Presented by A.M. Habib

Status of opened but unadvised LC until recalled by the Applicant.

During 2005, our company won an international tender for the supply of 30,000mt sugar shipment to be within twenty days (20) from the LC date. As per tender terms, the LC was received from the applicant (company floating the tender) and we opened a Back to Back LC by swift from one of the top five banks in favor of USA supplier advised through their own New York bank. The copy of LC was faxed same day (Thursday) to the supplier for their reference. On Friday, the supplier sent a fax directly to the attentions of our LC opening bank requesting for certain amendments urgently and as per contract signed between buyer/supplier and in case of failure by Monday will cause them to sell this material to another buyer under more favorable terms. Due to weekend holiday, our bank was closed during Friday & Saturday and when resumed on Sunday the first applicant and their bank was closed for acquiring necessary approvals. There was also a -12 hours time gap with supplier therefore; they could not be communicated for certain clarifications on required amendments. Nevertheless, our bank was helpless to respond to their urgent request therefore, the deal was considered as cancelled. On Monday, the supplier again contacted our bank complaining for not receiving the LC but keeping silent on the requested amendments issue that was meantime, not approved by first applicant bank. However, the supplier kept on tracing and pressing for instrument opened on Thursday but nothing was there to confirm the LC was opened. The supplier started calling this a scam and fraud and threatened if the instrument is not received they will initiate a legal action against the bank as well as our company for the loss for entire contract amount.

The fact is the LC was opened as we were holding a transmitted swift copy advised through the same bank in New York but why not received was still a mystery to us. However, due to this situation the supplier became more & more aggressive demanding for instrument and keep checking on the status through their as well as advising bank and was confirmed no instrument was never opened at the first place. They started pressing now for criminal charges based on the fax copy that was sent for their reference. The matter indulged in a heated correspondence among all parties and looking to this unhealthy situation, we requested our bank on Tuesday (after five days) to recall the LC if not already advised to the beneficiary just to check the status of our LC. The bank responded to our request and to one of the supplier’s letter stating that:

“ We confirm that a letter of credit was issued by us on Thursday 16 June. However, that letter of credit had not been advised to you by Tuesday 21 June when our customer instructed us to re call it. In the light of those instructions the letter of credit has been recalled and will not now be advised to you”.

The supplier for any good reasons did/could not file any criminal charges against the bank and our company but encouraged their local agents to file civil charges against our company for breach of trust for opening a fake LC and loss of profit share that would have been earned if the LC was opened as per the terms of contract. The singed contract disputed in a number of clauses from Master LC therefore, disputed from the Back to Back.

Our concern is:

1. Is it possible, if LC is opened and not advised?
    
2. Is it possible to recall an Irrevocable LC after it is opened?
    
3. If buyer/seller contract conditions conflict with Master / Back to Back LC conditions then which contract is to be considered valid for legal binding on all parties under UCP and the court of law?

 Yours sincerely,

 A.M. Habib

A very interesting case... because I was "caught" in a similar situation before. Thank goodness, it was settled outside 'banking channels' and did not involve the Bank concerned arising from a twist of circumstances (note: the Bank being drawn into a legal tussle is very real).  Just to share my experience...

 Background

• The middleman's bank issued an L/C, in favour of the supplier, via the nominated Advising Bank in China.
   

•  However, the Advising Bank denied receiving the Bank's import L/C.
   

• Despite attempts to prove that the L/C was successfully transmitted, the Advising Bank continue asserting that L/C was never received in the first place (note: we even went to the extent of "educating" the bank staff on how to retrieve the information from their back-end system to prove that the transmission did take place - - - but the replies from the Advising Bank was "no trace of L/C received"  In short, the Advising Bank stood its ground.

[comment:  we were, however, confident that the L/C was indeed transmitted.  For those who are familiar with L/Cs, the string of characters and numerals that follow after the application header: MSGACK, would clearly indicate that the Bank's L/C had been accepted by SWIFTnetwork and this includes the date and time in yymmddhhmm format]

• It is interesting to note that - - - at that point in time, prices were escalating by the day.  Not surprisingly, the supplier demanded increase in the sales price as compensation.

 Lessons Learnt

 From this case, we realized that there should be certain actions (on timely basis)  that the Bank should have enforced upon notification that (i) L/C Advising Bank denied receiving authenticated SWIFT and/or (ii) L/C Beneficiary's purported claim that L/C was not advised.  Painful lesson, though.

Regards,

Jee Meng

a) UCP600 article 4:

“A credit by its nature is a separate transaction from the sale or other contract on which it may be based.”  

“A beneficiary can in no case avail itself of the contractual relationships existing between banks or between the applicant and the issuing bank “

b) UCP600 article 2:

“Advising bank means the bank that advises the credit at the request of the issuing bank”.

Consequently, a bank that received an L/C from the issuing bank but did not advise the L/C cannot be considered as advising bank. To get the “advising bank” capacity, a bank must properly advise the beneficiary, in respect of UCP600. So, in absence of advising the beneficiary, a simple request from issuing bank addressed to the bank l/c was sent to, to consider the MT700 null and void/return the original letter of issuance, is enough to consider the operation closed.   

c) UCP600 article 9(e):

“if a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received”

A bank may, for various reasons elect not to advise the beneficiary. UCP 600 does not ask for such reasons to be mentioned by the bank, neither to beneficiary nor to the issuing bank. If reasons are evidenced or not depends on the bank policy. In fact a simple phrase likes this: “In respect of UCP600 article 9 we inform you that we elected not to advise this L/C”, could be considered enough for the action taken.

Regards,

Bogdan

In practice we sometime recall the letter of credit for cancellation; I have done that several times but in all those cases the beneficiary was not aware of the issuance of the letter of credit. In the case sighted by Majid the beneficiary (Bene) was aware of the issuance of the letter of credit. Bene has received a fax copy of the L/C and also received a swift advising the Bene that the LC was issued and then recalled. Since the LC is irrevocable and will be effective as of the time it is issued, recalling needs the Bene’s approval; especially so when the Bene is aware of the issuance of the credit.

Best Regards

Abdulkader

Quote

7.8 What is the implication of sub-article 7 (b)?

Suggested answer:

No different from what it would be under UCP 500. UCP 500 sub-article 9(d)(ii) stated that an issuing bank is irrevocably bound as of the time it issued an amendment. The same position must equally apply with respect to the issuance of a credit. If an issuing bank issues a credit and then seeks cancellation prior to the advice of the credit reaching the beneficiary, the beneficiary must still provide an acceptance of the cancellation request.

Unquote

Que 1.    Is it possible, if LC is opened and not advised?

Yes, it is possible. If for some reason (internal policy, public policy, government regulations, sanctions, type and kind of products etc), the Advising Bank finds it difficult to advise, it may not advise. (For example, if a US based bank receives LC covering shipment from Iran , Cuba , Syria or Sudan . It will not advise the LC). However, advising bank must inform the issuing bank without delay that it is not advising the LC.

Que 2.    Is it possible to recall an Irrevocable LC after it is opened?

"An issuing bank is irrevocably bound to honour as of the time it issues the credit" (see article 7.b of UCPP 600). This would be the case in most jurisdictions. However, it may still be possible to recall an irrevocable LC for example in the circumstances such as above or where advising bank is unable to advise the LC for reason of law or regulation prevailing in the country of advising bank. It must be noted that the LC should be recalled prior to advising the LC. (For example, how about LCs issued/transmitted in error ?). If the LC has already been advised to the beneficiary, the LC cannot be recalled and cancelled unless the original LC is surrendered back to the advising bank by the beneficiary. The advising bank in that case, must notify and confirm the return of the LC to the Issuing Bank in order for it to the reverse the LC liability from its books.

Que 3.   If buyer/seller contract is disputed from the Master LC clauses which contract is considered legally binding on involved parties in the court of law and as per UCP banking law?

Once an LC is established, it is separate and distinct from the underlying contract even though it may be based thereupon. There have been instances (I can particularly remember a case in China when the issuing bank had insisted upon a copy of the proforma invoice along with the LC application. The LC application was not in accordance with the proforma invoice, and the LC was issued in accordance with the LC application. Later when the documents were received, which were in accordance with LC, but not in accordance with proforma invoice, the applicant sued the issuing bank for not having checked the LC application vis-à-vis the proforma invoice !). Having said that, banks are not concerned with contracts based on which the LCs are issued. If there were contractual anomalies between the LC and the Contract, the parties must sort it out outside the banking channels.

Regards,

Pradeep