ISBP PARA 46 (a) – MATURITY DATE; OPEN CONFIRMATION

QUERY
ISBP PARA 46(a) – due date fixed by drawee bank on compliant docs.
John Lim – Singapore Posted 11 Jan 10 |

Does this principle also apply to LC under open confirmation, in which the drawee field is the issuing bank rather than confirming bank?

Please advise.
Thank you.
Yat
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JSMITH – United Kingdom Posted 11 Jan 10 |

I am not sure what you mean by ‘open confirmation’ but ISBP681 para 46(a) applies to any credit available by negotiation, where drafts are required, which has been confirmed.
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John Lim – Singapore Posted 12 Jan 10 |

Thanks Jeremy.

I am referring to a L/C with tenor 180 days sight in which case, it has been confirmed by a nominated bank under open confirmation, and drawn on the issuing bank. The docs were certified compliant, negotiated and due date fixed by the confirming bank. In this case, could we say that the above principle still applied? if yes, then the confirming bank should not allowed the drawee field to be remain as issuing bank – bearing in mind that under B/E act, drawee should not negotiate a B/E drawn under themselves.

Pls comment.

Thanks and regards

Yat

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JSMITH – United Kingdom Posted 12 Jan 10 |

I understand more clearly now. My opinion is that in such circumstances the confirming bank has to calculate when the due date is likely to be, before forwarding the documents to the issuing bank, so that they can either calculate the interest on any advance or, if agreeing to advance funds on or before the banking day reimbrusement is due, state that date in the agreement. The position would be exactly the same where a non-confirming nominated bank was willing to negotiate.

Incidentally, the UK’s Bills of Exchange Act 1882 states:

"31 Negotiation of bill
(1)A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill.
(2)A bill payable to bearer is negotiated by delivery.
(3)A bill payable to order is negotiated by the indorsement of the holder completed by delivery."

This would seem to allow a bill to be negotiated from -for example- the drawer (e.g. the beneficiary of a credit) to the drawee-acceptor (depending on its terms, the issuing bank of a credit or the nominated bank). Also, I believe the transferor (the beneficiary in my example and the party receiving value) would be considered the negotiating party and not the bank (where a credit is involved), i.e. the party giving value.

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N.H.Duc – Viet Nam Posted 13 Jan 10 |

Hi,

An acceptance credit is normally available with the issuing bank by acceptance of a draft drawn on the issuing bank. In case the credit is available with a nominated bank/confirming bank by acceptance, the draft is required to be drawn on the nominated bank/confirming bank. In this case the confirming bank must honour, i.e., accept the draft and pay at maturity.

From my experience I see that where an open confirmation credit requires a draft to be drawn on the issuing bank, the advising bank that wishes to add confirmation to the credit would normally ask the issuing bank to amend the credit so that it is available with the confirming bank with the draft drawn on the confirming bank and the issuing bank undertakes to reimburse the confirming bank when the draft is due. The confirming bank (drawee) shall calculate the maturity date in accordance with ISBP para. 46 (a).

In case the credit requires the draft to be drawn on the issuing bank and the confirming bank for some reason does not want to ask for such an amendment, when the confirming bank honours the documents (not draft) depends on and should be determined based on the specific confirmation agreement between the confirming bank and the beneficiary. One thing for sure is that the issuing bank will accept the draft drawn on it and pay at 180 days after the date of its receipt of the complying documents.

Regards,
N.H.Duc

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JSMITH – United Kingdom Posted 13 Jan 10 |

NHD,

1. What please is an ‘open’ confirmation?

2. I cannot see any reason why a bank would have any difficulty, in principle, with confirming a Credit available by negotiation and therefore with any draft being on the issuing bank. However, you seem to suggest they would (‘the advising bank that wishes to add confirmation to the credit would normally ask the issuing bank to amend the credit so that it is available with the confirming bank with the draft drawn on the confirming bank’). What please is the reasoning for this?

3. Your last paragraph seems to suggest that a confirming bank cannot negotiate (‘when the confirming bank honours the documents (not draft)’). However, surely 8(a)(ii) makes clear that a confirming bank can negotiate -when allied with Art. 2- documents and/or drafts? Where it does so, and there is a draft, surely there cannot be any question of it ‘honouring’ separately the documents?

4. In the last para you make reference to ‘the specific confirmation agreement between the confirming bank and the beneficiary’. I do not understand why a confirming bank would have a ‘specific agreement’ with the beneficiary rather than simply relying on the provisions of UCP600. Could you please clarify why this would be?

Thanks & regards, Jeremy

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N.H.Duc – Viet Nam Posted 14 Jan 10 |

Dear Jeremy,

Thanks for your comment. Truly appreciated.

1. Open confirmation is understood as the case where the issuing bank requests the advising bank to add confirmation to the credit. Opposite to open confirmation is silent confirmation where the issuing bank is not aware of any confirmation added to the credit.

2. As seen from the first paragraph of my last post, I am referring to a credit available by acceptance and not a credit available by negotiation. Under a credit available by acceptance with the issuing bank the draft is drawn on the issuing bank, whereas under a credit available by acceptance with the nominated (confirming) bank the draft is normally drawn on the nominated (confirming) bank.

I’m not sure whether the credit described by Yat is available by acceptance or by negotiation, with the issuing bank or with the confirming bank. But it seems from his description that the confirming bank has negotiated the drafts at 180 days sight drawn on the issuing bank.

In term of type of letter of credit, the practice that an acceptance credit is issued available with a nominated bank by negotiation of a time draft drawn on the issuing bank is not common. That’s why I say where a confirmed credit requires a (time) draft to be drawn on the issuing bank, the advising bank that wishes to add confirmation to the credit would normally ask the issuing bank to amend the credit so that it is available with the confirming bank with the draft drawn on the confirming bank.

By the way, I would like to add the following: If the draft is drawn on the confirming bank, the confirming bank can negotiate/discount the draft that has been accepted by it (sub-article 12(b)).

3. 3 & 4: I agree with you that as per sub-article 8 (a) (ii) the confirming bank must negotiate, without recourse, if the credit is available by negotiation with the confirming bank.
Perhaps I was too quick. As still keeping in mind that the described credit was issued available with issuing bank by acceptance of a time draft drawn on it (not available with the confirming bank by negotiation), I thought if the confirming bank wishes to add confirmation to such a credit, it should ask for an amendment with regards to the credit availability or should
have a specific agreement with the beneficiary with regards to its confirmation obligation.

Very sorry if my explanation was not clear enough.

Best regards,
N.H.Duc

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JSMITH – United Kingdom Posted 14 Jan 10 |

Thanks NHD. Quite surprised to learn the expression 'open' confirmation is used to distinguish a normal confirmation from a 'silent' confirmation and that people simply do not assume a confirmation is not a silent confirmation unless expressly stated. Anyway, there you go.

Regards, Jeremy

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Daniel D – Switzerland Posted 15 Jan 10 |

if a credit is available by acceptance of a draft drawn on the confirming bank, the confirming bank cannot negotiate, it pays at maturity or discounts the draft.

Daniel

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John Lim – Singapore Posted 15 Jan 10

Thank you all for your generous comments.

I would like to share with you my little findings as follows.

From Collyer Consulting, FAQ vol.1 and 2 says, ” negotiation is the purchase of a draft drawn on a bank other than the nominated bank (confirming bank). If drafts are drawn on the confirming bank they either pay (sight draft) or accept (usance draft).”

And from the reference book, The Guide to Doc Credits of Institute Financial Services Assoc (IFSA) says “…payee and subsequent holders can negotiate (discount) the bill by selling their rights in the bill to a 3rd party who then becomes the holder…” The 3rd party herein mention clearly cannot be a party in the draft, i.e. the confirming bank.

In view of the above mentioned, in this case in question, for a usance LC with tenor 180days sight, in my humble opinion, confirming bank should ask for LC to be made available with them by acceptance and drawn on them instead. So that the draft could be accepted before proceed to purchase it. This is in accordance with ISBP 681E 46A and UCP 600 art.12b and art.7c line 3, in which these two provisions have reinforce the position of the confirming bank from any negative impact come from the definition of negotiation under B/E act.

Regards
Yat

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JSMITH – United Kingdom Posted 15 Jan 10 |

Yat,

Sorry, but I think you have misunderstood what you have quoted and furthermore that what you have quoted does not actually support your apparent view that a bank cannot confirm a credit available by negotiation where drafts are drawn on the issuing bank.

If we look at what UCP600 actually says, it states in Article 8 that:

'a. Provided that the stipulated documents are presented to the confirming bank .. the confirming bank must:
…….
ii. NEGOTIATE, without recourse, if the credit is available by NEGOTIATION WITH THE CONFIRMING BANK.’ [emphasis added]

Thus, UCP600 expressly recognises that a credit can be available by negotiation with a confirming bank and thus that a bank can confirm a credit where any drafts are drawn on the issuing bank.

Negotiation by the confirming bank will simply be carried out as described in Article 2, i.e. the confirming bank will purchase the drafts and documents by advancing or agreeing to advance funds etc and such purchase will be -per sub-Article 8(a)(ii)- without recourse.

By purchasing the draft the confirming bank DOES become a holder of it, but not a party to it, but by reason of it having purchased the bill without recourse it is precluded from exercising the recourse rights a holder otherwsie has against the drawer (beneficiary) in the event the bill is not honoured by the drawee (issuing bank).

Lastly, where a draft is drawn at X days sight on the issuing bank, the fact that the confirming bank cannot know for certain exactly what the due date will be is not a barrier to it confirming the credit.

Regards, Jeremy

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John Lim – Singapore Posted 16 Jan 10 |

Thanks again, Jeremy.

I am sorry that i was not clear enough in my previous postings and had misunderstood you in certain extent.
With due respect to your comment on last para, for usance drafts drawn on issuing bank at X days sight especially, i do believe
1. in view of ISBP no.46a, to avoid running into any potential argument with issuing bank on fixing of due date, it is advisable for a confirming bank who intend to purchase the bill to ensure the relating draft is drawn on themselves.
2. while the confirming bank could not negotiate draft drawn on themselves – with regards to the negotiation definition -, they could prepay or purchase it under the protection of art.7c and art.12 b of UCP 600 from which it seems to suggest that the credit should be made available with confirming bank by acceptance.

Another point to note, to me, the term “negotiation” appears in UCP articles seems only associate with sight draft which drawn on issuing bank.

Regards
Yat. …