DEFERRED PAYMENT UNDERTAKING

QUESTION

I have come accross this statement.

“Under UCP600, the DPU remains undefined and still a bit of a mystery as to whether/how its incurrence may/must be evidenced.”

Could you please comment further?

Best regards,

G.
—-

ANSWER

You may have learnt about Banco Santander case in connection with discounting one’s own deferred payment undertaking (DPU). The main details of the case can be summarized as follows:

Upon receipt from the beneficiary of the documents complying with the terms and conditions of the deferred payment LC issued by Banque Paribas, Banco Santander, which was the nominated confirming bank, issued its undertaking to pay the beneficiary when due and at the same time discounted its own deferred payment undertaking. The documents was then forwarded to Banque Paribas. However, after examining and discovering that one of the presented documents was forged, Banque Paribas immediately informed Banco Sanatander of the same and refused to make reimbursement to Banco Santander (notwithstanding with UCP 500 Article 15 stipulating that banks assumes no liability or responsibility for the falsification or legal effect of any document.

The case was brought to the English Commercial Court, then the English Court of Appeal. However, both courts ruled that Banco Santander lost the case, i.e., not reimbursed by Banque Paribas. The courts reasoned that Banque Paribas did not authorize Banco Santander to discount its own deferred payment undertaking but only authorized Banco Santander to incur a deferred payment undertaking upon receipt of complying documents and pay at maturity.

The decision of the English courts immediately became a subject which had been discussed and argued by LC experts around the world for years and it was their discussions that led to a change in UCP 500 regarding DPU.
UCP 600 sub-article 7 (c) stipulates: “An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary”.

UCP 600 sub-article 12 (b) stipulates: “By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank”.

Stipulations in UCP 600 Article 7 and 12 have established the nominated bank’s independent rights; the nomination by the issuing bank to incur a deferred payment undertaking includes an authorization given to the nominated bank to prepay or purchase its own payment undertaking; and the right to be reimbursed is not affected by its action of prepayment or purchase of its own payment undertaking.

Regretful for Banco Santander! The courts of England would have had decisions in favour of Banco Santander if UCP 600 had come into forced earlier. But it may also be said that we UCP 600 would not have had any change regarding discounting DPU if Banco Santander case had not occurred.
I think under UCP 600 DPU is now so clear. There is no mystery.

Best regards,

Mr. Old Man