Key Terms for CDCS Explained

Types of Documents

Financial documents 

Financial documents refer to documents involved in the collection of amounts or securing payments in trade transactions. These typically include cheques, promissory notes, and drafts (also known as bills of exchange). These documents represent the financial obligations of one party to pay another, facilitating the transfer of funds and serving as legal evidence of payment terms and commitments.

Commercial documents

Commercial documents are used to demonstrate compliance with the terms and conditions of the sales contract. These documents include invoices, transport documents, insurance documents, inspection certificates, etc. They confirm that the goods have been shipped, insured, and inspected in accordance with the contractual requirements.

Official documents 

Official documents are required for customs clearance and vary depending on the country’s requirements and the nature of the commodity being traded. These documents include Certificate of Origin, Phytosanitary Certificate, Health Certificate, Radioactivity Contamination Certificate, etc.

Incoterms 2020

Incoterms (International Commercial Terms) are a set of standardized terms developed by the International Chamber of Commerce (ICC) to define the responsibilities of sellers and buyers in international trade transactions. They clarify key aspects such as obligations, costs, points of delivery, and the transfer of risks between the parties involved. Incoterms were first developed in 1936 and have been updated eight times since then, with the most recent version being Incoterms 2020. These terms are classified into 11 rules, divided into two categories: Any Mode or Modes of Transportation and Sea and Inland Waterways Transport.

EXW (Ex Works)

Ex Works (EXW): Under this term, the seller fulfills their obligation by making the goods available at the specified location (e.g., factory or warehouse), packed appropriately for transport and clearly apportioned or identified as per the specific contract. The buyer is responsible for loading the goods onto their arranged vehicle and handling all subsequent obligations, including transport and export clearance, if applicable.

FCA (Free Carrier)

Free Carrier (FCA): Under this term, the seller fulfills their obligation by making the goods available at the specified location (e.g., the seller’s premises or the carrier’s facility), packed appropriately for transport and ready for unloading. If the point of delivery is the seller’s premises, the seller is responsible for loading the goods onto the vehicle arranged by the buyer. If the point of delivery is the carrier’s facility, the seller must arrange transport to that location and ensure the goods are ready for unloading. The seller is responsible for clearing the goods for export.

FAS (Free Alongside Ship)

Free Alongside Ship (FAS): Under this term, the seller fulfills their obligation by delivering the goods alongside the vessel at the named port of shipment. The seller is responsible for all costs and risks up to the point where the goods are placed alongside the ship (e.g., on a quay or barge at the port). The seller is responsible for export clearance. From this point onward, the buyer assumes all costs and risks, including loading the goods onto the vessel, ocean freight, and any further transportation and import clearance at the destination.

FOB (Free on Board)

Free on Board (FOB): Under this term, the seller fulfills their obligation by delivering the goods on board the vessel nominated by the buyer at the named port of shipment. The seller is responsible for all costs and risks up to the point the goods are loaded onto the vessel, including export clearance. Once the goods are on board, the risk of loss or damage transfers to the buyer, who assumes responsibility for ocean freight, insurance, and any subsequent costs, including import clearance and duties at the destination.

CPT (Carriage Paid To)

Carriage Paid To (CPT): Under this term, the seller fulfills their obligation by delivering the goods to the carrier at the agreed place. The seller is responsible for arranging and paying for the carriage of the goods to the named destination. However, the risk of loss or damage to the goods transfers to the buyer once the goods are handed over to the carrier at the agreed place of delivery. The seller must also clear the goods for export. The buyer is responsible for all import clearance formalities, including duties, taxes, and any related charges at the destination.

CIP (Carriage and Insurance Paid To)

Carriage and Insurance Paid To (CIP): Under this term, the seller fulfills their obligation by delivering the goods to the carrier at the agreed place. The seller is responsible for arranging and paying for the carriage of the goods to the named destination, as well as purchasing insurance to cover the buyer’s risk of loss or damage to the goods during transit. The insurance must be provided at a minimum coverage of ICC (A) unless otherwise agreed by the parties. However, the risk of loss or damage to the goods transfers to the buyer once the goods are handed over to the carrier at the agreed place of delivery. The seller must also clear the goods for export. The buyer is responsible for all import clearance formalities, including duties, taxes, and any related charges at the destination.

CFR (Cost and Freight)

Cost and Freight (CFR): Under this term, the seller fulfills their obligation by delivering the goods on board the vessel at the port of shipment. The seller is responsible for arranging and paying the cost of carriage to the named port of destination. However, the risk of loss or damage to the goods transfers to the buyer once the goods are loaded onto the vessel at the port of shipment. The seller must clear the goods for export. The buyer is responsible for all costs and risks after the goods are loaded onto the vessel, including import clearance and any subsequent charges at the destination port.

CIF (Cost, Insurance, and Freight)

Cost, Insurance, and Freight (CIF): Under this term, the seller fulfills their obligation by delivering the goods on board the vessel at the port of shipment. The seller is responsible for arranging and paying for the carriage of the goods to the named port of destination and must procure insurance coverage at least equivalent to ICC (C) as a minimum, unless otherwise agreed by the parties. The risk of loss or damage to the goods transfers to the buyer once the goods are loaded onto the vessel at the port of shipment. The seller must also clear the goods for export. The buyer is responsible for all costs and risks after the goods are on board, including import clearance and duties at the destination.

DAP (Delivered At Place)

Delivered At Place (DAP): Under this term, the seller fulfills their obligation by delivering the goods to the named destination, ready for unloading. The seller is responsible for arranging and paying for all transportation costs to the agreed destination, including export clearance. The risk of loss or damage to the goods transfers to the buyer once the goods are made available for unloading at the named destination. The buyer is responsible for all import clearance formalities, including duties, taxes, and unloading charges at the destination.

DPU (Delivered at Place Unloaded)

Delivered at Place Unloaded (DPU): Under this term, the seller fulfills their obligation by delivering the goods to the named destination and unloading them from the arriving means of transport. The seller is responsible for arranging and paying for all transportation costs to the agreed destination, including export clearance and unloading at the destination. The risk of loss or damage to the goods transfers to the buyer once the goods are unloaded at the named destination. The buyer is responsible for all import clearance formalities, including duties, taxes, and any related charges.

DDP (Delivered Duty Paid)

Delivered Duty Paid (DDP): Under this term, the seller fulfills their obligation by delivering the goods to the named destination, ready for unloading, and assumes all costs and risks associated with transportation. The seller is responsible for export clearance, carriage to the destination, and all import clearance formalities, including payment of duties, taxes, and any associated fees. The risk of loss or damage to the goods transfers to the buyer once the goods are made available for unloading at the named destination. The buyer is only responsible for unloading the goods.

PAYMENT METHODS 

Advance Payment

In the Advance Payment method, the buyer makes payment to the seller before the goods are shipped. Once the payment is received, the seller ships the goods and sends the necessary shipping documents to the buyer. This method is often used when the seller is a monopoly in the market or when goods are tailor-made for the buyer’s specific requirements.

The seller takes no risk in terms of payment, but the buyer assumes the performance risk, meaning the buyer is exposed to the possibility of not receiving the goods after payment. Sometimes, the buyer may ask for an Advance Payment Guarantee, such as a Bank Guarantee or SBLC (Standby Letter of Credit), to mitigate this risk.

Open Account

In the Open Account payment method, the seller ships the goods and dispatches all relevant shipping documents directly to the buyer. The buyer is required to make payment at a future date, either in full or in part, as agreed by both parties. Typically, open account settlements are based on a running account rather than a bill-to-bill basis.

This method is commonly used when there is a long-term, established business relationship between the seller and the buyer, or when the seller aims to penetrate a new market or introduce a new product. The seller may opt to offer credit as a means of fostering business growth, increasing sales volume, or enhancing customer loyalty by providing more favorable payment terms.

However, the seller faces significant credit risk, as the goods are shipped before payment is made. The seller relies on the buyer’s ability and willingness to pay at the agreed future date.

While it is not always common practice, to mitigate the risk of non-payment, the seller may request a Standby Letter of Credit (SBLC) or another form of guarantee to ensure payment. This acts as security, allowing the seller to recover outstanding payments in case the buyer fails to fulfill the payment obligation.

Documentary Collections (DP / DA)

In the Documentary Collections (DP/DA) method, the seller ships the goods and submits all relevant shipping documents to their bank (Remitting Bank), with instructions to forward the documents to the buyer’s bank (Collecting Bank), authorizing them to release the documents either against payment (DP) or against acceptance of the bill of exchange (DA).

While the seller can exercise control over the goods until payment is made or the bill of exchange is accepted, the seller remains exposed to the risk of non-payment or non-acceptance, as the goods have already been shipped. To mitigate the risk of non-payment, the seller may consider credit insurance to recover losses in the event of non-payment.

For the buyer under Documents Against Payment (DP), the goods are only released after payment is made. However, the buyer is exposed to the risk of receiving inferior quality goods, as payment is made before the goods are received or inspected. This risk can be mitigated by insisting on an independent inspection by a third-party surveyor before shipment. The inspection certificate must accompany the shipping documents, allowing the buyer to review the quality of the goods before making payment.

Documentary collections are subject to the Uniform Rules for Collections (URC 522), ICC publication.

Documentary Credits

In the Documentary Credit method, the buyer’s bank (Issuing Bank) provides an undertaking to pay the seller (Beneficiary) on behalf of the buyer (Applicant), provided that the terms and conditions of the credit are fulfilled, and the required documents are presented as per the credit.

Instead of making an advance payment, the buyer applies to their bank to issue a Letter of Credit (LC) in favor of the seller. The seller ships the goods and presents the documents to a nominated bank (usually the seller’s bank) as stated in the LC. The nominated bank forwards the documents to the issuing bank for examination. If the documents comply with the terms of the credit and the applicable rules under UCP and ISBP, the issuing bank makes the payment to the seller and releases the documents to the buyer, enabling the release of the goods.

While the seller is protected from relying on the buyer for payment, they are still exposed to the issuing bank’s credit risk, the country risk associated with the issuing bank, and documentary risk. Payment is only guaranteed against compliant documents. In case of discrepancies, the seller may have to rely on the buyer’s acceptance of the discrepancies for payment.

To mitigate the issuing bank’s credit and country risks, the seller may insist on a confirmed LC, whereby a local bank (Confirming Bank) provides an additional guarantee of payment. This reduces the seller’s payment risk substantially. The confirming bank also examines the documents, advising discrepancies if any, so the seller can rectify and resubmit them.

This method protects the seller from payment risks and assures the buyer that the issuing bank will only pay the seller against documentary evidence that the terms and conditions of the LC have been fulfilled. However, it is a complex, time-consuming, and costly method of payment.

RISKS IN INTERNATIONAL TRADE

Country/Political Risks

Political instability, changes in government policies, civil unrest, or war in either the buyer’s or seller’s country can significantly disrupt trade. These risks may cause delays in shipments, payment defaults, or even restrictions on exports and imports.

Convertibility Risks

Convertibility risk occurs when a country’s government restricts the ability to convert local currency into foreign exchange or transfer funds internationally. This can prevent the buyer from making payments in the required foreign currency, causing delays or even jeopardizing the completion of the trade. For instance, if the buyer’s country faces a shortage of foreign reserves, the government may impose restrictions on the outflow of foreign currency, affecting the buyer’s ability to fulfill payment obligations.

Cultural Risks

Differences in language, business practices, and social norms can lead to misunderstandings, miscommunication, and contractual disputes. These cultural barriers may impact negotiations, relationship-building, and the smooth execution of trade contracts.

Commercial Risks (Counterparty Risks)

Commercial risks refer to the possibility that the other party to the contract (either buyer or seller) may fail to meet their obligations, such as non-payment, late payments, or failing to deliver goods or services as agreed. This includes risks such as insolvency, fraud, or deliberate default.

Market Risks

Market risks are caused by fluctuations in global economic conditions that affect supply, demand, exchange rates, or commodity prices. These fluctuations can directly impact the profitability of international trade transactions. Freight rates, as part of market fluctuations, can also affect the cost of shipping goods.

Transportation Risks

This includes the risks associated with the movement of goods, such as delays, damage, theft, or accidents during transport. Factors like natural disasters, strikes, or inefficiencies in logistics networks can also disrupt the transportation process, causing delays or losses.

Frauds

Fraud risks in international trade involve activities like falsified documents, counterfeit goods, identity theft, or scams. These fraudulent actions can lead to significant financial losses, legal issues, and reputational damage for the parties involved.

Contract Structuring Risks

Inadequate or poorly structured contracts can lead to serious legal complications. This includes risks related to the lack of penalty clauses for breaches, the absence of applicable laws, or unclear legal jurisdiction. Ambiguities in key clauses, such as delivery terms and payment terms, can result in disputes or financial losses.

TRANSPORT DOCUMENTS

Bill of Lading (B/L)

A Bill of Lading is a transport document used in port-to-port shipments, issued by the carrier as proof of shipment. It serves as a contract of carriage and a document of title. When issued in negotiable form, it allows the transfer of the right to receive the goods to a third party through endorsement and delivery.

Non-Negotiable Sea Waybill

A Non-Negotiable Sea Waybill is a transport document used for sea shipments. It serves as proof of shipment and a contract of carriage, but unlike a Bill of Lading, it is not a document of title and cannot be transferred to a third party. Delivery of the goods is made directly to the named consignee, without the need to surrender one original document.

Charter Party Bill of Lading

A Charter Party Bill of Lading is a transport document used for port-to-port shipments, typically for bulk cargo. It acts as proof of shipment, and the contract of carriage is governed by the charter party agreement. It is considered a quasi-document of title and quasi-negotiable due to limitations imposed by the charter party agreement, though it can be issued in negotiable form with associated risks.

Multimodal Transport Document

A Multimodal Transport Document, issued by the carrier, is used for shipments involving more than one mode of transport (e.g., road and sea). It serves as proof of shipment and a contract of carriage, covering the entire journey across multiple transport modes. It can be issued in negotiable form when the last leg of the journey is by sea and acts as a document of title.

Air Waybill

An Air Waybill, issued by the carrier, is a transport document used for air shipments. It serves as proof of shipment and a contract of carriage for the air transport of goods. Unlike a Bill of Lading, it is not a document of title and cannot be transferred to a third party. Delivery of the goods is made directly to the named consignee, without the need to surrender the original document.

INSURANCE DOCUMENTS

Insurance Policy

The insurance policy is a contract between the insurer and the insured, outlining the terms and conditions of coverage. It specifies the risks covered, any exclusions, and the effective date of coverage. The policy ensures that goods are protected during transportation, covering at least the route specified in the Letter of Credit (LC). This document defines the scope of coverage and the procedures for making claims if damage or loss occurs during transit.

Insurance Certificate

The insurance certificate is a subordinate document to the insurance policy, issued by the insurer, confirming that insurance coverage is in place for the shipment as per the terms of the underlying insurance policy. It provides essential details such as the insured party, risks covered, the effective date of coverage, the insurance amount, and the routing for the shipment, which is at least from the place of receipt to the place of delivery (or, for sea shipments, from the port of loading to the port of discharge).

Insurance under Open Cover Agreement

An open cover is a long-term agreement between an insured party and an insurance company, providing automatic coverage for multiple shipments over a specified period or until a pre-agreed limit is reached. Unlike a traditional insurance policy issued per shipment, an open cover policy eliminates the need for separate insurance arrangements for each consignment.
The insured is required to declare each shipment’s details (e.g., value, nature of goods, and destination) to the insurer as they occur. The insurer issues a signed declaration or an insurance certificate for each declared shipment, ensuring compliance with requirements such as those under UCP 600 Article 28 for presentation in letter of credit transactions.

Insurance Declaration Under an Open Cover

A declaration under an open cover is a document issued by the insurance company under an open cover policy. It certifies that insurance is in place and provides essential details such as the insured party, risks covered, the effective date of coverage, the insurance amount, and the routing for the shipment, which is at least from the place of receipt to the place of delivery (or, for sea shipments, from the port of loading to the port of discharge).

Insurance Cover Note

A temporary document issued before the insurance policy is finalised. It serves as interim evidence of coverage, typically containing essential details like insured risks, period of insurance, and insured value. However, an insurance cover note is not acceptable under letters of credit, as it is considered a temporary document that can be canceled at the discretion of the insurer at any time, lacking the finality and certainty of an insurance policy.

TYPES OF LETTERS OF CREDIT

Red Clause Letter of Credit

A Red Clause LC allows the beneficiary (seller) to draw a certain percentage of the LC amount as an advance before the shipment of goods. The seller may insist on advance payment because the goods are manufactured or packed according to the buyer’s specifications, possibly under the buyer’s brand. This arrangement also provides pre-shipment financing to sellers. Historically, banks used red ink to identify such LCs, which is why they are widely known as Red Clause LCs.

Green Clause Letter of Credit

A Green Clause LC enables the beneficiary (seller) to draw a specified percentage (e.g., 80%) of the LC amount before shipment, upon presenting either a trust receipt or a warehouse receipt. This type of LC is commonly used when the buyer is responsible for arranging freight or shipment but has not yet completed a back-to-back sale. It allows the goods to be securely stored in the seller’s country, under trust, until the buyer finalizes shipment arrangements.

Revolving Letters of Credit

A Revolving Letter of Credit (LC) is designed for repetitive transactions between a buyer and a seller over an extended period. It eliminates the need to issue multiple LCs for similar goods by allowing the credit to “revolve,” either in value or in time, as specified in the credit terms.

Back-to-Back Letters of Credit

A Back-to-Back Letter of Credit (LC) is a financing arrangement involving two separate LCs to facilitate a trade transaction. It is particularly useful for an intermediary trader (the seller) who receives an LC from the ultimate buyer and uses it as collateral to issue another LC in favor of the supplier of goods.

Transferable Letters of Credit

When an LC is designated as transferable, the beneficiary (the intermediary) may request the transfer of the credit in favor of the actual supplier of the goods, known as the second beneficiary. This arrangement is commonly used in transactions where intermediaries rely on suppliers to fulfill their obligations to the ultimate buyer.

Assignment of the Proceeds Under LC

When a buyer issues a standard Letter of Credit (LC) in favor of the intermediary (the beneficiary), rather than a Transferable LC, and the intermediary cannot arrange a back-to-back LC with their bank to the actual supplier of the goods, the assignment of LC proceeds provides an alternative solution to manage payment risk for the supplier. The beneficiary may request a nominated bank to assign the LC proceeds to the supplier. The assignment of proceeds is irrevocable, and the assignee gains the right to the proceeds of the LC but does not acquire the right to perform under the LC.

BANK TO BANK REIMBURSEMENTS

Reimbursement Authorization (RA)

When an LC includes reimbursing bank details, the issuing bank must send a separate Reimbursement Authorization (RA) to the reimbursing bank named in the credit. This authorization must be sent via authenticated tele-transmission, such as SWIFT MT 740, or through a signed letter. The issuing bank must not send a copy of the LC to the reimbursing bank as a substitute for or in addition to the RA. If the reimbursing bank receives a copy of the LC, it must disregard it.

Unless the reimbursing bank is requested to issue a Reimbursement Undertaking, the Reimbursement Authorization is revocable and must not include an expiry date.
A Reimbursement Authorization may be governed by the provisions of UCP 600 or URR 725.

Reimbursement Undertaking (RU)

In a sales contract, it may be agreed that payment will be made under a letter of credit (LC), with clean reimbursement provided through a reimbursement undertaking from a reputable bank. The seller may request this arrangement to mitigate the country and commercial risks associated with the issuing bank.

In such cases, the issuing bank may request the reimbursing bank to issue a Reimbursement Undertaking (RU) in favor of the claiming bank. The claiming bank must be named in the reimbursement authorization (RA), and the LC must be restricted to a specific nominated bank. When the issuing bank requests the reimbursing bank to issue an RU, such an undertaking is irrevocable, and the RA must specify the expiry date for the presentation of claims.

It is important to note that the reimbursing bank is not obligated to issue a reimbursement undertaking as requested by the issuing bank. If the reimbursing bank is unwilling to act upon the RA, it must inform the issuing bank without delay. However, if the reimbursing bank agrees to issue the RU, it may do so by blocking the issuing bank’s credit limit in favor of the claiming bank.

The reimbursement undertaking issued by the reimbursing bank is irrevocable and cannot be amended or canceled without the claiming bank’s consent.

Reimbursement Claim

A reimbursement claim may be sent by the nominated or confirming bank to the reimbursing bank stated in the letter of credit, provided the beneficiary has made a complying presentation. Typically, the reimbursement claim is sent via SWIFT MT 742, and it must include essential details such as the LC number to identify the relevant letter of credit, the name of the issuing bank to specify the originating bank, and the amount claimed along with the currency unit. These details ensure that the reimbursing bank can process the claim accurately and in compliance with the reimbursement authorization provided by the issuing bank.

Pre-notification of the Claim

If the LC requires the nominated bank (claiming bank) to send a pre-notification of the claim to the issuing bank, the nominated bank must send this notification via authenticated SWIFT to the issuing bank. This notification should indicate the amount to be claimed and the value date calculated based on the pre-notification period specified in the LC. This allows the reimbursing bank sufficient time to process the claim and arrange the transfer of funds. For example, if the pre-notification period specified in the LC is 4 banking days, the value date should be calculated as the 7th banking day, which includes the 3 banking days provided for the reimbursing bank to process the claim.

Pre-Debit Notification

If the reimbursing bank is required to provide a pre-debit notification to the issuing bank under the reimbursement authorization (which is also included in the LC for the information of the claiming bank to arrive at the value date), it must send the notification via authenticated SWIFT. This allows the issuing bank sufficient time to arrange the necessary funds.
The pre-debit notification period is in addition to the three banking days allowed for processing the reimbursement claim.

STANDBY LETTER OF CREDIT

Standby Letter of Credit (SBLC)

A Standby Letter of Credit (SBLC) is a financial instrument primarily used as a guarantee for non-performance, ensuring that the beneficiary is compensated if the applicant fails to fulfill their obligations. Unlike commercial letters of credit, which are focused on payment for goods or services, SBLCs serve as a safety net, being invoked only in the event of non-performance or default. SBLCs are typically governed by ISP 98, though they may also be subject to UCP 600.

Advance Payment Standby

An advance payment standby protects the buyer by securing the repayment of advance payments made to the seller. If the seller fails to perform their obligations after receiving the advance, the buyer can recover the payment through the standby credit.

Open Account Standby

An open account standby safeguards the seller against non-payment by the buyer under open account terms. If the buyer defaults and fails to settle dues, the seller can demand payment from the standby credit as per the terms of the agreement.

Direct Pay Standby LC

A Direct Pay Standby Letter of Credit (SBLC) is a financial instrument used to guarantee payment to the beneficiary, similar to a commercial LC, but without needing a default by the applicant. The issuing bank guarantees direct payment upon the beneficiary’s presentation of required documents, typically for specific financial obligations.

Financial Standby LC

A Financial Standby LC guarantees payment for financial obligations, such as loans or debt repayments. The applicant’s bank assures the beneficiary that payment will be made if the applicant fails to meet their financial commitments under the terms of the credit.

Insurance Standby LC

An Insurance Standby Letter of Credit (SBLC) is used to guarantee the obligations of the insurance company under an insurance contract. This type of SBLC ensures that the beneficiary will be compensated if the insurance company defaults on its obligations, such as failing to pay out claims or meet the insured coverage amount.

Counter Standby Letter of Credit (SBLC)

A Counter Standby Letter of Credit (SBLC) is issued by one financial institution to another, typically to support the issuance of a standby LC in favor of an ultimate beneficiary. This type of SBLC acts as a secondary guarantee or backup to the primary standby credit. Such an arrangement is required when the beneficiary needs a standby from a local bank, but the applicant may not have an account with that local bank. In this case, the applicant’s bank arranges the standby through their correspondent bank in the beneficiary’s country.

Bid Bond (Standby)

A Bid Bond is issued to ensure that a bidder will stick to their offer in a tender or auction process. If the bidder decides to withdraw their bid or doesn’t sign the contract after being selected, the beneficiary (usually the organization that issued the tender) can use the LC to get compensation. This helps keep the bidding process secure by guaranteeing that the bidder will follow through on their commitment.

Performance Bond (Standby)

A performance standby ensures that the seller fulfills their contractual obligations. If the seller fails to deliver goods or services as agreed, the buyer can invoke the standby credit by presenting a demand for compensation, as specified in the terms.

SHIPPING GUARANTEE / LETTER OF INDEMNITY / DELIVERY ORDER

Shipping Guarantee (SG)

If goods arrive before the original shipping documents, including the Bill of Lading (BL), the shipping company may require a Shipping Guarantee (SG) from the bank to release the goods without the original BL. The SG is an irrevocable undertaking by the bank to compensate the shipping company for any loss if a third party presents the original BL and claims the goods.

To issue the SG, the bank may block an additional credit limit up to the estimated value of the goods, depending on its internal policies and the applicant’s creditworthiness. In cases where the SG is tied to a Letter of Credit (LC), the bank typically requires a counter-indemnity from the applicant, confirming their acceptance of the documents despite any discrepancies. This counter-indemnity ensures the bank is indemnified for any potential claims arising from the release of goods.

Upon surrender of the original BL, the SG must be returned to the bank for cancellation

Letter of Indemnity (LOI)

A Letter of Indemnity (LOI) is a written assurance provided by the receiver of goods, typically the consignee, to indemnify the shipping company against any potential losses, claims, or liabilities arising from the release of goods without the presentation of the original Bill of Lading (BL). The LOI allows the receiver to take immediate possession of the goods, helping to avoid delays, demurrage, or storage charges.

Shipping companies may, at their discretion, release goods against an LOI, particularly for established and credible companies, without requiring a bank-issued shipping guarantee (SG). The LOI is usually executed in a prescribed format, and the shipping company may insist that the signature of the buyer’s authorized representative be verified by their bankers. However, the bank’s responsibility is limited to verifying the authenticity of the signatures.

The LOI remains valid until the original BL is surrendered, and the shipping company formally cancels the indemnity upon receipt of the original Bill of Lading.

Delivery Orders

Delivery Orders are issued by the buyer’s bank when the transport documents (such as an Airway Bill or a Non-Negotiable Seaway Bill) are consigned to the bank. In some countries, a Delivery Order for the release of air cargo is referred to as an Airway Release.

When issuing a Delivery Order under a Letter of Credit (LC), the issuing bank must obtain a counter-indemnity from the applicant. This counter-indemnity confirms that the applicant accepts the documents despite any discrepancies, thereby indemnifying the bank against any potential claims arising from such discrepancies.