Thursday, April 25, 2013

Nominated bank and UCP 600

This article analyses the roles and responsibilities of a nominated bank under selected provisions of UCP 600.
Article 6(a) of UCP 600 requires that a “credit must state the bank with which a credit is available”. This bank has been defined under Article 2 as the ‘nominated bank’. A nominated bank could be a bank specifically designated by the issuing bank for the purpose of negotiation or honour of documents. Alternately, it may be any bank. According to sub-article 7(c), the issuing bank’s undertaking to reimburse under its own LC is restricted only to a nominated bank. Note that the bank that has added its confirmation to a credit need not necessarily be a nominated bank.
Let us focus on the first major article on nomination, viz., Article 12. Sub-article 12(a) states:
“Unless the nominated bank is the confirming bank, an authorisation to honour or negotiate does not impose any obligation on the nominated bank to honour or negotiate, except where expressly agreed to by the nominated bank and communicated to the beneficiary.”
A simple reading of sub-article 12(a) conveys the following:  
  1.  An issuing bank may authorise a nominated bank to honour or negotiate (under its own credit).
  2.  Such authorisation casts no obligation (to honour or negotiate) on a nominated bank that has advised the credit to the beneficiary. 
  3.  The obligation (to honour or negotiate) is imposed on the nominated bank (which usually is the advising bank) if it also the confirming bank. This is reiterated in Article 8, especially sub-articles 8(a)(ii) and 8(b).
  4.   A nominated bank may, of its own volition – through an ‘express agreement’ between itself and the beneficiary – create an obligation to honour or to negotiate.
However, such ‘express agreement’ is a contractual obligation that subsists entirely between a nominated bank and the beneficiary. It is outside the UCP. Further, “[t]he fact that a nominated bank agreed to advance funds on a future date (i.e. on or prior to the date reimbursement was due) does not bind that bank to acting accordingly on the date the advance was expected or due (emphasis added).”[i]
If we rephrase sub-article 12(a), it could read as follows:
“Unless the nominated bank is the confirming bank or has expressly agreed to honour or negotiate and so communicated to the beneficiary, an authorisation to honour or negotiate does not impose any obligation on the nominated bank to honour or negotiate.”
In spite of what could very well be erroneously concluded from the construction of this sub-article, as far as the UCP is concerned, there is no difference whatsoever between a nominated bank “that is not a confirming bank [which] advises a credit [to the beneficiary] without any undertaking to honour or negotiate” (sub-article 9.a), and a nominated bank that “expressly agreed to [honour or negotiate] …and so communicated to the beneficiary” (sub-article 12.a). In either instance, a nominated bank enjoys exactly the same privilege and protection under the UCP, no more and no less.
Some say that sub-article 12(a) has probably been structured to provide for what is known as ‘silent confirmation’. Once again, such ‘silent confirmation’ is nothing more than a contractual agreement between a (nominated/lending) bank and the beneficiary/borrower. Such ‘silent confirmation’ lies outside the scope of the UCP. The nominated bank that extends ‘silent confirmation’ is in no better position, receives no greater protection under the UCP, than a nominated bank that offers no ‘express agreement’ to a beneficiary.
Sub-article 12(a) thus seems a mere repetition of the essence of sub-article 9(a). It adds no value, serves no distinct or unique purpose except to add to the confusion surrounding the obligations of a nominated bank. Unless it is reworded to remove the confusion caused by its present construction, sub-article 12(a) should be deleted.
Next, a few words about sub-article 12(b). By definition, a documentary credit is available only with a nominated bank by sight payment, deferred payment, acceptance or negotiation. However, this sub-article provides for an issuing bank to authorise “that nominated bank to prepay [an euphemism for advancing funds] or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank.”
The decision to advance money to anyone (including the beneficiary of a documentary credit) is always an internal decision of the lending institution (in this instance, the nominated bank). Unless the ‘authorisation’ referred to in sub-article 12(b) includes some form of guarantee or risk-participation by the issuing bank, this sub-article serves no useful purpose as far as the lending institution is concerned (Banco Santander case notwithstanding).
Which brings me back to the true purpose of the UCP and documentary credits. A letter of credit is essentially a contract between the issuing bank and the beneficiary – calling on the latter to specific performance through presentation of documents in compliance with the terms of the credit. Examined closely, issues regarding lending (money) are actually outside the domain of letters of credit. Therefore, lending decisions and risk management are matters that are best left to the lender and the borrower. In my opinion, the UCP should focus solely only on the operations of documentary credits. A consequent simplification of the UCP would reduce rejections, streamline compliance, promote world trade, and encourage greater usage and acceptability of LCs worldwide.
Let us now revert to Article 1 of UCP 600. It stipulates that the provisions of the UCP “are rules that apply to any documentary credit ... when the text of the credit expressly indicates that it is subject to these rules. They are binding on all parties thereto unless expressly modified or excluded by the credit.” Accordingly, sub-article 14(a) applies to “a nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank.” So does the provision regarding the period of examination of documents as envisaged in sub-article 14(b).
Although not clearly similarly stated in the remaining part of Article 14, one can safely assume that the Rules as laid down in sub-articles 14(c) to 14(l) are also required to be complied with by “a nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank” – as the case may be.
One may take note of the fact that sub-articles 16(a), 16(c) and 16(e) too cast clear and specific responsibilities on these banks – without exception. The role and the responsibilities of the nominated bank as well as the other banks have been spelt out in unambiguous terms at every place in Articles 14 and 16.
This brings us to sub-article 16(f). It stipulates that, if the issuing bank or the confirming bank fails to act in accordance with the provisions of this article (Article 16, and by extension Article 14), it would have to face certain consequences. Specifically, the concerned bank shall then be precluded from claiming that the documents do not constitute a complying presentation. Strangely, the nominated bank escapes this penal provision.
The issuing bank undertakes clearly defined obligations under Article 7 of UCP 600. The confirming bank does so under Article 8. One may argue that since an advising or a nominated bank is under no obligation to honour or to negotiate (unless it confirms the credit), it has no responsibility – and is therefore excluded from the application of sub-article 16(f). This is strange logic indeed.
Admittedly, unless it has confirmed a credit, a nominated bank is under no obligation to honour or negotiate even if complying documents are presented to it. However, once it agrees to honour or negotiate a complying presentation, it automatically and irrevocably subjects itself to the rules of the game (namely, the UCP). The rules – without exception – are supposed to be binding on all parties thereto (Article 1). This is evidenced by clear stipulations in Article 14 and Article 16 where the responsibilities of the nominated bank (as also the issuing bank and the confirming bank) are clearly spelt out.
When a nominated bank agrees to join the game, it consciously accepts the rules of the game. The rules should apply in totality, not selectively. There is no reason why a nominated bank should not be subjected to exactly the same rules, privileges and penalties that are applicable to an issuing or a confirming bank. The critical issue that we ought to address here is, whether the exclusion of the nominated bank from sub-article 16(f) renders the provisions of Article 14 and Article 16 – as far as these are applicable to a nominated bank (acting on its nomination) – infructuous and irrelevant. Only on this score alone, a nominated bank should be included in sub-article 16(f), and be subjected to the application of this sub-article.

[1] Published in DC Insight, Volume 17, No. 1, Jan-March 2011.
[1] Author is the former managing director of Fina Bank Ltd, Nairobi, Kenya and TransAfrica Bank  Ltd., Kampala, Uganda; founder and CEO of Institute of Banking Studies.  

[i] ‘Suggested answer’ to question no. 2.15, Frequently Asked Questions on UCP 600, Gary Collyer.

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