The case is:

1: The L/C asks for 2/3 B/L issued to order of the issuing bank and for beneficiary’s certificate stating that 1/3 B/L together with other documents have been sent directly to applicant via courier. The bill of lading has been issued to the order of the issuing bank, as requested, indicating applicant as notify.

2: The Documents presented to the issuing bank by the nominated bank were discrepant (B/L showing costs additional to freight which were not allowed by the LC) and the issuing bank send its MT734 to the nominated bank within the 5 banking days, stating /HOLD/.

3: A few days after the nominated bank notified the documents refusal to the beneficiary, as a reply to beneficiary’s email sent to applicant, applicant informed the beneficiary that have taken up the goods and that his bank, the issuing bank, will pay next day as per instructions received from the nominated bank.

4: No payment has been received nor any reply from the issuing bank to the many tracers sent by nominated bank since January till now.

5: The issuing bank is from a north African country

Questions:

1: Can the applicant get the goods without having the bill of lading endorsed by the issuing bank?

2: In case the issuing bank did endorse the bill of lading, is it obliged to pay notwithstanding the documents are discrepant and were refused in due time?

Answer from Emile Rummens, Belgium

Strictly speaking there is no basis in the UCP rules that the issuing bank is obligated to honour its L/C. They correctly refused the discrepant documents, and 1/3 original B/L was sent outside the L/C. This situation is a well-known risk when a beneficiary accepts to work with an L/C where not all originals have to be presented under the L/C (or documentary collection).

What happened in this case is unfortunately not an uncommon practice in that North African countries and I always advise exporters not to accept an L/C (or documentary collection) whereby not all originals have to be presented.

However, this does not mean that this case is hopeless. The presenting bank should indeed put as much pressure as possible on the bank, but not based on UCP but on the fact they have endorsed 1/3 B/L. I remember there is an Opinion which states that a bank which has endorsed a B/L "should pay". However, that was more a matter of "good banking practice" than ICC rules. maybe that Opinion could help.

As the import has been approved by the authorities of that country, the funds should normally be allocated. Normally you will be paid, but it will require a lot a pressure, patience, and efforts.

In such cases it is also useful to inquire with the carrier (or forwarder) for a copy of both sides of the original B/L against which the goods were released. In most such cases this will be the issuing bank (in which case such "evidence" is useful in your further discussions with the issuing bank, or for any legal action if needed) but occasionally there is no endorsement at all (in which case you can hold the carrier as responsible, which is sometimes easier than attacking the issuing bank in that country). Indeed, it could be that the carrier did not do any effort to get the endorsement on the 1/3 B/L from the bank (in that country the knowledge of good trade practices is low, and the negligence is high...). In other cases, the 1/3 B/L is simply handed over by a bank employee to the notify party without any endorsement at all...  

It's always good that you collect as much as possible facts and evidence when you start the discussions with banks in that country. What happened in reality is often other than we assume....

PS

If you have evidence that the local bank acted wrongly and if that bank is part of a French or EU-bank it's also advisable to inform the mother bank in EU...

Answer from Xavier Fornt, Spain

Answer to the first question is “theoretically no.”

To the second question, I agree with Emile that IF THE ENDORSED BL IS THE THIRD ONE, the bank will return the set of two received, and is not obligated to pay.

Any possible demand would be outside of the L/C.

However, if the endorsed B/L is one of the received by the bank, and the bank is not able to return all documents, it would be obligated to pay.

Answer from Nguyen Huu Duc, Vietnam

In my opinion:

1/ Where the bill of lading is issued to the order of the bank, the shipping company will only release the goods to the applicant upon receipt of either the bill of lading duly endorsed by the issuing bank, or a shipping guarantee issued by the issuing bank in favor of the shipping company.

In your case, the L/C requires presentation of 2/3 original bills of lading while 1/3 original bills of lading to be sent directly to the applicant. It is doubtful that the applicant falsely impersonated the issuing bank to endorse and present the bill of lading to the shipping company to take delivery of the goods.

2/ Once having endorsed and delivered the bill of lading the applicant, the issuing bank must pay irrespective of whether the documents are discrepant and were refused in due time.

Answer from Emile Rummens, Belgium

Dear Nguyen, your reply sub 1 is 100% correct but my experience with that Nort African country is that their practices are quite different from theory ....

I've handled many hundreds of L/C's and DC's and in a small but significant percentage there are cases where the buyer gets the goods without payment by the local bank while it should pay...This is due to lack of knowledge by these banks, negligence, corruption, complicated bureaucracy and red tape etc. Therefore, it is important that Ls/C and DC's in this country contain full set of all B/L's, without discrepancies etc.  

On the other hand, most problems get eventually resolved but it requires a lot of efforts by the presenting bank.

A documentary collection case

A discussion amongst the country editors.

The country editors have been discussing the following issue. The below answers are excerpts of the discussion.

A collecting bank received from a remitting bank a set of documents for collection with the instruction as follows:

“By D/P at sight upon receipt of shipping documents through Bank A in favor of the seller’s account”.

The collecting bank informed the buyer of the documents for collection, but the buyer refused to pay. Accordingly, the collecting bank sent MT422 to the remitting bank advising of the same and asked for the remitting bank’s instruction as to the further handling of the documents.

However, before the collecting bank received any further instruction from remitting bank, the buyer agreed to pay, and the collecting bank handed over the documents to the buyer. The collecting bank sent an MT400 informing the remitting bank of the payment, then it received a new instruction from the remitting bank instructing it to release the documents to another buyer.

Question:

Was it right or wrong for the collecting bank to hand over the documents to the buyer after it had sent MT422 to the remitting bank?  

Answer from Xavier Fornt, Spain

Perhaps the collecting bank should have contacted the remitting bank before delivering documents.

Reading URC 522 article 26 (c) (iii) and applying article 9, it seems that they should wait for the new instructions.

Answer from Domenico Del Sorbo, Italy

As "....the collecting bank sent MT422 to the remitting bank advising of the same and asked for the remitting bank’s instruction as to the further handling of the documents.", in my opinion, the collecting bank should have waited for the new instructions from the remitting bank before releasing the documents to the importer.

Answer from Nguyen Huu Duc, Vietnam

It is agreed that the collecting bank should wait for the remitting bank’s instructions as to the further handling of the documents or should ask for the remitting bank/seller’s consents before delivering the documents the buyer.

But what if the collecting bank delivered the documents to the buyer without waiting for the remitting bank’s new instructions? Should the seller accept eventually, or should it sue the collecting bank to court in this specific case?

Answer from Xavier Fornt, Spain

Unfortunately, the answer is not in URC 522. Like other ICC Rules, they do not stablish penalties.

Answer from ATM Nesarul Hoque, Bangladesh

I think the action point of the exporter depends on many more factors.

1. At the outset, the exporter is going to get his payment. In a business environment, both parties may continue to do future business as well, or

2. The exporter may in the meantime arrange to export the goods to an alternative importer - may or may not within the same country. In this situation, the exporter may be liable to breach of contract. The exporter need to prioritize his course of action.. or

3. The price of underlying goods may increase manyfold from the contracted price.

The exporter should also take into consideration of cost of litigation and uncertainty of the outcome in a court of law compared to the value of the underlying goods etc before deciding any legal action.

In other words, there is no straight forward answer to your query. The exporter, depending on the context, may choose either one – or in-between.

Answer from Pavel Andrle, Czech Republic

I understand that the buyer has paid according to the collection instructions.

The collecting bank sought new instructions based on the buyer´s refusal…but no new instructions came, i.e., the collection instructions were not changed.

Buyer changed its mind and paid…

I do not see much a seller can do if he really wishes against the collecting bank…

He was paid acc. to the collection instructions….

Answer from ATM Nesarul Hoque, Bangladesh

Dear Pavel, the related MT 422 message from collecting bank to remitting bank makes me nervous to conclude that collection instruction has not changed, at least legally.

Answer from Pavel Andrle, Czech Republic

Dear Nesar, I see your point – it would be beneficial to see what exactly the collecting bank stated in the MT422.

But in general, the collecting bank informed the remitting bank and sought new instructions.

But they were not given when the documents were given against the payment as instructed.

I believe that until new instructions are given, the previous ones are valid.

I would – as the collecting bank – be more cautious, but on the other hand I do not see much of a case.

for the seller against the collecting bank.

Answer from Xavier Fornt, Spain

Do not forget that the collecting bank has not only informed of non-payment but asked for the remitting bank’s instruction as to the further handling of the documents.

It seems that the collecting bank considered the old instructions null and void.

Answer from Radek Dobáš, Czech Republic

Sorry, but I must disagree with the views given, except for Pavel's (with some reservations).

As an L/C and collection practitioner I must point out that the original collection instruction is valid until a new instruction (i.e., in practice an amendment to the original collection instruction) arrives at the collecting / presenting bank.

I take for granted that the collecting bank merely informed about non-payment (i.e., did not utilise URC 522 sub-articles 1 (b) and (c)) by use of MT422 "Advice of Fate and Request for Instructions", informing the remitting bank that the drawee "refused to pay". In accordance with the SWIFT Standards this message merely advises the remitting bank about the current status of the collection.

To commence, one should bear on mind that collections have very much to do with Bills of Exchange and Bill of Exchange legislation. "Acceptance" is always connected to a Bill of Exchange and presentation for payment follows the logic for Bill of Exchange legislation in terms of presentation of a Bill of Exchange for payment.

It should be stated here that quite a number of collections are not paid at maturity or paid / accepted promptly. URC does not provide for any express time in terms of numbers of days for providing non-payment / non-acceptance advice, so we should look to applicable legislations.

For collections with fixed due date (or for payment under D/A collections where due date is, of course, known no later than on the acceptance date), advice of non-payment should be given without undue delay after the last day for which the applicable Bill of Exchange legislation provides for timely payment and possibly protest (usually two or three business days after due date). Local Bill of Exchange legislations usually provide for a specific number of days within which the holder in due course should provide its advice of non-payment to the previous holder. So, we can be guided by Bill of Exchange legislations in these cases.

For sight tenors we can again look to local B/E legislation for guidance. At least in accordance within our Bill of Exchange law there is a time given for possibility to protest a sight bill for non-payment, this being 30 days after sight (i.e. in this case after presentation). We can use a similar time constraint for providing acceptance. Thus, unless any specific time is provided by the collection instruction (see URC 522 sub-article 5 (b), it is at least reasonable to provide a notice of non-payment or non-acceptance within these 30 days (at least under our legislation).

It should also be stated that the non-payment or non-acceptance at these time terms in vast majority of the cases does not mean that the drawee finally decided not to pay or accept but merely that he takes his time.

In addition, in accordance with our Bill of Exchange legislation (and I believe it to be the same or similar to others), the drawee has the right to receive a bill of exchange from its holder in due course if it was presented by the holder and rests with him at the time he (the drawee) pays. The holder, of course unless he returned the bill, must take up the payment and release the Bill of Exchange, this regardless of the fact that the holder may have earlier advised non-payment.

By the way, the result of the above is that in practice we have some 30 to 50% "overdue" collections.

But back to the URC 522:

Sub-article 26 (c) (iii) merely states that "the presenting bank should endeavour to ascertain reasons for non-payment and/or non-acceptance" and that they should accordingly advise the bank from which they received the collection instruction. Similarly, the next sentence states that the presenting bank must send without delay an advice of non-payment or non-acceptance. This sub-article does not state that the collection instruction is thereby suspended until receipt of the instructions from the remitting bank mentioned in the last part. To the contrary, the last part provides for a 60 days after the non-payment / non-acceptance advice for which the presenting bank still must hold the documents before they return them. For what other reasons such a long time is provided other than to give both parties (remitting bank AND drawee) time to make up their mind? Quite a number of collections are in practice paid just within this 60-days' period! Moreover, the majority of banks never responds to the advice of non-payment or non-acceptance.

To conclude, the main principle of URC 522 is that the original collection instruction applies until it is amended. Amendment may only be made by the remitting bank (and by the drawer if we look at it from the remitting bank's perspective). The collecting / presenting bank cannot amend the collection instruction, even by providing a notice of non-payment or non-acceptance. The remitting bank should act without delay ("on receipt of such advice"), unless it provides any new instructions, the original instructions are still valid. The collecting / presenting bank may still release the documents against the action required by the collection instruction (i.e., in this case against payment) until the time the remitting bank provides for new instructions.

The only difference might be the case where the collecting bank decided not to handle the collection as a whole. But in such case the drawee would not even know that the bank had the collection, moreover, the documents would have been then already returned.

And my only reservation to Pavel's remarks: I have no idea how the presenting bank should (could) have been "more cautious". It acted exactly in accordance with what the URC 522 demands, i.e., they advised the remitting bank after the drawee informed them.

Thus, there was nothing wrong in the collecting bank's decision to accept payment and release the documents against such payment, on condition that the new instruction arrived AFTER the release of documents. Were that a collection incorporating a bill of exchange, the collecting bank would even be in obligation to do so under applicable Bill of Exchange law.

Answer from Bogdan Ilie, Romania

To quote what was in the original question “The collecting bank informed the buyer of the documents for collection, but the buyer refused to pay. Accordingly, the collecting bank sent MT422 to the remitting bank advising of the same and asked for the remitting bank’s instruction as to the further handling of the documents.”  

So, an MT422 has been sent by the collecting bank to the remitting bank.

We do not know how many days passed between the MT422 sending date and remitting bank’s reply. Anyway, remitting bank should have replied to collecting bank on the day they received the MT422, instructing the collecting bank to hold the documents till new instructions will be sent and, in the meantime, to ask for drawer’s instructions.

Even if I am incline to agree with you I do have one comment to make: At the moment the collecting bank send its message, became aware of the possibility of initial remitting bank’s instructions being changed. So being, in my opinion would have been normal – not to say professional – to send a new message to the remitting bank on the day the drawee declared that he is accepting the documents and will to pay, stating, for example, that drawee has changed his mind and is now willing to accept documents and effect payment and in absence of a reply within, let say 2-3 business days, will release the documents to the drawee and effect payment in accordance with the instructions of remitting bank .

If I am to exclusively take into consideration the URC 522, the collecting bank acted as per URC 522.

If I am to take into consideration how each bank’s action would be analysed in a court, I’d say that both banks acted wrong.

But in the end, no matter what I think and what I would have done being in their shoes, you are right.

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