ICC Digital Library Forum

I would like to share with DC-Pro subscribers two clauses incorporated in an LC recently received by us with brief comments. Hatem, the two clauses may be used as an ideal examples for your workshop.

a) DOCUMENTS NEGOTIATED / FORWARDED FOR PAYMENT BY A BANK OTHER THAN OUR NOMINATED CORRESPONDENT, SHALL BE TREATED AS DISCREPANT DOCUMENTS AND SHALL BE HANDLED AS APPROVAL / COLLECTION DOCUMENTS.

Comments: I am not sure how the bank came to this conclusion. I wonder how the bank could forgo article 9 of UCP 500 that clearly stipulates the liabilities of Issuing and Confirming Bank. The beneficiary can present documents to the nominated bank or directly to the Issuing Bank using any method of its choice as long as documents that comply with terms and conditions of the credit are presented to either the nominated bank or the Issuing bank within the validity of the credit.

B) DOCUMENTS FORWARDED FOR APPROVAL OR PAYMENT WITHOUT INDICATING THE DISCREPANCIES SHALL BE TREATED AS COLLECTION DOCUMENTS WITHOUT ANY LIABILITY AS PER ART. NO. 14 ON OUR PART

Comments : Actually article 14f states the contrary. The issuing bank is not relieved from its prime duties of checking documents and advising the presenter of any discrepancies highlighted within the allowed time frame (article 14d-i). One needs to also consult page 48 (last paragraph) of UCP 500 & 400 which states as follows:

It should clearly be the Beneficiary's choice whether he wishes the remittance of discrepant documents to the Issuing Bank or Confirming Bank, if any, to be governed by UCP or URC Rules. Also, NCs expressed the view that a mandatory application of the URC in UCP 500 sub-Article 14(f) would be contrary to generalized banking practices.
[edited 2/3/02 11:58:59 PM]

Abdulkader, wonderful. I think it is going to be fun in May when I present the workshop on managing export L/Cs, although I have other interesting conditions however this seems to be fresh.

A) DOCUMENTS NEGOTIATED / FORWARDED FOR PAYMENT BY A BANK OTHER THAN OUR NOMINATED CORRESPONDENT, SHALL BE TREATED AS DISCREPANT DOCUMENTS AND SHALL BE HANDLED AS APPROVAL / COLLECTION DOCUMENTS.

Desperate disease needs desperate remedies

I think the issuing bank is trying to sound “smart” in hitting two birds with one stone. The bank is trying to combine two things at once. The letter of credit is restricted for negotiation to the nominated bank. If the beneficiary decides to approach another bank except that nominated in the credit, the credit will automatically cease to be reliable instrument for payment and documents will be automatically subjected to URC 522 and to hell with the beneficiary who does not listen.

The stipulation of restricted negotiation credit is not uncommon. The restricted negotiation is implied in article 10 (b), which refers to freely negotiable L/Cs. The UCP does not impose limitations on the number of negotiations permitted under a particular L/C for the same draft(s) and/or document(s). Therefore issuing banks believe that restricting negotiation enables them to control their obligations abroad. Hence, they overcome this problem by adding a stipulation that the negotiation is restricted and should be effected at the counters of the nominated bank by the beneficiary only.

What is surprising here is to unilaterally impose that in case of violating this restrictive stipulation the whole credit ceases to be available. The bank is trying to create a default rule I the credit and this rule does affect not only the interest of the beneficiary as it may appear but also in some circumstances the interests of the applicant, in the event that there is a sales contract between him and the beneficiary. In the latter case if the contract stipulates that the applicant is required to establish irrevocable L/C then in this case beneficiary may sue the applicant for not having complied with the sales contract by inserting such a defective condition in the L/C, or simply request for an amendment and until then there might be delays in shipment or at worse if the sales contract provides for a time limit to establish L/C, and this time limit elapses before the amendment of such instrument then the beneficiary may opt to deem the contract as cancelled, perhaps because the prices has gone up or he has another better option with another buyer to exercise.

The problem can be further complicated if the beneficiary utilizes such L/C (if his bank is also suffering from defective trade finance thinking) and then become stuck with the issuing bank due to this stipulation. I think that this stipulation is serious one and I doubt if the applicant is 1% aware of the plight. Luckily Abdulkader is there to detect such malpractice.

Unfortunately some banks try to manufacture conditions they think it will render the credit a watertight status. It is very important that the issuing bank urgently think of the proverb that we quoted above “Desperate disease needs desperate remedies”.


B) DOCUMENTS FORWARDED FOR APPROVAL OR PAYMENT WITHOUT INDICATING THE DISCREPANCIES SHALL BE TREATED AS COLLECTION DOCUMENTS WITHOUT ANY LIABILITY AS PER ART. NO. 14 ON OUR PART.

“A man cannot serve two masters”

The letter of credit cannot be construed as subject to two rules UCP 500 and at the same time be automatically subjected to URC 522. although, the nominated bank although required to decide within 7 business date the fate of these documents, the bank is not required to do so on behalf of the issuing bank, but the decision solely concerns that bank. As per article 13 b the nominated bank has either two decisions to exercise one is to take up documents OR to refuse them. It seems that the bank here has an interesting interpretation of this article that “a nominated bank has to indicate whether the documents are compliant and therefore accepted for him or otherwise they are discrepant and following that the nominated bank has to state all the discrepancies detected by him” an interesting and forgivable mistake if it is so. We really do not want to be harsh to the issuing bank by saying that their action smells a degree of ignorance on their part regarding not only the literal meaning of UCP but rather its spirit and the common sense that bankers working in trade finance should possess.

The nominated bank may have opted to simply forward the documents without getting himself in the negotiation process, or do not wish to be a nominated bank and take the risk of raising what could turn to be later invalid discrepancies. The nominated bank may have serious doubts on the financial standing of the issuing bank and for the subsequent reimbursement if he take up documents and consider them as compliant as a result of his negotiation.

Even if the bank is a confirming bank, the result is simple. The bank will be precluded of later of claiming that documents are discrepant since the 7 days period has elapsed.

We do not wish to see banks becoming so lazy and so dependent on other parties to tell them if the documents are discrepant or not, although every one would wish the nominated bank would state the discrepancies detected by it however the issuing bank should not rely on this because there might be a great danger in that. Consider this scenario. What if the nominated bank stated the following discrepancies?
- Invoice does not state the order number as appearing in the description of goods in the L/C.
- Certificate of origin did not state the full address of the manufacture as required in the L/C
- Packing list did not state the packaging is in “jute bags” instead it stated in “bags”.

If the issuing bank, relying that this is the only discrepancies contained the documents, approaches the applicant, then the latter will likely waive the discrepancies since they appear for him to be trivial and worthless rejecting the whole deal. What if there is some serous discrepancies other than the above like:
- Bill of lading signed by the agent without indicating the capacity or on whose behalf he is signing.
- The bill of lading indicates an intended vessel and the on board notation is not dated nor the name of the actual vessel the cargo was loaded thereon.
- The analysis certificate indicates an unacceptable percentage of aflatoxine in the goods.

In this case the issuing bank will face serious consequences if the applicant sue it for negligence.

I personally know a real case, which is the outcome of insolence, which in my opinion is synonymous to ignorance.

A documents checker has reviewed that the covering schedule states that all terms and conditions are fully complied with. Since the bank was a prime one in Europe the documents checker had full confidence in that statement. However there was just something, which his subordinate noted. The invoice was legalized by the consulate of XYZ country in ABC country in Europe, although the L/C stated that legalization should be from SSS consulate in ABC country in Europe. The invoice stated “ there is no SSS consulate in ABC”. The beneficiary also submitted a certificate to this effect. The “smart” checker called the ministry of external affairs to ascertain this information, which was confirmed as true by the information and inquiry desk at the ministry. The checker without consulting his boss and without even talking to the applicant delivered documents to the applicant representative as compliant. After few days the applicant returned the documents to the bank stating they are discrepant, mainly because of the legalization issue, but there was also another discrepancy, which he has detected. To the surprise of the bank the health authorities confiscated the cargo and requested the carrier to return the shipment because it was not fit for human consumption. To add fuel to the fir, local newspapers addressed the issue and published the name of the bank under whose name the shipment is coming. The bank was forced to reship the goods.

one more thing to the issuing bank to draw their attention to article 10 c that provides "nomination by the issuing bank does not constitute any undertaking by the nominated bank to pay, to incur a deferred payment undertaking, to accept draft(s), or to negotiate". let alone the article 14 (f)

All is not gold that glitters

Although this is supposed to be a letter of credit, it smells the opposite. The issuing bank is trying to shift a major portion of his responsibilities to the nominated bank so that he can relax. Ultimately the issuing bank will relax if so he wishes to continue.

Like Abdulkader, I had always assumed that where there is a nominated bank the beneficiary is entitled, by virtue of sub-Article 9a, to present documents direct to the issuing bank. However, I have come across what appears to be a contrary view in ‘Documentary Credits’ by (Judge) Raymond Jack et al. Section 6.10 states:

‘The second paragraph of Article 10.b.i is perhaps not very clearly worded. …… It does not mean, for example, that the documents can be presented to the issuing bank as an alternative to the bank to which the credit provides that they are to be presented’.

From memory, the view that an issuing bank is entitled to insist documents are presented to the nominated bank is reiterated elsewhere in the book, but it is so large I cannot presently find the section. Overall, I now have an open mind on the subject.

Either way, I see nothing wrong -in principle- in stipulating that a provision of the credit contract is that documents must be presented through the nominated bank.

Hatem, I hope you’ll not mind my mentioning, but traditionally the expression is ‘All that glisters [as opposed to glitters] is not gold’. However, given your past academic history, it would not surprise me if you were already aware of this.

Jeremy,

I would agree with you if the letter of credit were subject to UCP 400. However, if you would look at UCP 500 & 400 compared, on page 29, it states that the issuing bank as nominated bank is deleted due to the liability of an issuing bank is now clearly set forth in article 9a of UCP 500. This, I believe, emphasis that the beneficiary has the right to approach the issuing bank directly instead of the nominated bank for payment.

In addition, since article 10c gives the nominated bank the right to decline, at any stage, to carry out the instructions given by the issuing bank, is it practical to restrict the beneficiary to present documents only to the nominated without giving him the alternative to present documents directly to the issuing bank? The nominated bank may advise the LC to the beneficiary and then, for any reason, may refuse to even forward the documents to the issuing bank on behalf of the beneficiary let alone pay or incur deferred payment under taking or accept or negotiate. Appreciate if you would put some more light on your comments.

[edited 2/4/02 1:26:05 PM]

Abdulkader,

First of all, I must stress that I am not saying I disagree with the statement a beneficiary is entitled to submit documents direct to the issuing bank, where there is a separate nominated bank. I read sub-Articles 9a and 10bi in the same way as I believe you do. What I am saying is that I no longer assume my reading is definitely correct, given Jack et al’s comments.

I have now found the other statement in Jack’s ‘Documentary Credits’ (3rd edition, which covers UCP500) to which I was referring (page 36):

‘…… the view [is] expressed by the ICC Banking Commission , Opinions (1984 – 1986) ICC No 434 Ref 95 that documents may be presented direct to an issuing bank …… even though it has specified another bank as the negotiating bank in the credit …… It is suggested that, if a bank specifies negotiation through a particular bank as a term of the credit, it is surely entitled to insist on such negotiation (unless the bank specified has refused ……) and to reject documents presented to it direct.’

Regards, Jeremy

Dear Jeremy,
I have also found some comments in some books written by lawers, consultans, advisors etc. which I consider to be not consistent with international standard banking practice.
Re. the issues above: the only prudent approach will be to insist on deleting these conditions from the L/C by amendment.

Pavel Andrle
[edited 2/4/02 5:02:18 PM]

These conditions are certainly not agreement between the buyer and seller in the sales contract. Is the purpose of LC to faciliate trade or just a vehicle for bankers to grap money. Issuing banks incorporate similar terms in their LCs are passing their costs and responsibilities to the negotiating bank but enjoying the issuing fee and payment fee. Sometimes, they do enjoy rebate from the negotiating bank who imposes heavy charges on the poor beneficiary. If this is to be continued, I will forsee less LCs in the market.

Regards

Dear Pavel,

I certainly agree that those clauses should be deleted, however, unless requested by the beneficiary, do you think any nominated bank would take the initiative to have the clauses removed? I don't think so despite the problems raised in the preceding comments since the nominated bank is not affected by any means. Besides, if it does so, it would close its doors to forthcoming business.


[edited 2/5/02 6:52:38 AM]

Jeremy

Thank you for pointing out the traditional form of the proverb.

In fact this proverb had different forms since it was first known since 1300. The current form is “all is not gold that glitters”. The traditional one is “ all that glisters is not gold”. You know language is evolving just like UCP, perhaps when I quoted this I had, unconsciously, in mind the circle of evolution.

Abdulkader,

I would certainly hope that an advising-nominated bank would insist on deletion of clause B, given the actions of the nominated bank ought not to have any impact on the obligations of the issuing bank to the beneficiary. Having said that, I could sympathise with an advising-nominated that took a pragmatic decision not to do so, on the basis of risk v cost, i.e. reverting to the issuing bank costs money and ensuring the discrepancies are listed on the remitting schedule is quite simple and straightforward.

Hatem,

As I expected, an erudite response from you.

Jeremy

[edited 2/5/02 9:39:30 AM]