Letter of Credit Forum

Article 7 UCP 600 provides for the obligations of the issuing bank as did Articles 9 a(i) to (iv) of the UCP 500.  The revision was necessary to coordinate Article 7 with Article 2 UCP 600 which defines among others terms like complying presentation, confirmation, credit honour, issuing bank, negotiation, nominated bank, presenter and presentation.

Article 7 a (i) to (v) accurately defines the obligation of the issuing bank according to the LC's availability by sight, deferred payment, acceptance, or negotiation. The obligation of the issuing bank further depends on whether a nominated bank has been involved in the LC transaction. If a nominated bank has been provided for in the LC,  the obligation of 

the issuing bank to honour the documents is only triggered once the nominated bank does not honour itself (in previous installments we had already mentioned that even though the term negotiation is not formally included in the definition of Article 2 UCP 600, it is literally included; 

also last week, when discussing Article 6 UCP, we had already pointed out that the issuing bank's payment obligation is only secondary to the payment obligation of the nominated bank.)

Consequently, the designation of a nominated bank is a substantial part of the opening of an LC. According to Article 10 b (i) UCP 500 and Article 9 d (i), the designation of a nominated bank is part of the essential provisions of an LC that cannot be cancelled or modified without  the consent of the Issuing Bank, the Confirming Bank (if provided for), and the Beneficiary.The Beneficiary still has no claim for payment directly against the issuing bank as long as the nominated bank has not refused to honour the documents. This is true even in case the nominated bank cannot dispose of the funds due to domestic currency restrictions. In our view, Article 6 a UCP 600 (as discussed last week) does not modify this basic tenet. Article 7 a (v) and Article 7 a (i) clarify, that the issuing bank is only obligated to negotiate documents once the nominated bank has refused to do so. The primary obligation of the issuing bank is to obtain the honour of the nominated bank. 

The wording of Article 7 a(v) is unambiguous in this regard: ... the issuing bank must honour if the credit is available by:... "negotiation with a nominated bank and that nominated bank does not negotiate."