Sunday, November 06, 2016

Decoding UCP Article 30 on LC amount, quantity and unit price

Decoding UCP Article 30 on LC amount, quantity and unit price [1]
Rupnarayan Bose[2]

Article 30, UCP 600[3]
We are aware that if a beneficiary is to get his documents negotiated under a letter of credit, he must conform strictly to the terms of the credit. Compliance with the terms includes, among others, compliance with amount and quantity of goods being shipped. Under certain conditions, the UCP permits variations in both the amount and the quantity. These conditions are spelt out in Article 30 of UCP 600.
This article addresses the issues regarding variations in the quantity of the goods shipped, the amount of presentation under documentary credits vis-à-vis the amount and quantity for which a particular credit may have been issued. These are critical issues for the beneficiary, as also for a bank that issues a credit and later has to examine the documents presented for compliance. This is primarily because the exchange control regulations of some countries do not permit import of goods for values that exceed (even by a small margin) the amount stated in the credit. On his part, the buyer too may not wish to accept excess drawing or excess shipment. It is, therefore, necessary to understand the provisions of Article 30 that permit variations, and the circumstances under which it does so. Do note carefully the instances where 10% and 5% variations apply.
Variation in Amount, Quantity or Unit Price
Article 30(a) stipulates that if the term ‘about’ or ‘approximately’ is used in respect of an amount, quantity or unit price stated in the credit, then it is to be understood that the credit permits a tolerance not to exceed 10% more or 10% less in the amount, the quantity or the unit price respectively to which the term has been prefixed or suffixed.
Thus, if the credit is issued for ‘about USD.100,000 or USD.100,000 approx.’, then shipment can be made for a total amount of (USD.100,000 +/- (10% of 100,000), that is) USD.110,000 (maximum) or USD.90,000 (minimum). Similarly, if the term ‘about’ or ‘approximately’ relates to the quantity stated in the credit, the total quantity shipped may be 90% or 110% of the quantity stated in the credit. The same rule applies to the unit price.
It would be seen from this example that the term ‘about’ or ‘approximately’ used in conjunction with amount, rate or quantity creates room for excess or short shipment under a letter of credit. In certain instances, such eventualities may invite complications, especially if the law of the land is breached as a result. It is, therefore, necessary to be careful if the terms such as ‘about’, ‘approximately’ are used in a credit when referring to amount, quantity, rate or measure. However, if the country’s laws do not stand in the way, and there is a possibility that the shipment may not be for the exact amount specified in the credit, it may be advisable to prefix the amount with the expression ‘up to’, or ‘not to exceed’ or words to that effect (viz. LC issued for amount up to USD.1000,000.00 only, or credit amount not to exceed USD.100,000) to restrict the drawing strictly within the amount stated in the credit.
Variation only in Quantity
Sub-article 30(a) deals with the use of the term ‘about’ or ‘approximately’ in conjunction with the amount, rate or quantity stated in a credit. But what happens if these terms are not used to qualify the quantity stated in a credit, but variations are observed? To what extent such variations could be permitted or is acceptable? These issues have been dealt with in the next section of Article 30, i.e. sub-article 30(b).
Even if nothing is stated in the credit, no qualifying term or expression is used, sub-article 30(b) still permits a variation of 5% either way (i.e. more or less) in the quantity stated in the credit. But this variation is allowed under the following conditions:
(1)   if a credit does not stipulate the quantity in terms of a stipulated number of packing units or individual items, and
(2)   also provided that the total amount utilised does not exceed the amount of the credit.
Hence, (keeping the two foregoing provisions in view) if variation in quantity shipped is not to be allowed at all, the issuing bank should word the credit to specifically stipulate that the quantity of the goods specified must not be exceeded or reduced.
Invoicing for a Lower Amount
In real life, while a credit is issued as far as possible for or near to a round sum, the actual amount drawn may not always be exactly so. The amount finally invoiced may happen to be a broken amount, more often slightly less than the amount stated in the credit. The last section of Article 30 provides for this possibility. It states that (even when partial shipments are not allowed) a tolerance not to exceed 5% less than the amount of the credit would be allowed (practically by way of default). This would, of course, be under certain specific conditions.
A beneficiary may thus submit his invoice for an amount lower than the LC amount (maximum 5%), provided,
(1)   that the quantity of the goods (if stated in the credit) is shipped in full, and
(2)    the unit price (if stated in the credit) is not reduced.
This deviation does not apply when the credit stipulates a specific tolerance, or uses the expressions ‘about’, ‘approximately’ or terms to similar effect (as stated in sub-article 30(a)).
This means that if the credit stipulates a specific tolerance limit, that will apply. If terms such as ‘about’, ‘approximately’ etc. are used, then the 10% variation (as per sub-article 30(a)) will prevail. As already clarified, the invoice amount being lower than the LC amount by (a maximum margin of 5%) is a default option permitted in the UCP.
If the above still appears to be confusing and unclear, the illustration furnished in the next section may be helpful in better understanding of the relevant articles of the UCP.
Article 30: A worked out example
Sub-article 30(a): If the quantity of goods in the credit is simply mentioned as ‘1000 MT’, the beneficiary must ship a minimum of 950 MT, or up to a maximum of 1050 MT (+/- 5% allowed as per sub-article 30(b), provided the other stipulations are complied with). However, if the credit states the quantity of goods to be shipped as about or approximately 1000 MT, then the shipment can vary between a minimum of 900 and a maximum of 1100 MT and still comply with the credit terms. It is to be remembered that even if more than the stipulated quantity is shipped under this provision, the total amount available under the credit cannot be exceeded.
Sub-article 30(b) & (c): Assuming that a credit is issued for USD100,000 (not ‘approximately’ US$100,000 or ‘about’ US$100,000); quantity of goods is stipulated as 1000 MT; partial shipment is not allowed, to what extent can the beneficiary vary the quantity of goods that he wishes to ship and the amount of his invoice?
Under the provisions of sub-article 30(c), the minimum amount that can be drawn is restricted to (5% less than the LC amount, that is) USD 95,000. Since the credit has mentioned the quantity of the goods to be shipped, it must be shipped in full. Further, since the amount is not being exceeded, or the credit does not stipulate any packing unit or individual item, this issue does not attract the provisions of sub-article 30(b). The quantity, therefore, can also be varied by 5% either side of that stated in the credit (1000 MT). Shipment can thus be made for either 950 MT or 1050 MT as long as the unit price (if stated in the credit) is not changed.
The Issuing Bank and Article 30
In view of the provisions of Article 30, and the leeway provided by the same to the beneficiary in terms of variation in amount drawn under a credit, the unit price and the quantity finally shipped, the issuing bank should apply its mind with due care while drawing up a letter of credit.
Here too, understanding the exact requirement of the applicant would be helpful in giving final shape to the terms and conditions of a documentary credit.

[1] First published in LCM-Trade Services Update, Volume 15, Issue 1, January - February 2013.
[3] This interpretation is my based on my understanding of UCP, Article 30. Error, if any, may please be pointed out for rectification.]

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