Original Invoice and Copies

Two days ago I received an email from abroad concerning “original” and “copies” of invoice. The issue of original and copies have been brought to the attention of ICC many years ago when UCP 500 was still in force. It was a big issue where there were cases ended up in legal disputes.

To make this very clear, I think it is best to look at four situations below:

1. LC requests original invoice
2. LC requests a specific number of original invoice
3. LC permits copies of invoice
4. LC does not mention original invoice or copies

Upon receipt of the LC, it is very important to check and fully aware the terms of the LC such the issuing date, expiry date, the last day of presentation, availability of the LC and the date of shipment, to name a few. When these particulars are agreeable, look at the conditions like documents requirements, special instructions and the rest of the particulars.

Alright, let’s get back to invoice. Pay attention to field 46A (Documents required). Read carefully what are the documents required, number of pieces required. And cross check with field 47A (Additional conditions) to see if there is any special instruction where seller needs to perform.

If the LC requests the original invoice to be presented without specifically mentioned number of original, it means that at least one original invoice should be submitted. This will satisfy the requirement of the LC.

On the other hand, if the LC specifically mentioned “3 original invoice”, it means that 3 original invoice must be presented by the seller. This is a clear cut case.

Sometimes LC specifically mentioned, invoice in “3 copies”, “in duplicate” or “in two fold”. In this case, seller is said to have satisfied the condition of the LC by presenting at least one original invoice and the rest can be in copies. This is in accordance with article 17(a) of UCP 600.

If the LC does not mention either original invoice or copies to be presented, the seller shall present either original invoice or copies.

Discrepancy In Commercial Invoice

The commercial invoice is the commonest document in international trade because nearly no letter of credit issued without stipulating an invoice. In most cases, commercial invoice is the only document which the beneficiary issues himself which is in accordance with UCP 600, article 18(a)(i), “…A commercial invoice must appear to have been issued by the beneficiary (except as provided in article 38).”

It is the primary document where it reflects out what the goods are in respect of which presentation is been made and it states the price which is being claimed in respect of them. It serves as an accounting document and documentary evident in which the seller declares that he has sold to the buyer, what he has sold and at what price he has sold.

With regards to the commercial letter of credit, an invoice is a specific document which is closely related to the goods/services, quantity and price. The “description” of the goods is normally the cause for discrepancy which resulted in rejection by banks. This is because most of the traders do not understand the implications of non compliance.

To describe details of the goods should not at all be a major problem because it should go according to what is already described in field 45A of SWIT format. It is as simple as copying the description in a letter of credit into an invoice. For example, if the description in field 45A states “Advertising balloons and advertising blimps: 100 sets of helium balloons, 150 sets of advertising balloons and 50 sets of advertising blimps”, the invoice should bear the same description.

However, article 14(d) of UCP 600 in a way, provides allowance to the beneficiary where the description of the goods/services need not be identical but must not conflict with any data in any other document called for under the letter of credit. But bear in mind, a slightest mistake which brings a different meaning and does not refer to the goods mentioned in the letter of credit or ambiguous description, it is deemed to be a discrepancy by the bank. Therefore, to avoid any unnecessary disputes later on, the "description" is best to appear as a mirror-image.

The description of the goods/services in Insurance Certificate or Bill of Lading for example, may be described in general and need not be exactly as what is described in the invoice or letter of credit. It can be as general as “Advertising balloons and advertising blimps”. On principle, all data contents in all documents and the letter of credit itself must not conflict with each other.

S.W.I.F.T

Society For Worldwide Interbank Financial Telecommunication or in short SWIFT is a private international telecommunication network which was established in Belgium in early 1970s and became operational on May 9, 1977. SWIFT however, is not a financial institution but provides telecommunication service for transmission of financial and non-financial messages to all member banks worldwide. SWIFT is solely a transporter of messages. It does not hold funds nor does it manage accounts on behalf of customers, nor does it store financial information on an on-going basis.

As a message transporter, SWIFT transports messages between two financial institutions. This activity involves the secure exchange of proprietary data while ensuring its confidentiality and integrity.By introducing IPSec-based security, a suite of protocols for securing Internet Protocols (IP) communications, SWIFT continues to maintain its leadership in providing the most secure financial messaging services.

Interested e-commerce community who wish to get connected with SWIFT may subscribe to their direct connectivity facility using SWIFTNet services. Before subscribing, it is advisable to access to web hosting articles to find out more information on various ranges of software and security features available in the market.

Web hosting articles provide good source of information for the public, particularly e-commerce community in obtaining a holistic understanding on how the electronic medium works in message transmission while at the same time maintaining the security that is the most important feature.

Every bank that subscribes to SWIFT is assigned with a Bank Identifier Code or BIC which is a unique code to identify each different bank. For example, RHB Bank, one of the anchor banks in Malaysia and a member of SWIFT is identified with the BIC, RHBBMYKL. When SWIFT sends any message to this BIC, it will reach RHB Bank head office in Malaysia. It works on a basic concept similar to an email address or domain name as explained in many web hosting articles over the internet. There are two types of BIC, 8 character BIC or known as "BIC8" and 11 character BIC which is known as "BIC11". A BIC8 identifies a financial institution in a country or a location whereas BIC11 identifies the financial institution’s branch.

Messages sent through SWIFT are formatted according to message type, for example, MT100, MT700, MT202, MT799 and so on. The format is arranged using a specific alpha numeric code to identify data like name of beneficiary, name of a bank, location, amount, sender and other related information. This will enhance the processing of different type of messages by member banks before transmitting them to their respective branches.

High-tech cargo theft

The transportation industry in the U.S is reported to be within the circa of USD2.7 trillion. This statistic represents 17 percent of the whole U.S economy. Out of this, it is reported that around USD30 to USD50 billion worth of cargo is stolen worldwide each year. This alarming figure demands a serious security measure to be integrated into the transportation and delivery processes especially when dealing with high-tech cargo, for example electronic devices. These items are essential in industrial automation and attract high demand worldwide in pursuing to lower the cost of production and enhancing operations.

Trading parties, therefore need to conduct due diligent on transport operators or forwarding agents before appointing one. This is important for both trading parties because the movement of the cargo from the point of origin to the final destination should be readily updated and accessible at any time to both parties.

The security measures increasingly critical when dealing with parties of different countries. For example, ABC Technology, a company located in Malaysia is buying solid state relays, electromagnetic relays and relay socket PCD from Mil-Com Components, a company domicile in the U.S. Even if the trade term CIF is agreed upon by both parties, the buyer still can make a suggestion to the seller, Mil-Com to appoint a well established transport operator which also has an office in Malaysia. Although, the obligation to contract for transport lies in the hand of the seller, but the buyer may determine which transport operator he is comfortable with.

However, there are many other aspects leading to loss of cargo or stolen cargo such as the spread of global crime syndicates where a new breed of smarter criminals able to adapt to the new technologies of the cargo transportation industry.

Transferable Letter of Credit: Is It Really "Transferable?"

Letter of credit can be qualified in a number of ways and it is well recognized that a transferable credit is no different from any other apart from the fact that it enables the beneficiary of the credit to “transfer” the benefit to a third party. Where the credit itself is not stated to be transferable, no transfer of the credit is permitted because to do so would defeat the purpose of the credit.

The transferable credits are commonly used where the beneficiary contracts with a third party in order to obtain goods which are necessary to fulfill his obligations to the issuing bank’s customer. In such a case, the beneficiary will often be required to transfer the benefit of the credit to the third party in order to fulfill his obligations to that party.

Article 54 of UCP 400, Article 48 of UCP 500 and Article 38 of UCP 600, incorporated the relevant provisions relating to the transfer of a letter of credit. However, its interpretation has long troubled bankers, particularly with regard to the obligations placed upon the issuing or confirming banks.

A decision of the Privy Council considered this issue, and held that, although a beneficiary had the right to instruct the bank, which issued a transferable letter of credit, to make the credit available to one or more third parties, by Article 54(c) of UCP 400, no bank asked to transfer the credit was obliged to do so except to the extend and in the manner to which the bank expressly agreed. Furthermore, the designation of a letter of credit by the issuing bank as transferable was insufficient to constitute consent to a subsequent transfer request by the beneficiary.

The brief facts of the case were that Lariza (Singapore) Pte Ltd had agreed to sell crude palm oil to Bakrie Brothers (Singapore) Pte Ltd. It was a term of the contract that payment for the oil was to be made by means of a transferable irrevocable sight letter of credit to be opened in favour of Lariza, the opening of which was to be advised through the Bank of Canton Limited. In order to fulfill its agreement with Bakrie, Lariza entered into an agreement with Ban Lee oil Mill Co for the purchase of a corresponding quantity of crude palm oil which would be passed on to Bakrie. Payment of the Ban Lee contract was also to be made by an irrevocable sight letter of credit opened in their favour.

On 27 February 1980 (UCP 400 was in forced), a transferable irrevocable sight letter of credit was opened by Bank Negara Indonesia in favour of Lariza for the account of Bakrie and in due course Lariza requested Bank Negara Indonesia to transfer part of the letter of credit to Ban Lee, but the bank persistently refused to effect the transfer. As a result Lariza failed to perform its obligations under its agreement with Ban Lee and were sued by Ban Lee for damages for breach of contract.

Lariza subsequently brought an action against Bank Negara Indonesia claiming damages for breach of contract arising from the issuing and opening by the bank of the letter of credit. That claim was resisted by the bank, which contended that it was not under any obligation to effect the transfer of the letter of credit as requested by Lariza.

The case eventually reached the Privy Council , which held that under Article 54 of UCP 400, a bank which issued a transferable letter of credit could not, without more, be taken to have consented in advance to any request by the original beneficiary to transfer the credit to a third party. The consent contemplated by paragraph (c) of Article 54 was held to be a consent to effect the transfer to the particular extend in issue, and in that particular manner. Such a consent cannot be given in blanket form in advance, so as to apply to any request for transfer which may subsequently be made, whatever its extend or manner may be. Any consent given by the issuing bank must be an express consent which is made after the request by the beneficiary and it has to cover both the extent and the manner of the transfer requested.

It is submitted that if the view of the Privy Council is correct the whole purpose of the transferable letter of credit is effectively destroyed. A transferable credit should be transferable at the instance of the beneficiary and neither the issuing nor confirming bank should be able to refuse to transfer the credit, for otherwise the commercial purpose of such instruments would be defeated. Such restriction clause which appeared in UCP 400 and UCP 500 is still maintained in UCP 600 today.

Bank Guarantee: Part 2

Bid Bond (Tender Bond)
This guarantee is required in connection with public tenders. If a company participates in such a tender, it must submit a bid bond together with its offer. Bid Bonds therefore secure payment of the guarantee amount:

1. in the event of withdrawal of the offer before its expiry date
2. if the contract, after being awarded, is not accepted by the tenderer
3. if the bid bond, after the contract has been awarded, is not replaced by a performance bond

As a general rule, the guarantee amount is normally within 1% to 5% of the amount of offer. The validity period of the guarantee is until the signing of the contract or the issue of a performance bond, usually between three and six months.

Performance Bond
The bank undertakes, at the request of the seller, to pay the beneficiary the guaranteed amount in the event the supplier has not met or insufficiently fulfilled his contractual delivery obligations. The guarantee amount usually 10% of the contract amount. The bond remains valid for the full amount until complete performance of the contract. Where contracts for works and materials are concerned, this generally includes the warranty period for the correct functioning of a machine or system. The period of validity of performance bonds may be two years or longer.

Advance Payment Guarantee (Letter of Indemnity)
The terms of payment for major export orders generally stipulate that the buyer pays an installment for the purchase of raw materials and for the cost of production. However, such a down payment will only be agreed to by him after receipt of so called advance payment guarantee which ensures repayment of the advance by the seller in the event of non-performance of his contractual obligations. The amount guaranteed is 100% of the advance payment. In contrast to the performance bond, the advance payment guarantee should stipulate that the guaranteed amount be automatically reduced in proportion to the value of any partshipments made. A utilization of the related documentary credit is usually recognized as avidence of delivery. The validity of the advance payment guarantee should be limited in such a way that it expires on the date the covered performance is made.

The advance payment guarantee must usually be issued before prepayment is made, but should enter into force only after receipt of such payment. Therefore a clause to this effect should be included in the guarantee whenever possible.

Bank Guarantee

In international trade, it is difficult for the buyer to accurately assess the professional ability and financial position of a supplier or seller. The situation is worst when both parties are domiciled in different countries. The buyer therefore, quite rightly, demands that the seller’s ability to perform be secured and for this purpose a Bank Guarantee (BG) is arranged. In general, the use of the BG as an instrument for securing payment is restricted in international trade to non-payment guarantees used for the “open account” mode of payment.

A BG may be defined as the "irrevocable obligation of a bank to pay a sum of money in the event of non-performance of a contract by a third party". Similar to Letter of Credit, the guarantee is a separate obligation independent of the principal debt or the contractual relationship between the creditor and the principal debtor. Under the terms of the guarantee, the bank has to pay on first demand provided that the conditions contained in the guarantee are fulfilled. Guarantees are, as a rule, subject to the laws of the country of the issuing bank. Meaning to say, when a BG is issued by a bank in Malaysia, it is governed by the Malaysian laws. Under Swiss law, the parties are free to determine the contents and form of a guarantee. Generally, the contents of a BG more or less is standardized to suit to the issuing bank’s laws. However, minor adjustment is permissible subject to approval of the issuing bank. Issues or clauses not provided for would be adjudicated on basis of Article 111 of the Swiss Code of Obligations.

There are few example of related guarantees for securing performance or payment namely, the ‘simple’ guarantee (Swiss Code of Obligations, Art 495) and the ‘Joint and several’ guarantee (Swiss Code of Obligations, Art 496); by the contract of guarantee, the guarantor is obligated to make payment if the principal debtor becomes insolvent and goes bankrupt. The contract of guarantee presupposes a valid principal debt and also become void if the principal debt ceases to exist. In Switzerland, contracts of simple and/or joint and several guarantees are used almost exclusively for securing claims of domestic creditors.

The confirm payment order (Swiss Code of Obligations, Art 468); As in case of the guarantees, the irrevocable confirmed payment order includes an irrevocable, not accessory obligation to pay. Payments under this instrument can be subject to the fulfillment of the special conditions of this order. The documentary credit is an important case of application of the irrevocable, confirmed payment order.

As in the case of the documentary credit and the documentary collection, the International Chamber of Commerce in Paris has issued ‘Uniform Rules for Contract Guarantees’. But these guidelines issued in 1978 have not been generally accepted.