ICC Digital Library Forum

What risk, if any, does a bank incur where it issues a credit requiring bills of lading made out to the order of the issuing bank?

Thanks, in advance, for your views.

[edited 7/13/2010 3:51:05 PM]

Hi Jeremy,

Notwithstanding that more than 95% of L/Cs issued by our bank always require B/L issued to our bank’s order, so far our bank has not incurred any risk. This does not always mean that there will be no risks. Potential risks will appear when the documents presented are complying but the applicant has gone bankrupt or disappeared in thin air for some reason. If this is the case the issuing bank will encounter some risks and difficulties as follows:

- to honour the documents and take delivery of the goods
- to be liable to carrier, agent, and port authorities for unpaid freight, freight surcharges, demurrage and other liabilities.
- to be liable for customs clearance. I think it depends on each country’s customs regulations but I believe the formalities required must be much more complicated than in the case where the applicant takes delivery of the goods.
- to sell the goods to recover the costs paid. I’m afraid the issuing bank is not allowed to sell the goods directly to others as their business line does not include trading of goods.

Bank staff do not have experience in handling these transactions. If this is the case the issuing bank should sell the goods to another eligible buyer by endorsing the b/l to that buyer.

Regards,
Duc N.H

Thanks for your quick and comprehensive reply; its appreciated.

Regards, Jeremy

I agree. As long as you do not enforce your rights under the B/L you are not part of the transport contract. But if you enforce your rights you are with the consequences described by Duc N.H. If you have to enforce your rights, the first thing to do is to go to Legal.
Daniel

We do come across some times banks calling for BL issued "To Order" and blank endorsed.

Is there any specific reason for getting BLs issued this way?

One reason could possibly be to avoid any potential claim on the consignee from the shipping company.

It is quite rare for my department to issue doc. credits requiring that goods are consigned to the Bank. The specific reasons are:
1. the applicant has requested that the BL issued "to order" and blank endorsed.
2. the Bank no interest in the goods and –if it did- we could still take delivery of them, unless the documents were lost between any nominated bank and us.
3. it is perceived that stipulating that goods are consigned to the Bank creates potential risks where the documents are non-complying and the applicant refuses to waives discrepancies.

I prefer to avoid "to order and blank endorsed". Because they are bearer BL's it is very difficult to replace them if they are lost or misplaced.

Jeremy,
Depends.
A bank may have interest in the goods if it finances the transaction.
The bank does not want to have the property of the goods, it wants to get the goods as collateral.
Now it may depend on the goods.
If a bank finances a shipment of bikes, presumably it will not want the goods as collateral. It will look for other securities. Reasons: no stock- market, goods depreciating rather quickly.
But if the goods are soft or hard commodities for which there is a stock-market, the goods may be used as collateral for the financing of the transaction. The collateral will be the goods or the document representing the goods i.e. the B/L.
What matters for the bank is to have the document in its possession. The fact that the B/L is issued to order and blank endorsed, or to the order of the bank or even to the order of applicant amounts approximately to the same as long as the bank is in possession of the B/L. Mind you, a lawyer wrote an article dealing with the different ways a B/L is issued. It is a "dédale de subtilités" I have never fully understood it. The main point, anyway, is to be in possession of the B/L to enforce your rights if need be. Again without forgetting that if a bank enforces its right sand takes possession of the goods it becomes part of the contract
Daniel

Glenn,

That may be the case (but I am not convinced that it is; in my -admittedly limited- experience the rigmarole is the same however the BLs are made out) but it is not the issuing bank’s problem, unless a nominated bank is involved and the issuing bank is looking to the goods as security.

Daniel,

I quite agree that a bank may have interest in the goods if it ‘finances’ the transaction (but it is rarely the case that the bank is ‘financing’ the transaction in respect of the vast bulk of credits my department issues) and with what you say in general.

Regards, Jeremy