Drafts …. my worst LC nightmare!
A real challenge for me is to keep my writing short. For
this blog post there is a real risk that it will be very loooong. Too Loooong.
I have promised myself that this must not happen … so please stop me after 200
words….
The topic that may give birth to far too many words - is
drafts … or perhaps rather the “bill of exchange.” I cannot count the endless
discussions I have witnessed (but only seldom have taken active part in)
regarding drafts in LCs.
My favourite story about drafts is when I presented
documents to a confirming bank in Germany, and they refused because the LC
number was not mentioned on the draft. I told them 1) that you cannot refuse
based on the absence of an LC number, and 2) you cannot refuse a presentation
under an LC based on the draft.
The reply from the confirming bank was: “We know that, but
the issuing bank (in India) does not.” I had many laughs about that one that
summer.
Manily because I felt sure that I was right. For the issue
of the LC number I think that I am right … but for the issue of whether or not
a refusal can be made based on a draft I think that over time I am less and
less right. With the new ISBP 745 …. My level of being right is so small that I
am technically wrong ….
Let me explain:
ISBP 745 paragraph B1 (b) reads:
“Banks only examine a draft to the extent described in
paragraphs B2-B17.”
This does sound mostly harmless …. But if you read paragraph
B2 through B17 you will find that this covers mostly every single aspect of a
draft i.e.:
The tenor
The maturity data
Banking days
Grace days
Delays in remittance
Drawing
Signing
Amounts
Endorsements
Correction and alteration
Since the banks will examine these issues, then logically
these issues may be the basis for a refusal of the full presentation under the
LC. So: a refusal can in fact be based on drafts!
My second favourite story about drafts is from I just
started working in an LC department in a bank. I received the documents under
the issued LCs. Together with the documents was two small “slips” of paper. I
asked a more experienced colleague what that was. The answer: “drafts.” I said:
“Okay – what is it – and what to do with it.” The answer: “never mind just
attach it to the forwarding schedule and keep it in the file. We do not look at
it.”
Of course the LCs that we issued called for drafts (!!) –
but the drafts were never ever examined!
Is there morale to the story? Yes there is – here goes:
I accept fully that drafts/bills of exchange may play an
important role in a transaction – even a transaction covered by an LC. However,
in most cases it is my impression that the draft is required by the bank (i.e.
not the applicant), and has no real function to the transaction – and
effectively is NOT being used.
An LC should ONLY include documents and requirements that
are important to the transaction – because otherwise the presentation may be
refused based on a document of no real value to the commercial parties or the
transaction.
Since it is now made clear in ISBP 745 that a refusal may be
made based on a draft, then drafts should ONLY be required in an LC when it has
a real function to the transaction.
I repeat: Drafts should ONLY be required in an LC when it
has a real function to the transaction!
I repeat: Drafts should ONLY be required in an LC when it
has a real function to the transaction!
In other words: when a bank is about to issue an LC that
requires drafts, I beg that the LC officer stop – take a deep breath – and
think: “Why do we call for drafts. What is the purpose?” If there is no good
answer, then do not call for the draft.
I repeat: If there is no good answer as to why you call for
drafts, then do NOT call for drafts.
Take care of each other and the LC!
Kim
Ps. Hmmm that was 728 words … why did you not stop me?