Payment to be effected after acceptance of goods?

[Navi]

Hi Friends,
We often issue LCs whose payment terms indicate a percentage of LC amount to be paid at sight and remaining to be paid after acceptance of goods by applicant, according to his instructions. Against receipt of credit documents we pay the determined amount and wait applicant's instruction for payment of the balance. Sometimes we wait for years for applicant's payment instructions and sometimes we are asked to pay only a portion deducting some fee from the balance with the reason that beneficiary not fulfilled his obligations/contract with which the LC is not bound. And usually beneficiary consent this unwillingly.

What I want to discuss is, if the applicant does not want to pay the balance, do we, as an issuing bank, have any obligation to pay to beneficiary?

Regards

[shahriar]

Hi Navi!!

we also issue this kind of LC and i dont like them as we require to monitor them over a longer period. whether the issuing bank is under obligation depends on the LC terms. could you please out the exact clause here?

[Navi]

Thanks Shahriar,
.
The clause we add to both 47A and 78 is :
"Payment of remaining pct xx will be effected against inspection and acceptance report of applicant, according to applicant's instructions...". Sometimes applicant does not instruct us for years. We can reject payment claiming that inspection and acceptance report not fulfilled.
.
However, sometimes although inspection and acceptance of goods completed, applicant wants to deduct from the balance due to contract between them and beneficiary. Beneficiary wants full payment asserting that goods are accepted. At these situations I become anxious about whether, we as an issuing bank can relieve from payment obligation according to a/m clause especially underlined/bold part.
.
regards

[iLC]

"Payment of remaining pct xx will be effected against inspection and acceptance report of applicant, according to applicant's instructions...".

navi,
risky clause. appears to be a non documentary one. who is to present this report? what will be the content? you should make it clear that you wont pay without the certificate which will be presented to the issuing bank by the applicant directly.

[picant]

Hi Pals,

Is It the balance to be paid after acceptance of goods, covered or not, by the l/c amount? In this case I think no, so the L/c must be worded to accept an invoice higher than the l/c amount, and with instructions that documents will be delivered to applicant being not contingent to pay said excess. In case you have to pay the difference, it is better to fix a time limit i.e."balance will be paid on applicant instructions or directly within ...." or the like

Other comments appreciated
Ciao

[Navi]

"Payment of remaining pct xx will be effected against inspection and acceptance report of applicant, according to applicant's instructions...".

navi,
risky clause. appears to be a non documentary one. who is to present this report? what will be the content? you should make it clear that you wont pay without the certificate which will be presented to the issuing bank by the applicant directly.

Dear ILC,
.
Yes, this clause is a non documentary one. No documents relating to this clause is expected to be presented because if such report is requested, it will be issued and signed by applicant and prented to issuing bank, which makes this presentation useless from the beneficiary side.
Let me give you example:
We issue LC for EUR.100.000.-
Payment conditions: %70 ( EUR.70.000.-) to be paid at sight, against LC documents
%30 ( EUR 30.000.- ) will be paid against inspection and acceptance report of applicant, according to applicant's instructions.

We receive docs for EUR .100.000.- and pay only EUR 70.000.- and wait applicant's instructions for EUR.30.000.-.
Scenario 1: Applicant takes documents, clears goods from customs, install goods, perform some tests etc. and some time later instruct us that they accepted goods and we pay EUR.30.000.-.
Scenario 2: Applicant say that beneficiary not fullfilled his obligations, so acceptance of goods not completed and they will not pay remaining amount.
Scenario 3: Applicant say that they acceptance of goods completed however, beneficiary violated some clauses of contract between them and they deduct penalty fee according to their contract, request us to pay, lets say EUR.20.000.- only.
.
While issuing this LC, our intent is to indicate that we have no obligation to pay EUR.30.000.- and only pay it in case we are asked to do by applicant. I have doubts whether above clause is sufficent to secure us. In addition to that, maybe we should explicitly add another clouse to Lc that we, issuing bank, only responsible for payment of %70 of LC value...

Regards...

[Judith]

Ideally, the percentage that is payable at the applicant’s discretion should not be covered by a letter of credit because:
(a) it is non-documentary and
(b) it requires the consent of the applicant

In your example, you could advise the applicant to issue the main credit for 70% of the amount.

While issuing the credit, you could include the following instructions for the draft:
“Draft to be issued for 70% of the invoice.”

And include the following as information:
“30% of the invoice will be payable at the applicant’s discretion outside LC terms.”

Such issuance is advantageous both to the issuing bank (no need to track applicant’s consent, reputation risk etc.) and the applicant (need not block limits, less issuance fees etc.)

However, if the beneficiary insists that the LC covers the full amount, it is better that the 30% is payable against a document (like an independent third party inspection certificate).

Hope this helps.

[Navi]

Thanks Judith,
.
it is a good alternative and most of our clients will welcome except for some who reject to do any business and do payment out of LC.
.
regards

[nesarul]

Dear members,
First of all pls correct me, if i am in a wrong track.
Non documentary terms Vs conditions dilemma: [an analysis]:
Before UCP 500, there was no explicit article or sub article for requirement of documentary condition for credit transaction.Despite UCP 400's assumption that documentary condition are inherent...... the problem of non documentary requirement continues to plague the documentary credit business [Comparison between UCP 400 and UCP 500-charles del busto]. as consequence of above UCP 500 incorporated sub article 13(c) in recongnition of requirement of documentary conditions for letter fo credit transaction followed by ICC position paper 1.
.
If we look into the aove sub article keenly, we can realized that this is the sole sub article where the word "conditions" [emphasis added] is not accompanied the word "terms". this sharp distinction line was well explained in the above mentioned book,
"conditions should no be confused with terms. for almost two thousand years international law has distinguished the difference future and uncertain events[condition] with event that are certain to take place [terms]..........
,
under UCP 500 regime documentary conditions achieved in two ways: a) asking individual document and b) linkage formula.
.
UCP 600 maintains the same principal except linkage formula[confirmed by commentary of UCP 600..... still yet to receive any ICC official opinion] and sub article 14[h] has maintained the same purity by using only the word condition without accompanied the word 'terms'.
.
from my point of view, "remaining 10% payment will be effected....." is a terms rather than non documentary condition.
.
pls correct me if i go wong way.
sorry for long posting.
regards
nesar

[nesarul]

Dear Judith

“Draft to be issued for 70% of the invoice.”
And include the following as information:
“30% of the invoice will be payable at the applicant’s discretion outside LC terms.”

If draft incorporate such additional word, it may cause legal consequence under bill of exchange act ....is it not..
.
regards
nesar

[Judith]

If draft incorporate such additional word, it may cause legal consequence under bill of exchange act ....is it not..

from my point of view, "remaining 10% payment will be effected....." is a terms rather than non documentary condition.

Sorry about the ambiguity!

What I meant was that the LC could incorporate some information about the remaining 30% / 10%.

This would not be a part of the terms and condition of the credit at all!
In an MT 700, I guess I would incorporate this in field 78 or even in field 47A by giving a proper heading: E.g.
“FOR INFORMATION ONLY:
30% of the invoice will be payable at the applicant’s discretion outside LC terms”