Financing international trade

Question 1

What are Incoterms 2020

Answer 1

• Incoterms 2020 – Governing the parties physical and documentary duties with regard to shipment in international sales

Question 2

What are charter parties and Bills of Lading

Answer 2

• Charterparties & Bills of Lading - The contract of carriage and carriers duties vis-à-vis the goods

Question 3

What is the importance of shipping documents for the buyer

Answer 3

For the buyer – the documents provide evidence of physical performance, possessory rights over the goods and contractual rights against the carrier and insurer.
For the seller – it will only be paid if it can tender the documents promised under the contract of sale.

Question 4

Why do banks use a letter of credit as a means of financing intl trade

Answer 4

• Security – where no existing relationship between the parties, the bank acts as a trustworthy intermediary
• Insolvency – Payment is protected and certain as the bank makes an independent undertaking to pay
• Conforming goods – As payment is made against conforming documents, the buyer can be sure that they will receive what they contracted for

Question 5

What is a documentary credit

Answer 5

• A documentary credit is any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation
(Article 2 UCP)

Question 6

What are documentary credits governed by

Answer 6

• Documentary credits are governed by the
Uniform Customs and Practice for Documentary Credits (UCP 600), where expressly incorporated into the letter of credit
Under English law, the UCP applies only where incorporated by reference into a contract.

Question 7

What are revolving credits

Answer 7

• Revolving Credits – S can present documents and obtain payment as often as necessary during a credit period, subject to financial limit

Question 8

What are transferable credits

Answer 8

• Transferable/Non-Transferable Credits Transferable allows the S to transfer the rights embodied in the credit to a third party, e.g. their supplier

Question 9

What are back to back credits

Answer 9

Back to Back Credits – S will use the credit opened in their favour as security for the issue of a second, independent credit

Question 10

What are the steps to opening a letter of credit

Answer 10

1- application by buyer to their bank
2- seller notified of opening credit
3- complying documents by seller
4- seller paid when docs accepted
5-issuing bank tenders docs and seeks reimbursement from seller

Question 11

What happens in application by buyer to their issuing bank

Answer 11

• B must instruct the bank what documents are to be presented, the time for presentation, the description of the goods and other conditions to be met by the beneficiary (S) as agreed in the contract of sale.
• The credit can be rejected and shipment withheld by S if it does not conform with the contract of sale.
• Credit to be in place by the time of shipment.
(Glencore Grain Rotterdam BV v Lebanese Organisation for International Commerce [1997] 4 ALL E.R. 514)

Question 12

What happens when a seller is notified of opening of credit

Answer 12

• Directly by the Issuing Bank or by the Advising Bank in the Seller’s country
• Advising Bank will often become the Confirming Bank
• The credit becomes a “Confirmed” Credit and 2 independent undertakings to make payment will exist

Question 13

What happens of tender of complying documents by seller

Answer 13

The credit will provide for an expiry date for presentation and the place for presentation, Article 6 (d) UCP 600
Article 14, The documents will be examined to determine whether they appear on their face to constitute a complying presentation Article 14 (a)

Question 14

What happens when a bank tenders documents and seeks reimbursements from seller

Answer 14

If the documents constitute a complying presentation the bank must honour the presentation and the seller will be paid (Article 15(a))
• Under a confirmed credit, the confirming bank will pay and will tender the documents to the issuing bank for reimbursement
• Issuing bank tenders the documents to the Buyer and seeks reimbursement

Question 15

What are payment under documentary credits subject to under rules UCP 600 and the two principles

Answer 15

Autonomy of the credit and strict compliance. Developed from common law

Question 16

What is autonomy of credit

Answer 16

• Article 4 UCP 600
‘A credit by its nature is a separate transaction from the sale or other contract on which it may be based’
• Article 5 UCP 600
‘Banks deal in documents not goods, services or performance to which the credit may relate’
• The bank is not concerned with matters external to the letter of credit
Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 Q.B. 127
Court refused to grant an injunction to prevent the buyers bank from paying under the letter of credit, where the buyer claimed a breach of the underlying sales contract, i.e. that the goods were defective
• A limited duty of inspection
Article 34 UCP 600 Disclaimer on effectiveness of documents

Question 17

What is the principle in Gian Singh 1974

Answer 17

Court held that the bank could not be held responsible for paying against a forged document.
The bank was not obliged to investigate the genuineness of a signature which on its face purports to be the signature of the person named in the letter of credit.

Question 18

Explain the exception of fraud destroying autonomy of credit

Answer 18

i.e. circumstances external to the credit itself may be taken into consideration
United City Merchants Ltd v Royal Bank of Canada (The American Accord) [1983] 1 A.C. 168
A fraudulent presentation does not have to be honoured by the bank (fraud of the time of shipping)

But
• The seller/beneficiary of the payment must be party/privy to the fraud at date of presentation.
• The bank must be aware of the fraud at that date (subject to Article 34 UCP 600)
• Actual fraud must be proven
• Buyer will have to seek an injunction to prevent payment under the documentary credit.

Question 19

When will an injection against payment be granted

Answer 19

credit.
An injunction against payment will be granted where the only realistic inference is that;
(a) that the beneficiary could not honestly have believed in the validity of its demands under the bill of lading and;
(b) that the bank was aware of the fraud
N.b. Strong corroborative evidence is required.
Alternative Power Solution v Central Electricity Board [2014] UKPC 31

Question 20

What principles is payment made under

Answer 20

Article 4 UCP 600/ Article 5 UCP 600 and the two principles

Question 21

What is the principle in United City Merchants LTD 1983

Answer 21

• Exception: Fraud may destroy the autonomy of the credit
i.e. circumstances external to the credit itself may be taken into consideration
United City Merchants Ltd v Royal Bank of Canada (The American Accord) [1983] 1 A.C. 168
A fraudulent presentation does not have to be honoured by the bank (fraud of the time of shipment)

Question 22

What does Hamzeh say about matters regarding external letters of credit

Answer 22

• The bank is not concerned with matters external to the letter of credit
Hamzeh Malas & Sons v British Imex Industries Ltd [1958] 2 Q.B. 127
Court refused to grant an injunction to prevent the buyers bank from paying under the letter of credit, where the buyer claimed a breach of the underlying sales contract, i.

Question 23

What does article 34 say about effective documents

Answer 23

• A limited duty of inspection
Article 34 UCP 600 Disclaimer on effectiveness of documents
‘A bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document’

Question 24

Does a fraudulent presentation have to be honoured by the bank

Answer 24

United City Merchants Ltd v Royal Bank of Canada (The American Accord) [1983] 1 A.C. 168
A fraudulent presentation does not have to be honoured by the bank (fraud of the time of shipment)

But
• The seller/beneficiary of the payment must be party/privy to the fraud at date of presentation.
• The bank must be aware of the fraud at that date (subject to Article 34 UCP 600)
• Actual fraud must be proven
• Buyer will have to seek an injunction to prevent payment under the documentary credit.

Question 25

When is an injection against payment granted

Answer 25

An injunction against payment will be granted where the only realistic inference is that;
(a) that the beneficiary could not honestly have believed in the validity of its demands under the bill of lading and;
(b) that the bank was aware of the fraud
N.b. Strong corroborative evidence is required.
Alternative Power Solution v Central Electricity Board [2014] UKPC 31

Question 26

Strict compliance - no de minimus rule

Answer 26

No de minimis rule to the inspection of documents
“there is no room for documents which are almost the same, or which will do just as well”
Per Viscount Sumner, Equitable Trust Co of New York v Dawson Partners Ltd (1927) 27 LI L Rep 49

Question 27

What does article 14 a UCP 600 say about documents

Answer 27

Article 14(a) UCP 600
A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation

Question 28

How do we justify the principle in 14 a

Answer 28

• Banks can only be expected to be familiar with banking practices and not commercial practices and terminology of the parties to the underlying contract
E.g. they cannot assume responsibility for determining which documents fulfil the parties commercial purposes and those which do not

Question 29

Explain JH Rayner 1943

Answer 29

Facts: The credit described the goods as “coromandel groundnuts”.
The tendered bill of lading referred to “machine-shelled groundnut kernels” and the commercial invoice referred to “coromandel groundnuts

Held: While it was well known in the trade
that the two terms were inter-changeable, the
bank was entitled to reject the documents and
refuse payment.
“it was quite impossible to suggest that a
banker is to be affected with the knowledge of
the custom and customary terms of every one
of the thousands of trades for whose dealings
he may issue a letter of credit”

Question 30

Must a bank act as a agent of the applicant and remain within terms of principle for reimbursement?

Answer 30

Failure to comply with instructions, either by accepting or rejecting documents that it should not have, means that the buyer is not obliged to accept the documents from the bank and is not obliged to reimburse the bank for any payment made.

Question 31

What happens in Seaconsar 1993 and strict application of the principle pf reimbursement

Answer 31

• Strict application of the principle is seen in Seaconsar Far East Ltd v Bank Markazi Jomhouri Islami Iran [1993] 1 Lloyd’s Rep 236
Facts: The credit stipulated that all documents presented should carry the credit number and the buyer’s name. The advising bank refused to pay on the basis of the absence of these details on one document.
Held: Bank was entitled to reject the documents

Question 32

What cases explain typo errors

Answer 32

• Typographical errors and obvious mistakes and omissions
Banker Trust Co v State Bank of Indian [1991] 2 Lloyd’s Rep 443
(Trivial) mistake in the telex number
Hing Yip Hing Fat Co Ltd v Daiwa Bank Ltd [1991] 2 HKLR 35
‘Cheergoal Industrial Ltd’ v ‘Cheergoal Industries Ltd’

Question 33

What cases explain inconsistent documents

Answer 33

• Inconsistent documents
Bank Melli Iran v Barclays Bank DCO [1951] 2 Lloyd’s Rep 367
Facts: Credit called for documents showing shipment of “sixty new Chevrolet trucks”.
Invoice described them as “in new condition”, the delivery order as “new-good” and a certificate as “new, good, Chevrolet trucks”
Held: Bad tender as documents were clearly inconsistent

Question 34

Must documents must be construed in their entirety

Answer 34

• Documents must be construed in their entirety
Midlands Bank v Seymour [1955] 2 Lloyd’s Rep 147
Facts: B refused to reimburse the bank on the ground that the bill of lading did not state the description, quantity and price of the goods. These were however specified in the other documents
Held: The documents, when read together, contained a complete description of the goods without inconsistency and payment is made against documents.

Question 35

Explain the idea of the moving away from the mirror image approach

Answer 35

• Moving away from a mirror image approach?
Kredietbank NV v Midland Bank Plc [1999] 1 ALL E.R. (Comm) 801
“the requirement of strict compliance is not equivalent to a test of exact literal compliance in all circumstances and as regards all documents. To some extent, therefore, the banker must exercise his own judgement whether the requirement is satisfied by the documents presented to him”

Question 36

What is the UCP 600

Answer 36

UCP 600: Ensuring documents are not rejected for overly technical reasons…
• Article 14(d) data need not be identical, but must not conflict
• Article 14(e) In documents other than the commercial invoice, the description of the goods, if stated, may be in general terms not conflicting with their description in the credit

Question 37

What does article 2 state with intl standard banking

Answer 37

Article 2: A complying presentation is one that accords with…international standard banking practice
- International Standard Banking Practice for the Examination of Documents under Documentary Letters of Credit

“It explains, in explicit detail, how the rules set out in the UCP are to be applied on a day to day basis. As such, it fills a needed gap between the general principles announced in the rules and the daily work of the documentary credit practitioner”
Foreword, p3
Result is that less documents should be rejected for discrepancies on first presentation