Another student with some (many) questions
Hi all,
I'm a law student in the US. I'm researching LC law, and I'm hoping I can get some input for the following questions. I understand that it would probably take too long to answer these in full, so I'd be happy with a link, a case name, or some other directions.
1) Although many banks and courts had varying understandings of what "negotiation" means (and very often ignoring the definition in UCP 500), is that trend changing with the UCP 600? What were (are) some of the various interpretations among courts and banks around the world?
2)In the Uniform Commercial Code Art. 5, nominated persons, confirmers, holders in due course and assignees of a deferred payment obligation (dpo) are protected in case of fraud in the underlying transaction (and if they meet other qualifications specific to each). Is it correct that a negotiating bank can be a nominated person, a holder in due course, or an assignee of a DPO? (I'm quite sure that it cannot be a confirmer.)
3) The heart of the definition of "negotiation" in the UCP has changed from "giving value" to "purchase." Where can I find a definition of "purchase"? I believe it to mean something other than payment by an issuer or confirmer, since that would act merely to extinguish their obligation and they do not really "gain" anything in the transaction). Also, whereas payment by issuer or confirmer is final, payment by negotiating bank is not final until reimbursed by issuer/confirmer (since recourse to B is still available). Is that correct?
4) If an LC transaction is discovered to center around an illegal transaction (such as drugs, money laundering, or in violation of an embargo) rather than fraud, how does this affect the parties? Are protections still available to any of the parties?
5) How do protections change (if at all) when the fraud is committed by the applicant rather than the beneficiary?
6) Although a negotiating or discounting bank may have recourse to the beneficiary, does the availability or absence of recourse affect its status as a protected party?
7) Can the beneficiary become a holder in due course? For example, if for some reason he negotiated the draft and it was eventually indorsed back to him but something had affected the transaction during the interim.
Thank you all so much for any help you can spare!
-Andrew
Dear Andrew,
first of all welcome to this forum.
Generally speaking it's is much easier to answer one question instead of seven!!!! In view of your questions, I have to admit I'm not a specialist on American Law.
1) There are many interpretations on negotiation in other threads in this forum. Please search under "New forum topics.....more......letters of credit ....."?
2) A negotiating bank normally always I S a nominated person and it C A N be a confirmer (see art. 2 and 8e) of UCP 600.
3) The difference between "giving value" and "purchase." in my opinion is that a negotiating bank under UCP 600 should make a payment on or before the date of reimbursement on basis of their checking of the documents alone (what I call "True Negotiation"), whereas in many if not most cases especially Asian negotiating bankers wish to have an expiry with them but await issuing bank's taking up of docs before paying the beneficiary (what I call an "Asian" or "Untrue" negotiation).
4) I can only answer this from the German Law 's point of view. Somehow I expect that American Law should not be so different ..... even if the most court decisions which are made known to us have made us think the American Law and Justice is going bananas! ;-))
In German Law no one gets any protection under illegal businesses and no charges, expenses and the like are paid back! That' only right!
Fraud is difficult to judge and we definitely have to consider this in a one-case only environment.
5) How do protections change (if at all) when the fraud is committed by the applicant rather than the beneficiary?
Interesting idea, an applicant is not really involved a lot in the process of a credit. How can he commit a fraud unless the fraud is also carried out by the beneficiary as Mohkahn asked in the 2nd case study?
6) The "Without recourse" thing is not affecting other relations under the credit. An issuing bank is still an issuing bank and it has to fulfil its duties.
7) Can the beneficiary become a holder in due course? For example,
if for some reason he negotiated the draft and it was eventually
indorsed back to him but something had affected the transaction during
the interim.
Sorry I can't see the point. Could such things really happen? I think the "holder" is a person defined by American Law. I thought you meant something like a holder of a bill of exchange, but I think the question is too theoretical for me.
Maybe we can discuss this under a separate topic with a special case? Or some American friend can give advice.
-Each long journey starts with a small step-
Best regards
Frammi
1. Under UCP 600 the nominated bank purchases the draft(s) drawn on other bank.
2. Although I am not a law school graduated I can find difficult to understant how a negotiating BANK to be a nominated person (in my understanding I see 'person' as an individual rather than a legal entity)
3. Definition of purchase as we, bankers, see it, is to pay beneficiary from the own bank funds until reimbursement is due
4. As far as I know banks when issuing LC, to protect themselves from such illegal operations insert some compliance clauses in the line with UN , USA embargoes as bank may loose their reputation being involved in such transactions. However, an injuction court may prevent payment under an LC covering such transactions
5. hardly to understand how can a applicant commit a fraud since the obligation of payment under L/C rests on the issuing bank. Applicant is not party of the underlying transaction (L/C).
6. Negotiation bank always negotiate with recourse unless it is the confirming bank where negotiation is without recourse.
7. Hardly to understand how a drawer of a draft may become holder in due course of his own draft under a letter of credit when the intention of beneficiary is to collect goods value supplied.
Some questions you asked could be placed outside the scope of UCP and therefore only a L/C consultat can help you. Please also visit www.tolee.com, they are professionals as much as I could saw form their comments on that site.
Good luck
Cristian
Your questions are a bit difficult for me to answer.
Best of luck though. :) People here are very nice, so wait a few days.
To Frammi and Cristian : Referring to your answers that you gave to Andrew on his question 5. I think fraud can be committed, if both applicant and beneficiary are determined to cheat the bank, but it's very difficult, and only possible when banks do not follow the common and standard procedures, (which was, what happened in the case that we were discussing earlier).
Since I also work for the bank, so I will not go into details here. And based on my idea of how such a fraud can be committed, might not be fully understood by me, as I am new and only learning UCP600 recently, and I might have assumed certain parties to function in a certain way which might actually not be the case in reality, under UCP500-600.
But just in the case (that we were discussing before) of how the applicant conveniently happend to be bankrupt and bank had made certain mistakes in handling documents, eventually, it was the bank who had to bear the L/C payment to beneficiary.
Yea, my mama always tells me, I am too friendly and I always laugh and smile and she says, it's not good, makes me get no respect from friends, colleagues. etc.
so I tell her, I am just trying to change 1 person at a time, to be nice and friendly. And the first person to change to be better is myself.
by the way, i learned to be nice from my Holland friends, so i can give you some credit for that. though the few germans I met were really weired.. :) no offense.. weired in a nice way.
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