TRANSFERRING BANK’S LIABILTY UNDER TRANSFERRED LC

QUESTION

Dear Mr. Old Man

1. We are the 2nd beneficiary in LC and the actual suppliers/shippers of the cargo.
2. Our bank is based in Malaysia.
3. Transferable LC was opened from a Chinese Bank by Applicant based in China
4. First beneficiary’s address in LC is of Hongkong as 1st beneficiary is based in Hong Kong.
5. Applicant bank is in China (Wuhan Branch)
6. 1st beneficiary bank is also in China (Qingdao Branch – same bank as of applicant but different branches in different cities)
7. Clause 40B of LC says: “IRREVOCABLE (WITHOUT OUR CONFIRMATION)”
8. Clause 49 of LC says: “Confirmation Instructions: Without”
9. LC says all docs to be forwarded to 1st Beneficiary’s bank branch in Qingdao.
10. We sent the documents to our bank in Malaysia and they sent all the documents to 1st beneficiary bank in China (Qingdao branch). So far 8 banking days passed and we have not news from 1st beneficiary’s bank. There is no rejection or any refusal. So since 5 banking days passed so we assume it was a complying presentation otherwise they would have raised a discrepancy?

The Problem: Global prices of the cargo has dropped and have an impression from first beneficiary that they have made an alliance with the applicant not to honor this shipment and somehow escape or reject or refuse the documents and that is why so far the 1st beneficiary or his bank has not yet sent the substituted documents to applicant’s bank.

Now being shippers of the cargo, we have following concerns/questions:

1. What is the liability of the 1st beneficiary bank? Since our presentation was complying and they did not raise any objection and if on the pressure or mal-intention of the 1st beneficiary they do not present the substituted documents to applicant bank or 1stbeneficiary intentionally makes discrepant substituted documents so that applicant bank refuse it so what should be our position in this situation? What is legal liability of the 1st beneficiary’s bank under UCP 600 and International Chamber of Commerce rules? Can we force 1st beneficiary bank or Applicant bank to pay us?

2. What if 1st beneficiary’s doesn’t present docs to his bank (transferring bank) at all or if presents then presents discrepant docs? What should be role of the transferring bank? Can we challenge transferring bank failure to act as per UCP article 38(i)?

3. Incase 1st beneficiary doesn’t present docs at all or transferring bank forwards our docs to applicant bank as they last choice? Would they be deemed acceptable and complying since there would be unit price and amount difference and our invoice is issued in the name of 1st beneficiary? What is the legal liability in this case for applicant’s bank?

4. To cut the long story short, now at this stage, can our payment or documents be rejected as per UCP or any other reason?

5. Can we go to court and sue both banks if our payment is not realized?

Thanks a zillion for your kind help and advice.

Regards
Asim
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ANSWER

Dear Asim,

1) It is normal that the transferring bank would undertake to pay the 2nd beneficiary upon receipt of the proceeds from the issuing bank. Therefore, in most cases the transferring bank would not reject the documents but forward them to the issuing bank for payment. Of course, before forwarding the documents to the issuing bank, the transferring bank requests the 1st beneficiary to present its own invoice and draft, if any, to substitute those of the 2nd beneficiary. If the 1st beneficiary fails to present on first demand or if the invoice presented by the 1st beneficiary create discrepancies that did not exist in the presentation made by the 2nd beneficiary, the transferring bank would present the documents as received from the 2nd beneficiary to the issuing bank without further responsibility to the 1st beneficiary.

The 2nd beneficiary cannot force the transferring bank to pay so long as it has not yet received the proceeds/payment from the issuing bank.

2) As said, if the 1st beneficiary fails to present its invoice on first demand or if the invoice presented by the 1st beneficiary create discrepancies that did not exist in the presentation made by the 2nd beneficiary and the 1st beneficiary fails to correct on first demand, the transferring bank would present the documents as received from the 2nd beneficiary to the issuing bank without further responsibility to the 1st beneficiary.

3) If the transferring bank forwards the complying documents as received from the 2nd beneficiary, the issuing bank must honour irrespective of unit price and invoice amount being different from those in the L/C.

Here is ICC’s reasoning:

“When an issuing bank agrees to issue a transferable credit it must appreciate that some of the information appearing on certain documents may not agree with that shown on the invoices, due to the substitution of the second beneficiary’s invoices. For instance, the invoice number of the first beneficiary may be different from an invoice number (that of the second beneficiary) which may appear on say, a certificate of origin. If amounts are shown on documents other than the invoice (and draft(s) if any) and these differ from that on the substituted invoice, the issuing bank will still be bound to effect settlement if the documents are otherwise in conformity with the credit terms and conditions. The issue of amounts being shown on documents other than the invoice, is more for the first beneficiary who may not wish the original purchase price to be made known to the applicant. There would be no discrepancy for the reasons outlined above. The negotiating bank would not be required to produce any proof of values that may have appeared in the second beneficiary(ies) invoice(s). (Opinion R.489)

4) and 5) Your bank may send a message to the transferring bank enquiring the status of the documents. You can take legal action against the transferring bank if it did not act in accordance with UCP 600, i.e., not forwarding the documents to the issuing bank within a reasonable time or has received the proceeds from the issuing bank but do not pay you.

Kind regards,
Mr. Old Man