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 company
Buyer: 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 banks duty to reimburse the correspondent bank
Apart 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