THE ISSUING BANK'S RIGHT TO RECOURSE

QUERY FROM HARRY

First and foremost, thank you very much for your response.

Based on my research thus far it seems that there has been little academic commentary on the topic.

A few situations which I fail to understand are as follows:

a) The applicant asks the issuing bank (IB) to issue a LC in favour of a beneficiary. The beneficiary presents discrepant, forged or fraudulent documents to the IB who fails to detect the discrepancy or is unaware of the fraud and thus pays the beneficiary only later to have the documents rejected by the applicant. What recourse does the bank have against the beneficiary and what is the legal basis for this recourse?

I understand that the fundamental principles underpinning LCs require payment upon complying documentation but what happens where the IB is mistaken or fraudulently induced by the beneficiary? Surely, the IB will not be left out of pocket?

b) Where there is a confirming bank (CB) and/or a nominated bank involved in the contractual matrix what happens where the documents presented to it are, once again, discrepant, forged or fraudulent?

From your response it appears to me that the CB or NB are entitled to reimbursement from the IB regardless? Is this correct? If so, then does the IB not put an unwarranted amount of reliance upon the CB or NB to check the docuemtnation?

In that scenario what type of recourse will an IB have against the CB, NB or beneficiary? Contractual damages?

Obviously to ensure the efficacy of the credit system payment against documents is essential but in the case of payment against fraudulent, forged or discrepant documents there must be some sort of claim against a beneficiary? Possibly unjust enrichement?

I realise there is alot of hypotheticals and questions packed into this response but I am struggling to understand the availability of recourse and the apparent gap in the regime.

In your opinion do you think that the IB should have recourse to the beneficiary?

Many thanks and I look forward to your thoughts and comments.

Matt

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COMMENT
The Issuing Bank's Right to Recourse

Dear Harry,

I try to give step by step answers to your queries as follows:

Regarding query (a), I’d like to draw your attention to the two separate situations:

(1) The issuing bank fails to detect the discrepant documents and effects the payment to the beneficiary whereas the applicant does not waive the discrepancies and refuses to pay.
(2) The issuing bank fails to detect the fraudulent documents and effects the payment to the beneficiary whereas the applicant refuses to pay.

In the first situation, the issuing bank can not get back the money from the beneficiary as the issuing bank has a maximum of 5 banking days following the day of presentation to determine if a presentation is complying. If the issuing bank fails to detect the discrepant document or fails to give notice of refusal within the above mentioned period, it shall be precluded from claiming that the documents do not constitutes a complying presentation (UCP 600 Art. 14 & 16).

In the second situation, the issuing bank may get back the money from the beneficiary if it takes legal (bring a suit) against the beneficiary as the beneficiary has committed a crime (presenting fraudulent documents).

The Confirming Bank’s Right to Recourse

In the event the confirming bank/nominated bank fails to detect the discrepancy and effect the payment to the beneficiary whereas later on the issuing bank/applicant refuses to reimburse, the confirming bank/nominated is not entitled to the reimbursement from the issuing bank and can not get back the money from the beneficiary for the same reasoning as above (please refer to UCP 600 Art. 14 and 16).

In the event the confirming bank/nominated bank negotiates/honours the documents which are later on found fraudulent by the issuing bank, the confirming bank/nominated bank is still entitled to the reimbursement from the issuing bank if it can evidence that before deciding to negotiate/honour the documents, it checked documents with reasonable care and was not aware of any sign of fraud (Please refer to UCP 600 Art. 12(b) and Art. 34).

It’s just what UCP says. In practice, the matter can be settled in accordance with local law and depends upon the judge. In case, the confirming bank/nominated bank is not reimbursed by the issuing bank in accordance with the local law, the confirming bank/nominated bank can turn back and take legal action against the beneficiary for its fraud crime. In the event, the issuing bank must reimburse the confirming bank/nominated bank in accordance with the local law’s or the ICC arbitration’s decision, the issuing bank may take legal against the beneficiary to get back the money. It’s too complicated, isn’t it ?

Best regards,
Nguyen Huu Duc …