Draft drawn on the applicant

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Draft drawn on the applicant

Postby Judith - on Thu Apr 30, 2009 3:40 pm

A credit was received via DHL (domestic LC) available with a nominated bank by negotiation, payable at 180 days from the date of shipment.
One of the documents required under the credit was “Draft drawn on the applicant and pre-accepted by them.”

The beneficiary drew a draft and had it accepted by the applicant.
Credit compliant documents were also submitted to the issuing bank.

The following message was received from the issuing bank: “Documents have been accepted and payment will be made as per your instructions on 23-Sep-2009.”

1. Does this message constitute a deferred payment undertaking? (Is there a possibility that the issuing bank can deny payment if the applicant has insufficient funds?)

2. As per article 6, a draft should not be drawn on the applicant. What are the implications including this requirement in this credit?

Appreciate your comments.

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medium of payment

Postby jmitra - India on Sat May 02, 2009 8:37 pm

Dear Judith,

The scenario is pointed out shows how a cross border letter of credit differs from a domestic one. i have seen at least 3 countries where virtually no domestic letter of credit is without a requirement of at least one document drawn and accepted by the applicant. from observation, i found that these letter of credits are more a medium of payment than a guarantee. i have also seen widespread use of accommodation bill.

about the question you posed;

what was the availability of the credit? acceptance or deferred payment? i guess its deferred payment as you used the term in your question.

in my opinion, yes. its constitute a definite undertaking. because

1. the draft was pre accepted and there is no reason to accept them again.
2. the issuing bank used the term documents; not draft
3. the issuing bank is treating the draft as an additional document. if the draft is to be the main issue here, then there is no reason to issue a LC here as the draft has been accepted before the presentation.

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Available by negotiation

Postby Judith - on Mon May 04, 2009 9:52 am

The LC is available by negotiation.

Will the answer be different if the LC was available by Acceptance?

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Postby shahriar - Bangladesh on Mon May 04, 2009 7:40 pm

a good nut to crack at the day end!

well, i will summarize the issue first.

LC available by negotiation... with issuing bank? i guess not. otherwise they would have not issue an deferred payment undertaking.

draft to be drawn on applicant but "pre-accepted" by them. i think this is the key issue. a draft can be accepted once. so in no way issuing bank or applicant can accept it again. thus its just a document required for compliance. thereby i will consider the case as a deferred payment undertaking. the message from the issuing bank is quite clear in my opinion. there is no way to revoke it.

about article 6, the term used is 'must' not 'should'. on the basis of my answer, i would not say that the requirement is modifying the sub-article of UCP 600. the sub article said,

c. A credit must not be issued available by a draft drawn on the applicant.

since the draft is 'pre-accepted', its not 'available' by draft 'drawn' by applicant.

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Thank you

Postby Judith - on Tue May 05, 2009 8:59 am

Hi Shahriar,

Thank you for your comments. I didn't see it from the angle of the draft being available.
I am still curious about the consequence of Article 6(c). I think I'll raise it as a separate post!

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