Overview on URR, INCOTERM, MARINE INSURANCE and HIGH SEA SALES

Uniform Rules for Bank-to-Bank Reimbursement

The Uniform Rules for Bank-to-Bank Reimbursement (URR) were first published by ICC in November 1995 and came into force on July 1, 1996 as ICC publication no. 525. However, the current version is URR 725 effective from October 1, 2008 in conformity with UCPDC-600.

The bank issuing the LC is responsible for indicating in the credit that reimbursement claims are subject to URR-725.

Both MT 700: Issue of LC and MT-740: Authorization to reimburse swift messages must indicate the applicable rules.

There are 17 articles under URR-725 which have been divided into four groups:

General Provision and Definitions:

Art.01) Application of URR

Art.02) Definitions

Art.03) Reimbursement vs Credit

Liabilities and Responsibilities:

Art.04) Honour of Reimbursement Claim

Art.05) Responsibilities of Issuing Bank

Form of Notifications of Authorization, Amendments and Claims:

Art.06) Issuance and receipt of a Reimbursement Authorization or Amendment

Art.07) Expiry of Reimbursement Authorization

Art.08) Amendment/Cancellation of Reimbursement Authorization

Art.09) Reimbursement Undertaking

Art.10) Standard for Reimbursement Claim

Art.11) Processing Reimbursement Claim

Art.12) Duplication of Reimbursement Authorization

Miscellaneous Provisions:

Art.13) Foreign Laws and Usages

Art.14) Disclaimer of the Transmission of Messages

Art.15) Force Majeure

Art.16) Charges

Art.17) Interest Claim/Loss of Value

Important Provisions of URR

Application of the URR:

The credit issuing bank provides for the application of the URR by incorporating them into the text of the instructions (the reimbursement authorization) that it sends to the reimbursing bank as a standard clause ‘This reimbursement authorization is subject to the Uniform Rules for Bank-to-bank Reimbursement under Documentary Credits, ICC Publication No. 725’ (Art.01)

Nature of Reimbursement Operations:

The URR makes it clear that reimbursement procedures are separate transactions from the underlying credits, and that reimbursing banks are not concerned with or bound by the terms of such credits. (Art.03)

Relationship between the Banks:

The URR does not spell out the legal nature of the relationship between the issuing bank and the reimbursing bank. This is a matter of local laws applicable to the relationship.

‘Reimbursement Undertaking’ means a separate irrevocable undertaking of the reimbursing bank, issued upon the authorization or request of the issuing bank, to the claiming bank named in the reimbursement authorization, to honour that bank’s reimbursement claim provided the terms and conditions of the ‘Reimbursement Undertaking’ have been complied with. (Art.02-g)

Honour of Reimbursement Claim:

Except as provided by the terms of its Reimbursement Undertaking, a reimbursing bank is not obliged to honour a reimbursement claim. (Art.04)

Responsibility of the Issuing Bank:

The issuing bank is responsible for providing the information required in these rules in both the reimbursement authorization and the credit and is responsible for any consequences resulting from non-compliance with the provision. (Art.05)

Authorizations and Amendments: 

All reimbursement authorizations/amendments must be issued in the form of an authenticated message (Art.06-a)

Authorization and amendments must be complete and precise. (Art06-b)

Issuing bank should not send the details of the credit to the reimbursing bank. (Art.6-b) (i)

Unless otherwise agreed multiple reimbursement instructions should not be sent in the same communication. (Art.06-b) (ii)

Issuing bank does not require a certificate of compliance of terms and conditions of the credit in reimbursement authorization. (Art.06-c) Reimbursement Authorization must contain the following:

  i.   credit number

 ii    currency and amount

iii    additional amounts payable and tolerance if any

iv.   claiming bank details and parties responsible for charges. (Art.06-d) and (Art.09-b) where         reimbursement undertakings have been issued. 

In some cases, issuing banks require the claiming bank to notify them before claiming on the reimbursing bank. This practice is called pre-notification. The URR makes it clear that any such requirement must be included in the credit and not in the reimbursement instructions. (Art.06-f) (i)

In some cases, the issuing bank requires either the claiming bank or the reimbursing bank to provide it with advance notice of when the issuing bank’s account will be debited. This practice is called pre-debit notification. Such instructions may appear in either the individual reimbursement authorization, or in general agreement between the two banks. (Art.06-f) (ii)

Amendment and Cancellation:

Except in cases where a reimbursement undertaking is involved, the issuing bank can at any time cancel or amend its reimbursement authorization by notice to the reimbursing bank. (Art.08-a)

The issuing bank has to provide the nominated or advising bank of LC with fresh instructions if the original instructions are cancelled prior to the expiry of the credit. (Art.08-b)

Where an irrevocable reimbursement authorization is given by the issuing bank to the reimbursing bank, the authorization cannot be amended or cancelled without the agreement of the reimbursing bank. (Art09-h) (i)

Expiry:

There is no expiry date or latest date for presentation of claims except as agreed to by the reimbursing bank. (Art.07)

If the reimbursing bank has issued an independent undertaking, the authorization and the undertaking both must indicate the latest date for presentation of claim including any usance period (Art.09 (b) (v) and Art.09 (e) (v)

Claim Procedure:

Claiming bank’s claim must contain the details of credit i.e., credit no. currency and amount tolerance, parties responsible for charges etc. (Art.10-b).

Reimbursing banks have a reasonable time, not to exceed three banking days, to process a claim. (Art.11-a) (i) 

The reimbursing bank must inform the claiming bank and the issuing bank, if it decides not to reimburse. (Art.11-a) (ii).

Charges:

The reimbursing bank’s charges are for the account of the issuing bank. In cases where the charges are for the account of another party, it is the responsibility of the issuing bank to provide the appropriate information in both the credit and the reimbursement authorization. (Art.16-a)

INCOTERMS

INCOTERMS are a series of internationally recognized, standardized trade terms published by the ICC and widely used in international contracts of sale as well as in domestic trade also.

INCOTERMS rules mainly focus on obligation, costs and risks associated with transportation and delivery of goods.

INCOTERM 2010 effective from Ist January, 2010

INCOTERM 2020 effective from Ist January, 2020

Both Incoterms contain 11 items in two groups based on mode of transport.

7 Incoterms are for any mode of transport

4 Incoterms are for sea and inland waterways transport

Presently Incoterm 2010 and 2020 both are operational.

Purpose of Incoterms:

Incoterms covers:

• Who does what?
• Who pays for what?
• When risk in the goods passes.
• When delivery occurs.
• Who bears the insurance?
• Who will do export/import clearance?
• Who will pay other costs pertaining to delivery of goods?

Incoterms do not cover:

• Do not cover service contracts.
• Do not determine transfer of title.
• Do not determine breach of contract.
• Do not protect parties from their own risk of loss.
• Do not cover goods before or after delivery.

Structure of Incoterms:

Explanation of Incoterms

EXW – Ex Works:

Seller has the goods ready at his place. Cost and risk for bringing the goods to the final destination will be the buyer.

FCA – Free Carrier:

Seller hands over the goods, cleared for export, into the custody of the first carrier (named by the buyer) at the named place.

Incoterm 2020 about FCA:

i) Arrangement of carriage with own means of transport.

ii) Requirement of on-board bill of lading if parties so agreed.

CPT – Carriage Paid To:

Seller pays for carriage to the named point of destination, but risk passes when handed over to the first carrier.

CIP – Carriage and Insurance Paid:

Seller pays for carriage and insurance to the named point of destination, but risk passes when handed over to the first carrier.

DAT – Delivered at Terminal:

Seller delivers at the named terminal, except for cost related to import clearance, and assumes all risk prior to the point that the goods are unloaded at the terminal.

DAT has been replaced with DPU in Incoterm, 2020

DPU – Delivered at Place Unloaded:

The seller is responsible for arranging carriage and for delivering the goods unloaded from the arriving means of transport.

DAP -Delivered at Place:

Seller delivers the goods to the named place, except for the cost related to import clearance, and assumes all risk prior to the point that the goods are ready to be unloaded by the buyer.

In Incoterm, 2020, the difference between DAP and DPU is:

DAP: the seller is responsible upto unloading of goods

DPU: the seller is responsible for unloading of goods 

DDP – Delivered Duty Paid:

Seller delivers the goods to the named place in the buyer's country and pays all costs in bringing the goods to the destination including import duties and taxes, if any.

FAS – Free Alongside Ship:

Seller must place the goods, cleared for export, alongside the ship at the named place.

FOB – Free on Board:

Seller must load the goods on board the vessel nominated by the buyer. Costs and risks are divided when the goods are actually on board of the vessel.

CFR – Cost and Freight:

Seller must pay the cost and freight to bring the goods to the port of destination. However, the risk is transferred to the buyer once the goods are on-board the vessel.

CIF – Cost, Insurance and Freight:

Exactly the same as CFR except that the seller must in addition procure and pay for insurance for the buyer.

It appears from above that following are main changes from incoterm 2010 to Incoterm 2020:

• Term DAT has been renamed as DPU (delivered at Place Unloaded).
• Under FCA, buyer can now instruct its carrier to issue a bill of lading with an on-board notation to the seller so that they may satisfy the terms of a letter of credit.
• Under the revised term of CIP, the seller is now responsible for purchasing a higher level of insurance coverage i.e., at-least 110%   of the value of goods as detailed in clause ‘A’ of the Institute cargo clauses. Insurance requirements have not changed for CIF.
• Incoterm rules 2020 rules recognize sellers who may use their own transport to deliver the goods.

Incoterm 2020 rules now specifically call out the import and export security requirements and identify whether the buyer or seller is responsible for meeting those requirements. The Incoterm rules are not mandatory for the parties to a contract.

Marine Insurance

Definition:

Marine insurance is a type of insurance policy that provides coverage against any damage/loss caused to cargo vessels, ships terminals etc. in which the goods are transported from one point of origin to final destination. 

                                                                                    or

Marine insurance coverage includes loss or damage caused to the shipment/cargo/ship while it is grounded, and also from sinking, collision, burning, navigation errors, theft strikes, war and natural calamities.

It is a contract of indemnity and covered under Marine Insurance Act, 1963.

Goods in transit need to be insured by one of the three parties:

• The Forwarding Agent
• The Exporter
• The Importer

Features of Marine Insurance:

01) Comprehensive Coverage: A marine cargo insurance policy offers comprehensive coverage against all the potential marine related perils that the goods are exposed to while they are in transit.

02) Easy Customization: the plans can be easily customized and be adjusted to meet certain needs of the customers.

03) Flexibility: The plans are flexible, having a variety of options to cater to the requirements of the insured.

04) Claim Survey and Settlement Assistance:  The policy offers worldwide claims settlement assistance along with claim surveys.

05) Extension of Coverage: One has the liberty to enhance the coverage with add-on benefits and cover the risk like strike, riots etc.

Types of Marine Insurance Policy

The following are the major type of policies:

01) Marine Cargo Insurance: It covers the loss or damage caused to marine cargo during the transit. It also covers third party liability arising from any loss or damage caused to the ship, port or any other transport forms from the insured cargo. 

02) Liability Insurance: it protects the ship in case of crash, collision or any attack that can lead to a huge loss or damage. It compensates the policyholder for any such liability that is beyond his control.

03) Hull Insurance: It provides coverage to vessels including the furniture and articles of the ship against any unanticipated mishaps. It is beneficial for the ship owners.

04) Freight insurance: It compensates the shipping company in case freight is lost or damaged.

Other Marine Insurance Plans:

01) Open Marine Insurance Policy: It is issued for a specific time period and covers all shipments.

02) Time Plan:  it is for a specific period, generally for one year.

03) Voyage Plan: It is for a specific sea voyage, the moment the journey ends, plan expires.

04) Mixed Plan: It gives advantage of both voyage and time plan.

05) Port Risk Plan: It covers the risk when a ship is stationed at the port.

06) Valued Plan: The value either of cargo or consignment is determined in advance or mentioned in the policy.

07) Floating Plan: Amount of claim is specified beforehand however the details cannot be disclosed until the ship starts with the voyage.

08) Wager Plan: This plan does not have any predefined fixed repayment terms. The reimbursement depends upon any shortfall and harms deserving cases.

Institute Cargo Clauses:

Marine insurance cover is based on the Institute cargo clauses and the coverage is directly related to the insurance premium paid.

Institute cargo Clause ‘A’ – it is considered to be one of the widest coverages.

Institute Cargo Clause “B’ – It is considered to be slightly restrictive coverage.

Institute Cargo Clause ‘C’ – It is considered to be the most restrictive coverage.

Coverage Under Marine Insurance Institute Clauses:

Why Need for Marine insurance:

Insurance is needed to maintain the financial integrity of life and business.

Marine insurance is needed to cover the risk related to marine activities such as transportation through oceans and waterways.

High Sea Sales

High sea sales are affected when the goods are actually in mid sea or after their dispatch from the port/airport of origin and before their arrival at the port/airport of destination.

                                                                             Or

It means sales of goods after crossing the custom barriers of the foreign nation but before crossing the custom frontiers of India by way of transfer of documents of title of goods, while it is in transit.

High sea sale is permitted under Foreign Trade policy.

Important Provisions for High Sea Sales:

• Signing of High Sea Sale agreement after dispatch of goods but before arrival at destination.
• Endorsement of Bill of lading/Airway bill in favour of new buyer.
• IGM (Import General Manifesto) filed by the carrier in the name of HSS buyer.
• CIF value for calculation of duty is taken to be HSS value. However, there is practice followed in custom to add 2% of CIF value for calculation of assessable value.
• There is a bio bar on the same goods being sold more than once on the high sea.
• No sales tax on HSS.
• Delivery of goods from custom to HSS buyer. 
• HSS goods are entitled to classification rates of duty and all notifications/benefits as would be applicable to similar import goods on normal sale.

Documents Required to Prove High Sea Sales:

The following is the check-list that would be required to prove a High Sea Sale transaction:

i)  High Sea Sale Agreement on non-judicial stamp paper of requisite value as per Stamp Duty Act.

ii) Copy of Invoice, Bill of lading/Airway bill duly endorsed in favour of HSS buyer, insurance papers.

iii) Bill of entry specifying the name of final buyer and proof of payment of custom duty.

iv) Payment in foreign currency will be paid by the original importer to exporter, whereas the High Sea Sale buyer will pay to the seller in Indian rupee.

Written by : Mr Vijay Kumar Chhatwal, former Executive, Punjab National Bank. The article is based upon the deliberations made by Mr Vijay Kumar Chhwal in Banking Quest' Foreign Exchange Training Program.