Kim Sindberg Trade Finance Training 2019 - ICC Qatar by ICC Qatar

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Technical Advisor to the Banking Commission of the International Chamber of Commerce (ICC) Founder of Sindberg Consult Executive Adviser to Nordea Member of several national and international Trade Finance forums, and has served in several ICC working- and drafting groups.

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Published books include:

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“lcviews premium” is a new and innovative service that links Trade Finance rules to Trade Finance practice Covers: • UCP 600 • URDG 758 • URC 522 • ISBP 745 • PRC Guarantee Provisions – and much more

Introduction and expectations for the day Letters of Credit (L/C) - worst and best practices Recent ICC guidance Pitfalls and challenges in daily L/C handling Case studies and recent examples Networking break Highlights from Incoterms 2020 Status and key topics Relationship and interaction with the UCP 600 Lunch Break Guarantees - worst and best practices ICC rules on guarantees Pitfalls and challenges in daily guarantee handling The SWIFT release on guarantee messages (MT760 etc.) Case studies and recent examples Networking break Status on the demand guarantee standard banking practices Questions and Answers Thanks for today and round up

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Letters of Credit (L/C) - worst and best practices

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Recent ICC Guidance

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Recent ICC Guidance UCP 600 revision? Feed-back April 2017 1 NC supports a full revision process but business case predicated only upon one ISBP paragraph 3 NC’s request review of individual sub-articles but not full revision 1 NC split decision: no agreed consensus 15 NC’s support the Executive Committee’s view that, at the present time, a revision of UCP 600 is not justified All remaining NC’s: lack of feedback thereby implying no current support for a revision © Sindberg Consult 2017

Recent ICC Guidance

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Review pricing and digital availability of UCP rules and practices

MARKETING

More comprehensive and widely circulated training and guidance*

ACCESS

GUIDANCE

In line with the majority recommendation of National Committees, it is not considered, at this stage, to be appropriate to undertake a revision of UCP 600. However, there is a definitive viewpoint that a greater understanding of practices should be the way forward, rather than a revision of the rules.

Smart usage of information to achieve greater awareness by practitioners

Recent ICC Guidance

Conclusion: There is no definition of Strict Compliance The “UCP 600 Compliance” is e.g. reflected in these articles: UCP 600 sub-article 14 (a): “…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.” UCP 600 sub-article 14 (d): “…context … need not be identical … must not conflict …”

UCP 600 sub-article 14 (e): “…description of the goods … in general terms…” UCP 600 sub-article 14 (f): “…accept the document as presented if its content appears to fulfil the function …” UCP 600 sub-article 14 (j): “…addresses … Contact details (telefax, telephone, email and the like) …” ISBP 745 Paragraph A23: “… misspelling or typing error …”

Recent ICC Guidance

CONCLUSION AND RECOMMENDATIONS 1. It is recommended that the habit of requiring a draft for a documentary credit available at sight be curtailed, particularly sight drafts drawn on an issuing bank, confirming bank, or a bank nominated to pay, unless required for a specific commercial, regulatory or legal reason. 2. UCP 600 article 2 allows for negotiation to occur under a documentary credit available by negotiation with or without a presentation of a draft. It is recommended that the habit of requiring a sight draft for a documentary credit available by negotiation be reviewed and that negotiating banks be encouraged to rely, not on negotiable instruments' law, but instead on specific agreements with beneficiaries evidencing negotiation and their respective recourse and other rights and remedies. 3. It is recommended that banks issue usance documentary credits available by deferred payment as an alternative to availability by acceptance of a draft, unless there is a specific commercial, regulatory or legal reason to create a bankerâ&#x20AC;&#x2122;s acceptance. 4. All banks should review their UCP 600 documentary credit forms, whether in paper format and/or online, to indicate that a draft is not a standard requirement of the issuing bank and to indicate their requirements for another form of demand.

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Pitfalls and challenges in daily L/C handling

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Pitfalls and challenges in daily L/C handling • Ambiguities in the L/C • Modifications and exclusions of UCP 600 articles • Availability vs expiry vs risk of documents lost in transit • Who is obligated? • Non-documentary conditions • Oil LCs • Sanctions clauses

Pitfalls and challenges in daily L/C handling • Ambiguities in the L/C

ISBP 745 paragraph v: The applicant bears the risk of any ambiguity in its instructions to issue or amend a credit….

LC information: Bill of lading showing shipment from “ANY NORTH EUROPEAN PORT” Presentation information: Bill of lading showing shipment from Antwerp Refusal information: Antwerp is not within the geographical area or range stated in the LC. Is this a valid discrepancy? © Sindberg Consult 2017

Pitfalls and challenges in daily L/C handling

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Pitfalls and challenges in daily L/C handling â&#x20AC;˘ Modifications and exclusions of UCP 600 articles L/C requirement

UCP 600 article

UCP 600 article 14 (l) does not apply to this L/C

A transport document may be issued by any party other than a carrier, owner, master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23, or 24 of these rules.

UCP 600 sub-article 28(i) does not apply to this L/C

An insurance document may contain reference to any exclusion clause.

UCP 600 article 14 (k) does not apply to this L/C

The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit.

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Pitfalls and challenges in daily L/C handling • Modifications and exclusions of UCP 600 articles L/C requirement

UCP 600 article

IN ACCORDANCE WITH THE PROVISIONS OF ARTICLE 16 C III B OF UCP 600, IF WE GIVE NOTICE OF REFUSAL OF DOCUMENTS PRESENTED UNDER THIS CREDIT WE SHALL HOWEVER RETAIN THE RIGHT TO ACCEPT A WAIVER OF DISCREPANCIES FROM THE APPLICANT AND, SUBJECT TO SUCH WAIVER BEING ACCEPTABLE TO US, TO RELEASE DOCUMENTS AGAINST THAT WAIVER WITHOUT REFERENCE TO THE PRESENTER PROVIDED THAT NO WRITTEN INSTRUCTIONS TO THE CONTRARY HAVE BEEN RECEIVED BY US FROM THE PRESENTER BEFORE THE RELEASE OF THE DOCUMENTS. ANY SUCH RELEASE PRIOR TO RECEIPT OF CONTRARY INSTRUCTIONS SHALL NOT CONSTITUTE A FAILURE ON OUR PART TO HOLD THE DOCUMENTS AT THE PRESENTER'S RISK AND DISPOSAL, AND WE WILL HAVE NO LIABILITY TO THE PRESENTER IN RESPECT OF ANY SUCH RELEASE.

UCP 600 sub-article 16 (c) (iii) (b) reads:

“The notice must state […] that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver.”

Pitfalls and challenges in daily L/C handling • Availability vs expiry vs risk of documents lost in transit Availability and expiry:

Advising bank: Bank A, UK

UCP 600 article 6 (d):

i. A credit must state an expiry date for presentation. An expiry date stated for Place and date of expiry: 1 April honour or negotiation will be deemed to 2019 at the counter’s of the issuing be an expiry date for presentation. bank (Bank B, Sweden) ii. The place of the bank with which the Documents should be presented to credit is available is the place for Bank A: presentation. The place for presentation under a credit available with any bank is “Date of presentation of original that of any bank. A place for presentation documents at advising bank other than that of the issuing bank is in counters will be construed as the addition to the place of the issuing bank. presentation date” © Sindberg Consult 2017

Pitfalls and challenges in daily L/C handling Nomination UCP 600, Article 2

Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

UCP 600, Article 2

Honour means: a. to pay at sight if the credit is available by sight payment. b. to incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment. c. to accept a bill of exchange (â&#x20AC;&#x153;draftâ&#x20AC;?) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

UCP 600, Article 35 If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.

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Pitfalls and challenges in daily L/C handling • Who is obligated? From DOCDEX Case 359: THE ISSUING BANK WILL EFFECT PAYMENT ON DUE DATE UNDER THIS CREDIT TO THE BENEFICIARY BANK IN ACCORDANCE WITH THEIR INSTRUCTION UPON RECEIPT OF DOCUMENTS REQUIRED FULLY COMPLYING WITH LC TERMS AND PAYMENT FROM THE APPLICANT.

Pitfalls and challenges in daily L/C handling • Oil LCs :47A (Additional Conditions): The price shall be in united states dollars and shall be based on the bill of lading quantity in metric tons measured in vacuum at the average og high and low quotations for the FOB XXXXX quote for PREM UNL 10PPM under the heading Mediterranean cargoes as published in Platts European Marketscan substract a discount of U.S. Dollars 45.00 per Metric Ton. The platt’s quotations to be applied shall be for the period 01 February 2019 to 28 February 2019 (both dates inclusive). All published quotes shall apply. The final price shall be rounded to three (3) decimals places and the following arithmetic rules shall be applied to do this: If the fourth decimal place is five (5) or greater than five (5) then the third decimal shall be rounded up to the next digit. If the fourth decimal place is less than five (5) decimal places then the third decimal place will be unchanged. Any published correction to an y relevant quotations shall be taken into account.

Pitfalls and challenges in daily L/C handling • Oil LCs Questions: •

How is this condition to be documented in the presented documented?

•

What is the requirement of the involved banks in respect of checking “Platts European Marketscan”

Information box S&P Global is an independent provider of information and benchmark prices for the commodities and energy markets covering over 150 countries, and offer expertise in news, pricing and analytics. S&P Global Platts coverage includes oil and gas, power, petrochemicals, metals, agriculture and shipping.

Pitfalls and challenges in daily L/C handling • Oil LCs Relevant provisions and practices: • •

UCP 600 sub-article 14(h): Non-documentary conditions ISBP 745 paragraph A26: Non-documentary conditions

•

UCP 600 sub-article 14(a): Standard for document examination

Pitfalls and challenges in daily L/C handling â&#x20AC;˘ Non-documentary conditions

UCP 600 article 14(h): If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.

L/C requirement

Scenarios:

Country of origin: China

Certificate of origin not called for Certificate of origin called for by the L/C

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Pitfalls and challenges in daily L/C handling â&#x20AC;˘ Sanctions Clauses

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Pitfalls and challenges in daily L/C handling

â&#x20AC;Ś.an economic or military coercive measure adopted usually by several nations in concert for forcing a nation violating international law to desist or yield to adjudicationâ&#x20AC;Ś

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Pitfalls and challenges in daily L/C handling

… clauses in a trade finance-related instruments in relation to trade, economic or financial sanctions or embargos (“sanctions”) …

Pitfalls and challenges in daily L/C handling

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based…” (From UCP 600 article 4)

Regardless of the UCP and any obligation that it may have incurred in the ordinary course of its letter of credit business, a confirming bank has a legal duty to abide by mandatory economic sanctions that are applicable to it by law or regulation (From ICC Opinion TA752rev3)

Pitfalls and challenges in daily L/C handling

”If the sanctions clauses in trade finance-related instruments, including letters of credit or demand guarantees or counter-guarantees, allow the issuer a level of discretion as to whether or not to honour beyond the statutory or regulatory requirements applicable to that issuer, they bring into question the irrevocable and documentary nature of the letter of credit or guarantee”

Pitfalls and challenges in daily L/C handling

There is no standard for these clauses and they vary considerably in their scope. Where they simply state: â&#x20AC;&#x153;[The bank] is under a statutory duty to comply with sanctions laws and regulation mandatorily applicable to [it]â&#x20AC;?, they are merely informational and do not extend beyond applicable laws and regulation.

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Pitfalls and challenges in daily L/C handling

Clause in the credit: “OUR BANK PROCESS TRANSACTIONS IN ACCORDANCE WITH LOCAL AND INTERNATIONAL LAWS AND REGULATIONS, AND RESERVE THE RIGHT TO COMPLY WITH FOREIGN SANCTIONS AS WELL. CONSEQUENTLY DOCUMENTS ISSUED BY OR SHOWING ANY INVOLVEMENT OF PARTIES SANCTIONED BY ANY COMPETENT AUTHORITY OR CONTAINED ANY INFORMATION THEREON MIGHT NOT BE PROCESSED BY OUR BANK AT OUR SOLE DISCRETION AND WITHOUT ANY LIABILITY ON OUR PART”

Pitfalls and challenges in daily L/C handling Refusal message: “NOTE THE DOCUMENTS HAVE BEEN REJECTED AND RETURNED TO YOU BY COURIER BECAUSE OF LOCAL AND INTERNATIONAL LAWS AND REGULATIONS AND INTERNAL POLICY FOR AML/CTF AND FOREIGN SANCTIONS IN ACCORDANCE WITH OUR L/C TERMS”

Refusal explained: A. A vessel’s shipping route throughout a given period, rather than solely on the vessel’s route for the shipment under the letter of credit; or B. The applicant itself, presumably arising from internal knowledge that manifested after issuance of each credit, but not arising to the level of a prohibition under applicable laws or regulations.

Pitfalls and challenges in daily L/C handling

ICCâ&#x20AC;&#x2122;s conclusion Under such circumstances, an issuing bank has an obligation to honour a complying presentation. Should an issuing bank wish to apply its own internal policies within a credit, such policies should be substantiated in detail within the terms and conditions of the credit.

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Pitfalls and challenges in daily L/C handling

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Sanctions is a fact of life

Sanctions may restrict a bankâ&#x20AC;&#x2122;s ability to perform its role under ICC rules

Sanctions clauses must be considered case-bycase:

No problem if they inform about what applies

A problem if the clause bring into question the irrevocable and documentary nature of the letter of credit or guarantee

Case studies and recent examples

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Case studies and recent examples

LC goods description: VISCOSE STAPLE FIBER - QUANTITY: 500,000 KGS UNIT PRICE: 1.84 USD/KG VISCOSE STAPLE FIBER - QUANTITY: 500,000 KGS UNIT PRICE: 1.84 USD/KG (-/+ 5 %) Documents presented: Certificate of origin - gross weight 504,402 KGS / net weights 501,604.80 KG Bill of lading - gross weight 504,402 KGS / net weights 501,604.80 KGS Invoice - gross weight 504,402 KGS / net weights 501,604.80 KGS / commercial weight 513,828 KGS

The amount of the commercial invoice was based on this commercial weight.

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Case studies and recent examples

There is no conflict with the net and gross weights that appear on the documents The commercial invoice is acceptable in terms of the quantity invoiced and the calculation of the invoice amount

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Case studies and recent examples

Refusal: “Bill of Lading is not clean. It bears the clause as follows: Vessel under arrest 18 February 2013.”

Case studies and recent examples

1. The remark on the arrest of the vessel does not render the charter party bill of lading unclean 2. The issuing bank must accept the presented bill of lading

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Case studies and recent examples

Case 1: CPBL Signed as follows: Signed by XXX Logistics Co Ltd as agent for carrier YYY Shipping Lines Ltd Case 2: CPBL Signed as follows: Signed by “YYY SHIPPING JAPAN CO LTD” as agents for the master, Cap. (name) CPBL also shows “CARRIER: ZZZ SHIPPING LINE LTD” (twice, near the right-hand top and at signature column)

Case studies and recent examples

Case 1: CPBL Signed as follows: Signed by XXX Logistics Co Ltd as agent for carrier YYY Shipping Lines Ltd -----The discrepancy raised by the issuing bank, “Charter Party BL signatory‟s capacity not as master, owner, charterer or agent for any of the aforesaid”, is correct

Case studies and recent examples

Case 2: CPBL Signed as follows: Signed by “YYY SHIPPING JAPAN CO LTD” as agents for the master, Cap. (name) CPBL also shows “CARRIER: ZZZ SHIPPING LINE LTD” (twice, near the right-hand top and at signature column) --The bill of lading is correctly signed and acceptable, based on the information provided in this query.

Details of the query: DC information: 32B Currency Code, Amount: USD 80,000.00 39A Percentage Credit Amount Tolerance: 10/10 43P Partial Shipments: ALLOWED 45A Description of Goods and/or Services: 400 MT WIDGETS AT USD200.00/MT, PACKED IN 8 CONTAINERS 46A Documents Required: 1 ORIGINAL INVOICE, 3/3 ORIGINAL B/Ls 47A Additional Conditions: Both quantity and amount 10 pct more or less allowed.

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Case studies and recent examples

Details of the query:

Document information Two presentations of documents were made covering 2 shipments, as follows: 1st presentation – USD 26,400.00 3 containers with 132 MT 2nd presentation – USD 44,000.00 5 containers with 220 MT 2nd presentation was done after 1st presentation was paid by issuing bank. The issuing bank did not refuse the first presentation.

USD 70.400 352 MT

Case studies and recent examples

Details of the query: Refusal: The issuing bank refused the second presentation citing the following discrepancies: 1. Short shipment in 8 containers 2. LC amount short drawn Question: 1. Is the first presentation complying? Why or why not? 2. Is the second presentation complying; or, are the discrepancies cited by the issuing bank valid? Why or why not?

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Case studies and recent examples

Details of the query: Conclusion: 1. The first presentation was compliant. 2. The second presentation was not compliant

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Case studies and recent examples Details of the query: Analysis: The credit allowed partial shipments and, additionally, its amount (USD 80,000) and quantity of goods to be shipped (400 MT) were both subject to a tolerance of plus or minus 10%. The unit price was stated to be USD 200 per MT. In addition the credit terms was that the goods were to be packed in 8 containers. Therefore, by the time 8 containers are utilized, the quantity of goods shipped is to be between 360 and 440 MT.

Given that partial shipment was allowed, and the credit did not include a requirement in respect of the quantity to be shipped in each container, the shipped quantity, amount and number of containers in the first presentation was within that permitted by the credit. The second presentation would be discrepant for the reason that the quantity of goods shipped and containers utilized in the first two drawings were 352 MT and 8 respectively

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Case studies and recent examples Details of the query: DC information: Amount: EUR 2.418.154,10 Partial shipment: Allowed Credit amount tolerance: +/- 10% 10 % more or less on total quantity and amount allowed. Goods description: 50MT for size 1.5x1,250XC …. Total quantity: 5.000MT Document information Negotiated Amount: EUR 1.471.959,10 … 55.55MT For size 1,5x 1,250XC … Total quantity: 3.043,88 MT

Refusal information: Quantity over-shipped for size 1,5X1,250XC

Is this discrepancy valid?

Case studies and recent examples

Details of the query: Conclusion: Discrepancy is not valid

Analysis: The credit allowed partial shipments and, additionally, indicated that the amount and total quantity of goods to be shipped were both subject to a tolerance of plus or minus 10%. So this applies to total quantity instead of individual line items noted in the goods description

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Case studies and recent examples

Details of the query: DC information: Documentary Credit required, among others, the following document: + Beneficiary’s certificate dated and signed confirming that shipment details (vessel name, vessel flag, building date, quantity and date loaded, number of bills of lading, number of coils loaded and value of cargo) have been sent by e-mail to “xxx” (“xxx” being applicant’s name), for insurance purposes, within 3 working days of maritime bill of lading date Additional information included in the credit + Any spelling errors in our documentation is not going to affect payment obligation of the buyer, unless they materially affect quantity or value of product shipped + The number of the letter of credit to be mentioned on the invoice

Case studies and recent examples Document information The credit was issued under ref “xxx0724xxx” and the certificate showed the credit number as “xxx0742xxx”

Refusal / Question: Shipment certificate: O/ref LC number is not correct

Is this discrepancy valid?

Case studies and recent examples Details of the query:

Conclusion: The discrepancy is not valid Analysis: This type of issue has been addressed in numerous ICC Opinions in the past: R289, R578 (TA567rev), R635 (TA658) R811 (TA823rev) The mistyping of the credit number on this type of document does not render such document discrepant as the figure and other information for the insurance coverage can still be ascertained Moreover LC condition concerning spelling errors, can also be interpreted to mean that insertion of an incorrect credit number cannot, in any event, be construed as a discrepancy provided that documents can be applied to the correct credit The exception to this position is where it is a requirement of the importing country that the letter of credit number be stated on one or more documents. In such circumstances, the letter of credit should clearly indicate that this is the reason for the number to be shown on that or those documents

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Case studies and recent examples Field 47A: Additional Conditions: Details of the query:

Mixed Payment Details:

DC information:

• 80 pct of LC amount will be paid against presentation of documents 1 to 4 in field 46A

LC amount: USD 100,000.00

Field 46A Required Documents: 1. Invoice 2. Bill of lading 3. Packing list 4. Insurance document 5. Acceptance certificate issued by the applicant

• 20 pct of LC amount will be paid against presentation of acceptance certificate issued by the applicant or in case this document is not presented, at 45 days after B/L date (whichever occurs earlier). Case information: Documents 1 - 4 (USD 100,000) were presented, refused – and are not yet accepted.

Case studies and recent examples

Questions:

Conclusion:

1. Must the issuing bank pay the 20% on 6 October 2016 (B/L date + 45 days), if the acceptance certificate was not presented?

The provision for the (automatic) 20% is only effective if the 80% drawing has been honoured. If not there is no applicable bill of lading date to establish the payment date for the 20%. Payment 45 days from bill of lading date is subject to the 80% having been honoured. (given that the acceptance certificate has not been presented).

2. Is payment of the 20% subject to the drawing for 80% having been previously honoured or refused?

3. Is the issuing bank obligated to pay the 20%, against presentation of the acceptance certificate i.e. without presentation of documents 1 to 4?

Yes, in this case, one presentation will trigger up to two tenors. If the 20% tenor is based upon the bill of lading date, that payment was subject to the 80% having previously been honoured. If 20% was to be paid upon the presentation of the acceptance certificate, the answer is “no”. Yes, provided that presentation of the acceptance certificate is made prior to expiry. However, if the acceptance certificate is presented prior to presentation of documents 1 to 4, this should raise a Red Flag (however outside the scope of UCP 600.)

Case studies and recent examples

Analysis: The provision for the automatic payment of 20%, i.e., 45 days from the bill of lading date, is only effective if the drawing for 80% has been honoured due to the fact that this is a single presentation with two possible tenors, 80% at sight and 20% as stated in the credit. It is considered unlikely that any bank, having refused the presentation for 80%, would then proceed to record a commitment to pay the 20% portion. Until the discrepancies are accepted by the issuing bank (e.g., based upon a waiver from the applicant), the 80% and the 20% that could be payable at 45 days from the bill of lading date (an amount that would now be due for payment immediately) cannot be honoured. It should be noted that if the applicant had chosen to issue an acceptance certificate (however unlikely as it may be, given that the applicant had not waived the discrepancies for documents 1 to 4) and the document had been presented and was compliant, the issuing bank would be required to honour the 20%.

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Networking Break

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Highlights from Incoterms 2020

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Incoterms 2020

Trade Terms

Definition:

* Agreement between buyer and seller regarding delivery of a consignment of goods:

* Passing of risk from seller to buyer * Insurance * Transport agreement / freight

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Incoterms 2020

*A set of standard Trade

terms drafted by the ICC

*First published in 1936 2000 *Since revised a number of 1990 times:

1976 1967

1953

1936

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1980

Status & Key topics

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Status & Key topics 

FOB, CFR/CIF to be used with containers?

– –

Challenge: where does risk passes from buyer to the seller Better to use FCA, CPT/CIP?

Status & Key topics Trade Terms agreed: CFR Hong Kong

ď&#x192;˝

Who is at risk here?

The seller delivers the container to the container terminal in Copenhagen

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Risk transfers to buyer when the goods have been loaded on board the ship

Status & Key topics 

Shall Incoterms deal with transfer of title/Ownership?



Currently it regulates:

– – –

Passing of risk from seller to buyer Insurance Transport agreement / freight

Status & Key topics 

FAS to be deleted?

–

Replaced with a FCA-Delivery point

Status & Key topics 

EXW to be recommended only for domestic trade?

–



Export formalities difficult to handle by the buyer

DDP to be recommended only for domestic trade?

–

Import formalities difficult to handle for the seller

Status & Key topics 

Insurance to be expanded?

–

To cover ICC(A) by default

–

Currently the rule only require a minimum level of cover

Status & Key topics

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Incoterms versus UCP 600 From the Introduction to Incoterms® 2010: If you want the Incoterms® 2010 rules to apply, you should make this clear in your contract, through such words as, “[the chosen Incoterms rule including the named place, followed by] Incoterms® 2010”.

From UCP 600 (Article 4(a)): A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit…

Incoterms versus UCP 600 From ISBP (ICC Publication 745): When a trade term is stated as part of the goods description in the credit, an invoice is to indicate that trade term, and when the source of the trade term is stated, the same source is to be indicated. For example, a trade term indicated in a credit as “CIF Singapore Incoterms 2010” is not to be indicated on an invoice as “CIF Singapore” or “CIF Singapore Incoterms”. However, when a trade term is stated in the credit as “CIF Singapore” or “CIF Singapore Incoterms”, it may also be indicated on an invoice as “CIF Singapore Incoterms 2010” or any other revision.

Incoterms versus UCP 600 Goods description in a documentary credit: 500 cases of machine tools as per PO 123456. CFR Hong Kong Incoterms latest edition Goods description in a documentary credit: 500 cases of machine tools as per PO 123456. FOB Heathrow Incoterms 2010 Goods description in a documentary credit: 500 cases of machine tools as per PO 123456. CFR Kuala Lumpur Incoterms 2010 BUT: No indication that the bill of lading should state that freight has been prepaid? Goods description in a documentary credit: 500 cases of machine tools as per PO 123456. CIF Xingang Incoterms 2010 BUT: No insurance document required?

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Lunch Break

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Guarantees â&#x20AC;&#x201C; worst and best practices

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ICC Rules on Guarantees

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ICC Rules on Guarantees * Guarantee instruments are

often issued using different names and standards – and subject to different rules – or no rules The following slides will identify some of the key differences in the independent undertakings such as demand guarantees and standbys – as well as the main differences in the rules that the undertakings are issued subject to

ICC Rules on Guarantees

ICC's Uniform Rules for Demand Guarantees (URDG 758) – 2010 Revision Designed for independent (demand) guarantees

The International Standby Practices (ISP98) – In force as of 1 January 1999 Designed for standbys

ICC’s Uniform Customs and Practice for Documentary Credits (UCP 600) – 2007 Revision Designed for commercial documentary credits

Or no rules … © Sindberg Consult 2017

ICC Rules on Guarantees

* Independent undertakings are issued as different “types” * Sometimes based on an active choice – but more often than not based on practice and historical habits. * The different types appear:

* Independent

Guarantee (or “demand guarantee“ or just “guarantee”) The guarantee is used all over the world to identify an instrument where one part promise to pay another part a sum of money if a complying demand is made.

* Standby Letter Of Credit (or “standby” or “SBLC”)

The standby credit was invented in the USA at a time where the banks were not allowed to issue “guarantees.” I.e. it is a guarantee in the form of a documentary credit.

ICC Rules on Guarantees * Although the guarantee and the standby are both “guarantee instruments,” there are some differences in terms of how they are being structured For example:

Standby letter of credit – Confirmation

Issuance Confirmer

Applicant Application

Same standby credit

Beneficiary Guarantee

Applicant Application

Confirmation

Beneficiary

Guarantee issued on the basis of a counter guarantee

Two separate Same standby guarantees credit

Counter guarantee Issuer

Guarantor

Counter Guarantor

ICC Rules on Guarantees

* Guarantees and standbys are issued in different forms and shapes, for example:

* In letter form – directly towards the beneficiary * In letter form – via an adviser * In SWIFT – as message type MT700

(Structured to fit commercial documentary credits)

* In SWIFT – as message type MT760

(structured to fit guarantees and standbys)

ICC Rules on Guarantees

Demand guarantee or guarantee means any signed undertaking, however named or described, providing for payment on presentation of a complying demand. Article 2 A standby, however named, is an irrevocable, independent, documentary, and binding undertaking when issued Rules 1.01 (b) and 1.06

Credit means 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

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ICC Rules on Guarantees

• • • •

Applicant / Principal / Instructing Party Guarantor Counter Guarantor Beneficiary

Article 2 • Applicant • Issuer • Nominated person / confirmer / adviser • Beneficiary Rule 1.09 (a) • • • •

Applicant Issuing bank Nominated bank / confirming bank / advising bank Beneficiary

Article 2

ICC Rules on Guarantees

A guarantee is issued when it leaves the control of the guarantor. Article 4 (a)

A standby is issued when it leaves an issuer's control unless it clearly specifies that it is not then "issued" or "enforceable". Rule 2.03

No equivalent rule.

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ICC Rules on Guarantees

The presentation must be made in paper form and the demand must be signed and include a supporting statement. Articles 2, 14 (e) and 15 (a) A document must be presented as a paper document, unless only a demand is required, in which case a demand that is presented via S.W.I.F.T. by a beneficiary that is a S.W.I.F.T. participant or a bank complies. Rule 3.06 (b) Documents must be presented in original. Article 17

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ICC Rules on Guarantees

On the basis of a presentation alone, whether it appears on its face to be a complying presentation. Data in a document shall be examined in context. Need not be identical but shall not conflict with, data in that document, any other required document or the guarantee. Article 19 (a) + (b) Demands for honour of a standby must comply with the terms and conditions of the standby. An issuer or nominated person is required to examine documents for inconsistency with each other only to the extent provided in the standby. Rules 4.01 and 4.03 On the basis of the documents alone, whether or not they appear on their face to constitute a complying presentation. Data in a document, when read in context, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. Article 14 (a) + (d)

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ICC Rules on Guarantees

Where a complying demand includes, as an alternative, a request to extend the expiry, the guarantor may suspend payment for a period not exceeding 30 calendar days following its receipt of the demand. Article 23 and 24 A beneficiary's request to extend the expiration date of the standby or, alternatively, to pay the amount available under it Rules 3.09

When [the bank] determines that a presentation does not comply, it may refuse to honour or negotiate Article 16

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Extend or Pay demand – Guarantee Issuance (direct) Scenario:

Extend or pay demand received from the beneficiary (Information to the instructing party (article 16))

A guarantee is issued by the Guarantor – on the basis of an application received (It is NOT a counter guarantee)

Examination of the demand (article 19)

Complying demand

Guarantor transmit copy of complying demand (article 22)

Agree to extend the guarantee *)

May suspend payment up to 30 calendar days (article 23(a)(c)) *)

*) Guarantor to inform instructing party

May pay (article 23(e)) *)

Non complying demand

May waive (article 24(a+b+c))

May reject (article 24(a+d))

ICC Rules on Guarantees

A guarantee expires on its Expiry date, or upon * Expiry event (on presentation of stipulated documents), * Presentation of signed release * 3 years after issuance (in case of no expiry) Articles 2 and 25 (a) + (b) Must contain * an expiry date, or * a termination clause May also be cancelled upon consent in writing. Rule 9.01 A credit must state an expiry date for presentation. Article 6 (c) (i)

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ICC Rules on Guarantees

Governing law and jurisdiction is that of the guarantor’s office that issued the guarantee. Articles 34 and 35

An issuer is not responsible for observance of law or practice other … applicable at the place of issuance. Rule 1.08 (d)

No equivalent rule.

Counter Guarantor perspective Counter Guarantee Rules / Law of the guarantee URDG 758 / No law or law of the counter guarantor URDG 758 / No law or law of the counter guarantor3 No rules / law of the counter guarantor No rules / No law

Local Guarantee Rules / Law of the guarantee URDG 758 / No law or law other than that of the counter guarantor No rules / No law or law other than that of the counter guarantor No rules / No law or law other than that of the counter guarantor No rules / No law or law other than that of the counter guarantor

URDG 758 / Law other than that of the counter guarantor

URDG 758 / No law or law other than that of the counter guarantor4

No rules / Law other than that of the counter guarantor

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Comments The counter guarantee can be booked off after expiry. The counter guarantee can be booked off after expiry. The counter guarantee can be booked off after expiry. To be determined on a case-by-case basis. If there is doubt as to the expiry of the guarantee the customer must be informed that he will only be released from its obligations under its indemnity when Nordea is released under the guarantee. To be determined on a case-by-case basis.

To be determined on a case-by-case basis.

Pitfalls and challenges in daily handling

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Pitfalls and challenges in daily handling * Reduction clauses in guarantees * Customers may ask to include reduction clause (worded in

accordance with the requirements stated in the contract) Almost as a rule those reduction clauses include non-documentary conditions

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Pitfalls and challenges in daily handling * Traps beneficiaries can fall into * Has the bank of the beneficiary exchanged SWIFT keys with the guarantor?

* Will the beneficiary bank confirm that the signatures are binding on the beneficiary?

* Is it clear from the guarantee wording whether or not it is enough

to transmit the demand by swift, or does the demand also have to be sent by courier?

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Pitfalls and challenges in daily handling * Advance payment guarantees * Is it a condition in the guarantee that the payment should be done with a reference to the guarantee no? Has that been done? Or has only the invoice no been given as reference?

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Pitfalls and challenges in daily handling * Expiry date

* Is the expiry date of the guarantee a couple of weeks later than the latest

date for payment/performance? Sometimes it is not possible to give a true statement of default within the expiry of the guarantee as the expiry date is too close to the date of performance * Is the guarantee issued subject to international standard rules? If not you donâ&#x20AC;&#x2122;t know how long time the bank will take to check the documents and refuse them if discrepant. If presentation is made late, but before expiry, you might not be able to remedy before expiry * If you want to release the guarantee before the expiry/reduce the guarantee amount; what is required? It is normally not enough to return the physical document, and it could cause more work than anticipated, and a release must normally be signed by authorised signatories

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Pitfalls and challenges in daily handling * Governing law * When a guarantee is subject to law and jurisdiction other than the

guarantor, it may be challenging at the guarantor do not have any knowledge (or limited knowledge) about these laws and there may accrue costs and expenses for our customers account and risk

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SWIFT 2019/2020 release

SWIFT 2019/2020 release * MT 767 Amendment needed to be

completely redesigned, given the redesign of the base message MT 760

* New field, File Identification, to identify location of attachments

* New field for the counter-guarantee rules

* Optional field for Transfer Conditions

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Case studies & Recent examples

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Case studies & Recent examples Amendment to a demand guarantee (subject to URDG 758): “In view of the provisions of Section 28 of the Indian Contract Act and as per the opinion received from Indian Bankers Accociation, it has been decided by [BANK] that while issuing fresh BG or extending any existing BG, claim period of a minimum of one year from the date of expiry of validity period for BG is to be specified invariably. Accordingly, please arrange to make following amendments in the guarantee text….

Case studies & Recent examples Guarantee is subject to English laws - and URDG 758 Two issues: 1: In order to claim there must be “any and every written demand” Will a demand in SWIFT form comply?

URDG 758, article 14(e): Where the guarantee does not indicate whether a presentation is to be made in electronic or paper form, any presentation shall be made in paper form.

2: The demand states “we claim ... as a result of failure by the supplier to fulfil his obligations under the purchase order documents in question”

URDG 758, article 15(a): A demand under the guarantee shall be supported by such other documents as the guarantee specifies, and in any event by a statement, by the beneficiary, indicating in what respect the applicant is in breach of its obligations under the underlying relationship. This statement may be in the demand or in a separate signed document accompanying or identifying the demand.

This is the requirement from the guarantee. Is if this sufficient (considering URDG article 15(a)) - or do they need be more specific as to the breach?

Networking break

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Status on the International Standard Demand Guarantee Banking Practices ÂŠ Sindberg Consult 2017

Status on ISDGP

To provide a complement to URDG758 and articulate as to how the URDG rules are to be applied

To align ISDGP with ISBP considering the similarities in documentary credits and demand guaranties (independent character, documentary nature and irrevocable)

To provide a standard practice taking into account the URDG,ICC Banking Commission Opinions and DOCDEX decisions

Provide clarity to standard practice to e.g. 1. issuance, 2. amendment, 3. what constitutes a complying demand and 4. transfer

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Status on ISDGP

1. 2.

Drafting Group (Glenn Ransier) Consulting Group (Dr. Georges Affaki, Dr Andrea Hauptmann)

1. 2.

First Draft presented to the Consulting Group for comments Update on the ICC Banking Commission Meeting in Beijing (April 2019)

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Questions and Answers

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