The Art of Handling Special Letters of Credit: Oil & Gas

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1 The Art of Handling Special Letters of Credit: Oil & Gas Speakers Stacey Facter, Senior Vice President, Trade BAFT Chee Seng Soh CEO DC Consultancy Services

2 Composition of BAFT Working Group Chair: Glenn Ransier, North America Market Manager, Citibank NA Vice Chairs: Rita Ricci, Global Head Trade Expertise Desk, BNP Paribas Buddy Baker, VP/Manager Global Trade Solutions Delivery, Fifth Third Bank 42 Members From 26 Financial Institutions From 10 Different Countries

3 The Approach Take sample statements or clauses from actual LCs issued Provide Notes to help define and/or frame the issue or concern. Provide Suggested Guidance for all clauses covered.

4 The Guide: Table of Contents 1. Ambiguous Payment Tenor & Presentation Clauses Due Date Clauses Unit Prices Escalation Clauses Document Types Provisional Invoices Notice of Readiness (NOR) Ullage Reports Meter Tickets Pipeline Certificate Book Transfers Statements BL Telecopy Letter of Indemnity (LOI) Special Conditions References to Telex or Fax Documents References to Charter Party BLs References to shipments on a Particular Vessel References to Loading Periods References to Safe Ports References to Merchandise Acronyms or Short Names, etc References to Disports References to Copies, Photocopies References to Limiting or Excluding Examinations References to Multiple and/or Partial Payments/Shipments Reduction Clauses...29

5 The Guide: Section 4. Escalation Clauses Actual Clause Examples: THE AMOUNT OF THIS LETTER OF CREDIT SHALL AUTOMATICALLY FLUCTUATE TO COVER ANY INCREASE/ DECREASE ACCORDING TO THE PRICE CLAUSE WITHOUT FURTHER AMENDMENT TO THIS CREDIT. INVOICES FOR AMOUNTS IN EXCESS OF THIS LC S VALUE ARE ACCEPTABLE. HOWEVER, DRAWINGS AND PAYMENTS UNDER THIS UNDERTAKING CANNOT EXCEED THE TOTAL VALUE OF THIS LC.

6 Section 4: Notes Where the shipment is being bought and sold by traders (e.g. chain sales or string sales), these types of clauses are not uncommon in the Industry. However, readers are cautioned that these clauses obligate the issuer, confirmer and/or nominated party acting on its nomination to pay any complying presentations including those for amounts over and above an Undertaking s stated value. Should an Undertaking specify a tolerance expressed as a percentage in relation to Undertaking s stated value (e.g., a tolerance of 5% more/less is permitted), in addition to an escalation/de-escalation clause, such tolerance percentage does not override or otherwise limit the infinite nature that an escalation/de-escalation clause provides (emphasis added). Reference is made to ICC DOCDEX Decisions 238, 243, 244, and 248..

7 Section 4: Suggested Guidance Place an absolute limit on the Undertaking s available balance which may not be exceeded by the drawing amount(s). Append the escalation clause with wording similar to: A presentation above this Undertaking s amount will not be a discrepancy. However, payment cannot exceed the maximum value of XXX. Any amount claimed over and above this maximum value is payable by the applicant, outside of this Undertaking. If neither approach #1 nor #2 above is feasible, the WG recommends:

8 The Guide : Section 5. Document Types Each rule set (defined in the above Foreword) takes a specific approach to the examination of documents. For example, the ISP98 and URDG 758 each have a different definition of the term document. ISP98 and URDG 758 discuss electronic documents and their presentation methods while the UCP 600 does not unless the Undertaking is subject to the eucp. Care and consideration must be given when requesting and issuing an Undertaking and when determining which rule set will govern it. If an Undertaking s documentary requirements are not clear and concise, it will lead to confusion and this may lead to unexpected results.

9 The Guide : Section 5. Document Types Each rule set (defined in the above Foreword) takes a specific approach to the examination of documents. For example, the ISP98 and URDG 758 each have a different definition of the term document. ISP98 and URDG 758 discuss electronic documents and their presentation methods while the UCP 600 does not unless the Undertaking is subject to the eucp. Care and consideration must be given when requesting and issuing an Undertaking and when determining which rule set will govern it. If an Undertaking s documentary requirements are not clear and concise, it will lead to confusion and this may lead to unexpected results.

10 Section 5. Document Types Continued Additionally, many of the documents required in Undertakings related to this Industry are unique to this Industry. However, the rules that govern Undertakings are meant to be broad to facilitate trade and payments in all industries. As noted in the foreword, no issuer or document examiner can be familiar with every term/ acronym used in every industry. Given this, the WG would like to provide some considerations: See Document

11 The Guide: Section 10. Pipeline Certificate Actual Clause Example: COPY OF A PIPELINE CERTIFICATE Notes Pipelines are typically the most economical way to transport large quantities of oil and gas products. The Pipeline Certificate records the transfer of quantity sent through a pipeline to a stated destination. This certificate is not considered a transport document as defined in UCP 600.

12 Section 10: Suggested Guidance The Undertaking should be specific as to the required data content and the party that is to issue the pipeline certificate.

13 The Guide: Section 27. Closing It has been the drafting group s pleasure to present you with this technical guidance document. As a final reminder, as with any guidance document, the suggested guidance defined herein are not rules or laws, and should be read in conjunction with applicable rules and local laws and your organization s risk based policies and procedures. It is the drafting group s hope that this document will add transparency and facilitate understanding of a complex topic. Given the highly technical nature of this document, the BAFT Working Group will be available for questions. Please address your questions to BAFT via to: info@baft.org.

14 Oil & Gas Best Practices Guide on BAFT Website

15 Suit No. 162 of 2004 (REGISTRAR S APPEAL No. 307 of 2004) [Singapore] KOREA EXCHANGE BANK V STANDARD CHARTERED BANK

16 Korea Exchange Bank v Standard Chartered Bank Issuing Bank: Confirming Bank: Applicant: Beneficiary: Transaction: LCs: Korea Exchange Bank Standard Chartered Bank Petaco Petroleum Inc. Trafigura Beheer BV Sale of gas oil Two LCs for US$800,000 each. Both LCs subject to UCP500

17 Korea Exchange Bank v Standard Chartered Bank LC1: Field 32B: USD800,000 Field 39A: 10/10 Field 45A: Gas oil 26,000BBL +/- 10 pct. LC2: Field 32B: USD800,000 Field 39A: 10/10 Field 45A: Gas oil 27,000BBL +/- 10 pct.

18 Korea Exchange Bank v Standard Chartered Bank Both LCs: Field 47A (Additional Conditions) included a provision regarding price: Price: The price in US dollars per barrel based on the quantity as determined under clause 12 of the contract shall be on a ex tank price at Pyongtaek, Korea. Basis shall be equal to the average of the mean quotations published in the Platt s Asia Pacific/Arabian Gulf Marketscan for gasoil reg 0.5 pct quotations under the heading Singapore plus a premium of US dollars 3.38 per US BBL. The amount of this letter of credit shall automatically fluctuate to cover any increase/decrease according to the price clause without further amendment to this credit.

19 Korea Exchange Bank v Standard Chartered Bank Beneficiary presented documents for both LCs to SCB. Having determined that the documents complied, SCB honored the presentations and forwarded the documents to KEB for reimbursement under both LCs in the amounts of US$939, and US$1,021, KEB refused and sent a notice of refusal to SCB stating three discrepancies for each presentation. One of the reasons given for refusal of both presentations was Amount Overdrawn.

20 Korea Exchange Bank v Standard Chartered Bank SCB sued KEB for wrongful dishonor in Singapore. On SCB s motion, the trial court granted summary judgment in favor of SCB for US$1,961,430.67, plus interest and costs. The trial court rejected KEB s three discrepancies as invalid. KEB appealed on the sole ground that the refusal was proper because the amount stated in the documents was overdrawn.

21 Korea Exchange Bank v Standard Chartered Bank KEB argued that Fields 32B and 39A, when read together as US$800,000 +/- 10% limited the LC drawable amount to a range of US$720,000 to US$880,000. Accordingly, KEB reasoned that by making demands in the presentations for US$939, and US$1,021,641.66, amounts in excess of these tolerances, the credits were overdrawn.

22 Korea Exchange Bank v Standard Chartered Bank KEB further argued that Additional Condition E allowed for fluctuation in the price of gas oil without the need to amend the LC provided the price payable for the gas oil shipped was within the +/- 10 pct. tolerance for the LC amount stipulated for under Field 39A but was subordinate to the amount tolerances in Fields 32B and 39A which were paramount.

23 Korea Exchange Bank v Standard Chartered Bank SCB, on the other hand, argued that Field 47AAdditional Condition E prevailed. It argued that the scope of Field 47A was price fluctuations whereas the +/- 10 pct. tolerance in the credit limit was meant to cater to a similar percentage tolerance for the volume of gas oil shipped, as provided for in Field 45A.

24 Korea Exchange Bank v Standard Chartered Bank Since only Additional Condition E applied to price fluctuations, SCB further argued the reimbursement claims were proper given that Additional Condition E stated [t]he amount of the LC shall automatically fluctuate to cover any increase/decrease according to the price clause without further amendment to this credit. SCB argued that the phrase according to the price clause from Additional Condition E simply referred to Field 32B (USD800,000) as a starting point from which automatic fluctuation is allowed.

25 Korea Exchange Bank v Standard Chartered Bank The appellate judge concluded that the construction proposed by KEB would render Additional Condition E superfluous and if the tolerance in the credit limit was completely taken up by a maximum increase of 10% in the volume of gas oil, Additional Condition E would have to be disregarded and given absolutely no effect even if there was a price increase. Accordingly, the court characterized KEB s proposed construction to be untenable.

26 Korea Exchange Bank v Standard Chartered Bank The appellate court indicated that it was unmoved by KEB s argument that SCB s interpretation would leave its liability unlimited. The court stated that [i]t is untrue that such a construction would render the LC similar to a blank cheque as the [KEB s] counsel described it. Under Additional Condition E, the increase in the credit is limited by the increase in the price of oil. The court also noted that [i]f there is any ambiguous or unclear term in a letter of credit, a confirming bank is entitled to take a reasonable construction thereof even if, upon closer consideration in an action in a court of law, it is possible that some other interpretation is to be preferred

27 Korea Exchange Bank v Standard Chartered Bank KEB also argued that the price clause in Field 47A was a nondocumentary condition which was to be treated as not stated and therefore disregarded; The appellate court concluded that the non documentary condition rule avails the negotiating bank or confirming bank against the issuing bank and, arguably, the issuing bank against the applicant.

28 Korea Exchange Bank v Standard Chartered Bank The appellate court noted that the importance of the price clause and the automatic fluctuation clause to the working of the credit is obvious. Without it, the credit would be unworkable as the price for the gas oil is not fixed but fluctuates with a benchmark the court concluded even if they were non-documentary conditions, effect should be given to the two express clauses.

29 Korea Exchange Bank v Standard Chartered Bank Concluding that KEB s argument that the price fluctuation clauses should be disregarded had failed, the appellate court stated that the amount of payment sought by SCB did not exceed the credit limit of the LCs.

31 Case Study LC: Field 32 USD940,000 Field 45 Base Oil MT +/- 5% Field 47 The principal amount of this Letter of Credit will increase/decrease automatically, even above/below stipulated limits without further amendment: According to ICIS LOR* quotation, as per the price clause of the contract(s), and/or according to the actual quantity delivered under the contract for sale of oil and/or petrochemicals products, up to a maximum increase or decrease as stated in percentage terms in the opening paragraph of this Letter of Credit. *ICIS-LOR introduces real-time price reporting on key chemical commodities from PAS bureaus in London, Singapore and Houston.

32 Case Study Invoice submitted USD961, showing quantity 1, MT and also state price as per contract no. Question: Is the presentation discrepant?

Case Study #2: Commercial Letters of Credit. Chee Seng Soh CEO DC Consultancy Services

Case Study #2: Commercial Letters of Credit Chee Seng Soh CEO DC Consultancy Services [2014] SGHC 274 [2016] SGCA 32 Singapore High Court - Suit No 802 of 2012 Court of Appeal Civil Appeal Nos 156 and