ICC Digital Library Forum

I agree that the transferring bank should take reasonable care in examining documents of the 1st and 2nd beneficiary. The 2nd beneficiary who performed in compliance with the transferred LC terms, however, reserves the right to claim from the LC issuing bank if payment is not forthcoming through the transferring bank for any reason whatsoever. The LC issuing bank will not be relieved from its responsibilities towards the 2nd beneficiary due to the act of the transferring bank. In theory, I don’t also see any reason that would preclude the transferring bank from substituting the 1st beneficiary’s discrepant documents with those of the 2nd beneficiary i.e. after receipt of notice of discrepancy from the issuing bank, even if this happens after the expiry date of the master credit, provided:
a) The transferring bank acted in good faith when examining the documents of the 1st beneficiary.
b) The transferring bank acts without delay in replacing the 1st beneficiary’s documents and confirm to the issuing bank that 2nd beneficiary’s complying documents were received within the time limits allowed in the transferred credit.

I do also believe that the transferring bank, based on the 1st beneficiary's instructions, may request waiver of discrepancies in the 1st beneficiary's documents provided it also confirms to the issuing bank that it has in its possession 2nd beneficiary's documents that are in order and presented within the time limits allowed.

Due to the complications that may arise in transferable LC, I would also tend to agree with some banks that:
a) Accept transferable LC applications from only selective customers
b) Avoid acting as transferring bank or negotiating bank under transferable credits.
c) In case they elect to act as one, charge appropriately (sometimes heavy charges) to cover the risks involved.

[edited 3/31/01 10:51:48 AM]

Just to emphasise the previous point.

Charge appropriate fees and make sure you get them on or before transfer as it is not uncommon for contracts supported by transferable lc to falter.

Then it becomes very difficult to get payment of transfer fees.

I recently visited a bank which had done 162 separate transfers under one transferrable credit.

Not one set of 2nd beneficiaries documents complied on presentation.

When discussing the duty of the transferring bank in examination of documents, we should not mix up the two different roles a bank may play, as a transferring bank and as a nominated accepting/paying/negotiating bank.

As a nominated bank, the bank has the duty to check the documents from both beneficiaries. Having said that, purely as a transferring bank, the bank does not have such duty to check documents because it has no payment obligations. Its payment to the 2nd beneficiary cannot be considered as a payment but rather only following the payment decision made by the issuing bank. In other words, it is only a distributing bank, to distribute the issuing bank's (not its own) payment between the 1st and the 2nd beneficiaries. I am just following the logical approach learnt from my mentor, the late Bernard S. Wheble.

In a nutshell, to follow the famous formula presented by Albert Einstein, "advising bank" + "presenting bank" + "distributing bank" = "transferring bank". Hence I do not agree that the transferring bank owes any fiduciary duty (which legal term should be used precisely) since it has no payment obligations.

The transferring bank simply transfers the payment obligation of the issuing bank to the 2nd beneficiary. It has not assumed any payment obligation in this transfer process. Otherwise there should not be a need for back-to-back Ls/C, which are indeed two different and separate payment obligations or payment "contracts" (an LC is not a contract, it is only a payment undertaking, to be precise). We should not mix up transferable LC with back-to-back LC and see transferred Ls/C as two different payment obligations or contracts, which is not true.

If the transferring bank is ALSO a nominated bank, then its duty to check documents originates from the role of a nominated bank and not from the transferring bank.
Any mistakes in the documents presented made by the two (1st and 2nd) beneficiaries should be their own businesses. No bank has the duty to make sure that the documents are not discrepant. A paying bank's
duty is to check the documents and to determine compliance, based on which the payment decision is made. There is no duty to ensure that the documents are compliant. We should not mix this up.

It is also incorrect to see the transferable LC itself and the transferred portion as two payment contracts. The LC and the transferred portion(s) are one and the same payment contract (should be more precisely called payment undertaking). The payment obligator is always the issuing bank, and not the transferring bank, which only distributes the payment from the issuing bank. That is why we see the statement in the transferred portion that the payment of the transferred portion is subject to payment from the master LC.

If we could ask Mr. Wheble, I am sure that he would have said the same thing.

The problem and the chaotic situation by reading sub-Articles 48 (e) with 9 (d) (iii) of UCP 500 together is not anything new. I have already highlighted this risk in my UCP 500 workshops presented in Hong Kong during 1994. For the enquirer, Mr. K. Y. Leung from Hong Kong, my forthcoming workshops with the Hong Kong Institute of Bankers and HK General Chamber of Commerce will be held on 4th - 9th June 2001. My or their websites have the details.

My email address is experts@tolee.com

[edited 12/15/01 9:44:08 PM]