Laurence
I now understand to what you were referring and quite agree with you that there would not appear to be any document stipulated in the L/C to which the issuing bank can refer to denote that the relevant event has occurred. However, I personally would not have any sympathy for a bank that issued such a credit that had not thought through how it was going to establish, to the satisfaction of a court if needs be, if the necessary event(s) had occurred.
Jeremy
Soft clauses
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Soft clauses
Credits containing clauses as such are encountered in so many places in the world. These clauses rendere the credit an un-operative status.
Sometimes I wonder why the issuing banks are inclined to lend their names for such defective types of credits although the applicant might argue that these conditions are acceptable by the beneficiary. The clauses contained in the credit defeats the purpose and defy the basic principle of the letters of credit as an independent medium of payment on the part of the issuing bank against stipulated documents. If the credit is held in abeyance pending a forthcoming document from an applicant then there is no use of the whole instrument in this case, because the beneficiary might find himself at the mercy of the applicant or even the issuing bank.
The bank issuing such credits should consider a number of issues
1. The credit is in itself inconsistent as the payment mechanism is dependent on the clause that states “payment under the credit will only be made once the goods have been cleared through customs or have been approved for importation by a competent authority at their destination.” At the same time the credit designate itself as irrevocable and is subject to UCP500 article 9(a) that states, “ an irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated or to the issuing bank and that the terms and conditions of the credit are complied with”
2. The issuing bank faces a danger if the beneficiary manages to present to the nominated bank a document (forged)stating that the goods have been cleared through customs authorities, then the nominated bank will be protected by article 15 against the issuing bank.
3. The issuing bank might be challenged with a lawsuit from the beneficiary for male fides action.
4. I agree with Laurance that the clause is non-documentary. This will make things worse to the issuing bank if there is any litigation for this credit.
Put on the Underwear before the Pants
As for the applicant, the issue of clearing goods from customs should be dealt with prior to establishing the L/C. the applicant should know well in advance the official regulations regarding the goods. If there is a requirement for inspection test prior to clearance then the applicant could ask for an inspection certificate at the port of discharge. The stipulation as such is exactly putting on the underwear after wearing the pants. Logically and common sense says that the underwear should be put on before wearing the pants.
I would advise the issuing bank or the nominated bank equally to advise their respective clients to stipulate/amend to include a deadline for submission of a document from the applicant to that effect. This will preclude the issuing bank from any of the above dangers and it will secure that irrevocable payment undertaking in the credit.
Sometimes I wonder why the issuing banks are inclined to lend their names for such defective types of credits although the applicant might argue that these conditions are acceptable by the beneficiary. The clauses contained in the credit defeats the purpose and defy the basic principle of the letters of credit as an independent medium of payment on the part of the issuing bank against stipulated documents. If the credit is held in abeyance pending a forthcoming document from an applicant then there is no use of the whole instrument in this case, because the beneficiary might find himself at the mercy of the applicant or even the issuing bank.
The bank issuing such credits should consider a number of issues
1. The credit is in itself inconsistent as the payment mechanism is dependent on the clause that states “payment under the credit will only be made once the goods have been cleared through customs or have been approved for importation by a competent authority at their destination.” At the same time the credit designate itself as irrevocable and is subject to UCP500 article 9(a) that states, “ an irrevocable credit constitutes a definite undertaking of the issuing bank, provided that the stipulated documents are presented to the nominated or to the issuing bank and that the terms and conditions of the credit are complied with”
2. The issuing bank faces a danger if the beneficiary manages to present to the nominated bank a document (forged)stating that the goods have been cleared through customs authorities, then the nominated bank will be protected by article 15 against the issuing bank.
3. The issuing bank might be challenged with a lawsuit from the beneficiary for male fides action.
4. I agree with Laurance that the clause is non-documentary. This will make things worse to the issuing bank if there is any litigation for this credit.
Put on the Underwear before the Pants
As for the applicant, the issue of clearing goods from customs should be dealt with prior to establishing the L/C. the applicant should know well in advance the official regulations regarding the goods. If there is a requirement for inspection test prior to clearance then the applicant could ask for an inspection certificate at the port of discharge. The stipulation as such is exactly putting on the underwear after wearing the pants. Logically and common sense says that the underwear should be put on before wearing the pants.
I would advise the issuing bank or the nominated bank equally to advise their respective clients to stipulate/amend to include a deadline for submission of a document from the applicant to that effect. This will preclude the issuing bank from any of the above dangers and it will secure that irrevocable payment undertaking in the credit.
Soft clauses
Hatem,
There is little in what you have said with which I would demur.
However, with regard to your last para (and possibly your point 2), my view remains it is better simply for a nominated bank to state at the outset -to both the issuing bank and beneficiary- that it is not prepared to perform any nominated bank role and to leave the beneficiary to arrange any amendments should the credit not be acceptable to it. This, of course, rules out the possibility of confirmation.
With respect to your first two paragraphs, these ‘soft’ credits are not necessarily valueless to a beneficiary. If payment is contingent on goods being cleared through customs, for example, then I would anticipate that -provided compliant documents had been presented by the beneficiary- the issuing bank would be bound, in law, to make payment once -as a question of fact- this event had occurred. Nonetheless, like you, I would be most averse to agreeing to issue one.
Regards, Jeremy
There is little in what you have said with which I would demur.
However, with regard to your last para (and possibly your point 2), my view remains it is better simply for a nominated bank to state at the outset -to both the issuing bank and beneficiary- that it is not prepared to perform any nominated bank role and to leave the beneficiary to arrange any amendments should the credit not be acceptable to it. This, of course, rules out the possibility of confirmation.
With respect to your first two paragraphs, these ‘soft’ credits are not necessarily valueless to a beneficiary. If payment is contingent on goods being cleared through customs, for example, then I would anticipate that -provided compliant documents had been presented by the beneficiary- the issuing bank would be bound, in law, to make payment once -as a question of fact- this event had occurred. Nonetheless, like you, I would be most averse to agreeing to issue one.
Regards, Jeremy
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JudithAutié
- Posts: 195
- Joined: Fri Apr 05, 2019 5:20 pm
Soft clauses
Working with Middle Eastern banks on a regular basis, we have had many such credits containing the same soft clauses, which were always covering foodstuff. In every case, the beneficiary was aware that this clause would be inserted in the credit and had accepted the principle (albeit sometimes extremely reluctantly). Nevertheless we always put on our advices to the beneficiary that payment would only be effected by us provided we received specific instructions from the issuing bank to that effect. Sometimes amendments have been obtained stating that if an advice of rejection was not received by the advising bank prior to a certain deadline, payment was to be effected automatically.
Beneficiaries often request our confirmation of such credits, in order to cover the political risks of non-payment.
I have often suggested that these types of credits be issued in the form of standbys, payable against proof of having passed the necessary inspections on import and beneficiary's declaration of non-payment. However unfortunately standbys do not have the wider acceptance I think they deserve.
Beneficiaries often request our confirmation of such credits, in order to cover the political risks of non-payment.
I have often suggested that these types of credits be issued in the form of standbys, payable against proof of having passed the necessary inspections on import and beneficiary's declaration of non-payment. However unfortunately standbys do not have the wider acceptance I think they deserve.
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Soft clauses
Jeremy,
As for point 2, I have raised it to caution the nominated bank of such an inherent risk in this letter of credit. It is prudent that the nominated bank does not play the designated role assigned to him as such and just restricting itself to being an advising bank would be the right course of action.
As for the soft claused L/Cs, yes they might be accepted by the beneficiary who might be keen to increase his sales and who have a degree of confidence in the applicant, however in my banking experience I have found that this is not in all cases. I remember once that we have issued a letter of credit stipulating that: “15% of the documents value will be paid on collection upon the successful commission and installation of the machinery”
The beneficiary was chasing us for almost 7 months and the payment was unlikely to be forthcoming because the applicant did not authorize us to do so. We were financing the transaction of the applicant who is our customer. The bank gave him a loan to enable him meet his liabilities as he was expanding his business in textiles. We also at some point came to know that the machinery was functioning well but the applicant was trying to twist the arm of the disparate beneficiary who was in need for foreign currency.
You can see such a cocktail L/C, which is stipulating that it is irrevocable, subject to UCP 500 and at the same time contains such a condition which is not expressly state that it is subject to URC nor the method of payment. To our surprise the beneficiary came in person to the bank as he was touring in the area to promote his business. Our manager called the applicant who was taken aback by seeing the beneficiary in flesh and blood in the issuing bank’s main office, a possibility once in a billion. Our senior manager literally pressurized the applicant to settle the 15% outstanding to the beneficiary. At that time the beneficiary brought with him a set of documents for another L/C applied for from the same customer.
In other cases, sometimes people do things because they have been doing it for many years. It might be because of ignorance or because they simply resist change. Other possibility is that the bank does not want to decline services to prime customers who might find that a neighbouring bank willing to issue such a defective L/C or even worse. Therefore the issue does really relate to the policies and procedures of the bank, whether the bank want to uphold to the principles of the international standard banking practices or to comprise that in favour of an increment of business targets? A question left for the issuing bank to consider!
Judith
Your reference to standbys is interesting because standby seem to recognize such a dilemma. Rule 4.10 state: “A standby should not specify that a required document be issued, signed, or counter-signed by the applicant. However, if the standby includes such a requirement, the issuer may not waive the requirement and is not responsible for the applicant's withholding of the document or signature.”
These wordings seem to recognize that there is a room for such credits, although they are discouraged but not banned.
As for point 2, I have raised it to caution the nominated bank of such an inherent risk in this letter of credit. It is prudent that the nominated bank does not play the designated role assigned to him as such and just restricting itself to being an advising bank would be the right course of action.
As for the soft claused L/Cs, yes they might be accepted by the beneficiary who might be keen to increase his sales and who have a degree of confidence in the applicant, however in my banking experience I have found that this is not in all cases. I remember once that we have issued a letter of credit stipulating that: “15% of the documents value will be paid on collection upon the successful commission and installation of the machinery”
The beneficiary was chasing us for almost 7 months and the payment was unlikely to be forthcoming because the applicant did not authorize us to do so. We were financing the transaction of the applicant who is our customer. The bank gave him a loan to enable him meet his liabilities as he was expanding his business in textiles. We also at some point came to know that the machinery was functioning well but the applicant was trying to twist the arm of the disparate beneficiary who was in need for foreign currency.
You can see such a cocktail L/C, which is stipulating that it is irrevocable, subject to UCP 500 and at the same time contains such a condition which is not expressly state that it is subject to URC nor the method of payment. To our surprise the beneficiary came in person to the bank as he was touring in the area to promote his business. Our manager called the applicant who was taken aback by seeing the beneficiary in flesh and blood in the issuing bank’s main office, a possibility once in a billion. Our senior manager literally pressurized the applicant to settle the 15% outstanding to the beneficiary. At that time the beneficiary brought with him a set of documents for another L/C applied for from the same customer.
In other cases, sometimes people do things because they have been doing it for many years. It might be because of ignorance or because they simply resist change. Other possibility is that the bank does not want to decline services to prime customers who might find that a neighbouring bank willing to issue such a defective L/C or even worse. Therefore the issue does really relate to the policies and procedures of the bank, whether the bank want to uphold to the principles of the international standard banking practices or to comprise that in favour of an increment of business targets? A question left for the issuing bank to consider!
Judith
Your reference to standbys is interesting because standby seem to recognize such a dilemma. Rule 4.10 state: “A standby should not specify that a required document be issued, signed, or counter-signed by the applicant. However, if the standby includes such a requirement, the issuer may not waive the requirement and is not responsible for the applicant's withholding of the document or signature.”
These wordings seem to recognize that there is a room for such credits, although they are discouraged but not banned.
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StankaJurca
- Posts: 8
- Joined: Fri Apr 05, 2019 5:27 pm
Soft clauses
I wish to add to all opinions my personal one. I think that recetly we are all dancing arround the Publication UCP 500, which is only the additional tool and not a deity, a tool which uniforms dealing with Letters of Credit and is, normally, the aid in performing this banking service and the aid in case of disputes between banks. But we must not forget the initial purpose of Letters of Credit, which must not be lost between articles of UCP 500. The UCP 500 must be used by us and not opposite.
So called "soft L/C" in a no way differs to other L/Cs in its basic function. The banks in fact does not deal with goods, but nevertheless all start with goods. In this case the seller is aware of nature of his goods, he is aware that some goods have to pass examination before entering the importing country. This is the fact in case of open account, collection, guarantee and no L/C can not change this fact.
Furthermore the L/C has not lost its strength. The seller chooses the L/C for the same reason as in cases of ordinary goods. We have here two steps, instead of one only, upto the point when goods must be paid: Health and/or Customs clearance in addition to despatch of goods. Second step is not only out of the seller's control but also, we must not forget, out of the buyer's control. Why our thoughts are always on the beneficiary's side, when also the applicant to the L/C can suffer, esspecially in cases of goods which require import Health clearance.
Now, when starting from the point when goods must be paid, the L/C has its original intact, uncurtailed role also when covering shipment of goods, which from their nature require clearance by Health and/or Customs Authorities. After clearance the bank will pay the documents complying with L/C terms. The payment decision is not in buyers hands but in Health and/or Customs Authorities and issuing bank's hands. So the payment does not depend on buyers willingness to pay or buyer's capacity to pay. Those who are saying that such "soft clause" L/C represents the open account are awfully wrong.
It is only the question of mechanism outside of L/C, which will allow only to seller, the beneficiary of the L/C, to put his hands on the document issued by Health or similar Authorities, when issued, and to present it under L/C. There are also L/Cs which have a time boundary in which such documents must be issued, otherwise the L/C is nevertheless paid after that time limit.
So called "soft L/C" in a no way differs to other L/Cs in its basic function. The banks in fact does not deal with goods, but nevertheless all start with goods. In this case the seller is aware of nature of his goods, he is aware that some goods have to pass examination before entering the importing country. This is the fact in case of open account, collection, guarantee and no L/C can not change this fact.
Furthermore the L/C has not lost its strength. The seller chooses the L/C for the same reason as in cases of ordinary goods. We have here two steps, instead of one only, upto the point when goods must be paid: Health and/or Customs clearance in addition to despatch of goods. Second step is not only out of the seller's control but also, we must not forget, out of the buyer's control. Why our thoughts are always on the beneficiary's side, when also the applicant to the L/C can suffer, esspecially in cases of goods which require import Health clearance.
Now, when starting from the point when goods must be paid, the L/C has its original intact, uncurtailed role also when covering shipment of goods, which from their nature require clearance by Health and/or Customs Authorities. After clearance the bank will pay the documents complying with L/C terms. The payment decision is not in buyers hands but in Health and/or Customs Authorities and issuing bank's hands. So the payment does not depend on buyers willingness to pay or buyer's capacity to pay. Those who are saying that such "soft clause" L/C represents the open account are awfully wrong.
It is only the question of mechanism outside of L/C, which will allow only to seller, the beneficiary of the L/C, to put his hands on the document issued by Health or similar Authorities, when issued, and to present it under L/C. There are also L/Cs which have a time boundary in which such documents must be issued, otherwise the L/C is nevertheless paid after that time limit.
Soft clauses
Interesting and, to me, well argued views. However, to others grand heresy?
Soft clauses
Interesting reading but the answer is quite simple. An L/C with such a condition is not an Irrevocable L/C as we know it and should not be treated as such.
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StankaJurca
- Posts: 8
- Joined: Fri Apr 05, 2019 5:27 pm
Soft clauses
Sorry! I don't agree! It is still the Irrevocable L/C. In case the relevant document is produced, the bank will pay. In case the beneficiary fails to produce it, the bank will not pay. The bank is irrevocably bound to pay in case the condition is fulfilled. If the condition is not acceptable to the beneficiary, he may reject the L/C and despatch the goods on open account or find a country without such import legislation. I am sure that no country would change their import legislation only for the reason that de jure Irrevocable L/C will also be de facto irrevocable in view of UCP500. The best thing to do is to include the relevant document in L/C terms or to arrange that relevant document be delivered to the beneficiary for presentation under L/C with such 'soft' clause.
As already mentioned the beneficiary is aware of the nature of his goods and he expects such 'soft' clause 'irrevocable' L/C.
As already mentioned the beneficiary is aware of the nature of his goods and he expects such 'soft' clause 'irrevocable' L/C.
Soft clauses
Sorry - I did not make myself clear. I meant as far as the beneficiary is concerned the L/C could be considered as worthless as there are conditions outwith his control.