Advising amendments to a beneficiary – www.bankingallinfo.com
Advising amendments to a beneficiary – www.bankingallinfo.com
Learning objectives This chapter describes the process of advising an amendment to a beneficiary, with or without confirmation, and the manner in which the beneficiary notifies acceptance or rejection of an amendment. By the end of this chapter, you should be able to: ◆◆ describe the considerations that are made by an advising, second advising or confirming bank when advising an amendment to a beneficiary; ◆◆ understand that these banks have the right to refuse to advise an amendment; and ◆◆ identify the requirements for the beneficiary to indicate whether it has accepted or rejected an amendment.
11.1 Considerations prior to advising an amendment
An advising or second advising bank undertakes no obligation to honour or negotiate and therefore it incurs no credit risk by advising an amendment.
The sole obligation of the advising bank or second advising bank, if it accepts the issuing bank’s instructions, is to satisfy itself as to the apparent the authenticity of the amendment (advising bank) or the advice (second advising bank) and to advise the amendment to the beneficiary.
An advising or second advising bank is also to ensure that it advises the amendment substantially in the form in which it was received. For example, the bank is to ensure that the details received by way of content of the amendment are forwarded to the beneficiary.
Information that is considered strictly bank-to-bank information need not form part of the advice to the beneficiary unless it may be appropriate to another nominated bank – that is, where the documentary credit is available with ‘any bank’.
11.1.2 The risks applicable to a confirming bank
A bank that adds its confirmation to a documentary credit is often the advising bank. Therefore the requirements to satisfy itself as to the apparent authenticity of the amendment and to convey the details of the amendment as received apply equally to a bank that has added its confirmation. See section 11.1.4 regarding further requirements and risks that are applicable to a confirming bank.
11.1.3 The application of UCP 600, article 9, in respect of an advising or second advising bank
UCP 600, article 9, contains some minimal rules that apply when advising an amendment, which relate to an advising bank and a second advising bank.
UCP 600, sub-article 9(a), provides as follows.
A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honor or negotiate.
It should be noted, however, that UCP 600, sub-article 9(e), does not require that an advising bank or second advising bank must advise an amendment.
e. If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received.
There is no requirement to indicate the reason(s) for not advising the amendment.
UCP 600, sub-article 9(b), provides as follows.
b. By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received.
Similarly, UCP 600, sub-article 9(c), makes the following statement.
By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.
Although the main requirement for an advising bank or second advising bank is to determine the apparent authentication of the amendment (advising bank) or the advising bank’s advice of an amendment (second advising bank), UCP 600, sub-article 9(f), provides for the advising of an amendment where authentication has not been possible.
If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice.
11.1.4 The application of UCP 600, articles 9 and 10, in respect of a confirming bank
Because it is likely that an advising bank will be the bank that adds its confirmation, similar provisions to those listed in section 11.1.3 will apply to a bank that adds its confirmation.
A documentary credit cannot be amended without the agreement of the confirming bank.
According to UCP 600, sub-article 10(b), a bank that has added its confirmation to a documentary credit is not obligated to add its confirmation to an amendment. In effect, this means that a bank is not required to extend its confirmation to an extension of the expiry date of the documentary credit or any increase to its amount, or to agree to any extension of its payment terms, for example from 90 days after date of shipment to 180 days after date of shipment.
Amendments that change criteria such as partial shipments ‘not allowed’ to ‘allowed’ or make changes to the data content of documents should not cause problems for the continuation of a bank ’s confirmation.
If a confirming bank decides not to extend its confirmation to an amendment, it may decline the advising of the amendment, in which case it must inform the issuing bank of its decision without delay. Such advice need not indicate the bank’s reason(s) for its decision. It should be noted that, in the event of the confirming bank refusing to advise the amendment, the issuing bank would still be bound by its terms and conditions.
Alternatively, UCP 600, sub-article 10(b), allows a confirming bank to advise the amendment without its confirmation. In this event, it must inform the issuing bank without delay and clearly indicate the status of the amendment in its advice to the beneficiary.
An amendment that a confirming bank advises to a beneficiary without comment is understood to bear the confirmation of the bank. As of the time at which it advises the amendment, the confirming bank is irrevocably bound by its terms and conditions.
11.2 Requirements prior to advising an amendment
11.2.1 Receipt of the amendment
As mentioned in Chapter 8, an issuing bank will generally send an amendment using a SWIFT MT7 type message, such as an MT707 or MT799. This will enable an advising bank to determine the apparent authentication of the message in accordance with UCP 600, sub-article 9(b). For an amendment sent by telex or in letter form, authentication will be achieved, respectively, by means of the agreement of the testing algorithm that will appear on the telex, or the examination of the signature(s) against specimens held on file.
For a second advising bank, an amendment will be received from the advising bank by means of a SWIFT MT707 message or telex, or in letter form. The second advising bank is required to determine the apparent authenticity of the advice that has been issued by the advising bank. This will be achieved in the manner just described.
11.2.2 Reviewing the amendment against an agreed credit facility
Even if an amendment does not relate to a documentary credit for which confirmation has been added, there may still be a need to review the main criteria against a credit facility in the name of the issuing bank.
If an amendment is extending the payment terms under a documentary credit that is available with the advising bank and/or second advising bank by deferred payment or acceptance, the bank is being asked to incur a liability against the issuing bank should it agree to act on the nomination of the issuing bank and incur a deferred payment undertaking or accept a draft drawn on it. Prior to advising such an amendment, the bank should check to ensure that the terms and conditions fall within the parameters of the facility, so that if the beneficiary were to ask the bank to act on its nomination, there would be a reasonable chance that it will agree.
When a documentary credit has been confirmed, any amendment that affects its amount (an increase), an extension of the expiry date or a change in payment terms should be reviewed against the issuing bank’s credit facility to ensure compliance with its terms and conditions. Depending on the structure of the facility, other forms of data may also need to be reviewed.
11.2.3 Reviewing the amendment against bank policy and regulatory requirements
When an amendment changes the routing of the goods, changes the description of the goods, or incorporates different or additional names of individuals or companies that are required to issue certain stipulated documents, these details should be checked against any regulatory requirements, such as sanction regulations that are applicable to the bank.
Bank policy should also be adhered to in relation to the type and nature of the transaction, for example the goods description and how it may be described in an amendment.
11.3 Reviewing the content of the amendment
There is no requirement under UCP 600 for an advising bank or second advising bank to review the text of an amendment to ensure that its terms and conditions appear to be in a workable form. It should be noted that even if a bank were to complete such a review and come to the conclusion that the amendment – and, as a result, the documentary credit – appeared to be in a workable form, it would be only the beneficiary that could definitively make that decision.
In this context, some advising and second advising banks will examine every detail and contact the issuing bank should there be a conflict of data or a need for clarification of an amended term or condition.
Some banks will focus only on certain changes, such as to the expiry date and place, the latest shipment date, the goods description, the form of availability, etc.
Others will not review the text at all, on the basis that the documentary credit, as amended, conveys no undertaking on the part of the advising bank or second advising bank.
When a bank or beneficiary carries out a review of an amendment, it is not only the obvious that should be reviewed.
A documentary credit requires the presentation of a bill of lading, evidencing that the goods are consigned to the order of the issuing bank, marked ‘notify applicant’ and ‘freight prepaid’. An amendment is received stating: ‘Delete bills of lading and insert forwarder’s certificate of receipt
(FCR). All other terms and conditions remain unchanged.’
This amendment is not a simple exercise of deletion and addition. An FCR is not a title document and therefore will not indicate that goods are received to the order of the issuing bank. There would be no need for a notify party to appear or even for an indication of freight payment, because no shipment has occurred. If the credit were to indicate an Incoterm, the requirement for a FCR would affect it.
In effect, the terms and conditions of an amendment should be reviewed against each term and condition of the documentary credit to ensure that there is no conflict or ambiguity caused by its wording. In the event of ambiguity or clarification being needed, the issuing bank should be contacted without delay.
11.4 Was the advice of issuance of the documentary credit made through a second advising bank?
If the documentary credit was advised to the beneficiary through a second advising bank, the advising bank must use the same bank to advise the amendment to the beneficiary.
A second advising bank is under no obligation to advise an amendment. If it decides not to advise an amendment, it must inform the advising bank of its decision without delay. Such advice need not indicate the reason(s) for the bank’s decision.
11.5 Preparing an amendment for advising to the beneficiary
Note: For the purpose of this section and section 11.6, reference to ‘advising bank’ includes confirming bank, as may be applicable.
An advising bank or second advising bank will usually maintain a standard form of advice that it uses to advise an amendment to a beneficiary. These will vary from bank to bank.
In most cases, the advice merely indicates that an amendment has been issued and that a copy of the amendment is attached, and there will be an indication of the charges that are due from the beneficiary, if any.
It should be noted that, in its advice of the amendment, an advising bank or second advising bank is not required to translate any of its text or to interpret any technical terms (UCP 600, article 35).
An advising bank or second advising bank may incorporate its own standard wording in relation to certain matters relating to the content of the amendment including, but not limited to, sanction clauses.
If the amendment has been issued in respect of a documentary credit that a non-bank financial institution issued, the advising bank or second advising bank should bring this fact to the attention of the beneficiary.
11.6 Transmitting an amendment to the beneficiary
In most cases, the advising bank or second advising bank will advise the beneficiary of details of the amendment in hard copy. This will either be sent to the beneficiary by mail or courier, or the beneficiary will collect it from the offices of the bank. The latter is often the option chosen when an advising bank or second advising bank wishes to collet its fees in advance – that is, where the documentary credit is available with ‘any bank’ and the beneficiary is a non-customer of the advising bank or second advising bank.
Some banks now provide electronic delivery of the advice of the documentary credit, and any amendments thereto, to their clients by means of their front-end systems.
In relation to the actual transmission of the amendment or an advice thereof, UCP 600, article 35, states as follows.
A bank assumes no liability or responsibility for the consequences arising out of delay, loss in transit, mutilation or other errors arising in the transmission of any messages or delivery of letters or documents, when such messages, letters or documents are transmitted or sent according to the requirements stated in the credit, or when the bank may have taken the initiative in the choice of the delivery service in the absence of such instructions in the credit.[ … ]
A beneficiary should review the amendment upon its receipt to determine whether its content is as expected or requested. If not, the beneficiary should contact the applicant and request a further amendment. It is advisable that only when the documentary credit is in an acceptable form should the beneficiary commence manufacture, production or shipment of the goods, or provide the required service or performance.
11.7 Notifying acceptance or rejection of an amendment
UCP 600, sub-article 10(c), provides as follows.
The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment. The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment the credit will be amended.
Documentary credit practice recognises that the consent of the beneficiary is required for an amendment to be effective. It is a fact that beneficiaries rarely signify their consent prior to the presentation of documents. An indication of acceptance or rejection is generally determined by the status of the presented documents.
For example, a presentation for the full amount of the documentary credit will:
◆◆ indicate acceptance if it complies with the terms of the documentary credit and any previously unaccepted amendment(s); or
◆◆ indicate rejection if it complies with the terms of the documentary credit, but not with any unaccepted amendment.
A determination of acceptance or rejection, by means of the presentation of documents, can become somewhat clouded when partial shipments are effected, with questions raised such as whether the amendment applies only to a later shipment. In this respect, it should be noted that UCP 600, sub-article 10(c), includes wording to the effect that the documentary credit is amended only as of the moment at which a presentation is made that complies with the documentary credit and any unaccepted amendment(s), absent any prior notification of the beneficiary.
It is not always the case that acceptance or rejection of an amendment can be determined by means of an examination of the presented documents. Some amendments may have no bearing on the content of the stipulated documents. In such circumstances, a bank may be required to contact the beneficiary and obtain an advice of the status of the amendment, prior to concluding the examination process.
UCP 600, sub-article 10(e), indicates as follows.
Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment.
If some parts of an amendment are not acceptable, a beneficiary must decide whether to reject the amendment in its entirety and seek reassurance in an acceptable form, or to accept the amendment, but seek a further amendment that rectifies the anomalies in the first amendment.
In order to hasten the acceptance or rejection process, some banks have been known to incorporate clauses such as the following into their amendments.
Acceptance or rejection of this amendment must be notified by the Beneficiary to us (Issuing Bank) through the Advising Bank via telex/SWIFT within 7 working days after the date of this amendment, otherwise the amendment will come into force.
This amendment must be rejected in writing within 14 days of its date, and if not rejected within that time, this amendment will be deemed to have been accepted.
UCP 600, sub-article 10(f), counteracts the use of such clauses.
f.A provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded.
Should a beneficiary remain silent on the matter, this cannot be interpreted as either acceptance or rejection, particularly because UCP 600 allows the beneficiary to signify acceptance or rejection up to, and including, the point at which documents are presented. The presentation of documents may indicate the beneficiary’s acceptance or rejection in the absence of any prior notification.
1. A confirming bank is irrevocably bound by an amendment at what time?
A. When it approves the request of the issuing bank
B. When it advises the amendment
C. When the beneficiary provides its consent
D. When the beneficiary receives the amendment
2. Which of the following is true if a confirming bank decides not to add its confirmation to an amendment?
A. It must advise the amendment to the beneficiary without its confirmation.
B. It must nevertheless advise the amendment to the beneficiary with its confirmation, as it confirmed the documentary credit.
C. It may advise the amendment without its confirmation.
D. It may contact the issuing bank and advise that its confirmation no longer applies to the documentary credit.
3. ‘An amendment contains three changes to the terms and conditions of the documentary credit. The beneficiary may accept any combination of those changes and any unaccepted changes will be considered as disregarded and the issuing bank will be bound only by the accepted amendment(s).’ Is this statement true or false?
4. ‘A documentary credit indicates that the draft accepted by the nominated bank is to be discounted and that the discount charges are for account of the applicant. An amendment is issued stating that these charges are now for account of the beneficiary.The beneficiary has not provided notification of acceptance or rejection prior to its presentation of documents. The covering letter of the beneficiary is silent with regard to the amendment. At that point in time, the amendment should not be considered to have been accepted.’ Is this statement true or false?
5.‘When an advising bank advises an amendment to a beneficiary without any comment, it is to be considered that the amendment is genuine.’ Is this statement true or false?
Source: Guide to Documentary Credits-Gary Collyer Page-149-159