AN EXAMPLE TO ILLUSTRATE SUB-ARTICLE 30 (C) – TOLERANCE

QUESTION

Hi,

I find it hard to understand Article 30 (c) of UCP 600, which states that:

Even when partial shipments are not allowed, a tolerance not to exceed 5% less than the amount of the credit is allowed, provided that the quantity of the goods, if stated in the credit, is shipped in full and a unit price, if stated in the credit, is not reduced or that sub-article 30 (b) is not applicable. This tolerance does not apply when the credit stipulates a specific tolerance or uses the expressions referred to in sub-article 30 (a).

Could you please elaborate on this?

Regards,

Leo
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ANSWER

Hi Leo,

Reinhard Längerich writes in his book “Documentary credits in practice”:

The situation is described in Article 39 (c), which states that a tolerance of 5% less in the amount of the drawing is permissible, always provided that the credit prohibits partial shipments and that the entire quantity covered by the credit has been shipped. The purpose of this provision is to ensure that a reduction in, for instance, the cost of freight or the insurance premium does not prevent the honouring of documents under the credit.

ICC Official Opinion R367 says: Sub-article 39 (c) covers the situation where the terms are CFR or CIF and the price quotation is based on a hypothetical or soft quotation on the insurance premium and/or the freight charges. Upon presentation of the documents, the beneficiary invoices for the actual insurance and freight costs, which conceivably are less than those quoted originally in the purchase order. Therefore, a 5% tolerance is allowed in the beneficiary’s invoice, always provided that the quantity of the goods, if stipulated in the credit, is shipped in full, and a unit price, if stipulated in the credit, is not reduced.

Note: UCP 500 sub-article 39 (c) = UCP 600 sub-article 30 (c)

I just give an example to illustrate the point:

• LC details:
Credit amount: Not exceeding USD150,000
Goods: 10 trucks
Unit price: USD12,000/unit
Delivery term: CFR Da Nang Port, Vietnam
Freight charges as per actual freight invoice but not exceeding USD30,000

• Invoice presented:
Goods: 10 trucks
Unit price: USD12,000/unit
Freight charges: USD23,000.
Total invoice amount: USD143,000 CFR Da Nang Port, Vietnam

• Conclusion:
Draft drawn for USD143,000 is acceptable as per UCP 600 sub-article 30 (c).

Hope it is helpful.

Best regards,

Nguyen Huu Duc