Volume 17, Issue 3, July September 2015

TRADE SERVICES UPDATE

Covering practical aspects of payment instructions in international trade

In This Issue

From the Editor

Features:

There is something special about working life

after the summer holiday. It is like the whole
world has been shut down for 2 months and
then it all just kick-starts in a crazy sprint. When
writing this editorial, I am part of this sprint. It
can be tiresome but also really rewarding.
Some of the issues that go on include:

An Alternative on Status
of Documents Under
Sub-Article 16(c) (iii) (b)
(p.3)
UCP 600 vs ISP98 (p.5)
L/C Quiz (p.6)
ISBP 745 Revisited

Discussion Corner

Compliance, compliance and compliance . it has all gone crazy. I thought

that the maximum of craziness had been reached; but I have been proved
wrong about that. The good thing is that it does seem that the area is maturing and that the involved parties take a serious and realistic approach to it.

Charter Party B/L vs.

Marine Insurance (p.10)

The L/C Monitor is part of a very ambitious compliance initiative. I cannot

share more at this point of time you have to wait to the next issue.

ISBP 745Paragraph
by Paragraph (v) (p.8)

Irrevocable
Reimbursement
Undertaking IRU (p.12)
News from the Trade
World, (p.15)

ICC Opinions: There has been a lot of fuss about Opinions TA.814rev and
TA.820rev that was withdrawn following the final versions. We now await
the final final versions; but what remains is a somewhat shaky image of the
ICC Banking Commission. I truly hope we will avoid such situations in the
future.
And for the future; the new Draft Opinions are just out. It is a 45 page bundle
of 13 Opinions (TA828-TA840).
Otherwise a lot of questions about guarantee expiry versus local law that do
not respect expiry date. I must admit those are issues I fail to comprehend.
I can however comprehend this much that those are issues that are causing
lots of problems for counter guarantors and applicants.
But above all I have been working on this issue. There is a great feature
by Nesarul Hoque. Really thought provoking.
And then there is a quiz! And there is a prize
Happy reading and take care out there
Kind regards,
Kim Sindberg / Editor in Chief / Trade Services Update / info@lcmonitor.com

TSU Country Editors:

Australia and New Zealand, Hari Janakiraman, Australia and New Zealand Banking Group Ltd
Editor in Chief: Kim Sindberg
Austria, Karl Mayrl, ERSTE BANK
Assistant Editor: Zahoor N. Dattu
Bahrain, Pradeep Taneja, ICC Bahrain Trade Finance
Executive Editors: Jacob Katsman & Nick Pachnev
Forum
Bangladesh, Shahriar Masum, Mutual Trust Bank Ltd
Belgium, Emile Rummens, Senior Risk Manager, KBC
Legal Editors:
Bank NV
Robert M. Parson, Partner Reed Smith LLP, U.K.
Canada, Vincent Barboza, RBC Financial Group
Robert M. Rosenblith, Attorney at Law, U.S.A.
Chile, Rodolfo Guzmn Bastidas,
George F. Chandler III, Hill Rivkins & Hayden, U.S.A.
China, Sheilar Shaffer(Shi Xiaoling), Agricultural Bank
Saibo JIN, Beijing Commerce & Finance Law Offices, China. of China
Czech Republic, Pavel Andrle, Banking Commission of
ICC
Contributing Editors:
Denmark, Jakob Ingerslev, Nykredit Bank
Robert Ronai, Import-Export Services Pty Ltd, Australia
Estonia, Age Valgepea, Swedbank Estonia
Heinz Hertl, LC Trainer, Austria
Germany, Markus Wohlgeschaffen, UniCredit Group
Christopher Gregory, BBK, Bahrain
India, Rupnarayan Bose, Director of the Institute of
ATM Nesarul Hoque, Mutual Trust Bank Ltd., Bangladesh
Bank Studies (I)
T.O. Lee, T.O. Lee Consultants Ltd., Canada
Indonesia, Saul Daniel Rumeser
Wang Xuehui (Ofei), Anhui Agricultural University, China
Iran, Hamid Farrokhi , Bank Tejarat
Radek Dob, esk spoitelna, Czech Republic
Iraq, Prasad Gadwal, Trade Bank of Iraq
Ken Nyberg, SEB Merchant Banking, Finland
Ireland, Vincent O'Brien, The electronic Business
David Meynell, Germany
School International
Israel, Sarah Younger, Bank Leumi Le- Israel B.M.
Vijaya Kumar, RBS Services LTD, India
Latvia, Inna Smae, AS DnB NORD Banka
Giuseppe Ricchiuti, Sidel Holding Italia Spa, Italy
Mohammad Sohail Hussain, Abu Dhabi Islamic Bank, Pakistan Lebanon, Joseph Rizk, SGBL
Muhammad Jawad Iqbal Khan, Bank Alfalah Limited, Pakistan Malaysia, Tang Seng Fatt, EON Bank Berhad
Nigeria, Hedgar Ajakaiye, Zenith Bank Group
Jee Meng Chen, Ernst & Young, Singapore
Pakistan, Ahmir Mansoor, MCB Bank Ltd.
Andreu Vil, Banco Sabadell, Spain
Romania, Bogdan Ilie, Romanian Commercial Bank
Ingrid Fornt Sesmilo, CaixaBank - LA CAIXA, Spain
Saudi Arabia, Abdulkader A. Bazara, Samba Financial
Alan C.Y. Liu, EnTie Commercial Bank, Taiwan
Group
Hasan Apaydin, HSBC, Turkey
Singapore, Soh Chee Seng, DCTrade Consultants
Ron Wells, BarrettWells Credit Research, U.K.
South Korea, Chang-Soon Thomas Song, Korea Exchange Bank
Danielle Austin, LC Advisor, U.S.A.
Spain, Xavier Fornt, Professor at High School for InterWu Yihai, AHCOF Holdings Co., Ltd.
national Trade
Sweden, Fredrik Lundberg, Business School in Stockholm
About Trade Services Update
Switzerland, Daniel Devahive,
Turkey, Ali Polat, Turkiye Finans Katilim Bankasi
Ukraine, Lyudmyla Yeremenko, Public JSC KreditTrade Services Update is published quarterly by
prombank, Kiev
GlobalTrade Corporation. Views expressed herein are solely
United Kingdom, Abrar Ahmed, Crown Agents Bank
U.A.E., Laxmanan Sankaran, Commercial Bank of Duthe views of the authors of each article and do not necessarily
bai
U.S.A., Glenn D Ransier, American Express Bank
reflect the official positions of their employers or organizations
Vietnam, Nguyen Huu Duc, Vietcombank Danang

Editors

with which they are associated. This publication is designed

to provide accurate and authoritative information with regard

Design & Layout: Sergei Gurin

Copy Editor: Jens Hammer

to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal,
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URL: www.tradeservicesupdate.com

Email: tsu@globaltradecorp.com

2
Tel: +1 416-661-8520

waiver. The objective of this article is to analyse

the provision of sub-article 16(c) (iii) (b) under the
parameter of Principle of Irrevocability and offer
a solution as an alternative to it.
Historical background of provision of sub-article
16(c) (iii) (b):

Bio: http://www.tradeservicesupdate.com/
editor_hoque

An Alternative on Status
of Documents Under
Sub-Article 16 (c) (iii) (b)
By: ATM Nesarul Hoque
Introduction:

The journey of Principle of Irrevocability with the

UCP has been started from the very earliest version (UCP82) and continued to the very latest
version (UCP600). Earlier the L/C had to stipulate
irrevocability- in its condition in order to establish the L/C as irrevocable.But, with the expansion
of international trade and the involvement of more
and more people in the trading process, the limitations of the revocable L/C became evident to
traders, bankers and other practitioners. In time, it
fell into relative disuse, and the irrevocable L/C as
an instrument of international trade settlement,
with its own features, received recognition in UCP
500, giving it more importance than a revocable
L/C. And now under UCP600, an L/C is by definition irrevocable. This Principle of Irrevocability is
not just a rule or provision but act as basis point
for allocation of various risks and/or responsibilities among the parties like issuing bank, confirming bank, nominated bank and of course, the beneficiary. This goes for other provisions of the
UCP600 as well. Sometimes policy makers are
overwhelmed with L/C practices in the lifetime of
any version of UCP and incorporated these practices as recognition of standard L/C practice into
subsequent versions as provision. One of the provisions like above, is sub-article 16 (c) (iii) (b) of
the UCP 600. This provision permits the issuing
bank to state the status of the documents i.e.
that the issuing bank is holding the documents
until it receives a waiver from the applicant and
agrees to accept it, or receives further instructions
from the presenter prior to agreeing to accept a

During the lifetime of UCP500, the L/C practitioner

started to incorporate a new disposal instruction
outside the mandate of UCP 500 to the effect that,
the issuing bank has the right to seek the applicants waiver and release the documents to the
applicant after providing a notice of refusal [if any]
without prior permission from the presenter or
similar. The practice was evident in two different
formats. One is; first incorporated the same conditions as L/C condition which effectively modifying the status of the documents when subject to a
notice of refusal and the remaining was only practices in notice of refusal without having any indication in the L/C. Drafting of UCP 600 recognized
the practice and incorporated as one of the options available under sub-article 16 (c) (iii) and in
this regard the Commentary of UCP 600 says,
The wording contained in sub-article (c) (iii) (b)
will not be new to a large number of documentary
credit practitioners. This wording, or wording of a
similar nature, was used in a considerable number of notices of refusal given under UCP 500.
The problem was that the wording did not reflect
the options that were available under UCP 500
sub-article 14 (d) (ii), i.e., that the documents are
being held at the disposal of, or being returned to,
the presenter. In reality, the wording that was incorporated into those notices of refusal reflected
the practice of banks as opposed to the requirements of UCP 500sub-article 14 (d) (ii). That practice has now been recognized and incorporated
as one of the options available under sub-article
(c) (iii).
An unresolved question:

Arguably, there are two contrary positions while

applying the mentioned status of documents in a
notice of refusal. In one hand, it is international
standard documentary credit practices that once
presentation is refused, documents relevant to
this notice of refusal, are belong to the presenter
at this point of time to further action. On the other hand, in corporation of this provision offers flexibility to the issuing bank to seek applicant waiver
(without having any ownership) even after sending notice of refusal. Hence, the rule is actually
prioritized flexibility in operation over the
irrevocable right of the presenter.
3

An Alternative on Status of Documents (continued)

An Alternative:

The challenges to set up an alternative to the existing provision that the alternative must offer at
least similar kind of flexibility in operation and of
course, it must be done without hampering presenters irrevocable right
As a first step into the alternatives, we need to
reconsider the pre-waiver provisions of UCP 600
in sub-article 16 (b) as under:
When an issuing bank determines that a
presentation does not comply, it may in its
sole judgement approach the applicant for a
waiver of the discrepancies. This does not,
however, extend the period mentioned in subarticle 14 (b).
The issuing bank must sent a status report not later than close of fifth banking
day only mentioning the discrepancies
that the issuing bank convey to the applicant or similar.
By this provision, the presenter will be aware on
what ground the presentation is discrepant [within
not later than close of fifth banking day], which
will ultimately give the presenter better position to
further communicate its instruction, if contrary.
This status report is not a notice refusal but an
update on outcome of issuing bank examination
and its further course of action. If the presenter is
not satisfied with the reasons of status report,
the presenter may provide contrary instruction to
the issuing bank.
In continuation of above provision, Sub-article 16
(c) may be remained intake except sub-article
16 (c) (iii) (b) i.e.
When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing
bank decides to refuse to honour or negotiate,
it must give a single notice to that effect to the
presenter.
The notice must state:
i. that the bank is refusing to honour or
negotiate; and
ii. each discrepancy in respect of which the
bank refuses to honour or negotiate; and

iii. that the bank is holding the documents

pending further instructions from the presenter; or
b) that the bank is returning the documents; or
c) that the bank is acting in accordance
with instructions previously received from
the presenter.
Since, issuing bank may have already engaged in
pre-waiver process under sub-article 16 (b) (ii) [as
mentioned in this article], the time limit for sending
notice of refusal under sub-article 16 (d) should
be divided into the following two ways, i.e. one is
for the nominated bank acting on its nomination
and the confirming bank if any and the remaining
is solely for the issuing bank.
(i) Nominated bank acting on its nomination
and confirming bank and the issuing bank
(not acting under sub-article 16(b)), if any,
must give the notice required in sub-article
16 (c) by telecommunication or, if that is not
possible, by other expeditious means no
later than the close of the fifth banking day
following the day of presentation or similar.
(ii) The issuing bank acting under subarticle 16(b) must give the notice required in sub-article 16 (c) by telecommunication or, if that is not possible, by
other expeditious means no later than
the close of the tenth banking day following the day of presentation or similar.
Conclusion:

This article is an attempt to eliminate an unjust

gap between L/C practice and presenters irrevocable right that inherited UCP600 through incorporation of sub-article 16 (c) (iii) (b). As a part of allocation of risk while eliminating the gap, this article
allocate the risks and/responsibilities to the issuing
bank in the form of status report and to the beneficiary giving the issuing bank extended time limit
for not later than close of tenth banking days for
sending notice of refusal.
4

Under UCP 600 beneficiary may have up to 21

days after goods being shipped to present documents, while under ISP98 presentation must be
made without delay.
Documentary credits my be silent respect to the
language, but in standby letters of credit under
ISP 98 the language must be that of the
standby.
Bio: http://www.tradeservicesupdate.com/editor_xavier

Under UCP 600 is not necessary to present a

document demanding payment, while in ISP 98
it is necessary to present a demand for payment.

UCP 600 vs ISP98

In documentary credits, banks have up to 5 days

business days to review documents while in
ISP98 between 3 and 7 business days.

Reading article 1 of UCP 600, we may see that

this set of rules is also applicable to stand by documentary credits.

Documentary credits usually does not precise an

exactly hour for presentation, while standby letters of credit under ISP 98 may show a time of
day of expiration.

By Xavier Fornt

However, this type of documentary credits, also

have their own rules i.e, ISP98. Reading the
scope and application of the ISP98, we see in the
General Provisions, Rule 1.01, that they are intended to be applied only to stand by letters of
credit.
No reciprocity.
But, what happens really on the market? I honestly think that even the majority of the documentary
credits are submitted to UCP 600, we see some
of them subject to ISP 98.

UCP 600 does not include a syndication possibility, but this possibility is included in ISP98.
To conclude, let me say that UCP are Rules of
The Banking Commission and ISP are rules of
the International Banking Law and Practice endorsed by the Banking Commission.

So far, so close.

And can this situation originate some conflicts?

Theoretical no, but lets analyze some differences
between documentary credits (normally subject to
UCP 600) and standbys letters of credit (normally
subject to ISP98).
The main idea of the beneficiary of a documentary credit is to use them (i.e. present the required
documents after goods being shipped), while the
primary idea (or hope) of the beneficiary of a
standby documentary credit is not to use them
(i.e. only to draw if the counterpart defaults i.e.
does not pay at the agreed time).
A documentary credit requires original documents, while a stand by letter of credit normally
requires copies, except the demand.
A documentary credit is not intended to be renewed, while the ISP98 makes it possible.
5

Bio: http://www.tradeservicesupdate.com/editor_kim

L/C Quiz

By Kim Sindberg
The following quiz is made by Kim Sindberg. Answers can be sent via e-mail to
kim@kimsindberg.com.
Deadline for sending an answer is 20 November
2015. After that two winners will be picked from
the correct answers. The winners will receive one
free copy of Kim Sindbergs book The Cheaters
Handbook to Documentary Credits. More information about the book:
http://kimsindberg.dk/the-cheaters-handbook-todocumentary-credits-2014-2/?lang=en
The winners will be contacted directly, and will be
announced in the next issue along with the correct answers.
Global International Bank (GIB) has been requested to issue an L/C by its customer Loop Trading
Ltd in favour of Overseas Exporters.
The L/C is advised via First Traders Bank (FTB)
being available and confirmed with them.
The L/C is issued available by negotiation 90 days
after bill of lading.
The L/C is issued subject to UCP 600.
Tick off the appropriate box:
Question 01:
FTB is:

Question 02:
As an advising bank FTB must:
1. satisfy itself as to the workability of the L/C
and that the advice accurately reflects the
terms and conditions of the documentary credit
2. satisfy itself as to the apparent authenticity
of the L/C and that the advice accurately reflects the terms and conditions of the documentary credit
3. satisfy itself as to the apparent authenticity
of the L/C and that the advice accurately reflects the terms and conditions of the underlying contract
4. ensure that the L/C is authentic and exactly
reflects the terms and conditions of the L/C

Question 03:
As a confirming bank FTB must:
1. negotiate a complying presentation with recourse to the applicant
2. negotiate a complying presentation with recourse to the beneficiary
3. negotiate a complying presentation without
recourse to the applicant
4. negotiate a complying presentation without
recourse to the beneficiary

1. advising and confirming bank but not nominated bank

2. advising bank but not confirming bank or nominated bank
3. advising, confirming and nominated bank
4. confirming bank and nominated bank but not
advising bank

Question 04:
Overseas Exporters presents documents to
FTB. The L/C calls for a bill of lading. The date
of issue on the bill of lading is 15 October 2014.
The bill of lading indicates that the goods are
shipped on board at the port required by the L/C
on 20 October 2014...
6

L/C Quiz (Continued)

When is the maturity date?

Question 06:

1. 13 January 2015

The documentary credit includes a sanctions

clause.

2. 14 January 2015

Which is correct?

3. 16 January 2015

1. Trade Finance banks should not concern

themselves with sanctions, as the L/C is independent of the underlying transaction

4. 18 January 2015
2. The UCP 600 always override any sanctions
regime

Question 05:
The bill of lading presented is issued as signed by
ABC Forwarders Ltd as carrier.
Which is correct?

3. Sanctions may restrict a banks ability to perform under UCP 600

4. When a sanctioned part appears in a document presented under an L/C, the issuing bank
must refuse the presentation according to UCP
600 article 16.

1. A bill of lading must never indicate the word

forwarder
2. If the documentary credit does not include
anything about freight forwarders a freight
forwarder may issue and sign the transport
document as long as it is done according to
UCP 600 article 20(a)(i)
3. When a documentary credit prohibits a bill
of lading issued by a freight forwarder the
name of the issuer must not include word
forwarder
4. When a documentary credit allows for a bill
of lading issued by a freight forwarder the bill
of lading must be signed by the freight forwarder as carrier

Question 07:
Which way of signing is not acceptable on a bill
of lading presented under the documentary credit?
1. Mitsui O.S.K.Lines, Ltd. as Carrier (preprinted text) By Amity Shipping Ukraine
Ltd, As Agents
2. Header: Mitsui O.S.K.Lines, Ltd. Signed by
Amity Shipping Ltd, As Agents for the carrier
3. Header: Mitsui O.S.K.Lines, Ltd., carrier
Signed by Amity Shipping Ukraine Ltd, As
Agents for the carrier
4. [Signed by] Mitsui O.S.K.Lines, Ltd. as Carrier

L/C Quiz (Continued)

Question 08:

Question 10:

The L/C includes the following requirement UCP

600 article 14 (k) does not apply to this documentary credit

The banks define a clean bill of lading

document as:

What is the consequence of this?

1. The requirement is ambiguous and must be
disregarded
2. The shipper in the bill of lading must be the
beneficiary mentioned in the documentary credit
3. The shipper in the bill of lading must be the
applicant mentioned in the documentary credit

1. One that includes the word clean

2. One that does not include handwriting
3. One that does not bear any clause or notation expressly declaring a defective condition in the goods or their packaging
4. One that does not bear a clause such as
"shipper's load and count" or "said by shipper to contain"

4. The shipper in the bill of lading may be any

party

Question 09:
The documentary credit calls for a certificate of
origin issued by local chamber of commerce and
legalized by the embassy in the exporting country.
Who must authenticate a correction to the certificate of origin?
1. Only the beneficiary
2. The beneficiary and the chamber of commerce
3. The beneficiary, the chamber of commerce
and the embassy
4. The chamber of commerce and the embassy

ISBP 745
Paragraph by Paragraph
(Paragraph iv)
Following the last issue we here cover
paragraph iv of ISBP 745:
ISBP 745 Paragraph v The credit and amendment application, the issuance of the credit and
any amendment thereto
Relevant references:
Official Opinion R638 / TA629 (An ambiguous requirement for a transport document)
Official Opinion TA704rev (An ambiguous
condition in a L/C)
Official Opinion R634 / TA638rev
(On exclusions in a L/C that makes the credit ambiguous)

ISBP 745Paragraph by Paragraph (Paragraph iv) (continued)

Comments:
This paragraph addresses three different issues:
1. The applicant bears the risk on any ambiguity
in the L/C application/instruction.
This means that any ambiguity in the L/C ultimately falls back on the applicant.
The issue of ambiguities can be difficult to deal
with as the perception of what is ambiguous may
differ from person to person.
The paragraph tries to capture, as an example,
the situation where a L/C includes two conditions
(e.g. (1) and (2)), and when complying with condition (1) then condition (2) cannot be complied
with and vice versa.

3. The issuing bank should ensure that the L/C

is not ambiguous or conflicting in its terms and
conditions.
Example:
From the L/C application (issued by the applicant):
Country of origin: South Korea
After consulting with the applicant the issuing
bank changes this (non-documentary) requirement so that it is now to be stated in a document:
+ Certificate of Origin showing South Korea
origin

This is the situation in ICC Opinion R638 /

TA629 where a shipment between two seaports
is described (one mode of transport), and a multimodal transport document (at least two modes
of transport) is called for. In such case both requirements cannot be complied with at the same
time.
2. The issuing bank may supplement or develop
the instructions from the applicant in a manner
necessary or desirable to permit the use of the
L/C.
The intention is to allow the issuing bank to modify the instructions received from the applicant in
order to make the L/C workable.
As an example this could be to change a nondocumentary condition to a condition reflected in
a document. Of course such modifications
should only be made based on an agreement
with the applicant. If the issuing bank modifies
the conditions of the L/C without such agreement, and it results in a loss for the applicant,
the issuing bank may be faced with a claim.
The paragraph allows the applicant to instruct
the issuing bank not to supplement or develop
the instructions. In such case it is doubtful that
the issuing bank will issue the L/C if it includes
instructions that are ambiguous or conflicting in
its terms and conditions.
9

Charter Party BL vs. Marine Insurance

A discussion amongst the
country editors.
The country editors have
been discussing the following questions. The below
answers are excerpts of
the discussion.
The following LCM editors
have took active part in the
discussion:

Xavier Fornt

Andreu Vil

Radek Dob

Bob Ronai

T.O. Lee

Mohammad Sohail
Hussain

Bogdan Ilie

Zahoor N. Dattu

Daniel Devahive

Is it mandatory for L/C issuing banks to check the underlying marine insurance policy to ensure that it covers the risks
associated with Charter Party Bill of Lading (CPBL), where
the L/C requires a transport document as CPBL?

This discussion shows the L/CM editors in agreement but

with interesting nuances.
Andreu Vil, Spain
I would simply say no: Only when the insurance policy is a
requirement under the L/C and only to the extent of the L/C
(and UCP) requirements.
Radek Dob, Czech Republic
I would say: "it depends on what you mean by 'check the
underlying marine insurance policy' ".
Of course we have to examine the policy to determine
whether it appears, on its face, to comply with the L/C. In
addition, we have to determine it not to be in conflict with
other documents.
"To appear on its face" does, in my reading, mean that you
only examine the insurance document itself and do not examine the general insurance terms (they are usually not
even enclosed or reproduced on the document anyway)
and the full wording of the insurance clauses.

So, you do not have to read an express statement on the document that it covers charter party
shipment. But if the insurance document expressly states that it DOES NOT cover charter party
shipment, and CPBL has been in fact presented, such insurance document is discrepant.
Bob Ronai, Australia
In my opinion the answer is simple and one word: "no".
An underlying marine insurance policy covers risks of loss of or damage to the goods, not risks
"associated" with a CPBL if that refers to the owner's or master's actions and responsibilities
detailed in the CP.

10

Charter Party BL vs. Marine Insurance (continued)

T.O. Lee, Canada
From my experience, bankers do not care about matching insurance terms with transport mode, particularity for CPBL.
Also under Intercoms the vendor needs to cover minimum insurance cover, unless otherwise stated
in the sale/purchase contract.
In practice, it is up to the buyer to list his insurance requirements in the L/C application.
Then the banker will check compliance "on its face".
I hope the issuer would check this but this is only a Cinderella dream.
Xavier Fornt, Spain
While I agree that we need to check that it meets the terms and conditions of the L/C, much of the
due diligence needs to be done prior to the issuance of the L/C. Like integrity of the charterer, where
the vessel is registered (though this is not required as per UCP). But because the bank has financial
interest in the cargo, which is financed under the L/C, a due diligence is required. As regards to the
Insurance Policy that is presented under the L/C, my other challenge is to see the financial capacity
of the claims settling agent at the port of discharge. How do you ensure that the agent will meet the
claim of a higher value? If he does not honour, you would have to recover from the Principal, which is
another nightmare.
I am happy to take a locally issued Open Cover Note or Policy issued in the importer's country - since
I can gauge the financial ability of the Issuer - besides this, I can take them to the courts for nonhonouring the claim since it is much easy for the Issuing bank to recover the claim as the Insurance
company resides in the same country.
In short prevention is better than cure - would be my first choice.

11

Irrevocable Reimbursement Undertaking IRU

A discussion amongst the
country editors.
The country editors have
been discussing the following questions. The below
answers are excerpts of
the discussion.
The following LCM editors
have took active part in the
discussion:

Emile Rummens

Bogdan Ilie

Xavier Fornt

Radek Dob

Andreu Vil

Abdulkader Bazara

Nesarul Hoque

Nguyen Huu Duc

T.O. Lee

Would appreciate if we could have a short exchange of ideas on IRUs.

The last years we received quite some L/Cs issued by
smaller banks (or with a low credit rating) but with an Irrevocable Reimbursement Undertaking issued by an acceptable
(mostly Russian) bank and subject to URR 725.
We had to add our confirmation to the L/Cs, which we did
based on the IRU of the strong bank
In our bank we consider from a risk point of view an IRU as
some kind of a first / previous confirming bank (although of
course there are some differences between the 2 risk mitigating techniques). Till now our experience with IRUs is
satisfactory but this does not say much as till now there
were no big financial troubles with the issuing banks. And
one can only know whether your protection still holds when
the weather is stormy.
I would like to know whether the colleagues have technical
comments/concerns/points of attention / bad or good experiences with the technique of IRU.
PS. Let us keep the aspect of Russia, embargoes and the
like out of scope of our discussion

The editors share their experiences on the IRU.

Bogdan Ilie, Romania
We never faced bad experiences caused by IRUs issuers.
The only aspect that might give some headache and you always have to keep in mind is that
once a bank issues an IRU and inform you (the nominated/negotiating/confirming bank) the
terms and conditions of the IRU, you must not forget to quote its reference number when you
reimburse yourself.
Ive heard of (and even met once) cases where reimbursing bank did not honour on first demand because the remitting bank failed to quote the reference number of the reimbursing bank.
Another aspect is that in case L/C validity is extended or its value is increased it is recommended to contact reimbursing bank to confirm that you have received proper amendment from the
issuing bank and accept to amend its IRU accordingly. Sometimes issuing banks fail to send
the amendment to the reimbursing bank too.
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Irrevocable Reimbursement Undertaking IRU

Xavier Fornt, Spain
First of all, as per URR 725 art. 3, reimbursement authorisation is separate from the credit.
Second, the reimbursing bank is only obligated in the terms of its undertaking (article 4), and as per
General Provisions g. the reimbursement undertaking is irrevocable, but has his own conditions.
It depends whether you consider this reimbursement undertaking conditions acceptable or not.
In my case, IRU's experience was also satisfactory.
Radek Dob, Czech Republic
So far we have not encountered any troubles with IRU's. We have done some confirmations based
on them recently. However, since many of these transactions tend to have longer tenors, we have
had considerably less reimbursement claims than outstanding receivables so far. The reimbursements that had already matured went smoothly.
As to the accounting principles, I believe it is very much a matter of the applicable law and accounting / reporting principles (should be harmonised within EU) and also, to quite a high extent, their interpretation by local authorities and the banks themselves (and here we might differ).
We also consider the IRU issuing bank as a primary obligor and register the exposure against them.
However, I have heard differing opinions on that (even within my own institution).
So I would keep it the way you do it until someone turns to you saying it is wrong...
Andreu Vila, Spain
We do quite a few confirmations based on IRU, and I am not aware of any big problem so far. We
prefer IRUs being subject to URR 725, but there are also some undertakings not subject to URR. In
any event, acceptance of the IRU is done in a case by case basis.
To add something to what has been said, the only irregular practice that has a certain recurrence that
comes to my mind is receiving an IRU from a bank that it is not in fact a nominated reimbursing bank
in the L/C. Typically an L/C issued by an African bank, available with our bank and with reimbursement to be effect direct from the issuing bank after our claim, but supplemented by an IRU issued by
the London branch of the issuing bank. In fact, it would be something more similar to a payment guarantee, but drafted and labelled as an IRU.
Again, we try to get an amendment, what very often we dont get. Otherwise we have to consider
again the text and conditions of the undertaking, the time and period, the reliability of banks involved,
the amount, type of goods, beneficiary, etc. and if everything is ok we might accept that unconventional self-defined IRU (which of course is not subject to URR).
Adbulkader Bazara, Saudi Arabia
So far no problems but you need to be careful about the conditions of the IRU. Though they are subject to URR some IRU's might have additional conditions that one need to check and verify if they do
not cause problems at the time of claiming for payment.
In addition, as explained by others, amendments to the credit that have effect on the validity period or
increase in value shouldn't not be advised by extending the confirmation to them unless the IRU is
also amended.
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Irrevocable Reimbursement Undertaking IRU (continued)

Nesarul Hoque, Bangladesh
I agreed with all, on practice of IRU from rated bank (acceptable to bank) for accommodating lower
credit rated bank subject to URR only.
Nguyen Huu Duc, Vietnam
The question from Emile reminds me of those days when the U.S. trade embargo was still imposed
on Vietnam. During the time before the U.S. trade embargo was lifted in 1997, Vietnamese banks in
general and our bank in particular could not open USD accounts with any bank in the U.S. Despite
the U.S. trade embargo, payments including by L/Cs from and to Vietnam were still effected smoothly
via our correspondent banks in Asia and Europe. Most of L/Cs issued by our bank were nonconfirmed. However, we were sometimes requested to issue confirmed L/Cs and some confirming
banks in Europe would agree to add their confirmation if our L/Cs indicate a Europe - based reimbursing bank which was willing to issue their irrevocable reimbursement undertaking (IRU).
From the story of our bank in the time of the U.S. trade embargo, it is understood that for L/Cs issued
by banks in political or economic unstable countries, e.g., trade embargo countries, the confirming
banks would require IRU issued by first class banks to cover the risk of non-reimbursement.
IRU issued by the first class bank cannot be amended or cancelled without the agreement of the
claiming bank (i.e., confirming bank in Emiles case), the confirming bank is fully protected under URR
725.
T.O. Lee, Canada
Based on common sense, an IRU, as well as a commercial contract, or any currency note, is only as
good as its issuer.
Example: the PRC Yen or RMB, is not the same now as compared to 40 years ago, the Mao era. In
the future it may even replace USD.

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News from the Trade World

IIBLP have announced the following 2015 schedule:

Americas Standby & Guarantee Forum

New York
15 October 2015

Americas L/C Law Summit

New York
16 October 2015

ICC Banking Commission Technical Meeting

Date: 16-18 November 2015
Venue: HSBC, Paris. 103, Avenue des Champs-Elyses.
This will be the first of the technical meetings to be held.

Famous last word

Whenever you find yourself on the side of the majority, it is time to pause and reflect.
Mark Twain

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