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What happens if court stops payment of an irrevocable, confirmed letter of credit which is payable 90 days after sight due to low quality of goods?





















Importer company which is the beneficiary under the letter of credit transaction is Strong Saudi Steel Import Co. Ltd and exporting company which is the applicant under the letter of credit transaction is Korean Shining Steel Exporter Ltd. 












You can find important details of the letter of credit on below MT 700 swift message summary.  














































Under UCP 600 rules confirming banks have to honor complying presentations. Confirming banks can also discount letters of credit upon exporters’ demand.












The issuing bank also confirmed, by an authenticated swift message that, the acceptance of documents and the remittance of funds with a value maturity date. 

As it was mentioned earlier, the letter of credit is payable with a deferred payment which is 90 days after sight. The exporter applied to the confirming bank to discount the credit in order to get the payment in advance of the maturity date of the credit. 












One week before the maturity date, the issuing bank informed the confirming that the letter of credit payment has been stopped by the court order. In this regards the issuing bank sent two subsequent authenticated SWIFT messages to the confirming bank as follows:

























Confirming bank sent its objections to the issuing bank via authenticated swift message 3 days after issuing bank's swift messages have been received. Confirming bank claimed that the court ordered to stopped the payment to the beneficiary but according to UCP 600 rules the confirming bank are the owner of the receivables and entitled to receive the counter-value without any further delay.

Below you can find the summary of the swift message sent from confirming bank to the issuing bank.







































Conclusion: 

ICC banking commission states that local law will prevail over the letter of credit transaction. As a result banks must act according to court orders. 

However, the credit was subject to UCP 600 and apparently contained no exclusion to the rule appearing in sub-article 12 (b). Due to the content of sub-article 12 (b) and sub-article 7 (c), the issuing bank should seek to resist such an injunction in order to preserve the integrity of its credit and the UCP. It must be expected that the issuing bank will seek to have the injunction removed by referring the court to the appropriate articles of UCP 600 and the terms and conditions of the credit. The issuing bank would also be well advised to inform its applicant(s) of the content and effect of sub-article 12 (b) for this and any future transactions. It is the responsibility of the applicant to cover any issues concerning quality of goods in the documents called for and the data content required to appear on those documents, and not to seek redress that affects the right of a nominated bank to receive reimbursement in respect of a complying presentation.

This case study created by the author based on the informations gathered from ICC Opinion R629 / TA672rev.

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In many countries letter of credit applicants able to prevent payment by obtaining court orders forcing issuing banks from paying demands under their letters of credit on the grounds of low quality goods shipment or fraud. Often courts issue a temporary or preliminary injunction. On this case scenario we demonstrate a court order that stops payment of an irrevocable confirmed deferred payment letter of credit.  




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Confirmation: Confirmation means a definite undertaking of the confirming bank , in addition to that of the issuing bank, to honour or negotiate a complying presentation.

Confirming Bank: Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank's authorization or request.

Deferred Payment : Deferred payment refers to the payment which is made after a period of time that is specified also in the letter of credit. The payment period is usually determined as specific number of days after the date of presentation or the date of the transport document. Bill of exchange or draft is not required under deferred payment.

Nominated Bank : Nominated Bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

Mt 700 Swift Message: MT 700 is a type of swift message which is used by banks when issuing a letter of credit. MT 700 swift message is sent by the issuing bank to the advising bank.

UCP 600 Article 7-b: According to latest letter of credit rules article 7-b "An issuing bank is irrevocably bound to honour as of the time it issues the credit."

UCP 600 Article 12-b: According to latest letter of credit rules article 12-b "By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank."

Negotiation: 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.

Issuing Bank : Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

Nominated Bank's Reimbursement Claim: "Reimbursement claim" means a request for reimbursement from the claiming bank to the reimbursing bank. 

Complying Presentation : Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice.


Author:
Ozgur Eker is an independent trade finance consultant based in Izmir, Turkey. He has been 10+ years of experience in international trade finance field. He is also the founder of letterofcredit.biz.



irrevocable confirmed lc deffered payment
Saudi Arabian steel importer and South Korean steel supplier signed a sales contract
A multinational company's Saudi Arabia branch signed a sales contract with a South Korean steel supplier. The product being traded was Cold Rolled Steel Sheets. Sales contract amount was 9.700.000,00 USD and quantity of goods was 10.000mtons. 




step 2 letter of credit issuance
Letter of credit issued by a commercial bank in Saudi Arabia
A Saudi Arabian commercial bank issued the letter of credit which is available by a deferred payment payable 90 days after sight. Letter of credit is subject to UCP 600 and it is irrevocable. Letter of credit is available with a South Korean national commercial bank. Also issuing bank requested from the nominated bank to confirm the credit.




MT 700 Swift Message Summary

----------------------- Message Header ---------------------------------
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender     :   ARABBANKSKSA
                    SAUDI ARABIAN BANK 
                    (COMMERCIAL BRANCH) 
                    JEDDAH KSA

Receiver    : TRADEBANKXXX
                    SOUTH KOREAN TRADE BANK
                    (ALL SOUTH KOREAN OFFICES) 
                   SEOUL KR

40E:  Applicable Rules
        UCP LATEST VERSION
31D:  Date and Place of Expiry
        130106-SOUTH KOREA
50:   Applicant
        STRONG SAUDI STEEL IMPORT CO. LTD. 
        P.O. BOX 30000, JEDDAH
        KINGDOM OF SAUDI ARABIA
59:   Beneficiary - Name & Address
        KOREAN SHINING STEEL EXPORTER LTD
        (FULL BENEFS. NAME AND ADDRESS UNDER FIELD 47A ITEM NO.2)
32B:  Currency Code, Amount
         Currency    :    USD (US DOLLAR)
         Amount    :    #9.700.000,00#
39B:  Maximum Credit Amount
         NOT EXCEEDING
41A:  Available With...By... - BIC
         TRADEBANKXXX
         BY DEF PAYMENT
42P: Deferred Payment Details   
        90 DAYS AFTER SIGHT  
49:  Confirmation Instructions
        CONFIRM




step 3 letter of credit confirmed
Letter of credit confirmed by South Korean Bank
South Korean bank, which was initially the nominated bank, confirmed the letter of credit as per instructions received from the issuing bank. Once South Korean bank confirmed the letter of credit, it became the confirming bank. 




step 4 complying presentation
Complying presentation After having the letter of credit confirmed, exporter arranged the shipment and made the presentation to the South Korean Bank which is not only the nominated bank but also the confirming bank.  

Confirming bank checked the documents and found them complying. Confirming bank determined that the documents have been presented was free of errors. Confirming bank sent the documents to the issuing bank. 




step 5 discounting letter of credit
Letter of credit discounted by South Korean confirming bank 
Confirming bank and the exporter agreed on the terms and conditions of the letter of credit discount and confirming bank negotiated the credit without recourse basis. The confirming bank purchased the deferred payment undertaking resulting from documents presented in full conformity with the terms and conditions of the letter of credit and effected payment to the beneficiary.




MT 799 Swift Messages sent by the Issuing Bank

Swift Message MT 799 No.1:

"Please be informed that as per court order payment of this credit has been stopped."

Swift Message MT 799 No.2:

"According to the order dated February 15, 2013 issued by the Court of First Instance in the preliminary cautionary measures the planned payment is stopped. Because of this judicial order we cannot effect the above mentioned payment. You are requested to inform immediately the beneficiary in order to contact urgently the applicant."






Saudi Arabian court stopped payment of the letter of credit
After sending two informative swift messages, the issuing bank sent a telefax copy of the court order to the confirming bank. Additionally issuing bank sent a swift message to the confirming bank requesting to inform the issuing bank whether the confirming bank had already paid to the beneficiary or not.




step 6 letter of credit payment stopped
MT 799 Swift Message Summary


On 18.February.2013, the following swift message was sent by confirming bank to the issuing bank, which explained the objections of the confirming bank to the court order and the issuing bank's standing.

"Please kindly be informed that we would like to draw your attention to the following facts:

1.The Court Order dd. 15.February.2013 of the Court of First Instance is addressed to your bank, in order to proceed with the suspension of payment according to the instructions of applicant of L/C. This court order forbids your payment to be effected to the beneficiary.

2.According to Art. 7c of the UCP 600 of ICC

a) your bank is obliged to reimburse the nominated bank, i.e. confirming bank, at maturity

b) your undertaking to reimburse us is independent of your undertaking to the beneficiary

3. According to Art. 12b of the UCP 600, you authorized us to prepay or purchase a deferred payment undertaking incurred by us

4. As you are aware we prepaid the deferred payment undertaking to the beneficiary.

As a matter of fact we, confirming bank, are the owner of the receivables and entitled to receive the counter-value without any further delay. Summarizing the above, we regard you as a highly reputable bank with an excellent standing and experience in the international business, including documentary credits, and thus anticipate your assistance in solving the pending problem by appealing against the court order and to immediately remit funds in favour of our bank."




Issuing bank remained unanswered confirming bank's swift messages. 
The confirming bank believed that the issuing bank is obliged to honour the nominated bank's reimbursement claim immediately upon maturity, even if a court order issued against the issuing bank prohibits payment to the beneficiary. As the issuing bank remained silence the confirming bank applied to the ICC banking commission for an opinion.




issuing bank broke communication with confirming bank