Letter of Credit Forum

If an issuing bank empowers a nominated bank to examine and
honor documents under an LC  the issuing
bank has to reimburse the secondary bank. Two ways of reimbursement are
available:

1. Direct reimbursement by the Issuing Bank
2. Indirect reimbursement by a third party bank
   which the Issuing Bank has authorized to reimburse the secondary bank.

Direct reimbursement is provided for in Article 7 UCP 600
which contains the rather surprising provision that the Issuing bank is
obligated to pay at maturity even if the nominated bank prepaid or purchased before maturity.

This is a rather unanticipated course of events for the
Applicant. The Applicant believes that his payment obligation has been deferred
when he or she opens a deferred payment or an acceptance LC. To his shock he
notices that the prepayment of the LC by a nominated bank deprives him of his ability
to refuse payment in cases of fraud. Under normal circumstances the Applicant
would be able to enjoin payment to a fraudulent beneficiary. Due to the
prepayment, this defense is taken away without any substitute.

The proper advice to any applicant should be to exclude the
applicability of Article 7 UCP 600.

Article 13 UCP 600 deals with indirect reimbursements which
are to be processed according to URR ICC-Publication No. 525 (ICC Uniform
Rules for Bank-to-Bank Reimbursemets). However the application of URR 525 is
only an option.

As Article 13 b UCP 600 provides, the reimbursement authorization should not be subject to any expiration date which of course leaves open the possibility that it does.

A claiming is not required to provide to supply a
certificate of compliance with the terms and conditions of the credit. This requirement is nearly self-understood
since the reimbursing bank is not
involved with the examination or payment of the documents. Rather, the role of the
reimbursing bank is limited to compensate the claiming bank.

In case the reimbursing bank does not pay on first demand,
the issuing bank is responsible for payment.

If the documents get lost on the way to the reimbursing
bank, the reimbursing bank cannot pay. However, in this case the issuing bank
remains liable according to Article 7 c UCP 600.