A Red Clause Documentary Credit is a Documentary Credit with a special condition incorpora
ted into it that authorizes the Confirming Bank or any other Nominated Bank to make advances to the Beneficiary before presentation of the documents.
The clause is incorporated at the specific request of the Applicant, and the wording is de- pendent upon his requirements. The Red Clause Documentary Credit is so called because the clause was originally written in red ink to draw attention to the unique nature of this Documentary Credit. The clause specifies the amount of the advance authorized, which, in some in- stances, may be for the full amount of the Documentary Credit.
The Red Clause Documentary Credit is often used as a method of providing the seller with funds prior to shipment. Therefore, it is of value to middlemen and dealers in areas of commerce that require to a form. of pre - financing and when a buyer would be willing to make special concessions of this nature.
For example, it could be used by a wool importer in England to enable a wool shipper in Australia to obtain funds to pay the actual suppliers (either by direct purchase or through the wool auctions) by obtaining a loan from the Australian bank, either on an unsecured basis or against the security of interim documents. This would enable repayment of the loan, plus interest, from the proceeds due to the Australian Beneficiary when the wool was shipped and documents were presented in accordance with the terms of the Documentary Credit. If, however, the Beneficiary failed to ship the wool so as to repay the loan by presenting documents called for by the Documentary Credit, the Australian bank would have the right to demand repayment, with interest, from the Issuing Bank and that bank would have a similar right of recourse against the Applicant.
This kind of arrangement places the onus of final repayment on the applicant, who would be liable for repayment of the advances if the Beneficiary failed to present the documents called for under the Documentary Credit, and who would also be liable for all costs--such as interest or foreign exchange hedging-- incurred by the Issuing Bank, the Confirming Bank, if any, or any other Nominated Bank.
What does a Red Clause Documentary Credit mean？
A．It is a kind of Documentary Credit with a special condition incorporated into it that authorizes the Confirming Bank to make loans to the sellers prior to shipment.
B．It is a Documentary Credit without recourse as a "Confirming Bank" to the Issuing Bank, which clearly did not request or authorizes the bank to "add its confirmation".
C．It is a Documentary Credit with a special condition incorporate into it that authorizes the Confirming Bank or any other Nominated Bank to provide the Beneficiary with funds before presentation of the documents.
D．It is a Documentary Credit that may provide for automatic reinstatement immediately upon presentation of the specified documents.
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