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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by Pavel Andrle
After four years of operation, it's clear that the UCP 600 revision is a success. This is largely because it is a more concise and clearer set of rules than its predecessor. However, there are still issues that cause headaches to many practitioners. One of these is the "availability" of credits, which has been a subject discussed in previous issues of DCInsight. In this article I will address two related topics: first, with which banks is the credit available, and second, how is the credit available, with particular focus on negotiation and its difference from other forms of availability.
With which bank? Where to present documents?
The answer to this question is very important to the beneficiary, as he must present requested complying documents in time to the bank with which the credit is available.
UCP 600 sub-article 6 (a) states: "A credit must state the bank with which it is available or whether it is available with any bank. A credit available with a nominated bank is also available with the issuing bank."
UCP 600 sub-article 6 (d) (ii.) also stipulates: "the place of the bank with which the credit is available is the place for presentation. The place for presentation under a credit available with any bank is that of any bank. A place for presentation other than that of the issuing bank is in addition to the place of the issuing bank."
Consequently, there would be situations when the credit is available with:
a) Only one bank
The credit is available only with the issuing bank. As per UCP 600, the place of the issuing bank is the place for presentation, and the credit should be issued accordingly. The best way would be to state just that, i.e., that the place for presentation1 is "the issuing bank´s counters". The credit can also show the place where the issuing bank is located as the place for presentation (for example, by showing the name of the relevant country and/or the city). A specification of any other place as the place for presentation should always be avoided2.
b) Two banks;
Suppose the credit is available with a nominated bank. Then, by virtue of UCP 600 sub-article 6 (a), the credit is also available with the issuing bank. The availability of the credit with the issuing bank is a UCP 600 automatic option, presented as an addition to its availability with the nominated bank stated in the credit. The draftsmen of the UCP 600 decided to include this provision to make it clear that the documents can be always presented to the issuing bank, even if the credit is made available with another bank.
However, this additional automatic availability with the issuing bank is to be understood as an option to be exercised by the beneficiary only if it is really needed. As the first option, the beneficiary should preferably present documents to the nominated bank and not by-pass it3.
The credit should be issued correctly, taking into account comments made above, i.e., showing the place where the nominated bank is located as the place for presentation (preferably as: "the nominated bank´s counters", or showing the name of the country and/or the city where the nominated bank is located). As noted, UCP 600 sub-article 6 (d) (ii) states in this respect that: "the place of the bank with which the credit is available is the place for presentation."
c) More banks;
Suppose the credit is available with any bank. By the virtue of UCP 600 sub-article 6 (a) the credit is also available with the issuing bank, as above.
Again, the credit should stipulate the place where the banks with which it is available (nominated banks) are located as the place for presentation4.
How is the credit available?
UCP 600 sub-article 6 (b) states: "A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation."
If we read in conjunction article 7 (Issuing bank undertaking) and the definition of expressions "Honour" and "Negotiation" in article 2, it becomes clear that a credit should never be issued as available by negotiation with an issuing bank. The issuing bank is bound to honour a complying presentation. The definition of "honour" does not include the option of a credit being available by negotiation.
The fact that an issuing bank cannot negotiate in the sense of UCP 600 is also clear from the definition of the expression of negotiation itself: "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 bank5."
Users of UCP 600 sometimes wonder what the difference is between these options of availability. Let me focus only on the situation when the credit is available with a nominated confirming bank from its perspective.
Available by payment
In this case, the confirming bank would have to honour the complying presentation, i.e., pay at sight. If the credit requests a draft, it would be a sight draft made out on the confirming bank6.
Available by deferred payment
Here the confirming bank would have to honour the complying presentation, i.e., to incur a deferred payment undertaking and pay at maturity. In simple terms, "to incur a deferred payment undertaking" means to confirm to the presenter that the documents were taken up by the bank and that it will make payment for the documents' value at maturity. As stated in UCP 600 sub-article 12 (b), the nominated (confirming) bank is authorized to "prepay or purchase"7 a deferred payment undertaking incurred by that nominated bank; however, it would be always entitled to the reimbursement only at maturity8 (thus financing the beneficiary itself). The confirming nominated bank can incur its deferred payment undertaking and prepay it when it finds the presentation to be complying or later - for example, after the documents were taken up by the issuing bank later due to discrepancies9.
Available by acceptance
In this situation, the confirming bank would have to honour the complying presentation, i.e., to accept a bill of exchange ("draft") drawn by the beneficiary and pay at maturity. The confirming nominated bank is authorized (see sub-article 12 (b)) to prepay or purchase a draft accepted by that nominated bank, but it would be entitled to reimbursement only at its maturity (again, financing the beneficiary).
What exactly would the confirming nominated bank do? It would pay the beneficiary the discounted proceeds, i.e., the face value of the draft less discount. But strictly speaking, does it "prepay" or "purchase" the draft, and what is the difference?
The draft was drawn on and accepted by the confirming nominated bank. This bank is the drawee and the acceptor. If it pays the draft before its maturity10, the draft will be discharged at maturity11. In that sense, the confirming bank, the acceptor, prepays the draft (pays it before maturity)
The acceptor can also purchase a draft drawn on it. What exactly the expression "to purchase" means in this sense is not defined in UCP 600 (neither is the expression "to prepay"). In my view, a draft's purchase might be accomplished by transferring the draft by an endorsement of the holder completed by the delivery12 against immediate payment or another form of value (including a commitment to pay later). The new holder would be obviously the acceptor, the confirming nominated bank13.
It appears that the expression "to purchase" has a broader meaning than "to prepay". Obviously, the objective of this provision in UCP 600 was not to prescribe or choose any particular legal term with a precise and possibly limited scope, but rather to highlight that the nominated bank is authorized to somehow discharge its payment obligation toward the beneficiary (or a holder in due course in case of an acceptance credit) before its maturity if, and as agreed, with the beneficiary14, but, by the same token, to stress that the nominated bank is entitled to be reimbursed only at maturity.
It should be noted that the expression: "to purchase" in article 12 also pops up in the definition of negotiation in article 2. This creates some confusion. Is the purchase made by the nominated bank under a deferred payment or an acceptance credit actually a negotiation?
Available by negotiation
The definition of negotiation (see above) must be always understood and interpreted in the context in which it is used. UCP 600 defines what negotiation is in case of the credit available by negotiation. Only a nominated bank can negotiate (in the context of UCP 600) and only under a credit available by negotiation. If the credit is not available by negotiation, no negotiation within the meaning of the term in UCP 600 can take place. And as it is very clear from the definition of negotiation, the nominated bank is to negotiate only drafts drawn on a bank other than the nominated bank15. If the nominated bank purchases a draft drawn on another bank under a credit available by negotiation, it negotiates16. This type of purchase constitutes negotiation in the UCP 600 context.
However, negotiation also has other meanings. The most relevant is in the context of negotiable instruments17. Thus, the nominated bank which accepts and prepays or purchases a draft accepted by it under a credit available by acceptance would most likely, in the context of bill of exchange law, "negotiate" the bill18. But in the context of UCP 600 it would prepay or purchase the draft, and this prepayment or purchase would not constitute negotiation as described in the UCP.
The availability of credits is a complex matter. From a practical point of view just a couple of basic rules should be strictly followed to avoid confusion.
UCP 600 sub-article 12 (b) clearly intends to make the position of the nominated bank which purchases (or prepays) a draft accepted by itself or its own deferred payment undertaking on an equal footing regarding its reimbursement rights with the nominated bank that purchases drafts and/or documents under credits available by negotiation (i.e., negotiates them).
Finally, negotiation under UCP 600 and documentary credit practice and negotiation under negotiable instruments law and practice are separate and distinct areas.
Pavel Andrle is Secretary of the Banking Commission, ICC Czech Republic and an international trainer and consultant. His e-mail is email@example.com
1 If the credit is issued by the SWIFT MT 700, the place for presentation is the place mentioned in the field 31D: "Date and Place of Expiry" (it could be further specified in other part of the credit).
2 See the ICC Opinion TA 717.
3 As the presentation (to the nominated or issuing bank) must be always made in time! It is, in most cases, much easier and more convenient for the beneficiary to present documents to the nominated bank than to the issuing bank located abroad.
If the presentation is made to another bank (not nominated or issuing), it is not yet presentation as such under the credit. Also note, the beneficiary can benefit from the second half of article 35 of UCP 600 only if it presents complying documents to the nominated bank.
4 It is recommended to restrict nominated banks in the field 41D of the SWIFT MT 700, e.g., "any bank in Singapore" and stipulate the place for presentation accordingly.
5UCP 600 article 2.
6 However, it is recommended not to request presentation of a draft when a credit is available by sight payment, as its role in the transaction is rather pointless.
7 In this context the nominated bank would rather "prepay" than "purchase" its deferred payment undertaking.
8 As stated in UCP 600 sub-article 7 (c).
9 This has been clarified by ICC Banking Commission Opinion TA 690 approved at its spring 2010 ICC meeting.
10 Certainly only against its presentation.
11 BOA 1882, paragraph 59 says: "A bill is discharged by payment in due course by or on behalf of the drawee or acceptor." "Payment in due course" means payment made at or after the maturity of the bill to the holder thereof in good faith and without notice that its title to the bill is defective. The position under other B/E laws is similar.
12 This would, in fact, constitute "negotiation of the bill" as defined by paragraph 31 of BOA 1882.
13 Paragraph 61 of BOA 1882 states: "When the acceptor of a bill is or becomes the holder of it at or after its maturity, in his own right, the bill is discharged."
14 Whether it would be "purchase" or "prepayment" can be finally only decided by the applicable law.
15 Unfortunately, many credits available by negotiation are wrongly issued as calling for drafts to be drawn on the nominated (negotiating) bank. This is incorrect and should be avoided.
16 Strictly speaking, this "UCP 600 negotiation" does not have to be negotiation in the bill of exchange legal meaning - see further comments.
17 For instance, BOA 1882 in paragraph 31 defines negotiation of bills as: "A bill is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder of the bill ... (3.) ... A bill payable to order is negotiated by the endorsement of the holder completed by delivery."
18 Even a bank, which has little to do with the credit, as it is not a nominated bank, might "negotiate" a draft within the context of the bill of exchange law.