Parties

Initiator: Company C, Country C

Respondent:Bank B, Country C

Summary of the representations

  • On 25 November 1997, the Respondent issued a letter of credit by order of the Initiator for USD 2,417,000, in favour of Company E., valid until 31 December 1999.

  • The letter of credit was advised through Bank S, available with any bank by negotiation. The letter of credit was subject to the UCP 500.

  • A payment of USD 966,800 was due on 18 December 1998 (i.e. 360 days after the B/L date of the last shipment), in accordance with the terms of the letter of credit.

  • Upon instructions of the beneficiary, Bank F requested the issuing bank on 18 December 1998 to extend the maturity of the payment due on 18 December 1998. On the basis of the applicant's agreement, the issuing bank extended the due date of the payment on 1 January 1999 to read 455 days after the B/L date of the last shipment (i.e. 25 March 1999).

  • On 16 March 1999, the Respondent advised Bank F that documents for USD 966,800 were received but that the bill will not be honored because the applicant had asked not to pay the bill due to serious quality problems of goods.

Determination of the issues with reasons

The dispute under consideration is the result of the clause "The opening bank have the right to deduct the claim amount from the payment under negotiation mentioned above directly with the applicant's applications", contained in the letter of credit. The issuing bank's refusal to pay was based on this clause.

It is most unusual (and certainly against the spirit of UCP 500) for a letter of credit to contain a clause giving the issuing bank the right to deduct, at the instructions of the applicant, a claim amount from the payments under negotiations against conforming documents.

Furthermore, the wording of the clause does not contain any specific information regarding a possible maximum claim amount, latest date for a claim to be considered, or details regarding the conditions for such a claim to be acceptable as a valid deduction from proceeds under the letter of credit.

Letters of credit are separate transactions from the contract on which they may be based (UCP sub-Article 3(a)), and the undertaking of a bank is not subject to claims or defences by the applicant resulting from his relationship with the beneficiary.

Therefore, only the text of the letter of credit and not any particulars of the underlying contract (such as paragraph 19.2 referred to in the documentation) are to be considered. The wording of the clause "The opening bank" must be interpreted to give the issuing bank the right to effect certain deductions from payments under the credit upon the applicant's instruction.

Conclusion and decision

We feel that a beneficiary who accepts a letter of credit containing a clause permitting the issuing bank to deduct certain amounts from payments under the letter of credit does so at his own risk.

Though the condition in the credit is undesirable, our conclusion is that the issuing bank is entitled to deduct the claim amount from payments under the letter of credit.