QUESTION ON NOMINATION UNDER DEFERRED PAYMENT CREDITS

QUERY FROM THOMAS
Subject: question on nomination under deferred credit

Dear friends,

I wrote a 14 page reply this weekend at home to a banker in China who is a contributor to DCInsight.
I got to know her after reading her article and commenting on the said article.
She had asked me a question on Art. 12(b) on the application of nomination under a deferred credit.
Her question was whether the said article would apply to the case where the deferred undertaking was incurred by the issuing bank and not the nominated bank.
Under the U.S. Uniform Commercial Code, both the deferred undertaking of issuing bank and nominated bank are protected in the event of fraud.
I had replied to her that since the nomination deals with the authority to negotiate and such nomination is key to the doctrine of bona fide beneficiary which under law is accorded to one who has given value without notice of fraud, whether the subject of the negotiation, the deferred undertaking is incurred
by the issuing bank or the nominated bank would not make any difference in the application of the said nomination.

This morning at the bank, I checked the commentary on UCP 600 of the drafting group and it stipulates that the Art. 12(b) refers to the deferred undertaking of the nominated bank. There is no mention of the issuing bank.

It seems that the said Art.12(b) in fact only had in mind the deferred undertaking of the nominated bank.
So the question remains. What about the deferred undertaking of the issuing bank ?

There are two approaches to interpretation, one would be to say that if issuing bank was not mentioned, then issuing bank is not included in the said article.
Another would be that since nomination refers to authority to negotiate with its legal significance in terms of the bona fide beneficiary which is composed of giving of value without notice of fraud, the issuing bank
should be seen as being included in the said Art.12(b) deferred undetaking.
What would be your choice ?

Your comments if any as always is most welcome.

With respect and friendship,
Thomas

———————————————–

COMMENTS

From: Nguyen Huu Duc (DNG)

Dear Thomas,

UCP 600 Article 12 (b) refers to the fact that the nominated bank is authorized to discount its own deferred payment undertaking.

It is true that neither the said article nor any other article in UCP refers to the question as to whether the issuing bank can discount its own deferred payment undertaking. Yet, I do not think it is necessary to incorporate this provision in UCP. Once the issuing bank can nominate another bank to incur a deferred payment undertaking and authorize that bank to discount the deferred payment undertaking incurred by that nominated bank, then the issuing bank can at its own option discount its own deferred payment undertaking.

In reality, that the issuing bank discounts its own acceptance or deferred payment undertaking is rather common. This transaction does not bring any additional risks to the issuing bank so long as it can receive reimbursement from the applicant at maturity. Anway, the issuing bank must honour its payment undertaking in accordance with the provision specified in UCP 600 Article 7.

Best regards,
Nguyen Huu Duc
———————————–

From: Ransier, Glenn

Hello All,

The question: “Can a bank that issued a UCP600 LC that was available by deferred payment (dp), prepay it before maturity despite the UCP being silent on this issue?”. The short response is “yes” provided the parties agree. In much the same way that the credit may be amended, the parties can agree to a new extended maturity date, a shorthen maturity date or a prepayment. However, it is clear that they do not have to do any of these. It is a choice.

UCP 600 mandates that an issuer’s obligations are “irrevocable” and that an issuer must honour its LC. Under a deferred payment LC obligation, UCP mandates that the issuer must may the dp obligation upon maturity. It does not expressly grant permission nor forbid an issuer from prepaying. However, I am not familiar with any country laws that forbids an issuer from prepaying its irrevocable obligation when agreements are reached with the appropriate parties. It would be illegal for an issuer to prepay a lesser amount, prior to maturity, without agreement.

UCP 600 wording was crafted in an attempt to align country laws on the issue of fraud. Under UCP 500, the issuer was responsible for fraud found in a “sight” LC. However, depending on the country of litigation, the issuer may or may not be responsible for reimbursement/payment under a time LC when fraud is discovered, prior to maturity. Given this, UCP 600 attempts to hold the issuer responsible for fraud in all cases and to shed a light on the fact that it may not be the beneficiary but a bona fide holder that is due the money at maturity. The hope was that the issuer’s would in their LC application agreements, ultimately hold the applicant responsible for fraud.

I believe that the UCP does not need to address this further because the fact that the honour obligation is “irrevocable” is enough.

I hope this assists.
With Best Regards,
Glenn Ransier

——————————-
From: Don Smith []

Glenn,

“It would be illegal for an issuer to prepay a lesser amount, prior to maturity, without agreement.” – it might be ‘insufficient’ but probably not illegal to pre-pay a lesser amount.
I agree that UCP does not address and does not need to address this.
Best
Don
—————————————-
From: Pavel Andrle []

Dear colleagues,

Thank you for raising this interesting question and your enlighting views on the matter.
First of all I also certainly believe that the UCP 500 and even more so UCP 600 intention has not been to move the risk of fraud to the issuer – but rather (where it should be) to the applicant.
Secondly this particular issue now disccused here has been raised by our ICC National Committee in our official comments when revision UCP 600 took place.
I think that it is potentionally troublesome issue as the prepayment or purchase by the issuing bank
is not only theoretical issue but real one as issuing banks do this.
In my view it is possible to do so, it is not illegal. Of course there must be agreement between the beneficiary and the issuing bank as the payment would be less the interest and possibly charges. The question is if this is done without any "special" authority from the applicant what would happen in case of fraud before the original maturity. Can the applicant get out of his reimbursementobligation as he did not authorise this prepayment or purchase?

I would like to believe that he cannot – article 12 (b) talks about " by nominating a bank…….an issuing bank authorizes that nominated bank…." the argument would be "how could the issuing bank authorize another bank to do something if they do not have the same authority"?

Kind regards to all
Pavel

————————
From: Ransier, Glenn []
Hi Pavel,
The issuer would generally need to hold the applicant responsible via the LC application agreement. An applicant is not a party to a LC so there was not a method to hold them ultimately accountable in UCP. As I stated, the issuer's undertaking is irrevocable and it is their's alone. It is the issuer's LC not the applicant's. The issuer can settle early with the beneficiary because the issuer has the ultimate obligation under
the LC. An issuer also has a separate contract in the LC application. Generally, an issuer would protect themselves from fraud, prepayment, etc. Via this agreement and pass those risks to the LC applicant.
With Regards

———————————
From: Abdulkader A. Bazara

Dear All,

I would agree with the notion that UCP need not cover this. It is between the issuer and the beneficiary and should of course be based on an agreement. The reimbursement agreement between applicant and beneficiary is a separate contract which contains its own conditions subject to applicable law.
Best Regards
Abdulkader @2371
—————————————

From: Pavel Andrle []

Dear Glenn,

thank you for your comments.
Yes I agree that the applicant is not party to the L/C but typically the L/C application agreement would make it clear that the L/C issued will be subject to UCP 600, therefore UCP 600 is part of the agreement btw issuing bank and the applicant.
UCP 600 includes provisions mentioning the applicant clearly – see article 37, so UCP 600 could well cover this issue as well.

It seems to me that it would be indeed very wise for the issuing bank to cover this eventuality clearly in its L/C application agreement with the applicant as stated by you and others.
regards
Pavel

—————————————-
From: Barboza, Vincent []

Dear All,

It was a Good discussion. I think we all have arrived at a consensus that the issuing bank can prepay a deferred payment bill for its full value. If it is prepaying for a lesser value and deducting interest etc, then the issuing bank needs to seek concurrence from parties related to the transaction as its commitment is for the full value of the bill at a pre-determined date.
However it does not preclude the issuing bank from paying less and deducting interest/charges and it leaves the beneficiary to pursue their claim , if short changed through their bank and rightfully so. The issuing bank needs to cover its obligation under its indemnity with the applicant.
I tend to agree with Glen, we don't need UCP to cover this.
Kind Regards,.
Vincent
——————————————–
From: Soh CS []

Dear All,

I fully agree with Pavel. I always advise the issuing banks to cover this in their LC application form to avoid any dispute or misinterpretation by the Court.
Regards,.

Soh Chee Seng
DCTrade Consultants
Singapore …