Home Mr Old Man Articles WHERE THE CONFIRMING BANK HONOUR A TIME DRAFT DRAWN ON ANOTHER NOMINATED BANK

WHERE THE CONFIRMING BANK HONOUR A TIME DRAFT DRAWN ON ANOTHER NOMINATED BANK

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QUESTION

Hi Mr. Old Man,

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 CDCS question quoted below:

QUOTE:

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

  1. Sight payment – to pay at sight.
  2. Deferred payment – to incur a deferred payment undertaking.
  3. Negotiation – to negotiate with recourse time draft drawn by the beneficiary.
  4. 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?

————–

ANSWER

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 which 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

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4 Comments

  1. Alex Soon

    February 7, 2016 at 7:30 am

    Hi Mr Old Man:

    So if a LC is available with nominated bank by negotiation with draft drawn on confirming bank, and nominated bank decided not to negotiate complying presentation, the confirming bank will have to honor by paying at sight. Even if the draft is drawn on confirming bank, the confirming bank will (negotiate) pay at sight under a complying presentation. It is advisable but not a must for the beneficiary to draw a revised draft on the issuing bank to allow confirming bank to negotiate the draft?

    If issuing bank issues a LC available with confirming bank by negotiation then the draft (if any) must be drawn on other banks and not the confirming bank.

    Its seem the rules on “negotiating only draft drawn on other banks” and “accepting only draft drawn on itself” only strictly applies where the LC is directly available with the nominated/confirming banks. For cases where nominated banks don’t honor/negotiate leading to confirming banks(if any) having to honor, the confirming bank in such cases doesn’t not to follow these 2 rules.

    Reply

    • mroldman

      February 7, 2016 at 10:05 pm

      For further clarification, please refer to my below discussion with my friends with regard to draft drawn on confirming bank:
      QUOTE
      QUERY FROM SHEILAR
      ________________________________________

      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
      ________________________________________
      COMMENTS
      ________________________________________

      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
      ________________________________________

      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
      ________________________________________

      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
      ________________________________________

      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
      ________________________________________

      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
      ________________________________________

      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
      ________________________________________

      Dear Sheilar,

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

      Best regards,
      Nguyen Huu Duc

      UNQUOTE

      Reply

  2. Chippink

    February 16, 2016 at 9:40 pm

    Dear Mr Old Man,
    I am so sorry as i leave my question here because i can not find where to to leave the new one. I really need your kind help in some matters.
    1. collection docs not contain bill of exhange
    Collection schedule (not mention any tenor) states as follows:
    + maturity date: 30 OCT 2016
    + delivery against acceptance.

    Item I. In D/A, one of financial instrusments such as bill of exchange, promissory note, v..vv and others must be presented? Because in this case, the collection docs not contain bill of exhange or others. Normally, the collecting bank will send the bill of exchange to the drawee for their acceptance by signing on it. It there is no any financial instrucments, where the drawee sign on to accept?
    2. According to URC522, art. 7a :the collection should not….: I understand that if in case of D/P , the collection docs should not contain B/E. However, when reading art 7b, I am so confused when it states that if the collection docs contain B/L, the instruction should states D/P or D/A? So, it is inconsistent with my understanding of art 7a.

    Item II.

    I read many your articles of available by payment and the no draft presented. However, there is a request from BANK A for a confirmed l/c:
    available with … by … *41D
    BY PAYMENT AT BANK A

    Drawee: 42A : BANK A

    So, the draft is required here. Please kindly help to give me your instructions.
    Thank you so much! Best regards,
    Chippink

    Reply

    • mroldman

      February 17, 2016 at 3:54 pm

      Hi,

      1) Documentary collections not including bills of exchange
      It is agreed that documentary collections would include commercial documents and financial documents, i.e., bills of exchange. However, documentary collections may not include financial documents (see sub-article 2 (d) URC 522).

      Please also note that documentary collections are not restricted to D/P and D/A only. There are various types of document collections where the collecting bank is instructed to deliver the documents on other terms and conditions, e.g., delivery of documents against letter of undertaking to pay.

      As far as I know, importers (drawees) in some countries insist on delivery of documents against letter of undertaking to pay at a future date instead of against bills of exchange. The purpose of this type is to save drawees from paying stamp costs.

      The case in question is similar to the case where the documents are delivered against letter of undertaking to pay at a future date. The collecting bank may deliver the documents to the drawee upon receipt from the drawee of a letter of acceptance or a similar written undertaking in which the drawee accepts to pay the bill at maturity date, i.e., 30 October, 2016.

      2) URC 522 sub-article 7 (a)
      It is practice that D/P collections should include SIGHT bills of exchange and D/A collections should include USANCE bills of exchange, i.e., bills of exchange payable at a future date. This is what sub-article 7(a) means.

      3) Drafts under LC available by payment
      It should be agreed that LC available by payment does not require the presentation of drafts. Therefore, LC available by payment would not include Field 42C (Drafts at…) and Field 42a (Drawee).

      In you case, the beneficiary may or may not present drafts drawn on Bank A. Bank A cannot refuse to honour just because the presented documents do not include drafts.

      Kind regards,
      Mr. Old Man

      Reply

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