Case Studies on the Letters of Credit | Documents | International Banking

Here is a list of case studies on the letters of credit provided by banks.

Case # 1. Credits V/s Contracts:

Article 4, states that a credit by its nature is separate from the sale or other contract on which it is based and banks are in no way concerned with or bound by such contracts.

It also states that the issuing bank must discourage any attempt by the applicant to include the details of the contact, proforma invoice, etc., as an integral part of the LC.

Further, Article 5 of UCPDC 600, states that banks deal in documents and not in goods and services.

Even then, the applicants at times attempt to get the documents refused due to reasons, such as:

(i) Goods not as per proforma invoice.

(ii) Obtain stay/injunction against the opening bank to honour payment of the documents received under LC, due to the reason that the beneficiary has not sent the goods as shown, as mentioned in the contract or as given to understand.

Thus there could be a breach in the contract between the buyer and the seller, but the documents under LC could be perfectly in compliance of the terms of LC, thus making the issuing bank liable to pay/honour.

Courts, in many cases, have been putting stays/granting injunctions and stopping issuing banks to pay to the negotiating bank and debiting applicants accounts.

While issuing banks’ on their own, should not, in connivance or other-wise, try to excuse itself from making payments/honoring the documents, with such reasons, which link the discrepancies to the sale contracts or the quality of goods, the National courts/law, being above the UCPDC, they are bound to wait for the stay/injunction to be lifted before making payment to the negotiating banks.

The recovery of the amounts of documents from the applicant is altogether a separate issue, as it is a matter of taking credit risk by the opening bank on the applicant. Thus, recovery of amount from the applicant must also not be linked to the honoring of payment to the negotiating bank.

Case # 2. Case of Date of Documents:

Bank A issues LC dated 1.10.2009, in favour of a beneficiary in UK. The last date of shipment as per LC is 15.10.2009 and last date of negotiation 31.10.2009.

The beneficiary presents documents to Bank B, for negotiation on 05.10.2009, with documents evidencing shipment of goods on 30.09.2009, which sends the documents to the opening bank, asking to reimburse as per LC terms.

The opening bank, on receipt of documents notices that, the shipment was made on 30.09.2009 and the invoice was dated 2.09.2009, while the inspection certificate, analysis certificate and packing list were dated 25.09.2009.

The issuing bank on receipt of documents rejected the documents, notifying discrepancy that documents were dated prior to date of credit.

Article 14 i, specifically provides that documents could be dated prior to the date of LC, but should not be dated after the date of presentation.

While, the LC is silent about the date of documents, documents presented need to be dated as per LC terms, if so provided in the LC.

As such, assuming that the LC did not provide for dates of the documents, the rejection by the opening bank is not as per UCPDC.

Case # 3. Partial Shipments:

An LC, covering shipment of 1000 cartons consisting of 15000 pieces of shirts, (readymade garments), from Chennai port to Dubai port, provides that partial shipment is not allowed.

The beneficiary hands over 500 cartons of Shirts, to the shipping company on 15.7.2009 and another 500 cartoons on 18.7.2009.

The Shipping Company issues BL for the first 500 cartons on 17.7.2009 and another BL covering 500 cartoons on 19.7.2009. Both the consignments are to be shipped by a vessel that is due to leave Chennai port on 21.7.2009. Thus the total goods under the LC, i.e. 1000 cartons, are shipped on a single vessel, but with two BLs.

The LC issuing bank, on receipt of documents drawn under the LC rejects the documents, stating the shipment is not made under one BL and as such constitutes partial shipment, which is not permitted under the LC. The issuing bank, informs the negotiating bank that goods are held at their disposal and further instructions are awaited.

As per article 31 of UCP, a presentation of documents consisting of more than one set of transport documents, covering shipment of goods on the same means of transport and has same journey, will not be considered as partial shipment, even if they indicate different dates of shipment.

As such, in the given scenario, the rejection of documents by the LC opening bank is not correct as per the Article 31 of UCP, and the bank must pay/honour the documents.

Case # 4. Notice of Dishonor:

The LC issuing bank on receipt of documents on 15.9.2009 (Tuesday) took two days to examine the same and referred the documents to the applicants for their acceptance on 17.9.2009 (Thursday). The applicants came up with a discrepancy in documents, on 22.9.2009 (Tuesday) evening, stating that the documents need to be rejected as the BL was not stamped with “On board” stamp and initialed by the shipping company.

The issuing bank sent a Swift message of rejection to the negotiating bank on 23.9.2009.

On receipt of Swift message from the issuing bank, informing rejection of documents and discrepancy, as informed by the applicant, the negotiating bank referred the matter back to the opening bank stating that the message of refusal and notification of discrepancy was not received within the time period of 5 working days, and as such claimed to be reimbursed as per LC terms.

Article 16 d of UCP states that the notice of refusal and discrepancy must be given latest by the closing hours of the 5th working day from the date of presentation. In the instant case, the opening bank was correct in sending the swift message on 23.9.2009, which was 5^th working day, subsequent to the date of receipt of documents.

Since, 19^th and 20^th were Saturday and Sunday and 21.9.2009, being a holiday in India, on account of Ramadan ID, the opening bank was right in sending the notice of refusal/discrepancy on 23.9.2009, which was in compliance with the meaning of the said article.

Case # 5. Insurance:

An LC calls for insurance from ware house to warehouse, and insurance to cover 110% of the invoice value.

Bank A negotiates and forwards documents, covering invoice for USD 17920.00 under a Multi model transport document (Combined Bill of Lading) dated 15.9.2009. to the opening bank, under the said LC. The insurance enclosed to the documents is for USD 20,000.00 and is dated 17.9.2009.

As per the Article 28 of UCP, the insurance must indicate the amount of insurance. It should be at least 110%, of the invoice value if the LC is silent on this requirement and must not be dated prior to the date of transport document.

In the given scenario, the insurance is dated after the date of multimodal transport document, which should be covering the voyage of goods from the godown of the seller, and is more than the given percentage for insurance coverage, i.e. more than 110%.

Banks would normally accept some difference in insurance coverage which could be due to rounding off of the values/cover amount, but still can be used as a discrepancy to refuse the documents. However, a document dated after the date of shipping document, is clearly a discrepancy, and requires specific approval from the applicant.