The applicant is always the party that contacts the issuing bank to request the amendment. Typically the issuing bank grants the request of their customer and issues the amendment. So far it’s a pretty typical transaction.
Keep in mind most letters of credit are irrevocable, meaning that no change can be made to the LC without the agreement of all parties. When an amendment is made, the beneficiary has the right to either accept or reject the amendment in its entirety. However, nowhere is it stipulated just how long the beneficiary has to make this decision.
Let’s imagine that the amendment appears to restrain the beneficiary. For example, the amendment might reduce the dollar value of the LC, shorten the life of the LC by adding an expiration date, or change the tenor of the LC from a sight draft to a time draft with no mention of who would pick up the expense of accepting or discounting the draft.
The issuing bank needs to track these types of amendments to determine if the beneficiary has either accepted or rejected the change. If the beneficiary accepts the amendment, it can change the liability the applicant has with the LC.
If, for example, the amendment is trying to reduce the value of the LC and the beneficiary accepts the amendment, the issuing bank can reduce the exposure booked against the applicant’s line of credit. Until the issuing bank hears from the beneficiary, however, they can’t assume that the beneficiary will agree, and the bank must keep the full value of the LC booked against the applicant’s line of credit.
In order to speed up this process, the issuing bank may be tempted to add a clause to their amendment indicating that the beneficiary has a certain timeframe to either accept or reject the amendment. If the bank doesn’t hear from the beneficiary during the stipulated timeframe, it will automatically assume the beneficiary has agreed to the amendment.
From the issuing bank’s perspective, this arrangement is nice and tidy, as they can adjust their customer’s liability for the LC at the end of the timeframe without having to do any follow up if they haven’t heard from the beneficiary.
Unfortunately for the issuing bank and the applicant, this practice is seen as trying to change the nature of the irrevocable letter of credit, and may even be contrary to the laws in the country of the beneficiary. As a result the practice is strongly discouraged.