Additional documents under Transfearble LC

[AugustineArulnesan]

Can first beneficiary, under a transferable letter of credit, substitute and include additional document(s) other than invoice and draft?

The presentation of documents by second beneficiary under transferred letter of credit would be discrepant and substitution/inclusion of additional document(s) by first beneficiary would make the documents under original letter of credit compliant.

We are told that this practice is followed by many banks.
Appreciate your feedback on this.

[DanielD]

In transfer transactions, the bank of the first beneficiary wants to avoid credit risks. That's the philosophy of such transactions. If the bank depends on the first beneficiary as for the presentation of for some documents (ex. beneficiary's cert., insurance document (110%)), it takes a risk on the first beneficiary. It is up to the bank to decide if it agrees to take them or not.
Daniel

[AugustineArulnesan]

Thanks Daniel. Submission of insurance document by first beneficiary is intended to avoid letting second beneficiary know profit margin of first beneficiary so it would be in his interest to submit the correct document. Wouldn’t the inclusion of some documents by first beneficiary take the transaction out of the purview of UCP because document flow envisaged under UCP rules are not written/meant for this scenario otherwise UCP would have allowed other documents to be substituted or included in addition to draft and invoice ,

Regards
Rajan

[JudithAutié]

Although most banks will not transfer credits except by requiring exactly the same documents under the transferred credit, it is very frequent for banks to include additional conditions not indicated in the original credit terms.

For example, it is fairly frequent to find a condition stating that no document except the draft and invoice can show any value. This is to avoid having a certificate of origin, for instance, that shows the "cost" of the transferred invoice.

Also, whereas the original credit terms might authorize a tolerance for amount/quantity, the transferred credit could restrict this.

There can be cases when documents received under the transferred credit will be reissued by the first beneficiary -- such as a packing list that is on the second beneficiary's letter head paper -- or an insurance certificate

But most banks will be reluctant to transfer credits that from the start will mean that documents presented by the second beneficiary would not be complying under the original credit terms in case the first beneficiary is unable to exchange his documents.

Hope this is helpful
Judith

[DanielD]

Rajan,

Actually, all these issues have been addressed by the Banking Commission in a "paper" called "Transferable credits and the UCP 500" dated October 30th, 2002
Regards
Daniel

[AugustineArulnesan]

Thanks Judith and Daniel for your replies.

Regards

Rajan

[NigelHolt]

I would not agree to transfer a credit that -in the transfer- did not specify all the documents required under the credit. This is because when a credit is transferred the second beneficiary becomes a party to it and gains exactly the same rights as the beneficiary of a credit that is not transferable to the extent of the transfer. Therefore the issuing bank, confirming bank if any, and any nominated bank incur exactly the same legal obligations towards a second beneficiary as they would have to the beneficiary of a credit that is not transferable. Therefore, if the transfer does not specify all the documents one deprives the second beneficiary of the possibility of making a complying presentation and thus the transferring bank is likely to be liable in law to the second beneficiary if payment is not forthcoming for this reason.



[edited 5/3/2011 8:45:11 AM]

[CarmelBorg]

Rajan
If the second beneficiary's documents are discrepant for some TRIVIAL matter and you substitute documents with that of the first beneficiary to have a complying presentation under the master l/c, I see no harm.
But substituting or adding documents upon transfering a credit sounds to me like you are issuing a back to back l/c and not transferring one. You are therefore taking the risks Jeremy highlighted so clearly.
Regards.
Regards.

[JudithAutié]

I agree that the documents required on the transferred credit must be applicable on the original credit so that the second beneficiary does not lose the benefit of the transfer in case the first beneficiary is in default.

However I can also see (and have seen) credits which required supplementary documents from the second beneficiary, which would not have been presented in any case under the original credit. For example, the transferred credit could call for an inspection certificate not required in the original credit, in addition to all the other documents originally required.

In such a case the first beneficiary is in fact protecting himself from any eventual claim concerning the quality of the goods.

OK, technically this situation is not covered under the UCP, so it should not be considered a transfer, but as a transferring bank I'd rather do a transfer than a back to back in such cases.

Regards
Judith

[NigelHolt]

However, Judith, the transferring bank is NOT entitled to raise discrepancies relating to the documents not specified in the original credit, so one wonders what the first beneficiary has actually achieved.