Error In Advising And Issuing Bank Liability

[shahriar]

dear friends,

on many issues UCP 600 has set out operation parameter while is silent about what would happen if they are not followed. i consider article 9 as one of them. article 9b reads

By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.

now say there is an error in advising which ultimately made the presentation discrepant as per original credit. is the issuing bank liable to pay? what would be the case if the LC was available by payment with the nominated bank and nominated bank has paid for that LC? can the nominated bank claim under 7c
which reads

c. An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary

though 7c talks about complying presentation, it also says that its the nominated bank who will determine whether it is complying or not at the first phase. in our case the nominated bank was correct to determine the compliance as per available information to them.

at one point i thought that the issuing bank will be protected by article 37 of ucp600. but when i gave a second thought it appears that issuing bank has to reimburse the nominated bank under 37a while they are not also protected by 37b which reads

b. An issuing bank or advising bank assumes no liability or responsibility should the instructions it transmits to another bank not be carried out, even if it has taken the initiative in the choice of that other bank.

in our case the instruction to the nominated bank was to check the compliance and they carried it out perfectly.

your comments will be highly appreciated

regd

shahriar

[Md.zakir Hossen]

Dear Shariar
See below the Quotation from cdcs materials 3rd edition:
"Error made by issuing Bank or Advising Bank:
If the D.C.advice received by the beneficiary is different from the application,the issuing bank is bound to the beneficiary in terms of the advise received by the latter,irrespective of its liability to obtain reimbursement from the applicant and its likely that this positions is unchanged even if the error was made by the advising bank and notwithstanding the provision of UCP 600 articles 35 and 37".

So I think you got the answer.

[nesarul]

Dear all,
thanks zakir vai for your valuable posting.
but i want to add something which may not relevant to this issue:
disclaimer article 34-37 can not apply against the counter party automatically. for getting protection on above, the party will have to satisfy the following two conditions:
1. this error is beyond control of prospective party.
2. this party's perform its action without negligence.
.
i do agree with zakir vai that ultimate liability is on the issuing bank's account, this is solely because of the nominattion of advising bank by issuing bank.
.
My thinking:
But when advising bank's also performs nominated bank's function along with advising bank's function, i think, the bank may have to satisfy the above two conditions before court for getting protection under 7(c) of UCP 600. pls be noted that this is soley my thinking. pls ractify me if i am wrong.
regards
nesar
.

[jmitra]

That was quite interesting analysis from nesarul. i am in full agreement with you two conditions for effectiveness of disclaimer clause. however it depends. your two points are -
1. this error is beyond control of prospective party.
2. this party's perform its action without negligence.

now what is the meaning of beyond control? and what is the definition of without negligence? let me give you an example from daily life. i typed 10 pages on MS word. i started printing. the printing stopped due to a halt after 3 pages. when i resumed, one like was skipped due to a format error. but i got ten pages. now is it negligence or without control?

though brother zakir gave quote from CDCS guide, i think the issue is ultimately to be settled outside UCP at court. if we are talking about SWIFT advise, the possible error is the error in printing. there will be a obvious gap or break in number. the beneficiary and the nominated bank should have noticed that. if the complete 46A field is missing in the advised copy, does that mean that no document is to be submitted? i don't think so. so result will depend on the specific case.

regards

mitra

[nesarul]

Dear jmitra,

Hope fine. There is some technique own’s by the court to judge subjective issue such as: “Reasonableness” “Good Faith” “Trust” “Compliance” etc. based on which court reach in conclusion. Consequently subjective judgment is not a new issue before the court at all.
.
“Negligence” issued may be sought after by the court under the following three basis:

1. Gross Negligence: which indicate “COMPLETE CARELESS” Which seemed to the gross violation of law and international standard banking practice.
Example:
i) Wrongful conversion,
ii) Sending discrepant notice other than presenter,
iii) Sending amendment to another bank different from advising bank of original credit. etc.

2. Negligence in connection with immediate action:
which indicate action taken by the party [instructed, or instructor] “WITHOUT ENQUIRY”

Example: Your printing story

3. Negligence under remote ground:

Minor mistake by the party which cause harmful to the counter party.
Example:
Let issuing bank determined that document constitute complying presentation on the first day but provide discrepant notice on fifth banking day [despite the provision of 16(a)(b) and (c) especially, the indicative word “WHEN”]

note that although negligence under remote ground derived from minor mistake, it may be indemnified substantially.

Finally, I don’t know whether the above appease your lawful mind or not, but surely I try no stone unturned.
Regards
nesar

[shahriar]

i think that the decision taken by the CDCS guide is a general one. things will largely depend on individual case. i am having a funny question in my mind. what if the letter of credit was negotiated by another department of the advising bank? theoretically the issuing bank is still liable to pay the beneficiary. but i think the issuing bank can claim compensation from the advising bank. same should be the case even if the credit was negotiated by some other nominated bank. of course this is outside the scope of UCP600.

regd

shahriar

[iLC]

i dont understand why there is so much confusion around this topic. the beneficiary is innocent here and must not be punished by the mistakes of issuing bank or any other nominated bank. CDCS guide is just saying this fact. i think you are just confused cause a nominated bank has negotiated the document. this is not the problem in fact. the issuing bank has to pay in case where the document is presented to the issuing bank directly. if the issuing bank must pay the beneficiary, then it is also bound to pay the negotiating bank. how the issuing bank will settle the issue with the advising bank is not fully outside the scope of UCP and the underlying letter of credit.

regards

iLC