ICC Digital Library Forum

UCP has allowed banks to establish L/Cs either at the request of their customers or on their own behalf. how would you go about L/C issued by a bank on its behalf routed to a beneficiary either directly or through another bank considering 1. conflict of intersts 2. confirmation 3. negotiation of documents 4. authentication 5. refusal of documents.

[edited 2/3/01 12:28:56 PM]

The UCP rules were set up to provide an impartial means of settling payments based on documents presented. This basis applies regardless of whether a bank is an applicant or not. Therefore the points you raise (1, 3, 4, 5) will similarly be subject to an objective scrutiny under the UCP rules.
Your point #2 (confirmation) is an issue for the intended confirming bank only.

Laurence A. j. Bacon
laurence_aj@hotmail.com

*just shedding some light on the question*

if i'm not mistaken this is used in islamic banking trade L/Cs.
so, we must understand the folowing:
1- are these L/Cs subject to UCP500? (as islamic banking has it's own point of view on trade transactions ....etc)
2- are these L/Cs between banks using islamic practice ( in which case will they use the UCP or not)

The key point is that the Applicant (even if a bank) is not party to the definite undertaking of Letter of Credit as issued in the name of the Issuing Bank . It is for the other parties to determine whether to confirm, negotiate
and for the beneficiary to determine whether to ship or not.

It is quite common for a bank to appear as an LC applicant when a bank is purchasing capital equipment for subsequent leasing to customer.

Vob@obrico.com
[edited 4/12/01 9:34:54 PM]

There are three "contracts" (just to borrow this term for your easy understanding and I do not mean that an LC is a contract as many lawyers think so) in LC operations. The 1st one is between the applicant and tbe beneficiary, the second one is between the applicant and the issuing bank and the third one is between the beneficiary and the issuing bank.

In general, an LC has three parties, the issuing bank, the advising/nominated bank and the beneficiary. In a 2 party LC, there are only two parties, the issuing bank and the beneficiary, without the advising/nominated bank because such LC is sent directly from the issuing bank to the beneficiary.

Also in a what we call "two party" credit, the issuing bank and the applicant are one and the same legal person.

THEORETICALLY, this does not sound so nice. However, from a PRACTICAL point of view, if a bank wants to be naughty, it can do so whether or not it is a 3 party credit or a 2 party credit. The result is the same any way.

When one person does naughty things, it is considered as a bad habit. But when most of the people are doing the same naughty things, it is then considered as a practice. And law also follows practice. So there is no such thing as absolutely right or wrong in this world. We have to measure "right" or "wrong" according to the will and behaviours of the majority who always wins.

Disagree? When God made mankind, we were all naked. But now if we try to go out naked, we have broken the law, which is based on practice.

I appreciate this thought provoking query from Mr. Shehab, which I cannot provide a good answer because I cannot fight practice. What we can do is to be alert on the risks attached to 2 party credit and the golden rule "buyers beware" always applies.

I admit that a 3 party credit is better than a 2 party credit, from the beneficiary point of view. If you take the issuing bank or applicant point of view, then it is another ball game.

I am from www.tolee.com


[edited 5/24/01 11:56:35 PM]
[edited 10/26/01 3:56:47 AM]

I agree with Vobrien and others that there is no problem in practice and L/C issued by a bank on its own behalf is even expressly allowed by UCP500 itself in article 2. This is not a “naughty thing” at all as someone might suggest. There is a commercial need for this, for instance in StandBys.

Pavel Andrle

Dear Pavel,

When say "naughty things", of course we do not mean "two party credit" (which everybody knows is an established banking practice) although we made such statement whilst we commented on "two party credit". We mean those "soft clauses" in the DC or ... shalll we continue?

T. O.

[edited 8/30/01 7:58:52 PM]