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Negotiable document

Often, standbys require the presentation of financial documents like a bill of exchange, promissory note etc. Inherently, these are “negotiable”, which implies that they are transferable and payable to the named person/bearer.

ISP 98 deals with this subject in sub-rule 4.18. This sub-rule states that if the standby requires the presentation of the document that is transferable by endorsement and delivery [ i.e. a negotiable document] but does not specify whether, how or to whom the endorsement may be made, then the document may be presented without endorsement, or blank endorsed.

Blank endorsed means an endorsement [signed] without specifying any name. Effectively therefore, blank endorsed instrument converts the instrument into a bearer instrument.

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Notice of default and drawing event.

A standby can be invoked either in the event of default or on the happening of a drawing event.

Let us first deal with default.

Is a notice of default mandatory for the beneficiary to claim payment from the issuer? This issue is addressed in Rule 4.17.

“If a standby requires a statement, certificate or other recital of a default or other drawing event, but does not state the content, the document complies if it contains:

  1. Representation to the effect that payment is due because a drawing event as mentioned in the standby has occurred.
  2. Date of issue of the representation
  3. Beneficiary’s signature.

A demand for payment should be compliant with the requirements of both rule 4.16 and rule 4.17. The only additional requirement stipulated in Rule 4.17 is the representation stating that a drawing event has happened.

Where a standby is issued to cover a default on the part of the applicant, the beneficiary has to present a statement indicating that the applicant has defaulted. This is called a statement of default.

Other drawing events:

Over years, standby LCs have evolved to cover other situations, and are not restricted to only default on the part of the applicant. For example, a “direct pay” financial instrument might be backed by a standby LC that allows the beneficiary to receive payment on a mere request. Situations like these are called “drawing events” and are different from default events. A typical example of such a case would be a standby that guarantees payment of interest and principal on certificates of deposit or other financial instruments [ coupon bearing or otherwise] which evidence a debt.

Whether for default or any other demand, the notice or representation should fulfill the requirements of  sub-rule 4.16 or sub-rule 4.17, as applicable, regarding the content of the notice.

 

Standby document types and demand for payment

This important aspect is addressed in Rule 4.16 of ISP 98, which states as below:

4.16 Demand for payment

a. Unless specifically required, a demand for payment need not be separate from the beneficiary’s statement or any other required document.

b. If a separate demand is required, or given, at the instance of the beneficiary, it should contain, in the least, the following:

  • a clear demand for payment
  • date of issue of demand
  • amount of demand
  • the beneficiary’s signature [ which need not be a physical signature per se].

c. The demand for payment may be a simple request [ with the above details] or an order, or instruction or a draft/bill of exchange, which need not be in negotiable form, unless required by the standby.

As is obvious, there is no preset text for the demand. A valid demand should fulfill the above four requirements. It could be in any form, or vocabulary, so long as the above four conditions are met. The demand need not be entitled as “demand”. The words “please pay” is enough to indicate that a demand is being made on the issuer.

Sometimes, individual standbys may stipulate other requirements with respect to demand. These stipulations should be fulfilled along with the above four rules.

Original vs copies

This topic deals with an intriguing and oftentimes confusing aspect. Clause 4.15 of ISP 98 deals with this subject under the heading :” Original, copy and multiple documents”.

This clause states as below:

a. A presented document must be original.

b.A presentation of an electronic record, where electronic presentation is permitted or required, is “deemed” to be an “original”.

c.1. A presented document is deemed to be original unless it appears on its face to have been reproduced from an original.

c.2. A document which appears to have been reproduced from an original is deemed to be original if the signature or authentication appears to be original.

d. A standby that requires presentation of a “copy” permits presentation of either the original or the copy unless the standby states that only a copy should be presented or stipulates the manner of disposition of all originals.

e. If multiples of the same document are requested, only one should be “original”……

Thus, on a plain ready of sub-rule 4.15 helps us to understand the distinction or otherwise between original documents and copies. Besides of course the explicit stipulations, as mentioned above, the guiding principle here is that this is determined by the intention of the person producing the document. If the issuer of the document [ like for e.g. the beneficiary] prints a document from his computer, he is assumed to be an original.

However, a copy will be accepted as original if it is authenticated [ stamped, signed, endorsed and signed et al]. Banks treat the following as copy:

  1. A document marked as copy
  2. A photocopy
  3. A facsimile

It is important to note that banks will not verify the authenticity of the document, except on the basis of a prima facie examination. This is left to the law to handle.

Sub-rule 4.15 (d), the beneficiary can present either the original or the copy, if the standby stipulates the presentation of a copy. Further, as mentioned above, if the standby stipulates the disposition of the originals, then only a copy can be presented. For e.g. if the standby stipulates that the original bill of lading should be sent to the applicant, a certification to this effect in the copy of the bill of lading should be sufficient. Obviously, a presentation of the original will be a discrepancy.

As per sub-rule e, where the standby requires that all documents presented must be original, then the term “duplicate” original or “multiple” originals should be used.

 

Identification of beneficiary/payee

In a standby LC, payment is made to the bank account specified in the claim or the covering note/letter accompanying the presentation. In some cases, the beneficiary may have assigned the proceeds to a third person.

In such a case, is the issuer required to identify the payee? This is dealt with in rule 4.13 of ISP 98, which states as below:

“except to the extent that a standby requires electronic presentation:

a. the person honouring the claim [ which could be either the issuing bank or nominated bank or confirming bank] has no responsibility to ascertain the identity of the person making the presentation or the identity of any assignee

b. payment to a named beneficiary, assignee, transferee, or successor in law and to the account number and bank stated either in the standby or in the cover note fulfills the obligation  of payment against a proper claim..

Under rule a above, any bank making the payment is not obliged to ascertain the identity of the person making the presentation, if the presentation is not an electronic presentation. In this instance, applicant will be responsible for any fraudulent claim. Further, the applicant is responsible to make good any authentic claim made, in addition to a fraudulent claim. However, the issuer is responsible, if the applicant becomes insolvent.

CHECKPOINT:

In several cases, one comes upon the following text, purportedly in an issued standby:

…. upon surrender of the original…. followed by the following:

This SWIFT is an operative instrument and no hard copy follows. In such a situation, what original does one surrender?

 

More about non-documentary conditions

The aspects related to non-documentary conditions are covered by Rule 4.11 of ISP 98, which states:

” A standby term or condition which is non-documentary must be disregarded whether or not it affects the issuer’s obligation to treat a presentation as complying or to treat the standby as amended or terminated”.

Terms or conditions are non-documentary if the standby does not require presentation of a document in which they are to be evidenced and if their fulfillment cannot be determined by the issuer from the issuer’s own sources or within the issuer’s normal operations”

END QUOTE

In commercial LCs, banks discourage the inclusion of conditions that require the presentation of a document over which the beneficiary has no control. Such credits are called “inoperative credits”.

In standby LCs, one often sees conditions which stipulate that the beneficiary’s presentation includes a document signed by the applicant. This means that the applicant controls the payment in all circumstances. In rare cases, the applicant’s document may be required. In all other cases, such conditions are best avoided. If however, the standby includes such a stipulation, the issuer or applicant cannot waive this condition; to render this condition ineffective, the standby has to be amended. 

This rule is intended to be cautionary for the beneficiary that such stipulations may cause non-payment by the applicant or the issuing bank. Also in such situations, issuer is not responsible in case of failure by applicant to deliver the stipulated document.

Although as a general rule, non documentary conditions are excluded, sometimes it is possible to correlate this condition to some other essential document. For e.g. the credit may stipulate that the goods should be shipped only in a Cypriot carrier. The bill of lading evidences this condition. In such a situation, this condition can be considered as a documentary condition.

 

 

 

 

 

Non documentary conditions: issuer obligations

Lets examine this a bit more. Assume that the contract stipulates that ‘goods must be of Chinese origin’ but omits country of export certification as one of the documents [ many a time, this happens because of inexperience or negligence on the part of the applicant].

At the time of examination of documents, the issuer is not obliged to check if the documents contain evidence to the effect that the goods are indeed of Chinese origin. Unless therefore the credit stipulates ‘certificate of origin’ as a document, the issuer cannot hold back payment, if the presentation is compliant in all other aspects.