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TRADE CREDIT INSURANCE – a brief introduction

 Benefits of Trade Credit Insurance

The trade credit insurance scheme insures against the risk of non-payment. It is especially useful for manufacturers / exporters selling on open account (e.g. credit term).

Letter of Credit has been found to be expensive and cumbersome in most countries.

Moreover, buyer may not have much of trade credit line with its bank and therefore unable to purchase more from the seller. Apart from more purchasing power, Letter of Credit arranged by the buyer may not be recognized by local corresponding bank.

 

Trade credit insurance can help you enhance your marketing appetite or sales by selling more to your buyers or perhaps even venture into new markets of unfamiliar buyers and remain prudent in credit collection.

The other unique feature is that banks are able to discount / purchase the bills / invoices if they are insured. This will help the manufacturer / exporter to manage its cash flow. Depending on industry, country and type of arrangement, some policyholders choose to factor the premium cost into their selling invoice. As such, the buyers will be paying and they are willing to do so because such cost is cheaper in relative to LC opening charges. On the other hand, the premium paid by the policyholder for export sales is subject to double tax deduction; an indirect saving.

 

Local Underwriting Market

Apart from Malaysia Export Credit Insurance Berhad (MECIB -semi-government body), the facility for trade credit insurance in Malaysia is currently offered by four commercial underwriters, namely Hong Leong Assurance, MSIG Insurance, AXA Affin Insurance and Chartis Insurance. As a broker, we have placement access to all them. The trade credit insurance policy is incepted for 12 months period.

Therefore, a forecast of the policyholder’s “insurable turnover” for the 12 months with the insured buyers is required. Of course, during the policy period, the policyholders may add new buyers, replace or cancel the buyers originally insured. Subject to choice of insurers, please find the following general terms offered:


Insured Percentage: up to 90% of the unpaid debt

Coverage: Insolvency, Delay in Payment & Political Risks

Market: Domestic and/or export sales

Claims Waiting Period: 1 month for insolvency

Max 6 months for other non-payment cases

Minimum Insurable Amount: RM10 million per annum

Credit Opinion Charges: RM200 – RM350 per buyer per annum (includes monitoring services)

Premium rate: Subject to completion of risk questionnaire

Approved Credit Limits: Subject to insurer's credit search and assessment on furnished buyers

Est. Turnaround Time: 2 to 3 working days to obtain premium rate and average about 10 working days to obtain approval for credit limit

Upon obtaining the quoted premium rate and if it appears feasible to your requirement we can then approach the insurer to proceed with the credit limits’ evaluation.

For further details, kindly contact our stakeholder:

Mr. Zolkifli Bidin                016-2805145

Effective Resolution Strategies for Letter of Credit Disputes 25th May 2009

Letter of credit disputes often arise from dramatic upward or downward price movements of commodities. If a dispute is dealt with properly, the negotiating banks or exporters may recover not only the letter of credit proceeds, but also late payment interest and their costs and expenses from the issuing banks without resorting to legal proceedings. The success of such claims depends largely on an effective strategy, a good understanding of business dynamics and effective negotiation with the issuing banks. This update considers the main issues for negotiating banks and exporters in handling letter of credit disputes.

Parties' Relationships

On paper, the negotiating bank is fully entitled to demand reimbursement from the issuing bank under the Uniform Customs and Practice for Documentary Credits, International Chamber of Commerce (ICC) Publication 600 (UCP 600) if the discrepancies identified are invalid. However, as the main purpose of such rejection may be to achieve a reduction in price, the effort of arguing with the issuing bank on purely technical grounds may be in vain, as it is more a business than a documentary issue. 

Accordingly, the beneficiaries often play a vital role in resolving disputes amicably. Even in the case of letter of credit negotiation without recourse, most beneficiaries still negotiate with the applicant for an amicable settlement (ie, a price reduction) because it would not be in their best interests for their bankers to incur substantial credit loss in the relevant letter of credit negotiation. Beneficiaries are also in the best position to provide updated information to the negotiating banks about the background and development of the case and the shipments involved. Such information can be crucial in helping a negotiating bank to formulate an effective strategy for resolving letter of credit disputes.

Hard or Soft Approach?

A well-advised expert will generally recommend that a negotiating bank take a hard-and-fast approach to the issuing bank if the discrepancies quoted are invalid or unjustified, as the traditional approach of simply writing to the issuing bank demanding payment and threatening legal action is unlikely to work. The negotiating bank may find it more effective to write a detailed demand letter which:

  • summarizes the main facts of the case;
  • refutes all of the alleged discrepancies, supporting the refutations with ICC opinions, ICC Documentary Instruments Dispute Resolution Expertise (DOCDEX) decisions and previous court rulings;
  • highlights the additional liabilities of the issuing bank if it does not pay promptly; and
  • identifies the issuing bank’s potential breaches of the UCP 600, if any. 

Such a demand letter provides detailed justifications for letter of credit payment, thereby putting the issuing bank in a powerful position to press the applicant for prompt settlement of the dispute. The letter may be even more effective if a lawyer who has personal contact with the issuing bank makes a follow-up telephone call to the issuing bank on the negotiating bank's behalf. Such calls have proved extremely useful in ascertaining the issuing bank's attitude and position, which allows the negotiating bank to plan its next steps.   

However, if the negotiating bank overlooks valid discrepancies or identifies highly controversial discrepancies, it may consider adopting a softer approach. A proven tactic is for the negotiating bank's counsel to send a letter to the issuing bank, highlighting the negotiating bank's views about the discrepancies in order to persuade the issuing bank that the case may not be as strong as it originally thought. This may prompt the issuing bank to change its approach and urge the applicant to settle the dispute, since the issuing bank no longer considers it a sure-win case. The expert view of a leading trade finance lawyer or practitioner often adds weight in persuading the issuing bank to settle instead of pursuing an open dispute. 

Court Injunctions

Applicants occasionally apply for court injunctions to prohibit the issuing bank from effecting payments based on unsubstantiated allegations of fraud. This usually happens when the applicant knows that the discrepancies identified by the issuing bank are unjustified, but would like to delay payment in order to negotiate a substantial price reduction. 

Discharging a court injunction is a costly and time-consuming process. It is therefore advisable for the issuing bank to take the initiative in getting the court injunction discharged (if this is permitted under local law). Moreover, the negotiating bank may advise the relevant court that it has negotiated the documents and is immune from commercial disputes or fraud between the buyer and seller. The general principle is that if a negotiating bank negotiates the presented documents in good faith, for value and without notice of fraud or defences between the applicant and beneficiary, it is immune from fraud or commercial disputes raised by the applicant. The issuing bank is therefore obliged to reimburse the negotiating bank under the UCP 600. 

Alternatively, the issuing bank may convince the applicant to withdraw the stop payment order application from the local court, reasoning that if the negotiating bank sues the issuing bank in the negotiating bank’s country, the issuing bank will still be obliged to pay, since the local court’s injunction has no legal effect in the negotiating bank’s country. In terms of cost and time efficiency, this is probably the best way to settle the dispute and obtain reimbursement from the issuing bank.  

ICC DOCDEX

If the letter of credit dispute cannot be settled within a reasonable time, the negotiating bank may consider submitting the case for a decision under the DOCDEX Rules. Upon receipt of a request, the ICC will appoint three independent experts who will examine the parties' written submissions and rule on the dispute under the UCP 600. Although a DOCDEX decision is not legally binding unless both parties so agree, the issuing bank is unlikely to resort to legal proceedings if the decision goes against it. The chances of winning such a case are low, as most courts respect the ICC’s views or decisions on the UCP 600, unless local law provides otherwise. 

DOCDEX has proved a cost and time-efficient mechanism for resolving letter of credit disputes. A decision is usually issued within two or three months at a cost of $5,000 (for transaction amounts of $500,000 or below) or $10,000 (for transaction amounts of over $500,000), payable to the ICC. DOCDEX decisions are also reviewed by the technical adviser to the ICC Banking Commission to ensure that each decision is consistent with the official ICC opinions and other DOCDEX decisions.

Action Plan 

When a letter of credit dispute arises, the negotiating bank should consider:

  • instructing legal counsel, who should be highly experienced in international trade finance, to advise on the validity of the discrepancies identified by the issuing bank and to formulate a proper strategy for handling the dispute;
  • checking whether the vessel has arrived at the port of discharge and, if not, ascertaining when it will arrive. This will put additional pressure on the issuing bank, as it may have to bear the demurrage, storage and insurance charges if it is held to have been unjustified in rejecting the documents presented to it;
  • checking with the beneficiary about the contractual relationships (if any) between the ultimate buyer and import agent - if the applicant is only an import agent, it may be more effective to negotiate with the ultimate buyer directly;
  • establishing from the beneficiary the intention of the applicant in rejecting the documents (ie, whether it is seeking a reduction in price or whether the product dispute is genuine). If fraud is alleged, the negotiating bank should evaluate whether such allegations have merit, as this will affect the attitude of the issuing bank in handling the dispute; 
  • seeking counsel’s advice on whether a hard or soft approach should be adopted;
  • asking a lawyer with personal contacts at the issuing bank to call it in order to ascertain the issuing bank’s position and grounds for refusal, and to clarify any misunderstanding between the parties; 
  • issuing a well-drafted demand letter. Good drafting is essential, as the letter will be reviewed not only by the issuing bank's trade finance, business and legal departments and senior management, but also by the applicant. It may also be used as evidence in legal proceedings;
  • consulting legal counsel to establish whether the issuing bank has breached any UCP 600 provisions - if so, the negotiating bank may be able to claim its money back even if the presented documents are discrepant; and
  • preparing a DOCDEX application if the case cannot be settled within a reasonable period.

In addition, if a stop payment order has been granted by the local courts, the bank may wish to seek counsel's advice on the most effective way to get the order discharged.

Endnotes

(1) There may be no import agent in some transactions.

Comments

 

Expert commentary
Is it time to revise the ISBP?


by Gary Collyer

It doesn’t seem that long ago that the ICC Banking Commission approved UCP 600 and the
updated version of ISBP, ICC Publication No. 681. However, it is nearly three years now
since these documents were approved and two years since UCP 600 and ISBP No. 681 were
implemented. Therefore, you may ask, why would anyone be considering the revision of a
publication when only two years have passed since its coming into effect?

That is a good question and one that I hope to answer in the remainder of this article. To
those that attended the ICC Banking Commission meeting in Dubai in March 2009, the
question of revising ISBP will be old news. I made the announcement at that meeting that I
would be proposing to start the revision of ISBP at the forthcoming Banking Commission
meeting on 23/24 November in Brussels.

By way of history, it should be noted that once UCP 600 had been drafted and approved,
there was a necessity to review the content of ISBP Publication No. 645 to ensure that the
rules of the new UCP and the practices described in the ISBP remained in line with each
other. The result was that the new ISBP, Publication No. 681, contained only 185 paragraphs
compared with 200 in Publication No. 645. The reduction in paragraphs resulted from the
movement of practices that the UCP Drafting Group deemed to be more befitting of rules
from the ISBP to UCP 600, and also the deletion of practices that were effectively reversed
by the new rules in UCP 600. One example of the latter was the wording in UCP 600 sub-
article 23 (a) (iii) concerning a notation of the flight number and date being deemed to be the
date of shipment as opposed to the content of paragraph 151 of ISBP Publication No. 645,
which said that unless called for in the credit, the details in the notation would be disregarded.
The same applies to paragraph 186 of ISBP 645, which prohibited exclusion clauses from
appearing on an insurance document, and the content of UCP 600 sub-article 28 (i) and ISBP
No. 681 paragraph 173 that allow exclusions to appear.

Due to the short period of time between the approval of the UCP 600 and its implementation,
it was not possible to conduct a complete review and revision of the ISBP. In effect, ISBP
No. 681 was an updated version issued for use on or after 1 July 2007 (the implementation
date for UCP 600) in the expectation that it would meet the requirements for document
examination for credits subject to the revised UCP. Remember that as of 1 July 2007 there
was no practice for document examination under UCP 600. When ISBP publication 645 was
approved in 2002, there had been eight years of experience under UCP 500.

Experience

We are now at the point where we have had two years experience examining documents
under UCP 600, and it will probably take around 1-2 years to complete a revision of ISBP
No. 681. People have commented that this is only a money-making exercise for ICC and
asked whether we really need a revision. In the current financial climate, I can understand
those concerns, but I would disagree. The revision is necessary because a revised ISBP can
offer far more than ISBP 681 does today. Currently, in ISBP No. 681, there are 37 general


“examination” principles. I defy anyone to claim there are no more that deserve equal status
within the ISBP and to which banks, beneficiaries and other document issuers should adhere.
The remainder of the present ISBP 681 covers drafts, five transport documents, invoices,
insurance documents and certificates of origin.

Given that one would only expect to see one transport document per presentation, are we
really saying that each presentation only has five documents or that only five documents have
issues that warrant inclusion in the ISBP? Admittedly, we have some more straightforward
documents such as packing lists, weight lists, beneficiary certificates, etc., but these too can
have issues that will result in different examination practices being applied. What about the
more detailed documents such as inspection certificates, analysis certificates and health or
phytosanitary certificates?

I have told many people that I am not concerned if a revised ISBP will be 100 or 200 pages
long. A document examiner only need refer to the section applicable to the document being
examined at that time. The problem is that today we do not have that extensive coverage. I
have seen too many cases recently in which banks have refused documents for reasons that
have no foundation but where the beneficiary or nominated bank has had no ICC Opinion or
ISBP paragraph to refer to, since the document(s) or the issue in question has not been
covered by either.

Corporates

A common misconception, particularly from some corporates, is that the ISBP is intended for
banks. They look at the title “International Standard Banking Practice for the Examination of
Documents under Documentary Credits – 2007 Revision for UCP 600” and focus on the
word “examination”. Examination, they contend, is something that banks do, not corporates.
However, if corporate staff can understand how banks will examine their documents, they
can prepare the documents in a way that will make them acceptable under the credit.
Discrepancies rates are still far too high, and a more comprehensive ISBP is one way we can
help reduce that level.

In addition to adding more documents to those already covered, the new publication, in my
view, should also be extended to cover practices that relate to variants of documentary
credits, i.e., transferable credits, revolving and reinstatement credits, instalment credits,
assignment of proceeds and even back-to-back credits.

I believe we have an opportunity to create a publication that will have an even more
significant impact than the first two publications of ISBP. The decision to proceed lies with
the membership of the ICC Banking Commission.

Gary Collyer is Technical Adviser to the ICC Banking Commission and President of Collyer
Consulting.

This article was published in DCInsight Vol. 15.4 – October-December 2009

The reality of the strict compliance rule

"You bankers are technicians. Your job is to compare the documents with thedocumentary credit, the UCP and the documents with themselves, none ofwhich requires any discretion on your part!" ............ read more