What Is Prepay In Article 12(b)? Honor Or Negotiation?

[jmitra]

dear friends,

article 2,
Honor means:
a. To pay at sight if the credit is available at sight payment.
b. To incur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment.
c. To accept a bill of exchange (“draft”) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.

article 12b
By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank

as per article two honor means that it will be paid at maturity.
again negotiation defines purchase of draft drawn on other bank. again 12b says purchase of own acceptance.

whats is this prepay in 12b? honor or negotiation?

mitra

[picant]

Hi Pal,

as per art 12 b, the nominated bank undertakes to effect payment at maturity or to pay the accepted draft. It is a sort of post confirmation of the L/C, so the nominated bank must book this liability towards the issuing bank. Moreover if required the nominated bank can prepay its deferred payment undertaking or purchase the accepted draft, discounting its own engagement, giving proceeds to beneficiary without recourse, without granting a credit facility to the beneficiary, being its credit risk only towards the issuing bank, that will credit the nominated bank only at maturity. The reason for this article is that, due to a famous legal case, a nominated bank having a specific undertaking towards l/c beneficiary, was not authorized to pay in advance by the issuing bank, and did it under its own responsability. The new UCP tried to avoid this sad situation. So, now, if the nominated bank, determinated that documents are correct and having accepted the draft or released a deferred payment undertaking, is authorized to effect payment (final) to beneficiary, under issuing bank instructions and liabilities.

That's all -Ciao

[jmitra]

ciao,

no conflict with your opinion. but what will you call this activity? Honor or negotiation? i know many are thinking me stupid as it is discounting simply. ciao told this in his reply. but i wanna find the answer in UCP.

regd

mitra

[nesarul]

Dear mitra,
may be i got your point. if my understanding is correct, you want to mentioned that there are two type of payment system under UCP, i.e. honour or negotiation.
So nominated bank's prepay or purchase a draft according to sub article 12(b) is questioned whether it is honour or negotiation??????

very interesting thinking,
yes, you rightly said that it is discounting. but you want to get some refertences from UCP.
lets breakdown the situation:
let start to question sub article 12(b) and try to find an answer from it.
"WHY THE WORD "DISCOUNTING" IS NOT USED IN THIS SUB ARTICLE ALTHOUGH THIS TERMINOLOGY IS WIDELY USED IN L/C COMMUNITY?[EMPHASIS ADDED]
ASSUMPTION: CREDIT AVAILABLE WITH NOMINATED BANK, BY DEFERRED PAYMENT OR ACCEPTANCE.
POSSIBLE ANSWER:
DISCOUNTING CAN BE TAKEN TWO FORM SUCH AS:
1. DISCOUNTING ON NOMINATED BANK'S OWN DPU OR ACCETED DRAFT.
2. DISCOUNTING AFTER RECEIVING MATURITY DATE FROM ISSUING BANK.
.
IF ONE LOOK INTO THISSUB ARTICLE KEENLY, ONE FOUND THAT THIS SUB ARTICLE ONLY ALLOWED PREPAY OR PURCHASE ONLY ON NOMINATED BANK'S OWN DPU OR ACCEPTED DRAFT. SO DISCOUNTING UNDER ABOVE OPTION 2 IS OUTSIDE SCOPE OF UCP.
.
THAT IS THE REASON ICC DIDN'T USED THE WORD "DISCOUNTING" IN THIS SUB ARTICLE.
.
MOREOVER, ICC MADE ITS POSITION VERY CLEAR THROUGH ISSUING OPINION, [PROBABLY THE BEST EXPLANATION OF UCP IS THE OPINION:] ICC OFFICIAL OPINION R-398 ACKNOWLEDGE IT:
" IN MOST JURISDICTION, A BANK WHICH ADVANCES FUND UNDER A USANCE CREDIT "DISCOUNT" WHEN B/E HAS BEEN DRAWN ON THE NOMINATED BANK AND NEGOTIATE WHEN B/E HAS BEEN DRAWN ON ANOTHER PARTY."
.
SO ........NEITHER HONOUR NOR NEGOTIATION BUT DISCOUNTING..................
.
MY FUTURE THOUGHT IS TO QUESTION THIS SUB ARTICLE WHY PREPAY IS NEITHER HONOUR NOR NEGOTIATION? LOGICALLY NOT IN THIS POSTING. ITS TOO LONG.. SORRY.
REAGRDS
NESAR

[shahriar]

dear nesar,

as you wrote

POSSIBLE ANSWER:
DISCOUNTING CAN BE TAKEN TWO FORM SUCH AS:
1. DISCOUNTING ON NOMINATED BANK'S OWN DPU OR ACCETED DRAFT.
2. DISCOUNTING AFTER RECEIVING MATURITY DATE FROM ISSUING BANK.

i will rather consider your possible answer 2 as negotiation.

regd

shahriar

[nesarul]

DEAR SHAHARIER
NEGOTIATON IS ONLY APPLICABLE, IF THE CREDIT IS AVAILABLE BY NEGOTIATION ONLY [EMPHASIS ADDED], IN OUR CASE, CREDIT ASSUME TO BE AVAILABLE EITHER BY DEFERRED PAYMENT OR ACCEPTANCE.
.
DEAR mitra,
NOW LET TRY TO ANALYSIS YOUR REAL KILLING POINT i.e. whether "Prepay" termed as a negotiation or honour under UCP framework.
my analysis:
sub article 12(b) of UCP 600 is only applicable where credit available by deferred payment or by acceptance with a nominated bank.
.
Under above circumstances,in order to prove nominated bank acting on its nomination, it has to perform the following two obvious conditions, i.e.:
1. nominated bank has to incurred DPU or accept a draft drawn on it and
2. pay at maturity.
.
missing of one of above two condition prove that nominated bank doesn't act on its nomination. such as: as per sub article 12(b) nominated bank only authoirized to prepay or purchase only upon incurred its own DPU or accept draft drawn on it.
and according to sub article 7(a)(iii) & (iv), nominated bank may not pay at maturity after incurring its own DPU or accepted draft.
.
Consequently, if a nominated bank "Prepay" on its own DPU, its generally complete its above two function and so according to definition of honour in article 2,it will termed as "HONOUR"
hope this will add.
regards
nesar

[shahriar]

dear nesar,

point two is only applicable for letter of credit available by negotiation under UCP600 frame work. if the maturity has come from the issuing bank, that means the draft is drawn of the issuing bank. that means the nominated bank has not acted on its nomination if the LC is available by deferred payment undertaking. therefore UCP is no more applicable.

the only option available to be protected under UCP is to seek authorization from the issuing bank to advance fund. if the issuing bank allows, then i believe the LC availability is changed to available by negotiation.

regd

shahriar

[nesarul]

Dear,
I don't think availability of L/c automatically changed. pls looked FAQ,Vol-2 question: 12.11
regards
nesar

[iLC]

dear mitra,

i think i have you have the answer to save your soul.. discounting!! its not that ICC does not recognize this practice. check ICC opinion 398 which does speak about it. so take it and feel safe. and please dont ask why its not in UCP600. it will be a never ending discussion then

iLC