SCRUTINY OF LC DOCUMENTS AND NEGOTIATION

As per UCPDC – 600 Edition effective from 1st July 2007:-

“Documentary Credit means any arrangement that is irrevocable and thereby constitutes a definite undertaking  of the issuing bank to honor a complying presentation.”

Before we start our discussion, let’s first be aware of some important points:-

Banking Day – A day on which the bank is regularly open at a place where an action to these rules is to be performed.

Nominated Bank – The bank where credit is available or any bank in the case of credit available with any bank.

Presentation – Delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered. 

• All Banks to determine the complying presentation only on the basis of documents
• Presentation to be made not later than 21 calendar days after the date of shipment but within the validity of Credit.
• A document presented but not required by the credit will be disregarded. It may be returned to the presenter.  (Art 14g)
• If a credit contains a condition without stipulating the document related to the condition, banks will deem such condition as not stated.  (Art 14h)
• A document may be dated prior to the date of issue of credit but not later than date of presentation. (Art 14i)
• A maximum of 5 banking days following the day of presentation is allowed to determine whether a presentation is complying. (Art 14b)

Extension of Expiry Date or Last Day of Presentation

• If falls on a declared holiday, will get extended to the first following working day.
• The declared holiday has to be certified by the nominated bank.

Note: only Expiry Date of Letter of Credit will be extended, but the last date of SHIPMENT will not be extended.

Force Majeure – No liability of bank (Article 36). In case, due to strike, commotion etc, bank holiday is declared on the last day  of LC, the Expiry Date of LC will not be extended. 

Documents under a Letter of Credit- its Broad Group, Types and Sections

Let’s now scrutinise the various important documents generally presented by the exporter:-

Draft

• Tenor of Draft should be in accordance of the terms of the credit
• It should be drawn and signed by the beneficiary and indicate date of issuance
• Not to drawn on the applicant
• To be drawn  for the amount demanded in the presentation
• If drawn at a tenor other than sight, it should be possible to establish maturity date from the data in the draft
• Any correction on the Draft to be authenticated by signature or initials
• To be drawn on the bank stated in the credit

Invoice

• Invoice must have been issued by the Beneficiary.
• Need not be signed or dated.
• Made out in the name of Applicant.
• Same Currency as in Credit.
• Description of goods should correspond with that in the credit.

Banks may accept a Commercial Invoice for excess of the amount permitted by the credit, provided the bank in question has honoured documents only for credit amount.

Packing List

• To be issued if required by the credit.
• To be issued by the entity stated in the credit.
• If not stated, any entity can issue a packing list.
• If specific packing requirements are stated in the credit, then data in the document should not be in conflict with those requirements.
• Banks only examine values – total quantity, weight, measurements or packages to ensure that they are not in conflict with total shown in credit or any other stipulated document.

 Bill of Lading

• Check if LC calls for Bill of Lading
• If shipment is not from port to port, B/L is not a suitable document and LC should be amended
• Port of loading should be same as “Shipment from” location in the credit
• Port of discharge should be same as “shipped to” destination in the LC
• Document may carry a place of receipt of cargo and a place of final destination, in addition to the ports of loading and discharge. These are acceptable as long as the port of loading and port of discharge are the same.
• Name of vessel should appear on the B/L
• In case of transhipment, name of more than one vessel may appear on the B/L.
• ON BOARD date should precede the last date of shipment  (if stipulated in the credit) or expiry date of the credit.
• Signature on the B/L  should be by Carrier, Master or Agent

 Other important points of Bill of Lading

• The shipper need not be the same as the beneficiary of the credit.
• Consignee on BL should be the same as specified in the credit. 
• The consignee can be different from the applicant.
• Weight of the cargo on the BL should not be less than that in other documents. It is generally more, as BL mentions the gross weight including packaging.
• BL should not contain any qualifying remarks on the quality of goods or quality of packaging.
• Any change on original BL should be authenticated.

Airway Bill

• Indicated goods have been accepted for carriage
• Date of issuance deemed to be date of shipment unless specific notation mentioned
• Be original for consignor
• Name of Notify Party should be same as stated in the credit
• Transhipment means unloading from one aircraft and reloading to another aircraft
• Contain terms and conditions of carriage
• Indicate airport of departure and airport of destination
• Indicate the name of carrier; signed by  carrier or named agent

General principles – a few more

• A statement, declaration or certification required by a credit is to be signed.
• Correction of data in a document issued by a beneficiary need not be authenticated, except on Bill of Exchange.
• A document indicating date of issuance and a later date of signing is deemed to have been issued on date of signing.
• If credit is silent in respect of language, documents can be issued in any language.

NEGOTIATION OF DOCUMENTS

What is Negotiation?

 Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank. 

Negotiability of a credit

 1. Opening bank may make the credit available:

• By payment
• By deferred payment
• By acceptance
• By negotiation
•  

2. A negotiation cannot be done unless the credit is stated to be available by negotiation.

3. Negotiate or not - Checklist:-

• Is the credit genuine ?
• Is it issued subject to UCPDC 600?
• Is the opening/ confirming bank acceptable?
• Is the credit available by negotiation?
• If so, is it restricted to me/ freely negotiable?
• Do the documents satisfy terms of the credit?

Scrutiny of documents

• Negotiating bank to ensure that  documents fully conform to terms of the credit.
• Superfluous documents will not be examined
• Non documentary conditions will be ignored
• If any of the conditions are not satisfied, the document is said to be discrepant
  

Time limit for scrutiny 

• Scrutiny – Maximum of  5 Banking Days following the day of presentation.
• Date of receipt and intervening holidays excluded
• Time limit applicable to opening and confirming banks and any nominated bank 
• Contacting the applicant for waiver does not extend the period of 5 banking days
• If refusal is not advised before the close of the 5th banking day, the document cannot be refused.

Handling of discrepant documents

• Opening Bank can reject documents if  discrepant
• Decision of Rejection  should be on  the basis of documents  alone
• Advice of Refusal should be communicated to negotiating bank 
• List of discrepancies should also be advised
• No further delivery of documents should be made to the applicant
• Rejection notice to be sent even if discrepancies have been noticed by the negotiating bank

 Negotiation under reserve

• Normally negotiating bank has no recourse to beneficiary
• It is possible for bank to reserve recourse by special arrangement
• Recourse to Beneficiary arrangement may be done through a  letter of indemnity
• Recourse can be resorted to when documents are discrepant or when other risk factors are perceived
• Confirming bank cannot negotiate under reserve
• Reserve arrangement is between negotiating bank and beneficiary only
• Negotiating under reserve is a credit exposure on the customer

Manufactured clauses - precaution

These clauses are sometimes incorporated by the opening bank to avoid liability at a later date…

• “On receipt of conforming documents and receipt of   funds   under the master credit we promise ------”
• “On acceptance of drafts by the applicant we promise to….”
• The credit will become operative on issue of a  shipment authorisation by the applicant or his agent.
• All discrepancies are acceptable on payment of a fee.

DOCUMENTS SHOULD NOT BE NEGOTIATED WITH SUCH MANUFACTURED CLAUSES

Written by : Surinderjit Kaur, former Assistant General Manager & Faculty, State Bank of India