Nomination Without Obligation

The word ‘available’ as used in LC operations, ranks high on the list of terms that confuse exporters. An LC should clearly specify how it is available; by sight payment, deferred payment, acceptance or negotiation [article 6(b), UCP 600]. It is preferable for exporters that LCs be advised available with a local bank, or at least with a bank in the exporter’s own country. For instance, if the LC is available at the counters of a local advising bank by sight payment, deferred payment, acceptance, where confirmation is added, then the exporter will, in the normal course of events, receive payment or have a bank acceptance or a deferred payment commitment a few days after presenting documents complying with the terms of the LC. Such commitments are definitive and without recourse to the exporter. However, if LC is not confirmed, such advising bank may decide not to pay, accept or issue a deferred payment commitment at the time documents are presented, even if they are presented in order [article 12, UCP 600]. There can be many reasons for this, but the most common is that the advising bank where the LC is available is not satisfied with the bank risk or country risk.

If on the other hand, the LC was confirmed, such advising/confirming bank would have no option but to take up documents which comply with the terms and conditions of the LC and honour its commitment to the exporter.

Negotiation deserves a special mention. Negotiation is a term which regularly confuses exporters and perhaps even some bankers. If an LC is available by negotiation with an advising bank and not confirmed, that bank has the option to pay to the exporter, remit the documents and claim payment from the issuing bank. The exporter must realize that the final decision as to whether or not documents meet the terms and conditions of the LC, and consequently as regards payment, rests with the issuing bank. The negotiating bank will request repayment from the beneficiary (with interest) if payment is not received from the issuing bank. Negotiation without confirmation is with recourse.

An LC available by negotiation and confirmed by the negotiating bank means that the negotiating bank has no option but to negotiate documents presented complying with the terms and conditions of the LC. Such negotiation under a confirmed LC is without recourse. Where an LC is only available by negotiation and not confirmed, many banks which have been nominated as negotiating banks are not prepared to take the risk of paying the exporter for fear they may not get reimbursed. Exporter should appreciate the service provided by a bank when it negotiates documents, and also understand why a bank is not always prepared to negotiate.