Home Mr Old Man Payment NEGOTIATION WITH OR WITHOUT RECOURSE

NEGOTIATION WITH OR WITHOUT RECOURSE

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QUESTION

In response to a query at http://letterofcreditforum.com/content/i-need-some-clarification-regards-lc, you wrote: “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”.

I do not find in UCP 600 any article saying that the negotiating bank can have recourse to the beneficiary in the event the issuing bank fails to reimburse to the negotiating bank. What if the issuing bank refuses to reimburse based on the valid discrepancies which were not identified by the negotiating bank at the time of negotiation?
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ANSWER

Hi,

Thanks for quoting my answer. It was an old answer posted at www.letterofcreditforum.com more than six years ago.

I would like to answer your question as follows:

Regarding negotiation with recourse or without course, my said answer, if quoted in full, would be as follows: “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”.

By saying so, I mean that if the nominated negotiating bank is a confirming bank, in accordance with sub-article 8 (a)(ii) UCP 600, it must negotiate without recourse. That is to say, the confirming bank is exposed to risk of non-reimbursement from the issuing bank for whatever reasons.

If the nominated bank is not a confirming bank, it may agree with the beneficiary to negotiate with or without recourse. If it agrees to negotiate with recourse, it is entitled to have recourse to the beneficiary if it is not reimbursed by the issuing bank for whatever reasons. If it agrees to negotiate without recourse, like the confirming bank, it will bear the risk of non-reimbursement from the issuing bank for whatever reasons including the reason that the presented documents contain valid discrepancies not identified by the negotiating bank at the time of negotiation.

In practice, to avoid risk of non-reimbursement from the issuing bank, banks (except confirming banks) would agree to negotiate the documents on a with recourse basis.

Regards,
Mr. Old Man

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9 Comments

  1. […] NEGOTIATION WITH OR WITHOUT RECOURSE. […]

    Reply

  2. Alex

    February 1, 2016 at 5:55 pm

    Hi Mr Old Man:

    I saw this post which partially answered my doubts regarding nominated bank’s liability and rights.

    I would presume that confirming bank who added their confirmation on a LC and paid the nominated bank, would not be able to seek recourse from nominated bank even if in the event LC issuing bank later discovered valid discrepancy on presentation and served notice of refusal to confirming bank in accord with article 16 UCP600.

    I understand from if a non-confirming nominated bank honored (accepted draft, incurred deferred payment undertaking or paid at sight), it is automatically taken to be irrevocable and on a non-recourse basis. Meaning once non-confirming nominated bank accepted a draft or incurred a deferred payment undertaking, they must definitely pay beneficiary on due date regardless of what happens. If non-confirming nominated bank paid at sight, they also can’t retrieve back payment from beneficiary regardless of what happens later. Such shall be the case, UNLESS nominated bank and beneficiary have an express agreement for the honor to be “with recourse”.

    But for negotiation, a non-confirming nominated bank who decided to negotiate will need to come to an express agreement with beneficiary to state whether the negotiation is with or without recourse.

    is my understanding correct?

    Reply

    • mroldman

      February 2, 2016 at 3:06 pm

      Your understanding is correct. Non-confirming nominated bank may agree with the beneficiary on with recourse negotiation. It may refuse to act on its nomination, i.e. refuse to negotiate if the beneficiary insists on a without recourse negotiation.

      Reply

      • Alex

        February 3, 2016 at 5:42 pm

        The below is with regards to nominated banks’ honor/negotiation. I have seem questions where it says nominated bank pays without recourse simply because nominated bank had accepted a draft drawn on itself. I re-read UCP600 and finds that it says nominated banks pay with recourse UNLESS it expressly agreed with beneficiary to pay without recourse. The “expressly agreed” is very confusing as there is no official definition in UCP600.

        Below is what I understood. Its lengthy but I am trying to approach this topic in a systematic manner.

        ACCEPTANCE

        Only when LC is available by acceptance then a draft will be needed as acceptance means accepting a draft and pay on maturity date. LC available by sight, deferred payment and negotiation don’t need a draft. The act of accepting a draft under a LC available by acceptance means an irrevocable commitment to pay on due date and payment is without recourse. Since a bank can only accept a draft when itself is the named drawee, it means that when issuing bank make a LC available with a nominated bank by acceptance, the draft must be drawn on nominated bank to allow nominated bank to accept the draft. In other words, issuing bank intention is for nominated bank to honor without recourse. Nominated bank in such case can only choose between honor without recourse OR don’t honor at all. Only when nominated bank accepted the draft then can it qualify to “prepay or purchase” the acceptance.

        For LC available by sight payment, deferred payment and negotiation, draft is not needed but may be used.

        SIGHT PAYMENT

        When LC is available by sight payment, payment by nominated bank is generally without recourse (unless otherwise agreed with beneficiary) and no sight draft is needed. Non-confirming nominated bank who choose to pay ‘at sight with recourse’ against a complying presentation have to make sure (1) there is no sight draft with nominated bank as drawee (if any) & (2) to enter into an express agreement with beneficiary to pay at sight with recourse. However, if nominated bank is also the confirming bank and decided to add confirmation (issued advice of confirmation added) or non-confirming nominated bank decide to sight pay without recourse, the nominated bank are allowed to receive a sight draft drawn on it (if any) as honor by confirming bank is always without recourse unless otherwise agreed between confirming bank and beneficiary.

        DEFERRED PAYMENT

        For deferred payment, nominated bank will always pay without recourse (1)unless otherwise expressly agreed with beneficiary & (2) time/usance draft with nominated bank as drawee is not accepted by nominated bank . When nominated bank is a confirming bank who added confirmation or nominated bank is willing to incurred deferred payment undertaking without recourse, then a usance/time draft (if any) drawn on the confirming/nominated bank can be accepted. If draft is not available or draft drawn on other parties, confirming bank who added confirmation or nominated bank is willing to incurred deferred payment undertaking without recourse can send an express written agreement to beneficiary to pay $XXX on XXX date. Once accepted the draft drawn on itself or sent out an express written agreement to beneficiary, confirming/nominated bank can “prepay or purchase” the draft and complying presentation from the beneficiary.

        NEGOTIATION:

        When LC is available by negotiation, the advance payment may be made with or without recourse, and draft is not needed.
        When nominated bank is a confirming bank who added confirmation or nominated bank is willing to negotiate without recourse, they just need to make advance payment or agree to make advance payment to the beneficiary in return for the complying presentation, and accept a usance/time draft(if any) drawn on other banks/entities (not a must to accept). If time/usance draft is drawn on itself, nominated bank can only negotiate the complying documents and not the draft.
        When non-confirming nominated bank wish to negotiate with recourse, then ***(1) must not negotiate a time/usance draft drawn on other banks/entities and (2) have to enter into an express agreement with beneficiary to negotiate with recourse.

        *** I presume that once advance payment had been made by nominated banks or confirming bank to negotiate(purchase) the time/usance draft drawn on other banks from the beneficiary, the nominated bank and confirming bank cannot reverse the ‘negotiation (purchase)’. My logic is that if today I go out and purchase a bill of exchange draft in the market, and the owner endorsed on his/her draft to transfer ownership of the draft to me, then I am the new legal owner of the draft. Hence, I will have to bear the risk of non-payment by the drawee named on the draft.

        Reply

        • mroldman

          February 3, 2016 at 10:10 pm

          I agree with your explanation on sight payment, deferred payment and acceptance.

          With regard to “negotiation”, I ever answered a similar question. I quote here for your reference:

          Quote
          Regarding negotiation with recourse or without course, my said answer, if quoted in full, would be as follows: “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”.

          By saying so, I mean that if the nominated negotiating bank is a confirming bank, in accordance with sub-article 8 (a)(ii) UCP 600, it must negotiate without recourse. That is to say, the confirming bank is exposed to risk of non-reimbursement from the issuing bank for whatever reasons.

          If the nominated bank is not a confirming bank, it may agree with the beneficiary to negotiate with or without recourse. If it agrees to negotiate with recourse, it is entitled to have recourse to the beneficiary if it is not reimbursed by the issuing bank for whatever reasons. If it agrees to negotiate without recourse, like the confirming bank, it will bear the risk of non-reimbursement from the issuing bank for whatever reasons including the reason that the presented documents contain valid discrepancies not identified by the negotiating bank at the time of negotiation.

          In practice, to avoid risk of non-reimbursement from the issuing bank, banks (except confirming banks) would agree to negotiate the documents on a with recourse basis.
          Unquote

          Kind regards

          Reply

  3. Alex Soon

    February 3, 2016 at 1:29 am

    Hi Mr Old Man:

    Thanks for your reply. Can an issuing bank actually issue a LC available with nominated bank by acceptance with draft drawn on reimbursing/confirming/issuing bank/other named banks?

    I am asking this question because i understand the term “acceptance” as to mean the issuing bank authorizes the nominated bank to accept draft. If a draft is drawn on the nominated bank, then naturally no authorization is needed for nominated bank to accept the draft which is drawn on itself. So the ‘authority” granted by issuing bank to nominated bank is for nominated bank(1) to accept only draft drawn on itself? or (2) to accept all draft regardless of who the drawee is (i.e. reimbursing/confirming/issuing bank/other named banks)?

    Thanks = )

    Reply

    • mroldman

      February 3, 2016 at 9:11 am

      Hi,

      It is agreed that by issuing LC available with a nominated bank by acceptance, the issuing bank is deemed to have authorized that nominated bank to honour the draft and be entitled to the reimbursement from the issuing bank, and that where LC is available with a nominated bank by acceptance, drafts must be drawn on that nominated bank and not on a bank other than than that nominated bank., e.g. the issuing bank. A nominated bank is not in position to honour (i.e. not accept and pay at maturity) a draft drawn on a bank other than itself.

      It is practice that where LC is available with a nominated bank by acceptance without a pre-arrangement between the issuing bank and the nominated bank, the latter would not agree to act on its nomination even when the draft is drawn on itself. This practice also complies with UCP 600 sub-article 12 (a), which says “Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary”.

      Last but not least, where a draft is drawn on a bank other than the nominated bank, the term “negotiation” is more appropriate than “acceptance”. I see that some banks would issue LC available with any bank by negotiation of draft at xxx days after BL date (draft drawn on issuing bank). The purpose of this practice is to allow the LC to stipulate the date and place of expiry in the beneficiary’s country.

      Kind regards,
      Mr. Old Man

      Reply

  4. Alex Soon

    February 6, 2016 at 5:57 pm

    Hi Mr Old Man:

    Thanks for your guidance once again.

    If a LC is issued available with a nominated bank by negotiation and draft drawn on issuing bank, can the nominated bank just negotiate(purchase) the complying documents without negotiating the draft so as to qualify for negotiation with recourse? I understand once the nominated negotiated the draft, then it is bound to negotiate without recourse. Correct if i am wrong = )

    I came across a CDCD question quoted below:

    QUOTE:

    Which of the following is not an undertaking of the confirming bank for a credit available by:

    A sight payment – to pay at sight.
    B deferred payment – to incur a deferred payment undertaking.
    C negotiation – to negotiate with recourse time draft drawn by the beneficiary.
    D acceptance – to honour a time draft drawn on nominated bank if the nominated bank does not accept the time draft.

    The answer is C and i agreed with it.
    But option D puzzled me for 2 reasons (1) Draft is drawn on nominated bank, hence how can the confirming bank honor the time draft drawn on nominated bank? (I understand “honor the draft” in the content of LC available by acceptance to mean accepting the draft).

    I checked UCP600 article 8(a)(i)(d) which says upon receipt of complying presentation, confirming bank must HONOR if LC is available by acceptance with another nominated bank and that nominated bank does not accept a draft drawn on it or, having accepted a draft drawn on it, does not pay at maturity.

    Does the word “honor” used in UCP600 article 8(a)(i)(d) just simply means to PAY at sight/pay on maturity date, regardless of the drawee named on the draft?

    Reply

    • mroldman

      February 6, 2016 at 9:33 pm

      Hi,

      1) Unless the nominated bank is the confirming bank, it is not bound to negotiate the documents and/or the drafts. So, it may agree with the beneficiary to negotiate the documents on a with recourse or without recourse basis.

      2) Under a confirmed LC available by acceptance with a nominated bank other than the confirming bank, if the nominated bank refuses to honour ,it is advisable for the beneficiary to issue drafts drawn on the confirming bank. Upon receipt of the complying documents, the confirming bank must honour the drafts (i.e., accept and pay at maturity).
      Where the nominated bank has accepted the drafts but fails to pay at maturity, in accordance with sub-article 8 (a)(i)(d), the confirming bank must also honour (i.e. pay). In this case, the term “honour” means to pay at maturity.

      Kind regards,
      Mr. Old Man

      P/s: Last but not least, in 2007 when UCP 600 came into force I ever sent Kim Christensen (now Kim Sindberg) my remark on the term “honour”. I quote hereunder for your reference:

      Quote
      I have read your view on the definition of honor in UCP 600. I agree with you that the introduction of the term will change the language of UCP 600, that is to say, the UCP 600 is much easier to read and understand. However, I think that the definition of honor seems not to adequately reflect the practice and that it should include the action of sight payment under a negotiation credit. My reasons are as follows:

      (i) That the issuing bank or the confirming bank (up to the case) must pay at sight a complying presentation under a negotiation credit, which is not negotiated by the beneficiary’s bank or by the nominated bank is true and normal. The issuing bank’s or the confirming bank’s action of payment under the negotiation credit, in this case, is quite the same as that under the sight payment credit. Accordingly, it should be called honor.
      (ii) Honor in Article 2 UCP 600 seems inconsistent with honor in Article 7 and 8 UCP 600. Please refer to the followings which I quote from the said articles:
      (a) “… the issuing bank must honor if the credit is available by negotiation with a nominated bank and that nominated bank does not negotiate.”
      (b) “… the confirming bank must honor if the credit is available by negotiation with another nominated bank and that nominated bank does not negotiate.”
      (c) “An issuing bank is irrevocably bound to honor as of the time it issues the credit”
      (d) “A confirming bank is irrevocably bound to honor as of the time it adds its confirmation to the credit”

      My remarks:
      1. (a) and (b) show that honor includes the action of sight payment under a negotiation credit.
      2. (c) and (d) show that honor can be applied to any type of credit, irrespective of sight payment credit, acceptance credit, deferred payment credit or negotiation credit.

      Honor in Article 2 UCP 600 should have included the action of honor under a negotiation credit. The concept of honor in UCP 600 will be complete if the following or similar wording is added to its definition: “to pay at sight a complying presentation under the credit available by negotiation if such a presentation is not negotiated by the nominated bank”.

      Unquote

      Reply

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