Home Mr Old Man OBLIGATIONS AND LIABILITIES OF A TRANSFERRING BANK UNDER A TRANSFERRED LC

OBLIGATIONS AND LIABILITIES OF A TRANSFERRING BANK UNDER A TRANSFERRED LC

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QUESTION

Dear Mr. Old Man,

I’m trying to find a clause in UCP 600 or any related source showing that in transferable LC, transferring bank only settle the payment claim to second beneficiary upon their receipt of settlement from issuing bank.

Could you give me advice for this case.

Why don’t ICC translate the case to UCP?

I urge you post this issue to the committee asap.

Thanks a lot

TD

————-

ANSWER

Hi,

It is true that you cannot find any provision in UCP 600 stating that the transferring bank will pay upon receipt of the proceeds from the issuing bank as it is a clause in the transferred credit.

Please note that unless the transferring bank is the confirming bank an authorization by the issuing bank for the transferring bank to transfer the credit does not impose any obligation on the transferring bank to honour or negotiate the complying documents presented by the beneficiary. That is the reason why the transferring bank would undertake to pay upon receipt of the proceeds from the issuing bank.

ICC has published some opinions on the obligations and liabilities of a transferring bank under a transferred credit. Please find attached below ICC’s related analysis and conclusion in their Opinion R482.

QUOTE

Analysis and conclusion

A) Atransferring bankwhen issuing its advice of transfer to the second beneficiary provides either an unconfirmed or a confirmed credit. The type of advice is dependent on the instructions in the original credit as to whether or not the credit was to be confirmed and whether the advising and nominated transferring bank agreed to such a request. If the transferring bank has not added its confirmation to the transferred credit, it has no obligation to effect payment. If it has confirmed then it must honour the drawing of the first and second beneficiary, notwithstanding the position of the issuing bank and its ability to provide reimbursement. In any case, the documents belong to the second beneficiary until the presentation is honoured. If the transferring bank has taken up documents, i.e. negotiated or forwarded them without the authorization of the presenter, it would be liable for payment.

……

(C) If the transferring bank has made a promise to pay the beneficiary at maturity, it has presumably added its confirmation to the credit. This is a documentary risk that any bank which adds its confirmation takes. In the event of a dispute as to the acceptability of the documents presented (under a transferred credit which is confirmed), it is to be resolved between the issuing bank and the transferring bank, without the involvement of the first or second beneficiary.

(D) This type of clause will typically be seen on credits for which the transferring bank has not added its confirmation. It is more a statement highlighting the position of the transferring bank as a nominated bank in line with sub-Article 10(c) of UCP 500, rather than the bank’s position under Article 48. Sub-Article 48(c) is there to demonstrate that whilst a bank may be nominated to transfer, it is under no obligation to do so. However, if it does so, it is to the extent and manner to which it is willing to act with due regard to the remaining sub-Articles of Article 48 and other pertinent Articles of UCP 500.

UNQUOTE

I hope you are now satisfied with my answer

Kind regards,

Mr. Old Man

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7 Comments

  1. SUBHASH

    February 10, 2016 at 6:51 pm

    Dear Mr. Old man,
    What happens when second beneficiary submits complying document but first beneficiary fails to submit complying documents and the applicant refuses to accept the documents and so also goods and does not release payment? Does it mean even the second beneficiary loses right to receive payment under LC?

    regards, Subhash

    Reply

    • mroldman

      February 11, 2016 at 10:56 pm

      Will answer when having time.

      Reply

    • mroldman

      February 12, 2016 at 4:19 pm

      Hi,
      Good question!
      It is agreed that unless the transferring bank is the confirming bank, it would undertake to pay the second beneficiary only after receipt of the payment from the issuing bank.
      With regard to the case where the first beneficiary is to present its own invoice and draft (if any), UCP 600 sub-article 38 (i) just says that if the first beneficiary is to present its own invoice and draft, if any, but fails to do so on first demand, or if the invoices presented by the first beneficiary create discrepancies that did not exist in the presentation made by the second beneficiary and the first beneficiary fails to correct them on first demand, the transferring bank has the right to present the documents as received from the second beneficiary to the issuing bank, without further responsibility to the first beneficiary.
      Neither UCP nor ICC gives a firm answer that the transferring bank must pay the second beneficiary if it fails to act in accordance with sub-article 38 (i). It just says that the transferring bank should act in accordance with sub-article 38 (i) and, if necessary, utilise the second beneficiary’s documents as good tender under the credit.

      I have found an issue similar to yours in Document n° 470/977 Rev.3 (Transferable credits and the UCP 500 Commission on Banking Technique and Practice, 30 October 2002). However, ICC did not give a direct answer as to whether or not the transferring bank must pay the second beneficiary.

      For your reference, please find below the issue and ICC’s answer:

      QUOTE

      Issue:
      Bank B, when transferring the credit, failed to increase sufficient insurance coverage to cover the 110% of the first beneficiary’s invoice. Bank C in Country X received the documents and found them to be in order in terms of the transferred credit and negotiated the documents and forwarded them to the transferring bank for payment. Bank B (the transferring bank), while substituting the draft and invoices, received discrepant invoices and draft (merchandise description on invoice did not conform to the credit). Bank B forwarded the documents to the issuing bank for payment and the issuing bank refused payment for the following discrepancies: 1. insufficient insurance cover 2. description of goods not as per L/C. The issuing bank returned the documents by next mail to the transferring bank. What is the liability of the transferring bank in this case? Can the transferring bank be compelled to reimburse the second beneficiary’s bank even though it had a conditional payment clause on the credit or has the transferring bank no risk or liability at all as regards the documents?

      Answer:
      The documents, as received by Bank B, would appear to have met the terms of the transferred credit. The presentation of non-conforming invoices and draft in substitution for those of the second beneficiary did not change the acceptability of the initial presentation. The disposal of the documents (including the substituted invoices and draft) should only have occurred with the agreement of the first and second beneficiaries. On the basis that the second beneficiary’s documents conformed to the transferred credit, Bank B should have acted in accordance with the provisions of sub-article 48(i) [Mr. Old Man: now sub-article 38(i)] and, if necessary, utilised the second beneficiary’s documents as good tender under the credit.

      UNQUOTE

      Kind regards,
      Mr. Old Man

      Reply

      • Diệp Tử Vũ

        September 28, 2016 at 12:05 am

        Mr Old Man có thể cho cháu xin 1 vài case study về tranh chấp trong thanh toán bằng L/C chuyển nhượng được không ạ? Và cách giải quyết của nó nữa ạ. Cháu cám ơn Mr. Old Man.

        Reply

        • mroldman

          September 28, 2016 at 9:23 am

          Very sorry but I do not have any case with regard to transferred LC disputes!

          Reply

      • Linh

        December 18, 2022 at 4:31 pm

        Dear Mr Old Man

        In the above case, if the transferring bank forwards the second beneficiary’s documents to issuing bank but the presentation still consists discrepancy for insurance coverage due to the fact that transferred LC did not match the transferable LC’s terms, what will happend to the second beneficiary and bank C if the issuing bank deny to pay for the fist beneficiary? Will the transferring bank take some responsiblity in this case or not? And could Bank C which have negotiated second beneficiary’s documents can do anything to received the payment from transferring bank assuming that the negotiation was without recourse

        Reply

        • Mr Old Man

          December 19, 2022 at 12:12 pm

          As said unless the transferring bank is a confirming bank, it undertakes to pay the secondary beneficiary only upon receipt of the payment from the issuing bank. Bank C should not negotiate the documents on without recourse basis.

          Reply

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