Drafts / Bills of Exchange in LC transactions
October 2018 the ICC had their Technical meeting in Tbilisi, Georgia. At the meeting there was a segment called “Documentary Credit Practices: Controversy & Guidance”. This segment is supposed to be a returning agenda point at future ICC meetings. In Tbilisi one of the topics discussed during this segment was “usage of drafts under documentary credits: is there a real need?”
In addition to that discussion, the ICC is working on a document titled “Drafts under Documentary Credits Guidance Paper”. This blog post will “report” from the Tbilisi discussion regarding Drafts – and walk through the ICC document on the usage of Drafts.
As said, the usage of drafts under LCs was discussed during the ICC Technical meeting in Tbilisi. Here is an overview of some of the comments and arguments made:
· * More often than not the requirement for a Draft in an LC, is triggered by the policy of the issuing bank. At the meeting one bank reported that they had removed the Draft from the documentary credits issued by them. This had created no reactions.
· * There are some situations where a Draft is necessary. For example, when the LC is available by “Acceptance”. This is defined as follows: “[…] to accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance” (UCP 600 article 2, definition of “Honour”.)
· * The Draft/Bill of Exchange is covered by Section B (Drafts and calculation of maturity date) in ISBP 745. Paragraph B1 (b) sets the standard for examining a Draft, which is different than the standard that applies to the rest of the presented documents. This one reads:
“Banks only examine a draft to the extent described in paragraphs B2-B17.”
· * There are many examples where the data in the Draft is used to refuse a presentation under an LC.
· * There are even examples, where more presentations are refused than was necessary. For example, where multiple sets of presentations – covered by one Draft – is made. In such case it is in fact one presentation. Since all presentations are covered by (only) one Draft, there is no middle ground: The bank must refuse all presentations – or accept all the presentations.
· * In respect of the two bullet points above it seems wrong and unfair to refuse a presentation under an LC, when the Draft is not added to the LC based on an instruction from the Applicant – but is there based on the internal policy of the issuing bank
As said, the ICC is working on a document titled “Drafts under Documentary Credits Guidance Paper”, which is out for comments by the ICC National Committees. The deadline for comments is 23 November 2018.
It has been raised that the document is too long, and on that basis an executive summary has been made to accompany the document as such. I favour the drafting of the executive summary, but have the firm view that the main document is not one word too long. The document in its current form offers a very thorough and sober analysis of Drafts in LCs. On that basis the recommendations seem well thought-through and is hereby recommended.
Here is a rough overview of the recommendations:
· * In most cases an LC need not require a Draft to be presented.
· * The habit of requiring a Draft in LCs available at sight should be curtailed. This applies in particularly for sight drafts drawn on an issuing/confirming/nominated bank.
· * UCP 600 article 2 caters for negotiation with or without a presentation of a Draft. The habit of requiring a sight draft for an LC available by negotiation should be reviewed. Likewise the negotiating banks are encouraged to rely, not on negotiable instruments' law, but instead on specific agreements with beneficiaries evidencing negotiation.
· * It is recommended that banks issue usance LCs available by deferred payment as an alternative to availability by acceptance of a Draft, unless there is specific commercial, regulatory or legal reason.
· * Banks should review their UCP 600 LC forms, whether in paper format and/or online, to indicate that a Draft is not a standard requirement.
The Draft is an instrument that – in some form or another – has been part of the LC for at least 85 years, and therefore it represents a practice that is really difficulty to change; regardless of the facts and arguments that would support removing Drafts from LCs.
It is expected however, that the ICC document “Drafts under Documentary Credits Guidance Paper” is the strongest and most convincing attempt till date.
Let this blog post be my voice in supporting the ICC in only calling for a Draft when there is a commercial or legal or UCP 600 reason to do so.
And please allow me to also recommend that you take care of yourselves and the LC.
Kind regards
Kim