Who Gets to Discount a Deferred Payment LC?

(A question that often pops up over coffee among trade bankers)

Sometimes in LC discussions, what seems like a simple question turns out to be surprisingly layered.

A friend recently asked whether an advising bank can discount a deferred payment under a confirmed LC, when the confirmation was added by another bank.

At first glance, you might think, “Why not?” — but as always in trade finance, the answer depends on who the LC is available with and what kind of undertaking each bank has actually incurred.

Here’s the full exchange below — a nice example of how a small operational detail can make a big legal difference under UCP 600.

QUESTION

My dear friend, always,

I hope this message finds you well.

I have a small question that recently arose during discussions with some colleagues in the banking sector:

Is the advising bank entitled to discount a deferred payment under a confirmed documentary credit, when the confirmation was added by another bank? Moreover, would such action be protected under the international banking rules, namely the UCP 600?

In my opinion, the answer is no. The advising bank is not authorized to discount the deferred payment unless it has been expressly empowered or instructed to do so by the confirming and issuing banks. Otherwise, the advising bank would be acting outside the scope of the credit and therefore would not be protected under the international rules.

Thank you in advance for your kind attention and valuable opinion.

TF

____

ANSWER

Dear TF,

Thank you for your interesting and practical question. Here is my view.

There are three possible scenarios to consider:

Scenario 1 – The confirmed LC is available with the confirming bank by deferred payment:

If the documents are complying, the confirming bank must honour — that is, incur its deferred payment undertaking (DPU) and pay at maturity. It may also discount (prepay) its own DPU in accordance with UCP 600 sub-article 12(b).

Under UCP 600 sub-article 8(c), the issuing bank must reimburse the confirming bank when due, whether or not the confirming bank has prepaid or purchased its own DPU before maturity.

In this scenario, the advising bank is not the nominated bank and therefore is not in a position to incur a DPU or discount it.

Scenario 2 – The confirmed LC is available by deferred payment with the advising bank or any bank:

Although it is not common, an LC may be issued “available with any bank by deferred payment.” In such a case, the advising bank can act as the nominated bank — it may incur its own deferred payment undertaking and discount it before maturity, as permitted under UCP 600 sub-article 12(b).

According to UCP 600 sub-article 8(c), the confirming bank must reimburse the advising bank when due, whether or not the advising bank has prepaid or purchased its own DPU before maturity.

Scenario 3 – The confirming bank has incurred its DPU and advised the same via the advising/presenting bank:

If the advising bank wishes to discount the confirming bank’s deferred payment undertaking (that is, the confirming bank’s commitment), it should obtain the confirming bank’s authorization before doing so.

I hope this clarifies your concern.

Best regards,

Mr. Old Man