UNCTAD/SDTFJBFB/2

UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

Geneva

Legal aspects
of international trade

Prepared by the UNCTAD secretariat

UNITED NATIONS
New York and Geneva, 1999
 NOTE

The designations employed and the presentation of the material in this publication
do not imply the expression of any opinion whatsoever on the part of the Secretariat of
the United Nations concerning the legal status of any country, territory, city or area, or
of its authorities, or concerning the delimitation of its frontiers or boundaries.

*
* *

Material in this publication may be freely quoted or reprinted, but full acknowledge-
ment is requested. A copy of the publication containing the quotation or reprint should
be sent to the UNCTAD secretariat at: Palais des Nations, CH-1211 Geneva 10,
Switzerland.

UNCTAD/SDTEIBFB/2

UNITED NATIONS PUBLICATION

Sales No. E.99.11.D.6

ISBN 92-1-112446-8
 EXECUTIVE SUMMARY

This report focuses on the legal framework underlying export-import transac-

tions and examines the risks inherent in international trade and the means by which
they can be contained. It reviews the most frequent legal problems that arise from the
sale of goods when the seller and the buyer are based in different countries.
After the provisions governing the international sales of goods have been intro-
duced, the nature and functions of international commercial terms, or ""Incoterms", are
discussed. These are internationally standardized definitions setting out the rights and
responsibilities of the exporter and the importer regarding the arrangements and pay-
ment for the delivery of goods in international transactions. The report then describes
the different ways of ensuring that the main contractual obligations under the sale
transaction are respected and, in particular, that the promised goods and services are
delivered by the seller and the agreed payment is made by the buyer. The principal
instruments to secure payment (documentary credits and documentary collections)
and performance of the contract (bank guarantees) are therefore described.

* *

ACKNOWLEDGEMENTS

This report has been prepared by Carlos Moreno, Legal Officer, Cross-Sectoral
Legal Unit, Services Development and Trade Efficiency Division, UNCTAD, with
substantive inputs from Mahin Faghfouri, Head of the Cross-Sectoral Legal Unit.
The UNCTAD secretariat wishes to thank Daniel Devahive, Trade Finance Advisor
from Warburg Dillon Read, UBS AG, Geneva, for taking time to read and provide
valuable comments on the draft.

iii
 CONTENTS

Chapter Paragraphs Page

INTRODUCTION...................................................................................... 1-6

I. INTERNATIONAL SALE OF GOODS ...................................................... .. 7-36 3

A. International regulation of the sale of goods ............................. .. 8-9 3

B. Application of the United Nations Convention on Contracts
for the International Sale of Goods ........................................... .. 10-15 3
C. Formation of the contract .......................................................... .. 16-20 4
I. Offer ................................................................................... . 17-19 4
2. Acceptance .......................................................................... . 20 4
D. Obligations and remedies of seller and buyer ........................... .. 21-27 4
I. Obligations of the seller ...................................................... .. 22-24 5
2. Remedies available to the buyer.. ....................................... .. 25 5
3. Obligations of the buyer ..................................................... .. 26 5
4. Remedies available to the seller ......................................... .. 27 6
E. Passing of risk ............................................................................. . 28-31 6

F. Common provisions for seller and buyer .................................. .. 32-36 6

1. Anticipatory breach ............................................................ .. 32 6
2. Damages .............................................................................. . 33-34 6
3. The exemption offorce majeure ........................................ .. 35 7
4. Preservation of goods ......................................................... .. 36 7

II. INCOTERMS .......................................................................................... . 37-83 9

A. Development of lncoterms ........................................................ .. 43-45 9
B. The legal nature of lncoterms .................................................... .. 46-47 10
C. The current lncoterms ................................................................. . 48-49 10
D. Particular considerations ............................................................ . 50-80 11
1. Shipment contracts and arrival contracts ............................ .. 50-52 11
2. Contract of carriage ............................................................ .. 53-57 12
3. Insurance .............................................................................. . 58-62 12
4. Property and risk.................................................................. . 63-68 13
5. Cost distribution .................................................................. . 69-72 14
6. Miscellaneous ...................................................................... . 73-80 15
E. Standard variants on Incoterms ................................................. .. 81-82 16
F. The golden rules oflncoterms .................................................... . 83 16

Ill. PAYMENT METHODS IN INTERNATIONAL TRADE .............................. . 84-229 17

A. Payment in advance ................................................................... .. 84 17

B. Open account .............................................................................. . 85 17
C. Documentary credits .................................................................. .. 86-219 17
1. Definition ............................................................................ .. 86-88 17
2. Parties to a documentary credit .......................................... .. 89 17

V
Chapter Paragraphs Page
3. The stages of a documentary credit ..................................... . 90 18
4. Uniform Customs And Practice For Commercial Documen-
tary Credits ........................................................................... . 91-93 18
5. Basic types of documentary credit ....................................... . 94-110 19
6. Special forms ....................................................................... . 111-125 20
7. Method of payment .............................................................. . 126-129 22
8. Basic principles .................................................................... . 130-152 22
9. Payment under reserve or indemnity ................................... . 153-157 26
10. Documents ........................................................................... . 158-217 26
11. Authentication of original documents .................................. . 218-219 36
D. Documentary collection .............................................................. . 220-229 37
I. Stages of a documentary collection ..................................... . 224 37
2. Basic forms of documentary collections ............................. . 225-229 38

IV. BANK GUARANTEES AS A PROTECTION AGAINST NON-PERFOR-

MANCE OF THE CONTRACTUAL OBLIGATIONS BY THE SELLER ......... . 230-249 39
A. Demand guarantees ..................................................................... . 232-235 39
B. Suretyship guarantees ................................................................. . 236-241 40
C. Main uses of guarantees .............................................................. . 242-249 40
1. Tender bonds ........................................................................ . 243-244 40
2. Performance bonds .............................................................. . 245 41
3. Advance payment ................................................................ . 246 41
4. Payment guarantee in case of non-payment ......................... . 247 41
5. Retention bonds ................................................................... . 248 41
6. Maintenance bonds .............................................................. . 249 41

ANNEXES

I. lncoterms ................................................................................................................ . 43
II. British Marine Insurance Coverage ....................................................................... . 47
III. Combiterms: cost distribution between seller and buyer ...................................... . 48
IV. Standard shipping terms ......................................................................................... . 49
V. Distribution of costs and risks pursuant to Incotenns ............................................ . 50
VI. International usage of trade payment terms ........................................................... . 51
VII. The stages of a documentary credit........................................................................ . 53
Vlll. Checklist for documentary credits ......................................................................... . 54
IX. Specimen of irrevocable standby letter of credit ................................................... . 60
X. Specimen of performance bond ............................................................................. . 61

vi
 INTRODUCTION

1. A typical trade transaction starts with a contract of to be by letter of credit (see chapter III), the requirements
sale. A seller and a buyer agree a price for a specified under the credit need to be clearly spelt out.
quantity and type of goods to be purchased under speci-
fied terms and conditions. From the buyer's point of view 4. International sales of goods differ from domestic
the legal objective of such a contract is to obtain owner- sales in a number of ways: they generally involve long
ship of the goods, and from the seller's to receive the distances-during which the goods are in the custody of
price. Thus the essence of the contract is the transfer of the carrier-the risks involved in such transit are greater,
property in goods for financial consideration.' and the transaction is normally irreversible, in that the
physical return of the goods to the seller is in practice un-
2. Like any other contract, a contract of sale depends on likely to be a realistic option. Furtherrnore, because of its
an agreement-between the seller and the buyer-which nature, the transaction might be subject to a number of dif-
is usually shown by the acceptance of an offer.' The con- ferent jurisdictions with diverse legal systems. To cope
tract of sale of goods is characterized in a majority of with these problems, the business community has devel-
countries by the principle of "freedom of contract": the oped a number of standard contracts 4 and rules which
parties are free to fix the terms and conditions of the con- cater for the peculiar needs of international commerce.5
tract of sale-what prices will be charged, how payment
will be handled, who will bear which costs of delivery, 5. It is the purpose of this report to familiarize readers
who will support which risks--,;ubject to the general prin- with some of the most important tools used in interna-
ciples oflaw and to domestic legislation governing unfair tional trade to:
contract tenns. (a) Allocate the rights and responsibilities of exporters
and importers regarding the arrangements and payment
3. The contract of sale has been characterized as the for the delivery of the goods (chapter II);
~•master" contract3 since the series of contractual arrange-
(b) Secure the payment by the buyer of the merchan-
ments which follow-as regards transport, insurance and
payment--,;hould accord with its provisions. Thus to dises contracted (chapter III);
avoid unwanted disputes and litigation it is essential that (c) Protect the buyer against the non-performance of
the contract of sale is carefully drafted and that specific the contractual obligations by the seller (chapter IV).
reference is made to existing trade terms, like the current
Incoterms (see chapter II), when stipulating the delivery 6. The information provided in this report is not easily
point and the allocation of rights and responsibilities accessible to many developing countries and countries
between the buyer and the seller. Moreover, if payment is with economies in transition. It is believed that awareness
of the legal aspects involved in international transactions
1
An exchange of goods is not therefore a contract for the sale of will assist these countries in conducting international
goods but a barter. Likewise a gift for no consideration is not a contract trade more efficiently. Other important issues such as
of sale. See P. Selhnan, Law oflnternalional Trade, 7th ed., HLT Pub~
lications, 1996, p. 2, London.
transport and insurance will be dealt with in the second
2 part of this report by the UNCTAD secretariat.
The rules as regards the making and communication of offer and ac~
ceptance and the revocation and tennination of offers are common to all
4
contracts, and may be found in general works on the law of contracts. One of the most recent standard contracts is the ICC Model Inter-
See. for example, Benjamin, The Sale of Goods, Sweet and Maxwell, national Sale Contract (1997 edition) for the sale of manufactured
1981, p. 22, London. goods intended for resale.
3 5
G. Jimenez, ICC guide to export-import basics, Paris, ICC Publica- C. Debattista, Sale of Goods Carried by Sea, Buttenvorths, 1990,
tion No. 543, I 997, p. 34. p. 1, London.
Chapter I

INTERNATIONAL SALE OF GOODS

7. Contracts of sale are governed by either national 9. Almost immediately upon the adoption of the two
law-the law of the domicile of the seller or the buyer- conventions, there was widespread criticism of their pro-
or by an international treaty, the United Nations Conven- visions as reflecting primarily the legal traditions of con-
tion on Contracts for the International Sale of Goods tinental western Europe. One of the first tasks undertaken
(CCJSG---described below). Since the CCJSG and most by the United Nations Commission on International Trade
national laws are based on the customs of the business Law (UNCITRAL) upon its establishment in 1968 was to
community (the /ex mercatoria 6) it is not surprising that study the two conventions to ascertain which modifica-
they exhibit a great degree of similarity. It is precisely for tions might render them capable of wider acceptance by
this reason that we ~ill briefly review the main provisions countries of different legal, social and economic systems.
of the Convention.' The result of this study was the adoption by diplomatic
conference on 11 April 1980 of the United Nations Con-
vention on Contracts for the International Sale ofGoods, 9
A. International regulation of the sale which combines the subject matter of the two prior con-
of goods
ventions.1 °

8. Preparation of a uniform law for the international sale B. Application of the United Nations
of goods began in 1930 at the lnternational Institute for
the Unification of Private Law (UNIDROIT) in Rome. It Convention on Contracts
was felt at the time that it would be of great value to the for the International Sale of Goods
international business community to unify the law relat-
ing to international sales, to avoid providing different an-
swers to questions such as when an offer or acceptance I 0. Six forms of sale are excluded from the Convention
becomes effective, when possession, property or risk in according to article 2, the so-called "consumer contract"
the goods sold passes, what the rights of a buyer are when (goods bought for personal, family or household use), un-
goods not conforming to the contract are tendered, and less the seller at any time before, or at the time of, the con-
similar questions. 8 After a long interruption in the work as clusion of the contact neither knew, nor ought to have
a result of the Second World War, a draft was finally sub- known, that the contract was a consumer contract. Also
mitted to a diplomatic conference in The Hague in 1964, excluded are sales by auction and on execution or other-
which adopted two conventions, the Convention relating wise by authority of law. The nature of the goods is the
to a Uniform Law on the International Sale of Goods and basis for three further exclusions: the sale of securities,
the Convention relating to a Uniform Law on the Forma- the sale of ships and aircraft, and the sale of electricity. 11
tion of Contracts for the International Sale of Goods.
11. Article I (I) provides for the Convention to apply to
6 Among the most authoritative definitions of the lex mercatoria are contracts of sales of goods between parties whose places
the following: ''A set of general principles, and customat)' rules sponta• of business are in different States when either both of
neously referred to or elaborated in the framework of international
trade, without reference to a particular system of law" (B. Goldman, those States are contracting States or the rules of private
Contemporary Problems in International Arbitration, 1983, p. 116); "A international law lead to the law of a contracting State.
single autonomous body of law created by the international business Neither the nationality of the parties nor the civil or com-
community", (B. M. Cremades and S. L. Plehn, "The New Lex Merca- mercial character of the parties or of the contract is to be
toria and the Harmonization of the Laws oflntemational Commercial
Transactions", l 984, Boston University, International Law Journal, p.
9 The CCISG came into force on l January 1988. As at 1 January
324). See also Lord Justice Mustill, The New Lex Mercatoria: The First
Twenty-jive Years, Liber Amicorum for the Rt. Hon. Lord Wilberforce, I998 the Convention applied in 51 States in different parts of the world
edited by M. Bos and L Bro~nlie, Oxford, Clarendon Press, 1987, and with different economic and legal systems. According to the ''Ship-
pp. 149-183. ping, Transport, Marine Insurance and International Trade Newsletter"
7 Cf. footnote 4 above. Failing contrary agreement between the par- ofDibb Lupton Alsop, (March 1998), the States which have adopted the
ties, the ICC Model International Sale Contract subjects the transaction Convention to date are responsible for more than 60 per cent of the total
to the CCISG, which, for ease of reference, is appended to the model
volume of worldwide trade.
10
contract as annex I. By means of this incorporation of the CCISG into See explanatory note by the UNCJTRAL secretariat on the
the model contract, the Convention will apply whether or not the coun- United Nations Convention on Contracts for the International Sale of
tries of the seller and buyer have ratified the Convention. Goods (http://www.un.org@lJNCITRAL).
11 H. van Houtte, The Law of Jnternalional Trade, London, Sweet
s C. M. Schmitthoff, The Law and Practice of International Trade
(9th ed.), Stevens and Sons, 1990, p. 240, London. and Maxwell, 1995, p. 126.

3
4 Legal Aspects of International Trade

taken into consideration in determining the application of I. Offer

the Convention.
17. An "offer" is a statement intended to result in a bind-
12. According to article 6, the parties may exclude the ing contract if duly accepted by the offeree. It is defined
application of the CCISG or derogate or vary its effect. in the Convention as: "a proposal for concluding a con-
Parties may also negotiate different clauses in their con- tract addressed to one or more specific persons ... if it is
tract. Moreover, usages which are customary between the sufficiently definite and indicates the intention of the of-
parties and any practices which have developed in their ferer to be bound in case of acceptance. A proposal is suf-
relationship take precedence over the rules of the ficiently definite ifit indicates the goods and expressly or
CCISG. 12 Even usages which reasonable people would implicitly fixes or makes provision for determining the
normally consider to be part of their contract take prec- quantity and the price." (article 14 (1)) Thus the seller
edence over the provisions of the Convention." should make certain that the essential elements of the con-
tract are clearly stated in the communications exchanged
13. Parties may furthermore agree that the CCISG shall
by the parties. The sending of price lists, catalogues and
only apply in part and that they will derogate from some
so on are in principle not offers.
other CCISG provisions or alter their legal effect. The ba-
sic principle of the Convention is that, subject to one ex- 18. The offer is effective as soon as it reaches the of-
ception, the parties should be free to exclude its terms in feree (article I 5 (2)). The offeror may still withdraw his
whole or in part (article 6). The exception relates to the re- offer if the withdrawal reaches the offeree before or at the
quirement of writing. The Convention provides that a con- same time as the offer (article 15.2). After the offer has
tract does not have to be concluded, evidenced or varied reached the offeree, but before the acceptance has been
in writing (article 12). 14 Article 96, however, allows a dispatched, the offer may still be revoked, unless it was
State whose laws do have such a requirement to make a irrevocable, or could be considered by the offeree to be
declaration that this rule is not to apply when any party to irrevocable (article 16).
the contract has his place of business in that State. In that
case, the requirement of writing cannot be excluded. 15 19. An offer, even if it is irrevocable, is terminated
when a rejection reaches the offerer (article 17).
14. Finally, the CCISG is not applicable to the capacity
of the parties, the formal validity of the contract, the trans-
fer of ownership and the legal effects of the contract in re- 2. Acceptance
spect of third parties. 16
20. An "acceptance" is defined as a statement made by,
15. Pursuant to article 92, contracting States may ex- or other conduct of, the offeree that indicates assent to an
clude the application of part II (formation of an interna- offer. Actions of the acceptor, such as dispatch of goods
tional contract of sale) or part III (substantive rules). 17 or payment of the price, may indicate an implied accept-
ance. Silence or inactivitv does not in itself amount to ac-
ceptance (article 18). Article 19 deals with the so-called
C. Formation of the contract "'battle of forms'' between the offerer and offeree, when
there is a discrepancy between the conditions offered and
those accepted. The article reads as follows:
16. Part II of the CCISG defines how and when an inter-
national contract of sale comes into existence. Thus, in ac- ( 1) A reply to an offer which purports to be an accept-
cordance with article 23: "A contract is concluded at the ance but contains additions, limitations or other modifica-
moment when an acceptance of an offer becomes effec- tions is a rejection of the offer and constitutes a counter-
tive in accordance with the provisions of this Conven- offer.
tion". (2) However, a reply to an offer which purports to be an
acceptance but contains additional or different terms
11 When the seller and the buyer have agreed on a trade tenn, such as
which do not materiallv alter the terms of the offer consti-
tutes an acceptance, u~less the offeror, without undue de-
free on board (FOB) or cost, insurance and freight (CIF), the regulation lay, objects orally to the discrepancy or dispatches a no-
intended by that term takes precedence over the provisions of the Con-
tice to that effect. lfhe does not so object, the terms of the
vention. Further, the Convention does not prevent the parties from
contract are the terms of the offer with the modifications
agreeing on a uniform interpretation of the trade terms by embodying
into their contract Incotem1s or a similar text. See C. Schmitthoff, contained in the acceptance.
op. cit., pp. 245-246. (3) Additional or different terms relating, among other
13
The standard contracts of the Federation of Oils, Seeds and Fats things, to the price, payment, quality and quantity of the
Associations (FOSFA) and the Grain and Feed Trade Association goods, place and time of delivery, extent of one party's
(GAFTA) include the following clause: ··The following shall not apply liabilitv to the other or the settlement of disputes are
to this contract: (a) the unifonn law on sales (... ); (b) the United considered to alter the terms of the offer materially.
Nations Convention on Contracts for the International Sale of Goods
( .. .)".(Van Houtte. op. cit., p. 127.)
14
To warn traders. of the dangers ofcontracts based on a "'handshake"
or a "'gentlemen's agreement" the following humorous definition is pro- D. Obligations and remedies of seller
vided of a gentlemen's agreement: "'An unwritten agreement. not a con-
tract, between two parties-neither of which may be a gentleman-un- and buyer
der which each party believes the other side is fully bound. while its
ovm performance is strictly optional'" (Jimenez, op. cit., p. 33).
15
Clifford Chance, "'The UN Convention on Contracts for the Inter- 21. Part lll of the CCISG regulates the respective rights
national Sale of Goods", Maritime Review, October 1991, J\.·o. 8, p. 18. and obligations of buyers and sellers. A fundamental
16
Van Houtte, op. cit., pp. 127-128. breach of contract is defined in the Convention (article 25)
17 Ibid., p. I 28. as a breach that results in such a detriment to the other
 lnt-ernational saie of goods 5

party as substantially to deprive him of what he is entitled (c) Avoidance of the contract: as provided for in
to expect under the contract, unless the party in breach did article 49, the buyer may declare the contract avoided: (a)
not foresee and a reasonable person of the same kind in if the failure by the seller to perfonn any of his obligations
the same circumstances would not have foreseen such a under the contract amounts to a fundamental breach of
result. contract, or (b) in case of non-delivery of the goods;
( d) Reduction of the price: as provided for in
1. Obligations of the seller article 50, if the goods do not conform with the contract
and whether or not the price has already been paid, the
22. The basic obligation of the seller, as set out in buyer may reduce the price in the same proportion as the
article 30, is "to deliver the goods, hand over any docu- value that the goods actually delivered had at the time of
ments relating to them and transfer the property in the the delivery bears to the value that conforming goods
goods, as required by the contract and this convention". In would have had at that time.20
general, the seller must deliver goods that are of the quan-
tity, quality and description required by the contract and 3. Obligations of the buyer
that are contained or packaged in the manner agreed.
26. The basic obligation of the buyer is (a) to pay the
23. The Convention provides supplementary rules (in price for the goods and (b) take delivery of them as re-
the absence of contractual agreement) as to when, where quired by the contract (article 53).
and how the seller must perform its obligations. One set
of rules of particular importance involves the seller's ob- (a) The obligation to pay covers three elements: 21
ligation to deliver goods that are free from any right or
(i) The determination of the price: although in
claim of a third party, including rights based on industrial
principle the price is determined in the con-
property or other intellectual property. tract, in the absence of the same, the parties
24. In connection with the seller's obligations in regard are considered to have made an implied ref-
erence to the price generally charged at the
to the quality of the goods, the Convention contains pro-
visions on the buyer's obligation to inspect the goods. He time of conclusion of the contract for such
must give notice of any lack of their conformity with the goods sold under comparable circumstances
contract within a reasonable time after he has discovered in the trade concerned (article 55);
it or ought to have discovered it, and at the latest two years (ii) The place ofpayment: the price must be paid
from the date on which the goods were actually handed at the seller's place of business or if the pay-
over to the buyer, unless this time-limit is inconsistent ment is to be made against the handing over
18
with a contractual period of guarantee (article 39). of the goods or of documents, at the place
where the handing over takes place (article
57);
2. Remedies available to the buyer
(iii) The moment ofpayment: in the absence of an
agreed time for payment the buyer must pay
25. If the seller fails to perform any of his obligations
the price at the moment the seller places
the buyer may, dependin; on the circumstances, resort to
either the goods or documents controlling
the following remedies: 1 their disposition at the buyer's disposal (arti-
(a) Request for specific performance: as provided for cle 58 (I)). If the contract involves the
in article 46, the buyer may require performance by the carriage of goods, the seller may dispatch the
seller of his obligations or, if the goods do not conform goods on tenns whereby the goods, or docu-
with the contract, the buyer may require delivery of sub- ments controlling their disposition, will not
stitute goods (but only if the lack of conformity consti- be handed over to the buyer except against
tutes a fundamental breach of contract); payment of the price (article 58 (2)) unless
the contract states otherwise the buyer is not
(b) Time extension and right to cure: the buyer may fix bound to pay the price until he has had the
an additional period of time of reasonable length for per- opportunity to examine the goods
formance by the seller of his obligations. The buyer may (article 58 (3)).
not, during that period, resort to any remedy for breach of (b) Taking delivery: article 60, specifically provides
contract. However, the buyer is not deprived thereby of that the buyer's obligation to take delivery consists in (a)
any right he may have to claim damages for delay in per- doing all the acts which could reasonably be expected of
fonnance (article 47); him in order to enable the seller to make delivery, and (b)
taking over the goods. If the buyer does not take delivery
18 See explanatory note by the UNCITRAL secretariat on the he breaches the contract, which may make him liable for
United Nations Convention on Contracts for the International Sale of any damage to the goods.
Goods, op. cit .. p. 57.
19 By exercising his right to otherremedies, the buyer is not deprived
20
of any right he may have to claim damages (article 45 (2)). The whole This remedy is new to common law. Its advantage is said to be that
thrust of the Convenrion is on preserving the contract, and not permit- il enables the buyer to resolve his problem without the need to resort to
ting one party or the other to set the contract aside for a re!arive(v mi- a court. In many cases. however, this will not be practicable. If payment
nor breach. This is achieved by disregarding the common law distinc- is made against an irrevocable letter of credit. it v,:i!l be impossible to
tion between conditions and warranties. The right of one party or the reduce the price before payment. Payment will have to be made under
other to avoid the contract depends particularly upon there having been protest and reclaimed later (ibid .. p. 21 ).
21 See Van Houtte, op. cit., pp. 141-142.
a fundamental breach. See Clifford Chance. op. cit.. p. 20.
6 Legal Aspects of International Trade

4. Remedies available to the seller contract (article 69 (3)). For a contract of sale involving
carriage the following rules apply (articles 67 and 68):
27. The general pattern of remedies is the same as those (I) If the contract of sale involves carriage of the goods
available to the buyer: he may require the performance of and the seller is not bound to hand them over at a particu-
an obligation, declare the contract avoided and claim lar place, the risk passes to the buyer when the goods are
damages.22 handed over to the first carrier for transmission to the
buyer in accordance with the contract of sale. If the seller
(a) Request for specific performance: pursuant to arti- is bound to hand the goods over to a carrier at a particular
cle 62, the seller may require the buyer to pay the price, place, the risk does not pass to the buyer until the goods
take delivery or perform his other obligations, unless the are handed over to the carrier at that place. The fact that
seller has resorted to a remedy which is inconsistent with the seller is authorized to retain documents controlling the
this requirement. The seller may allow the buyer an addi- disposition of the goods does not affect the passage of the
tional period of time of reasonable length for performance risk.
by the buyer of his obligations (article 63 (1)). (2) Nevertheless, the risk does not pass to the buyer until
(b) Avoidance of the contract: the seller may declare the goods are clearly identified to the contract, whether by
markings on the goods, by shipping documents, by notice
the contract avoided (article 64) (a) if the failure by the
given to the buyer or otherwise.
buyer to perform any of his obligations amounts to a fun-
damental breach of contract, or (b) if the buyer does not, The risk in respect of goods sold in transit passes to the
within the additional period of time fixed by the seller per- buyer from the time of the conclusion of the contract.
form his obligation to pay the price or take delivery of the However, if the circumstances so indicate, the risk is as-
goods, or if he declares that he will not do so within the sumed by the buyer from the time the goods were handed
period so fixed. over to the carrier who issued the documents embodying
the contract of carriage. Nevertheless, if at the time of the
conclusion of the contract of sale the seller knew or ought
to have known that the goods had been lost or damaged
E. Passing of risk and did not disclose this to the buyer, the loss or damage
is at the risk of the seller.

28. A question of risk will arise when the goods which

have been agreed to be sold are lost, damaged, destroyed
or deteriorated and it is necessary to decide whether the F. Common provisions for seller and buyer
seller or the buyer shall bear the loss. 23
I. Anticipatory breach
29. Pursuant to article 66 of the Convention:
Loss of or damage to the goods after the risk has passed 32. If, after concluding the contract of sale, it appears
to the buyer does not discharge him from his obligation to that a party will be unable to perform a substantial part of
pay the price, unless the loss or damage is due to an act or his obligations, the other party may:
omission of the seller.
(a) Suspend the performance: a party may suspend the
30. Parties may stipulate a specific clause for the pass- performance of his obligations if, after the conclusion of
ing ofrisk in the contract or they may include it implicitly the contract, it becomes apparent that the other party will
by referring to an Incoterm. If nothing has been agreed, not perform a substantial part of his obligations as a result
the supplementary rules of the Convention will apply.24 of (i) a serious deficiency in his ability to perform or in his
creditworthiness, or (ii) his conduct in preparing to per-
31. The general rule under the Convention is that except form or in performing the contract (article 71). A party
for contracts of sales involving carriage the risk passes to suspending performance, whether before or after dispatch
the buyer upon delivery when he takes over the goods or, of the goods, must immediately give notice of the suspen-
if he does not do so in due time, from the time when the sion to the other party and must continue with perfor-
goods are placed at his disposal and he commits a breach mance if the other party provides adequate assurance of
of contract by failing to take delivery. However, if the his performance.
buyer is bound to take over the goods at a place other than
the place of business of the seller, the risk passes when de- (b) Avoid the contract: if prior to the date for perfor-
livery is due and the buyer is aware of the fact that the mance of the contract it is clear that one of the parties will
goods are placed at his disposal at that place commit a fundamental breach of contract, the other party
(article 69 (2)). If the contract relates to goods not then may declare the contract avoided. lftime allows, the party
identified the goods are considered not to be placed at the intending to declare the contract avoided must give rea-
disposal of the buyer until they are clearly identified to the sonable notice to the other party in order to permit him to
provide adequate assurance of his performance
22 Damages for breach of contract by one party consist of a sum equal (articles 72 and 73).
to the loss, including loss of profit, suffered by the other party as a con-
sequence of the breach. See articles 74 to 77 of the CCISG and
footnote t 9, above.
2. Damages
23
As a general rule the risk of the loss is, prima facie, in the person
in whom the property is "res peri domino''. (See Benjamin. op. cit., 33. Damages are due when there is:
p. 402).
24
Van Houtte, op. cit., p. 144. (a) a breach of contract;
 International sale of goods 7

(b) a loss suffered by the other party; and applies during the time the impediment exists
(article 79 (3)).
(c) a causal link between the breach of the contract and
the loss.2 5
4. Preservation ofgoods
34. Damages for breach of contract include the loss of
profit. Such damages may not exceed the loss which the
party in breach foresaw, or should have foreseen, at the 36. The Convention imposes on both parties the duty to
time of the conclusion of the contract (article 74). The preserve any goods in their possession belonging to the
party claiming damages must take all reasonable meas- other party. Such a duty is of great importance in an inter-
ures to mitigate the loss (article 77). national sale of goods where the other party is from a for-
eign country and may not have agents in the country
where the goods are located. Under certain circumstances
3. The exemption of force majeure the party in possession of the goods may sell them. A
party selling the goods has the right to retain out of the
35. A party is not liable for failure to perform any of his proceeds of sale an amount equal to the reasonable ex-
obligations if he proves that the failure was due to an im- penses of preserving the goods and of selling them and
pediment beyond his control. The impediment should be
must account to the other party for the balance. 26
unforeseeable at the time of the conclusion of the contract
(article 79 (I)). The exemption is only temporary: it only 26
See explanatory note by the UNCITRAL secretariat of the
United Nations Convention on Contracts for the International Sale of
25
Van Houtte, op. cit., p. 146. Goods, op. cit., p. 60.
Chapter II

INCOTERMS

37. Those engaged in international trade and commerce 41. Incoterms do not cover all possible legal or transport
prefer standardization of their contract provisions. By do- issues arising out of an international sale, but are a sort of
ing so, costs and risks can be calculated more accurately contractual shorthand which allows the parties to easily
and easily, and the number of disputes inherent in any specify their undertaking as to:
business transaction reduced to a minimum. The tech- (a) The transport costs which the seller will cover;
niques and methods adopted to achieve this have varied
and have ranged from the formulation of standard con- (b) The point at which risk of loss will be transferred
27
tracts affecting only a particular industry ortrade, some- from seller to buyer;
times categorized as "vertical standardization", to stand- (c) Who must handle customs formalities and pay
ardization of terms that affect the entire business duties;
irrespective of the commodity traded, or "horizontal (d) Insurance coverage, if any.
standardization". 28 The latter type of standardization has
primarily taken place in the area of trade terms. 42. The purpose of Incoterms is therefore to provide a
set of international rules for the interpretation of the most
38. Trade terms are primarily designed to define the commonly used trade terms in foreign trade. Thus the un-
method of delivery of the goods sold and to delimit the certainties of different interpretations of such terms in dif-
rights and duties of seller and buyer with regard to the fol- ferent countries can be avoided or at least reduced to a
lowing: considerable degree. 29
(a) Who will arrange and pay for the carriage of the
goods from one point to another?
A. Development of Incoterms
(b) Who will bear the risk if these operations cannot be
carried out?
43. The history oflncoterms 30 dates all the way back to
(c) Who will bear the risk of loss of or damage to the the l 920s, when the ICC noticed with concern that FOB
goods in transit? in one country did not mean the same thing in another
country. The ICC began to research these different inter-
All of these questions are concerned with actually getting pretations and discovered that despite the differences,
the goods from the seller to the buyer. there was a great deal of agreement. Common trade terms
were standardized in 1936 with the first edition of Inco-
39. Although universally recognized, trade terms might terms, which was subsequently revised in 1953, 1967,
be interpreted differently in various countries and their
I 976, 1980 and 1990.
meaning may be modified by agreement of the parties, the
custom of a particular trade or the usage prevailing in a 44. It was not until I 980 that the ICC changed its ap-
particular port. proach of merely revising the existing terms and practices
to seek the common denominator in the interpretation of
40. Incoterms (international commercial terms) are the terms. Since 1980, new terms as well as amendments
among the most important and universally recognized in- to existing terms have been included in Incoterms to suit
ternational trade terms. Incoterms are internationally changing circumstances in different trades, such as the
standardized definitions that have been prepared by the trend towards an increase of cargo unitization compared
International Chamber of Commerce (ICC), setting out with traditional cargo handling at the ship's side. 31 It was
the rights and responsibilities of exporters and importers precisely this trend that made certain traditional practices
regarding the arrangements and payment for the delivery obsolete. Thus, the ship's rail--once the traditional "crit-
of the goods in international sales. ical point" under the FOB, CFR (cost and freight) and CIF
terms-was no longer suitable as the point for the division
27 C. Schmitthoff, "The unification or harmonization of law bv means

of standard contracts and general conditions", International a:id Com- 29 ICC, Jncoterms 1990, Paris, ICC Publication No. 460, p. 6.
parative Law Quarterly, vol. 17, July 1968, pp. 551-570.
30 See f. Eisemann and Y. Derains,Lapratique des Jncoterms: ohjet
28 This classification was first suggested by Eisemann. See
F. Eisemann, "Incoterms and the British export trade",Journal of Busi- et histoire des Jncoterms, ICC Publication No. 453, 1988, pp. 3-9.
31 The 1980 edition of Jncotenns contained two new terms: "Free
ness Law, 1965, pp. 114-116, and D. M. Sassoon "Trade terms and the
container revolution", Journal of Maritime Law and Commerce, Octo- carrier" [named point] and "Freight or Carriage and Insurance paid to"
ber 1969, vol. 1, No. 1, p. 73. (ICC "Revision oflncotenns", ICC Document No. 460/234, 1978).

9
10 Legal Aspects of International Trade

of functions, costs and risks between sellers and buyers. 32 which merchants wishing to use them should specify that
Costs relating to the time after the receipt by the carrier their contracts be governed by Incoterms 1990 or by the
and before the loading of the cargo will normally be in- latest lncoterms version. Furthermore, it should be kept in
cluded in the freight and, therefore, it becomes more or mind that Incoterms do not exist in a vacuum; although
less impossible to identify precise cost distribution at the they provide a skeleton of terms, these terms can only sur-
ship's rail. In addition since a key function of the transport vive within the body of a contract of sale.
document is to evidence the "good order and condition" of
the goods, it should be issued at a point where the carrier
4 7. lncoterms are not the only example of standardized
has reasonable means of conducting a check. In modern
trade terms. In fact, rules of interpretation similar to those
transport operations this point has shifted from the ship's
rail to seaport or inland terminals, where the goods are fre- contained in lncoterms have been established in different
quently stowed in containers or trailers, or on flats or countries and regions of the world. The most relevant
pallets. As a result, a "received for shipment" type of ones are the following:
document was developed as an alternative to the tradi-
tional on-board bill of lading. The new transportation (a) The American Foreign Trade Definitions that ap-
techniques and the changed documentary practices peared in the United States in 19 I 9 and which were last
received s~ecial attention in the 1980 revision of revised in 1941. The definitions do not have the status of
Incoterms. 3 law but sellers and buyers may adopt them as part of their
contracts of sale. These trade definitions have apparently
45. In order to bring the rules in line with current inter- not been used by the trade organizations of the United
national trade practice, Incoterms was last revised in States since I 980.
1990. The main reason for this revision was the desire to
adapt terms to the increasing use of electronic data inter- (b) The Rules of Warsaw and Oxford that were pro-
change (ED!) and changed transportation techniques, par- posed by the International Law Association in 1932.
ticularly the unitization of cargo in containers, multi-
modal transport and roll-on/roll-off traffic with road ( c) The General Conditions for Delivery of Merchan-
vehicles and railway wagons in short sea maritime trans- dise which were developed in 1968 in the Council for Mu-
port. In connection with the substantive changes made, tual Economic Assistance (for the former Soviet Union
the terms have been grouped in four basically different and some countries in Eastern Europe) and revised on
34
categories for easier reading and understanding. l January 1976.

(d) Combiterms, 37 which were proposed in I 969 to

B. The legal nature of Incoterms simplify the division of costs and risks between the par-
ties, by introducing code numbers for the cost units con-
tained in the trade terms. Under each trade term it is then
46. lncoterms are contractual trade usages,35 universally resolved which of the seller and the buyer shall bear each
accepted by all trading countries and derived from the /ex cost unit. This was deemed to be particularly important
mercatoria. 36 They are not statutory trade usages which for the traffic of consignments insufficient to make up a
have force of law by virtue of a national enactment or a full load for a wagon, truck or container and which there-
measure of delegated legislation. That is the reason by
fore had to be grouped together with other consignments
32 According to Lord Devlin, "Only the most enthusiastic lawyer
belonging to different shippers or consignees (cargo con-
could watch with satisfaction the spectacle of liabilities shifting un- solidation). The advantages of this system are obvious,
easily as the cargo sways at the end of a derrick across a notional per- since the placing of the cost units on either the seller or the
pendicular projecting from the ship's rail" (Pyrene Co. Ltd. v. Sdndia buyer is determined in advance and there is no room for
Navigation Co. Ltd. (1954) 2QB 402, p. 419).
33
a subsequent dispute between the seller and the buyer pro-
ICC, Guide to Jncoterms: The Impact of Modern Transport ( 1980
edition) ICC Publication No. 354, pp. 8-9.
vided, of course, that all costs arising are correctly
34
ICC, Jncoterms 1990: why new lncoterms? ICC Publication included in the cost units. 38
No. 460, p. 6.
35 Although there is not a single definition of"trade usage", research
carried out in 1980 by the ICC Institute of International Business Law
and Practice on the interpretation and application of international trade C. The current Incoterms
usages, revealed a considerable degree of unanimity in the understand-
ing of this tenn, Thus it is thought that the unifunnly accepted features
of a trade usage are as follows: "A trade usage is a method of dealing or
a way of conduct generally observed in a particular line of business with 48. The 1990 version of the lncoterms has introduced a
such regularity that it is accepted as binding by those engaged in that
line of business". For a comprehensive classification of international
very clear and easy to understand presentation called the
trade usages see C. M. Schmitthoff, "International trade usages",News- "mirror-method". This means that every responsibility of
letter of the Institute of International Business Law and Practice, Sep- the buyer is placed next to the corresponding responsibil-
tember 1987, ICC Publication No. 440/4, pp. 26-30. ity of the seller. These responsibilities or obligations are
36 The /ex mercatoria has been defined as "a set of general principles,
and customary rules spontaneously referred to or elaborated in the
grouped under I 0 numbered articles, divided into two par-
framework of international trade, without reference to a particular na- allel series, one for the seller's responsibilities, and one
tional system oflaw" and "a single autonomous body oflaw created by for the buyer's responsibilities (see table I).
the international business community" (Lord Justice Mustill., op. cit.,
p. 151). See also B. Goldman, "The applicable law: general principles 37
of law-the lex mercatoria", Contemporary Problems in International See ICC, Guide to Incoterms, ICC Publication No. 354, p. 9.
38
Arbitration, Dordrecht, Martinus Nijhoff, 1987, pp. 113-125. A chart of combiterms is included in annex III.
 lncoterms II

TABLE 1: Seller's and buyer's responsibilities

A-Seller's responsibilities B-Buyer 's responsibilities

Al Providing the goods in conformity with the contract BI. Payment of the price

A2 Licences and other certificates B2 Licences, authorizations and formalities

A3 Contracts of carriage and insurance B3 Contract of carriage

A4 Delivery of the goods B4 Taking delivery

A5 Transfer of risk of Joss or damage B5 Transfer of risks

A6 Division of costs and taxes B6 Division of costs

A7 Notice to the buyer B7 Notice to the seller

AS Proof of delivery, transport documents or equivalent B8 Proof of delivery, transport documents

electronic message

A9 Checking, packing and marking B9 Inspection of goods

AIO Providing additional assistance and information BIO Other obligations

49. Each of the 13 Incotenns has a precise definition, C-tenns, like CJF and CIP, and the D-tenns. Thus the
but they can be grouped into the following four basic cat- C-tenns provide not only for one critical point but for two
egories (for explanation of abbreviations and for defini- critical points: the point of division of risks (e.g. the ship's
tions, see annex I): rail) and the point for division of costs, which is the des-
(a) E-term (EXW): where goods are made available to tination point. Jn the case of the D-tenns (arrival con-
the buyer at the seller's premise; tracts), both of these crucial points coincide in the des-
tination point. The distinction between the two types of
(b) F-terms (FCA, FAS, FOB): where the seller is re- contracts is essential, since the solution given in the case
quired to deliver the goods to a carrier appointed by the of goods lost or damaged in transit will be completely dif-
buyer; ferent, depending upon whether the contract is a shipment
(c) C-terms (CFR, CIF, CPT, CIP): where the seller contract or an arrival contract. If it is a shipment contract,
has to contract for carriage, but without assuming the risk the responsibility for recovering the cargo loss or damage
of loss or of damage to the goods or additional costs due will lie with the buyer, since the risk has already been
to events occurring after shipment or dispatch; transferred to him, whilst in the case of an arrival contract
(d) D-terms (OAF, DES, DEQ, DDU, DDP): where the seller may be liable for breach of contract, since he has
the seller has to bear all costs and risks needed to bring the not fulfilled his delivery obligation under the contract.
goods to the country of destination.
52. A buyer will be better protected by a D-tenn,
whereby the seller has to bear all the costs and risks
D. Particular considerations needed to bring the goods to the buyer's country of desti-
nation, than by a CIF Incotenn, since in the latter case the
only recourse available to the buyer is the insurance cov-
I. Shipment contracts and arrival contracts erage, as the seller does not assume the risk of loss or
damage to the goods after shipment. It follows that, in the
50. With the exception of the EXW tenn, all the other case of shipment contracts, if the goods are shipped and
tenns can be divided into what are known as "shipment lost during ocean transit the seller is still entitled to tender
contracts" and "arrival contracts". There is an important the proper shipping documents to the buyer and to claim
difference between these types of contracts. the purchase price. That is the reason why terms like DDU
or DPP mean greater risk for the seller and involve higher
51. Under the arrival contracts, the seller is responsible prices. 39
for the goods all the way to their arrival in the country of
destination. Only the so-called D-tenns (OAF, DES, 39
Delivered terms have become more popular in international trade
DEQ, DDU and DPP) will tum a contract into an arrival over the past decades. In addition to the advantage of optimizing trans-
contract. With all the other tenns (the shipment contracts, port economy, D-tenns allow for greater control by the seller of the
such as FOB and CIF), the seller fulfils his delivery ob- quality of transport. In the case of high-value manufactured goods, it
ligation at the point of shipment, irrespective of the fact may he very important for the seller to be in a position to assure that the
goods arrive in time and in good condition. Control of the entire trans-
that the cost of transport and insurance might have been port chain is facilitated for a seller under D-tenns (see Jimenez, op. ciL,
paid by the seller. This is the key distinction between the p. 89).
12 Legal Aspects of International Trade

2. Contract of carriage 3. Insurance

53. Although lncoterms only regulate certain aspects of 58. The purpose of cargo insurance is to protect goods
the legal relationship between seller and buyer and are against the perils of physical loss or damage in transit.
kept apart from the legal relationship between the parties Only two (CIF and CIP) of the 13 Incoterms stipulate the
to the contract of carriage, there is a definite need to con- obligation to contract insurance coverage. However, the
absence of requirements concerning insurance coverage
sider a synchronization between the two contracts (sale
for 11 Incoterms should not be interpreted as meaning that
and transport), so as to avoid unnecessary administrative cargo insurance is unnecessary. Their absence merely al-
expense and legal pitfalls. lows the seller and buyer to decide at their discretion
about insurance and its extent. The wording of the insur-
54. The contract of carriage is relevant to all the terms ance requirements (article A3 (b)) for the CIF and CIP
of sale contained in Incoterms, albeit to varying degrees. Incoterrns is identical, with only the provisions governing
Thus each Incoterm will allocate the costs and risks of the insurance period diverging. 43 In essence, they provide
carriage to one or other of the parties to the contract of as follows:
sale. The various carriage duties are imposed in particular
(a) The seller shall obtain marine cargo insurance at
by articles A3 (a), A4, A6, A7 and AS of Jncoterms 1990.
his own expense; it is irrelevant whether the seller takes
These carriage obligations can be grouped under four out a separate policy for the specific shipment or just ob-
headings relating respectively to the terms of the contract tains a certificate for the buyer confirming that the ship-
of carriage, the shipment of the goods, the route of ship- ment is insured under the seller's open cover;
ment and the discharge of the goods.
(b) The buyer or another person having an insurable
55. It is absolutely essential that commercial parties interest in the goods shall be entitled to raise a claim di-
take into account the type of transport envisaged when rectly against the insurer. For this purpose the seller shall
choosing an lncoterm. Thus, to select CIF for a contract provide the buyer with the separate insurance policy or the
certificate of insurance if protection is provided under an
involving multimodal transport will certainly make it dif-
open cover;
ficult for the seller to comply with his obligation to tender
a document stating that the goods have actually been (c) Failing express agreement to the contrary, the in-
shipped on board, since the multimodal transport docu- surance shall be in accordance with the minimum cover
ment is nearly always a "received for shipment" docu- provided by the Institute Cargo Clauses (Institute of Lon-
ment, where the carrier takes over the goods long before don Underwriters) or any similar set of clauses. This is so
they are loaded on to the means oftransport. 40 because all-risk cover is simply not customary for quite a
variety of cargo (e.g. sand, gravel, asphalt, oil, live ani-
56. For Incoterms in which the seller has to procure and mals or any goods transported unpacked or in bulk, such
as scrap metal, coal, chemical, fertilizers and cereals).
pay for the transport (those of group C), there is a duty to
Furthermore, as all-risk policies cover the risks of theft,
provide the buyer with continuous documentary cover. pilferage and robbery, it would be unreasonable if CIF
Thus where a sale contract on CIF terms incorporates and CIP terms imposed a general obligation on the seller
Jncoterms J 990 and the goods are delivered to the carrier to insure these risks, that he might be unable to insure for
at an inland depot in a container, the seller will be in certain parts of the world. This requirement is in compli-
breach of his sale contract ifhe tenders a bill oflading im- ance with the philosophy behind the Incoterms of only
posing responsibility on the carrier only from port to port. defining minimum obligations;
Such a bill of lading will prevent the buyer from making
any claim against the carrier if the goods are damaged be- 42
Even when the parties use F-tenns, in which case the seller is under
tween the inland point and the loading port. In such cases, no obligation to contract the transport (article A3), it may be important
for the buyer to provide clear instructions to the seller as to the way of
the choice of the CIP Incoterm will avoid the problems effecting the on-carriage. Thus, in the case of refrigerated cargo, it
caused by using the CIF Incoterm for this type of trans- would be important to assure that the cargo is transported in "refriger-
port.41 ated containers" during the on-carriage, prior to the cargo being deliv-
ered to the main carrier named by the buyer.
43
Rule AJ of the CIF (ncoterrn reads as follows:
57. To avoid unnecessary disputes, it is strongly recom-
The seller must obtain at his own expense cargo insurance as agreed
mended that the parties should clarify the type of contract in the contract., that the buyer, or any other person having an insur-
of carriage which the seller must tender to the buyer when able interest in the goods shall be entitled to claim directly from the
using Incoterrns of group C (CFR, CIF, CPT, CIP). 42 insurer and provide the buyer with the insurance policy or other evi-
dence of insurance cover.
The insurance shall be contracted \Vith undern'riters or an insurance
40 With the advent of the •'container revolution" in the 1960s and
company of good repute and, failing express agreement to the con-
other modem cargo unitization devices, there was a gradual switch from trary, be in accordance with minimum cover of the Institute Cargo
the customary "port to port" type of sea transport to a new "door to Clauses (Institute of London Underwriters) or any similar set or
door" combined transport concept (involving several means or modes clauses. The duration of insurance cover shall be in accordance with
of transport and different caniers). One of the problems raised by the 85 and 84 ("Transfer or Risks" and ';Taking Delivery"). When re-
new combined transport concept related to the documentary aspect of quired by the buyer, the seller shall provide at the buyer's expense
the CIF tenn and the inability to satisfy the bill of lading requirements war, strikes, riots and civil commotion risk insurances if procurable.
of the transaction (see D. M. Sassoon, "CIF and FOB contracts: The The minimum insurance shall cover the price provided in the con-
container revolution", British Shipping Laws, vol. V, 1975, p. 19). tract plus 10 per cent (i.e. 110 per cem) and shall be provided in the
41 See C. Debattista, Jncoterms in practice: lncoterms and the con- currency of the contract. (jncoterms 1990, ICC Publication No. 460,
tract ofcarriage, Paris, ICC Publication No. 505, 1995, pp. 14-15. pp. 50-51).
 lncoterms 13

(dJ If nothing has been agreed between the seller and 62. From a practical point of view and notwithstanding
the buyer, the lncoterms stipulate that the minimum cover that for certain Incoterms the seller is bearing the risk dur-
will be the price provided in the contract plus 10 per cent ing the pre-carriage to the port of shipment and the buyer
(i.e. 11 O per cent) provided in the currency of the contract. is assuming the risk from that point onwards, it is recom-
mended that one of the parties insure the complete trans-
59. The purpose of requesting coverage amounting to port (warehouse to warehouse) with one insurer. This will
1O per cent over the price provided in the contract goes facilitate any claims recoveries against the insurer.5'
back to the 1906 Marine Insurance Act. 44 This excess in- Furthermore, it is strongly recommended to specify in
surance is a general custom in certain trades and coun- the contract the scope of cover agreed by the seller and
tries, and was incorporated in the first edition of Inca- buyer. The following format has been suggested:
terms in 1936. There is nothing in Incoterms 1990 that Insurance cover on the basis of(clearly identified) condi-
prevents the parties from agreeing coverage higher or tions:
lower than 11 0 per cent (e.g. for the cocoa trade the cus-
tom is to cover the invoice price plus 12.5 per cent). It from. , (place qfcommencement of insurance).
should be underlined however, that the assured will only to .. (place elf termination of insurance).
receive an indemnity for the profit share exceeding Plus: ... days of storage at insured option . % antici-
10 per cent ifhe is able to prove this higher profit. 45 pated profit.
. . (if percentage higher or lower than 10% is desired).
60. In practice, exporters often take insurance for an
.. (named) currency (if not the currency of the contract).
amount somewhat higher than their actual value, to offset
losses that are not recoverable under the insurance policy, ... (other particularities). 52
such as indirect damage or loss resulting from delays in
the dispatch or arrival of goods, currency fluctuations or 4. Property and risk
storage expenses. 46
63. The primary legal objective of a contract for the sale
61. With the exception of EXW, DDU and DDP lnco- of goods is to transfer ownership from the seller to the
terms, all lncoterms provide for a transfer of risk from buyer; if all goes well the precise stage during the per-
seller to buyer at some point during transportation (arti- formance of the contract at which this occurs may be rel-
cles AS and B5). When loss or damage occurs, the insurer atively unimportant. As long as the buyer receives physi-
will examine in which phase of the transport the loss or cal delivery of the goods when he wants them and
damage occurred, and whether an insurable interest47 of ultimately obtains ownership of them, he is unlikely to be
the claimant existed at the time of the occurrence. Without worried. Where, however, things do go wrong, the precise
insurable interest there will be no obligation on the part of timing of the transfer may become crucial. Firstly, if the
the insurer to indemnify. It is customary in international seller or buyer goes into liquidation while the goods are in
trade to assign the insurance policy48 at any time even af- transit, the creditors of the insolvent party will wish to
ter a loss has occurred, 49 but the assignment is not valid if know whether the goods are owned by that party since this
it takes place after the assured has parted with his insur- may determine whether the goods will form part of his es-
able interest in the goods, except where the terms of sale tate ... Secondly, the seller's right to demand the price
indicate an intention to assign the policy or certificate, in may depend upon whether property has passed. Thirdly,
which case the policy or certificate can be assigned at any the buyer's right to sue the canier for loss or damafe to
50
time.
the goods may depend upon establishing ownership. 3
44
Section 16 (3) of the English Marine Insurance Act of 1906. 64. Incoterms do not regulate the important issue of
45
See K. B. Winkler, Jncoterms in practice: Jncoterms and insur- transfer of property, since the law on transfer of property
ance, Paris, ICC Publication No. 505, pp. 87-89, and K. B. Winkler, rights differs from country to country. The 1980 Conven-
''Incoterms and insurance", paper presented at the ICC Seminar on Mul-
timodal Transport. Hamburg, 8 September 1994. tion on Contracts for the International Sales of Goods, in
46
D. Chevalier, "Insuring your export shipment", International article 4, specifically states that:
Phvsical Distribution. International Trade Forum. October-December This convention governs only the formation of the con-
1989, p. 29. tract of sale and the rights and obligations of the seller and
47
Sections 5 and 6 of the English Marine Insurance Act of 1906 de-
the buyer arising from such a contract. In particular, ex-
fine the concept of"insurable interest" and the "time when interest must
attach". cept as otherwise expressly provided in this convention, it
48 is not concerned with:
Section 50-2 of the English Marine Insurance Act (l 906) reads as
follows: ''Where a marine policy has been assigned so as to pass the ... (b) the effect which the contract may have on the
beneficial interest in such policy. the assignee of the policy is entitled
property in the goods sold.
to sue thereon in his ov.n name and the defendant is entitled to make any
defence arising out of the contract which he would have been entitled
51
to make if the action had been brought in the name of the person by or Under the current Institute Cargo Clauses of 1982 (clause 8, on
on behalf of whom the policy was effected". "duration"), the goods are covered from the time they leave the ware-
49
Sections 50-51 of the English Marine Insurance Act of 1906. house at the place named in the policy for commencement of the transit
Where the goods are damaged before shipmenL a CIF buyer may sue on until delivery to the consignees or other final warehouse at destination
the policy, provided it has been assigned to him. although he has no in- named in the policy, provided that in no case the period of cover aft.er
surable interest in the goods at the time (see D. M. Sassoon, ''CIF and completion of discharge overside of the goods shall extend beyond 60
FOB contracts'', British Shipping Laws, vol. 5 (2nd ed.), 1975. pp. 136- days.
52
137. K. B. Winkler, op. cit. p. 86.
53
so R. H. Brown and J. J. Novitt, Marine Insurance, Vol. 2-Cargo Clifford Chance, ..The passing of ownership and risk in interna-
Practice, "Assignment of Policies", London, Witherby. 1985, pp. 89- tional commodity contracts", Afaritime Revinr. No. 10, June 1992,
90. p. 10.
 14 Legal Aspects of International Trade

65. In order to determine the moment at which the prop- 68. The above-mentioned prov1S1ons pursuant to
erty is transferred, it is therefore first necessary to deter- article 9 of the Convention only apply if the parties have
mine what national law will be applied for questions of not incorporated Incoterms in their contracts of sale. It has
property in an export transaction. In the majority of legal to be underlined that these provisions are of a less exhaus-
systems, the moment at which the property passes is en- tive nature than the solutions proposed by Incoterms but
tirely a question of intention to be gathered from the terms are not conflicting with them.
of the contract, the conduct of the parties and the circum-
stances of the case.
5. Cost distribution
66. The passing of ownership must be distinguished
from the allocation of risk between seller and buyer. The 69. The general rule is that the obligation to bear the
passing of risk means the transfer from seller to buyer of costs relating to the goods passes from the seller to the
the responsibility for loss, deterioration or damage to the buyer when the seller has fulfilled his obligation to deliver
goods occurring without the fault of either party. Al- the goods. Thus, "delivery" constitutes the borderline be-
though as a general rule the property and the risk pass at tween seller and buyer as regards cost distribution. 57 As
the same time, in international trade, risk will often pass pointed out above, cost units are attached to the various
before ownership is allocated. The transfer of risks from trade terms. The advantage of Combiterms is that the
seller to buyer is regulated in Incoterms under article AS. placing of the cost units on either the seller or the buyer is
The risk passes from the seller to the buyer when the seller determined in advance and there is no room for a subse-
fulfills his obligatio!) of delivering the goods. If the buyer quent dispute between the seller and the buyer provided,
does not take delivery as agreed or fails to instruct the of course, that all costs arising are correctly included in
seller-with respect to time for shipment and/or place for the cost units. Unfortunately, Combiterms do not entirely
delivery-the passing of risk may occur even before de-
reflect Incoterms, since they were basically prepared for
livery. The two notions which are most fundamental to the freight forwarders. Thus the costs of verification and
passage of property in goods 54 and commodities are "as- package of the merchandise, which should be borne by the
certainment" and "appropriation".55 seller according to Incoterms, do not appear in Combi-
67. The Convention on Contracts for the International terms.
Sale of Goods of 1980 regulates the subject in chapter IV,
entitled "Passing of risk" .56 The following cases are dif- 70. It is important to note that some ports have now suc-
ferentiated: ceeded in imposing a different allocation of costs in their
efforts to attract new customers. 58 This has traditionally
(a) In cases where the sale involves carriage of the been the case of the port of Antwerp, Belgium, where for
goods (article 67), the risk passes to the buyer when the an FOB contract it is not requested of the shipper, in ful-
goods are handed over to the first carrier, in accordance filling his delivery obligations, that the goods pass the
with the contract of sale, provided the goods are clearly bulwark of the ship, but it is sufficient that the seller
identified; places the goods at the quay (the place designated by the
(b) In cases where the goods are sold in transit, the risk shipowner or his representative) or the "ship's perimeter"
passes to the buyer from the time of the conclusion of the (when there are no express instructions regarding the
contract (article 68); point of delivery by the seller and the point of reception
by the buyer). Thus the Antwerp operators have impos·ed
(c) In all other cases (article 69), the risk passes to the
on shipowners the same standard handover point for the
buyer when he takes over the goods or, if he does not do attribution of costs in shipping agreements, with the gen-
so in due time, from the time when the goods are placed eral use of "liner terms from quayside". This means that
at his disposal and he commits a breach of contract by fail- freight covers the taking-over of goods on the quay, and
ing to accept the delivery. The goods are considered not to that loading costs are on the shipowners' account. Since
be placed at the disposal of the buyer until they are clearly 31 May 1996, the port of Dunkirk, France, on account of
identified to the contract. its proximity to Antwerp and in order to counterbalance
54
its disadvantageous commercial position, has passed a
The following general rules are listed by Tetley: resolution (at the Dunkirk Chamber of Commerce and In-
(i) The dominant rule has been that property in the goods passes dustry) adopting a new FOB Dunkirk according to which
when the parties intend it to pass.
(ii) If the intention of the parties is not clear, the property in speM
the seller fulfils his obligations when he delivers the con-
cific goods in a deliverable state passes to the buyer at the ventional goods at the place designated by the maritime
moment the contract is made. carriers or within the ship's perimeter (that is, within
(iii) [n the sale ofunascertained goods, property may not pass un- 120 m of the quay's edge). This new definition of FOB
til the goods have become ascertained under the contract.
However, once there is an unconditional appropriation of the 57
Article A4 of !ncoterms 1990 determines when delivery takes
goods to the contract, agreed to by both parties, the property
place and article A6 ("Division of costs'') establishes that the seller
in the goods passes."
should pay all costs relating to the goods until they are delivered in ac-
W. Tetley, "Who May Claim or Sue for Cargo Loss or Damage",Jour- cordance with article A4.
nal of Maritime law and Commerce, vol. 17, No. 3,July 1986, p. 416. 58
55
This is based on the prerogative granted by lncoterms 1990 (arti-
For a detailed study see C. Debattista, "Transferring Property in cle A4), according to which, for Tncoterrns involving maritime trans-
International Sales: Conflicts and Substantive Rules under English port, delivery takes place "in the manner customary at the port". These
Law". Journal of Maritime law and Commerce, vol. 26, No. 2, April customs are the result of port techniques. The seller is not always al-
1995, pp. 273-291. lowed to deliver the goods alongside the ship (FAS) oron board the sea-
56 See "La Convention de Vienne sur la Vente [nternationale et Jes going vessel (e.g. FOB and CIF), since handling and loading operations
Incoterms: Actes du Colloque du I et 2 decembre 1989", Centre de are the task of the competent port authorities to vvhom the goods are to
Droit des obligations de l'Universite de Paris I, 1990, pp. 128-140. be handed over.
 lncoterms 15

Dunkirk has been forwarded to the commercial court for premises in the country of import, to include some varia-
recommendation to trading parties.59 tions in Incoterms of group D, such as "DDU cleared",
when the seller takes care of the customs formalities with-
71. In practice, FOB Dunkirk became FCA in lncotenns out paying the duties. Other frequent variations are "DDP,
I 990, under which the seller fulfils his obligations to de- value-added tax (VAT) unpaid" and "DEQ, duty unpaid".
liver when he has handed over the goods, cleared for ex-
port, into the charge of the carrier named by the buyer at (b) Notice provisions
the named place or point.
76. Under articles A 7 and 87 the seller's and buyer's
72. Another important area that deserves special atten- responsibilities are as follows:
tion is the cost distribution of what are known as "terminal
handling charges", these refer to all charges related to the (i) The seller must give notice to the buyer as to:
handling of cargo at the terminal of loading or discharg- -when and where the goods will be placed at his
ing, operated by or for the account of the carrier. 60 Such disposal (EXW);
charges may be part of the freight agreed upon between
shipper and carrier, or the carrier may choose to bill all or -when and where the goods have been delivered
part of them separately. In order to prevent conflicts in the into the custody of the carrier (received for ship-
final distribution of costs between seller and buyer---as ment/on board) (F- and C-terms);
regards transport of break bulk goods-the Finnish for- -when and where the goods are expected to arrive
estry industry took the firs! initiative in 1994 to define and (D-terms ).
develop standard shipping terms. The Finnish National (ii) The buyer must give notice to the seller as to:
Committee of the ICC undertook further work on the sub-
-the time and place to take delivery (EXW and
ject, and in 1996 the Board of the Finnish Section ap-
D-terms);
proved the first comprehensive, agreed, national standard
of shipping terms. The Finnish Standard Shipping Terms -the vessel name, loading point and required de-
of 1996 are in full compliance with Jncoterms 1990, inso- livery time (F-terms);
far as the obligations of the buyer and the seller refer to the -the time for dispatching the goods and the desti-
customs of the port. 61 The shipping terms define the obli- nation (C-terms).
gations of the parties in the port ofloading and the port of
discharge. (c) Checking, packaging/marking and inspection ofgoods

77. Pursuant to article A9, the seller must pay the costs
6. Miscellaneous of those checking operations (such as checking quality,
measuring, weighing, counting) which are necessary for
(a) Customs clearances and formalities the purpose of placing the goods at the disposal of the
73. As explained in the introduction to lncoterms, 62 "it buyer.
is normally desirable that customs clearance is arranged 78. Concerning packaging, the seller must provide at his
by the party domiciled in the country where such clear- own expense any packaging which is appropriate for the
ance should take place or at least by somebody acting type of goods and the type of transport intended. Under
there on his behalf. Thus, the exporter should normally EXW or F-terms, where the seller may not know what the
clear the goods for export, while the importer should clear type or conditions of international transport will be, the
the goods for import". seller will only be required to provide appropriate packag-
74. Commercial parties should take particular care ing to the extent that these circumstances are made known
to him before the contract of sale is concluded. 64
whenever they choose an Jncoterm like EXW and FAS,
where the buyer undertakes to clear the goods for export 79. As to the inspection of the goods, a "pre-shipment
in the seller's country, or DEQ and DDP, where the seller inspection"65 is often requested by the buyer in order for
undertakes to clear the goods for import into the buyer's the goods to be inspected before or at the time they are
country. 63 handed over by the seller for carriage. Unless the contract
75. As explained below, it is possible for the seller 64
whose obligation of carriage extends to the buyer's Article 35 of the Convention on Contracts for the International Sale
of Goods provides that the goods delivered by the seller will not con-
form with the contract unless they "are contained or packaged in the
59 Source: "Le Port de Dunkirk", bulletin, No. 10, December 1996. manner usual for such goods or, where there is no such manner, in a
60
Terminal handling charges have been defined as "charges payable manner adequate to preserve and protect the goods". The only excep-
to a shipping line either for receiving a full container load at the con- tion to this rule is provided in sub-article 3 that excludes the liability of
tainer terminal, storing it and delivering it to the ship at the load port or the seller "if at the time of the conclusion of the contract the buyer knew
for receiving it from the ship at the discharge port, storing and deliver- or could not have been unaware of such lack of confonnity" ofthe pack-
ing it to the consignee" (P.R. Brodie, Dictionary, of Shipping Terms, aging.
65
London, Lloyds of London Press, 1985, p. 137). A "pre-shipment inspection" is an inspection of contract goods
61
"Standard Shipping Tenns 1996", Finnish Section of the ICC, Feb- prior to shipment to ascertain their quality, quantity or price. Importers
ruary 1996. may insist on a pre-shipment inspection, requiring the exporter to fur-
62 nish a certificate of inspection (commonly, issued by neutral, interna-
ICC Publication No. 460, p. 9. tionally respected finns such as SGS or Bureau Veritas ), so that the im-
63 One possible precaution, it is suggested, is to include in the sales
porter is assured of receiving goods of the specified quality and
contract the following two provisions: (I) the right to terminate the con- quantity. Government agencies may require inspection certificates as
tract in the event that customs clearance is impossible due to quotas or regards price, so as to prevent parties from under- or over-invoicing in
prohibitions., and (2) an extension of the time for delivery should cus- an attempt to pay lower customs duties or evade foreign-exchange
toms clearance be delayed (Jimenez, op. cit., p. 84). restrictions (Jimenez, op. cit, p. 224).
16 Legal Aspects of International Trade

stipulates otherwise, the buyer has to pay the cost of such F. The golden rules of Incoterms67
inspection when it is made in his own interest. If the in-
spection is required by the authorities of the country of ex-
portation, then the seller will normally bear the cost, un- 83. The following rules should be taken into account
less otherwise specified in the contract (article 9B). when selecting an Incoterm:

(a) Use FAS, FOB, CFR, CIF, DES and DEQ only for
(d) Other obligations
traditional maritime transport (goods lifted over ship's
side);
80. As a general rule (see articles A I O and BI 0), the
seller and the buyer must render each other any assistance (b) Use FCA, CIP, CPT, OAF, DOU and DDP for all
necessary for obtaining the necessary documentation and/ modes of transport, including maritime transport, unless
or for performing their contractual obligations under the you are shipping bulk commodity cargoes by sea;
respective Incoterms. The costs and charges incurred in
(c) Specify how delivery will take place, and specifi-
doing so should be paid by the party requesting such as-
cally who must load and who must discharge;
sistance.
(d) Specify how much insurance coverage you want,
especially if you want maximum insurance, and the geo-
graphical and time extent of the insurance (where and
K Standard variants on Incoterms when coverage begins and ends);
(e) Remember that Incoterms are meant for use in the
81. Although one of the main objectives of using Inco- contract of sale between buyer and seller, which should
terms is to allow the seller and the buyer to know in ad- not be confused with the related contract of carriage be-
vance each other's obligations in terms of costs, risks and tween the shipper and carrier. Traders should give precise
formalities with sufficient accuracy, the meaning oflnco- directions to their transporters as to the Incoterm they
terms, as has been illustrated, may be modified by agree- have chosen in a particular contract of sale; this will en-
ment of the parties, the customs of a particular trade or the sure that the contract of carriage is in conformity with the
usage prevailing in a particular port. Parties may adopt In- contract of sale;
coterms as a general basis for their contract but may also
(fJ Specify any necessary limitations on what kind of
specify variations or additions to them so that they match
the particular trade or their particular needs. This flexibil- transport is appropriate (i.e. refrigerated containers, not
carried on deck, etc.);
ity is very important for traders who might wish to in-
crease or decrease the buyer's or seller's obligations (e.g. (g) Make sure that your contract contains force ma-
requiring a CIF seller to provide more extensive insurance jeure, exoneration or time-extension clauses if you are re-
cover). sponsible for customs clearance or foreign delivery;

82. As has been underlined, the concept of"delivery" is (h) Explicitly incorporate Incoterms into your sales
crucial for the purposes of the division of costs and risks contracts, by specifically mentioning "FCA ... lncoterms
(articles A4 and B4 of Jncoterms 1990). As the definition 1990": always include the words "Incoterms 1990" in
your contracts;
of delivery in article A4 is not sufficiently detailed for all
circumstances, it might need to be qualified to suit the par- (i) Bear in mind that CIF, CFR, CIP and CPT are not
ticular circumstances. 66 arrival contracts but shipment contracts.
66 A. Raty, !ncoterms in practice, pp. 152-163. 67
Based on Jimenez, op. cit., pp. 90-91.
 Chapter III

PAYMENT METHODS IN INTERNATIONAL TRADE

A. Payment in advance ment to the seller for the contract goods or services on the
one hand and their delivery to the buyer on the other. 70

84. Payment in advance takes place when the buyer 88. The documentary credit system represents a real
places the funds at the disposal of the seller prior to ship- balance of interest between the buyer and the seller and,
ment of the goods or provision of services. While this sys- by reliance on the legal nature of documents such as the
tem is of great advantage to the seller, it does not provide bill of lading and the insurance policy, enables banks to
assurance to the buyer that the goods or services con- provide considerable credit on the security of the docu-
tracted will be supplied. ments while the goods are at sea and necessarily of no im-
mediate physical use to their buyer or seller. As such it has
been described as a "watertight system of checks and bal-
ances: the high water mark of finance in international
B. Open account trade" 71

85. An open account can be defined as an arrangement 2. Parties to a documenta,y credit

between the buyer and seller whereby the goods are
manufactured and delivered before payment is required. 68 89. The following are the parties to a documentary
Open account sales are fairly common in domestic sales, credit:
but are less common in international transactions because
they substantially increase the risk for the seller of non- (a) The beneficiary is the seller/exporter who receives
payment for the goods delivered to the buyer. In principle, payment from the letter of credit;
the open account system should only be used when the (b) The opener/applicant is the buyer/importer of
seller has complete confidence and trust in the buyer as goods, who instructs his bank (the issuing bank) to issue a
well as in the stability of the buyer's country and its im- credit in favour ,of the seller (beneficiary);
port regulations. This type of payment is very advanta- (c) The issuing bank is the bank which receives the im-
geous for the buyer who pays for the goods or services porter's application and agrees to ••issue" the credit. The
only when they are received or inspected, but does not issuing bank is commonly located in the buyer's country.
provide any assurance to the seller that he will be paid. By issuing the credit, the bank is making an irrevocable
undertaking to pay the beneficiary the value of the draft
and/or other documents, provided that the terms and con-
C. Documentary credits ditions of the credit are complied with; 72
( d) The nominated bank is the bank which is stipulated
in the credit as authorized to pay, negotiate, issue a de-
1. Definition
ferred payment undertaking or accept drafts. A nominated
bank is not normally bound to pay under the credit, unless
86. A documentary credit is a written undertaking by a it has added its confirmation to the credit and become a
bank (issuing bank) given to the seller (beneficiary) at the "confirming" bank; 73
request and on the instructions of the buyer (applicant) to
pay at sight or at a determinable future date up to a stated (e) The advising bank is the bank that undertakes the
sum of money, within a prescribed time limit and against transmission of the credit, and that advises the exporter/
stipulated documents. 69 beneficiary that a credit has been opened in his favour.
The advising bank does not take further risk, and only has
87. The main object of the documentary credit is to pro- the responsibility to take reasonable care to check the ap-
vide a means of payment for goods and services supplied parent authenticity of the credit which it advises: 74
by a seller to a buyer. It facilitates dealings between mer-
70
chants domiciled in different countries by ensuring pay- H. C. Gutteridge and M. \1egrah. The Law of Bankers' Commer-
cial Credirs. London. Europa Publications. 1984, p.l.
71
68
ICC guide to documentai}' credit operations for the UCP 500. ICC [_irquhart Lindsay and Co. v. Easrern Bank Ltd. ( 1921) A.C. 99.
7~ Jimenez. op. ciL. p. 134.
Publication l\o. 515, June 1994, pp. 19-20.
69 73
See Guide to documentm:v credit operations, ICC Publication Ibid .. p. 134.
74
No. 415, and article 2 of the ICC Uniform Customs and Practice for Article 7 of the Uniform Customs and Practices for Docwnentan1
Documemar_v Credits (UCP 500). Credits, 1993 Revision (UCP 500) (ICC Publication No. 500. 1993). ·

17
18 Legal Aspects of International Trade

(f) The confirming bank is the bank (normally the ad- other. When the war broke out, the old trading contacts
vising bank) which adds its own irrevocable undertaking were broken and it was necessary to look for new partners
in addition to the one given by the issuing bank. A confir- elsewhere. It was a question of dealing with firms one did
mation constitutes a definite undertaking of the confirm- not know and therefore could not trust. It was in these
ing bank, in addition to that of the issuing bank, provided circumstances that the documentary credit came into
that the stipulated documents are presented to the con- being. 77 Attempts to harmonize the law and practice of
firming bank and that the terms of the credit are complied documentary credits commenced after the First World
with. 7 ' War. The first efforts were all made on a national basis,
and it was not until 1993 78 that the Uniform Customs and
(g) The negotiating bank is the bank which examines Practice for Commercial Documentary Credits (herein-
the documents presented by the exporter and then negoti- after UCP) were first formulated by the International
ates the credit. The negotiation is usually done "with re- Chamber of Commerce. 79 Revised versions of the UCP
course", unless the negotiating bank is the confirming were issued in 1951, 1962, 1974, 1983 and 1993. 80 The
bank; this means that if the issuing bank fails to reimburse UCP is a set of standard terms that only applies if incor-
the negotiating bank, the negotiating bank will recover the porated into a documentary credit by reference to the
funds advanced to the beneficiary." UCP. As of today, it is estimated that some 95 per cent of
credits worldwide are issued subject to the UCP. 81
3. The stages of a documentary credit
92. Originally, the UCP was neither designed nor in-
90. The procedure· for a basic documentary credit is as tended to be law. It was prepared as a "set of standard
terms drafted by bankers for bankers" 82 to be incorporated
follows:
by reference into letters of credit. As pointed out by
(a) The buyer and the seller conclude a sales contract Kozolchy: "the draftsmen of the UCP had a realistic and
providing for payment by documentary credit; modest goal. The intent was not to codify all the relevant
rules oflaw, customary or otherwise, but rather to compile
(b) The buyer instructs his bank (the issuing bank) to international banking customs and other rules that facili-
issue a credit in favour of the seller (the beneficiary); tate banking functions." This modest goal has been over-
(c) The issuing bank asks an intermediary bank-usu- taken by events in recent years as a result of the near uni-
ally in the country of the seller-to advise and/or confirm versal adoption of the UCP. 83
the credit;
93. Opinions differ as to the legal status of the UCP.
(d) Advising/confirming bank informs the seller of the They range from the viewpoint that the Uniform Customs
issuing of the documentary credit; and Pratice "constitute an entity drawn up unilaterally by
(e) As soon as the seller is satisfied that he can meet the the bankers and which do not have the weight of custom-
terms and conditions of the letter of credit he can dispatch ary practice because they were not established by com-
the goods to the buyer; mon agreement between all the parties concerned", to the
opinion that the UCP must be seen as a "system if not
(j) The seller presents the documents evidencing the autonomous then at least specific, of legal rules demand-
shipment to the bank where the credit is available; ing uniform interpretation and application on an interna-
(g) The bank checks the documents against the credit: 77
if the documents meet the requirements of the credit, the For a detailed study of the historical developments (see
F. P. de Rooy, Documentary Credits, Dordrecht, Kluwer, 1984, pp. 1-
bank will pay, accept or negotiate according to the terms 20, and E. P. Ellinger, "The Uniform Customs and Practice for Docu-
of the credit; mentary Credits-the 1993 revision", Lloyd's Maritime and Commer-
cial law Quarter(v, Part 3, August 1994, pp. 377-381.
(h) The advising/confirming bank sends the docu- 78
It was not until the second revision in 1962 that the UCP became
ments to the issuing bank; universally accepted by all previous participants as well as by the bank-
ers in the United Kingdom and the Commonwealth of Nations (see
(i) The issuing bank pays/reimburses his correspond- Ellinger, op. cit.. p. 378).
ent bank (i.e. the advising/confirming bank); 79
To keep the UCP rules up to date, the ICC Commission on Bank-
ing Technique and Practice renders expert opinions on practical issues
(j) The documents are released to the buyer upon pay- involving UCP raised by commercial parties. While these opinions do
ment of the amount due; not have legal force, they are widely read and noted by the judiciary.
They are otlen explanatory of the thinking behind the UCP and they il-
(k) The buyer sends the transport document to the car- lustrate banking practice. See Decisions (I 975-1979), ofthe ICC Bank-
rier, who will then proceed to deliver the goods (if the ing Commission, ICC Publication No. 371; Opinions (/980-1981),
document is a document of title). //984-1986). (/987-1988), (/989-1991) of the ICC Banking Commis-
sion, ICC Publications Nos. 399. 434,469 and 494 rcspectively;Case
studies on documentary credits, ICC Publications Nos. 459 and 489.
80
4. Uniform Customs and Practice for Commercial The 1993 revision came into effect on I January 1994 (see ICC
Uniform Customs and Practice for Documentary Credits (/993), ICC
Documentary Credits Publication :\lo. 500).
81
P. Todd, Bill~ of fading and bankers 's documentary credirs, Lon-
don ( 1993), Lloyds of London Press Ltd., quoted in R. P. Buckley, "The
91. Before the First World War, trade was largely 1993 revision of the Uniform Customs and Practice for Documentarv
carried on by trading partners who knew and trusted each Credits", The George Washington Journal of International Law and
Economics, vol. 28, No. 2, 1995, p. 266.
75 81
Ibid., article 9 (b). Buckley. op. cit., p. 267.
83
76
Jimenez, op. cit., p. l35. C. Schmitthoff. "International trade usages'', op. cit.. pp. 39-40.
 Payment methods in international trade 19

tional level". 84 It seems, however, that most authors agree An irrevocable credit constitutes a definite undertaking of
that the UCP should be recognized as universally ac- the Issuing Bank, provided that the stipulated documents
cepted trade usage of a normative character. 85 As elo- are presented to the Nominated Bank or to the Issuing
quently pointed out by Schmitthoff, "As banks in more Bank and that the terms and conditions of the credit are
than 170 countries operate letters of credit under this doc- complied wit ...
ument, the Uniform Customs and Practice for Documen-
tary Credits has become world law". 86 99. Hence, once a bank accepts instructions from a
buyer to open an irrevocable credit, the buyer is powerless
to prevent payment being made under it in the normal
5. Basic types of documentary credit
course of business regardless of any misperformance or
non-performance by the seller. The effect of an irrevo-
(a) Revocable credit cable credit is to substitute the issuing bank for the buyer
as the person who undertakes to "buy" the shipping docu-
94. According to article 8 of the UCP, a credit is said to ments, and this is an undertaking which is absolute 90 in
be revocable when it may be amended or cancelled by the the sense that so long as the documents of title to the
issuing bank at any moment and without prior notice to goods which the seller tenders to the bank are in order, in
the beneficiary. the sense of being those prescribed in the credit, the bank
must accept them regardless of any controversy between
95. The issuing bank guarantees payment upon presen- the seller and the buyer91 as to whether the contract of sale
tation of the proper documents. If a sight credit is in- has been performed.92
volved, the bank may not revoke the credit after payment
or make any changes affecting the payment. The impor-
tant factor is not the time of the document's delivery, but (c) Confirmed and unconfirmed credits
whether payment has already been made. In the case of
deferred payment, the issuing bank cannot amend its later 100. The role of the correspondent bank could be two-
payment commitment once the documents have been fold, depending upon whether the issuing bank requests it
taken up, that is, after the bank has examined the docu- to "'add its own confirmation" or merely "to advise" the
ments and found them to be correct. 87 beneficiary.
96. The commercial value of a credit of this kind is con-
siderably impaired, since the issuing bank may cancel the (ij Corifirmed credit
credit when it pleases and is under no legal duty to give
prior notice either to the beneficiary or to anyone else. 88 IOI. Where the correspondent bank adds its own confir-
A !though it is the practice of banks to give notice of the mation, this constitutes a definite undertaking by the cor-
intention to cancel the credit, this is an act of courtesy and respondent bank to make payment or accept drafts in ac-
no liability is imposed on the bank when, by reason of cordance with the terms of the credit, providing the
some oversight or otherwise, the notice is omitted.89 correct documents are presented to it. Article 9 (b) of the
UCP defines such an undertaking as follows:
97. In the absence of the indication that the credit is
revocable, the credit is deemed irrevocable (article 6 (c) of A confirmation of an irrevocable credit by another bank
the UCP). (the "Confirming Bank") upon the authorization or re-
quest of the Issuing Bank constitutes a definite undertak-
ing of the Confirming Bank, in addition to that of the Is-
(b) Irrevocable credit suing Bank, provided that the stipulated documents are
presented to the Confirming Bank or to any other Nomi-
98. A credit is said to be irrevocable when the issuing nated Bank and that the terms and conditions of the credit
bank gives a binding undertaking to the beneficiary that it are complied with ...
will pay against documents or that all bills drawn in com-
pliance with the terms of the credit will be honoured. 102. Thus, in the case of an irrevocable confirmed
Thus, under article 9 (a) of the UCP: credit, the beneficiary enjoys two independent recogni-
tions of liability: one on the part of the issuing bank and
84
De Rooy, op. cit., pp. 15-16. one on the part of the confirming bank.
85
The United States Council on International Banking (USCIB) has
said that ..while the UCP is partly standard contract language, it is also 90
recognized by the markets and the courts throughout the world as the de In Stein v. Hambros Bank (1921) (9 LL. Rep. 433) Rowlatt said:
facto law ·which defines and regulates the interlocking relationships [in- •· ... the obligation of the bank is absolute and is meant to be absolute,
volved in documentary credits]"' (USCIB study of fundamental prob- that when the documents are presented they have to accept the bill. That
lems with the seventh draft. 31 March 1993 ). is the commercial meaning ofit."
91
86
C. Schmitthoff. Commercial Law in a Changing Economic Cli- The principle was already underlined in Hamzeh Malas and Sons
mate (2nd ed.), Stevens and Sons, London, 1981, p. 28. v. British /mex lndustr;es Ltd. (1957) (2 Lloyd's Rep. 549), where a
87 large quantity of steel ,vas sold on CJF tenns to be delivered in two in-
Union Bank of Switzerland (UBS). Guide Jo Documentary,· Trans- stalments; each instalment was to be paid for by an irrevocable credit.
actions in Fore;gn Trade (2nd ed.), Zurich, UBS Publication, January The first delivel")' was made and the credit was duly paid. The buyer,
1995, pp. 16-17. however, alleged that the goods were in many ways defective and
88
According to Boudinot. "v,,ithout priornotice", means that the ben- sought to prevent payment being made for the second instalment by
eficiary does not have to give his prior agreement but the issuing bank seeking an injunction to prevent the bank from honouring its credit. It
has to infonn the beneficiary of any amendment or cancellation (A. was held that no injunction could be granted: once the credit was
Boudinot, Pratique du credit documentaire. Editions Sirey. Paris, 1979, opened in this form. the bank had no alternative but to act in accordance
p. 31). ·with it provided the correct documents were presented.
89 92
Gutteridge and Megrah, op. cit.. pp. 18-19. Gutteridge and Megrnh, op. cit. p. 22.
 20 Legal Aspects of International Trade

103. Through the mechanism of confirmation, the bene- When a credit has been transferred and the first Benefi-
ficiary is relieved of the problem of the risk of non-pay- ciary is to supply his own invoice(s) (and draft(_s)) in ex-
ment by the issuing bank and any political and transfer change for the second Beneficiary's(ies') invoice(s) (and
difficulties that may arise (the so-called ''country risk"). draft(s)) but fails to do so on first demand, the Transfer-
The "sovereign risk", so-called political and transfer risk ring Bank has the right to deliver to the lssuing Bank the
and the risks coupled with mailing the documents are also documents received under the transferred credit, includ-
eliminated. The confirming bank gives an independent ing the second Beneficiary's(ies') invoice(s) (and
undertaking to the beneficiary so that the beneficiary may draft(s)) without further responsibility to the first Benefi-
have the right to look to both the issuing bank and con- ciary.
firming bank. 93 Confirmation offers the beneficiary an- I 08. This type of credit can only be transferred once
other security, that of "having a debtor in his own coun- (sub-article (g)) unless otherwise agreed. Thus the second
try"_94
beneficiary(ies) cannot transfer to a third beneficiary. The
104. To sum up, it can be said that a confirmed docu- transfer must be effected in accordance with the terms of
mentary credit offers the greatest degree of security avail- the original credit, subject to the following exceptions
(sub-articles (h) and (i)):
able under the documentary credit system.
-The name and address of the first beneficiary may be
(ii) Unconfirmed credit substituted for that of the applicant for the credit;
-The first beneficiary has the right to substitute his
105. ln the case of unconfirmed credit, the issuing bank
own invoices for those of the second benefi-
stipulates that the credit is available at the counters of a
ciary(ies);
bank (advising bank) established in the country of the
beneficiary. The so-called ·'advisory bank'', without any -The amount of the credit and any unit price may be
engagement on its part. will advise the beneficiary that the reduced;
credit has been issued. Article 10 (b) (i) of the UCP reads -The period of validity (the expiry date), the last date
as follows: ·'unless the credit stipulates that it is available for presentation of documents in accordance with ar-
only with the Issuing Bank, all credits must nominate the ticle 43, and the period for shipment may be short-
bank (the "Nominated Bank") which is authorized to pay, ened;
to incur a deferred payment undertaking. to accept draft(s) -The percentage for which insurance cover must be
or to negotiate.'' effected may be increased in such a way as to pro-
vide the amount of cover stipulated in the original
(d) Transferable and non-transferable credit credit.

I 09. The first beneficiary gives instructions to the bank

106. The main purpose of making an irrevocable credit
which agrees to the transfer and advises the second bene-
transferable to a third party is to enable the beneficiary to
ficiary that a documentary credit has been transferred in
acquire and pay for the contract goods which he cannot
his favour. The transfer of a documentary credit author-
supply himself and may· therefore have to get from else- izes lts utilization by the second beneficiary.
where.95 Article 48 of the UCP deals with transferable
credit, described in paragraph (a) in the following terms: 110. Transferable credits are particularly well adapted
to the requirements of international trade. A trader (mid-
A transferable credit is a credit under which the benefi- dleman) who receives payment from a buyer in the form
ciary (first beneficiary) may request the bank authorized of a transferable documentary credit can use that credit to
to pay, incur a deferred payment undertaking, accept or pay his own supplier. In doing so the trader has the right
negotiate (the ··transferring bank'"), or in the case of a
to substitute his own invoice for that supplier. so that the
freely negotiable credit, the bank specifically authorized
final purchaser is prevented from discovering the trader's
in the credit as a Transferring Bank, to make the credit
profit margin, and the identity of the supplier. 96
available in whole or in part to one or more other Benefi-
ciary( ies) (Second Beneficiary( ies) ).
6. Special forms
I 07. A credit can only be transferred if it is expressly
designated as '·transferable" by the issuing bank
(article 48 (b)). Sub-article (i) provides that: (a) Revolving credit

The first Beneficiary has the right to substitute his own in- 111. A revolving credit (revocable or irrevocable) is one
voice(s) (and draft(s)) for those of the second Benefi- in which the amount remains constant for a given period,
ciary( ies ), for amounts not in excess of the original so that whenever during the period it is drawn upon it be-
amount stipulated in the credit and for the original unit comes automatically available again for the full amount
prices if stipulated in the credit, and upon such substitu- either immediately or. perhaps. as soon as advice is re-
tion of invoice(s) (and draft(_s)) the first Beneficiary can ceived that earlier dra1ls have been paid. 97
draw under the credit for the difference, if any, between
his invoice( s) and the second Beneficiary's( ies ') 112. Revolving credits can be used when goods are to
invoice(s). be delivered in instalments at specified intervals. The
amount available at any one time is equivalent to the value
~3 See UBS Guide to Documentan· Transactions in Foreign Trade,
96
UBS Publication. op. cit.. p. 18. · See Credit Suisse Publication, Documel/{arv Credits, Documen~
4
<1 De Roo_y. op. cit.. p 37. tary lo!!ections, Bank Guaramees. Man.:h 1994. ·pp. 34~35.
5 97
C1 Gutkridge and rvtegrall. op. cit.. p. 99. Gutteridge and Megmh. op. cit., p. 15.
 Payment methods in international trade 21

of one partial delivery, e.g. ·'Credit amount $100,000, re- the beneficiary presents the stipulated documents. The
volving 11 times up to a total amount of $ I ,200,000". clause in the credit containing such authorization is called
After utilization of the first $100,000, the next portion the "red clause" 102 because it was originally customary
becomes available automatically, and so on up to the total for such a clause to be written on the credit in red ink.
of$1,200,000. The revolving clause also specifies the in-
tervals at which the credit may be utilized. 118. The red clause documentary credit is often used as
a method of providing the seller with funds prior to ship-
I 13. A revolving credit can be cumulative ornon-cumu- ment. Therefore it is of value to middlemen who require a
lative. Ifit is cumulative, amounts from unused or incom- form of pre-financing. 103
pletely used portions can be carried forward to a subse-
quent period. If it is non-cumulative, portions not used in 119. A red clause may be worded as follows: "under this
the prescribed period cease to be available.98 credit advance payment up to ... % of the credit amount is
permitted before shipment against beneficiaries' receipt,
114. A credit for the full value of the goods to be accompanied by their signed declaration stating that the
shipped but requiring specific quantities to be shipped shipping documents prescribed under this credit will be
weekly or monthly, and allowing part-shipments is not a delivered in good order and within the validity of this
revolving credit, but a credit available by instalments as credit. This advance must be deducted from your payment
envisaged in article 41 of the UCP. to beneficiaries against the prescribed documents." 104.
This kind of arrangement places the burden of final repay-
(b) Back-to-back credit ment on the applicant, who would be liable for repayment
of the advances if the beneficiary failed to present the
documents called for under the documentary credit. 105
I 15. A "back-to-back" credit is an ancillary credit
which arises where the beneficiary uses the credit granted
to him by the issuing bank to support another credit (d) Standby letter of credit
granted by the beneficiary's bank to his supplier. 99 The
back-to-back credit is used in the same situations as the 120. The standby credit is a documentary credit or sim-
transferable credit and has an identical economic func- ilar arrangement, however named or described, which
tion. It is often used when the seller is unable to supply the represents an obligation to the beneficiary on the part of
goods and needs to purchase them from, and make pay- the issuing bank to:
ment to, another supplier, without the credit being trans- (a) Repay money borrowed by the applicant, or ad-
ferable. Under this type of credit, the seller, as beneficiary vanced to or for the account of the applicant;
of the first credit, might offer it as "security" to the advis-
ing bank for the issuance of the second credit. As appli- ( b) Make payment on account of any indebtedness
cant for this second credit the seller is responsible for re- undertaken by the applicant; or
imbursing the bank for payments made under it,
regardless of whether or not he himself is paid under the ( c) Make payment on account of any default by the ap-
first credit. The two credits are autonomous, and therefore plicant in the performance of an obligation. 106
entirely independent of each other. In the case of a "coun-
ter credit", the procedure is the same except that the seller 121. Standby letters of credit are included in the 1993
requests his own bank to issue the second credit as a coun- revision of the UCP. The rules apply to all documentary
ter to the first one. credits (including to the extent to which they may be ap-
plicable to standby letters of credit) where they are incor-
116. In the cases of both back-to-back and counter porated into the text of the credit.
credit, the second credit should be worded so as to pro-
122. Standby letters of credit differ from the conven-
duce the documents (apart from the commercial invoice)
tional documentary credit in the type of documents which
required by the first credit and to produce them within the
are stipulated. In documentary credit, the documents stip-
time limits set by the first credit in order that the seller, as
ulated generally relate to a commercial transaction (in-
beneficiary under the first credit, may be entitled to be
paid. 100 Under this arrangement, the beneficiary of the 102
There is a distinction to be made between a "red clause" and a
second credit obtains greater protection than he would un- ··green clause". '·Green clause" credits are those in which a securit)' is
der an assignment of proceeds. required against the advance, while "'red clause credits'· are credits un-
secured, ibid., p. 48.
103
(c) Red clause credit The origin of the red clause is thought to be in the trade with
China. American skin traders applied for credits for large consignments
of skins which the beneficiaries (often agents of the American trader)
117. This is a special form of credit in which the issuing would buy from many different traders in the interior of China. Such
bank authorizes the advising (or confirming) bank to pay sellers would sell only if they received payment in cash. So the benefi-
a certain sum to the beneficiary as an advance 101 before ciary needed to have cash on hand and he was therefore enabled to draw
a certain sum as an advance. (see De Rooy, op. cit.. p. 48. quoting
H. Harfield Bank Credits and Acceptances (5th ed.). New York, 1974.
98
Credit Suisse, Documentary Credits, Documentarv Collections, p. 184). According to other sources the red clause was first developed
Bank Guarantees, op, cit. p, 31. · in the Australian wool trade.
99 104
Gutteridge and Megrah, op, cit.. p. 14. De Rooy, op. cit., pp. 48-49.
100 105
lCC, Guide to documentary credit operations, ICC Publication See ICC guide to documentary credi1 operations. for rhe [JC'P
No. 415. 1985, p. 35. 500, op. cit., p. 49.
101 105
De Rooy proposes to use the tem1 ''anticipatory credit" to refer to Ibid., p. 48. This definition coincides vvith the American defini-
any credit under which the beneficiary can obtain an advance in any tion laid down in Regulation Hof the Board of Governors of the Federal
way before presenting his documents (De Rooy, op. cit., p. 48). Reserve System.
 22 Legal Aspects oflnternational Trade

voices, bills oflading, etc.), since a standby letter of credit 7. Method ofpayment
is in effect an abstract guarantee.
126. Article 10 (a) of the UCP provides that all credits
123. According to White and Surnmer, 107 "the standby must clearly indicate whether they are available by sight
letter of credit is a credit under which the issuer is to pay payment, by deferred payment by acceptance or by nego-
only if papers certifying default of the customer are pre- tiation. This means that a credit has to make clear how the
sented". Standby credits can be used to structure many paying bank is to effect payment to the correspondent
kinds of transactions. Under such arrangements, the bank bank. There are several possible methods to effect pay-
promises to make payment upon the beneficiary's certifi- ment under a letter of credit, as described below.
cation that certain events have, or have not, happened.
Typically, the beneficiary merely certifies that a specified (a) Payment credit
obligation has not been paid when due. The bank is then
obliged to pay the beneficiary against its demand, without 127. Under such an arrangement, the nominated bank is
consideration of the underlying transaction. 108 required to pay to the beneficiary either by:
(a) Sight payment, which is essentially "cash against
124. The United Nations Convention on Independent documents". The beneficiary receives the proceeds of the
Guarantees and Stand-by Letters of Credit, 9 by estab-'° credit upon presentation and examination of the docu-
lishing a harmonized set of rules, attempts to provide ments. The bank is given reasonable time, not exceeding
greater legal certainty in the use of standby credits. Thus, seven banking days following the day of receipt of the
an "undertaking" is defined in article 2 of the Convention documents, to examine the same; or
as: "an independent commitment, known in international
practice as an independent guarantee or as a stand-by let- (b) Deferred payment, whereby the seller has to ship in
ter of credit, given by a bank or other institution or person advance of payment. The seller is paid some time after the
('guarantor/issuer') to pay to the beneficiary a certain or shipment of the goods (i.e. 30/60/90 days). The contract
determinable amount upon simple demand or upon de- generally specifies payment at a future date (without a bill
mand accompanied by other documents, in conformity of exchange). After presentation of the documents, the
with the terms and any documentary conditions of the amount due under the credit may be obtained in the form
of an advance (less current account interest).
undertaking, indicating, or from which it is to be inferred,
that payment is due because of a default in the perfor-
mance of an obligation, or because of another contin- (b) Acceptance credit
gency, or for money borrowed or advanced, or on account
of any mature indebtedness undertaken by the principal/ 128. Under this type of payment the beneficiary (seller)
applicant or another person." of the credit draws a time draft either on the issuing or
confirming bank, or on another bank, depending on the
credit terms. If everything is in order, the accepting bank
125. In the undertakings covered by the Convention, the
will accept the bill and may pass it back to the beneficiary,
guarantor/issuer promises to pay the beneficiary upon de- to enable him to discount it in the market, thus obtaining
mand for payment. The demand may, depending upon the immediate payment of the value of the bill, less interest
terms of the undertaking, be either a "simple" demand or and charges.
one having to be accompanied by the other documents
called for in the guarantee or standby letter of credit. The
guarantor/issuer's obligation to pay is triggered by the ( c) Negotiation credit
presentation of a demand for payment in the form, and
129. The negotiation of drafts/documents means that
with any supporting documents, required by the inde-
the negotiating bank gives value for the drafts/documents
pendent guarantee or standby letter of credit. The guaran-
less interest calculated from the time of negotiation until
tor/issuer is not called on to investigate the underlying
receipt ofreimbursement from the issuing bank. If the ne-
transaction, but merely has to determine whether the
gotiating bank has confirmed the letter of credit the nego-
documentary demand for payment conforms on its face to
tiation will be made without recourse, otherwise it will be
the terms of the guarantee or standby letter of credit. Be- made with recourse.
cause ofthis characteristic, the instruments covered by the
Convention are referred to common!~ as being "independ-
ent" and "documentary" in nature. 11 8. Basic principles
107
J. White and R. Summer, Handbook ofthe Law under the Uniform
Commercial Code, (2nd ed.), St. Paul, MN, West Publishing Co., 1980, 130. Before the exporter presents the documents to his
p. 713. bank, he must ensure that they fully meet the requirements
108
See J. H. Levie and A. M. Christenfield, "Recent cases undermin- laid down in the credit. All the documents called for must
ing the standby letter of credit", 1997 Annual Survey ofletter ofCredit be present (completeness); they must not contravene any
Law and Practice, Institute of International Banking Law and Practice, stipulation of the credit (correctness); and they must not
Gaithersburg, MD, pp. 148-154.
109 be at variance with each other (consistency). 111 The
The Convention was prepared by UNCITRAL and was adopted
on 11 December 1995. The deliberations ofUNCITRAL on the draft
bank's decision on whether or not to accept the documents
convention are reflected in the report on the work of its twenty-eighth
110
session (Official Records of the General Assembly, Fiftieth Session, Explanatory note by the UNCITRAL secretariat on the United
Supplement No. 17 (A/50/17, paras. 11-201 ). annex I of which contains Nations Convention on Independent Guarantees and Stand-by Letters
the draft convention as submitted by UNCITRAL to the General of Credit (op. cit.. para. 3, p. 14).
111
Assembly. Article 13 (a)ofthe UCP.
 Payment methods in international trade 23

will be based strictly on the principle that the documents errors,"' in which case it seems that the banks have a
themselves and the timing of their presentation must com- choice whether to pay or to refuse payment. 118
ply with the terms of the credit. 112
134. The standard for bank examination of documents is
defined in the second part of article 13 of the UCP as fol-
(a) Compliance with documentary requirements
lows: "compliance of the stipulated documents ... shall be
determined by international standard banking practice as
131. The bank must check the presented documents reflected in these articles. Documents which appear on
carefully against the wording of the terms of the credit. their face to be inconsistent with one another will be con-
This has led to the so-called doctrine of "strict compli- sidered as not appearing on their face to be in compliance
ance": 113 either the documents are in order or they are not. with the terms and conditions of the credit." To determine
Documents which, although different, amount to the same the exact meaning of "international banking practice" re-
thing, do not meet the requirements laid down by the mains one of the most difficult issues in this field. The
documentarv credit. If the documents submitted are not evidence that somewhere between one-half and two-
in order, the" bank can do one of four things: 114
thirds of documentary presentations 119 contain discrepan-
(a) Refuse payment; cies when first tendered 120 is proof that the present stand-
ards for document verification are not functional.
(b) Pay and take an indemnity from the beneficiary
(the seller) in respect of any loss or damage resulting from
the deficiency in the documentation; 135. The reference to "international standard banking
practice" was added in the I 993 revision of the UCP to ad-
(c) Pay the beneficiary "under reserve"; dress problems identified in these terms:

(d) Seek waivers of discrepancies by applicants. Currently, the notion ofreasonable care is usually applied
by courts ... in conjunction with the doctrine of '"'strict
compliance". Yet, as any experienced banker knows, a
I 32. According to article 13 (a) of the UCP, "banks word-by-word, letter-by-letter correspondence between
must examine all documents stipulated in the credit with
the documents and the credit terms is a practical impos-
reasonable care to ascertain whether or not they appear, sibility. Thus, courts wedded to a "mirror image" version
on their face, to be in compliance with the terms and con-
of strict compliance and reasonable care have failed to
ditions of the credit." Thus the bank need not ask itself
provide a functional standard of document verification.
whether the documents may perhaps be false, or whether
Conversely, courts that interpret strict compliance as al-
the goods declared to have been shipped have in fact been
shipped, or whether the document ma,Y have become lowing deviations-that do not cause ostensible harm to
worthless at the moment it was issued. 11 A crucial ques- the Applicant, or that do not violate the courts' own ver-
tion affecting documentary credits is how strictly the sion of"reasonableness", "equity", '"good faith", or "boni
documents must conform to the terms of the credit. Is the mores" have equally failed to provide a functional
standard a strict standard, so that even the most minor de- standard ... Not having such a functional standard ... has
viations entitle/oblige the bank to refuse payment or is it resulted in a proliferation of credit litigation and in costly
a substantial compliance standard, under which devia-
tions that the bank has no reason to believe are of com- ll7 The following case from Hong Kong, China, is illustrative of the
principle: In a documentary credit, the name "Cheergoal Industries
mercial significance are ignored? Or does the law adopt a Limited" was incorrectly reproduced as ''Cheergoal Industrial Lim-
bifurcated approach, under which the bank is entitled to ited". The bank paid despite the error and the court held that it was en-
invoke a strict standard of compliance against the benefi- titled to do so, the error being purely typographical. (Hing Yip Hing Fat
ciary, but is entitled to the benefit of a more relaxed stand- Co. Ltd. v. Daiwa Bank Ltd. (1991) 2, H.K.L.R. 35 (High Court)). It is
ard vis-a-vis its customer in choosing to pay despite minor reasonable to suppose that the bank would have been within its rights in
rejecting the documents, for how could it be sure that there was not a
deviations? separate company "Cheergoal Industrial Limited"?
118
Roy Goode, "Abstract payment undertakings in international
transactions", in 1997 Annual Survey ofLetter ofCredit Law and Prac-
I 33. Most jurisdictions appear to adopt a strict standard tice, Institute oflnternational Banking Law and Practice, Inc., Gaithers-
of compliance' 16 that disregards obvious typographical burg, MD, 1997, pp. 92-97.
119
About a quarter of all discrepancies relate to the beneficiaJ)·'s in-
112 ability to comply with the time parameters of the credit. Almost a half
Credit Suisse, Documentary Credits, Documentary Collections,
Bank Guarantees: Guide to Safer international Trading, op. cit., of all discrepancies are related to presentation of incorrect invoices and
p. 58. transport documentation, with probably a fairly similar proportion for
113
The position has been summed up by Lord Summer in a well- each. It is surprising that the invoice, the production of which is entirely
kno'w'Jl English case: "There is no room for documents which are almost in the hands of the seller, should be such a major cause of discrepancies
the same, or which will do just as well" (Equitable Trusr Co. v. Dawson (J. Turnbull, ';Payment under documentary credits", two-day course on
(1926) 27 LL.L. Rep. 49). bills oflading, London, 6-7 December 1988, Legal Studies and Services
114 Ltd., p. 11 ).
See W. Hedley, Bills of Exchange and Bankers' Documentary 120
Credits: London, Lloyds of London Press, 1986, pp. 234-236. Expert testimony given in 1996 in Bankers Trust Co. v. State
115 Bank ofIndia ( 1991) (2 Lloyd's Rep. 443). indicated that discrepancies
De Rooy, op. cit., p. 121.
116
are discovered in nearly one-half of all documentary presentations ten-
Some commentators have remarked that the documents should be dered under credits in England. Burnett has estimated that about 45 per
checked to see that every "i" is dotted and every "t" crossed and, some- cent of presentations are discrepant (R. Burnett, "Documentary credit
"'hat more unkindly, that ifbankers could read there would be no prob- operations", (unpublished paper) presented at an ICC seminar entitled
lems with documentary credits (D. Pm.vies, ''Shipping law into the 90s", --ice Uniform Customs and Practice for Documentarv Credits: 1993
British Council Course 833, 28 June-9 July 1988, Cardiff. p. ,55). Revision-UCP 500", held in Sydney, Australia, 10 NOvember 1993).
 24 Legal Aspects of International Trade

uncertainty throughout the Documentary Credit Now, while a bank still has a reasonable time to examine
World. 121 the documents and still has to give its notice without de-
lay, the examination and the giving of the notice are to-
136. This new provision added in the 1993 revision re-
gether subject to a limit of seven banking days. This limit,
flects the trend not to consider every minor mistake in a
as rightly pointed out by a well-known author, should be
document, such as a misprint or typographical error, as a
interpreted as "merely the maximum possible reasonable
discrepancy. 122
time, available only in cases of the utmost complexity". 125

(1) Bank's duty to raise all discrepancies (iii) Waiver ofdiscrepancies

137. Upon receipt of the documents tendered under the 141. As has already been pointed out, discrepancies in
credit by the issuing and/or confirming bank, the relevant the documents tendered are found in up to half of all cred-
bank must examine the documents to determine whether its. Assuming the issuing bank's examination reveals
thev conform to the terms of the credit, and it must decide some discrepancies, the question then arises as to whether
wh;t to do if discrepancies are found. it may consult the applicant for the credit at all and, ifso,
138. Pursuant to article 14 (e) of the UCP, a bank, which to what extent, as part of the process of determining what
course of conduct to take. Article 14 (c) of the UCP pro-
does not state all the discrepancies upon which it subse-
vides that:
quently seeks to rely is precluded from later raising those
extra discrepancies as grounds for rejection. This provi- If the Issuing Bank determines that the documents appear
sion allows a beneficiary which has received a notice stat- on their face not to be in compliance with the terms and
ing discrepancies to be sure that no other grounds for dis- conditions of the credit, it may in its sole judgement ap-
honour will be raised against it in the future, and that if it proach the applicant for a waiver of the discrepancy(ies).
can cure the discrepancies identified, the credit will be This does not, however, extend the period mentioned in
sub-article 13 (b).
honoured. 123
142. There is much commercial sense in this article, that
(ii) Time period for bank examination of documents permits consultation between the issuing bank and the ap-
plicant which could help to avoid the needless rejection of
139. The 1993 Revision of the UCP stipulates for the documents. It emerged from the expert evidence in the
first time the maximum number of days for banks to ex- Banker's Trust case (see footnote 124) that in the vast ma-
amine the documents and determine whether to take up or jority of cases where the tendered documents are found to
refuse the documents and to inform the party from which contain discrepancies, the applicants are prepared to ac-
it received the documents accordingly. Article 13 (b) pro- cept the same.
vides that:
The issuing bank, the confirming bank, if any, or a nomi- (b) The principle of independence of the credit and the
nated bank on their behalf, shall each have a reasonable underlying contract
time, not to exceed seven banking days following the day
of receipt of the documents, to examine the documents 143. The independent nature of the credit 126 is expressly
and determine whether to take up or refuse the documents declared by article 3 (a) of the UCP, according to which:
and to inform the party from which it received the docu- Credits, by their nature, are separate transactions from the
ments accordingly. sales or other contract(s) on which they may be based and
banks are in no way concerned with or bound by such
I 40. This rule has brought certainty into the system, al- contract(s), even if any reference whatsoever to such con-
though it has been criticized by some commentators for tract(s) is included in the credit. Consequently, the under-
the long period of time it allows banks to examine docu- taking of a bank to pay, accept and pay draft(s) or negoti-
ments. Before the 1993 revision, an issuing bank had a ate and/or to fulfil any other obligation under the credit, is
"reasonable time"rn to examine the documents and then not subject to claims or defences by the Applicant result-
had to give its notice of rejection, if any, without delay. ing from his relationships with the Issuing Bank or the
Beneficiary.
121
ICC, "UCP 500 & .JOO compared", ICC Publication No. 511,
1993, p. 39. The preface oflCC Publication No. 500.!CC uniform cus- 144. Therefore, when the conditions of the credit are
toms and practice for documentary credirs, makes it very clear that the complied with, the bank cannot dishonour the draft on ex-
1993 revision attempts to improve the functioning of the UCP, since traneous grounds relating to the performance of the com-
''some surveys indicate that approximately 50 per cent of the documents mercial transaction. As pointed out in a famous English
presented under the documentary credit are rejected because of discrep- case: 1:n
ancies or apparent discrepancies''_
122
See Ellinger. op. cit.. p. 391. 115
123
See Buckley, op. cit., p. 269. "'In cases of normal comple'(ity the actual time required to check
124
[n Banker's Tn1st Co. v. State Bank of India (1991) (2 Lloyd's the documents is usually only an hour or two·• (Buckley, op. cit,
Rep. 443), the United Kingdom Court ofAppeaL in a case concerning p. 277).
126
an extremely complicated documentary credit transaction comprising a '"It is \Veil established that a letter of credit is independent of the
total of967 sheets of paper relating to four separate shipments of steel. primary contract of sale between the buyer and the seller. The issuing
considered what ,.vould be a reasonable time for the examination of bank agrees to pay upon presentation of documents, not goods. This
documents generally and of the documents in question. Evidence was rule is necessary to preserve the efficiency of the letter of credit as an
given that nomrnl practice for United Kingdom clearing banks \Vas to instrument for the financing of trade'' (Judge Shientag in S=tejn v.
examine and arrive at a detem1ination v,,ithin three working days of re- J. Henry Schroder Banking Corporation (l941), 31 N.Y.S. 2d. 631,
ceipt of documents. According to Mr. Daniel Devahive from ·warburg p. 633).
127
Dillon Read. the "'reasonable time'' for examination of documents in J. Jenkins in Ham=eh Malas & Sonsv. British fmex Industries Ltd.
Geneva is 48 hours. (1958)(2QB 127).
 Payment methods in international trade 25

... the opening of a confirmed letter of credit constitutes that provisions as to the time of shipment prevail under
a bargain between the banker and the vendor of the goods, law. r29
which imposes upon the banker an absolute obligation to
pay, irrespective of any dispute there may be between the
( d) The exception offraud
parties as to whether the goods are up to contract or not.

147. It is a common feature of all systems of law to

(c) Compliance with time limits refuse the aid of the courts to persons seeking it in order
to carry out or profit from a fraudulent transaction.
145. The expiry date and latest shipping dates specified
in the credit must be strictly complied with. lf the docu- 148. The effect of the tender of a false document to an
ments are presented too late, the bank is not allowed to issuing bank under its irrevocable documentary credit de-
honour them. Article 42 of the UCP dealing with expiry pends on a number of factors, including the nature of the
date and place for presentation of documents reads: document and of the particular falsity, the state of knowl-
edge of the issuing bank, the time of tender and the knowl-
(a) All credits must stipulate an expiry date and a place edge of the seller-beneficiary. 130
for presentation of documents for payment, acceptance, or
with the exception of freely negotiable credits, a place for I 49. In principle, a banker can allege the exception of
presentation of documents for negotiation. An expiry date fraud as entitling him to dishonour the draft, since the cus-
stipulated for payment, acceptance or negotiation will be tomer cannot be deemed to have authorized him to pay
construed to express an expiry date for presentation of against documents which are known to be forged and, on
documents. the other hand, such payment would deprive the banker of
any real security by means of the documents for his ad-
(b) Except as provided in sub-article 44 (a). 128 docu- vances.
ments must be presented on or before such expiry date.
150. Both the principle and the exception were clearly
(c) If an issuing bank states that the credit is to be
set out by Lord Diplock in the United City Merchants
available "for one month" "for six months", or the like,
case: 131
but does not specify the date from which the time is to run,
the date of issuance of the credit by the Issuing Bank will If on their face the documents presented to the confirming
be deemed to be the first day from which such time is to bank by the seller conform with the requirements of the
run. Bank should discourage indication of the expiry date credit as notified to him by the confirming bank, that bank
of the credit in this manner. is under a contractual obligation to the seller to honour the
credit, notwithstanding that the bank has knowledge that
146. Another important time to bear in mind when pre- the seller at the time of presentation of the conforming
senting documents in addition to stipulating an expiry documents is alleged by the buyer to have, and in fact has
date as set out in article 42, concerns what are known as already, committed a breach of his contract with the buyer
"stale bills". Thus, pursuant to sub-article 43 (a) of the for the sale of the goods to which the documents appear
UCP, every credit which calls for a transport document on their face to relate, that would have entitled the buyer
should also stipulate a specified period of time after the to reject the goods and refuse to pay the seller the pur-
date of shipment during which presentation must be made chase price. The whole commercial purpose for which the
in compliance with the terms and conditions of the credit. system of confirmed irrevocable documentary credits has
If no such period of time is stipulated, banks will not ac- been developed in international trade is to give the seller
an assured right to be paid before he parts with control of
cept documents presented to them later than 21 days after
the goods that does not permit of any dispute with the
the date of shipment. In any event, documents must be
buyer as to the performance of the contract of sale being
presented not later than the expiry date of the credit. The used as a ground for non-payment or reduction or defer-
reason for this provision is to ensure that the transport ment of payment.
document(s) reach the consignee before the arrival of the
goods to which they relate. This practice is based on the I 51. As was held by the United Kingdom House of
belief that the issuing bank is under a duty to the con- Lords in the American Accord case, 132 the fraud exception
signee to see, as far as possible, that the consignee is not is very narrow and the bank is bound to pay unless fraud
put to any expense as the result of the arrival of the goods on the part of the seller is proved. Due to the public policy
before the documents. Questions have arisen as to the date doctrine, if the seller himself is committing a fraud, he can
from which the 21 days are to run in certain cases. Where, bring no action against the bank: "ex turpi causa non
for instance, an "on board" bill of lading is called for and oritur actio" (no action arises from the plaintiffs wrong-
a ·'received for shipment" bill is tendered with an "on
board" notation dated subsequently to the date of what :zg Gutteridge and Megrah. op. cit., pp. 153-154.
may be termed first issue. it is said that the first issue date °
13
For a detailed study of the subject, see Gutteridge and Megrah,
should be taken; it may be, however, that the later date is op. cit.. pp. 179-189.
the correct one for this purpose, for the "received for ship- 131
United City A4erchams Ltd. and Glass Fibres and Equipments
ment" bill would have been unacceptable under the credit Ltd. v. Raval Bank ofCanada, r·urorefaer:os SA. and Banco Continen-
were it not for the "on board" notation. This is the case in tal S.A. (i98I). Lloyd's Rep. 604.
132
commodity contracts (e.g. CIF contracts), where it is clear In the American Accord case (1983) Lav.-· Reports Appeal Cases
Series 168 machinery had been shipped aboard the m.v .American Ac-
cord after the contract date, but the date on the bill of lading was falsi-
128
Sub-article 44 (a) deals with cases in which the last day for pres- fied to make it appear that they were shipped according to contract:
entation of documents falls on a day on which the bank is closed-:force though there may have been fraud. it was not shown that the seller was
mqjeure not included-in which case the period is extended to the first fraudulent (see P. Todd, Modern Bills of Lading, London, Collins Pro-
following day on ,;vhich such bank is open. fessional and Technical Books, 1986, pp. 67-68).
 26 Legal Aspects of International Trade

doing). Thus, it must be the seller's fraud, otherwise the refusal, the notification of the reserve is not passed on to
bank must pay. the issuing bank by the remitting bank;
152. The decision taken in this case has been criticized (b) External reserve: when the irregularity is undeni-
by some leading scholars on different grounds. Thus, able but nevertheless so slight that in the remitting bank's
Goode discusses the position of the bona fide plaintiff, as opinion it will not lead to refusal, and the reserve is noti-
follows: fied to the issuing bank by the remitting bank.
Is a plaintiff who seeks to enforce a letter of credit af- 156. For obvious reasons, payment under internal re-
fected by forgery of the documents or other fraud in the serve has significant advantages for the beneficiary over
transaction ifhe himself acted in good faith? There is a re- payment under external reserve. Thus, if payment has
markable dearth of authority on this question. Let us start been made under internal reserve, the remitting bank will
with the beneficiary. He himself has a duty to tender behave towards the issuing bank as if the credit had been
documents which are in order, and the fact that he acted settled normally. It is then up to the issuing bank to ascer-
in good faith in tendering forged documents is thus irrel- tain the irregularity in question and to refuse to settle the
evant. This fundamental point appears to have been over- credit.
looked by Mr. Justice Mocatta in The American Accord
when he held that the beneficiary was entitled to collect
payment despite the insertion of a fraudulent shipping (b) Payment against indemnity
data on the bill of lading, since the fraud had been com-
mitted by the loading broker who was the agent of the car- 157. lfthe bank does not know the beneficiary, or if the
rier, not of the seller/beneficiary. But this, with respect, is amount to be paid is very large, taking into account the fi-
not to the point. The beneficiary under a credit is not like nancial position of the beneficiary, the bank will prefer to
a holder in due course of a bill of exchange; he is only en- pay the beneficiary only against an indemnity 136 in which
titled to be paid if the documents are in order. A fraudu- the irregularities are noted and in which the beneficiary
lently completed bill of lading does not become a con- agrees to repay the sum paid to him to the bank immedi-
forming document merely because the fraud is that of a ately, if the documents were refused because of the said
third party. 133 irregularities. 137

9. Payment under reserve or indemnity l 0. Documents

(a) Payment under reserve 158. According to article 4 of the UCP, "In credit oper-
ations all parties concerned deal with documents, and not
153. If the documentary irregularities are not of a funda- with goods, services and/or other performances to which
mental nature the bank will often be prepared to pay under the documents may relate". Thus it is essential for parties
reserve. This implies that it reserves the right to recover wishing tci use the system to have a clear understanding of
the amount it has paid if the applicant for the credit were the main features of the documents commonly requested
to refuse the documents on the grounds of the irregular- under a letter of credit.
ities discovered. 134
159. Articles 20 to 38 of the UCP deal with the various
154. Payment under reserve is an instrument which gen- documents often requested by the buyer as a condition for
erally exists when there is a relationship of trust between his bank making payment. Article 5 of the UCP in order
the bank and the beneficiary and will therefore chiefly be to protect the banks and commercial parties involved in
used when the beneficiary is a customer of the remitting the transaction, states in subparagraph (a) that "In order to
bank or a well-known company with an undisputed repu- guard against confasion and misunderstanding, banks
tation. should discourage any attempts to include excessive de-
tail in the credit or in any amendment thereto". The un-
155. There are two variants of payment under reserve derlying philosophy-that can be traced back to the 1951
depending upon whether the reserve is notified or not to revision-is that the requirements spelt out in the UCP as
the issuing bank: 135 regards the different types of documents are not impera-
tive. They apply only in the absence of stipulation to the
(a) Internal reserve: in case of minor irregularities contrary in the credit. Thus even in the case ofa provision
which can be assumed not to offer sufficient grounds for of cardinal importance, such as article 32 (2), which re-
quires banks to reject an "'unclean" transport document,
iJJ R. M. GoOde, "Reflections on letters of credit", Centre Point. the parties are free to stipulate that certain notations on the
134
The Court of Appeal in the case Banque de I' !ndochine et de Suez document are acceptable and, hence, do not render it
v . .f H. Rayner (Mincing lane) Ltd. (1983) (I Lloyd's Rep. 228),
stated: "The effect of the payment from the confinning bank to the sell- unacceptable. 138
ers being made 'under reserve' was that lhe sellers were obliged to
repay the money to the confirming bank on demand if the issuing bank l 60. The number and type of documents requested, to
rejected the tendered documents on its own initiative or on the buyer's effect payment and give the necessary security to the
instructions for the same reason that the confirming bank had originally buyer, will in practice depend upon the lncoterm selected,
rejected them. Since the issuing bank had rejected the documents for
reasons which included at least one of the discrepancies relied on by the 136
confirming bank in making payment to the sellers conditional on the In practice the bank will request that such an indemnity should be
payment being under reserve, it followed that the confirming bank was issued by a bank.
737
entitled to demand repayment from the sellers as soon as the issuing De Rooy, op. cit., p. 155. See also W. Hedley_ op. cit., pp. 236·
bank rejected the documents." 238, and Gutteridge and Megrah, op. cit.. pp. 196-204.
135 138
De Rooy, op. cit., pp. 15 l • l 55. See Ellinger, op. cit., p. 393.
 Payment methods in international trade 27

the applicable government regulations and the nature of (b) Unless otherwise stipulated in the credit, banks
the transaction. may refuse commercial invoices issued for amounts in ex-
cess of the amount permitted by the credit. Nevertheless,
161. The following documents will be examined here: if a bank authorized to pay, incur a deferred payment un-
(a) Commercial invoice; dertaking, accept Draft(s), or negotiate under a credit ac-
cepts such invoices, its decision will be binding upon all
(b) Certificate of origin; parties, provided that such bank has not paid, incurred a
(c) Insurance document; deferred payment undertaking, accepted Draft(s) or nego-
(dJ Inspection certificate; tiated for an amount in excess of that permitted by the
credit.
(e) Certificates of weight and quantity;
(c) The description of the goods in the commercial in-
(j) Transport documents;
voice must correspond with the description in the credit.
(g) Provisions relating to transport documents gener- In all other documents, the goods may be described in
ally: general terms not inconsistent with the description of the
(i) Carriage on deck; goods in the credit.
(ii) Shipper's load and count; 165. As pointed out in subparagraph (c), the description
(iii) Clean transport document; of the goods in the invoice must correspond with their de-
scription in the credit while in all other documents the
(h) Specific transport documents: goods may be described in general terms not inconsistent
(i) Marine/ocean/port-to-port bill oflading; with the terms of the credit.T4o
(ii)Non-negotiable sea waybill;
166. The following case serves to illustrate the impor-
(iii)Charter party bill oflading; tance attached to the description of the goods in the com-
(iv) Multimodal transport document; mercial invoice. Bank Melli Iran issued a credit for the
(v) Air transport document; supply of trucks in favour of a British seller on behalf of
an Iranian buyer. The credit was made available at the
(vi) Road, rail or inland waterway transport
counters of Barclays Bank in England and the description
document;
of the goods in the credit stated "new trucks". In the in-
(vii) Courier and post receipt; voices which the beneficiary presented to Barclays Bank
(viii) Transport document issued by freight for- together with the other stipulated documents, the descrip-
warders. tion of the goods was worded "trucks in new condition
(I 00 new, good Chevrolet M.6, 4x4 trucks)". Barclays
(a) Commercial invoice Bank accepted the documents, paid the beneficiary and re-
imbursed itself on Bank Melli Iran. In a dispute which
arose some time afterwards (it was found that although the
162. One of the most important credit documents is, trucks had never been used, they had been standing ex-
without doubt, the commercial invoice. By describing the posed in the open air for a winter, as a result of which they
goods exactly as they are stated in the credit, the seller were beginning to rust), the judge decided that: "I feel no
confirms that they have been delivered as contracted. doubt at all that the phrase 'in new condition' is not or
Thus, by tendering the invoice, the seller declares: may not be synonymous with the term 'new'. It is, of
(a) That he has sold goods to the buyer; course, true that the term 'new' is capable of different
(b) The type of goods sold; and
meanings in relation to different subject-matters. For ex-
ample, the term 'new' when applied to wine, as in the
(c) The price of the goods. phrase 'putting new wine into old bottles' has clearly a
different meaning from that it bears when applied to a
163. In certain countries--0ften for customs clearance motor-car; but 'in new condition' in relation to a motor
and for exchange restrictions-the beneficiary is required vehicle seems to me to be essentially different from
to present a consular invoice. This is an invoice authenti- 'new' _,,141
cated by the consulate of the importer's country, confirm-
ing that the invoice amount represents the actual value of
the goods. (b) Certificate of origin and other documents other than
transport documents, insurance documents and com-
164. Article 37 of the UCP provides that: mercial invoices
(a) Unless otherwise stipulated in the credit, commer-
cial invoices: 167. "A certificate oforigin is a statement signed by the
appropriate authority, as required by the Document¾';
(i) must appear on their face to be issued by the Credit, providing evidence of the origin of the goods". 1
beneficiary named in the credit (except as pro-
vided in article 48 13"), and 140
"'A less precise description is not admissible, but a more precise
(ii) must be made out in the name of the applicant description is" (De Rooy, op. cit., pp. 131~134).
141
(except as provided in sub-article 48 (h), and Bank Melli Iran v. Barclays Bank (1951), 2 Lloyd's Rep. 367.
Case reported by De Rooy, op. cit., p. 132, and Gutteridge and Megrah,
(iii) need not be signed. op. cit., p. 176.
142
ICC guide to documentary credit operations for the UCP 500,
9
JJ Article 48 of the UCP refers to "transferable credits". op. cit., p. 66.
28 Legal Aspects oflnternational Trade

Although the UCP does not regulate the specific require- place of destination")] value of the goods, as
ments for a certificate of origin to be considered as a valid the case may be, plus 10 per cent, but only
tender, article 21 ("unspecified issuers or contents of when the CIF or CIP value can be determined
documents") provides as follows: from the documents on their face. Otherwise,
banks will accept as such minimum amount
When documents other than transport documents, insur- 1 10 per cent of the amount for which payment,
ance documents and commercial invoices are called for, acceptance or negotiation is requested under
the credit should stipulate by whom such documents are the credit, or 110 per cent of the gross amount
to be issued and their wording or data content. [fthe credit of the invoice, whichever is the greater.
does not so stipulate, banks will accept such documents as
presented, provided that their data content is not incon- 170. Subparagraph (d) constitutes an important change
sistent with any other stipulated documents presented. as compared with the situation under the UCP 1983 revi-
sion (article 38 (b)). The object of this provision is to en-
168. The sentence in article 21 that "banks wi II accept
sure that, unless a documentary credit expressly stipulates
such documents as presented" should be interpreted in a
an insurance policy, banks will accept an insurance certif-
restrictive manner. Thus, the bank will still be required to
icate or a declaration under open cover pre-signed by in-
carry out a twofold examination: to check whether the
surance companies or underwriters as a valid insurance
document is made out in the "usual form" and whether it
document. Cover notes issued by brokers will not be ac-
is consistent with the other documents stipulated under
cepted by the banks unless specifically authorized by the
the credit. 143 Thus if, for example, a bill of lading shows
credit.
that the goods were loaded on board on I November, a
certificate of analysis dated 10 November cannot be ac- 171. As already underlined in the chapter on Incoterms,
cepted unless it is clear from the certificate that samples and as requested in subparagraph (e), there is a need for
were taken before 1 November but the results of the continuous insurance coverage from the date of loading
analysis were not known until later. on board or dispatch or taking in charge of the goods.
Furthermore, the insurance document must be consistent
( c) Insurance documents with the other documents in its identification of the voy-
age and description of the goods (subparagraphs 13 (a)
169. Articles 34, 35 and 36 of the UCP spell out in detail and 37 (c) of the UCP).
the requirements for insurance documents to be accepted
under a documentary credit. Article 34 reads as follows: 172. Concerning the "type of insurance cover" and the
meaning of"all risks insurance cover", articles 35 and 36
(a) Insurance documents must appear on their face to provide as follows:
be issued and signed by insurance companies or under-
writers or their agents. (a) Credits should stipulate the type of insurance re-
quired and, ifany, the additional risks which are to be cov-
(b) If the insurance document indicates that it has been ered. Imprecise tenns such as '·usual risks" or ·'customary
issued in more than one original, all the originals must be risks" shall not be used; if they are used, banks will accept
presented unless otherwise authorized in the credit. insurance documents as presented, without responsibility
(c) Cover notes issued by brokers will not be accepted, for any risks not being covered.
unless specifically authorized in the credit. (b) Failing specific stipulations in the credit, banks
(d) Unless otherwise stipulated in the credit, banks will will accept insurance documents as presented, without re-
accept an insurance certificate or a declaration under an sponsibility for any risks not being covered.
open cover pre-signed by insurance companies or under- (c) Unless otherwise stipulated in the credit, hanks will
writers or their agents. If a credit specifically calls for an accept an insurance document which indicates that the
insurance certificate or a declaration under an open cover, cover is subject to a franchise or an excess (deductible).
banks will accept, in lieu thereof, an insurance policy. [Article 35].
(e) Unless otherwise stipulated in the credit, or unless
it appears from the insurance document that the cover is Where a credit stipulates ''insurance against all risks",
effective at the latest from the date of loading on board or banks will accept an insurance document which contains
dispatch or taking in charge of the goods, banks will not any ''all risks'' notation or clause. whether or not bearing
accept an insurance document which bears a date of issu- the heading "all risks", even if the insurance document in-
ance later than the date of loading on board or dispatch or dicates that certain risks are excluded, without respon-
taking in charge as indicated in such transport document. sibility for any risk(s) not being covered. [Article 36].
(j) (i) Unless otherwise stipulated in the credit, the in-
surance document must be expressed in the ( d) Inspection certificate
same currency as the credit.
173. The buyer having to rely exclusively on the docu-
(ii) Unless otherwise stipulated in the credit, the ments when acquiring and paying for the goods will, in
minimum amount for which the insurance most cases, require to know, prior to the goods being
document must indicate the insurance cover to shipped, that they are up to the specification laid down in
have been effected is the CIF [( cost, insurance the contract of sale. Very often there is a requirement in-
and freight( ... "named port of destination")] or corporated in the letter of credit that the seller should ten-
CIP [(carriage and insurance paid to( ... "named der an inspection certificate issued by an independent in-
spection company contracted for either by the buyer or by
143
De Rooy, op. cit., pp. l48-l49. the seller, as stipulated in the credit. As always, it is for the
 Payment methods in international trade 29

parties to agree what exactly is to be certified, and by plicable, a tolerance of 5 per cent less in the amount of the
whom, and then see to it that the terms are incorporated in drawing will be permissible, provided that if the credit
the credit. For certain commodities or for certain coun- stipulates the quantity of the goods, such quantity of
tries, such inspection certificates must be issued by a gov- goods is shipped in full, and if the credit stipulates a unit
ernment entity. price, such price is not reduced. This provision does not
apply when expressions referred to in sub-article (a)
174. The inspection certificate (also known as a pre- above are used in the credit.
shipment~inspection certificate, or PSI) contains details
of the shipment to which it relates, states the result of the 177. Thus "about", "approximately", "circa" and simi-
inspection, and bears the signature, the stamp or the seal lar expressions are construed as allowing a difference of
of the inspecting entity. 144 up to 10 per cent where they refer to the amount of the
credit, to a unit price or to quantity. Where no such ex-
pression is used, a tolerance of up to 5 per cent in the
(e) Certificates of weight and quantity
quantity of the goods is permissible, provided that the
drawing does not exceed the amount of the credit and it
175. These are certificates given, usually by independ- falls within the purview of article 39 (b) of the UCP.
ent inspectors to verify the amount of goods shipped.
When the goods being bought are bulk (e.g. grain or coal)
or where the goods are bought by reference to a unit or (f) Transport documents
unit price, the parties should always agree a weight or unit
tolerance within which the bulk quantity will be accept- 178. These are the documents which evidence that the
able when delivered. It is usual to fix the price for ship- goods are in the hands ofa carrier for transportation to the
ment in advance of knowing exactly what the shipped buyer and, to that end, that they have left the control of the
amount will be so as to arrange the terms of credit by seller. Transport documents are defined in the UCP as
agreeing a price pro rata with a maximum value of the "Documents indicating that goods have been loaded on
credit. The credit will then be paid once the bulk is estab- board, dispatched, taken in charge, accepted for carriage
lished, and providi~ it is within the tolerance agreed in or received for dispatch".
the main contract. 14 ·
(g) Provisions relating to transport documents generally
176. Article 38 of the UCP provides that: "If a credit
calls for an attestation or certification of weight in the case 179. The following provisions might apply to the vari-
of transport other than by sea, banks will accept a weight ous transport documents irrespectively of the mode of
stamp or declaration of weight which appears to have transport used:
been superimposed on the transport document by the car-
rier or his agent unless the credit specifically stipulates (ij Carriage on deck
that the attestation or certification of weight must be by
means of a separate document." The allowances permitted I 80. Unless the credit provides otherwise, where the
in credit amount, quantity and unit price are set out in ar- credit includes carriage by sea, a positive statement in a
ticle 39 of the UCP as follows: transport document that goods will be carried on deck
makes the document unacceptable, but one which refers to
(a) The words "'about'', "approx'imately", "circa" or only that possibility is acceptable. Article 31 (i) of the
similar expressions used in connection with the amount of UCP provides:
the credit or the quantity or the unit price stated in the
credit are to be construed as allowing a difference not to Unless otherwise stipulated in the Credit, banks will ac-
exceed JO per cent more or 10 per cent less than the cept a transport document which:
amount or the quantity of the unit price to which they (i) Does not indicate, in the case of carriage by sea or by
refer. more than one means of conveyance including car-
riage by sea, that the goods are or will be loaded on
(b) Unless a credit stipulates that the quantity of the deck. Nevertheless, banks will accept a transport
goods specified must not be exceeded or reduced, a toler- document which contains a provision that the goods
ance of 5 per cent more or 5 per cent less will be permis- may be carried on deck, provided that it does not spe-
sible, always provided that the amount of the drawings cifically state that they are or will be loaded on deck.
does not exceed the amount of the credit. This tolerance
does not apply when the credit stipulates the quantity in 181. · The reason for such a provision is that on-deck
terms of a stated number of packing units or individual cargo has always been looked on as requiring special at-
items. tention because of the dangers to which this gives rise by
exposing the goods to hazards not faced by goods loaded
(c) Unless a credit which prohibits partial shipments below deck. 140
stipulates otherwise, or unless sub-article (b) above is ap-
(ii) Shipper's load and count
144
The following definition is provided in the /CC guide to docu- 182. A transport document which is claused "shipper's
mentary credit operations for the UCP 500 (op. cit., p. 70): "An inspec-
tion certificate is a statement issued and signed by the appropriate au~ load and count" or "said by shipper to contain" or suchlike
thority, either a governmental entity or a private inspection company,
providing evidence that the goods were inspected and detailing the re- 146
Article l (c) of the 1968 Hague-Visby Rules states: "'goods' in-
sults of such inspection." cludes goods, wares, merchandise, and articles of every kind whatso-
145
W. Hedley, Bill ofExchange and Bankers' Documentary Credits, ever except live animals and cargo which by the contract of carriage is
op. cit., pp. 224-225. stated as being carried on deck and is so canied."
 30 Legal Aspects of International Trade

is acceptable unless the credit provides otherwise. transactions. 149 Where this statement is unqualified by
Article 31 (ii) provides: reservations indicating a defect in the apparent condition
or packaging of the goods, the transport document is said
Unless otherwise stipulated in the Credit, banks will ac-
cept a transport document which: to be "clean"; where it is so qualified, it is said to be
"dirty" or "unclean''. 150
(ii) bears a clause on the face thereof such as "shipper's
load and count" or "said by shipper to contain" or
words of similar effect. 187. Any clause or notation which does not relate or re-
fer to "defective condition of goods and/or packaging"
183. The effect of such a phrasing is that the carrier is (subparagraph (a) of article 32) will not render the trans-
not bound by the quantity or weight declared to him by the port document unclean. Nor would notations such as
consignor and which he would otherwise acknowledge by "shipper's load and count" or loading or discharging com-
the bill oflading. The need to be able to clause bills in this ments make the transport document unclean. 151 However,
way is greatly increased by the use of containers: unless the inclusion of "wet packaging", "wet package" or
the carrier has put the goods into the container it is only in "wet" on a bill of lading falls into the category of a
exceptional circumstances that he will check the contents. declaration of defective condition. 152
Bills of lading frequently contain a printed clause stating
"weight, measure, quantity, contents and value un- I 88. Due to the lack of merchantabi I ity of the unclean or
known". This does not render the bill unclean. 147
dirty transport documents, shippers/consignors are often
prepared to offer an indemnity (a "letter of indemnity") to
(iii) Clean transport documents the carrier in return for leaving the document clean. The
acceptance of the indemnity involves the suppression on
184. It is well known that one of the important functions the transport document of material facts which the con-
of transport documents is to serve as evidence of the re- signee has a right to know. In various jurisdictions, courts
ceipt of the goods by the carrier. Thus transport docu- have ruled this practice to be illegal and void. The official
ments provide information as to the identity, quantity and ICC position is as follows:
state of the goods on shipment. In order to protect himself
from undue claims, the carrier-who is prima facie liable
for loss or damage to cargo received in good order and re- ICC opposes the practice of attempting to give indem-
nities to carriers for the purpose of omitting from the
leased to the consignee short or in bad order-will issue a
receipt for the consignment as it appears to him at the time transport document any qualifying remarks on the condi-
of reception. Any discrepancy noticed by the carrier be- tion of the goods and/or the packaging. As a general rule
tween the description of the goods and packaging on the such letters of indemnity should not be used and only in
transport document and the external appearance of the very few limited cases of bona fide dispute, where the dif-
goods and packaging as they are actually received should ficulty of ascertaining the correct state of affairs is out of
be noted on the transport document by the carrier. It is proportion to its importance, might a letter of indemnity
these reservations and comments that give rise to disrutes be commercially justified. 153
as to whether or not a transport document is "clean". 148
189. Article 17 of the 1978 United Nations Convention
185. Article 32 of the UCP defines a clean transport on the Carriage of Goods by Sea ("Hamburg Rules") reg-
document as follows: ulates the practice of issuing a letter of guarantee or in-
(a) A clean transport document is one which bears no demnity. Subparagraph (3) states that the letter of guaran-
clause or notation which expressly declares a defective tee or indemnity is valid as against the shipper, but only if
condition of the goods and/or the packaging. "by omitting the reservation the carrier or person acting
on his behalf did not intend to defraud a third party, in-
(b) Banks will not accept transport documents bearing
cluding a consignee, who acted in reliance on the absence
such clauses or notations unless the Credit expressly stip-
ulates the clauses or notations which may be accepted. of such reservation and thus on the description of goods as
contained in the bill oflading".
(c) Banks will regard a requirement in a Credit for a
transport document to bear the clause ''clean on board"' as 190. The problem in applying such a provision is that it
complied with if such transport document meets the re- is difficult to draw the line between genuine doubt on the
quirements of this article and of articles 23, 24, 25, 26, 27,
part of the carrier as to the need for a reservation, and ac-
28 or 30.
ceptance that what is being done is wrong. 154
186. As described by article 32, the statement concern- 149
In the case of containerized cargo, the '"apparent condition" re•
ing the "apparent good order and condition of the goods" !ates to what is apparent to the carrier on taking over the goods.
at the time of taking in charge or loading the goods onto 150
C. Debattista, Sale of Goods Carried by Sea, op. cit., pp. 130-134.
the means of transport by the carrier issuing the docu- 151
ICC, Clean transport documents, op. cit., p. 9.
ments play a very important role in documentary credits 152
Opinions of the ICC Banking Commission, document 470.TA.7
of24 February 1997.
147 153
R. Jack. Documentmy Credits. London, Butterworths, 1993, ICC, Clean transport documents, op. cit., p. 8.
p. 191. 1 4
~ See F. J. J. Cadv,,allader, .. Unclean bills of lading-banking prob-
148
See lCC. Clean transport documents, ICC Publication ;\lo. 473, lems and legal consequences··, in P. Koh Soon Kwang (ed.).Carriage
September I 989. of Goods by Sea, Singapore, Butterworths 1986. pp. 82-99.
 Payment methods in international trade 31

(h) Specific transport documents Requirements imposed on a bill of lading by the UCP

191. Many of the problems in documentary credits are 194. The requirements are set out in article 23 of the
UCP, which reads as follows:
associated with the transport documents.' 55 Some of the
problems arise when parties agree to use a certain lnco- (a) If a Credit calls for a bill of lading covering a port-to-
term, requesting a transport document not suitable for the port shipment, banks will, unless otherwise stipulated in
mode, or modes, of carriage which will be used (e.g. using the credit, accept a document, however named, which:
a CIF term for multimodal transport). 156 In the UCP the (i) appears on its face to indicate the name of the car-
various kinds of transport documents are cited in separate rier and to have been signed or otherwise authenti-
articles (articles 23 to 29). We shall therefore look at these cated by:
documents individually.
-the carrier or a named agent for or on behalf of
the carrier, or
(i) Marine/ocean bill of lading
-the master or a named agent for or on behalf of
the master.
192. When bills of lading are tendered under a docu-
mentary credit, the bank will carry out a twofold examina- Any signature or authentication of the carrier or
tion. Firstlv it will check whether the document meets the master must be identified as carrier or master, as
requirements imposed on a bill of lading by law, and, sec- the case may be. An agent signing or authenticat-
ondly, if the result of that examination is positive it will ing for the carrier or master must also indicate the
check whether the document satisfies the requirements name and the capacity of the party, i.e. carrier or
master, on whose behalf that agent is acting,
concerning the bill of ladinF as provided for in the UCP
and in the relevant credit. 15 and
(ii) indicates that the goods have been loaded on
Requirements imposed on a bill of lading by law
board, or shipped on a named vessel.
193. Although bills of lading are regulated by a variety Loading on board or shipment on a named vessel
of statutory laws, 158 there is a large degree of uniformity may be indicated by pre-printed wording on the
as to the requirements imposed on a bill of lading. These bill of lading that the goods have been loaded on
requirements have been set out in consideration of the board a named vessel or shipped on a named ves-
traditional functions of a bill oflading as: sel, in which case the date of issuance of the bill of
lading will be deemed to be the date ofloading on
(a) A receipt by a carrier (commonly a shipowner) to board and the date of shipment.
show that an identifiable consignment has been received In all other cases loading on board a named vessel
by him for shipment ('"received for shipment" bill oflad- must be evidenced by a notation on the bill oflad-
ing) or actually loaded on board his ship ("on board" bill ing which gives the date on which the goods have
of lading) to a stated destination. It typically contains been loaded on board, in which case the date of the
statements as to the quantity, apparent quality, etc.; on board notation will be deemed to be the date of
shipment.
(b) Evidence of the contract of carriage, repeating in
If the bill of lading contains the indication "in-
detail or by reference ("short form" type of document) the tended vessel", or similar qualification in relation
terms of the contract, which was in fact concluded priorto to the vessel, loading on board a named vessel
the signing of the bill of lading; must be evidenced by an on board notation on the
bill of lading which, in addition to the date on
(c) A document of title to the goods (as long as it is ex- which the goods have been loaded on board, also
pressly made negotiable by the shipper) and as such en- includes the name of the vessel on which the goods
abling the consignee to dispose of the goods by endorse- have been loaded, even if they have been loaded on
ment and delivery of the bill oflading.JS9 the vessel named as the "intended vessel".

155 If the bill of lading indicates a place of receipt or

It is interesting to note that out of292 queries relating to the UCP
and considered by the group of experts of the ICC Commission on taking in charge different from the port ofloading,
Banking Technique and Practice benveen October 1984 when the 1984 the on board notation must also include the port of
revision came into force and December 1990, 41 per cent related to the loading stipulated in the Credit and the name of the
documents to be presented, in particular to transport documents vessel on which the goods have been loaded, even
(R. Jack, op. cit.. p. I 0). if they have been loaded on the vessel named in the
156
See paras. 55 and 56. bill of lading. This provision also applies when-
157
De Rooy, op. cit., p. 134. ever loading on board the vessel is indicated by
158
Nine main different combinations of statutory laws governing pre-printed wording on the bill oflading,
bills of lading are listed in W. Tetley "The Hague, Hague/Visb), and
Hamburg Rules of the Conflict of Laws" paper delivered at the Cana- and
dian Maritime Law Association Toronto. 20 January 1994.
159
Despite the emphasis on negotiability, the bill of lading has not
(iii) indicates the port of loading and the port of dis-
evolved into what is technically known as a "negotiable instrument" but charge stipulated in the Credit, notwithstanding
is considered as a "quasi-negotiable" document, since it cannot transfer that it:
to the consignee a better title than that of the transferor (e.g. a buyer can-
not claim property in the goods merely by virtue ofholding a bill oflad- a. indicates a place of taking in charge different
ing if it transpires that the seller did not have good title to pass to him) from the port of loading, and/or a place of final
(P. Todd, Modern Bills ofLading, op. cit., p. 14). destination different from the port of discharge,
32 Legal Aspects of International Trade

and/or indicate "intended" ports of loading or discharge are not

b. Contains the indication "intended" or similar acceptable;
qualification in relation to the port ofloading and/
or port of discharge, as long as the document also
(d) The tender must include either the sole original bill
states the ports of loading and/or discharge stipu• issued or the full set;
lated in the Credit, (e) The bill of lading must either contain all the terms
and of carriage or must identify them by reference to a source
document other than the bill itself.
(iv) consists of a sole original bill of lading or, if is-
sued in more than one original, the full set as so (ii) Non-negotiable sea waybill
issued,
and 196. The basic difference between a waybill and a bill
of lading is that a waybill is not a negotiable document.
(v) appears to contain all the terms and conditions of
This means that it need not be presented at the port of des-
carriage, or some of such terms and conditions by
tination as a condition for receiving the goods. Without
reference to a source or document other than the
bill of lading (short form/blank back bill of lad- waiting for the document to arrive, the carrier delivers the
ing); banks will not examine the contents of such goods to the party named as consignee in the waybill on
terms and conditions, production of proof of identity by the consignee or its
authorized agent without any documentary formalities. 160
and
(vi) Contains no indication that it is subject to a char- 197. The use of non-negotiable sea waybills is particu-
ter party and/or no indication that the carrying larly recommended when the seller and the buyer are
vessel is propelled by sail only, well-established trading partners and when there is no in-
tention to resale the goods afloat. 161
and
( vii) in all other respects meets the stipulations of the 198. Article 24 of the UCP covers in detail the require-
Credit. ments of a non-negotiable sea waybill covering a port-to-
(b) For the purpose of this article, transshipment means port shipment for presentation under a documentary
unloading and reloading from one vessel to another vessel credit.
during the course cf ocean carriage from the port of load-
ing to the port of discharge stipulated in the Credit. 199. The main problem when using non-negotiable sea
waybills in documentary credits arises because the ship•
(c) Unless transshipment is prohibited by the terms of the per cannot consign the goods "to order" and leave the bill
Credit, banks will accept a bill of lading which indicates blank endorsed, as is common practice when using bills of
that the goods will be transshipped, provided that the en•
lading. One way to overcome this problem and to provide
tire ocean carriage is covered by one and the same bill of
the banks with the security they require is to nominate the
lading.
bank in question as a consignee of the sea waybill; how-
(d) Even if the Credit prohibits transshipment, banks will ever, banks are often reluctant to become part of the con-
accept a bill of lading which: tract of carriage. 162
(i) indicates that transshipment will take place as
long as the relevant cargo is shipped in Con- (iii) Charter party bill of lading
tainer(s), Trailer(s) and/or "LASH" barge(s) as
evidenced by the bill of lading, provided that the 200. Article 25 of the UCP reads as follows:
entire ocean carriage is covered by one and the
160
same bill oflading, The Baltic and International Marine Council (BIMCO) Blank
Back Form ofNon-Negotiable Liner Waybill introduced in 1980, reads:
and/or "The goods shipped under this liner waybill will be delivered to the
(ii) incorporates clauses stating that the carrier re- party named as consignee or its authorized agent, on production of
proof of identity without any document fonnalities".
serves the right to transship. 161
During the early 1970s containerization, faster vessels, fewer
ports of call and improved terminal facilities greatly reduced transit
195. The main requirements are thus as follows: time, but often the processing of bills oflading failed to match this. The
(a) Article 23 (a) (i) requires a marine bill of lading to result was (and still is) that many consignments anive at their destina-
name the carrier and to be signed/authenticated either by tion before the necessary documentation. To solve this problem the
non-negotiable sea waybill was introduced in the mid 1970s as an alter-
the carrier or the master or by a named agent for the carrier native to the traditional bill of lading to tl)' to avoid the problems of de-
or for the master. Such an agent must, however, indicate layed documents and their direct consequences: (cost of demurrage or
on whose behalf he is acting; shed rent waiting for them, or the cost of getting a bank-supported in-
demnity to enable the carrier to deliver without the bill of lading, pend-
(b) The bill of lading must indicate that the goods have ing its arrival). For a detailed description, see W. Tetley, ··waybills: the
been shipped on board a named vessel. Loading on board modem contract of caniage of goods by sea'',Journai of/V/aritime law
may be evidenced either by a pre-printed clause or by a and Commerce, Parts I and II, Vol. 14, No. 4, October 1983, pp. 465w
notation to this effect. In addition, when the bill oflading 511, and Vol. l5, No. I, January 1984, pp. 41-68.
162
indicates an "intended vessel", the on-board notation must The United Kingdom Carriage of Goods by Sea Act of 1992, that
repealed the Bills of Lading Act of I855 and has been in force since
specify the name of the vessel on which the goods have 16 September 1992. provides in article 2 ( 1) (h) that the consignee, or
been loaded, even when they have been loaded on the in- any other person to whom the canier is duly instmcted to deliver under
tended vessel; the terms of the sea waybill. is entitled to sue on the contract of carriage,
without prejudice to the rights of the original shipper. See also Interna-
(c) Bills of lading must indicate the ports of loading tional Maritime Committee (CMI). 'TM[ Unifom1 Rules for Sea Wayw
and discharge stipulated in the credit; bills of lading that bills", CMl document, Paris IL 1990, pp. 202w207.
 Payment methods in international trade 33

(a) !fa Credit calls for or permits a charter party bill of of this kind is subject to a charter party, does not need to
lading, banks will, unless otherwise stipulated in the indicate the name of the carrier. 163 must be signed/authen-
Credit, accept a document, however named, which: ticated either by the master or the owner or by a named
( i) contains any indication that it is subject to a agent for the master or owner. Even if the credit requires
charter party, the presentation of a charter party in connection with a
and charter party bill of lading, banks will not examine such
charter party, but will pass it on without responsibility on
(ii) appears on its face to have been signed or
otherwise authenticated by:
their part. Thus, banks are relieved of any duty to examine
the terms of the charter party.
-the master or a named agent for or on be-
half of the master, or (iv) Afultimodal transport document
-the owner or a named agent for or on be-
halfof the owner. 201. At the very early stages of multimodal transport,
Any signature or authentication of the master what primarily concerned bankers was that the traditional
or owner must be identified as master or bill of lading, which through customs and by law had
owner as the case may be. An agent signing come to be recognized as a document of title representing
or authenticating for the master or owner the underlying goods, would, as a result of combined
must also indicate the name and the capacity transport, be replaced by another document or other doc-
of the party, i.e. master or owner, on whose uments of doubtful value. 164 This was especially the case
behalf that agent is acting, as regards security for any advances they might be called
and upon to make. The Hague Rules and The Hague-Visby
Rules, which had been internationally agreed upon and
( iii) does or does not indicate the name of the car-
rier,
given the force of law in many countries, related to carri-
ers' liabilities, but their application related solely to the
and time during which the goods were on board a vessel and
(iv) indicates that the goods have been loaded on was obligatory only when a bill oflading was issued. 165
board or shipped on a named vessel.
Loading on board or shipment on a named 202. From a commercial and banking point of view
vessel may be indicated by pre-printed word- there was a need for one document to cover the whole of
ing on the bill of lading that the goods have the transport process which would be acceptable to both
been loaded on board a named vessel or shippers and bankers, and which would enjoy interna-
shipped on a named vessel, in which case the tional legal recognition. 166
date of issuance of the bill of lading will be
deemed to be the date of loading on board 203. As of today, banks negotiating shipping documents
and the date of shipment. under letters of credit are quite willing to accept and pay
In all other cases loading on board a named against tender of combined transport documents. Article
vessel must be evidenced by a notation on 26 of the UCP covers in detail the requirements of a trans-
the bill of lading which gives the date on port document coverinf, at least two different modes of
which the goods have been loaded on board, transport, is as follows: 67
in which case the date of the on board nota-
tion will be deemed to be the date of ship- 163
"Charter parties are usually negotiated between sophisticated en-
ment. tities with considerable knowledge of the contract's actual terms. In this
context, it is clearly unnecessary to require the carrier to be identified or
and the bank to scrutinize the tenns of the charter party." (Buckley, op. cit.,
(v) indicates the port of loading and the port of p. 286).
discharge stipulated in the Credit, 164
Until the 1960s most commercial letters of credit, reflecting docu-
mentary sales terms, called for payment against presentation of negoti-
and able ocean bills of lading endorsed to the issuing or confirming bank
(vi) consists of a sole original bill of lading or, if (see B. Kzolchyk, "Evolution and present state of the ocean bill oflad-
issued in more than one original the full set ing from a banking law perspective", Journal of Maritime Law and
as so issued, Commerce, vol. 23, No. 2, April 1992).
165
The use ofa single document to cover the entire process ofmul-
and timodal transport-signed by the multimodal transpon operator, in his
(vii) contains no indication that the carrying ves- capacity as a carrier-gives rise to considerable legal problems, due to
the fact that only a few countries dispose of national legislation regulat-
sel is propelled by sail only, ing multimodal transport contracts, and that the United Nations Con-
and vention on International Multimodal Transport of Goods ( 1980) has not
yet entered into force. As a result, the multimodal transport operation as
(viii) in all other respects meets the stipulations of a whole and the document issued by the multimodal transport operator
the Credit. in particular have in most cases only a contractual status. Because of
this contractual status, the multimodal transport contract is in principle
( b) Even if the Credit requires the presentation of a governed by the different mandatory rules pertaining to each mode of
charter party contract in connection with a charter party transport (J. Ramberg, "UNCTAD/ICC Rules for Multimodal Trans-
bill of lading, banks will not examine such charter party port Documents: origins and contents", ICC Symposium on Multimo-
contract, but will pass it on without responsibility on their dal Transport, Barcelona, 2-3 April 1992 ).
166
part. See L. A. Barlow, "Banking and combined transport documents",
paper delivered at a Seminar on "Through transport: problem areas,
documentation and insurance", organized by Lloyds of London Press,
Thus, it contains the same terms as for the port-to-port bill London, 15-16 June 1978.
167
oflading in article 23 of the UCP, except that a document See Debattista, Sale of Goods Carried by Sea, op. cit., p. 227.
34 Legal Aspects oflnternational Trade

(a) If a Credit calls for a transport document covering (vi) contains no indication that it is subject to a
at least two different modes of transport (multimodal charter party and/or no indication that the
transport), banks will, unless otherwise stipulated in the carrying vessel is propelled by sail only,
Credit, accept a document, however named, which: and
(i) appears on its face to indicate the name of the (vii) in all other respects meets the stipulations of
carrier or multimodal transport operator and the Credit.
to have been signed or otherwise authenti- (b) Even if the Credit prohibits transshipment, banks
cated by: will accept a multimodal transport document which indi-
-the carrier or multimodal transport opera- cates that transshipment will or may take place, provided
tor or a named agent for or on behalf of the that the entire carriage is covered by one and the same
carrier or multimodal transport operator, multimodal transport document.
or
-the master or a named agent for or on be- This article is the mirror image of article 23 dealing with
half of the master. ocean bills of lading, subject to the following major dis-
tinctions:
Any signature or authentication of the car-
rier, rnultimodal transport operator or master (a) Under article 26 (a) (i), the document may be
must be identified as carrier, multirnodal signed not only by the carrier, the master or their respec-
transport operator or master, as the case may tive agent but also by a multimodal transport operator or
be. An agent signing or authenticating for the his named agent;
carrier, multimodal transport operator or
master must also indicate the name and the (b) The document need not evidence shipment. As in
capacity of the party, i.e. carrier, multimodal the case of an ocean bill oflading, it may, instead, indicate
transport operator or master, on whose be- that the goods have been dispatched or been taken in
half that agent is acting, charge ("received for shipment" document) (subpara-
and graph (a) (ii));
(ii) indicates that the goods have been dis- (c) Even if the credit prohibits transshipment, banks
patched, taken in charge or loaded on board. will accept a multimodal transport document which indi-
Dispatch, taking in charge or loading on
cates that transshipment will or may take place, provided
board may be indicated by wording to that
the entire voyage is covered by one and the same multi-
effect on the multimodal transport document
and the date of issuance will be deemed to be
modal transport document;
the date of dispatch, taking in charge or load-
(d) Banks will accept a document which '"indicates the
ing on board and the date of shipment. How-
place of taking in charge stipulated in the Credit which
ever, if the document indicates, by stamp or
otherwise, a date of dispatch, taking in
may be different from the port, airport or place ofloading,
charge or loading on board, such date will be and a place of final destination stipulated in the Credit
deemed to be the date of shipment, which may be different from the port, airport or place of
discharge" (subparagraph (iii) (a)).
and
(iii) a, indicates the place of taking in charge (v) Air transport document
stipulated in the Credit which may be differ-
ent from the port, airport or place of loading, 204. The ''air consignment note" is the document con-
and the place of final destination stipulated stituting prima facie evidence of the conclusion of the
in the Credit which may be different from the contract, of the receipt of the goods and of the conditions
port, airport or place of discharge, of carriage. 168 The note is made out in three original
and/or parts: 169
b. contains the indication "intended" or
similar qualification in relation to the vessel
(a) The first part is for the issuing carrier and is signed
and/or port of loading andlor port of by the consignor;
discharge,
(b) The second part is for the consignee, and is signed
and by the consignor and by the carrier and accompanies the
(iv) consists of a sole original multimodal trans- goods; and
port document or, if issued in more than one
(c) The third part is for the consignor, and is signed by
original, the full set as so issued,
the carrier and handed by him to the consignor after the
and goods have been accepted. If the tender of an air consign-
(v) appears to contain all of the terms and condi- ment note is stipulated under a documentary credit, the
tions of carriage, or some of such terms and beneficiary will be required to present the third part 170
conditions by reference to a source or docu-
ment other than the multimodal transport 205. The credit should not require an air transport docu-
document lshort form/blank back multi- ment to be presented in more than one original. Nor
modal transport document); banks will not
examine the contents of such terms and con- 168
Article I I, paragraph L of the 1929 Warsaw Crmvention.
ditions. 169
Ibid .. article 6.
170
and See P. De Rooy. op. cit.. pp. [43-144.
 Payment methods in inter-national trade 35

should it call for a full set of original air waybill/consign- transport document will be deemed to be the
ment notes. Furthermore, since the air transport document date of shipment,
is not a negotiable document, and must name a consignee, and
it should not be required to be issued "to order" or "to be
endorsed''. 171 (iv) indicates the airport of departure and the air-
port of destination stipulated in the Credit,
206. Article 12 (3) of the Warsaw Convention contains and
a provision that offers an important protection to an appli- (v) appears to be the original for consignor/ship-
cant for credit who stipulates the tender of an air consign- per even if the Credit stipulates a fo!l set of
ment note in his documentary credit: "If the carrier obeys originals, or similar expressions,
the orders of the consignor for the disposition of the goods and
without requiring the production of the part of the air con-
signment note delivered to the latter, he will be liable, (vi) appears to contain all of the terms and condi-
without prejudice to his right of recovery from the con- tions of carriage, or some of such terms and
conditions, by reference to a source or docu-
signor, for any damage which may be caused thereby to
ment other than the air transport document;
any person who is lawfully in possession of that part of the
banks will not examine the contents of such
air consignment note.i'
terms and conditions,
207. When the beneficiary has presented to the bank and
that part of the air consignment note issued to him (the (vii) in all other respects meets the stipulations of
third part), and it has been examined and found to be in the Credit.
order, the applicant for the credit will not run the risk that (b) For the purpose of this article, transshipment
the beneficiary may have altered the destination of the means unloading and reloading from one alrcraft to an-
goods after receipt of the air consignment note. If other aircraft during the course of carriage from the air-
he wishes to do so, he will have to return his part of the air port of departure to the airport of destination stipulated in
consignment note to the carrier. Thus the Convention the Credit.
provides protection for the applicant. 172
(c) Even if the Credit prohibits transshipment, banks
208. Article 27 of the UCP states: will accept an air transport document which indicates that
transshipment will or may take place, provided that the
(a) If a Credit calls for an air transport document, entire carriage is covered by one and the same air trans-
banks will, unless otherwise stipulated in the Credit, ac- port document.
cept a document, however named, which:
( i) appears on its face to indicate the name of the The article thus covers in detail the requirements for an air
carrier and to have been signed or otherwise transport document to be tendered under a documentary
authenticated by: credit. Subparagraph (a) (iii) of this article provides that
the date of the issuance of the document is deemed the
-the carrier, or
date of shipment, but where the credit calls for an actual
-a named agent for or on behalf of the car- date of despatch, the date has to be indicated by a specific
rier. notation on the document.
Any signature or authentication of the carrier
must be identified as carrier. An agent sign- (v,) Road, rail or inland waterway transport
ing or authenticating for the carrier must also
indicate the name and the capacity of the 209. Article 28 ofUCP covers in detail the requirements
party, i.e. carrier, on whose behalf that agent of a road, rai I or inland waterway transport document for
is acting, presentation under a documentary credit. The principles
and applied are the same as the ones developed in respect of
marine bills of lading (article 23) but with the following
(ii) indicates that the goods have been accepted
for carriage,
major modifications:
and (a) The document must indicate that the goods have
(iii) where the Credit calls for an actual date of been received for shipment, despatch or carriage (sub-
dispatch, indicates a specific notation of such paragraph (a) (ii)); and
date, the date of dispatch so indicated on the
air transport document will be deemed to be (b) In the absence of any indication on the transport
the date of shipment. document as to the numbers issued, banks will accept the
transport document(s) presented as constituting a full set.
For the purpose of this article, the informa-
tion appearing in the box on the air transport 2 I 0. Pursuant to article I (I) of the 1956 Convention on
document (Marked "For Carrier Use Only" the Contract for the International Carriage of Goods by
or similar expression) relative to the flight Road (CMR), 173 the consignment note (the CMR docu-
number and date will not be considered as a ment) is the document which constitutes prima facie evi-
specific notation of such date of dispatch. In
all other cases, the date of issuance of the air 173
The CMR applies mandatorily to a contract for the carriage of
171 goods by road where goods are carried on wheels across national bor-
See ICC. The new standard documentary credit forms for the ders, whether by sea (i.e. roll-on/roll-off) or on land, where either the
UCP 500, ICC Publication No. 516. 1993, pp. 32-33. place of commencement of carriage or the place of delivery is in a coun-
172
From De Rooy, op. cit.. p. 144. try which is party to the CMR.
36 Legal Aspects of International Trade

dence of the making of the contract of carriage, the condi- and

tions of the contract and the receipt of the goods by the (iii) in all other respects meets the stipulations of
carrier. the Credit.
211. The consignment note is made out in three origi- (viii) Transport documents issued by freight for-
nals signed by the sender and the carrier. The first copy is warders
for the sender, the second copy is for the consignee (it ac-
companies the goods) and the third copy is for the carrier 215. Under the 1983 revision of the UCP, bills oflading
(article 5 (I) of the CMR). If the tender of a CMR con- issued by freight forwarders were unacceptable unless
signment note is stipulated under a documentary credit, permitted by the credit or issued by the forwarder as an
the beneficiary will be required to present the first copy. agent for a carrier or issued in the Combined Transport
Form of the International Federation of Freight Forward-
212. The CMR offers the applicant of the credit similar ers Associations (the FIATA Combined Transport Bill of
protection to that provided by the Warsaw Convention. Lading, sanctioned as a good tender under article 25 (d) of
Thus, it is provided in article 12 (5) of the CMR that the the 1983 revision). 175
exercise of the right of disposal of the goods is dependent
216. Transport documents issued by freight forwarders
upon the presentation of the first copy of the consignment
are now dealt with separately in article 30 of the UCP, as
note. Therefore the applicant for the credit has the security
follows:
that the destination of the goods cannot be changed after
the first cop~ of the consignment note has been presented Unless otherwise authorized in the Credit, banks will only
to the bank. 74 Thus the copy for the consignor should be accept a transport document issued by a freight forwarder
required in a documentary credit. if it appears on its face to indicate:
(i) the name of the freight forwarder as a carrier or
(vii) Courier and post receipts multimodal transport operator and to have been
sigoed or otherwise authenticated by the freight
213. The requirements for a post receipt or certificate of forwarder as carrier or multimodal transport op-
posting are covered in article 29 of the UCP. Pursuant to erator,
this provision, banks will accept such a document, which or
evidences the respective dispatch by post or by a courier
as required and discloses the date of dispatch. (ii) the name of the carrier or multimodal transport
operator and to have been signed or otherwise
authenticated by the freight forwarder as a named
214. The article provides as follows:
agent for or on behalf of the carrier or multimodal
(a) If a Credit calls for a post receipt or certificate of transport operator.
posting, banks will, unless otherwise stipulated in the
Credit, accept a post receipt or certificate of posting The transport documents issued by freight forwarders are
which: acceptable if the document otherwise complies with the
terms of the relevant transport article and is either: (a)
(i) appears on its face to have been stamped or authorized in the credit, or (b) issued and signed by the
otherwise authenticated and dated in the place forwarder as a carrier or multimodal transport operator or
from which the Credit stipulates the goods are as an agent for or on behalf of a carrier or multimodal
to be shipped or dispatched and such date will transport operator.
be deemed to be the date of shipment or dis-
patch, 217. Although transport documents issued by freight
and forwarders will continue to require enhanced care and
scrutiny, particularly to ascertain their form, function and
(ii) in all other respects meets the stipulations of proper categorization, the practice of a forwarder issuing
the Credit. a transport document in the capacity of a carrier is now
(b) If a Credit calls for a document issued by a courier clearly acceptable under article 30 (i) of the UCP. 176
or expedited delivery service evidencing receipt of the
goods for delivery, banks will, unless otherwise stipulated 11. Authentication of original documents
in the Credit, accept a document, however named, which:
(i) appears on its face to indicate the name of the 2 I 8. Article 20 of the UCP addresses the problem of
courier/sentice, and to have been stamped, original documents as follows:
signed or otherwise authenticated by such
(b) Unless otherwise stipulated in the Credit, banks
named courier/service (unless the Credit spe-
will also accept as an original document(s), a document(s)
cifically calls for a document issued by a
produced or appearing to have been produced:
named Courier/Service, banks will accept a
document issued by any Courier/Service), (i) by reprographic, automated or computerized sys-
tems~
and
(ii) as carbon copies;
(ii} indicates a date of pick-up or of receipt or
wording to this effect, such date being deemed 175
The express reference to a FIA TA document has been deleted due
to be the date of shipment or dispatch, to the emergence of olher freight fon,varders' associations (!CC bro-
chure No. 511, p. 87).
174 176
See De Rooy, op. cit., pp. 144-145. Buckley, op. cit., pp. 286-287.
 Pa:yment methods in international trade 37

provided that it is marked as original and, where nec- tions. 180 The ICC Uniform Rules apply by being incorpo-
essary, appears to be signed. rated into the text of the "collection instruction''. Article 2
A document may be signed by handwriting, by of the Rules defines "collection" and '·documents'' as fol-
facsimile signature, by perforated signature, by stamp, by lows:
symbol, or by any other mechanical or electronic method
of authentication. (a) "Collection" means the handling by banks of
documents as defined in sub-article 2 ( b ), in accordance
(c) (i) Unless otherwise stipulated in the Credit, banks with instructions received, in order to:
will accept as a copy(ies), a document(s) either labelled (i) obtain payment and/or acceptance,
copy or not marked as an original-a copy(ies) need not
be signed. or
(ii) deliver documents against payment and/or against
(ii) Credits that require multiple document(s) such as acceptance,
'"duplicate", "two fold", "two copies" and the like,
will be satisfied by the presentation of one original or
and the remaining number in copies except where (iii) deliver documents on other terms and conditions.
the document itself indicates otherwise.
(b) "Documents" means financial documents and/or
(d) Unless otherwise stipulated in the Credit, a condi- commercial documents:
tion under a Credit calling for a document to be authenti- (i) "Financial documents" means bills of exchange,
cated, ·validated, legalized, visaed, certified or indicating promissory notes, cheques, or other similar instru-
a similar requirement, will be satisfied by any signature, ments used for obtaining the payment of money;
mark, stamp or label on such document that on its face ap-
pears to satisfy the above condition. (ii) "'Commercial documents", means invoices, trans-
port documents, documents of title or other similar
219. Due to the Iimited capacity of banks to verify the documents, or any other documents whatsoever,
authenticity of documents within the available time, this not being financial documents.
is an area where the rrovisions are still quite weak from a (c) ''Clean collection" means collection of financial
buyer's perspective. 77 documents not accompanied by commercial documents.
(d) "Documentary collection" means collection of:
(i) Financial documents accompanied by commercial
D. Documentary collection documents;
(ii) Commercial documents not accompanied by fi-
220. A documentary collection is an operation in which nancial documents.
a bank collects payment on behalf of the seller (the prin-
cipal) by delivering documents to the buyer. 178 The docu- 223. There are generally four parties involved in a docu-
ments presented are proof of the actual delivery of a prod- mentary collection:
uct or service rendered by the seller. (a) The "principal", who is the party entrusting the
221. A documentary collection provides a greater de- handling of a collection to a bank, and who is usually the
gree of security than payment on an open account, be- seller/exporter who hands over the documents to his bank
cause the importer (in the case of a negotiable document together with a corresponding collection order;
such as a negotiable bill oflading) cannot take possession (b) The "remitting bank", which is the bank to which
of the goods without either making payment or accepting the principal entrusts the handling of a collection;
a bill of exchange. The documentary collection, as com-
pared with the documentary credit system, involves a (c) The "collecting bank", which is any bank, other
prior performance on the part of the seller: the manufac- than the remitting bank, involved in processing the collec-
ture and dispatch of the goods or the rendering of services tion; and
before securing payment. 179 The advantages of the docu-
mentary collection are that it offers simple and inexpen- (cl) The "drawee", who is the buyer or importer to
sive handling, as well as the possibility of handing over whom the collection documents are presented.
documents to the buyer against simultaneous payment of
the amount owed or against acceptance of a draft. The risk 1. Stages of a documentary collection
involved is that if the buyer refuses to honour the docu-
ments, the seller is obliged to return the merchandise or to 224. A basic documentary collection involves three
find a substitute buyer for it. stages:
222. The documentary collection system is often gov- (a) The buyer and seller agree in the contract of sale to
erned by a set of voluntary rules of practice adopted under effect payment by documentary collection;
the auspices of the ICC and approved by the banking sys-
tem and known as the ICC Uniform Rules for Callee- (b) The seller dispatches the goods directly to the ad-
dress of the buyer or to the presenting bank (the collecting
177
Ibid .. pp. 291-292. bank making presentation to the drawee). At the same
178
See Documen/arv Credits, Documentarv Collections. Bank Guar- time he assembles all the necessary documentation (in-
antees. Credit Suisse Publication, 1994, pp. '79-91.
179
See Documentary Credits, DocumenlmJ' Colleclions, Bank Guar- 180
ICC Publication No. 522, 1995 revision in force as from
anlees. UBS Publication, pp. 74-81. I January I 996.
38 Legal Aspects of International Trade

voice, transport document, insurance certificate, certifi- (b) Documents against acceptance
cate of origin) and sends them to his own bank (the remit-
ting bank) together with the ·'collection order". The 227. In this case, the collecting bank releases the docu-
remitting bank then sends the documents, together with ments to the buyer against his acceptance of a bill of ex-
the necessary instructions to the collecting bank; change, which is usually payable 30-180 days after sight
or at a fixed future date. Under this form of arrangement,
(c) The collecting bank informs the buyer of the arrival the buyer gains possession of the goods before payment is
of the documents and notifies him of the terms of their re- made; by reselling the goods immediately, he is able to
lease. The buyer makes payment, or accepts the bill of ex- raise the necessary funds to pay the draft on its due date.
change and in return receives the documents. The collect- Once the documents have been released, the seller's onl.,Y
ing bank then transfers the collected amount to the security is the bill of exchange accepted by the buyer. 18 '
remitting bank, which credits it to the exporter's ac-
count.I&!
(c) Release of documents against letter of undertak-
ing
2. Basic forms of docun-1enta,~v collections
228. Under this type of documentary collection the col-
225. The basic forms of documentary collections are as lecting bank releases the documents to the buyer against a
follows: ··Jetter of undertaking", the exact wording of which is de-
termined by the buyer or the remitting bank. 184
(a) Documents against payment or cash against
documents (d) Collection with acceptance: release of documents
only against payment
226. This is the form of documentary collection when
229. Although not very much used in practice, this type
the collecting bank is only authorized to release the docu-
of documentary collection entails the buyer gaining pos-
ments to the drawee against immediate payment. In com-
session of the goods only after the bill of exchange has
mercial practice, •'immediate' has been interpreted as
been paid.
meaning not later than the arrival of the goods. If the seller
does not wish to wait for his money until the arrival of the
goods, he must include in the collection order a clause
stipulatin~ ·'payment on first presentation of the docu-
ments'~.13-

181 UBS. Documentarv Credi1s, Documentarr Collections. Bank

Guarantees. op. cit., pp. 8t-82. ·
183
182
]bid., p. 83. According to article 5 (b) of the CRC ICC Publication UBS. Documentarv Credits, Documentan: Collections, Bank
No. 522. the collection instmction should state the exact period of time Guarantees. op. cit.. p. 83. and Credit Suisse, Documenrary Credits,
within which the drawee must take up the documents or fulfil other con- Documentary Collections, Bank Guarantees.. op. cit p. 75.
184
ditions. Ibid .. op. cit.. p. 76.
 Chapter IV

BANK GUARANTEES AS A PROTECTION AGAINST NON-

PERFORMANCE OF THE CONTRACTUAL OBLIGATIONS BJ THE
SELLER

230. The purpose of this type of guarantee is to protect is relieved not only of the risk of the principal becoming
the buyer against non-performance of the contract by the insolvent but also of the risk of having to obtain a judge-
seller. The common element in the various guarantees of ment or award before the guarantee is executed. The rule
this type is that the commitment made by the guarantor is "pay first, sue later". 188
(usually a bank) is legally independent (autonomous) of
the underlying commercial contract (under the principle 233. Demand guarantees are often sub1·ect to the ICC
of independence of the guarantee). Under this type of Uniform Rules for Demand Guarantees. 89 Under these
guarantee, the guarantor undertakes to be answerable for rules, banks and issuing guarantors will only make pay-
the payment of a debt or the fulfilment of an obligation in ment against presentation of proper documents. 190 The
the event of default by the party primarily responsib\"e. 185 beneficiary of such a guarantee could obtain payment
It is often called a "collateral contract", as it is collateral without having to prove any breach of contract, do or es-
to the contract providing the primary liability which is tablish that it had suffered any damages. The use of de-
guaranteed, 186
188
Ibid., p. 95.
231. There are two basic kinds of guarantees/bonds in 189
The current version is from 1992. in force as from I Januarv 1993
international trade: (ICC Publication No. 458). -
190
Article 2 of the 1992 ICC Unifom1 Rules for Demand Guarantees
(a) Demand guarantees, which represent instant cash (''Definitions and general provisions"), reads as fol!O\vs:
for the beneficiary, who only has to make a demand; a. For the purpose of these Rules. a demand guarantee (hereinafter
referred to as ··Guarantee'·) means 311)· guarantee, bond or other pay-
(b) Suretyship guarantees, which establish an acces- ment undertaking. hO\vever named or described, by a bank, insurance
sory or conditional obligation towards the creditor. sub- company or other body or person (hereinafter called "the Guarantor'")
ject to the existence of the principal debtor's obligation. 187 given in writing for the payment of money on presentation in confonn-
ity ,vith the tenns of the undertaking ofa written demand for payment
and such other document(s) (for example. a certificate by an architect
or engineer. a judgement or an arbitral award) as may be specified in the
A. Demand guarantees Guarantee, such undertaking being given
i. at the request or on the instructions and under the liability of a
party (hereinafter called ..the Principal""): or
232. Under this type of guarantee, the guarantor must ii. at the request or on the instructions and under the liability of a
bank, insurance company or any other body or person (herein-
pay on first demand as long as the claims submitted meet after ..the Instructing Party .. ) acting on the instructions of a
the formal conditions laid down in the guarantee. Under Principal to another party (hereinafter the .. Beneficiary").
this type of guarantee, the guarantor does not examine the b. Guarantees by their nature are separate transactions from the con-
material justification of the claim but will make payment tract(s) or tender conditions on which they may be based. and Guaran-
tors are in no way concerned with or bound by such contract(s), or ten-
merely against presentation of proper documents. Once der conditions, despite the inclusion of a reference to them in the
again, the principle of autonomy, as in the case of docu- Guarantee. The duty of a Guarantor under a Guarantee is to pay the sum
mentary credits, plays an important role, The beneficiary or sums therein stated on the presentation of a written demand for pay-
ment and other documents specified in the Guarantee ,vhich appear on
185 their face to be in accordance with the tenns of the Guarantee.
Credit. Suisse, Documentary Credits, Documentarv Collections, c. For the purpose of these Rules, ··counter-Guarantee"' means any
Bank Guaramees. op. cit., p. 94 .. ln the Documentary Credits, Docu-
guarantee, bond or other payment undertaking of the Instructing Party.
mentary Collections, Bank Guarantees(op. cit., p. 86) a bank guarantee however named or described, given in ,vriting for the payment of
is defined as follows: ·The irrevocable obligation of a bank to pay a
money to the Guarantor on presentation in confonnity with the tenns of
sum of money in the event ofnon-perfonnance ofa contract by a third
the undertaking of a written demand for payment and other documents
party. The guarantee is a separate obligation independent of the princi-
specified in the Counter-Guarantee which appear on their face to be in
pal debt or the contractual relationship between the creditor and the accordance with the terms of the Counter-Guarantee. Counter-Guaran-
principal debtor. Under the tenm of the guarantee the bank has to pay
tees are by their nature separate transactions from the Guarantees to
on first demand provided that the conditions contained in the guarantee
which they relate and from any underlying contract(s) or tender condi-
are fulfilled." UBS. Documen1arv Credits, Documentarv Collections,
tions. and Instructing Parties are in no ,vay concerned with or bound by
Bank Guarantees, op. cit., p. 86. · ·
186
such Guarantees. contract(s) or tender conditions. despite the inclusion
See Jack, op. cit., p. 261. of a reference to them in the Counter-Guarantee.
187
See /CC guide to export-import basics. op. cit.. pp. 154-162. and d. The expressions ..v.-Titing.. and "\\Titten ·· shall include an authenti-
UBS, Documemary Credits, Documentary Coliecrions, Bank Guaran- cated teletransmission or tested electronic data interchange {"ED!'')
tees, op. cit., pp. 94-106. message equivalent thereto.

39
40 Legal Aspects oflnternational Trade

mand guarantees under the ICC Uniform Rules provides as accessory to that of the principal. The primary liability
the beneficiary with an instrument similar to an irrevoc- for any default under a contract is that of the principal. If,
able letter of credit pursuant to which it can, at any time, however, the principal fails to remedy any default or make
up to the expiry date of that instrument, draw down a sum payment of any damages or financial compensation due in
up to the bond amount without any further proof or condi- respect of that default, the secondary obligations of the
tion-and despite any contestation or dispute on the part guarantor are available as security for the beneficiary. 195
of the principal-merely upon presentation of a demand
in the correct form accompanied by such documents as 240. As contract bonds involve the guarantor in an as-
may be specified. 191 sessment of allegations of breach or default affecting the
underlying contract, banks do not generally wish to be-
234. Article 20 of the ICC Uniform Rules sets forth the come involved in issuing this type of guarantee. Contract
formal requirement for payment under this type of guar- bonds will ordinarily be issued by insurance companies
antee. It requires that the demand for payment shall be in having the necessary expertise to become involved in
writing, and be supported by a written statement stating: determining whether or not a proper claim has arisen or a
default has given rise to payment. 196
(a) That the principal is in breach of his obligation(s)
under the underlying contract(s); and 241. Article 7 (j) of the Uniform Rules provides detailed
(b) The respect in which the principal is in breach. procedures for ascertaining whether a default has arisen,
as follows:
235. It is important to note that the statement of breach
does not need to be ·provided by a neutral third party un- Notwithstanding any dispute or difference between the
less, of course, this is expressly stipulated in the guaran- Principal and the beneficiary in relation to the perform-
tee. The beneficiary's own statement is sufficient. In prac- ance of the contract any Contractual Obligation, a Default
tice, although a demand guarantee can be given for any shall be deemed to be established for the purposes of these
percentage of the value of the underlying contract, be- Rules:
cause of its unconditional nature it is rare for principals to ( i) upon issue of a certificate of Default by a third
agree to demand guarantees for more than a small fraction party (who may without limitation be an independ-
(generally between 5 and I 0 per cent) of the total contract ent architect or engineer or a Pre-Arbitral referee
value. 192 of the ICC) if the Bond so provides and the service
of such certificate or a certified copy thereof upon
the guarantor, or
B. Suretyship guarantees (ii) if the Bond does not provide for the issue ofa cer-
tificate by a third party, upon the issue of a cer-
tificate of default by the Guarantor, or
236. These guarantees are also known as "conditional (iii) by the final judgement, order or award of a court
guarantees", since the delegations of the guarantor are ac- or tribunal of competent jurisdiction,
cessory to and co-extensive with the obligations of the
principal under the contract to which the relevant bond re- and the issue of a certificate of Default under paragraph
lates. Under suretyship guarantees, the beneficiary must (i) or (ii) shall not restrict the rights of the parties to seek
prove a breach of contract and establish that it has suf- or require the determination of any dispute or difference
fered damages before it is entitled to payment; "the obli- arising under the Contract or the Bond or the review of
gation of the guarantor is triggered by the actual default or any certificate of default or payment made pursuant
contractual breach of the principal as evidenced in a docu- thereto by a court or tribunal of competent jurisdiction.
ment such as a court judgement or arbitral award against
the principal". 193
237. Since suretyship guarantees provide a greater C. Main uses of guarantees
measure of protection for the principal than demand guar-
antees, it is not unusual for the amounts guaranteed to be
higher with this type of guarantee (between 30 and 242. The most important types of guarantees encoun-
tered in international trade are as follows:
40 per cent of the contract value).
238. To regulate the provisions of suretyship guaran- I. Tender bonds
tees, the ICC adopted, on 23 April 1993, the ICC Uniform
Rules for Contract Bonds. 194 243. Tender bonds (or bid bonds) are used to secure per-
239. The Rules were drafted to be used in connection forrnance in contracts awarded by competitive bidding. 197
with contracts where the beneficiary requires a bond as se- Tender bonds are designed to deter companies from mak-
curity for the performance of contractual obligations by
l<JS Article 3 (b) of the Uniform Rules provides as follows:
the principal. The Rules treat the liability of the guarantor
The liability ofthe Guarantor to the Beneficiary under the Bond is ac-
cessory to the liability of the Principal to the beneficiary under the Con-
191
Draft explanatory guide to the ICC Uniform Rules, ICC Publica- tract and shall arise upon Default. The Contract is deemed to be incor-
tion No. 524. revised 27 June 1996 and amended 30 January 1997. p. 2. porated into and fonn part of the Bond. The liability of the Guarantor
in ICC guide to export-import basics. op. cit., p. 157. shall not exceed the Bond Amount.
193 196
Ibid .. p. 158. Drai explanatory gwde to the ICC Uniform Rules for Contract
194
ICC Publication :\lo. 524; the Uniform Rules came into effect on Bonds, lCC Publication No. 524, pp. 3-4.
197
I January 1994. /CC guide to export-import basics. op. cit., p. 161.
 Bank guarantees as a protection against non-performance of the contractual obligations by the seller 41

ing a tender and then rejecting the contract when it is will only agree to such a down payment after receipt of an
awarded to them. Tender bonds are usually issued for a advance payment guarantee, which ensures repayment of
period of three to six months, until the signing of the con- the advance by the seller in the event of non-performance
tract or the issue of a performance bond. The amount se- of his contractual delivery obligations. The advance pay-
cured by the bond ranges from I to 5 per cent of the tender ment guarantee is usually provided for the same amount
price. as the advance payment. It often includes a clause
whereby the guarantee amount is automatically reduced in
244. A claim can be made under a tender bond if the ten- proportion to tbe value of any part shipments made.201
derer:
(a) Withdraws the tender before the expiry date; 4. Payment guarantee in case of non-payment

(b) Refuses to accept the awarded contract; 24 7. This type of guarantee is mainly used for the secur-
ing of payments made on an "open account" basis, but it
(c) Is unable or unwilling to provide the required per- may be used for several purposes, including as security
formance bond. 198 for the full payment of the delivery of goods or services.
The payment of a claim under a payment guarantee is usu-
2. Performance bonds ally made against the beneficiary's written declaration
that he has delivered the goods but has not received pay-
ment at maturity. 202
245. These guarantees cover the risk that the exporter or
contractor will fail to adequately perform the contract or
fail to perform in due time. The guarantee amount is gen- 5. Retention bonds
erally a stated percentage of the contract price, commonly
up to 10 per cent. 199 A performance bond is essentially a 248. These are commonly used in contracts involving
reinforcement of the contractual relationship between goods and services. They replace the retention of funds
buyer and seller. 200 during a certain period of time as a sort of security against
defects which are not immediately apparent. This type of
guarantee is commonly used in construction projects. 203
3. Advance payment

246. The basic purpose of an advance payment guaran- 6. Maintenance bonds

tee is to ensure that the money advanced by the buyer to
the supplier (seller) for the purchase of materials and for 249. These guarantees are commonly used to secure the
tbe cost of production is affected to such use. The buyer warranty obligations of equipment suppliers throughout
the period of the supplier's liability for defects.204
198
Documentary Credits, Documentary Collections, Bank Guaran-
201
tees, credit Suisse Publication, op. cit., p. l 00, and Documentary Cred- See UBS Publication, Documentary Credits, Documentary Col-
its, Documentary Collections, Bank Guarantees, UBS Publication, lections. Bank Guarantees, op. cit., p. 87 and Credit Suisse Publication,
op. cit., p. 87. Documentary Credits, Documentary Collections, Bank Guarantees, op.
199
/CC guide to export-import basics, op. cit., p. 159. cit., p. 104.
202
200 See Credit Suisse Publication, Documentary Credits, Documen- UBS Publication, Documentary Credits, Documentary Collec-
tary Collections, Bank Guarantees, op. cit., p. I02, and tions, Bank Guarantees, op. cit., p. 88.
203
UBS Publication, Documentary Credits, Documentary Collections, See ICC guide to export-import basics, op. cit, p. 161.
204
Bank Guaranteees, op. cit, p. 87. Ibid., p. I 61.
 ANNEXES
Annex I

INCOTERMS
ICC 1990 version
Group Abbrev. Description Mode Contract
E EXW Ex-works All modes Shipment
FCA Free Carrier All modes Shipment
F FAS Free alongside ship Sea only Shipment
FOB Free on board Sea only Shipment
CFR Cost and freight Sea only Sea only
C CIF Cost, insurance and freight Sea only Shipment
CPT Carriage paid to All modes Shipment
CJP Carriage and insurance paid to All modes Shipment
DAF Delivered at frontier Land only NIA
DES Delivered ex-ship Sea only Arrival
DEQ Delivered ex-quay Sea only Arrival
D
DDU Delivered duty unpaid All modes Arrival
DDP Delivered duty paid All modes Arrival

Definitions (as revised on 1 Jnly 1990)

Jncoterm Definition International code

Ex-Works '"Ex-works" means that the seller fulfils his obligation to deliver when he has EXW
[named place] made the goods available at his premises (i.e. works, factory, warehouse, etc.)
to the buyer. In particular, he is not responsible for loading the goods on the
vehicle provided by the buyer or for clearing the goods for export, unless oth-
erwise agreed. The buyer bears all costs and risks involved in taking the goods
from the seller's premises to the desired destination. This term should not be
used when the buyer cannot carry out directly or indirectly the export formal-
ities. In such circumstances, the FCA term should be used.

Free Carrier "Free carrier" means that the seller fulfils his obligation to deliver when he has FCA
[named place] handed over the goods, cleared for export, into the charge of the carrier named
by the buyer at the named place or point. Ifno precise point is indicated by the
buyer, the seller may choose within the place or range stipulated where the car-
rier shall take the goods into his charge. When, according to commercial prac-
tice, the seller's assistance is required in making the contract with the carrier
(such as in rail or air transport), the seller may act at the buyer's risk and ex-
pense.

43
44 Legal aspects of international trade

This term may be used for any mode of transport, including multimodal trans-
port. "Carrier" means any person who, in a contract of carriage, undertakes to
perform or to procure the performance of carriage by rail, road, sea, air or in-
land waterway or by a combination of such modes. If the buyer instructs the
seller to deliver the cargo to a person, e.g. a freight forwarder who is not a car-
rier, the seller is deemed to have fulfilled his obligation to deliver the goods
when they are in the custody of that person.

"Transport terminal" means a railway terminal, a freight station, a container

terminal or yard, a multi-purpose cargo tenninal or any similar receiving point.

''Container" includes any equipment used to unitize cargo ( e.g. all types of
containers and/or flats), whether ISO accepted or not, trailers, swap bodies, ro-
ro equipment and igloos, and applies to all modes of transport.

Free alongside Ship "Free alongside ship" means that the seller fulfils his obligation to deliver FAS
[named port of ship- when the goods have been placed alongside the vessel on the quay or in light-
ment] ers at the named port of shipment. This means that the buyer has to bear all
costs and risks of loss of or damage to the goods from that moment.

The FAS term requires the buyer to clear the goods for export. It should not be
used when the buyer cannot carry out directly or indirectly the export formal-
ities.

This term can only be used for sea or inland waterway transport.

Free on Board "Free on board" means that the seller fulfils his obligation to deliver when the FOB
[named port of ship- goods have passed over the ship's rail at the named port of shipment. This
ment] means that the buyer has to bear all costs and risks of loss of or damage to the
goods from that point.

The FOB term requires the seller to clear the goods for export.

This term can only be used for sea or inland waterway transport. When the
ship's rail serves no practical purposes, such as in the case of roll-on/roll-off or
container traffic, the FCA term is more appropriate to use.

Cost and Freight "Cost and freight" means that the seller must pay the costs and freight neces- CFR
[named port of desti- sary to bring the goods to the named port of destination but the risk of loss of
nation] or damage to the goods, as well as any additional cost due to events occurring
after the time the goods have been delivered on board the vessel, is transferred
from the seller to the buyer when the goods pass the ship's rail in the port of
shipment.

The CFR term requires the seller to clear the goods for export.

This term can only be used for sea and inland waterway transport. When the
ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or
container traffic, the CPT term is more appropriate to use.

Cost, Insurance and "Cost, insurance and freight" means that the seller has the same obligations as CIF
Freight under CFR but with the addition that he has to procure marine insurance
[named port of desti- against the buyer's risk of loss of or damage to the goods during the carriage.
nation] The seller contracts for insurance and pays the insurance premium.

The buyer should note that under the CIF term the seller is only required to ob-
tain insurance on minimum coverage.

The CIF term requires the seller to clear the goods for export.

This term can only be used for sea and inland waterway transport. When the
ship's rail serves no practical purposes such as in the case of roll-on/roll-off or
container traffic, the CIP term is more appropriate to use.
 Annex I 45

Carriage paid to "Carriage paid to ... " means that the seller pays the freight for the carriage of CPT
[named place of des- the goods to the named destination. The risk of loss of or of damage to the
tination] goods, as well as any additional costs due to events occurring after the time the
goods have been delivered to the carrier, is transferred from the seller to the
buyer when the goods have been delivered into the custody of the carrier.

"Carrier" means any person who, in a contract of carriage, undertakes to per-

form or to procure the performance of carriage, by rail, road, sea, air or inland
waterway or by a combination of such modes.
If subsequent carriers are used for the carriage to the agreed destination, the
risk passes when the goods have been delivered to the first carrier.

The CPT term requires the seller to clear the goods for export.

This term may be used for any mode of transport, including multimodal trans-
port.

Carriage and Insur- "Carriage and insurance paid to ... " means that the seller has the same obliga- CIP
ance paid to tions as under CPT but with the addition that the seller has to procure cargo
[named place of des- insurance against the buyer's risk of loss of or damage to the goods during the
tination] carriage. The seller contracts for insurance and pays the insurance premium.

The buyer should note that under the CIP term the seller is only required to ob-
tain insurance on minimum coverage.

The CIP term requires the seller to clear the goods for export. This term may
be used for any mode of transport, including multimodal transport.

Delivered at Fron- "Delivered at frontier" means that the seller fulfils his obligation to deliver DAF
tier when the goods have been made available, cleared for export, at the named
[named place] point and place at the frontier, but before the customs border of the adjoining
country. The term "frontier" may be used for any frontier, including that of the
country of export. Therefore, it is of vital importance that the frontier in ques-
tion be defined precisely by always naming the point and place in the term.
The term is primarily intended to be used when the goods are to be carried by
rail or road, but it may be used for any mode of transport.

Delivered ex-ship "Delivered ex-ship" means that the seller fulfils his obligation to deliver when DES
[named port of desti- the goods have been made available to the buyer on board the ship uncleared
nation] for import at the named port of destination. The seller has to bear all the costs
and risks involved in bringing the goods to the named port of destination.

This term can only be used for sea or inland waterway transport.

Delivered ex-quay "Delivered ex-quay (duty paid)" means that the seller fulfils his obligation to DEQ
[named port of desti- deliver when he has made the goods available to the buyer on the quay (wharf)
nation] at the named port of destination, cleared for importation. The seller has to bear
all risks and costs including duties, taxes and other charges of delivering the
goods thereto.
This term should not be used if the seller is unable directly or indirectly to
obtain the import licence.

If the parties wish the buyer to clear the goods for importation and pay the
duty, the words "duty unpaid" should be used instead of"duty paid".

If the parties wish to exclude from the se11er's obligations some of the costs
payable upon importation of the goods, such as value added tax (VAT), this
should be made clear by adding words to this effect: "Delivered ex-quay, VAT
unpaid [named port of destination]."

This term can only be used for sea or inland waterway transport.
46 Legal aspects of international trade

Delivered duty "Delivered duty unpaid" means that the seller fulfils his obligation to deliver DDU
unpaid when the goods have been made available at the named place in the country of
[named place of importation. The seller has to bear the costs and risks involved in bringing the
destination] goods thereto (excluding duties, taxes and other official charges payable upon
importation, as well as the costs and risks of carrying out customs formalities).
The buyer has to pay any additional costs and to bear any risks caused by his
failure to clear the goods for import in time.
If the parties wish the seller to carry out customs formalities and bear the costs
and risks resulting therefrom, this has to be made clear by adding words to this
effect.

Delivered duty paid If the parties wish to include in the seller's obligations some of the costs pay- DDP
[named place of able upon importation of the goods (such as VAT), this should be made clear
destination] by adding words to this effect: "Delivered duty unpaid, VAT paid, [named
place of destination]".
This term may be used irrespective of the mode of transport.
"Delivered duty paid" means that the seller fulfils his obligation to deliver
when the goods have been made available at the named place in the country of
importation. The seller has to bear the risks and costs, including duties, taxes
and other charges, of delivering the goods thereto, cleared for importation.
Whilst the EXW term represents the minimum obligation for the seller, DDP
represents the maximum obligation.

This term should not be used if the seller is unable directly or indirectly to ob-
tain the import licence.
If the parties wish the buyer to clear the goods for importation and to pay the
duty, the term DDU should be used.
If the parties wish to exclude from the seller's obligations some of the costs
payable upon importation of the goods (such as VAT), this should be made
clear by adding words to this effect: "Delivered duty paid, VAT unpaid
[named place of destination]".

This tenn may be used irrespective of the mode of transport.

Source: ICC, Incotenns 1990, Paris, ICC Publication No. 460.

 Annex II
BRITISH MARINE INSURANCE COVERAGE

Coverage
Clause Clause Clause War Strike
Type of risk A B C Clause Clause
1. Fire or explosion

2. Stranding, wreck, capsizing

3. Overturning, derailment of land vehicle

4. Collision of ship

5. Discharge of cargo at port of refuge

6. Earthquake, volcanic eruption, lightning

7. General average sacrifice

8. (a) Jettison

(b) Carrying away by sea

9. Entry of sea, lake or river water

IO. Total loss of package during cargo handling

11. "'Sue and labour clause" (protective measures)

12. Theft, looting, non-delivery

13. Damage due to condensation or heat

14. Contamination of other goods

15. Leakage
16. Breaking and other particular average

Exclusions:
1. Negligence of the insured
2. Normal wear and tear, age

3 Insufficient or improper packaging

4. Inherent defect or nature of the goods insured
5. Delay
6. Insolvency of shipowner
7. Use of atomic weapon
8. Wrongful act
9. War
10. Strikes

Source: D. Chevalier, '"International Trade Forum", October-December 1989, p. 26.

47
 Annex III

COMBITERMS: COST DISTRIBUTION BETWEEN SELLER AND BUYER

• •. .••
=
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001
"' Ex·worlcs (named place]
•s • •s •s •s •s • • • • • • • • ••
002 fCA Free carrier seller's premises
•s • • • • • • • •
003 fAS free alongside ship (named port ot shipnent] s • • • • • • • • • • • • •
004 f0B Free on board {named port of shipment] s s s s s s • • •• • • • • •
005 fCA free carrier (named ter111inal 1l s s s s s s •s •s • • •' • •• •
006 s s s s
• • • • •
[;]•
CPT carriage paid to [named frontier point in s s
country of dispatch]
007 CIP Carriage and insurance paid to[named frontier s s s s s s s s s • • • • •
... I ooa
point in country of dispatch]

"' CfR Cost and freight (named port of destination] s s s s s s s s s s • • • • •

009 Clf Cost, insurance and freight [named port of
destination]
s s s s s s s s s s s • • • • •
010 Carriage paid to (named frontier point in s s s s s s
•• • • • •
Q
CPT s s
country of destination]
011 CIP Carriage and insurance paid to {name of
frontier point in country of destination}
s s s s s s s s s • • • • • • •
012 CPT Carriage paid to [named terminal 2) s s s s s s s s s s •• • • •• •
013 CIP Carriage and insurance paid to [named
terpiinal 21
s s s s s s s s s s s
• • •
014 CPT Carriage paid to buyer's premises s s s s s s s s s s • • • s •
015 CIP Carriage and insurance paid to buyer's
premises
s s s s s s s s s s s • • • s •
016 0ES Delivered ex·ship [named part of destination) s s s s s s s s s •s • • • • •
017 OED Delivered ex·quay [named port of
destination), duty unpaid
s s s s s s s s s • • • • •
018 OAf
oou
Del j11ered at frontier [named terminal 21 s s s s s s s s s s • • • • •
019 Delivered duty unpaid [named terminal 2] s s s s s s s s s s • •s • ••
020 OED Delivered ex·quay named port of destination], s s s s s s s s s s s • •
021

022
023
0OP

oou
0OP
duty paid, exclusive of [named tax]
Delivered duty paid (named terminal 21,
exclusive of [named tax]
Delivered duty unpaid buyer• s prerni ses
Delivered duty paid, buyer's premises,
exclusive of [named tax)
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
s

s
s
D s •
•s ss •
•

Source: J. Ramberg, JCC Guide 10 lncoterms, Paris, January 1991.

 Annex IV

STANDARD SHIPPING TERMS

Port of loading Carriage Port of discharge

Gate term
, .. £?:J: I
~ 7~
6 ~
Costs ~I
Risk

Warehouse term
• ,;:f;.a I
~ 7 \,
0
h f..);,'
.
so
Costs
Risk

Quay term

Costs
Risk
..,er~ ~ r?:t,'
Ship tenn

Costs
Risk
I .,t?:t I ~~ I £:),. I
◄--------------------
 Annex V

DISTRIBUTION OF COSTS AND RISKS PURSUANT TO INCOTERMS

■ Seller's risks and costs Packing Loading Inland Export Handling Main .cargo Handling Import Inland Unloading Mode of
0 Buyer 1 s risks and costs and transport clearance transport insurance clearance transport transport
checking
i'1
!ncoterms code

Ex-works EXW ■ 0 0 0 0 0 0 0 0 0 0 HT

Free carrier (named place} FCA ■ ■ ■ ■ 0 0 0 0 0 0 0 HT,AT,RT

Free alongside ship FAS ■ ■ ■ '.] 0 0 0 0 0 0 0 ST

[named port of shipment]

Free on board FOB ■ ■ ■ ■ ■□ 0 0 0 0 0 0 ST

[named port of shipment]

Cost and freight CFR ■ ■ ■ ■ ■ ■ 0 0 0 0 0 ST

(n.i.med port of destination]

,,. Cost, insurance and freight CIF ■ ■ ■ ■ ■ ■ ■ 0 0 0 0 ST

Q [named port of destination}

carriage paid to CPT ■ ■ ■ ■ ■ ■ 0 0 0 0 0 HT

[named place of destination]

Carriage & insurance paid to CIP ■ ■ ■ ■ ■ ■ ■ 0 0 0 0 MT

[named place of destination]

Delivered at frontier DAF ■ ■ ■ ■ ■ ■□ ■□ 0 0 0 0 HT

{named place]

Delivered ex-ship DES ■ ■ ■ ■ ■ ■ ■ 0 0 0 0 MT

[named port of destination]

Delivered ex-quay DEQ ■ ■ ■ ■ ■ ■ ■ ■ ■ 0 0 ST

[named port of destination]

Delivered duty unpaid DDU ■ ■ ■ ■ ■ ■ ■ ■ 0 ■ ■ ST

(named place of destination]

Delivered duty paid DDP ■ ■ ■ ■ ■ ■ . ■ ■ ■ ■ ■ ><T

(named place of destination]

11
MT: any mode, including multimodal AT: air transport RT: rail transport ST: sea and inland waterway transport
 Annex VI

INTERNATIONAL USAGE OF TRADE PAYMENT TERMS

Payment terms across international trade routes

Payment terms (%)

Open Letters Collections Advance paJ'-
Routes account of credit ments

Exports from the European Uniona

European Union 72 8 9 11
North America 70 10 8 12
Central and South America 18 48 12 22
Africa 22 46 8 12
Far East 28 45 15 12
Middle East 32 42 11 15
Asia 24 46 8 24

Imports to the European Uniona

European Union 73 8 12 7
North America 76 7 10 7
Central and South America 76 7 11 6
Africa 36 33 13 J8
Far East 22 39 22 16
Middle East 28 42 18 12
Asia 20 26 24 12

United States exports to b

European Union 76 7 10 7
Canada 60 30 5 5
South America 45 35 10 10
Africa 45 40 5 10
Far East 45 40 10 5
Middle East 75 I5 5 5
Oceania 60 30 5 5

United States imports from h

European Union 70 10 8 12
Canada 60 30 5 5
South America 60 30 5 5
Africa 50 40 5 5
Far East 40 45 10 5
Middle East 60 20 JO 10
Oceania 50 35 10 5

Far East exports to b

European Union 23 39 22 16
North America 35 55 5 5
South America 35 55 5 5
Africa 25 60 10 5

51
52 Legal aspects of international trade

Middle East 45 45 5 5
Oceania 40 45 10 5
Far East imports from •
European Union 28 45 15 12
North America 40 45 10 5
South America 45 35 10 5
Africa 45 45 5 5
Middle East 55 35 5 5
Oceania 50 40 5 5

Source: Through Transport Mutual Insurance Association Ltd. and SWIFT s.c. The Bolero Project: used by permission.
a Information provided by the United Kingdom, Central Statistical Office and Department of Trade and Industry, 1994.

b Reproduced by kind permission of the Bank Relationship Consultancy, 1997.

 Annex VII

THE STAGES OF A DOCUMENTARY CREDIT

I. (Sales contract)
SELLER BUYER

(Beneficiary) 5. (Goods) (Applicant)

11. (Release of goods)

'2 ~
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~

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:,
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2.
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,...; 0
-0

3. (Credit)

8. (Documents)
BANK BANK

(Advising/confirming) 9. (Payment) (Issuing)

53
 Annex VIII

CHECKLIST FOR DOCUMENTARY CREDITS

A. Checklist for the seller after the issuance of the documentary credit

General points
Does the documentary credit correspond with the contract, especially in connection with
--the amount/unit price?
--the period of validity/time limit for shipment?
--the terms of delivery?
--the description and origin of the merchandise?
Is the documentary credit revocable, irrevocable/unconfirmed or confirmed?
Is it transferable, if necessary?
Where and how is the credit available?
If unconfirmed or confirmed by a bank abroad, how do you assess
(a) the credit risk (creditworthiness of the bank)?
(b) the conditions in the buying country (political and transfer risk)?
(c) the mailing risk (if credit is available abroad)?
Are the names and addresses of the applicant and the beneficiary correct?
Is the documentary credit subject to the ICC's currently valid Uniform Customs and Prac-
tice for Documentary Credits?
• Is there sufficient time available to complete attestation and authentication procedures?
Are declarations requested in the documents which cannot be made?
Are documents stipulated which are contradictory to the terms of delivery?
Does the credit stipulate documents which need to be drawn up or countersigned by the
buyer or his bank? (In such a case, the utilization of the credit depends to a large extent on
the goodwill of the buyer.)
Can the required number of specified documents be furnished?

Deadlines and shipment of goods

• Can the shipment deadline be met?
• Are the terms regarding the place where the goods are to be taken into possession and the
points of departure and arrival feasible?
Are part-shipments and !rans-shipments prohibited contrary to the terms of contract?
Can the prescribed marks and modes of transport be provided?
Can the documents be presented in the desired form by the dates specified in the credit? (If
the credit stipulates a transport document, the documents have to be presented at the bank
not later that 21 days after the date of shipment unless the credit stipulates another time
limit.)
Are you familiar with the expressions of time utilized in the credit''

54
 Anne, VIII 55

Draft

Are you absolutely certain about the way the draft should be made out?

Invoice
Can the description of the goods in the invoice be taken word for word from the documen-
tary credit?

Transport documents in general

• Are you aware that if the transport document is not described precisely, banks do not accept
any document that
(a) is subject to a charter party (only in the case of seaborne transport),
(b) designates loading on deck (only in the case of seaborne transport),
(c) stipulates carriage by sailing ship,
(d) is issued by a freight forwarder, unless such document is signed by the freight for-
warder in capacity of the carrier or multimodal transport operator or as a named agent
on behalf of a carrier or multimodal transport operator whose name is to be indicated
on the document?

• Are you aware that if goods are exported through the intermediary of a company domiciled
abroad (a subsidiary), in some countries the value of the merchandise has to be stated in the
transport documents. Does this value correspond to the amount and the currency in your
invoice?
• Rail freight: can the duplicate of the railway bill be obtained?

Marine/ocean bill oflading

• Does the freight forwarder who will issue the bill of lading act as carrier or as agent of an
expressly named carrier?
• Is the bill of lading to be issued to order of the buyer or is it to be made out in his name? In
both events it will be extremely difficult to arrange any return of the goods. This point
should be taken into full account.
• Do the prescribed freight notations conform to the terms of delivery?

Charter party bill oflading

• Does the credit call for such document or allow that a charter party bill of lading is
acceptable?

Multimodal transport document

• If goods must be dispatched by more than one mode of transport, does the credit call for a
multimodal transport document?

Air transport document

Does the freight forwarder who will issue the air transport document act as carrier or as
agent for an expressly named carrier?

Insurance documents

• Can the terms of insurance be fulfilled?

Will you be able to cover accurately the risks described in the credit? (Avoid imprecise for-
mulations such as "customary risks", etc.)
• Does the insurance cover exceed the requirements stipulated in the contract?
56 Legal aspects of international trade

Is it clear whether a policy or a certificate is required? (Broker's cover notes will not be
accepted by the bank unless expressly permitted in the credit.)

Certificate of origin

Are the Chamber of Commerce and a consulate willing to attest or authenticate the state-
ments required to appear on the certificate of origin?
Iflegalization is necessary, does the respective country maintain a consulate where needed?
Can a certificate of origin issued in the country of origin be furnished in time?
• Can the legalization be effected in time?

B. Checklist for the seller for the verification of the documents prior to
presentation to the bank

General points

• Is the credit still valid and have the shipment dates been adhered to?
• Are the documents all present in the prescribed form and number? Can they be presented at
the bank within the prescribed period after the date of shipment? If no such condition is
stipulated in the credit, a period of 21 days is valid according to article 43 (a) of the UCP.
• Are the data in the documents consistent with each other?
Are the attestation and legalization procedures completed?
Have, contrary to the terms of the credit, part-shipments or partial utilizations been
effected?

Draft (bill of exchange)

Does the form of the draft meet the legal requirements?

• Does the draft, if made out to the order of the beneficiary, bear an endorsement?
Does the draft contain all the clauses required in the credit?
Invoice
• Is the invoice signed in the event that it is stipulated in the credit or in case the invoice
includes any certificates, affidavits, etc.?
• Unless otherwise stipulated in the credit, is the invoice made out in the name of the appli-
cant of the credit (article 37 (a) (i) of the UCP)?
• Do the currency and the amount stated in the invoice as well as the individual items corre-
spond to the terms of the credit?
Does the description of the goods correspond exactly to the description in the credit
(article 37 (c) of the UCP)? We recommend that this is rendered word for word.
Are the terms of delivery, price and, if stipulated, customs tariff and licence numbers, etc.,
specified?
• Are any additional goods or costs listed in the invoice which are not stipulated in the docu-
mentary credit or implied in its delivery terms?

Transport documents in general

Documents which evidence shipment on board or dispatch or taking in charge or acceptancefor

carriage or receipt for dispatch
Is the document issued by a freight forwarder not acting as carrier or agent of an expressly
mentioned carrier?
 Annex VIII 57

• Is the transport document "clean", that is, without bearing a clause or notation which
expressly declares a defective condition of the goods and/or the packaging?
• Did you ensure that in the case of seaborne transport, the transport document is not subject
to a charter party or does not stipulate loading on deck?
Are the goods, contrary to the terms of the credit, to be trans-shipped (see articles 23, 24,
26, 27 and 28 of the UCP)?

Marine/ocean bill of lading

If, as transport document, a bill of lading covering port-to-port shipment is stipulated:

Does it indicate the name of the carrier and is it signed by the carrier or the master, or
named agent on behalf of the carrier/master?
Does it stipulate that the goods have been shipped on board an expressly mentioned vessel?
• Has the full set of originals been handed over?
Is it marked "charter party" or were the goods transported on deck?
Does the word "intended" or a similar expression appear in connection with the vessel or
the port of loading or discharge? The notation "intended" is only permitted under certain
conditions (see article 23 (a) (ii) and (iii) of the UCP).
Are goods, contrary to the terms of the credit, to be !rans-shipped (see article 23 (b), (c) and
(d) of the UCP)?
Did you make certain that it was not issued by a freight forwarder (unless the freight for-
warder is acting as carrier or agent of an expressly named carrier - see article 30 of the
UCP)?
Is the merchandise consigned as stipulated (bearer, to order of a named consignee or direct
to a named consignee without a "to order" notation)?
Is the "notify address" correct?
• Are the original bills of lading properly signed, and endorsed if necessary?
• Do all the bills of lading show the number of originals issued?
Is the bill of lading "clean", that is, without bearing a clause or notation which expressly
declares a defective condition of the goods and/or the packaging?
• Are all alterations on the bill oflading properly countersigned?

Charter party bill of lading

• Does it contain an indication that it is subject to a charter party?

Is it signed by the master or owner, or by a named agent for the master/owner?

Multimodal transport document

Does it indicate the name of the carrier or multimodal transport operator?

Is it signed by the carrier or multimodal transport operator or master, or by a named agent
for one of the three parties?

Courier and post receipts

• Is the receipt of goods for delivery stamped or signed by a named courier service and does
it indicate the date of pick-up or ofreceipt?
Is the postal receipt issued or stamped at the same place stipulated in the credit as being the
place of dispatch?
58 Legal aspects of international trade

Air transport document

• Does the air transport document indicate the name of the carrier and is it stamped and/or
signed by the carrier or a named agent on behalf of the carrier? (Air transport documents
issued by freight forwarders will not be accepted by the bank unless the freight forwarder is
acting as carrier or agent for an expressly named carrier.)
• Is the original air transport document to be submitted to the bank the so-called "original for
consignor/shipper"?
Whenever stipulated in the credit, does the air transport document, in addition to the date of
issuance, bear separately the actual date of dispatch? The information appearing in the box
on the air transport document (marked "for carrier use only" or similar expression) relative
to the flight number and date will not be considered as a specific notation of such date of
dispatch.
Is the air transport document "clean", that is, without bearing a clause or notation which
expressly declares a defective condition of the goods and/or the packaging?
Are the consignee's name and address in agreement with the terms of the credit?

Insurance documents

Is the insurance document of the right type (i.e. is it a policy or a certificate, etc.)? Brokers'
cover notes are not accepted by the bank unless expressly permitted in the credit.
Are the specified risks covered?
• Has the document
been submitted in a full set?
been endorsed, if necessary?
not been dated later than the date of dispatch? (if not, the document must expressly state
that insurance cover is effective at the latest from the date of loading on board or dispatch
or taking in charge of the goods, according to article 34 (e) of the UCP.)
been issued in the same currency as the credit and for the specified amount, or at least for
the CIF or CIP value plus 10 per cent? (If the CIF/CIP value cannot be determined,
110 per cent of either the amount drawn under the credit or the gross amount of the relative
commercial invoice, whichever is greater, applies.)

Certificate of origin
Has it been attested/authenticated by the required authorities?
If necessary, has it been issued in the country of origin of the goods?

Weight list
• Are the exact gross and net weights specified? Do they correspond to those shown in the
other documents?
If the credit stipulates a certificate of weight, has this document been signed?

Packing list
• Does the packing list contain the necessary details such as total number of units, number of
units in each package, container breakdown, etc.?
Are the marks consistent with those on the transport document?

Certificates of analysis and survey

Were they issued and signed by the required companies?
• Are the results of the analysis consistent with the terms of the credit and do they correspond
with the data in the other documents?
 Annex VIII 59

Consular invoice
Is the consular invoice "customary in trade", i.e., does it conform to the regulations of the
importing country?
• Have the attestation regulations been fulfilled?
If a breakdown of the CIF invoice amount in FOB plus freight plus insurance costs has been
stipulated, are those details consistent with the other documents?
Source: Union Bank of Switzerland (January 1994 ).
 Annex IX
SPECIMEN OF IRREVOCABLE STANDBY LETTER OF CREDIT
From,
To (Beneficiary's Bank)
Teston CHF
- our ref. SPECIMEN
attn.

IRREVOCABLE STANDBY LETTER OF CREDIT No. SPECIMEN

We hereby issue our Irrevocable Standby Letter of Credit as per following specifications:
Form of Credit: Irrevocable
Credit Number: SPECIMEN
Reference pre-advice:
Date of issue of credit:
Date and place of expiry: ( )/
Issuing Bank: Bank
Applicant:
Beneficiary:
Currency/Amount: CHF (Swiss Francs)
Available with:
by: Payment. We shall effect payment to a bank account of your
choice with a deferred value date of banking days after
receipt of your duly encoded telex or cable or swift confirm-
ing that you have taken up and despatched to our address
documents strictly complying with the terms and conditions
of this Irrevocable Standby Letter of Credit.
Partial drawings: allowed
Covering/relating to:
Documents: Beneficiary's duly signed statement that applicant , ... (e.g.
has failed to fulfil his contractual obligations ... ).
Additional conditions:
Commission and charges: All commission and charges outside Switzerland are for
beneficiary's account.
Period for Presentation of
documents: Within credit validity
Confirmation instructions: Add your confirmation
Operative instrument: Yes
We hereby undertake that payment will be effected if documents tendered comply with the credit terms
and if all other conditions of this credit are fulfilled.
This credit is issued subject to Uniform Customs and Practice for Documentary Credits, 1993 revision,
ICC Publication No. 500.
Documents to be sent to us by registered airmail/by courier service in one lot to the following address:
Bank
Document
Source: UBS (1998)

60
 Annex X

SPECIMEN OF PERFORMANCE BOND

PERFORMANCE BOND No. SPECIMEN

Dear Madams, dear Sirs

You have concluded on with Messrs , a contract No. for at a price of CHF
As security for the due performance of the contract, an indemnity by a bank shall be furnished.

At the request of Messrs , we, the BANK , herewith irrevocably undertake to pay you on
first demand, irrespective of the validity and the effects of the above-mentioned contract and waiving
all rights of objection and defence arising therefrom, any amount up to

CHF (Swiss Francs)

upon receipt of your duly signed request for payment stating that Messrs , have failed to fulfil their
contractual obligations.

The total amount of this indemnity will be reduced by any payment effected hereunder.

For the purpose of identification, your request for payment in writing has to be presented to us through
the intermediary of a first rate bank confirming that the signatures thereon are legally binding upon you.

Your claim is also acceptable if transmitted to us in full by duly encoded telex/cable/swift through a first
rate bank confirming that your original claim has been sent to us by registered mail and that the signa-
tures thereon are legally binding upon you.

Your claim will be considered as having been made once we are in possession of your written request
for payment or the telex or cable or swift to this effect at our above address.

Our indemnity is valid until

( )

and expires in full and automatically if your claim has not been made on or before that date, regardless
of such date being a banking day or not.

This indemnity is governed by Swiss law, place of jurisdiction is Geneva.

Document

Source: UBS ( 1998)

61
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Printed at United Nations, Geneva United Nations publication

GE.99-5030()-April 1999--3,035 Sales No. E.99.11.D.6
UNCTAD/SDTE/BFB/2 ISBN 92-1-112446-8