CALCULATION OF MATURITY DATE OF DRAFT UNDER COLLECTION TRANSACTION; NON-DOCUMENTARY CONDITION; C/O ISSUED RETROACTIVE; GUARANTEE VS CONTRACT

QUESTION

Dear Mr. Old Man,

Could you give me your opinions about controversy issues that I come across during my processing of documents?

COLLECTION:

We have received under a D/A collection a set of documents including drafts at 60 DAYS AFTER SIGHT.

Should we calculate the maturity date from the day we receive the above documents for collection or from the day the importer accepts the documents?

LETTER OF DOCUMENTARY CREDIT:

Case 1:   LC requires:

Field 46A (Documents Required):

– Signed commercial Invoice

– Delivery Order

– Packing List

Field 47: Additional Condition:

Mill Test Certificate must be issued by ABC Company (without showing the phrase ‘Continued from Field 46A”)

Is it a non-documentary condition or a kind of documents that must be presented for negotiation?

Case 2:      LC requires:

C/O form E issued by COCKPIT. If B/L date is after C/O date. It must stick in box 13:”Issued retroactively”.

C/O presented with the phrase:  “Issued retroactively” in other place not stick in the box 13.

Is it discrepancy?

GUARANTEE:

A clause in a guarantee read as follows: “THIS PERFORMANCE GUARANTEE WILL COME INTO EFFECT FROM  August 5, 2018 AND SHALL REMAIN IN FORCE UNTIL THE APPLICANT HAS FULFILLED ITS OBLIGATION(S) UNDER THE CONTRACT, WHICH WILL BECOME EVIDENT TO THE GUARANTOR UPON RECEIPT OF AN AUTHENTICATED SWIFT MESSAGE FROM BENEFICIARY’S BANK CONFIRMING, ON BEHALF OF THE BENEFICIARY, RELEASE FROM LIABILITY UNDER THE GUARANTEE. HOWEVER, THIS GUARANTEE EXPIRES IN ANY CASE IN FULL AND AUTOMATICALLY IF BENEFICIARY’S WRITTEN DEMAND FOR PAYMENT AS WELL AS THE CONFIRMATION OF BENEFICIARY’S SIGNATURE(S) ARE NOT RECEIVED BY THE GUARANTOR ON OR BEFORE EXPIRY”

Please note the clause in bold “…UNTIL THE APPLICANT HAS FULFILLED ITS OBLIGATION(S) UNDER THE CONTRACT”.  Are we bound by such a clause to check if the the applicant has fulfilled its obligation under the contract?

Thanks you so much

Kind regards,

LHH

————–

ANSWER

Hi,

Maturity date of a tenor draft under a D/A collection transaction

Drafts under collection transactions are drawn on the buyer/importer (drawee). For drafts at 60 days sight, the maturity date will be 60 days after the date the documents are presented to the drawee.

The above calculation is based on ICC Guide to Collection Operations for the ICC Uniform Rules for Collections (URC 522) written by Lakshman Y. Wickremeratne, Chairman of ICC Working Party on URC 522. Regarding bills of exchange under collection transactions, he explains at pages 40 – 41 as follows:

“When a bill of exchange is due to be paid depends upon how it is written, i.e. drawn, whether (a) on demand; (b) a period after sight; (c) a period after a fixed date”.

a) ON DEMAND, i.e. when payment is demanded/requested by the drawer/seller. A bill will be payable on demand if it says:

1) “on demand”, or

2)  “at sight”, i.e. when it is SEEN by the drawee/buyer, or

….

b) A period after sight, e.g., 30 days after sight. This means 30 days after it is SEEN by the drawee/buyer

c) A period after a fixed date, e.g. 30 days after date (meaning the date of the bill); 30 days after bill of lading date (meaning the date on the bill of lading plus 30 days)”.

Assuming that the collecting bank receives the documents on 1 August, 2014 and presents the draft at 60 days after sight to the drawee on 3 August, 2014 for acceptance and the drawee accepts on 5 August, 2014. In accordance with the above ICC Guide, the maturity date of the draft in this case will be 60 days after 3 August, 2014.

I see that ICC Guide with regards to calculation of maturity date  of drafts appears contrary to Bills of Exchange Act 1882 paragraph 14(3) [Computation of time of payment], which says: “Where a bill is payable at a fixed period after sight, the time begins to run from the date of the acceptance if the bill be accepted, and from the date of noting or protest if the bill be noted or protested for non-acceptance, or for non-delivery”.

Practice has shown that some banks would calculate the maturity date of a tenor draft from the date it is presented to the drawee, whereas some other banks would calculate from the date the draft is accepted by the drawee. I tend to follow ICC Guide to URC 522.

LC issues

Case 1:

It is the intention of the issuing bank that Mill Test is required to be presented for negotiation/payment. However, the issuing bank fails to express its intention in the LC. It is advisable for the beneficiary to present Mill Test to avoid dispute.

Case 2:

In my opinion, there is no discrepancy. The fact that the C/O indicates “issued retroactively” satisfies the LC requirement. There’s no need for such wording to be indicated in Box 13.

Guarantee vs Contract

A guarantee is by its nature independent of the underlying relationship (i.e., the contract, tender conditions or other relationship between the applicant and the beneficiary on which the guarantee is based) and the guarantor is in no way concerned with or bound by such relationship (see URDG 758 Article 5).

You are not obliged to check to determine whether the applicant has fulfilled its obligation under the contract.

According to the described clause, the liability of the guarantor under the guarantee shall be released upon receipt from the beneficiary’s bank of its swift message confirming to this effect.

Kind regards,

Mr. Old Man