Article

UCP 500 sub-articles 10(b)(ii) and 10(c)

Recourse to the beneficiary in a negotiation; can the beneficiary and nominated bank agree to effect negotiation for a value less than 100 per cent of the drawing amount?

Query [TA 613]

We are writing to seek an Opinion from the ICC Banking Commission on a point regarding L/C negotiation.

Background

From time to time, L/C beneficiaries, for interest saving reasons, may request the negotiating bank to partially negotiate documents presented under export letters of credit, e.g., if the drawing amount is HK$100, the beneficiary may only request the negotiating bank to negotiate documents to the extent of HK$60.

Assumptions

1. The L/C is available by negotiation with any bank and may or may not call for a draft;

2. The negotiating bank has not confirmed the L/C; and

3. The balance of the L/C proceeds (i.e., HK$40) will be paid to the beneficiary upon receipt of funds from the issuing bank or paying bank.

Queries

1. If the negotiating bank accepted the client's request described above, would such "partial negotiation" be recognized as negotiation under the UCP and would the negotiating bank's interest be recognized up to HK$60?

2. Would the negotiating bank's right of recourse against the L/C beneficiary affect its negotiating bank status? We are of the view that the right of recourse against the L/C beneficiary would not affect the negotiating bank's status. It is because the with or without recourse arrangement is a separate agreement between the negotiating bank and the beneficiary only, whilst the negotiating bank's status is determined pursuant to the contract between the issuing bank and the negotiating bank.

Analysis

UCP 500 sub-article 10(b)(ii) reads: "Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation."

Sub-article 10(c) reads: "Unless the Nominated Bank is the Confirming Bank, nomination by the Issuing Bank does not constitute any undertaking by the Nominated Bank to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate. Except where expressly agreed to by the Nominated Bank and so communicated to the Beneficiary, the Nominated Bank's receipt and/or examination and/or forwarding of the documents does not make that bank liable to pay, to incur a deferred payment undertaking, to accept Draft(s), or to negotiate."

Conclusion

In a credit where the nominated bank has not added its confirmation, any negotiation will normally be subject to some form of recourse to the beneficiary (except where sub-article 10(c) applies). The terms of that negotiation, including the event(s) that may lead to a recourse being exercised, are outside of the UCP and are a matter for agreement between the beneficiary and the nominated bank. This agreement, preferably in writing, would include the form of negotiation and the value thereof. There is no reason why the beneficiary and nominated bank cannot agree to effect negotiation for a value that is less than 100 per cent of the drawing amount. In agreeing to negotiate, the nominated bank has presumably satisfied itself as to the compliance of the documents with the terms of the letter of credit.

Using your example, the nominated bank would have right of recourse to the beneficiary for HK$60 in line with the agreement between that nominated bank and the beneficiary, made at the time of presentation.

UCP 500 sub-articles 23(a)(ii) and 9(b)

Whether a bill of lading has to indicate the name of the vessel onto which the goods will be transhipped; where the confirming bank's undertaking was conditional on the receipt of compliant documents

Query [TA 614]

We, Bank L, would like to have the Opinion of the ICC Banking Commission regarding an on board notation appearing on a bill of lading where goods are transhipped.

We received a L/C issued by a bank in Manila, the Philippines and confirmed by a bank in Country G. In the L/C:

- Transhipment is allowed;

- Loading in charge 44A, Iceland Port;

- For transport to 44B, Manila port.

In The B/L:

- Port of loading is Reykjavik;

- Ocean vessel is Vessel H;

- Port of discharge is Rotterdam;

- Place of delivery is Manila port.

On board notation:

- "Shipped on board Vessel H 01.06.2006 for shipment to Manila port, port of discharge";

- The L/C also stated that all documents must show the L/C number.

We received the following SWIFT MT799 from the confirming bank: "Pls be informed that we found the following discrepancies: B/L: not show vessel name for shipment from Rotterdam to Manila port. In text field mentioned Manila port of discharge but as per B/L it is Rotterdam. The L/C Number not correctly mentioned. Pls authorize us to send documents on approval basis to issuing bank. Meanwhile, we hold documents at your risk and disposal at our counters."

We sent a SWIFT MT799 to the confirming bank arguing that the B/L was correctly issued and that the on board notation fulfilled the requirements of UCP 500. Also, we referred to the conclusions of the ICC Banking Commission regarding this matter. We also mentioned that the error in the L/C number was an obvious typing error (the last two digits of the L/C number were missing.)

The confirming bank replied that it could agree with us that the wrong L/C number was a typing error, but it still insisted that the vessel from Rotterdam to Manila port must be mentioned on the B/L.

Ultimately, the beneficiary instructed that the documents should be forwarded to the issuing bank for payment notwithstanding the dispute, as the goods were about to arrive in Manila.

We would like to have your comment with regard to the on board notation on the B/L. We would also like to know if requesting the confirming bank to forward the documents to the issuing bank releases them from their obligation under the L/C.

Analysis

Sub-article 23(a)(iii) reads: "indicates the port of loading and the port of discharge stipulated in the Credit, notwithstanding that it ... ". Sub-article 9(b) reads: "A confirmation of an irrevocable Credit by another bank (the 'Confirming Bank') upon the authorization or request of the Issuing Bank, constitutes a definite undertaking of the Confirming Bank, in addition to that of the Issuing Bank, provided that the stipulated documents are presented to the Confirming Bank or to any other Nominated Bank and that the terms and conditions of the Credit are complied with."

ISBP paragraph 81 reads: "While the named port of discharge, as required by the credit, should appear in the port of discharge field within the bill of lading, it may be stated in the field headed 'Place of final destination' or the like if it is clear that the goods were to be transported to that place of final destination by vessel, and provided there is a notation evidencing that the port of discharge is that stated under 'Place of final destination' or like term."

Conclusion

Despite the content of UCP 500 subarticle 23(a)(iii), ISBP paragraph 81 provides clarification that should the named port of discharge (in the credit) be shown as the place for final destination (or similar), then a bill of lading including a notation stating that the port of discharge is that which is stated in the credit will make the document acceptable. The bill of lading in question evidences shipment from Rejkjavik to Rotterdam on the Vessel H with transhipment occurring at Rotterdam with final destination Manila port. There is no requirement for the bill of lading to indicate the name of the vessel onto which the goods will be transhipped at Rotterdam. The bill of lading is acceptable.

Sub-article 9(b) provides that the undertaking of the confirming bank is conditional upon their receipt of compliant documents. As the documents actually complied, the undertaking of the confirming bank would stand despite the fact that they were sent on approval. ICC Opinion R. 520 provides the response to the more general application of your question where there are valid discrepancies in the documents.

Miscellaneous

Whether the addition of "Incoterms 2000" on an invoice made the document discrepant

Query [TA 615rev]

I would appreciate if you can provide your Opinion as to whether you consider the invoice to be discrepant in the following circumstances.

An export L/C in favour of a beneficiary in Country M shows the quotation price as CFR Esmeraldas Ecuador. The beneficiary presented his invoice showing CFR Esmeraldas Ecuador, Incoterms 2000. The issuing bank rejected the documents, arguing that the L/C does not reference Incoterms 2000. We, as the confirming bank, contest that this is additional information that should not be considered for the checking of the documents. The issuing bank's view is that the addition of "Incoterms 2000" affects the meaning of the term of sale, as the beneficiary and the applicant may have agreed on another version of the Incoterms (e.g., Incoterms 1990, etc.).

Analysis and conclusion

If the credit shows CFR Esmeraldas Ecuador, the addition of "Incoterms 2000" on the invoice does not make the document discrepant.

URC 522 article 1 and sub-articles 4(b) and 26(c)

Problems in a direct collection where the collection instruction met the requirements of sub-article 4(b) and the collecting bank, a savings bank, neither declined to act according to the instruction nor to act in accordance therewith

Query [TA 616rev]

We kindly ask your official Opinion on the following question regarding URC 522.

As a disagreement in a collection matter has occurred between Bank B in Country P and Bank N in Country D, we, Bank N, should like to have ICC's Opinion on the following subject:

- Remitting Bank: Bank N (A)

- Collecting Bank: Bank B (B)

- Collection item: documents

- Drawer: (C)

- Drawee: (D)

- Type of collection: direct (forwarded by C on behalf of A to B) subject to Uniform Rules for Collections, ICC Publication 522

- Amount and tenor: USD 50.360,24 at first presentation.

1. The documents and collection instruction were sent to B via courier service.

2. The documents were received by B on 30 November 2004.

3. On 10 December 2004, A sent first tracer for payment.

4. During January through June 2005, A sent a number of tracers to B

5. June 2005. The collection was still unpaid, and it became clear that the documents sent for collection were not available at B (A asked B to return the documents, but B seemed unable to do so.)

In June 2005, B made the following comments:

- that documents were never received. (This was contradicted via a print from the courier's website stating precisely who signed for the pouch and at what time);

- that the pouch contained only copy documents (The collection instruction indicated that original documents were enclosed, and B had not previously questioned that);

- that they never received the tracers (It was later discovered that said SWIFT messages were in fact "not acknowledged");

- that since the URC 522 covers bank-tobank transactions, they would expect to receive the original documents directly from A (Documents were sent by C - but clearly "on behalf of A");

- that B is a savings bank and has no international trade operation. In addition, it indicated that it was informed that the drawer had already received the original documents. Therefore, it claimed that it was absolved from any liability. (It is correct that B is a savings bank - owned however by an international bank. The whereabouts of the original documents have never been 100 per cent determined.)

A commented as follows:

- If B were unable to handle collections, it should have advised A upon receipt.

- As to whether the courier contained original or copy documents, B should have determined if the documents listed in the collection instruction matched the ones actually enclosed. B never objected.

- Assuming that only copy documents were enclosed, B should still have followed the instructions if unpaid - i.e., to revert to A for instructions. B never asked for instructions regarding the documents.

- In addition, the documents received (whether originals or copies) should still have been available at B. This, however, was not the case.

The collection is still unpaid, and documents are not available at B. Based on the above, we seek your Opinion as to whether or not B is liable for payment of the collection amount.

Analysis

URC 522 Article 1 states:

"a. The Uniform Rules for Collections, 1995 Revision, ICC Publication No. 522, shall apply to all collections as defined in Article 2 where such rules are incorporated into the text of the 'collection instruction' referred to in Article 4 and are binding on all parties thereto unless otherwise expressly agreed or contrary to the provisions of a national, state or local law and/or regulation which cannot be departed from.

b. Banks shall have no obligation to handle either a collection or any collection instruction or subsequent related instructions.

c. If a bank elects, for any reason, not to handle a collection or any related instructions received by it, it must advise the party from whom it received the collection or the instructions by telecommunication or, if that is not possible, by other expeditious means, without delay."

URC 522 sub-Article 26(c) (3) states: "The presenting bank should endeavour to ascertain the reasons for nonpayment and/or non-acceptance and advise accordingly, without delay, the bank from which it received the collection instruction.

The presenting bank must send without delay advice of non-payment and/or advice of non-acceptance to the bank from which it received the collection instruction.

On receipt of such advice the remitting bank must give appropriate instructions as to the further handling of the documents. If such instructions are not received by the presenting bank within 60 days after its advice of non-payment and/or non-acceptance, the documents may be returned to the bank from which the collection instruction was received without any further responsibility on the part of the presenting bank."

Conclusion

Although this was a direct collection, i.e., one that was instigated by the exporter but utilizing the form of the remitting bank, reference was made to the application of URC 522.

Provided the collection instruction met the requirements of sub-article 4(b), the collecting bank is required either to decline to act according to the instruction (according to sub-article 1(c)) or to act in accordance therewith, including instructions relating to release of documents and advice of non-payment.

From the text of the query, the collecting bank initially denied all knowledge of the collection. The response given in June 2005 to the effect that only copy documents were enclosed is proof of their actual receipt or the location thereof. As this was a direct collection, it is impossible for "A" to know whether or not original documents were enclosed with the collection instruction. For the purposes of collections subject to URC 522, whether the enclosed documents were originals or not does not affect the manner in which the collecting bank is expected to act.

The collecting bank would be expected to either refuse to act under the collection instruction or, having not received an acceptance from the drawee, provide an advice of non-payment. The documents, whether originals or not, would remain at the disposal of "A".

Having failed to act according to the provisions of URC 522, as outlined above, the collecting bank would be responsible for the consequences of such action. However, this case highlights the problems inherent in direct collections sent to a collecting bank that is not necessarily established to handle such transactions.