Features Of Standby Letters Of Credit Used As Payment Security In Oil Trade
What Amount Is Available For Payment
The standby letters of credit are issued to secure the payment of price and buyers` potential liability for VAT and Excise Duty for oil cargoes sold on open account terms in sale contracts providing for monthly shipments. The amount of such standby letters of credit is calculated based on the mean value of the marker crude price quotations used as reference for pricing on the days preceding the date of issuance, the maximum quantity range stated in the sale contract for a monthly shipment and the applicable VAT and Excise Duty.
Similarly to documentary letters of credit, the standby letters of credit include the contractual price clause based on the marker crude price quotations published by Platts or Argus and a linked amount escalation/de-escalation clause stating that the letter of credit amount will automatically be adjusted for any price increase or decrease in accordance with Platts` or Argus` price quotations for the marker crude used as reference in the price clause1.
In BP Standby Letter of Credit format published in Schedule C of BP Sale Terms and Conditions, 2015 Edition, the drafters sought to cover both the possibility of price fluctuation and the possibility of overshipment of goods in CFR and CIF sales where the sellers may take advantage of price rising by shipping more than the contractual quantity range of 15%. BP Standby Letter of Credit format states a cargo quantity range within +/-15% of the mean contract quantity and the Sub-Clause 63.14.2 of BP Sale Terms and Conditions stipulates that the letter of credit amount must be sufficient to cover the contractual mean value of the oil cargo plus 15% and a further amount to cover a potential escalation in duties. BP Standby Letter of Credit format includes the following conditions:
“Special Conditions:
6. The value of this Standby Letter of Credit may escalate/de-escalate above or below the tolerances allowed without any amendment on our behalf.
………..
9. Any discrepancy resulting from the invoiced quantity exceeding or falling below the quantity range allowed in this Standby Letter of Credit is acceptable. Payment will be effected on the invoiced quantity in case the maximum quantity allowed in this letter of credit is not exceeded. In case the invoiced quantity exceeds the maximum quantity allowed in this Standby Letter of Credit the bank will pay on the maximum quantity allowed in this Standby Letter of Credit.”
The Special Condition 9 seems to be intended to prevent the CFR/CIF sellers from taking advantage of price rising by loading more oil than the contract quantity range. It allows the seller to ship more than the maximum quantity stated in the standby letter of credit, but it provides that the issuing bank will not pay for more than the maximum quantity stated in the standby letter of credit, i.e. the cargo quantity range of 115%.
The Special Condition 6 provides that the value of letter of credit may escalate above the 15% tolerance without any amendment. This means that in case of price rising, the letter of credit amount will automatically be increased to allow the payment in accordance with the new price2, even if the invoice amount exceeds 115% of the amount stated in the letter of credit, but provided that the invoiced quantity does not exceed the maximum quantity allowed in the letter of credit, i.e. 115%.
This matter should have been stated clearly in the BP Standby Letter of Credit format. The Special Condition 9 should have been placed right after the Special Condition 6 and make that clear.
Therefore, the oil traders using BP Sale Terms and Conditions should consider an alternative wording for the Special Condition 9 in the standby letter of credit applications. An example of such alternative wording is provided below:
“A demand for payment exceeding the amount stated in this standby letter of credit will be acceptable provided that the invoiced quantity does not exceed the maximum quantity allowed in this standby letter of credit. If the invoiced quantity exceeds the maximum quantity allowed in this standby letter of credit, we will pay only a demand for an amount calculated based on the maximum quantity range allowed in this standby letter of credit.”
Security For The Payment Of Additional Costs
LITASCO Standby Letter of Credit format states that it is a security not only for the payment of price of cargo but also for the payment of any applicable VAT due amount and Excise Duty and additional costs and expenses, penalties and interest incurred by the Beneficiary (seller) as a result of the applicant`s (buyer) failure to provide him with the information and documents necessary for the Beneficiary (seller) to supply the oil cargo without having to charge and account for VAT and/or Excise Duty3.
In order to allow the seller to comply with the regulations on VAT and Excise Duty in force in the country of destination of oil cargo and avoid the payment of VAT and Excise Duty, the buyer must provide to seller the necessary information and documents in due time.
If the buyer is the final consignee of oil cargo, he must provide to seller his VAT and Excise Duty numbers.
If the buyer is not the final consignee of oil cargo, he must provide to seller his VAT number and the VAT and Excise Duty numbers of the final consignee.
After the discharge of cargo at the port of destination, the buyers must also provide to seller a certificate of discharge of oil cargo stating the port(s) and date(s) of discharge and the grade(s) and quantity discharged.
If the buyer provides the required information and documents in due time, the seller shall not charge VAT in addition to the price. The price will be exclusive of VAT and Excise Duty. But if the buyer fails to provide the required information and documents in due time or if the documents provided by the buyer fail to comply with the requirements, the seller shall be entitled to issue a further invoice for the amount of any VAT and/or Excise Duty payable on the oil cargo and for any penalties and/or interest stipulated under the applicable VAT and Excise Duty regulations.
BP and Shell Sale Terms and Conditions stipulate that such invoice must be fully paid within one banking day in New York after the presentation4.
LITASCO Sale Terms and Conditions state that such invoice must be paid within five calendar days after the presentation by the seller5.
Therefore, the unpaid invoice required to be presented by the Beneficiary (seller) along with the demand for payment could be either an invoice for the price of cargo or an invoice for the amount of VAT and/or Excise Duty payable on the oil cargo.
by Vlad Cioarec, International Trade Consultant
This article has been published in Commoditylaw`s Oil Trade Review Edition No. 2.
Endnotes:
1. See Sub-Clause 58.2 of LITASCO General Terms and Conditions For Sales and Purchases of Crude Oil and Petroleum Products, 2014 Edition and LITASCO Standby Letter of Credit Terms and Conditions in the Schedule 2 to LITASCO Sale Terms and Conditions.
2. ISP98 Rule 2.06 (a) has the following provisions: “If a standby expressly states that it is subject to “automatic amendment” by an increase or decrease in the amount available […], the amendment is effective automatically without any further notification or consent beyond that expressly provided in the standby. (Such an amendment may also be referred to as becoming effective “without amendment”.)” The Official Commentary On The International Standby Practices states that if a standby letter of credit contains a statement that a modification shall become effective “without amendment”, such an amendment shall become effective automatically “without any further notification or consent”, because it is a reservation or condition to the undertaking itself. See page 82 of The Official Commentary On The International Standby Practices.
3. See Special Condition 7.
4. See Sub-Clause 62.2.2 of BP Oil International Limited General Terms & Conditions for Sales and Purchases of Crude Oil and Petroleum Products – 2015 Edition and Sub-Clause 31.1.3 of Shell`s General Terms and Conditions for Sales and Purchases of Crude Oil, 2010 Edition.
5. See Sub-Clause 62.11 of LITASCO General Terms and Conditions For Sales and Purchases of Crude Oil and Petroleum Products, 2014 Edition.