DISCOUNT OF EXPORT DOCUMENTS PRIOR TO ISSUING BANK’S ACCEPTANCE

(Q&A quoted from DCPro UCP 600 Discussion Forum 23 – 27 Jan 2015)

QUESTION

Bank A issues a usance L/C (say 90 days after B/L date) available by negotiation/acceptance with any bank with draft drawn on the issuing bank (reimbursement to be effected by the issuing bank at maturity against a complying presentation). The L/C does not ask for confirmation thereof, and hence is not confirmed by the beneficiary’s bank (Bank X).

Exporter makes a complying presentation to Bank X and requests them to negotiate/discount the export bill before the draft and documents are sent to the issuing bank.

Questions:

i. If the term draft is drawn on the issuing bank (negotiation L/C), can Bank X negotiate/discount the draft presented by its customer before it is accepted by the issuing bank ?

1. If the term draft is drawn on the issuing bank (acceptance L/C), can Bank X negotiate/discount the draft presented by its customer before it is accepted by the issuing bank ?

Regards,

Shahed

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ANSWER

Stone fish in my garden pond

Dear Shahed,

In addition to the 4 common types of LC, which includes: (1) LC available by negotiation of draft at sight; (2) LC available by payment (no sight draft is required); (3) LC available by acceptance of draft at xxx days sight/after BL date; and (4) LC available by deferred payment (no time draft is required), we sometimes come across their varieties one of which is LC available by negotiation of a time draft drawn on the issuing bank.

Can the nominated negotiating bank negotiate a draft at xxx days sight/after BL date before it is accepted by the issuing bank?

My answer is yes, based on the following reasoning:

According to Article 2 UCP 600, negotiation is defined as the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.

It is understood from the above definition that the nominated negotiating bank can negotiate any draft irrespective of draft at sight or draft at xxx days sight/after BL date, and irrespective of whether or not the draft is accepted by the issuing bank. The nominated bank can also negotiate documents presented under the negotiation LC which does not require presentation of drafts. If the documents are complying the nominated negotiating bank is entitled to the issuing bank’s reimbursement when due.

Where the LC is available with the issuing bank by acceptance of draft, it is obvious that the issuing bank does not authorize any bank to negotiate/discount the not yet – accepted draft. Therefore, the bank that has negotiated the not yet-accepted draft may be exposed to the risk of non-reimbursement from the issuing bank as it cannot take any legal action against the issuing bank on its name.

So, my short answers to your questions are as follows:

1. Yes
2. Should not.

Kind regards,

N.H.Duc

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QUESTION

Thanks.

But I also like to know what would be the scenario of “Deferred Payment” L/C?

Can a nominated bank negotiate/discount the export bill prior to issuing bank’s acceptance of documents?

It may be mentioned that there is no draft required under a deferred payment L/C.

Regards,

Shahed

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ANSWER

Hi Shahed,

Where the LC is available with a nominated bank by deferred payment, then in accordance with sub-article 12 (b) that nominated bank may discount its own deferred payment undertaking.

Where the LC is available with the issuing bank by deferred payment and the issuing bank has not yet incurred a deferred payment undertaking, the presenting bank, which is not a nominated bank, is not authorized to discount the documents. Even when the issuing bank has incurred its deferred payment undertaking and so communicated to the presenting bank, the presenting bank should ask for the issuing bank’s authorization to discount if it intends to discount the deferred payment undertaking. Please note that deferred payment undertaking is not world wide recognized as an financial instrument that is negotiable.

Kind regards,

N.H.Duc

P/s: Please note that where an LC is available with the issuing bank by deferred payment, there is no nominated bank. The bank that presents the documents to the issuing bank on behalf of the beneficiary is the presenting bank (and not nominated bank).