USANCE LC AVAILABLE WITH ANY BANK: IS IT PRACTICAL?

INTRODUCTION

At first sight, there seems to be no reason why a usance LC cannot be made available with any bank by acceptance or by deferred payment. UCP 600 does not prohibit such a structure.

But there is an important practical question: will any bank actually be willing to act on such a nomination?

This question becomes even more interesting when the LC also specifies the beneficiary’s country as the place of expiry. Based on practical experience, the answer is not always as straightforward as it may appear.

QUESTION

Dear Mr. Old Man,

I have a question regarding Letters of Credit and would very much appreciate your advice.

My bank usually issues usance LCs with the following provisions in fields 31D and 41D:

31D: Date and Place of Expiry: … Issuing Bank
41D: Available with ISSUING BANK by acceptance or by deferred payment

I wonder why a usance LC cannot be issued with the following terms:

31D: Date and Place of Expiry: … Beneficiary’s Bank
41D: Available with ANY BANK by acceptance or by deferred payment

I look forward to hearing your advice.

Thank you and best regards,
An

____

ANSWER

Dear An,

In practice, both Vietnamese and foreign banks commonly issue usance LCs—whether available by acceptance or by deferred payment—with provisions in fields 31D and 41D similar to those used by your bank, namely:

31D: Date and Place of Expiry: … Issuing Bank
41D: Available with ISSUING BANK by acceptance (for a usance LC requiring a draft) or by deferred payment (for a usance LC without a draft).

Accordingly, the beneficiary is required to present the documents to the issuing bank within the stipulated presentation period so that the issuing bank can accept the draft and pay at maturity (in the case of a usance LC requiring a draft), or undertake to make deferred payment (in the case of a usance LC without a draft).

A usance LC may provide for presentation of documents for payment to a nominated bank. However, in practice, this is usually a specifically named nominated bank, for example:

31D: Date and Place of Expiry: … ABC Bank’s counter
41D: Available with ABC BANK by acceptance or by deferred payment

In practice, many banks still issue usance LCs requiring presentation of documents to the issuing bank rather than to a nominated bank, whether the nominated bank is a specifically named bank or any bank. This may be for the following reasons:

(i) The issuing bank does not wish to authorize another bank to accept the draft or undertake deferred payment;

(ii) The nominated bank may refuse to act on the nomination, i.e. refuse to accept the draft and documents or refuse to undertake deferred payment, unless the nominated bank has agreed to do so or is the confirming bank.

A nominated bank may refuse to act on the nomination under UCP 600 Article 12(a), which provides:

“Unless a nominated bank is a confirming bank, an authorization to pay or incur a deferred payment obligation or negotiate does not impose any obligation on that nominated bank to pay or negotiate, unless expressly agreed to by that nominated bank and so communicated to the beneficiary.”

Based on practical experience, Mr. Old Man can say that 99% of nominated banks under a usance LC available with ANY BANK will refuse to act on the nomination, i.e. they will refuse to accept the usance draft or refuse to incur a deferred payment undertaking.

Accordingly, a usance LC should generally not be issued as available with ANY BANK by acceptance or by deferred payment.

Finally, in practice, many banks issue usance LCs requiring presentation of documents to the issuing bank for acceptance or deferred payment, while at the same time specifying the place of expiry for presentation as being in the beneficiary’s country.

This may appear somewhat contradictory. However, such an arrangement may have been requested by the beneficiary to avoid the risk of a late presentation discrepancy that could arise if the place of expiry were specified as the issuing bank.

Best regards,
Mr. Old Man