Issuing Bank Undertaking
Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:
- sight payment, deferred payment or acceptance with the issuing bank;
- sight payment with a nominated bank and that nominated bank does not pay;
- deferred payment with a nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
- acceptance with a nominated bank and that nominated bank does not accept a draft drawn on it or,
- having accepted a draft drawn on it does not pay at maturity;
- negotiation with a nominated bank and that nominated bank does not negotiate.
An issuing bank is irrevocably bound to honour as of the time it issues the credit. An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying
presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.
No Recourse Against Seller
The most favourable type of credit for the seller is an irrevocable and confirmed credit. Both the issuing bank and the advising bank indicate that it will honour the drafts drawn on the importer or issuing bank, provided they are drawn and presented in conformity with the terms of the credit.
Under a confirmed credit, the paying bank does not have a right of recourse against the seller unless the bank pays under reserve or has obtained an indemnity from the seller. It may recover from the seller in the event of fraud.
The confirming bank which has paid the seller has a right of recourse to the issuing bank or to the buyer who applied for the credit.
Confirming Bank Undertaking I
Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must. honour it, if the credit is available by
- sight payment, deferred payment or acceptance with the confirming bank;
- sight payment with another nominated bank and that nominated bank does not pay;
- deferred payment with another nominated bank and that nominated bank does not incur its deferred payment undertaking or, having incurred its deferred payment undertaking, does not pay at maturity;
- acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity;
- negotiation with another nominated bank and that nominated bank does not negotiate.
It must negotiate, without recourse, if the credit is available by negotiation with the confirming bank.
Confirming Bank Undertaking II
A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank.
Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank’s undertaking to reimburse another nominated bank is independent of the confirming bank’s undertaking to the beneficiary.
If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation.
Assignment of Benefit of Credit
A Letter of credit as such is not negotiable. It may be assigned provided this is permitted by the parties. Issues may arise as to the assignment of the benefit of the credit and transfer of the credit itself.
A letter of credit is capable of being assigned by the seller as it is in the nature of a debt, subject to a precondition, on the part of the bank. It is assignable in the normal manner of a chose in action by notice in writing to the bank. The pre-conditions still remain and must be discharged by the seller or his agent.
The obligations of the credit cannot be assigned without the consent of the relevant parties. It requires the instructions of the other relevant parties including, in particular, the issuing bank and ultimately the buyer.
The UCP permits the assignability of the benefit of a letter of credit even if it is not specifically stated to be transferable, provided that assignment / transfer is not excluded. The assignment may be by way of security.
Assignment and Dividing the Entire Letter of Credit
If expressly permitted, both the right to receive payment and the right to perform may be transferred. The consent of the buyer to the transfer of credit is required. The consent of the issuing bank is required. The credit by its terms must be stated to be transferable. The presumption is that it may be transferred once, if transferable.
Historically, it was presumed that a credit was not divisible. However, the UCP provides for transferable credits. If UCP applies if may be made divisible. The transferable credit may be made available in whole or in part to another beneficiary at the request of the first beneficiary. The transferring bank is a nominated bank that transfers the credit or in a credit available with any bank, a bank that is specifically authorised by the issuing bank to transfer the credit. The issuing bank may be a transferring bank.
It is presumed unless otherwise agreed that all charges including commissions fees costs and expenses incurred in respect of the transfer must be paid by the first beneficiary. Under the UCP, the credit may be transferred in part to one or more second beneficiaries provided partial drawings for shipments are allowed. It cannot be further transferred.
Any request for transfer must indicate if and under what conditions amendments may be advised to the second beneficiary. The transferred credit must clearly indicate those conditions.
If a credit is transferred to more than one second beneficiary, the rejection of an amendment by one second beneficiary does not invalidate the acceptance by any other second or other beneficiary with respect to which the transferred credit should be amended accordingly. For any other beneficiary that has rejected the amendment to transferred credit remains unamended.
Terms of Transferred Credit
The transferred credit must accurately reflect the terms and conditions of the credit, including confirmation, if any, with the exception of:
- the amount of the credit,
- any unit price stated therein,
- the expiry date,
- the period for presentation, or
- the latest shipment date or given period for shipment,
any or all of which may be reduced or curtailed.
The percentage for which insurance cover must be affected may be increased to provide the amount of cover stipulated in the credit or the UCP. The name of the first beneficiary may be substituted for that of the applicant in the credit. If the name of the applicant is specifically required by the credit to appear in any document other than the invoice, such requirement must be reflected in the transferred credit.
Rights of First Beneficiary
The first beneficiary has the right to substitute his own invoice and draft, if any, for those of a second beneficiary for an amount not in excess of that stipulated in the credit. Upon such substitution, the first beneficiary can draw the credit for the difference if any between its invoice and the invoice of the second beneficiary.
If the first beneficiary is to present its own invoice and draft (if any) but fails to do so on first demand or if the invoice presented by the first beneficiary creates discrepancies that did not exist in the presentation made by the second beneficiary, and the first beneficiary fails to correct them on first demand, the transferring bank has the right to present the documents as received from the second beneficiary to the issuing bank without further responsibility to the first beneficiary.
The first beneficiary may in its request for transfer indicate that honour or negotiation is to be affected to a second beneficiary to which the credit has been transferred up to and including the expiry date of the credit. This is without prejudice to the rights of the first beneficiary above. The presentation of documents by or on behalf of a second beneficiary must be made to the transferring bank.
Transferable credits may be used in back-to-back arrangements through several jurisdictions.
If non-conforming documents are presented, the bank instead of rejecting them may seek an indemnity from the seller or its bank. The indemnity will usually entitle the bank to enforce against the seller if it suffers a loss in consequence of not refusing the non-conforming documents.
Underlying Transaction I
The letter of credit is, in the same manner as a bill of exchange, a conditional discharge of the debt. If for any reason it is not honoured, the seller may claim the price directly from the buyer. If, however, it is provided for by the contract the seller can insist that this is the manner of payment.
Generally, the bank does not concern itself with the underlying transaction but with the documents. If, however, they are fraudulent they are not effective. An allegation of fraud may be made, leaving the bank in a difficult position. It is not obliged to determine whether there has been fraud. It may consider the evidence offered by the buyer.
The bank should generally pay even if there is an allegation and even a suspicion of fraud. If it is shown to the satisfaction of bank that there has been fraud in the sense that the documents are fraudulent or forged, the bank may refuse to honour.
Underlying Transaction II
Where the beneficiary of the credit is not shown to be aware of the fraud, it is arguable that the bank must pay where the documents appear to conform. However, arguments may be made against this position, which has been criticised.
A bank assumes no liability or responsibility for the form sufficiency, accuracy genuineness, falsification or legal effect of any document. In cases where it is alleged that the documents furnished are no or limited effect or are nullities, the bank may still pay.
In cases where the bank can show that a fraud was committed and that the beneficiary was aware of it, the bank must not honour the credit. Where it is shown that the documents tendered by the seller are false, the bank may refuse payment.
References and Sources
Consumer Law Long 2004
Commercial Law White 2nd ed 2012
Commercial & Economic Law in Ireland White 2011
Commercial Law Forde 3rd ed 2005
Irish Commercial Precedents (Looseleaf) 2004
Modern law of personal property in England and Ireland Bell 1989
Commercial & Consumer Law: Annotated Statutes O’Reilly 2000
Schmitthoff: The Law and Practice of International Trade 13th ed Carole Murray, David Holloway, Daren Timson-Hunt, Schmitthoffs 2018
Damages Under the Convention of Contracts for the International Sale of Goods 3rd ed Bruno Zeller 2018
International Economic Law 4th ed Asif Qureshi, Andreas Ziegler 2018
Law of International Trade: Cross Border Commercial Transactions 6th ed Jason C.T. Chuah 2018
World Trade Law: Text, Materials and Commentary 3rd ed 2018
The International Sale of Goods 4th ed Michael Bridge 2017
International Trade Law 6th ed Indira Carr, Peter Stone 2017
International Institute for the Unification of Private Law 2nd ed (UNIDROIT) 2017
Understanding the CISG Understanding the CISG 5th (Worldwide) ed 2017
The Law and Policy of the World Trade Organization: Text, Cases and Materials 2017
International Trade Law and Regulation:: Michael Blakeney, Aline Doussin, John Clarke, Mark Clough, 2017
International Sale of Goods: A Private International Law Comparative Edited by: Nicolas Nord, Gustavo Cerqueira 2017
International Sales Law Edited by: Franco Ferrari, Clayton P. Gillette 2017
The CISG Advisory Council Opinions Edited by: Ingeborg Schwenzer 2017
World Competition: Law and Economics Review – Editor in Chief: Jose Rivas 2017
Making Money with Incoterms 2010: Strategic Use of Incoterms Rules in Purchases and Sales Arthur O’Meara 2017
World Trade Organization: Law, Practice and Policy World Trade Organization: Law, Practice and Policy 3rd ed Mitsuo Matsushita, Thomas J. Schoenbaum, Petros C. Mavroidis, Michael Hahn 2017