When a Nominated Bank Defaults: Who Really Pays?

Every trade finance practitioner has seen this moment—or at least worried about it.

A nominated bank gives its word.
It incurs a deferred payment undertaking, or accepts a draft.

Then maturity arrives… and nothing happens.

No payment. No honour.

So the uncomfortable question arises:
Is the beneficiary now exposed?

The Rule Is Clear—Even If Reality Isn’t

Under UCP 600 sub-articles 7(a)(iii) and 7(a)(iv), the answer is reassuringly firm:

If a nominated bank fails to honour at maturity, the issuing bank must pay.

The involvement of the nominated bank does not dilute the issuing bank’s obligation.
It never did.

So the beneficiary’s first move is not complicated:
Go back to the issuing bank and claim payment.

But What If the Issuing Bank Hesitates?

Now we step out of the comfort of theory and into the real world.

If the issuing bank delays, disputes, or simply refuses to pay, the beneficiary still has options—though they are no longer operational, but legal.

At that stage, action may be taken against:

• the nominated bank — for failing to honour its own undertaking;
• the issuing bank — for failing its primary obligation under the credit.

And here, experience often trumps theory.

If the nominated bank is located in the same jurisdiction as the beneficiary, it may be the more practical target.
Not necessarily because it is more liable—but because it is more reachable.

A Final Thought

Incidents like this test more than just documents and obligations.
They test confidence in the system.

The reassuring part is this:

Even when a nominated bank fails,
the structure of UCP 600 ensures that the beneficiary is not left standing alone.

The issuing bank remains the anchor.

What’s your experience?
Have you ever encountered a case where a nominated bank failed to honour at maturity?
Did the issuing bank step in smoothly—or did things get… complicated?

___________

Mr. Old Man