Home Uncategorized PAYMENT LC Vs NEGOTIATION LC

PAYMENT LC Vs NEGOTIATION LC

6 min read
10
0
10,421

QUERY FROM BAHAR

Dear Mr. Oldman,
I live and work in middle east and have some problems on opening LC. Kindly provide me with differences of PAYMENT and NEGOTIATION LCs.
Thanks a million.

Bahar

———————————–
COMMENT FROM MR. OLD MAN

Dear Bahar,

Thanks for using Mr. Old Man’s blog.

I have answered the same question as yours in www.letterofcredit.com and also posted it in my blog under tag “LC Availability”. For your convenience, I cite hereunder such an answer with some minor modifications.

An LC may be stipulated available by payment, available by negotiation, available by acceptance or available by deferred payment.

LC available by (sight) payment does not require sight drafts to be presented and normally the payment is to be effected at the counter of the issuing bank or at its nominated paying bank upon receipt of the complying documents. The beneficiary under LC available by payment normally may not obtain the payment in advance by negotiating (selling at a discount) the documents at his bank.

Different from LC available by payment, LC available by negotiation allows the beneficiary to receive the payment by negotiating the sight drafts and documents at a nominated negotiating bank which is normally located in his country. The negotiation may be effected on a with or without recourse basis. However, under a confirmed LC, the confirming bank must negotiate the documents on without recourse basis.

Acceptance LCs and deferred payment LCs are usance LCs. The difference is that the acceptance LC requires a time draft, whereas the deferred payment LC does not.

Under acceptance LC, the beneficiary may receive the payment before the draft is due by discounting the accepted draft at its bank or discounting it on forfaiting markets (as the accepted draft is a financial instrument which can be transferable).

Under deferred payment LC, after his presentation of complied documents, the beneficiary receives a deferred payment undertaking incurred by the issuing bank or its nominated bank. Deferred payment undertaking is not largely accepted as a financial instrument, therefore, normally the beneficiary may not discount the deferred payment undertaking. However, in some cases, the beneficiary can use the deferred payment undertaking incurred by the issuing bank or nominated bank as a security for the advance given by his banks.
UCP 500 was silent on negotiating/discounting deferred payment undertakings. The dispute between Banco Santander and Banque Paribas in connection with the discounting of a deferred payment undertaking led to the change in UCP. Under UCP 600 Art. 12 (b), the nominated bank is allowed to purchase (buying at a discount) its own deferred payment undertaking.

Some advices:

If you are the seller/beneficiary, you should choose LC available by negotiation or by acceptance as you may obtain the payment in advance by negotiating the drafts and/or documents with the nominated bank that are normally located in your country. You can also discount the draft that was accepted by the issuing bank.

If you are the buyer/the applicant, you should request for LC available by payment or deferred payment. These types of LC, in some scenario, may help you avoid paying for the fraudulent documents as said, the documents are normally required to be presented to your bank’s counter (the issuing bank).

Hoping the matter has been clear.

Best regards,
Mr. Old Man (Nguyen Huu Duc) …

Load More Related Articles
Load More By Mr Old Man
Load More In Uncategorized

10 Comments

  1. Letter of Credit

    May 2, 2016 at 4:01 pm

    Dear Mr.Oldman,

    It’d be your kindness if you could explain the meaning of “Negotiation”

    According to Article 2,
    Negotiation means the “PURCHASE” by the nominated bank of drafts (drawn on a bank other than the nominated bank “And/Or DOCUMENTS” under a complying presentation, by “ADVANCING” or “AGREEING TO ADVANCE” funds to the beneficiary “ON” or “BEFORE” the banking day on which reimbursement is due to the nominated bank.

    My question are :
    1) What is the difference between “PURCHASE” and “PREPAY” ?
    2) Does the clause……”And/Or DOCUMENTS”….. indicate that Negotiation can be made by presentation of documents alone without draft ?
    3) What is the difference between “ADVANCING” or “AGREEING TO ADVANCE”… ?
    and how is it related to….”ON” or “BEFORE”…?
    4) Can a “Term Draft” be presented for “Negotiation” ?
    (because there is no restriction as to the terms of draft stipulated in the definitions of Negotiation)

    Thank you in advance for your kind advice.

    Sanchai

    Reply

    • mroldman

      May 2, 2016 at 9:42 pm

      Hi,

      Interesting questions!

      My view is as follows:

      1) Difference between purchase and prepay
      As you may know, “purchase” is used in the definition of negotiation where the nominated bank is authorized to buy drafts (drawn on a bank other than the nominated bank) and/or documents by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank, whereas “prepay” is used in sub-article 12 (b) where the nominated bank is authorized to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.
      So, “purchase” is used with regard to an action of negotiation by the nominated bank of drafts and/or documents, whereas “prepay” is used with regard to an action of payment in advance by the nominated bank of a draft accepted or a deferred payment undertaking incurred by that nominated bank. However, it is noted that the term “purchase” can also be used with regard to action of payment in advance by the nominated bank of a draft accepted or a deferred payment undertaking incurred by that nominated bank.

      2) Negotiation of documents without drafts
      There was ever a view that negotiation is negotiation of drafts and not documents because drafts are negotiable instruments while documents are not. However, this view has been changed. In LC transactions, negotiation may include negotiation of (1) drafts and documents and (2) documents (where LC does not require presentation of drafts – rarely).

      3) Advancing and agreeing to advance
      On or before is used to signify that payment in advance can be done by a particular date. It can also be done prior to that date. It is understood from the definition of negotiation that advancing is an action/performance of payment in advance, whereas agreeing to advance refers to an agreement to advance, which may take place in the future but not later than the day the reimbursement is due to the nominated bank.

      4) Negotiation of term drafts
      The term “discount” would be used to refer to an action of prepayment of term drafts, whereas the term “negotiation” would be used to refer to an action of purchase of sight drafts and/or documents. However, in practice these two terms can be used interchangeably without causing misunderstanding.
      Language is arbitrary. What it is called is not important.
      Sorry but English is not my native language. I hope you understand.

      Kind regards,
      Mr. Old Man

      Reply

      • Sanchai

        May 3, 2016 at 1:12 pm

        Dear Mr. Oldman,

        Thank you very much for your kind suggestion.

        Sorry for inconvenience, and please allow me to clarify my question no. 4.

        I intend to ask whether the draft can be drawn at “xx days after shipment date” (Which I called it as “Term draft”) ?
        (because definitions of Negotiation does not clearly mention whether the draft must always be drawn at Sight)

        Please correct me if I’m wrong, I understand the the terms “Advancing” is intended to apply for the case of negotiation by nominated bank of “draft drawn at Sight” while the terms “Agreeing to advance” is intended to apply for the case of negotiation by nominated bank of “draft drawn at xx days after shipment date”

        Sorry for inconvenience and hope to have you kind suggestion as always.

        Sanchai.

        Reply

        • mroldman

          May 3, 2016 at 5:48 pm

          Hi,

          You have good reason to believe so because in practice in addition to 4 main types of LC (which are (1) LC available by negotiation of (sight drafts); (2) LC available by payment (at sight, without drafts); (3) LC available by deferred payment (without drafts); and (4) LC available by acceptance of (term drafts)) some banks would issue LC available by negotiation of term drafts. But I don’t think this is the initial intention of the UCP Drafters.

          Kind regards,
          Mr. Old Man

          Reply

  2. Thanh thanh

    December 18, 2016 at 8:18 pm

    Dear Mr Old Man,
    i received 1 L/C with the details as follows:
    Sender: ABC BANK singapore brancb
    Receiver: XYZ BANK IN VIETNAM
    expiry date: 1/1/2017 in vietnam
    Available with ABC BANK SINGAPORR BRANCH by negotiation.
    .
    Dear Mr Old Man, in the normal L/C: avalaible with any bank in Vietnam by negotiation or avalaible with a named bank in vietnsm by negotiation, thr ben can present docs to any bank or that named bank and can apply for negotiation at those bank. But in this case, the bank nominated is in singapore, i have not understand the way of presentation. Please kindly help me to clarify this matter. Thank you so much!

    Reply

    • mroldman

      December 19, 2016 at 8:08 am

      Hi,

      I guess it is an MT710 (Advice of a Third Bank’s or Non-Bank’s Documentary Credit). This message is sent by an advising bank which has received from the issuing bank or the non-bank issuer, to the bank advising the beneficiary or another advising bank.

      So, it is understood in this case that ABC Bank Singapore is acting both as the advising bank and as the nominated negotiating bank and that XYZ Bank Vietnam is acting as another advising bank.

      The beneficiary may present the documents via a bank in Vietnam (e.g., XYZ Bank Vietnam) to ABC Bank Singapore for negotiation. The bank in Vietnam is acting as a presenter making the presentation on behalf of the beneficiary.

      Kind regards,
      Mr. Old Man

      Reply

  3. Shaun

    November 5, 2017 at 5:07 pm

    Hi Mr Old Man,

    Which type of calculation for LC acceptance fee is correct? Please kindly advise.

    0.125% = bank commission
    140 days= from LC expiry date to Maturity date

    Invoice Amount x 0.125% x 12/360 x 140

    Or

    Invoice Amount x 0.125% x 140/360

    Thanks.

    Reply

    • mroldman

      November 6, 2017 at 9:27 am

      Assuming the banking commission is per year, the acceptance fee will be Inv amount x 0.125% x 140/360

      Reply

  4. Pau

    December 11, 2020 at 12:11 pm

    Hi Mr. Old Man

    What is your suggestion on how to proceed with an Issuing Bank that does not honor a, By Payment-Not Confirmed L/C on Complying Documents
    Thanks

    Reply

    • Mr Old Man

      December 13, 2020 at 8:25 am

      That should be settled by ICC International Court of Arbitration or by the local court in the issuing bank’s country.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Check Also

ĐẠP XE THĂM ĐỊA ĐẠO KỲ ANH

Địa đạo Kỳ Anh trước đây thuộc xã Kỳ Anh (nay là xã Tam Thăng) cách thành phố Tam Kỳ 7 km …