Comments on ICC Document 470/1026

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23 October 2009

To: Emily O'Connor, Senior Policy Manager
and Members of Commercial Law and Practice
International Chamber of Commerce (ICC)

Document 470/TA.688 (UCP 600)

Due to popular demand from readers, as a columnist in Lloyd's of London Press "Maritime Asia / Intermodal Asia" Magazine, I have prepared an article named “What To Order" and "Blank Endorsed" Actually Means” published in December 1993 issue. For details please click http://www.tolee.com/html/col206.htm.

All negotiable instruments, drafts, bills of lading or insurance policies, should follow the same principle on negotiability.

For a “bearer” instrument, the “consignee” box in a bill of lading should be either left blank or with the word “Bearer”. The “insured” box in an insurance policy should be filled similarly, either left blank or “Bearer”. This trade practice was popular in the East India Company period to facilitate easy transfer of the documents of title linked to a sea venture from one party to another without fear about legality or validity. At that time, bearer bills of lading and insurance policies were “traded” amongst brokers. Finders, keepers, provided they obtain the instruments lawfully and with a “consideration”. Due to high risk, bearer bills of lading and policies are seldom used nowadays, and may be replaced by the more exciting CDS, CDO and Accumulator (nick named “I kill you later”) from Lehmann Brothers and AIG :-)

In a bill of lading, if the “consignee” box is filled “To order”, it implies “to order (of the shipper)” who has to make an endorsement on either the front or back of the bill of lading to turn it into either an open endorsement (blank endorsee) or restricted endorsement (to order of one particular party).

In an insurance policy, if the “insured” box is filled “to order”, it implies “to order of the insured” who has to make an endorsement on either the front or back of the policy to turn it into either an open endorsement (blank endorsee) or restricted endorsement (to order of one particular party).

Compared with “bearer”, “to order and blank endorsed” offers more protection to a “holder in due course” in case of frauds because he can claim as a third party who knows nothing about the fraud or the underlying trade since the insurance policy is passed from the insured to his hands through blank endorsement. The insured is the “front line” person who should know more about the underlying trade and the other involved parties. The holder in due course is not the front line person and should enjoy “in good faith” protection under the applicable law.

After setting the scene, it is time to come back to the query itself.

Case 1 - LC asks for a blank endorsed policy and “Assured” box shows “To bearer” without endorsement.

Use of the term “assured” is technically incorrect because “assurance or assured” refers to a risk that must happen, such as death is assured :-( in life “assurance”. “Insurance or insured” refers to a risk that may or may not happen, such as fire and war “insurance”.

“Blank endorsed” always need an endorsement although made in blank (giving no name of any party). So “without endorsement” is not compliant.

A blank endorsed policy gives more protection to the applicant in case of frauds as a “holder in due course”. Now a “bearer” policy would bring him to the front line and it is not the intent of the LC.

ISBP 681 paragraph 179 is not technically accurate because a “to order” policy offers more protection to the parties than a “bearer” policy. Hence this ICC opinion based on paragraph 179 is not desirable by accepting such a “to bearer” document.

Case 2 - LC asks for a blank endorsed policy and “Assured” box shows “ABC Exporting Co Ltd - To bearer” without endorsement.

The “Assured” box is contradictory, showing a specific party and another party as bearer at the same time.

“Blank endorsed” needs an endorsement although made in blank. So “without endorsement” is not compliant.

The opinion of the ICC group of experts is correct by refusing such a document.

Case 3 - LC asks for a blank endorsed policy and “Assured” box shows “To order” without endorsement.

Technically speaking, “to order and blank endorsed” policy is not the same as “bearer” policy because the former offers more protection to the endorsee.

“To order” means “to order of the insured” and hence the insured must add the endorsement.

“Blank endorsed” needs an endorsement although made in blank. So “without endorsement” is not compliant.

The ICC opinion is not correct in accepting such a document without endorsement.

Case 4 - LC asks for a blank endorsed policy and “Assured” box shows “ABC Exporting Co Ltd - To order” without endorsement.

“Assured” box showing “ABC Exporting Co Ltd - To order” is confusing and misleading. It should be either “To order (of insured)” or “To order of ABC Exporting Co Ltd (insured).”

“Blank endorsed” needs an endorsement although made in blank. So “without endorsement” is not compliant.

The opinion of ICC is correct but the reason is not clear and precise.

Case 5 - LC asks for a policy “to order of XYZ Bank Ltd” and “Assured” box shows “To order of XYZ Bank Ltd” without endorsement.

At time of presentation, there is no need for the issuing bank to add any endorsement. But most banks need endorsement by the beneficiary regardless.

XYZ Bank Ltd only needs to endorse the policy to the applicant after full payment for the cost of the goods by the applicant.

The ICC opinion is correct by accepting such document.

Case 6 - LC asks for a policy “to order of XYZ Bank Ltd” and “Assured” box shows “ABC Exporting Co Ltd - To order of XYZ Bank Ltd” without endorsement.

The “Assured” box showing two parties is both contradictory and misleading. It should have shown “To order of XYZ Bank Ltd” without endorsement for reasons explained in case 5 above. But most banks need endorsement by the beneficiary regardless.

This ICC opinion is right but the reason is not clear and precise.

Document 470/TA.690 (UCP 600)

The ICC opinion should have clarified that before a nominated bank can be protected by the UCP 600 articles on reimbursement due to prepayment or purchase of compliant drafts and/or documents, the nominated bank must have first taken up the nomination as the accepting, paying or negotiating bank, as the case may be. Taking up the nomination only after knowing the acceptance of the presentation from the issuing bank or the confirming bank is not “giving value” at all as there is no “consideration” that represents “taking the risk of refusal of presentation or no reimbursement from the issuing bank or the confirming bank”. “Giving value” is now replaced with “purchase” in definition of “negotiation” in UCP 600. The definition of “negotiation” also requires the nominated bank to make the decision to take up the nomination “before the banking day on which reimbursement is due to the nominated bank.”

Before knowing the decision of the issuing or confirming bank about acceptance of the presentation, the nominated bank must first take up the nomination. Otherwise it cannot enjoy the protection under UCP 600 for reimbursement after prepayment or purchase of the documents.

Document 470/TA.691 (UCP 600)

In my involvement with international litigation, I understand that when a law firm (Simmons & Simons) signs a document, the partner signs as “Simmons & Simmons” to bind the law firm legally.

In invoice No. 103, the stamp indicates clearly the name of the beneficiary, being “ABC Co Ltd”. According to article 3 of UCP 600, a stamp is also a signature.

From common sense point of view, the document checker can check with the LC content and can easily realise that the beneficiary is ABC Co Ltd. Hence this stamp is acceptable as both a signature and an indication of the capacity of the beneficiary.

I disagree with the ICC opinion to refuse invoice No. 103. It appears to be robotic and detached from sound common sense.

The blank endorsement (by adding a stamp showing ABC Co Ltd) at the back of the bill of lading is valid from shipping and insurance practice point of view. There is no need to add any word such as “endorsements or indorsements” as suggested by ICC group of experts. In shipping and insurance practice, there is no such superfluous requirement.

Document 470/TA.700 (UCP 600)

I disagree with the ICC opinion in situation C that the beneficiary should pay for the SWIFT message in advice of the maturity or due date in deferred payment undertaking. This charge should be paid by the applicant as part of the obligation of the issuing bank in deferred payment undertaking. This charge is also not outside country X, where the issuing bank is domiciled. The beneficiary is responsible only for charges outside the country of the issuing bank.

Document 470/TA.702 (UCP 600)

In the “LC Escort” service in which I am retained to do the document checking for one of my clients, I note that in the LC from a large retail chain store in USA, the applicant shows the head office in Wisconsin whereas four branches are named as the consignee located in Los Angeles or Kent or Miami or Savannah, depending on the shipping instructions in the related purchase orders. Goods are consigned to one of these four places. In this case the address of the consignee in a bill of lading is bound to be different from the address of the applicant in the credit.

Hence the ICC opinion to put article 14 (j) on top of ISBP paragraph 144 (i.e. address of applicant as the consignee or the notify party in a bill of lading must be the same as the address of the applicant in the credit) is not consistent with trade practice and makes the credit a barrier in international trade. Such opinion would make “supply chain” purchase by conglomerates a “mission impossible”.

Document 470/TA.705 (UCP 600)

In question 1, the credit asks for shipment from any Czech Republic Port which is “mission impossible” because Czech is a landlocked country without any seaport.

According to paragraph 4 of ISBP 681, an issuing bank is authorized to supplement or develop the terms in a manner necessary or desirable to permit the use of the credit. The applicant also bears the risk of any ambiguity in its instructions to issue or amend a credit.

Hence the issuing bank and the applicant should bear the consequences of ambiguity and it is against common sense to penalise the beneficiary for doing the right thing, shipping from the nearest seaport Hamburg in Germany. ICC opinion should not be too literal or it may face the danger of being robotic and detached from common sense.

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