There are many questions in mind on
different aspects of LC practice. The questions are the outcome of (re)current
issues, controversies, deficiencies, relating to transport documents, UCP,
LC documentation, LC litigation, INCOTERMS. It is tempting to have
one-stop interview in search for all answers. One stop-interview is
possible if the interviewee is one-stop LC specialist where information
about any LC-related subject is available. Ravi Mehta's banking friends
in the developing economies, especially of the Middle East, suggest him
to "Google" T. O. Lee for every kind of LC-related information as he is
Mr. Know-All. Their suggestion is right. T.O.Lee, MAE, MCIArb, MITD ,
is really the most knowledgeable LC specialist in the LC world. He
is consultant, trainer, expert witness, DOCDEX expert, ICC's UCP Revision
Consulting Group member, and trade finance writer. He is all-in-one. His
this distinctive characteristic in him tempted Ravi Mehta to prepare
a shopping list of 20 wide ranging questions for loading 20 answers for
unloading on www.lcviews.com
. You can ask him unlimited questions - he is so knowledgeable.
One-stop interview with him can be non-stop.
Q1 The transport documents
and the UCP relating to it are always in the news. May we know the latest
developments in the shipping industry with regard to transport
documentation, which have become hot news in the banking industry and
ICC?
Maersk/Sealand group introduced three
new indemnity clauses in August 2003 on the front page of their bills of
lading (B/L) and faced strong objections from the letter of credit (L/C)
community. These three new indemnity clauses are:
(1) Where the bill of lading is
non-negotiable the Carrier may give delivery of the goods to the named
consignee upon reasonable proof of identity and without requiring surrender
of an original bill of lading.
(2) Where the bill of lading is
negotiable, surrender of an original bill of lading will generally be
required before delivery is given, but the Carrier has the option to deliver
the Goods to a person whom he reasonably believes to be entitled to take
delivery of the Goods without requiring surrender of an original bill of
lading.
(3) The Carrier will also be
entitled to give delivery of the goods against what he reasonably believes
to be a genuine original bill of lading. Delivery as aforesaid is authorized
and shall constitute due delivery hereunder and the merchant shall have no
claim for loss or non-delivery.
Following the result of voting by
representatives from ICC National Committees in ICC Banking Commission
meetings, the ICC Statement appearing to support the three indemnity clauses
was later removed from the ICC DC Pro website and so far there is no
replacement statement to be put on probably due to the fact that it is
unable to reach consensus on the contents of the new replacement
statement.
For clause 1 above, as far as delivery
is concerned ,the USA Carriage of Goods by Sea Act (COGSA) treats a
non-negotiable B/L or the so-called "straight" B/L (SBL, straight consigned
to a particular person or legal entity) almost same as a sea waybill (SWB)
where a carrier may release the cargoes to the consignee without the need
for production of an original straight B/L. But in COGSA UK, an original
B/L must be produced in claiming the goods because a straight B/L is also
regarded as a document of title. Personally I support clause 1 for
consistence between a straight B/L and a SWB and to avoid confusions in the
I/E trade. From a pragmatic point of view, SBL & SWB should be used to
facilitate trade and not to provide opportunities for the scholars to argue
on technical issues.
As told by Mr. Charles del Busto, the
Chairman of UCP 500 Working Party, the late Mr. Bernard S. Wheble, the
father of letter of credit, insisted in putting in Article 24 in UCP 500
although it is almost identical to Article 23 for B/L. Mr. Wheble's real
intention, I guess, is to encourage those who wish to use the straight B/L
to use SWB instead to avoid the confusions created by the COGSA in USA and
UK. This intention is recently confirmed by an email to me from Mr. John
Richardson, the retired consultant to P&O/Nedlloyd who at that time acted as
the maritime transport consultant to Mr. Wheble.
Q2. Why have these
developments become so controversial in the banking industry?
The bankers usually treat the B/L as a
collateral or security for the financing extended to the traders in import
and export operations. Hence they do not wish to see the awkward situation
that the full set of three original B/Ls are in their hands but the goods/cargoes
have already been released to the traders financed by them. Thus clauses 2
and 3 are not acceptable to them. For example, Heinz Hertl, the
representative from ICC Austria, is strongly against clauses 2 & 3 although
Austria is a land locked country.
Q3: What is being done to
resolve the issues and controversies between the shipping industry and
banking industry over transport documents?
Upon public demand, Maersk/Sealand
group subsequently made an announcement that those parties who did not
like these 3 clauses might treat them as non existing or they could
exchange for a new B/Ls without bearing such clauses.
Q4. Are trade associations
playing any role in raising or resolving conflicting interests resulting
from the trends in shipping practices?
Of course, this is one of the many
purposes of trade associations, to help members to liaise with other trade
associations to settle conflicts or to clarify confusions. ICC
Commissions on Banking and Transport have contributed to the settlement of
this Maersk/Sealand B/L disputes. Professor Debattista of University of
Southampton also participated actively in ICC Banking Commission meetings.
He also encouraged me to comment on the issues during the ICC meetings
since he also knew that I was very concerned about these issues at that
time Professor Debattista is an ICC authority on B/L and charter parties
as well as Incoterms 2000.
Q5: It is said that usually
the transport documents presented do not conform to the LC stipulations or
UCP rules. Is it because the banker's LC issuing practice is not
consistent with carrier's transport document issuing practice ? Or is it
because the UCP/ISBP is not consistent with the transport documentation
practice of the shipping industry? What is being done to manage such
situation? Is UCP revision trying to adapt the UCP to the new situations
in transport and cargo insurance industries?
The transport articles in UCP are
mainly drafted by bankers who may not know the current shipping or
insurance practices. The responses from other ICC Commissions are either
slow or not active. Hence these are the main reasons for conflicts or
inconsistencies between the UCP and the current shipping and insurance
practices. I wrote many articles to alert the parties on inconsistencies
of UCP and ICC opinions on insurance and transport issues but my voice is
like a whisper. Sometimes it took almost three years for the related
opinions of ICC to be reversed. It is glad that in the new draft of UCP
600, it stipulates that when an agent signs for a master, the name of the
master needs not be stated on the B/L. This is to match the shipping
practice in Asia where the whole team of crew is provided by a human
resource agent working for the ship owners who do not employ their crews
on permanent basis to avoid the high operation costs of retirement, long
holidays, medical and other benefits. The crew members are employed on
contract basis through the human resource agent, similar to some Canadian
companies who wish to circumvent the strict staff benefits local
legislations. So before the ship sets sails, the name of the master may
be still unknown. As a member of the UCP 500 Revision Consulting Group, I
am glad that this time my prayers are answered in the new draft of UCP
600.
My other prayers on percentage of
insurance were also answered in last few years by ICC Banking Commission
taking an attempt to reverse their old opinion that stated when the L/C
stipulated 110% insurance cover, the insurance document must show 110%,
accurate up to two decimal places. This is unreasonable and against the
basic insurance principles, to create hurdles in L/C operations other than
to facilitate the I/E trade. Now the new ICC opinion states that this
110% requirement in the L/C only represents a minimum insurance
requirement and parties are free to cover more than 110% of CIF value if
desirable. For those who wish to read more, the related article from my
L/C website is
I always lament that when one gives
his opinions free of charge, nobody will listen. They will sure carry out
your opinions if you charge them for a very high fee. This is human
nature. Maybe this is a default setting in our DNA!
Q6. Take for example,
shipment date on bill of lading Is UCP revision consulting transport
industry what date on a transport document should be taken as shipment
date in order to make new UCP and industrial practices/interpretations
uniform? Or UCP has its own way?
Traditionally the shipped on board
date in a B/L is taken as the shipment date in L/C operations. This
becomes a norm and is accepted by the trade community. So there should be
no change in UCP 600. For a series of loading on board the same vessel by
the same consignor, the last loading on board date is counted is the
shipment date so that the 21 day presentation requirement under UCP 500
Article 43 can be extended. This is more reasonable for the shipper/beneficiary.
Another reason is that only on the last loading date, the whole shipment
is deemed to be completed.
However, I am still struggling on the
issue that the issuing date of a cargo insurance document bears no relationship
to its effective date. There are two main kinds of insurance, (a) the
benefit insurance (such as life, third party liability in motor and health)
and (b) the indemnity insurance (such as household furniture, machinery
and cargo insurance). Benefit policy has a clear effective date written
on the policy but for indemnity insurance the effective date relies on the
occurrence of a specified event, and in cargo insurance, on the moment
when transport commences. I encounter strong resistance for my opinions
as some conservative bankers regard that they are bankers and they need
not know or care about cargo insurance principles. An open-minded banker,
Mr Kim Christensen, VP of Nordea Bank A/S Copenhagen, does endorse my
opinions after checking with an insurance expert in his home country,
Denmark. For those who have interest in this subject please visit my
website
www.tolee.com
and find out more in the related articles there or by clicking below for
one such article:
Q7: Outsourcing is the latest
trend The exporters outsource to freight forwarders. But a freight
forwarder may not be a carrier or carrier's agent. Is UCP revision
thinking of bringing the outsourcing practice within the Uniform Customs
and Practice to encourage the outsourcing practice?
Outsourcing is a new tool to minimize
costs for banks and other incorporations in order to survive in a very
competitive market. Documentation for exporters is frequently outsourced
to freight forwarders to handle. So the freight forwarder now becomes a
double agent, representing both the shipper/beneficiary and the carrier.
I have already pointed out this dilemma in an article published in my
personal column in a Lloyds of London magazine back in March 1995. For
full details please click below but premium membership is required for
reading this article:
Please bear in mind that the UCP 600
is only a set of universal rules to govern L/C operations. ICC has no
power or interest to tell the traders what should be done. It is better
left to the traders to decide for themselves what is best for them. Hence
it is wrong to look at the UCP as the Bible to resolve all the problems
encountered by the parties in the marketplace, as a lot of people do. The
UCP has its own limitations. In a nutshell, UCP should mean "U Can Pay",
and that is what UCP is all about. Outsourcing is independent from UCP
and is to be governed by the contract between the parties, other than the
UCP.
This is a rather complex problem and
cannot be explained clearly in a short interview. Freight forwarders are
now so popular that we cannot avoid them. The only way is how to
differentiate those freight forwarders with strong finance muscle from
those "a man and a table" freight forwarder who has no asset to meet the
obligations of a carrier. It is also important to know whether the
freight forwarder plays its role as an agent of the carrier or acts as the
carrier itself. In my opinion, more scrutiny should be exercised by the
parties if the freight forwarder plays the role of a carrier. Then we
have to clarify whether the freight forwarder is playing as an actual
carrier or only as a contracting carrier. In a nutshell, I would
recommend traders to use members of FIATA group as they have strong
finance background and strictly regulated by the FIATA. In fact, FIATA
was formerly endorsed by ICC Banking Commission. Those who are interested
in the subject may read related articles in my website
www.tolee.com
, such as
Q8: Which is better -
internal export manager or outsourcing?
Both are
efficient and cost saving, depending on the size of the company and the
volume of the work to be done daily. In general for a big exporter, DIY
(do it yourself) is better as it is more secured and controllable.
Important business information may not be leaked out to competitors
through unreliable outsourcing partners. For a small exporter, who has no
expertise in preparing documentation, such as those high end Hi-Fi
equipment manufacturers, outsourcing is a must. It is also controversial
whether a bank should inform its customers that certain works are to be
outsourced as the bank's customers may only trust the bank and nobody else.
I am expecting a judicial decision to clear this mist. This may have
great impact to the present outsourcing practices. The regulators of
banks should clarify how the due diligence duty of a banker is to be
applied in outsourcing activities, as they did in anti-money laundry and
the Patriotic Act in USA against terrorism.
Q9. There are 13 Incoterms, indicating
there are 13 kinds of practices in shipment? Why so many practices and
Incoterms? Can't we have only two alternate Incoterms and shipping
practices. One, let buyer do all (Ex-W). Or alternatively, let seller do
all (DDP). Right from clearing goods for export to delivery of goods at
the ultimate destination in the buyer's country. Meaning, no division of
obligations and risks between buyer and seller in transit- like my
responsibility ends here and yours start from here as the other 11
Incoterms indicate. Can the dream of two alternate Incoterms become a
reality?
For the 13 versions of Incoterms
2000, each has its own specific application environment to meet the
various needs and wants of the exporters and importers in different
countries with different cultures, trading environments and national trade
policies. For example, some countries in bad need of foreign exchange do
not allow exports done in FOB/FCA and imports by CIF/CIP. Hence the
Incoterms cannot be reduced to two or three.
The same reason applies to the menu
in a fine dining restaurant. In a good restaurant one cannot be
restricted to either chicken or beef, as in airline catering - the
Skykitchen. A gourmet restaurant should have breakfast, lunch, afternoon
tea and dinner menu to serve different needs of its customers. For
example, even for a tea house such as the famous Angelina in Paris, they
have breakfast, lunch, afternoon tea and dinner menu, although the
Japanese and Korean tourists come mainly for the afternoon tea in order
to try their famous African hot chocolate with Chantilly cream and the
"Mount Blanc", their most famous desert that is usual sold out by 5.30 pm.
Q10: During sales contract
negotiation buyer and seller may have conflicting interests in Incoterms
matters. The buyer may opt for DDP, while the exporter may suggest EXW.
How can they resolve their conflicting interests?
DDP is only meant for the experts as
for an exporter in a foreign country it is difficult to tell when the
import duties will be increased. So it is very risky to quote a price
including import tax or other duties. The best I would recommend is DDU,
where duties are to be borne by the buyer.
To go deeper into this issue, a lot
of I/E practitioners may not realize one very important point. EXW is
regarded as a domestic sale and hence would be subject to local law
whereas DDP is regarded as an international sale and is usually subject to
foreign law. The exporter may not be familiar with foreign law and in
case of litigation, translation fees alone would be very expensive, not to
mention other high costs such as foreign law counseling, courier, airfare,
hotel and the like. So taught by my experience in resolving international
trade disputes for the last 30 years or so, I see more serious landmines
hidden under these simple three letter codes, FOB, CIF. For example, FOB
is international trade (loaded on a vessel carrying a foreign flag to
shift the risk and cost to a foreign seller after the goods/cargoes
crossing the ship's rails) whereas FAS is local trade (delivery along side
a ship in own waters). So even for a simple term FOB, there are two
totally different delivery environment: FOB and FAS with different legal
implications. If I were to quote for a 100 ft private pleasure boat to
be transported on deck of a break bulk vessel, I would only quote FAS and
would leave the troubles of finding a gigantic crane to load the boat on
the vessel with the buyer. I had experience many years ago when all the
available gigantic cranes from Asia were chartered on long contract basis
to build the Hong Kong new airport. So at that time FOB was mission
impossible. Hence again, the more you know, the more you don't know. FOB
is not so simple as most people think. Trying to reduce the Incoterms to
two would create a lot of risks and disputes.
That also explains why we need 13
different kinds of Incoterms. Preparing food should be simpler than
preparing documents under L/C. If this is so, then please go to the
kitchen and see how many different kinds of knives used by the French
chefs.
Q11: You are DOCDEX expert
and expert witness. How can traders arrange funds for financing
resolution/litigation costs? Which is better mechanism for dispute
resolution - legal mechanism of court or non-legal mechanism of DOCDEX?
Give reasons.
For a simple case where there is no
need to examine the witnesses, ICC DOCDEX is more appropriate. For a case
where the parties say different things, for example, the issuing bank says
it has advised notice of refusal by telephone where the presenting bank
says there is no such telephone received, then litigations is a must as
DOCDEX cannot allow examination of witnesses. For DOCDEX the risk is
that one cannot pick up one's own adjudicators, like in arbitration. So
if you are relying on strict compliance for the discrepancies and
unfortunately all three DOCDEX experts appointed by ICC Centre for
Expertise are substantial compliance believers, then you will be digging
your grave. Most DOCDEX experts are bankers, not lawyers. So if you need
to rely on sophisticated legal principles, I would recommend you to
litigate. So it is difficult to say which is better, it all depends.
From my experience involved in so many international L/C and B/L
litigations, sometimes litigation is only used as an effective tool to
pull the other side to the negotiation table. The plaintiffs have no real
intention to litigate all the way to the end. It is like a poker game.
Many cases are delayed and delayed and ultimately the defendants propose
amicable settlement only one week before the scheduled trial date.
From my experience, winning is important.
But how to enforce the arbitral award or court decision is most important.
So before litigation, the plaintiffs have to make sure that they can get
the money after winning the case and Mareva injunction (to ask the court
to freeze the asset of the defendants) will come in handy in most litigations
where the defendant is a foreign party who may sell or dispose of all its
local assets before the trial commences.
Some traders who are very nervous
cannot go to litigation as the tensions may kill them. I often play the
role of a baby sitter for those nervous clients who may ask me the same
question 20 times or more to get the assurance from an expert each week.
This is psychology. Before I manage the case, I have to manage my client
first, to pacify him and to keep him healthy and fit for the long trial
ahead.
Q11: Which is better for the
exporter - credit insurance or litigation? Is litigation the best
alternative or necessary evil?
The questions are too generalized and
I cannot give you straight answers, to be honest. It all depends, on how
much fund, spare time, staff members are available Litigation is like a
poker game, the one with the most chips will win ultimately, even if his
cards are not so strong. So if one party is much richer than the other
party, one may use litigation as a tool to make the other party yield by
accepting more discount for amicable settlement. Whether litigation is
an angel or an evil depends on how one deals with it. Some cases fail
because the expert witness has failed to convinced the judges or has
failed to lead the judges to think alone the correct perspectives. Some
untrained expert witnesses often tend to act as advocates. They try to
help but in fact they are digging the graves for the instructing parties.
How to tell the judge on complicated L/C concepts is an art, not easily
mastered. Like good vintage, it takes time for an expert witness to
mature.
Most traders do not realize the risk
attached to export credit insurance in D/A or D/P. You will not get paid
if the buyer tries to pick on quality issues, such as goods not matching
the specifications as stated in the contract. The insurer would only pay
you after you winning the quality dispute case. Hence such coverage
cannot help when the seller tries to make fun with the contractual quality
of goods to force the seller for a big discount.
Q12. It is said that 50-70 %
of sets of documents are rejected at first presentation. We know the
common discrepancies as surveys suggest. But we don't know the common
causes of common discrepancies. As an LC consultant, could you tell us the
common causes.
According to
the surveys done by ICC and SITPRO, the average may be more than 70% in
some countries, particularly for the first presentation For some countries,
90% is not a big surprise. Some discrepancies are due to the bad practice
of the exporters, never checking the contents of the L/C carefully
immediately upon receipt to see if all the terms and conditions are
enforceable. Some discrepancies are due to lack of training in UCP 500.
Some discrepancies are fabricated by the issuing bank upon request from
the VIP applicant who does not wish to take up the goods if the spot price
is much lower. So, whenever there is human being, discrepancies cannot be
avoided completely no mater how well the UCP is written. The most
popular discrepancies relate to Articles 23 and 48 of UCP 500.
Q13. We don't know what
percentage of rejections is litigated. How to minimize rejections and
litigations? It is said that the developed countries are litigious and
developing countries are defendants. Do you agree?
There is no such figures available,
as far as I know. You may say that the developed countries use
litigations more often and the developing countries use court interim
injunction or court order to freeze payment more often.
Q14: What UCP articles are
mostly involved in litigations? And, why?
Articles 13 and
14 of UCP 500 regarding reasonable time and the effectiveness of notice of
refusal are mostly involved in the litigations. Others are Article 23
about signing of B/L and Article 48 about transferable L/C.
Q15. The UK-based Sitpro's
survey suggests 48% of the LCs received by the UK beneficiaries are
defective/erratic. Why are their weaknesses in the LC practice of issuing
banks, especially in developing countries? What steps are being taken to
overcome the weaknesses?
Bankers are not adequately trained on
these articles. A training program is only as good as the trainer. Banks
have not adequate financial resources to provide really effective training
by professional trainers. The effective means is by education but who is
going to pay for the professional trainer? That is the big problem. The
human resources (HR) department of a bank prefers to send candidates to
management trainings such as communication, delegation, problem solving,
time management, and the like that they know well and are confident with.
They do not know what is UCP and hence try to avoid such trainings. They
do not know who is good and who is bad. Some HR professionals just try to
send bank candidates to government owned training centers for lower costs
but most of them are badly run. The HR manager can easily fill out in his
report that a large number of L/C staff are trained and mission
accomplished. Who cares about the real results? They care only for the
numbers.
Q16. The developing countries
are receiving LC training from the developed countries for improving LC
expertise. You play a key role in training LC people in Asian and Middle
Eastern economies. As a trainer could you please tell us -is training
making intended difference in the LC practices of the developing and
transitional economies or it is an exercise in futility - let us be frank?
From my experience, bankers in
developing countries either pretend that they know everything or they
regard them as bankers and need not know about other L/C related subjects,
such as B/L, charter parties, cargo insurance, Incoterms and the like.
Some are even hostile to training as they see going into a training room
implies that they are not good enough.
In developing countries, they are
more receptive to training. My first debut in Dubai was when I was invited
by a banker with foresight, Mr. Zahoor Dattu, who was attracted by the
contents of my L/C website and invited me to conduct a specific training
program on transport and cargo insurance as they wish to know more about
these subjects. But, they did not want to do the case studies prepared by
me. Instead, they presented their real life cases and asked me to use
them as case studies. In this way I saved a lot of otherwise unfortunate
beneficiaries by disagreeing some of the discrepancies pointed out by them. Bankers
in Hong Kong, China, Taiwan and Malaysia welcome me each year for an
extensive training program on UCP 500, L/C frauds, transport, cargo
insurance, Incoterms, risk management and related subjects. I also
witness that there is very fast progress in China for UCP knowledge
compared with 20 years ago. I can anticipate that in the next 10 years
you will find the best L/C experts in the world from China. One of my
disciples, Mr. Jia Hao from Bank of China Yangzhou, is such a candidate (see
Ravi Mehta's interview with Jia Hao in November/December 2005 issue of GTR)
He is now studying maritime transport, cargo insurance, laws under my
guidance.
Q17. Developing countries are
the main user of LC product. But in making UCP to govern LC, it is said , mostly
developed countries are involved, which lack knowledge of the needs,
expectations and problems of the developing countries. Take for example,
the tern "negotiation" in UCP. The West says delete it, while the East
says save it. As a member of the UCP Revision Consulting Group please tell
us what steps ICC is taking to make UCP relevant and purposeful to
developing countries?
What you said is true. The bankers
in developed countries do not know that negotiation is the lifeblood of
L/C operations as they don't have much negotiation in their own countries.
I tried very hard to convince them and now they are aware of the
importance of negotiation, after hearing from the ICC National Committees
from the Middle East and Asia. They try to introduce the concept of honor
and negotiation in the UCP 600. Hope this would be successful. So far it
is difficult to define negotiation as this same term has different
implications in the East and the West.
Q18: The developing countries
complain UCP is not easily understandable. It is said traders are
UCP-illiterate. Is UCP revision trying to make UCP user-friendly?
UCP is for the traders not lawyers.
So it must be user-friendly and easily understood by those whose mother
tongue is not English As I am from the East (Hong Kong) now living in
the West (Toronto), I try to narrow down the gap by suggesting use of
simple English in the drafts of UCP 600. To a certain extent, this is
successful You will find some articles in UCP 600 more precise and clear.
Q19: UCP revision is taking
long time. The delay gives rise to a doubt that the UCP revision may
lack consensus formation. Could you tells us the facts to clear doubts and
myths?
It is not strange that experts may
hold different opinions on a common topic. So far there are disagreements
on reasonable time, without delay, negotiation, cargo insurance effective
date, transferable L/C, assignment of proceeds, instalment shipments, whether
to state the name of the master when the B/L is signed by an agent of the
master, straight B/L, charter party, indemnity clauses, force majeure
clauses, whether to follow some ISP98 provisions for consistence, whether
to split up road waybills, inland waterway transport documents, rail
waybills into three separate articles.
In the past years upon enquiry, ICC
said "The UCP 600 is ready when it is ready". Now from the progress, I
guess the UCP 600 should be ready for approval at end of 2006 and to be
effective from early 2007. The commentary will be available about 3- 6
months after publication of the rules.
Q20: What will be new in new
UCP - can you disclose to us right now?
Some new concepts are honor; 5
banking days as reasonable time including the time to approach the
applicant; notice of refusal must be a single notice, a norm that is now
clearly spelt out in new UCP; no need to mention name of master when
signed by an agent; a proxy can also sign an insurance document and the
like. However all these are not final yet. It depends on the final
voting of the ICC National Committees. So at this time, please do not
take them too seriously and act on them. They may be changed. Who knows?
As Buddha said: "There is nothing that is not subject to change and change
is in fact the norm".
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