ASSIGNMENT IN FAVOUR OF THE NOMINATED BANK

QUESTION

Hello Mr Old Man

I am a big fan of your blog and read with interest your views on L/C issues.

I wonder if you can help as I have a question for you (actually, a number of questions but all on the same theme):

1. A letter of credit is issued by Bank I in favour of BENE available with Bank C by deferred payment.
2. Bank C is requested to add its confirmation and Bank C does so.
3. BENE presents compliant documents and Bank C incurs deferred payment undertaking/ undertakes to pay at maturity and forwards documents to Bank I.
4. BENE then indicates that it would like Bank C to prepay/ discount its deferred payment undertaking.
5. Bank C asks BENE to request prepayment formally on the basis of Bank C's standard form prepayment request letter.
6. Bank C's standard form includes a provision whereby, in consideration for the prepayment from Bank C, BENE assigns absolutely to Bank C all of its rights/entitlement etc under the L/C.

My question is, is it really necessary that Bank C's standard form request letter contains an assignment in its favour from BENE? Surely, once Bank C has prepaid its deferred payment undertaking, it has discharged its obligation under the L/C and there is nothing left for BENE to assign to Bank C? Might the existence of the assignment actually be harmful to Bank C (i.e. as in Banco Santander v Bayfern case (where Santander took an assignment as part of its standard procedures) might it be argued against Bank C that the existence of the assignment shows that Bank C did not actually discharge its obligation under the L/C by virtue of the prepayment (and that therefore Bank C is only a mere assignee and, should fraud intervene, Bank I may seek to avoid its obligation to pay the assignee (i.e. Bank C)). Should Bank C continue to ask for the assignment as a "belt and braces" just in case (for some reason) it is not deemed to be a nominated bank acting on its nomination?

Also here, a question on recourse.

a) In the above scenario, we know from Article 8(a)(i)(a) UCP 600 that Bank C would be obliged to honour a compliant presentation by incurring a deferred payment undertaking and paying at maturity. I know you have said before (although I cannot find the post from your blog right now) that a nominated confirming bank must honour documents without recourse if the credit is available with the confirming bank (UCP 600 Art. 8). I agree with your thinking there but I have trouble pinpointing that in the exact text of Article 8 UCP 600 because recourse is only mentioned in Article 8(a)(ii) in the context of negotiation re a credit available by negotiation (and in this example we are dealing with a credit available by deferred payment). Could you help me on this – where do we find in UCP 600 that a nominated confirming bank must honour a compliant presentation without recourse.

b) If we agree (and I think we do) that a nominated confirming bank must honour documents without recourse, does this mean that a nominated confirming bank must also prepay its deferred payment undertaking without recourse? Or can the nominated confirming bank come to its own arrangements with the BENE as regards recourse in respect of a prepayment of his deferred payment undertaking?

Thanks in advance for your thoughts

William
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ANSWER

Dear William,

Thank you for your interesting question. I would like to share my view as follows:

1) Assignment [of the proceeds] in favour of a nominated bank would occur in case of the LC available with the nominated bank by negotiation of draft drawn on a bank other than that nominated bank.
Where the LC is available with a nominated bank by deferred payment or by acceptance of drafts drawn on the nominated bank, the nominated bank that agrees to act on its nomination will incur its deferred payment undertaking or accept draft drawn on itself and pay at maturity. If requested, the nominated bank may prepay its own deferred payment undertaking or its own accept draft. Its action is protected by sub-article 12 (b) UCP 600, which allows the nominated bank to prepay its own deferred payment undertaking or its own accepted draft (Banco Santander would have won the case if UCP 600 had been published earlier!).

As the nominated bank prepays its own deferred payment undertaking or its own accept draft, there is no need for the nominated bank to insist on an assignment of proceeds from the beneficiary. The existence of the assignment in this case does not add any legal value.

2) It should be agreed that the concept of recourse or non-recourse is used in connection with the LC available by negotiation of draft drawn on a bank other than the nominated bank. A confirming bank must negotiate without recourse whereas a non confirming bank may agree to negotiate on a with or without recourse basis.

Where the LC is available with a nominated bank by deferred payment or by acceptance of drafts drawn on the nominated bank and the documents presented are complying, the nominated bank that has incurred its deferred payment or accepted the draft may prepay its own deferred payment or its own accepted draft on a without recourse basis. I do not find good reason for the nominated bank to prepay its own deferred payment with recourse to the beneficiary.

UCP 600 has a definition of the term “honour” which means:
a) to pay at sight if the LC is available by sight payment
b) to incur a deferred payment undertaking and pay at maturity if the LC is available by deferred payment
c) to accept a draft drawn by the beneficiary and pay at maturity if the LC is available by acceptance.

The definition of “honour” does not talk about with recourse or without recourse issues. However, in my opinion, honour constitutes a payment without recourse. It is unreasonable for the nominated bank to accept a draft or incur a deferred payment undertaking and (pre)pay with recourse to the beneficiary.

Just my own view.

Kind regards,
Mr. Old Man

P/S: Further comments from other readers are welcomed always.