Mr Old Man Payment Q&A WHEN WILL A CONFIRMING BANK HONOUR OR NEGOTIATE? By Mr Old Man Posted on 6 seconds ago 18 min read 0 0 0 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr One reader recently sent Mr. Old Man four questions about confirmed LCs. By the time he finished reading them, he realized they were not four questions at all, but at least fourteen! Since many trade finance practitioners encounter similar issues—particularly regarding a Confirming Bank’s obligation to honour or negotiate—Mr. Old Man decided to answer them all in one article. Hopefully, readers will find the explanations useful and, perhaps, be a little kinder when sending questions in the future. After all, coffee gets cold while lengthy answers are being written! QUESTION Dear Mr. Old Man, Good morning! I am a banker working in international trade finance. Thank you very much for your detailed and dedicated articles on trade finance. I have learned a great deal from them throughout my work. I am currently handling my first transaction involving a confirmed letter of credit and would appreciate your guidance on the following questions. Question No. 1 LC Available with Confirming Bank by Negotiation When the beneficiary presents documents to the Confirming Bank and requests negotiation: If the presentation is compliant, is the Confirming Bank obliged to negotiate the documents without recourse? If the presentation contains discrepancies, is the Confirming Bank entitled to refuse negotiation? In practice, how do Confirming Banks normally handle discrepant presentations? Will the Confirming Bank issue a notice of refusal in accordance with Article 16 of UCP 600? If the beneficiary subsequently corrects the discrepancies and re-presents the documents, does the Confirming Bank remain obligated to negotiate without recourse if the new presentation is compliant? If the Issuing Bank agrees to waive the discrepancies, is the Confirming Bank then required to negotiate, or may it still refuse to do so? Question No. 2 LC Available with Confirming Bank by Payment (Sight Payment) If the beneficiary presents a complying presentation to the Confirming Bank, is the Confirming Bank obligated to honour the presentation? In practice, how does a Confirming Bank ensure that it receives reimbursement from the Issuing Bank in time to pay the beneficiary? Do Confirming Banks normally require a reimbursement arrangement allowing reimbursement by authenticated SWIFT claim? Can the Confirming Bank claim reimbursement immediately after determining that the presentation complies, while forwarding the original documents separately by courier? Is it acceptable for the Confirming Bank to use the full five banking days permitted under Article 14(b) of UCP 600 for examination before making payment to the beneficiary? Question No. 3 LC Available with Confirming Bank by Negotiation When a beneficiary presents a complying presentation under a sight credit available by negotiation, may the Confirming Bank negotiate and pay the beneficiary before receiving reimbursement from the Issuing Bank? Is it common practice for Confirming Banks to advance funds to the beneficiary and seek reimbursement from the Issuing Bank afterward? If the Confirming Bank determines that the presentation is compliant and negotiates without recourse, but the Issuing Bank later claims that the documents contain discrepancies and refuses reimbursement, can the Confirming Bank recover the funds from the beneficiary? If the presentation contains discrepancies and the Confirming Bank nevertheless agrees to negotiate with recourse, can it recover the funds from the beneficiary if the Issuing Bank subsequently refuses reimbursement? Question No. 4 Usance LC Available by Negotiation How do Confirming Banks normally handle a beneficiary’s request for discounting under a usance credit available by negotiation? Is a Confirming Bank obligated to negotiate without recourse when a complying presentation is made under such a credit? Is the discount charge normally calculated based on the usance period, for example 60 or 90 days after sight? Do Confirming Banks generally wait for the Issuing Bank’s acceptance before discounting, or is this practice more commonly associated with a nominated bank that has not added its confirmation? Thank you very much and have a nice day. Best regards, C.A _________ ANSWER Dear C.A, You have asked quite a number of questions at once while I happen to be sitting in a coffee shop. Therefore, I will answer them as briefly and practically as possible. Article 8 of UCP 600 clearly provides that a Confirming Bank must honour or negotiate, without recourse, when a presentation made to it constitutes a complying presentation. Accordingly, a Confirming Bank must: (a) HONOUR when the credit is available by: sight payment, deferred payment or acceptance with the Confirming Bank; sight payment with another nominated bank that does not honour; deferred payment with another nominated bank that does not incur a deferred payment undertaking or fails to pay at maturity; acceptance with another nominated bank that does not accept or fails to pay at maturity; negotiation with another nominated bank that does not negotiate. (b) NEGOTIATE without recourse when the credit is available by negotiation with the Confirming Bank. Based on Article 8, my answers are as follows. Answer to Question No. 1 LC Available with Confirming Bank by Negotiation (1) Complying presentation If the presentation is complying, the Confirming Bank must negotiate without recourse. (2) Discrepant presentation If the presentation contains discrepancies, the Confirming Bank is under no obligation to negotiate. The Confirming Bank will normally issue a notice of refusal to the presenter (the beneficiary or the presenting bank acting on behalf of the beneficiary) in accordance with Article 16(c) of UCP 600. As long as the credit remains valid, the Confirming Bank cannot simply walk away from its confirmation undertaking because the beneficiary may correct the discrepancies and re-present the documents. If the re-presentation is complying, the Confirming Bank remains obligated to negotiate without recourse. The Confirming Bank is only obliged to negotiate without recourse when the presentation is complying. If discrepancies exist, it may refuse negotiation even if the beneficiary requests negotiation with recourse. Likewise, even if the Issuing Bank subsequently agrees to waive the discrepancies, the Confirming Bank is not obliged to negotiate and may still refuse to do so. Answer to Question No. 2 LC Available with Confirming Bank by Payment (Sight Payment) (1) Complying presentation If the presentation is complying, the Confirming Bank must honour. (2) Reimbursement and timing In practice, when agreeing to add its confirmation, the Confirming Bank will normally insist that the credit permits reimbursement by authenticated SWIFT claim. Under such an arrangement, once the Confirming Bank determines that the presentation complies with the terms and conditions of the credit, it sends an authenticated SWIFT reimbursement claim to the Issuing Bank. The Issuing Bank is then required to reimburse the Confirming Bank within the period stipulated in the reimbursement clause, often three banking days from receipt of the SWIFT claim. The original documents are forwarded separately by courier service such as DHL. This mechanism enables the Confirming Bank to receive reimbursement from the Issuing Bank before, or around the same time as, payment is made to the beneficiary. Although a Confirming Bank’s undertaking is independent of the Issuing Bank’s reimbursement obligation, this reimbursement arrangement is widely used in practice to ensure timely settlement. As regards examination, Article 14(b) of UCP 600 allows a maximum of five banking days following the day of presentation for the bank to determine whether the presentation is complying. While a bank may complete its examination earlier, many banks utilize the full five banking day examination period. Consequently, payment is often made on the sixth or seventh banking day following presentation. This is a reasonable and widely accepted banking practice and is generally not open to objection by the beneficiary. Answer to Question No. 3 LC Available with Confirming Bank by Negotiation When the credit is available by negotiation and the presentation is complying, the Confirming Bank must negotiate without recourse. The Confirming Bank may negotiate and pay the beneficiary before receiving reimbursement from the Issuing Bank and then claim reimbursement afterward. In practice, however, payment is often made after completion of the examination process. The confirming bank does not necessarily incur a loss by doing so, as negotiation charges are deducted from the proceeds payable to the beneficiary. In practice, these charges are frequently calculated on a basis similar to interest for a period of 10 days or even more, notwithstanding that the credit is a sight credit available by negotiation. If the Confirming Bank determines that the presentation is complying and negotiates without recourse, it assumes the risk of any discrepancy that it may have failed to detect. Consequently, if the Issuing Bank later refuses reimbursement based on a valid discrepancy overlooked by the Confirming Bank, the Confirming Bank generally cannot recover the funds from the beneficiary. On the other hand, if the presentation contains discrepancies and the Confirming Bank nevertheless agrees to negotiate with recourse, it may recover the funds from the beneficiary if the Issuing Bank subsequently refuses reimbursement. Such recovery is based on the recourse agreement entered into between the Confirming Bank and the beneficiary. Answer to Question No. 4 Usance LC Available by Negotiation Pursuant to Article 8 of UCP 600, where a usance credit is available by negotiation with the Confirming Bank and a complying presentation is made, the Confirming Bank is obligated to negotiate without recourse. The discount charge is normally calculated based on the usance period, for example: 60 days after sight; 90 days after sight; or any other deferred payment period specified in the credit. The practice of waiting for the Issuing Bank’s acceptance before discounting is more commonly seen where the bank acts merely as a nominated bank and has not added its confirmation. Once a bank has added its confirmation, its obligation under Article 8 is independent of the Issuing Bank’s undertaking. Therefore, a Confirming Bank is generally expected to negotiate without recourse upon determining that a complying presentation has been made. A final note: next time, please do not ask so many questions at once. Mr. Old Man has spent far too much time answering them in detail while trying to enjoy his coffee! Best regards, Mr. Old Man