Mr Old Man Payment Q&A ADB-Funded L/C: Inoperative Clause & Reimbursement Authorization By Mr Old Man Posted on 3 hours ago 8 min read 0 0 5 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr Intro Letters of Credit financed by the Asian Development Bank (ADB) often include a clause making the L/C inoperative until ADB’s Commitment Letter is received. While this is normal practice, what if the Issuing Bank also requires its own “authorization” before the Negotiating Bank can claim reimbursement from ADB? Under UCP 600 and ADB’s Commitment Procedure, if the presented documents are compliant, the Negotiating Bank has the right to claim payment directly from ADB without asking for the Issuing Bank’s permission. The following Q&A examines these two key clauses and outlines the standard disbursement workflow under ADB’s Commitment Procedure. QUESTION Dear Sir, Our branch has received a domestic L/C (copy attached) containing some unusual clauses compared to standard L/Cs. Could you please review and advise whether the following clause affects our bank’s rights and responsibilities? “THIS L/C WILL ONLY BECOME OPERATIVE WHEN BOTH THE ISSUING BANK AND THE ADVISING BANK RECEIVE THE ASIAN DEVELOPMENT BANK’S (ADB) COMMITMENT LETTER FOR REIMBURSEMENT UNDER THIS L/C” (Excerpt from the attached L/C copy – Field 78): “FOR PAYMENT(S) UNDER THIS LETTER OF CREDIT: UPON RECEIPT OF ISSUING BANK AUTHORIZATION, PLEASE REIMBURSE YOURSELVES BY CABLE ON ADB, REFERRING ADB’S COMMITMENT LETTER FOR REIMBURSEMENTS UNDER ADB LOAN NO.12345 -VIE DATED 17 SEP. 2009 INDICATING THE DATE AND NUMBER OF THIS CREDIT” Thank you in advance for your guidance. Best regards, T.H _______ ANSWER Dear T.H, Thank you for your question. It can be understood that this L/C is financed by funds from the Asian Development Bank (ADB) under a framework loan agreement signed between the Government of Vietnam and ADB. Accordingly, ADB acts as the Reimbursing Bank and will issue a Commitment Letter after the L/C is issued. On the other hand, the Issuing Bank may worry that it will have to pay if ADB, for some reason, fails to reimburse. Therefore, to be safe, the Issuing Bank issued the L/C with such an operative condition. This kind of condition is quite common in L/C transactions. However, the Beneficiary must note that they should only ship the goods when the L/C becomes operative — that is, when ADB’s Commitment Letter is received. Regarding the L/C terms, the Beneficiary and the Negotiating Bank should pay attention to the following clause (Field 78): “FOR PAYMENT(S) UNDER THIS LETTER OF CREDIT: UPON RECEIPT OF ISSUING BANK AUTHORIZATION, PLEASE REIMBURSE YOURSELVES BY CABLE ON ADB, REFERRING ADB’S COMMITMENT LETTER FOR REIMBURSEMENTS UNDER ADB LOAN NO.12345 -VIE DATED 17 SEP. 2009 INDICATING THE DATE AND NUMBER OF THIS CREDIT” According to this condition, the Negotiating Bank can only claim reimbursement from ADB after receiving the Issuing Bank’s authorization. Normally, this should only happen when the presented documents have discrepancies. When the documents are compliant, the Negotiating Bank can claim reimbursement directly from ADB without asking for the Issuing Bank’s authorization. Therefore, your bank should ask the Issuing Bank to amend the L/C by deleting the phrase “UPON RECEIPT OF ISSUING BANK AUTHORIZATION,”. In my opinion, if the Issuing Bank agrees to remove that phrase (or if your bank only acts as an Advising Bank and pays when receiving money from ADB), you can accept this L/C. Regards, Mr. Old Man P/S: Disbursement Workflow under ADB’s Commitment Procedure: Issuance of Inoperative L/C: The Applicant (Borrower/Project Owner) applies to the Issuing Bank to open an L/C in favor of the Beneficiary (Supplier) through the Advising Bank. The L/C is initially issued as inoperative. Application for Commitment Letter: The Advising Bank advises the L/C to the Beneficiary (with a clear warning not to ship yet). The Borrower submits an Application for a Commitment Letter (accompanied by a copy of the L/C) through the Ministry of Finance to ADB. Issuance of Commitment Letter: Upon review and approval, ADB issues an irrevocable Commitment Letter to the Advising/Negotiating Bank, with copies sent to the Issuing Bank and the Borrower. Activation of L/C: The Issuing Bank issues an amendment (MT707) notifying the Beneficiary through the Advising Bank that the L/C is now operative. Shipment & Presentation: The Beneficiary ships the goods and presents the required documents to the Advising/Negotiating Bank. Negotiation & Reimbursement Claim: The Negotiating Bank examines the documents, negotiates/pays the Beneficiary, and sends a reimbursement claim via authenticated SWIFT/cable to ADB. Reimbursement Rules: The reimbursement claim must certify that the presented documents strictly comply with the L/C terms and conditions. In the event of discrepancies, the Negotiating Bank must obtain the Issuing Bank’s waiver/authorization before claiming reimbursement from ADB.