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.

Letter Of Credit, Issuing Bank, Strict Compliance

LETTER OF CREDIT: STRICT COMPLIANCE

One cardinal rule of letters of credit always prevails: strict compliance. Early in my career as an international banker, a lawyer wisely told me, “Roy, when processing a letter of credit, your job is to compare; not interpret.” That advice has helped me on numerous occasions to keep issues in perspective.

It would have helped another banker in this lesson, too, if she had received the same advice.

Before the electronic computer age, international banks typically communicated with each other by telex. A bank in Greece issued a letter of credit by telex and advised it through a New York bank. Upon receipt of the letter of credit, the New York bank followed their policy to re-type the information on their own letterhead and send it to the beneficiary.

BAD JUDGMENT

As the typist transferred the information onto the bank’s letterhead, she came across the merchandise description, which read, “1,000 adzing machines.” In her best judgment, the bank in Greece had made a mistake, so she altered it to read, “1,000 adding machines.”

Upon receipt of the letter of credit, the beneficiary shipped the adding machines and presented documents to the New York bank, which made payment because the documents correctly complied with the terms of the letter of credit.

ISSUING BANK REFUSED TO PAY

The New York bank couriered the documents to the issuing bank in Greece which promptly refused to honor them because their customer had indeed ordered 1,000 adzing machines, an ancient wood-working tool.

The bank in Greece held the New York bank responsible and returned the shipment. The New York bank, left holding the bag so to speak, ended up with 1,000 adding machines. Unable to sell them to recover their losses, the bank made a decision to use the adding machines in their next promotional offer.

"COMPARE, NOT INTERPRET"

If the bank had simply instructed their letter of credit staff to compare, not interpret, this story would have had an uneventful ending and would have never made it into this blog.