QUERY

On 25 March 2019, the advising bank received a documentary credit issued under UCP 600 for an initial amount of USD 465,000 with the following terms and conditions: available at any bank in Country I by negotiation, without confirmation, partial shipment allowed, expiry date 21 May 2019, latest day of shipment 30 April 2019 and presentation period 21 days.

The advising bank advised the credit to the beneficiary indicating that they did not accept the nomination to negotiate. The issuing bank was not informed of this decision.

Subsequently, the credit was increased to USD 472,500 with a new expiry date of 6 July 2019 and latest shipment date of 15 June 2019.

In availment of this letter of credit the following presentations were made within the presentation period (21 days):

7 May 2019 for USD 136,117.80 - 14 May 2019 for USD 146,478.15

16 May 2019 for USD 129,109.05 - 14 June 2019 for USD 60,795.00

After a preliminary verification (not having accepted its nomination to negotiate), the advising bank forwarded each set of documents to the issuing bank. The issuing bank neither acknowledged nor sent any refusal message.

On 25 June 2019, the advising bank informed the beneficiary that the issuing bank had not given any acceptance or refusal of the documents and the beneficiary decided to act directly by contacting its commercial counterpart. The advising bank, through its Correspondent Banking Department, repeatedly requested a response, but the issuing bank never replied even though the courier tracking system showed that the presentations had been delivered.

On 03 July 2019, in the absence of an acknowledgment or refusal of the documents, the advising bank requested confirmation and details of the payment of the documents for USD 136,117.80 which was a partial payment “at sight” scheduled in the credit but, once again, there was no reply.

Only on 12 August 2019, i.e., 3 months after receipt of the documents, the issuing bank sent a SWIFT MT999 message indicating that "... the consignments/goods are not as per specification of documentary credit. Port customs authority of [Country B] had suspected and informed that the consignments contains forbidden and harmful swine/ porcine and anthrax/bovine. For this reasons customs temporary suspend/ stopped to release the imported consignment.”

With the aim of assisting its customer, the advising bank sent many requests in order to clarify the situation, but only on 7 October 2019 the issuing bank (now always by email) sent a copy of a petition no. 9217 connected to the SWIFT message of 12 August 2019. This petition showed that the issuing bank had to pay a "duty". At the same time, however, the issuing bank informed the advising bank by e-mail that the documents sent in May and June 2019 were still kept and had not been delivered to the applicant.

The advising bank, failing to assert the application of the UCP 600, decided to explicitly request the intervention of the Central Bank with a letter from their Representative Office which is located in the country of the issuing bank, reporting all the events of the pending transactions.

In December 2019, the advising bank was informed by its Representative Office that the High Court (before which the Central Bank itself had brought the matter) would give an answer within one month. In the meantime, in December 2019, the exporter also acted independently to obtain feedback locally. They hired a local lawyer who prepared a "Legal notice" which was sent to the issuing bank, demanding the settlement of the due amount within 15 days of receipt of the notice

At the beginning of January 2020, two amounts were credited to the beneficiary's account without any details about the L/C “blocked/frozen”. These were the presentations for USD 129,109.05 for which USD 128,889.05 was received with value date 09 January 2020 and USD 146,478.15 for which USD 146,258.15 was received with the same value date. The issuing bank gave no indication as to the reason why only these two presentations had been paid.

On 03 February 2020, the advising bank sent a payment reminder to the issuing bank and on 04 February 2020, the issuing bank replied specifying that no additional payment could be processed as a new petition had been filed (no. 519/2020) which “blocked/froze operations until the High Court issues a judgment.”

On 06 February 20, the advising bank reiterated that the documentary credit, by its nature, is a separate operation from the underlying commercial contract, but the issuing bank reaffirmed its obligation to comply with the decision of the High Court.

On 12 February 2020, the advising bank underlined the delays in the application of the UCP 600 sub-article 16 (d) and the ensuing application of UCP 600 sub-article 16 (f) which prevents the issuing bank from considering the presentation as not complying.

On 17 February 2020, the issuing bank, after keeping the documents several months and without any previous communication, returned the documents held at their counters since May 2019. The remaining drawings of 7 May 2019 for USD 136,117,80 and 14 June 2019 for USD 60,795.00 were never paid.

We will be grateful if the Banking Commission would express their opinion about the following comments:

1. The issuing bank’s behaviour was not in line with UCP 600 sub-articles 14 (b), 16 (c) and 16 (d).

2. UCP 600 sub-article 16 (f) is applicable and the issuing bank was precluded from claiming that the documents do not constitute a complying presentation. On the sixth banking day after the receiving of the documents, failing sending a refusal notice to the presenting bank, the issuing bank was obliged to honour the presentation.

3. The issuing bank informed the reason of non-payment 3 months after the presentation of documents and it was not due to an injunction of non-payment by a public authority but a problem about the nature on the goods.

4. The continuous lack of collaboration of the issuing bank which is outside the current international banking practice in documentary credit operations.

ANALYSIS

Based upon the content of the query, a UCP 600 article and several sub-articles are directly applicable.

Article 5 states that: ‘Banks deal with documents and not with goods, services or performance to which the documents may relate’.

Sub-article 7 (a) states that provided the stipulated documents are presented to the issuing bank and are compliant, then the issuing bank must honour. Furthermore, as stated in sub-article 7 (b): ‘An issuing bank is irrevocably bound to honour as of the time it issues the credit.’

Sub-article 14 (a) highlights that an issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. In addition, and in accordance with sub-article 14 (b), an issuing bank shall have a maximum of five banking days (emphasis added) following the day of presentation to determine if a presentation is complying.

As stated in sub-article 16 (d), if an issuing bank refuses to honour, then its notice of refusal must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation. Should this not be provided by the close of the fifth banking day following the day of presentation, then, in accordance with sub-article 16 (f), the issuing bank shall be precluded from claiming that the documents do not constitute a complying presentation.

At various times during May-June 2019, four separate presentations were made under the credit. The advising bank, pursuant to a preliminary examination of the documents and electing not to act on its nomination, merely forwarded the documents to the issuing bank.

Based upon the content of the query, no advice of refusal was ever sent by the issuing bank for any of the presentations.

The issuing bank remained silent until 12 August 2019, when a SWIFT message was sent to the advising bank indicating that “the consignments/goods are not as per specification of documentary credit”. This message was clearly outside the required five banking days required by sub-article 16 (d) and, clearly, did not constitute an advice of refusal as required by UCP 600 sub-article 16 (c). As such, sub-article 16 (f) applies, and the issuing bank is precluded from citing any discrepancy and must, therefore, honour in accordance with sub-article 7 (a).

Subsequently, on 7 October 2019, the issuing bank sent a copy of a petition no. 9217 connected to the SWIFT message of 12 August 2019 apparently showing that the issuing bank had to pay a "duty , and that documents had not been delivered to the applicant. Once again, this did not constitute an advice of refusal as required by UCP 600 sub-article 16 (c).

The issuing bank failed to respond further until January 2020, when two of the four presentations were finally honoured, at least in part. The remaining two presentations were never honoured, although the issuing bank stated, on 4 February 2020, that no additional payment could be processed as a new petition had been filed (no. 519/2020) which ‘blocked/froze operations until the High Court issues a judgment’. Eventually, on 17 February 2020, the two remaining presentations were returned to the presenter.

From the text of this query, the issuing bank neither acted in accordance with the doctrine of UCP 600 nor established international standard banking practice in documentary credit operations. Typically, a bank’s actions with regards to credits will occur “without delay”, as noted in various UCP 600 articles and within the timelines stated in UCP 600 for the examination of documents and the refusal thereof (if applicable).

CONCLUSION

1. Agreed. The issuing bank did not act in accordance with UCP 600 sub-articles 14 (b), 16 (c) and 16 (d).

2. Agreed, UCP 600 sub-article 16 (f) is invoked and the issuing bank must honour.

3. Agreed. Banks do not deal with goods, and refusal can only be predicated upon the documents themselves and in line with the timeframes stated in UCP 600 sub-article 16 (d).

4. Agreed. The issuing bank’s actions were not in line with international standard banking practice in documentary credit operations and constitute bad practice.