WHO PAYS THE DISCOUNTING CHARGES IN A DEFERRED PAYMENT LC?

QUESTION

Hi,

An LC for USD 1,000,000 is issued with these key terms:

• Usance LC: 180 days from date of negotiation
• 41D: Available with any bank in the beneficiary’s country by negotiation
• 71D: All charges are on account of the applicant
• The beneficiary asks the negotiating bank to discount the bill at 3% per annum.

Who is responsible for paying the 3% discounting charge—and why?

Regards,

Ranjana Pathak

TOC

ANSWER

Hi Ranjana Pathak,

The beneficiary is responsible for paying the 3% discounting fee, unless the LC clearly states otherwise.

Here’s why:

• The LC is available by negotiation, which means the beneficiary can ask any bank in their country to negotiate and possibly discount the documents. But the issuing bank is not obligated to cover the discounting cost.
• Even though the LC says “all charges are on account of the applicant” (Field 71D), this usually refers to charges under the LC—like advising or confirmation fees—not discounting charges, which are between the beneficiary and the negotiating bank.
• Discounting is done at the beneficiary’s request, so unless the LC specifically says the applicant will pay for it, the beneficiary covers the cost.

Two important notes:

1. If the applicant ends up paying the discounting charges under a deferred payment LC, it would be more reasonable to issue a sight LC instead. Otherwise, the applicant would bear both the cost of discounting and the higher price of goods often associated with deferred payment terms—making it financially disadvantageous.
2. To avoid misunderstandings, the issuing bank should clearly write in Field 71A:

“All charges outside the issuing bank’s country are for account of the beneficiary.”

This makes it clear who pays what—and prevents disputes.

Best regards,

Mr. Old Man