Revolving Letter of Credit

A revolving credit (RC) is one that is available for an amount that remains constant for a given period of time so that whenever it is drawn upon, it becomes available again for the full amount, either immediately or as soon as advice is received from the issuing bank that earlier presentations are acceptable to them. Alternatively, it may be made available for a reducing sum during a given period of time, to become automatically available again for the original sum at the end of the period. If the renewal of amount is not automatic but subject to reinstatement instructions after each drawing, it is not strictly a true RC but rather one of fixed amount which has to be increased by means of amendment.

RC may be renewable as to amount and time as follows:

· RC may be available for up to, say USD10,000 at any one time, and as soon as a drawing is made the amount drawn immediately becomes available gain. Often there is no limit to the number of drawings that may be made of up to USD10,000 each, except perhaps a qualification as to how much may be drawn per day; such RC continues to be drawn upon and reinstated until it expires.

· RC may be available for up to USD10,000 per week or per month. The amount is automatically available each week or month irrespective of whether any sum has been drawn during the previous week or month. This can be on a cumulative or non-cumulative basis, cumulative being more common, i.e. un-utilized amounts are carried forward and added to the total amount available for the following week or month.

RCs that revolve around amount, as in the first example, are rarely confirmed since it is virtually impossible to establish the total liability that may be incurred during the life of the RC. RCs that revolve around time (example 2) are more likely to bear confirmation since the overall amount of liability is ascertainable.

RCs should not be confused with LCs available by instalments. If an LC has an overall limit as to amount and validity and permits specified drawings or quantities of goods to be shipped at appointed periods of time during that validity, it is an LC that is available by instalments and as such is subject to UCP 600 article 32, “if a drawing or shipment by instalments within given periods is stipulated in the credit and any instalment is not drawn or shipped within the period allowed for that instalment, the credit ceases to be available for that and any subsequent instalment.”

Shipping Guarantee: Part 2

In international trade, banks deal with documents and not with physical goods although these documents represent goods and movement of goods. The regulatory and commercial requirements of international trade have resulted in the use of many and varied documents. It is not unusual to see exports department and imports department staff of banks buried under huge mass of documents. You will appreciate that due to this inherent characteristic of international trade shipping documents through delays, losses in the mail and bureaucratic procedures may arrive after the goods have reached their destination. Non-arrival of shipping documents may result in the importer facing a loss should he not be able to take delivery of goods and sell them especially if they are perishable goods. To assist the importer to take delivery of the goods a Shipping Guarantee (SG) is issued in favour of the carrier of the goods.

In general, SGs only relate to bills of lading that have been delayed, lost, mislaid, stolen or destroyed.

SG is an indemnity given by the consignee to which the bank jointly indemnifies the carrier of goods so that the consignee so named can take delivery of the goods without production of the relevant bills of lading. The consignee and the bank jointly undertake to indemnify the carrier against all liabilities relating to the delivery and undertake to surrender the bill of lading duly endorsed to the carrier on receipt of it.

On receipt of notice of arrival of ship bearing the goods, the consignee will ascertain whether the bank has received the relevant shipping documents, particularly the bill of lading. If the shipping documents are not on hand, the consignee will then request the bank to issue a SG.

The normal prudent consideration for a banking facility is applied. If the consignee is someone who is not known to the bank or who has had minimal dealings with the bank, a deposit varying in amount up to the full invoice value of the imports normally required by the bank. This deposit is commonly known as a margin and provides the requisite security should the consignee turn out to be someone who is not entitled to the goods. A counter indemnity is also taken whereby the consignee undertakes to indemnify the bank against all losses, damages and expenses in relation to the issue of the SG and at the same time undertake to deliver the bill of lading duly endorsed on receipt or obtain a discharge of the bank’s liability under the indemnity. Having satisfied that all precautions have been taken the bank will then issue the SG and forward it to the carrier or his representative for the goods to be released.

On receipt of the shipping documents, the bank will extract the bill of lading and after having obtained the required endorsements forward it to the carrier to redeem the SG.

Commercial Invoice

Commercial Invoice is a bill for the goods shipped to the buyer. It is the accounting document for seller’s claim on the buyer for goods sold to the buyer. Commercial Invoice would normally contain the following information:

1. Names and addresses of the buyer and the seller
2. Date of invoice, sale contract or firm order, reference number, date and etc
3. Unit prices, if any, final sum claimed, shipment terms
4. Settlement terms viz sight, tenor, DA/DP and etc
5. Shipping marks and numbers
6. Weight/quantity of the goods
7. Name of the vessel, port of embarkation etc

In addition to these particulars, the following details are generally given in the commercial invoice to facilitate customs clearance in the importing country:

1. Country of origin of the goods
2. Ports of loading and discharge
3. Details of freight and insurance charges (where applicable)
4. Commissions payable to an agent
5. Seller’s certification under signature certifying value of goods and relevant particulars to be correct

When an invoice is to be tendered under terms of the LC, care must be taken to comply with the following requirement:

1. Invoice – made out to the seller – beneficiary (exception to transferable LC)
2. Must be addressed to the opener or such other party as specified in the LC
3. Description of goods must exactly correspond with description in the LC
4. Quantity must agree with that stated in the LC – subject to tolerance limits permitted under UCP
5. Price and price basis must be specified and agree with the LC terms
6. Signed, if expressly stated in the LC
7. Identifying marks, numbers, gross/net weight, number of packages etc agree with all other

8. relevant documents e.g. BL, insurance etc
9. Only permitted items of costs included
10. License number etc specified when stipulated
11. Amount should not exceed LC amount subject to the provision of UCP

There are variations of invoices which are used for various purposes either as a substitute or along with commercial invoice. Such widely used documents are:

1. Certified Invoice
2. Legalized Invoice
3. Combined Certificate of value and origin
4. Visaed invoice

Standby LC and Principle of Autonomy

The traditional LC for import and export transaction is issued to provide the exporter with a guarantee of payment when performance has occurred by submitting documents in accordance with the terms and conditions of the LC. However, the standby LC (SBLC) for import and export transaction is issued to provide the exporter with a guarantee which is only activated in the case of non-performance of another pre-arranged activity. The development of SBLC took place in the United States where the banks do not have the power to issue performance bonds and first demand guarantee.

SBLC can be issued in lieu of performance guarantee in construction contracts, as a guarantee to loan repayment or as a guarantee to a seller as a back-up to some other pre-arranged method of finance. In transactions involving the manufacturing and the sale of goods, SBLC can also be used to secure payment of the price; the payment of liquidated damages for faulty performance; and to cover a deposit repayable in the event of the non-performance of the underlying contract. Losses which could be incurred in a take-over of a company and arising from the non-payment of a promissory note, the payment of rental and the payment of an amount can be, likewise, secured by SBLC.

The beneficiary can usually draw under the SBLC on the basis of providing a certificate or statement that a specific agreement has not been complied with. Given that specified documentation is presented, the bank called upon will be required to pay, regardless as to whether or not the applicant of the LC considers he has performed. Just as in the case of commercial LCs, the payment of a SBLC is subject to the tender of a fully complying set of documents by beneficiary.

The autonomy of a SBLC leads to certain problems. As the bank’s undertaking frequently assumes the form of a promise to accept a bill of exchange accompanied by a default certificate or statement, the beneficiary, who executes the two documents, is in a position to abuse the rights conferred on him.

For example, in the case of Intraworld Industries Inc vs Girard Trust Bank, a SBLC was issued by a bank in order to cover annual rentals due under a lease of a hotel. Payment was to be effected against the beneficiaries’ sight draft, accompanied by their written statement confirming the non-payment of the rent. As the account party (the lessee) mismanaged the hotel to such an extent as to seriously damage its international reputation, the beneficiaries cancelled the lease. They made a demand under the SBLC in order to recover an amount of liquidated damages due under the terms of the lease in lieu of rent.

The account party brought an action for an injunction to restrain the bank from paying. He alleged that the beneficiaries’ demand for fraudulent because it did not involved a genuine claim for rent, as represented in the default notice, but a “stipulated penalty”. Dismissing this action, the Supreme Court of Pennsylvania observed that the circumstances which would justify the granting of an injunction were limited to situations of fraud in which the “wrongdoing” of the beneficiary had vitiated the entire transaction.

In another case, Bossier Bank & Trust Company vs Union Planters National Bank, the Circuit Court of Appeals emphasized that an injunction could be granted only if the alleged fraud related to the relationship between the issuing bank and the beneficiary and not the underlying contract between the beneficiary and the account party.

Shipping Guarantee

Shipping Guarantees are issued by banks to enable importing customers to effect clearance of goods in circumstances where the bill of lading covering the cargo has not come forward or may be missing. In doing so, the bank incurs liability in respect of the goods. Also, of course, it may involve loss of control of the goods, the documents for which the bank has been entrusted to handle.

Shipping guarantees are only issued in respect of missing bill of lading where the guarantees relate to documents which are definitely expected to come forward through the bank. In the absence of already approved credit facilities under which a shipping guarantee may be issued, all applications for shipping guarantees are subject to a credit appraisal of the applicant. Where the standing of an applicant does not justify clean credit facilities, a cash margin (normally 100%) is taken. In all cases, it is essential that banks satisfy themselves from appropriate and reliable documentation regarding the value of the cargo prior to the issue of the guarantee. Shipping guarantees may not be issued in respect of cargo under lien to another bank.

Upon clearance of goods, the guarantee must be returned to the issuing bank for cancellation. It should not remain outstanding for more than one month from the date of its issuance. It is customary, where bank would initiate an enquiry into the reason for its non-return immediately after expiry date of the guarantee.

Proforma Invoice

Proforma Invoice is a form of quotation by the seller given to a potential buyer. It is identical to a commercial invoice in appearance except that words ‘Proforma Invoice’ prominently appear on it.

Proforma invoice is used as an invitation to the buyer to place a firm order based on prices quoted in it. Many a time local regulations make it obligatory for the buyer to have proforma invoice which forms the basis for obtaining an import license and/or an exchange permit.

The proforma invoice would normally show the terms of trade and prices. The buyer is encouraged to fill in the quantity and total amount which is treated as an ‘offer to buy’ or ‘tender’. This, when accepted by the seller, forms a firm sale contract. In other words, proforma invoice is the simplest form of a sale contract.

Accepted proforma invoice is conclusive evidence of the terms agreed upon. Details from this are transposed verbatim to the commercial invoice in due course when goods are ready for delivery. Often the seller is required to certify on the commercial invoice that goods are in accordance with the proforma invoice no….dated….

Proforma invoices are also used in the following situations where settlement is not directly linked to the movement of goods e.g:

1. Advance payment i.e. before shipment of goods

2. Consignment sales; goods are exported to an agent who concludes firm sale contracts with the buyers and renders account of these sales to exporter from time to time. Proforma invoice acts as a guide for prices to be obtained from the buyers

3. Tender sales; proforma invoice is used to support a tender for a sale contract.

Nomination Without Obligation

The word ‘available’ as used in LC operations, ranks high on the list of terms that confuse exporters. An LC should clearly specify how it is available; by sight payment, deferred payment, acceptance or negotiation [article 6(b), UCP 600]. It is preferable for exporters that LCs be advised available with a local bank, or at least with a bank in the exporter’s own country. For instance, if the LC is available at the counters of a local advising bank by sight payment, deferred payment, acceptance, where confirmation is added, then the exporter will, in the normal course of events, receive payment or have a bank acceptance or a deferred payment commitment a few days after presenting documents complying with the terms of the LC. Such commitments are definitive and without recourse to the exporter. However, if LC is not confirmed, such advising bank may decide not to pay, accept or issue a deferred payment commitment at the time documents are presented, even if they are presented in order [article 12, UCP 600]. There can be many reasons for this, but the most common is that the advising bank where the LC is available is not satisfied with the bank risk or country risk.

If on the other hand, the LC was confirmed, such advising/confirming bank would have no option but to take up documents which comply with the terms and conditions of the LC and honour its commitment to the exporter.

Negotiation deserves a special mention. Negotiation is a term which regularly confuses exporters and perhaps even some bankers. If an LC is available by negotiation with an advising bank and not confirmed, that bank has the option to pay to the exporter, remit the documents and claim payment from the issuing bank. The exporter must realize that the final decision as to whether or not documents meet the terms and conditions of the LC, and consequently as regards payment, rests with the issuing bank. The negotiating bank will request repayment from the beneficiary (with interest) if payment is not received from the issuing bank. Negotiation without confirmation is with recourse.

An LC available by negotiation and confirmed by the negotiating bank means that the negotiating bank has no option but to negotiate documents presented complying with the terms and conditions of the LC. Such negotiation under a confirmed LC is without recourse. Where an LC is only available by negotiation and not confirmed, many banks which have been nominated as negotiating banks are not prepared to take the risk of paying the exporter for fear they may not get reimbursed. Exporter should appreciate the service provided by a bank when it negotiates documents, and also understand why a bank is not always prepared to negotiate.