• LC issuing bank: Bank A
• LC Available by Negotiation at Sight at the Nominated Bank: Bank B
• Reimbursing bank: Bank C

Bank A received a set of documents from Bank B – under their covering schedule stating:

1. We have negotiated draft / documents
    
2. Documents are being forwarded in trust on approval basis.
    
3. In terms of credit, please authorize us to claim reimbursement from Bank C

Upon examination of the documents Bank A found several discrepancies, however did not issued any refusal notice to Bank B assuming that according to the forwarding schedule (item 2) the documents are not presented under the LC, hence to be treated a collection item under URC 522.

Please advice, even upon a clear statement from nominated bank that the documents are forwarded “in trust on approval basis” whether or not an issuing bank is required to issue a notice of refusal in accordance with UCP 600 article 16?

I have also seen document receipt advices addressed to applicants indicating only that documents are received on approval basis without stating the discrepancies.

Having said that, I would like to state that unless a nominated bank sends documents to an issuing bank stating that the documents should be treated as collection subject to URC 522, the issuing bank has the duty to check the documents and determine based on the documents alone whether the documents appear on their face to constitute a complying presentation (UCP 600 article 14a). If the issue bank decides to refuse the documents due to discrepancies noted as a result of examination of the documents, it must advise the nominated bank by telecommunication or any other expeditious method within the time frame allowed i.e. no later than close of the fifth banking day following the day of presentation - receipt of documents - (UCP 600 article 16d). The notice must be in the form prescribed in UCP 600 article 16c.

Hope above helps.

Regards

Abdulkader

There is no need for us to elaborate further their defenses that should be clear for everyone here.

We can only wait for a court decision to determine whether this is a presentation under UCP or URC?

Having said that, it would take the issuing bank only no more than fifteen minutes to draft the notice of refusal under UCP. If the issuing bank did not do this, it might end up using months and months in litigation. That is my advice to the bankers during my workshops.

Best regards,

T.O.

Sending documents on approval basis does not mean that the documents are on ”collection basis”.

Since the presentation is discrepant and nominated bank drawn issuing banks attention to the fact that the documents are sent "on trust under approval basis" the issuing banks undertaking ceases but in respect to the UCP the issuing bank must act as per UCP600 art.16.

The fact that the documents were in fact treated (by the nominated) as under the LC is proven by the following statement:

1. Nominated bank negotiated draft/docs
(Negotiation being subject to UCP).

This is however another issue.

If the issuing bank did not act as per UCP600-art.16c and 16d, the nominated bank may claim payment from issuing bank, in respect of art.16f.

A quote from that one reads:

When forwarding documents to an issuing bank, under a letter of credit, every effort should be made to ensure that no reference to 'collection' or 'Subject to URC522' or similar appears in order to avoid any unnecessary delay or misapplication of the documents.

Further the Opinion is rather clear when it comes to a schedule with a clear reference to URC522:

With regard to this issue, the schedule clearly indicated that the presentation was subject to URC522 and it would not be unreasonable for the bank to treat the presentation under such rules despite the fact that the LC number appeared.

It does not clearly address the issue where terms like "collection", "on approval basis" or "in trust" have been used. This would be a case-by-case evaluation based on the exact (and full) wording of the forwarding schedule. This would therefore underline that it is preferable to be clear and precise in order to avoid confusion.

It should also be noted that LC documents clearly send and treated as a collection subject to URC 522 would not reduce the LC balance. 

(1) For palm oil and soft oil shipment to established European buyers; sales are transacted on "in-trust" basis (there are variations in terminologies - CAD-in-trust, Documents-in-trust, etc). Under such trading mode, L/Cs are not used. Documents are routed directly from the trading intermediary bank to the named European buyers, without using banking channel.

Some banks (i.e. the intermediary banks), however, prefer to rout the documents to the named European buyers through the buyers' nominated banks. Such documentary transmission mode is still on an "in-trust" basis.

(2) In the query, an L/C was issued. The covering schedule cited "in trust on approval basis". The application of this term, "on approval", denotes that there are documentary discrepancies and some trade practitioners would interpret it as "on approval by the L/C applicant". As a prudent practice, these practitioners would consider this i.e. "in trust on approval basis", as within the ambit of L/C operations.

In Trust

1. I do not support any documentary credit practice which uses unclear and imprecise terms leaving them for interpretation or misinterpretation and create unwarranted problems for the parties concerned. The term "in trust" is certainly an interpretative phrase and its usage mixed up with another term "on approval" could, if read in isolation, create uncertainty for the issuing bank who could construe, rather misconstrue, the phrase/statement no. 2, "Documents are being forwarded in trust on approval basis" to mean that the since the documents presumably or possibly contain discrepancies, the issuing bank is not bound or required to scrutinise documents and list out and notify the discrepancies. However, if read in conjunction with phrase/statement no. 3 reading, "In terms of credit, please authorize us to claim reimbursement from Bank C", it could convey a different meaning for the issuing bank who might think that the negotiating bank intends the issuing bank to treat the documents under the letter of credit and apply applicable provisions of UCP.
    
2. The problem arises for the non-English native speaker. The term "in trust" used in regard to forwarding the documents should normally mean that in case the documents are not taken up on account of discrepancies, the issuing bank should hold the documents "in trust" for the negotiating bank, i.e., issuing bank rejects the documents and holds them "at the disposal" of the negotiating bank.
    
3. However, I have seen a most surprising result (long back in late eighties), where there was a practice of holding the documents "at disposal" but no practice of holding them "in trust". But there was another practice of "financing in trust" or "trust receipt" financing (where the goods or consignment are held by the importer "in trust") the issuing bank misinterpreted the word "in trust" to imply that in case the documents were rejected on account of discrepancies, the negotiating bank wanted it to clear the consignment and hold it "in trust" in a bonded warehouse until a suitable arrangement was made with the buyer or an alternate buyer !!! Believe me this is what the issuing bank did.

On Approval Basis

1. Usage of the words "on approval basis" is clearly meant to imply that in case the documents were not acceptable on account of discrepancies, the issuing bank should seek applicant's approval,or waiver thereof, and hold documents at the disposal of the negotiating bankn until such waiver or approval was received. The phrase, however, does not exonerate the issuing bank from its responsibility to "check and pay" if documents are in order or "check and refuse" if documents are not in order.
    
2. Since UCP, in any case, imposes the aforesaid liability or responsibility on the issuing bank to check documents whether or not the words "on approval basis" are used by the negotiating bank in its forwarding letter, I have always discouraged usage of the phrase, "on approval basis" as it fails to achieve any meaningful purpose other than compounding to the already existing problems of interpretation.
    
3. I repeat the issuing bank must notify discrepancies, if there are any, and should not presume that since the documents received "on approval basis, it is not required to check or refuse.
    
4. I remember having handled a document where apart from using the term that the documents are sent on approval basis, the negotiating bank (in India) had listed out several discrepancies for which the documents were sent on collection basis. In order to avoid labour, my staff rejected the documents using the same discrepancies in their refusal notice as those mentioned in the forwarding schedule of the negotiating bank. After a month or so, I received a copy of a complaint lodged by the Indian exporter (beneficiary) sent to Reserve Bank of India with copies to Ministry of Finance, Export Promotion Council and Chairman of my bank stating that the documents were not discrepant and we had wrongly rejected the documents. I called for the documents and checked them by myself and to my surprise, the documents were strictly in order with no discrepancies ! It had so happened that documents were intially discrepant but the benficiary had repaired them but the negotiating bank did not remove the discrepancies from its covering schedule. Obviously we had to pay and apologise !!

Collection

1. Usage of word "collection" clearly means that the beneficiary or the forwarding bank have "discarded" the LC and chosen another set of rules (URC 522) to govern the documents. However, in case the forwarding bank has not specified that the "collection" is indeed subject to URC 522, there is another problem for the issuing bank, for, and believe me, I have seen some presentations : 1) "on approval basis" subject to UCP/URC. 2) "on collection" subject to UCP 3) "on approval basis" subject to URC 3) "under LC" subject to URC.
    
2. What should be the stance and approach of the issuing bank ?
    
3. Will you be surprised if I tell you of another story which I have handled : a) LC expired long ago and reversed from the books of the bank b) Late shipment c) Documents, e.g., Bill of Exchange, invoice and all other documents mention LC number. d) most documents discrepant e) documents received on collection basis subject to URC with "no mention" of LC number on the covering schedule.
    
4. We handled the documents on collection basis rightly and rightfully for the reasons cited above.
    
5. It was a UCP 400 transaction. However, the importer had already taken the goods as LC stipulated a condition that one original B/L was to be sent directly to the applicant. Due to a dispute, the "drawee" refused documents and instructed us to return to the presenting bank unpaid which we did. After a month or so, the Head office of my bank received a notice from Calcutta High Court to respond to the plaint of the beneficiary alleging that both the forwarding bank and issuing bank had wrongly handled the transaction. The forwarding bank had wrongly used the word "collection" and we the issuing bank, acted on such wrong instruction and since we failed to notify discrepancies, we were obliged to pay. The beneficiary contended that even though the forwarding bank had used the word "collection", we were still accountable to check documents and notify the discrepancies since the documents had mentioned the LC number which we could have noticed. All our pleas were rejected by the Honourable Court and the Judge ruled that as issuing bank, we were responsible and now we must pay. In response to our pleas and references to UCP and the ICC Banking Commission opinions, the judge remarked, "I do not care. This is my opinion. You do what you want". He was taken away more by the fact that by issuing an LC with a condition that one B/L is to be sent directly to the applicant, we had facilitated clearance of the consignment and now we were colluding with the applicant by not paying. Principle of natural justice prevailed in this case !

Kim, what I am trying to state is in the world of LCs , you can still be taken by surprises which you never knew or anticipated.

I would urge all to read TO Lee's comments once again with whom I fully agree that it is better to spend 15 minutes now than to spend months and months of litigation later.

With reference to documents under LC but presented as collection under URC522, I believe that the issuing or confirming bank should check the documents against the LC if they are able to identify the presentation as relating to the LC issued or confirmed by it. If the documents are in order, the issuing or confirming bank should honour or negotiate as applicable; if not refuse to honor or negotiate. In case of the latter, the refusal message should carry a message to the effect that article 16 (d) will apply for the further processing of the presentation i.e. being handled on collection, subject to URR522. My belief is based on the following logic:-

(a) An LC issuing or confirming bank’s liability is clearly laid out in UCP.

(b) UCP does not say that the above liability would get amended automatically based on the selections made by the presenting bank.

(c) Unless there is an affirmative declaration from the beneficiary that they are not availing of the letter of credit, it cannot be presumed that LC can be ignored by the issuing or confirming bank.

(d) It can be argued by the presenting bank that the presentation was a collection for them as they are not obliged under it to honor or negotiate but not for you as you are the issuing or confirming bank.

Because of the above reasons, the issuing or confirming bank should check documents if they are able to identify them as appearing to be connected to LC. If the issuing or confirming bank could not make the identification, then they may handle the presentation as collection. I believe that all banks glance through documents these days as part of due diligence exercise and during that process identification could be made – e.g. LC number is staring at the reviewer.

First, i would like to thank you for sharing your knowledge with newcomers like us, your detailed explanations on lcviews.com has really helped me to understand various articles of UCP 600.

Further to the discussion on single window question regarding "In trust, on approval basis, collection" where you quoted ICC Opinion TA.541 (Issue 6) that LC documents clearly send and treated as a collection subject to URC 522 would not reduce the LC balance. I want to know what will be the status of LC balance if issuing bank sends notice that article 16 (d) will apply for the further processing of the presentation i.e. being handled on collection, subject to URC522 of refusal as suggested by Mr. N.D. George. I mean to say what will happen if applicant allows waiver of discrepancies? Will the LC amount be reduced or presentation will be subject to URC 522.

Best Regards

Thank you for you e-mail and your interest.

It is indeed a tricky issue - and much would depend of the specific case. As I see it however: if the letter from the bank holds a clear reference to the URC - then it is a collection and not an LC. Consequently - even if the receiving bank chooses to handle the documents as a presentation under the LC - and the buyer (applicant to the LC, drawee to the collection) "waives" the discrepancies, the balance of the LC would not be affected.

The above should never be a subject for discussion under a real case - as I would hope that the only situation where LC documents are sent under the URC is where the LC is long expired :-) and then it would not matter at all - or you might even argue, that the URC is better option for such case.

Best regards

Kim Christensen