Hi
With the introduction of this article putting the onus on the IB to reimburse, would the tradational discounting on 'customer risk' disappear for a compliant presentation made by the beneficiary?
Regards
Jason
Art 7c
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AsifMahmoodButt
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KimChristensen
- Posts: 404
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Art 7c
Dear Jason,
I am not sure that I follow you exactly – so if I am totally off track – kindly elaborate further.
The essence is that a bank that has followed its nomination is protected by the rules. Article 7,c and 12,b underlines that this nomination includes “prepay or purchase”.
If the nominated bank is a non-confirming bank – then the framework of the obligation depends on the agreement with the beneficiary (Article 12,a) – E g. pay to the beneficiary with recourse or without recourse – prior to maturity or at maturity.
So you may do all kind of things – I expect – just as you did before – guess it is just clearer now that if you (as a nominated bank) “prepay or purchase” a compliant presentation – then the issuing bank is obligated to reimburse you.
Best regards
Kim
I am not sure that I follow you exactly – so if I am totally off track – kindly elaborate further.
The essence is that a bank that has followed its nomination is protected by the rules. Article 7,c and 12,b underlines that this nomination includes “prepay or purchase”.
If the nominated bank is a non-confirming bank – then the framework of the obligation depends on the agreement with the beneficiary (Article 12,a) – E g. pay to the beneficiary with recourse or without recourse – prior to maturity or at maturity.
So you may do all kind of things – I expect – just as you did before – guess it is just clearer now that if you (as a nominated bank) “prepay or purchase” a compliant presentation – then the issuing bank is obligated to reimburse you.
Best regards
Kim
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Art 7c
Dear Kim
What I meant was in the past, for unconfirmed usuance LCs, there was no explicit undertaking from the IB to reimburse a nominated bank, as such the practise was to discount these documents with recourse to the beneficiary i.e. customer risk since the there was no definite undertaking from the IB. Since Art 7c provides a definite undertaking would it make sense to continue with discounting 'with recourse' to the beneficiary? If so why?
Regards
Jason
What I meant was in the past, for unconfirmed usuance LCs, there was no explicit undertaking from the IB to reimburse a nominated bank, as such the practise was to discount these documents with recourse to the beneficiary i.e. customer risk since the there was no definite undertaking from the IB. Since Art 7c provides a definite undertaking would it make sense to continue with discounting 'with recourse' to the beneficiary? If so why?
Regards
Jason
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KimChristensen
- Posts: 404
- Joined: Fri Apr 05, 2019 5:21 pm
Art 7c
Dear Jason,
Okay – I see what you mean. I do not agree with you that a UCP 500 credit available by deferred payment did not provide a definite undertaking from the issuing bank.
The problem that some courts created was that they did not protect a nominated bank that had prepaid; i.e. the nominated bank did not get reimbursed as the issuing bank was subsequently prevented by the court to pay due to beneficiary fraud.
This is the situation that 7c and 12b is trying to solve.
However – apart from beneficiary fraud – the issuing bank would be obligated to pay at maturity if credit compliant documents were presented.
So in answering your question: It depends on what kind of risk you are willing/prepared to take:
If you prepay the beneficiary without recourse your risk is on the issuing bank – and you have to evaluate and price that one.
If you discount with recourse to the beneficiary – your risk is on the beneficiary – and you have to evaluate that one.
Please bear in mind that even though the issuing bank is obligated to reimburse it may not be able to do so – so if you prepay without recourse you need to consider the political and commercial risk on the issuing bank – and if you discount with recourse you need to consider the situation that you do not get reimbursed and need to revert to the beneficiary to claim the funds back.
Best regards
Kim
Okay – I see what you mean. I do not agree with you that a UCP 500 credit available by deferred payment did not provide a definite undertaking from the issuing bank.
The problem that some courts created was that they did not protect a nominated bank that had prepaid; i.e. the nominated bank did not get reimbursed as the issuing bank was subsequently prevented by the court to pay due to beneficiary fraud.
This is the situation that 7c and 12b is trying to solve.
However – apart from beneficiary fraud – the issuing bank would be obligated to pay at maturity if credit compliant documents were presented.
So in answering your question: It depends on what kind of risk you are willing/prepared to take:
If you prepay the beneficiary without recourse your risk is on the issuing bank – and you have to evaluate and price that one.
If you discount with recourse to the beneficiary – your risk is on the beneficiary – and you have to evaluate that one.
Please bear in mind that even though the issuing bank is obligated to reimburse it may not be able to do so – so if you prepay without recourse you need to consider the political and commercial risk on the issuing bank – and if you discount with recourse you need to consider the situation that you do not get reimbursed and need to revert to the beneficiary to claim the funds back.
Best regards
Kim
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Art 7c
Dear Kim,
Thanks for your reply. Regarding the last para .. the IB obligated to pay but may not be able to do so and also the part on the country and commercial risk ..... how different would this be from Confirmation of a LC. When a Confirmed LC is discounted, one would also cover both scenarios mentioned. How would courts react to this ? Confirmed LC - Discounted without recourse. Unconfirmed LC - discounted without recourse. Whats the difference - in both cases money is due from the issuing bank and in UCP600 both are allowed to pre pay.
Regards
Jason
Thanks for your reply. Regarding the last para .. the IB obligated to pay but may not be able to do so and also the part on the country and commercial risk ..... how different would this be from Confirmation of a LC. When a Confirmed LC is discounted, one would also cover both scenarios mentioned. How would courts react to this ? Confirmed LC - Discounted without recourse. Unconfirmed LC - discounted without recourse. Whats the difference - in both cases money is due from the issuing bank and in UCP600 both are allowed to pre pay.
Regards
Jason
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KimChristensen
- Posts: 404
- Joined: Fri Apr 05, 2019 5:21 pm
Art 7c
Dear Jason,
In practical terms most likely not much difference. Please however note two issues:
First the issue of “timing”; where the LC is unconfirmed it would seem unlikely that the nominated bank would give any kind of “promises”. This means that the beneficiary would only know exactly what the nominated bank is willing to do at the time he presents the documents – i.e. after goods being shipped.
If the LC is confirmed then at the time of receiving the advice / confirmation he would know that the confirming bank is obligated in accordance with article 8 – and consequently the confirming bank would in many cases be in a position to “offer” some kind of “prepay” already at that point in time – i.e. prior to shipment of goods.
Secondly please bear in mind then when a non-confirming bank decides to pay the beneficiary without recourse before maturity – then this is not based on article 8 – but on 12,a – i.e. with background in an express agreement – stipulating the terms of such payment.
In any case – rule wise from the perspective of the issuing bank there is no difference. Bottom line: they are obligated to pay when a complying presentation is made.
How courts would react; I have no idea – only hopes
Anyway – see the postings of 10+11 Aug by Smith and Barnes under the topic “article 12a” – perhaps that will give you some kind of idea.
Best regards
Kim
In practical terms most likely not much difference. Please however note two issues:
First the issue of “timing”; where the LC is unconfirmed it would seem unlikely that the nominated bank would give any kind of “promises”. This means that the beneficiary would only know exactly what the nominated bank is willing to do at the time he presents the documents – i.e. after goods being shipped.
If the LC is confirmed then at the time of receiving the advice / confirmation he would know that the confirming bank is obligated in accordance with article 8 – and consequently the confirming bank would in many cases be in a position to “offer” some kind of “prepay” already at that point in time – i.e. prior to shipment of goods.
Secondly please bear in mind then when a non-confirming bank decides to pay the beneficiary without recourse before maturity – then this is not based on article 8 – but on 12,a – i.e. with background in an express agreement – stipulating the terms of such payment.
In any case – rule wise from the perspective of the issuing bank there is no difference. Bottom line: they are obligated to pay when a complying presentation is made.
How courts would react; I have no idea – only hopes
Anyway – see the postings of 10+11 Aug by Smith and Barnes under the topic “article 12a” – perhaps that will give you some kind of idea.
Best regards
Kim
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AsifMahmoodButt
- Posts: 89
- Joined: Fri Apr 05, 2019 5:21 pm
Art 7c
Dear Kim,
Thanks a lot.
Regards
Jason
Thanks a lot.
Regards
Jason