Can Issuing Bank Negotiate If Nominated Bank Refuses Negotia

[jim]

friends,

say an acceptance letter of credit is available by negotiation with any bank. now if the nominated bank refuse to negotiate and beneficiary present the document to the issuing bank with the same draft drawn on the nominated bank, will the issuing bank negotiate?

jim

[shahriar]

dear Jim,

your question has some logical error.

if an acceptance letter of credit is available by negotiation with any bank, then the draft must have been drawn on the issuing bank. therefore if for any reason the nominated bank refuse to negotiate the document and beneficiary present the draft to the issuing bank, then it must honor. please remember that the draft is drawn on the issuing bank. UCP 600 -

Article 7 - Issuing Bank Undertaking

a. provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available by:

v. negotiation with a nominated bank and that nominated bank does not negotiate.

a better question would be that if a draft is drawn on a bank other than the issuing bank and is presented to the issuing bank, what will be the course of action.

UCP 500 suggested that the beneficiary should revise the draft. but UCP 600 is silent on the issue; to give a greater option to the beneficiary and to that issuing bank. if the issuing bank agrees, then it may accept the draft though it was not drawn on it. however even under such scenario, the issuing bank will honor the presentation under the letter of credit.

hope that will help.

regd

shahriar

[nesarul]

Dear Shaharier,
Your last part of answer followed by a very tricky question. Its interesting.
Here i share my thought:
Your query [ i repeat your query for my own convenient]:
credit available with a nominatd bank by acceptance
draft drawn on nominated bank.
nominated bank decline to act under this credit.
beneficiary's possible course of actions:
1.Beneficiary can prepared a draft drawn on issuing bank and presented the document to the issuing bank directly.

or.
2. Beneficiary can send the document to the issuing bank except draft which was drawn on nominated bank. under this circumstances, since nominated bank is an authorization of an issuing bank, declining its act will ultimately goes to issuing bank's' soulder. in this situation, issuing bank should have to provide DPU and pay at maturity.
or.
3. Beneficiary can send the document along with draft which was drawn on nominated bank to the issuing bank directly. under this circumstance, the issuing bank should have to perform according to my above point 2.

am i wrong?????????????
regards
nesar

[cparial]

If I accept the answer of Nesarul of serial 2, does it mean that " beneficiary have to be satisfied with DPU only, S/He will not be able to get any finance through negotiation ( the main objective of negotiation?) earlier than its maturity?'.

thanks

[shahriar]

dear cparial,

good question. unfortunately the answer is will be something like should / may etc . UCP article 7 says

a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honor if the credit is available by:

v. negotiation with a nominated bank and that nominated bank does not negotiate.

so issuing bank will honor the presentation. article 2 defines honors as

Honor means:
a. To pay at sight if the credit is available at sight payment.
b. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
c. To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

so theoretically the issuing bank will pay at maturity and therefore is not bound to discount its own undertaking.

however if somehow one can manage to show that discounting is a part of honor, then there "may" be a way out. cant say for sure.

but my rational mind says that the issuing bank "should" discount the bill for the following reasons -

a. when one issues a deferred letter of credit available by negotiation, the underlying motive is to allow the beneficiary to generate some quick cash at his own cost.

b. once the issuing bank has incurred a deferred payment undertaking, it has to pay at maturity. then why not discount the bill and earn some interest. its the safest business!!

regd

shahriar