lcviews CoronAdvice #4: Applicants under LCs subject to UCP 600
The fourth blogpost in the segment “lcviews CoronAdvice” takes a more practical approach, in that it aims to guide applicants to LCs during the coronavirus situation.
As has been described in the two previous “lcviews CoronAdvice” whether or not the coronavirus situation is a Force Majeure event for the purpose of the Trade Finance rules will depend on the circumstances surrounding the actual case. The same is the case for the contract between the buyer and the seller. For that reason, the buyer and the seller must check their agreements, and possibly seek legal guidance.
Besides that, the coronavirus situation may provide some practical challenges, and there may well be some remedies that may assist the situation – and at least enhance the position of the buyer – i.e. the applicant to the LC. Below are some vital points to consider:
Dialogue, dialogue and dialogue
Have a good and ongoing dialogue with the seller to understand if they are able to ship the goods – and you are able to receive it.
For example, India's Prime Minister Narendra Modi has imposed a nationwide lockdown in an attempt to slow the spread of the coronavirus. One consequence of that is that some transport services to and from India are suspended. However, with exceptions meaning that transportation for essential goods only is allowed.
If the seller is not able to ship the goods, or you are not able to receive it, strongly consider making an arrangement to cancel or postpone the delivery.
Have a good an ongoing dialogue with the carrier to ensure that they are able to ship the goods – so that it reaches you within the agreed delivery date. If that is not the case, communicate with the seller on how to best handle the situation.
Have a good and ongoing dialogue with your bank to ensure that it is possible to forward the documents to the bank – and that it is possible for the bank to present to the issuing bank. The dialogue should explore the possibility of using electronic means; e.g. electronic documents. For example, would copies of the documents be sufficient?
LC structure and content
For ongoing and new LCs there are some issues that should be carefully considered. Those are issues that are always important – but may be especially important in times like these. What may seem to be details, may be crucial in this situation. Those issues include:
Availability
Consider carefully how the LC is made available. If the LC is available with a bank in the country of the seller, and expires in the country of the seller, then a complying presentation to the nominated bank will obligate the issuing bank – i.e. your bank. In normal circumstances you will be obligated vis-à-vis the LC application. It must be expected, that the transit time (between the banks) of the documents takes longer than it normally would; i.e. it may take longer before the documents are received at the issuing bank. This means that the LC will be in the books of the issuing bank longer than it normally would.
In that situation it must also be remembered that if a complying presentation is made to the nominated bank and that bank forwards the documents to the issuing bank then the issuing bank is obligated to honour even when the documents have been lost in transit between the nominated bank and the issuing bank (UCP 600 article 35). I.e. in reality you could be obligated to pay under the LC even though the documents are lost in transit. In such situation you should request copies of the documents – and check carefully if the documents comply. If they do not, the risk of the documents lost in transit is on the beneficiary.
If it is not possible for the nominated bank to get the documents to your bank it may even be necessary to consider having your bank arranging a shipping guarantee for the release of the goods. This of course will depend on how the goods has been consigned and the transport document issued.
If the LC is (only) available with the issuing bank (and expires in your country), then the presentation must be made to the issuing bank in order to obligate that bank.
Complying – or not a complying – presentation
It must be remembered that the banks involved in an LC deal with documents, and not with the goods. This means that the issuing bank is obligated to honour once a complying presentation is made; regardless the fate of the goods.
However, this also means that a presentation that do not comply with the terms and conditions of the LC may be refused. In most cases it is (fortunately) so that the documents are approved. However, in this situation it should be carefully considered if the discrepancies (if any) should be waived.
Takeaways:
* Have a good and ongoing dialogue with seller, carrier and bank.
* Consider carefully how the LC is made available.
* Consider if discrepancies (if any) should be waived.
Look out; more “lcviews CoronAdvice” to come.
Meanwhile – as always, take care of the LC – but take special care of each other during these difficult times.
Kind regards
Kim