When Article 35 Meets Modern Trade Finance Operations

In the old days, documents were usually dispatched by the nominated bank itself.
But today, some banks allow customers or overseas units to access trade finance systems, print the covering schedule, and send documents directly to the issuing bank.

So what happens if the documents are lost in transit?

Does UCP 600 article 35 still protect the nominated bank?

An interesting practical question from Rohini.

Question

Dear Mr. Old Man,

LC available with Bank N, expiring in country N.

Beneficiary’s unit in Country B will dispatch the documents under the LC to issuing bank directly using nominated bank’s cover letter (internal agreement between Bank N and beneficiary).

The question is, would the nominated bank (Bank N) be covered under UCP article 35 if the documents get lost in transit between Chennai and the issuing bank, since beneficiary’s unit in Country B handled the documents on behalf of Bank N?

Regards,
Rohini

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Answer

Dear Rohini,

Thank you for your very interesting question.

UCP 600 article 35 applies where complying documents are lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.

In such cases, the issuing bank must honour or reimburse even if the documents are lost in transit, whether or not the nominated bank has honoured or negotiated.

Your question concerns a slightly different situation: the documents are physically dispatched by the beneficiary’s unit or another party acting under authorization from the nominated bank.

In practice, some nominated banks allow customers to access their trade finance systems, prepare the covering schedule, print it under the bank’s authorization, and dispatch the documents directly to the issuing bank. In such cases, the covering schedule normally indicates that the dispatch is made under the nominated bank’s authority.

UCP 600 does not expressly address this scenario, and Mr. Old Man is not aware of any ICC Opinion dealing specifically with it.

However, if the covering schedule clearly evidences that the dispatch was made under the nominated bank’s authorization and on its behalf, there is a reasonable argument that article 35 protection should still apply.

That said, because the physical dispatch was not handled directly by the nominated bank itself, the issuing bank could potentially challenge the applicability of article 35. Therefore, the operational arrangement and wording of the covering schedule become very important.

This is one of those interesting areas where traditional UCP wording meets modern trade finance practice and digital workflow arrangements.

Best regards,
Mr. Old Man