MEMO: Handling of Drafts and Documents under LC with Draft Drawn on Nominated Bank

Subject: LC issued by K. BANK – Refusal to Confirm and Subsequent Presentation

From: Mr. Old Man

Date: 4 June 2025

Background

Bank N received a letter of credit (LC) from K. BANK with the following terms:

• 41A: Available With Bank N By Negotiation
• 42A: Drawee: Bank N
• 42C: Draft: At Sight
• 47A: T/T Reimbursement is Not Allowed
• 49: Confirmation Instruction: Confirm
• 78: All documents must be mailed in one lot to K. BANK

Bank N decided not to confirm the LC and notified K. Bank accordingly. The beneficiary had also not requested confirmation.

The following questions arise:

1. Must the draft still be drawn on Bank N and sent to it, while the rest of the documents are mailed to K. Bank?
2. If the beneficiary later requests discounting, is Bank N obliged to negotiate?
3. Should the draft be included when forwarding documents to K. Bank?

1) Draft Drawn on Bank N under a Negotiation LC

While the LC states that it is available by negotiation with Bank N and that the draft is to be drawn on Bank N, this arrangement technically contradicts the definition of “negotiation” under UCP 600 Article 2, which reads:

“Negotiation means the purchase by the nominated bank of drafts drawn on a bank other than the nominated bank…”

Accordingly, a draft drawn on Bank N (which is also the nominated bank) does not conform to the UCP definition of negotiation.

However, in practice, such LCs do exist—especially in cases where the nominated bank is also requested to confirm. In such cases, the confirming bank is generally expected to honor (pay) the draft, rather than negotiate it, if it accepts the confirmation.

Note:

If the draft is drawn on the confirming bank under a negotiation LC, and the bank has confirmed, then it must pay, not negotiate.

If the bank does not confirm, it has no obligation to pay or negotiate.

2) Right to Refuse Negotiation after Refusing to Confirm

According to UCP 600 Article 8(d), if a bank is requested to confirm an LC but chooses not to do so, it must inform the issuing bank without delay and may proceed to advise the LC without confirmation.

Furthermore, UCP 600 Article 12(a) states:

“Unless a nominated bank is the confirming bank, an authorization to pay, incur a deferred payment undertaking, accept drafts or negotiate does not impose any obligation on that nominated bank to do so, except when it has expressly agreed and communicated that agreement to the beneficiary.”

Since Bank N has refused to confirm, it is not bound to negotiate or pay under the LC—even if it is the drawee.

Therefore, Bank N has the right to refuse discounting the draft upon presentation.

3) Should the Draft Be Sent to K. Bank with the Documents?

Ideally, if the LC is to be complied with strictly and Bank N chooses not to act on its nomination, all original documents, including the draft, should be forwarded to the issuing bank (K. Bank).

Even though the draft is drawn on Bank N (which no longer intends to act), sending the full document set ensures compliance with the LC’s instructions under field 78.

Practical Note:

Even if the draft seems redundant or inconsistent with UCP 600, the issuing bank may not reject the presentation solely for lacking a draft drawn on the nominated bank. Better to include the draft than risk incompleteness.

Conclusion

• Draft drawn on Bank N under a negotiation LC is technically incorrect under UCP 600 but is often accepted in practice.
• Bank N, having refused to add its confirmation, is under no obligation to negotiate or pay.
• It is prudent to forward the entire document set, including the draft, to the issuing bank for settlement.
• As noted in the ICC Guidance Paper on the use of drafts under documentary credits, it is recommended that the practice of requiring a draft under a documentary credit available at sight be curtailed—particularly sight drafts drawn on the issuing bank, confirming bank, or a nominated paying bank—unless justified by a specific commercial, regulatory, or legal requirement.

Best regards,

Mr. Old Man

LC & Trade Finance Consultant