Letter Of Credit, Shipment Date, Applicant, Negotiate Documents
LETTER OF CREDIT REQUIRED A LATEST SHIPPING DATE
A US importer applied to a New York bank for a letter of credit for candy from a supplier in Greece. The letter of credit stipulated a shipment date which would insure arrival of the candy in time for a particular Greek festival.
LETTER OF CREDIT PAYMENT REFUSED
Unfortunately, the supplier dispatched the candy one day after the latest date allowed for shipment. When the issuing bank noted this discrepancy, they contacted the applicant for approval to pay, but the applicant declined because the late shipment meant missing the festival date. The Greek bank was notified that payment had been refused.
Since the Greek bank had negotiated the documents and already paid the supplier, they were now the sweet owner of the candy and promptly contacted the New York bank for assistance in finding a new buyer for it.
"NEGOTIATING" A LETTER OF CREDIT
Let’s clarify the technical term “negotiate.” According the UCP, “Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank” (Article 2).
In other words, a bank other than the issuing bank may purchase the beneficiary’s documents before the issuing bank receives the documents and consents to payment. This provides an advantage for the beneficiary who receives the money faster. It also provides income to the negotiating bank by collecting fee income plus a fee to compensate them for the cost of “float,” or interest on the money, which they paid but have not yet collected from the issuing bank.
The negotiating bank, however, takes the risk of the issuing bank not paying. In this story, why the negotiating bank chose to purchase discrepant documents remains unclear. Apparently, unable or unwilling to recover the payment from the beneficiary, they solicited the issuing bank’s assistance in the matter.
CREATING A NEW MARKET FOR THE CANDY
Fortunately, the story ends well. The New York bank discovered an agent who was willing to sell the candy for a 20% commission. He traveled the country and successfully established ecstatic buyers for the candy. After he kept 20%, the New York bank remitted over $143,000 more than the draft amount to the Greek bank and the agent launched a new market for the candy.
Thank you to Jim Harrington for another entertaining story.