Case Note – Negotiation of Deferred Payment Undertaking Without Authorization

This case highlights the risks for presenting banks when discounting a deferred payment undertaking (DPU) without explicit authorization from the issuing bank. It also illustrates how local court orders—particularly in jurisdictions that favor domestic parties—can override payment expectations under an LC, leaving the negotiating bank exposed.

Fact Summary

• The issuing bank in Iraq incurred a deferred payment undertaking under an LC.
• The presenting bank in Korea negotiated (discounted) the deferred payment undertaking without obtaining authorization from the issuing bank.
• The issuing bank never authorized the presenting bank to discount its deferred payment undertaking.
• Subsequently, a local court in Iraq issued an attachment order at the request of a third party unrelated to the LC transaction.
• That third party later won a lawsuit against the LC beneficiary and obtained an execution order from the same court.
• The Iraqi issuing bank complied with the court order by paying the third party.
• As a result, the issuing bank has not paid the presenting bank, citing the attachment and execution orders from the court.

Issue

Will the court lift the stop payment order when the presenting bank claims it negotiated the DPU?

Analysis

In jurisdictions where courts tend to prioritize the interests of domestic applicants and issuing banks, the stop payment order is unlikely to be lifted if the issuing bank confirms it did not authorize the presenting bank to discount the DPU. The negotiation in such circumstances would be deemed “at the presenting bank’s own risk” and outside the credit’s terms.

However, if the issuing bank had expressly agreed to the discount—whether through LC terms or written confirmation—the court would likely lift the order. In that case, the payment obligation to the presenting bank would be considered valid and independent from the underlying dispute between applicant and beneficiary.

Conclusion

• No authorization → Court likely maintains stop payment order.
• Authorization → Court likely lifts stop payment order.

Recommendations for Banks Considering Discounting a DPU

• Obtain explicit authorization from the issuing bank—preferably in the LC terms or in a separate written undertaking—before discounting any deferred payment obligation.
• Assess jurisdictional risk by reviewing the issuing bank’s location, applicable local laws, and potential for court orders that could prevent payment, especially in countries where foreign banks may face enforcement challenges.