Should We Pay Under LC Transferred Without Confirmation

[MIA19]

Dear all,
if we transfer l/c, without adding our confirmation, should we pay under transferred l/c if documents are complied, although under master l/c documents are under reserve. In other words in case of transferring should we insure us with colateral from first beneficiary in case of such situation.
thanks

[abrar]

I'm not sure if I've understood the question properly but if the main LC is confirmed, the transferred LC must also be be confirmed. If the main LC is not confirmed then tbe transferred LC is also advised without engagement.

[MIA19]

Dear Abrar,
thank you for replying me, it is always an honour and pleasure
Actually the question was about the risk when transferring the l/c. As we do not have experience with transferred l/c, we are now discussing the risk for a bank. One opinion was that if we put in payment clause that we shall pay only when we receive funds from issuing bank under original l/c, than we are protected and there is no risk for us as transferring bank.
So the question is:
1.is such payment clause usual in tranferred letters of credit and if the banks are always using such structure of payment clause when transferring l/c or is it something which some banks are using but it is not proper since second beneficiary should be paid if he present complying document not depending on first beneficiary's ability to present properly.
2. If we add our confirmation, we could not use such payment clause, so what happens when second beneficiary present complying documents how do we force first beneficiary to present correct invoice (presuming that the documentary risk of all other documents is not in question). We would have payment obligation under transferred l/c and reserve under original l/c. How do we protect ourselves from such situation?
thanks
regards
Snježana

[abrar]

Hi Mia

Before I reply, could you please explain ? :

"We would have payment obligation under transferred l/c and reserve under original l/c. How do we protect ourselves from such situation?".

Under what circumstances are you contemplating that you would reserve recourse to the first beneficiary

[MIA19]

I ment that we could have situation that second beneficiary has complied presentation so we should pay and first beneficiary has presentation with discrepancies (so we won't receive money)

[abrar]

If the substitution concerns only the invoices between the first and second beneficiary, any discrepancies caused by the first beneficiary's invoices should not be allowed too taint the second beneficiary's presentation. Therefore, if the first beneficiary is unable to correct the discrepancies, sub-article 38 i makes it clear that the compliant documents as presented by the second beneficiary ( including the second beneficiary's invoice) should be honoured ( if confirmed) and forwarded to the issuing bank for payment. So, the situation that your describe should not be allowed to arise

Of course, this would mean that the first beneficiary receives no value under its own invoices but that is the reality.

[MIA19]

Yes, we could avoid such situation by presenting second beneficiary's invoice to the issuing bank, without substituting it.
And could you please reply to my first question - is the payment clause that we shall pay only when we receive funds from issuing bank under original l/c, usual in tranferred letters of credit and the banks are always using such structure of payment clause when transferring l/c or is it something which some banks are using but it is not proper

[abrar]

Form a personal perspective it's difficult to say how common the bad practice is as I have rarely been at the end of the bank receiving the transferred LC advice. However, it's also worth mentioning that unless in the unlikely situation that the second beneficiary is apprised of the contents of the incoming LC as received by the transferring bank, the second beneficiary whether the main LC was required to be confirmed and whether the bank actually confirmed the LC. If the transferring bank wishes to keep silent on this matter (i.e. omitting ADDING OUR CONFIRMATION in field 40b of the MT720) no one would be any the wiser.

On a more general point, if the main LC is confirmed and if the LC has been transferred accurately, the transferring bank should not be under any additional risk under the transfer than that which already exist under the main LC. Therefore, it makes no sense to withhold confirmation under the transferred LC or allow a situation to be created whereby it runs the risk of being obliged to pay the second beneficiary whilst not being able to claim under the main LC due to first beneficiary's discrepancies

[abrar]

Please read corrected text as follows : "...the beneficiary would not necessarily be aware whether the main LC was required to be confirmed and whether the bank actually confirmed the LC."