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Transfered Credit
I recently brought this up at a Law Conference and was not quite sure the response I received was sufficent. We were the advising bank on a transfer. Our role was to review the documents under the credit, determine compliance and send the documents to the bank who transferred the credit. Their role was to substitute the first beneficiary's draft and invoices and apply to the original letter of credit. The transfer called for insurance coverage for 110% of the invoice amount. Documents complied with the transfer and we forwarded to the transfering bank. They came back stating documents did not comply as insurance did not cover 110% of the substitued invoices and they were forwarding documents on approval. The bank that transferred did not confirm the transfer. Two questions: 1) Yes I know the transferring bank is responsible for the accuracy of their transfer but to what degree? Do they have to pay? 2) Should we as the advising bank for the transfer have questioned the fact that the insurance appeared not to have been increased to cover for substitution?
Transfered Credit
Larry,
Just my two cents:
1) The transferring bank should pay the second beneficiary as the bank transferred improperly. However, the second beneficiary may have to sue them to get the money.
2) The advising bank has no duty to question this of the issuing bank. If you happened to notice this and go back to the issuing bank, fine. That's great of you. But honestly, I seriously doubt that any of my advising people would have picked up on something like this and questioned it.
Lisa
Just my two cents:
1) The transferring bank should pay the second beneficiary as the bank transferred improperly. However, the second beneficiary may have to sue them to get the money.
2) The advising bank has no duty to question this of the issuing bank. If you happened to notice this and go back to the issuing bank, fine. That's great of you. But honestly, I seriously doubt that any of my advising people would have picked up on something like this and questioned it.
Lisa
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Larry,
Surprised to hear your role was to determine compliance as I would not expect you to have a nominated bank role if advising a transfer. Perhaps the credit was freely negotiable or available by payment or negotiation and the first beneficiary took advantage of sub-Art 48j?
As to your questions, personally & without any liability or responsibility:
1. I think the answer has to be the product of the applicable law. If it were English, I would anticipate that the transferring bank would have bound the ISSUING bank, as its agent acting within its ostensible authority, and thus the issuing bank would have be liable to the 2nd benef provided the presentation was otherwise complying. The issuing bank would, in turn, then be able to recover any loss it suffered by virtue of the transferring bank’s breach of contract from the transferring bank.
2. I do not believe an advising bank has any duty to a beneficiary to identify possible ‘flaws’ in a credit. After all its principal –the party on whose behalf it is acting- is the issuing or, in this case, transferring bank and not the (second) beneficiary.
Lastly, a bank cannot dispose of documents unless it has taken them up under the credit or obtained the presenter’s agreement. Thus, I find the transferring bank’s apparently unilateral decision to forward the documents to the issuing bank on an ‘approval basis’ quite wrong.
Jeremy
Surprised to hear your role was to determine compliance as I would not expect you to have a nominated bank role if advising a transfer. Perhaps the credit was freely negotiable or available by payment or negotiation and the first beneficiary took advantage of sub-Art 48j?
As to your questions, personally & without any liability or responsibility:
1. I think the answer has to be the product of the applicable law. If it were English, I would anticipate that the transferring bank would have bound the ISSUING bank, as its agent acting within its ostensible authority, and thus the issuing bank would have be liable to the 2nd benef provided the presentation was otherwise complying. The issuing bank would, in turn, then be able to recover any loss it suffered by virtue of the transferring bank’s breach of contract from the transferring bank.
2. I do not believe an advising bank has any duty to a beneficiary to identify possible ‘flaws’ in a credit. After all its principal –the party on whose behalf it is acting- is the issuing or, in this case, transferring bank and not the (second) beneficiary.
Lastly, a bank cannot dispose of documents unless it has taken them up under the credit or obtained the presenter’s agreement. Thus, I find the transferring bank’s apparently unilateral decision to forward the documents to the issuing bank on an ‘approval basis’ quite wrong.
Jeremy
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
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I agree with Jeremy that an Advising Bank (AB) has no duty to check for flaws in the LC, but I regard it as usually in the interests of all (incl AB) to highlight such flaws and address them as appropriate.
Addressing such issues at an early stage usually involves less work and is less complicated than otherwise. It also contributes to good customer relationships.
Laurence
Addressing such issues at an early stage usually involves less work and is less complicated than otherwise. It also contributes to good customer relationships.
Laurence
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JuergenHoltij
- Posts: 9
- Joined: Fri Apr 05, 2019 5:19 pm
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I agree with the comments made before and like to add that to my experience a transfer of a LC requesting insurance cover never works easily. That's why in most cases I did reject to transfer such LC's since they are not workable without going beyond the rules as per article 48. This would only work in cases where the total sum of the LC has been transferred (and mentioned accordingly in the transfer)
Furthermore, the 2nd beneficiary should not forget to "ask" the 1st beneficiary for the countervalue as well, since the contractual agreement is with him. Perhaps he should think not only to sue the transferring bank but also the 1st beneficiary, since the substitution of the invoice (which is acceptance of the documents and make use of them by 1st bene) by the 1st beneficiary did "create" the discrepancy.
This is my personal opinion without any responsibility.
Furthermore, the 2nd beneficiary should not forget to "ask" the 1st beneficiary for the countervalue as well, since the contractual agreement is with him. Perhaps he should think not only to sue the transferring bank but also the 1st beneficiary, since the substitution of the invoice (which is acceptance of the documents and make use of them by 1st bene) by the 1st beneficiary did "create" the discrepancy.
This is my personal opinion without any responsibility.