DRAFTS UNDER CONFIRMED LCs AVAILABLE BY NEGOTIATION WITH CONFIRMING BANK  

QUESTION

Hi,

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 bank:

1/ 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?

Dele (Canada)

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ANSWER

Hi,

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.

In answer to the question, Glenn Ransier, Technical Advisor to the ICC, said: “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). An LC does not have to call for a draft. If one is asked for it is merely another document that must reviewed”.

Best regards,

Mr. Old Man