Interpretation of International Trade Settlement Terms

Negotiating Bank

A Negotiating Bank is a bank that, under the authorization of the issuing bank, purchases or discounts drafts and/or documents presented by the beneficiary that comply with the terms of the letter of credit. The negotiating bank accepts the invitation of the issuing bank in the letter of credit and trusts the payment guarantee in the letter of credit. It buys the documents against the full set of export documents presented by the exporter, including the bill of lading representing title to the goods. After negotiation, the negotiating bank sends the documents to the issuing bank for reimbursement. If the issuing bank finds that the documents do not comply with the requirements of the letter of credit and refuses to pay, the negotiating bank has the right of recourse against the beneficiary or other prior parties.

Beneficiary

The Beneficiary refers to the person designated in the letter of credit as entitled to use it, i.e., the exporter or actual supplier. The beneficiary has the right to present drafts and/or documents in accordance with the terms and conditions of the letter of credit to claim payment. If, after the beneficiary presents the documents, the issuing bank fails and the letter of credit cannot be honored, the beneficiary has the right to demand payment from the importer, who remains liable. In such a case, the beneficiary should send the documents that originally complied with the letter of credit requirements to the importer through a bank for collection. If the issuing bank has not failed but refuses to pay unreasonably, the beneficiary or the negotiating bank may file a lawsuit and also has the right to demand payment from the importer.

Accepting Bank

An Accepting Bank is a bank designated to accept a usance draft. If a usance letter of credit requires the beneficiary to issue a time draft, a bank is specified as the drawee bank to accept the draft; this is the accepting bank. If the accepting bank is not the issuing bank and subsequently fails to make payment after acceptance, the issuing bank bears the ultimate responsibility for payment. If the documents are compliant but the accepting bank does not accept the draft, the issuing bank may instruct the beneficiary to issue a new time draft drawn on the issuing bank itself, which will accept and pay at maturity. After payment, the accepting bank claims reimbursement from the issuing bank.

Reimbursing Bank

A Reimbursing Bank is an agent designated by the issuing bank to provide reimbursement to the negotiating bank, paying bank, or accepting bank. To facilitate settlement, the issuing bank may authorize another bank with which it holds an account relationship to reimburse the negotiating, paying, or accepting bank on its behalf. The reimbursing bank only makes payment when it holds sufficient funds from the issuing bank and has received the issuing bank's reimbursement instructions. After reimbursement, the reimbursing bank claims compensation from the issuing bank. Costs and interest losses related to the reimbursing bank are generally borne by the issuing bank. The reimbursing bank does not examine documents; therefore, if the issuing bank later discovers discrepancies between the documents and the credit, it can only claim recourse against the claiming bank, not the reimbursing bank. If the reimbursing bank fails to fulfill its payment obligation to the claiming bank, the issuing bank is responsible for making payment.

Confirming Bank

A Confirming Bank, usually referred to as the confirming bank, is a bank in the exporting country or a third location that, at the request of the issuing bank, adds a clause to the letter of credit confirming that it, like the opening bank, bears the responsibility of paying or accepting the drafts and documents presented by the beneficiary that comply with the credit terms.

Paying Bank

A Paying Bank, also known as the Drawee Bank, is the bank authorized by the issuing bank to make payment or acceptance under the letter of credit and to pay the drafts drawn by the beneficiary. Usually, the paying bank is the same as the opening bank, but it may also be another bank designated by the opening bank. If the issuing bank has poor creditworthiness, the paying bank has the right to refuse to make payment on its behalf. However, once the paying bank has made payment, it cannot claim recourse against the beneficiary but can only seek reimbursement from the opening bank.

Advising Bank

An Advising Bank, also called a Notifying Bank, is the bank that, entrusted by the issuing bank, delivers the letter of credit to the beneficiary. The advising bank is typically located in the exporter's country. Its responsibilities include notifying or transmitting the credit promptly, verifying its authenticity, and clarifying any doubts without delay. If the advising bank cannot verify the apparent authenticity of the credit, i.e., it cannot check the signature or test key, it must inform the bank from which it received the instructions without delay, stating its inability to confirm the credit's authenticity. If the advising bank still decides to advise the credit, it must inform the beneficiary of its inability to verify the credit's authenticity.

Issuing Bank

An Issuing Bank, also known as an Opening Bank or Establishing Bank, is the bank that issues a letter of credit based on the request and instructions of the applicant (the importer) or on its own behalf. The issuing bank is usually located in the importer's country. The issuing bank is liable for the obligations under the credit in its own name. Although the opening bank is subject to two contracts—the application form and the L/C itself—according to UCP500 Article 3, its obligations to pay, accept drafts, negotiate, or fulfill other duties under the letter of credit are not affected by any disputes between the issuing bank and the applicant or between the applicant and the beneficiary. Once the issuing bank pays against inspection of the documents, it has no right of recourse against the beneficiary or any prior parties.