Clause a: When an issuing bank determines that a presentation is complying, it must honour.
Explanation: An issuing bank, upon receiving the documents under a letter of credit (LC), has the responsibility to check if the documents comply with the terms and conditions of the LC. If the documents are found to be in compliance, the issuing bank must honor its commitment to pay the beneficiary immediately or accept the documents and pay on due date.
Example: An exporter in India ships goods to an importer in the USA under an LC issued by an American bank. The exporter presents the required documents to the issuing bank. After examination, the bank finds all documents in compliance with the LC terms. The issuing bank then proceeds to honor the payment, transferring the funds to the exporter’s account.
Clause b: When a confirming bank determines that a presentation is complying, it must honour or negotiate and forward the documents to the issuing bank.
Explanation: A confirming bank adds its confirmation to an LC, providing an additional payment guarantee to the beneficiary. If the confirming bank determines that the presented documents comply with the LC terms, it must either honor or negotiate (purchase the documents) and then forward the documents to the issuing bank for reimbursement.
Example: An exporter in Germany receives an LC confirmed by a German bank. The exporter presents the documents to the confirming bank, which checks and finds them in compliance. The confirming bank pays the exporter (honours) and then forwards the documents to the issuing bank in the USA for reimbursement.
Clause c: When a nominated bank determines that a presentation is complying and honours or negotiates, it must forward the documents to the confirming bank or issuing bank.
Explanation: A nominated bank is authorized to pay, accept, or negotiate under an LC. If the nominated bank finds the documents compliant and decides to honor or negotiate, it must forward the documents to the confirming bank (if there is one) or the issuing bank.
Example: An exporter in China ships goods under an LC issued by a UK bank, with a nominated bank in China. The exporter presents the documents to the nominated bank in China. The bank reviews and finds the documents in compliance, pays the exporter, and then forwards the documents to the issuing bank in the UK for reimbursement.