UPAS REVISITED

QUESTION FROM TANY H.F

Dear Mr Old Man,

I offered to ship goods to Korea stating payment ‘’by irrevocable L/C by sight payment” (to my understanding: cash against documents) and my bank received a L/C with fields:

41D: Available with .. by …

ANY BANK

BY NEGOTIATION

42C: Drafts at ….

90 DAYS AFTER SIGHT

42A: Drawee – FI BIC

CHASUS33XXX

Suspecting that I will be paid with a Draft payable after 90 days, I asked the buyer to amend L/C, delete above three fields and insert field:

41A available with … by …

THE NAME OF MY BANK
BY PAYMENT
which was not done.

The buyer insists that the Draft at … 90 days refers to his agreement with the issuing bank and that I will be paid upon presentation of docs to the issuing bank.

Can you tell me which interpretation is correct?

Thanks in Advance and Kind Regards,

Tany

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ANSWER

Dear Tanny,

I cannot give a firm answer without reading the L/C. However, I would like to note you that this type of L/C which is popularly issued by Korean banks is called UPAS L/C (Usance Paid at Sight).

By appearance, it looks like an acceptance L/C as it requires time drafts (90 days sight). However, it is in fact a sight L/C as it allows the beneficiary to negotiate the time drafts on at sight basis. That is to say, notwithstanding the fact that the L/C requires a time draft, e.g., 90 days sight, the beneficiary/negotiating bank still receives payment/reimbursement on at sight basis from the nominated reimbursing bank. There has been an arrangement between the issuing bank and the issuing bank on UPAS refinancing.

The UPAS L/C would indicate in Field 78 (Instructions to the Paying/Accepting/Negotiating Bank) the following instructions:

Quote

+ BENEFICIARY TIME DRAFT SHALL BE NEGOTIATED ON AT SIGHT BASIS AND SHOULD BE FORWARDED TO THE DRAWEE BANK (i.e., BANK indicated in F.42A ).

+ ALL DOCUMENTS MUST BE FORWARDED DIRECTLY TO US (ISSUING BANK) IN ONE LOT BY COURIER SERVICES

Unquote

I ever wrote a detailed article about UPAS L/C, but I cannot provide you as it is in Vietnamese. So, please find hereunder LC Sam’s detailed description of the process of UPAS L/C (http://letterofcreditforum.com/content/under-letter-credit ):

Quote

1. The applicant and the beneficiary agree on terms of sale where the beneficiary will be paid at sight.

2. The applicant approaches their bank requesting a letter of credit and asking that they be able to finance the transaction for 180 days sight.

3. The issuing bank issues the UPAS letter of credit requiring the draft at 180 days sight drawn on the reimbursing bank and stating that the beneficiary is to be paid at sight with all interest charges for the account of the applicant. The letter of credit will also state the reimbursing bank which is normally the local branch of the issuing bank.

The issuing bank will also send a reimbursement authorization with the same payment terms as the letter of credit to the reimbursing bank. The authorization will also request the reimbursing bank to accept and discount the draft as per an agreement between the issuing bank and the reimbursing bank.

4. Given that the beneficiary will be paid on a sight basis, they ship the goods and present the required documents to their local bank.

5. The local bank examines the documents and if the documents are in order proceeds with the reimbursement claim as follows:

A. The original documents except for the draft are forwarded to the issuing bank

B. The draft plus a cover letter is sent to the reimbursing bank.

6. The reimbursing bank will receive the draft and act in accordance to the reimbursement authorization by accepting and discounting the draft. The face amount of the draft is then sent to the beneficiary's bank (less possible minimal reimbursing fees [usually around USD100.00]) Funds for the payment will come from a long term suspense account of the reimbursing bank.

The reimbursing bank will then contact the issuing bank and let them know that the draft was presented, accepted and discounted. They will also let them know the maturity date of the draft and all fees associated with the acceptance and discount of the draft.

7. The issuing bank receives the message from the reimbursing bank and the documents from the beneficiary's bank. The issuing bank examines the documents, and provided the documents comply, advises the applicant of the maturity date and all fees. The issuing bank also provides the applicant with the documents so that the applicant can obtain the goods.

8. The beneficiary's bank, having received the funds from the reimbursing bank deducts any fees and remits payment to the beneficiary.

9. 180 days after sight, the issuing bank provides the reimbursing bank funds to cover the payment of the letter of credit plus the fees for the UPAS draft (the UPAS draft fees may be paid up front, depending on the agreement between the issuing bank and the reimbursing bank).

10. 180 days after sight, the issuing bank collects the draft amount plus all fees from the applicant (the fees may be collected up front depending on the agreement between the issuing bank and the applicant.

– It is important to note that the payment from the issuing bank to the reimbursing bank is separate from the payment from the applicant to the issuing bank, as the reimbursing bank is taking on the risk of the issuing bank, and it is the obligation of the issuing bank to pay the reimbursing bank from its own funds even if payment is never received from the applicant.

Unquote

Hope it is helpful.

Best regards,

Mr. Old Man