Thursday, November 09, 2006

A Few Questions and Answers on UCP - Part 7

Question: An Indian Bank after negotiation did not pay to Beneficiary considering the non payment of earlier part bill by Foreign Bank against same L/C and also for the reason that the beneficiary had no credit limit facility with the Nagotiating Bank.

- Can Issuing Bank establish that documents were not negotiated as per Article 10b(ii)?

- After 17 months of 1st discrepancy Telex dated 23.11.98 is Issuing Bank authorised to say now that documetns were not negotiated?

- When L/C was subject to UCP 500 on which conditions law of land will apply and is that applicable in present case?

Answer:
According to UCP 500 Article 9 negotiation means "giving value". It has been clarified time and again by the ICC Banking Commission and there is also a position paper on the subject clarifying that giving of value need not be immediate.

If the Negotiating Bank is requested to give the value immediately then at that time it will do minus interest; otherwise it will pay the beneficiary full amount on due date.

The very fact that Indian Bank after negotiation did not pay to the beneficiary does not vitiated the negotiation process. In this connection I am faxing under separate cover a copy of the ICC Position Paper.

1. Based on the above, replies to queries are as under :

In the situation enumerated in your message the Issuing Bank can not establish that documents were not negotiated as per Article 10b(ii) once the Negotiating Bank certifies that they have negotiated.

2. In view of the reply to 1 above question 2 has no validity or relevance.

3. Once the L/C is subject to UCP 500 the law of land will apply only in cases which are not covered by UCP 500.

Question:
Kindly clarify the following :
  • L.C states under clause no. "39a: 10/10". What does it mean =!0%(+ or -) in both quantity and value or only in quantity?
  • If the L/C is silent about the negotiating bank, can we treat it as free negotiation?
  • Is it compulsory under a letter of credit to draw a bill of exchange. What would be the consequences if no bill of exchange is drawn (When no clause of B/E is there in the L/C)?
  • L/C states that "all bank charges outside (parties country) are to the account of the beneficiary" dies it include the reimbursement charges of the opening bank. If nothing is mentioned about the reimbursement charges, can we treat that they are to the account of the opening bank?
  • Opening Bank has raised a discrepancy that "Carrier’s name not indicated on Bill of Lading" – Clarify the meaning of Carrier in this case.
  • If the opening bank does not come back to us or to the negotiating bank with any discrepancies with in one week from the date on which they receive the original documents, are they allowed to charge any discrepancy charges? If they have already charged, can we claim them from opening bank?

Answer:
Article 39a allows a tolerance of 10% more or less than the amount or the quantity or the unit price to which they refer. It will depend as to whether the words "about", "approximately", "circa" or similar expressions are used with the quantity, amount or the unit price and will apply to that. If they are used with both quantity and value only then it will apply to both.

According to Article 10b(i) unless the credit stipulates that it is available only with the Issuing Bank, all credits must nominate the bank which is authorised to pay, to incur a deferred payment undertaking, to accepts drafts or to negotiate. If no bank is nominated and the credit is not available with the Issuing bank then it will be deemed to be freely negotiable credit. You are, therefore, right in presuming so.

Drawing of a bill of exchange is not mandatory in respect of credits providing for sight and deferred payment. However, drafts will have to be drawn in respect of an acceptance credit where the banks have to accept drafts drawn by the beneficiary so also in respect of negotiation credit. If no bill of exchange is to be drawn then the payment will be forthcoming based on the presentation of the conforming documents.

As per Article 19e the Reimbursing Bank charges are to be for the account of the Issuing Bank. If nothing is mentioned about the reimbursement charges then surely you can treat them to be for the account of the Issuing Bank.

Article 23 dealing with the Marine/ Ocean bills of lading stipulates as one of the conditions for a bill of lading to be acceptable that it appears on its face to indicate the name of the carrier and have been signed or otherwise authenticated either by the carrier or a named agent or the master or a named agent. Carrier is the shipping company which undertakes to carry the goods to the named destination. Without indication of carriers’ name on the B/L, we would not know as to who has taken the responsibility for the carriage of goods.

Discrepancy charges are payable only if discrepancies are found and so informed the Opening Bank is not allowed to levy such charges.

A Few Questions and Answers on UCP - Part 6

Question : Bank of India, Calcutta, negotiated Sonali Bank, Dhaka’s L/C which stipulated presentation of documents within 16 days from the date of shipment. L/C was freely negotiable with any Bank in India.

Shipment has been made on 30.10.98 within last shipment date of 31.10.98. The Beneficiary presented the conforming documents to Bank of India on 13.11.98 a day earlier to the last date of presentation 14.11.98.

Bank of India sent the documents to Sonali Bank, Dhaka, under cover of their forwarding schedule date 17.11.98 certifying that "Documents have been disposed off in terms of Credit and all the terms and conditions have been complied with" but nowhere was there mention of presentation/negotiation date.

Sonali Bank under telex dated 23.11.98 stated we refuse "Negotiation of documents as per Article 14D(ii) of UCPDC 500" and stated discrepancy as "L/C expired and late negotiation by 3 days."

Bank of India disputed the same and informed Sonali Bank under telex dated 24.11.98 that "Beneficiary has deposited captioned bill within the validity of L/C". In refusal notice Sonali Bank have only mentioned that they have referred the matter to the drawee and has not mentioned "whether they are holding the documents at the disposal of, or returning them to the presenter".

Export goods in the meantime were auctioned by customs of the country of import in May 1999.

Was issuing bank correct in refusing the documents/negotiation?

• Any evidence was required to be submitted for timely presentation of documents by Beneficiary?

• Mentioning only "refusing documents as per Article 14D(ii) responsibility of Issuing Bank for stating that "they are holding documents at the risk of Bank of India or returning to them" is covered?

• Is Issuing Bank precluded from claiming discrepancy under Article 14(e) of UCP500?

Who will be responsible for the material auctioned?

Answer:
As per UCP 500 the negotiating bank has maximum of 7 days for examining documents and undertaking negotiation. In this particular case, as it is clear from the documents, negotiation was done 3 days after expiry of L/C according to the issuing bank which is well within the permitted reasonable time for examination of documents. The issuing bank, therefore, is not right in refusing the documents.

Any evidence for timely presentation of documents by the beneficiary is not needed so long as the documents have been examined by the negotiating bank and negotiation undertaken within a period of not more than 7 banking days.
As per UCP 500 Article 14D(ii) a bank deciding to refuse documents has to give a notice to that effect.

Such notice must state all discrepancies in respect of which the bank refuses the documents and must also state whether it is holding the documents at the disposal or is returning them to the presenter. In this case, since the issuing bank failed to indicate whether it is holding the documents at the disposal of the Bank of India or returning them to that bank, the issuing bank is precluded from claiming discrepancies.

In terms of Article 14(e) if the issuing bank fails to act in accordance with the provisions of this article and/or fails to hold the documents at the disposal of or return them to the presenter, the issuing bank ..... shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the credit. As per the provisions of this particular sub-clause, the issuing bank is precluded from claiming discrepancies.

Since documents have been presented in time and negotiated, the issuing bank, in terms of Article 14(e) of UCP 500, is bound to pay to the beneficiary. As for the responsibility for the material auctioned, it is a matter between the issuing bank and the applicant for the credit.

Question:
Clarification required on tolerance clause in L/C
An L/C allows for tolerance of 10% plus or minus in L/C amount
The L/C also bears a clause stating that commercial invoices issued for amounts in excess of the amount permitted by the credit not acceptable.
Kindly clarify whether the advantage of the positive tolerance of 10% as allowed by the L/C can we availed.

Answer:
One can certainly avail the positive advantage of 10% tolerance allowed in the L/C.

Question :
Kindly clarify the following :
L/C value is $ 10000/- Tolerance allowed is +/- 10% in Quantity and Value. One of the L.C. condition states that "Documents must not be drawn in excess of the credit value". Here credit value means $ 10,000/- or $ 10,000 with variance of 10% i.e. 11000/-. Banks are objecting if we negotiate documents worth $ 10,500/-.

L/C $ 17400/- Tolerance allowed is +/- 10%. In reimbursement instructions of L/C opening bank says that "Please claim reimbursement for $ 14,400/-". Does it mean that documents for which value is more than $ 14,400/- will not be reimbursed by the opening bank? If yes what is the significance of + 10% tolerance in this regard.

L/C issuing bank address mentioned in clause 42 (A) is differing from the address mentioned in Instructions for negotiating bank column (Normally issueing bank will give their full address for forwarding the Original Documents). In such case which address to be treated as issuing bank’s correct address.

L/C says that documents to be presented within 16 days. Should we include or exclude the B/L date for the purpose of arriving last date/expiry date for negotiation.

As per U.C.P, if the B/L is signed by an Agent the words "On behalf of carrier as agents" should appear on B/L. In some of the B/Ls only name of the Carrier and the words "as agents" were mentioned but the notation "On behalf of the carrier" was not appearing. Will it be treated as discrepancy.

Last date of Shipment is 31.01.00 and expiry is 15.02.00 Bill of lading was dated 28.01.00. We have asked bank to send the documents on collection basis on 05.02.00 as it was a state bill of lading. Does Opening Bank is obligated to check for all the conditions mentioned in L/C even after sending the documents on collection basis. Opening bank has pointed out some discrepancies. Is opening bank right to raise discrepancies even after sending it on collection?

L/C expiry is 29.02.00. As we could not get country of origin by 29.02.00 we could not negotiate on 29.02.00 but were sent on collection on 02.03.00. In this connection we would like to bring to your notice that all documents were having the L/C NO., date and opening bank name as we were thought of negotiating before expiry of the L/C.

In this case, when Negotiating Banks is requested to send it on collection are they duty bounded to check for the L/C conditions just because the L/C No. and other details are mentioned on the documents. What is the right of opening bank regarding discrepancies.

L/C requires courier receipt as a proof of couriering non negotiable copies with in 5 days of shipment. Opening Bank point out a discrepancy that the courier receipt does not mention what it contains. Is it a valid discrepancy?

Answer:
Clarifications required by you are given below ad seriatim :
If the L/C stipulates documents must not be drawn in excess of the credit value, in that case tolerance will be available only in regard to quantity and not value. The specific stipulation of the credit will supercede provisions of Article 39. Hence bank’s objections seems to be all right.

As already commented in 1 above tolerance will be available only if the L/C does not specifically provide otherwise. If, however, reimbursement is limited to the credit value then that will supercede Article 39.

Address given in the L/C will be the correct address as provided in L/C for purposes of this particular question.

If L/C says documents are to be presented within 16 days then it will include the date of B/L for purposes of arriving at the last date of negotiation.

In this connection, I am sending by post a copy of the ICC Position Paper relating to B/L. It all depends upon various factors enumerated in the Paper.

As per facts mentioned by you I am unable to find the logic for sending documents on collection basis for if the last date for shipment was 31/01/00 and expiry date as 15/02/00 then a B/L dated 28/01/00 will be perfectly all right and not stale. For this reason the Opening Bank is treating documents under L/C and not under collection (URC 522) and raising discrepancies. If you intend documents to be sent on collection basis then appropriate collection instructions need to be given through your bank to the Issuing Bank.

In this particular case since documents were not sent under L/C the banks will handle collection on the basis of collection instructions.

So long as the courier receipt can be linked with the other L/C particulars, there is no need for the courier receipt to mention of what it contains. In any case at the time of receiving such courier documents courier will not know what it contains.

A Few Questions and Answers on UCP - Part 5

Question: Contract terms stipulate "Net Cash Against a Customary Set of Shipping Documents for 98%. Balance 2% to be payable to XYZ towards commission."
Documents drawn as follows :
Invoice & Bill of Exchange drawn for 100% with separate instructions to remit 98% and pay 2% to XYZ A/C
Invoice prepared for 100% less 2% commission to XYZ net 98%. Bill of Exchange drawn for net 98%.
Which of the above two are correct?

Answer:
If the term of L/C is to make payment of 98% of the proceed against shipping documents and balance 2% to be payable to XYZ towards commission, then the best course will be to prepare invoice for 100% assign 2% of the proceed in favour of XYZ and draw B/E for the balance 100%.

Question:
We had negotiated some export bills under various DCs issued by the Standard Chartered Bank, Hong Kong calling for "Clean Shipped on Board Marine Bills of Lading". Documents drawn as per L/C terms were sent to the issuing bank after negotiation.

The B/Ls issued by M/s Maersk India Ltd have the following clause therein :

"Received in apparent good order and condition, unless otherwise stated herein, for transportation on board the ocean vessel mentioned herein or any substituted vessel or on board the feeder vessel or other means of transportation (rail or truck) if place of receipt is named in this Bill of Lading the goods or packages or containers said to contain goods, hereinafter called "the Goods", specified herein for carriage from the port of loading named herein or place of receipt if mentioned herein, on a voyage as described and part of discharge named herein or deliver at the place of delivery if mentioned herein, such carriage, discharge or delivery being always subject to the exceptions, limitations, conditions and liberties hereinafter agreed in like order and condition at the port of discharge or place of delivery if named as the case may be, for delivery unto the Consignee mentioned herein or to his or their assigns where the Carrier’s responsibilities shall in all cases and in all circumstances whatsoever finally cease. It is further agreed that Containers may be stowed on deck without notice pursuant to Clause 16 on the reverse side of this Bill of Lading. In witness whereof the number of original Bills of Lading stated on this side have been signed one of which being accomplished the other(s) to be void".

The Standard Chartered Bank refused the documents under article 23 a(ii) of UCP 500 on the ground that the on Board notation on the B/L does not show actual vessel’s name.

We believe that the discrepancy pointed out does not hold good as the printed clause mentioned on the front side of our B/L is neither a "substitution clause" nor does it represent the indication "intended vessel or similar qualification".


We would like to seek opinion of the group as to the validity of the stand taken by our bank.


Answer:
This case is similar to the Query TA.18 handled by Banking Commission bearing a similar clause stating inter-alia "by the vessel named herein or any substitute at the carriers option and/or other means of transport" where the Banking Commission has held that if the B/L contains the indication ‘intended vessel or similar qualifications in relation to the vessel, loaded on board or named vessel must be evidenced by the on board notation on B/L to the date on which the goods have been loaded.

Even if they have been loaded on the vessel named as the ‘intended vessel’. The Banking Commission had further added that where the pre-printed statement ‘loaded on board the vessel’ appears this should also incorporate the name of the actual vessel even if this is the same vessel which appears under the heading ‘ocean vessel’.


The same logic as in the case of Banking query TA.18 will apply to this case. Since no finality could be reached in regard to this particular query even at the Banking Commission it will be pre-mature to express any opinion. We may possibly have to wait till a unanimous opinion crystallizes in the Banking Commission on this subject. (Since handing out of this opinion the Banking Commission has decided that in the circumstances of this particular case, name of the actual vessel need not be given in the on board notation).


Question:
We are manufacturer exporter of Home furnishings and Bags . Nowadays a lot of buyers are asking for FCR (forwarders cargo receipt, for sea shipment) and House Airway Bill for Air Shipment.

These are normally issued by shipping/forwarding agents nominated by the buyer who have their counterparts/business partners at the other end. When they take in charge goods from the exporter they issue House Airway Bill/FCR which shows bank as the consignee but the master B/L or the Airway Bill shows their counterpart as the consignee.

The nominated shipping agents handover only House Airway Bill/FCR copy to exporter. When the goods reach the port of destination, their counterpart releases the goods immediately and handover to the applicant. The importer after taking delivery of the goods if he wishes to avoid payment, simply asks his banker to engineer, and discrepancies return the documents making the exporter suffer.

Is the release of goods by these shipping agents to the buyer justified? Whether or not it is justified, what are the precautions that need to be taken for getting paid for?

Answer:
This is not a UCP issue. If a House Airway Bill/FCR shows bank as the consignee and the shipping agents deliver the goods to the applicant without the House Airway Bill/FCR as presented through Bank, they are liable to recompense the beneficiary. They need to be dragged to the courts of law or to an arbitration depending upon the terms of contract of particular case between the beneficiary and the shipping agents.

A Few Questions and Answers on UCP - Part 4

Question: UCPDC 500 makes it mandatory that Letter of Credit should provide for Drafts/ Bill of Exchange to be drawn on the Opening Bank and not on the applicant.

If such drafts (i.e. drawn on applicant) are drawn, they will be treated as extraneous documents. However, in practice several Letter of Credit come across which call for drafts drawn on the applicant.

In this regard please clarify :

• Whether such an L/C becomes invalid abinitio under UCPDC 500.
• Whether a Negotiating Bank loses protection under UCPDC 500 if it negotiates documents containing a draft drawn on the applicant in confirmity with L/C terms.
• Whether a negotiation gets a protection under UCPDC 500 if it negotiates documents containing a draft drawn on the opening bank even though the Letter of Credit calls for a drawn on applicant.

Answer:
An L/C calling for draft on the applicant will not be invalid on that count.
Since draft on the applicant is additional document the Negotiating Bank will loose protection of UCP500 if it negotiates documents containing a draft drawn on the applicant only.
The Negotiating Bank will be protected under UCP if it negotiates document containing a draft drawn under Issuing Bank even though the L/C calls for a draft drawn on applicant.

Question:
L/C Opening Bank under usance letter of credit sent following acknowledgment on receipt of documents from Negotiating Bank, who had instructed Opening Bank to acknowledge and advise acceptance and due date.
"We acknowledge receipt of documents which is subject to acceptance."

As the reply was not satisfactory Negotiating Bank requested Opening Bank on telephone to advise acceptance and due date, for which the reply was "Unless you hear from us documents can be treated as accepted."


Can the Negotiating Bank treat the acknowledgment letter as acceptance. If no communication is received within 7 working days it will be understand as documents are in order.


Answer:
As per UCP 500 if the Issuing Bank does not communicate with 7 working days its rejection of documents that bank is precluded from refusing to take up the documents thereafter.

Question:
All export documents drawn under credit has to be in foreign currency (Home currency not permitted) as per RBI/FEDAI directive/guidelines. Whether an export document under L/C negotiated by the Bank will be treated as giving value for the draft/ document when Rupee advance is given without taking foreign currency into position.

While Rupee advance is given not upto 100% of invoice value but around 80% to 90% holding balance as margin (may be to cover exchange risk/interest recovery). In such case, part disbursement/advance shall be treated as full negotiation of document under the credit.


Answer:
Any Rupee advance given without taking foreign currency into account will be deemed as giving value for the draft/documents negotiated to the extent of the advance and will be subject to further adjustments later on.

A Few Questions and Answers on UCP - Part 3

Question : Buyers in Italy get quick stay from the Court preventing payment being effected under letters of credit. Can ICC do something about it?

Answer:
ICC is continually seeking to address the issue of injunctions being obtained to stop payment under credits. Banks are expected for the sake of protecting their name and goodwill to move the courts to get the injunctions vacated. It is deplorable that not many banks do that, which is not desirable.

Question:
Many times documents are dispatched directly to the beneficiary who takes delivery of goods and then has documents rejected by the Issuing Bank. What should be done in such cases? In this connection it was pointed out that it should be stipulated in the UCP that once buyer has taken delivery of goods, he must pay. Also many times documents could be corrected. The exporter should, therefore, be given an opportunity to do so. Should ICC not appoint a panel to see whether discrepancies are there or not?

Answer:
If the feeling is that this type of situation arises because of documents getting refused after goods have been dispatched directly to the buyer, then the best course will be to get the credit amended. This requires greater caution even at the stage of entering into purchase-sales contract and ensuring that there is a provision of the issuance of an L/C which does not provide for goods going direct to the buyer.

As regards the suggestion of making the buyer pay, if he has taken delivery of goods despite documents being discrepant, it is not feasible for how will you convert this into a documentary requirement. What type of documents will meet the requirement, who will issue it and whether it will be possible to get such a certificate, are some of the questions deserving attention.


Question:
In a letter of credit issued by one of the Korean Banks the reimbursement conditions was that the Issuing Bank will reimburse to the Negotiating Bank in accordance with their instructions provided all the terms and conditions of the credit have been complied with.

The Negotiating Bank negotiated documents and sent a reimbursement claim to the Issuing Bank with a request to affect payment value three working days later as per the reimbursement conditions. The Issuing Bank, however, did not meet its obligations and did not reimburse to the Negotiating Bank on value date.

While the reimbursement instructions stated that the Issuing Bank will make reimbursement in accordance with the Negotiating Bank’s instructions, they have not met the value date requested. Kindly clarify what is the correct position.


Answer:
If an Issuing Bank includes reimbursement instructions in their credit requiring the Negotiating Bank to claim from them and they will honour the claim according to the Negotiating Bank’s instructions this does not necessarily apply to the honouring of the claim with the value date requested by the Claiming Bank.

The claim for interest, if any, would need to be based on what is deemed to be the ‘reasonable time’ for the Issuing Bank to honour the claim and not that the Claiming Bank received payment on a date later than that requested in the telex claim.


Question:
Kindly clarify on the following points where airfreighting of consignments under house airway bills issued by freight forwarders are concerned.

Does the act of issue of a delivery order by a freight forwarding agent who is in control of the consignment (and the consequent authorization of delivery) to a party other than the named consignee of the airway bill without obtaining authorization from the named consignee fall under the purview of the Warsaw Convention?

If so, do the limits of liability for such an act as stipulated in Article 18 and 22 of the Amended Convention apply for such an act? Or would such an act be looked into under the framework of Article 25 and 25A which indicate the conditions under which the limits of liability are not applicable.

Is it a practice in New Delhi for Airfreight forwarding agents to hand over consignments to a party other than the named consignee of an airway bill without obtaining from such a consignee proper authorization to do so?

If it is a practice, isn’t the freight forwarder responsible for his own acts of resorting to such a practice? Is or is not the freight forwarder liable for the consequences of such an act?

Answer:
The issue of a delivery order by a freight forwarding agent to a party other than the named consignee of the airway bill without obtaining authorization from the named consignee will be outside the purview of the Warsaw Convention for as explained above the provisions of Warsaw Convention get complied with as soon as the airlines has handed over the delivery to the freight forwarding agent in New Delhi.

In view of what has been stated above limits of liability as stipulated under various provisions of Warsaw Convention will not apply.

There is no practice in New Delhi for airfreight forwarding agents to hand over consignments to a party other than the named consignee of an airway bill without authorization from such a consignee.

The freight forwarder is liable for consequences of such an act.

A Few Questions and Answers on UCP - Part 2

Question : Can a transferable L/C be transferred to an overseas supplier or it has to be with the national boundaries of the first beneficiary?

Answer:
There is no bar in a transferable L/C being transferred to an overseas supplier.

Question:
One of the conditions of a credit is submission of Pre-shipment Inspection Certificate retarding specification, quality, quantity, packaging, marketing and all other details of the goods by M/s SGS Bangladesh Ltd/ Llyods/ Bureau Veritas or their accredited representative.
The Pre-shipment Inspection Certificate is issued by M/s SGS India Ltd and a separate letter from SGS Bangladesh Ltd says that SGS India Ltd is a member of worldwide SGS Group operating out of SGS Geneva. Will such a Certificate of Pre-shipment Inspection be acceptable or will it be considered as a discrepancy?


Answer:
The supporting document should be issued as an attachment to the SGS certificate issued by SGS India and that this would be sufficient proof to determine that SGS India is an appointed agent. Issuance of the supporting document without it being an attachment to the actual Inspection Certificate would constitute an ‘additional document’ in the context of the UCP500 and would be ignored by banks for the purposes of checking.

Question:
We are exporting components to a buyer in the US against irrevocable L/C. The Issuing Bank is deducting US $60 for discrepancy charges on the ground that the B/L is not signed as per UCP500. Kindly advise the correct position.

Answer:
There is a trend in US in the banks to charge discrepancy fee for the handling of discrepant documents. As already indicated by the Issuing Bank these discrepancies charges are for the Bill of Lading not being signed as per UCP500. In the absence of a copy of B/L it is not really possible to know whether the Bill of Lading in question has been signed as explained above. If not, then it will be deemed to be a discrepant presentation. The Issuing Bank will certainly charge discrepancy fee for handling discrepant documents if that is their policy.

Question:
An L/C has been received with the following conditions :
Documents can be negotiated any time during the validity period of the L/C irrespective of date of transport documents/LR.
Clearly the L/C waives applicability of 21 days after the date of issuance of the transport documents under Article 43 by expressly mentioning irrespective of date of transport documents. The Negotiating Bank, however, maintains that since no other specified date has been mentioned, 21 days period will apply. Kindly clarify.

Answer:
The condition on the L/C by mentioning that documents can be negotiated in time during the validity period of the L/C irrespective of date of transport documents in fact waives the requirement of 21 days from the date of transport documents being applicable under Article 43. If the words ‘irrespective of date of transport documents’ were not there, the 21 days period would have been applicable.

Question:
An L/C was opened on 180 days usance basis. The L/C required inter alia the following :
• Material Receipt challan for the entire quantity from customer to be submitted, while negotiating documents.
• Copy of certificate of origin issued by Chamber of Commerce.

The beneficiary after delivery of material by endorsing the B/L in favour of the applicant and getting the Receipt Challan as required negotiated the documents with its bankers. The certificate of origin as submitted was issued by its overseas supplier instead of Chamber of Commerce.

The L/C Opening Bank, therefore, informed the Negotiating Bank of the discrepancy in that a certificate of origin issued by a Chamber of Commerce is not enclosed. The beneficiary thereupon arranged a certificate of origin issued by a Chamber of Commerce covering the entire quantity in the vessel and showing a third party as the consignee.

The L/C Opening Bank thereupon refused to accept the certificate of origin as it was not as per the terms of L/C and, therefore, agreed to handle the documents on collection basis.

The applicant, however, while issuing the Receipted Challan confirmed that documents are acceptable to them inspite of discrepancies and that they are requesting their bankers to release the payment of the L/C on due date. The discrepancies in the 2nd certificate of origin was that the consignee name in it differed from the notify party name in the B/L.

The Opening Bank also refused to refer the matter to the applicant on the ground that it is the Opening Bank alone who could decide whether to take up the documents or not based on documents alone.


Kindly provide answer to the following queries :

• Whether the L/C Opening Bank was justified in not referring the discrepancy to the customer and rejecting the documents.
• Whether the L/C Opening Bank was justified in rejecting the documents inspite of clear acceptance conveyed by the customer.
• If the bank is justified in rejecting the payment what course of action is available to the supplier, specially considering the fact that customer is a sick and ‘BIFR’ unit?
• Whether the L/C Opening Bank was justified in appropriating the margins under the L/C towards other outstandings, while rejecting the documents under the L/C?

Answer:
In terms of UCP500 it is the Issuing Bank alone who decides whether the documents are in terms of L/C or not. It may if it so wishes refer the matter to the applicant. It is not mandatory for them to refer the matter to the applicant.

The Opening Bank is fully justified in rejecting the documents inspite of clear acceptance conveyed by the applicant for if documents submitted are not in terms of L/C then the submission is discrepant and the Issuing Bank is not bound by any agreement between the applicant and the beneficiary.

This is a commercial risk which has to be borne by the beneficiary. The only course of action available to him is to file a suit for recovery of dues.

The question of appropriating the margins by the Opening Bank under the L/C towards other outstandings is on the basis of arrangement between the parties and the beneficiary has no claim against those margins.

A Few Questions and Answers on UCP - Part 1

Question : Who is a Buyer?

Answer:
Buyer is the drawee to whom presentation is to be made in accordance with the collection instructions. His role is to accept B/E facilitating release of documents if the terms are documents against acceptance (D/A) or to pay on presentation of documents if the terms agreed are documents against payment (D/P).

Question : Define the term ‘Presenting Bank’.

Answer :
The presenting bank is the one which makes presentation of documents to the drawee for payment, if the terms are documents against payment (D/P), or for acceptance, if the terms are documents against acceptance (D/A). The presenting bank is also known as the collecting bank and it is the one which comes in direct contact with the drawee. This bank’s role is to present Bill of Exchange (B/E) and other documents for payment under D/P terms or release documents after securing acceptance of B/E in case of D/A terms, and present B/E on due date for payment. This bank must act according to the collection instructions and get the noting and protesting of a dishonoured B/E if so instructed by the remitting bank and so willing.

Question :
In relation to a case of fraud, wherein the injunction forbids the Issuing Bank to effect payment under its credit to the negotiating bank, whether
• the Negotiating Bank has a recourse against the beneficiary,
• the Negotiating Bank has recourse against the beneficiary even if the Negotiating Bank has confirmed the credit, and
• whether the Issuing Bank is still responsible to make payment to the Negotiating Bank because the Negotiating Bank negotiated the documents in good faith.

Answer :
Article 3 emphasizes that credits are separate transactions from underlying contracts, and Article 4 stresses that in credit transactions all parties deal with documents and not with goods, and Article 10(b) and Article 14(a) state that nominated banks are entitled to be reimbursed if they have complied with the terms and conditions of the credit. However, there is an exception to these provisions in many jurisdictions, namely related to abuse of rights and frauds. It is upto the courts in various jurisdictions to fairly protect the interest of all bona fide parties concerned.

Question :
Whether an expired L/C can be transferred by a Bank?

Answer : An expired L/C cannot be transferred by the Transferring bank for there is no L/C to Transfer.

Question :
When an L/C is transferred for a value less than the original credit, does the second beneficiary to whom the L/C is not transferred to, get the right to negotiate the documents with the first applicant directly, bypassing the first beneficiary?

Answer:
Unless the L/C provides otherwise a second beneficiary does not get the right to negotiate documents with the first applicant directly bypassing the first beneficiary.

Wednesday, November 08, 2006

Export Credit Insurance - Nationality Requirements

Usually no nationality requirements have to be satisfied by the exporters. In a few specific cases the exporters must have the nationality of the country where the credit agency or the insurance company is based: the Dutch NCM, for example, requires the exporter to be Dutch when cover of political risks with reinsurance by the Dutch government is needed.

Other exceptions refer to the enterprise itself: in Austria, for example, insurance cover may be provided to enterprises domiciled in the country or abroad which export Austrian products or invest abroad, or to credit institutions domiciled in Austria or abroad which finance Austrian export.

In Denmark, insurance cover may be provided to an exporter or to a Danish or foreign bank that is financing a transaction by means of buyer’s credit.

In Germany, cover is available to German exporters and normally for goods manufactured in, and services rendered from within Germany, while in Spain there are no nationality requirements as far as the goods exported are Spanish.

In the United Kingdom, specific guarantees are restricted to UK companies or foreign companies
exporting UK goods and services.

In Switzerland, the rules are stricter: applicants must be domiciled in the country and entered in the Register of Commerce.

In the non-European countries, two are the most required elements: in some countries, such as Australia, New Zealand, Hong Kong, and Malaysia rules are more tolerant and to be eligible for cover, business entities must carry on business or other activities in those countries.

In Eastern-European countries (Hungary, Poland, Czech
and Slovak republic and Romania), in the Asian countries (Japan, Taiwan, Indonesia, Singapore, China, and Thailand) and in South Africa it is necessary to be legally resident, or the company should be registered there.

Particular conditions are required in Saudi Arabia, where, in order to qualify for cover, exporters may be either of the following:
- client of the Islamic development bank;
- persons who are nationals of a member state;
- corporations or other juridical entities, the majority of whose shares are owned by nationals of one or more member states and whose principal office is located
in a non-member state, provided that not less than 50% of its shares are owned by nationals of member states.

Percentage of Risk Cover in Export Credit Insurance

The analysis of the cover’s percentage shows that coverage accorded by ECAs and insurance companies is generally less than 100%: exporters are asked to bear part of the risk, and this part differs depending on the characteristics of the insurance policy.

Some institutions grant cover to supplier credits extended by the exporter, but not to buyer credits where the exporter’s bank lends to the buyer or his/her bank, while others accept both but with different coverage.

General criteria according to which a defined percentage of cover is provided are the following:

• type of risk: in most of the OECD and non OECD countries higher cover is granted for political (90-95%) than for commercial risks (85-90%);

• type of debtor: cover is higher in case of a public debtor, or when the debtor or the guarantor is a bank as opposed to the case of a private debtor; this is
the trend required by the Belgium Office National di Ducroire (OND);

• type of country of destination: in some cases, cover is higher if the country of destination is a member of the OECD; this is the criteria employed by the
Portuguese Companhia de Seguro de Creditos (COSEC) and many others.

Particular attention has to be given to the Export Credit Insurance Corporation of Poland (KUKE), which distinguishes between short and medium/ long term credits: in the first case, the cover for political and catastrophic risks is up to 90%, and for commercial risks is up to 85%. In the latter case: under Buyer Credit facilities for both political catastrophic risks and commercial risk, up to 100% of the credit value while, under Supplier Credit facilities, up to 90% of the credit value for political/catastrophic risks; up to 85% of the value for commercial risks.

The actual percentage of cover granted is decided not only on the basis of the total transaction value, but also on the terms of payment requested and, especially, on the basis of an accurate assessment of the credit worthiness of both the country and the buyer. Such assessment is conducted using different sources of information, such as specific company’s information, International Monetary Fund and World Bank reports, and information from other diplomatic missions.

Even if the coverage does not differ greatly from one country to another, and the actual percentage granted depends on the characteristics of the buyer, rules of origin may allow the exporter to apply for an insurance policy in a country where conditions are more advantageous.

The concept of “conditions” relates not only to the amount
reimbursed in case of loss but also to the premium charged, to the availability of policies covering particular types of risks or certain kinds of goods and to the length of the contract. The exporter can successfully apply for an insurance policy in a different country only if the terms of rules of origin, previously underlined, are respected.

The Link Between Rules of Origin and Export Credit insurance

The link between rules of origin and export credit insurance The notion of rules of origin has great relevance even outside the general context of the WTO Agreement.

Insurance Companies and Export Credit Agencies, for instance,
require applicants for an insurance policy to comply with rules of origin set by them and adopted on a case by case basis. Even though general principle and classification methods are the same used and referred to in the Agreement, insurance companies, usually, apply rules of origin drawn up in an independent way according to their institutional purpose.

Rules of origin are adopted by ECAs and insurance companies to define the maximum percentage of foreign content (or the minimum percentage of domestic
content) on which they base the granting of their financial services. Therefore, the product’s origin is a remarkable decisive element for the exporter.

Entrepreneurs who
apply for an insurance policy are requested to accept the rules of origin that are stated in a different and autonomous way by each Export Credit Agency and insurance company.

Rules of origin are, thus, an important factor in determining both the tariffs that are imposed on specific goods and whether quantitative and other trade restrictive measures may be applied to imported goods. Their application is also fundamental as criteria to apply for an insurance policy. Consequently the manner in which these rules are formulated and applied may have a relevant impact on the entrepreneur’s decisions.

Considering rules of origin may provide for either discriminatory trade measure or higher percentage of risk not insured, they have a significant impact on the strategic planning of firms. In the first case, exporters analyse the different rules, quantify their costs, treat them as a factor of production in determining where to source their investments, purchase their raw materials, produce or purchase intermediate materials and assemble the final products. In the second case, the entrepreneur decision on if and to whom apply (which agency and in which country) for a credit insurance is influenced by rules of origin and the percentage of cover granted.

In order to apply for an insurance policy, the nationality of the good is the guideline to determine the percentage of risk that will be covered. Since a high
percentage of foreign content leaves most part of the risks on him, the entrepreneur has to consider:
• the method used to determine the origin of products
• the percentage of domestic content necessary to be provided by the insurance cover
• the percentage of foreign content accepted in the insurance policy
• the exceptions to the rule related to particular originating countries
• the reduction of the risk coverage due to the presence of higher foreign content
• the amount of the reduction of risk coverage

In addition, it becomes important for him to know the percentage of cover granted by each Export Credit Agency for all types of risks (political or commercial) if local costs are covered and within which limits, and the nationality requirements to provide insurance cover. It is obvious that the adoption of rules of origin by ECAs and insurance companies has relevant influence on the producer’s and exporter’s decision-making; as more local industrial processes and materials are employed in the manufacture of a product, the percentage of risk covered increases.

Origin rules play also an important role with regards to the exporter’s need of financial resources: funds
available at more convenient terms in another country can be obtained thanks to insurance cover or guarantee provided by that country’s export credit insurance company. Rules of origin encourage enterprises to diversify their economic efforts and to carry out more industrial processes within their territory and, whenever possible, to use local materials.

The decision to acquire inputs or to apply for an insurance policy in another country involves the evaluation of transaction costs. The final resolution will depend on an accurate analysis of costs and benefits related to each option. Hence, knowing which origin rules are in force in other countries becomes an important instrument for the entrepreneur to be more efficient and thus more competitive on the market place.

Institutions Providing Export Credit Insurance

Export credit insurance, guarantees and/or funding support are usually provided by specialised institutions, the Export Credit Agencies (ECAs), which can be governmental, semi-governamental or private agencies, established with the aim of facilitating exports and enhancing trade through the provision of their services.

Originally these services were provided by state-owned institutions but in the last ten years, risks insurance has been taken into consideration by private sector insurance companies, which usually guarantee short-term commercial risks.

Export credit agencies and insurance companies nowadays assume different forms: a section of a ministry, a government agency, a semi-public joint stock company or a private institution sometimes operating on behalf of the government. The actual distribution of the insurance and financing activities among institutions depends on the country’s laws and regulations. In some cases, official financial support is provided only when backed by an appropriate insurance; in other cases, the entry of private banks and insurance companies into the market is forbidden.

The growth of the private sector is connected to the gaps it fills in the programs of the official credit agencies, for example by insuring pre-shipment risks, pre-export financing, countertrade deals and existing investments. Its development benefits exporters, in terms of improved insurance programs, policies and conditions of coverage, as well as insurers, thanks to expanded activity.

Some state-owned ECAs have been privatised during the last years: the Export Credits Guarantee Department (ECGD), former British Government department, or the Compagnie Française d’Assurance pour le Commerce Extérieur (COFACE), which has also expanded its
operations in many countries by creating Credit Alliance, an international network of specialised credit insurers.

In certain cases, namely when exports from different enterprises of different countries are to be financed, public and private agencies become partners: as for example in the case of COFACE and ECGD signed in 1995 an agreement that enables Anglo-French bids on major overseas projects. Private agencies also try to co-ordinate their policies on major issues and to exchange information on borrowers. This cooperation has induced the development of institutional arrangements, operating mainly through OECD, the Berne Union and ICIA.

Types of Export Credit Insurance Against Risks

The degree of protection offered by credit insurers, i.e. the amount of reimbursement, depends on the nature of the risks themselves. Credit risks may be
classified as follows:
Political and economic risks:

• War, hostilities, civil insurrections,
rebellion, strikes or other disturbances outside the exporter’s country;

• Risks arising from economic events (including shortage of foreign exchange or other restrictions imposed by the buyer’s government) that prevent the transfer of payments or the importation of the goods into the country;

• Boycotts which effectively prevent or restrict the importation of goods into the buyer’s country;
• Natural disasters.

Commercial risks:
• Insolvency resulting in: sequestration, liquidation, judicial management;

• Protracted default: failure of the buyer to pay an undisputed debt within a fixed period (usually six months) from the due date;

• Repudiation: refusal of the buyer to take delivery of the goods without any apparent valid reason.

Various types of export credit insurance are available to meet the exporter’s needs for risk coverage. The main categories are:

- Short-term export credit insurance relating to credits not exceeding 180 days: it is mostly employed when exports are conducted on a cash or letter of credit basis.

Insurance of this type (turnover or global policy) generally covers the firm’s entire turnover and it is issued within an agreed upper limit when the exporter has a large number of export operations. Pre-shipment and post-shipment policies are available: pre-shipment insurance grants protection from the date of validity of the contract until shipment; post-shipment insurance grants protection from the date of shipment until the goods have reached the buyer and payment has been received.

- Medium- and long-term export credit insurance: it is issued for credits extending for periods up to five years (medium-term) or longer (long-term). It provides cover for financing exports of capital goods and services or construction costs in foreign countries.

- External trade insurance: it applies to goods not shipped from the originating country and it is not available in many developing countries. The external trade insurance covers the same risks covered by the short-term export credit insurance policy, with the exception of political risks.

- Foreign exchange risk insurance: it covers losses from fluctuations in the relative exchange rates of the importer’ and the exporter’s national currencies over a defined period running from the date the exporter quotes a definite price.

- Transfer risk insurance: it covers from the risk that the buyer will not be able to convert local currency into foreign exchange and therefore will be unable to effect the payment. Transfer risk, also known as conversion risk, can arise from exchange restrictions imposed by the government in the buyer’s country.

The Benefits of Export Credit Insurance

Export credit insurance is a trade financial facility that provides an important support to exporters needing financial resources to enlarge their economic potentialities
by insurance coverage from different risks they face in their activity.
Export credit insurance is thus an important instrument for exporters both in developed and indeveloping countries. It provides the following benefits:

1. Exporters can offer their buyers competitive payment terms.

2. They are insured from political and commercial risks.

3. They are protected against financial costs of non-payment.

4. They have freer access to working capital and they are covered against losses from variations in currency exchange rates after non-payment occurs.

5. Their insurance cover reduces their need for tangible security when negotiating credit with their banks.

Exporters are often exposed to credit risks: the buyer may not be able to pay on due date, payments may be suspended for political reasons or recovery of goods may be unfeasible.

Credit insurance provides protection in the form of reimbursement in the event of non-payment. The insurer compensates exporters and their creditors against loss deriving from causes outside their control and from events occurring outside their own country which are not normally insured under other types of policies, such as marine or fire insurance policies.

The insurance cover or the guarantee granted by the insurer enables the exporter to obtain funds from a bank, funds that are often difficult to be obtained without providing securities. Hence, the exporter has better access to working capital and can offer extension to the buyer. Credit insurance benefits the exporter’s financier as well: in case of loan default, a credit insurance policy reduces the dependence on tangible assets.

As an efficient export credit insurance market is essential for exporters, rules and regulations must be set up to avoid unfair competition and decreasing quality of the services offered. The first step towards harmonisation and transparency in official export credit systems was by the EU on 7 May 1998; the Council has then adopted a Directive concerning harmonisation of export credit insurance for transactions with medium and long-term cover. The directive attempts to reduce distortions of competition among enterprises in the Community caused by differences in official export credit systems in Member States.

Before this Directive came into force, the conditions of export credits that benefit from such insurance or guarantees were provided in the OECD Arrangement on Guidelines for Officially Supported Export Credits. It contains limits on the terms and conditions for export credits with a duration of two or more years that are officially supported, i.e. that are insured, guaranteed, refinanced or subsidised by or through ECAs, without covering the conditions of insurance or guarantees. European Union countries were required to bring into force the laws, regulations and administrative provisions necessary to comply with the Directive by 1st of April 1999.

Member States have therefore made some changes in their systems and, where necessary, they have made notifications in accordance with the requirements of the Directive. It is too early to draw any conclusions on the operation as it is too early to assess whether any changes will need to be made to the directive. The Commission is due to submit a report to the Council by 31 December 2001 on the experience gained and the convergence achieved in applying the provisions laid down in the Directive.

The advent of the Euro has had an impact in the field of export credits, particularly where official supported financing is concerned: previously there were Commercial Interest Reference Rates (CIRRs) for most Member States currencies and also for the ECU. CIRRs are the minimum interest rates that can be officially granted by national export credit agencies under the OECD Arrangement on Guidelines for Officially Supported Export Credits.

A single Euro CIRR now prevails for all Member States in the Euro zone instead of the national CIRRs. The Euro CIRR is also used by other participants in the OECD Arrangement whenever financing is named in Euros.

Rules of Origin and The Impact on the World Trading System

The lack of harmonisation in rules of origin regulation is still providing countries with the opportunity and incentive to use their rules of origin to implement protectionism in trade policy and to accord disparate treatment to similar goods.

In the increasingly globalised nature of production, there is no single correct definition of origin. Nowadays, the origin is determined according to the way rules of origin are formulated and applied. It means that countries, using Rules of Origin in a results-oriented manner as a trade policy tool, can control the degree of preferential treatment in international trade. Rules of origin may, for example, be utilised to restrict the import from particular sources.

As a consequence of the increasing number of free trade area agreements, it is also important to consider the link between rules of origin and regional free trade areas.

In a free trade area, tariffs and quotas are eliminated on goods originating from and traded between member countries. In a custom union the same principle applies with the added element of the determination of a common external tariff applied to goods originating from non-member countries.

Sometimes rules of origin generate distortions since they encourage countries to use local factors of production in order to facilitate the determination of origin and to benefit from preferential measures addressed to them. In this way, local inputs may be preferred even when it is economically more efficient to import them.

Rules of origin encourage countries to diversify their economic processes and produce within their national territory and to use whenever possible local materials in the manufacture of products. Sometimes, however, it would be more efficient for a country to import certain materials or to carry out specific industrial processes abroad because of cheaper or of higher quality. Nevertheless, the benefits deriving from the national origin of the goods make countries move into the opposite direction.

Criteria for Defining the Origin

The determination of origin does not present special difficulties when the product is “wholly obtained or produced” in one State. But it has become increasingly complex as a result of the globalisation of the world trade and the activity of pannational companies. Producers may source the components from different countries or may manufacture the product in subsequent stages in different countries. In this case problems arise in determining the spot of production.

A product originates in a particular country either if it is “wholly obtained and produced” in its customs territory or if it has undergone “substantial transformation”.

The substantial transformation method states that a good originates from the last country where it emerged from a given process with a distinctive name, character or use. It requires that the product has been transformed into a new and different article.

It means that exporter, importer or producer are requested to furnish a great deal of factual information to prove substantial processing. What is to be determined is whether the change, manufacturing or processing is of such a substantial nature to justify the conclusion that the article is a product of the country where this change took place. A change of use is usually considered as a determinant factor if the processing or manufacturing transforms the product from one that is suitable to one use to one applicable for another use or for multiple uses. A processing operation that merely completes an article normally does not constitute a change in use sufficient to substantially transform the article.

Substantial transformation can be basically defined according to three criteria: the “value-added “ criterion, the “ process” criterion and the “change in tariff classification” criterion.

- The value-added or ad valorem percentage test: it defines the degree of transformation required to confer origin to the good in terms of minimum percentage of value that must come from the originating country or of maximum amount of value that can come from the use of imported parts and materials. If the floor percentage is not reached or the ceiling percentage exceeded, the last production process will not confer origin.

The value of the goods exported is normally calculated using the cost of manufacture and the price at exportation: the value of the constituent materials might be established from commercial records or documents. Two problems arise: firstly, border-line cases, determining a slight difference above or below the prescribed percentage, because a product failed to meet origin requirements; secondly, elements such as the cost of manufacturing or the total cost of the products are usually difficult to assess and may have different interpretations in the country of exportation and in that of importation. This criterion is applied by
Australia, Canada, New Zealand and the United States and also by Bulgaria, the Czech Republic, Hungary, Poland, the Russian Federation and Slovakia. The latter group of countries has fully harmonised the criterion applied.

- The specified process tests of origin: it confers origin to the product based on the results of tests it must undergo. This criterion is applied by the European Community, Japan, Norway and Switzerland.

- The change in tariff classification method: it is the most widely applied criterion. It determines the origin of a good by specifying the change in tariff classification of the “ Harmonised System of Tariff Nomenclature” (HS) required to conferring origin on a good. As a general rule, imported materials, parts or components are considered to have undergone substantial transformation when the product obtained is classified in a heading of the HS at the four-digit level which is different from those in which the non-originating inputs used in the process are classified.

However, since sometimes the CTH rule is not able to determine the origin of a product, preference-giving countries have drafted a list, the Single List, of working or processing to be carried out in non-originating inputs in order that the final products may obtain originating status.

Global Harmonisation of Rules of Origin


In 1953 the International Chamber of Commerce made the first attempt to harmonise rules of origin: it submitted a resolution to the contracting parties recommending the adoption of a uniform definition for determining the nationality of manufactured goods. In the 1970’s another effort was made with the Kyoto Convention.

It came into force the 25 September 1974,
with the aim of attaining a harmonised scheme of custom procedures. The text is divided in two parts: the body of
the Convention and the Annexes. As each Annex considers a specific customs procedure, the most important for the purposes of this paper are the “D.1. Concerning rules of origin”, “D.2. Concerning documentary evidence of origin” and “D.3. Concerning the control of documentary evidence of origin”.

The Convention has
particular relevance since it explains the most used criteria to determine the origin with their main advantages and drawbacks, and provides suggestions about their use.

The use of the rules of origin to implement
trade restrictive and trade distortive policies finally lead to the inclusion of “rules of origin” as a topic of the Uruguay Round
multilateral trade negotiations. The WTO Agreement on Rules of Origin was part of the outcomes of the Uruguay Round: it sought to harmonise the non-preferential rules of origin used by signatory countries into a single set of international rules. By drafting the rules in a multilateral context where all countries are represented and the adopted rules are used for all non-preferential purposes, the possibility for a single country to draw up rules in politically motivated ways has thus been limited.

A specific program was set up, and two new institutions
were created to reach this purpose. The first one was the Geneva-based Committee on Rules of Origin (CRO)
at the WTO, the second body was the Brussels-based Technical Committee on Rules of Origin (TCRO) of the World Custom Organisation. The Harmonisation Work Programme (HWP), which was launched on 20 July 1995, was scheduled for completion within three years of its initiation, i.e. by July 1998. However, due to the complexity of the issues, the work has still not been completed.

Negotiation difficulties can be attributed
to problems such as:


1) the definition of goods which are wholly obtained in one country, in particular when they are related to products extracted from international territories, as in high seas or outer space;

2) the need for further refinement of the definitions of minimal operations and processes which do not by themselves confer origin: processes like assembly, disassembly, bleaching, drying, cutting and sewing, blending, packing and packaging, colouring must be classified and ordered in the definition of “substantial transformation”;

3) the need of product-specific rules for particular product sectors.

In order to achieve harmonisation
, committees are working on a detailed uniform definition for determining when goods are wholly obtained in one country, on
a list of minimal operations or processes that do not by themselves confer origin to a good and finally on the definition of last substantial transformation. The determination of the last transformation will depend on the change in the tariff classification method through the use of the harmonised system combined, when necessary, with tests of value-added and others specific methods.

As of May 2000, measurable progress
had been made with respect to the general rules but the TCRO is still unable to complete the work owing to the divergence of
views over the method of application for the primary and residual rules. The work is currently in progress.