There is no limit to the number and variety of documents which letters of credit may stipulate. The following is a list of documents most commonly seen in a letter of credit transaction. Each document is described in brief with a check-list for preparing the document.
As already stated, the beneficiary should, on first being advised of the letter of credit, examine it carefully and be satisfied that all the documentary requirements can be complied with. Unless the documentary requirements can be strictly complied with, the beneficiary may not receive payment from the issuing bank. If there are any requirements that cannot be complied with, the beneficiary should immediately request the applicant to arrange for an appropriate amendment to the letter of credit.
Draft
A draft is a bill of exchange and a legally enforceable instrument which may be regarded as the formal evidence of debt under a letter of credit. Drafts drawn at sight are payable by the drawee on presentation. Term (usance) drafts, after acceptance by the drawee, are payable on their indicated due date.
Checklist
• Drafts must show the name of the issuing bank and the number and date of the letter of credit under which they are drawn.
• Drafts must be drawn and signed by the beneficiary of the letter of credit.
• The terms of the draft must be expressed in accordance with the tenor shown in the letter of credit; e.g., at sight or at a stated number of days after bill of lading/shipment date.
• The amount in words and figures must agree and be within the available balance of the letter of credit and in the same currency as the letter of credit.
• The amount must agree with the total amount of the invoices unless the letter of credit stipulates that drafts are to be drawn for a given percentage of the invoice amount.
Commercial Invoice
The commercial invoice is an itemized account issued by the beneficiary and addressed to the applicant, and must be supplied in the number of copies specified in the letter of credit.
Checklist
• The invoice description of the goods must be identical to that stipulated in the letter of credit.
• Unit prices and shipping terms, ie., CIF, FOB, etc., must be as stipulated in the letter of credit. Extensions and totals should be checked for arithmetical correctness. For definitions of CIF, FOB etc., see page (16).
Consular or Customs Invoice
A consular or customs invoice is prepared by the beneficiary on forms either supplied by the buyer or local consulate offices.
Checklist
• Consular invoices must be visaed (officially stamped) and signed by a consular officer of the importing country and be supplied in the official form and number of copies as stipulated in the letter of credit.
• All headings of the forms must be completed.
• The value of goods required must agree with that shown on the commercial invoice.
Bill of Lading
A bill of lading is a receipt issued by a carrier for goods to be transported to a named destination, which details the terms and conditions of transit. In the case of goods shipped by sea, it is the document of title which controls the physical custody of the goods. There are two different types of bill of lading:
• A STRAIGHT BILL OF LADING is one that names a specific consignee to whom goods are to be delivered. It is a non-negotiable document.
• An ORDER BILL OF LADING is one that is written “to order” or to order of a named party making the instrument negotiable by endorsement. Letters of credit usually call for an order bill of lading blank endorsed, meaning the holder of the bill of lading has title to the goods.
Given that each bill of lading must be either “straight” or “order”, the following is a list of more common types of bill of lading:
• An OCEAN BILL OF LADING is one issued by an ocean carrier in sets, usually three signed originals comprising a complete set, any one of which gives title to the goods. Ocean bills of lading may be issued in “straight” or “order” form.
• A SHORT FORM BILL OF LADING is one issued by a carrier which does not indicate all the conditions of the contract of carriage. This is acceptable unless otherwise specified in the letter of credit.
• A CHARTER PARTY BILL OF LADING, is one which shippers may, when large or bulk cargoes are concerned, lease the carrying vessel for a stated time or specific voyage under a charter party contract with the owner. Goods carried are then covered under a form of bill of lading issued by the charterer and indicate as being shipped, subject to the term and conditions of the charter party. Charter party bills of lading are not acceptable unless specifically authorized by the letter of credit.
• A MULTIMODAL TRANSPORT DOCUMENT is one covering shipments by at least two different modes of transport.
Checklist
• Ensure that the port of loading and port of discharge are as stipulated in the letter of credit.
• The shipment must be consigned in the manner stipulated in the letter of credit.
• A general description of the goods is acceptable if consistent with but not necessarily identical with the description specified in the letter of credit and other documents.
• If the letter of credit calls for an “on board” bill of lading, it must be evidenced by a “shipped on board” bill of lading, or by marked or stamped “on board” notation indicating the date the goods were loaded on board.
• If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF or CFR; or if the ocean freight has been added to the FOB or FAS value: the bill of lading must be marked “freight paid” or “freight prepaid”. Expressions such as “freight to be paid” or “freight payable” are not acceptable.
• The bill of lading must be “clean”. Any superimposed marking indicating a defect in the packaging or condition of the goods renders the bill of lading “unclean” and unacceptable.
• Bills of lading indicating goods shipped “on deck” are not acceptable unless specifically allowed in the letter of credit.
• The total number of packages comprising the shipment, shipping marks and numbers, and any gross weight must agree with those on the commercial invoice and other documents.
• Letters of credit should stipulate a period of time after date of issue of the bill of lading or other shipping document for presentation of drawings. If no such period is specified, banks will refuse documents and consider them to be stale dated if presented later than 21 days after the date of “on board” endorsement, or, in the case of a shipped bill of lading or other shipping document, 21 days after the date of issue.
• The bill of lading is to cover only goods described in the invoice and specified in the letter of credit.
• Any correction or alteration must be initialled by the party signing the bill of lading.
• The name of the carrier must appear on the front of the bill of lading where the particulars of the shipment are shown.
• If the bill of lading is signed by an agent, the name of the agent as well as the name of the carrier must be shown.
Air Waybill
An air waybill is a receipt issued by an air carrier indicating receipt of goods to be transported by air and showing goods consigned to a named party. Being a non-negotiable receipt it is not a document of title.
Checklist
• Only the goods invoiced and specified in the letter of credit may be covered by the air waybill.
• If the letter of credit stipulates that freight is to be prepaid; or if the invoice is priced CIF or CFR; or if freight is otherwise included in the invoice: the air waybill must indicate that freight has been paid.
• The airport of departure and airport of destination must be as stipulated in the letter of credit.
• The number of packages and gross weight shown on the air waybill must be consistent with the other documents.
• An air waybill issued by a forwarder is not acceptable.
Insurance Policy or Certificate
Under the terms of a CIF contract, the beneficiary is obliged to arrange insurance and furnish the buyer with the appropriate insurance policy or certificate. The extent of coverage and risks should be agreed upon between the buyer and seller in their initial negotiations and be set out in the sales contract.
Since the topic of marine insurance is extremely specialized and with conditions varying from country to country, the services of a competent marine insurance broker are useful and well-advised.
Checklist
• If the letter of credit calls for an insurance policy, an insurance certificate is not acceptable and the policy must be provided. Broker’s cover notes are not acceptable unless specifically allowed in the letter of credit.
• If the insurance policy or certificate indicates that it is issued in duplicate, both copies must be presented.
• Unless the amount to be insured is stipulated in the letter of credit, the amount should cover at least the CIF value plus 10 percent if invoiced in those terms. Otherwise, the amount should be for the greater of the draft amount or the total invoice value plus 10%.
• The amount insured must be expressed in the same currency as the letter of credit.
• The description of the goods insured must be consistent with that in the other documents although not necessarily identical.
• The number of packages comprising the shipment and shipping marks and numbers must agree with those shown on the invoice and bill of lading.
• The name of the carrying vessel, port of loading and port of discharge must agree with those shown on the bill of lading.
• The insurance document must cover transshipment if transshipment is indicated on the bill of lading.
• The insurance document must cover specifically those risks stipulated in the letter of credit. The “all risks” clause in the insurance document does not cover risks of war, which must be separately shown as covered, if required by the letter of credit.
• Unless the letter of credit specifies to whom loss is to be payable, the insurance document must be endorsed by the party to whose order it is made so as to be in negotiable form.
• The date of the insurance document should not be later than the date of shipment as shown by the bill of lading or other transport document. However, the insurance document may be dated after the date of shipment provided it evidences that cover is effective from date of dispatch ie., by way of “warehouse to warehouse” clause.
• Any alterations or corrections to the insurance document must be initialed by the party signing the document.
• The insurance document must be signed by an authorized person.
The foregoing are the most common documents usually called for in an export letter of credit. The following may also be asked for to satisfy government requirements or for the convenience of the buyer.
Certificate of Origin
As the name suggests, a certificate of origin certifies as to the country of origin of the goods described and should comply with any stipulations in the letter of credit as to originating country and by whom the certificate is to be issued. The certificate should be consistent with and identified with the other shipping documents by shipping marks and numbers, and must be signed.
Inspection Certificate
When a letter of credit calls for an inspection certificate it will usually specify by whom the certificate is to be issued; otherwise, the same general comments as in the case of the certificate of origin apply.
As a preventative measure against fraud or as a means of protecting the buyer against the possibility of receiving substandard or unwanted goods, survey or inspection certificates issued by a reputable third party may be deemed prudent. Such certificates indicate that the goods have been examined and found to be as ordered.
Packing List
A packing list is usually requested by the buyer to assist in identifying the contents of each package or container. It must show the shipping marks and number of each package. It is not usually required to be signed.
