ICC Digital Library Forum

Jeremy,
your version of UCP 500 must be different to mine, as I can find no reference in Article 14 c to "allow an issuing bank to release discrepant documents to an applicant without the presenter’s agreement" as stated by you. The fact that 14 c permits the issuing bank to approach the applicant for a waiver does not imply any contradiction or supercedence over 14 d ii, nor does it make any statement allowing the issuing bank to release discrepant documents to an applicant without the presenter’s agreement.

Perhaps you meant to quote some other Article or reference to back this up. If so, please advise this.

Dear Jeremy,

We wish to respond to a few side but related issues emerged during the discussions, or heated arguments, if you will, which are good for all of us.

(1) You consider that the beneficiary has no right to sell the goods to a third party even if the presentation for payment has been refused by the issuing bank due to being bound by the underlying contract. Although we have also studied commercial law and have passed the examinations, we are however not lawyers and hence cannot give a definite answer to this. However, please consider the following viewpoints from us.

(a) The decision to refuse the documents and the payment by the issuing bank, as an agent of the applicant/buyer, might bind the principal. So the underlying contract may be rendered invalid, since the prime obligation by the seller/beneficiary (delivery of the goods) has already been performed, but that of the buyer/applicant (payment for the goods on arrival) has been defaulted, particularly if the discrepancies are immaterial to the underlying transaction, such as typo or other trivial discrepancies, where the seller/beneficiary cannot be considered to have breached the underlying contract.

(b) Having said that, if the goods are junks, that will be another story.

(2) You consider that after receipt of payment refusal the beneficiary should approach the applicant to seek payment or approval before he can sell the goods to a third party. This is what we expect from a happy and lucky banker from the Heaven or a scholar. We as a DC consultant serving in the Hell may have different views.

From our experience in dealing with such payment refusal cases, what you have suggested is theoretical rather than practical. First, we should ask ourselves why the parties have the DC in the first place? It is simply because the seller does not trust the buyer. If the price of the goods has gone up, the applicant would certainly want to take the goods, but his bank would not allow him. This is a red flag message to the seller that the buyer as an applicant may have financial troubles. Otherwise his banker should be very happy to waive the discrepancies and pay.

So the smart beneficiary would not want to sell to the applicant even if he agrees to pay. If the seller accepts this payment undertaking from the buyer/applicant, he needs not ask for the DC in the beginning.

So from our market place experience, the beneficiary would sell to third party regardless. And experience tells us that the applicant has so much financial and other troubles, such as being chased by other creditors, staff chasing for deferred salary payment etc. that he has no time and resources to institute litigation.

Your theoretical “contractual obligations” is not realistic and cannot help. You fight the war in the underground air-conditioned “war room” whilst we fight the war on the frontlines. You may never see blood but we do.

(3) Inspired by Laurence’s message talking about “customer”, we wish to express our views on “customer” and “client” here. Both “customer” and “client” may refer to the same person. Yet “customer” is used when we focus on “providing services”. When we focus on “contractual relationship”, we use the word “client”.

Jeremy does not think a beneficiary is a customer of the issuing bank. This statement may reflect his subconscious mind that he may have little customer service concept in his mind. Inspired by Laurence's comments, when Jeremy says that the applicant is his customer, he may have meant that the applicant is his client. For such statements, we may be wrong and if that is the case, please accept our apologies.

Again on the issue whether the beneficiary is a customer of the issuing bank, a general from the war room may not agree with the view of the battle reported by a wounded soldier returned from the frontlines. And many battles were lost like this in history.

It is luckier to be a general.

http://www.tolee.com

[edited 9/13/01 8:31:42 PM]

Laurence,

My personal views are:

1. If ‘ruins the protection’ isn’t pejorative, I don’t know what is!

2. I cannot see what ‘protection’ is being destroyed if the issuing or nominated bank cannot release/despatch discrepant documents without a waiver being granted. If a waiver is granted, then the beneficiary has no need of the documents as they have been taken up in accordance with the contract terms, as reflected in the availability provisions of the credit. Prior to this event, the beneficiary can recover the documents should they wish.

3. Having trawled through all your & T.O.’s postings I regret I cannot find any examples quoted that seem to be based on real DC transactions where beneficiaries took the option not to accede to requests to cede discrepant documents to the applicant (apologies if its just that I need glasses). If T.O.’s example on his last posting does involve credits (which is by no means certain to me), I cannot see it concerned ‘not acced[ing] to requests to cede discrepant documents to the applicant’. On the contrary, it seems as if the buyer did not want the goods (and any related documents).

Incidentally, I did not realise you were a ‘consultant’. Perhaps there are more than I appreciated making contributions to the discussion forum.

4. I just do not see the ‘new’ approach as being akin to launching a new product or even "modified" product, given the infinitesimally small change in practice. Also, I do not regard beneficiaries as being the ‘purchasers’ of documentary credits (even when they have to pay the issuing bank’s charges). I regard the applicant as being the ‘purchaser’ as they are the issuing bank’s principal and thus ‘customer’.

5. I am at least confident we both have the same version of UCP500. My reading of Article 14c -read in the context of Article 14 as a whole- is that it allows an issuing bank to approach the applicant for a waiver prior to sending a refusal notice, and if the waiver notice is granted, to release the discrepant documents to the applicant without contacting the presenter, i.e. without sending a refusal notice. An issuing bank only has to send a refusal notice, with respect to discrepant documents, if it ‘refuses’ the documents (per sub-Article 14di), which it will not -of course- do if it receives an acceptable waiver within the sub-Article 13b time limit(s). In other words, the fact that documents are discrepant does not mean they have to automatically be ‘refused’ per sub-Article 14d.

To avoid possible confusion, when I said sub-Article 14d was mandatory I was of course referring to when a bank ‘refuses’ documents. If a bank does not ‘refuse’ documents because a waiver has been granted, then sub-Article 14d is of no application.

If you do not share this interpretation then we may have -at long last- got to where any misunderstanding lies.

Jeremy.

[edited 9/13/01 6:09:49 PM]

Dear Jeremy,

In your last posting, you encourage an issuing bank to approach the applicant for a waiver, as a right under the UCP 500. You seem to enjoy doing this and even use this as your "defence" for your "new practice/clause in DC".

Again, Mr. General from the war room, let this wounded soldier tell you his story from the frontline.

THE SMART APPLICANT STORY

In a steel goods transaction involving millions of USD, the issuing bank found some immaterial discrepancies and approached the applicant by phone for a waiver.

The smart applicant responded: "Would you please send us a fax so that we can see clearly what goes wrong?" A fax was sent "without delay".

Seeing the prices of the steel goods were cheaper in the spot market, the applicant did not wish to take up the documents and sent a fax to the issuing bank: "Thank you very much for advising us that there are discrepancies in the documents. In that case, please reject the discrepant documents and stop payment. Thank you very much for your fax notice".

Now the issuing bank had lost its right to get reimbursement from the applicant since it admitted EXPRESSLY that the documents were discrepant and the applicant had given its instructions to refuse the documents.

But the negotiating bank claimed for reimbursements as a holder in due course or "see you in court". According to the issuing bank's legal counsel, the issuing bank would probably lose the case since the discrepancies should not be considered as valid ones. Hence to avoid further losses if litigation did fail and to safeguard its worldwide reputation, the issuing bank was forced to pay the negotiating bank.

ISSUING BANK GOT "SANDWICHED"

But it could not get reimbursements from the applicant relying on the bank/client services/loan/TR/hypothecation agreements because the owner of the applicant had declared bankruptcy due to heavy losses in his speculative activities in the real estate and stock markets that had collapsed in the meantime. Remember the Asian flu triggered by Mr. George Soros?

We use this story to alert the bankers in our workshops and ask them to think twice before approaching the applicants, particularly in a down commodities market where the applicant would like to buy from spot market.

In fact, as the people in Hong Kong say: "We are putting money into your pocket with this story."

So, Jeremy, may we wish you good luck in your "new practice" venture.

http://www.tolee.com

[edited 2/2/02 8:39:04 PM]

T.O.,

My personal views are as follows:

A. Your point 1:

My position is that I cannot see how a beneficiary legally can sell goods to a third party when they have contracted to supply them to the applicant, unless they know for certain that the applicant has rejected them and the related documents.

Your point 1a:

I would first point out that the beneficiary has brought about this situation by presenting discrepant documents, which additionally-by virtue of their discrpancy/ies- may be a breach of the underlying contract, for example a certificate of origin that does not meet those regulations of the applicant’s country that are reflected in the credit’s provisions. Secondly, legally, an issuing bank is not the agent of the applicant. In law, the issuing bank acts as principal in its own right because the Credit contract is between the issuing bank and beneficiary, not the applicant and beneficiary. Thus, I cannot accept your views.

B. Your point 2:

Para 1: see A. above, my first para.

Para 2 - 4: I regret I do not understand these.

Para 5: You seem to think I am remote from reality. However, as I have a responsibility for all documentary (credits, guarantees, collections) related (potential) losses, disputes and litigation involving my bank, and as I have a responsibility for monitoring English litigation involving documentary matters, I can assure that the reverse is the case.

Based on my experience, I believe any banker that does not take other than a strictly legal approach to documentary matters, for example not taking into account the general principles of contractual law, is asking for trouble. Incidentally, I therefore take the view that it is better for a bank to lose/not take on documentary business if it involves adopting any other approach.

C. Your point 3:

Para 1: You are of course entitled to your personal opinions, but I am quite certain the vast majority of native English speakers would regard the two words as being interchangeable. For light relief, I would just like to quote the (to me) humorous old saying (I cannot recall to whom it is attributed):

‘Prostitutes and hair dressers have clients; banks have customers’.

Para 2 – 4: See B above, my last point.

The steel goods story: I am afraid I cannot see its relevance to the matter under discussion, i.e. the release of discrepant documents to the applicant on the issuing banks responsibility, in accordance with the availability terms of the credit, without the presenter’s prior express agreement.

D. You seem to be saying that you advise bankers, on your ‘workshops’, that where they have identified discrepancies, not to advise the applicant of those discrepancies in certain circumstances, and therefore -by so doing- not to give the applicant the opportunity to grant a waiver. But I thought you believed in ‘customer service’?

E. Finally, it is not ‘my’ new practice venture. Many banks are already adopting this approach and, I imagine, that as it becomes more widely known, it will be more widely adopted till it becomes the norm.

Jeremy.

[edited 9/14/01 3:29:39 PM]

Dear Jeremy,

AGREE TO DISAGREE

It is perfectly OK that we hold different opinions to the same issue. We do not wish to argue further with you as we have limited time to be spent in the DC Pro due to "rice and noodles" reasons. We also wonder how you manage to get heavily involved in the DC Pro discussions and yet you can handle all your complex duties in your bank as you have told us in your last response. Would you care to share your little secrets with other fellow banker members here?

RELATIONSHIP BETWEEN ISSUING BANK AND APPLICANT

To respond to the relationship between the applicant and the issuing bank, we of course understand and agree that the issuing bank is a principal, if one takes the perspective of the DC itself. However, if we take a bird's eye view over the whole transaction, taking a broader perspective, we may see that the issuing bank is in fact performing the payment obligation part upon instructions from the applicant. That is what we intend to mean by "agent". Of course we understand that the applicant is not even a party in the DC, a definite, independent and irrevocable payment undertaking assumed by the issuing bank and the confirming bank, if any.

SENIOR BANKERS SHOULD PRACTICE MBWA

Although you have handled all the banking operations in your bank, DC, collections, guarantees, T/R loan/credit authorisation, including litigation, you are still a general doing all these in your air-conditioned "war room". Please allow us to ask you some questions to clarify this:

(1) How many times you meet your customers in a week, not counting those meetings in the golf courses or the Michelin 1-3 star restaurants or night clubs?

(2) How many times in a week that you show up in a customer's office?

(3) Do you talk to the clerks other than the senior managers?

(4) Do you know what is MBWA, which all senior managers should practise?

We are sorry that we treat you like a witness in the witness box. Hope you don't mind all these questions. If you are what you claim to be, these questions would only give you a chance to shine. Of course, you have the right not to answer them. We raise these questions just to give you some inspiration. We do not intend to create any inconveniences.

From our consultancy experience, we always get what we want, important evidences from the junior staff. Their stories may be completely different from those told by the senior managers.

YOU MAY HAVE MISSED THE BEST PART OF OUR STORY

We do not think that our steel goods story is irrelevant. Of course we endorse the practice to approach the applicant, a practice already written in the UCP 500. What we are trying to say is that before a banker decides to approach the applicant AT HIS SOLE DISCRETION he should have estimated the "What If" consequences. Please do not read our story taking the negative view. Otherwise you may have missed the best part of our story.

WE RESPECT OUR "OPPONENT"

We appreciate it very much that you have responded in a calm and logical manner to which we respect you more. You have shown us a very good example how heated arguments should be handled in the DC Pro.

T. O.

[edited 2/2/02 8:33:07 PM]

T.O.,

As its almost ‘home time’, I’ll have to be brief:

1. Fortunately, documentary losses/litigation/disputes etc are not that frequent and I have a relatively high degree of autonomy. These factors, among others, enable to me get involved in DC Pro discussions.

2. I see the issuing bank as performing the payment ‘guarantee’ part (as opposed to the payment obligation part, as the applicant may still have an obligation to make payment under the underlying contract despite presentation of discrepant documents) upon instructions from the applicant. However, this ‘guarantee’ is contingent on complying documents being presented. If discrepant dox are presented, then to me the beneficiary has created this situation and the applicant ought therefore to be allowed the documents, if they want them, per the underlying contract without obstruction from the beneficiary, per the credit availability terms. (I must stress I regard this as a side issue. To me, even if you and Laurence are correct in your views regarding the ‘protection’ of the beneficiary, it is -to me- simply not the issuing bank’s concern.)

3. I am a ‘technician’, without any direct customer responsibilities. In my role I need to be always able to take an objective/dispassionate view of documentary matters, from a risk perspective. Of course, in practice this does not mean I can ignore customer service/income loss/generation issues, even though that responsibility lies elsewhere. In essence, therefore, I -along with my immediate colleagues- primarily look after the risk side of the ‘risk/reward’ equation. Anyway to answer your question, I think -from memory- I have met a customer, and visited a customers’ office, once in the last few years.

B. I have to talk to our documentary processing staff.

C. I do not MBWA is.

Jeremy.

[edited 9/14/01 5:27:27 PM]
[edited 9/14/01 5:28:43 PM]
[edited 9/14/01 5:30:15 PM]

Dear Jeremy,

We are glad to share with you our understanding about MBWA, which is practised to a certain extent by HP, United Airlines, Corning, 3M, Citibank, Tupperware, Walt Disney, IBM...and of course to full extent by us too although we are a very small potato.

MBWA TO VERIFY FACTS REPORTED

MBWA is classic management concept. It stands for "Management By Wandering About/Around". A senior manager should not rely on the reports to run a corporation as these reports are coming from several layers, with each layer trying to cover up something, full of "discrepancies" in banker terms. He has to go to the frontline and befriends with the workmen or clerks to check the data content of those infactual reports.

MBWA TO MOTIVATE STAFF

Another purpose of MBWA is to motivate the frontline staff to show that the senior management does care about them. Hearing them airing their grievances may help release their dissatisfaction about the corporation procedures or structure and get them understood the porblems and pressure senior management has to face.

MBWA TO HUNT FOR FREE SOLUTIONS TO PROBLEMS

A CEO with good communication skills may also pick up some practical solutions from the frontline staff, and this can save a lot of money rather than hire a consultant to do the same job. Those solutions are free and in most cases should be very effective. Nobody knows the problems better than those frontline staff that face them every day.

OUR MBWA EXPERIENCE

Whilst I was the director and general manager in a division of the Jardine Matheson Group (the "Taipan" Scotish Company that controlled 1/10 of the total stock market value of Hong Kong at the time with very diversified trades, such as banking, imports, exports, China trade, Welcome Supermarket chain, shipping companies, freight forwarding, airlines agency, insurance, real estate, Hong Kong Land, Dairy Farm...etc.) I used MBWA. I seldom called a meeting. I spent at least 1/4 of a day going to the frontline as well as meeting the customers. I was the Jardine Group DC consultant and trainer, on a voluntary basis. I have to stop here or else...

DEFINITION OF A CONSULTANT

Now I practise MBWA in my consultant career and the results are amazing. Junior staff of my customers are my free consultants to point out effective cures for their own problems. That is why some people say that the definition of a consultant is: "The one who borrows your watch and tells you the time". Another more entertaining definition is: "A consultant is one who can tell you one hundred ways to make love but he is not yet married and without a single girl friend". That is what we are trying very hard to avoid.

We would like to end with a third definition: "A consultant is one who has lost his job recently".

Vincent, we have not heard from you recently in the DC Pro. Would you give us some more amusing definitions from Ireland?

http://www.tolee.com

[edited 2/2/02 8:26:08 PM]

We would like to share an interesting story about MBWA to add interst to and also to cool off the otherwise heated arguments here.

THE YKK SUCCESS STORY

A CEO from a garment manufacturer visited the YKK zipper manufacturing complex to make complaints on the delayed delivery. When he entered the complex, he met a man in causal wears, helping other workmen to pack the zippers into cartons.

"Who is the Manager here?" asked the CEO.

"I am a Manager" replied the workman.

"Then who is the General Manager?" asked the CEO.

"I am also the General Manager", replied the workman.

He though this guy was either kidding or crazy and ingored him.

When he was finally ushered by the receptionist to the General Manager's office, to his great surprise, the man greeting him was the same "workman" he first met when he entered the YKK Complex.

This is the success story of the YKK zippers, a classic MBWA case study in business management.

MANY DISCREPANCIES CAN BE ELIMINATED BY MBWA

Many discrepancies can be eliminated if managers in banks, trading firms, freight forwarders, carriers and insurers care to do MBWA and talk to their junior staff, to visit their customers and members of other industries more often.

JEREMY, AGREE OR DISAGREE?

Would Jeremy agree to this proposal? With due respect to Jeremy, we are mentally prepared to hear an answer "Yes but..." or even "No, this is not required by the UCP and we stick to the UCP. This is not my duty. I am only a DC technician" from our previous interaction with him. Hope he would surprise us this time.

http://www.tolee.com

[edited 2/2/02 8:20:52 PM]

T.O.,

I find little obvious -in principle- to disagree with in MBWA. But I am at a loss as to what relevance it has to the central point of discussion –the issuing bank giving itself the right to release discrepant documents to an applicant on the responsibility of the issuing bank per the availability provisions of the credit after a refusal message has been sent without further contacting the presenter; its legal affect/its correctness in principle/impact on the parties etc.
To me, my views are either right or wrong, irrespective of my professional background, experience or management approach.

Therefore, I fear that we are now wandering way off the subject and, as we have reached ‘page 4’ in this discussion, I am left with the impression that there is little more of substance that can be said regarding the central point. Therefore, I would prefer not to respond further unless there is -what I believe to be- substantive new comment on the subject by someone.

Best regards, Jeremy.

[edited 9/17/01 9:47:46 AM]