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Case Number 1 The Case of the Contingent Irrevocability of the Credit

UCP500 Article 4 and sub-article 8(a)

Background

Type of Credit: Irrevocable Application:UCP500 Issuing Bank: Bank I Advising Bank: Bank A

Availability: At sight with the Issuing Bank Expiry: At the counters of the Issuing Bank Circumstances

Issuing Bank: Bank I issued its irrevocable Credit and advised it to the Beneficiary

through Bank A.

Advising Bank: Bank A advised the Credit to the Beneficiary

Credit: Among the terms and conditions, the Credit asked for:

1. Sight draft on the issuing bank

2. Bills of lading issued to order of Bank I for account of the Applicant 3. Special Conditions:

(a) Payment of drafts drawn hereunder will be made only after the

realization of the re-export proceeds program.

Beneficiary: The Beneficiary shipped the goods and presented the documents required

by the Credit to Bank A.

Advising Bank: Bank A informed the Beneficiary that in view of the special conditions

related to payment and because the Credit expired at the counters of the Issuing Bank, Bank A would only forward the documents to Bank I for their action.

Beneficiary: After determining that Bank A had no obligation to negotiate, relying upon

the standing of the Issuing Bank as a premier financial institution, and being comfortable that the Credit was subject to UCP500, the Beneficiary instructed Bank A to forward the documents to Bank I.

Issuing Bank: Informed Bank A that while the documents presented under the Credit

were compliant, they were not in a position to honor the drawing, as the necessary funds had not been made available to them from the “re-export proceeds program”. If and when such proceeds were made available, they would pay the drawing under their credit.

Beneficiary: The Beneficiary never received payment for the goods shipped, even though

the documents presented under the Credit complied fully with the terms and conditions of the Credit. Bank I stated that while their Credit was irrevocable, it contained special conditions stating that irrevocability was subject to receipt of the necessary funds from the “re-export proceeds program”. Since such proceeds were not received, Bank I had no obligation to honor the drawing. Bank I suggested that the Beneficiary try to recover directly from the Applicant.

Queries: Please review, analyze the queries, give your opinion and be prepared to

answer each query

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(1) Would your Bank have issued or confirmed such an Irrevocable Credit?

(2) If your bank advised such a Credit to the Beneficiary, would it have warned the

Beneficiary about its special conditions?

Is it correct for Bank I to have issued this Credit subject to UCP500?

Case Number 2 The Case of Payment Against Copies of the Transport Documents

UCP500 Article 14

Background

Type of Credit: Irrevocable Negotiable Application: UCP500 Issuing Bank: Bank I Advising Bank: Bank A

Negotiating Bank: Freely Negotiable Availability: at sight

Expiry: At the counters of Negotiating Bank Circumstances

Issuing Bank: Bank I issued its irrevocable freely negotiable Credit in favor of the

Beneficiary and advised it through Bank A.

Advising Bank: Bank A advised the Credit to the Beneficiary

Beneficiary: Upon shipment, the Beneficiary presented the documents to Bank A for

negotiation, informing Bank A that the full set of the original bills of lading, endorsed in blank, had been forwarded directly to the Applicant due to the short transit time and normal delays of document processing. The Beneficiary requested Bank A to telex Bank I for authority to pay despite the fact that copies of the bills of lading were presented and not the originals as required by the Credit.

Negotiating Bank: Bank A, after examining the documents and determining that the only

discrepancy was that copies instead of the originals of the bills of lading were presented, telexed Bank I for permission to negotiate despite the noted discrepancy.

Issuing Bank: Upon receipt of the telex from Bank A, Bank I notified the Applicant of the

presentation of the documents to Bank A by the Beneficiary and the request to pay against copies of the bills of lading instead of the originals as required by the Credit. The Applicant authorized the payment against the documents presented. Bank I telexed Bank A accordingly.

Negotiating Bank: Bank A, after receipt of such payment authorization, paid the

Beneficiary and forwarded the documents to Bank I requesting reimbursement.

Issuing Bank: Two days after authorizing payment, Bank I received the documents from

Bank A and determined that all other terms and conditions of the Credit, except for the requirement for presentation of the original bills of lading, were complied with. Accordingly, Bank I credited the account of Bank A and debited the account of the Applicant.

Issuing Bank: The day after the debit to their account, and lacking receipt of the full set of

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original bills of lading, the Applicant requested Bank I to issue a “steamship indemnity” to enable him to obtain the merchandise from the carrier, as the goods had already arrived. Bank I, acknowledging that payment had already been made to Bank A and that the Applicant’s account had been charged in reimbursement, issued the “steamship indemnity” as requested by the Applicant.

Issuing Bank: One week after payment under the Credit and subsequent issuance of the

“steamship indemnity” and release of the goods by the carrier to the Applicant, Bank I received a “Collection Instruction Letter” from Remitting Bank X on behalf of a Principal/Shipper (a party other than the Beneficiary of the Credit), enclosing a sight draft, a commercial invoice and the original bills of lading that were to have been presented under the Documentary Credit. Bank I tried communicate with the Drawee (the same company as the Applicant for the Credit) but was unable to make contact since the company had gone out of business and the principals could not be found. Bank I informed Remitting Bank X of their inability to contact the Drawee for collection of the item and requested instructions as to the disposition of the documents.

Remitting Bank: Remitting Bank X notified its client of Bank I’s message and requested

instructions.

Principal: The Drawer of the Draft for collection informed Remitting Bank X that they

determined that Bank A had issued a “steamship indemnity” in favor of the carrier, enabling the importer to take title to the goods, despite their inability to produce the original bills of lading. Since the Drawer of the collection Draft was the holder of the full set of original bills of lading, the Drawer claimed that title to the goods was with them and Bank A had no authority to dispose of their property without its corresponding payment. Accordingly, the Drawer, in absence of immediate payment of the collection by Bank A, would be making a formal demand on the carrier for payment of the value of the goods released against the steamship indemnity, plus related expenses.

Remitting Bank: Remitting Bank X informed Bank A accordingly.

Issuing/Collecting Bank: Bank I realized that it had been duped by the Applicant and

decided that since it had already paid for the merchandise on behalf of the Applicant, they were not obligated to pay for the same goods twice, especially in view of the potential fraud that was committed to induce the banks to enter into such a transaction. Bank I informed Remitting Bank X of its position.

Queries: Please review, analyze the queries, give your opinion and be prepared to

answer each query.

What is (are) your opinion(s) and the reason(s) for it (them)? For example, what kind of fraud is it ？How many payments for goods have they defrauded the Issuing Bank of ?

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