Theoretical Operation Practice Of Letter Of Credit

Case study:

A family in China

However, in the process of circulation of documents, the letter of credit has a fine clause, that is, if the exporter's documents do not conform to the requirements of the letter of credit, the issuing bank has the right to deduct 10% of the total amount of the fine.

In order to prevent bank fines, the exporters have asked our banks to send the documents to foreign banks. They should attach the words "if you want to pay a fine, please return all the documents and the exporter will not accept the fine".

In practice, such practices are also accepted by foreign banks.

Because of the mistake, the notification bank forgot to send the statement to the foreign bank at the same time, and returned a notice until second days.

As a result, foreign banks still pay a fine.

Now, the exporter asks the bank to compensate him for the fine.

Q: how should this case be decided?

In this case, the following questions are involved: first, if the issuing bank deducts 10% of the fine, is there any reasonable basis? Secondly, the notification bank forgets whether it is wrong to convey the customer's request when sending the documents; thirdly, the customer responds, "if you want to pay a fine, ask your bank to return all the documents, and the exporter does not accept the fine".

If we clarify these key issues, we can have a fair judgement.

1. Is there a reasonable basis for the issuing bank to deduct 10% of the fine?

This problem is related to the theoretical basis of the bank's responsibility and the independence principle of the letter of credit.

As we all know, banks in the letter of credit business is mainly in line with the principle of "uniform documents" to carry out the trial.

The so-called "uniform document", that is, the documents submitted by the beneficiary must conform to the terms and conditions of the letter of credit on the surface, and the documents should be consistent with each other. Otherwise, the bank has the right to refuse the documents submitted by the beneficiary and refuse to pay.

According to international practice, the consistency of documents is very strict.

The documents must be in conformity with the stipulate of the credit in all respects. If there is a slight discrepancy, the documents may be rejected by the applicant, the issuing bank or the drawee bank and the negotiating bank.

Therefore, banks should refuse to accept documents without payment when there is discrepancy in the documents. There is no room for negotiation.

If this is not done, banks will take great risks, resulting in serious consequences.

In addition, the biggest feature of the letter of credit, "independence of the letter of credit" is also to avoid banks involved in the sale contract.

The reason why the letter of credit is involved in bank credit is to make international trade flexible.

But the role of banks is the most, and banks are unable and unwilling to step in.

In order to further reduce the risk of the bank itself, there is no liability in the bank's exemption for the description, quantity, weight, quality, status, packaging, delivery value or existence of the goods in the document.

From the above theory, we can see that the bank's examination documents are strict and standard.

In this strict sense, the bank in this case can not have the same provisions as "the discrepancy between the requirements of the documents and the letter of credit, and the penalty for deducting 10% of the total amount of payment".

However, it is far from practical that all problems involving letters of credit are viewed from a theoretical perspective, and we must draw conclusions from the facts.

The origin of the letter of credit is the operation of the practice. In order to summarize the rules and regulate the behavior, people have expounded a series of theories about the letter of credit on the basis of practical experience. However, some phenomena which are not theoretically explained have a reasonable aspect in their actual activities.

The case is whether the issuing bank has a reasonable basis for deducting 10% of the fine.

We know that under market conditions, the protection of paction security and the stability of market order are the basic concepts of all economic activities.

For example, in the paction, if the breach is not fundamental, it is necessary to ensure the continuation of the paction as far as possible.

In international trade, the same theory is still applicable because it is not conducive to the exchange and development of international trade if the continuation of trade is merely because of the discrepancy of documents.

In view of this, the relevant letter of credit strict document consistency principle, in practice, need to be flexible.

For example, we can stipulate 1000 tons in the quantity clause, not 1000 tons.

Accordingly, the issuing bank in this case does not rigidly stipulate that if the document does not comply with the similar provisions, such as refusing to pay the payment, it stipulates that if the document does not conform to the penalty, it is reasonable for its practice.

In addition, the issuing bank's notice does not mean that the beneficiary will be binding on him as long as he reaches the beneficiary.

The beneficiary should examine the documents first. If it is considered unreasonable or difficult to do so, it can be negotiated with the buyer or the issuing bank for amendment.

Therefore, for such provisions, the seller has the opportunity to refuse.

However, the rationality here is that the provisions of the issuing bank conform to the general spirit, and whether the details are appropriate is still open to question.

In connection with the case and practical experience, the issuing bank States, "if the exporter's documents do not conform to the requirements of the letter of credit, the issuing bank has the right to deduct 10% of the total payment of the fine." at least there are some discomfort. First, even if there is a penalty in practice, is it too heavy to deduct 10%? Second, what is the penalty for the issuing bank's deduction?

But this is not tenable, because first, the bank has already charged the application fee in the process of opening the letter of credit; secondly, 10% is deducted from the total amount of payment, that is to say, in fact, the buyer finally bought the goods by the 90% of the original contract price, so the cost is not bank income, but the applicant is the buyer's income.

Whether or not it can be deduced from this is that the issuing bank has taken advantage of the above adaptation for the sake of the interests of the applicant.

In such a case, the seller is passive. If he is negligent, he will be deducted from the fine, and the buyer can easily receive the goods as scheduled, and actually reduce the price.

Third, "if the exporter's documents do not conform to the requirements of the letter of credit", it is also vague.

To what extent does it not meet the requirements? If it is considered reasonable when the documents are seriously inconsistent, then the right to interpret is entirely in the hands of the issuing bank, giving the seller a very unfavorable position.

Therefore, in view of the above discussion, the issue of whether the issuing bank deducts 10% of the fine from the payment can be considered reasonable. If the seller's documents are seriously inconsistent, the issuing bank may deduct a certain fine, but the penalty rate should not be too high.

Two, the nature of seller's response.

This question is related to the theory of amendment and procedure of letter of credit.

The cognizance of the nature of seller's behavior is related to the sharing of fault liability.

By issuing the penalty conditions and the seller's response, the buyer and seller can see that there is no such requirement in the conclusion of the sales contract, that is, there is discrepancy between the letter of credit and the sales contract. This discrepancy leads to the amendment of the letter of credit.

The amendment of a letter of credit means whether the contents of a letter of credit are changed by the importer, or the contents of the letter of credit proposed by the exporter, such as changing the name or address of the beneficiary, the applicant, or changing the amount of the letter of credit, the name of the goods, the terms and conditions of the paction, the mode of pportation, the port of loading and unloading, the relevant time limit, or any other relevant terms of the credit.

The amendment to a letter of credit should follow the following principles:

(1) in the validity period of the letter of credit (this is self-evident);

(2) the principle of unanimous consent of the parties in the terms of the letter of credit.

This refers to an irrevocable letter of credit.

If the seller proposes to amend the letter of credit, after the consent of the issuing bank is made, the bank shall inform the bank by modifying the notice or telegraph, and then the buyer will be changed by the notification bank before the Seller agrees. If the buyer makes the amendment, the seller must agree to the seller's approval through the issuing bank.

(3) express principle.

The beneficiary must make an express way to accept the amendment.

The terms of the original letter of credit are still valid for the beneficiary until the beneficiary agrees to accept the amendment to the bank.

However, if the beneficiary does not expressly indicate whether he accepts the amendment, but when the documents submitted are in conformity with the revised contents, the act is presumed to be accepted by the beneficiary and the letter of credit has been amended.

(4) the principle of full acceptance.

The beneficiary or other parties may not accept part of the amendment in the notice of the same amendment, and only accept or reject all the contents of the amendment.

If part of the acceptance is accepted, the letter of credit is not amended.

(5) the principle of complete clarity.

The instructions for amendment and amendment of the L / C must be complete and clear. This includes two aspects: first, the issuing bank's instructions for amendment to the advising bank should be completely clear; secondly, the amendment of the letter of credit must be complete and clear, and should not cause misunderstanding or confusion.

{page_break}

From the definition of the amendment to the above L / C, we can see that the holder of the L / C amendment can be the buyer or the seller:

First, the buyer proposes to amend the letter of credit.

The buyer must first consult with the seller about the contents of his amendment. After the agreement is reached, the buyer will apply for amendment to the issuing bank and be amended by the issuing bank.

If consensus is reached, it will be deemed to have not been modified only if the buyer and the seller agree privately and have not applied for the amendment of the issuing bank.

When the buyer and the buyer fail to reach a consensus, even if the buyer applies for the amendment of the issuing bank, the seller may expressly refuse to accept the amendment notice.

Secondly, the seller proposes amendments to the letter of credit.

This is generally the case after the seller's inspection of the letter of credit.

At this point, the seller should immediately express his objection.

However, as a beneficiary, he can not directly negotiate with the bank, but can only negotiate with the buyer, through the buyer instructing the bank to amend the letter of credit.

In connection with the case, it can be concluded that the buyer and seller did not mention the penalty in signing the sales contract.

After the letter of credit is opened, the penalty clause is set forth in the interests of the applicant, and the penalty is deducted from the payment. It can be regarded as the result of changing the sales contract by modifying the terms and conditions of the letter of credit. The seller does not agree and therefore makes an objection.

In this process, although the seller asked the bank to convey his opinion, he still failed to fulfill his full responsibility.

This is because, in this case, it appears that the seller is negotiating the terms of the L / C with the issuing bank, but in essence, it is the purpose of modifying the sales contract through the terms of the letter of credit, because the fine is not deducted from the other, but is deducted from the payment. The seller replied, "if you want to deduct the penalty, please return all the documents, and the exporter does not accept the fine".

The seller's delivery is directly related to the buyer's immediate interest, so the seller must consult with the buyer when he dissenters with the bank.

Moreover, in accordance with the revision procedures of the L / C, the amendment of the L / C must be applied to the issuing bank as an amendment, as is the application procedure of the letter of credit.

In this case, the seller will only notify the bank to convey the request for disagreement, and fails to fulfill all the obligations that should be paid attention to, and should also bear the fault liability accordingly.

Three. The advising bank forgot to convey the customer's fault when sending the documents.

Due to negligence, the advising bank handed the customer's request to the issuing bank together with the documents, which resulted in the customer being fined.

Is there any fault in the notice bank? If so, what should be the fault?

According to UCP500 twelfth, "if a bank uses the services of other banks (notifying the banks) and the beneficiary is a letter of credit, it needs to make use of the same bank's service as a notice of amendment."

It can be seen from this that the notification bank has the obligation to inform.

Therefore, it is certain that the advising bank is at fault.

However, such notification obligation is only for the issuing bank, because the relationship between the notifying bank and the issuing bank is entrusted. In such a relationship, the notifying bank is the principal and is obligated to complete the obligation to notify the issuing bank.

However, according to the basic relationship theory of letters of credit, there is no relationship between the notifying bank and the exporter.

At this point, the notice bank is only his agent, not agent, relative to the exporter.

Therefore, as a communication person, especially a free person, the duty of the advising bank is lighter than that of the agent.

In this case, because of the consequence of the communication failure of the notification bank, the seller can not ask the notice bank to make full compensation, just like an agent.

Four. Suggestions for handling the case.

In view of the above analysis of the case through the relevant theories of the letter of credit, we are now prepared to handle the case as follows:

1. because the penalty clause of the issuing bank is unreasonable, the exporter should not place the fault entirely in the advising bank, or consider taking corresponding measures against the issuing bank.

2. the exporter should also be partly liable for his fault.

3. the exporter may negotiate with the buyer to request the buyer to apply for amendment of the letter of credit, and the advising bank shall also actively consult with the issuing bank to make up for the loss caused by the fault to the seller.