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The Uniform Commercial Code, like the UCP, would not recognize a non-nominated financing bank as having rights against the issuing bank on its DPU, except as an assignee of LC proceeds. Even then, the issuing bank could ignore the claimed assignment, so that the assignee would want a formal acknowledgement from the issuing bank (which is likely to charge a fee for the assignment).

UCC 5-109, unlike the UCP, protects assignees of incurred DPUs against beneficiary fraud, if the assignee had no notice of fraud before it gave value for the DPU.

Regards, Jim

For what it is worth my understanding is that under English law:
1. a debtor (e.g. issuing bank) must abide by an assignment unless the contract (e.g. credit)contains provisions disallowing assignment or requiring its agreement to any assignment.
2. an assignment, in the case of a credit, need not be confined to the proceeds and can encompass all the beneficiary's rights against -for example- the issuing bank.

Nice to have seen you on Tuesday, Jim.
[edited 5/22/2010 10:04:18 AM]

Very often the phrase is used ‘protection under the UCP’

What exactly does this mean?

If an issuing bank goes bankrupt as has happened during current testing times even a nominated bank has no protection under UCP. No money = no money!

If there is fraud proven before maturity date of a deferred payment undertaking then in most instances a court will at first sight support a plea by the issuing bank to avoid reimbursement in seeking to provide justice and not to enrich parties guilty of illegal or perhaps criminal acts.

The main distinction appears to me to be that if the issued credit specified a nominated bank under a deferred payment credit and that nominated bank has prepaid, purchased, discounted or basically given value against a complying presentation then the protection in the first instance is that under the rules there is an obligation of the issuing bank to reimburse that bank which was nominated by the issuing bank at the time the credit was issued.

However, I believe this obligation would be tested in court in the context of whether the reimbursement under the rules would facilitate illegal gains by unscrupulous parties and whether the nominated bank acted in good faith.

I am far from a legal expert but even in the US I believe the nominated bank has this ‘protection’ which I would define in simple terms as ‘right of reimbursement’ only if it had acted in good faith and without notice of fraud in documents or material fraud.

Also as I understand it when a nominated bank forwards a presentation to the issuing bank for reimbursement it warrants that they are due reimbursement and that the transaction is not tainted (to the best of their knowledge) by fraud.

If the credit is available by deferred payment only with the issuing bank then the issuing bank has an obligation to pay at maturity. It is possible for another non nominated bank to gain protection or ‘right or reimbursement’ from issuing bank but this is not articulated in the UCP for good reason.

Svetlana

if you are protected by the UCP, you will be, I hope, in a better position in case of trouble. If you are the nominated bank prepaying (in good faith) a deferred payment undertaking, you have acted according to the UCP and therefore (again, I hope) a court will recognize it in case of fraud by the beneficiary. If you're not the nominated bank and if you advance the funds to the beneficiary you are not acting according to the UCP and the court will also recognize the fact; to your detriment, presumably.
If the issuing bank goes bankrupt, nominated bank or not , it is not a UCP issue anymore it is credit risk.
Regards
Daniel

"Protection" is not a very helpful word.

If a nominated bank is entitled to "reimbursement" under UCP600, it probably should be protected against , i.e., be allowed to avoid, a fraud defense or claim that would be good against the beneficiary. But courts are slow to let the scope of the fraud/abuse exception be dictated by UCP (and ICC Banking Commission opinions routinely say that the law may override the UCP). (This is also true of other extra-ordinary defenses based on court injunctions or governmental regulations excusing or compelling LC dishonor.)

A bank that is not nominated under a credit will not be entitled to "reimbursement" under UCP600, no matter what.
But it can acquire the beneficiary's rights to receive the proceeds of honor, subject to applicable rules and law on assignment of LC proceeds. Rights under an incurred DPU should qualify as LC proceeds. These laws governing assignment of LC proceeds differ, particularly in the extent to which they treat LC proceeds as peculiar and treat LC banks as more deserving of protection than, say, the obligor of a trade payable.

Our codified LC law on assignment of LC proceeds is rather complicated, but in general it protects banks that refuse to recognize a claimed assignment of LC proceeds. Our codified law on fraud protection gives the most protection to confirmers and then descending levels of protection to other nominated persons, un-nominated holders of acceptances and assignees of DPUs, as follows:

Sec. 5-109. Fraud and forgery.
(a) If a presentation is made that appears on its face strictly to comply with the terms and conditions of the letter of credit, but a required document is forged or materially fraudulent, or honor of the presentation would facilitate a material fraud by the beneficiary on the issuer or applicant:
(1) the issuer shall honor the presentation, if honor is demanded by (i) a nominated person who has given value in good faith and without notice of forgery or material fraud, (ii) a confirmer who has honored its confirmation in good faith, (iii) a holder in due course of a draft drawn under the letter of credit which was taken after acceptance by the issuer or nominated person, or (iv) an assignee of the issuer's or nominated person's deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person; and
(2) the issuer, acting in good faith, may honor or dishonor the presentation in any other case.

Regards, Jim Barnes

Dear Daniel and James,

Thank you for helping me fine tune my understanding.

I also find the wording ‘protected by UCP’ unhelpful and actually misleading.

It is interesting to see the actual wording of the US Law and to see the explicit reference to ‘good faith’. I think this is important and wonder why it is not in UCP.

Furthermore, I welcome the arrival of Article 30 or URDG 758 which now makes direct reference to acting in ‘good faith’.

So, would you be of the view that if a NON-NOMINATED bank under a deferred payment LC discounted or as it might be called ‘fortaited’ and then fraud was established before maturity then the issuing bank would could avoid reimbursement of that NON-NOMINATED bank.

I believe this would be settled in court, probably in jurisdiction of where the credit was available but I would bet that it is most likely the court would rule that the NON-NOMINATED BANK is not entitled to reimbursement……… unless of course that NON-NOMINATED bank obtained the Issuing Banks authorization to finance, discount, prepay before advancing the funds to someone who ultimately tuned out to be a fraudster.

Thanking you

Sveta

A non-nominated person could qualify for protection from a fraud defense or claim under UCC 5-109 in the two circumstances mentioned in sub-sections (iii) and (iv).

The first would likely apply in many countries that protect holders in due course of a banker's acceptance (whether or not generated under an LC). The second is probably peculiar and reflects the view of the UCC drafters that incurred deferred payment obligations should provide equivalent protection. Both require that the issuer has created an absolute obligation under the LC by accepting a time draft or incurring a DPU.

Note that the good faith test is the only test that an issuer or confirmer must meet in order to qualify for reimbursement after honor, and that good faith under the UCC LC statute is narrowly defined to mean honesty in fact.

The UCC drafters meant to protect the reimbursement rights of issuers and confirmers unless there was (i) a timely notified court injunction against honor or (ii) dishonest conduct by the issuer or confirmer, which generally requires a showing that a banker was corrupted into helping commit fraud and not just a showing that before the bank honored it knew or should have known the beneficiary was committing fraud. (The bank can voluntarily dishonor and defend itself on grounds of fraud, but it should not be easily induced to do so by applicant threats of non-reimbursement.)

Regards, Jim Barnes

I am not a lawyer but if I understand the reasoning of our Supreme Court in different cases, for a "non-nominated" bank, to make an "advance" under a DC available by deferred payment would be to make a transaction independent of the DC.
Regards
Daniel

Daniel, Same here. Our UCC protects a non-nominated person only for advances against a DPU made after the DPU has been incurred: "(iv) an assignee of the issuer's or nominated person's deferred obligation that was taken for value and without notice of forgery or material fraud after the obligation was incurred by the issuer or nominated person;" Jim
[edited 6/19/2010 12:18:11 AM: typo]