In The Uniform Customs and Practice for Documentary Credits 500, letters of credit (L/Cs) negotiation is defined as the giving of value for bill(s) of exchange and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.
In a recent Hong Kong case, Cooperatieve Centrale, Raiffeisen-Boerenleenbank B.A. ("Rabobank") v Bank of China (2004), the court ruled that Rabobank did not qualify as a negotiating bank, mainly due to the following reasons:
1) Rabobank did not purchase the documents presented under the export L/C without recourse;
2) No payment was effected by Rabobank to the beneficiary under the export L/C when the documents were dispatched to the L/C issuing bank;
3) Rabobank did not credit the export L/C proceeds to the beneficiary's account but applied them directly for the settlement of the corresponding back-to-back L/C drawing; and
4) Rabobank booked an import loan rather than an export loan in settling the back-to-back L/C drawing.
The court held that the sum paid by Rabobank seven days after the dispatch of export documents was not derived from negotiation of the export documents but from an import loan to discharge its own pre-existing payment obligation under the back-to-back L/C.
1) Must negotiation be without recourse against the beneficiary?
We agree that by issuing a back-to-back L/C against the support of an export L/C, Rabobank assumed the credit/payment risk of the export L/C. However, Rabobank did not confirm the export L/C. Accordingly, it was not obliged to negotiate the presented documents without recourse. Whether negotiation is with or without recourse should in no way change the fact that Rabobank had negotiated the documents, since the negotiating contract is separate from and independent of the L/C contract under the L/C autonomy principle.
2) Does payment have to be made at the time of presentation?
Payment can be effected at any time after the dispatch of documents to the issuing bank, but before the issuing bank settles its payment obligations. Accordingly, a bank may choose to negotiate export documents after the issuing bank has accepted the documents in order to eliminate the discrepancy risk. Unfortunately, it appears that Rabobank failed to convince the court with adequate evidence to prove that it had negotiated the documents by undertaking an obligation to effect payment to the beneficiary instead of by immediate payment.
3) Must the negotiation proceeds be credited to the account of the beneficiary before their application?
The export L/C proceeds were paid by Rabobank seven days after the dispatch of the documents. Such proceeds were not actually credited into the beneficiary's account, but were used to settle the back-to-back L/C drawing directly.
Note that once negotiation has taken place, the negotiation proceeds form part of beneficiary's assets and it is at the beneficiary's discretion to dispose of the funds. There is no requirement that the negotiation proceeds must first be credited to the beneficiary's account before utilization. With respect, we are of the view that this point, together with the above two, were wrongly decided.
4) Should an export loan instead of an import loan be booked by Rabobank for the settlement of the back-to-back L/C drawing?
The booking of an import loan for the settlement of the back-to-back L/C drawing was strongly challenged by the defendant's counsel that Rabobank had not negotiated the export documents. As a proper practice, an export loan instead of an import loan should have been booked to reflect the nature of the transaction.
This case demonstrates that a bank may be scrutinized by the courts with respect to its application forms, agreements with clients, debit and credit advices, covering letters, loan booking entries and procedures in handling the relevant transactions. It is therefore vital that all the bank's procedures be properly documented. It is advisable that banks conduct a thorough review of their standard procedures, policies, guidelines, templates, internal and external documents in order to ensure that they are not only up-to-date but also satisfy the latest legal and banking requirements.