In this example,the document that must be produced to collect on the letter of credit is a certification from the applicant that the required services, the installation of a $6m information system, have been performed.
What are the pitfalls of such a condition, especially if the beneficiary is planning to use the letter of credit to borrow funds to finance the development of the information system.
Applicant Control
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FrankSweeney
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Frank
While the LC is a definite and independent undertaking of the Issuing Bank, payment is dependent on presentation of complying documents.
If for some reason the Applicant would not provide the certification for the specified document then you may have problems with your presentation and in turn payment.
[edited 4/25/01 10:01:41 PM]
While the LC is a definite and independent undertaking of the Issuing Bank, payment is dependent on presentation of complying documents.
If for some reason the Applicant would not provide the certification for the specified document then you may have problems with your presentation and in turn payment.
[edited 4/25/01 10:01:41 PM]
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larryBacon
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The pitfalls of such a condition depend directly on the precise wording of the relevant documentary requirement. For example, is such certification required on the applicant's letter heading ? Must it be signed ? Is this limited to authorised signatories of the applicant ? If so does the L/C contain examples of such signatories to allow the Negotiating Bank to verify ?
A possible solution which may be acceptable to both sides is to have such certification by a recognised body independent of both parties such as S.G.S or Cotecna. Again the wording in the L/C would be critical to ensure that compliance is achievable.
laurence_aj@hotmail.com
A possible solution which may be acceptable to both sides is to have such certification by a recognised body independent of both parties such as S.G.S or Cotecna. Again the wording in the L/C would be critical to ensure that compliance is achievable.
laurence_aj@hotmail.com
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PGauntlett
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The beneficiary has no security with this type of l/c since he has to rely upon performance by the application which, by having a credit in the first place, he wants to avoid.
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FrankSweeney
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I am an accountant who has come across a letter of credit which includes the condition that the document that must be produced is a certification from the applicant. There is also a side agreement between the beneficiary and the applicant in which the beneficiary agrees that the beneficiary will not attempt to obtain the required certification from the applicant until the applicant obtains the funds necessary to reimburse the issuing bank.
I think I recognize the pitfalls. Does the existence of the side agreement nullify the letter of credit?
I think I recognize the pitfalls. Does the existence of the side agreement nullify the letter of credit?
Applicant Control
In response, I am going to qoute Article 3 of UCP 500:
"a. Credits, by their nature, are separate transactions from the sales of other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary."
In short, the credit is a contract between the issuing bank and the beneficiary. The issuing bank will pay provided that the beneficiary presents documents that comply with the credit.
The "side agreement" should not effect the operation of the credit.
In this instance, however, it seems very unlikely that the benficiary will be able to present complying documents as in this case that is dependent on the applicant providing the beneficiary with the document needed for presentation under the credit.
Such a condition within a credit seems to run contrary to the nature and purpose of credits.
"a. Credits, by their nature, are separate transactions from the sales of other contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s), even if any reference whatsoever to such contract(s) is included in the Credit. Consequently, the undertaking of a bank to pay, accept and pay Draft(s) or negotiate and/or to fulfil any other obligation under the Credit, is not subject to claims or defences by the Applicant resulting from his relationships with the Issuing Bank or the Beneficiary."
In short, the credit is a contract between the issuing bank and the beneficiary. The issuing bank will pay provided that the beneficiary presents documents that comply with the credit.
The "side agreement" should not effect the operation of the credit.
In this instance, however, it seems very unlikely that the benficiary will be able to present complying documents as in this case that is dependent on the applicant providing the beneficiary with the document needed for presentation under the credit.
Such a condition within a credit seems to run contrary to the nature and purpose of credits.
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larryBacon
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I would agree with Leo that the applicant seems to have the upper hand here. He is in a position to make it impossible for the beneficiary to obtain a required document, thus effectively delaying or preventing payment. However, it is possible by agreement with the applicant to obtain an amendment to the L/C as suggested in my earlier reply.
The "side agreement" can only nullify the Letter of credit if the L/C calls for documentary evidence relating to this which the beneficiary cannot supply.
Bear in mind also that if the L/C calls for a transport document, there will be a default time limit of 21 days for presentation of documents unless otherwise allowed in the terms of the L/C.
If the necessary L/C expertise is not present in your company, you may consider "buying in" this through L/C specialists such as Export Edge. You can contact me directly at :
larry@export-edge.com
The "side agreement" can only nullify the Letter of credit if the L/C calls for documentary evidence relating to this which the beneficiary cannot supply.
Bear in mind also that if the L/C calls for a transport document, there will be a default time limit of 21 days for presentation of documents unless otherwise allowed in the terms of the L/C.
If the necessary L/C expertise is not present in your company, you may consider "buying in" this through L/C specialists such as Export Edge. You can contact me directly at :
larry@export-edge.com
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PGauntlett
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Regardless of the above, the bottom line is that if the beneficiary has to rely on the applicant's performance in any manner then the independent nature, and security, of the l/c falls away.
Applicant Control
I have discussed this "applicant's certificate" issue with a few world class ICC LC experts. They consider that the beneficiary should have checked for the content of the LC to ensure he can perform all the tasks listed there and also to see if he feels comfortable with the terms therein. If he does not like any terms, he should ask for an amendment. Otherwise he has to live with it and should not complain later.
Well, as we understand from our consultancy career that for all sorts of reasons, the beneficiaries do not all check the content of their LCs. And even if they check for the content, they may not realise the serious consequences until it strikes, mostly because they know not too much about LC system and the UCP 500.
Such terms deviate from the doctrine that an LC is a payment undertaking that contains all the terms that the beneficiary can control and perform to earn his payment under the LC. It is not fair for an LC to include a condition which the beneficiary has no control as one of the conditions for payment. This is not what the LC is originally intended.
The ICC Banking Commission, if not able to condemn such practice, should have at least discouraged such practice, which would make exporters hesitate to use LCs.
We do realise that certain banks cannot refuse the applicants' request for such terms to be added in their LCs, particularly those power applicants, because of business concern.
We are doing the job of discouraging the use of these terms in our LC workshops.
I am from www.tolee.com
[edited 11/22/01 10:32:58 PM]
Well, as we understand from our consultancy career that for all sorts of reasons, the beneficiaries do not all check the content of their LCs. And even if they check for the content, they may not realise the serious consequences until it strikes, mostly because they know not too much about LC system and the UCP 500.
Such terms deviate from the doctrine that an LC is a payment undertaking that contains all the terms that the beneficiary can control and perform to earn his payment under the LC. It is not fair for an LC to include a condition which the beneficiary has no control as one of the conditions for payment. This is not what the LC is originally intended.
The ICC Banking Commission, if not able to condemn such practice, should have at least discouraged such practice, which would make exporters hesitate to use LCs.
We do realise that certain banks cannot refuse the applicants' request for such terms to be added in their LCs, particularly those power applicants, because of business concern.
We are doing the job of discouraging the use of these terms in our LC workshops.
I am from www.tolee.com
[edited 11/22/01 10:32:58 PM]