ICC Digital Library Forum

A small correction to my ‘posting’ above, contrary to what I say in the opening paragraph, Article 14 (unmodified) is not -in its entirety- of equal applicability to the issuing bank and nominated bank. Sub-Article 14c only affects an issuing bank and sub-Article 14e does not affect nominated banks on unconfirmed credits.

Apologies.

Jeremy,

my key point is that if one accepts the principle that it is ok for a bank (issuing) to cede discrepant documents to the next party in the L/C chain, without prior approval from the presenter, then this precedent, logically, should apply to all cases where a bank (negotiating, confirming or issuing) acts in this way.

Therefore I object to this in principle.

Whether a bank is allowed to do this with impunity may only be determined de facto by the courts - a situation I am sure neither one of us wants.

Laurence,

But as I keep -I think- saying, it is ONLY ‘ok for a bank (issuing) to cede discrepant documents to the next party in the L/C chain, without prior approval from the presenter’ IF authority to take up the documents is given and they are released on the responsibility of the bank and in accordance with the availability terms of the credit. This being so, I cannot see how a nominated bank could legitimately forward discrepant documents to the issuing bank, in the absence of the presenter’s authority, without the issuing bank’s authority to the nominated bank to take them up (in accordance with the availability terms of the credit) being given FIRST and the nominated bank actually taking them up accordingly.

Therefore, I feel your objection is based -with respect- on a misunderstanding.

Regards, Jeremy.

Jeremy,

if I misunderstood you, please accept my apologies, but I inderstood you to say that your clause subverted the requirement of Article 14 d ii to hold documents at the disposal of the presenter, by allowing an issuing bank to cede discrepant documents to the applicant without prior approval of the presenter (negotiating bank). If this clause is accepted in principle for the issuing bank, then surely the same principle (ceding documents to the next party in the L/C chain without prior approval of the presenter) applies to the negotiating bank.
I accept that it is the right of the issuing bank, under Article 1 to vary the terms of the L/C as it sees fit, even if this goes against standard practice as in Article 14. However, I could never regard this as good practice and would always recommend my clients to avoid this clause. "Good Practice", in my book takes account of all parties to the L/C, and not the singular preference of the issuing bank.

I understand if you prefer not to answer, but did you canvass beneficiaries on their (informed) opinions before or after introducing such a clause ?

Laurence,

I would take issue with the word ‘subverted’ (given its pejorative connotations), but would freely agree with the word ‘modified’ or ‘amended’. Thus, I agree I am saying that a clause along the one used by my bank modifies/amends ‘the requirement of Article 14 d ii to hold documents at the disposal of the presenter, by allowing an issuing bank to cede discrepant documents to the applicant without prior approval of the presenter’ (whether beneficiary, nominated bank or remitting bank), PROVIDED authority to take up the documents is given and they are released on the responsibility of the relevant bank in accordance with the availability terms of the credit.

Therefore, I am at a loss to see why you would always recommend to your ‘customers’ (I take it by this you mean account holding beneficiaries*) that they avoid this clause. Surely it is in their interests?, as:

1. The documents will potentially be taken up -and thus payment be made- more quickly.

And,

2. If the documents are not taken up, they will be at the disposal of the beneficiary.

Therefore, I fear your approach risks -at best- causing your customers needless concern and -at worst- doing them (and all parties involved in the credit) a disservice.

Finally, we did not consult any beneficiaries and -setting aside the fact that (at least to me) the case in favour of the proposition that the ‘new approach’ is in everyone’s interest is logically overwhelming - I would have found it most odd that an issuing bank should even consider consulting beneficiaries, let alone actually do so.

Jeremy.

* I make this clarification because I understand that legally where a bank is performing the role of advising bank or nominated bank (and I appreciate you might not be referring to such a situation), the party upon whose behalf it is acting (i.e. the principal or ‘customer’), and thus the party whom the advising/nominated bank must be seeking to protect (while not stepping outside its legal obligations under the credit to the beneficiary), is the issuing bank and not the beneficiary.

[edited 9/12/01 5:47:29 PM]

Dear Jeremy,

GAIN ON ONE SIDE AND LOSE ON THE OTHER FRONT

You only focus that your suggested banking practice regarding disposal of documents is helping the beneficiary to get paid faster by simplification of the procedures. But you seem to have forgotten that at the same time, you have deprived the beneficiary of the freedom and right to sell the goods to a third party in case the documents are considered discrepant and when the price of the goods has gone up.

A popular saying from Hong Kong: " Too focused on gaining one benefit may render one losing other interests".

BENEFICIARY CANNOT SELL TO A THIRD PARTY

If your recommended clause is put into the DC, the beneficiary cannot sell to a third party. It would be too late to change it and deletion of this clause needs the applicant's authorisation (which would not be given if the price of the goods had gone up).

Relying on this clause in the DC, the issuing bank then has the right to release the documents to the applicant who is glad to waive any discrepancy if the price of the goods has gone up, in spite of the fact that the beneficiary instructs otherwise, from the law of contract point of view. Any amendment to the original clause must be agreed upon by the issuing bank. What about if the issuing bank is on the side of the applicant? in order to help its customer make better profits when the price of the goods has gone up.

MODIFICATION ALSO WON'T WORK

Even if you try to modify your recommended clause to allow the beneficiary to give fresh instructions, in actual practice, it may be too late as by the time the issuing bank receives such instructions, the documents may have already been released to the applicant.

If our clients, playing the roles of beneficiaries, are dealing with commodities, where the price may fluctuate widely, we would hesitate to accept such a clause.

SELLING TO THIRD PARTIES IS NOT RARE

Jeremy, as a banker, you seldom see beneficiaries selling the goods to third parties. But as a DC consultant, we see many such cases, particularly in commodities trades dealing with steel goods from Eastern Europe or Russia.

For example, in last month, we lost one business from a beneficiary/client referred to us by a banker in China whom we met in Paris ICC Banking Commission meeting in May this year. The prospective client, after receipt of our quotation, was notified by the carrier that due to nobody claiming for the goods after arrival at the port of discharge, the carrier/master took the decision to ship the goods back to the port of loading. For simplicity, the beneficiary chose to sell the goods to a third party by absorbing the double sea freight himself and save on our consultancy fees. So our exposures are utterly different and you should not make your judgement solely based on a banker's personal experience. And to respond to your earlier comments, and for the sake of creating some humour here if you don't mind, dear friend, we are both living in the same planet named earth.

http://www.tolee.com

[edited 2/2/02 8:46:16 PM]

T.O.,

1.

A. I can but repeat an extract from a previous posting:

‘I fail to see how the fact that the Beneficiary is not given the option to seek another buyer in the event of alleged discrepancies is a disadvantage for the Beneficiary. They have contracted with the Applicant to provide goods against (ultimate) payment under the credit, the availability provisions of which should reflect the [underlying] contract. If they receive such payment, where is the ‘loss’, in the true sense of the word? The fact that the Beneficiary may have found another buyer willing to pay a higher price is not a ‘loss’.

I would also make the following additional observation: to avoid falling foul of sub-Article 14e very often ‘refusal notices’ are sent by banks before the Applicant has either been consulted, or had time to respond to the Issuing Bank, regarding discrepant documents. This is because while sub-Article 14c allows an Issuing Bank ‘in its sole judgement [to] approach the Applicant for a waiver of the discrepancy(ies)’, ‘This does not, however, extend the period mentioned in sub-Article 13 (b)’. Therefore, the fact that the Issuing Bank has ‘refused’ the documents does not mean that the Applicant has. Consequently, by seeking another buyer for the goods, the Beneficiary may well be in breach of their contract with the Applicant as the Applicant may well wish to take delivery of the goods, and thus to take up the documents, per the contract terms. Thus, the Beneficiary looking for another buyer may well do more financial harm than good.’

Thus, I find the ‘beneficiary needs to be able to find another buyer once a refusal notice has been sent’ argument 100% unconvincing

B. Sub-Article 14c already allows an issuing bank to release discrepant documents to an applicant without the presenter’s agreement. Therefore, one is simply carrying forward this principle beyond the stage of refusal by the ISSUING BANK, i.e. not the applicant.

2. I agree that ‘if you try to modify your recommended clause to allow the beneficiary to give fresh instructions, in actual practice, it may be too late as by the time the issuing bank receives such instructions, the documents may have already been released to the applicant.’ But for the reasons above I cannot see why this is a problem.

3. I regret I cannot see the relevance of your example to a situation where an applicant does want to take up the documents, and thus the goods, in accordance with the credit, and underlying contract, terms.

Jeremy.

P.S. I thought you would be interested to know, given your connections, that I’ve just noticed (p.m., 13 Dec 01) that the HK office of an ‘international’ bank, that has a substantial presence in the Far East (inlcuding HK) -you will understand, I am sure, if I am not more specific- modifies sub-Article 14dii in a manner that achieves the affect of the ‘new’ approach in (I believe, based on background information I have) all the credits it issues.

[edited 9/13/01 2:10:28 PM]

As a bank involved in many LC transactions we completely agree with Mr. O'Brien. Inserting a condition that we will release documents in case of applicant's acceptance without any authorization from the presenter into Advice of refusal seems to us not correct.
By including such clause in the LC terms at the time of issuance of credit we make an offer. Beneficiary can accept it or not if he doesn't want the issuing bank to release documents without permission of the presenter unless the presenter has expressly stated otherwise. If he doesn't want the issuing bank to do so, he has the opportunity to contact the applicant for making the amendments before shipping the goods.
As we effect a lot of LC transactions every day we understand the practical importance of this problem and think that such practice is suitable for all parties of credit transactions and doesn't violate the UCP.

From the general thrust of your ‘posting’ I imagine I am right in thinking that either the inclusion of the word ‘not’ is a typographical error or that the word ‘correct’ should be ‘incorrect’, in the sentence:

‘Inserting a condition that we will release documents in case of applicant's acceptance without any authorisation from the presenter into Advice of refusal seems to us not correct.’

Overall, its good to see more and more bankers can apparently appreciate the rationality of the ‘new’ approach and that it seemingly does not do any harm to any party (including the beneficiary).

Jeremy
My dictionary defines subvert as "to bring about the complete downfall or ruin of (something existing by a system of law etc.)". This is in line with the intended meaning, rather than any perceived pejorative connotation. Your clause completely ruins the protection of access to discrepant documents by the beneficiary afforded by Article 14 d ii.

When I referred to my clients, I did so in reference to my capacity as a Documentary Credit consultant to industry, although I also act as a DC consultant to banks. Both T.O. Lee and myself have already given you examples based on real DC transactions where beneficiaries took the option not to accede to requests to cede discrepant documents to the applicant. You may be right in considering that the best interests of your bank are served by ignoring beneficiaries and inserting this clause. From the beneficaries viewpoint, I feel that their best interests are served by refusing to accept such a clause.

The insertion of the clause in question is akin, in industry, to launching a new product, or to use words you prefer a "modified" product. In industry, anybody launching a product, or modified product, would rarely do so without considering the opinions of intended purchasers. Otherwise we end up with a product like the Sinclair C5, which in terms of health benefits etc could be described using your words " the case in favour of the proposition that the ‘new approach’ is in everyone’s interest is logically overwhelming". Despite all this great logic and "benefits to everyone", nobody wanted to buy it. If we continue the analogy to L/Cs, we have seen bankers express the opinion elsewhere in the discussion forum (I forget where & when) that beneficiaries are not customers. It is easy to see why they might reach such a conclusion, as issuing banks usually do not have any direct contacts with their respective L/C beneficiaries. In my opinion, this is a blinkered view, as without beneficiaries there would be no L/Cs. When I asked the question about contact with beneficiaries, I only meant it in the sense of market research. I did not think that you would contact the beneficiaries of L/Cs issued by yourselves, but surely you also act as negotiating bank, which might allow you to view the possible insertion of such a clause from a different perspective, i.e. that of the beneficiary and accordingly seek their views, since I assume that you also have a customer relationship with these. I have no doubt that some beneficiaries would agree with your views on the insertion of this clause. I am also sure that some would not. What I honestly do not know is the statistical significance in the split between these two. If any research is available from any source on this split, I think that it would be of interest to all.