• LC Type - Irrevocable Transferable
• Value - 100000
• Transferred Value - 80000 without confirmation
• 2nd beneficiary made a complying presentation
• 1st beneficiary replaced the invoice which has discrepancies
• Transferring bank didn't notice that and forwarded the same.
• Issuing bank refused to pay. LC expired.
• 1st beneficiary went bankrupt.

Question - Does the 2nd beneficiary have any claim?

ICC Official Opinion R484 - 2000/01 & Official Opinion R375 - 1998/99 is not really supporting the second beneficiary. Please opine.

Another fact is about the 100% transferred credit. Many Asian banks feel it good to send the documents directly to the issuing bank. I read ICC opinion TA 632rev, 2007 which says that a transferring bank may introduce a clause like "documents may be sent directly to the issuing bank." What's your opinion about the legal status of such clause introduced by the transferring bank?

Regards,

Shahriar

I have passed this one on to the editorial board - and I will let you know what comes out of it.

My immediate reaction would be the following:

No banks are (at the outset) liable to pay under the LC. The transferring bank did not confirm - and the issuing bank refused accordingly and correctly.

So basically it is matter outside the LC. The 2nd beneficiary may sue the transferring bank for the obvious mistake made by them - causing a clear loss.

In general my view is that an un-confirming bank may not have a payment obligation - but they are of course responsible to the tasks they do - and (I would guess in this case also) charge for.

So if e.g. the discrepancy was of the nature that could be cured – had the transferring bank noted it - then I would guess that the 2nd beneficiary has a very strong case.

For the specific case - even were it was a mistake that could not be cured - the original invoice could still have been be presented - and at least 80$ could be recovered.

So my best guess is that (depending on the details of the case - and not least the agreement/communication between 2nd beneficiary and transferring bank) the 2nd beneficiary would have a good case against the transferring bank.

Just my first response - as said I will revert to you later.

Best regards

Kim

Issue One

It is most unfortunate that the worst happened in this transaction, i.e., "submitted" documents were compliant while the "substituted" ones turn out to be discrepant leaving the second beneficiary in a difficult predicament.

Unless the transferring bank was the confirming bank it would be difficult for the second beneficiary to "enforce" a claim against the transferring bank albeit the second beneficiary "has" a claim on the transferring bank for its failure to exercise its "duty of care" in respect of following :

1. not having checked the documents substituted by the first beneficiary,
2. not pointing out, not making a demand on the first beneficiary to correct the documents,
3. not correcting the discrepancies on "first demand" (UCP 600 sub-art 38.i), and
4. not forwarding the documents of the second beneficiary to the issuing bank since first beneficiary’s documents were discrepant and were not corrected.
5. forwarding the discrepant documents of the first beneficiary to the issuing bank while holding compliant documents of second beneficiary

To above extent the second beneficiary "has" a right to claim against the transferring bank in having acted in a manner detrimental to and jeopardising the interests of second beneficiary.

But as I said before, it might be difficult to sue the transferring bank and to enforce the claim since the transferring bank was not confirming bank and could claim that it had no duty to "check, negotiate and pay", the second beneficiary notwithstanding those listed out above. But this option is not something improbable. I feel second beneficiary should claim from transferring bank and sue it in a court of law.

Had the LC not expired, and if was not possible to repair the discrepancies in the documents provided by the first beneficiary, I would have suggested a practical solution by asking the transferring bank, with the prior written concurrence of first beneficiary, to forward the original compliant documents "submitted" by the second beneficiary in "substitution" of the "substituted" documents and claim the amount of the second beneficiary’s invoice. That way at least the transferred amount could have been recovered from the issuing bank.

But since the LC has expired in the meantime, the above is difficult to implement now but worth a try if issuing bank cooperates and applicant is willing to help.

Last resort that the beneficiary has is to call back the documents, find an alternate buyer in the country of applicant/import or re-import the goods and bear the expenses of freight and other handling charges.

You know Kim, with a view to avoiding situation such as above; I have always maintained that it is advisable for the second beneficiaries to seek confirmation of the transferred credit from the transferring bank.

Issue Two

By inserting a clause such as "documents may be sent directly to the issuing bank", the transferring bank is probably trying to assert that is merely a nominated bank and that it assumes no responsibility to honour, negotiate or pay against documents submitted by the second beneficiary and as such, it will be in order for the second beneficiary's banks to forward the documents directly to the issuing bank.

But this is tantamount to exclusion or modification of sub-article 38..k which reads “Presentation pf documents by or on behalf of a second beneficiary must be made to the transferring bank” for which transferring bank is not authorised since any express exclusion or modification has to be allowed by the credit itself (see UCP 600 Article 1).

What I am trying to say is that even though transferring bank might have inserted a clause as above and banks might have acted on it or may act on it, if for some reason, issuing bank does not want to pay, it could refuse the documents under the pretext that transferring bank is not authorised to make any exclusion of above sub-article and hence documents must be submitted to the transferring bank only.

The foregoing is my personal opinion notwithstanding anything contrary stated in ICC Banking Commission opinion TA 632rev,2007

Regards,

Pradeep Taneja

I agree with Pradeep to bring the dispute to court as a last resort, and the local law will override the provisions of UCP 600. The second beneficiary can sue the transferring bank on many counts, based on its many hats, not necessarily only under UCP 600.

Article 38(k) in UCP 600 is obviously added in the revision to protect the applicant and the transferring bank but at the expense of the second beneficiary.

My advice to those traders who are dealing with big credit amount is that they should hire an expert to draft the documentary credit terms to protect their own interest and such money is well spent as an "insurance cost". I do have a few such intelligent clients.

Best regards,

T. O.

I'd like to know if:

• The transferring bank included or not into the LC a clause stating that even docs presented by 2nd beneficiary are ok, will effect payment only after receipt of funds from issuing bank (I met such transferred LCs).
   
• The transferring bank agreed or not to negotiate 2nd beneficiaries documents (if so allowed by the LC terms)

Regards,

Bogdan

I have read Pradeep's response as well as Mr. Lee's response.

To me I would not come to any conclusion or draw any inferences unless I see what were the wordings incorporated by the transferring bank when transferring the credit. Most of the banks do not take the risk of checking documents under a transferable letter of credit, unless it is confirmed by them. Quite often even if the credit is confirmed towards the first beneficiary, banks still transfer the credit on un-confirmed basis to the transferee. This is not in line with UCP. If the beneficiary insists that it must be transferred on confirmed basis to the transferee, transferring bank would not agree to handle the transfer at all. They are therefore protected under UCP 600 if they do not wish to handle the transfer at all. Now coming back to the question. I presume that for a nominal transfer fee, bank would have incorporated the following into its transfer advice or words of similar meaning

"Once the documents are received at our counters, we shall only substitute the documents and forward without risk and responsibility on our part to the Issuing Bank. In the even, if the beneficiary fails to present the documents on first demand, we would forward your documents without risk and responsibility to the Issuing Bank for Payment. Payment would be made once the Issuing Bank makes the payment to us and funds are received into our account "

If there are wordings of similar effect, then I do not think you can hold the transferring bank responsible.

This is my personal opinion.

Cheers

I fully agree from the prespective of transferring bank that the protective clause suggested by Zahoor will safeguard transferring bank's interests but then the second beneficiary will have a problem of payment especially in stituations referred to in the single window question under question.

Regards,

Pradeep

I see that the second beneficiary can lodge a claim against the transferring bank as well as the issuing bank. The second beneficiary, in this case, has accepted the LC because it has accepted the risk on the issuing bank as the principal obligor. Yes, the transferring bank has the duty to check documents and make the substitution in the manner acceptable provided it has accepted to play the role of a transferring bank. However, in case of failure to do so, the 2nd beneficiary who is the actual owner of the goods, until paid, has all the rights to go to the principal if the agent (transferring is acting as agent of the issuing bank) did not perform its job as required.

I personally believe that the issuing banks undertaking to the 2nd beneficiary, in a transferable LC, is independent from the undertaking to the first beneficiary; therefore, it is obligated to pay the 2nd beneficiary who made a complying presentation whether or not the LC got expired after the 2nd beneficiary made a timely and complying presentation.

This is in the ideal life but how a court may act if the case is brought to it is something I may not be able to predict. Therefore, to avoid any mishaps, long court proceedings and delay in payments, a prudent 2nd beneficiary will only accept a transfer of a credit from a credible bank; a bank that it can trust and know that it can handle transferable LCs. I believe all of us know that not all banks can handle transferable LCs.

Best regards

Abdulkader

I am inspired by the comments from Abdulkader, who states: "Yes, the transferring bank has the duty to check documents".

However, from what I have heard from bankers in Asia, the Middle East, Europe and North America, there are two schools of thinking on this issue, namely:

A The transferring bank has the duty only to count the number of documents, or going a bit further, to check whether they are originals and copies as required by the credit or amendments. It will not check the contents for compliance.

Rationale: a transferring bank is not a nominated bank (according to the definition in article 2 of UCP 600) and there is no requirement under UCP 600 for the transferring bank to check documents for compliance or to send notice of refusal (since it is not a nominated bank and hence articles 14 & 16 are not applicable to a transferring bank).

B The transferring bank has to check the contents of the documents for compliance. Here further complexity comes in.

B1 Should the transferring bank do the checking once only, after substitution, or it has to do two checkings, before and after the substitution?

B2 If there is no time for the first beneficiary to cure the discrepancies, should the transferring bank ask for approval from the first beneficiary before sending the un-substituted documents from the second beneficiary to the issuing bank?

B3 If the first beneficiary objects, should the transferring send them to the issuing bank or not?

B4 If the first beneficiary objects, should the transferring bank send the documents back to the second beneficiary who will send them directly to the issuing bank?

B5 Can the first beneficiary sue the transferring bank for such return of documents to the second beneficiary?

I expect different answers from different bankers around the world.

A good consultant should look deeper into the issues but unfortunately he is often seen negatively by some people who regard a consultant is one who makes a simple problem more complicated. Do you agree?

I hope that we can exchange our views on these issues and most importantly with reasons, based on UCP, ISBP or official opinions from the ICC Banking Commission.

As Chinese New Year Day falls on Thursday 7 February 2008, may I wish you all

Gong Xi Fa Cain (Putonghua version) & Kung Heir Fat Choy (Hong Kong Cantonese version)

T. O.

This is simple logic and one does not need to refer to ICC Opinion or other rules. We all know that not everything is covered by ICC Opinion or ISBP etc. This is my personal opinion and if I were the 2nd beneficiary, I would not hesitate to sue the transferring bank for negligence and the issuing for non-payment for a compliant presentation.

Best regards

Abdulkader

Interesting views. Here is my take on the issue.

• 2nd beneficiary had made a complying presentation to the transferring bank.
   
• the issuing bank gets hooked from that moment on. Beneficiary’s right to receive payment stands ‘crystallized’ at this point in time.
   
• 2nd beneficiary is not a party to whatever happens thereafter.
   
• 2nd beneficiary’s right to receive from the issuing bank cannot get nullified by actions / inactions of the transferring bank.

• the fact that the transferring bank had not checked the substituted invoice (or checked but failed to find discrepancy therein) is of no concern to the 2nd beneficiary. Its crystallized right would not melt away because of this.
   
• while issuing bank may refuse the presentation (not having seen the 2nd beneficiary’s invoice), it would have to honour if the 2nd beneficiary is able to establish that a timely and complying presentation was made by it.

Thanks

George Devassy Nedumparambil

However, if I were the 2nd beneficiary I would not accept a transfer of credit from any bank unless I know that such bank is able to carryout its function properly. This is to avoid running around to prove to the issuing bank that a correct and timely presentation was made in accordance to the transferred credit and that the issuing bank is obligated to pay.

The issuing bank may in some cases also refuse to pay delay charges and thus I may not, in some cases, hesitate to squeeze both the issuing and the transferring banks to get paid for any loss in interest (delay payment fees). In the event that the transferring bank has transferred the credit in a manner not authorized by UCP and / or by the issuing bank and as a result I am denied from payment, then until I get paid, I would be chasing both the issuing and the transferring bank. We should not forget that the transferring and the issuing banks could be in two different countries and the 2nd beneficiary could be in a third country which would worsen the situation i.e. in case any difficulty as such arises. Here I don’t want to go out of context but just wanted to re-emphasize the importance of the quality of a transferring bank.

In the real world the scenario stated above could easily happen. We have received many requests from first beneficiaries to change the LC terms, before transferring to the 2nd beneficiary, in a manner not authorized.

Best Regards

Abdulkader

I have to clarify that the transferring bank who regards itself not a nominated bank is that it agrees to transfer the credit but it does not agree to take up the nomination.

Article 38 (b) is interpreted to its advantage because this sub-article has not stated clearly that a nominated bank who does not wish to take up the nomination cannot do the transfer.

A banker argues in my workshop that at the time of transfer, the bank has not decided to take up the nomination. It will decide only upon presentation by the second beneficiary. The UCP 600 has not specified the procedure in such accuracy and the generalized provisions may be interpreted to a bank's advantage if it wants to.

So the further issues are:

1 Can the nominated bank transfer the credit before it takes up the nomination?

2 Checking documents for compliance is only a bonus service or additional service against extra charges but it does not mean taking up nomination.

I hope I can receive comments from you on my issues.

I think it is better to give my comments after thorough discussions in order not to influence your independent thinking.

For discussion sake, please treat my issues as not related to the case originally put forward and do not assume that the bank (in my issues) has already taken up the nomination.

Best regards,

T. O.