Available with a Nominated Bank by Acceptance or Deferred Payment: Is the Nominated Bank Obliged to Act?

One of the most common misconceptions in documentary credit practice is that once an issuing bank nominates a bank to accept drafts or incur a deferred payment undertaking, that nominated bank is automatically obliged to perform that role.

A reader recently raised an interesting question regarding credits available with a nominated bank by acceptance and by deferred payment. The answer lies in a fundamental principle of UCP 600: nomination gives authority, but not necessarily obligation.

Question

Dear Mr. Old Man,

My name is Nhat Tuan. I recently read your article discussing the clause “Available with … by …” and would appreciate your views on the following scenarios:

Scenario 1

Field 41 of the MT700 states:

“Available with ACB, Vietnam by Acceptance.”

When the beneficiary presents documents to ACB, does ACB have the right to either accept the draft or refuse to do so?

Scenario 2

Field 41 of the MT700 states:

“Available with ACB, Vietnam by Deferred Payment.”

When the beneficiary presents documents to ACB, does ACB have the right to incur a deferred payment undertaking, considering that no draft is required under a deferred payment credit?

In other words, if the issuing bank nominates ACB as the nominated bank for acceptance or deferred payment, does ACB have the right to either accept or decline such nomination?

My understanding is that only if ACB is also the confirming bank would it be obliged to perform these functions.

Thank you for your assistance.

Best regards,

Nhat Tuan

________

Answer

Dear Tuan,

It appears that you have already arrived at the correct conclusion. Let me simply support it with the relevant UCP 600 provision.

UCP 600 sub-article 12(a) states:

“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.”

This principle is the key to answering both of your questions.

Scenario 1

Credit available with ACB by Acceptance

I agree with your understanding.

Since ACB is not a confirming bank, sub-article 12(a) allows it to decide whether or not to act on its nomination.

Accordingly, when documents are presented, ACB may:

• Accept the draft if it agrees to act on its nomination; or
• Decline to accept the draft if it chooses not to act on its nomination.

If ACB does not act on its nomination, it may still act as a presenting bank and forward the documents to the issuing bank for examination and, if found compliant, acceptance.

Scenario 2

Credit available with ACB by Deferred Payment

You are correct that a deferred payment credit does not require the presentation of a draft.

However, ACB’s ability to incur a deferred payment undertaking is not derived from the absence of a draft. Rather, it is governed by the same principle set out in sub-article 12(a).

Because ACB is not a confirming bank, it may choose either:

• To act on its nomination and incur a deferred payment undertaking; or
• Not to act on its nomination and simply forward the documents to the issuing bank.

Therefore, nomination alone does not automatically require ACB to incur a deferred payment undertaking.

Conclusion

In both scenarios:

• If ACB is merely a nominated bank, it is free to decide whether or not to act on its nomination.
• If ACB is also the confirming bank, it is obligated to honour or incur a deferred payment undertaking, provided the presentation complies with the terms and conditions of the credit.

A useful way to remember this distinction is:

Nomination gives authority; confirmation creates obligation.

Best regards,

Mr. Old Man