As regards the methods of executing L/Cs' transactions

[DmitriyDorofeev]

Dear Sirs,
We would much obliged to you if you could give us your valuable comments.
The documents are sent by the nominated bank to the address of its branch in the Applicant's country before opening a Letter of Credit.
When the Letter of Credit is opened, the nominated bank sends the notice of negotiation to the issuing bank, and simultaneously instructs the branch to deliver the documents to the issuing bank.
Taking into account the fact that the Letter of Credit provided negotiation at the Beneficiary's bank, we wonder whether such a scheme may take place in L/Cs' transactions and is correct, and what actions should be undertaken by the issuing bank if the documents received allow to infer that the negotiated bank acted in the above mentioned way.
Yours faithfully,

[NigelHolt]

My initial personal views, without responsibility/liability, are:

1. The scenario you have outlined strikes me as being most bizarre. If I have understood it correctly, presentation to -and examination of documents by- the advising(?)-nominated bank takes place prior to the credit being issued (let alone advised).

2. Legally, I would have thought the position would be as follows:

A. At the time documents were presented the credit instrument did not exist.

B. Therefore, documents could not have been presented under -or examined in accordance with- the credit if not presented to the nominated bank, in the designated town/state/country, on or after –at best (from the nominated bank’s point of view)- at least the time of issue. However, it may be that the time the details of the issued credit were notified to the nominated bank, presumably as advising bank, that is material.

C. Consequently, should the issuing bank discover this presentation and ‘examination’ prior to issue (or receipt by the nominated bank of the credit instrument) it would be entitled to refuse, or request refund of, a facially complying presentation.

D. Were the credit expressed to be freely available by negotiation I could see my remarks above not applying.


[edited 2/12/02 10:09:54 AM]

[larryBacon]

In the same way that banks work from copies of credits, it is assumed that the nominated bank checked for original documents where required and took copies of all documents to enable subsequent checking against the L/C when received, before despatching them to its branch. To do otherwise would not only be illegal, but crazy.

Jeremy's point C raises the question of examination of documents prior to issue of the credit. As far as I know there is nothing in UCP, Opinions etc against this, but this does not infer that documents are checked against the credit at that point in time, as this would be impossible. Such examination may be a simple issue of prudence to check for consistency and compliance with the UCP. The full examination could not take place until not only the nominated bank, but the beneficiary has received the L/C.

The sending of documents to the branch in my opinion, is no different to despatching them by courier to the issuing bank, but with an instruction to defer delivery until instructed by the nominated bank to complete the delivery. I see nothing wrong in that, assuming that provisions for checking the documents (see above) have been taken. This assumes that there is no instruction within the L/C indicating how or by whom documents are to be sent to the issuing bank.

In this case, the beneficiary takes a big risk, for example, that documents may be out of date by the time the L/C is received by him, or that amendments are required which may delay "official" presentation resulting also in late presentation. If the underlying transaction indicates transport by air, for example, goods may have been received by the applicant before issue of the L/C. Depending on the integrity of the applicant, this runs the risk that the L/C is not issued or is delayed as a bargaining ploy.

Laurence

[NigelHolt]

Laurence,

Given the rather unusual nature of the query I certainly would not dismiss your views out of hand. However, for me the problem remains that it seems arguable that -as a matter of fact- the documents, in respect of which the nominated bank is claiming rights against the issuing bank, are never in the hands of the nominated bank during the existence of the credit. Therefore, this -I believe- must at least call into question the nominated bank’s rights under sub-Articles 10d & 14a, irrespective of the fact that UCP is silent on the question. Of course, I appreciate from your posting above that you do not share this concern.

Jeremy

[hatemshehab]

I agree with Jeremy that this transaction is bizarre. This transaction is best designed to be on collection basis rather than against a letter of credit since the beneficiary having presented documents even before the establishment of the letter of credit is an evidence of great trust and confidence in the applicant. The beneficiary has already shipped the goods and took the risks of doing so without any reliance on an instrument that could give him protection for that performance. Not only that, the beneficiary presented documents before the receipt of the L/C instrument, which is an evidence of great trust unless the beneficiary is so naïve to do so.

For Jeremy's point C one cannot assume in the absence of any specific UCP article or ICC opinion prohibiting such action, that there might not be legal consequences as a result of this.

1. If the bank is acting in the capacity as a nominated bank, then by definition he has accepted to perform this rule in light of UCP 500 article 10 (d) which provides that:

“By nominating another bank, or by allowing for negotiation by any bank, or by authorising or requesting another bank to add its confirmation, the Issuing Bank authorises such bank to pay, accept Draft(s) or negotiate as the case may be, against documents which appear on their face to be compliance with the terms and conditions of the Credit and undertakes to reimburse such bank in accordance with the provisions of these Articles”

The issuing bank could argue that the nominated bank is precluded from claiming reimbursement under the credit because he did not actually negotiate the document, and even he did not examine them under the terms and conditions of the credit, which was in the labour stage, and not yet born.

2. The nominated bank did not act on the basis of article 13 (a) which provides that:

“Banks must examine all document stipulated in the Credit with reasonable care, to ascertain whether or not they appear, on their face, to be in compliance with the terms and conditions of the Credit”

In view of the above where is the question of examination ageist the credit? The issuing bank could argue that the nominated bank should be held responsible for acting in bad faith and that he should be sued for deception.

3. The nominated bank takes risk with article 13 (b) regarding the calculation of the seven-day period. The beneficiary submitted documents on 1/03/2002 and the nominated bank in country A sent them to its branch in country B on 4/03/2002. The nominated bank received the L/C on 10/03/2002 and on 11/03/2002 he sent the documentary credit schedule to its branch in country B, in this case the period for raising discrepancies has elapsed and the negotiation becomes binding o the nominated bank unless that bank takes precautionary measures against this possibility.

Even if the above is not in question of consideration for the issuing bank, I think that the nominated bank’s action lacks prudence. The nominated bank should have instructed the beneficiary to wait until the L/C is established since presentation of documents itself will not do any benefit for him, let alone the risks associated with that.

[larryBacon]

Jeremy,

I presume that you would not have a problem with this if documents presented before receipt of the L/C were held until such receipt. Subsequently, it would not be unusual for document checkers in the bank to work from copies of both the L/C and documents presented. Therefore, in the case in question, your objection is in putting the cart before the horse in relation to originals only. I must admit that my initial knee-jerk reaction was similar to yours, because it is not a case I have come across before, although I have come close (presenting on date of receipt of L/C).

A similar scenario to consider would be if documents were presented and rejected on first presentation. While the nominated bank held the documents, the cause of the discrepancy is then immediately corrected by amending the L/C. Upon receipt of the amendment the nominated bank is then able to accept documents in order, but, in fact, they had received documents before receipt of the full L/C (incl amendment). Banks would have no problem with this situation, which is similar, but not identical to the item under discussion.

A similar variation would be documents presented against a pre-advice. The nominated bank may be prepared to send the documents in trust to its branch near the issuing bank, whilst awaiting verification on a simple matter such as authenticity of the credit. I think that this would be acceptable, but I would like to hear your opinion.

Nobody has contributed any suggestions regarding why such a situation should arise. I think we would all agree that it must be exceptional. It may happen where there is a long lasting relationship between applicant and beneficiary and the issue of L/Cs is a requirement for importation into the applicant's country. In such a situation of trust, the beneficiary may be prepared to ship goods wanted urgently by the applicant, even before receipt of the L/C. Where speed is of the essence, it may seem appropriate to despatch documents via the nominated bank's branch, to await instruction to forward the docs to the issuing bank upon issue of the L/C.

In this case, the nominated bank would also be taking a great risk, as it is possible that they would not receive the L/C within the max seven days allowed, but there may exist a relationship with the beneficiary or an agreement allowing the nominated bank a choice of date of receipt of documents to suit receipt of the L/C. This is not something I would recommend the bank nor the beneficiary to do under any circumstances, but it happens.

Laurence

[NigelHolt]

Laurence

1. In my current state of knowledge I would not have a problem with documents being presented before receipt of the credit and their being held until such receipt and examined accordingly. However, I do not see my concern as relating “to putting the cart before the horse in relation to originals only”. My concern simply relates to the documents, supposedly presented under the credit, never actually having ever been in the hands of the nominated bank during the life of the credit. In other words, my concern does not relate to the fact that copy documents are examined and not the originals.

2. I do not perceive this as being a similar scenario to documents being presented and rejected on first presentation, retained by the nominated bank and then authority to take them up being given, as here the documents have been in the hands of the issuing bank during the life of the credit.

3. From your description of a ‘pre-advice’ I take it that the credit instrument already exists. Thus, in your example the documents would have been in the hands of the issuing bank during the life of the credit.

4. Whatever the reasons for such an arrangement, I personally would refuse to agree to them, if they were proposed by an applicant-customer, on reputational grounds alone, i.e. the possible consequences of it being discovered one was (considered to be) deliberately misleading the issuing bank.

Jeremy

[larryBacon]

Jeremy,

1. The original & copy issue I mentioned presumed that the nominated bank took copies of the documents before sending them, temporarily, to its branch. Therefore, when the original L/C arrived, the copy docs could be checked against the original L/C. As already happens in banks, when simultaneous double checking of a presentation occurs, at least one set of docs is checked against copies. This is the similarity to which I alluded. So, when you talk about the docs never being in the hands of the nominated bank during the life of the credit, in fact you mean the original docs. We have not been given information about the docs required under the credit. It may be that only copy docs were required. Since copies held in the hands of the nominated bank is as valid as copies held by their branch, then they would indeed have received a presentation during the lifetime of the credit.

2. If docs are checked against an L/C which includes accepted amendments, to omit the amendments would be to check against an incomplete L/C. Therefore in my example, the nominated bank received docs against an incomplete L/C.

3. On the contrary, a pre-advice can only be issued if the L/C in question cannot be advised. It may/may not have been issued, but the advising bank may not have been able to authenticate it etc. Thus the content may be sent as a pre-advice, but always with the caveat that this is NOT an advice of a credit, as this has not yet been established to the satisfaction of the advising bank.

4. I agree for various reasons that all concerned would be best served to steer clear of this situation.

Laurence

[NigelHolt]

Laurence,

I've noted your views.

Jeremy