LC: Negotiation under reserve

Negotiation under reserve is sometimes resorted to by a bank only when it is convinced that the nature of discrepancies are not of any serious consequences and which in the bank’s experience have not materially affected the LC terms but would nevertheless negotiate the documents under reserve. At the time of making payment under reserve, both the negotiating bank and the seller believe that the documents will be taken up by the issuing bank despite the discrepancies. The negotiating bank will draw the attention of the issuing bank by listing all the discrepancies on the remittance schedule. If, however, the documents are rejected, the seller will reimburse the bank for the amount and the interest from the date of negotiation to the date of repayment.

Nevertheless, the fact remains that the documents are not in complete conformity with the LC. A bank makes payment under reserve only to a seller who is a valued client of the bank and whose integrity is beyond doubt. By understanding all types of negotiation (without recourse, with recourse, against indemnity & under reserve), I hope all traders are aware of the risks and the roles of buyer, seller as well as functions of the issuing bank and negotiating bank in LC operations.

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