BANK A ISSUED A SB LC TO BANK B WITH DETAILS A/F:
QUOTE
PLEASE VERY URGENTLY ISSUE UNDER OUR RISK AND RESPONSIBILITY YOUR COUNTER STANDBY LC IFO BANK C IN YOUR STD FORMAT REQUESTING THEM TO ISSUE A P/B IN THEIR FORMAT FOR AN AMOUNT OF.... FOR AN A/C OF XYZ CO., LTD AND IFO ABC CO., LTD COVERING THE PERFORMANCE OF CONTRACT NO...., PAYMENT UNDER THIS P/B IS ONLY EFFECTED UPON RECEIPT OF THE FOLLOWING DOCS VIA THE BUYER'S BANKER:
1....
2....
3....
IN CONSIDERATION OF YOU ISSUING YOUR CSBLC AS REQUESTED ABOVE, WE HEREBY OPEN IN YOUR FAVOUR OUR SBLC FOR AMOUNT.... AVAILABLE AGAINST YOUR TESTED MSG THAT YOU HAVE DULY ISSUED YOUR CSBLC AS REQUESTED BY OURSELVES..." (NOTICE: SBLC IS SUBJECT TO UCP600)
.
BANK B ISSUED CSBL REQUESTING BANK C TO ISSUE P/B BUT IN THE CSBLC THEY DELETE OUR CONDITIONS "PAYMENT UNDER THIS P/B IS ONLY EFFECTED UPON RECEIPT OF ...1... 2... 3..."
.
BANK C CLAIM BANK B FOR PAYMENT AND BANK B CLAIM BANK A THE SAME WITH CONFIRMATION THAT THEY ISSUED THE CSBLC AS REQUESTED BY BANK A.
.
CAN WE CONSIDER BANK B TO ISSUE THE CSBLC IN COMPLIANCE WITH BANK A? CAN BANK A REFUSE THE CLAIM OF PAYMENT DUE TO BANK B NOT TO ISSUE THE CSBLC AS REQUESTED? IS IT ALLOW THAT BANK B HAS THE RIGHT TO DELETE THE CONDITIONS BANK A REQUEST WITHOUT PRIOR CONFIMATION? WHAT SHOULD WE THINK ABOUT THE REQUEST "ISSUED IN THEIR FORMAT"?
standby LC
standby LC
It is a pity the transaction is not subject to ISP 98. Rule 4.21 deals with this matter. Rule 4.21 addresses the fact that the SB recites the text of the separate undertaking. But the rule does not specify what happens if the instructions are not followed. So technically speaking, as the 2 undertaking are separate, bank A should honour if it receives the message "that you have duly issued ..." The fact that the instructions were not carried out would be beyond UCP or ISP. Maybe our American friends would be willing to comment.
Daniel
Daniel
standby LC
Hi Daniel
I forget to inform the following detail. Before receiving the claim from Bank B, Bank A also received a tested swift msg from Bank B saying that they excluded all Bank A's conditions for P/B as Bank B's and Bank C's standard format" don't have these conditions.
I wonder
1/How should we understand the word "standard format"
2/Is Bank B allowed to exclude Bank A's conditions for P/B without prior confirmation with Bank A?
3/ Can we consider the swift msg of Bank B as a proof that Bank B has not duly issued the CSBLC as Bank A's request?
I forget to inform the following detail. Before receiving the claim from Bank B, Bank A also received a tested swift msg from Bank B saying that they excluded all Bank A's conditions for P/B as Bank B's and Bank C's standard format" don't have these conditions.
I wonder
1/How should we understand the word "standard format"
2/Is Bank B allowed to exclude Bank A's conditions for P/B without prior confirmation with Bank A?
3/ Can we consider the swift msg of Bank B as a proof that Bank B has not duly issued the CSBLC as Bank A's request?
standby LC
Having received a facially complying demand under a UCP600 SBLC, A is obligated to honor the demand. UCP provides for no exception.
ISP98 if applicable, would provide no exception to A's obligation to honor. If A honored, Rule 4.21, should protect A vis a vis the applicant (absent receipt of a timely court order enjoining honor). (UCP600 is less clear on this topic.)
Applicable law may well provide for an exception based on fraud/abuse. That extraordinary legal exception may possibly allow for a defense in this case against honor or allow the applicant to obtain a court order enjoining honor.
Applicable law (or the particular agreement between the issuer and applicant) may well provide that the applicant is ultimately responsible to reimburse and indemnify the issuer no matter what the issuer decides to do in this case.
Codified US law (Article 5 of the Uniform Commercial Code as adopted by all 50 states with very few variations) provides for a "material fraud" defense and allows the issuer to invoke it or not and, if not, allows the applicant to seek injunctive relief by convincing a court that more likely than not the drawing is materially fraudulent and post-honor recovery from the beneficiary would be uncertain.
The extraordinary defense of "material fraud" is equitable, so that I would want to know more about the conduct of the beneficiary, applicant, and issuer in this case before opining on the question under US law. In this regard, invoking the fraud exception does not simply raise a question as to whether the statement "We duly issued the requested undertaking" is false or known to be false by the beneficiary. Among other things, it would matter whether conditions 1, 2, and 3 were met or whether the applicant was otherwise obligated in the underlying transaction. When the fraud exception to independence is invoked, the underlying transaction becomes relevant in the fraud dispute, particularly if a court focuses on the intent and reliance aspects of a fraud claim. See UCC 5-109.
UCC Article 5 provides for and allows significant post-honor rights in a case like this. The applicant (or the unreimbursed issuer asserting the applicant's rights) may have a post-honor warranty right against the beneficiary for violating the agreement intended to be supported by the SBLC (i.e., the agreement that the beneficiary issue the requested undertaking in consideration of SBLC issuance). It would be considerably easier to prove that the statement of due issuance of the requested undertaking breached this UCC 5-110 post-honor warranty than that the statement constituted UCC 5-109 fraud. This codified post-honor warranty is peculiar to US law, but US law, like the law of other jurisdictions, also allows for post-honor rights and remedies based on the applicant's underlying contract with its ultimate counterparty and also based on statements contained in documents presented under a letter of credit for ultimate delivery to and reliance by the applicant.
Regards, Jim Barnes
ISP98 if applicable, would provide no exception to A's obligation to honor. If A honored, Rule 4.21, should protect A vis a vis the applicant (absent receipt of a timely court order enjoining honor). (UCP600 is less clear on this topic.)
Applicable law may well provide for an exception based on fraud/abuse. That extraordinary legal exception may possibly allow for a defense in this case against honor or allow the applicant to obtain a court order enjoining honor.
Applicable law (or the particular agreement between the issuer and applicant) may well provide that the applicant is ultimately responsible to reimburse and indemnify the issuer no matter what the issuer decides to do in this case.
Codified US law (Article 5 of the Uniform Commercial Code as adopted by all 50 states with very few variations) provides for a "material fraud" defense and allows the issuer to invoke it or not and, if not, allows the applicant to seek injunctive relief by convincing a court that more likely than not the drawing is materially fraudulent and post-honor recovery from the beneficiary would be uncertain.
The extraordinary defense of "material fraud" is equitable, so that I would want to know more about the conduct of the beneficiary, applicant, and issuer in this case before opining on the question under US law. In this regard, invoking the fraud exception does not simply raise a question as to whether the statement "We duly issued the requested undertaking" is false or known to be false by the beneficiary. Among other things, it would matter whether conditions 1, 2, and 3 were met or whether the applicant was otherwise obligated in the underlying transaction. When the fraud exception to independence is invoked, the underlying transaction becomes relevant in the fraud dispute, particularly if a court focuses on the intent and reliance aspects of a fraud claim. See UCC 5-109.
UCC Article 5 provides for and allows significant post-honor rights in a case like this. The applicant (or the unreimbursed issuer asserting the applicant's rights) may have a post-honor warranty right against the beneficiary for violating the agreement intended to be supported by the SBLC (i.e., the agreement that the beneficiary issue the requested undertaking in consideration of SBLC issuance). It would be considerably easier to prove that the statement of due issuance of the requested undertaking breached this UCC 5-110 post-honor warranty than that the statement constituted UCC 5-109 fraud. This codified post-honor warranty is peculiar to US law, but US law, like the law of other jurisdictions, also allows for post-honor rights and remedies based on the applicant's underlying contract with its ultimate counterparty and also based on statements contained in documents presented under a letter of credit for ultimate delivery to and reliance by the applicant.
Regards, Jim Barnes
standby LC
Khanhletu,
I think Mr Barnes has covered the subject.
I would add that if bank B could not comply with Bank A's request, it should have asked for instructions before doing anything else.
I think that standard format means what a bank likes to do in order to be on the safe side. But sometimes you have to depart from the standard format because of the pressure put by some parties.
Daniel
I think Mr Barnes has covered the subject.
I would add that if bank B could not comply with Bank A's request, it should have asked for instructions before doing anything else.
I think that standard format means what a bank likes to do in order to be on the safe side. But sometimes you have to depart from the standard format because of the pressure put by some parties.
Daniel