An Assessment of Negotiation Practice under L/C Transactions: A Focus on Deferred, Acceptance and Negotiation L/Cs

Abstract

Purpose - The purpose of this paper is to improve operations of the credit negotiation business by assessing the transactional practice of purchasing Bills of Exchange and/or documents before maturity under Letter of Credit transactions. Design/Methodology - The author first considers the types of usance L/C (e.g., negotiation L/C, deferred L/C, acceptance L/C) and examines the meaning of ‘negotiation’ defined in Article 2 and Article 12(b) of the UCP. Finally, this study takes a deep look into legal cases in which the act of negotiating has been an issue. Findings - First, in order to meet the requirement of ‘negotiation’ under UCP, four conditions must be satisfied. Second, banks are even allowed to purchase deferred payment undertaking (DPU) freely, as the UCP allows them to do so. Third, the beneficiary under acceptance L/C can freely recover payment in two ways - by discounting the Bill of Exchange accepted by that bank, and by selling the Bill of Exchange and/or documents. Lastly, there is a need to distinguish between the words ‘discounting’ and ‘negotiation’ used interchangeably in the field because these two mean different methods of recovering the payment. Originality/value - Despite the fact that the usage of Usance L/Cs has considerably increased in the export business of Korea, prior studies have focused only on issuing or confirming banks, or analyzing the articles of the UCP. Moreover, there has been no research on usance L/Cs nor on the practice of negotiating such L/Cs in the field.