WHETHER THE ISSUING BANK CAN PREPAY OR PURCHASE ITS OWN ACCEPTED DRAFT OR ITS OWN DEFERRED PAYMENT UNDERTAKING

QUESTION

Dear Mr. Old Man,

Hope this mail finds you well. I have a question that needs your expertise clarification:

Can the issuing bank prepay or purchase its own accepted draft or its own deferred payment undertaking under UCP 600 sub-article 12(b)?

Thank you.

Frank

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ANSWER

Hi Frank,

UCP 600 Article 12(b) permits a nominated bank that has accepted a draft or incurred a deferred payment undertaking to prepay or purchase its own obligation. However, this article does not apply to the issuing bank.

Key Clarifications:

• UCP 600 Article 12(b) refers only to a nominated bank or confirming bank. It does not address the issuing bank.
• There is no provision in UCP 600 that explicitly allows or prohibits the issuing bank from prepaying its own acceptance or deferred payment undertaking.
• Nevertheless, in practice, once the issuing bank is irrevocably bound to pay at maturity (per Article 7), it may choose to settle early by mutual agreement with the beneficiary.
• Such early payment is not considered a “negotiation” under UCP, but rather a voluntary prepayment or purchase, often subject to a discount.

Conclusion:

Although UCP 600 is silent, it is widely accepted in practice that an issuing bank may prepay or purchase its own deferred payment undertaking or acceptance, provided this is done in agreement with the beneficiary. There is no article prohibiting this action.

Best regards,

Mr. Old Man