CHAPTER 30 - PARTIES IN GUARANTEES

•     Principal: Principal (Applicant) means the party indicated in the guarantee as having its obligation under the underlying relationship supported by the guarantee. The applicant may or may not be the instructing party.

•     Guarantor Bank: Guarantor is the institution that issues the bank guarantee. As per URDG 758 guarantor means the party issuing a guarantee, and includes a party acting for its own account.

•     Advising Bank: Advising party means the party that advises the guarantee at the request of the guarantor. Also known as Receiving Bank.

•     Beneficiary: Beneficiary means the party in whose favour a guarantee is issued.

CHAPTER 29 - GENERAL - BANK GUARANTEES

URDG758 governs the operation of Bank Guarantees

It is an undertaking/promise/indemnity given by a Bank on behalf of the Applicant and in favour of the Beneficiary. Whereas, the Bank has agreed and undertakes that, if the Applicant failed to fulfill his obligations either Financial or Performance as per the Agreement made between the Applicant and the Beneficiary, then the Guarantor Bank on behalf of the Applicant will make payment of the guarantee amount to the Beneficiary upon receipt of a demand or claim from the Beneficiary.

Bank Guarantees earlier governed by URCG (Uniform Rules for Contract Guarantee), now it has been replaced by URDG (Uniform Rules for Demand Guarantees).

In Bank Guarantees not all the Types of Guarantees where Buyer or Importer needs to be Applicant and Seller or Exporter need to be Beneficiary. Only in few types that concept will work.

Bank Guarantees can also be called as Demand Guarantees and Guarantees.

CHAPTER 28 - INCOTERMS 2010 (INTERNATIONAL COMMERCIAL TERMS)

The purpose of Incoterms is to provide a set of standard and uniform international rules for the interpretation of most commonly used trade terms in foreign trade.

·      These are official trade shipping terms agreed by the International Chamber of Commerce, Paris.

·       There are 11 Inco Terms and comes into force on 01st January 2011.

·      Each Inco Term defines the responsibilities of buyers and sellers for the delivery of goods under sales contract.

·      They are authoritative rules for determining how costs and risks are allocated to the parties.

RULES FOR ANY MODE OF TRANSPORT: (AIR, ROAD, RAIL AND MULTIMODAL MODES)

·         EXW     Ex Works

·         FCA       Free Carrier

·         CPT       Carriage Paid To

·         CIP        Carriage and Insurance Paid To

·         DAT       Delivered at Terminal

·         DAP      Delivered at Place

·         DDP      Delivery Duty Paid

RULES FOR SEA AND INLAND WATERWAY TRANSPORT

·         FAS      Free Alongside Ship

·         FOB     Free on Board

·         CFR     Cost & Freight

·         CIF      Cost, Insurance & Freight

The first class includes the seven Incoterms 2010 rules that can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed. They can be used even where there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

In the second class of Incoterms 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports.

CHAPTER 27 - DOCUMENTS IN INTERNATIONAL TRADE

·         Commercial Invoice.

·         Packing List.

·         Weight List.

·         Bill of Lading.

·         Airway Bill.

·         Truck Receipt / Consignment / Delivery Note / Railway Receipt.

·         Sales / Purchase Contract.

·         Bill of exchange / Draft.

·         Certificate of Origin.

·         Inspection Certificate.

·         Quality Certificate.

·         Fumigation Certificate.

·         Phytosanitary Certificate.

·         Analysis Certificate.

·         Insurance Policy / Certificate.

TYPES OF DOCUMENTS

·         Financial documents - Bill of Exchange, Promissory Note, Co-Accepted Draft (Avalization).

·         Commercial documents - Invoice, Packing list, Weight List Etc.

·         Official documents - Certificate of Origin, Inspection Certificate, Phytosanitary Certificate, License, Embassy legalization.

·         Transport documents or Shipping Documents - Bill of lading (Clean, ocean or multi-modal or charter party ETC), Airway Bill, CMR, Lorry / Truck receipt, Railway Receipt.

·         Insurance documents - Insurance Policy or Certificate.

CHAPTER 26 - ISLAMIC TRADE FINANCE 

·         Islamic trade finance is Sharia compliant banking (Sharia Rules), Islamic Trade Finance is very similar to Conventional Trade Finance, the key difference in Islamic Trade Finance is, a bank will provide a letter of credit, guaranteeing import payments using its own funds for a client based on sharing the profit from the sale of the item.

·         So one can conclude that the major difference between Conventional and Islamic Trade Finance is payment and financing. Both Conventional and Islamic Trade Finance can operate in the same Platform or Application.

·         Even though Islamic Trade Finance services are more time consuming. Islamic Trade Finance has been in a rise and it is very popular in Middle Eastern Countries and also in the Countries where they practice Islam as a Religion. Where they think taking Interest (Riba) for Money is Sinful (haraam)

Islamic Trade Finance Products (Subjective)

·         Wakala (Agency), Musharaka (Partnership) and Murabaha (Cost Plus Profits) functionality is associated with the financing of Letter of Credits (LC) opened by customers. Some would feel even other Islamic Finances like Mudarabaha, Ijara, Wadiah etc coud be used in Trade Finance. But Wakala, Musharaka and Murabaha are the most common Islamic Trade Finance Products

Wakala Islamic Letter of Credit (Subjective)

·         Through the principle of Wakala the Issuing Bank (IB) act as the AGENT of the customer, the customer will ask the bank to issue the ILC by providing a written instruction to the seller. Then, the bank will ask the customer to place the amount of the price of the goods in place the contract amount in LC in the bank as security. Next, the bank creates the ILC in favour of the Importer and collects its commission and other charges involved. After negotiation of the document, the issuing bank will pay the negotiation bank utilizing the customer’s deposit. Later, the bank releases the document to the buyer and charge fee for its services under the principles of Ujrah (fee).

Musharaka Islamic Letter of Credit (Subjective)

·         Through principle of Musharaka, the IB issues the ILC and both the Bank and customer involves ( PARTNERSHIP ) to the purchase price under ILC. Next they will share the profit of the business venture based on the pre-agreed profit sharing ratio. But, losses are borne proportionate to the capital contribution. Likewise, to the Wakala ILC, the first procedure involve in establishing the Musharaka ILC begins with the customer informs the IB of his ILC requirement and negotiates the term of Musharaka financing for his requirement. Then, the customer deposit enough money with the bank for his share of the cost of good to be purchased or imported as per the Musharaka agreement which the IB accepts under the principle of “Wadiah Yad Dhamanah”. Later, IB create the ILC and pays the proceeds to the negotiating bank, Utilising the customer’s deposit as well as its own shares of financing. After that, IB releases the documents to the customer. Lastly the customer takes possession of the goods and disposes of these in the agreed manner.

Murabaha Islamic Letter of Credit (Subjective)

·         Under this principle the IB will provides a financing facility to customer that unable to pay the purchase price to the exporter. Then the bank will resells the good at a higher price agreeable to the customer. The new price will include mark-up of certain profit. In summary, the procedure start when the customer informs the IB of his ILC requirement and request the IB to purchase or import the good by executing an “aqd” in writing. The IB as an agent will purchase the goods. Later, the IB will sells the goods to a new customer at a sale price comprising its COST and PROFIT margin under the principle of Murabaha for settlement on a deferred time.

CHAPTER 25 - PAYMENT TERMS

Determines when the payment has to happen in a transaction.

PAYMENT  TERMS IN DOCUMENTARY CREDIT

·         Sight Payment.

·         Acceptance (Usance Payment).

·         Deferred Payment.

·         Mixed Payment (outside of UCP).

·         Negotiation - Sight.

·         Negotiation - Usance.

PAYMENT  TERMS IN DOCUMENTARY COLLECTION

·         Payment (Sight Payment).

·         Acceptance (Usance Payment).

·         Mixed Payment.

CHAPTER 24 - TYPES OF LETTER OF CREDIT

Revocable Letter of Credit

·         A revocable documentary credit may be amended or cancelled by the Issuing Bank at any moment and without prior notice to the beneficiary.

·         Revocable documentary credits are no more used in LC’s.

·         Revocable documentary credit offers no security of payment to the beneficiary.

·         If the nominated bank has already taken up documents or given an undertaking to pay prior to receipt of notice of cancellation, the issuing Bank is committed to reimburse the nominated bank.

Irrevocable Letter of Credit

·         An irrevocable documentary credit cannot be amended or cancelled without the agreement of the Issuing Bank, the Beneficiary and confirming Bank.

·         Irrevocability of documentary credit given by the Issuing Bank provides lot of comfort to the beneficiary.

Confirmed Letter of Credit

·         Confirmation means a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation.

·         Confirmation of a documentary credit helps the beneficiary in mitigating:

§  Issuing Bank Risk

§  Country Risk ( Economic / Political / Transfer / Sovereign)

·         The beneficiary can depend on the confirming bank for payment in case the payment is not forth coming from the Issuing Bank for various reasons.

·         Charges are to be paid to the confirming bank for adding its confirmation.

·         For adding confirmation to the letter of credit, the confirming bank will require credit lines on the issuing bank and country of issuing bank.

Unconfirmed Letter of Credit

·         A documentary credit which is backed only by the undertaking of the issuing Bank is termed as unconfirmed documentary credit.

·         The beneficiary has to entirely rely on the undertaking of the issuing Bank for obtaining the payment.

·         The beneficiary is open to Issuing Bank Risk & Country Risk.        

Transferable Letter of Credit

·         A transferable documentary credit is one wherein it could be transferred to one or more second beneficiaries at the instructions of the first beneficiary.

·         The second beneficiaries do not have the right to transfer the documentary credit to other beneficiaries.

·         Ordering Customer is the First Beneficiary in Transferable LC.

·         In case of transferable documentary credits, the buyer accepts the risk or receiving goods from a third party, which not be known to the buyer and with whom there may have been no previous business dealings.

·         The letter of credit should specifically indicate that it is transferable for the same to be made transferable.

·         At the time of transferring the letter of credit to the second beneficiary, the transferring bank could reduce or curtail the following:

o   Amount of the credit

o   Unit price, if any

o   Expiry date

o   Last  date for shipment

o   Period for presentation

·         The percentage of insurance could be increased to provide the cover required under the original letter of credit.

·         The name of the first beneficiary may be substituted for that of the applicant in the credit.

Non - Transferable Letter of Credit

·         A credit which cannot be transferred to second beneficiary is termed as non transferable credit. This will be mentioned as a Condition in LC issuance saying this LC should not be transferred.

Red Clause Letter of Credit

·         Under a red clause documentary credit, the advising / nominated bank is authorised by the issuing Bank (Applicants request) to pay a certain sum of money to the beneficiary of the credit as advance for procuring raw materials and meet part of the processing cost.

·         The advance given to the beneficiary is adjusted at the time of making final payment against tender of shipping documents.

·         In case the beneficiary is unable to make the shipment and hence unable to settle the advance payment, the advising / nominated bank advancing the amount could recover the same from the Issuing Bank and Issuing Bank will collect the Money from Applicant.

·         Red Clause documentary credit was once popular in Fur Trade in China and Wool Trade in Australia.

·         Traditionally written or Typed in Red Ink before Swift messages used.

Green Clause Letter of Credit

·         A documentary credit which permits negotiation of documents or providing an advance to the beneficiary against a warehouse receipt (where the goods have been stored in a warehouse awaiting arrival of the ship).

·         Long back the use of a green clause letter of credit is often used in the agricultural business where a company can fund the harvest of a new crop by pledging available stock as collateral.

Revolving Letter of Credit

·         Revolving documentary credits are used between buyers and sellers who have a long standing trading relationship and experience in the shipment of goods described in the documentary credit.

·         This allows the amount thereof to be reinstated without any specific amendment i.e on an automatic basis.

·         The amount of the documentary credit gets reinstated automatically once shipment is effected.

·         The reinstatement could be based on a fixed amount to be reinstated after a specific time interval or after shipment or a combination e.g. AED 50,000 to be reinstated on 01st of each month.  So Revolvement or Revolving LC is based on Time or Value.

·         Further, the reinstatement could be cumulative or non - cumulative / automatic or not automatic.

Non-cumulative revolving letter of credit

·         For a non-cumulative revolving letter of credit, the beneficiary can draw each revolving amount for any given period, and any unused portions cannot be drawn on the subsequent periods.

·         Using the above example, the shipper could still ship USD 100.000,00 each month and be fully paid.  If the shipper shipped USD 90.000,00 in a given month, they would still be paid provided that partial shipment is allowed for each shipment, but they could not get the additional USD 10.000,00 by shipping excessive amount on the upcoming months.

Cumulative revolving letter of credit

·         Cumulative revolving letter of credit means that the unused sums in the L/C can be added to the upcoming shipments.

·         Using the above example, the shipper could still ship USD 100.000,00 each month and be fully paid.  If the shipper shipped USD 90.000,000 in a given month, they would still be paid, and they could get the additional USD 10.000,00 by shipping extra in the next months until letter of credit reaches to expiry.

Revolvement - dependent on time

·         AED 50,000 may be drawn each month during the six months validity of the documentary credit.

Revolvement - dependent on value

·         Documentary credit may indicate that the amount is to revolve upon utilization within the overall validity of the documentary credit.

Back to Back Letter of Credit

·         In a back to back documentary credit, the advising bank issues another documentary credit in favour of different beneficiary based on the security of the Master LC (Original LC or Prime LC). Here Advising Bank is also known as Second Issuing Bank.

·         This is required for the original beneficiary to procure raw material and goods for manufacture / shipment under the original documentary credit.

·         The main risk associated in case of back to back documentary credits are that the shipment under the back to back documentary credit may not happen resulting in default under the original documentary credit as well.

·         Is also known as Countervailing Credit or Counter Credit or Reciprocal Credit or Reciprocal LC or Second Letter of Credit.

Inoperative Letter of Credit

·         Issue of Pre Advice (MT705) is one of the kind of Inoperative LC.

·         A preliminary advice (Pre Advice) of the issuance of a credit or amendment shall only be sent if the issuing bank is prepared to issue the operative credit or amendment. An issuing bank that’s ends a pre-advice is irrevocably committed to issue of the operative credit or amendment, without delay, in terms not inconsistent with the pre advice.

·         An Inoperative documentary credit which includes certain conditions over which the beneficiary has no control.

§  e.g. payments are to be made only once the goods have been cleared through customs.

§  e.g. The documentary credit is to become operative only upon the issuance of an amendment that an import license has been issued.

§  e.g. The documentary credit is to become operative upon the  receipt of a performance guarantee acceptable to the issuing bank.

·         Inoperative letter of credit is not a good security to the beneficiary till the same is made operative.

Restricted Letter of Credit (Nominated Bank)

·         A credit which is available for negotiation only with a specified nominated bank is called a restricted credit.

Unrestricted Letter of Credit ( Any Negotiating Bank)

·         Is also known as Freely Negotiable Letter of Credit.

·         A Nominated Bank is not specified, which means that the exporter can negotiate with any bank and receive a payment on an unrestricted LC.

All the above Letter of Credit is known as Commercial Letter of Credit, except the below Standby Letter of Credit.

Standby Letter Credit (Commercial SBLC)(UCP) (Also See below Standby Credit (ISP)

·         Normally a substitute for Bank Guarantee.

·         Operates like a Commercial Letter of Credit, except that typically it is retained as a "standby" instead of being the intended payment mechanism. UCP600 article 1 provides that the UCP applies to Standbys; ISP98 applies specifically to Standby letters of Credit; In 1998 the International Chamber of Commerce (ICC) added ISP98 (International Standby Practices 98 89 Articles) as the rules to guide standby letters of credit, since in UCP600 there is only 1 Article which may not be enough for a Standby Transactions.

·         The ISP98 rules are slowly being adopted; however, many of the standby letters of credit continue to rely on the ICC’s older guide, UCP600.

·         Such LCs is opened mostly by banks in countries where, by law, they are prohibited from issuing Guarantees (e.g., USA) and the countries where they don’t use Standby as per ISP98.

·         Is invoked in case of non-performance of the contract.

·         Documents to be presented under the SBLC are normally very minimal.