Can an issuing bank discount its own acceptance?

[Judith]

Can an issuing bank discount its own acceptance?
The answer is yes. But is the issuing bank protected under UCP with regards to its right of reimbursement from the applicant?

Case 1:
LC is available by deferred payment undertaking with the issuing bank.
Tenor: 180 days sight
The beneficiary presents compliant documents directly to the issuing bank.
The issuing bank gives their undertaking.
The beneficiary requests the issuing bank to prepay, which the issuing bank does.

A few days later, it is discovered that the goods are actually pieces of scrap and it is obvious that the beneficiary has committed a fraud. The beneficiary is no longer traceable.

On due date, can the applicant refuse to pay the issuing bank?
What factors are required to be taken into consideration?

[loankim]

Hi,

As far as I know, I think the issuing bank can face with losing his right of reimbursement from the applicant. The reason isnt related to poor quality of goods or the beneficiary gets money by fraud. Just because, his prepaying is not covered in UCP’s scope .
When documents constitue a complying presentation, the issuing bank must honour and in the case of deferred payment, honour means : “ incur a deferred payment undertaking and pay at maturity” .
Following yr case, the issuing bank can prepay at the request of the beneficiary but this is only their own agreement and out of scope of UCP. By this I mean, the requirement “pay at maturity” of UCP isnt obeyed here, so the issuing bank isnt protected under it.

Yr comments are highly apreciated !

Regards,

[cvrkswami]

UCP governs the practice between related paries to Documentary credits, after the credit is issued. Issue of a credit and relationship of the issuer and the applicant is beyond the scope of UCP 600. A credit decision has been taken and the bank has to take its own recourse for recovery of the amount from the applicant. Let us not get confused with frauds etc. Even in cases of a complying presentation and genuine deals , the applicant may not be in a position to pay the issuer, after it honor. Such issues are beyond UCP 600.
Secondly, When the issuing bank discounts the documents, even though under its own LC, it enters into a seperte arrangment with the person who submitted the documents.( can even be the beneficiary of the LC). This is not a subject matter of UCP.

[shahriar]

in my opinion, in the given case the issuing bank is well protected; especially under article 4 and 5. in a letter of credit transaction, there could be two types of fraud; the documents are all fake and the goods are of no quality. for a banker, a fraud is if the documents are fraud. any dispute over the quality is not a concern of the bank. although article 7c only talks about nominated bank, i think the provision equally applies to issuing bank. otherwise it does not make in sense that while there is a fraud, issuing bank has to pay but it is not entitled to reimburse.

[cvrkswami]

The query raised by Judith has two areas:

1. The recourse available to the issuer in case of detected fraud before the due date of payment.
2. can the issuer prepay and have the recourse to the applicant on due date.

Facts:
The documents are complying.
The fraud is " supply of inferior materials ".

On point 1 : whether it makes any difference if fraud is detected after the due date? The detection of fraud before the due date will provide an opportunity to the applicant to pre empt his liability. Hence he will approach the judicial forum even before due date, request for restraining the bank to demand payment. The basis are discussed later. As discussed prepayment is a pure credit decision beyond the scope of UCP. However the liability of the applicant to the LC would devolve only on due date, hence prepayment is not matter linked to the his responsibility.

If the fruad is detected after the due date, it does not matter, as the applicant would have paid by that time.

On point 2:

The documents are compliant and hence the applicant has to honor the payment on due date. His responsibility is to make payment to the bank as per the agreement with the issuer irrespecive of the defects in the goods, but on the due date only. However it is possible that he may take a position that the issuing Bank has connived with the beneficiary and avoid payment . The prepayment is the ground on which the connivance/collussion will be built and hence he is not responsible. Here onus lies with the issuing bank. If the issuing bank can successfully defend their position, then the payment has to be made by the applicant. These issues, in my opinion, are beyond UCP. UCP in my view, deals with the responsibility between issuing bank and other banks involved in transactions and beneficiary.



Opinions welcome.