Article 10.(a) of UCP 500 begins with the words, All Credits must clearly indicate whether they are available by sight payment, by deferred payment, by acceptance or by negotiation.
However, nowhere in the UCP, or in any of the other publications or their Position Papers, did ICC clarify as to what it meant by these terms, and what distinguished one term from another.
Now, with the UCP 600 having come into effect, we read in article 6.(b) that A credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. Once again, there no explanation or inter-se comparison has been offered for these terms.
For the first time ever, an attempt has been made to define the term negotiation.
Article 2 of UCP 600 states Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
Taken together or separately, neither article 6.(b) nor the definition of the term negotiation furnished under article 2 provide ready answers to the following questions:
1. What is the precise difference between the terms negotiation and payment?
2. How do you determine whether a credit should be marked as available by negotiation or by payment? In other words, what are the criteria that should determine or identify the appropriate availability?
3. What would be the implications if availability is marked wrongly on the face of a credit instrument (for example, a credit marked as being available by negotiation only with the issuing bank); would there be any impact on a documentary credit operation, in practice, if such a credit is used?
4. Looking at article 2, why the definition of the term negotiation excludes drafts drawn on a bank other than the nominated bank?
5. What happens if the draft is drawn on nominated bank?
6. If no draft is required as per the terms of a credit, what would be the feature to distinguish between a credit that is available by negotiation and by payment, respectively?
7. Article 8.a.(ii) is the only place in the whole of UCP 600 that refers to negotiation without recourse. It occurs when a confirming bank negotiates. Are there any other circumstances when negotiation would be without recourse?
8. Article 12.a of UCP 600 states that Unless the nominated bank is the confirming bank, an authorisation to honour or negotiate does not impose any obligation on the nominated bank to honour or negotiate, except where expressly agreed to by the nominated bank and communicated to the beneficiary. Would negotiation under such circumstances (credit advised to beneficiary expressly agreeing to negotiate a complying presentation) be with or without recourse?
9. Is negotiation under a credit available by payment without recourse? (Incidentally, when we say negotiation under a credit available by payment, is that a contradiction in terms?)
10. UCP does not refer to the expressions payment under reserve or under reserve. Yet, these expressions are used very frequently by commercial banks the world over. Do these expressions have any bearing on recourse or without recourse payments?
As always, as far as these subjects are concerned, the UCP raises more questions than it answers. I would like to wait for people who know to respond and clarify my doubts on them. Later, I'd like to put across my views on these topics.