NEGOTIATION LC AND BANKS OBLIGATIONS

ABDUL’S QUERY
Negotiation credits

Hi,

I need to know what a negotiation credit is and what the bank's obligations are relating to such a credit.
Also, what are the consequences for a bank which fails to act according to the required standards?

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MR. OLD MAN’S COMMENT
Negotiation L/C and Banks' Obligations

Dear Abdul,

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, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank (UCP 600 Article 2).

Negotiation L/C is the L/C which is available with a nominated bank by negotiation of drafts and/or documents. Nominated bank is the named bank with which the L/C is available with or any bank in case the L/C is available with any bank.

So, you can see that the beneficiary under a negotiation L/C can receive an advance payment by negotiating the documents with the nominated bank. The documents may be negotiated on a with or without recourse basis. It depends on the agreement between the nominated bank and the beneficiary. However, if the L/C is a confirmed L/C, the nominated bank which has added its confirmation to the L/C must negotiate without recourse.

Obligations of involved banks under a negotiation L/C

Obligations of the issuing bank (UCP 600 Article 7):
+ to reimburse the nominated bank which has negotiated and forwarded the complying documents to the issuing bank..
+ to honour if the L/C is available by negotiation with a nominated bank and that nominated bank does not negotiate..

Obligations of the nominated confirming Bank (if any) (UCP 600 Article 8):
+ to negotiate, without recourse, if the L/C is available by negotiation with the confirming bank.
+ to honour if the L/C is available by negotiation with another nominated bank and that nominated bank does not negotiate..

Obligations of the nominated (non-confirming) Bank (UCP 600 Aricle 12)
The nominated (non-confirming) bank is not obligated to negotiate the documents, except when it agrees to do so and communicates the same to the beneficiary.

The issuing bank is irrevocably bound to honour as of the time it issues the L/C and the confirming bank (if any) is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the L/C. Therefore, if the issuing bank or the confirming bank fails to fulfill its said obligations, i.e., fails to honour or negotiate the complying documents, the beneficiary may take legal action against it.

Best regards,
Nguyen Huu Duc …