Drafts Under a Letter of Credit Available by Negotiation

Introduction

When a letter of credit is available by negotiation and Field 42C identifies the Issuing Bank as the drawee, does the beneficiary necessarily have to present a draft? Or can the Issuing Bank reject the documents if no draft is presented?

This question from Firas raises an interesting point about the role of drafts under documentary credits and, in particular, the distinction between a draft being identified in the credit and a draft being expressly required to be presented.

Mr. Old Man’s answer reflects his own view. Opinions and comments from other experts are welcome and appreciated.

Question

If a letter of credit is available with a nominated bank by negotiation, and Field 42C indicates that the draft is drawn on the Issuing Bank, would the beneficiary’s failure to present/submit the draft constitute a valid reason for the Issuing Bank to reject the documents?

Firas

______

Answer

Dear Firas,

Thank you for your question.

According to the Additional Material Relating to the Guidance Paper — The Use of Drafts Under Documentary Credits, a draft under a letter of credit is, ultimately, a redundant instrument, particularly in the case of a sight draft. Unless required for a specific commercial, regulatory, or legal reason, drafts should generally not be required by a credit. The guidance therefore recommends discouraging the use of drafts and calling for them only when there is a genuine commercial need.

UCP 600, Article 2, allows negotiation under a documentary credit available by negotiation with or without a presentation of a draft. It is therefore recommended that the practice of routinely requiring a sight draft under a credit available by negotiation be reviewed, and that negotiating banks be encouraged to rely not on negotiable instruments law, but rather on specific agreements with beneficiaries establishing their respective rights, remedies, and recourse.

In view of the above, if the credit does not expressly require the presentation of a draft, the mere fact that Field 42C identifies the Issuing Bank as the drawee should not, in my view, make the absence of a draft a discrepancy. Accordingly, the Issuing Bank should not reject the documents solely because a sight draft was not presented.

If a draft is expressly required by the terms of the credit, however, its absence may constitute a discrepancy. For example, if the credit expressly requires “a sight draft drawn on the Issuing Bank” to be presented, failure to present the draft may constitute a discrepancy.

Best regards,

Mr. Old Man

________

Further Question

How about if Field 42C states: “Draft at 60 days from commercial date”? Does this constitute an explicit requirement to present a draft?

____

Mr. Old Man’s Answer

No, I don’t think the statement in Field 42C, by itself, constitutes an explicit requirement to present a draft.

Even where Field 42C of a credit available by negotiation specifies a time draft, for example, “draft at 60 days from commercial date”, I would still take the view that the Issuing Bank should not reject the documents solely because a sight or time draft was not presented, unless the credit expressly requires the draft to be presented for negotiation or payment.

My view is based on UCP 600 Article 2, which allows negotiation under a documentary credit available by negotiation with or without presentation of a draft.

Furthermore, the ICC Guidance Paper on The Use of Drafts Under Documentary Credits recommends that banks issue usance documentary credits on a deferred-payment basis as an alternative to availability by acceptance of a draft, unless there is a specific commercial, regulatory, or legal reason to create a banker’s acceptance.

Therefore, in my view, specifying the tenor of a draft in Field 42C is not, by itself, the same as expressly requiring that draft to be presented.