Refusal to advise a letter of credit
I am asking for input on the following scenario. I just want to see if others see the scenario in the same way.
---Scenario---
I recently issued a letter of credit to be advised by our correspondent bank. The correspondent bank contacted me stating that they chose not to advise the letter of credit, that they consider it null and void and that they close their files.
Upon receipt of the notice I reached out to our banker contact at the correspondent bank to determine the reason for the decision not to advise. The banker advised me that he would check on it and provide an answer.
A day later, I received a message from the correspondent bank stating that they have advised the letter of credit.
--- End of Scenario---
My belief is that the advising bank acted in error and should not have subsequently advised the letter of credit without specific instructions from us to do so. My reasoning on this is that we could have re-sent the letter of credit through another correspondent, thereby creating potential risk of duplication.
Please let me know your thoughts on this.
Best regards,
LC Sam
Guys, I had a similar kind of experience in my career,
We have received L/C for advising, but erroneously we have sent swift msg to issuing bank that we may not be able to advise this credit.
But later, issuing bank has approached us, seeking clarification as to why we cant advise, when we chekc the records we found that the msg was errouneously sent to issuing bank.
But later we adviced the same L/C (not another one) and bene has performed under the same L/C and get paid.
Regards.
I would concur. In terms of redress, as the correspondent bank has not (initially at least) carried out the act of "advising", the scenario is not covered by any specific UCP provision. UCP addresses the requirement for the advising bank to revert, for reason of authentication only (Art. 9f).
The correspondent bank has declared that it will not act on the request to advise the LC, and that it has closed its files. The bank however does not indicate that it is, or may be pursuing further lines of enquiry to enable it to advise the LC. The issuing bank is therefore entitled to rely on this notice of "cancellation" and resend the LC, as necessary. From the point of view of the correspondent bank, the LC is now a nullity, and does not exist. Therefore, there is no longer an LC to "advise". Any further action by the nominated bank regarding the LC without the issuing bank's approval should be considered as an unauthorised action, and any harm or financial loss that the issuing bank may suffer as a result, should be borne by the correspondent bank.
But, if the beneficiary receives advise of both LCs, the issuing bank is still liable to the beneficiary under both. However, the question to be asked is perhaps whether the beneficiary would be engaging in a fraudulent act by performing under both LCs. If it is clearly apparent that both LCs have been issued with the same number, and all other details being identical, I suspect the courts would take a dim view of the beneficiary claiming under both.
In either case, whether in the case of the correspondent bank carrying out an unilateral unauthorised action, or in the case of the beneficiary performing under both LCs, my view is, that recourse would have to be obtained outside UCP.
Hello
I am not so sure that the beneficiary would be acting fraudulently if they performed under both credits – unless they tendered the same documents i.e. one incidence of export with duplicate documents. This should be difficult to do, particularly in sea freight but if achievable would certainly be illegal.
However, if they performed twice i.e. two shipments, and tendered separately against both credits, I doubt if that is a fraudulent act.
The identical credit reference numbers would not be relevant; it is not on the seller (of documents) to understand the significance of the buyer’s reference system. The beneficiary has every right to see two separate offers of contract. It is on the offering party to ensure their offer is valid; it is not on the accepting party to query its validity.
As always, I may be wrong on this.
cheers
phill doran
one hill at a time, please
If the same LC is advised to the same beneficiary twice, then how many letters of credit are there?
I would hazard that there is only 1 instrument. The reason for puting an LC number on the instrument would be to avoid problems like this entirely.
SWIFT is only a messagin system. The fact that the beneficiary recieved the same message two times doesn't mean that there are two instruments in place.
Does someone have another thought?
Alex
Hello Alex
Perhaps it would help if we put this into a context – and of course there are many, many realities other than the following, each of which may yield a different answer (and in part that is my point);
So, let us say I employ 2,000 people, 120 of which work in the shipping department. We received 100’s of orders each month, involving maybe 40 to 50 credits.
When a credit comes in, it is handed to any one of several employees to process.
Now, every time we are advised of a credit, is the burden on my employee to check with every other employee to make sure that it isn’t a duplicate, or would you say the burden on the advising bank/issuing bank to know what they are doing? Are we saying that the beneficiary has to validate the integrity of the offer – if so, what then is the role of the advising bank?
What if we have begun manufacturing to meet the ‘phantom’ credit – can the liable party avoid responsibility for the consequences of their actions, leaving the innocent third-party (me) to suffer the loss arising from their oversight or error?
By stepping back, looking at a bigger picture, we can see in this case that there is only one credit intended but the beneficiary in my example is (not able and) not required to ‘step back’. An offer is an offer, once accepted it’s a contract. The applicant may see one obligation, but the beneficiary has every reasonable right to see two offers. I believe, in the myriad of banks between these two points’ lies the consequence.
However – as stated – the Devil is in the Detail and a definitive answer at law requires the consideration of law…everything else is guesswork…
…and this, therefore is only my (humble and non-legal) opinion.
cheers
phill doran
"...in armour bright, the merchant men..."
I worked a bank in my home country for 13 years as a banker particularly in the field of trade finance then i decided to try working abroad and unfortunately i landed a job as a senior accountant handling import and export documents. i may say that i am now at the picture where i represent as a customer of the bank..as an exporter or an importer.. based on my experience the process of negotiation between a seller and a buyer started from a scratch, we used to introduce our products to our prospective buyers..then they will ask for our quotation..we shall prepare then our quotation with our prices stated therein and the sizes and other details of course our quotation must have a quotation no. for reference.customerwise..our General Manger will negotiate our prices with our buyers till they agreed on certain price of our products. once agreed, we need to prepare our proforma invoice ,again with reference no. for tracking purposes..in serial wise..the buyer will then use this proforma invoice to open an lc with their bankers. we maintain a separate file per customer or even per customer's project. Once we receive an LC for that particular Customer or project we shall start preparing our merchandise for delivery. the next thing is the preparation of documents for presentation to our bankers.AGAIN, we shall prepare our commercial invoice etcc. with corresponding REFERENCE NO. for trackingpurposes... so my point is ..it is very easy to know whether an LC is a duplication on part of the beneficiary. in that way they will advise their applicant if there is a duplication. But Abrar is right, once the Lc is issued twice it is the responsiblity of the issuing bank to pay both .(but how can a beneficiary ships his merchandise if there is a duplicate proforma invoice related to that shipment on their file? They might suspect that it is a duplication and they must inform their the applicant. Normally ,even in big industries , there are assigned account executives for every customers to handle their accounts.
Another thing is..if you are the issuing bank, in case that the advising bank has sent you a message that they are unable to advise the LC do not ask for reasons as it is not required for the advising to communicate their reason of not advising the credit.
Importantly, do not communicate verbally to the advising bank..if you really wants know what happened to the subject LC you must send your inquiry via SWIFT. In this way you will know their response before taking the next course of action of re-issuing the same LC and avoiding the possiblity of duplication,,not only of the LC itself but duplication of your undertaking to pay.
To continue my story ...my job in export and import company is boring...luckily i got another bank job again...wherelse ...in TRADE FINANCE.
Well, I guess it depends how you define "same" in this case, but once issued by the issuing bank (and not cancelled), it may not be easily evident to an advising/negotiating/confirming bank, which may receive numerous LCs, whether a particular LC is in fact a duplicate. This would entail applying an enhanced level of due diligence, and which may be impractical.
However, any attendant risks under this scenario would rest with the issuing bank, and if beneficiary were to present documents under both, and receive payment via negotiation of documents, the financial loss in having to pay out twice would have to be borne by the issuing bank. Presumambly, the applicant would be protected under the terms of the underlying indemnity insofar as such indemnity is limited by the bank not acting negligently. There is always however the "fraud exception" rule, and the issuing bank could try to claw the money back from the beneficiary for the 2nd payment, and if not successful could bring a case against the beneficiary directly. What it couldn't do however, is engage the negotiating bank, which in all likelihood may have negotiated in good faith, to recover the monies
However, a SWIFT MT700, is not simply a messaging system. Once issued, an LC issued in MT700, becomes a financial instrument in its own right, under which the issuing bank is fully engaged
Ok. But presumably (if mentiond in the LC) there would only be one unique P.I / P.O under the underlying contract. If this was duplicated on two LCs, and the beneficiary proceeded to perform under both, surely this would give further ammunition to the buyer in bringing a case against the seller?
...is in the detail
Hello
You may be right - although I don't think the action would be between the seller and buyer: rather, between the issuing bank (who acted in error) and the beneficiary. (The buyer - as applicant, would surely only have to pay for one set of documents?)
I do not think Pro-Forma invoices 'legally' need be uniquely numbered or even Purchase Orders for that matter. We may argue that a reasonable business should have unique numbers, but that is only our opinion. Certainly it would be a legal requirement for the accounting invoice (the "tax" Invoice) to be uniquely numbered, but this is not usually the invoice called for under the credit.
It is a really interesting situation, but it would be decided on some detail or other that we maybe cannot contemplate when talking about it theoretically - I wonder if any other poster has experience of such a case coming before the courts?
I respect your opinion and have benefited by your prior posts
regards
phill doran
one hill at a time, please
Yes. I agree with your first para. My oversight.
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