Do We Need To Accept A Draft Before Discounting?

[dinesh2476]

Dear Experts,

Need your opinion on the below. It will also useful to the folks who have been looking for clarification under article 12

Do we need to accept a draft before discounting?
We have unconfirmed LC, do we need to accept draft before discounting.

We have credit complied documents and we are forwarding the same to the issuing bank now. When we have payment assurance through LC by the issuing bank as the documents comply with LC conditions, what comfortable we will get by discounting our own understanding.

Out of UCP,if we are discounting a draft to the beneficiary accepted by other bank, we have payment quarantee from that on maturity. What is the importance of having below condition in the UCP.

And also what if deferred payment understanding where there is no requirement for a draft to be presented.


ARTICLE 12
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.

[picant]

Hi Pal,

when a bank negotiates or discount or advance, it has a problem, to whom booking the risk.
beneficiary or issuing bank, with or without recourse. depending on these terms it will be more or less comfortable.
other comments appreciated
ciao

[cristiand969]

Well, at first stage we have to determine what was the intention behind of UCP600 of the drafting group when inserted such automatic authorization? I feel it is clear for everyone that the reason of inserting such authorization was the verdict of the court in the famous case Banco Santander S A v Banque Paribas 2007 when Santader purcased documents amounting US 20mln due for payment at 180 days, which subsequently, but prior maturity, has proven to be a fraud.
As the court decided that Santander was no authority from issuing bank to discount the value of documents and lost the case, although the discounting bank has acted in good faith, the UCP600 comes now to protect the nominating bank rights in case such bank is asked to discount proceeds.
Now coming back to the questions of whether or not the nominating bank has to accept the draft prior to the discounting process in order to stay under the protection of UCP600, at first sight of reading article 12, it seems that it must do so.
However, such article must be read in conjuction of all UCP articles regarding the obligation of issuing bank for reimbursement, and as such, we have to link this article with art. 7 c, the issuing bank obligation where it says that:
" reimbursement for the amount of complying presentation unde the credit available by ACCEPTANCE or DEFERRED payment is due at maturity WHETHER OR NOT the nominated bank prepaid or purchased before maturity. Furthermore the position of nominating bank is strengthened by the independence of the issuing bank undertaking towards nominating bank vs beneficiary.
Hence, the conclusion is that the nominating bank needs not to accept the draft prior to discounting documents (which anyway would double the risk of the nominating bank - one taken under bills of exchange applicable law and one under UCP) . However, such authorization is in place when no exclusion of UCP600 was made by issuing bank .
As Picant explained, when discounting, you have to evaluate to whcih party you can take the risk. Normaly, when you have a credit confirmed the discounting is without recourse due to undertaking of conforming bank to pay at maturity

[dinesh2476]

Dear cristiand969 & Picant,

Thanks for your valuable time taken to clarifying the below.

I understand that Due to issue between bank earlier, to make it clear, UCP has been drafted including this condition so that the bank negotiating the draft has protection over discount.

please acknowledge my understanding on the draft acceptance ;
Presenting bank has to accept the draft to prove that negotiating bank complied with article 12B incase of any issue.

Regards
Dinesh

[cristiand969]

As I covered in my previous post , there is an exclusion clause which obliges you to accept the draft prior to any discounting.