AUTHORIZATION FOR DISCOUNT OF DEFERRED PAYMENT UNDERTAKING

QUESTION

Dear Mr. Old Man,

At the request and for account of ABC Co., Ltd (applicant), our bank has issued a deferred payment LC advised through Bank of China. Now at the request of the beneficiary, the applicant asks requests our bank to add the following provision in Field 47A:

“WELLS FARGO BANK, N.A IS AUTHORIZED TO DISCOUNT OUR DEFERRED PAYMENT UNDERTAKING BEFORE MATURITY. WE UNDERTAKE TO REIMBURSE WELLS FARGO BANK, N.A AT MATURITY”

We have never issued LCs with such a provision. Should we agree to add such a discount authorization?
What risks could our bank/the applicant could be exposed to if we agree to amend the LC?

Thank you.

BD
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ANSWER

Hi,

As you may know, under deferred payment LC, after his presentation of complying documents, the beneficiary receives a deferred payment undertaking incurred by the nominated bank or the issuing bank.

If the deferred payment undertaking is incurred by the nominated bank, the beneficiary may discount it with that nominated bank as the nominated bank is allowed, under UCP 600 Art. 12 (b), to purchase (buying at a discount) its own deferred payment undertaking.

However, if the deferred payment undertaking is incurred by the issuing bank, the beneficiary may not discount it with another bank as deferred payment undertaking is not largely accepted as a negotiable financial instrument. If this is the case, the bank that wishes to discount the deferred payment undertaking incurred by the issuing bank should ask for the issuing bank’s authorization.

Back to your case. It is understood that the LC is available with your bank by deferred payment and Wells Fargo Bank, which is not the nominated bank to incur its deferred payment undertaking, agrees to discount your bank’s deferred payment undertaking, hence, it needs to be so authorized by your bank.
What risks could the issuing bank/applicant be exposed to if they agree to add such an authorization for discount?

It is quite possible for the issuing bank (of course, at the request of the applicant) to authorize another bank to discount its deferred payment undertaking. However, one disadvantage for the issuing bank/applicant is that in case of dispute, e.g., fraud dispute, that leads to a court order preventing the payment, that court order may not be enforced if the deferred payment undertaking has been discounted by the authorized bank.

Kind regards,

Mr. Old Man