ICC Technical meeting in Paris, Opinion TA895 and non-documentary conditions
Just home from the Technical Meeting in the ICC Banking Commission – held this week in Paris - my brain is filled with the impressions from the meeting. As such the meeting is 3 days; that is 2 days of working group meetings and one day plenary meeting. The one day of plenary meeting is very compressed – and filled with information; most of it really relevant. For this blog post I will focus on the session with the Draft ICC Opinions. This of course, because I was a part of that. Other topics from the meeting will be addressed in later blog posts.
There were 6 new Draft Opinions to be discussed. However, one was withdrawn by the presenter before the meeting (TA894) – so only 5 to be discussed; i.e. TA891, TA892, TA893, TA895 and TA896.
The 4 of them were easily approved – with only few changes. However, for TA895 that was not the case. It was even so that already when the delegates arrived at the meeting, they were handed out a revised version on the Draft Opinion. The background for this was the comprehensive changes made to the Opinion. The changes made – based on the comments from the national committees – took 14 PowerPoint pages to walk through. At the meeting walking through this Opinion alone took more than one hour. During the meeting the Opinion was referred to as a “comedy of errors” – and wrong to waste the time of the ICC Banking Commission with such nonsense Opinion. I do not disagree with that – but think that the discussion revealed a number of issues – that has not really been discussed; and in fact, offered some enlightenment into some topics that before seemed straight forward – but may not actually be so.
I will use this blog post to discuss some of the elements in play in this case; none of which are “black and white” – all of which could potentially change the result.
First a recap of the case:
1: LC issuance:
The LC included this wording:
“In the event of delay in FOB delivery beyond 4 January 2019 the value of this letter of credit shall stand reduced by 0.5PCT (one half percent) of purchase order value per week or part thereof subject to a maximum discount of 5PCT (five percent) of the FOB order value. The date of Bill of Lading will be considered as date of delivery.”
The description of Goods field included: “Trade Terms: CFR Kolkata Seaport, India”
Latest date of shipment was 6 February 2019.
2: LC confirmation
The LC was confirmed by the confirming bank – who did not question the clause at the time of confirming / advising the LC.
3: Presentation of documents
The presentation included a bill of lading showing shipment 11 January 2019.
The invoice was issued for the full LC amount.
The confirming bank accepted the presentation; with a reserve towards the beneficiary that the issuing bank is entitled to deduct 0.5 PCT from the proceeds.
The covering schedule of the confirming bank indicated the full LC amount to be drawn – and did not mention the “reserve”.
4: Refusal
Following receipt of the presentation the issuing bank refused the presentation mentioning the following discrepancy:
“LC amount overdrawn as per LC Field 47A point no 7”.
The good question is if the discrepancy is valid – and how the confirming bank should have dealt with such clause.
Here are some of the elements in play:
The ambiguity issue
There seems to be no doubt that this is a badly worded LC. It includes a clause that in reality is unworkable. It requires 2 pieces of information for it to work. One is the date of shipment. That information is in the B/L. The other is the purchase order value or the FOB value. However, since this is a CFR shipment the purchase order value / FOB value is not required to be mentioned in the documents.
The good question is what is the consequence of this ambiguity? ISBP 745 paragraph v include this wording:
“The applicant bears the risk of any ambiguity in its instructions to issue or amend a credit...”
But what does that mean for this case? Does it mean that the confirming bank can simply disregard the clause? After all the clause potentially changes the value of the LC – i.e. the amount the confirming bank would be obligated to pay – depending of date of shipment.
The non-documentary condition issue
There were quite some comments indicating that this should be treated as a non-documentary condition subject to 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.”
The argument supporting this is that in order for this clause to work, there must be 2 pieces of information available; 1: purchase order value / FOB value, 2: date of shipment. Since point 1 is not available from any document, this should be treated as a non-documentary condition.
The counter argument is that since the date of shipment, i.e. the information that triggers the condition comes from the bill of lading (a document required by the LC) – it is not a non-documentary condition. In other words: it is an ambiguous “documentary” condition.
A third way to view this, is that it is actually not such clause that is in scope for UCP 600 article 14(h). What (most like) is in scope for this article (or rather in the minds of the drafters of ISBP 745) are clauses like “Country of Origin: Argentina”. If there is no document to indicate this (like a certificate of origin), then the (non-documentary) condition will be disregarded.
The clause in this case is not such condition; it is more a “automatic reduction clause”; i.e. the clause is triggered by information in the presented document – BUT there is nothing that as such need to be reflected in any presented document for it to work (of course given that the clause was clear).
What is interesting – all 3 lines or argumentation above are reasonable – and each would create a different result.
The timing / practical issue
When reading a case like this; one tent to forget the issue of timing, as all the information is available. However, for this case timing is important. Consider the following:
When receiving the presentation, the confirming bank took note of the clause, but because it was unclear, the bank was unable to calculate the 0,5%. Hence, it took a reserve towards the beneficiary.
However, in the forwarding schedule it mentioned the full amount – only.
In other words, the issuing bank received a presentation that was clearly for a too high amount –not knowing about the reserve towards the beneficiary.
From that perspective, what can the issuing bank do? After all, the clock is ticking – as the issuing bank has a maximum of five banking days to refuse – otherwise it would be obligated for the full amount. The only remedy in the rules is therefore a refusal.
There were comments from national committees about the refusal; indicating it is not correct to refuse, as a refusal is for 100% of the amount – but what is in question is maximum 0,5% of the LC amount.
However, at the end of the day this is a practical issue: The parties should have solved this already at the time of issuance / confirmation. They did not. Therefore, they must solve it once the presentation is made.
The documentation issue
Another good question is how to “document” such a clause; i.e. a clause that is triggered by information in the presented documents – but without a requirement for it to be indicated in any presented document.
The obvious (first) answer is that this should have been addressed in the clause!
However, it was not and therefore there are logically 2 ways to document this by the:
One is by the beneficiary – as part of the invoice. The other is by the confirming bank as part of the forwarding schedule.
For this case – none of the above were chosen. Rather both the beneficiary and the confirming bank kept silent.
When reading the above, not strange that this was a long discussion. There are many elements in play – any of which could potentially change the outcome – and still be based on good and sound arguments.
So, what was the conclusion?
Well, you of course need to see the final wording once the final Opinion is available. However, with my words the conclusion for this particular (and hopefully very rare) case is:
1: Although this (primarily) points back to the issuing bank, the confirming bank cannot disregard this clause, because it directly affects the amount that may be drawn under the LC.
2: Based on the above, the confirming bank should have asked the issuing bank for clarification – already at the time of confirmation.
3: Since the confirming bank did not do that, they should have added text to the forwarding schedule regarding the 0,5%.
4: Then, for the practical solution (for this case) the confirming bank and the issuing bank should agree to the deduction, and as of that time the issuing bank should withdraw its refusal and honour – less the agreed amount.
In many ways this solution may not be perfect – but after all it is a flawed case; so given the circumstances it is actually a practical and workable solution; and if I may add: One that forces the parties to agree on the clause (which they should have done much earlier).
Sorry to put this one on you (if you are still reading) – but I needed to get it out; as I really like the issues raised about ambiguities, non-documentary conditions and auto reduction clauses – which I think is perhaps a bit un-explored in LC practice.
However, the case at hand is almost trivial – in that it comes from a badly drafted LC! Had the clause been worded perfect, there would have been no case, and I would have been able to walk out into the Champs Elysees one hour earlier….
Enough of that … however, during the next couple of weeks there will be more on this channel from the ICC Technical meeting. Just the reviews of the approved ICC Opinions will be made available in lcviews premium (once out).
Meanwhile, please remember to take care of each other and the LC.
Kind regards
Kim