NEGOTIATING DOCUMENTS PRESENTED UNDER LC AVAILABLE BY PAYMENT

Metropole Hanoi corridor

QUESTION

Dear Mr. Old Man,

1) If the LC is available with Bank A by payment, can Bank A negotiate the documents?

2) If the LC is available with the issuing bank by payment, can Bank A negotiate the documents and/or forward the documents to the issuing bank for reimbursement/payment?

Thank you.

PM

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ANSWER

Hi,

1) If the LC is available with Bank A by payment and Bank A agrees to act on its nomination, it must pay (and not negotiate) upon receipt of the complying documents.

2) If the LC is available with the issuing bank by payment, Bank A is not authorized to negotiate or to pay the documents. Therefore, it should not negotiate the documents. However, it may forward the documents to the issuing bank for payment. In this case, Bank A is acting as a presenter that makes a presentation on behalf of the beneficiary to the issuing bank.

Notwithstanding the above analysis, in practice banks may accept to negotiate the documents presented under LC available by payment, of course, on a with recourse basis.

Kind regards,

Mr. Old Man

P/s: Please follow the link http://letterofcreditforum.com/content/i-need-some-clarification-regards-lc  to read my answer in 2007 to a similar question or read the below:

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 payment 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 forfeiting 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 undertakings.  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.  

Hoping the matter has been clear.

Best regards,

Nguyen Huu Duc

UNQUOTE