ICC Digital Library Forum

Dear Radek,

Welcome to the discussion forum. I read with interest your comment on the issues of “release of discrepant documents” initiated by Abdulkader. I think all parties to this forum has argued well in support of their point of views on the subject matter that all have reached to a point that there might be less to say and viewers are able to decided for themselves whether to adopt the “alternative approach or not to”. Any way this is not the question now after having four pages of extensive discussion.

Your comments included some statements that might be striking in effect. I would like to deal with them in the following points:

1. “Vast majority of the banks do not think the way the Banking Commission recommends”

I am not quite sure on what basis, statistics, and research you have made this conclusion. If you refer to bad practices or to approaches that do not seem to be in line with the UCP 500 and the resolutions of Banking Commission on different facets of trade finance issues then that might be understood but to an extent. I think the query system taken as an example constitutes a major reference for trade finance practitioners to resolve disputes amicably if there is a similar argument between two banks on an issue of contrasting opinions. I think this conclusion undermines the role of the Banking Commission in providing proper guidance as to the best practices in letters of credit transactions.

Although I do not want to generalize but rather speak from my own experience and observation, bankers working in trade finance have their own limitations. The bad practice appearing here and there cannot be contributed to being a different approach other than that of the Banking Commission. It can be attributed to ignorance, to laziness, lack of training, lack of knowledge, or in many cases because “ it works, we used to do it like that, we had no problems with this, why change, who are you to tell us what to do” and all those sorts of absolute conclusions if one may question the prevailing practices in a given bank. This has nothing to do with the Banking Commission at all. It lies within us bankers. If we are welling to change, to renovate our practices or just to keep on the same old track until something miraculous happens and the change becomes inevitable.

At the end of your comments you seem to recognize the importance of the Banking Commission “to advocate and educate bankers in order to adopt practices”, a paradox that needs clarification!

2. “I have checked hundreds of discrepant sets of documents and received hundreds refusal advices with „documents held at your disposal“ clause. However, I have never been asked by the bank that held documents at my (our) disposal to confirm that we as the presenter agree that documents be released to the applicant against bank’s fulfillment of its obligations under the Credit.”

Do you think this observation of yours sanctions a departure of a backbone doctrine in UCP 500? While I do recognize that many banks do not request a release of documents after sending a refusal notice to the presenter, do you think a bad practice can sanction a third approach? Did you research why these banks do not do such thing? Is it out of smartness or out ignorance? Are these banks aware of this approach and do they recognize its potential risks and limitations? I have worked in a number of banks in country x, most (if not all, but I do not want to generalize) of the banks in that country treat discrepant documents presented under a letter of credit subject to UCP 500 as collection. They automatically transfers the document to the collection department of course after sending the refusal notice indicating in it that documents are subject to URC 522, can we make a conclusion that discrepant documents presented under a letter of credit is automatically becomes subject to URC? I affirm that your answer is not because you said in your comments that “But do you think that the issuing bank is the person to amend contracts it is not party to?” by the same analogy do you think the issuing bank can amend its liabilities under the letter of credit stipulations unilaterally? Can the issuing bank manufacture new UCP provisions for its internal convenience?

I remember a number of bad practices adopted by banks I worked for which defies the spirit of UCP 500, and because of continued education, training, banking commission resolutions these practices have diminished and new ones replaced them. This had a great effect on the performance of the bank, its employee and the parties involved. Bad practices should not be considered as a benchmark for alteration.

Very recently I was requested to close a training course on “Introduction to Bank Lending” and take the feedback of the trainees on the course contents, delivery style and topics discussed. One of the trainees started to severely criticize that the trainer gave them “lengthy balance sheets to study which was not like the ones adopted by local banks”. Since he was making a generalization I further inquired from other participants on the validity of this point, many agreed with him on this issue. Then I requested that he produce a sample from the balance sheet, which he feels is lengthy, and to my surprise it was not more than one page (A4) not congested as one might think. I further cross-examined him why do you think this balance sheet is lengthy? He said that we do not need to know all these information; it is enough to know how much is his capital, total assets and total liabilities! I asked, “then what is left? You already requested a full balance sheet the only difference is that you need to know the particulars of the total assets and total liabilities.” As the discussion went through it was obvious that the guy did not have a background of accountancy, which is a prerequisite for the course, and therefore he had difficulty in understanding the balance sheet. When I reminded the group of the scandal in Jordan of granting USD 119 MILLION worth of direct facilities to 31 years old young man, who disappeared all of sudden, they realized that whether you like to work on lengthy balance sheet or on a shorthand balance sheet this is the banks internal choice, but DO NOT GENERALIZE! There are a lot of lessons to draw from the above story.

3. “I cannot see in the above discussion any remark on a point that I find very substantial”

If I feel compelled to responds to a topic in the discussion forum, I am the one compelling myself. I hope this clarifies.

4. Your paragraph 5, 6 and 7 seems to be unclear as to what you really want to suggest. I am not able to quote an exclusive statement but would like to break them down into pieces of quick comments:

A- the buyer and the seller are not experts of UCP 500. The reference to the underlying contract that may contain provisions of the applicability of UCP 500 does not preclude the bank from suggesting some alterations to UCP. This is of course not to suggest a total deviation from the core doctrines of UCP but just to give a degree of tolerance to the bank to do such action. Unless we address a certain specific example we can neither say what can be excluded and what cannot. If as you suggest that the parties intend to apply UCP in full then at least the applicant should so tell the issuing bank that no provision of UCP may be altered unless our prior consent is sought. In many cases the issuing bank is not aware of the underling contract or it does not review its contents as the application for opening L/C is to be filled by applicant. If the banker is required to help the applicant filling in that application, it is the responsibility of the applicant to clarify what does he really want to stipulate in the credit. Of course the issuing bank should also inform the applicant of stipulations in the credit, but who does so? It is advisable that the issuing bank gives a draft to the applicant before issuing the credit in its final form.

B- your suggestion that in the absence of the “alternative approach” that the beneficiary authorizes the release of documents against the issuing bank’s full performance under the credit is quite true, but not exclusive. Generally the beneficiaries are keen to have their money against he documents evidencing shipment of goods, but there are incidents that other beneficiaries might not think the same. One example is that if the applicant tries to blackmail the beneficiary for some discount on the documents value. Remember the issuing bank cannot go psychosocial in analyzing the intensions of the parties as well as any other bank involved in the credit. If we agree that there are exceptions or limitations to this, then why take such risks?

C- in paragraph 7 you mention that the issuing bank based on the instruction of the beneficiary’s bank contact the applicant for a waiver, but if the later is not welling to waive the issuing bank may “send a refusal notice while not holding the documents at unlimited disposal of the presenter but rather stating something to that effect that the issuing bank approaches the applicant and waits whether the documents will be accepted despite discrepancies”

What is the effect of the refusal notice without disposal instructions? What is the time gap between this notice of refusal and the applicant’s acceptance of discrepancies? Why would you assume that a default result would occur that “the presenter would be anyway entitled to request return of the documents”? Why not assume that the presenter will simply demand that payment should be made without delay since the issuing bank did not comply with article 14? would you accept a "shorthand" refusal notice holding documents at your disposal but containing no discrepancies? afetr all, it is the other way round!

Contrary to what you believe, your approach has further complicated the issue. After all as TO Lee has said once in this forum, it is all a matter of a brief swift message that will save all this requesting the presenter to authorize the issuing bank to release the rejected documents to the applicant. Is that so difficult for us bankers to do?

Best regards
hatem


[edited 2/23/02 9:53:42 PM]

I am now back to Toronto. Referring to Hatem's comments on the opinions of Radek Dobas, we have the following points to add:

DIFFERENCES AMONGST A BAD PRACTICE, A SHARP PRACTICE & A DANGEROUS PRACTICE

BAD PRACTICE

When a banker does not know what he is doing, such as in a practice that is against the ICC Banking Commission decisions, this is categorized as a "Bad Practice", due to lack of professional training or ignorance of the trade practices of other trades, such as in transport and insurance. The banker thinks that such a practice is OK out of his limited understanding or imprecise interpretation of the UCP 500.

SHARP PRACTICE

When a banker knows that what he is doing is not right but he still wants to do it, such practice is a "Sharp Practice", intended to hurt the right or interest of other parties, for the selfish intent to protect his own bank or his own client, the Applicant. Soft clauses and fabricated discrepancies belong to this category.

DANGEROUS PRACITCE

For a practice that a banker wishes to save the World, to facilitate the parties to do their trade more smoothly, such as the "alternative clause" (to be added in a DC to enable the issuing bank to release documents to the Applicant without seeking the consent of the Presenter) as suggested by Jeremy, it is of another category. It is out of goodwill but without being aware that the banker is stepping out of his safety zone, trying to interfere with the underlying trade where the banker is not a party to it and he is also trying to step outside the domain of UCP 500, which is separate from the underlying trade.

For such a practice, we may call it a "Dangerous Practice" that tries to re-write the international standard banking practices as reflected by the UCP 500 or eUCP V1.0. If there is any thing wrong, the bank may have to pay a heavy price for a job, which is not required in the UCP 500 in the first place. Volunteers are not needed in DC operations. The market would adjust its own practices or prices according to a basic economic theory. A banker should better stay in his own safety seat and play his role according to UCP 500 but not further.

GENERALIZATION IS DANGEROUS

We should not generalize an issue or a practice in our posting in the Discussion Forum. Otherwise it may mislead members to believe that a certain country has a certain local practice, which may be in fact not true.

www.tolee.com

[edited 2/25/02 12:09:55 AM]

Radek (if I may use your first name),

Thank you for taking the time to read my article in the latest DCI and to comment on it (extensively!) in the Discussion Forum. My reactions to your comments are:

1. That the applicant is the ‘customer’ or principal of the issuing bank is a question of law and my belief is that knowledgeable courts would uphold this view.

2. There are a number of reasons why you may not have been approached by a bank, post-refusal, for authority to release the documents: ignorance or banks ‘taking a view’ (deciding the risk of not following UCP500 is minimal).

3. I think the point you make about the underlying sales contract -stipulating issue of a credit subject to UCP500- is most interesting. I freely admit I had not considered it and am therefore grateful for your mentioning it. I would comment that:

A. In practice we have not received any adverse reaction over the 2 – 3 years we have adopted this policy;

B. I would anticipate that -in the unlikely event of this coming to court- a court would not regard this as a material breach of the underlying contract, especially where the beneficiary had failed to request an amendment to the credit.

Nonetheless, I recognise that there must at least be a theoretical risk.

4. If I understand correctly, your suggestion is that when the beneficiary presents the documents they give authority that the issuing bank may release them, post-refusal, without further authority. I see nothing wrong with this in principle. However, I cannot see that advising banks or remitting banks would wish to take it upon themselves to ‘educate’ beneficiaries.

(As an aside, it is not my experience that banks -that are not a nominated bank- will examine documents. Perhaps practice is different in your part of the world?)

5. To me, any bank –at least one that has to make a profit for its shareholders- is concerned to handle documentary business with the minimum effort and thus cost possible, while keeping operational risks at a reasonable level. This is what the approach advocated in my article is designed to achieve.

Finally, I look forward to further contributions from you.

Regards, Jeremy

[edited 2/25/02 12:45:20 PM]

Dear Hatem,

I am sorry that I may have created some misunderstanding regarding what I have meant in my contribution.
Just let me reassure that my statements are clear:

1. I did not want to suggest that the banks generally do not obey UCP 500 or do generally deviate from all the practices adopted and/or advised by the Banking Commission by means of their Opinions and other documents. The only point I wanted to show is that in my own practice no banks requested me (the bank I work for) as the presenter to authorise release of the documents after having sent a refusal notice and held the documents at the presenter’s disposal (another one’s practice may be different, of course). I did not address any other issue whatsoever. Since number of the Banking Commission documents is very clear to state that such treatment of the documents is not correct, I guess these banks do deviate from the very spirit of the UCP 500. I understand your statement that a malpractice should not be a benchmark for alteration. I just merely wanted to start my contemplations with a real situation that I derive from my own seven-year practice in the documentary business.

Further to your remark in 1. I really feel that the Banking Commission documents are to set something what may be called “sound practices“ and in this way “educate“ the bankers. I do not feel that even after nearly whole-life practice in the documentary credits I will know everything and will have “eaten all the world’s wisdom” as one says in Czech. I feel that we learn something new everyday since we face new situations everyday. And, as I see it, the Banking Commission issues not only rules such as UCP 500 themselves, but also “recommendations“. For example, some practices adopted by the banks may be considered inadvisable, however, they may fall under “unless otherwise stipulated in the Credit“ provision of the Article 1 of the UCP 500 (same may apply to the subject-matter of this very discussion). By saying here, for example, that these practices are not “standard” (even though it currently may not prohibit them) the Banking Commission, as I feel it, educates the bankers. Correct me, if I am wrong, please.

2. I am sorry that my comprehension of English might not be perfect but I did understand what you meant by “…do you think that a bad practice can sanction a third approach“. I really do not think that a bad practice may be a justification of a deviation from a backbone doctrine in UCP 500 and I have not suggested by a single word that this might be my way of thinking, if this was meant by the word “sanction”. Please read correctly my sentence “So I think Jeremy starts with very correct assumptions but ends up with a solution which may not seem correct to some others including myself.“ The only thing I wanted to say was that Jeremy approached a real-life problem, which a banker faces in his everyday practice.

3. Again, I feel that misunderstanding might have occurred here. I only wrote what I consider substantial. If I found such considerations in previous discussion, I would remain silent. Nevertheless, I feel that bankers should care about what the parties to the sales contract stipulated in their contracts just for the sake of saving problems to both the bank they work at and the parties themselves. And I feel here that the bank is not the one to amend the sales contract, which it is not party to, by imposing its own conditions without express authority to do so.

4. Let me summarize here my considerations outlined in the second part of my contribution. We have a beneficiary who presents discrepant documents to his bank (presumably different to the issuing bank; let me call this Bank B). Bank B checks the documents, finds discrepancies and informs beneficiary. Beneficiary is for the first time here faced with a statement that there are discrepancies within the documents (unless he presents discrepant documents knowingly, which would not have much effect on the situation, anyway). If beneficiary agrees that Bank B send the discrepant set of documents to the issuing bank (Bank A) for approval, this itself may suggest that bene agrees that documents be released to applicant despite discrepancies (on condition applicant either waives discrepancies at the first request or approves that the Bank A perform even after it refused the documents). However, UCP 500 states expressly that documents, if refused, must be held at the presenter’s disposal or returned and we are not here to raise any suggestions outside the scope of UCP or outside what is authorised by the parties. Therefore it is beneficiaries only who might authorise Bank B to contain a specific clause in their (i.e. „presenter’s“ from the viewpoint of the Bank A) cover letter to that effect that presenters and bene expressly agree that the documents be released despite discrepancies being claimed, however, strictly against Bank A’s full performance. This, in my opinion, might solve the situation (such a clause could be included, of course, only with beneficiary’s consent!). If the applicant wanted to bargain for a discount, Bank A would have to contact the presenter anyway, as payment subject to discount would not constitute Bank A’s performance under the credit. If the beneficiaries found another buyer, they could request return of the documents before documents being approved. And last but not least, if bene did not want such approach be adopted, they would not authorise their bank to write such clause in their cover letter. Here the beneficiaries play the active role (note that they have presented discrepant documents at the first place thus breaching the Credit contract and maybe even their sales contract with the applicants) and no preliminary restrictions of the UCP are imposed by the issuing bank. I am aware that these considerations might sound rather hypothetical and academic, but if found reasonable and in line with the spirit of UCP, I see no reason why one should not adopt such practice.
I hope that despite English not being my mother tongue, my considerations were spelled out comprehensibly to both native English speakers and others. Otherwise I am sorry to have distracted you by unclear contemplations and let us forget about them.
Have a nice day
Radek

LONG POSTINGS MAY MAKE READERS LOSE INTEREST IN THE DISCUSSION FORUM

We would suggest that the recent practice of posting long messages should be discouraged as we find it difficult to read all the postings. It is a very time consumming job.

All of us are busy people and we hope memebers would shorten their postings from now on, although each memeber has his or her own right to write as long as he or she pleases or in any style he or she prefers. However, busy peole like us may lose interest in the Discussion Forum.

Frankly we have a problem in following up the long positngs here, and may not have time left to post our views.

In a long posting, a short title may help the readers to grasp the core message in that particular paragraph.

A long paragraph should be broken into many short paragraphs. Otherwise it may discourage us to read further on.

www.tolee.com

[edited 2/25/02 6:16:47 PM]

Jeremy,

The notion of "customer" has been covered quite extensively in this forum and I shall therefore try to be very brief.

You are right saying that applicant is issuing bank's customer or principal. By issuing a credit based upon applicant's application the issuing bank enters into a contract with the applicant. However, by issuing the credit the issuing bank automatically enters into a separate contractual relationship with the beneficiary, too, and therefore I would suggest that in this way the beneficiary is also its customer.

Note that the credit may be advised to bene directly, i. e. without using different advising bank (mostly the case under domestic credits) and bene may even hold an account with the issuing bank here. Than you may see bene as a "customer" both in broader and narrower sense.

Regarding examining documents I see it as a general practice that the banks in the Czech Republic (and I have seen this practice in Austria, too) examine documents presented to them regardless of whether the credit is made available with them or not. This will mostly (but not exclusively) be the case where the credit is made available with the issuing bank.

Note that we deliver a service to the bene (bene see whether their bankers consider documents correct or not) and we get paid for this service.

T. O.,

I am sorry to be too extensive on the subject. I shall try to be more concise in the future.

Thank you for patience, anyway.

Regards to all

Radek

Radek,

As you say, the notion of ‘customer’ has been covered quite extensively in this forum and I shall also therefore try to be very brief.

I reject the idea that when one examines documents, as nominated bank, one is performing a service on behalf of the beneficiary. To me, one is performing the service –i.e. determining documents compliance and making (ultimate) payment- on behalf of the applicant. It is for this reason that I do not -& I believe ‘the law’ does not- consider the beneficiary a ‘customer’ (for the purpose of the transaction, even if they happen to hold an a/c with the issuing/nominated bank). Consequently, I would not accept your apparent proposition that entering into a contract with someone makes them AUTOMATICALLY a ‘customer’.

Regards, Jeremy

Radek

you have made a statement that "If beneficiary agrees that Bank B send the discrepant set of documents to the issuing bank (Bank A) for approval, this itself may suggest that bene agrees that documents be released to applicant despite discrepancies".

You are no doubt aware that there can be disputes between bene & negotiating bank and also between negotiating bank & issuing bank over what is/is not a discrepancy. Therefore it does not follow that the bene accepts that docs are discrepant by giving an instruction to the negotiating bank to send docs to the issuing bank. It follows that when this happens the bene has not agreed (even implicitly) that docs be released upon acceptance of alleged discrepancies by the applicant, regardless whether or not the issuing bank upholds the view of the negotiating bank regarding discrepancies.

This is not based on an hypothetical case, but past experience.

Laurence

Laurence,

there is no doubt that in many situations the proposed solution would not be applicable. It is very often the case that it is not in the interests of the bene and/or their bankers to turn attention to any points, which bene's bankers might find not in line with the Credit terms and conditions (be sure we both have similar experience regarding this).

However, there are cases, e. g. late shipment, missing documents, etc., where there is little doubt.

I am, of course, aware of the drawbacks of the proposed approach. I, nevertheless, disagree, for the reasons that have been covered earlier in the discussion, that the bene's rights in case of refusal of the documents, be restricted by an unilateral action of the issuing bank (be it upon issuance of the credit or upon sending its refusal notice). But this is the point where the opinions of the contributors may differ to such extent that there seems to be little space for any change of the standpoints.

Radek

Radek,

DC IS NOT A CONTRACT

We do not consider a DC as a contract made between the beneficiary and the issuing bank, although in many DC textbooks, especially those written by judges or lawyers, it is so stated.

Let us see a few special features of a contract here.

IF DC WERE A CONTRACT, THEN FUNNY THINGS WOULD HAPPEN

If the DC were a contract, then the non-presentation from the beneficiary would be regarded as a breach of contract. But this is not so. No issuing bank would sue a beneficiary for not making any presentation.

If the DC were a contract, then the beneficiary should have been involved in the drafting stage to ensure the terms and conditions in the DC are "brewed" together. But the terms and conditions are unilateral and not even known to the beneficiary unless it is advised.

A contract has a couple of key important elements, such as meeting of minds, terms and conditions made together by the two contracting parties, fair and in good faith (what about those DCs with a lot of soft clauses created by the applicants and/or the issuing banks together?).

DC IS A MERE PAYMENT UNDERTAKING BY A BANK

For us the DC is a mere payment undertaking by a bank, triggered by timely presentation of compliant documents and nothing more.

MANY LEGAL THEORIES TRYING TO EXPLAIN DC AS A CONTRACT BUT ALL HAVE FAILED

We have read the legal aspects of DC written by lawyers and there is no convincing analysis to help us believe that the DC is without any doubt a contract. Many law experts try to explain the DC with different approaches and theories, such as the "offer and acceptance" theory, the "seller's offer" theory, the "consideration" theory, the "novation" theory, the "guarantee" theory, the "estoppel" theory and the "unique system" theory. They appear very mechanical and not convincing.

DC AND BL ARE CREATED BY THE TRADERS WHO KNOW LITTLE ABOUT LAWS

We know if anyone trying to legalize the DC, he or she is bound to fail. The reason is quite simple. DC and BL are not created by the lawyers. They are created by the traders who do not know much about the laws. Hence they have made a very practical tool to help them trade well, but this tool needs not be fitting all the legal concepts.

ON BL FRONT

On the BL front, after many maritime cases giving unreasonable judicial decisions to the amazement of the parties, the Carriage of Goods by Sea Act 1992 of UK has to change certain basic legal doctrines in order to accommodate the BL transport practices.

ON CARGO INSURANCE FRONT

On cargo insurance front, the previous judicial decisions are that the final buyer may not have "insurable interest" (a condition precedent to claims) because at the time the cargo insurance is covered, the shipper does not know to whom his or her cargo may sell to in the commodity trade where brokers pass the BL from one broker to another whilst the vessel is still sailing in the high seas. Afterwards, the Martine Insurance Act of UK makes certain changes and regards the shipper as an agent of the "yet to be born" final buyer. In this way, the final buyer who appears later would be deemed to have "insurable interest" to enable him or her to make claims where necessary. Otherwise commodity trade cannot tick based on the original cargo insurance law concepts.

ON DC FRONT

We are certain that the law may make such accommodation to the DC in time to come.

www.tolee.com

[edited 2/26/02 1:19:58 PM]