Transferable Letters of Credit – Problematic Documentary Clauses

Occasionally a Letter of Credit might have a documentary clause which could state, for example (or a variation thereof):

“Beneficiary must advise us (usually name of issuing bank) value of the consignment, name of the carrying vessel/agent, voyage number/Flight number, Bill of Lading number and date/Airway Number and date, Container Number/Flight Number, if any, and actual date of shipment on board by fax within seven working days after shipment of goods and documents must include a copy of such advice along with the fax transmission report.”

These clauses are included because this is the information that the Issuing bank and/or the Applicant requires to arrange suitable Marine Insurance for the shipment. However, if the contract is CIF, CIP or DDU/DDP with insurance, then this clause is effectively redundant and, if required, the Beneficiary should ask for the Applicant to remove this particular documentary requirement through an amendment.

However, if the Letter of Credit is a Transferable Letter of Credit, this type of clause (regardless of the terms of shipment) can cause serious problems to either the First Beneficiary or the Second Beneficiary when trying to supply conforming documents under the Letter of Credit.

This is because when a Letter of Credit is transferred by the First Beneficiary to the Second Beneficiary, it is transferred in its entirety. The only details the First Beneficiary can change is the value of the consignment (on invoices and drafts), the last shipment date, the expiry date and the percentage on the insurance certificate (if insurance is included). The problem arises when, for example, the Second Beneficiary is charging £10,000.00 but the First Beneficiary is charging £15,000.00.

If there is a documentary clause asking for a fax to be sent showing the details of the shipment, including the value of the consignment, the Second Beneficiary has to send a fax to the Issuing Bank stating that the value of the shipment is £10,000.00.

However, when the First Beneficiary obtains these documents and makes their presentation, they have a problem. If they submit the fax from the Second Beneficiary, showing a consignment value of £10,000.00, but their invoice is for £15,000.00, then this will cause a discrepancy in the documents being presented.

Even if the Second Beneficiary offers to state £15,000.00 on their fax, the fact their invoice only states £10,000.00 means that their presentation will then be discrepant.

The way forward here is to watch out for these types of clauses on Transferable Letters of Credit and to discuss solutions with the Advising Bank and the Applicant beforehand and to have amendments in place that will allow both the First and Second Beneficiaries to present conforming documents.

Maria Narancic from Point to Point Export Services is an independent international trade adviser who assists organisations world wide with their international trade projects, documentation, Documentary Credits and import/export training.  She is based in the United Kingdom.  If you require any further assistance with the matters mentioned above, please do contact us by e-mail on info@point-point.com or check out other international trade articles on the Point to Point Export Services website at www.point-point.com
 

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