LC AVAILABLE BY PAYMENT

QUERY

Hi Mr Old Man,

Can I ask you some questions?

Issuing bank: ABC BANK GERMANY
41A: Available with by: DEF BANK VIETNAM by payment
47A: Please dispatch documents to us (ABC BANK GERMANY)
53A: Reimbursing Bank: GHK BANK NEWYORK
78A: In reimbursement, please draw on our USD account with GHK BANK NEWYORK
……………..

Where should Negotiating Bank send documents to?

1/ Negotiating Bank should send documents to A B C BANK and claim reimbursement from G H K BANK NEWYORK?

2/ Negotiating Bank should send documents to D E F BANK VIETNAM for payment?

Thanks in Advance.

NLAT
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ANSWER

Hi,

This is an LC available by payment, and not LC available by negotiation. The beneficiary is unable to obtain the payment in advance by negotiation of the drafts and documents but must present the documents to the issuing bank or the nominated bank (if any) for payment.

From your description I see that DEF Bank Vietnam is a nominated bank. Therefore, the beneficiary should present the documents to DEF Bank for payment. However, according to UCP 600 Article 12 (a), unless the nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour (pay), except when expressly agreed to by that nominated bank and so communicated to the beneficiary. Therefore, the beneficiary should ask DEF Bank whether they agree to act on its nomination or not, i.e., agree to pay the documents or not. If they agree the beneficiary presents the documents to them for payment, but if they do not agree, the beneficiary may presented the documents to the issuing bank via DEF Bank or via his bank for the issuing bank’s payment or for the issuing bank’s authorization to claim payment from GHK Bank, New York. In this case DEF Bank or the beneficiary’s bank acts as a remitting/presenting bank only (i.e., the bank that presents the documents to the issuing bank on behalf of the beneficiary).

Also, please note that under the LC available by payment the issuing bank does not nominate any bank to act as a negotiating bank.

Hope it is clear.

Happy new year!

Mr. Old Man
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P/s: To differentiate L/C available by payment and LC available by negotiation, please also find below my answer to a similar question in Letter of Credit Forum:

QUOTE

Dear Neville Dcosta,

As you may know, an LC may be stipulated available by payment, available by negotiation, available by acceptance or available by deferred payment.

LC available by (sight) payment does not require sight drafts to be presented and normally the payment is to be effected at the counter of the issuing bank or at its nominated bank upon receipt of the complied documents. The beneficiary under LC available by payment normally may not obtain the payment in advance by negotiating (selling at a discount) the documents at his bank.
Different from LC available by payment, LC available by negotiation allows the beneficiary to receive the payment by negotiating the sight drafts and documents at a nominated negotiating bank which is normally located in his country. The negotiation may be effected on a with or without recourse basis. However, under a confirmed LC, the confirming bank must negotiate the documents on without recourse basis.

Acceptance LCs and deferred payment LCs are usance LCs. The difference is that the acceptance LC requires a time draft, whereas the deferred paymet LC does not.

Under acceptance LC, the beneficiary may receive the payment before the draft is due by discounting the accepted draft at its bank or discounting it on forfaiting markets (as the accepted draft is a financial instrument which can be transferable).

Under deferred payment LC, after his presentation of complied documents, the beneficiary receives a deferred payment undertaking incurred by the issuing bank or its nominated bank. Deferred payment undertaking is not largely accepted as a financial instrument, therefore, normally the beneficiary may not discount the deferred payment undertaking. However, in some cases, the beneficiary can use the deferred payment undertaking incurred by the issuing bank or nominated bank as a security for the advance given by his banks.

UCP 500 was silent on negotiating/discounting deferred payment uindertakings. The dispute between Banco Santander and Banque Paribas in connection with the discounting of a deferred payment undertaking led to the change in UCP. Under UCP 600 Art. 12 (b), the nominated bank is allowed to purchase (buying at a discount) its own deferred payment undertaking.

UNQUOTE