Most DC's we see being issued covering sea shipments have as one of their conditions presentation of a full set of B/L's issued to the order of the issuing bank In some DC's, however, the applicant requires 1/3 B/L to be sent to him directly for the reason of expediting release of goods from the port. Although the 1/3 B/L is still made to the order of the issuing bank, there are additional risks taken by the issuing bank: (1) Misuse of the original B/L by the applicant (2) Release of goods prior to presentation of documents under the DC and hence prior to completing the process of honouring or negotiation or refusal to honour.
Risk (1) relates to the customer assessment & customer relationship management and risk (2) in case of discrepancies could lead to applicant's refusal of documents. This risk could be mitigated by obtaining a prior waiver of discrepancies from the applicant, treating it in a similar way when a shipping guarantee is issued.
Having seen the Official Opinion R252 -1997, do you agree that incorporating such a condition in the DC exposes the issuing bank to an additional credit risk?
Regards
Dimitri
Consequences of 1/3 B/L being sent to the applicant
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DimitriScoufaridis
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Consequences of 1/3 B/L being sent to the applicant
Dimitri,
I am not sure what you mean by ‘additional CREDIT risk’.
I certainly see no risk to an issuing bank where the BL sent to the applicant is not made out or endorsed to the issuing bank (assuming the issuing bank is not -as is the case in most instances- looking to the goods as security for the transaction).
However, if the BL sent to the applicant is made out or endorsed to the issuing bank (something which I would find rather odd as to me it defeats the object of the exercise) and the issuing bank endorses it and delivers it back to the applicant, then one cannot, I believe, rule out the possibility that the issuing bank might incur a liability to the beneficiary / presenter if non-complying documents are not honoured. So yes, I see strong parallels with where an issuing bank issues a missing bills of lading indemnity in respect of bills of lading that have yet to be received under a documentary credit (something I imagine is a rare and exceptional occurrence).
I am not sure what you mean by ‘additional CREDIT risk’.
I certainly see no risk to an issuing bank where the BL sent to the applicant is not made out or endorsed to the issuing bank (assuming the issuing bank is not -as is the case in most instances- looking to the goods as security for the transaction).
However, if the BL sent to the applicant is made out or endorsed to the issuing bank (something which I would find rather odd as to me it defeats the object of the exercise) and the issuing bank endorses it and delivers it back to the applicant, then one cannot, I believe, rule out the possibility that the issuing bank might incur a liability to the beneficiary / presenter if non-complying documents are not honoured. So yes, I see strong parallels with where an issuing bank issues a missing bills of lading indemnity in respect of bills of lading that have yet to be received under a documentary credit (something I imagine is a rare and exceptional occurrence).
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ThuHoangAnh_
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Consequences of 1/3 B/L being sent to the applicant
Hi,
That one set of documents including 1/3 original b/l is required to be sent to the applicant within a certain time after shipment is quite common, especially when the goods are expected to arrive at the port before the documents reach the issuing bank’s counter.
There’s no risk to the issuing bank if the b/l is made out to the order of the issuing bank. If the applicant wants to take delivery of the goods, he must have the b/l endorsed by the issuing bank. And the issuing bank would endorse the b/l only after receipt from the applicant of his acceptance of payment and waiver of discrepancies, or only after the applicant has fulfilled his obligation toward the issuing bank under the contract for opening L/C.
Best regards,
N.H. Duc
That one set of documents including 1/3 original b/l is required to be sent to the applicant within a certain time after shipment is quite common, especially when the goods are expected to arrive at the port before the documents reach the issuing bank’s counter.
There’s no risk to the issuing bank if the b/l is made out to the order of the issuing bank. If the applicant wants to take delivery of the goods, he must have the b/l endorsed by the issuing bank. And the issuing bank would endorse the b/l only after receipt from the applicant of his acceptance of payment and waiver of discrepancies, or only after the applicant has fulfilled his obligation toward the issuing bank under the contract for opening L/C.
Best regards,
N.H. Duc
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DimitriScoufaridis
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Consequences of 1/3 B/L being sent to the applicant
Jeremy,
In the case of a customer's credit line approved for sight credits, the issuing bank is looking to the goods as a security to the transaction. However, if such a DC condition is introduced then control of merchandise is hindered and the bank is exposed to an additional credit risk which has to be taken into account at the time of issuance.
Regards
Dimitri
In the case of a customer's credit line approved for sight credits, the issuing bank is looking to the goods as a security to the transaction. However, if such a DC condition is introduced then control of merchandise is hindered and the bank is exposed to an additional credit risk which has to be taken into account at the time of issuance.
Regards
Dimitri
Consequences of 1/3 B/L being sent to the applicant
Dimitri,
Are you suggesting that the norm is for the issuing bank, where a credit is available at sight, to be looking to the goods as security ?
If so, this is news to me. I would expect most banks usually to base their decision to issue a doc. credit on the balance sheet strength of the applicant, together possibly with security held, and not be in the slightest bit concerned with the goods. Therefore, I would not anticipate a bill of lading going direct to the applicant as normally creating an additional ‘credit’ risk.
Perhaps practice in this respect varies from bank to bank, country to country or region to region?
Regards, Jeremy
Are you suggesting that the norm is for the issuing bank, where a credit is available at sight, to be looking to the goods as security ?
If so, this is news to me. I would expect most banks usually to base their decision to issue a doc. credit on the balance sheet strength of the applicant, together possibly with security held, and not be in the slightest bit concerned with the goods. Therefore, I would not anticipate a bill of lading going direct to the applicant as normally creating an additional ‘credit’ risk.
Perhaps practice in this respect varies from bank to bank, country to country or region to region?
Regards, Jeremy
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DimitriScoufaridis
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Consequences of 1/3 B/L being sent to the applicant
Jeremy,
No this is not I'm suggesting. The security of the goods in one of available options (way out) in case of the customer's payment default. Certainly the decision is based on the financial assessment of the customer. However, some banks have their letter of credit facilities approved for sight and/or usance DC's, others categorize them into "with control of merchandise" or "without control of merchandise" DC's. I'm referring to those banks that differentiate between sight and usance DC credit lines.
Regards
Dimitri
No this is not I'm suggesting. The security of the goods in one of available options (way out) in case of the customer's payment default. Certainly the decision is based on the financial assessment of the customer. However, some banks have their letter of credit facilities approved for sight and/or usance DC's, others categorize them into "with control of merchandise" or "without control of merchandise" DC's. I'm referring to those banks that differentiate between sight and usance DC credit lines.
Regards
Dimitri
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GlennRansier_
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Consequences of 1/3 B/L being sent to the applicant
Where an issuer endorses a BL prior to original credit documents being received they are generally accepting the same liabilities as if they had issued a steamship guarantee. However, they should always examine the documents once received. If discrepant they should refuse.
Some general bank risks include:
1. Receiving credit documents that far exceed the expected credit value.
2. Carrier costs and or carrier legal costs that exceed the credit value.
3. Applicant claiming bankruptcy.
Some general bank risks include:
1. Receiving credit documents that far exceed the expected credit value.
2. Carrier costs and or carrier legal costs that exceed the credit value.
3. Applicant claiming bankruptcy.
Consequences of 1/3 B/L being sent to the applicant
Glenn,
I am possibly guilty of nit picking but to me the liabilities the bank concerned in the two situations you describe are quite different even though the issuing bank will, if it is prudent, require from the Credit applicant an undertaking that they will agree to waive any discrepancies in the documents in both cases.
In the case of a missing bill of lading indemnity (BLI) the bank’s obligations are to the carrier alone and usually go beyond the value of the goods. (However, I am willing to accept the possibility that a court just might decide that the giving of the BLI created a liability to the beneficiary although I am generally sceptical.)
In the case of the issuing bank endorsing a BL sent to the applicant and prior to receipt of the Credit presentation, there is obviously not any obligation created to the carrier and it is by no means certain that it creates an obligation to the beneficiary. However, I accept that a court might -and I would emphasise the word ‘might’- decide it was an implied term of the Credit contract that the issuing bank would only endorse the BL if the documents were honoured by it.
Lastly, I do not see any point in examining, let alone refusing, the presentation if the applicant has committed itself to waiving discrepancies except for possibly where the Credit is substantially ‘overdrawn’ and honour would create a loss to the issuing bank.
Lastly, are you aware of any statute or case law, whether in the USA or elsewhere, regarding either situations? I am not.
Regards, Jeremy
[edited 4/21/2009 3:01:33 PM]
I am possibly guilty of nit picking but to me the liabilities the bank concerned in the two situations you describe are quite different even though the issuing bank will, if it is prudent, require from the Credit applicant an undertaking that they will agree to waive any discrepancies in the documents in both cases.
In the case of a missing bill of lading indemnity (BLI) the bank’s obligations are to the carrier alone and usually go beyond the value of the goods. (However, I am willing to accept the possibility that a court just might decide that the giving of the BLI created a liability to the beneficiary although I am generally sceptical.)
In the case of the issuing bank endorsing a BL sent to the applicant and prior to receipt of the Credit presentation, there is obviously not any obligation created to the carrier and it is by no means certain that it creates an obligation to the beneficiary. However, I accept that a court might -and I would emphasise the word ‘might’- decide it was an implied term of the Credit contract that the issuing bank would only endorse the BL if the documents were honoured by it.
Lastly, I do not see any point in examining, let alone refusing, the presentation if the applicant has committed itself to waiving discrepancies except for possibly where the Credit is substantially ‘overdrawn’ and honour would create a loss to the issuing bank.
Lastly, are you aware of any statute or case law, whether in the USA or elsewhere, regarding either situations? I am not.
Regards, Jeremy
[edited 4/21/2009 3:01:33 PM]
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GlennRansier_
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Consequences of 1/3 B/L being sent to the applicant
Hi Jeremy,
The LOI and the endorsing of a BL are somewhat different in nature but both result with an applicant receiving goods that they may not have initially paid for. While either may have occurred because of an LC that was issued, I would also argue that both occur outside of the LC since credits themselves and UCP do not discuss when a BL is to be endorsed nor LOI's. The action/obligation is separate and distinct from the LC.
However, UCP is very clear that banks deal in documents under the LC and that the issuer has an obligation to examine presented documents for compliance. Forcing someone to waive discrepancies is, in my humble opinion, not the correct approach and it may not relieve an issuer from performing its UCP duties nor may it be in the best interest of the issuer.
Some time ago banks were getting into trouble when certain beneficiaries would purposely hold the documents causing an LOI to be issued and then doubling and or tripling the invoice value.
Endorsing as a named consignee versus issuing LOI's I am sure have some different legal connotations. I am not a legal professional so I cannot address any nuances. However, my guess is that, in both instances, the bank is in some way indebted to the carrier for the carrier's fees and may hold them harmless from legal claims.
In either case, the bank is taking a risk. I would rate the risk as minor but there are risks associated. Banks in the US generally post a LC as a contingent risk and the issuance of an LOI as a contingent risk because both actions bear different risks to different parties. Bankers should also understand that while a LC or collection may be for a minor amount, the obligation to a carrier may be higher and they may need to account for this possibility in their contingent liability posting.
The LOI and the endorsing of a BL are somewhat different in nature but both result with an applicant receiving goods that they may not have initially paid for. While either may have occurred because of an LC that was issued, I would also argue that both occur outside of the LC since credits themselves and UCP do not discuss when a BL is to be endorsed nor LOI's. The action/obligation is separate and distinct from the LC.
However, UCP is very clear that banks deal in documents under the LC and that the issuer has an obligation to examine presented documents for compliance. Forcing someone to waive discrepancies is, in my humble opinion, not the correct approach and it may not relieve an issuer from performing its UCP duties nor may it be in the best interest of the issuer.
Some time ago banks were getting into trouble when certain beneficiaries would purposely hold the documents causing an LOI to be issued and then doubling and or tripling the invoice value.
Endorsing as a named consignee versus issuing LOI's I am sure have some different legal connotations. I am not a legal professional so I cannot address any nuances. However, my guess is that, in both instances, the bank is in some way indebted to the carrier for the carrier's fees and may hold them harmless from legal claims.
In either case, the bank is taking a risk. I would rate the risk as minor but there are risks associated. Banks in the US generally post a LC as a contingent risk and the issuance of an LOI as a contingent risk because both actions bear different risks to different parties. Bankers should also understand that while a LC or collection may be for a minor amount, the obligation to a carrier may be higher and they may need to account for this possibility in their contingent liability posting.