DOCUMENTS UNDER A BACK-TO-BACK LC LOST IN TRANSIT

QUESTION

Dear sir,

Please provide your opinion on the matter below.

We have issued a back-to-back LC against a master LC.  The beneficiary’s bank made the presentation under the back-to-back LC but unfortunately documents have been lost in transit. Now what steps can we take to make presentation under the master LC to receive payment and settle the back-to-back LC presentation?

Regards,

Farukh Mulla 

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 ANSWER

 Hi,

In a back-to-back LC transaction, the back-to-back LC and the master LC are separate and independent of each other. As the issuing bank of the back-to-back LC, your bank must honour if the presented documents comply with the LC terms and conditions. According to UCP 600 article 35, it must honour even when the documents have been lost in transit between the nominated bank and it. It must also honour even when it does not receive payment from the issuing bank of the master LC for whatever reasons.

It is noted that article 35 talks about the documents lost in transit between the nominated bank and the issuing bank. So, if the beneficiary’s bank is not the nominated bank (this occurs in case the LC is available with the issuing bank), your bank may refuse to honour.

I am not sure which solution is the best for your problem, but the following steps your bank should follow:

Step 1: Check the LC to determine if it is available with a nominated bank or with issuing bank (i.e., your bank). If it is available with your bank, then your bank can refuse to honour because article 35 applies to the case where there is a nominated bank involved.

Step 2: If it is available with a nominated bank, then your bank can insist the nominated bank to provide it with a photocopy set of required documents to check to determine if the documents are complying with the LC terms and conditions. If not complied, your bank can refuse to honour.

Step 3: If the photocopied documents appear to comply, your bank should ask the applicant to request the beneficiary to create and present new sets of required documents. The shipping company may agree to issue new original bills of lading against your bank’s letter of indemnity (?) Your bank may bear no risk if the lost bills of lading issued to the order of your bank as the person incidentally picked up the bills of lading or the fraudster cannot receive the goods without your bank’s endorsement. The letter of indemnity is issued at the request and for the account of the applicant.

Try these steps first. If not successful, your bank will find another solution while negotiating with relevant parties.

Keep me informed of the case progression.

Good luck!

Mr. Old Man