Who Bears the Risk? Understanding Issuing vs. Nominated Bank Responsibilities under Different LC Availabilities

“By payment”, “by negotiation”, “by deferred payment”, “by acceptance” — same LC, different risks.

But who really carries the burden when things go wrong?”

A common question from trade finance practitioners — and one that sparks more debate than you’d expect.

When an LC says “by payment” or “by negotiation”, who really bears the risk if things go sideways? Let’s unpack it. 

Question from NA

Dear Sir,

May I ask for your advice on an issue related to letters of credit?

I would like to understand the difference in risk and responsibility between the issuing bank and the nominated bank when an LC is available by negotiation, by deferred payment, by payment, or by acceptance.

As I understand, Field 78 of the LC generally provides that the issuing bank will honour upon receipt of a complying presentation. However, I’m still confused about the “by payment” case:

• Some say this increases the issuing bank’s risk.
• Others argue that the real risk lies with the nominated bank or the beneficiary, because if the issuing bank refuses the documents, the nominated bank — even if it has already paid or committed to pay the beneficiary — has no recourse against the issuing bank.

I would be grateful for your clarification.

Thank you very much.

NA

_______

Answer

Dear NA,

Thank you for your thoughtful question.

1. Responsibility and Risks of the Issuing Bank

The issuing bank’s obligations are clearly defined under Article 7 of UCP 600.

As long as the documents presented under the LC constitute a complying presentation, the issuing bank must honour or reimburse the nominated bank — regardless of whether the LC is available by negotiation, by payment, by deferred payment, or by acceptance.

While UCP 600 does not explicitly define the issuing bank’s risks, in practice, they typically include:

• Reimbursement risk:

The applicant fails to reimburse the issuing bank for the amount paid.

• Document-related risks:
  • Payment or acceptance made despite discrepancies, later refused by the applicant.
  • Payment against forged documents, later discovered to be fraudulent.
  • Complying documents lost in transit between banks, leaving the issuing bank obligated to pay while the applicant refuses reimbursement (unless the bank issues a shipping guarantee, which carries its own risk).

Notably, if an LC is available with the issuing bank by payment, deferred payment, or acceptance, the issuing  bank avoids the risk of paying before receiving the documents.

     2. Responsibility and Risks of the Nominated Bank

The nominated bank is authorized to pay, accept, or negotiate documents, but — unless it is the confirming bank — it has no obligation to do so unless it explicitly agrees and informs the beneficiary (UCP 600, Article 12(a)).

Key risks for a nominated bank include:

• Document risk: Paying or negotiating without recourse but later not being reimbursed because of non-complying documents.
• Reimbursement or country risk: Paying or negotiating without recourse but not being reimbursed due to issuing bank default or country restrictions.
• Beneficiary risk: In with recourse negotiation, being unable to recover funds from the beneficiary after a refusal by the issuing bank.

3. Risks of the Beneficiary

• Documents contain discrepancies that cannot be corrected, leading to refusal of payment.
• Documents are compliant, but the issuing bank — for political, legal, or insolvency reasons — fails to honour the LC.

In Summary

Under UCP 600, the issuing bank’s obligation to honour a complying presentation remains the same regardless of whether the LC is available by payment, negotiation, deferred payment, or acceptance.

However, the risk distribution among the issuing bank, nominated bank, and beneficiary depends on who acts first — and whether that action was with or without recourse.

Best regards,

Mr. Old Man