INVOICE DOES NOT INDICATE ACTUAL PORT OF DISCHARGE

2 Comments

1. 

   mk

   April 23, 2015 at 1:57 pm

   what is difference between discounting and negotiation. please clarify.

   Reply

• 

  mroldman

  April 24, 2015 at 8:58 pm

  Hi,

  I ever made in Letter of Credit Forum my comments on the topic regarding “negotiation vs discounting”.

  For your reference, please find attached below those comments. You can also read them at http://letterofcreditforum.com/content/can-issuing-bank-negotiate

  Kind regards
  Mr. Old Man

  QUOTE

  1/ What does he mean by deferred LC ?
  I guess he means usance LC that may include (i) an acceptance LC and/or (ii) a deferred payment LC.

  2/ Discount of Negotiate ?
  In accordance with the above reasoning, the term “discount” instead of “negotiate” should be used to indicate the action of purchasing at a discount of an accepted time draft or of a deferred payment undertaking (though in reality the term. “negotiate” is sometimes used by some banks).

  3/ Can the issuing bank discount a bill of exchange or a deferred payment undertaking accepted or incurred by itself ? My answer is yes. However, the issuing bank is not obligated to discount unless it is willing to do so as its obligation under an acceptance LC or under a deferred payment LC is to honour a bill of exchange or a deferred payment undertaking accepted or incurred by itself. Except for sight payment LC, the term “honour” is understood as its action of (i) accepting a bill of exchange (draft) drawn by the beneficiary and pay at maturity or (ii) incurring a deferred payment undertaking and pay at maturity .

  4/ Discounting with recourse or without recourse ? And risk of loss ?
  Discounting if any should be on a without recourse basis. The issuing bank has no risks when discounting its own accepted bill of exchange or its own deferred payment undertaking as it is the issuing bank that shall reimburse itself when due.

  The issuing bank may suffer risk of loss in case the applicant fails to fulfil its obligation under its contract with the issuing bank for opening usance LC. That the issuing bank refuses to discount but pay at maturity does not help it avoid the same risk if any.
  However, to avoid risks regarding possible disputes between the applicant and the beneficiary in connection with the cargoes shipped under the LC, a cautious bank should choose the right time to discount, i.e. discount after the applicant has been in full receipt of the cargoes and satisfied with the quality (though I know banks deal with documents not with goods).

  5/ What benefit does the issuing bank earn from discounting a bill of exchange or a deferred payment undertaking accepted or incurred by itself ?
  By discounting, the issuing bank may get the benefit both from the beneficiary (due to paying at a discount) and from applicant (due to aval commission).

  I think in reality that the beneficiary requests the issuing bank to discount its own accepted bill of exchange or its own deferred payment undertaking rarely happens. However, if someday my bank receives such request from the beneficiary of the acceptance or deferred payment LC issued by my bank, I will not hesitate to advise my staff to take it into consideration.

  Frammi and Shahriar, I will appreciate your comments on my point of view.

  Best regards,
  Nguyen Huu Duc
  UNQUOTE
  —-
  QUOTE

  I highly appreciate your comments. I wish to exchange with you the following:

  Draft when accepted shall become a negotiable financial instrument that is independent of the LC and can be forfaited or sold on the market. Therefore, any banks including the issuing bank can discount (purchase at a discount) such a draft if they wish to do so.

  I am afraid that a deferred payment undertaking is not largely accepted as a financial instrument that can be forfaited or sold on the market like an accepted draft. Therefore, the bank that discounts such a deferred payment undertaking may not be protected by UCP. Yet, one thing I wish to draw your attention to is that UCP 600 Art. 12 (b) has given the green light to the nominated bank to prepay or purchase its own deferred payment undertaking (or its own accepted draft). It was the famous court case “Banco Santander” that brought about this change in UCP.

  UCP has a definition for the term “negotiation” which you can refer to in Art. 2 but no definition for the term “discounting”. In practice when referring to an action of purchase at a discount of a time draft, the term “discounting” is used. However, in the marketplace the two terms are sometimes used interchangeably without causing any misunderstanding.

  Thanks for your experience sharing.

  Best regards,
  Nguyen Huu Duc
  UNQUOTE

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