WHETHER A NOMINATED BANK CAN NEGOTIATE DRAFTS DRAWN ON ITSELF

QUESTION

Dear Mr. Old Man,

You are kindly requested to explain to me paragraph B10 ISBP 745, which says: “When a credit is available by negotiation with a nominated bank or any bank, the draft is to be drawn on a bank other than the nominated bank”.

I understand if the LC is available with a nominated bank, e.g., Bank A, the draft may be drawn on other bank

If LC is available with a nominated bank (Bank A) and the draft is drawn on another bank (Bank B).  I want to know whether Bank B can negotiate the draft and claim reimbursement from the issuing bank  without presentation of the documents to  Bank A?

I’m rather confused.

Thank you.

TC

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ANSWER

Hi,

Paragraph B10 ISBP 745 is created based on the definition of the term “negotiation” in UCP 600 Article 2, which says: “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”.

The question does not tell me whether the LC is available by acceptance or by negotiation. So, my answer will cover both cases.

Where LC requires presentation of drafts, it depends on the type of LC that drafts may be required to be drawn on a nominated bank or on a bank other than the nominated bank. If LC is available with a nominated bank by acceptance, the drafts would be required to be drawn on the nominated bank. However, if LC is available with the nominated bank by negotiation, the drafts would be required to be drawn on a bank other than the nominated bank, normally on the issuing bank or on the confirming bank (if any).

Please note that where complying documents including drafts drawn on a nominated bank, the nominated bank that agrees to act on its nomination would honour  (and not negotiate) and claim reimbursement from the nominated reimbursing bank or from the issuing bank in accordance with the issuing bank’s instructions.

Back to you case, it is advisable for the beneficiary to present the documents to Bank A to comply with the LC requirement. If Bank A agrees to act on its nomination, it would negotiate the documents and claim reimbursement from Bank B or from the issuing bank in accordance with the issuing bank’s instructions. However, if the beneficiary presents the complying documents including drafts drawn on Bank B to Bank B and if Bank B agrees to act on its nomination, it would honour (pay), AND NOT NEGOTIATE, and claim reimbursement from the issuing bank. If it is the case, there is no need for the documents to be presented to Bank A.

Kind regards,

Mr. Old Man