Letter of Credit Basics

Understanding main concepts of letters of credit and most frequently used terms related to L/C payments.

What Happens if Due Date of a Letter of Credit Falls on a Bank Holiday?

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What happens if due date of a letter of credit falls on a bank holiday?

Letter of credit is a conditional payment method. It is only payable if the issuing or confirming bank determines that the presentation is complying.

Once, either the issuing bank or the confirming bank determines that the presentation is complying, the letter of credit amount must be paid to the beneficiary on due date.

But what happens if the due date of an L/C is a non-banking day or bank holiday? On this post I will answer this question.

However, first of all I must define the bank holiday term according to the international letter of credit rules. What is a banking day as per ICC? How a banking day is defined under the International Standard Banking Practices?

UCP 600 defines banking day as follows:

“Banking day means a day on which a bank is regularly open at the place at which an act subject to these rules is to be performed.”

We should understand from the definition of the ICC is that if an issuing bank or confirming bank is open on a day to conduct letter of credit transactions, then that day will be defined as a banking day.

If an issuing bank or confirming bank is not open to conduct letter of credit transactions, then it will be understood as a non-banking day or bank holiday.

According to ISBP 745:

“Payment must be available in immediately available funds on the due date at the place where the draft or documents are payable, provided such due date is a banking day in that place. If the due date is a non-banking day, payment will be due on the first banking day following the due date.”

We understand from ISBP’s definition that if the due date of a letter of credit falls on a bank holiday, then the payment will be made the on the first banking day following the due date.

Case Study : Does a Saturday count as a “banking day”?

If an issuing bank, confirming bank or nominated bank is open on a Saturday to operate, among its other duties, documentary letter of credit transactions, then that half or full day will be classified as one of the “five banking days following the date of receipt of the documents”. As per UCP 600 there is no difference between a full working day or half working day when determining a banking day. If a bank’s letter of credit department is open on Saturday, then it will be deemed to be a banking day.

How to Determine Date of Shipment on a Road Transport Document?

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How to determine date of shipment on a Road Transport Document?

Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine

  • whether shipment made on time or not (in other words a late shipment has been effected or not)
  • whether documents presented within the presentation period or not (in other words a late presentation has been effected or not)
  • maturity date of the time draft
  • maturity date of a deferred payment letter of credit.

Date of shipment can be determined in two ways on a Road Transport Document.

  • In the first scenario we will face a situation where road transport document does not contain any date of receipt or a date of shipment notation.
  • In the second scenario we will be having a road transport document which contains a date of receipt or a date of shipment notation.

Option 1 => There is no notation of a date of receipt or a date of shipment on the Road Transport Document:

  • The date of issuance of the road transport document will be deemed to be the date of shipment.

Option 2=> Road transport document indicates, by notation, a date of receipt or a date of shipment:

  • Date of receipt notation/stamp => this date will be deemed to be the date of shipment.
  • Date of shipment notation/stamp => this date will be deemed to be the date of shipment.

How to Determine Date of Shipment on a Charter Party Bill of Lading?

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How to determine date of shipment on a Charter Party Bill of Lading?

Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine

  • whether shipment made on time or not (in other words a late shipment has been effected or not)
  • whether documents presented within the presentation period or not (in other words a late presentation has been effected or not)
  • maturity date of the time draft
  • maturity date of a deferred payment letter of credit.

Date of shipment can be determined in two ways on a Charter Party Bill of Lading.

  • In the first scenario we will face a situation where Charter Party Bill of Lading does not contain any date of shipped on board notation.
  • In the second scenario we will be having a Charter Party Bill of Lading which contains a dated shipped on board notation.

Option 1 => There is no shipped on board notation exists on the Charter Party Bill of Lading:

  • The date of issuance of the Charter Party Bill of Lading will be deemed to be the date of shipment.

Option 2=> Charter Party Bill of Lading indicates, by stamp or notation, a date of shipped on board: Notation date will be deemed to be the date of shipment as specified below:

  • Date of shipped on board notation/stamp => this date will be deemed to be the date of shipment

Example: On the below figure you can see a shipped on board notation which is located on the bottom of a Charter Party Bill of Lading.

As there is a dated on board notation exist on the Charter Party Bill of Lading, date of shipment will be deemed to be this shipped on board notation date which is 30.December.2012.

charter party bill of lading date of shipment

How to Determine Date of Shipment on a Sea Waybill?

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How to determine date of shipment on a Non-Negotiable Sea Waybill?

Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine

  • whether shipment made on time or not (in other words a late shipment has been effected or not)
  • whether documents presented within the presentation period or not (in other words a late presentation has been effected or not)
  • maturity date of the time draft
  • maturity date of a deferred payment letter of credit.

Date of shipment can be determined in two ways on a Non-Negotiable Sea Waybill.

  • In the first scenario we will face a situation where Non-Negotiable Sea Waybill does not contain any date of shipped on board notation.
  • In the second scenario we will be having a Non-Negotiable Sea Waybill which contains a dated shipped on board notation.

Option 1 => No shipped on board notation exists on the Non-Negotiable Sea Waybill:

  • The date of issuance of the Non-Negotiable Sea Waybill will be deemed to be the date of shipment.

Option 2=> Non-Negotiable Sea Waybill indicates, by stamp or notation, a date of shipped on board:

  • Date of shipped on board notation/stamp => this date will be deemed to be the date of shipment

Example: On the below figure you can see a shipped on board notation which is located on the bottom of a Non-Negotiable Sea Waybill.

As there is a dated on board notation exists on the Non-Negotiable Sea Waybill, date of shipment will be deemed to be this shipped on board notation date which is 30.December.2012.

date of shipment on sea waybill

How to Determine Date of Shipment on a Multimodal Bill of Lading?

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How to determine date of shipment on a Multimodal Bill of Lading?

Date of shipment is one of the key definitions in a letter of credit transaction. It is used to determine

  • whether shipment made on time or not (in other words a late shipment has been effected or not)
  • whether documents presented within the presentation period or not (in other words a late presentation has been effected or not)
  • maturity date of the time draft
  • maturity date of a deferred payment letter of credit.

Date of shipment can be determined in two ways on a multimodal bill of lading according to the letter of credit rules.

  • In the first scenario we will face a situation where multimodal bill of lading does not contain any date of dispatch, taking in charge or shipped on board notation.
  • In the second scenario we will be having a multimodal bill of lading which contains a date of dispatch, taking in charge or shipped on board notation.

Option 1 => There is no shipped on board or taking in charge notation exists on the multimodal bill of lading:

  • The date of issuance of the multimodal bill of lading will be deemed to be the date of shipment.

Option 2=> Multimodal bill of lading indicates, by stamp or notation, a date of dispatch, taking in charge or shipped on board: Notation date will be deemed to be the date of shipment as specified below:

  • Date of dispatched notation/stamp => this date will be deemed to be the date of shipment
  • Date of taken in charge notation/stamp => this date will be deemed to be the date of shipment
  • Date of shipped on board notation/stamp => this date will be deemed to be the date of shipment

Important Note: Only applies when the notation is in respect of dispatch, taking in charge or shipped on board at the place or port named in the credit for the commencement of the carriage.

To Order and Blank Endorsed Bill of Lading

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To Order and Blank Endorsed Bill of Lading

Bill of lading, which is a transport document used in international trade, is an authentic receipt delivered by a carrier, confirming that the goods therein specified (markings, types of goods, number of packages, etc.) have been loaded or taken in charge for loading on a designated vessel for carriage to a specified port.

On this article you can find the definitions of “to order” and “blank endorsed” terms as used on bills of lading.

To order and blank endorse term is related to the consignee field of a bill of lading and determines if a letter of credit issued in a negotiable or straight form.

If you need more information regarding negotiable bills of lading and straight bills of lading, please read my article “What Does “Made Out to the Order of” Mean in a Bill of Lading?”.

To order bill of lading is the one that consignee part of the bill of lading have been completed by writing “to order” only as can be seen on the below example.

To Order Bill of Lading Example

  • “To order” means that the bill of lading has been consigned to order of the shipper. The shipper indicated on the bill of lading determines who should collect the goods at the port of discharge by surrendering at least one original copy to the carrier.

The shipper makes this determination with the help of the endorsement.

  • “Blank endorsement” means that the holder of the original bills of lading can claim the goods from the carrier at the port of discharge by surrendering at least one original copy of a bill of lading.

To order bill of ladings can be blank endorsed by putting Shipper Company’s stamp and signature on the reverse side of the bill of lading.

According to ICC experts a bill of lading issued to the order of a party can only be endorsed by the party stated in the “consignee” field of the bill of lading.

Only when the B/L is made out to order of the shipper is the shipper able to endorse in blank before presentation under the credit.

As a result,

  • Consignee: to order ==> shipper can endorse in blank
  • Consignee: to order of the shipper ==> shipper can endorse in blank
  • Consignee: to order of the issuing bank ==> issuing bank can endorse

Importance of Bill of Lading Title: Ocean or Marine Bill of Lading

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bill of lading title. ocean or marine bill of lading

Issuing banks often require an ocean bill of lading or a marine bill of lading under letters of credit as a transport document.

The question is whether the title of the bill of lading is important or not when checking the documents?

Letter of Credit Examples:

Ocean Bill of Lading Example

  • Full set of clean shipped on board ocean bills of lading drawn or endorsed to the order of issuing bank ltd, Sana’a Yemen showing freight prepaid and marked notify
    a.applicant (giving full name and address).
    b.issuing bank ltd Sana’a Republic of Yemen.

Marine Bill of Lading Example

  • Full set of clean on board marine bill(s) of lading issued or endorsed to the order of Issuing Bank PLC, notify applicant showing freight prepaid and showing full name and address of the shipping company agent or his representative in Bahrain.

Each shipping line has a pre-printed form of bills of lading.

Some shipping lines are using ocean bills of lading and others are using marine bill(s) of lading.

It is highly likely to be working with a shipping company who has a marine bill(s) of lading pre-printed form where credit calls for an ocean bill of lading or vice versa.

According to latest letter of credit rules

“A bill of lading need not be titled “marine bill of lading”, “ocean bill of lading”, “port‐to‐port bill of lading” or words of similar effect even when the credit so names the required document.”

As a result title of the bill of lading is not important when checking the documents under the letter of credit transactions.

What Does “Made Out to the Order of” Mean in a Bill of Lading?

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Made Out to the Order of

Majority of the letters of credits are asking for a bill of lading which must be issued made out to the order of the issuing bank.

This condition indicated under field “46A – Documents Required” for the letters of credit that are issued in a swift format.

In simple words bills of lading can be classified under two groups: Negotiable bills of lading and non-negotiable bill of lading. Non-negotiable bills of lading also known as sea waybills.

Negotiable bills of lading can also be classified under two main groups. Negotiable bills of lading and straight bills of lading.

  • Negotiable Bills of Lading: Negotiable bills of lading are the ones that have been issued “to order” or “to order of a named party”. If bill of lading has been issued in a negotiable form, then the buyer of the goods need to surrender at least one original bill of lading to the carrier at the port of discharge. In this scenario bill of lading must be endorsed properly.
  • Straight Bills of Lading: Straight bills of lading are the ones that have been issued in a way to consigned a named party. If bill of lading is issued in a non-negotiable form, then the buyer can get the goods either by,
    • surrendering at least one original bill of lading to the carrier at the port of discharge or
    • in accordance with rules of the national law at the port of discharge which may accept the delivery of the goods to the buyer against proof of identity.

Both “to order” and “to order of a named party” statements make a bill of lading a negotiable bill of lading.

Letter of Credit Examples:

  • Example of to order and blank endorsed bill of lading: Full set signed clean on board ocean bills of lading made out to order and blank endorsed marked ‘freight prepaid’ and notify Import Bank of India indicating letter of credit number.
  • Example of made out to order of bill of lading: Full set of original clean on board bill of lading issued to the order of Arab Bank PLC Algeria notify applicant marked freight prepaid.

Costs Additional to Freight

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costs additional to freight

If a letter of credit indicates that costs additional to freight are not acceptable, a transport document is not to indicate that costs additional to the freight have been or will be incurred.

If you are working with CIF, CFR, CIP, CPT trade terms under letters of credit you are likely to see a statement under field “47A: Additional Conditions” such as “Costs additional to freight is prohibited.”

The logic behind these kinds of statements is to fix the freight cost by the issuing banks to the value that was indicated in the credit.

Normally letter of credit rules allow additional costs which may be shown on the transport documents such as multimodal transport documents or bills of lading.

However issuing banks frequently disallow charges additional to freight by inserting a statement in the credits on this effect, when the trade term is CFR, CIF, CIP or CPT.

Remember on FOB, FCA and EXW terms freight is payable at destination, so you should not be having any problem arising from prohibition of costs additional to freight.

You need to look at the letter of credit text on DAT, DAP and DDP trade terms to determine whether costs additional to freight is prohibited or not.

Examples:
47A: Additional Conditions:

  1. Transport document bearing reference by stamp or otherwise costs additional to freight is prohibited.
  2. Costs additional to freight are prohibited.
  3. Costs additional to freight are not allowed.

Which Costs Can be Regarded as Costs Additional to Freight?

According to the International Standard Banking Practice an indication of costs additional to freight can be shown on the transport documents by two ways:

  • by express reference to additional costs
  • by the use of trade terms which refer to costs associated with the loading or unloading of goods, such as, but not limited to,
    • Free In (FI),
    • Free Out (FO),
    • Free In and Out (FIO) and
    • Free In and Out Stowed (FIOS).

What Happens If a Letter of Credit Prohibits Costs Additional to Freight?

According to the International Standard Banking Practice if a credit indicates that costs additional to freight are not acceptable, a transport document is not to indicate that costs additional to the freight have been or will be incurred.

Related Articles:

Document Issued or Countersigned by the Applicant: What are the Risks?

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document issued or countersigned by the applicant

What are the risks of a document which is to be issued, signed or countersigned by the applicant in a letter of credit transaction?

In some occasions importers would like to divide letter of credit payments into two or three parts in order to make sure that they will be receiving ordered goods in proper condition.

We call it mixed payments under letters of credit.

Mixed payments is used extensively in bigger projects such as capital machinery sales, construction plant installations etc.

On the below example I will be demonstrating a possible scenario as follows:

An exporter and importer have signed a sale contract which is stating that the payment will be done by an irrevocable letter of credit for 100% of the contract amount.

  • 90% of letter of credit amount will be paid at sight against complying shipping documents.
  • 10% of letter of credit value will be paid after the importer accepts the quality of goods by presentation of the installation certificate which is issued and signed by the authorized officers of the importer.

What are the risks of a document which is to be issued, signed or countersigned by the applicant in a letter of credit transaction?

Letters of credit issued with similar conditions as stated above may bring some uncertainties to the exporters, mainly because of the fact that they may not be able to secure their balance payment, which is payable after the acceptance of the goods by the importers.

Exporters may find these clauses confusing and risky. They may want to know what would be their risks under these kinds of letters of credit?

In order to answer this question properly once again we should check ICC’s view.

ICC banking commission explains their stance in this regard at the latest version of the International Standard Banking Practices publication which is known as ISBP 745.

ISBP 745 states that “a credit or any amendment thereto should not require presentation of a document that is to be issued, signed or countersigned by the applicant.”

On the above example 10% of the balance payment requires presentation of a document issued and signed by the applicant, which is openly against the ICC’s stance.

Beneficiaries should remove such clauses from the letters of credit via amendments. If they fail to do so, they may increase their non-payment risk of the balanced payment.