Negotiation means the standard procedures that bank performs which includes checking of the documents and giving value to the seller. The issuing bank may issue the LC available by negotiation with a nominated bank or it may allow the LC to be freely negotiated with any bank.
In the first case, the beneficiary, that is the seller, has to present the documents only to that bank, which is the nominated bank. Nevertheless, the nominated bank is not bound to negotiate if it has not undertaken a separate payment obligation to the seller. The nominated bank may simply refuse to negotiate the documents drawn under the LC. This is because, by having been nominated by the issuing bank, it does not constitute and undertaking to negotiate. If, however, the nominated bank has added its confirmation to the LC at the request of the issuing bank, thereby undertaking a separate payment obligation to the seller, then it has to honour its undertaking and pay for the documents drawn under the LC if they are in order . LC which does not nominate any bank is normally available for negotiation with any bank in the country of the seller which is willing to negotiate the documents. For the information of all traders, there are 4 types of negotiation practiced by banks around the world. They are:
1. Negotiation without recourse
2. Negotiation with recourse
3. Negotiation against indemnity
4. Negotiation under reserve
Let me explain Negotiation without recourse first and the rest at a later posting. A seller may present his documents drawn under LC directly to either:
a) The issuing Bank (bank that issues the LC) or
b) The confirming bank (bank that adds its confirmation at the request of the issuing bank) or
c) To his own bank
If the seller chooses to present the documents directly either to the ISSUING BANK or to the CONFIRMING BANK, these banks make payment WITHOUT RECOURSE to him. Meaning, the payment that has been paid to the seller shall not in any way become claimable by these banks in the event the documents are found not in order after making such payment. These banks cannot have recourse to the seller because by issuing or confirming the LC, they have taken upon themselves the risk that the party from whom reimbursement is to be obtained may become insolvent.
I hope this would give traders a general idea of how the LC operates and the implications to buyer and seller.