Discounting a deferred payment undertaking incurred by the issuing bank

Dear Nguyen Huu Duc,

Thanks for your question. I will give my "interpretation" of this.

As I understand it 12(b) is to protect a nominated bank that has acted in accordance with its nomination. E.g. incurred a deferred payment undertaking AND in addition to that discounted, i.e. paid to the beneficiary before the due date.

In such case the nominated bank is protected, and is entitled to be reimbursed no matter what - e.g. where fraud is detected between the deferred payment undertaking is effected and the due date where payment must be effected by the issuing bank.

I am sure you know, that the background for this article was the Banco Santander Case where a judge said that such discounting was a transaction outside the LC - and the nominated bank had the full risk in that respect.

As said this is to protect the nominated bank that acts in accordance with its nomination. This means that a non-nominated bank does not have such protection. Their role is more to act as an agent for the beneficiary - i.e. 12(b) only relates to the nominated bank. Therefore the position of such non-nominated bank is not as strong as that of the nominated bank - and probably a non-nominated can not claim protection as per 12(b). For example in the fraud scenario.

That being said it is vital to remember that an issuing bank (as per article 7) is obligated to honour a compliant presentation. This means that the issuing bank can not refuse to pay because a non-nominated bank has discounted - if a compliant presentation is made to the issuing, confirming or nominated bank.

So to answer your questions:

1) Yes it can - and the issuing bank would be obligated to pay on due date in accordance with article 7. However if the bank making the discounting is not a nominated bank, it is not protected by article 12(b).

2) Yes it is. An issuing bank can not refuse to honour a compliant presentation based on the fact that a non-nominated bank has discounted.

I hope this helps you - and is clear - otherwise please revert for clarification.

Best regards

Kim

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From: Nguyen Huu Duc (DNG) [mailto:nhduc.dng@vietcombank.com.vn]
Sent: Friday, March 02, 2007 10:28 AM
To: Christensen, Kim afd7450
Subject: Discounting a deferred payment undertaking incurred by the issuing bank ?

Dear Kim Christensen,

I would like to hear your opinion on "discounting a deferred payment undertaking" under UCP 600.

Article 12 (b) UCP 600 stipulates that by nominating a nominated bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorised that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.

My understanding is that only the nominated bank can discount/negotiate their own deferred payment undertaking and in that case the issuing bank will reimburse the nominated bank that has discounted the deferred payment undertaking.

My questions are:

1. Can a bank discount a deferred payment undertaking incurred by the issuing bank ?

2. Is the bank that has discounted a deferred payment undertaking incurred by the issuing bank entitled to the reimbursement from the issuing bank ?

My answer to the 1st question is "yes" and "No" to the 2nd question if the discounting has not been informed to and agreed by the issuing bank.

Different from discouning/forfating a accepted draft in which the holder in due course is protected by Bill of Exchange Acts, the bank discounting a deferred payment undertaking incurred by the issuing bank may not be protected by the UCP or by any law, i.e the discounting bank is unable to take legal action in its name agaist the issuing bank.

I will appreciate if you give me your own view on this matter.

Best regards,

Nguyen Huu Duc

Vietcombank Danang