NEGOTIATION UNDER A CREDIT AVAILABLE BY PAYMENT

What "negotiation" means?
INAPARK – Korea Posted 25 Mar 10 |

1. I really want to know the difference between "available by negotiation" and "available by payment" as there's no exact definition in detail.

2. Further, Official Opinion R666 / TA569 says as follows:
"A letter of credit is stated to be available with nominated bank by negotiation should not include any reference to claiming reim from a reim bank or , indeed, any reference to the debiting of the issuing bank's a/c held with the nominated bank…….issuing bank will reim in according with the instructions of the nego bank."
I wonder on which base such as rule or regulation or documents or book, "negotiation" represents as above mentioned!!!

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COMMENTS

N.H.Duc – Viet Nam Posted 25 Mar 10 |

1) 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 (Article 2).

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.

Different from LC available by negotiation, 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 paying bank upon receipt of the complying 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.

2) ICC Official Opinion R666/TA569.

Regards/N.H.Duc

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JSMITH – United Kingdom Posted 25 Mar 10 |

A credit can be available by payment at sight with the issuing bank alone or a nominated bank as well. Whereas a credit available by negotation can only be available with a nominated bank.

In essence:
1. a credit available by payment at sight with a nominated bank requires that the nominated bank can obtain simultaneous reimbursement from -or on behalf of- the issuing bank at the same time it pays the beneficiary. Thus there is no LENDING to the beneficiary. By making payment at sight the nominated bank does not 'purchase' the documents under the rules of UCP600.
2. a credit available by negotation instead requires that the nominated bank either LENDS the beneficiary the amount of its drawing or that it commits itself to lending the beneficiary the amount of its drawing in the future (by implication, when requested by the beneficiary). Hence, no reimbursement instruction should be included as otherwise there would not be a loan.

Incidentally, in my bank we receive alot of credits issued by -to us- Far Eatern banks (especially Korean) that are stated to be available by negotation but which should be stated to be available by sight payment as they include reimbursement instructions. (We rarely have this problem with other parts of the world.) We therefore call these 'Far Eastern negotation' credits and correctly issued credits available by negotation 'true negotation credits'.

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THI THUY MYT- Viet Nam Posted 26 Mar 10 |

Dear Mr Duc,

Could you clarify clearly yr opinion which "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."
I think if L/c available with nominated bank by payment, beneficiary may negotiate the documents at his bank.

TKS
Regards
A.K

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JSMITH – United Kingdom Posted 26 Mar 10 |

Under UCP600 documents can only be negotiated, in the UCP600 sense of the term, if a credit is stated to be available by negotiation. Therefore, if a credit is available with a nominated bank by payment the beneficiary can only have the documents paid by the nominated bank and cannot have them negotiated in the UCP600 sense of the term.

My impression is that there is a still widespread, and very annoying (given the subject is so utterly simple and straightforward), misunderstanding that the term ‘negotiation’ covers any examination and settlement of documents by a nominated bank. It does not. It only covers the specific act defined in Article 2 of UCP600 where the credit is stated to be available by negotiation.

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N.H.Duc – Viet Nam Posted 26 Mar 10 |

Hi A.K,

Jeremy has helped me answer your question. It’s clear enough.

I just want to point out a common practice with regard to the so called negotiation under a payment credit.

In some Asian countries, negotiation is normally effected on a with recourse basis. It looks like a short-term loan secured by the documents. Upon receipt of the payment from the issuing bank, the beneficiary’s bank will collect the advance/loan amount plus accrued interest which is calculated from the date the beneficiary received the advance/loan amount to the date the bank receives the payment from the issuing bank. In this particular respect, some banks seem to treat a payment credit the same as a negotiation credit, i.e. whether the credit is available by negotiation with any bank or by payment with the issuing bank, the beneficiary may be financed against the documents.

Perhaps it is because of this practice that you think the beneficiary may negotiate the documents under a credit available by payment.

I would like to draw your attention to the fact that the issuing bank under a credit available by payment does not authorize any bank to negotiate the documents, hence, the bank that has negotiated the documents under a credit available by payment will not enjoy the same legal protection as the bank that has negotiated the documents under a credit available by negotiation . For example, it can not take legal action against the issuing bank in its own name as a transferee of the proceeds or a holder in due course in the event for some reason, e.g., fraud, the issuing bank refuses to pay the documents.

Regards,
N.H. Duc …