MT700 DC Questions - help needed urgently

[Navi00]

Dear all,

I am currently engaged in negotiations with a potential commodities seller. The deal requires me to send him an MT700 DC with a credit amount of 1.000.000,00 USD.

The verbiage of the instrument would be the following :

MESSAGE TYPE MT 700
ISSUING BANK: XXXXXXXXXXXXXX
BENEFICIARY: SWIFT CODE: CHASUS33
XXXXXXXX
JPMORGAN CHASE BANK,
XXXXXXX
XXXXXXX
XXXXXX
ACCOUNT NUMBER: XXXXX
IBA NUMBER: XXXXXX
27 SEQUENCES OF TOTAL:
40A FORM OF LETTER OF CREDIT: MT700
20 LETTER OF CREDIT NUMBER: XXXXXXXXX
31C DATE OF ISSUE: XXXXXXXXXXX
31D DATES AND PLACE OF EXPIRY: THIRTY DAYS AT THE JPMORGAN CHASE BANK`S
COUNTERS
51A APPLICANT BANK: JP MORGAN CHASE BANK,

50 APPLICANTS: XXXXXX
59 BENEFICIARY: XXXXXX
32B CURRENCY CODE/AMOUNT: US$1,000,000.00
39A PERCENTAGE CREDIT AMOUNT TOLERANCE: 90%
41A AVAILABLE UPON PRESENTATION OF UNDER-LISTED SHIPPING DOCUMENTS
43P PARTIAL PAYMENT ALLOWED
44C LATEST DATE OF SHIPMENT 3 DAYS BEFORE EXPIRY
44E PORT OF LOADING: XXXXXXXXX
44F PORT OF DISCHARGE: XXXXXXXXX
45A DESCRIPTION OF GOODS AND/OR SERVICES:
LOGISTICS OF XXXXXXXX
CONTRACT CODE XXXXXXX
CONTRACT REFERENCE XXXXXXX.
QUANTITY: XXXXXXXXXX
COMMERCIAL INVOICE NUMBER: REF: XXXXXXXX

46 DOCUMENTS REQUIRED FOR IMMEDIATE CREDIT
A. XXXXXX
B. XXXXXXX
C. XXXXXXX


47 ADDITIONAL CONDITIONS
+REIMBURSEMENT AS PER INVOICE
+ PARTIAL DRAW ALLOWED
71B CHARGES
+ ALL CHARGES OF BENEFICIARY’S BANK ARE TO BE BORNE BY THE BENEFICIARY + ALL CHARGES OF ISSUER’S BANK ARE TO BE BORNE BY THE ISSUER

48 PERIOD FOR PRESENTATION
DOCUMENTS TO BE PRESENTED WITHIN THE VALIDITY OF THIS CREDIT ARE ACCEPTABLE
49 CONFIRMATION INSTRUCTION: WITHOUT
57D ADVISE THROUGH BANK: JPMORGAN CHASE
72 THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS
(2007 REVISION), INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO. 600,
NO WRITTEN CONFIRMATION TO FOLLOW.


The questions I have regarding this instrument are:

1) FIELD 39A PERCENTAGE CREDIT AMOUNT TOLERANCE : 90%

As I understood, this means the seller has the right to draw 90 % of the total credit amount (900.000,00 USD) before the delivery of the documents necessary for immediate credit.
which bank provides him with the credit in this case, The issuing bank or the receiving (advising) bank ?

2) What happens in case the seller draws the 900.000,00 USD and doesn't deliver the necessary documents until the date agreed in the instrument ?


So my main question is : am I exposed to losing 900.000,00 USD of my money ?

Thank You in advance.

Kind regards

[picant]

Hi Pal,

please contact your for advice!
Something in lc wording is wrong or incomplete, 90% tolerance means that you may avail the l/c from
100.000 to 1.900.000 usd but naturally presenting correct documents. 40) form of letter of credit: MT700?
.....
Depending where you are located, three days is a very short period of time, reimbursement as per
invoice.....
Many doubts friend!
Ciao

[Navi00]

Dear Picant,

Thank You for Your comment, I really appreciate it.

Yes, I have noticed that field 40 should say "Irrevocable" instead of "MT700"

What the seller told me is that after we sign the contract he will receive an invoice from his supplier in the amount of 900k $.
At that point I send the DC to him. When he receives the MT700 he presents the invoice to the recipient/advising bank, and that bank sends a request to the issuing bank to draw the 900k $ in order for him to be able to pay the invoice. Sort of a pre-finance.
Afterwards, after he presents the bill of lading and the rest of the documents, he can collect the remaining 100k $.

Is that how an LC with this wording is supposed to work ?

Sorry for my lack of knowledge, it's the first time I am dealing with an MT700.

Thank You.

Kind regards

[picant]

Hi Pal,

contact your bank!
The scenario seems a sort of red clause l/c, your seller get funds to buy and to further send the goods to you under l/c. This happens when a syrong commercial relationship is between buyer and seller, in
your case is the first time, so, please, contact your banker for a safe advice.
Other comments appreciated
Ciao

[TaiOanlan]

At Navi00
You can have L/C amount as USD1,000,000.00. Then, the require of documents field 46A can be breaking down to two parts. Part A 90% of L/C value, documents require Invoice in xxx copy(ies), etc. Part B 10% of L/C value, documents require Invoice in xxx copy(ies) / Packing List in xxx copy(ies) / Bill of Lading in xxx copy(ies), etc. This way might be more simple. Or just open two L/Cs in USD900,000.00 and in USD100,000.00.
As per Picant pointed out, the L/C is a bit hard to understand in wording and so on. To me, the allowance of L/C seems not necessary. Also, it is better off putting actual date of expiry and latest date of shipment rather than ``Thirty days`` and ``3 days before expiry``. Field 41 is not quite correct. Is it ``Any bank by Negotiation`` or ``Any bank by payment``? Or is it restricted to a specific bank? Field 43T is missing..........

Regards,

[kisazi]

Hi,
As I know, 39A only means the tolerance of LC amount (i.e. LC amt: usd1mil, tolerance: 90% -> total LC amt: usd1.9mil).
It doesn't mean the beneficiary can draw any money before the delivery of the documents?
Besides, if you didn't fill in application that 90% tolerance, why could issuing bank open like that?

[alaaebrahem]

Hi,
Regarding Tolerance on credit amount and goods quantity, Would you allow the beneficiary to ship goods in excess of the quantity order? By how much percent more? If Yes, please note that there shall be an increase in the amount the beneficiary can draw under the LC as well. Please note that if you allow tolerance, quantity and amount in excess or lesser is acceptable under the LC. For example: If your LC is for USD100,000 and you allow 10% +/- tolerance, your LC facility will be booked for USD110,000.
Any funds to be transferred should be against shipping documents only, in case of this is the first case or deal with this supplier and need the funds in advance to buy the required goods then to be sent to you through the LC, please be careful, listen to the advice of picant.
if you want to pay something in advance to him, you can specify for example $1 MM is payable at sight as advance payment against commercial invoice signed by beneficiary and countersigned & noted "approved for payment" by applicant's authorized representative.... along with original advance payment guarantee for same value (to specify the LG format to allow you to extend or claim the guarantee at any time), the remaining LC value to be against shipping doc (Comm Inv, BL, COO,....Etc)

Regards,
Alaa