ICC Digital Library Forum

Credit (established by SWIFT) calls for the delivery note to be signed by the authorised signatory of the applicant as per the specimen to follow by mail. If the issuing bank, fails to provide the specimen,can the nominated bank accept the documents as tendered?
Khalid

THE QUERY

An irrevocable DC requires a document to be signed by the applicant and it also states that a specimen of the document will be provided by the issuing bank at a later date. Howevcer, this specimen document is never provided before the DC expiry. In that case can a presentation missing this document be deemed as compliant?

COMPLEX ISSUES THAT NEED MORE DATA CONTENT

This query may not be as simple as it appears on its face. More concrete data content must be provided for a more relevant opinion.

As a consultant, we immediately think of the complex situation in which the nominated bank may not be the advising bank. Then how can the nominated bank know whether the issuing bank has not sent out the specimen document, when it examines on the face of the documents alone as required by the UCP 500 Article 13?

A LEGAL ISSUE RATHER THAN UCP ISSUE

Whether this is a dicrepancy or not appears to be a legal issue to be determined by the court that has jurisdiction over this dispute.

The beneficiary should refuse the DC or ask for an amendment to avoid risks.

NO UNIFIED OPINIONS AMONGST ICC EXPERTS

We have discussed similar issue with some ICC experts and they may have different opinions amongst themselves. Some consider that the beneficiary would be bound by the terms of the DC if he does not object such terms upon receipt. However, from our experience, some beneficiaries may know little, if not nothing, about the UCP and do not realise the trap until it pops up to kill them.

Some experts consider this a revocable DC under the disguise of "irrevocability" or a wolf in sheep's clothing. This can be classified as a soft clause. It is also similar to a DC stating that it is valid only upon receipt of further notification from the issuing bank, like certain revolving DC, after a drawing, its validity is to be reinstated only upon receipt of further instructions from the issuing bank.

So there is no unified answer to this query and the answer depends on how one looks at this issue.

BANKS SHOULD NOT ISSUE SUCH DC IN THE FIRST PLACE

From our view, banks should be discouraged in issuing such DC, that would only damage the good image of DC built up by ICC in the last fifty years or so.

http://www.tolee.com

[edited 1/6/02 5:38:21 AM]

The situation raised here happens quite often, especially in our area. I consider this practice as similar to issuing a pre-advice LC or an LC that states the mail confirmation will be the operative instrument. There is no doubt that the issuing bank is committed to provide the specimen signature and must do it without delay.

Nevertheless, a prudent nominated bank would not add its confirmation to such LC nor negotiate any document unless the specimen signature is received. The specimen signature might have actually been sent by the issuing bank and got lost in transit. Such prudent nominated bank would not have a problem in presenting the documents, on behalf of the beneficiary, to the issuing bank as tender but in no way would accept or negotiate drafts drawn under such credit unless the missing specimen signature is received.

The beneficiary who opted to perform before the specimen signature is received through the banking channel takes the risk on the issuing bank. This of course is not advisable.

ORIGINAL TEXT OF THE QUERY

“Credit (established by SWIFT) calls for the delivery note to be signed by the authorised signatory of the applicant as per the specimen to follow by mail. If the issuing bank, fails to provide the specimen, can the nominated bank accept the documents as tendered?
Khalid”

TWO INTERPRETATIONS POSSIBLE

The wording of the query quoted above is not absolutely clear and precise and may have two interpretations. The word “specimen” may mean a “specimen of the authorized signatory of the applicant” or a “specimen of the delivery note”.

From risk management and fraud prevention points of view, we would not suggest providing the specimen signatory of the applicant to the beneficiary. This may encourage forgery if it needs to be done. If the applicant was a regular customer of the beneficiary, then the beneficiary should have known the signatory of the applicant. Under such circumstance there is no need to provide a specimen signatory. If they are strangers, then it is risky to do so.

That is why we have reworded the query to mean specimen of the delivery note as a document although we are aware that this may not be the original intent of the enquirer Khalid. We have our purposes for doing this:

(1) To broaden the scope of the query without affecting its nature, where the answer to the two scenarios should be almost the same.

(2) Not to encourage the practice of sending specimen signatory to strangers.

(3) Considering that our postings here (only ours and not other members’ as we do not have their copyright) may also be viewed in our website. We have to reword the query in order not to hurt the copyright of the enquirer.

From our experience in international trade operations, some customs and import control offices (such as those issuing import licences and import tax preference certificates) may require a specific document to be made out in the format meeting strictly the specimen provided by the government bodies. Certain data content must be provided by the parties. A specimen is a clear indication of the government needs.

SPECIMEN DOCUMENT SHOULD BE SENT TOGETHER WITH THE DC

So it makes sense for the issuing bank to provide a specimen of the document in the DC to warrant the right document is presented. But it does not make sense for the issuing bank not to provide the specimen document at the time of issuing the DC by SWIFT and delay it to a later date. This is not only not a good banking practice but the issuing bank may also be suspected by the beneficiary to have a hidden agenda, of either avoiding its payment undertaking after receiving an opening commission or trying to help the power applicant to void the DC whenever the need arises.

RISK FOR THE APPLICANT

There is a risk for the applicant if the trade is a commodity. If its price goes up sharply, the beneficiary may treat the specimen as an amendment and refuses it, selling the good to a third party for more profit. May we share Chinese words of wisdom here - “A needle cannot be sharp at both ends”.

BUSINESS ETHICS FOR A CONSULTANT

I still remember that in one of my workshops, a gentleman approached me during a coffee break, leading me to a quiet corner and asked: “Mr. Lee, theoretically, is it possible to issue an L/C in such wording so that the applicant may avoid taking up the documents if he needs to?’ I responded, “This is of course possible, not only theoretically buy also practically!” “Would you give me a private tuition and I will pay whatever fees you would charge”, proposed by the gentleman.

I gave him a free advice: “If I need this sort of money, why not I do it myself? If I wish to do it, I do not need to share my secrets with you to create a competitor. If too many people were doing the same thing, measures would be taken by the banks or the authorities to stop it. That is why if you can find somebody who wishes to share his secrets with you, he should be a stupid guy and his scheme may not work! So please give up this idea. I would not do it and you should not do it too! As human being, we have this thing called business ethics”.

http://www.tolee.com

[edited 1/10/02 7:25:43 PM]

I do agree with T.O.Lee that specimen signatures should not be divulged to the beneficiary. In fact LC’s that involve specimen signatures should be avoided. On receipt of such LC’s some nominated banks would advise the issuing bank that the matching of the signature appearing on the document with that of the specimen would be made on its face. I would not know how far this kind of clause would protect the nominated bank.

ýNevertheless, the practice of including the condition of the specimen signature in an LC and providing copy of it to the beneficiary is widely acceptable in our region. In fact a bank that tries to avoid such conditions would lose the local LC’s business. Though I have not seen statistics on how many fraud cases lodged due to this practice, I have only heard of one case so far. In reality, quite often, documents under such LC’s are rejected due to mismatch of the signature appearing on the documents verses the specimen signature provided to the beneficiary. Usually beneficiaries don’t care to check ýýthat the signatures on the documents they present to the bank tally with the specimen provided and thus giving way to discrepancies and delay or possibly rejection of payment to them.

We don’t stop from educating our clients that such LC’s, in many cases, are actually not LC’s. They don’t usually give protection to the beneficiary since payment is contingent on applicant’s signature on certain documents. We do this through customers’ seminars and face to face meetings but as it is in all other cases this habit is hard to die.

[edited 1/7/02 5:12:10 AM]

I agree that such practice should be discouraged, but if a bank issues it, the advising bank should treat it as a pre-advice. The L/C should not be regarded as valid until receipt of the authorised signature. The absence of this should be regarded in the same way as the absence of any other critical piece of information. Would the advising bank have issued its advice if the L/C stated "List of documents required to follow by mail" ? In my opinion, the absence is of the same importance.

I must admit that when I first read the title of this topic, I thought that we would be discussing somebody's arrest under breathalyser laws !!!

Laurence
[edited 1/7/02 9:51:10 AM]

I follow the reasoning given by AbdulkaderBazara. Also in my country this is quite usual in area of local L/Cs. Banks issue the L/C to become operative only on receipt of the specimen signatures with the advising bank.

Pavel Andrle

[edited 1/8/02 7:41:30 AM]