When “Approval Basis” Presentations Come Up – UCP or URC?

Intro

In practice, not every LC presentation is textbook perfect. Sometimes banks and beneficiaries face the tricky situation of discrepant documents. A recurring question in trade finance circles is: If a nominated bank forwards documents “on approval,” is that still under UCP, or should it instead be treated as a documentary collection under URC?

And a follow-up question naturally arises: If the nominated bank forwards such documents as though they were compliant, could the beneficiary later hold the bank liable for payment?

Here are Mr. Old Man’s answers to a reader’s questions:

Question 1

If a nominated bank forwards discrepant documents on an approval basis, does that mean it is not acting on its nomination? Could the nominated bank instead simply return the documents to the beneficiary, and only assist further if the beneficiary authorises handling under URC? If sent on approval, under which section of UCP would this fall?

Answer

From more than 30 years of practical experience with LCs, I would note:

• Rare in practice: Banks seldom forward discrepant documents “on approval.” More often, the nominated bank sends the documents without highlighting discrepancies, sometimes even certifying them as complying. The issuing bank may initially refuse, but in most cases payment is eventually made—since applicants open LCs to import goods, not to reject documents, unless a major issue arises (e.g. expired LC).
• At applicant’s request: When documents are sent “on approval,” it is usually at the applicant’s request and only in clear-cut cases of discrepancy (such as expired LC).
• Nomination vs obligation: A nomination by the issuing bank does not oblige the nominated bank to act, unless it has added its confirmation. If the documents are non-complying, the nominated bank generally does not act on its nomination and rarely sends on approval.
• Still UCP, not URC: If the nominated bank does forward documents “on approval,” the presentation is still governed by UCP. This ensures the issuing bank’s payment obligation once it releases the documents to the applicant.
• When URC applies: Only if the applicant instructs the bank to send documents as a documentary collection under URC does the LC framework no longer apply. In that case, payment depends solely on the applicant’s willingness to pay, especially under usance LCs.

In short:

“Approval basis” does not automatically switch an LC presentation to URC. Unless explicitly instructed otherwise, such presentations remain subject to UCP.

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Question 2 (further question)

If the nominated bank does not honour or negotiate, but still forwards the documents while certifying them as compliant, could the beneficiary later hold the nominated bank liable for payment—arguing that the bank is deemed to have acted on its nomination and therefore is obligated to honour?

Answer

I would like to draw your attention to sub-articles 12 (a) and (c) of UCP 600, which state:

• 12 (a): Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary.
• 12 (c): Receipt, examination, and forwarding of documents by a nominated bank that is not a confirming bank does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or negotiation.

In practice, nominated banks that do not act on their nomination—i.e. they neither honour nor negotiate, or they negotiate with recourse—have often forwarded documents with a covering schedule, sometimes even certifying them as compliant. Such banks are not liable for payment if the issuing bank subsequently refuses the documents due to valid discrepancies.

In view of the above: If the nominated bank does not honour or negotiate (even if it negotiates with recourse), it is not liable to pay. This remains true even where the bank forwards documents and certifies them as compliant, provided the issuing bank refuses the presentation on valid discrepancy grounds.

Conclusion

Forwarding discrepant documents “on approval” may look unusual, but it does not change the framework: the presentation remains under UCP unless the applicant explicitly shifts it to URC. And unless the nominated bank has confirmed the LC—or clearly undertaken to honour or negotiate—it cannot be held liable for payment.

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Mr. Old Man – For those who eat, sleep, and breathe Letters of Credit