TELL ME WHEN WILL PAYMENT BE MADE, TELL ME QUANDO QUANDO QUANDO (*)

One of the most frequently misunderstood provisions in UCP 600 is the relationship between a deferred payment maturity date and the five banking days allowed for document examination under Article 14(b).

What happens when documents arrive so late that the LC maturity date falls only a day or two after presentation? Must the issuing bank pay on the contractual due date, or may it still take advantage of the full examination period allowed by UCP 600?

A reader recently asked exactly that question.

QUESTION

Dear Mr. Old Man,

Our bank issued an LC available by deferred payment at 30 days from the bill of lading date.

However, the goods have already been delivered and the documents were presented to us rather late. As a result, if the maturity date is calculated strictly from the bill of lading date, payment would fall due only two days after presentation.

In this situation, may we disregard the stated maturity date and treat the presentation in a manner similar to a sight LC, i.e., make payment after our document examination period of up to five banking days?

Many thanks.

T.N. Yen

________

ANSWER

Hi Yen,

Article 14(b) of UCP 600 provides that a nominated bank acting on its nomination, a confirming bank (if any), and an issuing bank each have a maximum of five banking days following the day of presentation to determine whether a presentation is complying.

Accordingly, your bank is entitled to use up to five banking days to examine the documents. If the presentation is found to be complying, payment on the sixth or seventh banking day after presentation would be consistent with international banking practice.

It should be understood, however, that the five banking days provided under Article 14(b) represent the maximum period allowed for document examination, not a mandatory waiting period before payment.

For example, if the documents are determined to be complying on the second banking day following presentation, a “fair-play” issuing bank may choose to make payment on the third or fourth banking day rather than waiting until the end of the fifth banking day.

In practice, many issuing banks make full use of the examination period permitted by UCP 600 and effect payment on the sixth or seventh banking day, even when compliance has been established on the first or second day and the applicant may already have taken delivery of the goods. Such a delay may save the applicant a few days’ interest while remaining fully within the rules.

CONCLUSION

From a strictly legal and UCP perspective, the issuing bank is entitled to use the full examination period available under Article 14(b), even if the maturity date specified in the LC falls within that period.

However, if the issuing bank has already issued a shipping guarantee or letter of indemnity enabling the applicant to obtain delivery of the cargo before the original bill of lading was presented, the situation looks somewhat different.

Once the applicant has received the goods on the strength of the bank’s undertaking, there is little commercial justification for deliberately postponing payment merely because UCP 600 allows up to five banking days for document examination.

Therefore, while the issuing bank may legally use the full examination period, a strong argument can be made that, as a matter of fairness and good banking practice, it should honour the presentation on the due date specified in the LC rather than intentionally delaying payment beyond that date.

In short:

The bank can wait.
Whether it should wait is another question.

Best regards,

Mr. Old Man

(*) A playful reference to the classic song “Quando, Quando, Quando”, made famous internationally by Engelbert Humperdinck.