Collections

The collection mechanism provides for the presentation of commercial, financial or title documents to the goods to the buyer by a bank entrusted to make collection on behalf of the seller. Upon payment or acceptance, the documents are delivered to the buyer who may then proceed to make commercial use of the goods.

The parties to the collection process are the "principal" (seller) who is the party entrusting the handling of a collection to a remitting bank; the "collecting bank" which is any bank, other than the remitting bank, involved in processing the collection; and the "presenting bank" which is the collecting bank making presentation to the drawee (buyer). The rules and procedures governing collections by banks are codified under the I.CC. Uniform Rules for Collection (URC 522) in effect on January 1, 1996.

Unlike the letter of credit transaction, neither the remitting nor collecting bank engages its own liability to pay to the principal nor the drawee. The funds collected do not belong to the collecting bank, nor to the remitting bank. Nor do the goods enter into the possession or title of either bank.In the event the collection is not successful, the banks have no liability for the buyer’s non-payment or non-acceptance.

Documents sent for collection are accompanied by a collection instruction indicating that the collection is subject to URC 522. Banks are only permitted to act upon the instructions given in such collection instruction and do not examine documents in order to obtain instructions.

Unless otherwise authorised in the collection instruction, banks disregard any instructions from any party/bank other than the party/bank from whom they received the collection. Banks have no obligation to take any action in respect of the goods to which a documentary collection relates, including storage and insurance of the goods even when specific instructions are given to do so.

As is the case of processing letters of credit, banks assume no liability for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any document, or for the general and/or particular conditions stipulated in the document or superimposed thereon. Nor do they assume any liability for the description, quantity, weight, quality, condition, packing, delivery, value or existence of the goods represented by any document, or for the good faith or acts and/or omissions, solvency, performance or standing of the consignors, the carriers, the forwarders, the consignees or the insurers of the goods, or any other person.

Rather than looking to the bank as the neutral paymaster, the principal or seller looks to its own purchaser for payment. The collection instruction gives specific instructions regarding protest   in the event of non-payment or non-acceptance. In the absence of such specific instructions, the banks concerned with the collection have no obligation to have the document protested or subjected to other legal process for non-payment or non-acceptance.

Checking Documents

The object of the issuing bank in examining the documents forwarded to it is to check that the documents presented by the beneficiary to the confirming bank are in order and compliant. This is clear from the structure of UCP 600 and the nature of the relationship between the issuing and the confirming bank. The reimbursement obligation under a credit is not subject to the receiving of documents by the issuing bank but only to a compliant presentation being made to the nominated bank: Societe Generale SA v Saad Trading & Anor [2011] EWHC 2424 (Comm) (05 October 2011)

Letters of Credit

Drafts as Required Documents

Where the drafts are included in the letter of credit in the list of documents to be presented by the beneficiary to the confirming bank and are so presented, the duty of the confirming bank on the true construction of UCP 600, and in particular of Article 7(c), is to forward them to the issuing bank. The language of Article 7(c) does not permit any exception. Further, to permit the nominated bank a discretion to decide not to forward a listed document because it would appear to serve no useful purpose is contrary to the principle of strict compliance which permeates the law of documentary letters of credit; see, for illustrations of the doctrine of strict compliance concerning drafts ( The Lena [1981] 1 Lloyd's Reports 68 at p.75 and The Messiniaki Tolmi [1986] 1 Lloyd's Reports 455 at p.457).

False Carriage Documents 

Carriers are often pressured to issue false documents. The document may be false with respect to its date, or with respect to the apparent order and condition of the cargo. Some carriers have, at their folly, issued such documents against letters of indemnity.  The case of Kuehne + Nagel Ltd. v. Agrimax Ltd., 2010 FC 1303 (CanLII) discussed the issue of the bill of lading which is a multi-faceted document. It is not the contract of carriage, but may, and usually does, evidence its terms. It may, or may not, be a negotiable instrument. It contains various representations on behalf of the carrier, such as the apparent order and condition of the goods, whether freight was pre-paid or is owing, and the date when the cargo was “received for shipment”, or “shipped” on board as the case may be. Under the Hague-Visby Rules, Schedule I to the Marine Liability Act, a shipper may simply demand a “received for shipment” bill of lading. However, and irrespective of whether or not it demanded a “received for shipment” bill of lading, it may also demand a “shipped” bill of lading once the cargo is loaded on board the carrying ship.  In United Baltic Corporation, Ltd. v. Dundee, Perth & London Shipping Company, Ltd. (1928), 32 Ll. L.R. 272 at page 272, the court held: “The practice of issuing clean bills of lading when goods are damaged is very reprehensible. It leads to trouble, and the people who do it ought to suffer trouble.”

Letters of Credit as Security

Where a statute permits an administrative official to determine what mode of security is acceptable, the official is entitled to refuse a letter of credit submitted as security. In the event the letter of credit is conditional and does not otherwise comply with the requirements of the statutory security, the court certainly will not issue a mandamus ordering the acceptance of the credit. In Tre Maiali Fashion Group Inc. v. Canada (Border Services Agency), 2010 FC 1261 (CanLII), in regard to the Customs Act, R.S.C. 1985, c. 1 (2^nd Supp.), the court found it was not the letter of credit that was excluded outright, at all, but the nature of its provisions. The deficiencies included:

(a) inadequate wording to protect the total amount owing, including interest;

(b) reference to an “agreement” between the CBSA and the customer (the Applicant), when no such agreement has been entered into or proposed by the Applicant;

(c) being time-limited, with an expiry date of March 31, 2010; and

(d) no right to call-in the credit in the event that TD Canada Trust declines to issue a new letter upon its expiry.

Introduction
A letter of credit is an undertaking by an issuer, usually a bank, to pay a beneficiary an amount of money, which is debited to the account of an applicant [the customer of the bank] upon the fulfillment of any documentary requirements set out in the letter of credit. If there are no documentary requirements, the letter of credit may be termed a standby credit.

Letters of credit are often stipulated to be subject to the Uniform Customs and Practice for Documentary Credits (UCP), 2007 Revision, I.C.C. Publication no. 600. In the United States of America, letters of credit are often stipulated to be governed by the Article 5 of the Uniform Commercial Code.

Judgments of the courts on letters of credit matters are instructive in their uses and interpretation.

Litigation
A letter of credit posted in place of a lien falls if the lien falls. John Barlot Architect Ltd. v. 413481 Alberta Ltd., 2010 ABCA 51 (CanLII)

Delivery of a certificate to the debtor company as a prerequisite to drawing on a letter of credit has been stayed as a proceeding against a CCAA debtor: Nortel Networks Corporation (Re), 2010 ONSC 1304 (CanLII)


Use in lease
Paragraph 27(c) of the Lease also has no application to what is requested by the Trustee. Under paragraph 27(c) of the Lease, the Tenant may, with prior notice to the Landlord, assign the Lease and be released from all of the terms, covenants and conditions of the Lease if the assignee covenants directly with the Landlord to be bound to all terms, covenants and conditions of the Lease in place of the Tenant and the assignee provides the Landlord with a unconditional and irrevocable letter of credit in the sum of $250,000.00, which shall be replaced on a yearly basis. Canadian Petcetera Limited Partnership v. 2876 R. Holdings Ltd., 2010 BCSC 98 (CanLII)


Certificate of authenticity
Such invoices as were disclosed were the subject of paper of Tlais Trading Company Limited shows the price due as $ 30 per case. That is the price used in the letter of credit for the relevant goods but the customer account statement refers to $ 60 as the price per case. Either the customer account statement the notice of challenge to which I referred in paragraph 586. One set of invoices on the is wrong or the price was not wholly paid by the letter of credit . In that event the certificate of authenticity stating that the amount invoiced is the full price is misleading. Gallagher International Ltd v. Tlais Enterprises Ltd [2008] EWHC 804 (Comm)

Timely provision of LC
If the test is whether an acceptable letter of credit was opened within such a time as would enable the vessel to load the contractual quantity within the shipment period, then, if one is to take the loading rate taken in the contract for the purpose of calculating laytime, there was plenty of time for loading if the relevant date is 21st September. If the relevant date is 26th September then there was just sufficient (17,500 m.v. @ 175 m.t. per hour = 100 hours = 4 days and 4 hours). AG v Traxpo Enterprises PVT Ltd [2010] EWHC 113 (Comm) (01 February 2010)

Fraud- Sham
An elaborate but simple scheme involves defrauding the confirming bank. An issuer issues a letter of credit for a sizeable and inflated amount to a purchaser of goods which is confirmed by a confirming bank. The purchaser pays for the goods in cash at a deep discount without advising the confirmer. The seller, who has now been paid, presents the required documents to the confirmer, which pays the face amount of the credit. When the confirmer seeks reimbursement from the issuer, it finds the issuer is in receivership. The scheme involves the premeditated conspiracy of the purchaser and the issuer, or a devious employee within the issuer’s credit department.

Wrongful Honour

A claim in damages against a bank for wrongful honour of a credit must be brought by the party who suffered the damages. In many jurisdictions, the rule in corporate law is that a shareholder cannot claim damages in his own right where the damages have been suffered by the corporation. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out.

Security
While the Uniform Customs may not prohibit a non-bank entity from issuing letters of credit under its rules, acceptance by beneficiaries of non-bank credits is a matter of solvency of the issuer. One court has ordered security, requiring the defendant to deposit with the court an irrevocable letter of credit in place of the bank draft on file, provided the letter of credit is issued by a chartered bank: Kramer Ltd. v. R.M. of Invermay No. 305, 2009 SKQB 185 (CanLII); Fraser v. Morrison et al., 2009 MBQB 185 (CanLII)

Recourses

Where the letter of credit has been illegally obtained, or given to support an agreement which has not been signed, or issued on a condition which has not been fulfilled, the court may order the original of the letter of credit returned either to the plaintiff claiming recovery, or to the issuer for cancellation: Salman v. 1152030 Ontario Inc., 2009 CanLII 26360 (ON S.C.)