DUTY OF ISSUING BANK IN LETER OF CREDIT TRANSACTION

Issuing bank is one of the core parties in a letter of credit transaction. Letter of credit is opened and finalized by the issuing bank.

I - Duty of issuing bank to applicants

1. The duty to issue an efficacious credit.As we know , the buyer will approach a bank to request the opening of a documentary credit in favour of the seller, on the terms based on the contract of sale. If the bank agrees, a contractual relationship comes into existence between the buyer and the bank. In the agreement, the bank, which is known as the issuing bank, as agent of the buyer, agrees to issue the type of credit requested, in the time requested and to arrange payment against conforming documents. => So, the primary duty that the issuing bank owned to the applicant is the duty to issue an efficacious credit.

2. The duty to receive and examine the required documents and make payment in accordance with the credit's stipulation.

Article 14 (a) of UCP 600 states: “ …the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation". This is also regarded as "the doctrine of strict compliance".

Secondly, An issuing bank is irrevocably bound to honour as of the time it issues the credit. ( UCP 600 article 7)=> This means if issuing bank agree to open letter of credit, they have to make payment

II- Duty of issuing bank to beneficiary

1. The doctrine of strict compliance and standard for examining the documents

The doctrine of strict compliance is the principle that the issuing bank deal with the document, which means that the documents presented by a beneficiary must on their face strictly comply with the terms of the credit.

The documents can be examined include: commercial invoice, bill of lading, warranty of title, letter of indemnity …

2. The issuing bank's duty to raise all discrepancies in a reasonable time

After receiving the documents under the credit, the issuing bank firstly must examine the documents according to "the doctrine of strict compliance", secondly, it must decide what to do if discrepancies are found.

According to UCP 600 article 14 “ …the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation”

- Case studies Seller : a French companyBuyer: a Shanghai company - Oct : a contract of selling 200 computers , payment : irrevocable L/c , delivery :

December at French Port- Nov 15 : Bank of China made a $200,000 irrevocable L/c according to the instruction

of buyer- Dec 20 : seller load cargo on board and got all required documents sent to French

bank for negotiation - Upon review : documents were consistent , bank make payment for the seller - 10 days later: cargo sank into the sea due to heavy storm , buyer know the loss and

then bank of china intend to reimburse the negotiating bank to pay the purchase price did the issuing bank have obligation to receive money back ? no , bank is only responsible for document examination , as long as the documents

comply with terms of credit , bank is required to make payment

III. The issuing bank’s duty to reimburse the correspondent bankApart from the duties owned to the applicant and the beneficiary, the issuing bank also has the duty to reimburse the correspondent bank, which is also on the agent contract. (Art 7c – UCP 600)

IV. Benefits and Risks

1. Benefits

- Opening a letter of credit is a commercial decision. Banks issue letters of credit in order to make more money. An issuing bank charges letter of credit fees from the applicant against services it offers and risks it takes.

2. Risks

- Fraud risk: The risk of issuing bank can come from discrepancies on the credit. Those discrepancies may come from the result of fraudulent document, and cause big damage to the bank and beneficiary. Art. 34 of UCP 600 contain a disclaimer for the risks of bank. However, banks can be liable for losses and damages, if a bank does not fulfill its obligation to examine the documents in a reasonable way.

- Insolvency of the applicant: The applicant can go bankrupt and cannot reimburse for issuing bank

- Legal risk: Possibility that performance of a Documentary credit maybe disturbed by legal action related directly to the parties and their rights and obligations under the documentary credit