If an LC is issued by Issuing Bank available by Deferred Payment with a Nominated Bank when has that Nominated Bank actually Honoured?
a) at time of Incurring Deferred Payment by Nominated Bank
or
b) at time of making the payment on the deferred payment maturity date?
One of my junior staff aksed me this 'simple question' but I did not find it easy to come up with a 'simple clear answer'
Svetlana
When has Nominated Bank Honoured
When has Nominated Bank Honoured
According to the 'definition' in Art 2 honour occurs when a nominated bank both incurs a DPU AND pays it at maturity.
[edited 6/10/2008 12:51:03 PM]
[edited 6/10/2008 12:51:03 PM]
When has Nominated Bank Honoured
Dear Mr.Smith
I am inclined to agree with your interpretation as you point out that is exactly what is stated in Article 2 – Definitions.
However, I recently travelled to a seminar given by a well respected trade finance expert who maintained that the Nominated Bank honours when it 'acts pursuant to its nomination' i,e pays, accepts, incurs etc.
Thanking you.
Svetlana
I am inclined to agree with your interpretation as you point out that is exactly what is stated in Article 2 – Definitions.
However, I recently travelled to a seminar given by a well respected trade finance expert who maintained that the Nominated Bank honours when it 'acts pursuant to its nomination' i,e pays, accepts, incurs etc.
Thanking you.
Svetlana
When has Nominated Bank Honoured
Svetlana,
I would not necessarily disagree with this ‘well respected trade finance expert’; it all depends on context. I certainly would describe any nominated bank that had incurred a DPU or had accepted a draft, where the due date had not yet been reached, as having ‘honoured’. However, I think we would all agree - including the well respected trade finance expert- that if such a bank did not then make payment on the due date it could not be described as having ‘honoured’; on the contrary it would have ‘dishonoured’.
I would also note that a bank is not merely nominated to incur a DPU or accept a draft, but to incur a DPU AND pay it at maturity or accept a draft AND pay it at maturity. Therefore, strictly speaking, one can only know if a nominated bank has 'acted pursuant to its nomination' after the due date (unless it refused to incur a DPU or accept a draft in the first place).
Jeremy
[edited 6/11/2008 4:27:12 PM]
I would not necessarily disagree with this ‘well respected trade finance expert’; it all depends on context. I certainly would describe any nominated bank that had incurred a DPU or had accepted a draft, where the due date had not yet been reached, as having ‘honoured’. However, I think we would all agree - including the well respected trade finance expert- that if such a bank did not then make payment on the due date it could not be described as having ‘honoured’; on the contrary it would have ‘dishonoured’.
I would also note that a bank is not merely nominated to incur a DPU or accept a draft, but to incur a DPU AND pay it at maturity or accept a draft AND pay it at maturity. Therefore, strictly speaking, one can only know if a nominated bank has 'acted pursuant to its nomination' after the due date (unless it refused to incur a DPU or accept a draft in the first place).
Jeremy
[edited 6/11/2008 4:27:12 PM]
When has Nominated Bank Honoured
Dear Jeremy
Thank you.
That is a very valuable documentary credit insight.
Svetlana
Thank you.
That is a very valuable documentary credit insight.
Svetlana
When has Nominated Bank Honoured
Svetlana,
I realise my 'insight' was not wholly accurate. My statement that 'strictly speaking, one can only know if a nominated bank has 'acted pursuant to its nomination' after the due date (unless it refused to incur a DPU or accept a draft in the first place)' is not necessarily correct as if a nominated bank 'prepays' or 'purchases' (sub-Art. 12(b))before the due date then it has, I believe, 'honoured'. However, UCP600 does not, I think, expressly recognise this.
Jeremy
I realise my 'insight' was not wholly accurate. My statement that 'strictly speaking, one can only know if a nominated bank has 'acted pursuant to its nomination' after the due date (unless it refused to incur a DPU or accept a draft in the first place)' is not necessarily correct as if a nominated bank 'prepays' or 'purchases' (sub-Art. 12(b))before the due date then it has, I believe, 'honoured'. However, UCP600 does not, I think, expressly recognise this.
Jeremy
When has Nominated Bank Honoured
Jeremy,
Sometimes, it is the wording which can be misleading. English is not my language but when I read article 15 b, for instance, I could think that BC's honour and the forwarding of documents take place at the same time which is not necessary the case, as we know, with a DPU
Daniel
Sometimes, it is the wording which can be misleading. English is not my language but when I read article 15 b, for instance, I could think that BC's honour and the forwarding of documents take place at the same time which is not necessary the case, as we know, with a DPU
Daniel
When has Nominated Bank Honoured
I agree Daniel; good point.
When has Nominated Bank Honoured
Good point!
I had not taken Article 15 into consideration before posing this question:
For example Article 15 provides some clarification:
‘When a confirming bank determines that a presentation is complying, it must honour (or negotiate) and forward the documents to the issuing bank’
These words seem to point very strongly that in ‘acting’ by paying a ‘sight payment’ LC, or acting by ‘accepting’ under and acceptance LC, this act actually equals ‘honour’
It seems to me that when a Nominated Bank accepts under an acceptance LC it has honoured under the LC but then itself becomes liable under the acceptance which as we know may in fact have a maturity date well after expiry of the LC.
Thank you
Svetlana
I had not taken Article 15 into consideration before posing this question:
For example Article 15 provides some clarification:
‘When a confirming bank determines that a presentation is complying, it must honour (or negotiate) and forward the documents to the issuing bank’
These words seem to point very strongly that in ‘acting’ by paying a ‘sight payment’ LC, or acting by ‘accepting’ under and acceptance LC, this act actually equals ‘honour’
It seems to me that when a Nominated Bank accepts under an acceptance LC it has honoured under the LC but then itself becomes liable under the acceptance which as we know may in fact have a maturity date well after expiry of the LC.
Thank you
Svetlana
When has Nominated Bank Honoured
Whether "honor" has occured may depend on whether we are talking about honoring a draft or honoring an LC obligation. It may also depend on whether the claim of honor is made to support a reimbursement claim, or to enjoin honor, or for some other purpose.
UCP600, particularly in its definitions of "honor" and of "confirmation" as "adding" to the issuer's obligation, laudably tries to protect the beneficiary. It expressly protects the beneficiary who receives an incurred DPU or acceptance but no payment at maturity by making both the issuer and nominated bank liable until honor of the issuer's or confirmer's non-recourse obligation is finalized by payment.
To complicate matters further, if a confirmer honors its confirmation but the issuer refuses to reimburse, has the issuer honored its obligation to the beneficiary? Is the underlying obligation discharged?
Regards, Jim Barnes
UCP600, particularly in its definitions of "honor" and of "confirmation" as "adding" to the issuer's obligation, laudably tries to protect the beneficiary. It expressly protects the beneficiary who receives an incurred DPU or acceptance but no payment at maturity by making both the issuer and nominated bank liable until honor of the issuer's or confirmer's non-recourse obligation is finalized by payment.
To complicate matters further, if a confirmer honors its confirmation but the issuer refuses to reimburse, has the issuer honored its obligation to the beneficiary? Is the underlying obligation discharged?
Regards, Jim Barnes