Transferable credit. Draft substitution

ChantalDuguay · Post by **ChantalDuguay** » Thu May 26, 2011 1:00 am

Bonjour

I am currently reviewing part of my bank’s policies and procedures for transferable credits.
Legal suggested the following clause in the transfer request form which if adopted will change our current practice.

''Where a draft is required under a transferable Credit, the draft of the first beneficiary to be presented in an amount equal to the difference between the amount of the relative drawing authorized and the amount of the draft presented by the Second Beneficiary''

Thanks in advance for providing your thoughts and comments

GlennRansier_olsABN · Post by **GlennRansier_olsABN** » Thu May 26, 2011 1:00 am

I would advise against it as a full policy. Where the LC calls for drafts to be drawn on the issuer/confirmer, etc. it needs to be for the full amount of the combined drawing. Sending two drafts to the issuer could be seen as a discrepancy. UCP 38 h. offers guidance and protections ensuring that the first beneficiary is entitled only to any difference between their and a second beneficiary's inv. value.
I only seek a split in cases of DP or BA where drafts are drawn on my bank and one or the other beneficiary seeks a prepayment.

ChantalDuguay · Post by **ChantalDuguay** » Thu Jun 02, 2011 1:00 am

Dear Glenn

Thanks for your helpful comments

GSham · Post by **GSham** » Thu Jun 09, 2011 1:00 am

You need to educate your Legal on the mechanism of transfer of LC with substitution of documents. The first beneficiary need to present drafts for full amount so that the applicant will not know the first beneficiary's profit margin. UCP allows substitution of drafts and invoices for such reason.

JimBarnes · Post by **JimBarnes** » Thu Jun 09, 2011 1:00 am

A transferring bank that inadvertently disclosed the second beneficiary's documents to the issuer was held liable to the first beneficiary for consequential damages based on lost future business. See Jackson v. Royal Bank of Scotland [2005] UKHL 3. I am not a fan of the reasoning or result in this case, but it is a house of lords decision in an area in which there is very little law and much misunderstanding of the role of transferring banks.

Regards, Jim Barnes

NigelHolt · Post by **NigelHolt** » Fri Jun 10, 2011 1:00 am

What Glenn's and Gsham's postings do seem to take account of is where 'term' drafts are drawn on the issuing bank. Surely the second beneficiary is entitled to have their own draft accepted by the issuing bank? For example, they may wish to have it discounted (pre-paid/purchased) whereas the first beneficiary may not. It is for this reason I am certain an issuing bank is not entitled to refuse separate first and second beneficiarys' drafts.

Furthermore, the issuing bank is -as indicated by Jim Barnes above- not entitled to reveal the the first beneficiary's mark up to the applicant, at least under English law. Of course, this may be apparent from other documents presented under the credsit but that is another matter.