Sunday, June 02, 2013

Do letters of credit have expiry dates?

Do letters of credit have expiry dates?[i]
 Rupnarayan Bose[ii]

“Date”, in relation to documentary credits, appears in various contexts in the UCP. We come across expressions such as “expiry date of credit”, “last day for presentation”, “expiry date for honour or negotiation” or simply “expiry date”. This article attempts to interpret these expressions in the context of documentary credits and proposes what “expiry date” as stated in a credit is supposed to signify.

An L/C, in many ways, is similar to a contract[iii]. A credit’s author is called the issuing bank. When a bank issues a letter of credit, it takes on certain financial risks and responsibilities on behalf of its client (applicant). According to sub-Article 7(b) of UCP 600:An issuing bank is irrevocably bound to honour as of the time it issues the credit.” Thus, the date of issue of a credit (SWIFT Field 31C, MT700) is when, as far as the issuing bank is concerned, a letter of credit comes into being.

While it is for the issuer to set the terms of the documentary credit, it’s for the beneficiary to accept or act on it. The beneficiary is not obliged to (contd...)


[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]





[i] Published in DCInsight, pp 16, Vol 19 No. 2, April-June 2013.
[ii] CEO, International Trade Services. Website: www.internationaltradeservices.in. Contact: rnbose@gmail.com.
[iii] Refer to this author’s article “Some random thoughts on the UCP”, LC Monitor-Trade Services Update, Special Edition, January 2011.
[iv] Refer to article Wanted: A more positive Article 15, Rupnarayan Bose, DCInsight, Vol. 18, No. 4, October-December 2012.

Monday, May 20, 2013

The chain-mail conundrum

Forwarding e-mails (mostly received from others who have similarly forwarded them to us) is a favourite pastime of many. Some have, however, made it a full-time occupation. This piece is primarily about them.


Anyone accessing the internet sometime or the other would surely be aware that there exists an active industry churning out (and recycling) sob-stories, free offers, religious craps and the like, looking for victims in the cyberspace. The first variety is mostly of the ‘chicken soup for the soul’ brand. The stories are mushy, tell of some act of charity or bravery, preach some wonderful sermons (even the Pope could take a leaf out of them) which sound great when you read it for the first time, some lifestyle tips and so on. The basic idea is primarily to pull at the readers’ heart strings (the success of the ‘chicken soup...’ series of books will give you some idea of their universal appeal) and trap them into following the subsequent steps.
Then there is another variety. This says, ‘Forward to ten of your friends in five minutes and you will be the beneficiary of all the blessings of some god or the other, get a free Sony Ericsson high-end mobile phone (claiming that it was a marketing drive by Sony); forward to twenty in 5/10 minutes, and you get a S-Class Mercedes; forward it to forty in five minutes and your Swiss Bank numbered account will be credited with hundred million dollars (yes, USD!)’. And then they add the fear factor, full of threats and horrendous consequences. God (the same one, in all probability!) help you if you don’t do as told. The wrath of Satan will befall you…etc. etc. etc. Some of these e-mails follow up with supposedly real names of those who acted promptly and received unheard of rewards. They also give details of who got what and how much (there is no means to verify the information, but who is interested!). Such e-mails also tell you who got punished for not following the directives in such e-mails.
Some may even ask you to copy the message to a particular address every time you forward a message to twenty others. Obviously to keep track of all your good deeds and later send you the rewards for your troubles, or so you assume!
Whereas the first group play on people’s emotions, the second play on the primal instincts of fear and greed. Some who forward these e-mails want to spread good cheer. Others say to themselves, “It costs me nothing to forward it to 20 of my acquaintances. May be, it could benefit them too (of course, after first benefiting ME!)’’. A click of the mouse, and your mail box is deluged with these messages, day in and day out. The threat at the end of such e-mails, of course, plays its silent role in acting as a motivator.
There is another type of people who probably have nothing better to do. They forward to you YouTube links to items which they assume that you’d enjoy, find useful or informative, or something absolutely irrelevant (to you, but not to him). There are several I know of who keep forwarding messages, at the same time stating something like, “Got this from a friend on the net. No idea if it works. Nothing to lose by someone trying it out.” (Quoted verbatim from a message received on 12 September from a friend of mine based in London). The message was about removing gall stones! You’d have to have his head examined to find out why on earth this "friend" (who had no idea if I or any member of my family had gall stones!) found it necessary to send that message to me.
After I received one so-called e-mail about the Sony Ericsson promotion, I checked with Sony. They denied having ever floated such a promotion (I still have their e-mail with me). There was another about some hospital in Nebraska, USA where a teenaged boy was dying of cancer. The mail said that he had a message for everyone (another lengthy sob story). The hospital promptly denied ever having such a person as its patient.
Many must have forwarded mails they received with 5/10/15 minutes of opening their mail boxes, expecting a reward or to escape the threatened consequences. I wonder how many individuals that you PERSONALLY know that have received the promised windfall benefits. How many have been cast into Hell for not doing as directed? Incidentally, how does anyone actually count the ‘minutes’ (remember the threat, if you do not forward to so many individuals within so many minutes....etc.)? From the time it arrives in your mail box, from the time you open your mail, how? Who keeps track, anyway?
The question that begs an answer is this: If these ‘forward>forward>forward’ e-mails were actually meaningless pursuits or of no consequence, why were they being generated? What makes them go around the world so many times? To answer the second question first, it is nothing but greed, the lure of easy money, of something for nothing. The answer to the first question, and the more relevant one, is: Obviously, for someone’s benefit. For, every time you open your address book and forward these e-mails, you are revealing to the world personal details (e-mail is personal contact information) of someone else, giving a go-bye to the confidentiality or the convenience of the person concerned, acting without his knowledge and permission. The person who receives your bulk mail may know only you. He may not have the faintest idea who the others included in your copied/forwarded mail might happen to be.
But then, would he care in the least? Not at all! He would forward your mail anyway, once again. It takes just a click of the mouse and costs virtually nothing; what does he got to lose, any way? May be someone will benefit, he’d hope. Never mind if he does not agree to the content of the message. Greed and fear help him to overcome such minor distractions. Before forwarding, neither would he take the trouble to physically delete the e-mail addresses carried over from earlier (unknown) senders. So the length of message keeps growing, carrying over all the gory details from former posts.
Can you estimate even roughly how many e-mail addresses one such ‘forwarded’ e-mail may contain if each of us has sent to ten others; every one of those ten having sent it to another ten, and so on, one particular mail having passed through ten hands and multiplied on an exponential basis? If you try out your maths, the answer would stagger you.
A point that often goes unappreciated is the fact that every message that one sends, carries with it an electronic signature. The digital signature is not readily visible, but it is not a great secret and is easily accessible to anyone who wishes to have it for his use. The signature can help the receiver of a message trace the electronic path right back to the source and identify the origin of every message generated. Your location and identity remain confidential no more, thanks to someone else’s generosity.
The e-mail fraud (I would call it just that) is, thus, nothing but the cheapest and the most convenient method used to get hold of totally free, genuine, current and active e-mail addresses. Obtaining such databases would, otherwise, cost the earth.
Spams have unfortunately become a part of our life. We know that computer-generated e-mails are one of the many methods used to spawn spam mails. But the chances are that e-mails created by computer programmes may not be real or active. These attempts are mostly shots in the dark. Therefore, the hit rate is very low, and the results uncertain. On the other hand, the e-mail addresses that you and I help to generate so freely for their benefit, because of their very nature, are worth much, much more. These are, therefore, much sought after by the senders of spam mails and the faceless mail-marketing guys.
There is a third group of the ‘forward’ club that I have not talked about yet. They forward to their friends matters of special interest like jokes, management lessons and things they like to share. I have nothing against them as such. On the contrary, I have in my collection some gems I received from my very considerate friends who shared them with me.
These messages are not harmful because the sender does not insist that you forward these messages to ten or twenty others in ten minutes (or God help you...!). These have little or no nuisance value, since these e-mails are mostly one-to-one, or one-to-many, and are confined to a close circle. Most of the time they do not multiply exponentially, neither do they land in the hands of total outsiders as do the other mails, or pass on personal information to all and sundry.
However, a few words of caution may be in order here. Firstly, before you forward an item that you like to share with someone you know, do show some respect for his time and patience. Rather than simply clicking on the ‘forward’ button, take a little trouble to go through the body of the e-mail. Delete the portions that are irrelevant (like the preceding personal messages, or the large number of e-mail addresses). Clean up the message, retain only the section that you wish him to read, before you hit the ‘forward’ button. This will not only help the receiver to find the intended part quickly, but keep the length of the message to the minimum, thus reducing the overall load on the system.
Secondly, take a second to add a personal note to the person you are forwarding the message to. It is courteous to do so. More importantly, it tells the receiver that the message is not the carrier of any virus. Computer virus gets transmitted through auto-generated messages (mostly, but not always, as attachments) that sometimes carry a bland, impersonal text message on the body of the e-mail, thus: ‘Hi, you’d like this’, ‘something interesting for you’, ‘good one, have a look’, or ‘Hi, this is great, very interesting.’ Some of the computer viruses can hijack your address book without your knowledge and send off e-mails with bland messages as described above. If such mails are opened, the computers of your friends who receive them would get infected. The chain thus continues to grow.
As a matter of routine precaution, I delete all messages (including attachments) that do not carry a personal note addressed to me. On receipt of these impersonal messages, (if I don’t delete them immediately) I invariably enquire with the sender if he/she had actually sent me the message. Till date, 99% of these messages have turned out to be false, virus generated/affected, hence promptly deleted.
Finally, size matters (no pun intended). If the file size is large (say, containing several pictures, pushing up the file size to over 3 MB), do your friend a favour. Think twice before you send him such messages. Large files clog up the mail box, slow down the system horrendously, and act as great nuisance on a busy day, especially if the download takes ages and one is pressed for time.
Therefore, before you blindly hit the ‘forward’ button, take a few seconds to think about the implication of your action.
As I finished writing this piece, I received another ‘forwarded’ e-mail titled ‘Health tips - the joy of good sex’. It had some saucy pictures of an attractive couple in various suggestive poses and stages of undress. At the tail-end of the series of pictures and the narratives recounting the benefits of good sex, the message said (I quote exactly as received): “Do not keep this message, it must disappear from you mailbox in 96 hours. Send 10 copies and see what happens in 4 days. This message must go around the world. She will visit you 4 days after you have received this message, but only if you circulate it. If you do not, then you will never have good sexual relations again for the rest of your life. You will be celibate and your genital organs will rotten and fall off.”
Read carefully through the above quote, and you cannot miss the several fallacies in the message. Yet, I received it because someone did act on it, did actually forward it to me without giving a thought about how ridiculous the message, the promise and the threat were. He forwarded it without a thought about how ridiculous the sender himself may appear by doing so, since he had taken the time and the trouble to forward to others such an idiotic item, obviously looking forward to the promised visit or hoping to avoid the implied threat.
Of course, I have no intention whatsoever to forward the message to anyone, to circulate it futher. If you need a copy of the message, you would have to ask me specifically, before I delete it. You can also e-mail me direct if you want to know if I happen to remain in one piece after the 96-hour deadline [the deadline has passed as I write this article :-)].
Incidentally, ever wondered how one would react to the message (especially the bits about the promised visit by the curvaceous female pictured in the message, and about the threat of losing a male organ) if the recipient happened to be a female of the species!
Originally written on Sunday, July 30, 2006

Sunday, May 19, 2013

Pre-payment, honour and bills of exchange


INTRODUCTION[i]
The terms honour and pre-payment were introduced to documentary credit operations for the very first time through UCP 600. The intended meaning of “pre-pay” appearing in article 12(b) has defied interpretation since its introduction and caused quite some confusion. A recent query on “pre-pay” and related issues came to the fore in the form of the following query on another forum. The query, presented in two parts, was as follows:
“Situation One
LC available with the confirming bank by acceptance; draft to be drawn on the confirming bank. Tenor of the draft: 120 days from the date of bill of lading. Additional condition: Despite the tenor of the draft being 120 days from the date of B/L, the confirming bank may discount the bill upon receipt of complying presentation at its counter and pay the beneficiary at sight. Discounting charge and confirming fee are on applicant's account.
Upon receipt of documents, confirming bank decided that the documents constituted a complying presentation. It discounted the bill as per credit stipulation and forwarded the documents to the issuing bank.
Issues:
1.     Is the discounting function of the confirming bank equivalent to "honour" as defined in the UCP?
2.     If not, what other function remains pending at the counter of the confirming bank in order to term the transaction for having met the definition of "honour" (Article 2 of UCP 600)? (contd...)
12.Dec.2012


[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]




[i] Published in Trade & Finance, (under The State Administration of Foreign Exchange), March 2013, China.
[iv] Import of Goods and Services, RBI/2012-13/13 Reserve Bank of India Master Circular No.13 /2012-13 dated July 02, 2012.

Tuesday, April 30, 2013

Wanted: A more positive article 15


Wanted: A more positive article 15[1]

The expressions “reasonable time” and “without delay”, because of their non-specific nature, came under intense scrutiny during the drafting of UCP 600. “Without delay” survived, but the appearance of the expression “reasonable time” in sub-article 13(b) of UCP 500 was to be its last. The latter was removed completely from UCP 600. Five years on, few seem to feel its absence.
“Without delay” conveys a greater sense of urgency than “reasonable time”. “Reasonable time” stretches the permitted time to an outer limit that could perhaps be justified under a given circumstance. Yet, both of the expressions are subjective in nature; neither indicates any definitive time frame nor a globally acceptable standard. It’s debatable whether any period could, in all fairness, be set as a “reasonable time”. Hence, it could not be part of any internationally applicable rules. If considered from a technical or legal point of view, a definite number of days was desirable. But even in its absence, most people preferred clear definitions and guidelines, black-and-white solutions over stipulations that were indefinite or vague in nature. A definite period was easier to handle. Compliance, or its breach, was easier to determine.
“Without delay”
The term “without delay” posed similar problems.  (Contd.....)

[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]
----------

[1] Published: DCInsight, Page 10, Vol 18, No. 4, October-December 2012.

Thursday, April 25, 2013

Redefining 'negotiation'


Background
The term ‘negotiation’ has defied definition since its inception. As far back as the early 1980s people have been asking what negotiation was supposed to mean. Integral to the meaning of negotiation is the issue about recourse payment. The confusion about correct interpretation and application of the term ‘negotiation’ is not confined to laymen like me, but has troubled some of the experts in the business.
Ole Malmqvist, a member of the UCP Drafting Group for UCP 600 says, 
.... there has been an extended discussion about the word negotiation, which nobody can define and which only a few want to get rid of.... I'm still looking for someone who can explain to me the difference between payment and negotiation .... so far no one has been able to come up with a definition, not one I have seen, at any rate, so I doubt that anyone will be able to come up with a definition now .... I suggested that we get rid of the word negotiation.... The word ‘negotiation’ is a problem.... In short, I think we should get rid of the word ‘negotiation’ because we cannot define it and because we don't need the concept…. (contd......)

[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]





[i] DCInsight, April-June 2004.
[ii] LC Monitor-Trade Services Update, Volume 11, Issue 2, March–April 2009.
[iii].Ibid.
[iv].Ibid.
[v] Ibid.
[vi] Ibid.
[vii] Ibid.
[viii] Ibid.
[ix] DCInsight, Vol 15, No 3, July-September 2009.
[x] LC Monitor-Trade Services Update, Volume 11, Issue 2, March - April 2009.
[xi] Another comment on ‘Negotiation, Trade Services Update Volume 12, Issue 3, May – June 2009.
[xii] Ibid.
[xiii] LCM-Trade Services Update, Volume 11, Issue 2, March - April 2009.
[xiv] DCInsight, Vol 15 No 3, July-September 2009.

Nominated bank and UCP 600


This article analyses the roles and responsibilities of a nominated bank under selected provisions of UCP 600.
Article 6(a) of UCP 600 requires that a “credit must state the bank with which a credit is available”. This bank has been defined under Article 2 as the ‘nominated bank’. A nominated bank could be a bank specifically designated by the issuing bank for the purpose of negotiation or honour of documents. Alternately, it may be any bank. According to sub-article 7(c), the issuing bank’s undertaking to reimburse under its own LC is restricted only to a nominated bank. Note that the bank that has added its confirmation to a credit need not necessarily be a nominated bank.
Let us focus on the first major article on nomination, viz., Article 12. Sub-article 12(a) states: (contd...)

[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]




[1] Published in DC Insight, Volume 17, No. 1, Jan-March 2011.
[1] Author is the former managing director of Fina Bank Ltd, Nairobi, Kenya and TransAfrica Bank  Ltd., Kampala, Uganda; founder and CEO of Institute of Banking Studies.  

[i] ‘Suggested answer’ to question no. 2.15, Frequently Asked Questions on UCP 600, Gary Collyer.

Wednesday, April 24, 2013

Article 12, UCP 600 - a critical analysis


Ever since UCP 600 was published, Article 12 (Nomination) each of the three sub-articles provided room for confusion about their intent and purpose. This article examines the issues related to Article 12 as a whole, taking up one sub-article at a time.

Sub-article 12(a)
Sub-article 12(a) states:
“Unless the nominated bank is the confirming bank, an authorisation to honour or negotiate does not impose any obligation on the nominated bank to honour or negotiate, except where expressly agreed to by the nominated bank and communicated to the beneficiary.”
This sub-article addresses two distinct effects of nomination. The first is a nominated bank’s obligation, if any, to honour or negotiate upon being nominated. The second is an apparent exception to the foregoing. The first part of the sentence stipulates that, unless the nominated bank confirms the credit, its nomination by the issuing bank casts no obligation on the bank thus nominated to honour or to negotiate. This is perfectly correct, and is also in accordance with Article 8. This is not a rule, but more in the nature of a clarification; however, its existence helps. The problem is with the second part of this same sentence or sub-article. The expression “except where expressly agreed to…” appears to provide for an exception to what goes before it. One would, thus, be led to believe that the obligation to honour or negotiate is indeed cast on the nominated (non-confirming) bank, provided that bank ‘expressly agrees’ (to negotiate or honour) and communicates the same agreement or willingness to the beneficiary.

As we know, this sub-article intends no such thing, rather ....(contd...)


[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]





[i] Nominated bank and UCP 600, DCInsight, Volume 17, No. 1, Jan-March 2011.
[ii] “Issues in UCP 600: another look at five banking days and negotiation” by King-Tuk Fung, DCInsight, Vol. 16, Issue 1, October-December 2009.
[iii] That confirmation may be on the forwarding schedule itself or through later communication.
[iv] Negotiation and the law of contracts, DCInsight, Vol. 16, No. 2, April-June 2010, and Re-defining Negotiation, LC Monitor-Trade Services Update, Volume 11, Issue 4, July–August 2009.

Some random thoughts on the UCP


1.        Introduction
Often I had wished that I were a fly on the wall, had a voice recorder in place to record the deliberations, or could browse through the background papers and notes while the first ever UCP was being drawn up nearly 80 years ago. Tapping into the minds of the first ever drafting group could have been a revealing experience. For, very recently, while trying to understand the true meaning of the term “negotiation” and a few other provisions of the UCP, the question that I repeatedly asked myself was, “Does the UCP have its roots in the laws of contract?” For, there were certain inescapable similarities between the articles of the UCP and the laws of contract. I am not a member of the legal profession, neither qualified in matters of law. Yet, even to a layman like me, the similarities became so compelling that I decided to put my thoughts on paper. My initial effort resulted in a paper published in DC Insight[i]. I based that paper on the Indian Contract Act, 1872. However, since the Indian Contract Act (ICA) was formulated by the British, I looked for the original English Act to use it in my analysis. To my surprise I learned that, even today, there is no English law equivalent to the Indian Contract Act 1872 (ICA).
The ICA appears to be basically a codification of the English Common Law (contd....)

[The complete article is available in the book 'Beyond Trade Finance', published on 13-Apr-2021 by Notion Press, and available at https://notionpress.com/read/beyond-trade-finance or at https://www.amazon.in/dp/1638508666]





[i] Negotiation and the laws of contract, DC Insight, Vol. 16, No. 2, April-June 2010.
[ii] Issued by the United Nations Commission on International Trade Law, United Nations, New York, 2010.
[iii] Articles 15(2) and Article 16 of the CISG reflect similar approach to revocation.
[iv] Does this provide grounds enough for modifying Articles 2 and 4 of the ISBP to create a level playing field?
[v] The expression ‘promisee’, describing the issuing bank - the original promisor or proposer – in this particular context, is derived from the title to Section 52 viz., “Order of performance of reciprocal promises”, and sub-section 2(e) of the ICA (“Every promise and every set of promises, forming the consideration for each other…”.
[vi] “…Silence or inactivity does not in itself amount to acceptance”, states Article 18(1) of the CISG.
[vii] ICC Official Opinion R520 / TA543 rev2 - Unpublished Opinion 1995-2004.
[viii] DC Insight, Vol. 17, No. 1, Jan-March 2011.
[ix] An agreement, valid in law, is defined as a contract. In places, I have used the terms interchangeably for the limited purpose of this article.
[x] Article 3 of the Uniform Rules for Collection, ICC Publication No. 522.
[xi] Refer to my articles Negotiation and the law of contract, DC Insight, Volume 16, Issue 2, April-June 2010, and Re-defining negotiation, LC Monitor-Trade Services Update, Volume 11, Issue 4, July-August 2009.
[xii] This appears to be a deviation from the principle stated in UCP 500, sub-article 10(b)(ii) which read as follows: “Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorised to negotiate. Mere examination of the documents without giving value  does not constitute a negotiation. (emphasis added)”
[xiii] The definition in Article 2 of UCP 600 is full of holes. After the publication of my article Re-defining negotiation, in the LC Monitor-Trade Services Update, Volume 11, Issue 4, July-August 2009, I was hoping to receive very strong, specific, point-by-point rebuttal of the points I had made therein. Surprisingly, I have received absolutely none till date. (Incidentally, has anyone ever wondered why, since the first UCP was released in 1933, the term “negotiation” has defied a universally acceptable definition?)
[xiv] Review of the recent Swiss Supreme Court decision (Emirates Bank International v. Credit Lyonnais (Suisse) S.A., Decision 1 June 2004, Tribunal Federal) on deferred payment credit from a comparative commercial law perspective, Chang-Soon Thomas Song, 10 May 2005.
[xv] Sub-article 12(b) was inserted in UCP 600 to address the issues raised by the courts on deferred payment credits.
.