General Considerations
Amount
- As mentioned earlier, an overstatement of the amount to be drawn could lead to the rejection of documents when presented.
- The words "circa" or "about" relating to the quantity or unit price of the goods or to the amount of the credit allow a tolerance of 10% either way.
- Unless a credit stipulates that the quantity of the goods specified must not be exceeded nor reduced, a tolerance of 5% either way is permissible, always providing that the total amount of the drawings does not exceed the amount of the credit. However, this tolerance does not apply when the credit specifies quantities in terms of a stated number of packing units or individual items.
Shipment
Check that:
- Specified shipping documentation can be obtained.
- If you are chartering a vessel or shipping on deck, the credit specifically permits such methods.
- Ports of shipment and discharge, if specified, do not conflict with your price quotations.
- If partial shipment or transhipments have to be made, these are not prohibited in the credit.
- Time available for shipment is sufficient and that the period allowed for presentation of documents after shipment is also sufficient. It should be noted that, if a credit expires on a day when banks are not open, the validity is usually extended to the next working day. However, such an extension does not apply to the stipulated time (after shipment) allowed for the presentation of documents.
- If partial shipments within given periods are called for and any instalment is not shipped within the stipulated period, the credit is effectively cancelled unless it already covers such an eventuality.
Exporters are advised to read the payment instructions issued to advising banks which will include one of the following:
Points to Look for in Individual Documents
Draft
The draft must be drawn by the beneficiary on the party specified in the credit or as requested by the advising bank. It must be drawn in accordance with the terms of the credit, bear the requisite reference number and also comply with the requirements of the Bills of Exchange Act. Also check that it is:
- correct in words and figures;
- drawn payable at sight (or sometimes at a given future time);
- claused in accordance with the credit terms; and
- correctly dated.
Bear in mind that a tenor draft accepted by a London bank can often be discounted at a comparatively fine rate.
Bills of Lading
A traditional bill of lading has a threefold purpose:
- formal receipt by the ship owner for goods;
- evidence of the contract of carriage; and
- document of title to goods.
Bills of lading should be carefully examined with the following points in mind. They should:
- be issued by a shipping company or its accredited agent;
- not be issued by a forwarding agent nor under a charter unless specifically authorised by the letter of credit unless it is a FIATA bill of lading and acceptable under the letter of credit;
- be shipped on board, unless the credit provides otherwise;
- bear a proper amendment, duly dated and signed by the shipping company, if a "received for shipment" item has been converted into a "shipped" document. The same applies to any other alteration;
- be in a complete set (unless otherwise indicated in the letter of credit) with any required number of non-negotiable copies, each negotiable copy being signed by the shipping company;
- be free from any detrimental clauses added by the shipping company indicating damage to goods or packing;
- cover an ocean voyage. Bills of lading evidencing shipment by a local vessel are not normally acceptable if transhipment is not allowed;
- bear a precise notation concerning payment of freight, i.e. either "freight paid" or freight payable at a given destination;
- bear goods description either in general or particular terms: however, the wording chosen must not conflict with the credit or other documents;
- bear shipping marks, number of packets and weights, consistent with all other documents. In particular, care should be taken that details on the bill of lading (often the last document to become available) do not contradict details typed on earlier documents;
- show ports of shipment and discharge in agreement with credit terms;
- be endorsed on the reverse if made out to the shipper's order;
- be presented within the time limit specified in the credit for presentation of documents. If no such period is stipulated, banks will refuse documents presented later than 21 days from the date of the bill of lading;
- must bear a shipment date on or before the last stipulated shipment date but, in any event, within the validity of the credit;
Unless otherwise stipulated in the credit, banks will accept:
- short form bills of lading issued by shipping companies or their agents;
- combined transport bills of lading issued by shipping companies or their agents.
Insurance Documents
Check that:
- the extent of the cover agrees precisely with the credit terms, bearing in mind that Institute Cargo Clauses (All Risks) do not always cover special risks;
- the date of the insurance document is not later than the shipment date or, if dated after shipment, it bears a clause to the effect that cover commences not later than the date of shipment;
- claims are payable in the place specified in the credit;
- the amount payable is in accordance with the credit terms plus any specified percentage and is in the currency of the credit;
- marks, weights and description of the goods agree with the bill of lading and all other documents;
- policy or certificate required by the credit terms is signed by the insurance company, agents or underwriters and endorsed as necessary;
- cover is not by means of a broker's cover note, unless this is specified in the credit; and
- any insurance policy or certificate made out to the order of the shippers has been blank endorsed.
Bear in mind that, when a credit calls for an Insurance Policy, a certificate issued by Lloyds of London is normally acceptable to most banks.
Invoice
Check that:
- these have been completed by the beneficiary in the name of the buyer unless the credit specifies otherwise;
- totals of all invoices agree with the amount of the drawing;
- prices and shipment terms (FOB and CIF etc) agree with the credit;
- if a combined invoice and certificate of origin is called for, the certificate of origin is duly completed and signed;
- if invoices have to be visaed, this has been done by the authority stipulated in the credit. Also remember the time lag between forwarding documents to a consulate and their return;
- full and exact description of the goods as shown on the credit appears on the invoice and that the quantity and specifications are as called for. If goods are described as being "...... in accordance with pro forma invoice number ...... dated ......", this can reduce superfluous, error-producing, detail;
- there are no additional goods, charges or deductions not authorised in the credit. However, a deduction of normal trade discount is allowed as long as the final amount is correct - neither overdrawn nor underdrawn;
- if both an invoice and a packing list are called for, no "combined invoice and packing list" should be offered. An appropriately detailed extra invoice may often satisfy the packing list need, if suitably headed;
- pro forma invoice numbers or reference numbers are required by the credit are shown; and
- marks and weights (nett unless the credit states otherwise), number of cases and name of vessel agree with the bill of lading and other documents.
Certificates of Origin
An exporter's own certificate on a separate sheet is acceptable unless the credit states otherwise.
Check that:
- all details quoted, shipping marks and description of goods, agree with the letter of credit, bill of lading and other documents; and
- the certificate does not conflict with other documents with regard to value and country of origin.
Weight Note / List
Note that:
- certificates of weight must bear an authorised signature of the person/firm/company issuing the certificate in the detail required;
- if a weight list is called for by the credit, this requires the individual weight of each parcel or package together with the total weight; and
- if a weight note is called for by the credit it can merely state the weights concerned in general terms, perhaps one total.
Other Documents
There are various other documents which provide evidence of the movement of goods but which are not documents of title.
Air Waybill (air consignment note)
These should be issued and stamped by an airline on standard forms and should appear to be the original for the shipper (usually copy 3). This shows:
- name of consignee;
- goods, which must agree with the credit and all other documents;
- flight number and date;
- freight paid or to be paid at destination (again, in accordance with the terms of the credit); and
It is essential that the correct copy be submitted, bearing a clear reception stamp with signature of the carrier or his agent.
Air waybills issued by freight forwarders and referred to a master air waybill are not acceptable unless there is presented a certificate stating that the forwarders are acting as agents for the carriers.
Parcel Post Receipt
Check that:
- the receipt shows evidence of despatch to the party named in the credit; and
- the Post Office stamp shows a despatch date on or before the last stipulated date for shipment.
Note Credits calling for postal despatch on a FOB basis are not acceptable as postal charges to destinations have to be prepaid.
Forwarding Agent's Receipt
It is very important to establish at the outset whether there is a requirement for:
- a forwarding agent's receipt showing goods received for shipment; or
- a forwarding agent's receipt showing goods received and despatched, as in the case of the CMR note. Normally, one set of documents accompanies the goods on this type of journey.
- Contents
- Executive Summary
- Section 1 - Introduction
- Section 2 - Letters of Credit - An Explanation
- Section 3 - Global Payment Patterns
- Section 4 - The Survey
- Section 5 - Demonstrated Best Practice
- Section 6 - Conclusions
- Glossary of Commonly Used Terms in Documentary Credits
- Appendix 1 - List of Discrepancies and Frequency
- Appendix 2 - Organisations Providing Letter of Credit Training
- Appendix 3 - Checklist for Compiling Documents Under a Letter of Credit - Return to top of page
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