discount of proceeds

[BilselTatar]

Dear all;

I would like to get your opinion regarding the discount of proceeds under deferred payment and acceptance L/Cs. If the nominated bank does not act on its nomination and just examines and sends the documents to the issuing bank, then does the nominated bank still have the right to discount without getting permission (consent) of the issuing bank?
I am waiting for your comments.

[NigelHolt]

My opinion is that if a nominated bank does not honour by accepting a draft or incurring a deferred payment undertaking or -for that matter- negotiate at the time documents are presented and found by it to be compliant it is not entitled subsequently to accept a draft, incur a deferred payment undertaking or negotiate under UCP500 or UCP600 and therefore to claim the rights of a nominated bank unless it has sought and obtained the issuing bank’s prior agreement. One cannot of course purchase / pre-pay unless one has accepted a draft or incurred a deferred payment undertaking.

[AbdulkaderBazara]

Nominated bank, like any other bank, may discount with recourse to beneficiary. Some banks including nominated banks would not want to discount unless they receive issuing bank's confirmation that documents are found in order and that payment is forthcoming on maturity. A nominated bank that did not act on its nomination may not be categorized as a nominated bank for that specific transaction.

Under UCP 600, these types of situations do not seem to be covered and thus the bank that discounted the payment may not have the protection against beneficiary’s letter of credit fraud; therefore, the safest way remains to discount with recourse to beneficiary if you are happy with beneficiary's risk or if you obtain the approval of the issuing bank and of course you are happy with the risk of the bank.

Best regards
Abdulkader

[edited 7/16/2007 8:50:44 PM]

[JimBarnes]

July 19

If you are not a nominated bank entitled to reimbursement (based on your honour or negotiation), then, if the issuing bank fails to pay you for any reason, your problems are that you will have no rights of your own under the LC and will have uncertain standing to enforce the beneficiary's rights against the issuing bank.

If you are nominated and forward documents to the issuing bank, your status may be unclear to the issuing bank. You presumably cannot accept a draft after you forward it unsigned, but maybe you can negotiate or incur a DPU after forwarding documents. That might qualify you for reimbursement under UCP600, even though the timing is unusual. You might still be at risk to a fraud defense, because many courts ask, not whether you are entitled to reimbursement, but rather whether you facilitated beneficiary fraud by giving value when you were not obligated to, particularly if you gave value after receiving notice of fraud.

Regards, Jim Barnes

[BilselTatar]

If the nominated bank is also a confirming bank, then what is the position of this bank in case of presentation of discrepant documents? In order to be more clear, if the confirming (nominated) bank sends docs to the issuing bank on approval basis, does this bank still have the right to discount without getting permission of the issuing bank (after the acceptance of docs by the issuing bank)?
I am waiting for your comments.

Best regards...
Zeynep

[AbdulkaderBazara]

If a confirming bank has the intention to prepay or purchase, it would be safer if it sends a list of discrepancies to the issuing bank for waiver rather than sending documents on approval basis. Once the discrepancies are waived, the confirming bank may prepay or purchase and send the documents to the issuing bank. This would be in line with article 12(b) of UCP 600.

However, if the confirming bank has sent the documents to the issuing bank on approval basis and obtained its (the issuing bank) waiver, the confirming bank may still want, but not obligated, to extend its confirmation to this presentation and would have the right to claim the amount from the issuing bank on the maturity date. In practice, many confirming banks that elected to extend their confirmation to this type of presentation after obtaining the issuing bank's undertaking to pay at maturity would usually advance the beneficiary. Nevertheless, I'm not sure of the legal implication of article 12(b) here, though personally feel that there should not be any technical reason for denying reimbursement to the confirming that was functionally able to prepay or purchase prior to any notice of fraud.

Regards
Abdulkader
[edited 7/21/2007 9:24:22 AM]