From Negotiation to Payment: What’s Behind the Confirming Bank’s Request?

Not all L/C amendments are about shipment dates, amounts, or documents. Sometimes, a confirming bank requests changes that appear quite technical, such as changing a credit from “available by negotiation” to “available by payment” or moving the place of expiry from one country to another.

Are such amendments merely operational preferences, or do they have legal and risk implications for the parties involved?

A reader recently posed exactly this question.

QUESTION

Dear Mr. Old Man,

I have the following scenario:

• Issuing bank: Singapore
• Advising/Confirming bank: Italy
• Field 31D (Date and Place of Expiry): 260618 – SINGAPORE
• Field 41A: Available with the confirming bank by NEGOTIATION

The confirming bank has requested the following amendments:

• Field 31D: 260618 – TRIESTE
• Field 41A: Available with the confirming bank by PAYMENT

Could you explain why the confirming bank is requesting these amendments?

Would such amendments expose the issuing bank to any additional risks?

Kind regards,

Susan

_________

ANSWER

Dear Susan,

Thank you for your question.

1. Why should the place of expiry be amended from Singapore to Trieste?

Under documentary credit practice, the place of expiry should normally correspond to the place where documents are to be presented.

This is also reflected in the SWIFT definition of Field 31D (Date and Place of Expiry), which states that this field specifies both:

• the latest date for presentation under the credit; and
• the place where the documents may be presented.

In your case, the credit is available with the confirming bank in Trieste, Italy. Therefore, documents are expected to be presented to that bank, and the place of expiry should accordingly be Trieste (or at least Italy), rather than Singapore.

The requested amendment therefore aligns the credit wording with normal documentary credit practice.

2. Why is the confirming bank requesting availability by payment instead of by negotiation?

The most likely reason relates to the confirming bank’s operational, legal, tax, or policy requirements.

A credit available by negotiation has traditionally been associated with the presentation of a draft (bill of exchange), which the nominated bank may negotiate by purchasing or advancing funds against a complying presentation.

By contrast, a credit available by payment does not require negotiation and, in many cases, does not require a draft to be presented.

In some jurisdictions, including Italy, drafts or bills of exchange may be subject to stamp duty or other formal requirements. Consequently, banks often prefer credits available by payment rather than by negotiation in order to simplify processing and avoid costs associated with negotiable instruments.

Another practical reason may be that some confirming banks simply prefer not to handle credits available by negotiation. As a matter of internal policy and operational convenience, they may request that such credits be made available by payment instead.

This approach is also consistent with ICC guidance on the use of drafts under documentary credits. ICC has recommended that the practice of requiring drafts under documentary credits available at sight be curtailed, particularly sight drafts drawn on an issuing bank, confirming bank, or a bank nominated to pay, unless there is a specific commercial, regulatory, or legal reason for doing so.

It is also worth noting that UCP 600 article 2 does not require a draft for negotiation. The definition of negotiation allows a nominated bank to negotiate a complying presentation by advancing or agreeing to advance funds against documents and/or a draft. Therefore, negotiation may occur with or without the presentation of a draft.

Accordingly, the confirming bank’s request may simply reflect its operational policy and modern documentary credit practice rather than any concern regarding the underlying transaction.

However, the precise reason should ultimately be confirmed with the confirming bank, as its internal policies may vary.

Note: The preference for availability by payment rather than by negotiation is increasingly seen in modern documentary credit practice, particularly for sight credits. This trend is consistent with ICC guidance discouraging the routine use of drafts in sight credits and should not automatically be interpreted as a risk concern on the part of the confirming bank.

3. Does this amendment create any additional risk for the issuing bank?

Generally, no.

Changing the place of expiry from Singapore to Trieste merely reflects the actual place of presentation and is consistent with standard practice.

Likewise, changing the availability from negotiation to payment does not materially increase the issuing bank’s undertaking under the credit. The issuing bank remains obligated to honour a complying presentation, whether the credit is available by payment or by negotiation.

Accordingly, the amendment is primarily intended to accommodate the confirming bank’s operational, legal, tax, or policy requirements and would not normally expose the issuing bank to any additional documentary credit risk.

Kind regards,

Mr. Old Man

__________

Mr. Old Man’s Further Note

There was an interesting practice in the past whereby some banks, including confirming banks, under credits available by negotiation, insisted that drafts be drawn on themselves. Strictly speaking, this sat uneasily with the UCP definition of negotiation. Under UCP 600 article 2, “negotiation” means the purchase by the nominated bank of drafts drawn on a bank other than the nominated bank and/or documents under a complying presentation.

Modern ICC guidance has moved away from the routine use of drafts in sight credits. As a result, the growing practice of dispensing with drafts altogether under negotiation credits often aligns well with the operational preferences of confirming banks.

Viewed from that perspective, a confirming bank’s request to change a credit from availability by negotiation to availability by payment may simply reflect contemporary documentary credit practice rather than any concern regarding the issuing bank or the underlying transaction.