ICC Digital Library Forum

I am requesting some thoughts for reimbursements under a Red Clause Letter of Credit.
In my opinion, the advance is granted to the beneficiary at the request of the Issuing Bank. Hence, any advance must be reimbursed immediately without the need for submission of 'all' credit compliant documents and only on the strenght of a draft(where called for) and an undertaking from the beneficiary. The reason for this query is that certain banks issue red clause DCs and undertake to reimburse upon receipt of 'documents complying with all repeat all terms and conditons of the DC' which seems ambiguous to me. The use of the word 'all' misleads as to when the reimbursement will happen. Should anyone need more information, I will be glad to provide.

Without liability/responsibility, personally:

I do not see any ‘ambiguity’; it seems quite clear the issuing bank does not intend to reimburse the advising bank unless a complying presentation is received. Therefore, it would seem to me that the advising bank should only lend if it is confident it will be able to recover the loan from the beneficiary in the event the beneficiary does not make a complying presentation to the advising bank.

rene.mueller@credit-suisse.ch
a red clause letter of credit is an old traditional instrument. it originated in the sheep wool trade between australia and the UK. fact is, that a red clause represented an authorisation by the issuing bank addressed to the advising/confirming bank to grant an advance to the beneficiary against a receipt and a commitment of the beneficiary to effect the required shipment and to present the shipping documents or, alternatively, to reimburse the advance to the advising/confirming bank at maturity. the credit did also contain conditions as to the interest (whether claimable in addition to the advance granted or to be included in the amount of the advance) and the method of reimbursing the advance. the latter meaning that no additional payment of the remaining document value was to be effected until full reimbursement of the advance by presentation of documents (100 percent of the goods value) until the advance was fully repaid or whether the balance of the document value (100 percent of the goods value) was to be paid on presentation (e.g. if advance was 30 percent, each presentation of shipping documents entitled the beneficiary to obtain the remaining 70 percent). if at the expiry of the credit, no presentation of shipping documents was made and if the beneficiary failed to reimburse the advance, the advising/confirming bank was entitled to claim reimbursement from the issuing bank (with or without interest). if unsufficient presentations were made, the same procedure would apply as outlined here before.
unfortunately, nowadays many banks use the term 'red clause letter of credit' for transactions where the term 'letter of credit with anticipatory drawing' would be a correct term. in that latter case, the advising/confirming bank would be authorised to pay to the beneficiary an advance payment, for which it may claim reimbursement from the issuing bank, remitting the documents received (receipt and commitment) immediately.
i trust that this will make the difference clear. literature is available on that.
regards and enjoy the coming festive season.
rene