Should the draft be drawn on the issuing bank or on the confirming bank?

Should the draft be drawn on the issuing bank or on the confirming bank?

Intro

Seventeen years ago, my website, www.mroldman.net, shared the following Q&A from the DCPro Discussion Forum.

The discussion was about a rather interesting question: under a confirmed LC available by negotiation with the confirming bank, should the draft be drawn on the issuing bank or on the confirming bank?

The question attracted several interesting responses from well-known LC practitioners, including Glenne Ransier, Jeremy Smith, and others.

It is an old discussion, but the issue remains interesting—and perhaps still worth revisiting.

So, Mr. Old Man would like to reshare this Q&A and invite your comments.

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Dele Ibitoye – Canada

Attention is being drawn to the issue regarding drawing of drafts under a UCP600 confirmed credit available by ‘ negotiation ‘ with the confirming bank.

This clarification is necessary because of different interpretations among LC practitioners.

The contention here is whether drafts under confirmed credits available by ‘negotiation’ with the confirming bank are to be drawn on the issuing bank or the confirming bank.

As a matter of observed practice, there are different scenarios involving request to confirm LCs available by negotiation with confirming bank1- some issuing banks call for drafts drawn on themselves based on Art 2 of UCP 600 which insists that drafts must be drawn on a bank other than the nominated bank.2- some others still request confirmation as follows ‘ At beneficiary’s request, bank xxx to add its confirmation at beneficiary’s request.

If credit is confirmed, it is available with confirming bank and draft is to be drawn on confirming bank’. If this is not indicated in the LC confirming banks themselves often insist that drafts under confirmed credits be drawn on themselves rather than the issuing bank, occasionally making their confirmation conditional upon drafts being drawn on themselves in order to protect themselves under negotiable instruments Act/Bills of Exchange Act in their respective countries by having drafts payable in their own country.

Does a confirming bank fulfil its nomination of ‘ negotiation ‘ by negotiating/purchasing only the documents in this instance, but insisting that drafts be drawn on themselves?

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N.H. Duc – Viet Nam

Under an LC available by negotiation with the confirming bank, the draft should be drawn on the issuing bank or another bank other than the confirming bank.

This requirement is complying with the definition of negotiation in UCP 600 Article 2, which says ” Negotiation means the purchase by the nominated bank of drafts (DRAWN ON A BANK OTHER THAN THE NOMINATED BANK) … “.

However, in practice the fact that the draft is requested to be drawn on the confirming bank under LC available by negotiation is quite common.

If the draft is on the confirming bank, the confirming bank must PAY (not negotiate) though the L/C is available by negotiation. It is because of this that the confirming bank would always insist on TT reimbursement clause, i.e. the issuing bank must reimburse within 03 banking days upon receipt of tested telex/ authenticated SWIFT message from the confirming bank certifying that the documents presented are complying with the LC terms and conditions.

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Daniel – Switzerland

A DC available by negotiation and requiring a draft drawn on the N/C bank is a DC available by acceptance and should be dealt with as such. I do not know if the practice is common but surely it is (another) wrong practice.
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J. SMITH- United Kingdom

Just to echo comments made above: a nominated bank cannot, by definition, negotiate where drafts are drawn on it.

I am also mystified as to how a nominated bank might benefit, from a negotiable instruments law perspective, by having a draft drawn on it; in fact, I would have thought if anything the opposite would apply as if the draft is on the nominated bank it cannot claim the rights of the holder of a dishonoured bill should the issuing bank not pay. However, in the case of confirmation, as negotiation is without recourse this is all rather academic.

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Glenne Ransier – United States

I agree with Jeremy. I know banks are under the mistaken belief that they:

1. somehow have stronger legal protections should the drafts be drawn on them or
2. need to continue with their legacy practice and demand the draft be drawn on them whenever they confirm (old habits die very hard).

A LC does not have to call for a draft. If one is asked for it is merely another document that must reviewed.

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Albert B – United States

We all understand that a confirmer is replacing the rights and obligations of the issuer (act as an issuer) and is directly obligated to “honor” (not to negotiate) a presentation under a letter of credit.

I believe the whole issue was created by article 2 that definition of “Confirmation” also referring to “to negotiate”. (I am not very comfortable with this portion). Please put in mind that “negotiation” per UCP means to “purchase” by “advancing funds” which is contradicts the role of the confirmer that he must “honor” a complying presentation.

I am not sure whether or not all readers agree that there is a distinction between “honor” and “negotiate”, it doesn’t make sense to make LC available with the confirming bank by negotiation with draft drawn on the issuer, (or drawn on the confirmer) it is similar to an LC that available with the issuing bank by negotiation with draft drawn on itself. Below are conditions that I would agree to add confirmation to an LC:

1) Negotiation LC: Available with any bank (or a nominated third bank) by negotiation that draft to be drawn on the confirming bank.

2) Sight/deferred payment and acceptance LC: Available with the confirming bank by sight/deferred payment or acceptance that draft (if required) to be drawn on the confirmer.

3) In both cases, presentation should be made to the confirming bank.