I POST THIS QUERY UPON REQUEST FROM A PERSON WHO ADVISED THAT THERE IS DEBATE ON HIS BANK OF THIS PROCEDURE.
QUOTE
Dear Mr. Shehab,
Please post this query on the DC PRO if possible
As I understand the nominated bank has seven banking day to examine the documents and determine whether to take them up or refuse them and inform the party from which it received the documents accordingly. My question is that can we (the nominated bank) defer the payment until the issuing bank utilizes its reasonable time (7 days maximum) to ensure that documents are really in order and then we will release the payment to the beneficiary. In other words we will not pay the beneficiary until we get reimbursed from the issuing bank despite the fact that we have negotiated the documents and to our best knowledge they are in order, however we will not inform the beneficiary that we have negotiated them because we might have overlooked a discrepancy that might be detected by the issuing bank.
Thank you.
UNQUOTE
[edited 5/27/02 6:02:59 AM]
Deferring payment upon reimbursement from issuing bank.
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Deferring payment upon reimbursement from issuing bank.
It seems that the bank doesn't know its role or it is not confident either of its ability to properly check documents or has doubts on the credibility of the issuing bank.
The bank should clearly advise the beneficiary and the issuing bank that it would not want to act as the nominated paying bank (if that is the nomination for) and does not want to negotiated drafts drawn under the credit. It might opt to examine the documents but not negotiate and pay drafts. The seven-business-days period is the maximum period allowed for examining documents. Depending on the circumstance prevailing at the time of examining documents, complexity of the transactions etc. the period allowed could vary but in any case should not exceed the limit stated above. So it is not necessary that the beneficiary should wait for the seven-business-days to get paid.
The bank should clearly advise the beneficiary and the issuing bank that it would not want to act as the nominated paying bank (if that is the nomination for) and does not want to negotiated drafts drawn under the credit. It might opt to examine the documents but not negotiate and pay drafts. The seven-business-days period is the maximum period allowed for examining documents. Depending on the circumstance prevailing at the time of examining documents, complexity of the transactions etc. the period allowed could vary but in any case should not exceed the limit stated above. So it is not necessary that the beneficiary should wait for the seven-business-days to get paid.
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DimitriScoufaridis
- Posts: 85
- Joined: Fri Apr 05, 2019 5:17 pm
Deferring payment upon reimbursement from issuing bank.
Hatem,
There are three issues to be addressed here.
1. The role of the nominated bank, which apparently in this case plays the role of the advising bank only.
2. The meaning of negotiation.
3. The role of the issuing bank.
For point no. 1: As per ICC’s publication no. 511 on Documentary Credits – UCP 500 & 400 Compared pp. 47-48 “a Nominated Bank has only a duty to the presenter to examine documents and to give notice of refusal”, however, “there is no penalty imposed by the UCP rules on such bank (unless it is the Nominated Confirming Bank) if it fails to act in the manner required by Article 14”. As a result, the Nominated Bank in this case is not liable for payment.
For point no. 2: It is not clear to me whether the said bank means actual negotiation as per Article 10 (ii) of UCP 500 which is “giving value for Draft(s) and/or document(s) by the bank authorized to negotiate” or simple document examination without giving value. The latter does not constitute negotiation as per the same article.
For point no. 3: As per Article no. 13 & Article no. 14, the issuing bank has the duty to examine the documents and advise discrepancies (if any); therefore, since there is no confirming bank in this case, it will have the last word.
Finally, I agree with Abdulkader that probably the said bank has some doubts concerning the strength of its document examiners.
There are three issues to be addressed here.
1. The role of the nominated bank, which apparently in this case plays the role of the advising bank only.
2. The meaning of negotiation.
3. The role of the issuing bank.
For point no. 1: As per ICC’s publication no. 511 on Documentary Credits – UCP 500 & 400 Compared pp. 47-48 “a Nominated Bank has only a duty to the presenter to examine documents and to give notice of refusal”, however, “there is no penalty imposed by the UCP rules on such bank (unless it is the Nominated Confirming Bank) if it fails to act in the manner required by Article 14”. As a result, the Nominated Bank in this case is not liable for payment.
For point no. 2: It is not clear to me whether the said bank means actual negotiation as per Article 10 (ii) of UCP 500 which is “giving value for Draft(s) and/or document(s) by the bank authorized to negotiate” or simple document examination without giving value. The latter does not constitute negotiation as per the same article.
For point no. 3: As per Article no. 13 & Article no. 14, the issuing bank has the duty to examine the documents and advise discrepancies (if any); therefore, since there is no confirming bank in this case, it will have the last word.
Finally, I agree with Abdulkader that probably the said bank has some doubts concerning the strength of its document examiners.
Deferring payment upon reimbursement from issuing bank.
Hatem,
Hope you’re well.
My personal reactions, without liability, are:
1. A bank does not have seven banking days to examine documents etc. It has a ‘reasonable time’. It just so happens that this ‘reasonable time’ can never exceed 7 banking days. I would envisage that only in the most exceptional circumstance would 7 banking days be reasonable.
2. A nominated bank that has not confirmed the credit is not under any obligation to make payment. Therefore, in principle, there is nothing to stop it paying the beneficiary only on receipt of the funds. However:
A. Assuming the credit is expressed to be available by negotiation, the nominated bank will not have ‘negotiated’.
B. The documents remain the property of the beneficiary until they are taken up by the relevant bank. Therefore, the nominated bank should not despatch them –if it is not taking them up- without the beneficiary’s agreement.
C. The pro-rata commission the nominated bank makes for examining and taking up documents is usually to reflect the ‘documentary risk’ (the fact that documents may not in fact be compliant and thus the nominated bank may suffer loss as a result). Here, the nominated bank will not have taken any documentary risk and therefore I wonder on what basis it could justify taking ‘documentary risk’ commission. In fact, why bother examining the documents at all if one’s preparedness to settle is dependent on knowing the issuing bank has effected settlement?
D. Lastly, I find it astonishing that a bank could consider deliberately misleading (because that it is what seems to be suggested) another party. This would seem to me to pose both significant reputational and legal risk.
Regards, Jeremy
Hope you’re well.
My personal reactions, without liability, are:
1. A bank does not have seven banking days to examine documents etc. It has a ‘reasonable time’. It just so happens that this ‘reasonable time’ can never exceed 7 banking days. I would envisage that only in the most exceptional circumstance would 7 banking days be reasonable.
2. A nominated bank that has not confirmed the credit is not under any obligation to make payment. Therefore, in principle, there is nothing to stop it paying the beneficiary only on receipt of the funds. However:
A. Assuming the credit is expressed to be available by negotiation, the nominated bank will not have ‘negotiated’.
B. The documents remain the property of the beneficiary until they are taken up by the relevant bank. Therefore, the nominated bank should not despatch them –if it is not taking them up- without the beneficiary’s agreement.
C. The pro-rata commission the nominated bank makes for examining and taking up documents is usually to reflect the ‘documentary risk’ (the fact that documents may not in fact be compliant and thus the nominated bank may suffer loss as a result). Here, the nominated bank will not have taken any documentary risk and therefore I wonder on what basis it could justify taking ‘documentary risk’ commission. In fact, why bother examining the documents at all if one’s preparedness to settle is dependent on knowing the issuing bank has effected settlement?
D. Lastly, I find it astonishing that a bank could consider deliberately misleading (because that it is what seems to be suggested) another party. This would seem to me to pose both significant reputational and legal risk.
Regards, Jeremy
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hatemshehab
- Posts: 220
- Joined: Fri Apr 05, 2019 5:19 pm
Deferring payment upon reimbursement from issuing bank.
The real intension of the bank trying to defer payment is its fear of having missed a discrepancy in documents that might be detected by the issuing bank, which may result in dishonour of reimbursement and rejection of the documents.
Although this is the most bizarre approach I have ever heard of from a nominated bank to do so, however what is more strange is that the bank is trying to extend the reasonable time by waiting another 7 banking days until the issuing bank take up the documents and confirm their compliance with the terms and conditions of the L/C.
I do not have much to say on this issue expect that anything may happen theses days. I do not know if it is really appropriate to talk about revising/updating UCP when banks lack the basic understanding of current UCP!
Although this is the most bizarre approach I have ever heard of from a nominated bank to do so, however what is more strange is that the bank is trying to extend the reasonable time by waiting another 7 banking days until the issuing bank take up the documents and confirm their compliance with the terms and conditions of the L/C.
I do not have much to say on this issue expect that anything may happen theses days. I do not know if it is really appropriate to talk about revising/updating UCP when banks lack the basic understanding of current UCP!
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Deferring payment upon reimbursement from issuing bank.
I think that Dimitri touched on the key aspect when he questioned if the bank really understood what is meant by negotiation. I feel that if this was fully understood, the question would not have been posed.
It would also seem that this bank does not understand that a maximum 7 banking days is permitted only in exceptional circumstances. Although this bank appears to be trying to renege on its duty to act properly as a nominated bank, the beneficiary is entitled to a response regarding acceptability of documents tendered within the normal parameters of his country. This rarely equates to 7 banking days. In a typical scenario, the nominated bank would take 2-3 days to check documents, 1 days delay in posting and 2-3 days in transit to the issuing bank. It would then take 2-3 days for the issuing bank to do its own check and a further day to advise the nominated bank of the results of this. This equates to 7-10 days in total before the nominated bank would know the outcome of the check by the issuing bank. Thus the earliest the nominated bank is in a position to rely on the issuing bank's check is after 7 days. In the vast majority of cases, this delay is unsustainable.
It appears to me that there may be another reason to consider this action. Some banks are loathe to remit l/c payments from their own funds even if the terms are payment by negotiation or at sight. Some L/Cs are issued with the stipulation that reimbursement will only be made X days after docs in order, despite the L/C showing payment at sight. This apparent contradiction can lead to a situation where the nominated bank seeks to "cut its losses" wherever it can without seeking an amendment.
Laurence
It would also seem that this bank does not understand that a maximum 7 banking days is permitted only in exceptional circumstances. Although this bank appears to be trying to renege on its duty to act properly as a nominated bank, the beneficiary is entitled to a response regarding acceptability of documents tendered within the normal parameters of his country. This rarely equates to 7 banking days. In a typical scenario, the nominated bank would take 2-3 days to check documents, 1 days delay in posting and 2-3 days in transit to the issuing bank. It would then take 2-3 days for the issuing bank to do its own check and a further day to advise the nominated bank of the results of this. This equates to 7-10 days in total before the nominated bank would know the outcome of the check by the issuing bank. Thus the earliest the nominated bank is in a position to rely on the issuing bank's check is after 7 days. In the vast majority of cases, this delay is unsustainable.
It appears to me that there may be another reason to consider this action. Some banks are loathe to remit l/c payments from their own funds even if the terms are payment by negotiation or at sight. Some L/Cs are issued with the stipulation that reimbursement will only be made X days after docs in order, despite the L/C showing payment at sight. This apparent contradiction can lead to a situation where the nominated bank seeks to "cut its losses" wherever it can without seeking an amendment.
Laurence
Deferring payment upon reimbursement from issuing bank.
From above it is evident that the nominated bank is not acting as such. It acts as a „remitting bank only“. If the nominated bank does not confirm the L/C, it is not obliged to honour the complying documents. UCP500 does not include „the punishment“ for the nominated bank which does not act acc. to articles 13-14 UCP500. However the beneficiary would be well advised to use services of another bank next time to get his money promptly.
Pavel Andrle
Pavel Andrle
Deferring payment upon reimbursement from issuing bank.
REASONABLE TIME IS NOT TO BE DETERMINED BY BANKERS BUT BY A COURT OF LAW
We are not able to comment on the reasonable time issue in Article 13 & 14 of UCP 500 as we are now involved in a couple of DC legal cases where reasonable time is one of the issues.
For Jeremy, who knows laws well, please bear in mind that reasonable time is a legal issue that can only be determined by a court of law but not bankers.
REASONABLE TIME DEPENDS ON MANY FACTORS
Having said that, in the famous DC "reasonable time" case from Hong Kong, the Hing Yip Hing Fat Company Limited v. The Daiwa Bank Limited, High Court Commercial List No. 22 of 1989, Kaplan J. considered that reasonable time depends on many factors, such as the size of bank (a smaller bank may take longer time), business at the time of the examination (more presentations to be handled would take more time), English not being a mother tongue of the document checkers, number of documents to be checked, so on and so forth.
From our experience in handling DC dispute cases, delays due to translations, shortage of staff members (some document checkers taking their holidays) and other interruptions should also be taken into account.
In a nutshell, reasonable time should be determined with common sense.
www.tolee.com
[edited 6/2/02 3:37:47 PM]
We are not able to comment on the reasonable time issue in Article 13 & 14 of UCP 500 as we are now involved in a couple of DC legal cases where reasonable time is one of the issues.
For Jeremy, who knows laws well, please bear in mind that reasonable time is a legal issue that can only be determined by a court of law but not bankers.
REASONABLE TIME DEPENDS ON MANY FACTORS
Having said that, in the famous DC "reasonable time" case from Hong Kong, the Hing Yip Hing Fat Company Limited v. The Daiwa Bank Limited, High Court Commercial List No. 22 of 1989, Kaplan J. considered that reasonable time depends on many factors, such as the size of bank (a smaller bank may take longer time), business at the time of the examination (more presentations to be handled would take more time), English not being a mother tongue of the document checkers, number of documents to be checked, so on and so forth.
From our experience in handling DC dispute cases, delays due to translations, shortage of staff members (some document checkers taking their holidays) and other interruptions should also be taken into account.
In a nutshell, reasonable time should be determined with common sense.
www.tolee.com
[edited 6/2/02 3:37:47 PM]