WITH OR WITHOUT RECOURSE

10 Comments

1. 

   anonymous

   May 15, 2010 at 2:05 pm

   nominated & negotiating bank writes:Dear Sironce the advising bank hands me a LC marked By negotiation at any bank; At Sight. My next step is to ask my bank if it will be the negotiating bank and subsequently my bank will issue me a letter stating so?A nominated bank.I understand that an nominated bank does not enter into any obligation to negotiate or honor (I think honor means if I present it with an endorsed draft from the issuing bank it can choose to pay or not) unless it expressly dose so in writing. Also if the issuing bank nominates a bank to pay the draft how do I know it will? And should I get a letter from the nominated bank first saying that it will pay?If I don't get a letter from the nominated bank does it still have to send the documents to the issuing bank? And if so, can I present my documents to the nominated bank on the last day of the LC? or allow enough time for them to send to the issuing bank before the LC expires?I read somewhere that nominated banks (presumably without first agreeing to negotiate) will check the documents, then inform the issuing bank but hold onto the documents until they receive payment from the issuing bank? But what guaranty do I have the issuing bank will pay or should I ask the nominated bank for a letter accepting to be a nominated bank?Also if the nominated bank (who has not agreed to be a negotiating bank) checks the letters an informs the issuing bank and the issuing bank pays, then when the issuing bank receives the docs and finds a discrepancy does the nominated bank still have recourse against the beneficiary? Your advice is most appreciated Mr. Willy Cooper

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2. 

   mroldmanvcb

   May 16, 2010 at 9:05 am

   Dear Mr. Willy Cooper,Notwithstanding the fact that the LC stipulates it is available by negotiation restrictedly with the advising bank or with any bank, unless it is the confirming bank, the advising bank is not obligated to negotiate, except when it has expressly agreed to and so communicated to the beneficiary.The nominated confirming bank must negotiate without recourse, whereas the nominated (non-confirming) bank normally chooses to negotiate the documents on a with recourse basis. The beneficiary who wants the documents to be negotiated on a without recourse basis may ask the advising bank to add confirmation to the LC.Though nominated under the LC, the advising bank may refuse to exam or forward the documents to the issuing bank. In this case, the beneficiary had better present the documents to another bank in his country (though it may present the documents directly to the issuing bank). Under the LC available by negotiation as the expiry date and place is normally in the beneficiary’s country. The beneficiary need not care how long, when and if the documents reach the issuing bank’s counter provided that he has presented the documents to the nominated bank within the stipulated presentation time and before the LC expiry date.Under LC available by negotiation with any bank, the issuing bank would authorize the nominated bank to negotiate the documents and undertakes to reimburse upon receipt from the negotiating bank of (i) the complying documents; or (ii) a tested telex/authenticated swift message certifying the documents presented are complying. So, provided that the documents presented constitute a complying presentation, the beneficiary will be entitled to the payment from the issuing bank as per the issuing bank undertaking under the LC and Article 7 UCP 600. The fact that the nominated bank pays the beneficiary after receipt of the payment from the issuing bank does not constitue an action of negotiation. If the issuing bank has honoured the documents based on the nominated bank’s confirmation that the documents presented are complying but later finds the documents to be discrepant and decides to refuse them, it is entitled to reimbursement from the negotiating bank. The fact whether or not the nominated bank can have recourse against the beneficiary depends on: (i) whether the nominated bank is the confirming bank; or (ii) whether the nominated bank has agreed to negotiate the documents on a with or without recourse basis.Best regards,Mr. Old Man

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3. 

   anonymous

   May 18, 2010 at 6:05 am

   nominated & negotiating banks, Mr. Willy Cooper writes:Dear SirThank you for your prompt reply, I which my bank manager was so forth coming.I pretty much understand all of your advice except for the last paragraph so I would like to rephrase my question a little.Two scenarios 1, A negotiating bank and At Sight2, A bank nominated in the LC which has to agreed in writing to be a nominated bank, but not a negotiating bank.1) I thought that the UCP 600 rules provided that once a negotiating bank had checked the LC doc's as complying then after forwarding the documents to the issuing bank, if the issuing bank then found a discrepancy (Ie, 2 bags on the invoice and 3 bags on the LC) that the advising bank has no recourse against the beneficiary for a mistake which it made? Or is what you are telling me is that the negotiating bank can override a statute of law by saying so in it's signed agreement with the beneficiary to negotiate the LC?2) The nominated bank has full recourse against me no mater what? For example it only informs the issuing bank that it has been presented with documents by the beneficiary On The Day The LC expires then it just forwards them the the issuing bank? Is there a time limit for the nominated bank to forward the documents? And in turn after receiving the doc's is the issuing bank still required to check them within 5 working days for compliance or is there some other process that takes place here?Best regardsMr. Willy Cooper

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4. 

   mroldmanvcb

   May 18, 2010 at 11:05 am

   Sorry if my explanation was not clear enough.I think the following article of mine published in http://www.lcviews.com can help answer your question.QuoteRecourse in case the documents are discrepant or forgedBy Nguyen Huu DucA member of letterofcreditforum.com raised on the same forum a question regarding the right to recourse in case the documents honoured or negotiated are found to be discrepant or forged and rejected by the issuing bank or applicant. The question is not new. Still, it has remained to be one of the focuses of attention of LC practitioners in the world. As a banker, I wish to share my view on the question as follows:What is recourse?In the context of documentary credit operations, recourse is normally understood as the nominated bank’s right to recover from the beneficiary any payment or advance that the nominated bank has made to the beneficiary in the event reimbursement is not received from the issuing bank. That such a recourse is available or not depends on the agreement between the nominated bank and the beneficiary and/or the rules of UCP, i.e. the payment or advance has been made on a with or without recourse basis.Recourse in case the documents are discrepant and rejected by the issuing bank Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary (Art 12 (a) UCP 600). In the light of the above provision, a nominated non-confirming has its own option to honour or negotiate the documents either with recourse or without recourse. If a nominated non-confirming bank has agreed with the beneficiary to honour or negotiate the documents with recourse and if reimbursement is not received due to a correct refusal by the issuing bank, that nominated bank will have recourse to the beneficiary. However, the nominated bank will bear the risk of loss, i.e. not having recourse to the beneficiary, if it has agreed to honour or negotiate the documents without recourse.A nominated confirming bank must honour or negotiate the documents without recourse if the credit is available with the confirming bank (UCP 600 Art. 8). In view of this provision, a confirming bank will not have recourse to the beneficiary once the documents honoured or negotiated by the nominated confirming bank are found to contain discrepancies and rejected by the issuing bank. However, in the scenario where the documents presented are found by the confirming bank to contain discrepancies and the confirming bank has agreed with the beneficiary to honour or negotiate under reserve, i.e. on a with recourse basis, that confirming bank will have recourse to the beneficiary if reimbursement is not received due to a correct refusal by the issuing bank. Recourse in case of fraudThe famous court case between Banco Santander and Banque Paribas led to some changes in UCP regarding the position of the nominated bank in case of fraud. These changes are reflected in the following provisions:UCP 600 Article 34 says: A bank assumes no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document …UCP 600 Sub-article 12(b) says: By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.UCP 600 Sub-article 7(c) says: An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.Under these new and/or revised provisions, the nominated bank that has acted on its nomination is entitled to full reimbursement from the issuing bank even in case the documents honoured or negotiated are found by the issuing bank to be forged. Of course, the nominated bank must evidence that it has honoured or negotiated the documents without recourse and it has checked the documents with reasonable care and has not been aware of any sign of fraud.My above explanation about the position of the nominated bank in fraud cases is mainly based on the new provisions of UCP. However, I wish to share Mr. T.O Lee’s concern in his response to my query that these new provisions may not be workable in the courts of law globally. Let’s take China as an example. The Supreme People’s Court promulgated The Regulations of The Supreme People’s Court on Several Issues in the Hearing of Cases Involving Disputes over Letters of Credit (entered into effect on 1st January 2006). According to these regulations, the Chinese courts will not support a credit dispute regarding the underlying transaction between the applicant and the beneficiary of the credit, except in the case of fraud. According to Jia Hao’s explanation (in an interview by Kim Christensen of lcviews.com), the provision (Articles 8) reflect the well-established “fraud exception rule” in the letter of credit world. The purpose of such fraud exception rule is to stop fraudsters from getting benefits by use of letters of credit. Regarding fraud exception rule, UCC Article 5 of the United States also provides that a court may enjoin honour of a payment demand when a required document presented under the letter of credit is forged or fraudulent or where there is fraud in the transaction.It is largely understood that local law always prevails over rules including UCP rules. In reality there is a practice that has been globally recognized: where fraud is involved, the court is normally on the side of the defrauded. Suppose that the issuing bank is obligated under UCP to reimburse the nominated bank, the issuing bank will normally ask the applicant to deposit funds (in case the import transaction is self-financed) or to provide signed promissory note to the issuing bank (in case the import transaction is financed by the issuing) to cover the payment. Thus, the issuing bank’s risk is passed to the applicant. However, except where there is a collusion between the applicant and the beneficiary like Solo Industries fraud case, no applicant easily agrees to pay for the fraudulent documents. Most of the time the applicant (maybe with the issuing bank’s consultancy) will seek an order from the court to suspend the payment. And it is quite common that local courts seem to be ready to issue such an order to protect the interest of the applicant. Such an order will become much more forceful especially when the nominated bank has honoured or negotiated the documents with recourse. There is a bad habit in letter of credit operations that where there is the court’s interference some nominated banks often claim they have honoured or negotiated the documents without recourse while in fact they have done with recourse.China’s above-mentioned regulations has no clear provisions on how the court should deal with fraud cases where the nominated bank has honoured or negotiated the documents without recourse, neither does the United States’ UCC Article 5. So far, it is too early to know how the courts of law globally will deal with these cases. Perhaps we had better take a wait and see attitude towards the matter. Pending the future responses from the courts of law to the related provisions in UCP 600, sharing the view of a member on letterofcreditforum.com, I think in fraud cases the nominated bank should in the first place take legal action against the beneficiary to get back the money if no reimbursement is received from the issuing bank. It is more convenient and advantageous for the nominated bank to have recourse to the beneficiary as the nominated bank an
   d the beneficiary are normally in the same country. And of course, I believe no court supports the party who has committed a crime.

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5. 

   anonymous

   May 26, 2010 at 10:05 pm

   Willy Cooper writes:Dear SirBill of Laden & LC by negotiating, at sight.Sorry I'm a little confused again1 LC by negotiation, at sight, with drafts drawn on the issuing bank. a) So after 5 days of presenting the compiling documents to the negotiating bank the negotiating bank is now required to pay me first(with recourse, in a reasonable time of course). And after the negotiating bank has presented the doc's with a sight draft (or telex swift confirmation) to the issuing bank it waits for reimbursement, right? b) Dose the issuing bank release (or can if it wants) the Bill of laden to the buyer before the 5 days that it has to check the documents for discrepancy's?c) If the issuing bank finds a discrepancy, can it still release the Bill of Laden to the customer without first amending the LC? I.e can the customer first take possession of the goods and then have the issuing bank rightfully refuse to pay? And are they now legally his according to the Bill of Laden?d) If the issuing bank has accepted the doc', drafts etc and has given the Bill of laden to the buyer, but it now can't pay due to insolvence who owns the goods? 2) What is the exact difference with a LC negotiated by acceptance particularly with the above in mind?I understand that it is good practise to send the doc's etc with instructions only to release them to the buyer upon payment and/or cosigning the Bill of Laden to the negotiating bank or issuing bank pending payment. But most customers don't want to do that so that they can take advantage of free or low intrest money by doing so (which is understandable).Best regardsWilly Cooper

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6. 

   mroldmanvcb

   May 27, 2010 at 9:05 am

   Hi,1.a) Correct. It depends on the issuing bank’s reimbursement undertaking.In the case of T.T reimbursement allowed, the issuing bank may reimburse upon receipt from the negotiating bank of an authenticated swift message certifying that the documents presented are complying.If the issuing bank undertakes to reimburse upon receipt of complying documents, it has a maximum 5 banking days following the day of presentation to determine if the presentation is complying. However, it should honour upon the documents are deterimed to be complying, possibly on the 2nd banking day or the 3rd banking day…1.b) Once having released the bill of lading to the applicant (buyer), the issuing bank is obligated to pay the documents whether or not they are found to be discrepant later, hence, if the applicant wants to have the bill of lading, he must provide the issuing bank with a written undertaking that he agrees to waiver all discrepancies (if any) and fulfill his obligation toward the issuing bank under the contract for LC opening. If the applicant has met such such conditions, the issuing bank may release the duly endorsed bill of lading to the applicant and effect the payment to the negotiating bank even without checking the documents.1.c) – No. – The holder in due course of the bill of lading is the righful owner of the goods.1.d) As said, the holder in due course of the bill of lading is the righful owner of the goods. When the issuing bank has released the duly endorsed bill of lading to applicant, the applicant is the rightfull owner of the goods. If the applicant can not pay due to insolvence and the goods is still owned by the applicant.2) I’m not sure I fully understand Question No. 2. Under LC available by acceptance, if the documents presented are complying the issuing bank must accept the draft and pay at maturity whether or not the applicant has fulfilled his obligations toward the issuing bank under the contract for LC opening signed between the appicant and the issuing bank. Please bear in mind again that the issuing bank should only agree to release the documents to the applicant when the applicant has fulfilled his obligations under the contract for LC opening, that may includes:- depositing sufficient funds (if the import transaction is self-financed) to secure the payment when due.- providing signed promissory notes if the transaction is financed by the issuing bank.Best regards,Mr. Old Man

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7. 

   anonymous

   December 1, 2010 at 2:11 am

   Anonymous 34567812 writes:What are the rights and obligations of HCB and SF USA with respect to each other? if HCB is a negotiating bank to the seller and SF USA the buyers bank not the issuing bank. please help is needed and if i can get a real case that relates to such situation.

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8. 

   mroldmanvcb

   December 1, 2010 at 2:12 pm

   Hi,I’m not 100% sure I understand your question. I see under L/C transaction there is no contractual relationship between the negotiating bank and the buyer’s bank which is not the issuing bank, hence, both parties have no rights or obligations towards each other.Best regards,Mr. Old Man

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9. 

   anonymous

   November 27, 2011 at 7:11 pm

   Anonymous writes:Dear sir , here by i paste a case study , if u can answer the questions it would be a great help. A third shipment, of excavator conveyor belts, was made by Norwich to Bombsaway. The terms of the sale required Bombsaway to open an irrevocable, negotiation documentary letter of credit (D/C) in favour of Norwich on the following terms: I. Any part of this DC shall be assignable unconditionally at the order of the beneficiary nominated in the DC. II. Hajji Chartered Bank (HCB) in Japan is to advise the beneficiary – 3 -III. Yonkers Bank is the paying bank. IV. The DC incorporates UCP 600. V. The DC shall have attached  a certificate of quality issued by the Japan Export Board identifying the model and date of manufacture,  a clean bill of lading, showing departure on or before 20 April 2009,  a contract of sale containing the description of the goods and breakdown of the price.Bombsaway opened the credit with their bankers, SF USA. HCB advised Norwich that the credit had been opened on 20 April 2009. HCB sent all the documents submitted by Norwich to Yonkers for payment. Yonkers discovered that the certificate issued by the Japan Export Board was on an old letterhead, saying “Inspection Certificate of Quality “ rather than “ Certificate of Quality”. The terms and contents of the certification done were however completely the same. Yonkers also discovered that the bill of lading although stamped on 20 April, was in fact backdated. HCB promised to compensate Yonkers Bank discrepancies with a letter of indemnity. Thus Yonkers accepted the documents and paid HCB under them. Yonkers then sent them to SF USA for reimbursement. At Norwich’s request, HCB transferred 30% of the value of the credit to Montech, a supplier of tools to Norwich for the construction of the excavators. In the meantime Bombsaway had received the shipment and discovered that it was the conveyor belts are for the wrong model of machine. They instruct SF USA to withdraw the DC. SF USA notified Yonkers of their refusal to reimburse them because of the discrepancies. Yonkers Bank immediately contacts HCB requesting payment under its letter of indemnity or refund of the amount paid. HCB reverses the payments on the DC that it had credited to the bank accounts of Norwich and Montech held with it but holds the money pending clarification of its legal position. Put yourself in the shoes of the legal advisor to HCB. 1. What are the rights and obligations of HCB and Yonkers Bank with respect to each other? 2. What are the rights and obligations of HCB and SF USA with respect to each other?

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10. 

    mroldmanvcb

    November 28, 2011 at 10:11 pm

    It’s not easy to give a good answer without seeing the L/C and all related documents.In my opinion, instead of issuing a letter of indemnity, HCB should have rejected the discrepancies raised by Yonkers Bank as there were not valid. According to ISBP paragraph 41 and UCP 600 sub-article 14(f), banks will accept a document that is titled as called for in the credit, bears a similar title or untitled provided the content of the document appears to fulfil the function of the required document. So, the Inspection Certificate of Quality is acceptable if it contains details regarding the quality.Banks examine the documents to determine, on the basis of the documents alone, whether or not the documents appear ON THEIR FACE to constitute a complying presentation. Banks do not go beyond the face of the documents to conclude that the bill of lading was in fact backdated.1) It is understood that Yonkers Bank is a nominated non-confirming bank. According to UCP 600 sub-article 12(a), Yonkers Bank is not obliged to honour even when the documents presented are complying, except when expressly agreed to by Yonkers Bank and so communicated to the beneficiary.Yonkers refused to honour due to the discrepancies (assuming they were valid) and HCB issued a letter of indemnity in favour of Yonkers Bank (the nominated paying bank) to enable Yonkers Bank to honour regardless of the discrepancies. Hence, HCB is obliged to reimburse Yonkers Bank in the case SF USA (the issuing bank) rejects the payment due to the discrepancies. 2) According to UCP 600 sub-article 6(a), a credit available with the nominated bank is also available with the issuing bank. If the nominated bank (Yonkers Bank) refuses to honour or negotiate, the presenter may present the documents direct to the issuing bank (SF USA)for payment. SF USA is obliged to honour if the documents are complying. Assuming the documents contain valid discrepancies, SF USA can refuse to honour.

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