SHORT DRAWN AND SHORT SHIPMENT

QUESTION

Dear Mr. Old Man,

I need your opinion on the following case:

LC stated:

+ Quantity: 1000 MT (+/- 10%)
+ Unit price: USD 100
+ Total amount: USD 100,000 (+/- 10%)
+ Packing: in 5 containers
+ Partial shipments allowed

In May the beneficiary made the 1st presentation for USD 30,000 covering shipment of 300 MT packed in 2 containers and was paid.

In June the beneficiary made the 2nd presentation for USD 55,000 covering shipment of 550 MT packed in 3 containers. The issuing bank refused the documents stating the following discrepancies:

1/ Short drawn
2/ Short shipment

Are the discrepancies raised by the issuing bank valid?

Looking forward to your comment.

Thanks and best regards,

N.L
——–

ANSWER

Hi,

Your question seemed to be created based on the query in ICC Opinion TA869rev. ICC was of the opinion that the 2nd presentation was not compliant, i.e., the discrepancies raised by the issuing bank were valid.

Please find herewith ICC Opinion TA869rev to know the reasons:

QUOTE

Official Opinion TA869rev

QUERY

The documentary credit authorised confirmation, which was subsequently added.
Extracts from the documentary credit:

32B Currency Code, Amount: USD 80,000.00
39A Percentage Credit Amount Tolerance: 10/10
43P Partial Shipments: ALLOWED
45A Description of Goods and/or Services: 400 MT WIDGETS AT USD200.00/MT, PACKED IN 8 CONTAINERS
46A Documents Required:
1 ORIGINAL INVOICE, 3/3 ORIGINAL B/Ls 47A
Additional Conditions:
BOTH QUANTITY AND AMOUNT 10 PCT MORE OR LESS ALLOWED

Two presentations of documents were made covering 2 shipments, as follows:

1st Presentation – USD 26,400.00
3 containers with 132 MT

2nd Presentation – USD 44,000.00 (presented after 1st presentation paid by issuing bank)
5 containers with 220 MT

The issuing bank paid the first presentation. The confirming bank had not received any refusal notice. The issuing bank refused the second presentation citing the following discrepancies:

1. Short shipment in 8 containers
2. LC amount short drawn

Questions:

1. Is the first presentation complying? Why or why not?
2. Is the second presentation complying; or, are the discrepancies cited by the issuing bank valid? Why or why not?

UNQUOTE
________________________________________

ANALYSIS

The credit allowed partial shipments and, additionally, its amount (USD 80,000) and quantity of goods to be shipped (400 MT) were both subject to a tolerance of plus or minus 10%. The unit price was stated to be USD 200 per MT.

Based on these conditions alone, it should be noted that as partial shipments are allowed, the beneficiary would be able to ship any quantity up to a maximum of 440 MT (i.e., 400 MT plus 10%) by the latest shipment date. Thereafter, it may make a presentation to the nominated bank or issuing bank for honour or negotiation, if the documents are otherwise complying. In other words, the beneficiary would not be penalised i.e., face a refusal of its documents for failing to ship at least 360 MT (i.e., 400 MT minus 10%). This is in accord with Opinion TA816rev/R843, which states that when a credit permits partial shipments, there is always the possibility of only a partial utilisation of the credit and many valid reasons may exist for this.

However, and of importance to this query, there is a distinct difference between the above-referenced Opinion and this particular query in that another condition of the credit was that the quantity of goods i.e., 400 MT plus/minus 10% (i.e., a quantity between 360 MT and 440 MT) was to be packed in 8 containers. This condition can also be stated or referred to as “8 containers containing 400 MT +/- 10% Widgets at USD 200/MT.” Accordingly, the conclusion reached in Opinion TA816rev/R843 would not be valid for the circumstances described herein.

Therefore, by the time 8 containers are utilised, the quantity of goods shipped is to be between 360 and 440 MT.

The first presentation covered a shipment of 132 MT shipped in 3 containers for a drawing amount of USD 26,400. Given that partial shipment was allowed, and the credit did not include a requirement in respect of the quantity to be shipped in each container, the shipped quantity, amount and number of containers was within that permitted by the credit.

The second presentation covered a shipment of 220 MT, shipped in 5 containers, for a drawing amount of USD 44,000.

Therefore, the beneficiary, in two shipments, utilised 8 containers for the shipment of 352 MT of the required goods for a total value of USD 70,400. Despite the credit indicating that partial shipments were allowed, the beneficiary had utilised 8 containers in shipping only 352 MT instead of a minimum of 360 MT.

The second presentation would be discrepant for the reason that the quantity of goods shipped and containers utilised in the first two drawings were 352 MT and 8 respectively, with a total drawing amount of USD 70,400 whereas the credit required that where 8 containers were utilised, the quantity shipped would be between 360 and 440 MT with a commensurate value of between USD 72,000 and USD88,000.
________________________________________
CONCLUSION

For the reasons stated under Analysis:

1. The first presentation was compliant.
2. The second presentation was not compliant

UNQUOTE

Kind regards,

Mr. Old Man