THE INDEPENDENCE OF THE ISSUING BANK’S UNDERTAKINGS

QUESTION

Dear Mr. Old Man,

Please help me solve the following issue:

With regard to sub article 7c in UCP 600, “An issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary”, the statement does not clarify which “independent” is.

Question 7.7 in FAQ under UCP 600 explained this statement as suggested that:

– Issuing Bank has the irrevocable undertaking to honour a complying presentation made by Beneficiary

– When a nominated bank agrees to act under their nomination and honours or negotiates, such undertaking becomes undertaking to reimburse the nominated bank.

–  Such two undertakings are independent: (1) to Reimburse nominated bank; (2) to honour if nominated bank has not honoured, negotiated, or Beneficiary presented the documents directly to Issuing bank)

My question is:

What is the purpose of such sub article (7c)?

Does it imply that (1) if Issuing Bank already reimbursed the Nominated Bank but then, Nominated Bank does not pay Beneficiary, Issuing bank has to pay Beneficiary? or (2) as said that the undertaking with Beneficiary became undertaking with Nominated Bank, Issuing Bank  will not have to pay Beneficiary?

If (1) then what should Issuing Bank act under such circumstances?

If (2) then can you explain the “independent” term within the context of sub article 7c?

Hope to hear from you soon. Thanks in advance.

With regards.

Thomas Jack

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ANSWER

Hi,

It should be understood that the issuing bank’s payment undertaking to the beneficiary and the issuing bank’s reimbursement undertaking to the nominated bank are two separate undertakings. The issuing bank’s payment undertaking to the beneficiary involves two parties, the issuing bank and the beneficiary; and the issuing bank’s reimbursement undertaking to the nominated bank involves two parties, the issuing bank and the nominated bank.

Under the issuing bank’s reimbursement undertaking to the nominated bank, if the nominated bank has acted its nomination, i.e., negotiated or honoured a complying presentation, it is entitled to reimbursement from the issuing bank.

In case, the issuing bank fails to reimburse, the nominated bank can take legal action against the issuing bank (not the beneficiary) for reimbursement.

Under the issuing bank’s payment undertaking to the beneficiary, if the beneficiary has made a complying presentation (not negotiated or honoured by the nominated bank) to the issuing bank, it is entitled to payment from the issuing bank. In case, the issuing bank fails to pay, the beneficiary can take legal action against the issuing bank (not the nominated bank) for payment.

The issuing bank can in no case avail itself of  its undertaking to the beneficiary to deny its obligation under its undertaking to the nominated bank. Similarly, it cannot avail itself of its undertaking to the nominated bank to deny its obligation under its undertaking to the beneficiary.

So to conclude,  the two undertakings are independent of each other.

Mine is another way of intepretation which does not conflict with Gary Collyer’s intepretation in Question 7.7 in FAQ under UCP 600.

Best regards,

Mr. Old Man