DOCUMENTARY CREDITS

Coverage:

• The Basics of Letter of Credit

• Types of Letter of Credit
• Documents under a Letter of Credit
• Incoterms

Documentary Credit i.e. Letter of Credit is one of the key payment methods in International
Trade, the other three being Cash in Advance, Open Account & Documentary Collection.

Let us look at each of these payment methods.

"CASH-IN-ADVANCE" Payment Method

• In Cash-in-advance method, payment is made by the Importer before goods are shipped by
the exporter. With this method of payment, exporter avoids credit-risk as the payment is
made by the importer (received by exporter in most of the cases) before the shipment is
made by the exporter (or even the ownership of the goods is transferred to the importer in
most of the cases). At the same time, exporter’s liquidity also improves with receipt of an
early payment. Being a high goods-risk and liquidity-stress proposition, Cash-in-advance is
arguably the least preferred payment method for the Importers.

NOTABLE POINTS (CASH-IN-ADVANCE):

• Payment is transferred, in full or as a part payment (of the contract value), before
ownership of good is transferred (before shipment date, technically).
• Though Cash-in-advance seems to be of the highest-risk proposition for the importer (and
most-secure for exporter), it may still be the method agreed by the parties basis overall
dynamics of international trade.

SOME SCENARIOS (CASH-IN-ADVANCE):

• Importer is a new entrant in the market and its operating / payment history is untraceable.
• Importer’s creditworthiness / payment history is in questionable.
• Importer is based / located in a country / region which is politically, economically or
commercially considered to be at high-risk.
• Exporter is a monopoly (or one of the very few) supplier of the goods.

ADVANTAGE TO EXPORTER (CASH-IN-ADVANCE)

• Negligible non-payment risk
• Goods shipped when convenient
• Increased liquidity

RISK TO IMPORTER (CASH-IN-ADVANCE)

• No control over the goods receipt or timely shipment
• Exporter country-risk which may create hindrance to the shipment / timely shipment
• Liquidity stress due to early payment

"CASH-IN-ADVANCE" Flow
"OPEN-ACCOUNT" Payment Method

• In Open-account method, goods are shipped by the Exporter before payment is made by
the importer. After shipment, the title documents are also made available to the importer
by the exporter. With this method of payment, exporter assumes credit-risk as the
shipment is made (or ownership of the goods is transferred to the importer) by the Exporter
before that payment is received by exporter. Being a high credit-risk, Open-account is
arguably the least preferred payment method for the Exporters.

NOTABLE POINTS (OPEN-ACCOUNT):

• Exporter ships the goods first and importer may pay for the goods (for a single shipment or
collectively for multiple shipments) after receipt of the goods (like weekly, fortnightly,
monthly etc).
• Open-account terms, if clubbed with an effective trade finance technique (for liquidity and
risk mitigation), may make exporter more competitive in market.
• Though Open-account seems to be of the credit-risk proposition for the Exporter (and most-
secure for importer), it may still be the method agreed by the parties basis overall dynamics
of international trade.

SOME SCENARIOS (OPEN-ACCOUNT):

• Long stable relationship between the party
• Importer is highly reputed and solvent with a good track record in the market
• In highly competitive market where exporter is under pressure to export
• Frequent shipments (say daily)
• Exporter has an effective without recourse financing facility for its exports to the importer

ADVANTAGE TO IMPORTER (OPEN-ACCOUNT)

• Negligible Goods-Risk
• Payment convenience

RISK TO EXPORTER (OPEN-ACCOUNT)

• No control over the goods or payment
• Importer may refuse or delay the payment
"OPEN-ACCOUNT" Flow
"DOCUMENTARY COLLECTION" Payment Method

• Two of the four payment methods, i.e. Cash-in-advance and Open-account, rest on extreme
sides with risks for either of the trading parties, importers and exporters respectively. While
Cash-in-advance is the highest goods-risk situation for the importer, the Open-account
remains the highest credit-risk situation for the exporter. Thus, unless it is a compulsion on
these parties, they would prefer to have a middle path with risk mitigation at a reasonable
cost. With this though, they may agree for Documentary Collection.
• In Documentary Collection, importer makes the payment or agrees to make the payment on
a future way by of accepting a draft / bill of exchange drawn on it (i.e. importer is the
drawee) for receiving the documents (including title documents), which the exporter sends
through a bank and where the banks act as trusted intermediary and custodian of
documents and swapping the documents against the funds as agreed and appropriately.
• With this method of payment, exporter mitigates its credit-risk by routing the documents
through intermediary banks to ensure that the importer receives the documents only on
payment or acceptance of draft / bill of exchange (evidence of indebtedness). On the other
hand, the importer’s goods-risk is mitigated by the fact that he makes payment only when
the intermediary bank offers him the documents. The aforementioned documents become
more important when the include title documents (like BL incase of sea shipments).
• In most of the practical circumstances, four parties are involved in documentary collection
method – Exporter, Remitting Bank (normally exporter’s bank), Collecting / Presenting Bank
(normally importer’s bank) and the Importer

NOTABLE POINTS (DOCUMENTARY COLLECTION)

• Importer does not pay for goods before shipment.
• Exporter keeps control over goods till importer pays or accepts the draft / bill of exchange
(incur a legal obligation to pay on a specified later date).
• Though the title to the goods can be controlled under ocean shipments, it may not be
controlled under the mode of shipments and the importer may receive the goods in such
cases with or without payment.
• Banks, the Remitting Bank (exporter’s bank) and the Collecting Bank (importer’s bank) play
a major role in facilitating the documentary method process. However, it is to be noted that
these banks facilitate the document flown and payment flow but they neither verify the
documents nor take any risks.
• DP – Documents against Payment in Documentary Collection: In DP the payment is to be
made immediately upon receipt of the draft and / or shipping documents by the importer's
bank. The importer’s bank releases the documents to the importer once importer makes
the payment.
• DA – Documents against Acceptance in Documentary Collection: In DA, exporter would have
agreed to allow a credit period to the importer for making the payment. This is facilitated by
way of obtaining a written promise from the importer (usually by way of acceptance on a
 draft or bill of exchange). The bank delivers the documents to the importer only when the
importer accepts the draft (as an evidence of indebtedness).

SOME SCENARIOS (DOCUMENTARY COLLECTION)

• The exporter and importer have a well-established relationship however both want to trade
in a limited risk environment.
• The exporter is confident that the importing country is politically and economically stable.
• When an open account sale is considered too risky and an LC is unacceptable to the
importer.
• When both the parties want to trade in a safer route but don’t want to undertake the
documentary credit method as it may be more complex and costly for them.

ADVANTAGES TO EXPORTER (DOCUMENTARY COLLECTION)

• Assurance that the bank will not release the documents to the importer unless payment is
made or the draft is accepted by the importer, in DP and DA cases respectively.
• In case of DA, there is an Evidence of indebtedness available with the exporter.
• The process is simpler, faster, and less costly than LCs

RISKS TO EXPORTER (DOCUMENTARY COLLECTION)

• Importer may refuse to pay or accept the draft
• Foreign exchange risk
• Country’s political risk
• Banks only facilitate and not guarantee the payment

ADVANTAGES TO IMPORTER (DOCUMENTARY COLLECTION)

• Assurance that the bank is in control of the documents and will release them on payment or
acceptance of draft, in DP and DA cases respectively.

RISK TO IMPORTER (DOCUMENTARY COLLECTION)

• Documents may not be sufficient
• Documents may be erroneous
"DOCUMENTARY COLLECTION" Flow
"LETTER OF CREDIT (DOCUMENTARY CREDIT)" Payment Method

• While letter of documentary collection provides importer and exporter with a middle way
between the two extremes, Cash-in-advance and Open-account, there are still some
limitations which the importer and exporter would like to surpass. For instance,
documentary collection does not directly help an exporter in a situation where the importer
refuses to get the documents released from the bank by making payment or accepting
draft. In such a situation, the exporter might have to call the shipment back or find a
different buyer in the country of importer, which will be a difficult situation for the
exporter. Looking from importer’s side, there will be a lot of trouble in case the documents
received from the bank are not sufficient or erroneous. The letter of credit / documentary
credit method in international payment further mitigates such risks perceived / faced by
these parties.
• Documentary Credit is popularly known as Letter of Credit (LC). A letter of credit (LC) is a
promise of a bank on behalf of importer (applicant of the LC) to pay its exporter (beneficiary
of the LC) a specified sum provided that the beneficiary submits the required documents
and adheres to the terms, as set in the LC, by a predetermined deadline.
• It’s a win-win situation for the exporter and the importer as the exporter is assured of the
payment for the supplies and the importer is assured that the payment will be made only
against delivery of the agreed documents.
• As defined in UCP 600, ICC’s governing rules for Letter of Credit / Documentary Credit (or
also called as ‘Credit’ in UCP 600), “Credit means any arrangement, however named or
described, that is irrevocable and thereby constitutes a definite undertaking of the issuing
bank to honor a complying presentation.”
• Letters of credit (LC) is one of the most secure instrument and balanced method of payment
in International Trade. LC is also useful when an exporter is doubtful of the importer’s
capacity to pay for the goods but is satisfied with the creditworthiness of importer’s bank.
However, since LC has many opportunities for discrepancies, they should be prepared by
well-trained documenters.

DEMONSTRATION OF A SIMPLE LETTER OF CREDIT TRANSACTION

• Exporter and Importer agree on the terms and conditions of the trade and sign a contract
keeping the payment terms as LC and also agreeing on the documents to be called under
the LC along with other terms and conditions to be adhered for making a complying
presentation.
• Importer applies with its bank for issuance of a Letter of Credit favouring the exporter
mentioning the documentation as well as other terms which should govern the complying
presentation in the LC.
• In line with the LC application, bank’s own LC policies and subject to availability of sufficient
credit limits, the bank (issuing bank) makes and LC and transmit it to the exporter’s bank,
through swift for advising it to the exporter (beneficiary). A sample of the tentative LC Swift
copy is placed in the Annexure 1 for ready reference.
• The advising bank advises the LC to the beneficiary. By advising LC, the advising bank
satisfies itself as to the apparent authenticity of LC and makes sure that the advice
accurately reflects the terms and conditions of the credit received.
• The beneficiary checks the conditions of the credit and finding it in order, makes the
shipment as agreed in the LC.
• Beneficiary then submits the documents (along with shipping document) in accordance to
the terms as stated in the LC to the nominated bank (it may or may not be the advising
bank).
• The nominated bank dispatches the documents to the issuing bank on behalf of the
beneficiary.
• The issuing bank scrutinizes to ascertain whether it is a complying or a discrepant
presentation. For a presentation to be a complying presentation, it should be in line with
the LC terms, provisions of UCPDC rules (governing the LC) and international standard
banking practices.
• In case of a complying presentation, issuing bank honors (its payment obligation) and remits
the payment to the exporter through nominated bank.
• Issuing bank releases the documents to the importer against payment or acceptance, as the
case may be. The applicant uses these documents to clear the goods from the customs.

TYPES OF LC (IN TERMS OF AVAILABILITY OF CREDIT)

• Sight: Under a sight letter of credit, payment is made to the seller immediately after the
required documents have been submitted to the authorized bank, provided the conditions
in the letter of credit have been met. Banks are, however, allowed a reasonable period of
time for checking purposes (not more than five banking days after they receive the
documents).
• Deferred Payment: In the case of a letter of credit with deferred payment, the payment to
the seller is not made when the documents are submitted, but instead at a later time
defined in the letter of credit.
• Acceptance: In the case of an acceptance credit, the payment to the seller is not made
when the documents are submitted, but instead at a later time defined in the letter of
credit. The seller can request a discount from the bank that accepted the bill of exchange,
or from another bank, and thus draw the amount of the bill minus the discount at any time
after the documents have been submitted.
• Negotiable Credit: Under UCP 600 (Uniform Customs and Practice for Documentary Credits,
2007 revision, article 2) negotiation means the purchase by the nominated bank of drafts
(drawn on a bank other than the nominated bank) and/or documents under a complying
presentation, by advancing or agreeing to advance funds to the beneficiary on or before the
banking day on which reimbursement is due to the nominated bank.

TYPES OF LC (apart from Availability)

• Transferable L/C: Transferable letters of credit are particularly well adapted to the
requirements of international trade. They allow an intermediary to transfer a letter of credit
 to a supplier, thus enabling the intermediary to reduce the extent to which it uses its own
funds to process business transactions.
• Standby L/C: Standby letters of credit are similar to guarantees. Due to their documentary
nature, they fall under the UCP (Uniform Customs and Practice for Documentary Credits).
Standby letters of credit can also be issued under ISP98 (International Standby Practices). If
the guaranteed service/payment is not provided, the seller can invoke the bank’s obligation
to pay by submitting, together with any other documents that the letter of credit might
require, a declaration stating that the letter of credit customer has failed to meet his
obligations/payment.
• Revolving L/C: If the buyer requests partial deliveries of the ordered goods at specific
intervals (contract for delivery by installments), payment can be made under the terms of a
revolving letter of credit that covers the value of each consecutive installment. The bank is
normally liable for the total value of all agreed partial deliveries. However, the second
partial payment is not effective until the first installment has been paid, and so forth.
• Red Clause L/C: In the case of a red clause credit (letter of credit with advance payment),
the seller can request an advance for an agreed amount (defined in the terms and
conditions of the letter of credit) from the correspondent bank. This advance is basically
intended to finance the manufacture or purchase of the goods to be delivered under the
letter of credit. The advance is normally paid against receipt and a written undertaking from
the seller to subsequently deliver the transportation documents before the credit expires.
• Unconfirmed: In the case of an unconfirmed letter of credit, the correspondent bank merely
notifies the seller that a letter of credit has been opened. In this case, it makes no promise
to pay and is therefore not required to honor documents presented by the seller. As a
result, the seller may rely exclusively on the issuing bank (letter of credit bank) and
therefore bears the collection risk of the issuing bank and the country risk – according to
their domicile – as well as the transfer risk.
• Confirmed: If the correspondent bank confirms the letter credit (on behalf of the issuing
bank), then it is committing itself towards the seller to honor documents that are in
compliance with the documentary credit terms and presented on time. In this case, the
seller receives not only an obligation by the issuing bank but also a legally equivalent and
independent promise of payment on the part of the correspondent bank. The seller then
bears the collection risk of the confirming bank and, if this bank is not domiciled in his
country, the corresponding country risk – according to its domicile – as well as the transfer
risk.
• Revocable: All letters of credit subject to the current “Uniform Customs and Practice for
Documentary Credits” (UCP 600), which is effectively the norm nowadays, are regarded as
irrevocable. It is possible in theory to open a revocable letter of credit, but this is no longer
done in practice for various reasons (difficult wording/insufficient security [revocation]).
• Irrevocable: An irrevocable letter of credit is a firm commitment by the issuing bank to
make payment if the documentary credit conditions are fulfilled. It may not be amended or
canceled without the consent of the seller and all obligated banks. If the seller wishes to
amend or cancel individual conditions of the letter of credit, then he must ask the buyer to
issue an instruction to the issuing bank in this respect.
NOTABLE POINTS (DOCUMENTARY CREDIT)
• An LC, also referred to as a documentary credit, as also called Credit in UCP 600, is a
contractual agreement whereby a bank (generally in importer’s country), known as the
issuing bank, acting on behalf of its customer (the importer), authorizes a bank in the
exporter’s country, known as the negotiating bank, to make payment to the beneficiary (the
exporter) against the receipt of stipulated documents.
• The LC is a separate contract from the sales / purchase contract on which it is based and,
therefore, the bank is not concerned whether each party fulfills the terms of the sales
contract.
• The bank’s obligation to pay is solely conditional upon the beneficiary’s (exporter’s)
compliance with the terms and conditions of the LC. In LC transactions, banks deal in
documents only, not goods.

ADVANTAGES TO EXPORTER (DOCUMENTARY CREDIT)

• Payment is assured by a bank, which is considered to be more creditworthy, after goods are
shipped and documents are submitted
• The shipments made under LCs find easier, cost effective and wider financing options
• Country Risk can be mitigated through LC confirmation

RISK TO EXPORTER (DOCUMENTARY CREDIT)

• Bank’s undertaking to pay is conditional to submission of a complying presentation. A
slightest mistake can release the bank from its obligation.

ADVANTAGES TO IMPORTER (DOCUMENTARY CREDIT)

• Assured that bank will not honor unless exporter fulfills the terms and conditions as
mutually agreed between both parties and specified in the LC.
• Importer benefits from bank’s expertise in document scrutiny

RISK TO IMPORTER (DOCUMENTARY CREDIT)

• In case documents are complying however goods are found not to be in order, bank does
not provide any solution as banks deal in documents and not in goods.
"DOCUMENTARY CREDIT" – FLOWS
DOCUMENTS UNDER A LETTER OF CREDIT

Bill of Lading (B/L)

✓ Bill of Lading is a transportation document issued by the carrier or by the carrier’s

authorized agent, for the consignment to be shipped. This document states the main
shipping terms for the consignment.
✓ The three prominent kinds of Bills of Lading
o The on-board bill of lading is issued after the consignment has been loaded onto the
ship. It states the loading date and the name of the ship.
o The received-for-shipment bill of lading merely confirms that the carrier has
received the goods designated for shipping.
o The through bill of lading covers the entire journey of the goods, whether they are
transshipped or carried by different means of transport.
✓ A Bill of Lading Is a Security: Only the holder of the bill of lading can take possession of the
goods.
✓ The bill of lading can be issued (addressed) as follows:
o To the order of a natural or legal person (order bill of lading): Entitlement to the
goods can be transferred by endorsement.
o A “straight consignment” to a natural or legal person (“straight bill of lading”):
Transfer can be effected only by assignment.
o An “order” (bearer bill of lading): Whoever has possession of the original bill of
lading is entitled to the goods.
✓ The bill of lading is transferred on the release of the document. A sample of Bill of Lading is
placed in the Annexure 2.

Commercial Invoices

✓ The commercial invoice is the accounting document which shows the financial claim of the
seller against the buyer.
✓ A customs invoice is often required in addition to a commercial invoice to document the
value of the goods for import clearance.

Packing List, Weight List

✓ Packing lists, weight lists, and official accompanying documents or permits required by
certain countries for export and / or import (such as EUR, ATR, “Clean Report of Findings”)
are not covered in the UCP (Uniform Customs and Practice for Documentary Credits); they
must be issued under the conditions stipulated by the letter of credit.
Certificates

✓ Certificates of quality, analysis and inspection, etc., are not covered in detail in the UCP
(Uniform Customs and Practice for Documentary Credits); they must be issued under the
conditions stipulated by the letter of credit. Certificates must be signed by the issuer.

Certificate of Origin

✓ A certificate of origin is a document that confirms the origin of the goods. It may be issued
by an official organization, such as a chamber of commerce, or by the beneficiary or the
manufacturer (but always as per the terms and conditions of the LC).

Insurance Documents

✓ If the agreed delivery terms are CIF or CIP, it is up to the seller to arrange insurance. The
insurance document (policy or certificate) is the proof that he has done so. According to
UCP (Uniform Customs and Practice for Documentary Credits), the insurance document
must cover a minimum of 110% of the CIF value of the goods and the risks defined in the
letter of credit, unless stated otherwise.

Forwarder’s Certificate of Receipt

✓ A document issued by a forwarding agency confirming receipt of the goods for

shipment/dispatch and dispatch instructions. The forwarder’s certificate of receipt (FCR)
does not fall under the UCP (Uniform Customs and Practice for Documentary Credits) and is
not recognized as a valid transportation document.

Sea Waybill

✓ A non-negotiable sea waybill certifies that goods have been loaded on board a ship, but the
document itself does not have the properties of a security. It is not necessary to present this
document in order to take possession of the goods.

Courier Delivery Slip

✓ This certifies that goods have been accepted and forwarded by a courier service.

Air Waybill

✓ An air waybill confirms the conclusion of a contract between carrier and consignor, and sets
out the conditions with respect to handling, flight route and delivery of the goods.
Road Waybill

✓ This certifies that a contract has been signed between the consignor and the carrier
concerning the transportation of goods by road (by truck).

Inland Waterways B/L

✓ This certifies that a contract has been signed between the consignor and the carrier
concerning the transportation of goods by inland waterways.

Postal Delivery Slip

✓ This certifies that goods have been accepted and forwarded by a postal service.
INCOTERMS 2010

Why Incoterms

✓ To provide a set of rules (to guide people / international traders) that would govern things
like:
o Who is responsible for the well-being of goods in the transit?
o Who pays for transportation along the way?
o Who has done all these things to make sure that the goods actually move?

What are Incoterms

✓ INternational COmmercial TERMS

o 11 terms of shipment and delivery
o created by the International Chamber of Commerce (ICC)
o for use in sales contracts
✓ Provide an Internationally accepted definition of:
o The responsibilities of Buyer and Seller
o The allocation of delivery costs
o The assumption of delivery risks
✓ Periodically updated to reflect trade practice
✓ Should be referred to as ‘Rules’

What are they not?

✓ Law – Incoterms need to be specified in sales contracts in order to apply so that things are
interpreted pursuant to ICC Incoterms
o This is normally done by citing the current Incoterms version in sales quotations and
purchase orders.
✓ All-Inclusive – Detailed situations beyond the scope of Incoterms must be covered
elsewhere in sales contracts

What they do

✓ Divide costs, risks and responsibilities between seller and buyer

✓ Guide one or the other contracting party into subsidiary contracts necessary to fulfill
designated Incoterm tasks, such as contracts of carriage and insurance
✓ Provide useful shorthand
✓ Reduce potential misunderstandings between buyer and seller
✓ “Reflect” rather than dictate trade practice
What they don’t do

✓ Convey title
✓ Include all of the duties of the Buyer/Seller in a transaction
✓ Automatically apply (you must specify)
✓ Speak about payment disputes between buyer and seller
✓ Deal with a breach in contracts

Incoterms defined

✓ By focusing on the Seller’s delivery obligations within an international sales contract,

Incoterms govern three critically important considerations:
o At what physical point in a supply chain the risk of damage to the goods shifts from
seller to buyer
o At what physical point in a supply chain the responsibility for all transportation,
custom clearance, duties, and related charges shifts from seller to buyer
o Responsibility between seller and buyer for execution of certain functional activities

11 Incoterms

✓ EXW – Ex Works (named place of delivery)

✓ FCA – Free Carrier (named place of delivery)
✓ FAS – Free Alongside Ship (named port of shipment)
✓ FOB – Free on Board (named port of shipment)
✓ CFR – Cost and Freight (named port of destination)
✓ CIF – Cost, Insurance & Freight (named port of destination)
✓ CPT – Carriage Paid To (named place of destination)
✓ CIP – Carriage and Insurance Paid to (named place of destination)
✓ DAT – Delivered At Terminal (named terminal at port or place of destination)
✓ DAP – Delivered At Place (named place of destination)
✓ DDP – Delivered Duty Paid (named place of destination)

A ready reckoner of Incoterms 2010 is placed in Annexure 3.

EXW (named place of delivery)

✓ Ex Works
✓ Named place is usually the seller’s premises / works
✓ Minimum risks for the seller
✓ Seller’s cost and risk end when seller places the goods at the disposal of the buyer at sellers’
premises or another named place at the origin
✓ Seller is not responsibility for exports custom clearance
✓ Seller is not loading on the collecting vehicle
✓ More practical for Domestic Trade
FCA (named place of delivery)

✓ Free Carrier
✓ Named place usually the seller’s Premises or a buyer appointed carrier terminal on the
seller’s side
✓ Seller’s cost & risk end when goods are delivered to Buyer’s Carrier at the seller’s premises
or another named place at the origin
✓ Seller is loading if the delivery at the seller’s facility
✓ Seller is responsibility for exports custom clearance
✓ Any Mode of transport

FAS (named port of shipment)

✓ Free Alongside Ship

✓ Seller’s cost and risk end when goods are placed alongside the vessel nominated by the
buyer at the named port of shipment
✓ Seller not responsible for loading on board the vessel at Origin
✓ Seller is responsible for Export clearances
✓ Maritime mode of transport
✓ Suggestion: In case of containers delivered at a terminal, the FCA rule is more appropriate

FOB (named port of shipment)

✓ Free On Board
✓ Vessel loading: Seller’s responsibility
✓ Seller’s cost and risk end when the goods are delivered on board the vessel nominated by
the buyer
✓ Export Clearance: Seller’s responsibility
✓ Maritime mode of transport
✓ Suggestion: For containerized shipments, consider FCA showing the carrier’s terminal at the
port as the designated place

CFR (named port of destination)

✓ Cost & Freight

✓ Delivered when goods are loaded on board the vessel, however Seller pays transport costs
to port of arrival
✓ Not meant for containerized cargo (instead, use CPT)
✓ For Maritime transport
CIF (named port of destination)

✓ Cost Insurance & Freight

✓ Seller’s risks of damage or loss end when goods are on board the vessel, however Seller
must contract for and pay the costs and freight necessary to bring the goods to the named
port of destination
✓ Insurance: Seller must effect a minimum coverage insurance policy on behalf of the buyer
✓ Suggestion: for containerized shipments, consider CIP showing the destination port or an
inland location on the buyer’s side.
✓ Maritime mode of transport

CPT (named place of destination)

✓ Carriage Paid To
✓ Seller’s risk ends when goods are delivered to the first carrier or another person nominated
by the seller at an agreed place
✓ Seller must pay for the transport costs of carriage necessary to bring the goods to the
named place of destination
✓ Any mode of transport
✓ Suggestions: Ideal for containerized shipments

CIP (named place of destination)

✓ Carriage & Insurance Paid To

✓ Seller’s risk ends when goods are delivered to the first carrier or another person nominated
by the seller at an agreed place at the origin
✓ Seller must pay for the transport costs of carriage necessary to bring the goods to the
named place of destination and also secures a minimum coverage insurance on behalf of
the buyer
✓ Any mode of transport

DAT (named terminal at port or place of destination)

✓ Delivered At Terminal
✓ Seller’s risks end once goods are unloaded from the arriving means of transport and placed
at the disposal of the buyer at a named terminal at port or place of destination
✓ The Seller must contract for the costs of carriage to the named terminal at the agreed port
or place of destination
✓ Import Clearances & Duty: Seller is not responsible
✓ Suggestion: when using this term, it is recommended to specify as clearly as possible the
terminal at the agreed port or place of destination, as the risks to that point are for the
account of the Seller
✓ Any mode of transport
DAP (named place of destination)

✓ Delivered At Place
✓ The seller’s risks end when goods are placed at the disposal of the buyer on the arriving
means of transport ready for unloading
✓ Unloading: Seller not responsible
✓ Import Clearances & Duty: Seller is not responsible
✓ The Seller bears the costs for the carriage of the goods to the named place of destination or
the agreed place
✓ Suggestion: when using this term, make clear which party is responsible for unloading and
any type of on-carriage

DDP (named place of destination)

✓ Delivered Duty Paid

✓ Maximum risk for the Seller
✓ Seller bears
✓ all the costs and risks involved in bringing the goods to the place of destination and
✓ has an obligation to clear the goods not only for export but also for import,
✓ And has to pay any duty for both export and import and
✓ Has to carry out all customs formalities
✓ Unloaded is not Seller’s responsibility
✓ Any mode of transport

Choice of Incoterms 2010 – It depends whether

✓ the seller should refrain from undertaking any additional obligation as in EXW
✓ the seller is prepared to do more than to make the goods available to the buyer at the
seller’s premises;
✓ the buyer’s bargaining position allows him to require the seller to undertake extended
obligations;
✓ the seller is able to undertake additional obligations and, in particular, to quote a more
competitive price by extending his obligations;
✓ it is necessary to use the maritime terms FAS, FOB, CFR or CIF when the goods are intended
to be resold by the buyer before they reach the destination.

Terms covered by Incoterms

✓ Warehousing
✓ Packing and loading
✓ Inland freight
✓ Terminal charges
✓ Freight forwarder’s fees
✓ Ocean/air freight
✓ Duty, taxes, & customs clearance
✓ Delivery
✓ Security Clearances (new to 2010)
Annexure 1: Tentative LC Swift copy

----------------- Instance Type and Transmission ----------------------

Original received from SWIFT
Priority/Delivery : Normal
Message Output Reference : 1225 121016XXXXXXXXX5657939061
Correspondent Input Reference : 1225 121016XXXXXXXXX1178375172

----------------------- Message Header ---------------------------------

Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : ARABBANKXXX
ARAB BANK
(COMMERCIAL BRANCH)
MANAMA BH

Receiver : TRADEBANKXXX
TRADE BANK
(ALL TURKEY OFFICES)
ISTANBUL TR

----------------------- Message Text ----------------------------------

27: Sequence of Total

1/1

40A: Form of Documentary Credit

IRREVOCABLE

20: Documentary Credit Number

2012AML201203366

31C: Date of Issue

121016

40E: Applicable Rules

UCPURR LATEST VERSION

31D: Date and Place of Expiry

130106-TURKEY

50: Applicant

BAHRAIN MANUFACTURING COMPANY W.L.L

P.O. BOX 30000,

KINGDOM OF BAHRAIN
59: Beneficiary - Name & Address

INTERNATIONAL IMPORT COMPANY LTD, STI.

(FULL BENEFS. NAME AND ADDRESS UNDER FIELD 47A ITEM NO.6)

32B: Currency Code, Amount

Currency : USD (US DOLLAR)

Amount : #310.000,00#

39B: Maximum Credit Amount

NOT EXCEEDING

41A: Available With...By... - BIC

TRADEBANKXXX

BY PAYMENT

43P: Partial Shipments

NOT ALLOWED

43T: Transhipment

ALLOWED

44E: Port of Loading/Airport of Departure

ANY TURKISH PORT

44F: Port of Discharge/Airport of Destination

KHALIFA BIN SALMAN PORT

44C: Latest Date of Shipment

121215

45A: Description of Goods &/or Services

CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02 DATED 03/07/2012

CFR, BAHRAIN.

46A: Documents Required

1. SIGNED COMMERCIAL INVOICE IN 1 ORIGINAL + 2 COPIES INDICATING DELIVERY TERMS.

2. FULL SET OF CLEAN ON BOARD BILL OF LADING ISSUED OR ENDORSED TO THE ORDER OF

ARAB BANK PLC, NOTIFY APPLICANT SHOWING FREIGHT PREPAID AND SHOWING FULL NAME

AND ADDRESS OF THE SHIPPING COMPANY AGENT OR HIS REPRESENTATIVE IN BAHRAIN.

3. A CERTIFICATE ISSUED BY THE VESSEL OWNERS/CAPTAIN/ CARRIER OR BY ONE OF THEIR

AGENTS STATING THAT THE CARRYING VESSEL IS SUBJECT TO THE INTERNATIONAL SAFETY

MANAGEMENT CODE (ISM) AND INTERNATIONAL SHIPPING AND PORT SECURITY SAFETY

CODE (ISPS).

4. CERTIFICATE OF ORIGIN STATING THAT GOODS ARE OF TURKISH ORIGIN ISSUED BY A

CHAMBER OF COMMERCE SHOWING NAME AND ADDRESS OF MANUFACTURERS.

5. PACKING LIST IN 1 ORIGINAL + 2 COPIES.

47A: Additional Conditions

(1) HONOUR/NEGOTIATION OF DOCUMENTS UNDER RESERVE OR AGAINST INDEMNITY OR

GUARANTEE IS PROHIBITED.

(2) DISCREPANCY FEE FOR USD 75.- (OR EQUIVALENT IN L/C CURRENCY) PLUS ALL RELATIVE

SWIFT/TLX CHARGES WILL BE DEDUCTED FROM DOCUMENTS VALUE FOR EACH

PRESENTATION OF DISCREPANT DOCUMENTS UNDER THIS CREDIT, NOTWITHSTANDING ANY

INSTRUCTIONS TO THE CONTRARY.

(3) ALL REQUIRED DOCUMENTS INCLUDING TRANSPORT DOCUMENTS MUST BE DATED BUT

NOT DATED PRIOR TO THE ISSUANCE DATE OF THIS CREDIT.

(4) ALL REQUIRED DOCUMENTS INCLUDING DRAFTS - IF ANY – MUST INDICATE OUR CREDIT

NUMBER.

(5) FULL BENEFICIARYS NAME AND ADDRESS: INTERNATIONAL IMPORT COMPANY LTD, STI.

BOGAZICI SOKAK.NO:12 KAVAKLIDERE ANKARA ANKARA, TURKEY,

(6) ALL PARTIES TO THIS TRANSACTION ARE ADVISED THAT WHERE THE U.S. EU, UN, AND

OTHER GOVERNMENT AND/OR REGULATORY AUTHORITIES IMPOSE SPECIFIC SANCTIONS

AGAINST CERTAIN COUNTRIES, ENTITIES AND INDIVIDUALS, BANKS MAY BE UNABLE TO

PROCESS A TRANSACTION THAT INVOLVES A BREACH OF SUCH SANCTIONS, AND

AUTHORITIES MAY REQUIRE DISCLOSURE OF INFORMATION. ARAB BANK IS NOT LIABLE IF IT,
OR ANY OTHER PERSON, FAILS OR DELAYS TO PERFORM THE TRANSACTION, OR DISCLOSES

INFORMATION AS A RESULT OF ACTUAL OR APPARENT BREACH OF SUCH SANCTIONS.

KINDLY ACKNOWLEDGE RECEIPT AND ADVISE US BY SWIFT THE DATE OF THIS CREDIT HAS

BEEN ADVISED TO AND RECEIVED BY BENEFICIARY.

71B: Charges

ALL CHARGES AND COMMISSIONS OUTSIDE BAHRAIN INCLUDING COURIER, CONFIRMATION

AND REIMBURSEMENT CHARGES SHOULD BE PAID BY BENEFICIARY.

48: Period for Presentation

PLS SEE FIELD 47A ITEM NO.15

49: Confirmation Instructions

CONFIRM

53A: Reimbursing Bank - BIC

CHASUS33XXX JPMORGAN CHASE BANK, N.A. NEW YORK, NY US

78: Instruction to Paying/Accepting/Negotiating Bank

YOU ARE KINDLY REQUESTED TO FORWARD ORIGINAL SET OF DOCUMENTS AND DUPLICATES
DIRECTLY TO US IN TWO CONSECUTIVE SETS BY SPECIAL COURIER TO OUR ADDRESS :
TRADE FINANCE LETTER OF CREDIT PROCESSING CENTER, DUBAI, U.A.E. FOR THE VALUE OF
DOCUMENTS WHICH STRICTLY COMPLY WITH CREDIT TERMS, PLS REIMBURSE ON OUR
BAHRAIN BRANCHES CENTER, USD A/C WITH JPMORGAN CXXSE BANK N.A., NEW YORK UNDER
ATHENTICATED SWIFT ADVICE TO US .

57D: `Advise Through` Bank -Name&Addr

MEESNL2A

----------------------- Message Trailer ------------------------------

{MAC:00000000}
{CHK:XXXXXXXX}
Annexure 2: Sample of Bill of Lading
Annexure 3: Incoterms 2010 Ready Reckoner