What is Factoring ?

Factoring is a service that covers the financing and collection of account receivables in domestic and international trade. It is an ongoing arrangement between the client and Factor, where invoices raised on open account sales of goods and services are regularly assigned to "the Factor" for financing, collection and sales ledger administration. The buyer and the seller usually have long term relationships. The client sells invoiced receivables at a discount to the factor to raise finance for working capital requirement. The factor may or may not accept the incumbent credit risk. Factoring enables companies to sell their outstanding book debts for cash. The factor operates by buying from the selling company their invoiced debts. These are purchased, usually with credit protection, by the factor who then will be responsible for all credit control, collection and sales accounting work. Thus the management of the company may concentrate on production and sales and need not concern itself with non-profitable control and sales accounting matters. By obtaining payment of the invoices immediately from the factor, usually up to 80% of their value the company's cash flow is improved. The factor charges service fees that vary with interest rates in force in the money market
Domestic Factoring
Through this product, our intention is to be an active partner in the management of your company's supply/delivery chain. Through domestic factoring, we could look at financing your receivables from your buyers. Additionally we also undertake to finance your vendor/supplier payments.Receivables Finance can be structured with on a With Recourse Basis (where we would be setting up lines on your company) or on a Without Recourse Basis.Payments of all your service and utility bills could be done through our Vendor Finance product. These could include for example, courier payments, electricity bills payments. Through this mechanism we will pay out your service provider on the due date of the invoice/bill and collect the money from you after a pre-determined credit period.
International Factoring
In international factoring there are usually two factors. The export factor looks at financing the exporter and sales administration (presenting invoices at the right time, collecting payments being the key tasks). The import factor is interested in evaluating the buyer, collecting the money on time at the same time ensuring that he is protected against default.International factoring encompasses all the four services, that is, pre-payments, sales ledger administration, credit protection and collections
7 - Step Guide to International Factoring:The importer places the order for purchase of goods with the exporter. The exporter requests the Export Factor for limit approval on the importer. Export Factor in Turn forwards this request to an Import Factor in the Importer's country. The Import Factor Evaluates the Importer and conveys its approval to the Export Factor who in turn conveys Commencement of the Factoring arrangement to the Exporter. The exporter delivers the goods to the importer. Exporter produces the documents to the Export Factor. The Export Factor disburses funds to the Exporter upto the prepayment amount decided and at the Same time the forwards the documents to the Import factor and the Importer. On the due date of the invoice, the Importer pays the Import Factor, who in turn remits this Payment to the Export Factor. The Export Factor applies the received funds to the outstanding amount of the advance against The invoice. The exporter receives the balance payment.
In the international product suite, apart from the existing export-factoring product, we are now poised to launch import factoring as well. That will make us the first and only Bank offering the entire bouquet of factoring products to customers in India.
Distributor Finance Programme (DFP) to set up a financing and collection arrangement for your delivery chain.The credit worthiness of distributors is established independently by THE Financing BANK and credit limits are set up on each distributor. Regular MIS from the bank's end to both you and your distributors ensures that the sales ledger remains updated at all times and frees Client from reconciliation issues.This approach is to provide value-added services over and above the basic funding against your receivables from the channel. This allows you to focus the efforts of your sales team on actual sales rather than collection.
ForfaitingIT is when a bank arrange for an offshore financing on your export receivables to countries esp. high / medium risk with medium to long credit periods.Forfaiting can be structured and executed non-recourse as off balance sheet facilities world-wide using bills of exchange, letters of credit, guarantees and formal loan agreements

Bill Discounting

Bill Discounting
While discounting a bill, the Bank buys the bill (i.e. Bill of Exchange or Promissory Note) before it is due and credits the value of the bill after a discount charge to the customer's account. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill until it is due for payment.Under certain circumstances, the Bank may discount a bill of exchange instead of negotiating them. The amount the Bank advances to you also depends on your past record and reputation of the drawee.Usually, the Bank may want some conditions to be fulfilled to be able to discount a bill:A bill must be a usance bill It must have been accepted and bear at least two good signatures (e.g. of reputable individuals, companies or banks etc.) The Bank will normally only discount trade bills Where a usance bill is drawn at a fixed period after sight, the bill must be accepted to establish the maturity The advising or confirming bank will hide the reimbursement instruction from the beneficiary so that his bank must present the documents to the nominated bank for negotiation in order to obtain payment under the DC terms.Bills which are financed by the receiving branch, whether drawn under a DC or not, are treated as Bills Receivable by both the remitting branch and the receiving branches.
Presenting a bill Bills may be presented to the nominated bank in two ways:
With recourseWe check the documents and confirm that they comply with the DC terms, and send the bill with the original DC to the nominated bank requesting payment. The nominated bank need not recheck the documents and it can claim a refund from us in the case of an unspotted discrepancy. We pay our customer after receipt of funds from the nominated bank.
Without recourseWe pass the original DC and unchecked documents to the nominated bank on a collection basis, requesting payment. The nominated bank has to check the documents in the normal way. Usually, we present documents to the nominated bank without recourse: a. When the opening bank is a member of the Bank nominated for payment, acceptance or negotiationb.When the nominated bank has confirmed the DCc.When the nominated bank is the draweeIf you have a good standing, we can give you an advance against an OBN bill. You will then have to repay the advance from the proceeds of the bill.
Finance Against CollectionYou as an exporter may ask the Bank for finance against a collection bill. Now, if your buyer will close the sale only if he gets credit, you may involve the Bank to arrange for the same. This will allow you to be flexible in the payment terms.The remitting bank may finance a good creditworthy exporter by purchasing or discounting his collection bills under an "Export Line". However,If the importer refuses a bill the Bank has purchased, the Bank must be sure of being able to get a refund. The importer must be reliable. The Bank usually tries to avoid the risk of refusal by keeping in touch with large banks. The Bank always ensures that when a bill is purchased, it is drawn on approved drawees within limits.

URR, uniform rules for Bank to Bank reimbursements

A) GENERAL PROVISIONS
Article 1 - Application of URR

The uniform rules for Bank to Bank reimbursements under Documentary Credits (“Rules”) ICC Publication No 525 shall apply to all Bank to Bank reimbursements where they are incorporated into the text of the reimbursement authorisation. They are binding on all parties thereto unless therwise expressly stipulated in the reimbursement authorisation. The issuing bank is responsible for indicating in the documentary credit “(Credit”) that reimbursement claims are subject to these rules

In a bank to bank reimbursement subject to these Rules the Reimbursing Bank acts on the instructions and/or under the authority of the issuing bank.

These rules are not intended to override or change the provisions of the IC Uniform Customs and Practice for Documentary Credit
Article 2 - Definitions

As used in these Rules, the following terms shall have the meanings specified in this Article and may be used in the singular or plural as appropriate:

A. “Issuing Bank shall mean the bank that has issued a Credit and the Reinbursement Authorisation under that credit.

B. “Reimbursing Bank” shall mean the bank instructed and/or authorised to provide reimbursement pursuant to a Reimbursement Authorisation issued by the issuing bank.

C. “ Reimbursement Authorisation” shall mean an instructions and/or authorisation, independent of the Credit, issued by an Issuing Bank to a reimbursing Bank to reimburse a Claiming Bank, or, if so requested by the Issuing Bank, to accept and pay a time draft(s) drawn on the Reimbursing Bank.

D. Reimbursement Amendment shall mean an advice from the Issuing Bank to a Reimbursing Bank stating changes to a Reimbursement Authorisation

E. Claiming Bank shall mean a bank that pays, incurs a deferred payment undertaking, accepts draft(s) or negotiates under a Credit and presents a Reimbursing Claim to the Reimbursing Bank on behalf of the bank that pays, incurs a deferred payment undertaking, accepts draft(s) or negotiates.

F. Reimbursing Claim shall mean a request for reimbursement from the Claiming Bank to the Reimbursing Bank.

G. Reimbursement Undertaking shall mean a separate irrevocable undertaking of the Reimbursing Bank, issued upon the authorisation or request of the issuing bank to the Claiming Bank named in the Reimbursement Authorisation, to honour that bank’s Reimbursement Claim provided the terms and conditions of the Reimbursement Undertaking have been complied with.

H. Reimbursement Undertaking Amendment shall mean an advice from the Reimbursing Bank to the Claiming Bank named in the Reimbursement Authorisation stating changes to a Reimbursement Authorisation.

I. For the purpose of these Rules branches of a bank in different countries are considered separate banks.

Article 3 - Reimbursement Authorisations Versus Credits

A Reimbursement Authorisation separate from the credit to which it refers, and a Reimbursing Bank is not concerned with or bound by the terms and conditions of the Credit, even if any reference whatsoever to the terms and conditions of the Credit is included in the Reimbursement Authorisation.


B) LIABILITIES AND RESPONSIBILITIES
Article 4 - Honour of Reimbursement Claim

Except as provided by the terms of its Reimbursement Undertaking a Reimbursing Bank is not obligated to honour a Reimbursement Claim.

Article 5 - Responsibilities of the Issuing Bank

The issuing bank is responsible for providing the information required in these Rules in both the Reimbursement Authorisation and Credit and is responsible for any consequences resulting from the non-compliance with this provision.


C) FORM AND NOTIFICATION OF AUTHORISATIONS, AMENDMENTS AND CLAIMS
Article 6 - Issuance and Receipt of a Reimbursement Authorisation or Reimbursement Amendment

A. All Reimbursement Authorisations and Reimbursement Amendment must be issued in the form of an authenticated teletransmission or a signed letter.

When a Credit or amendment thereto which has an effect on the Reimbursement Authorisation is issued by teletransmission the Issuing Bank should advise its Reimbursement Authorisation or Reimbursement Amendment to the Reimbursing Bank by authenticated teletransmission. The teletransmission will be deemed the operative Reimbursement Authorisation or the operative Reimbursement Amendment and no mail confirmation should be sent. Should a mail confirmation nevertheless be sent it will have no effect and the Reimbursing Bank will have no obligation to check such mail confirmation against the operative Reimbursement Authorisation or the operative Reimbursement Authorisation or the operative Reimbursement Amendment received by teletransmission.

B. Reimbursement Authorisations and Reimbursement Amendment must be complete and precise. To guard against confusion and misunderstanding, Issuing Banks must not send to Reimbursing Bank:

1 a copy of the credit or any part thereof or a copy of an amendment to the Credit in place of, or, in addition to the Reimbursement Authorisation or Reimbursement Amendment. If such copies are received by the Reimbursing Bank they shall be disregarded.

2 multiple Reimbursement Authorisation under one teletransmission or letter, unless expressly agreed to by the Reimbursing Bank.

C. Issuing banks shall not require a certificate of compliance with the terms and confirmation of the Credit in the Reimbursement Authorisation.

D. All reimbursement Authorisations must (in addition to the requirement of Article 1 for incorporation of reference to these rules) state the following :

1 Credit Number
2 Currency and Amount
3 Additional Amounts payable and tolerence,if any
4 Claiming Bank or in the case of freely negotiable credits that claims can be made by any bank. In the absence of any such indication the Reimbursing Bank is authorised to pay any Claiming Bank
5 Parties responsible for charges ( Claiming Bank’s and Reimbursing Bank’s charges) in accordance with Article 16 of these rules.

Reimbursement Amendments must state only the relative changes to the above and the Credit number.

E. If the reimbursing bank is requested to accept and pay a time draft(s) the Reimbursement Authorisation must indicate the following, in addition to information specified in (d) above:

1 tenor of drafts to be drawn
2 drawer
3 party responsible for acceptance and discount charges, if any

Reimbursement charges must state the relative changes to the above.
Issuing bank should not require a sight draft(s) to be drawn on the Reimbursing Bank.

F. Any requirement for

1. Prenotification of a reimbursement claim to the Issuing Bank must be included in the Credit and not in the Reimbursement Claim
2. Pre-debit notification to the Issuing Bank must be indicated in the Credit.

G. If the Reimbursing Bank is not prepared to act for any reason whatsoever under the Reimbursement Authorisations or Reimbursement Amendment, it must so inform the Issuing Bank without delay.

H. In addition to the provisions of Article 3 and 4 Reimbursing Banks are not responsible for the consequences resulting from non-reimbursement or delay in reimbursement of Reimbursement Claims, where any provision contained in this Article is not followed by the Issuing Bank and / or Claiming Bank.

Article 7 - Expiry of a Reimbursement Authorisation

Except to the extent expressly agreed to by the Reimbursing Bank, the Reimbursement Authorisation must not have an expiry date for presentation of a claim except as indicated in Article 9.

Reimbursing Banks will assume no responsibility for the expiry date of Credits and if such date is provided in the Reimbursement Authorisation it will be disregarded.

The issuing bank must cancel its Reimbursement Authorisation for any unutilised portion of the Credit to which it refers informing the Reimbursing Bank without delay.

Article 8 - Amendment or Cancellation of Reimbursement Authorisations

Except where the Issuing Bank has authorised or requested the Reimbursing Bank to issue a Reimbursement Undertaking as provided in Article 9 and the Reimbursement Bank has issued a Reimbursement Undertaking:

A. The issuing bank may issue a Reimbursement Amendment or cancel a Reimbursement Authorisation at any time upon sending notice that effect to the Reimbursing Bank.

B. The issuing bank must send notice of any amendment to a Reimbursement Authorisation that has an effect on the reimbursement instructions contained in the Credit to the nominated bank or in the case of a freely negotiable credit the advising bank. In the case of cancellation of the Reimbursement Authorisation prior to expiry of the Credit, the Issuing Bank must provide the nominated bank or the advising bank with new reimbursement instructions.

C. The Issuing Bank must reimburse the Reimbursing Bank for any Reimbursement Claims honoured or draft(s) accepted by the Reimbursing Bank prior to the receipt by it of notice of cancellation or Reimbursement Amendment.
Article 9 - Reimbursement Undertakings

A. In addition to the requirements of sub-Article 6 (a), (b) and (c) of these Rules, all Reimbursement Authorisations authorising or requesting the issuance of a Reimbursement Undertaking must comply with the provisions of this Article

B. An authorisation or request by the Issuing Bank to the Reimbursing Bank to issue a Reimbursement Undertaking is irrevocable (“Irrevocable Reimbursement Authorisation”) and must (in addition to the requirement of Article 1 for incorporation to these Rules) contain the following:

1 Credit Number
2 Currency and Amount
3 Additional amounts payable and tolerance, if any
4 Full name and address of the Claiming Bank to whom the Reimbursement Undertaking should be issued.
5 Latest date for presentation of a claim including any usance period.
6 Parties resposible for charges (Claiming Bank’s and Reimbursement Bank’s charges and Reimbursement Undertaking fee) in accordance with Article 16 of these rules.

C. If the Reimbursing Bank is requested to accept and pay a time draft(s), the Irrevocable Reimbursement Authorisation must also indicate the following, in addition to the information contained in (b) above:

1. Tenor of draft(s) to be drawn
2. Drawer
3. Party responsible for acceptance and discount charges, if any

Issuing Banks should not require a sight draft(s) to be drawn on the Reimbursing Bank

D. If the Reimbursing Bank is authorised or requested by the issuing bank to issue its Reimbursement Undertaking to the Claiming Bank but is not prepared to do so, it must so inform the Issuing Bank without delay.

E. A Reimbursement Undertaking must indicate the terms and conditions of the undertaking and :

1 Credit number of the issuing bank
2 Currency and amount of the Reimbursement Authorisation
3 Additional amounts payable and tolerence, if any
4 Currency and amount of the Reimbursement Undertaking
5 Latest date for presentation of a claim including any usance period
6 Party to pay the Reimbursement Undertaking fee, if other than the issuing bank. The Reimbursing Bank must also include its charges,if any, that will be deducted from the amount claimed.

F. If the latest for presentation of a claim falls on a day on which the Reimbursing Bank is closed for reasons other than those mentioned in Article 15 the latest date for presentation of a claim shall be extended to the first following day on which the Reimbursing Bank is open.

G.
1. An irrevocable Reimbursement Authorisation cannot be amended or cancelled without the agreement of the Reimbursing Bank
2. When an Issuing Bank has amended its irrevocable Reimbursement Authorisation, a Reimbursing Bank which has issued the Reimbursement Undertaking may amend its undertaking to reflect such amendment. If a Reimbursing Bank chooses not to issue its Reimbursement Undertaking Amendment it must so inform the Issuing Bank without delay.
3. An Issuing Bank which has issued its Irrevocable Reimbursement Authorisation Amendment shall be irrevocably bound as of the time of its advice of the Irrevocable Reimbursement Authorisation Amendment.
4. The terms of the original Irrevocable Reimbursement Authorisation ( or an Authorisation incorporating previously accepted irrevocable Reimbursement Authorisation Amendments) will remain in force for the Reimbursing Bank until it communicates its acceptance if the amendment to the Issuing Bank
5. A Reimbursing Bank must communicate its acceptance or rejection of an Irrevocable Reimbursement Authorisation Amendment to the Issuing Bank. A Reimbursing Bank is not required to accept or reject an Irrevocable Reimbursement Authorisation Amendment until it has received acceptance or rejection from the Claiming Bank to its Reimbursement Undertaking Amendment

H.
1. A Reimbursement Undertaking cannot be amended or cancelled without the agreement of the Claiming Bank
2. A Reimbursing Bank which has issued its Reimbursement Undertaking Amendment shall be irrevocably bound as of the time of its advice of the Reimbursement Undertaking Amendment.
3. The terms of the original Reimbursement Undertaking (or a Reimbursement Undertaking incorporating previously accepted Reimbursement Amendments) will remain in force for the Claiming Bank until it communicates its acceptance of the Reimbursement Undertaking Amendment to the Reimbursing Bank
4. A Claiming Bank must communicate its acceptance or rejection of a Reimbursement Undertaking Amendment to the Reimbursing Bank.
Article 10 - Standards for Reimbursement Claims

A. The claiming Bank’s claim for reimbursement :

1. must be in the form of a teletransmission, unless specifically prohibited by the Issuing Bank or an original letter. A Reimbursing Bank has the right to request that a Reimbursement Claim be authenticated and in such case the Reimbursing Bank shall not be liable for any consequences resulting from any delay incurred. If a Reimbursement Claim is made by teletransmission, no mail confirmation is to be sent. In the event such a mail confirmation is sent the Claiming Bank will be responsible for any consequences that may arise from a duplicate reimbursement.
2. Must clearly indicate the Credit number and Issuing Bank (and Reimbursing Bank’s reference number, if known).
3. Must separately stipulate the principal amount claimed, any additional amount(s) and charges
4. Must not be a copy of the claiming bank’s advice of payment, deferred payment, acceptance or negotiation to the Issuing Bank
5. Must not include multiple Reimbursement Claims under one teletransmission or letter.
6. Must in the case of a Reimbursement Undertaking, comply with the terms and conditions of the Reimbursement Undertaking.

B.
In cases where a time draft is to be drawn on the Reimbursing Bank, the Claiming Bank must forward the draft with the Reimbursement Claim to the Reimbursing Bank for processing and include the following in its claim if required by the Credit and/or Reimbursement Undertaking :

1. general description of the goods and/or services
2. country of origin
3. place of destination/performance and if the transaction covers the shipment of merchandise.
4. Date of shipment
5. Place of shipment

C.
Claiming Banks must not indicate in a Reimbursement Claim that a payment acceptance or negotiation was made under reserve or against an indemnity.

D.
Reimbursing Banks assume no liability or responsibility for a any consequences that may arise out of any non-acceptance or delay of processing should th Claiming Bank fail to follow the provisions of this Article.
Article 11 - Processing Reimbursement Claims

A.
1. Reimbursing Banks shall have a reasonable time, not to exceed three banking days following the day of receipt of the Reimbursement Claim, to process claim. Reimbursement Claims received n the next banking day.
If a pre-debit notification is required by the Issuing Bank, this pre-debit notification period shall be in addition to the processing period mentioned above.

2. If the Reimbursing Bank determines not to reimburse either because of a non-confirming claim under a Reimbursing Undertaking, or for any reason whatsoever under a Reimbursement Authorisation, it shall give notice to that effect by telecommunication or if that is not possible by any other expeditious means, without delay, but no later than the close of the third banking day following the day of receipt of the claim (plus any additional period mentioned in sub Article (1) above). Such notice shall be sent to the Claiming Bank and the Issuing Bank and, in the case of a Reimbursement Undertaking, it must state the reasons for non payment of the claim.

B. Reimbursing Banks will not process requests for back value (value dating prior to the date of a Reimbursement Claim) from the Claiming Bank.

C. Where a Reimbursing Bank has not issued a Reimbursement Undertaking and a reimbursement is due on a future date :

1. The reimbursement claim must specify the predetermined reimbursement date.
2. The Reimbursement Claim should not be presented to the Reimbursement Bank more than ten (10) of its banking days prior to such predetermined date. If a Reimbursement Claim is presented more than ten (10) banking days prior to the predetermined date, the Reimbursement Bank may disregard the Reimbursement Claim. If the Reimbursing Bank disregard the Reimbursing Claim it must so inform the Claiming Bank by teletransmission or other expeditious means without delay.
3. If the predetermined reimbursement date is more than three banking days following the day of receipt of the Reimbursement Claim, the Reimbursing Bank has no obligation to provide notice of non-reimbursement until such predetermined date, or no later than the close of the third banking day following the receipt of the Reimbursement Claim plus any additional period mentioned in (a) (1) above, whichever is later.

D. Unless otherwise expressly agreed to by the Reimbursing Bank and the Claiming Bank. Reimbursing Banks will effect reimbursement under a Reimbursement Claim only to the Claiming Bank

E. Reimbursing Banks assume no liability or responsibility if they honour a Reimbursement Claim that indicates that a payment, acceptance or negotiation was made under reserve or against an indemnity and shall disregard such indication. Such reserve or indemnity concerns only the relations between the Claiming Bank and the party towards whom the reserve was made or from whom or on whose behalf the indemnity was obtained.
Article 12 - Duplications of Reimbursement Authorisations

An Issuing Bank must not upon receipt of documents give a new Reimbursement Authorisation or additional instructions, unless they constitute an amendment to or cancellation of an existing Reimbursement Authorisation. If the Issuing Bank does not comply with the above and a duplicate reimbursement is made, it is the responsibility of the Issuing Bank to obtain the return of the amount of the duplicate reimbursement. The reimbursing Bank assumes no responsibility for any consequences that may arise from any such duplication.


D) MISC PROVISIONS
Article 13 - Foreign Laws and Usages

The Issuing Bank shall be bound by and shall indemnify the Reimbursing Bank of all obligations and responsibilities imposed by foreign laws and usages.
Article 14 - Disclaimer on the Transmission of Messages

Reimbursing Banks assume no liability or responsibility for the consequences arising out of delay and/or loss in transit of any message(s), letter(s) or document(s) or for delay,mutilation or other errors arising in the transmission of any telecommunication. Reimbursing Banks assume no liability or responsibility for errors in translation.
Article 15 - Force Majeure

Reimbursing banks assume no liability or responsibility for the consequences arising out of acts of God, riots, civil commotions, insurrections, wars or any other causes beyond their control or by any strikes or lockouts.
Article 16 - Charges

A. The Reimbursement Banks charges should be for the account of the Issuing Bank. However in cases where the charges are for the account of another party, it is the responsibility of the Issuing Bank to so indicate in the original credit and in the Reimbursement Authorisation.

B. When honouring a Reimbursement Claim, a reimbursing bank is obligated to follow the instructions regarding any charges contained in the Reimbursement Authorisation.

C. In cases where the Reimbursing Bank charges are for the account of another party they shall be deducted when the Reimbursement Claim is honoured. Where a Reimbursing Bank follows the instructions of the Issuing Bank regarding charges(including commissions, fees, costs or expenses) and these charges are not paid or a Reimbursement Claim is never presented to the Reimbursement Bank under the Reimbursement Authorisation the Issuing Bank remains liable for such charges.

D. Unless otherwise stated in the Reimbursement Authorisation all charges paid by the Reimbursing Bank will be in addition to the amount of the Authorisation provided that the Claiming Bank indicates the amount of such charges

E. If the issuing bank fails to provide the Reimbursing Bank with instructions regarding charges, all charges shall be for the account of the Issuing Bank.
Article 17 - Interest Claims / Loss of Value

All claims for loss of interest, loss of value due to any exchange rate fluctuations, revaluations or devaluations are between the Claiming Bank and the Issuing Bank, unless such losses result from the Reimbursing Banks obligation under a Reimbursement Undertaking.

Policy statement
The determination of an "Original" document in the context of UCP 500 sub-Article 20(b)Commission on Banking Technique and Practice, 12 July 1999

Original documentsThe attached ICC Banking Commission Decision on original documents was sent to members in July. At the time, there were two typographical errors in it, which have since been corrected in the attached text. The first error was in Section 2, sub-section UCP 500 Requirements and referred to sub-Article 13(d) of UCP 500. The correct reference is sub-Article 13(c). The second was in the last paragraph of Section 2. The sentence in the previous draft read: "Sub-Article 13(b) of UCP 500 refers to compliance of the presented documents being determined by international standard banking practice as defined in the articles of UCP." The correct reference, as in the attached document, is to sub-Article 13(a). These corrections have also been made on the Internet version on the ICC web site, http://www.iccwbo.org.
This Decision emphasizes the need to correctly interpret and apply sub-Article 20(b) of UCP 500. Consequently, ICC national committees and associated organizations are strongly urged to distribute this Decision as widely as possible to help ensure the correct interpretation in the evaluation of documents issued under letters of credit. This Decision does not amend sub-Article 20(b) of UCP 500 in any way, but merely indicates the correct interpretation thereof which has been adopted unanimously by the ICC Commission on Banking Technique and Practice on 12 July 1999.
1. BackgroundOver a period of several years there have been a number of queries raised with the ICC Banking Commission as to the determination, by banks, of what is an "original" document under a letter of credit and the necessity, if any, for such a document to be so marked.
For ease of reference the text of sub-Article 20(b) reads:
"Unless otherwise stipulated in the Credit, banks will also accept as an original document(s), a document(s) produced or appearing to have been produced
by reprographic, automated or computerized systems
as carbon copie s;
provided that it is marked as original and, where necessary, appears to be signed.
A document may be signed by handwriting, by facsimile signature, by perforated signature, by stamp, by symbol, or by any other mechanical or electronic method of authentication."
2. Determination of originalityIn documentary credit operations, the document checker is faced with a number of issues pertaining to originality including:
Apparent originalityBanks undertake to determine whether a document appears on its face to be an original document, as distinguished from a copy. Except as expressly required by a letter of credit including an incorporated term – such as UCP 500 sub-Articles 23(a)(iv) or 34(b) – banks do not undertake to determine whether an apparent original is the sole original. Banks rely on the apparent intent of the issuer of the document that it be treated as an original rather than a copy.
In this regard, a person sending a telefax or making a photocopy on plain paper or pressing through carbon paper presumably intends to produce a copy. On the other hand, a person printing a document on plain paper from a text that that person created and electronically stored presumably intends to produce an original. Accordingly, documents bearing facsimile signatures or printed in their entirety (even including the issuer’s letterhead and/or signature) from electronically stored text are presumably intended by the document issuer to be original and in practice are accepted by banks as original.
Documents that appear to be original but are notBanks do not undertake to determine whether a document is original in fact. Under UCP 500 Article 15, banks are not responsible for the genuineness or falsification of any document. If a document appears to be original or to have been marked as original but is in fact not original, then its presentation may give rise to exceptional defences, rights, or obligations under the law applicable to forged or fraudulent presentations and is beyond the scope of UCP 500.
UCP 500 requirements:
The UCP neither requires nor permits an examination beyond the face of a document to determine how the document was in fact produced, unless the document was produced by the bank, e.g. on a telefax, telex, e-mail, or other system that prints out messages received by the bank. The "produced or appearing to have been produced" language in sub-Article 20(b) does not override UCP 500 sub-Articles 13(a), 13(c), or 14(b), or other practice and law that prohibit issuers and confirmers from determining compliance on the basis of extrinsic facts.As indicated by inclusion of the word "also" (" ... banks will also accept as original(s) ..."), sub-Article 20(b) is neither compr ehensive nor exclusive in its provisions that distinguish originals from copies. For example, a document printed on plain paper from electronically stored text is acceptable, without regard to 20(b), if it appears to be an original.Sub-Article 20(b) does not apply to documents that appear to be only partially produced by reprographic, automated, or computerized systems or as carbon copies. In this regard, a photocopy ceases to be "reprographically produced" within the meaning of sub-Article 20(b) when it is also manually stamped, dated, completed, or signed by the issuer of the document.The "marked as original" proviso in sub-Article 20(b) is satisfied by any marking on a document or any recital in the text of a document that indicates that the issuer of the document intends it to be treated as an original rather than a copy. Accordingly, a document that appears to have been printed on plain paper from electronically stored text is "marked as original" under sub-Article 20(b) if it also states that it is original or includes letterhead or is hand marked.
Sub-Article 13(a) of UCP 500 refers to compliance of the presented documents being determined by international standard banking practice as defined in the articles of UCP. International standard banking practice in relation to determination of "original" documents could be described as follows:
3. Correct interpretation of sub-article 20(b)General approachBanks examine documents presented under a letter of credit to determine, among other things, whether on their face they appear to be original. Banks treat as original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not original. Accordingly, unless a document indicates otherwise, it is treated as original if it:
(A) appears to be written, typed, perforated, or stamped by the document issuer’s hand; or
(B) appears to be on the document issuer’s original stationery; or
(C) states that it is original, unless the statement appears not to apply to the document presented (e.g. because it appears to be a photocopy of another document and the statement of originality appears to apply to that other document).
Hand signed documents.Consistent with sub-paragraph (A) above, banks treat as original any document that appears to be hand signed by the issuer of the document. For example, a hand signed draft or commercial invoice is treated as an original document, whether or not some or all other constituents of the document are preprinted, carbon copied, or produced by reprographic, automated, or computerized systems.
Facsi mile signed documentsBanks treat a facsimile signature as the equivalent of a hand signature. Accordingly, a document that appears to bear the document issuer’s facsimile signature is also treated as an original document.
PhotocopiesBanks treat as non-original any document that appears to be a photocopy of another document. If, however, a photocopy appears to have been completed by the document issuer’s hand marking the photocopy, then, consistent with sub-paragraph (A) above, the resulting document is treated as an original document unless it indicates otherwise. If a document appears to have been produced by photocopying text onto original stationery rather than onto blank paper, then, consistent with sub-paragraph (B) above, it is treated as an original document unless it indicates otherwise.
Telefaxed presentation of documentsBanks treat as non-original any document that is produced at the bank’s telefax machine. A letter of credit that permits presentation by telefax waives any requirement for presentation of an original of any document presented by telefax.
Statements indicating originalityConsistent with either or both of sub-paragraphs (A) and (C) above, a document on which the word "original" has been stamped is treated as an original document. A statement in a document that it is a "duplicate original" or the "third of three" also indicates that it is original. Originality is also indicated by a statement in a document that it is void if another document of the same tenor and date is used.
Statements indicating non-originalityA statement in a document that it is a true copy of another document or that another document is the sole original indicates that it is not original. A statement in a document that it is the "customer’s copy" or "shipper’s copy" neither disclaims nor affirms its originality.
4. What is not an "Original"?A document indicates that it is not an original if it
appears to be produced on a telefax machine;
appears to be a photocopy of another document which has not otherwise been completed by hand marking the photocopy or by photocopying it on what appears to be original stationery; or
states in the document that it is a true copy of another document or that another document is the sole original.
5. ConclusionBased upon the comments received from ICC national committees, members of the ICC Banking Commission and other interested parties, the statements in clauses 3 and 4 above reflect international standard banking practice in the correct interpretation of UCP 500 sub-Article 20(b).
Document n° 470/871 Rev.29 July 1999

Trade Finance Glossary

Acceptance
The act of giving a written undertaking on the face of a usance bill of exchange
to pay a stated sum on the maturity date indicated by the drawee of the bill,
(usually in exchange for documents of title to goods shipped on D/A terms).
Acceptance Credit
A documentary credit which requires the beneficiary to draw a usance bill for
subsequent acceptance by the issuing bank or the advising bank or any other
bank as the credit stipulates.
Accepting bank
The bank which accepts a bill of exchange drawn on it under a documentary
credit.
Accommodation Bill
In the context of fraud, a bill drawn without a genuine underlying commercial
transaction.
Accountee
Another name for the applicant/opener of a documentary credit i.e. the importer
= the person for whose account the transaction is made.
Advice of Fate
The Collecting Bank informs the Remitting Bank of non- payment/nonacceptance
or (for D/A bills) of acceptance and the bill maturity date.
Advising bank
The bank by which the terms and conditions of the documentary credit are
conveyed to the beneficiary. It is usually a bank in the beneficiary’s country.
Amendment
An alteration to the terms and conditions of the documentary credit. Following
the applicant’s request, the amendment originates from the issuing bank and is
advised to the beneficiary by the advising bank. Irrevocable credits (almost all
credits are irrevocable) cannot be amended unless the beneficiary agrees.
Applicant
The party, usually the importer, who applies to his bank to issue a documentary
credit. Also sometimes referred to as the opener or accountee.
Avalise
The act by a bank in guaranteeing payment of a bill of exchange or promissory
note by endorsing the reverse with the words "good per aval" and signed by the
bank, or by the issuance of a separate guarantee.
Back-to-Back Credit
A credit issued against the security back of another credit (master credit) on the
understanding that reimbursement will stem from documents eventually
presented under the first credit (master credit) issued. It follows therefore that
each side of a B/B transaction covers the shipment of the same goods.
Beneficiary
The party to whom a documentary credit is addressed and who will receive
payment under it if he complies with its terms.
Bill for Collection
Document(s) or cheque submitted through a bank for collection of payment from
the drawee.
Bill of Exchange
An unconditional order in writing, addressed by one person to another, signed
by the person giving it, requiring the person to whom it is addressed to pay on
demand or at fixed or determinable future time a sum certain in money to or to
the order of a specified person, or to bearer.
It is usually referred to in documentary credits as a draft.
Bill of Lading
A document demonstrating, among other things, ownership of goods.
Bill Receivable
Bills which are financed by the receiving branch, whether drawn under a DC or
not, are treated as BRs by both the remitting branch and the receiving branch.
Blank Endorsed
When a bill of lading is made out to order or shipper order and the shipper has
signed on the back of it, it is said to be blank endorsed. The bill of lading then
becomes a bearer instrument and the holder can present it to the shipping
company to take delivery of the goods.
Carrier
Person or company undertaking, for hire, the conveyance of goods e.g. shipping
company.
Case of Need
Agent nominated by a principal, to whom the collecting bank may refer in
specified circumstances concerning collections.
Clean
Used to describe a draft/cheque with no shipping documents (Collections
transactions), or to describe a bill of lading without clauses that expressly
declare a defective condition of the goods or the packing.
Clean Bill Purchased
A collection bill purchased with no shipping documents.
Clean Bill Receivable
BR (Bill Receivable) with no shipping documents. The term is more often used
for non-trade bills such as travellers cheques.
Clean Collection
A draft with no documents attached.
Clean Import Loan
A loan granted to an importer for payment of import bills, without the Bank
having any claim to the goods.
Collecting Bank
The bank, normally in the territory of the drawee/importer, which acts as the
agent of the remitting bank in collecting proceeds of a clean or documentary bill.
Collected proceeds are remitted back to the remitting bank, for payment to their
customer.
Collection/Collection Basis
A general term used in the TS FIM to describe a non-financed non-DC bill.
Collection Order
Form submitted, with documents, to the Remitting/Negotiating Bank by an
exporter with their instructions.
Confirming bank
A bank that undertakes on its own responsibility to pay, undertake a deferred
payment obligation, accept or negotiate under a documentary credit issued by
another bank. The confirming bank is usually the advising bank.
Consignee
Person, company or bank to whom goods are addressed.
Consignor
Also known as the shipper, the person or company sending goods.
Contingent Liability
A liability that arises only under specified conditions, e.g. when a bank opens a
DC it incurs an obligation to make a future payment on condition that the terms
are fully met.
DC Bills
Bills drawn under documentary credits.
Deferred Payment Credit
A DC which allows the nomination of a bank, or the issuing bank to effect
payment against stipulated documents at a maturity date as specified or
determinable from the wording of the credit.
Demurrage
A charge made by a shipping company or a port authority for failure to load or
remove goods within the time allowed.
Discounting
Act of purchasing an accepted usance bill of exchange at an amount less than
the face value.
Discrepancy
Any deviation from the terms and conditions of a DC, or the documents
presented thereunder, or any inconsistency between the documents themselves.
Dishonour
Non-payment or non-acceptance.
Documentary Credit
A conditional undertaking by a bank to make payment, often abbreviated to
credit. More precisely, it is a written undertaking by a bank (issuing bank) given
to the seller (beneficiary) at the request of the buyer (applicant) to pay a sum of
money against presentation of documents complying with the terms of the credit
within a set time limit.
Documents
The characteristics and importance of the various documents associated with
Import/Export operations are explained and illustrated in Deciding on
Documents.
Documents Against Acceptance
Instruction for commercial documents to be released to the drawee on
acceptance of the Bill of Exchange.
Documents Against Payment
Instruction for documents to be released to the drawee only on payment.
Documents of Title
Documents that give their owner the right to the goods, i.e. Bill of Lading.
Draft
Bill of exchange issued by an exporter and submitted to his bank for collection,
or under a DC - usually submitted with attached shipping documents - not to be
confused with a bankers draft which is sometimes used as a vehicle for
reimbursement.
Drawee
Party on whom a bill is drawn and the one to whom presentation is to be made
according to the collection order - the importer (NB: for DC bills, the drawee is
usually the DC issuing bank).
Drawer
The exporter, who draws the Bill of Exchange/draft which in itself is a claim for
payment.
Due Date
Maturity date for payment.
Endorsement
Signing (a bill of exchange or bill of lading) on the reverse to transfer title to
another party.
Expiry Date
Latest date, usually in the country of the beneficiary, on which
negotiation/payment of a DC can take place.
Financed Bills
Bills sent on collection in which the remitting bank has a financial interest.
Foreign Bill Purchased
A bill remitted to a correspondent bank in which the remitting branch is
financing the exporter.
Forward Exchange Contract
Contract between the Bank and its customer to buy/sell a fixed amount of
foreign currency at a future date at a specified rate. This could be for a
customer to make payment under a DC or to sell the proceeds received from an
export negotiation.
Freight
Goods OR the cost of transporting goods.
General Average
Loss which is the result of a sacrifice voluntarily made or an expense incurred;
for the sole purpose of saving a ship and its cargo in face of a common danger
(e.g. jettison of cargo to lighten a ship in distress). The loss is borne
proportionately by ship and cargo owners according to their respective interests
in the voyage.
Gross Weight
The weight of the merchandise in its shipping form, i.e. including all its
packaging.
Honour
To pay or accept a bill of exchange.
Import Licence
A permit issued by the importing country’s authorities in respect of goods
subject to import licensing restrictions.
Indemnity
Also known as Letter of Guarantee (L/G), it is an undertaking given in respect of
discrepancies in documents presented under a credit. The beneficiary who issues
the indemnity is primarily liable to repay funds received from the negotiating
bank in settlement under the credit, if the negotiating bank cannot obtain
reimbursement from the issuing bank as a result of documents being rejected by
the applicant.
Inherent Vice
The propensity of a commodity to self-destruction which gives rise to a high
insurance risk, therefore cover is given only after payment of an additional
premium (e.g. fruit rots, coal-dust spontaneously ignites).
Irrevocable DC
Constitutes a definite undertaking of the issuing bank and the confirming bank, if
any, to honour the credit provided the terms of the credit are observed. It may
be advised to the beneficiary without engagement by the advising bank, and
cannot be amended or cancelled unless the issuing bank, the confirming bank
and the beneficiary agree.
Issuing Bank
The bank that issues the documentary credit and acts for the applicant (usually
the importer).
Letter of Credit
American term for documentary credit. In the United States, the letters DC can
often be confused for documentary collection.
Letter of Hypothecation
A promise to hold goods as security taken from customers who are granted
loans against goods imported on a collection basis.
Master Credit
In back-to-back operations, the original export credit against which the second
credit is issued.
Maturity
The date on which a usance bill of exchange becomes due for payment.
Negotiable/Non-Negotiable
Usually used with regard to Bills of Lading: a negotiable BL is a valid document
of title, while a non-negotiable BL is not - the beneficiary of a DC (the exporter)
may send the importer a non-negotiable BL for information.
Negotiation
The purchase of a bill of exchange or documents which under the credit terms
the issuing bank has undertaken to pay. Unlike payment, Negotiation is with
recourse to the Drawer/Beneficiary. Unless otherwise indicated the term is used
in its generic sense in this manual to describe any method of settlement, or
giving value under documentary credits.
Negotiating Bank
The bank which negotiates under a documentary credit. It may be a bank
nominated by the issuing bank or any other authorised under the credit.
Net Weight
The weight of the merchandise before any packaging.
Non-DC Bill
A set of documents with or without a bill of exchange relating to a trade
transaction, not drawn under a DC, financed by a Group Office.
Non-Financed Bills
Bills sent on collection in which the remitting branch has no financial interest.
Notify Party
Most contracts involving transport overseas specify a party who is to be advised
of the arrival of the goods. This may be the consignee himself or an agent and
his name and address must appear on the transport document.
Noting
The first stage in protest of a dishonoured bill: if instructed to protest for nonpayment/
non- acceptance, the collecting bank must send the bill to a notary
public who will represent it to the drawee on the same day it was refused, or the
next business day. If the drawee still refuses the bill the notary public notes on
the bill: the amount of his charges, the date and his initials. The reason for
refusal is shown on a note attached to the bill. The bill is then protested.
Opener
See Applicant.
Opening Bank
See Issuing Bank.
Order (To)
The phrase To Order is sometimes shown on Bills of Lading against consignee:
this means that the Bill of Lading must be endorsed in blank by the shipper (i.e.
not to any particular named party which makes it bearer document and it
becomes transferable by delivery).
Packing Credit
A loan given to the beneficiary by the bank to enable him to purchase raw
materials. The beneficiary is usually requested to deposit the DC with the bank
as security.
Past Due
Bill or loan that has not been paid on the maturity date/due date.
Paying Bank
The bank which is to pay the proceeds under a payment DC. It can be the
issuing bank itself or a bank nominated by it, usually the advising/confirming
bank.
Perils of the Seas
They are accidents or casualties of the sea. The ordinary actions of the winds
and waves are not included. Heavy or tempestuous weather on a voyage is of
sufficient violence to constitute a peril of the sea.
Power of Attorney
Authority given to one party to act for another.
Presentation
Act of requesting the importer’s payment/acceptance of an import bill.
Presenting Bank
The bank that requests payment of a collection bill - may be the Collecting Bank
or its nominated branch or local correspondent, which is better placed to contact
the importer.
Principal
The exporter in collection transactions, being the initiator of the transaction,
whose instructions are followed at all stages (may be used to refer to any
customer who initiates a transaction e.g. the issuer of a DC).
Promissory Note
A signed statement containing a written promise to pay a stated sum to
specified person at a specified date or on demand.
Protest
The formal representation of a dishonoured bill of exchange: the bill is presented
by a notary public to the drawee - if refused again, it is noted” - see noting. The
notary public then issues a formal protest, an official certificate that the bill has
been refused: the drawer can use this certificate to sue the drawee in court.
Purchase
Unless otherwise indicated the term is used in its generic sense to describe the
process where an export department advances the proceeds of a non-DC bill to
a customer.
Recourse
The right to claim back a payment made.
Red Clause Credit
A credit with a clause which authorises the advising bank to make an advance
payment to the beneficiary.
Reimbursing Bank
The bank nominated by the DC issuing bank that will pay the value of the DC to
the negotiating/paying bank.
Remitting Bank
The bank that acts on behalf of the drawer/exporter in handling documents
under DC or non-DC bills. It sends documents to a receiving or collecting bank
for payment by the importer.
Retirement
The act of paying or settling an outstanding bill or import loan; i.e. payment by
the importer to the Bank.
Revocable DC
A documentary credit which may be amended or cancelled at any time without
prior notice to the beneficiary.
Revolving Credit
A credit automatically reinstated after each drawing or upon receipt of
authorisation from the DC issuing bank, with limits as to the duration of the
facility and as to the (cumulative or non-cumulative) amount involved for each
drawing.
Schedule
The Remitting/Negotiating Bank's letter covering a bill sent to the
Collecting/Issuing Bank, which lists the documents attached and gives collection
and/or payment instructions.
Self-Liquidating
A transaction is said to be self-liquidating when there is a known source of funds
available for its settlement on due date.
Settlement
Payment, acceptance or negotiation under a documentary credit. See
negotiation.
Shipment Date
The date inserted on the bills of lading evidencing goods received on board is
regarded for documentary credit purposes as being the date of shipment.
Shipper
See Consignor
Shipping Guarantee
Guarantees of this nature are required to enable customers to obtain goods
before the arrival of the documents of title, and are issued to the shipping
companies by the Bank against an undertaking to forward the bills of lading
when they are received. The Bank normally take 100% cash margin against the
value of the goods if the customer does not have T/R facility.
Sight
Under a sight documentary credit a Group Office should effect settlement
immediately if it is satisfied with the documents presented (unless the terms of
the sight credit are in some way modified by its contents). Banks are allowed a
reasonable time to check documents.
Snags
Irregular bills; import and export.
Status Report
Produced by a bank's TCI department or a credit information bureau, giving
details of the creditworthiness and business background of traders and
manufacturers.
Substitution
The act whereby the prime beneficiary substitutes his own documents i.e.
invoices and drafts, in back-to-back and transferable credit operations prior to
negotiation of the master credits.
Tenor
The period of time that must pass before a bill of exchange or promissory note
becomes due for payment. The date must be determinable from the face of the
bill or note.
Terms
Stipulates the conditions of the documentary credit, the method for the dispatch
of the goods, the basis on which the payment amount is fixed (e.g. FOB, CIF),
and the documents required under the credit.
Trade and Credit Information
A bank department that prepares and distributes status reports on its own
customers, and maintains records of traders and manufacturers with whom its
customers deal.
Transferable Credit
Permits the beneficiary to transfer all or some of the rights and obligations under
the credit to a second beneficiary or beneficiaries.
Transferee
A party (2nd beneficiary) to whom a transferable credit is transferred in whole or
in part.
Transferor
A party (1st beneficiary) at whose request a transferable credit is transferred to
a second beneficiary in whole or in part.
Transport Documents
Formerly and still usually referred to as shipping documents, the documents
which demonstrate that goods have been dispatched from one place to another.
Usance
In contrast to a sight credit, a usance credit is one where the bill (or draft) is
intended to be payable at a date later than that of the presentation of
documents (See Tenor).
Waive
To relinquish a right: used in collections, with BC charges and/or interest to be
collected from the drawee. These can be waived in certain circumstances as set
out in URC 522.

Transferable credits and the UCP 500

Transferable credits and the UCP 500

Commission on Banking Technique and Practice, 30 October 2002

Department of Policy and Business Practices

Introduction

At the April 2002 Banking Commission a first draft of a paper on Transferable Credits was presented and discussed. This paper brought together and represented a summary of the main Banking Commission Opinions on the subject of application of Article 48 and Transferable Credits in general. Article 48 being one of the Articles that had received the most queries over the last few years. The paper did not seek to provide answers as to specific transferable letter of credit practice nor to issues that had not been previously agreed by the Commission.
During the discussion at the meeting, a number of the comments sought to change the viewpoint that had been expressed in past (agreed) opinions. In addition, there was a feeling that the document should in some way look at issues of practice. It was outlined, that the intention of the paper is to create a document that brings together a selection of the opinions that have a direct bearing on day to day issues relating to transferable credits. A number of the opinions that have been given are specific to certain circumstances or of an obscure nature and had not been included. This does not undermine the status of opinions not included, details of which can be found in ICC Publication No. 632, which is a compilation of opinions given since the introduction of UCP 500.
It was agreed that issues relating to practice would need to be the subject of a separate paper and input from National Committees. From a number of the questions that have been posed, it is clear that there is some confusion with regard to some of the provisions of Article 48. In addition, it would seem that there are parties who are issuing, or seeking to have issued, transferable credits which do, or would, contain conditions which go beyond those provided for in Article 48.
Each of the issues and responses have been highlighted under the respective or appropriate sub-Article for ease of reference. Where there is a published opinion, the respective "R" number is annotated after the answer.

Article 48 - transferable credit
a. A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate (the "Transferring Bank"), or in the case of a freely negotiable Credit, the bank specifically authorised in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more other Beneficiary(ies) (Second Beneficiary(ies)).
Issue(s) :
Issue 1: Credits are occasionally issued whereby the issuing bank is the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate, but it specifies the advising bank as the transferring bank. Can this advising bank nevertheless transfer the credit?
Answer: The advising bank should refuse to transfer unless the availability is changed to the extent that they become a nominated bank. Otherwise, the only bank that is able to effect a transfer thereunder is the issuing bank. It is in the interests of the issuing bank that they retain control over the handling of the transfer where the credit is restricted to them. (Opinion R.246)
Issue 2 : Can a credit specify more than one transferring bank?
Answer: This sub-Article was written to impose a reasonable level of control on the transferring of a credit without significantly changing operational practice. Requiring that a single bank be nominated as the transferring bank, even in a freely negotiable letter of credit, provides a certain amount of protection. However, this sub-Article contains no prohibition against naming more than one transferring bank if the issuing bank is willing to do so. Providing that the applicant, issuing bank, confirming bank, beneficiary, and transferring bank agree to such a transfer, there is nothing to prevent it from being incorporated into the terms and conditions of the credit. However, the ICC discourages the issuance of such transactions. (Opinion R.244)
Issue 3 : If the credit were to be transferred by a bank that was not specifically nominated, but that bank were the bankers of the first beneficiary, would the transfer be considered proper?
Answer : Only the bank that is specifically authorised, as defined in sub-Article 48(a), may effect a transfer under the credit. Any transfer effected by a bank that was not so authorised, would not be considered effective for the purposes of UCP 500 and, in particular, Article 48. (Opinion R.246)
Issue 4: Where a credit is issued as being available with any bank (freely negotiable) can it be assumed that the bank through whom the credit has been advised is the designated transferring bank?
Answer : In a freely negotiable credit, the issuing bank must specify the bank that is authorised to transfer the credit. The fact that a credit has been advised through a particular bank does not imply that it is the authorised transferring bank. (Opinion R.246)
b. A Credit can be transferred only if it is expressly designated as "transferable" by the Issuing Bank. Terms such as "divisible", "fractionable", "assignable", and "transmissible" do not render the Credit transferable. If such terms are used they shall be disregarded.
Issue(s) :
None
c. The Transferring Bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank.
Issue(s) :
Issue 1: Is an authorised transferring bank under an obligation to transfer a credit so designated?
Answer : The fact that a credit may be stated to be transferable, does not bind the nominated transferring bank or the issuing bank to effecting any transfer.
Issue 2: A bank receives a transferable credit, in the capacity of advising bank only, and is requested by the beneficiary to transfer the credit. The bank states that it cannot transfer the credit. The beneficiary contacts the issuing bank in order to amend the availability, but the issuing bank states that there is no need to make the credit available at the counters of the advising bank for that bank to transfer the credit. Is that correct?
Answer : A bank that is nominated to transfer a credit is under no obligation to effect a transfer and is able to indicate under what conditions they would be willing to consider effecting such transfer. This would include, but not be limited to, the availability of the credit, the parties involved, the underlying terms of settlement, the documents that are to be presented and the manner of their issuance. (Opinion R.483)
Issue 3: A documentary credit has been transferred to a second beneficiary and documents presented by that second beneficiary to the transferring bank. Documents have been found in compliance, but the issuing bank does not fulfil its payment obligation due to internal problems (i.e. it is bankrupt, there are economic or political difficulties to honour, etc.) What are the liabilities of the transferring bank? Is the transferring bank obliged to pay the second beneficiary in such a situation if it does not receive the funds from the issuing bank?
Answer : A transferring bank, when issuing its advice of transfer to the second beneficiary, signifies whether they have confirmed the credit or not. The type of advice is dependent on the instructions in the original credit as to whether or not the credit was to be confirmed and whether the advising and nominated transferring bank agreed to such a request. If the transferring bank has not added its confirmation to the transferred credit, it has no obligation to effect payment. If it has confirmed then it must honour the drawing of the first and second beneficiary, notwithstanding the position of the issuing bank and its ability to provide reimbursement. In any case, the documents belong to the second beneficiary until the presentation is honoured. (Opinion R.482)
Issue 4: The transferring bank considers that documents received from the second beneficiary are in full compliance with the L/C terms. It then provides an undertaking to pay at maturity, but the issuing bank finds that the document(s) contain discrepancy(ies). What is the right way for the transferring bank to act in this situation? What would be the way to waive these risks?
Answer : If the transferring bank has provided an undertaking to pay the beneficiary at maturity, it has presumably added its confirmation to the credit or made some other arrangement with the beneficiary. This is a documentary risk that any bank, which adds its confirmation, takes. In the event of a dispute as to the acceptability of the documents presented (under a transferred credit which is confirmed), it is to be resolved between the issuing bank and the transferring bank, without the involvement of the first or second beneficiary. (Opinion R.482)
Issue 5: It is usual to see documentary credits that have been transferred bearing the following reimbursement clause: 'The transferring bank will pay to the second beneficiary only when funds are received from the issuing bank'. Do you consider this clause to be good international standard banking practice? Do you consider that the transferring bank is acting in accordance with sub-Article 48(c) of UCP 500?
Answer : This type of clause will typically be seen on credits for which the transferring bank has not added its confirmation. It is more a statement highlighting the position of the transferring bank as a nominated bank in line with sub-Article 10(c) of UCP 500, rather than the bank's position under Article 48. Sub-Article 48(c) is there to demonstrate that whilst a bank may be nominated to transfer, it is under no obligation to do so. (Opinion R.482)
Issue 6: A transferable L/C provided for presentation, in addition to others, of the following: Beneficiary's certificate stating that Original Mills Test certificates have been sent directly to the applicant by DHL courier service within 5 working days from shipment; Master's declaration confirming that he has received one full set of copy documents for delivery to applicants.The transferring bank refused to transfer the L/C stating the following reasons: 'the certificate as required, has to be issued by the first beneficiary and not by the second beneficiary. If this certificate is issued by the second beneficiary it will be considered as discrepant, as not issued by the nominated party in the L/C. For the declaration, the second beneficiary will hand over to the master his own invoices which will be different from those which will be presented to the issuing bank, as their invoices will be replaced by those of the first beneficiary'. Is the transferring bank correct in its interpretations?
Answer : Sub-Article 48(c) states that the transferring bank is under no obligation to effect a transfer except to the extent and in the manner it expressly consents. If a transferring bank does not feel comfortable in transferring a credit, due to the requirement of the first or second beneficiary to fulfil certain conditions, they are within their rights not to do so. If the credit were to be transferred, the requirements listed under "Issue" would need to be completed by the second beneficiary that may not be the intention of the first beneficiary. Conditions such as those quoted require the first beneficiary to look at the possible implications once the credit has been transferred and, if necessary, to seek an amendment to the original credit to either delete or modify the condition(s) prior to any transfer being effected. (Opinion R.456)
d. At the time of making a request for transfer and prior to transfer of the Credit, the First Beneficiary must irrevocably instruct the Transferring Bank whether or not he retains the right to refuse to allow the Transferring Bank to advise amendments to the Second Beneficiary(ies). If the Transferring Bank consents to the transfer under these conditions, it must, at the time of transfer, advise the Second Beneficiary(ies) of the First Beneficiary's instructions regarding amendments.
Issue(s):
Issue 1: A first beneficiary has irrevocably instructed the transferring bank that they do not require prior indication of amendments prior to the transferring bank advising same to the second beneficiary, would this include an amendment to increase the value of the original credit i.e. are there exceptions?
Answer : An instruction relating to the advising of amendments to any second beneficiary(ies) covers all amendments unless otherwise specified at the time of transfer and agreed by the transferring bank. (Opinion R.482)
Issue 2: Does the first beneficiary have the absolute right to determine whether the transferring bank will transfer an amendment to the second beneficiary(ies)?
Answer: The first beneficiary has the right to determine whether or not amendments are advised to the second beneficiary(ies). This position needs to be declared at the time a request to transfer is submitted to the transferring bank. For example, an amendment to the expiry date of the original credit may need to be passed on to a second beneficiary(ies) but not to the full extent of the amendment that has been received. The right of the first beneficiary to refuse to allow amendment(s) to be advised to any second beneficiary(ies) (as allowed in sub-Article 48(d)) does not preclude the first beneficiary from requesting that an amendment be made to the transferred credit of any second beneficiary(ies) at a later stage. (Opinion R.485)
Issue 3: If we assume the transferring bank has no right to enforce the advising of an amendment to a second beneficiary, then can the transferring bank press the first beneficiary to reject or refuse to allow its acceptance of an amendment?
Answer : The transferring bank can request, but cannot insist due to the wording of sub-Article 9(d)(iii). Sub-Article 9(d)(iii) states that the terms of the original credit including any subsequent amendment(s) remains in force for the beneficiary until such time as he communicates his acceptance or rejection of an amendment. If a request is received to cancel the original credit or a reduction in the value that would affect the value of a transferred credit, no agreement of the first beneficiary can be acted upon until such time as the agreement of the second beneficiary(ies) is received. (Opinion R.485)
Issue 4: If the second beneficiary comes to know of the existence of an amendment, can it request the assistance from the transferring bank to obtain a similar amendment? Is the transferring bank obliged to protect the interest of the second beneficiary?
Answer: A second beneficiary may approach the transferring bank, but the transferring bank cannot insist that the first beneficiary amend a transferred credit. A transferring bank is only obliged to protect the interest of the second beneficiary to the extent of the advice of the credit and any amendments thereto that are issued. (Opinion R.485)
e. If a Credit is transferred to more than one Second Beneficiary(ies), refusal of an amendment by one or more Second Beneficiary(ies) does not invalidate the acceptance(s) by the other Second Beneficiary(ies) with respect to whom the Credit will be amended accordingly. With respect to the Second Beneficiary(ies) who rejected the amendment, the Credit will remain unamended.
Issue(s):
<>None.
f. Transferring Bank charges in respect of transfers including commissions, fees, costs or expenses are payable by the First Beneficiary, unless otherwise agreed. If the Transferring Bank agrees to transfer the Credit it shall be under no obligation to effect the transfer until such charges are paid.
Issue(s):
None.
g. Unless otherwise stated in the Credit, a transferable Credit can be transferred once only. Consequently, the Credit cannot be transferred at the request of the Second Beneficiary to any subsequent Third Beneficiary. For the purpose of this Article, a retransfer to the First Beneficiary does not constitute a prohibited transfer. Fractions of a transferable Credit (not exceeding in the aggregate the amount of the Credit) can be transferred separately, provided partial shipments/drawings are not prohibited, and the aggregate of such transfers will be considered as constituting only one transfer of the Credit.
Issue(s):
Issue 1: In light of the content of sub-Articles 48(a) and (g) a transferable credit can be transferred to a second beneficiary and upon his refusal to accept the transfer or his request to re-transfer again in the name of the first beneficiary, the credit can be re-transferred to the first beneficiary. Our point of concern is whether after the re-transfer of that credit favouring the first beneficiary, the same credit can now be transferred to another second beneficiary or not?
Answer: The credit can be transferred to any new second beneficiary(ies) to the value available under the original credit, including the value of any amount re-transferred to the original. The new transfer also being subject to the provisions of Article 48. If the transferred portion of a credit expires unutilised, the first beneficiary may request the transferring bank to transfer the unutilised portion to a new second beneficiary as long as the original credit has not expired. The transferring bank, however, should obtain explicit confirmation from the original second beneficiary that he has not utilised, or will not utilise, the available balance under the transferred credit and request that the original advice of the transferred credit be returned. Alternatively, if the transferred credit was advised to the original second beneficiary through another designated advising bank, the transferring bank may request the advising bank to notify the transferring bank that the transferred credit expired without utilisation (or that it expired with a residual balance). However, the transferring bank does not have any obligation to accept such instructions from the first beneficiary and would only conse nt to such instructions if it were willing to do so under its own terms. (Opinion R.486)
h. The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of:
the amount of the Credit, any unit price stated therein, the expiry date, the last date for presentation of documents in accordance with Article 43, the period for shipment, any or all of which may be reduced or curtailed. The percentage for which insurance cover must be effected may be increased in such a way as to provide the amount of cover stipulated in the original Credit, or these Articles. In addition, the name of the First Beneficiary can be substituted for that of the Applicant, but if the name of the Applicant is specifically required by the original Credit to appear in any document(s) other than the invoice, such requirement must be fulfilled.
Issue(s):
Issue 1: We request our customers open an irrevocable L/C on us and we in turn open a back-to-back L/C on the overseas supplier. We have now come across Article 48 of UCP 500, which also envisages a similar arrangement. In this context we require your clarification in respect to this article and the merchanting trade that we are involved in.
General comment : Back-to-back L/C's are not covered by the UCP.
(a) When a L/C is transferred for a value less than the original credit, does the second beneficiary to whom the L/C is now transferred have the right to negotiate the documents with the first applicant directly, by-passing the first beneficiary?
Answer : When a letter of credit is transferred, there is a risk that the second beneficiary may choose to "by-pass" the first beneficiary and present his documents directly to the issuing bank. Most banks, when transferring a letter of credit, will incorporate into the advice that the documents are to be sent to their specific address. Additionally, where the credit is confirmed, the second beneficiary would be placing this confirmation at risk by presenting directly to the issuing bank. An issuing bank that receives documents directly from a second beneficiary or their negotiating bank should look to protect the interests of the first beneficiary and check with the transferring bank with regard to any possible requirement for substitution of documents. (Opinion R.488)
(b) If the original L/C is opened for an interest free deferred payment period of up to 360 days while the transferred L/C is required to state first 60 days interest free with the balance of interest for account of the applicant (first beneficiary), is such a condition acceptable under UCP?
Answer: Sub-Article 48(h) provides details of the terms and conditions which may be reduced or curtailed when issuing a transferred credit, namely: the amount of the credit, any unit price stated therein, the expiry date, the last date for presentation of documents in accordance with Article 43, the period for shipment and any insurance coverage increase. Any other alterations or changes are not specifically authorised within the UCP, and if requested by the first beneficiary to be incorporated in the transferred credit, is a matter for agreement by the transferring bank. (Opinion R.488)
(c) Can a transferable L/C be transferred to an overseas supplier or does it have to be within the national boundaries of the first beneficiary?
Answer : Unless the credit states otherwise, a transferred credit may be issued in favour of a (second) beneficiary outside the national boundaries of the first beneficiary. (Opinion R.488)
Issue 2: Recently, our company, as a second beneficiary received a transferable credit. When I checked the L/C, I found that there were a number of differences from the original L/C. I know that according to UCP 500 sub-Article 48(h), the L/C can be transferred only on the terms and conditions specified in the original L/C except that: the amount, the expiry date, the last date for presentation of documents in accordance with Article 43 and the period for shipment may be reduced or curtailed. However, the L/C not only changed the above terms but also changed others. For example, the original L/C allowed for partial shipment, but the L/C prohibited this. Even the expiry date was longer than that in the original L/C. The original L/C allowed the first beneficiary to add additional conditions except for any alteration in the amount. My first question is: Is this L/C valid or not? Must I ask the first beneficiary to have the original L/C changed to reflect the changes in the transferred L/C? The second question is in accordance with the L/C, the date of negotiation is prior to the expiry of the L/C but the date of payment is beyond the expiry date, i.e. the negotiation date is 20 August, the expiry date is 1 September and the payment date is 10 September. With such conditions, should we still receive the money smoothly?
Answer : The terms of the original credit are not in line with the usual way in which you would see a transferable credit structured. By allowing the credit to be transferred incorporating changes to all the terms and conditions, with the exception of an increase in the amount, the issuing bank has, effectively, replaced the content of sub-Article 48(h). By the issuance of such a credit, the issuing bank is bound by the changes requested by the first beneficiary subject to the condition of sub-Article 48(c) which reads "The Transferring Bank shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank." If the transferring bank transfers the credit incorporating changes, in line with the provision in the original credit, the transferring bank (and the issuing bank) will be bound by the terms of that transfer. There would be no requirement for the applicant to be requested to amend the original letter of credit. In the event a bank was willing to issue such a credit it would be well advised to have a copy of that transferred credit remitted to it at the time of transfer. This will ensure that the documents presented conform to the transferred credit and to any unchanged conditions of the original L/C.The fact that documents are negotiated within the expiry date, but the maturity of the draft and/or documents falls on a date beyond the expiry date, is a perfectly normal occurrence in letter of credit operations, and the issuing bank is bound to pay on the basis of conforming documents having been presented.(Opinion R.487)
Issue 3: I would like to know if there have been any rulings/clarifications/guidelines regarding negotiation of second beneficiary's documents which pertain to the transferring bank's responsibility/liability. Once a L/C has been transferred, does the transferee (second beneficiary) enjoy the same protection under UCP 500 as the first beneficiary? Also, is the transferred L/C covered by all sections of UCP 500 except those stipulated in Article 48? If not, please list which articles that do not apply.
Answer : The second beneficiary will receive a letter of credit on the same terms and conditions as the first beneficiary, with the exception of any changes the first beneficiary may request in accordance with sub-Article 48(h). The second beneficiary must act in accordance with the terms of the transferred letter of credit and all the relevant Articles of UCP 500 (except Article 48 - it must also be remembered that some of the Articles are specific only to banks). (Opinion R.270)
Issue 4: Our company performs pre-shipment inspection. We have been approached by our clients to find out if we could adapt to terms and conditions of a transferable L/C. Our operational procedure for a country applying foreign exchange policy is as follows:Step 1. We inspect goods before shipment in the country of supply.Step 2. We classify the goods as per the importing countries tariff book and give an opinion of the dutiable value of the goods inspected.Step 3. We issue a report of findings (based on Step 1 and Step 2) which allows the importer to clear his goods in the country of import.Step 4. We affix a security label on the seller's final invoice. This label attests our inspection and mentions the amount of the invoice.A problem arises under a 'transferable L/C', considered as a single transaction as per Article 48 of UCP, where only some exceptions, as per sub- Article 48(h) of the terms and conditions of the credit, are applicable. We need to know if the security label clause could be deleted when the seller transfers this type of credit. Our mandate does not oblige us to issue a label to the supplier but only to the seller.
Answer : The requirement for pre-shipment inspection is one that a beneficiary of the original credit would find extremely difficult to have removed. The problem lies in the fact that as an inspection agency you will only affix your label to the final invoice (i.e. the one issued by the original beneficiary and which will subsequently be substituted for that of the transferee). A bank requested to transfer a letter of credit must do so incorporating all the terms and conditions contained in the original credit (with the exception of the information contained in sub-Article 48(h) of UCP 500, which may be curtailed). This provides a clear problem for the transferee, since he will be unable to satisfy the terms of the transferred credit due to your being unable to attach a security label to their invoice. This is an issue for the issuing bank and/or the transferring bank and/or first beneficiary.
To overcome this problem, the following could be considered or occur:
a) The issuing bank could issue its transferable letter of credit stating words to the effect that "In the event that this credit is transferred, the second beneficiary may present an invoice issued by the first beneficiary bearing the security label of X inspection agency even though the amounts shown therein may differ from that of the second beneficiary's invoice".
b) The transferring bank has the option to decline the transfer if it is not satisfied with the manner in which the transferred credit may have to be "manipulated" to achieve a valid presentation by the second beneficiary.
c) The first beneficiary would be required to inform the second beneficiary of his "profit" by way of handing him his invoice to achieve the result under option a) above. (Opinion R.296)
Issue 5: Bank B, when transferring the credit, failed to increase sufficient insurance coverage to cover the 110% of the first beneficiary's invoice. Bank C in Country X received the documents and found them to be in order in terms of the transferred credit and negotiated the documents and forwarded them to the transferring bank for payment. Bank B (the transferring bank), while substituting the draft and invoices, received discrepant invoices and draft (merchandise description on invoice did not conform to the credit). Bank B forwarded the documents to the issuing bank for payment and the issuing bank refused payment for the following discrepancies:1. insufficient insurance cover2. description of goods not as per L/C.The issuing bank returned the documents by next mail to the transferring bank.What is the liability of the transferring bank in this case? Can the transferring bank be compelled to reimburse the second beneficiary's bank even though it had a conditional payment clause on the credit or has the transferring bank no risk or liability at all as regards the documents?
Answer: The documents, as received by Bank B, would appear to have met the terms of the transferred credit. The presentation of non-conforming invoices and draft in substitution for those of the second beneficiary did not change the acceptability of the initial presentation. The disposal of the documents (including the substituted invoices and draft) should only have occurred with the agreement of the first and second beneficiaries. On the basis that the second beneficiary's documents conformed to the transferred credit, Bank B should have acted in accordance with the provisions of sub-Article 48(i), and, if necessary, utilised the second beneficiary's documents as good tender under the credit.What is the risk and liability on the part of the transferring bank irrespective of whether the L/C is confirmed or not by the advising/nominated bank?
Answer : The main risk and liability on the part of the transferring bank is the transposing of information from the original credit and transfer application form provided by the first beneficiary into the text of the transferred credit.
i. The First Beneficiary has the right to substitute his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount stipulated in the Credit and for the original unit prices if stipulated in the Credit, and upon such substitution of invoice(s) (and Draft(s)) the First Beneficiary can draw under the Credit for th e difference, if any, between his invoice(s) and the Second Beneficiary's(ies') invoice(s).When a Credit has been transferred and the First Beneficiary is to supply his own invoice(s) (and Draft(s)) in exchange for the Second Beneficiary's(ies') invoice(s) (and Draft(s)) but fails to do so on first demand, the Transferring Bank has the right to deliver to the Issuing Bank the documents received under the transferred Credit, including the Second Beneficiary's(ies') invoice(s) (and Draft(s)) without further responsibility to the First Beneficiary.
Issue(s):
Issue 1: Which are the documents the transferor is allowed to substitute while drawing the difference in amount, other than the draft and invoices?
Answer: Sub-Article 48(i) refers to the substitution of invoices and draft(s). While a bank may determine under its own internal policies to permit the substitution of further documents, this is at its own risk. It is not a practice supported by UCP. (Opinion R.375)
Issue 2: Under a transferred L/C, the first beneficiary has the right to substitute his own invoice(s) (and draft(s)) for those of the second beneficiary(ies) (sub-Article 48(i) refers). However, we observe that some of the remaining document(s) of the second beneficiary may also show the value of goods. These documents may include, but are not limited to: Export licence (showing FOB value in local currency), Certificate of Origin, Inspection Certificate, Packing List, Transport Documents, Cargo Receipt, etc. Unless the original L/C has explicitly prohibited the other documents to show the value of drawing/goods, the presentation made by the second beneficiary is perfectly clean. Unfortunately, after substitution of documents, documents will appear on their face to be inconsistent with one another (other documents showing value which differs from first beneficiary's invoice).
Strictly speaking, it appears to be a discrepancy. Nevertheless, one may believe that under a transferable L/C, the original L/C opening bank should be well aware that some of the documents may be prepared by the second beneficiary who is ignorant of the original value. Therefore, it should be practically reasonable and acceptable. This is particularly reasonable for the case of the export licence. An export licence often shows the FOB value in local currency which will be inconsistent with the invoice value of the first beneficiary after substitution of the invoice occurs. We are of the opinion that once the presenting bank/negotiating bank can prove that the documents other than the invoice and/or draft are in fact showing a value same as the invoice of the second beneficiary, the inconsistency should not be considered as a discrepancy. The opening bank will be bound to pay if all the other terms and conditions of the L/C are complie d with. Such proof can be provided by the presenting/negotiating bank stipulating so in its covering schedule or be provided subsequently, i.e. after the receipt of dishonour notice from the opening bank. For both cases, we believe that the opening bank must accept the explanation and will be bound to pay the presentation.
Answer : 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)
Issue 3: In the SWIFT MT720, which is used for the transfer of a credit, the applicant of the credit does not appear. Therefore, the second beneficiary can only make out the invoice with the first beneficiary as the consignee. In this case, can the issuing bank point out the first beneficiary as the consignee in the invoice as a discrepancy? Until when does the first beneficiary have to substitute the invoice and the draft?
Answer : The MT720 contains field 50 with the heading "First Beneficiary". This is on the basis that in most circumstances the first beneficiary elects to substitute documents. If the first beneficiary did not seek any involvement in the transaction (following the request to transfer), the name of the applicant under the original credit would be inserted. If the first beneficiary elects to substitute his invoices and draft(s), if any, for those of the second beneficiary and fails to do so on first demand, the nominated bank may forward the documents - including invoices issued by the second beneficiary addressed to the first beneficiary - and the issuing bank must accept them as a valid document under their credit.Sub-Article 48(i) refers to the substitution of documents occurring on first demand. (Opinion R.374)
Issue 4: According to sub-Article 48(h), the amount, unit price, expiry date, presentation period, and shipping date can be decreased or curtailed and the percentage of insurance cover can be increased up to the insurance cover amount of the original credit (that is, other terms and conditions cannot be amended). The restriction of negotiation to the transferring bank and the designation of the applicant as the notify party in the bill of lading need to be amended in the credit. Are such amendments possible and what is the scope of other amendments which are possible?
Answer : If the first beneficiary requires that the second beneficiary and the applicant be kept unaware of each other's involvement in the transaction, the original credit will need to be amended in all places where such divulgence of information could occur. The issuance of amendments to delete documents and/or clauses is subject to the approval and instigation by the applicant of the original credit. (Opinion R.374)
Issue 5: In regard to the substitution of invoice and draft by the first beneficiary, the second beneficiary is named as the shipper in the bill of lading, insurance policy, certificate of origin and beneficiary certificate. Would these documents be considered inconsistent with the invoice and therefore be considered a discrepancy?
Answer: The shipper on the documents you have mentioned would only be the first beneficiary if the original credit so specified, or if the transferring bank allowed such a condition in the transfer of the credit. Unless the credit stated otherwise, the shipper on certain documents being different to the issuer of the invoice would not be a discrepancy. Also refer to UCP 500 Article 31(iii). (Opinion R.374)
Issue 6: How long does the first beneficiary have to present documents? Within seven business days? If documents are presented after seven business days, is the bank liable to present only the second beneficiary's documents to the issuing bank?
Answer : Sub-Article 48(i) refers to substitution of documents on "first demand" and whilst not specifically defined within UCP 500 as to a particular number of days, first demand must mean first demand as requested by the nominated bank. To allow the first beneficiary seven business days in which to substitute may not, in a number of countries, be defined as first demand. It must be remembered that whilst this period is being allowed for substitution, the transferee is entitled to settlement. In approaching the first beneficiary for substitute documents, the date of expectation of receipt of those documents should be expressed. Failure by the first beneficiary to provide timely substitution would allow the nominated bank to forward the docu ments received from the second beneficiary without any further commitment to the first beneficiary for any difference in value. As with all transferable credits, tight control needs to be exercised until settlement is achieved. (Opinion R.270)
j. The First Beneficiary may request that payment or negotiation be effected to the Second Beneficiary(ies) at the place to which the Credit has been transferred up to and including the expiry date of the Credit, unless the original Credit expressly states that it may not be made available for payment or negotiation at a place other than that stipulated in the Credit. This is without prejudice to the First Beneficiary's right to substitute subsequently his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies) and to claim any difference due to him.
Issue(s):
None.
Document n° 470/977 Rev.330 October 2002