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NIL, LETTERS OF CREDIT, REVIEW QUESTIONS

1. How shall the paying bank determine the compliance by the beneficiary of the documentary
requirements under the LC so that it may honor the draft drawn by the beneficiary against the
LC?

The paying bank determine the compliance by the beneficiary of the documentary requirements under the LC
through the Advising Bank which is responsible in determining that the letter of credit is valid and the documents
are authentic, which then send the same documents the issuing bank.

2. What is the main difference between the liability of the notifying bank and the confirming bank
under the LC?

What are the differences between the nominated bank and confirming bank?

Answer: As per letter of credit rules the confirming bank has clear payment obligations. If the presentation is
complying the confirming bank must honor. t forward definition. But nominated banks may or may not pay
against complying presentations. If they do not, then either confirming bank or issuing bank must pay. While the
notifying bank has not assumed a direct obligation.

3. If a bank requires a beneficiary under an LC to submit the documents required therein and
eventually pays the beneficiary, does the bank become a confirming bank?

Yes. The confirming bank is usually the advising bank. So after the correspondent bank performs the role of an
advising bank which requires a beneficiary under a Letter of credit to submit the requirements required therein, it
may confirm the letter of credit for the beneficiary. At the request of the issuing bank, the correspondent bank, as
a confirming bank, obligates itself to insure payment under the letter of credit.

4. If an advising bank confirms the authenticity of a letter of credit, does it become a confirming
bank?

No. Since it is the advising bank that verifies the authenticity of the letter of credit, prepares a cover letter
containing presentation instructions, and forwards the L/C to the beneficiary. The advising bank has no obligation
to pay. Unless the advising bank has added its confirmation to the L/C, it will pay the beneficiary only after it
has received good funds from the issuing bank.

5. If the supposed issuing bank disowns a letter of credit, and the beneficiary has already drawn
drafts against the letter of credit, may the negotiating and paying bank recover what it has paid
from the beneficiary?

It depends. The nominated confirming bank must honour or negotiate the documents without recourse if the
credit is available with the confirming bank. In view of this provision, a confirming bank will not have recourse to
the beneficiary once the documents honored or negotiated by the nominated confirming bank are found to
contain discrepancies and rejected by the issuing bank. However, in the scenario where the documents presented
are found by the confirming bank to contain discrepancies and the confirming bank has agreed with the
beneficiary to honour or negotiate under reserve, i.e. on a with recourse basis, that confirming bank will have
recourse to the beneficiary if reimbursement is not received due to a correct refusal by the issuing bank.
6. Does the paying bank have the discretion not to require the submission to it of a document
mentioned under the letter of credit needed for payment if it finds said document as immaterial
or irrelevant to the letter of credit?

No. Since the paying bank only acts upon the instructions of the issuing bank, it cannot, on its own discretion
decide whether the required document is material or immaterial.

7. What is the legal effect if the terms of the letter of credit incorporate or do not incorporate the
provisions of the Uniform Customs and Practice for Documentary Credits?

Unless included or incorporated in the terms of letters of credits, provisions of the Uniform Customs and Practice
for Documentary Credits have no effects of the law.

The ICC, although an international organisation, does not possess legislative authority but an organisational
representational of world business and finance. Although the UCP rules do not have the force of law, it cannot be
denied that it is forceful since it has been incorporated by reference in the majority of letters of credit used
worldwide.
Undeniably the UCP have an important role in the conduct of international trade. They expound technical terms;
they promote consistency; and they enable the parties to express their intention briefly, without the need to
negotiate and set out all the terms of the relationship at length. Nevertheless, whilst not belittling the utility of the
UCP, it must be recognized that their terms do not constitute a statutory code, as their title makes clear they
contain a formulation of customs and practice, which the parties to a letter of credit can incorporate into their
contract by reference.

8. If a bank in the place of the beneficiary accepts the request of the opening bank to notify the
beneficiary of the opening of the letter of credit and transmits the same to the beneficiary, does
it mean that the said bank confirms the letter of credit?

No. If the bank is only a notifying bank, its responsibility was solely to notify and/or transmit the documentary of
credit to the private respondent and its obligation ends there.

10. Under an irrevocable letter of credit, if the correspondent bank accepts the instructions of the
issuing bank, does it necessarily imply that it has also confirmed the credit?

No. The buyer's issuing bank must follow through with payment to the seller, only after it complies with the
conditions listed in the letter of credit. after the advising bank reviews and confirms that all documentary
requirements are met, it will pay the seller

12. Suppose a correspondent bank grants a loan to the beneficiary in consideration of the
subsequent presentation by the beneficiary of the irrevocable letter of credit, should said
correspondent bank be considered to have confirmed the irrevocable letter of credit?

No. It has no basis in fact or in law. There must have been an absolute assurance on the part of the
correspondent bank that it will undertake the issuing banks obligation as its own. The loan agreement is more
reasonably classified as an isolated transaction independent of the the documentary credit.

13. What are the differences between guaranty and irrevocable letter of credit?
Demand guarantee is an irrevocable undertaking issued by a bank according to instructions received from the
principal, to pay the beneficiary any sum that may be demanded by that beneficiary up to a maximum amount
specified in the guarantee, upon presentation of complying demand with the terms of the bank guarantee.

Commercial letter of credit, which is used in international export and import transactions, is also an
irrevocable and definite undertaking of the issuing bank to honour a complying presentation.

Although these two trade finance instruments share almost identical definitions, there are major differences exist
between letters of credit and bank guarantees. Today I explain the main differences between L/Cs and BGs.

a) Modes of Payment
Under a commercial letter of credit beneficiary gets the payment when he completes his duties and makes a
complying presentation. For example, exporter, who is the beneficiary of a commercial letter of credit, will get
paid only after he ships the goods to the importer and makes a complying presentation to the issuing bank or
confirming bank as per letter of credit terms and conditions.

Contrary to the commercial letter of credit, under a bank guarantee, beneficiary will be entitled to claim payment
from the guarantor bank only if the applicant default on his duties at the underlying contract, which is exist
between the beneficiary and applicant, even if the bank guarantee is an independent payment undertaking of the
guarantor bank against the beneficiary.

Commercial letter of credit is a primary payment option and is expected to be utilized by the beneficiary upon
completion of his contractual obligations. Bank guarantee is a secondary payment option and can be activated
only at unexpected situations, in particular where applicants could not fullfil their contractual obligations.

b) Beneficiary Oriented Approach and Applicant Oriented Approach


The commercial letter of credit is a "beneficiary oriented" trade finance tool, whereas the bank guarantee is
an "applicant oriented" trade finance facility.

Beneficiary oriented means that the letter of credit mostly protects the interests of the beneficiary of the letter
of credit, who in most trade transactions will be the exporter.

Applicant oriented means that compared to a commercial letter of credit, the bank guarantee tends to favor
the interests of the applicant.

c) Availability of the Bank Guarantee and Letter of Credit

Commercial letters of credit could be issued available by payment, deffered payment, acceptance or negotiation.
On the other hand bank guarantees could be issued only by payment. It is not possible to negotiate a bank
guarantee, however letter of credit rules allow for a negotiation.

d) Confirmed Letter of Credit and Counter-Guarantee


Letter of credit rules allow for a confirmation as a result we can talk about a confirmed letter of credit. On the
contrary, bank guarantee rules do not allow for a confirmation. Because of this reason counter-guarantee
mechanism has been created under bank guarantee transactions.

Counter-guarantee means any guarantee, bond or other payment undertaking of the instructing party, however
named or described, given in writing for the payment of money

e) Applicable Rules : UCP 600 and URDG 758


Commercial letters of credit are mostly issued subject to Uniform Customs and Practice for Documentary
Credits (UCP), whereas bank guarantees are usually issued subject to Uniform Rules for Demand Guarantees
(URDG 758).

UCP 600 are the set of rules, which are prepared by ICC Banking Commission, that apply to commercial letters of
credit and standby letters of credit to the extent to which they may be applicable.

14. May the confirming bank be compelled to honor the drafts drawn by the beneficiary under the
letter of credit even if there is failure on the part of the beneficiary to submit a document mentioned
in the letter of credit which should have been provided to him by the buyer, but the buyer failed to
provide him?

No. Since the correspondent bank, like the beneficiary, principally deals only with the documents, the absence of
any document required in the documentary credit justidies the refusal by the correspondent bank to negotiate,
accept or pay the beneficiary, as it is not its obligation to look beyond the documents. It merely has to rely on the
completeness of the documents tendered by the beneficiary.

15. Is a letter of credit a contract of suretyship?

No. The primary difference between the two is a bond guarantees work will be performed, while a letter of credit
promises that payments will be made. Understanding the difference can help you know what to ask for when the
time comes.

A letter of credit promises to cover payments for a project, up to the stated credit amount, on an approved
project. For example, if a developer is building a subdivision and needs to purchase supplies, the letter of credit
guarantees the supplies will be paid for. The supplier only has to show invoices and proof of delivery or pick-up to
the bank and the bank will cut a check to pay for them.

A bond puts up a specified amount of money to ensure contractual work will be performed to the contract
standards. If the work is not completed, or is substandard when compared to the contract terms, the recipient
can request bond funding be released to hire someone to satisfactorily complete the work.

16. What liabilities or responsibilities are not assumed by banks which are parties to a letter of
credit?

Article 15 and 18 (b) of the UCP 500, limits the liability of the banks in a letter of credit transaction and which
have almost made it a risk free transaction for the banks.

Article 15 says:
Banks assume no liability to or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal
effect of any document(s) or for the general and/or particular conditions stipulated in the document(s) or
superimposed thereon, nor do they assume any liability or responsibility for the description, quantity, weight,
quality, condition, packing, delivery, value or existence of the goods represented by any document(s) or for the
good-faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the
forwarders, the consignee or the insurers of the goods or any other person whomsoever.

Article 18(b) further states:


Banks assume no liability or responsibility should the instructions they submit not be carried out, even if they
have themselves taken the initiative in the choice of such other bank(s). The UCP 500 places the applicant-buyer
in an absurdly vulnerable position through its disclaimer clauses. To some extent there is a lack of duties on the
part of the bank to verify the authenticity of the documents. Hence it might not be wrong to say that albeit there
is a waste increase in the use of letters of credit, does not signify that the UCP is fairly drafted.

17. When may payment under a letter of credit be enjoined?

When there is material fraud. The remedy for fraudulent abuse is an injunction. However, injunction should not
be granted unless: (a) there is clear proof of fraud; (b) the fraud constitutes fraudulent abuse of the independent
purpose of the letter of credit and not only fraud under the main agreement; and (c) irreparable injury might
follow if injunction is not granted or the recovery of damages would be seriously damaged.

18. May the beneficiary of a letter of credit also invoke the independence principle?

Yes. As it is, the independence doctrine works to the benefit of both the issuing bank and the beneficiary.
Letters of credit are employed by the parties desiring to enter into commercial transactions, not for the benefit of
the issuing bank but mainly for the benefit of the parties to the original transactions. With the letter of credit from
the issuing bank, the party who applied for and obtained it may confidently present the letter of credit to the
beneficiary as a security to convince the beneficiary to enter into the business transaction. On the other hand, the
other party to the business transaction, i.e., the beneficiary of the letter of credit, can be rest assured of being
empowered to call on the letter of credit as a security in case the commercial transaction does not push through,
or the applicant fails to perform his part of the transaction. It is for this reason that the party who is entitled to
the proceeds of the letter of credit is appropriately called beneficiary.
19. Under a letter of credit, who is bound to honor the letter of credit and who has the right to ask
that the same be honored?

The general rule is, it is the Issuing bank that gives ultimate irrevocable and conditional payment guarantee to
the beneficiary. However, if the issuing bank fails to honor, confirming bank must pay to the beneficiary once it
adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as of the time it adds its
confirmation to the credit. On the other hand, it is the beneficiary who has the right to ask the bank to honor the
credit by allowing him to draw thereon.

20. Should the parties resolve first the issues in the underlying contract of the letter of credit before
the beneficiary may be paid under the letter of credit?

No. Article 3 of the UCP provides that credits, by their nature, are separate transactions from the sales or other
contract(s) on which they may be based and banks are in no way concerned with or bound by such contract(s),
even if any reference whatsoever to such contract(s) is included in the credit. Consequently, the undertaking of a
bank to pay, accept and pay draft(s) or negotiate and/or fulfill any other obligation under the credit is not subject
to claims or defenses by the applicant resulting from his relationships with the issuing bank or the beneficiary. A
beneficiary can in no case avail himself of the contractual relationships existing between the banks or between
the applicant and the issuing bank.

Thus, the engagement of the issuing bank is to pay the seller or beneficiary of the credit once the draft and the
required documents are presented to it. The so-called "independence principle" assures the seller or the
beneficiary of prompt payment independent of any breach of the main contract and precludes the issuing bank
from determining whether the main contract is actually accomplished or not. Under this principle, banks assume
no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any
documents, or for the general and/or particular conditions stipulated in the documents or superimposed thereon,
nor do they assume any liability or responsibility for the description, quantity, weight, quality, condition, packing,
delivery, value or existence of the goods represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the carriers, or the insurers of the goods, or any
other person whomsoever.39

21. When does the fraud exception to the independence principle apply?

To employ the fraud exception, it should be under very strict conditions. One, the fraud must be established. It
must be "outright fraud", such as fraudulent presentation of documents for non-existent cargo, or similarly,
"proven manifest fraud"; and second the injunction can only be employed in order to prevent a payment to the
beneficiary in case the fraud in relation to presentation of documents took place.

There is a difference between "manifest fraud" on the one hand and an "alleged fraud" or a "commercial dispute"
on the other. Courts are expected to draw a line between these different situations. A further convergence of
laws and their interpretation in relation what constitutes a fraud in the context of independent banking
undertakings would be very welcome. In any event, an injunction should be granted only in very exceptional
cases of fraud to prevent payment to the beneficiary.

22. What are the requisites so that injunction may be granted against payment under a letter of
credit?

An injunction is an extraordinary, equitable remedy with specific requirements which the plaintiff must satisfy
before an injunction will issue.The requirements are that: 1) the plaintiff has shown a strong probability of
success on the merits; 2) the plaintiff will suffer irreparable injury absent an injunction; and 3) the public interest
will be served by the issuance of an injunction. In deciding injunction against honor cases, the courts concentrate
almost exclusively on the public interest requirements. The factors which are weighed in the public interest test
are the need to protect an innocent plaintiff from being defrauded by an unscrupulous beneficiary on the one
hand, and the need to protect the independence of the issuer's obligation from the underlying transaction on
the other.