TRANSFERRING BANK ’S LIABILITY UNDER SUB-ARTICLE 38 (i)

QUESTION

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

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ANSWER

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) [now sub-article 38(i)- Mr. Old Man] and, if necessary, utilised the second beneficiary’s documents as good tender under the credit.

UNQUOTE

Kind regards,

Mr. Old Man