Thursday, November 09, 2006

A Few Questions and Answers on UCP - Part 4

Question: UCPDC 500 makes it mandatory that Letter of Credit should provide for Drafts/ Bill of Exchange to be drawn on the Opening Bank and not on the applicant.

If such drafts (i.e. drawn on applicant) are drawn, they will be treated as extraneous documents. However, in practice several Letter of Credit come across which call for drafts drawn on the applicant.

In this regard please clarify :

• Whether such an L/C becomes invalid abinitio under UCPDC 500.
• Whether a Negotiating Bank loses protection under UCPDC 500 if it negotiates documents containing a draft drawn on the applicant in confirmity with L/C terms.
• Whether a negotiation gets a protection under UCPDC 500 if it negotiates documents containing a draft drawn on the opening bank even though the Letter of Credit calls for a drawn on applicant.

An L/C calling for draft on the applicant will not be invalid on that count.
Since draft on the applicant is additional document the Negotiating Bank will loose protection of UCP500 if it negotiates documents containing a draft drawn on the applicant only.
The Negotiating Bank will be protected under UCP if it negotiates document containing a draft drawn under Issuing Bank even though the L/C calls for a draft drawn on applicant.

L/C Opening Bank under usance letter of credit sent following acknowledgment on receipt of documents from Negotiating Bank, who had instructed Opening Bank to acknowledge and advise acceptance and due date.
"We acknowledge receipt of documents which is subject to acceptance."

As the reply was not satisfactory Negotiating Bank requested Opening Bank on telephone to advise acceptance and due date, for which the reply was "Unless you hear from us documents can be treated as accepted."

Can the Negotiating Bank treat the acknowledgment letter as acceptance. If no communication is received within 7 working days it will be understand as documents are in order.

As per UCP 500 if the Issuing Bank does not communicate with 7 working days its rejection of documents that bank is precluded from refusing to take up the documents thereafter.

All export documents drawn under credit has to be in foreign currency (Home currency not permitted) as per RBI/FEDAI directive/guidelines. Whether an export document under L/C negotiated by the Bank will be treated as giving value for the draft/ document when Rupee advance is given without taking foreign currency into position.

While Rupee advance is given not upto 100% of invoice value but around 80% to 90% holding balance as margin (may be to cover exchange risk/interest recovery). In such case, part disbursement/advance shall be treated as full negotiation of document under the credit.

Any Rupee advance given without taking foreign currency into account will be deemed as giving value for the draft/documents negotiated to the extent of the advance and will be subject to further adjustments later on.

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