WHERE THE DRAFT IS DRAWN ON THE CONFIRMING BANK

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QUERY FROM SHEILAR
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Dear Nguyen and Abrar,

There is one case that I would like to hear your opinion:
1. LC (issued by xxx Bank, Kenya) stipulating:
Available with: Bank A, Shanghai by negotiation
Drawee: Bank A, Shanghai
Personally, I think the drawee should have been the issuing bank, as Bank A, Shanghai is the nominated negotiating bank in this arrangement.

2. The LC later authorized Bank A Shanghai to add confirmation and amended the drawee as the issuing bank!

I think this is unreasonable to change the drawee, because Bank A Shanghai which is now the confirming bank should be drawee if the beneficiary wants to present documents to the confirming bank.

What concern me are:
1. Technically speaking, which should be the drawee if the nominated negotiating bank is also as a confirming bank?
2. From the legislative perspective, if the drawee is the issuing bank, would Bank A Shanghai (with duel role of a negotiating bank and also a confirming bank) be precluded from claiming its right of recourse if it effects the payment to the beneficiary?

As we are considering the financing possibility (such as forfeiting), I need to do some risk assessment for this one.

Thanks and best regards
Sheilar
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COMMENTS
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Dear Sheilar,

1) Technically, under LC available by negotiation with the confirming bank the draft should be drawn on the issuing bank or on a nominated bank other than the confirming bank.
However, it is agreed that the fact that the draft is required to be drawn on the confirming bank under LC available by negotiation with the confirming bank is quite common. If so, the confirming bank must PAY and not negotiate.

2) In line with the above, the amendment is correct. If the LC is available with the confirming bank by negotiation of the draft drawn on the issuing bank, the confirming bank must negotiate without recourse to the beneficiary (UCP 600 sub-article 8 (a)(ii)).

Best regards,
Nguyen Huu Duc
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Thank you, Nguyen.

I understand that under UCP600, a confirming bank could not claim right of recourse to the beneficiary ( UCP600 art.8 aii).
But when the confirming bank requires a draft with the drawee as the issuing bank, I guess they intend to claim reimbursement from the issuing bank as a bona find holder. What I really don’t understand is : a bona find holder under Exchange Act is entitled to claim recourse to its predecessors, do you think whether this stipulation of Exchange Act would change the confirming bank’s position under the LC?

Thanks and best regards
Sheilar
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Dear Sheilar

Not wishing to dwell on the point as to why banks still insist on requiring sight drafts under LCs, I would agree with Nguyen’s comments, the main focus of which is that a bank cannot negotiate drafts drawn on itself; it can only negotiate drafts drawn on a bank other than itself. I also agree that even if the LC is stated to be available by negotiation, as a confirming bank with sight drafts drawn on itself, the act of honouring the presentation would constitute Payment, and not Negotiation.
Whether the confirming bank pays under drafts drawn on itself, or whether it negotiates drafts drawn on the issuing bank; in both cases, payment to the beneficiary is without recourse. Since the draft in this case, is entwined with the LC, the fact that the draft may be subsequently dishonoured by the drawee (issuing bank) would not in my view, provide for the opportunity by the confirming bank to seek recourse to the drawer, as might normally be the case, had we not been considering a confirmed LC transaction. The non-recourse nature of payment by an issuing/confirming bank would always be paramount, and be upheld by the courts, regardless of whether or not a draft was involved.
However, outside an LC transaction, recourse in respect of dishonor could be sought under s 43(2) and s 47(2) of the Bills of Exchange Act 1882, or equivalent provisions under other relevant Acts.

Regards
Abrar
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Hi Sheilar,

I see that if the draft is drawn on the confirming bank, the confirming bank is the drawee, i.e., the party ordered to make payment and not the bona fide holder or the holder in due course. Such a draft shall not necessarily be included in the documents presented by the confirming bank to the issuing bank for reimbursement.

Best regards,
Nguyen Huu Duc
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Dear Nguyen,

I agree.

But what I consider is this case:”the confirming bank requires a draft with the drawee as the issuing bank” .(this situation would render the confirming bank as a bona find holder.) What I really don’t understand is : a bona find holder under Exchange Act is entitled to claim recourse to its predecessors, do you think whether this stipulation of Exchange Act would change the confirming bank’s position under the LC?

By the way, many thanks for Abrar’s comment (very convincing, I could hardly argue against him!).

Thank you
Sheilar
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Dear Sheilar

Pending Nguyen’s comments, my view is that if the confirming bank requires the beneficiary to draw a draft on the issuing bank, presumably to preserve the confirming bank/’s rights both as a holder in due course, and also to preserve its rights as a nominated and confirming bank under the LC, it appears that the confirming bank is acting in two different directions. On the one hand, it has obligations under the LC to honour complying documents, by negotiating the draft and documents without recourse, and on the other hand, it is attempting to preserve its rights as a “holder in due course”, to recourse on the drawer/beneficiary in the event of dishonour of the draft by the issuing bank.

The latter course would be reasonable if the negotiation were to be effected with recourse (i.e without confirmation), and full protection would be offered under the relevant Bills of Exchange legislation, but the same could not be said to be true under a confirmed LC, where the honour/dishonour of the sight draft drawn on the issuing bank is taken out of the equation, on account of UCP provisions taking precedence.

Best regards

Abrar
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Dear Sheilar,

I think Abrar’s comment is clear enough. No need to add more comment.

Best regards,
Nguyen Huu Duc