Estimated reading time: 5 minutes
Back in 2007, when the adoption of the final draft of what was to be the Uniform Customs and Practice for Documentary Credit (UCP 600) was being put to vote among the country representatives to the International Chamber of Commerce (ICC) Banking Commission, there was a good amount of consternation over the late addition of the second paragraph of Article 35.
Although adoption was approved, several banks began stating in their letters of credit (LC) subject to UCP 600 that Article 35 was excluded.
Although this practice seems to have died down, there has remained a fair amount of concern over what this rule actually requires of an LC issuer if documents get lost in transit between banks.
In the September 2022 issue of Documentary Credit World (DCW), it was reported that the Banking Commission has now published Technical Advisory Briefing (TAB) #4 on the topic of lost documents, i.e., the subject of UCP600 Article 35.
The TABs are intended to serve as educational materials about ICC rules regarding which practitioners may need guidance. Although they are not meant to change any rules, they may clarify them. As of now, four TABs have been issued, a fifth is being finalised, and more are in the works.
In the case of TAB#4, “Documents presented by a nominated or confirming bank under UCP 600 and lost in transit.”
The clarification provided should cause much relief as it removes the primary concern many practitioners have had with the second paragraph of Article 35 surrounding documents being lost in transit.
What that paragraph says is:
“If a nominated bank determines that a presentation is complying and forwards the documents to the issuing bank or confirming bank, whether or not the nominated bank has honoured or negotiated, an issuing bank or confirming bank must honour or negotiate, or reimburse that nominated bank, even when the documents have been lost in transit between the nominated bank and the issuing bank or confirming bank, or between the confirming bank and the issuing bank.”
TAB#4 says that the correct interpretation of this wording is that the LC issuer is liable to honour a compliant drawing even if the documents get lost. In other words, the fact the documents have been lost cannot be used as a reason to refuse to pay.
Although the wording of Article 35 implies (at least to some practitioners) some immediacy, it does not actually say what needs to happen before the LC issuer is expected to honour.
TAB#4 goes on to explain how this scenario may proceed. Once it is established that the documents are missing, the nominated bank may submit copies for the LC issuer to examine. (Although not pointed out in the TAB, this would probably be by emailing scans of copies from the nominated bank’s files.)
The LC issuer has the right to examine the copies themselves and make their own determination regarding whether the originals seem to have complied. The TAB says this should be subject to the same rules for document examination as normal, including the time limit and procedures for refusal due to discrepancies.
In the event the nominated bank is unable to produce copies of all the missing documents, the situation remains unresolved, but, as the TAB says, “The appropriate approach is to initiate a dialogue between the concerned banks in order to arrive at an equitable resolution.”
What the UCP does not get into, and so neither does TAB#4, is what the LC issuer might be expected to do in order to get goods released to the applicant if an original bill of lading is required.
And, of course, delays can lead to costs like demurrage and how those are resolved is not directly addressed, but the TAB does point out that, per the first paragraph of UCP600 Article 35, banks are not responsible for the consequences of documents being lost or delayed in transit.
TAB#4 does underscore the fact that the second paragraph of Article 35 only applies if:
1. The bank that sent the lost documents is a nominated bank, and;
2. The documents were sent in accordance with any instructions contained in the credit. Coincidentally, the Banking Commission just finalised opinion TA926, which concerns documents that were delayed in transit.
The query posed to the Banking Commission states that the LC in question was available only with the LC issuer––there was no nominated bank.
Although the beneficiary presented documents to a bank (perhaps the advising bank, but the query does not say) before the credit expired, and that bank forwarded the documents to the LC issuer with what appeared to be sufficient time to arrive before the expiration date, there was a delay in transit, and the documents arrived late.
The LC issuer refused to pay because the credit had expired, and the query was whether Article 35 applies. The opinion makes it clear that the provisions in Article 35 apply only if the documents are lost in transit between a nominated bank and the LC issuer. As the presenting bank, in this case, was not a nominated bank, the provisions do not apply.
The distinction between the situations in UCP600 Article 35 and in opinion TA926 makes sense when you consider what constitutes the beneficiary complying with the terms and conditions of a given LC.
If there is a nominated bank, the beneficiary is only required to present compliant documents to that nominated bank before the credit expires.
The fact that the documents may subsequently be lost should not impact the beneficiary’s right to payment.
Indeed, many of what are termed ‘negotiable’ LC allow the nominated bank to claim reimbursement from a reimbursing bank or directly from the LC issuer before even sending the documents to the LC issuer.
TAB#4 is consistent with this practice. But if an LC is only available with the LC issuer, that is where it expires. Additionally, if documents are presented to someone else, they must be understood that they must still be forwarded in time to arrive at the LC issuer on or before the expiration date.
