When Can a Non-Nominated Bank Negotiate? Risks and Realities for Bank B in Documentary Credit Transactions

In the world of documentary credits, the terms of availability play a critical role in determining which banks are authorized to act under the credit. A common point of confusion arises when a beneficiary chooses to present documents to a bank that is not nominated in the LC — raising the question: Can that bank negotiate the documents? And if so, at what risk?

In the following inquiry, a practitioner seeks clarification on two scenarios involving the presentation of documents to Bank B, which is not named in Field 41A of the LC. Mr. Old Man, our ever-reliable expert, provides practical insights into the rules, risks, and responsibilities involved.

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QUESTION

Dear Mr. Old Man,

We would be grateful if you could kindly clarify the following situation:

• Scenario 1:

The LC states:

Field 41A – Available with issuing bank by payment

• Scenario 2:

The LC states:

Field 41A – Available with Bank A by negotiation

In both cases, the beneficiary presents documents to Bank B.

Questions:

1. May Bank B negotiate the documents in either scenario?
2. What risks would Bank B face if it chooses to negotiate the documents?

Thank you and best regards,

T.T.

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ANSWER

Dear T.T.,

Thank you for your thoughtful question. Here’s how I see it:

1/ Can Bank B negotiate the documents in both scenarios?

Scenario 1:

Since the LC is available with the issuing bank by payment, a complying presentation must be made to the issuing bank, which alone effects payment under the LC. No other bank—including Bank B—is authorized to negotiate the documents. Therefore, Bank B cannot negotiate under the LC.

Scenario 2:

The LC is available with Bank A by negotiation. In this case, Bank A is the nominated bank and may choose to negotiate documents if they comply. Bank B, however, is not nominated, so it is also not authorized to negotiate under the LC.

In both scenarios, Bank B may still choose to discount or advance funds to the beneficiary, but this would be outside the scope of the LC, and at its own risk. Such an action is not considered “negotiation” under UCP 600 Article 2, since only a nominated bank may negotiate.

2/ What risks may Bank B be exposed to?

If Bank B advances funds without being nominated:

• It has no recourse against the issuing bank, even if the documents comply.
• If the issuing bank refuses to honour (wrongfully or not), Bank B must seek reimbursement from the beneficiary.
• Therefore, negotiating with recourse is prudent—provided the beneficiary is financially reliable.

Final advice:

In both scenarios, Bank B should simply act as the presenting bank. If it must provide financing to maintain the customer relationship, it should only do so with recourse, and only after assessing the beneficiary’s ability to reimburse in case of non-payment.

Best regards,

Mr. Old Man