Common Letter of Credit Documents

As an exporter, how accurate are the letter of credit documents that you present to the bank?

We have stated numerous times in our articles and guides that around 70% of documents presented under letters of credit are refused upon first presentation to banks. The International Chamber of Commerce (ICC) Banking Commission has recently announced that it has no immediate intention to revise the UCP 600 rules on the basis that they are fit for purpose as long as they are correctly interpreted and applied. It is therefore incumbent upon exporters to ensure that they are familiar with the rules as they relate to documents, terms and conditions stated within a credit and make complying presentations to the bank.

Our popular Letter of Credit training programmes have proved highly successful in helping exporters to develop best practice based on our guidance for preparing complying documents.

This article will help you to familiarise yourself with the main groups of documents commonly required under a letter of credit. It is by no means intended as an exhaustive guide as contractual terms will determine varying degrees of complexity in terms of requirements.

 

Documents requesting payment

Bill of Exchange (Draft)

The legal definition of a Bill of Exchange (as per the UK’s Bills of Exchange Act, 1882) is:

“An unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of a specified person, or bearer”  

In simple terms, it can be likened to a “U O Me”  and is normally addressed to a buyer by a seller.

In the context of a Letter of Credit, a Bill of Exchange is commonly referred to as a ‘Draft’ and is used as an instrument of payment and/or finance.

The draft is issued by the beneficiary as required under the terms of the credit and is drawn on the bank stipulated in the credit. The obligation of the banks involved exists regardless of the drawee bank. The draft may be payable at sight or at a later maturity date (known as a Term or Usance Bill / Draft).

Term drafts can be ‘fixed’, eg: 30th September ….., ‘x days (eg: 30, 60, 90) after sight’ (date of sighting / acceptance by the drawee bank) or ‘x days (eg: 30, 60. 90) after date (eg: Bill of Lading date).

Invoice 

The invoice provides details and price of the goods that form the basis of the trade transaction. It is made out by the seller (beneficiary under a Letter of Credit), usually on his own headed paper, in the name of the buyer (applicant), unless a Letter of Credit instructs otherwise.

The description of the goods must correspond exactly with the description stated in the Letter of Credit (article 18c, UCP 600). Any reference in the invoice to a proforma invoice or a contract does not imply that banks will examine the connection between the different documents. Banks will check solely that the reference in the credit is shown in the invoice presented. Unless otherwise stipulated, neither the proforma invoice nor the contract will form part of the letter of credit (article 4, UCP 600).

In certain cases invoices may need to be authenticated by a Chamber of Commerce and / or the Consulate of the importer’s country.

 

Transport Documents

According to Uniform Customs & Practice for Documentary Credits (UCP 600), transport documents, however named, must appear to indicate the name of the carrier and be signed by the carrier or a named agent for or on behalf of the carrier.

The requirements for different types of transport documents presented under Letters of Credit are laid down in UCP 600 (Articles 19-25). These articles describe precisely how each type of document should be issued and by whom / how it should be signed. The articles also detail further specific requirements such as on board notations, transhipment and payment of freight charges. 

Marine / Ocean Bill of Lading

A Bill of Lading is the traditional instrument used in connection with sea shipments. It has three key functions:

  1. A receipt given by a shipping company upon shipment of goods
  2. Evidence of a contract of carriage, the terms and conditions of which are stated on the reverse.
  3. Most importantly, a Bill of Lading is a ‘document of title’ and as such is required by the importer at the port of destination in order to take possession of the goods. Bills of Lading are normally issued in sets of two or three ‘originals’ or ‘negotiable copies’, any one of which can give title to the goods.

A Bill of Lading should be ‘clean’, meaning that there is no clause recording a defective condition in the state of the goods or packaging. The goods are often consigned ‘to order of the shipper (exporter)’ in which case the Bill of Lading will be ‘blank endorsed’ (signed on the reverse) by the exporter. This has the effect of rendering the Bill of Lading transferable and the goods will be released to the bearer (or holder) of the document. If the consignee on the Bill of Lading is specifically named (eg: the importer) then the goods will normally only be released to such named person / persons, upon production of suitable identification.

The Bill of Lading must show that the goods are actually on board a named vessel and signed in accordance with the relevant UCP article (see above).

If ocean transport forms only a part of the complete journey, a Multimodal Transport Document or Combined Transport Bill of Lading can be issued to cover all stages of the journey. Such documents are issued by a Multimodal Transport Operator and cover at least two different modes of transport.

Air / Sea Waybills 

A Waybill is a document issued by the carrier of the goods or its agent.  It acts as a receipt for the goods and provides evidence of a contract of carriage. Unlike Bills of Lading, Waybills are neither negotiable nor documents of title. The goods will be released to the named consignee (eg: the importer) upon application and production of suitable identification.

Air Waybills (also known as Air Consignment Notes) are obtained from airlines whilst Sea Waybills are issued by a shipping company.

Road Consignment Note (CMR) 

Issued for carriage by truck or lorry, a Road Consignment Note evidences that the goods have been received by the carrier for onward transportation by road.

It is not a document of title and the goods will be released to the consignee upon application and production of suitable identification. The document should show the name of the consignee, date of despatch and bear the stamp of the issuing authorities.

Rail Consignment Note (CIM) 

Issued by a railway authority for the transportation of goods by rail, a Rail Consignment Note evidences that the goods have been received by the carrier for onward transportation.

It is not a document of title and the goods will be released to the consignee upon application and production of suitable identification. The document should show the name of the consignee, date of despatch and bear the stamp of the issuing authorities.

Courier or Parcel Post Receipt 

Issued for goods sent by courier or parcel post, a Courier or Parcel Post Receipt evidences that the goods have been received for despatch. It is not a document of title.

 

Insurance Documents

If goods are to be insured for an amount exceeding the value of the goods, a Letter of Credit must state the relevant percentage. If the credit does not stipulate an amount or percentage, the minimum insured value is deemed to be 110% of the CIF or CIP value (UCP 600 Article 28). The credit should also stipulate the risks to be covered by the insurance.

Insurance Policy 

An Insurance Policy is issued by the Insurance Company. The Policy states the amount of the insurance, the goods insured, the risks covered and all the conditions of the insurance.

If a Letter of Credit calls for an insurance certificate, a policy is acceptable.

Insurance Certificate 

An Insurance Certificate is issued by the Insurance Company by reference to a comprehensive Insurance Policy and its conditions. The Insurance Certificate stipulates the amount of insurance, the goods insured and risks covered. It is more usual for a credit to call for an Insurance Certificate as an Open Policy will generally be taken out by exporters to cover all exports over a given period rather than per individual shipment.

 

Other Common Documents

Certificate of Origin 

A Certificate of Origin is a signed declaration stating the country of origin of the goods. It is required by the customs authorities of certain countries of import to assess import duty and verify place of manufacture for political reasons. Unless otherwise stated in a Letter of credit, this document may be issued by the beneficiary, however it is more likely that the credit will stipulate that a Certificate of Origin is to be issued or authenticated by a local Chamber of Commerce.  It may additionally need to be legalised by the local embassy of the importing country.

Packing List 

The packing list is usually drawn up by the exporter and it provides a detailed inventory of the goods, including the contents of each packing unit together with weights and dimensions. It is vital that information shown on other related documents is consistent (eg: weights, shipping marks etc).

Inspection Certificate 

An Inspection Certificate may be issued by an independent third party, by the importer’s agent or by the importer himself.  As is the case with other documents, if the issuer of an inspection certificate is not specified within the letter of credit, the bank will accept such document as presented. This could mean that a simple certificate issued by the beneficiary would be acceptable to the bank (if not the importer!) The certificate should state that the exported goods conform to a certain standard or have achieved a ‘clean report of findings’.

An independent third party is usually resident or represented in the exporter’s country and so the goods are inspected prior to shipment / dispatch.  

Beneficiary’s Certificate / Declaration 

The buyer may require the seller to undertake certain obligations such as (but not limited to) the despatch of copy documents directly following shipment. Under UCP 600 rules, banks require documentary evidence to support such conditions. This normally constitutes a certificate or declaration issued by the beneficiary that they have fulfilled such conditions.

 

TIP: Invoices (and other documents) produced in a consistent format such as ‘SITPRO’ aligned, will be easy to complete and make it easier for the bank document examiner to check. Discrepancies across documents will also be easier to rectify if export documentation software is used! The layout is similar to a transport document and other ‘officially’ produced documents such as Certificates of Origin issued / stamped by the Chamber of Commerce.

 

Related Training Courses:

The Essential Guide to Letters of Credit for Exporters

Advanced Letters of Credit Training for Exporters

 

 

 

2017-06-22T18:36:02+00:00 June 22nd, 2017|