ICC Digital Library Forum

Could you give me your opinion in a situation like following:

Both applicant and beneficiary are our
customers and they are involved in a domestic documentary credit transaction.
Applicant request our lc import department to issue a doccred in favor of the beneficiary and instructs to advise it through our export lc dept.
L/c is available by negotiation. The thing is: in case beneficiary, after presentation of docs. complying with credit terms and conditions, asks our export department to negotiate docs and we accept it,

Are we in contrary to the provisions of article 2 of UCP 500 that stipulates "documentary credit....mean any arrangement... whereby a bank (the issuing bank)... authorizes ANOTHER bank to negotiate, since issuing and negotiating bank are the same bank ??

Thanks in advance for your comments.

A BANK MAY PLAY TWO OR MORE ROLES

This is in fact a derivative of a "two party credit", where the issuing bank plays more than one role in the DC operations, as an issuing bank and also as an appplicant, which may be seen as a conflicting role. If that is OK, then the issuing bank also acting as a negotiating bank should be OK, if the DC is available for deferred payment or acceptance of time drafts, where the beneficiary of this local DC wishes to be paid before the maturity date to increase its cash flow.

The "another bank" in Article 2 (iii) quoted by you may be a branch of the same bank in another country or the issuing bank itself that plays the role of "another bank", the nominated negotiating bank. But logically, it is not the nominated bank per se, but only it plays the ROLE of a nominated bank.

REAL INTENT MORE IMPORTANT THAN LITERAL INTERPRETATION

We have to read the UCP 500 Articles with simple common sense, by understanding its real intent, rather than relying solely on its literal interpretation. Article 20 (b) on original documents is a good example. Since the issuing bank is the "master" of the DC and the bank that takes up the definite payment undertaking, we do not see any reason why it cannot fulfill its payment obligation or "discharge its indebtedness" (Santander case concept) earlier, before the maturity date of the deferred payment or time drafts, as the case may be.

Please understand that the issuing bank, in a "two party credit", can make payment or negotiation by itself, without nominating another bank. That is the right of the issuing bank, to choose whatever means or mode of payment that pleases itself.

CASE STUDY IS CRUCIAL IN CDCS EXAM

Some people fail the CDCS exam because they cannot apply the UCP 500 Articles fluidly to deal wtih the case studies, which is the most difficult part of the CDCS exam, according to the insider tips. In order to get 95% right for distinction, one must answer the case studies accurately and speedily. Some people know all the correct answers but they regret that they cannot finish in good time and lose the chance of getting a disctinction.

POSSIBILITY OF CONFLICT OF INTEREST

There may be conflict of interest for one bank to represent both the seller and the buyer, although the enquirer has not raised this issue. However this may be OK according to banking practice as the bank plays a neutral role and is not concerned with or bound by the underlying transaction or contract.

Having said that, however, when the parties have disputes, the bank may be placed in an awkward position, from the business and customer service/support point of view.

We are from http://www.tolee.com

[edited 11/17/02 3:59:05 AM]

I'm afraid that Marcos Paredes is quoting the UCP out of context. When he says that the issuing bank "..... authorises another bank to negotiate" (Article 2 iii) he omits the options of the two preceding sections of Article 2. In fact Article 2 i covers this situation, without the involvement of another bank.

Each of the three sections of this Article are separated by the word "or" meaning that the issuing bank can choose any one of these. Therefore there is no conflict for the bank with the UCP.

The clarification of Mr. Bacon is crystal clear. The issuing bank may exercise different options when making the L/C available for payment, among these is to have the L/C available at his counters after being advised directly to the beneficiary. This will surely be a perfect exercise for such bank to reflect its fiduciary role in letters of credit operations.

In this case the issuing bank is an advising and nominated bank as well.

The risks that are pointed out by Mr. Lee might be there to watch for, however the bank is expected to exercise due diligence in discharging its obligation under the two party L/C. This is what banks are for.

One more thing to add is that even if the advising bank is different from the issuing bank, the issuing bank’s liability under L/C remains intact until such time he is relieved from it by honoring the complying documents thereunder. The beneficiary in such a case may as well surrender his documents directly to the issuing bank by passing the nominated bank or even the confirming bank. So in a way we might end up seeing the issuing bank playing different roles under different names while the liabilities are the same.

The message that I want to convey is that if we assume that there is a prohibition or contradiction in article 2 one may argue that the issuing bank should not negotiate documents unless they are routed through the advising, nominated or confirming bank as the case maybe.

To tell you something, I have in my banking experience encountered a similar case.

Once I was transferred from the head office to a branch for a period of time since the employee who was responsible for “foreign department” was on maternity leave. Since I was working in head office in the central department of trade finance, which is responsible to issue and advise the L/Cs, I was in acquaintance of L/C not fully honored due to a certain condition in it. The condition was to pay 15% of the documents value against the presentation of commissioning certificate issued by the applicant who banks with this branch.

As a bank we knew that the machinery bought from the beneficiary under the L/C was perfectly working and that the applicant is fulfilling his financial obligations to the bank quite well. However, and on the other hand the beneficiary was going mad because of this 15% “ thorn in his throat” thing.

The poor guy was desperately trying to make us pay the outstanding amount with no avail, of course why the bank should?

Now, to go back to where I was transferred, I assumed my responsibilities as usual. On one fine and shiny day full of pressure (as usual) one “foreigner” walked into the branch, and was taken to the manager by the receptionist, seemingly upon his request. After sometime I was called by the manager to join them. To my astonishment the “foreigner” was the beneficiary. It was the first time in my life to see a beneficiary under L/C I have processed. He simply came for many things, the foremost are two: to pressurize the applicant for speedy payment of the 15% and to surrender another set of documents under the L/C.

The poor chap was told by the manager that he should return the documents to the advising nominated bank, which should rout them to us endorsed as complying for payment. Of course after having told our manager privately that this is wrong, I was subject to some ridicule as somebody has confirmed his suggestion from head office.

At that time, I became reluctant to test my understanding of L/Cs by a very professional banker in the field called by the banking community as “ the king of L/Cs”. He taught me the ABC of L/Cs, which I shall cherish forever and a day. Luckily he was at the same bank as an executive manager for a “corporate branch”.

He laughed at the suggestion and intimated the central department to negotiate the documents and effect payment as per instructions. (Needless to mention that this was done after verification of the ID of beneficiary, sending advise for nominated bank, reimbursing bank and other precautionary measures to mitigate risks)

The executive manager also took a firm stand against the applicant and literally pressurized him to give instructions to our bank to effect the outstanding payment.

Remember beneficiaries are not foreigners, they are “ remote customers”

Many thanks to expert opinions given by Mr. T. O. Lee , Mr. Bacon and Mr. Shehab. In order to clarify our view we would like to effect following comments:
Of course, we agree to your point of view and negotiation of documents were made by us before query posted.
But, maybe due to my poor english (iam a spanish native speaker) my question were not understood by you or maybe my explanation were not so clear as should have been.-

We have been in many courses given by Mr. del Busto here in Uruguay since 1990, we are signed up in Mr Lee website which one we have been visiting since 1993 if my memory is ok.- Also, dc insight comes to our bank since the first issue and we try to buy and "eat" every book icc has published. you know we are a developing country (if you like to support this term) and feel dc pro is a wonderful way to exchange points of view with experts like you.

For that, "simple common sense", "literal interpretation" as Mr. Lee says or "out of context" as per said by Mr. Bacon, seemed to be that my query has not been well stated by us.
we know issuing bank can also acting as a negotiating bank itself.

The question regarding article 2 (and i dont want to make a bored discussion, so excuse me if you are thinking that) is why such article does not indicate in the case of issuing bank the word NEGOTIATE, only indicates PAY OR ACCEPT (Article 2 I and introduction to same article) while Article 2 II and III referring to ANOTHER BANK contains the terms PAY, ACCEPT AND NEGOTIATE.

Thanks in advance for your kind opinion.

There is a very logical reason for omitting "negotiation" from Article 2 i. My understanding of negotiation in this context, involves the giving of value prior to reimbursement. This, by definition, assumes the involvement of another bank. Article 2 i involves no bank other than the issuing bank and therefore it follows that there is no negotiation.