DOCUMENTS LOST IN TRANSIT: WHEN DOES ARTICLE 35 UCP 600 APPLY?

This interesting Q&A discusses a situation where documents presented under an LC are lost in transit. Is the issuing bank still obliged to honour the presentation?

Let’s look at the following case:

QUESTION

Dear Mr. Old Man,

I have a case that we are currently debating involving an LC available with any bank, with the date and place of expiry in Vietnam, i.e. the country of the issuing bank.

Some colleagues argue that since the LC expires in Vietnam, Article 35 of UCP 600 would not apply. In other words, the original documents must be presented to the issuing bank in order for the issuing bank to make payment.

If the LC is available with the issuing bank by payment and the date and place of expiry are at the issuing bank’s counters, can the issuing bank avoid the risk under Article 35?

Our bank is about to issue a high-value LC involving a bill of lading made out to order and endorsed in blank.

I would greatly appreciate your advice.

Thank you very much.

NY

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ANSWER

Dear NY,

Thank you for your question.

I assume that the issue you are debating concerns a situation where documents are lost in transit, and therefore relates to Article 35 of UCP 600.

Article 35 of UCP 600 provides that if a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, the issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.

This rule does not automatically cease to apply merely because the LC specifies the place of expiry as the issuing bank’s country. Article 35 would only be excluded if the LC expressly excludes its application.

In your case, although the LC specifies the place of expiry at the issuing bank in Vietnam, it also allows negotiation by a nominated bank — “available with any bank by negotiation.” The LC does not exclude Article 35 of UCP 600.

Therefore, the nominated bank, whether or not it has negotiated the documents, would still be protected by Article 35 if the documents are lost in transit between that bank and the issuing bank.

It should also be noted that the issuing bank may issue an LC expressly excluding the application of Article 35 of UCP 600. However, there is no guarantee that the beneficiary will accept such a condition.

Article 35 of UCP 600 concerning documents lost in transit does not apply where the LC requires presentation directly to the issuing bank under:

• an LC available with the issuing bank by payment;
• an LC available with the issuing bank by deferred payment; or
• an LC available with the issuing bank by acceptance.

In these cases, the LC does not nominate another bank to honour or negotiate the presentation.

Therefore, if your bank wishes to avoid the risk of being required to honour a complying presentation when the documents are subsequently lost in transit, it may consider issuing a sight-payment LC available with the issuing bank by payment, rather than an LC available with a nominated bank by negotiation.

In short, the place of expiry alone does not remove the protection of Article 35. The key issue is whether the LC provides for presentation to, and honour or negotiation by, a nominated bank.

Best regards,

Mr. Old Man