Beneficiary submitted compliant docs to us to collect the proceeds. Beneficiary is not interested to negotiate as they do not wish to pay the interest. We are requested to by him to claim reimbursement
from the designated reimbursing bank even though we have not given value for the documents.
Is it proper for a bank to claim reimbursement when it has not negotiated the documents?
Reimbursement
Reimbursement
THE BANK HAS NO RIGHT TO CLAIM REIMBURSEMENT
We assume that the LC is available for negotiation by the bank and reimbursement is provided by a reimbursing bank.
The bank should present the compliant documents to the issuing bank or to the confirming bank, where applicable. The intended approach is not proper and may lead to problems. Improper reimbursement claims may be denied by the issuing bank.
The bank may be asked to refund the money received because without givng value, the claimed negotiation is not a negotiation under the UCP 500 according to ICC Position Papers and the bank has no right to claim reimbursment in the first place.
We are from http://www.tolee.com
[edited 7/22/01 5:42:26 PM]
We assume that the LC is available for negotiation by the bank and reimbursement is provided by a reimbursing bank.
The bank should present the compliant documents to the issuing bank or to the confirming bank, where applicable. The intended approach is not proper and may lead to problems. Improper reimbursement claims may be denied by the issuing bank.
The bank may be asked to refund the money received because without givng value, the claimed negotiation is not a negotiation under the UCP 500 according to ICC Position Papers and the bank has no right to claim reimbursment in the first place.
We are from http://www.tolee.com
[edited 7/22/01 5:42:26 PM]
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PGauntlett
- Posts: 153
- Joined: Fri Apr 05, 2019 5:25 pm
Reimbursement
As far as I am aware (having spent 27 years working at such banks as Stanchart, Paribas, UBS, SBC and KBC) it is standard banking practice for a nominated 'negotiating' bank to:
a) check docs
b) if in order forward docs to I/B and claim reimbursement from nominated Reim Bank
c) pay beneficiary upon receipt of funds
Probably theses type of l/c's should be available 'by sight payment' but a large number of issuing banks are ignorant in these matters.
I believe, however, that in practical terms there is nothing wrong with the above procedure.
a) check docs
b) if in order forward docs to I/B and claim reimbursement from nominated Reim Bank
c) pay beneficiary upon receipt of funds
Probably theses type of l/c's should be available 'by sight payment' but a large number of issuing banks are ignorant in these matters.
I believe, however, that in practical terms there is nothing wrong with the above procedure.
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AbdulkaderBazara
- Posts: 256
- Joined: Fri Apr 05, 2019 5:15 pm
Reimbursement
I agree with PGauntlett, I don't think it is wrong to claim reimbursement without negotiation (paying of value without recourse). In practice, as stated in PGauntlett's comment, many banks check documents, ensure that they are in order, then claim reimbursement on behalf of the beneficiary. Once the amount is received, they pay the beneficiary less their handling charges which maybe equivalent to their negotiation charges. These banks take the risk of having the documents being rejected by the issuing bank for any reason since it would be difficult to reclaim the amount from the beneficiary once paid unless they have a separate agreement to have a recourse on the beneficiary.
Reimbursement
SHOULD NEGOTIATION COMMISSION BE CHARGED WHEN NO VALUE HAS BEEN GIVEN?
We have an important question to ask Mr. PGaunlett and Mr. AbdulkaderB. Should the claimed "negotiating bank" (who does not give value) charge the beneficiary for negotiation commission? We think many banks do charge. That practice is not right. The claimed "negotiating bank" has no right to charge negotiation commission because no actual negotiation has been done. The claimed "negotiating bank" has no risk because it pays the beneficiary only when the fund from the reimbursing bank is avaialble. The negotiation commission also compensates for the risk faced by the negotiating bank in the unfortunate event that advance payment has been made (giving value) but the reimbursement claim is not successful for various reasons.
TREATING DOCUMENTARY CREDIT AS DOCUMENTARY COLLECTION
By paying the beneficiary only after successful reimbursing claim is treating documentary credit as documentary collection. The nominated bank has not performed its duty to pay in advance of reimbursement, which the DC system is all about. The presentation for payment is in essence a documentary collection approach except that under the UCP 500 the beneficiary has a right of recourse to the issuing/confirming bank against compliant documents and he is also protected by Articles governing examination of documents and refusal advice.
DON'T ASK FOR/ACCEPT ANYTHING YOU DON'T NEED
If the beneficiary does not wish to pay for the interest charges in negotiation, he should have asked for an LC available for sight payment instead.
A beneficiary who accepts a negotiation DC but does not use the negotiation facility due to not willing to pay for the interest charges, is just like buying a Rolls Royce but not willing to pay for the gasoline charges and therefore having to travel on foot.
We are from http://www.tolee.com
[edited 8/23/02 9:09:19 PM]
We have an important question to ask Mr. PGaunlett and Mr. AbdulkaderB. Should the claimed "negotiating bank" (who does not give value) charge the beneficiary for negotiation commission? We think many banks do charge. That practice is not right. The claimed "negotiating bank" has no right to charge negotiation commission because no actual negotiation has been done. The claimed "negotiating bank" has no risk because it pays the beneficiary only when the fund from the reimbursing bank is avaialble. The negotiation commission also compensates for the risk faced by the negotiating bank in the unfortunate event that advance payment has been made (giving value) but the reimbursement claim is not successful for various reasons.
TREATING DOCUMENTARY CREDIT AS DOCUMENTARY COLLECTION
By paying the beneficiary only after successful reimbursing claim is treating documentary credit as documentary collection. The nominated bank has not performed its duty to pay in advance of reimbursement, which the DC system is all about. The presentation for payment is in essence a documentary collection approach except that under the UCP 500 the beneficiary has a right of recourse to the issuing/confirming bank against compliant documents and he is also protected by Articles governing examination of documents and refusal advice.
DON'T ASK FOR/ACCEPT ANYTHING YOU DON'T NEED
If the beneficiary does not wish to pay for the interest charges in negotiation, he should have asked for an LC available for sight payment instead.
A beneficiary who accepts a negotiation DC but does not use the negotiation facility due to not willing to pay for the interest charges, is just like buying a Rolls Royce but not willing to pay for the gasoline charges and therefore having to travel on foot.
We are from http://www.tolee.com
[edited 8/23/02 9:09:19 PM]
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Reimbursement
Mandy Vong seems to be of the view that a L/C available by negotiation must be negotiated. This is not the case.
Mr. T.O. Lee & Mandy Vong seem to only look at the aspect of interest charges as the reason for not negotiating. This may not be the only reason. The beneficiary may take the view that the forex future makes it more advantageous to await payment. He may not want to take such a decision until the time of presentation of documents.
Similarly he may take a view on possible changing interest rates before deciding on whether or not to negotiate.
He may also take such a decision depending on his cash flow needs at the time.
I often advise exporters on the drafting of L/Cs and frequently demonstrate to them how they can build in a certain flexibility. They may or may not need this flexibility, but it is better to have it than wish they had it.
Mr. T.O. Lee & Mandy Vong seem to only look at the aspect of interest charges as the reason for not negotiating. This may not be the only reason. The beneficiary may take the view that the forex future makes it more advantageous to await payment. He may not want to take such a decision until the time of presentation of documents.
Similarly he may take a view on possible changing interest rates before deciding on whether or not to negotiate.
He may also take such a decision depending on his cash flow needs at the time.
I often advise exporters on the drafting of L/Cs and frequently demonstrate to them how they can build in a certain flexibility. They may or may not need this flexibility, but it is better to have it than wish they had it.
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PGauntlett
- Posts: 153
- Joined: Fri Apr 05, 2019 5:25 pm
Reimbursement
A 'negotiation fee' is perfectly justifiable in the above situation. Although the bank has not paid out of its own funds it has taken a risk that the documents may be rejected by the issuing bank. Whilst a neg bank (under an unconfirmed l/c) has recourse to the beneficiary, such recourse may be difficult, or morally unjust, to exercise if the bank has been negligent in the doc checking process.
In the uk market (leaving aside interest charges) the rate of commission for negotiating/paying is the same since it is the same process.
If the beneficiary does not want to incur such local charges he is free to send documents directly to the issuing bank. A beneficiary would be stupid to take this action.
Whilst acknowledging that a true negotiation (as happened in the days before tt reimbursement)is paying the ben immediately (with interest deducted for the estimated time bank is out of funds) it does not make commercial sense (from a bank's perspective) to pay in advance when reimbursement is only 2-3 days away.
If a credit, whether available by sight payment/negotiation, nominates a reimbursing bank and doesn't disbar tt reimbursement it is the issuing bank's intention to allow the ben to receive immediate payment without any deduction of interest (the interest is effectively paid by the applicant).
I don't recall any beneficiaries complaining about this procedure.
In the uk market (leaving aside interest charges) the rate of commission for negotiating/paying is the same since it is the same process.
If the beneficiary does not want to incur such local charges he is free to send documents directly to the issuing bank. A beneficiary would be stupid to take this action.
Whilst acknowledging that a true negotiation (as happened in the days before tt reimbursement)is paying the ben immediately (with interest deducted for the estimated time bank is out of funds) it does not make commercial sense (from a bank's perspective) to pay in advance when reimbursement is only 2-3 days away.
If a credit, whether available by sight payment/negotiation, nominates a reimbursing bank and doesn't disbar tt reimbursement it is the issuing bank's intention to allow the ben to receive immediate payment without any deduction of interest (the interest is effectively paid by the applicant).
I don't recall any beneficiaries complaining about this procedure.
Reimbursement
We wish to respond to the comments by Mr. Bacon and Mr. PGaunlett as follows:
RIGHT NOT TO NEGOTIATE
Of course we understand from UCP 500 sub Article 10 (c) that a nominated negotiating bank has the right not to negotiate. The beneficiary has the same right and he may choose for the right time to present documents for payment for reasons as pointed out by Mr. Bacon.
TO NEGOTIATE IS TO GIVE VALUE (OR TO PAY) BEFORE BEING REIMBURSED
However, to negotiate is to pay BEFORE reimbursement claims rather than to pay AFTER successful reimbursement claims. By simple logic, a nominated bank has the right to claim reimbursement only after paying out the beneficiary but not sooner.
That is why a nominated bank is provided in the DC - to pay the beneficiary in advance on the issuing bank's behalf and then to be reimbursed (paid back) later. Reimbursement, by its implication, is pay back, and not to pay in advance.
To correct this improper banking practice, sub Article 10 (b) (ii) stipulates that "Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate. Mere examination of the documents without giving of value does not constitute negotiation". The same thing is again stipulated in ICC Position Papers.
Would Mr. Bacon and Mr. PGaunlett take a good look at these stipulations and the implied meaning of the word "reimburse" to decide whether payment AFTER successful reimbursement claims is the negotiation under the UCP 500.
RIGHT TERMINOLOGY TO BE USED
A bank should charge "payment commission" for payment and "negotiation commission" for negotiation although these two charges may be the same in certain countries. A banker should not charge for an apple whereas an orange is actually delivered.
We are from http://www.tolee.com
[edited 7/25/01 6:16:23 PM]
RIGHT NOT TO NEGOTIATE
Of course we understand from UCP 500 sub Article 10 (c) that a nominated negotiating bank has the right not to negotiate. The beneficiary has the same right and he may choose for the right time to present documents for payment for reasons as pointed out by Mr. Bacon.
TO NEGOTIATE IS TO GIVE VALUE (OR TO PAY) BEFORE BEING REIMBURSED
However, to negotiate is to pay BEFORE reimbursement claims rather than to pay AFTER successful reimbursement claims. By simple logic, a nominated bank has the right to claim reimbursement only after paying out the beneficiary but not sooner.
That is why a nominated bank is provided in the DC - to pay the beneficiary in advance on the issuing bank's behalf and then to be reimbursed (paid back) later. Reimbursement, by its implication, is pay back, and not to pay in advance.
To correct this improper banking practice, sub Article 10 (b) (ii) stipulates that "Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorised to negotiate. Mere examination of the documents without giving of value does not constitute negotiation". The same thing is again stipulated in ICC Position Papers.
Would Mr. Bacon and Mr. PGaunlett take a good look at these stipulations and the implied meaning of the word "reimburse" to decide whether payment AFTER successful reimbursement claims is the negotiation under the UCP 500.
RIGHT TERMINOLOGY TO BE USED
A bank should charge "payment commission" for payment and "negotiation commission" for negotiation although these two charges may be the same in certain countries. A banker should not charge for an apple whereas an orange is actually delivered.
We are from http://www.tolee.com
[edited 7/25/01 6:16:23 PM]
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Reimbursement
In theory, I do not dispute T.O. Lee's meaning of reimbursement. However practice may prove different.
Article 19d states that the issuing bank is responsible for any loss of interest if reimbursement is not provided on first demand.
If payment is made on the same day as such reimbursement claim and receipt of funds, it may be difficult to determine which comes first - reimbursement or payment. If a Negotiating bank determines that documents are in order, this is usually the trigger to claim reimbursement and it does not need the affirmation of the beneficiary to do so. There may be a normal administrative delay in contacting the beneficiary. It may be necessary for the Negotiating bank to revert to the beneficiary for instructions on where to make the payment or whether any forex deals are to be considered. Any delay in receiving such instructions will probably result in the Negotiating bank receiving reimbursement before making payment.
With the advent of tt & SWIFT, the issue of reimbursement under negotiation has been relegated to a minor facet of UCP as the difference between payment & reimbursement is often measured in hours or minutes. As I have only been involved in L/Cs for about 30 years, my experience does not go beyond this, but I should imagine that it started life as an important issue when reimbursement necessarily followed some time after payment. However I have, even recently, come across L/Cs which forbade tt & SWIFT reimbursement. This was obviously used by the issuing bank to delay reimbursement/gain interest, effectively circumventing Article 19d in spirit if not in fact.
None of the Articles of UCP 500 precludes the Negotiating bank from receiving reimbursement funds before payment to the beneficiary. If banks manage their affairs so that payment & reimbursement are both effected on the same day, this avoids the issue of interest paid or payable and may be the most equitable arrangement for all parties concerned.
Article 19d states that the issuing bank is responsible for any loss of interest if reimbursement is not provided on first demand.
If payment is made on the same day as such reimbursement claim and receipt of funds, it may be difficult to determine which comes first - reimbursement or payment. If a Negotiating bank determines that documents are in order, this is usually the trigger to claim reimbursement and it does not need the affirmation of the beneficiary to do so. There may be a normal administrative delay in contacting the beneficiary. It may be necessary for the Negotiating bank to revert to the beneficiary for instructions on where to make the payment or whether any forex deals are to be considered. Any delay in receiving such instructions will probably result in the Negotiating bank receiving reimbursement before making payment.
With the advent of tt & SWIFT, the issue of reimbursement under negotiation has been relegated to a minor facet of UCP as the difference between payment & reimbursement is often measured in hours or minutes. As I have only been involved in L/Cs for about 30 years, my experience does not go beyond this, but I should imagine that it started life as an important issue when reimbursement necessarily followed some time after payment. However I have, even recently, come across L/Cs which forbade tt & SWIFT reimbursement. This was obviously used by the issuing bank to delay reimbursement/gain interest, effectively circumventing Article 19d in spirit if not in fact.
None of the Articles of UCP 500 precludes the Negotiating bank from receiving reimbursement funds before payment to the beneficiary. If banks manage their affairs so that payment & reimbursement are both effected on the same day, this avoids the issue of interest paid or payable and may be the most equitable arrangement for all parties concerned.