ICC Digital Library Forum

Hi there,

Seems that strange L/C clauses continues to evolve. Many a wise man have said, that the L/C is an instrument of payment. However; one “breed” of L/C clauses is pointing in the exact opposite direction: Their purpose is to stop the payment – regardless of the prior acceptance of the documents by the issuing bank.

Here are two examples:

Clause 1:
IN CASE THE GOODS WILL BE REJECTED BY AUTHORITIES:
1) BEFORE 65 DAYS FROM B/L DATE THE PAYMENT SHALL NOT BE
EFFECTED.
2) AFTER PAYMENT HAS BEEN EFFECTED THE AMOUNT IS TO BE
REIMBURSED TO APPLICANT WITHIN 7 DAYS FROM REJECTION.
3) FOR BACTERIAL OR ANTI-BIOTICAL REASONS THEY ARE RETURNED
WITH OCEAN FREIGHT AT SELLER'S ACCOUNT IF THEY ARE RETURNED TO COUNTRIES NOT WITHIN EUROPE.

Clause 2:
PAYMENT WILL BE MADE AT MATURITY, 60 DAYS AFTER B/L DATE, UNLESS APPLICANT PRESENTS TO ISSUING BANK, AN ORIGINAL REJECTION REPORT FROM THE VETERINARY AUTHORITIES IN COUNTRY X, CONFIRMING THAT THE GOODS HAVE BEEN REJECTED FOR IMPORT INTO EU.


In both cases the idea is, that it is a deferred payment L/C (e.g. 60 days after B/L). The documents are examined and accepted by the issuing bank. The L/C however includes the above clause, allowing the applicant to stop the payment – either based on a document (rejection report) or nothing (!!).

Have any of you seen anything like this? What have you done? What do you think?

Thanks in advance

Kim

Hi,

Yes, the second one is a clause that I have seen frequently on Egyptian credits covering foodstuffs. Altho as a banker I did have more than a little reticence in advising or confirming such a credit, I drew the beneficiary's attention to the clause. When the beneficiary accepted the credit in writing, I officially advised and/or confirmed it (which a special clause which more or less mirrored the credit's clause.)
In some 20 yrs or so, I didn't have any problems, since the beneficiaries were all well known and competent suppliers.

Regards
Judith

Kim,

Given my bank’s internally published policy regarding ‘soft’ credits I would not expect to see any referrals to my office on this question from our doc credit processing areas and have not. So I am afraid I cannot answer your question.

With respect to the:

1. first ‘clause’, I wonder how the issuing bank expects to be able to enforce ‘part’ 2 of it.

2. second ‘clause’, I do not have strong objection in principle to it, notwithstanding it falls outside the definition of a credit per Art 2, provided the credit is not available with a nominated bank. I can see why such a ‘credit’ might be acceptable to an exporter.

Regards, Jeremy

Dear Judith and Jeremy,

Thanks for reply. Highly appreciated.

Here is - for your information - yet another reaction - received to my mailbox from a European Banker:

Quote:
Re your challenging question yes we did receive -and still receiving -such l/c s from middle east banks

What we do is firstly discuss with beneficiary to make sure that this is the clause what they really agreed with applicant and then explain to the beneficiary that in these cases unfortunately we can not add our confirmation and we may pay them after we receive the funds from applicant's
bank ... since applicant has this right to stop payment and most of the time beneficiary and applicant do not want amend the l/c rules and agree what we
offer them.

And under these l/c s we are receiving the funds pretty late actually and beneficiary is aware of the situation each and every time.
Unquote.

Best regards
Kim

By the way, there is one thing I didn't mention : sometimes we were able to get the credit amended so that, for example, the refusal certificate would have to be presented no later than 45 days after shipment (for a 60 days deferred payment credit).

Our confirmation undertaking was expressed as "we irrevocably undertake to effect payment provided we have not received notice from issuing bank prior to maturity that a rejection certificate has been received by them"

In all the cases we handled, the beneficiary had already agreed to the clause -- as an alternative to issuing a demand payment guarantee, which he felt was more liable to an abusive call.

We did not experience late payments from our correspondents.

Regards
Judith