Article

by Jim Barnes

A nominated bank presents a beneficiary's documents to an issuing bank under a deferred payment credit issued subject to UCP 600. The issuing bank determines that the presentation complies or it waives all discrepancies. The issuing bank then notifies the nominated bank that it has accepted the documents and/or that it will pay on the maturity date indicated in the credit. Presumably, the issuing bank will make payment at maturity to the nominated bank that forwarded the documents. Will that payment constitute reimbursement of the nominated bank or honour of the beneficiary's drawing or both? Does it matter which?

UCP 600 sub-article 7 (c) (and the parallel provision for confirming banks in sub-article 8 (c)) provides for reimbursement of nominated banks that honour or negotiate under deferred payment credits, as follows: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary."

Reimbursement rights are clearly limited to presenters that qualify as a "nominated bank". There must be a "complying presentation", which should include any presentation that is affirmatively accepted or as to which the issuing bank has precluded itself from raising non-compliance as a defence. The nominated bank must have "honoured" or "negotiated". Which term applies depends on the nomination language in the credit. In this regard, I use the term "deferred payment credit" to refer to the type of undertaking made by an issuing bank in a credit. A credit available with the issuing bank by deferred payment may authorize a nominated bank to honour or to negotiate (or may be unclear about the authority of a nominated bank to honour or negotiate). Accordingly, I discuss separately below the possibility that a nominated bank may claim reimbursement on the basis of its honouring or negotiating a presentation.

Nominated bank honour

Under a deferred payment credit, a nominated bank may "honour" only if the credit authorizes the nominated bank to incur a deferred payment under taking ("DPU") and if the nominated bank incurs a DPU and pays the DPU at maturity (or pre-pays it sooner, as is now expressly authorized in sub-article 12(b)).

UCP 600 does not define DPU incurrence or state whether or how DPU incurrence must or may be documented. Presumably, an "incurred" DPU should be the equivalent of an issuing or confirming bank's undertaking to pay under a credit whose terms and conditions have been met, except for the passage of time. Any issuing or confirming bank that suffers preclusion has arguably thereby incurred a DPU. In any event, it should not matter much whether or how a precluded issuing or confirming bank evidences DPU incurrence, because its breach of its obligation under the DPU will also qualify as wrongful dishonour of the credit.

Incurrence of a DPU by a non-con- firming nominated bank, however, requires additional evidence that the bank obligated itself and that its obligation meets the minimum requirements for a DPU, so that, when incurred, the nominated bank's obligation was not conditioned on compliance or reimbursement and, when paid, the nominated bank's payment would be as final as a payment made by an issuing or confirming bank. In this regard, it should be noted that a nominated bank might agree to incur a DPU after certain conditions are met, in which case the DPU would be incurred at some later date when the conditions are met.

ICC Banking Commission officers' Opinion TA 690 addresses the reimbursement rights of a non-confirming nominated bank under a credit available by the nominated bank's incurrence of a DPU. The Opinion, which is currently being submitted to ICC national committees for their comments, concludes that the nominated bank's reimbursement rights depend on its incurrence of a DPU, not on its "pre-payment" of the issuing bank's obligation following the issuing bank's acceptance of the documents. In the Opinion's first example, the nominated bank was not entitled to reimbursement because it failed to incur a DPU and instead "pre-paid" the issuing bank's DPU. In the second example, the nominated bank was entitled to reimbursement because it did incur (and then pre-paid) its own DPU, albeit after it examined and forwarded complying documents, and after it received notice that the issuing bank had accepted the documents and would pay at maturity.

Nominated bank negotiation

A nominated bank may "negotiate" under a deferred payment credit by agreeing with the beneficiary to advance funds on or before the maturity date. UCP 600 article 2 defines "Negotiation" as a "purchase" by "advancing or agreeing to advance funds...". The definition makes clear that the agreement must be for the purchase of the documents presented and that the date for funding must be set on or before the reimbursement due date. The definition does not indicate that the agreement to advance funds must be as independent or unconditional as a confirmation or an incurred deferred payment undertaking, or that any funds advanced must qualify as a final or nonrecourse payment. According to sub-article 12 (c), mere receipt and for war ding of documents will not qualify as negotiation. From that, as well as from the usual meaning of the word "advance", it may be fairly inferred that an agreement to advance funds to the beneficiary that is conditioned on receipt of funds from the issuing bank will not qualify as negotiation.

There is, however, no basis in the language of UCP 600 for limiting "negotiation" to fundings that are immediate, unconditional or non-recourse. In particular, the language of the rules allows for negotiation under deferred payment credits by the nominated bank's agreement to advance funds on the condition that the issuing bank accepts the documents. That kind of agreement would presumably shift issuing bank credit and country risk to the nominated bank, but not the risk that the issuing bank will raise discrepancies, whether or not noted by the nominated bank, when examining or forwarding the documents. It also allows for agreements which provide for beneficiary indemnification in case a claim of fraud/abuse is raised, or a court or agency order interferes with reimbursement on extra ordinary grounds.

A recent English case, Fortis Bank S.A./ N.V. Stemcor UK Limited v. Indian Over seas Bank, [2009] EWHC 2303 (Comm), addressed reimbursement rights under UCP 600 sight credits "available by negotiation". The issuing bank dishonoured based on claims of discrepancy (most of which were rejected by the court) and separately argued that the nominated bank was not entitled to reimbursement under sub-article 7 (c) and under the definition of negotiation in article 2 as applied to a sight credit, because those articles require that the nominated bank advance funds without waiting for reimbursement.

It appears that the nominated bank did advance funds to the beneficiary after the five banking day period provided in article 16 and, on some drawings, after the issuing bank refused the documents (i.e., after the date on which reimbursement was due under the sight credit). The court was not persuaded by any of the issuing bank's arguments for limiting reimbursement rights under UCP, saying: "64. I reject these arguments. Under the UCP the obligation to reimburse the nominated bank arises if it honours or negotiates a complying presentation and forwards the documents to the issuing bank. In the present case, [the nominated bank] did negotiate what on their case was a complying presentation and did forward the documents to [the issuing bank]. What matters is the fact of honouring or negotiating a complying presentation."

When does it matter?

Usually, it does not matter whether an issuing bank's payment effects honour or reimbursement or both. In most circumstances an issuing bank does not care whether its payment to a nominated bank is for collection on behalf of the beneficiary or for reimbursement of the nominated bank. An issuing bank that has decided to pay at maturity will make that payment to the bank that forwarded the documents and will not bother to decide whether the payment constitutes honour or reimbursement or both.

Any bank forwarding the documents to the issuing bank will qualify as the "presenter". The issuing bank may, and generally must, deal with the presenter when sending a notice of acceptance or dishonour, or when returning documents or effecting payment. If banks were required to know whether a presentation under a letter of credit (or in a docu mentary collection) was made by a bank as a collection agent or as a purchaser/owner of the documents presented, bank processing would be slow, expensive and contentious.

In unusual circumstances resulting in an issuing bank's failure to pay at maturity, it matters whether the presenting bank is entitled to reimbursement. If an issuing bank accepts documents but then fails to pay at maturity, its defence will be extraordinary, because the issuing bank will have precluded itself from raising non-compliance as a defence. The issuing bank's extraordinary defence could be based on a court injunction/attachment, government sanction, issuing bank insolvency or issuing bank setoff right against the beneficiary or the issuing bank's claim of fraud/abuse. In response to the issuing bank's extra ordinary defence, the presenting bank could claim that it has a right to payment that is independent of the beneficiary's right to payment under UCP 600 and, for that reason, is not subject to defences available against the beneficiary based on setoff, fraud/abuse, sanctions or injunction. Even in the case of issuing bank insolvency, it might matter whether the beneficiary or the presenting bank owns the claim, if one, but not the other, has a setoff right.

When an issuing bank fails to pay at maturity and raises an extraordinary defence, the language of the credit and of UCP 600 will play an important role in determining whether the issuing bank must or may honour or reimburse or refuse to do either. Presumably, the issuing bank wants to pay at maturity, but is compelled not to pay or is satisfied that it is otherwise excused from paying. The affected bene fi- ciary or the presenter or both could assert claims for payment, ultimately by suing the issuing bank, quite possibly in the claimant's home court. The court hearing a claim against the issuing bank will decide whether the beneficiary or the presenter is a proper claimant and whether the issuing bank's extraordinary defence justifies non-payment to the particular claimant. Here it matters whether the presenter has a right of reimbursement and whether that right is independent of the beneficiary's right to honour. (And here the process becomes slow, expensive and contentious.)

Extraordinary defences may override independent rights

Sub-article 7 (c) may not protect nominated banks against dishonour for extraordinary reasons. This sub-article (and the parallel provision for confirming banks in sub-article 8 (c)) provide that the basic undertaking to reimburse is "independent" of the issuing bank's obligations to the beneficiary. Literally, the UCP dictates that an issuing bank must reimburse under 7 (c) even if applicable law excuses the issuing bank from honouring a complying presentation that is tainted with beneficiary fraud/abuse (or if dishonour is compelled by applicable law or court order). Courts may conclude that, under applicable law, they may or must limit the independence of reimbursement rights in a case of beneficiary fraud/abuse or beneficiary activity covered by government sanctions or the like.

Unlike bankers paying on accepted documents received from presenting banks, judges want to know whether payment by the issuing bank to a presenting bank would reward an undeserving beneficiary or punish an innocent nominated bank. A judicial inquiry may parallel the UCP tests for reimbursement rights, but it is likely to focus on factors not relevant to UCP 600 reimbursement rights, notably when, if ever, did the nominated bank confirm, accept, incur a DPU, advance funds or otherwise lose its legal right or practical ability to refuse payment or to recover a payment made. In this context, whether a nominated negotiating bank advanced funds before or after receiving notice of beneficiary fraud may prove critical. Readers interested in this topic may wish to refer to my prior DCInsight articles on the Santander case (Summer 2000), nomi na ted bank discounting (April-June 2006) and bank responsibility for fraud (January-March 2007).

James G. Barnes is senior counsel at Baker & McKenzie LLP, Chicago, Illinois, USA.
His e-mail is James.G.Barnes@Bakernet.com