A presenting bank (non-nominated bank) discounted or purchased a export bill under LC (available with issuing bank by accepatance) without recourse to bene. Will this non-nominated bank claim to issuing bank on maturity be free of fraud?
Your comments , please.
Thanks.
Hong
Discount or purchase on acceptance L/C
Discount or purchase on acceptance L/C
I will give it a try. If the bank that has discounted is not a nominated bank, it has discounted at its own risks. This, according to 12b. But (see previous topics) this issue may be outside the frame of UCP.
Daniel
Daniel
Discount or purchase on acceptance L/C
Hi Daniel
Thanks again for your invaluable comments.
Hong
Thanks again for your invaluable comments.
Hong
Discount or purchase on acceptance L/C
John,
The UCP is irrelevant to the position. What matters is the applicable negotiable instruments law (that of the jurisdiction in which the acceptor is located I would anticipate). I would expect such a law to protect any 'third party' 'holder for value' (in English law terms) from any fraud claims relating to the underlying transaction (whatever it may be).
Regards, Jeremy
[edited 11/6/2007 9:21:13 AM]
The UCP is irrelevant to the position. What matters is the applicable negotiable instruments law (that of the jurisdiction in which the acceptor is located I would anticipate). I would expect such a law to protect any 'third party' 'holder for value' (in English law terms) from any fraud claims relating to the underlying transaction (whatever it may be).
Regards, Jeremy
[edited 11/6/2007 9:21:13 AM]
Discount or purchase on acceptance L/C
Jeremy,
Thank you for your reply.
From what i understand in B/E act, sect.30 (2) that every holder of a bill is prima facie deemed to be a holder in due course, which is also further supported by sec.29(b); but in your reply above, you seem to imply that a non-nominated bank can only be a holder for value (please correct me if i am wrong), are you citing this based on B/E act sect.27? Or from your understanding in any preceding case law?
Hope to hear from you again.
Thanks in advance.
Hong
Thank you for your reply.
From what i understand in B/E act, sect.30 (2) that every holder of a bill is prima facie deemed to be a holder in due course, which is also further supported by sec.29(b); but in your reply above, you seem to imply that a non-nominated bank can only be a holder for value (please correct me if i am wrong), are you citing this based on B/E act sect.27? Or from your understanding in any preceding case law?
Hope to hear from you again.
Thanks in advance.
Hong
Discount or purchase on acceptance L/C
Hong,
I was not intending to imply anything and was intending to steer clear of the specific provisions of a particular jurisidiction’s negotiable instruments law. Having said that, now that I have consulted the BEA 1882 I can see that perhaps ‘holder in due course’ would have been the more appropriate term to use in the particular context of my earlier posting instead of ‘holder for value’.
Regards, Jeremy
I was not intending to imply anything and was intending to steer clear of the specific provisions of a particular jurisidiction’s negotiable instruments law. Having said that, now that I have consulted the BEA 1882 I can see that perhaps ‘holder in due course’ would have been the more appropriate term to use in the particular context of my earlier posting instead of ‘holder for value’.
Regards, Jeremy
Discount or purchase on acceptance L/C
When we re-codified LC law in the US in the 90s, we spelled out who may avoid a fraud defense.
We gave maximum protection to a confirmer and limited protection to a negotiating bank (requiring proof of value given without notice of fraud). We gave no protection to non-nominated banks unless they discounted a time draft or a DPU accepted or incurred by the issuing or confirming bank.
Being a holder in due course of an instrument should protect the holder under negotiable instruments law against a party obligated on the note. Unless it has accepted a time draft, an LC issuer is obligated under its LC but not on any draft presented under the LC. An LC issuer has no obligation to a non-nominated bank and can therefore raise any defense that would be available against the beneficiary.
I am summarizing US state statutory law here, but the considerations which underlie it may apply in other countries.
Regards, Jim Barnes
We gave maximum protection to a confirmer and limited protection to a negotiating bank (requiring proof of value given without notice of fraud). We gave no protection to non-nominated banks unless they discounted a time draft or a DPU accepted or incurred by the issuing or confirming bank.
Being a holder in due course of an instrument should protect the holder under negotiable instruments law against a party obligated on the note. Unless it has accepted a time draft, an LC issuer is obligated under its LC but not on any draft presented under the LC. An LC issuer has no obligation to a non-nominated bank and can therefore raise any defense that would be available against the beneficiary.
I am summarizing US state statutory law here, but the considerations which underlie it may apply in other countries.
Regards, Jim Barnes
Discount or purchase on acceptance L/C
Hi Jim
Thank you for the reply.
Put the b/e aside, from my understanding in art 7 of UCP 600, it does not expressly stretch an issuing bank undertaking in reimbursement to inclusive of a non-nominated bank, even if an issuing bank has added its acceptance to the bill.
Please correct me if i am wrong.
Thank you.
Regards
Hong
Thank you for the reply.
Put the b/e aside, from my understanding in art 7 of UCP 600, it does not expressly stretch an issuing bank undertaking in reimbursement to inclusive of a non-nominated bank, even if an issuing bank has added its acceptance to the bill.
Please correct me if i am wrong.
Thank you.
Regards
Hong
Discount or purchase on acceptance L/C
Dear all.
I have read this with great interest and found the concise summary of US legal position from Jim Barnes very helpful and it appears to be a very logical and fair approach.
Would you consider the following statements of my interpretation of UCP rules accurate having followed this as well as having studied the Santander case in detail.
I am doing a study on the evolution of UCP.
1. Under the UCP 500 rules (without modification or exclusions in a Credit), the UCP 500 rules did not provide protection for a Nominated Bank that discounted or prepaid under a Credit available by deferred payment before maturity (without authorisation of Issuing Bank) in the event that beneficiary fraud was proven before maturity.
2. Under the UCP 600 rules (without modification or exclusion in a Credit), the UCP 600 rules provide protection for a Nominated Bank that discounted or prepaid under a Credit available by deferred payment before maturity even when beneficiary fraud is proven before maturity.
In my mind this appears to me to be the change in the new UCP 600 rules.
Any comments welcome.
Thank you. And wishing you a peaceful and prosperous New Year without any conflict.
Svetlana
I have read this with great interest and found the concise summary of US legal position from Jim Barnes very helpful and it appears to be a very logical and fair approach.
Would you consider the following statements of my interpretation of UCP rules accurate having followed this as well as having studied the Santander case in detail.
I am doing a study on the evolution of UCP.
1. Under the UCP 500 rules (without modification or exclusions in a Credit), the UCP 500 rules did not provide protection for a Nominated Bank that discounted or prepaid under a Credit available by deferred payment before maturity (without authorisation of Issuing Bank) in the event that beneficiary fraud was proven before maturity.
2. Under the UCP 600 rules (without modification or exclusion in a Credit), the UCP 600 rules provide protection for a Nominated Bank that discounted or prepaid under a Credit available by deferred payment before maturity even when beneficiary fraud is proven before maturity.
In my mind this appears to me to be the change in the new UCP 600 rules.
Any comments welcome.
Thank you. And wishing you a peaceful and prosperous New Year without any conflict.
Svetlana
Discount or purchase on acceptance L/C
I rejoin the discussion after time off for hip replacement surgery, which seems to have become quite common.
It seems to me that UCP 500 and 600 (as well as US codified LC law) are pretty clear that a non-nominated bank is not entitled to reimbursement in its own right and is therefore dependent on the rights of the beneficiary.
(Any holder of a negotiable draft that has been accepted by an LC issuer should have right to enforce the accepted draft against the issuer-acceptor under negotiable instruments law. Whether those rights are good notwithstanding drawer fraud is a separate question--generally answered in the affirmative if the holder gave value without notice of fraud. Whether those rights are also recognized under LC law or practice or also extended to an assignee of a DPU incurred by the issuer are separate questions--answered in the affirmative in the US and not well answered outside the US.)
UCP 500 and 600 (and predecessors) say that "banks" (which includes nominated banks that have acted on their nominations) are not responsible for beneficiary fraud. Dishonor of a UCP reimbursement obligation shifts the responsibility for beneficiary fraud onto the nominated bank. I have never understood why that UCP language is ignored by so many banks and courts when excusing or ordering non-reimbursement.
I've written several times in DCI on Santander and on fraud and discounting issues arising in the course of the most recent revision of UCP. I won't rehash all that except to say that an issuer's obligation to reimburse a nominated bank should be considered independent of its obligation to honor the beneficiary's presentation--a point that is now explicit in UCP600 and conceptually more important than the explicit rights to discount acceptances and incurred DPUs.
Regards, Jim Barnes
It seems to me that UCP 500 and 600 (as well as US codified LC law) are pretty clear that a non-nominated bank is not entitled to reimbursement in its own right and is therefore dependent on the rights of the beneficiary.
(Any holder of a negotiable draft that has been accepted by an LC issuer should have right to enforce the accepted draft against the issuer-acceptor under negotiable instruments law. Whether those rights are good notwithstanding drawer fraud is a separate question--generally answered in the affirmative if the holder gave value without notice of fraud. Whether those rights are also recognized under LC law or practice or also extended to an assignee of a DPU incurred by the issuer are separate questions--answered in the affirmative in the US and not well answered outside the US.)
UCP 500 and 600 (and predecessors) say that "banks" (which includes nominated banks that have acted on their nominations) are not responsible for beneficiary fraud. Dishonor of a UCP reimbursement obligation shifts the responsibility for beneficiary fraud onto the nominated bank. I have never understood why that UCP language is ignored by so many banks and courts when excusing or ordering non-reimbursement.
I've written several times in DCI on Santander and on fraud and discounting issues arising in the course of the most recent revision of UCP. I won't rehash all that except to say that an issuer's obligation to reimburse a nominated bank should be considered independent of its obligation to honor the beneficiary's presentation--a point that is now explicit in UCP600 and conceptually more important than the explicit rights to discount acceptances and incurred DPUs.
Regards, Jim Barnes