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Dear Sheilar,
Thank you for
using the Single Window.
I have been
considering whether or not to provide my view on this question. It seems to
me however that the structured of the LC you present is (unfortunately) not
uncommon at all – so if nothing else I may raise a few red flags related to
this way of issuing LCs.
First of all I
do think that I understand the background – or perhaps rather reasoning for
doing it like this. On one hand the issuing bank wants to provide the
beneficiary the possibility to present the documents in his own country – on
the other hand it want to make sure that it is only obligated to honour
provided complying documents reaches their counters.
In your
question you seek the consequence for doing it like this – and frankly
speaking I can not answer that in any authoritative way. I have spoken to a
number of LC specialists about this, and there seem to be a general
understanding that such LC is “ambiguous”. To me it is that too – but
perhaps more troublesome from my perspective is that interferes with the
otherwise clear UCP 600 provisions regarding which banks are obligated – and
when such obligation is in fact triggered.
Many UCP 600
provisions are based on the acts of a nominated bank. For example
sub-article 7(c) which says that the issuing bank must honour when a
complying presentation is made to either the nominated bank or the issuing
bank. In your case the LC is (based on the information given) available with
the issuing bank only – which means that the bank in China is not a
nominated bank. So formally a complying presentation to a bank in China will
not trigger the obligation of the issuing bank.
This of course
leads directly to article 35 ¶2 which places the risk of documents lost in
transit with the issuing bank. Again this article assumes that a complying
presentation has been made to a nominated bank – which in this case has not.
Even the formal
“presentation” f the documents is based on a nominated bank. The definition
reads (article 2):
Presentation
means either the delivery of documents under a credit to the issuing bank or
nominated bank or the documents so delivered.
In this case
since there is no nominated bank – a “formal” presentation can only be made
to the issuing bank.
The same in
fact applies to the examination of the documents. For example UCP 600
sub-article 14(a) reads:
A nominated
bank acting on its nomination, a confirming bank, if any, and the issuing
bank must examine a presentation to determine, on the basis of the documents
alone, whether or not the documents appear on their face to constitute a
complying presentation.
So in answering
your questions (to the extent possible) I would say the following:
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If the
beneficiary chooses to present the documents directly to the issuing bank,
my best guess would be that the documents must be presented at the
counters of the issuing bank on or before the expiry date mentioned in the
LC.
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As for the
documents lost on transit – my best guess would be that the answer is
“no”; in such structure I would expect the that risk of documents lost in
transit before reaching the issuing bank lies with the presenter – and not
with the issuing bank.
As it appears
from the above – there is a good amount of “guess work” in determining the
consequences of such a structure, and I would not consider it good banking
practice to issue LCs this way. The reason for that is that it may easily
lead a beneficiary (who most likely is not UCP 600 expert) to believe that
he has fulfilled his obligations under the LC and are entitled to receive
the funds from the issuing bank once documents are presented to and
“approved” by his own bank in his own country. This may not be the case.
If I were the
beneficiary to such an LC I would consider matter carefully – and basically
regard it as an LC only available with the issuing bank – meaning
that I would make sure that a complying presentation reaches the issuing
bank latest on the LC expiry date or latest date for presentation.
As mentioned
this issues has been discussed with a number of LC specialists. I would like
to share one view on this LC structure, as it is of a very practical nature
– and in my view reflects how many banks deal with those cases in real
life:
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Quote
I agree that
LCs issued like this is not UCP 600 compliant. The correct way to handle it
would be to either to ask the issuing bank for an amendment (and they rarely
do that) or to instruct the beneficiary to present the documents as early as
possible and forward them to the issuing bank so that they receive the
presentation not later than the expiry date.
The above was
correct way of handling. The following is our actual practice: We do accept
the presentation up to the LC expiry date and forward the documents to the
issuing bank with a remark that the documents were presented to us on time.
We do that even though we are not nominated bank. So far we have not
experienced any problems with that procedure, because in those cases it can
safely be assumed that the issuing bank was not aware that this structure is
not UCP 600 compliant.
Regarding the
questions from Ms. Sheilar:
1. If I was in
the shoes of the beneficiary when making a direct presentation I would make
sure that the documents reach the issuing bank latest on the date of expiry.
Anything later would be too late.
2. In case the
documents are lost in transit I would say that the issuing bank is not
obligated to pay as the presenting bank was not a nominated bank.
Unquote
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I hope this
helps you
Best regards
Kim
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