I post the following query as received:
Quote
“Normally we establish letters of credit designated as irrevocable and subject to UCP 500, however I always wonder what will be the consequences resulting from the following scenario.
The letter of credit stipulated the following:
Payment terms:
85 % payable at sight against presentation of required documents.
15 % of invoice value against presentation of a certificate issued by applicant and authenticated by us “XYZ BANK” showing that the commissioning of the machine is satisfactory.
My query is
· Is the issuing bank liable to effect payment if the applicant fails to present such document?
· Are we required to cancel the L/C upon expiry without effecting payment to the beneficiary?
· What if we receive such certificate after the expiry of the credit, are we still liable to effect payment?
· What is the legality of such stipulation in view of the fact that the L/C is irrevocable?
Your views are welcomed.
Unquote
L/C containing special payment terms
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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
L/C containing special payment terms
Hatim,
As you know these types of conditions are common in our area. The bank guarantees payment if complying documents are presented within, of course, the validity period of the credit. This is its irrevocable commitment.
The practice is if the document for the 15% payment, as stipulated in this query, is presented after the expiry date of the credit, it would not be honoured under the LC. Payment may be made to the beneficiary depending on the instructions of the applicant provided sufficient funds are available in the account and the party signing the instruction is authorized to operate the account.
This action would differ from a bank to bank. Some banks would refer again to the applicant and take a written confirmation; others will suffice, depending on the relation between the applicant and the bank, on telephonic confirmation etc.
In any case, if the beneficiary does not want to accept conditions that require applicant's sign-off on any of the documents, then he should request for an amendment or comply with the condition. This approach is also followed by ISBP revision document that will be voted on in Rome end of October 02.
Regards
As you know these types of conditions are common in our area. The bank guarantees payment if complying documents are presented within, of course, the validity period of the credit. This is its irrevocable commitment.
The practice is if the document for the 15% payment, as stipulated in this query, is presented after the expiry date of the credit, it would not be honoured under the LC. Payment may be made to the beneficiary depending on the instructions of the applicant provided sufficient funds are available in the account and the party signing the instruction is authorized to operate the account.
This action would differ from a bank to bank. Some banks would refer again to the applicant and take a written confirmation; others will suffice, depending on the relation between the applicant and the bank, on telephonic confirmation etc.
In any case, if the beneficiary does not want to accept conditions that require applicant's sign-off on any of the documents, then he should request for an amendment or comply with the condition. This approach is also followed by ISBP revision document that will be voted on in Rome end of October 02.
Regards
L/C containing special payment terms
Hatem,
Long time no see! Hope you now settle down nicely in your mother country Jordan.
ABOUT ‘IRREVOCABILITY’, IT ALL DEPENDS ON THE DEFINITION OF ‘PRESENTATION’
Your query about “irrevocability” can only be determined after clarification of what is meant by “presentation”, a term where there is no express definition in the UCP 500, ISBP or other ICC documents we have in our private library so far.
If ONLY the beneficiary can make “presentation”, (we believe this was the original purpose of UCP 82), then you can say that the term in the DC (15% payment against presentation of a certificate from the applicant authenticated by a bank) makes the DC from irrevocable to revocable.
But if “presentation” MAY ALSO be done by other parties, such as the applicant, another bank, inspection agency, and the like, then it is another ball game. And the term in the same DC (15% payment against the applicant’s certificate authenticated by a bank) would not turn the DC into revocable.
In eUCP version 1.0, it allows presentation by a party other than the beneficiary, or presentation by pointing to a website where the e-document (electronic record) can be retrieved for examination purpose.
IF THE BENEFICIARY DOES NOT REFUSE SUCH TERM, THEN IT BECOMES VALID
However, as already pointed out by Abdulkader, in the latest and final version of ISBP, ICC Document 470/951rev4, the applicant MAY present a document, if the beneficiary accepts such DC without refusal or asking for an amendment. This term would bind the beneficiary. However, the ICC Banking Commission also discourages such practice. But please remember, such term is still regarded valid by the ISBP and other previous ICC official opinions, which may be found in the DC Pro.
We have already highlighted such risks in our “Risk in International Trade Finance” workshop many years ago.
www.tolee.com.
[edited 10/14/02 8:36:22 PM]
Long time no see! Hope you now settle down nicely in your mother country Jordan.
ABOUT ‘IRREVOCABILITY’, IT ALL DEPENDS ON THE DEFINITION OF ‘PRESENTATION’
Your query about “irrevocability” can only be determined after clarification of what is meant by “presentation”, a term where there is no express definition in the UCP 500, ISBP or other ICC documents we have in our private library so far.
If ONLY the beneficiary can make “presentation”, (we believe this was the original purpose of UCP 82), then you can say that the term in the DC (15% payment against presentation of a certificate from the applicant authenticated by a bank) makes the DC from irrevocable to revocable.
But if “presentation” MAY ALSO be done by other parties, such as the applicant, another bank, inspection agency, and the like, then it is another ball game. And the term in the same DC (15% payment against the applicant’s certificate authenticated by a bank) would not turn the DC into revocable.
In eUCP version 1.0, it allows presentation by a party other than the beneficiary, or presentation by pointing to a website where the e-document (electronic record) can be retrieved for examination purpose.
IF THE BENEFICIARY DOES NOT REFUSE SUCH TERM, THEN IT BECOMES VALID
However, as already pointed out by Abdulkader, in the latest and final version of ISBP, ICC Document 470/951rev4, the applicant MAY present a document, if the beneficiary accepts such DC without refusal or asking for an amendment. This term would bind the beneficiary. However, the ICC Banking Commission also discourages such practice. But please remember, such term is still regarded valid by the ISBP and other previous ICC official opinions, which may be found in the DC Pro.
We have already highlighted such risks in our “Risk in International Trade Finance” workshop many years ago.
www.tolee.com.
[edited 10/14/02 8:36:22 PM]
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
L/C containing special payment terms
I differ slightly from T.O.'s view on this. Where the DC splits the payment, it is somewhat equivalent to partial shipment, where 85% is payable against one set of documents totally within the control of the beneficiary & 15% payable against another set of documents, issued by the applicant and totally within the control of the applicant. The presentation of the document/s by the applicant should not be of great significance, as the only result of this will be to the benefit of the beneficiary. I therefore see the applicant acting on behalf of the beneficiary in making such a presentation.
It is commonplace for carriers or their agents to submit transport documents directly to a negotiating bank as part of a presentation by the beneficiary. It is still accepted as part of a presentation by the bene, with the carrier acting for the bene in a fashion similar to the applicant submitting a final document directly to the bank.
Laurence
It is commonplace for carriers or their agents to submit transport documents directly to a negotiating bank as part of a presentation by the beneficiary. It is still accepted as part of a presentation by the bene, with the carrier acting for the bene in a fashion similar to the applicant submitting a final document directly to the bank.
Laurence
L/C containing special payment terms
Hatem,
Hope the new job’s going well.
Briefly, and without responsibility/liability, my personal answers would be: no, yes, no & it has no impact on the credit’s ‘irrevocability’.
The first three answers are based on the assumption that the credit is not poorly worded in such a way as to impliedly extend the issuing bank’s liability beyond the expiry date.
Also with respect to the first question, unless the credit expressly prohibits it, why shouldn’t the certificate be presented by the beneficiary? This would be more logical in a doc credit operation.
Jeremy
P.S. I'm not looking to enter into any discussion regarding my answers.
Hope the new job’s going well.
Briefly, and without responsibility/liability, my personal answers would be: no, yes, no & it has no impact on the credit’s ‘irrevocability’.
The first three answers are based on the assumption that the credit is not poorly worded in such a way as to impliedly extend the issuing bank’s liability beyond the expiry date.
Also with respect to the first question, unless the credit expressly prohibits it, why shouldn’t the certificate be presented by the beneficiary? This would be more logical in a doc credit operation.
Jeremy
P.S. I'm not looking to enter into any discussion regarding my answers.
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
L/C containing special payment terms
Jeremy,
Please don't take this as a precedent, but I actually agree with everything in your response !
It is true that it is more logical to expect presentation of the applicant issued document from the beneficiary, but it is usually more expedient for the applicant to present it to the issuing bank, normally located near to him.
From a humanistic viewpoint, the applicant knows that he holds a full veto over the 15% payment, but he may only wish to extend credit to himself for this 15% upto the latest day permitted by the DC by witholding presentation to the bank until the expiry date or close thereto. He can only be certain of this "extended credit", whilst still paying the full invoice amount, by restricting the presentation of the applicant document/s to the bank to himself.
Laurence
Please don't take this as a precedent, but I actually agree with everything in your response !
It is true that it is more logical to expect presentation of the applicant issued document from the beneficiary, but it is usually more expedient for the applicant to present it to the issuing bank, normally located near to him.
From a humanistic viewpoint, the applicant knows that he holds a full veto over the 15% payment, but he may only wish to extend credit to himself for this 15% upto the latest day permitted by the DC by witholding presentation to the bank until the expiry date or close thereto. He can only be certain of this "extended credit", whilst still paying the full invoice amount, by restricting the presentation of the applicant document/s to the bank to himself.
Laurence
L/C containing special payment terms
Dear Laurence and Jeremy,
If everything goes fine and the applicant is an honest gentleman, then presentation by which party is not a concern. But if the goods are commodities and the price drops drastically upon arrival, and if the whole DC amount is involved and that the applicant is not an honest person, then presentation by an applicant would turn the DC into revocable in nature, although on the face of the DC, it is irrevocable.
From our experience, many applicants in commodities trade, such as steel goods, agricultural produce, are not gentlemen. They would delay or simply did not make any presentation at all so that the DC stood expired, leaving the beneficiary with the burden to sell the goods to a third party to cover part of the loss. This category becomes our regular consultancy business.
So theory and practical may not be the same. And Murphy’s Law holds at all times.
May we say that a DC is as good as the integrity of the issuing/confirming bank and the applicant?
www.tolee.com.
If everything goes fine and the applicant is an honest gentleman, then presentation by which party is not a concern. But if the goods are commodities and the price drops drastically upon arrival, and if the whole DC amount is involved and that the applicant is not an honest person, then presentation by an applicant would turn the DC into revocable in nature, although on the face of the DC, it is irrevocable.
From our experience, many applicants in commodities trade, such as steel goods, agricultural produce, are not gentlemen. They would delay or simply did not make any presentation at all so that the DC stood expired, leaving the beneficiary with the burden to sell the goods to a third party to cover part of the loss. This category becomes our regular consultancy business.
So theory and practical may not be the same. And Murphy’s Law holds at all times.
May we say that a DC is as good as the integrity of the issuing/confirming bank and the applicant?
www.tolee.com.
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DimitriScoufaridis
- Posts: 85
- Joined: Fri Apr 05, 2019 5:17 pm
L/C containing special payment terms
Hatem,
This is a perennial problem we are facing in our region. I have even seen some badly structured credits which require presentation without mentioning the payment term but rather simply stating “x% of the LC value against presentation of a certificate issued by the applicant will be paid” (??!!), leaving payment wide open and thus calling for trouble!!
I agree wit Jeremy on the answers to your first three questions, i.e. no, yes, no. As another comfort element, you could add a clause to state, “Such certificate should be presented within the LC validity”. As far as the irrevocability is concerned, it is my opinion that it is confined to the credit’s validity period and is linked to its meaning, i.e. accept or pay against stipulated doc’s provided that the terms and conditions of the credit are complied with.
As mentioned by Abdulkader and T.O. Lee, ISBP has accepted such practice although it states that credits “should not require” presentation of such documents. It is unfortunate that in these cases the market practice has allowed the applicant to play the role of the beneficiary of the credit putting the latter at a disadvantage!
Dimitri
This is a perennial problem we are facing in our region. I have even seen some badly structured credits which require presentation without mentioning the payment term but rather simply stating “x% of the LC value against presentation of a certificate issued by the applicant will be paid” (??!!), leaving payment wide open and thus calling for trouble!!
I agree wit Jeremy on the answers to your first three questions, i.e. no, yes, no. As another comfort element, you could add a clause to state, “Such certificate should be presented within the LC validity”. As far as the irrevocability is concerned, it is my opinion that it is confined to the credit’s validity period and is linked to its meaning, i.e. accept or pay against stipulated doc’s provided that the terms and conditions of the credit are complied with.
As mentioned by Abdulkader and T.O. Lee, ISBP has accepted such practice although it states that credits “should not require” presentation of such documents. It is unfortunate that in these cases the market practice has allowed the applicant to play the role of the beneficiary of the credit putting the latter at a disadvantage!
Dimitri
L/C containing special payment terms
Jeremy,
CONFLICT OF INTEREST
Please make good use of your legal knowledge and comment on the issue whether there is any element of "conflict of interest" for a DC asking for a document to be presented by the applicant?
If the document were discrepant, presented after expiry or not presented at all, it would relief the payment/reimbursement obligation of the applicant arising out of the issue of a DC.
To put this in simple terms, is it a sound idea to allow a cat to guard the fish? Well, this appears to be OK if the cat is vegetarian. But we do not see any veggie cat up to this moment!
www.tolee.com
[edited 10/15/02 8:29:27 PM]
CONFLICT OF INTEREST
Please make good use of your legal knowledge and comment on the issue whether there is any element of "conflict of interest" for a DC asking for a document to be presented by the applicant?
If the document were discrepant, presented after expiry or not presented at all, it would relief the payment/reimbursement obligation of the applicant arising out of the issue of a DC.
To put this in simple terms, is it a sound idea to allow a cat to guard the fish? Well, this appears to be OK if the cat is vegetarian. But we do not see any veggie cat up to this moment!
www.tolee.com
[edited 10/15/02 8:29:27 PM]
L/C containing special payment terms
Sorry, don't have the time.