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A subject that re-surfaces occasionally is that of goods being released to a buyer prior to a documentary credit being settled.

It is worth examining a former ICC Opinion, R744 (TA744rev), in order to understand how such an issue should be approached.

Background:

• Issuing bank refused documents under a documentary credit due to discrepancies.
• Nominated bank subsequently learnt that the issuing bank had allowed delivery of the goods to the applicant by endorsing a bill of lading.
• Nominated bank informed the issuing bank that, because goods had been delivered to the applicant, there was no justification for originally refusing the documents.
• Issuing bank stated that the discrepancies had not been accepted and documents remained unpaid.
• In view of the fact that the issuing bank endorsed a bill of lading to the order of the applicant, the nominated bank held them directly liable for making payment.
• Issuing bank then stated that the applicant informed the nominated bank that the goods were not as per the credit and that payment could not be effected.
• Nominated bank informed the issuing bank that issues relating to quality of goods should be resolved between the buyer and seller outside the credit.
• Issuing bank informed the nominated bank that the transaction had a signal of commercial fraud and, according to its laws, they were allowed to postpone payment until the dispute is settled.
• Nominated bank advised issuing bank that an allegation of fraud should be supported by a court order and the argument was not valid and could not be accepted unless a court order was produced.
• Issuing bank did not agree and stated in its reply that according to its law, even if there is no court order stopping payment, the buyer has the right to stop payment as long as it has evidence of commercial fraud of the seller.
• Nominated bank believed that the issuing bank had grossly mishandled the documents.
• In the opinion of the nominated bank, the issuing bank was not authorised to endorse the bill of lading in favour of the applicant without obtaining payment.
• Who is right, the issuing bank or the nominated bank?
• Should payment be effected despite fraud, or should payment be withheld because of fraud?

Analysis:

• According to the text of the query the nominated bank received information, by way of a photocopy of an original bill of lading, that the issuing bank had assisted the release of the goods to the applicant by endorsing one original bill of lading in its favour. In view of this information, it would not be possible for the issuing bank to return a full set of original bills of lading following the apparent release of one of them to the applicant.
• The nominated bank had not received back the documents, which were said to have been returned by the issuing bank. In this context, the issuing bank is required to return the documents in the same form and number of originals and copies as received from the nominated bank.
• If the issuing bank is unable to return all the documents in the form and substance as received from the nominated bank, the issuing bank is precluded under UCP 600 sub-article 16 (f) from claiming that the documents did not constitute a complying presentation.

Conclusion:

• By apparently endorsing one original bill of lading in favour of the applicant, the issuing bank has not acted in accordance with the requirements of UCP 600 sub-article 16 (c) (iii).
• As the issuing bank did not return the documents, as stipulated in its notice, they failed to act in accordance with sub-article 16 (c) (iii) (c) and are precluded under sub-article 16 (f) from claiming that the documents are discrepant.
• The issuing bank is required to honour its undertaking.
• The issues of potential fraud and the necessity of obtaining a court order to stop payment are subject to the applicable law and are outside the scope of UCP.

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