Can These Special Conditions Be Accepted in an LC?

When applicants ask for “special clauses” in their credits, bankers often face a balancing act: accommodating commercial realities while safeguarding the credit’s integrity. Some requests are harmless, some are risky, and a few are downright dangerous.

A reader from the Middle East recently sent me a list of such clauses proposed by his customer, asking which ones can be accepted, which should be rejected, and what precautions an issuing bank ought to take.

Here’s the case:

QUESTION

Dear Mr. Old Man,

Have a good day…

Our customer asks us to add below special conditions in the credit:

1. Documents including BL dated prior to the issuance date of this credit are ACCEPTABLE.
2. Short form/black back BL NOT ACCEPTABLE.
3. Documents showing consignee as “TO ORDER” and notify as “APPLICANT” are ACCEPTABLE.
4. Copy of documents presented by fax or email or any other means are ACCEPTABLE for negotiation and payment.
5. Documents ACCEPTABLE as presented.

Note: Charter Party BL is ACCEPTABLE.

Please give your opinion on each clause and its intention.

What should we add/amend precaution clauses in our credit in this case?

Will really appreciate your help in this regard.

Best regards,

Ziyad

_____

ANSWER

Hi Ziyad,

I would like to answer your questions one by one as follows:

1) Documents including BL dated prior to the issuance date of this credit are ACCEPTABLE.

According to UCP 600 Article 14(i), a document may bear a date prior to the issuance date of the credit, but not later than its date of presentation. Therefore, a bill of lading dated earlier than the credit issuance date does not make it discrepant.

This practice is quite common in oil and commodity trade, where cargo may already be loaded and at sea before a final buyer is secured and arranges for an LC. Allowing pre-credit BLs ensures such trades can still be financed.

That said, in general merchandise trade many banks prefer to limit how far back the BL can be dated (e.g., not earlier than X days before LC issuance) to avoid excessive backdating and to maintain better control over shipment timing.

2) Short form/blank back BL NOT ACCEPTABLE.

UCP 600 requires a transport document to contain terms and conditions of carriage or make reference to a source where they can be found. A short form or blank back bill of lading is one without such terms. Rejecting such BLs is good practice, so the bank may accept this clause.

3) Documents showing consignee as “TO ORDER” and notify as “APPLICANT” are ACCEPTABLE.

This is standard market practice. Where the BL is made out “to order, blank endorsed,” the issuing bank should always require the full set of original BLs to ensure that the applicant can only take delivery of the goods after fulfilling its obligations under the LC. Indicating the applicant as the notify party is also common and poses no special concern.

4) Copy of documents presented by fax or email or any other means are ACCEPTABLE for negotiation and payment.

This clause is highly risky. No bank should negotiate or pay against faxed, emailed, or photocopied documents, as such documents are vulnerable to fraud and offer no security. The issuing bank should not accept this clause.

5) Documents ACCEPTABLE as presented.

This clause is also problematic. Under ISBP, such an expression could mean that documents would not be examined for compliance with the credit or UCP 600, which would effectively waive the bank’s right and duty to examine documents. This is unacceptable, and the issuing bank should not accept this clause.

Conclusion and Precautionary Suggestions

• Clauses (1), (2), and (3) may be accepted, with suitable clarifications:

+ Limit pre-credit BLs (e.g., not earlier than X days before LC issuance).

+ Always require a full set of original BLs when made out “to order.”

• Clauses (4) and (5) should not be accepted under any circumstances.
• Since the note indicates that Charter Party BLs are acceptable, the issuing bank should also recognize the additional risks of CPBLs (e.g., disputes between charterer and shipowner that could affect delivery) and decide whether it wishes to take them on.

Kind regards,

Mr. Old Man