Is A U.S. Confirming Bank allowed to discount its Deferred Payment undertaking on a 'without recourse' basis, without the prior agreement of the L/C Issuing Bank ?
In the affirmative, what kind of action should the issuing bank take in case of presentation by the applicant of a court injunction for stopping payment ?
Regards
Antoine Samaha
Discounting of Deferred Payment Undertaking
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larryBacon
- Posts: 689
- Joined: Fri Apr 05, 2019 5:26 pm
Discounting of Deferred Payment Undertaking
A confirming bank which takes a decision to discount, does so at its own exclusive risk. Where such decision is based on a deferred payment, extra risks may be encountered. This is especially true dependent on the jurisdiction. See Banco Santander v Paribas case.
When you talk of an injunction by the applicant to stop payment, you do not state on what grounds this action is taken. Please elaborate.
Laurence
When you talk of an injunction by the applicant to stop payment, you do not state on what grounds this action is taken. Please elaborate.
Laurence
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JudithAutié
- Posts: 195
- Joined: Fri Apr 05, 2019 5:20 pm
Discounting of Deferred Payment Undertaking
The ICC has always refused to say anything other than the fact that legal decisions have to be respected.
However this does not mean that we banks are bound hand and foot without any means of defense.
Practically the only reasons for getting a court injunction stopping payment are for fraud. I was very interested when attending a presentation by an international law firm who stated that the (in)famous Paribas/Santander case would probably have had a different outcome if it had been judged in the US, thanks to the new UCC particularly section 5-109 which states that the issuer must honor the presentation of complying documents if the nominated person or the confirmer had honored in good faith.
Have a look at that excellent book by the Wunnickes and Turner "Standby and Commercial Letters of Credit" published by John Wiley & Sons Inc., and good luck.
Judith
P.S. I think all of doc credit users, whether banks or businesses, would sing "hallelujah" if the revision of the UCP could clarify this matter, but I have my doubts it will be so.
However this does not mean that we banks are bound hand and foot without any means of defense.
Practically the only reasons for getting a court injunction stopping payment are for fraud. I was very interested when attending a presentation by an international law firm who stated that the (in)famous Paribas/Santander case would probably have had a different outcome if it had been judged in the US, thanks to the new UCC particularly section 5-109 which states that the issuer must honor the presentation of complying documents if the nominated person or the confirmer had honored in good faith.
Have a look at that excellent book by the Wunnickes and Turner "Standby and Commercial Letters of Credit" published by John Wiley & Sons Inc., and good luck.
Judith
P.S. I think all of doc credit users, whether banks or businesses, would sing "hallelujah" if the revision of the UCP could clarify this matter, but I have my doubts it will be so.
Discounting of Deferred Payment Undertaking
Asamaha,
Without liability / responsibility, I personally think:
As Judith suggests, you need to consult the US Uniform Comm’l Code (its accessible on the internet). I too think you’ll find it puts a nominated bank that discounts a d/p obligation on a par with a nominated bank that discounts an accepted bill.
Also, I do not see the relevance of your question (including the fact that the credit was confirmed; this should make no difference). Even if a nominated bank is not entitled to discount its d/p obligation at the issuing bank's risk or it has not discounted its d/p obligation (and is therefore awaiting the due date to settle with the beneficiary), it is still distinctly possible it will have an obligation to make payment on the due date and/or be entitled to reimbursement on the due date, given the court order is presumably of a court in a different jurisdiction (e.g. Lebanon), i.e. one without power to bind the (e.g. U.S.) nominated bank, as well as being against the issuing bank and not the nominated bank.
I would expect that the injunction to which you refer is an ‘ex parte’ injunction. That is one granted without the parties affected by the injunction (e.g. the issuing bank and nominated bank) having had the opportunity to put their case –on the basis of the UCP- to the court. Where a nominated bank has taken up documents in accordance with the credit and that nominated bank has affected settlement, or is obliged to do so in the future, I would generally expect the issuing bank to obtain a hearing before the court at the earliest opportunity to have the injunction lifted so as to enable the issuing bank to settle its obligations to the nominated bank. The fact that the applicant is the issuing bank’s customer should not affect this.
Finally, if the (e.g. U.S.) nominated bank is not reimbursed on the due date I would not be surprised if it were able to take action successfully in its own (e.g. Californian) courts against the issuing bank, enforcing the judgement in its favour against any assets of the issuing bank in that jurisdiction or any other jurisdiction (e.g. NY?) that recognises the court orders of the jurisdiction in which the nominated bank has taken action. In other words, if the issuing bank does nothing it could find itself obliged to reimburse the issuing bank out of assets held abroad but be unable to obtain recovery from the applicant.
Jeremy Smith
[edited 8/18/2004 10:43:56 AM]
Without liability / responsibility, I personally think:
As Judith suggests, you need to consult the US Uniform Comm’l Code (its accessible on the internet). I too think you’ll find it puts a nominated bank that discounts a d/p obligation on a par with a nominated bank that discounts an accepted bill.
Also, I do not see the relevance of your question (including the fact that the credit was confirmed; this should make no difference). Even if a nominated bank is not entitled to discount its d/p obligation at the issuing bank's risk or it has not discounted its d/p obligation (and is therefore awaiting the due date to settle with the beneficiary), it is still distinctly possible it will have an obligation to make payment on the due date and/or be entitled to reimbursement on the due date, given the court order is presumably of a court in a different jurisdiction (e.g. Lebanon), i.e. one without power to bind the (e.g. U.S.) nominated bank, as well as being against the issuing bank and not the nominated bank.
I would expect that the injunction to which you refer is an ‘ex parte’ injunction. That is one granted without the parties affected by the injunction (e.g. the issuing bank and nominated bank) having had the opportunity to put their case –on the basis of the UCP- to the court. Where a nominated bank has taken up documents in accordance with the credit and that nominated bank has affected settlement, or is obliged to do so in the future, I would generally expect the issuing bank to obtain a hearing before the court at the earliest opportunity to have the injunction lifted so as to enable the issuing bank to settle its obligations to the nominated bank. The fact that the applicant is the issuing bank’s customer should not affect this.
Finally, if the (e.g. U.S.) nominated bank is not reimbursed on the due date I would not be surprised if it were able to take action successfully in its own (e.g. Californian) courts against the issuing bank, enforcing the judgement in its favour against any assets of the issuing bank in that jurisdiction or any other jurisdiction (e.g. NY?) that recognises the court orders of the jurisdiction in which the nominated bank has taken action. In other words, if the issuing bank does nothing it could find itself obliged to reimburse the issuing bank out of assets held abroad but be unable to obtain recovery from the applicant.
Jeremy Smith
[edited 8/18/2004 10:43:56 AM]
Discounting of Deferred Payment Undertaking
P.S. For an example of a beneficiary (in the U.S.)successfully suing an issuing bank, that was legally prevented from paying in its own country, in England through the London branch of the issuing bank (which had no involvement in the credit) see Power Curber International Ltd v National Bank of Kuwait [1981] Court of Appeal.