Explanation of UCP600 Article 35
If compliant documents under an LC are presented by a nominated bank to the issuing bank as per LC instructions but are lost in transit, the issuing bank is obliged to reimburse the nominated bank at the risk of the applicant.
Responsibility of Issuing Bank
As there exists no contractual relationship between the nominated bank and the applicant in an LC, the nominated bank only has a right of recourse against the issuing bank. That is to say, if the compliant documents presented by the nominated bank are lost in transit, the issuing bank is obliged to reimburse the nominated bank without receipt of the original documents. As a result, the issuing bank may encounter unexpected risks.
The issuing bank should require evidence from the nominated bank in the form of presentation of copies of the documents by the nominated bank. If the LC is available with the nominated bank, the issuing bank is obliged to reimburse the nominated bank if the nominated has acted in accordance with the instructions provided in the LC. The issuing bank could request the nominated bank to provide evidence, such as a cover schedule and document copies, in order to determine if the original documents were presented as per the LC and complied. If a discrepancy is found upon its examination of the copies, the issuing bank could reject the presentation.
Responsibility of LC Applicant
Risks arising from lost in transit of documents presented under an LC should be borne by the LC applicant. The issuing bank has a right of recourse against the applicant. In this regard, if compliant documents are accepted, negotiated by a nominated bank, and presented to the issuing bank for reimbursement as per LC terms - even if the documents are lost in the transit - the issuing bank is still liable to honour and be reimbursed by the applicant.
Possible Areas of Improvement in UCP
1) When compliant documents are accepted by a nominated bank and presented to the issuing bank for payment but are lost in transit, the nominated bank should be asked to present copies of the documents. The issuing bank will process the copies, but UCP does not provide a solution on how to deal with the problem.
2) The issuing bank should bear the interest loss arising from the delay and has recourse against the LC applicant. UCP should provide a solution.
While many might agree with these general conclusions, some have questioned whether it is correct to describe the right of the issuer against the applicant as a right of “recourse”.
Additionally, some disagree with the notion that the most important aspect of the nominated bank’s entitlement is that it has no privity with the applicant. Rather, it is that it was nominated to act by the issuer which bears a corresponding obligation to reimburse when it does so.
Nonetheless, the issuer is entitled to proof that complying documents were timely received and forwarded and subrogation as to any rights that the nominated bank has with respect to the documents and assignment of any rights that exist under them, whether from the nominated bank or the beneficiary as the case may be.
To probe these issues further, I raised points and engaged in a discussion with a leading LC expert who offered counterpoints.
The Right of the Issuing Bank against the Applicant
Point: UCP600 Article 37(d) implies that when an LC is issued, the applicant accepts to indemnify the issuing bank against effects that law and usage may have on its handling of the LC. The issuing bank has the right of recourse to the applicant against risks arising from loss in transit of documents presented under the LC.
Counterpoint: I agree that the issuer probably has an implied right to reimbursement from the UCP but would not rely on the UCP for reimbursement but on the implied contract between them or, more usefully, on an express contract. The UCP is not focused on the relationship between the issuer and the applicant. The right in favor of the issuer that arises from this relationship is one of reimbursement and not “recourse” (under Common Law) which arises on a negotiable instrument.
Privity between the Nominated Bank and the Applicant
Point: In my view, the applicant is not included as a party to the LC but instead is included in an agreement between the applicant and the issuing bank, such that the issuing bank is the only bank having a direct relationship with the applicant. As a result, the applicant is not involved in the process of LC handling, albeit the issuing bank could approach the applicant for waiver of discrepancies. Furthermore, the undertaking of the concerned banks (including the nominated bank) in an LC is not subject to claims or defenses by the applicant arising from its relationship with the issuing bank or beneficiary, an LC cannot be made available by a draft drawn on the applicant. Based on this reasoning, it is my idea that there is no contractual relationship between the nominated bank and the applicant in an LC.
Counterpoint: Absent a contractual relationship, there is no privity between a nominated bank and the applicant. There is no contractual relationship in most situations.
What’s Necessary to Prove Compliance
Point: Even if the reimbursement clause in an LC states “upon receipt of full sets documents in conformity with the L/C terms, we will effect payment as per your instruction” or similar effect, the reimbursement obligation under the LC is not subject to the receiving of documents by the issuing bank, but only to a compliant presentation being made to the nominated bank. If documents are lost in transit from the nominated bank to the issuing bank, in order to be reimbursed, the nominated bank should be asked to present copies. However, in the text of the commentary on UCP600 issued by ICC, it is stated that there is no obligation for a nominated bank to retain copies of documents that have been presented to it. I do not agree with this view of the ICC.
Counterpoint: While I agree with you about the absence of any obligation to copy documents, the nominated bank must prove that it has received the documents and forwarded them if the issuer demands proof. Were I advising the issuer, I would advise it to do so.