CDCS* UCP 600 Practice Exercises 3

WARNING!

Disclaimer

• CDCS means "Certified Documentary Credit Specialist", a certification from ICC Paris, administered by IFSA for the USA, Canada, and Mexico, whilst for the rest of the world by IFS School of Finance.
• CDCS is a registered trade mark of ifs School of Finance registered with the EU Community Trade Mark office under number 000858704.

The Bad News

1. We declare our copyright for the following CDCS Exam Exercises and Model Answers (the Exercises). Please understand that you may face serious legal consequences for unauthorised use of our exercises.
2. Some of our Exercises are tricky ones and you have to read them carefully and think twice before you finish your answers. For best learning results (if you don't know the answer at all) or for testing purposes (if you believe that you should know what the correct answer is), please do not click the Model Answer button placed below each question so soon. After you have provided your answer, which you think should be correct, do think twice before you click for the Model Answer. Otherwise you will exclaim: "Oh shiX! I should have given a different answer if I had read the question correctly and had given the issues a little more thoughts".

The Good News

If you fail in providing good answers for the Exercises, don't worry! You would still be able to pass the CDCS exam, because our Exercises may be more difficult than those in the CDCS. The examiners of CDCS only wish to check your knowledge on UCP 600, ISP98 and the other ICC Rules. They do not wish to give you a hard time like we do, to push you to the limit, so that you may get a distinction!

Our Advices

In the CDCS examination, due to fear, anxiety and heavy pressure, you could only perform up to 66% (2/3) of your normal capacity. That means you would not be able to think so coolly and intelligently for the best answers. And exercises like this would prepare you well in advance for the most difficult part (case studies) of the CDCS examination that would ultimately lead you to a pass, if not an enviable distinction.

Here you go. And good luck!

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Note:

Questions 74 and 75 were added on 3 Jun 2009. Question 63 and answers to questions 54, 55, and 57 were edited on 19 Jun 2009.

51. Change credit currency from USD to CAD in a transfer

    In a credit subject to UCP 600, the first beneficiary requests the transferring bank to change the currency from USD to CAD in its transfer to the second beneficiary.

    Q1	Should the transferring bank accept such request?
    Q2	If the transferring bank nevertheless accepts the request, what measures should the transferring bank take?

    

52. UCP 600 uses terms like "banks", "banking days" and "international standard banking practice". Would this imply that UCP 600 couldn't be applicable to credits issued by non-banks?

    To answer this question we have to go back to the original intent of the UCP 600 Drafting Group.

    

53. Is "advance or agree to advance funds" in the definition of "negotiation" in UCP 600 article 2 same as "giving of value" or "undertaking an obligation to make payment" in ICC Position Papers No. 2?

    Negotiation is one of the most misled terms in UCP operations because the meaning of negotiation may be different from one region to another, such as North America, Europe, Middle East and Asia. Hence it is almost impossible to create a perfect definition for "negotiation" in UCP.

    As a result, the definition of "negotiation" in article 2 of UCP 600 is not perfect and is still subject to disputes during the drafting stage as well as after approval by the ICC National Committees. For example, some bankers start asking ICC Banking Commission to provide the definition of "purchase" used in article 2 of UCP 600. The more new words are introduced, the more clarification will be requested.

    

54. A credit subject to UCP 600 is fully transferred to a second beneficiary without any reduction in unit price and total value. The issuing bank has been notified for the details of this transfer by the transferring bank. Meanwhile the first beneficiary has also received outside the credit operations an agreed amount from the second beneficiary as its reasonable share of profits in the underlying transaction. In this arrangement, it is obvious that there is no need for substitution of documents by the first beneficiary. Then can the second beneficiary bypass the transferring bank and make direct presentation to the issuing bank?

    

55. Master Air Waybill v. House Air Waybill

    According to ICC Document 470/TA.621, if a credit requires expressly a master air waybill, a house air waybill is also acceptable based on the following reasons:

    1. Wordings like "HAWB (house air waybill) No. XXXXX" in an air waybill is acceptable even if the credit expressly requires a "master air waybill" .
    2. The intent of this condition (requiring presentation of a master air waybill in a credit) is unclear.
    3. Under Article 27 of UCP 500, as far as the air waybill is signed by a "carrier", it is acceptable. UCP 500 does not care whether the carrier is an actual carrier or a contracting carrier.
    4. This "master air waybill condition" does not prohibit signature by a freight forwarder.
    5. This ICC decision is based on ICC Opinion No. R 221 (where the credit does not expressly require a master air waybill).

    Do you agree with this ICC decision?

    

56. Lost of letter of credit advice

    If a credit advice by local mail is lost, is this advice duly given by the advising bank?

    A credit advice has been lost in local mail.

    Q1	Is such an advice considered as sent by the advising bank?
    Q2	Is such advice considered as received by the beneficiary?

    

57. What Is A Banking Day?

    After a long holiday, a letter of credit document checker Bob went to his office to work overtime on Sunday 6 July 2008 in Hong Kong. His old classmate Jim called his mobile phone to invite him to lunch. When Jim knew that Bob was working in his office, he went to Bob's office to pick him up for lunch at a restaurant just two blocks from Bob's office. He went into Bob's room and handed over Bob one set of documents presented under a local letter of credit subject to UCP 600 where the issuing bank was Bob's bank branch. The presentation consisted of a simple set of stipulated documents.

    The notice of refusal was sent by fax on Monday 14 July 2008 pointing out 7 valid discrepancies. Jim's boss Don demanded payment from Bob's bank because the notice of refusal was sent on the sixth banking day and as a result of this, the discrepancies would be waived automatically under article 16 (f) of UCP 600. Bob's office is not open on Saturday and Sunday.

    Q1	Is Don correct in his demand?
    Q2	What should Don have done to claim payment?

    

58. Bank I invited its VIP customer C to attend a real estate mortgage promotion campaign held on Tuesday 8 July 2008 on board a 100 feet yacht near Lantau Island, Hong Kong, where the Hong Kong Disneyland is located. C met D on the yacht. D was a letter of credit document checker for Bank I. C handed over to D one set of documents presented under a local letter of credit subject to UCP 600 where Bank I was the issuing bank. The presentation consisted of a simple set of stipulated documents.

    The notice of refusal was sent by fax on Wednesday 16 July 2008 pointing out 5 valid discrepancies. C demanded payment from Bank I because the notice of refusal was sent on the sixth banking day and as a result of this, the discrepancies would be waived automatically under article 16 (f) of UCP 600. Bank I was open on Tuesday 8 July 2008 but is not open on Saturday and Sunday.

    Q1	Is C correct in his demand?
    Q2	What should C have done to claim payment from Bank I?

    

59. Presentation to an Overseas Branch of a Bank

    A credit subject to UCP 600 issued by the head office of an Indian international bank in New Delhi stated in SWIFT MT700 field 31D:

    “Presentation to us on or before 1 July 2008”.

    After being aware that there was not enough time to send the stipulated documents by courier to the head office of the issuing bank in New Delhi, the beneficiary presented them to its branch in Hong Kong. When the documents arrived the head office, the expiry date was over and a notice of refusal was sent to the beneficiary due to presentation after expiry.

    The beneficiary argued that “us” on its face should include all branches of the Indian bank. If the issuing bank did really mean presentation exclusive to the head office, the credit should have stated so clearly and precisely. Otherwise the benefit of doubts should go to the beneficiary due to confusions created by such loose wordings.

    Q1	Should the issuing bank honour the presentation under such circumstance?

    

60. Presentation to a Local Branch of a Bank

    A credit subject to UCP 600 issued by State Bank of India head office in New Delhi stated in SWIFT MT700 field 31D:

    “Presentation to us on or before 1 July 2008”.

    Field 41a states:

    “Available with the State Bank of India by sight payment”.

    After being aware that there was not enough time to send the stipulated documents by courier to the New Delhi head office of the State Bank of India, the beneficiary in Bangalore presented them to its branch in Bangalore, India. When the documents arrived the New Delhi head office, the expiry date was over and a notice of refusal was sent to the beneficiary due to (i) presentation to the wrong branch and (ii) after expiry.

    The beneficiary argued that “us” in field 31D and “State Bank of India” in field 41a, on their face, should include all branches of the State Bank of India. If the issuing bank did really mean presentation exclusive to the New Delhi head office, the credit should have stated so clearly and precisely. Otherwise the benefit of doubts should go to the beneficiary due to confusions created by such loose wordings.

    Q1	Is the argument by the beneficiary valid?

    

61. Article 14 (l) allows any party, beneficiary included, to issue a transport document. What measures should an issuing bank take to avoid the potential risks?

    According to this sub-article 14 (l) of UCP 600, any third party may issue a transport document as a carrier, master, owner, charterer, or their agent. A beneficiary may also do so if he prefers. In other words, this sub-article would provide a legitimate platform for creation of fraudulent transport documents.

    

62. What qualifies "indication" of a charter party bill of lading under article 22 (a) of UCP 600?

    UCP 600 article 22 (a) states: "A bill of lading, however named, containing an indication that it is subject to a charter party (charter party bill of lading)..."

    Bankers are frustrated as to the precise interpretation of the word "indication" quoted above. Due to lack of knowledge on charter party operations, bankers do not have an effective means to determine which bill of lading is a charter party bill of lading as most of the bills of lading look like the same on the face page, sharing many identical data contents and boxes.

    Q1	How would you determine a charter party bill of lading on its face?

    

63. Does an oral waiver constitute an amendment?

    In USA the issuing bank dishonoured by naming a valid and incurable discrepancy (executing the first instalment shipment after latest date for shipment as stated in the instalment shipment schedule) in its notice of refusal. After an exchange of long distance telephone calls, the applicant finally agreed to waive this discrepancy in an email to the beneficiary.

    A copy of the waiver was sent to the issuing bank. An officer of the issuing bank tried to comfort the beneficiary on the phone by serving a diplomatic message: “Please do not worry. There should be no problem with the discrepancy with our bank.” Later, the issuing bank dishonoured despite giving the “verbal waiver” as regarded by the beneficiary and the “wavier in writing” from the applicant. The beneficiary sued the issuing bank and the applicant.

    Who is going to win the case, the beneficiary, the applicant or the issuing bank?

    

64. In the Total Energy v. Standard Chartered Bank Hong Kong case, (a) a fax stating discrepancies alone in the morning followed by (b) a phone in the afternoon stating refusal and disposal of documents, would comply with UCP 500 Articles 13 & 14. Is this court decision valid in UCP 600 where "a single notice" is required?

    According to the judicial decisions of the captioned case provided by the Hon. William Stone J.,

    1. sending a copy of the discrepancies checklist used by the bank internally, listing all the discrepancies in the morning, followed by
    2. a phone call in the afternoon to the same person in the beneficiary's company, advising the bank's decision to refuse documents and asking for disposal of documents

    would comply with UCP 500 Articles 13 & 14.

    Q1	Is this court decision valid in UCP 600 where "a single notice" is required under article 16 (c)?

    

65. Insurance problems in a transferable DC

    A DC subject to UCP 600 calls for goods of CIF Dubai value of USD1,100,000. Shipment is by sea from Shanghai to Dubai. The first beneficiary in Hong Kong intends to transfer the full DC quantity to a second beneficiary in Shanghai for CIF value of only USD220,000. The issuing bank that provides the financing insists that the insurance policy must cover a minimum CIF value of USD1,100,000 to protect the bank's interests. The first beneficiary hesitates to ask the second beneficiary to do this insurance cover, as the second beneficiary will then know the price that the first beneficiary sells to the applicant in Dubai. The second beneficiary will be very unhappy after knowing the huge profit the first beneficiary makes.

    What is the best solution to make the first beneficiary and the second beneficiary both happy?

    

66. CIF insurance problems in a transferable DC

    What is the best solution in Exercise No. 65 if the first beneficiary is not from Hong Kong but from a small country in Africa, which is in severe short of foreign exchange?

    As a result, this African country does not allow exports in FOB or CFR terms or imports in CFR or CIF. The only term allowed in exports is CIF and imports in FOB in order to earn more foreign exchange in its international trade. In a nutshell, for both imports and exports, freight and insurance costs must be paid in this African country.

    The benefit for the African country is that, for exports, the country can earn more foreign currency such as USD and for imports, it can avoid paying in foreign currency, such as USD that it has not enough reserve to meet the foreign exchange obligations.

    

67. Can an issuing bank negotiate when the nominated negotiating bank refuses to negotiate?

    In a DC subject to UCP 600 without providing confirmation, available by usance drafts at 60 days after shipped on board date in bill of lading, the beneficiary demands the issuing bank to negotiate according to the provisions of UCP 600 sub-article 7 (a) (v) when the nominated negotiating bank refuses to negotiate. The issuing bank refuses to negotiate.

    Q1	Is the issuing bank correct in its refusal?
    Q2	What should the beneficiary do under the circumstance?

    

68. Can an issuing bank negotiate or discount when the nominated confirming bank refuses to negotiate?

    In a DC subject to UCP 600, available by negotiation with usance drafts drawn on the confirming bank at 60 days after shipped on board date in bill of lading. The confirming bank refuses to negotiate due to discrepancies. However, the issuing bank finds the presentation compliant. The beneficiary demands the issuing bank to negotiate according to the provisions of UCP 600 sub-article 7 (a) (v). The issuing bank refuses to negotiate.

    Q1	Is the issuing bank correct in its refusal?
    Q2	Can the beneficiary ask the issuing bank to discount?
    Q3	What can the beneficiary do under the circumstance in order to receive payment before maturity?

    

69. Problems with drafts drawn on an applicant in a credit subject to UCP 600

    Despite the provision of UCP 600 sub-article 6 (c), a credit subject to UCP 600 is however available by negotiation of usance drafts drawn on the applicant at 60 days after shipment date. The applicant refuses to accept the drafts relying on fabricated discrepancies disagreed by the issuing bank and the beneficiary. The issuing bank however disagrees to honour or negotiate the compliant presentation.

    Q1	Is the issuing bank obligated to honour or to negotiate under the UCP 600?
    Q2	If the credit is confirmed, is the confirming bank obligated to honour or to negotiate under the UCP 600?
    Q3	What should the beneficiary have done to avoid such risk?

    

70. Terms like "purchase", "advancing funds", "agreeing to advance funds" and "prepay " are used in UCP 600 articles 2, 7 (c), 8 (c) and 12 (b). What do they really mean?
     

    Q1	What are the origin, focus and implication of these terms?
    Q2	What are the actions that these terms refer to under UCP 600?
    Q3	In the market place, do these terms share the same meaning as they are interpreted under UCP 600?

    

71. Multimodal Transport Document On Board Notation 1

    An L/C subject to UCP 600 specifies:

    A multimodal transport bill of lading;

    Place of receipt: Macau;

    Place of final destination: West Orange, New Jersey.

    The multimodal transport bill of lading shows:

    Place of Receipt	Vessel Name
    Macau	Casino Royale
    Port of Loading	Intended Vessel Name
    Hong Kong	Chopsticks
    Port of Discharge	Place of Final Destination
    New York	West Orange, New Jersey

    The issuing bank refuses payment due to one discrepancy:

    “An on board notation is required because Chopsticks is an intended vessel only.”

    Is this discrepancy valid?

    

72. Multimodal Transport Document On Board Notation 2

    An L/C subject to UCP 600 specifies:

    A multimodal transport bill of lading;

    Place of receipt: Hong Kong;

    Place of final destination: West Orange, New Jersey.

    The multimodal transport bill of lading shows:

    Shipped on board dated 1 May 2009

    Place of Receipt	Vessel Name
    Hong Kong Port
    Port of Loading	Vessel Name
    Hong Kong Port	Chopsticks
    Port of Discharge	Place of Final Destination
    New York	West Orange, New Jersey

    The issuing bank refuses payment due to one discrepancy:

    “The on board notation has not shown the vessel name and the port of loading.”

    Is this discrepancy valid?

    

73. Multimodal Transport Document On Board Notation 3

    An L/C subject to UCP 600 specifies:

    A multimodal transport bill of lading;

    Port of loading: Hong Kong;

    Place of final destination: West Orange, New Jersey.

    The multimodal transport bill of lading shows:

    Shipped on board this vessel dated 1 May 2009

    Place of Receipt	Vessel Name
    Shenzhen, China	Container Haulage Motor Truck No. HK 8228
    Port of Loading	Vessel Name
    Hong Kong Port	Chopsticks
    Port of Discharge	Place of Final Destination
    New York	West Orange, New Jersey

    The issuing bank refuses payment due to one discrepancy:

    “The on board notation has not shown the vessel name and the port of loading.”

    Is this discrepancy valid?

    

74. Loss of documents in a back-to-back credit situation

    The documents presented under a baby letter of credit subject to UCP 600 were lost during transit. Nevertheless, Bank IB, the intermediate bank that issued the baby credit, paid the ultimate supplier according to the provisions of UCP 600 article 35. Certified true copies of documents, including the bills of lading, other than drafts and commercial invoices that were replaced with originals, were presented to Bank IA, the issuing bank of the master letter of credit that was also subject to UCP 600.

    Could Bank IA refuse the otherwise compliant presentation according to UCP 600 17 (a), relying on the following reasons:

    1. The two credits, although both subject to UCP 600, are in fact separate payment undertakings.
    2. The originals are lost in another presentation (under the baby credit) and not in the same presentation (under the master credit), and
    3. Most of the documents (other than drafts and commercial invoices) are not originals?

    

75. Is an “UPS waybill” a courier receipt or an air waybill under UCP 600?

    In a credit subject to UCP 600, an “UPS waybill” is presented, showing air carriage of vintage collection series Lamborghini remote control titanium toy cars of CIP value USD20,000 stowed in 20 packages of size 24 x 12 x 10 inches.

    The issuing bank dishonours because in the “UPS waybill”, the carrier is not identified as required under UCP 600 article 23.

    The negotiating bank disagrees and says that the “UPS waybill” is a courier receipt and should be examined under UCP 600 article 25 where there is no need to identify the carrier, which is also not required under the credit.

    Q1	Is an “UPS waybill” a transport document under UCP 600?
    Q2	Under which article, article 23 or 25 in UCP 600 should this document be examined?

    

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