UCP500. (International Affairs Section).(Brief Article)

This ninth commentary on UCP500 concludes the examination of Article 14 and also examines Articles 15 and 16.

Article 14--continued

Reference is made in Article 14f to the practice whereby beneficiaries of letters of credit (LCs) obtain conditional payment from the confirming or negotiating bank, despite making a non-compliant presentation of documents. It is not unusual for banks to be willing to make payment "under reserve" or more probably "against a written indemnity" (possibly issued by another bank) notwithstanding discrepancies, especially when the beneficiary is a favored customer or is otherwise well known and trusted. This means that the beneficiary receives payment, albeit on a conditional basis, earlier than would otherwise be the case. It is, of course, part of the agreement that the beneficiary must refund payment if the issuing bank and applicant refuse to take up the documents.

Whether or not the confirming or negotiating bank will agree to this course of action is likely to depend on a number of factors; for example, it depends on the value of the transaction and the country of the issuing bank, not merely on the standing of the beneficiary. Banks are under no obligation to offer such arrangements, but it clearly helps a beneficiary's cash-flow if an agreement can be obtained. Since this would simply be a private arrangement between the confirming or negotiating bank and the beneficiary, it is of no concern to the issuing bank or applicant.

When discrepant documents are sent to the issuing bank, it is suggested that unless there are some special circumstances, they should be sent under the LC and clearly stated to be subject to UCP500. Otherwise there is a risk, particularly if the words "for collection" or similar are used, that the documents may be handled under the separate and generally less favorable Uniform Rules for Collections, thereby losing certain valuable protections afforded by UCP.

Article 15

This is one of the key Articles which, when read in conjunction with Articles 3, 4 and certain others, support the autonomy principle underlying LC business and emphasize the limited role of banks as independent paymasters, basing their actions on documents and the apparent facial conformity thereof. It is also the basis for one of the chief criticisms laid against LCs, ...