

3. One that does not bear any clause or no-tation expressly declaring a defective condi-tion in the goods or their packaging

4. One that does not bear a clause such as"shipper's load and count" or "said by ship-

per to contain"

L/C Quiz (Continued)


9/15

3. The issuing bank should ensure that the L/Cis not ambiguous or conflicting in its terms andconditions.

Example:

From the L/C application (issued by the appli-cant):

“Country of origin: South Korea”

After consulting with the applicant the issuingbank changes this (non-documentary) require-ment so that it is now to be stated in a docu-ment:

+ Certificate of Origin showing South Korea

origin

Comments:

This paragraph addresses three different issues:

1. The applicant bears the risk on any ambiguity

in the L/C application/instruction. This means that any “ambiguity” in the L/C ulti-mately falls back on the applicant.

The issue of “ambiguities” can be difficult to dealwith as the perception of what is ambiguous maydiffer from person to person.

The paragraph tries to capture, as an example,the situation where a L/C includes two conditions(e.g. (1) and (2)), and when complying with con-

dition (1) then condition (2) cannot be compliedwith and vice versa.

This is the situation in ICC Opinion R638 /TA629 where a shipment between two seaportsis described (one mode of transport), and a mul-timodal transport document (at least two modesof transport) is called for. In such case both re-quirements cannot be complied with at the sametime.

2. The issuing bank may supplement or develop

the instructions from the applicant in a mannernecessary or desirable to permit the use of theL/C.

The intention is to allow the issuing bank to mod-ify the instructions received from the applicant inorder to make the L/C workable.

As an example this could be to change a non-documentary condition to a condition reflected ina document. Of course such “modifications”should only be made based on an agreementwith the applicant. If the issuing bank modifiesthe conditions of the L/C without such agree-ment, and it results in a loss for the applicant,the issuing bank may be faced with a claim.

The paragraph allows the applicant to instructthe issuing bank not to supplement or developthe instructions. In such case it is doubtful thatthe issuing bank will issue the L/C if it includesinstructions that are ambiguous or conflicting inits terms and conditions.

ISBP 745—Paragraph by Paragraph (Paragraph iv) (continued)


10/15

Charter Party BL vs. Marine Insurance

A discussion amongst the

country editors.

The country editors havebeen discussing the follow-

ing questions. The below

answers are excerpts of

the discussion.

The following LCM editors

have took active part in the

discussion:

Xavier Fornt

Andreu Vilà

Radek Dobáš

Bob Ronai

T.O. Lee

Mohammad SohailHussain

Bogdan Ilie

Zahoor N. Dattu

Daniel Devahive

Is it mandatory for L/C issuing banks to check the underly-ing marine insurance policy to ensure that it covers the risksassociated with Charter Party Bill of Lading (CPBL), where

the L/C requires a transport document as CPBL?

This discussion shows the L/CM editors in agreement – butwith interesting nuances.

I would simply say no: Only when the insurance policy is a

requirement under the L/C and only to the extent of the L/C(and UCP) requirements.

I would say: "it depends on what you mean by 'check theunderlying marine insurance policy' ".

Of course we have to examine the policy to determinewhether it appears, on its face, to comply with the L/C. Inaddition, we have to determine it not to be in conflict withother documents.

"To appear on its face" does, in my reading, mean that youonly examine the insurance document itself and do not ex-amine the general insurance terms (they are usually noteven enclosed or reproduced on the document anyway)and the full wording of the insurance clauses.

So, you do not have to read an express statement on the document that it covers charter partyshipment. But if the insurance document expressly states that it DOES NOT cover charter partyshipment, and CPBL has been in fact presented, such insurance document is discrepant.

In my opinion the answer is simple and one word: "no".

An underlying marine insurance policy covers risks of loss of or damage to the goods, not risks"associated" with a CPBL if that refers to the owner's or master's actions and responsibilitiesdetailed in the CP.

Andreu Vilà, Spain

Radek Dobáš, Czech Republic

Bob Ronai, Australia


11/15

Charter Party BL vs. Marine Insurance (continued)

From my experience, bankers do not care about matching insurance terms with transport mode, par-

ticularity for CPBL.

Also under Intercoms the vendor needs to cover minimum insurance cover, unless otherwise statedin the sale/purchase contract.

In practice, it is up to the buyer to list his insurance requirements in the L/C application.

Then the banker will check compliance "on its face".

I hope the issuer would check this but this is only a Cinderella dream.

While I agree that we need to check that it meets the terms and conditions of the L/C, much of thedue diligence needs to be done prior to the issuance of the L/C. Like integrity of the charterer, wherethe vessel is registered (though this is not required as per UCP). But because the bank has financialinterest in the cargo, which is financed under the L/C, a due diligence is required. As regards to theInsurance Policy that is presented under the L/C, my other challenge is to see the financial capacityof the claims settling agent at the port of discharge. How do you ensure that the agent will meet theclaim of a higher value? If he does not honour, you would have to recover from the Principal, which isanother nightmare.

I am happy to take a locally issued Open Cover Note or Policy issued in the importer's country - sinceI can gauge the financial ability of the Issuer - besides this, I can take them to the courts for non-honouring the claim since it is much easy for the Issuing bank to recover the claim as the Insurancecompany resides in the same country.

In short prevention is better than cure - would be my first choice.

T.O. Lee, Canada

Xavier Fornt, Spain


12/15

Irrevocable Reimbursement Undertaking IRU

A discussion amongst the

country editors.

The country editors havebeen discussing the follow-

ing questions. The below

answers are excerpts of

the discussion.

The following LCM editors

have took active part in the

discussion:

Emile Rummens

Bogdan Ilie

Xavier Fornt

Radek Dobáš

Andreu Vilà

Abdulkader Bazara

Nesarul Hoque

Nguyen Huu Duc

T.O. Lee

Would appreciate if we could have a short exchange of ide-as on IRU’s.

The last years we received quite some L/C’s issued bysmaller banks (or with a low credit rating) but with an Irrevo-cable Reimbursement Undertaking issued by an acceptable(mostly Russian) bank and subject to URR 725.

We had to add our confirmation to the L/C’s, which we didbased on the IRU of the strong bank

In our bank we consider from a risk point of view an IRU assome kind of a first / previous confirming bank (although ofcourse there are some differences between the 2 risk miti-gating techniques). Till now our experience with IRU’s is

satisfactory but this does not say much as till now therewere no big financial troubles with the issuing banks. Andone can only know whether your protection still holds whenthe weather is stormy……….

I would like to know whether the colleagues have technicalcomments/concerns/points of attention / bad or good expe-riences with the technique of IRU.

PS. Let us keep the aspect of Russia, embargoes and thelike out of scope of our discussion

The editors share their experiences on the IRU.

We never faced bad experiences caused by IRU’s issuers.

The only aspect that might give some headache and you always have to keep in mind is thatonce a bank issues an IRU and inform you (the nominated/negotiating/confirming bank) theterms and conditions of the IRU, you must not forget to quote its reference number when youreimburse yourself.

I’ve heard of (and even met once) cases where reimbursing bank did not honour on first de-mand because the remitting bank failed to quote the reference number of the reimbursing bank.

Another aspect is that in case L/C validity is extended or its value is increased it is recommend-ed to contact reimbursing bank to confirm that you have received proper amendment from theissuing bank and accept to amend its IRU accordingly. Sometimes issuing banks fail to sendthe amendment to the reimbursing bank too.

Bogdan Ilie, Romania


13/15

Irrevocable Reimbursement Undertaking IRU

First of all, as per URR 725 art. 3, reimbursement authorisation is separate from the credit.

Second, the reimbursing bank is only obligated in the terms of its undertaking (article 4), and as perGeneral Provisions g. the reimbursement undertaking is irrevocable, but has his own conditions.

It depends whether you consider this reimbursement undertaking conditions acceptable or not.

In my case, IRU's experience was also satisfactory.

So far we have not encountered any troubles with IRU's. We have done some confirmations basedon them recently. However, since many of these transactions tend to have longer tenors, we havehad considerably less reimbursement claims than outstanding receivables so far. The reimburse-

ments that had already matured went smoothly.

As to the accounting principles, I believe it is very much a matter of the applicable law and account-ing / reporting principles (should be harmonised within EU) and also, to quite a high extent, their inter-pretation by local authorities and the banks themselves (and here we might differ).

We also consider the IRU issuing bank as a primary obligor and register the exposure against them.However, I have heard differing opinions on that (even within my own institution).

So I would keep it the way you do it until someone turns to you saying it is wrong...

We do quite a few confirmations based on IRU, and I am not aware of any big problem so far. Weprefer IRUs being subject to URR 725, but there are also some undertakings not subject to URR. Inany event, acceptance of the IRU is done in a case by case basis.

To add something to what has been said, the only irregular practice that has a certain recurrence thatcomes to my mind is receiving an IRU from a bank that it is not in fact a nominated reimbursing bankin the L/C. Typically an L/C issued by an African bank, available with our bank and with reimburse-ment to be effect direct from the issuing bank after our claim, but supplemented by an IRU issued bythe London branch of the issuing bank. In fact, it would be something more similar to a payment guar-antee, but drafted and labelled as an IRU.

Again, we try to get an amendment, what very often we don’t get. Otherwise we have to consider

again the text and conditions of the undertaking, the time and period, the reliability of banks involved,the amount, type of goods, beneficiary, etc. and if everything is ok we might accept that unconven-tional self -defined IRU (which of course is not subject to URR).

So far no problems but you need to be careful about the conditions of the IRU. Though they are subject to URR some IRU's might have additional conditions that one need to check and verify if they donot cause problems at the time of claiming for payment.

In addition, as explained by others, amendments to the credit that have effect on the validity period orincrease in value shouldn't not be advised by extending the confirmation to them unless the IRU isalso amended.

Xavier Fornt, Spain

Radek Dobáš, Czech Republic

Andreu Vila, Spain

Adbulkader Bazara, Saudi Arabia


14/15

I agreed with all, on practice of IRU from rated bank (acceptable to bank) for accommodating lowercredit rated bank subject to URR only.

The question from Emile reminds me of those days when the U.S. trade embargo was still imposedon Vietnam. During the time before the U.S. trade embargo was lifted in 1997, Vietnamese banks ingeneral and our bank in particular could not open USD accounts with any bank in the U.S. Despitethe U.S. trade embargo, payments including by L/Cs from and to Vietnam were still effected smoothvia our correspondent banks in Asia and Europe. Most of L/Cs issued by our bank were non -confirmed. However, we were sometimes requested to issue confirmed L/Cs and some confirmingbanks in Europe would agree to add their confirmation if our L/Cs indicate a Europe - based reimbuing bank which was willing to issue their irrevocable reimbursement undertaking (IRU).

From the story of our bank in the time of the U.S. trade embargo, it is understood that for L/Cs issueby banks in political or economic unstable countries, e.g., trade embargo countries, the confirmingbanks would require IRU issued by first class banks to cover the risk of non -reimbursement.

IRU issued by the first class bank cannot be amended or cancelled without the agreement of theclaiming bank (i.e., confirming bank in Emile’s case), the confirming bank is fully protected under UR725.

Based on common sense, an IRU, as well as a commercial contract, or any currency note, is only as

good as its issuer. Example: the PRC Yen or RMB, is not the same now as compared to 40 years ago, the Mao era. Inthe future it may even replace USD.

Nesarul Hoque, Bangladesh

Irrevocable Reimbursement Undertaking IRU (continued)

Nguyen Huu Duc, Vietnam

T.O. Lee, Canada


15/15

News from the Trade World

IIBLP have announced the following 2015 schedule:

Americas Standby & Guarantee Forum

New York 15 October 2015

Americas L/C Law Summit

New York

16 October 2015

ICC Banking Commission Technical Meeting

Date: 16-18 November 2015

Venue: HSBC, Paris. 103, Avenue des Champs-Elysées.

This will be the first of the “technical meetings” to be held.

Famous last word

Whenever you find yourself on the side of the majority, it is time to pause and reflect.

Mark Twain