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New UCP Article
12b
launches an international debate [LC VIEWS Newsletter
N0.91; January 2007]
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MOOT POINT:
In order for the nominated bank to pay
before maturity
is it necessary
that the credit
should
be
available by
negotiation?
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Editor’s note:
This moot point originated in Middle East – Dubai, U.A.E., which has in its
LC market distinguished certified documentary credits specialists, whose
beautiful mind has analyzed UCP 600 and is now producing intelligent
questions.
Dubai is the right consumer market for testing the efficacy of new UCP.
The said moot point has given an opportunity to bring together the LC
specialists from all over the world to share their views to learn from each
other, which is the manifest aim of
LC
VIEWS.
Article 12a:
Unless a
nominated bank is the confirming bank, an authorization to honor or
negotiate does nor impose any obligation on that nominated bank to honor or
negotiate, except when expressly agreed to by that nominated bank and so
communicated to the beneficiary.
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
nominating bank.
Article 2:
Negotiation means the purchase by the nominated bank of drafts (drawn on a
bank other than the nominated bank) and/or documents under a complying
presentation, by advancing or agreeing to advance funds to the beneficiary
on or before the banking day on which reimbursement is due to the nominated
bank.
Article 6b:
A credit must state whether it is available by sight payment, deferred
payment, acceptance or negotiation
Both articles 12b and 2 allow prepayment. But the difference is, as Kim
Christensen makes it simple to understand, that for
"pre-payment":
Article 2 (definition “negotiation”) applies where the LC is available by
negotiation;
Article 12b applies if the LC is available by deferred payment or
acceptance.
Ravi Mehta,
Ph.D.
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What they say on the moot point
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Zahoor
Dattu,
Abu Dhabi Commercial Bank, U.A.E.
In my
opinion the nominated bank can purchase the draft accepted for
prepayment or prepay the deferred payment undertaking irrespective of
whether or not the credit is available by negotiation in as much as it
is a nominated bank. |
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Nicole
Keller,
Dresdner Bank,
Frankfurt
I
agree with what Zahoor Dattu says. Whether a nominated bank would be
willing to effect payment earlier than maturity date under a usance documentary
credit (whether available by deferred payment, acceptance or
negotiation) depends on what they agreed
to do and upon the terms of their agreement with the
beneficiary. When they agree to prepay under a deferred payment
documentary credit the beneficiary would receive payment prior to
maturity date. When they do not agree to prepay the beneficiary would
not receive payment prior to maturity. |
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Soh Chee
Seng,
Singapore
There are four types of
credit in UCP. They are sight payment credit, deferred payment credit,
acceptance credit and negotiation credit. A credit may be made available
by deferred payment or by acceptance with a nominated bank. Article 12
of UCP 600 states clearly that an authorization to honor or negotiate
does not impose any obligation on the nominated bank to honor or
negotiate, unless that nominated bank expressly agrees to do so.
However, if the nominated bank agrees to incur a deferred payment
undertaking or to accept the drafts drawn by the beneficiary,
it must pay at maturity. It may also prepay or
purchase a draft accepted or a deferred payment undertaking incurred by
it. And, for prepayment the credit is not necessary to be a negotiation
credit. |
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Jia
Hao,
Bank of China,
Frankfurt
According to the current definition of negotiation and article 12b, it
is not. We may understand it in such a way that a deferred payment
credit or acceptance credit is also a negotiation credit, which includes
two nominations: one is nomination for honor, the other is for
prepayment that may be deemed as negotiation as per the definition of
negotiation.
One point that merits attention is prepayment should be done after the
nominated bank incurs deferred payment undertaking (promises against
documents) or accepted (promised against bills of exchange).
Whilst under negotiation credit, the nominated negotiating bank may
negotiate
any time
after the documents and/or bills of exchanges are presented.
However, I do not think the definition of “negotiation” is good.
I have insisted that the words “if the credit is available by
negotiation” be added.
In my view, negotiation should be a prepayment/purchase of other’s
payment undertaking, not its own. Prepayment/purchase of its own payment
undertaking should be called discounting. So under deferred payment or
acceptance payment credit, the nominated bank may be nominated to
discount its own undertaking(including the case that the nominated bank
is the issuing bank). It may avoid the case that the issuing bank is
deemed to negotiate when it prepays before maturity. However, in this
way, such discounting is not deemed as honor, will be deemed as a third
kinds of payment under credit besides honor and negotiation. that is
why, there has been doubt about the reason and purpose of introducing of
the new word or definition of “honor”. With it, no clarification is
established. Instead, confusion is followed.
In my opinion, it is the biggest failure of this revision.
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Kim
Christensen,
Nordea,
Denmark I think that article 12(b) is
rather clear: If LC is valid by deferred payment or acceptance, then the
nominated bank is "authorized" to prepay. As such I do not think that
12(b) deals with negotiation - as negotiation is defined in article
2 - which also "authorizes" the negotiating bank to "prepay".
In other words, simply speaking for "pre-payment":
Article 2 applies if the LC is
available by negotiation;
Article 12b applies if the LC is
available by deferred payment or acceptance.
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