- 20 Marks
ITF – APR 2023 – L3 – Q5 – Medicare & Associates Documentary Credit Issue
State issuing bank's responsibilities under UCP 600 and measures to prevent non-payment in a documentary credit scenario for hospital equipment importation.
Question
You are the head of your bank’s Trade Department. Through the bank’s Corporate Department you received an application for the establishment of documentary letter of credit (L/C) from a customer. Medicare & Associates for the importation of hospital equipment from Germany. You supervised the issue of the credit in favour of the beneficiary and advised it through your euro correspondent, Commerzbank, Frankfurt. The credit amount of Euro 350, 000 was the total cost of the hospital equipment at CIF. Tema port. Upon receiving the L/C. Commerzbank immediately advised the beneficiary suppliers who organized the goods and shipped them under the CIF terms to Tema port. Documents were accordingly sent to the counters of Commerzbank for payment as the credit was under sight payment.
After thoroughly examining the documents, Commerzbank paid the beneficiary under the compliant presentation and sent the documents to your bank for reimbursement.
Upon receiving the documents, your examination team went through for any discrepancy but found none. Unfortunately, Medicare & Associates had no funds in their account to meet the payment of the reimbursement claim from Commerzbank.
Your bank had to reimburse Commerzbank immediately in accordance with Article 7 of UCP 600 – which is categorical on the Issuing Bank’s undertaking when it issues a documentary credit. You released the documents received from Commerzbank to customers and goods were cleared to their warehouse which was eventually sold to ultimate buyers. Strangely enough, Medicare & Associates could not pay your bank – citing Covid-19 problems as their reason for the failure to pay.
Medicare & Associates are now asking for the Euro 350,000 to be converted into a loan facility and be given time to pay.
Required i. State the undertaking/responsibilities of your bank with respect to UCP 600 of your bank which agreed to issue this documentary credit on behalf of its customer. (9 marks) ii. Indicate what could have been done to prevent this from happening? (11 marks)
[Total Marks 20]
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