Article

by Bob Ronai

Rupnarayan Bose's article "An enigma called draft" in the summer issue of DCInsight attempted to address the comments on LinkedIn about the pointlessness of L/Cs calling for drafts, and I freely admit I am one of the main protagonists. Unfortunately, Mr Bose missed the point.

A long time ago, before the days of electronic communications, L/Cs required that reimbursement claims be made on a bank in the country of the L/C currency by presenting a draft drawn on that reimbursing bank. UCP 600 sub-article 7 (a) (iv) still refers in a way to that procedure, but only for acceptance.

These days the vast majority of L/Cs require presentation of a sight draft drawn on the issuing bank. Yet article 7 in the lead paragraph imposes the responsibility upon the issuing bank to honour a complying presentation. Reference to virtually any L/C will show an undertaking from the issuing bank that says, upon receipt of a complying presentation, it will reimburse the presenting bank. That is what an L/C is all about.

The claim that action can be taken against the issuing/drawee bank if payment of the draft is not made is unrealistic. Whom would the presenting bank instruct to note and protest - the issuing bank? That, of course, being the bank that has refused to pay the draft drawn on itself. And why would that issuing bank refuse to pay the sight draft? In the vast majority of cases, because the presentation was not complying. We cannot have the nonsensical scenario that the issuing bank would give notice in accordance with sub-article 16 (c) (i) "that the bank is refusing to honour or negotiate" and yet have the presenting bank insist that the draft be accepted. Note that UCP 600 article 16 makes no mention of accepting a draft.

The solution to eliminating sight drafts from L/Cs is very simple. Delete fields 42A and 42C, and presto the issuing bank's undertaking, as expressed usually in field 78 and covered by UCP 600 article 7, is completely adequate.

As for usance L/Cs, why not simply have a deferred payment L/C with exactly the same usance period, typically XX days after the shipment date? I have had responses in LinkedIn saying that the issuing bank accepts a usance draft which it returns to the presenting bank to give back to the beneficiary. Imagine if the beneficiary then sold that draft, and the holder on the due date claimed payment from the drawee, when that drawee, being the issuing bank, is obliged to honour the presentation due by reimbursing the presenting bank. I'm sure no bank wants to pay twice. But also no proponents of this process actually admitted to following it; it just exists in theory or the imagination.

The draft is a misunderstood and totally misused concept which has no place in the vast majority of L/Cs. Requiring a draft is superfluous and pointless. If good sense prevails and it is eliminated, let me assure you that international trade will not falter, and beneficiaries everywhere will be very happy, as will the trees who live on with this saving of paper.

Bob Ronai's e-mail is bobr@exports.com.au