DOCUMENTS LOST IN TRANSIT

Article 35 UCP 600 Does Not Apply to an L/C Available with the Issuing Bank by Payment, Deferred Payment, or Acceptance

INTRODUCTION

From time to time, LC practitioners raise concerns about what happens if documents are lost in transit between banks. Article 35 of UCP 600 seems to provide clear protection — but when and to whom does that protection apply? And can an issuing bank reduce its exposure by making the LC available only with itself?

This Q&A looks into that issue with a real question from a reader.

QUESTION

Dear Mr. Old Man,

We are debating a case involving an LC that expired in Vietnam. Some colleagues believe that since the LC has expired in Vietnam, Article 35 of UCP 600 should be excluded. This means payment can only be made upon receipt of the original documents at the issuing bank (the LC expires in Vietnam but is stated to be available with any bank by negotiation).

If instead we issue the LC to expire in Vietnam and make it available with the issuing bank by payment, would that reduce our risk — meaning we only pay after receiving the original documents?

The LC we are about to issue involves a “to order” bill of lading and a fairly large amount.

I would appreciate your advice.

TNY

_____

ANSWER

Hi,

It seems your discussion concerns the situation where documents are lost in transit — the very issue addressed in Article 35 of UCP 600.

Article 35 provides that if a nominated bank determines that a presentation is complying and forwards the documents to the issuing or confirming bank — whether or not the nominated bank has honoured or negotiated — the issuing or confirming bank must honour or negotiate, or reimburse that nominated bank, even if the documents are lost in transit between those banks.

In other words, once the nominated bank has determined a complying presentation, the risk of document loss shifts to the issuing or confirming bank.

This rule applies unless the LC specifically excludes Article 35 of UCP 600.

In your case, although the LC expires at the issuing bank (in Vietnam), it allows negotiation at a nominated bank and does not exclude Article 35. Therefore, even if the nominated bank does not negotiate, it is still protected under Article 35 should the documents be lost in transit between that bank and the issuing bank.

Please note that an issuing bank can issue an LC with a clause excluding Article 35, but there is no guarantee that the beneficiary would accept such a condition, as the nominated bank may refuse to negotiate an LC containing such an exclusion clause.

Importantly, Article 35 does not apply to LCs available with the issuing bank by payment, by deferred payment, or by acceptance. Such credits require the documents to be presented directly to the issuing bank and do not involve any nominated bank for negotiation or payment.

Accordingly, your bank may consider issuing the LC available with the issuing bank by payment rather than available with any bank by negotiation. Doing so avoids the risk of being obligated to pay when documents are lost in transit.

However, bear in mind that making the LC available only with the issuing bank might be less attractive to beneficiaries, as it limits their ability to obtain financing through negotiation.

Best regards,

Mr. Old Man