Is it just me?

[NigelHolt]

I find remarks by King Tak Fung in the latest DCI rather odd. He says:

“The introduction of the "honour" concept appears to indicate that an L/C available by sight payment, by deferred payment or by acceptance is not negotiable. Accordingly, no authorization is given to any bank to negotiate (by way of advancing or agreeing to advance) the drafts and/or documents presented under a sight payment, deferred payment or acceptance L/C prior to the issuing or nominated bank's effecting payment under the L/C. This, in my view, would substantially undermine the role of the L/C as a financing instrument.”

But surely this is the current position under UCP500? In other words, no authorization is given in UCP500 to any bank to negotiate (by way of advancing or agreeing to advance) the drafts and/or documents presented under a credit expressed to be available by sight payment, deferred payment or acceptance. Therefore the proposed ‘UCP600’ changes nothing. Or am I missing something?

[KimChristensen]

Dear Jeremy,

I can not help agreeing with you

I interpret the introduction of honour to primary be of a practical nature:

So that when the UCP 500 says:

“..to pay, incur a deferred payment undertaking, accept Draft(s), or negotiate..”

The new one would simply say:

“..to honour or negotiate..”

Much fewer words; easier to read.

Best regards
Kim

[NigelHolt]

Thanks, Kim.

[AbdulkaderBazara]

Just to get things straight in my mind, does UCP 500 or the current draft of UCP 600 prohibits purchasing /discounting, by an investor / purchaser, a draft (drawn under an LC available by acceptance) that has been duly accepted by the drawee bank so long that such investor / purchaser accepts risk on the drawee? Can the drawee bank or any bank that has accepted the draft for payment on future maturity date refuses to honour its obligation to the bona fide holder of the draft claiming that the LC is not available by negotiation or by exercising the fraud exception rights? Does this exercise of purchasing / discounting an accepted draft within the scope of UCP or is it a matter of governing law? Am I confusing things? Kindly comment.

regards

[KimChristensen]

Dear Abdulkader,

Yes – this is indeed a simple complex issue

In any case; the principle as I understand it: Nothing in the UCP 500 (and as I am aware it – in the coming one) prohibits any kind of purchase, discounting etc. Such acts are of course done at the risk of the purchaser – but if that purchaser acts as nominated bank, then he is protected by the credit and should be reimbursed by the issuing bank.
The fraud scenario is outside the rules, and a matter of law. There are many “interesting” cases pointing in different directions. In the Banco/Santander case the financing under a deferred payment credit was ruled to be outside the credit, and the purchaser was not reimbursed – and the judge went as far as to say, that the outcome may have been different had there been drafts.
Another case is actually mentioned in the K.T. article mentioned by Jeremy, where the judge went rather far to determine whether or not the nominated bank had in fact negotiated, e.g. at what point in time the actual transfer of funds was made.
These examples are always scary; but it goes without saying that once a case end up in a court room, it is simply another game.
(I am sorry that I have used more lines in this posting talking about fraud, than the normal everyday discounting – because the fact is that this fraud scenario is – fortunately – very rare indeed

Best regards
Kim


Ps. you may also want to the the expert view by KT: Fraud and injunctions. It is rather good. You can find it on:
http://focus.dcprofessional.com/DCpro-L ... 120000.xml

[AbdulkaderBazara]

Dear Kim,

Many thanks.

I understand that if LC is not available by negotiate a bank other than the issuing bank or the nominated bank may not be protected if it pays value; however, in my view, if a draft is already accepted for payment by the issuing bank or the nominated bank and returned to the beneficiary, then the accepter (be it the issuing bank or the nominated bank) can not back-off and refuse payment to the bona fide holder of the draft on the maturity date. i believe once the draft is accepted it falls in a different ball game and should not be confused with terms and conditions of the LC.

regards

[edited 2/7/2006 9:48:07 AM]

[NigelHolt]

Abdulkader,

With respect to your first posting, as far as I am aware, the UCP is completely silent regarding the ‘purchase’ or ‘discounting’ of a draft once it has been accepted by an issuing bank (or nominated bank). Thus it does not prohibit it. (The UCP would only seem to envisage negotiation, where a credit is expressed to be so available, at the time of presentation of documents to the nominated bank. In other words, I do not believe negotiation -per sub-Article 10(b)(ii)- can take place after acceptance of a draft by the issuing bank.)

However, under a documentary credit, I understand that the issuing bank’s contract is with the beneficiary and the nominated bank, if any, alone (unless otherwise stated). If correct, these are logically the only parties that can exercise any rights under a credit and thus the UCP.

As a result, my impression is that any party* that ‘purchases’ or ‘discounts’ a draft AFTER it has been accepted by the issuing bank can NEVER look to the UCP for any rights and instead has to look to the provisions of the law regarding bills of exchange of the place where the draft is payable (usually the issuing bank’s country), in particular in relation to the obligations of an acceptor. As a result, any defence to payment -by the issuing bank- with respect to a party other than the beneficiary ought to be based on such law and not the UCP.

With respect to your second posting, I do not see that one can rule out the possibility that the law to which the accepted draft is subject does allow payment to be refused to a bone fide holder on the due date in certain circumstances.

Regards, Jeremy

* Except in the unlikely event of a beneficiary re-purchasing / re-discounting.


[edited 2/7/2006 12:01:47 PM: 'to be refused' added to last para]
[edited 2/7/2006 12:10:11 PM]

[AbdulkaderBazara]

Jeremy,

Thanks, I have a clear head now

regards

[JimBarnes]

Sorry to chime in so late, but the discussion left me a bit confused. There are three categories of non-beneficiary banks that may claim rights: nominated banks that do only what they are expressly nominated to do, nominated banks that do more than that, and banks that are not nominated at all. Some of the responses addressed the rights of banks in the third category. I took the question to refer to the second category, i.e., to banks nominated to incur a deferred payment undertaking (or accept a draft) that do so and then do more--prepay or purchase the DPU or acceptance. (This is the Santander case fact pattern.)

I was further confused at the lack of discussion of the possibility that an LC is available with the issuer by acceptance or sight or deferred payment, and also nominates one or more other banks to negotiate (which I would take to be express authority to "discount" before or after the issuer accepted or incurred a DPU).

I don't think that UCP now or as revised will change the rights of banks in the third category or of banks authorized to negotiate under LCs available with the issuer by acceptance or DPU. I do expect change, or clarification, of the rights of nominated banks to discount their own acceptances or DPUs under LCs that nominate them to accept or incur a DPU.

[KimChristensen]

Dear Mr. Barnes,

Thanks for your views – very helpful. There is one question that I must ask:

You mention that you “expect change, or clarification, of the rights of nominated banks to discount their own acceptances or DPUs under LCs that nominate them to accept or incur a DPU”.
Personally I do hope that your expectations will prove correct. However – regarding the initial question by Jeremy, do you then think that such “clarification” is (as it looks now) part of the “Honour concept”?
Or saying it another way: do you agree with Jeremy when he says that the proposed changes regarding “Honour” changes nothing?

Thanks
Kim