Documentary credit with deferred payment

Documentary credit with deferred payment (연지급신용장/延支給信用狀) or deferred payment letter of credit (L/C) is a letter of credit whose payment is specified on a certain date with no draft accompanied. This deferred payment L/C, newly introduced by the 4th version of the International Chamber of Commerce (국제상업회의소/國際商業會議所) rule in 1983, is characterised by the presence of negotiating bank, which is committed to pay within a certain period after a specified date, e.g., at 90 days after B/L (bill of lading) date, and no requirement of a draft nor endorsement.

Key words
deferred payment credit, ICC UCP, nominated bank, issuing bank, fraudulent

Nominated Bank of Deferred Payment L/C
In accordance with the ICC rule, or USP, there is a nominated bank for the documentary credit with deferred payment, which used to be a depositary correspondent bank (예치환거래은행/預置換去來銀行) of the issuing bank.

According to the Supreme Court decision stated below, from the moment that the bank has paid the amount of the credit to the beneficiary in advance, the bank is responsible for realizing the credit or authorized for this purpose as the nominated bank, the payment made counts as realization.

Advance settlement of a documentary credit with deferred payment is therefore judged to be legal. It opens a recourse against the issuer to the paying bank and no fraud subsequently discovered may invalidate this recourse. The issuing bank may only defer reimbursement until the maturity date. But a right to reimbursement is conclusively acquired upon the discharge of the documents.

To support this position the Court points out that the UCP does not exclude advance execution of a documentary credit with deferred payment. It also confirms that the risk resulting from the abstract nature of the independence, in order to protect the beneficiary's interests, is supported by the principal who ordered the letter of credit, even in the case of a credit with deferred payment.

Finally, when a bank is authorized to realize a credit, the authorization implies, unless otherwise stipulated, the obligation to reimburse it even if realization took place prior to the maturity date? So, does an advance payment by a nominated bank of a documentary credit with deferred payment have the same effects and does it give the nominated bank the same rights as payment at the maturity date. The solution, if it is correct, is obviously transferable to a case where all banks are allowed to realize the documentary credit.

Supreme Court case
In 2003, the Supreme Court delivered Decision 2001Da68266 on January 24, 2003 which attracted much attention worldwide thanks to a supportive comment on Documentary Credit World written by Changsoon Song, L/C Specialist working at the Korea Exchange Bank, as explained above. Industrial Bank of Korea v. BNP Paribas was illustrated in light of evidence and records adopted by the court below:
 * (1) SARL JALTEX incorporated in France (˝JALTEX˝) placed an order for fabric in the quantity of 23,000m to a non-party to this lawsuit 1 stock company incorporated in Korea (˝Non-party 1 company˝), and applied for a Credit in the Turenne branch of the defendant bank for the amount available on the Credit (˝Credit amount˝) in the sum of US$81,650 which is to be paid for the sales of goods, and the main branch of the defendant bank issued a irrevocable Credit (˝Credit of this case˝) on July 7, 1997 with 097549/00823 as the Credit number, US$81,650 as the Credit amount, JALTEX as the applicant of the Credit, Non-party 1 company as the beneficiary, the expiration date and the place of presenting documents as August 15, 1997 and Paris, and the payment maturity date as the 90th day running from the shipping date.
 * (2) On the other hand, the Credit of this case was issued as a deferred payment Credit, and did not require an issuance of a bill of exchange (˝Draft˝), and according to Field 41D, it is provided that ˝available with … at ours counters by DEF payment,˝ and Field 78 provides that ˝At maturity, as per instructions of the negotiating bank, for 97 percent of value of documents in order only, … will be paid by ourselves.˝
 * (3) Thereafter, Non-party 1 company shipped the non-confirming goods, which were substantially inferior in quantity and quality to those specified in the Credit, and nonetheless requested the negotiation of documents stipulated in the Credit of this case (˝Stipulated documents˝) to the plaintiff bank by forging shipping documents as if the goods of the same quality and quantity as specified in the Credit of this case had been shipped, and the plaintiff effected a negotiation of the aforementioned documents with Non-party 1 company as of July 25, 1997, and around that time presented the aforementioned documents to the defendant and demanded acceptance, and thereupon, the defendant transmitted on August 8, 1997 the following notice that ˝… has accepted above shipping documents as follows: Accepted amount: US$79,150.50, Maturity date: Oct. 23, 1997.˝
 * (4) Thereafter, upon the application by ZARLTEX, Paris Commerce Tribunal (Tribunal de Commerce de Paris) granted a provisional injunction ordering to stop payment under the Credit of this case against the defendant on September 17, 1997, and in the case where ZARLTEX filed a claim for damages arising from fraudulent shipment of the goods upon being confirmed that it is not obligated to pay the Credit amount to Non-party 1 company as well as Francǫis Rubinoic, a broker of transaction of this case, the aforementioned Tribunal rendered the judgment that cancelled the sales contract formed on April 14, 1997 between Non-party 1 company and ZARLTEX, and invalidated the claim demanding the payment under the Credit of this case, which had been issued based on Non-party 1 company's unfair sales practice and forged documents.

In case where the plaintiff as a negotiating bank of shipping documents of this case demanded the payment under the Credit of this case against the defendant as an issuing bank,

the court below, while admitting that (1) the deferred payment Credit such as the Credit of this case in principle does not allow a negotiation as it did not provide a device of negotiation such as Draft, and (2) exceptionally, the possibility of negotiation of a deferred payment Credit cannot be entirely excluded depending on the case, nonetheless accepted the defendant's defense of refusing the payment under the Credit on the ground of forged shipping documents, and

accordingly dismissed the plaintiff's claim, on the ground that the plaintiff cannot obtain the status of a negotiating bank as the Credit of this case did not nominate a negotiating bank in light of the court below's reasoning, and thus the plaintiff was not a negotiating bank of the Credit of this case, but merely obtain the status of assignee of Non-party 1 company's rights against the defendant as an issuing bank, and thus the defendant may avail itself of entire defenses, to which Non-party 1 company is subject, against the plaintiff, which succeeded to the status of Non-party 1 company.

So the appeal is dismissed on the following grounds:

[1] Even if a Credit transaction was revealed as fraudulent one due to forged shipping after a Credit had been negotiated in compliance with the applicable law, a negotiating bank may nonetheless demand reimbursement of the Credit amount unless it is recognized that a negotiating bank was involved in a fraud such as forgery as a party actually committing such an act, or at the time of negotiation, knew or had sufficient reasons to suspect that a fraud had been committed such as forgery of documents, etc. (See Supreme Court Decisions 96Da43713 delivered on August 29, 1997, 96Da37879 delivered on August 29, 1997, 2000Da60296 delivered on October 11, 2002). However, in case where a Credit is negotiated not in compliance with the applicable law, the negotiation cannot be deemed to be a ˝negotiation˝ as provided in the UCP even if a negotiation is completed in exchange for value, and an issuing bank may avail itself of all defenses, which the beneficiary may be subject to, against a negotiating bank that presented a Credit at maturity, and upon the revelation of beneficiary's fraudulent acts, an issuing bank may refuse payment on such ground.

[2] The UCP, which has been effective as of the date on which the Credit is issued, is supposed to apply to a Credit issued by means of SWIFT (abbreviation for the Society for Worldwide Interbank Financial Telecommunication) (See SWIFT Manual, p.154, 156, 161 of the records of this case), and likewise, the UCP which has been in effect as of the date of the issuance of pertinent Credit is applicable to a Credit unless exceptional circumstances are demonstrated as having existed, even if a provision expressing that the UCP legislated by ICC shall apply to a Credit does not appear on the face of a Credit.

[3] In light of the purport of provisions of the aforementioned UCP Paragraphs a, c, d of Article 10 and Paragraph b Item i of Article 10, Paragraph a of Article 14 as to an issuing bank's authorization and reimbursement obligation against a nominated bank (hereinafter equally applicable to a confirming bank as well) and the non-existence of Articles banning a negotiation of shipping documents and the payment of a deferred payment Credit before the expiration date by a nominated bank under the UCP and the fundamental purport of using a Credit as an independent and abstract mode of payment in international transactions in order to eliminate insecurities associated with the payment to the beneficiary, and under the consideration that from the fairness point of view the risks arising from a Credit's characteristics of being independent and abstract should be borne by the applicant of a Credit, even in case of a deferred payment Credit provided with the maturity date of payment, so as far as an issuing bank nominated another bank which incurs a deferred payment undertaking by negotiation, we hold the view that an issuing bank by such authorization towards another bank purports to undertake reimbursement of the payment at maturity even if a nominated bank negotiated shipping documents before the maturity date unless otherwise stipulated (on the condition that an issuing bank may refuse the reimbursement up until the maturity date). Because it is not infeasible to negotiate a Credit with shipping documents, etc. even in case where a Draft is not issued in connection with a Credit, a deferred payment Credit may be negotiated by a nominated bank as far as a nominated bank exists.

[4] As Paragraph b Item ii of Article 10 of the UCP provides that ˝Negotiation means the giving of value for Draft(s) and/or document(s) by the bank authorized to negotiate. Mere examination of the documents without giving of value does not constitute a negotiation.˝ Thus, in light of the purport of this provision, a ˝negotiation˝ can be recognized only where a bank authorized by an issuing bank gives value for documents, and in case of an unauthorized bank, a ˝negotiation˝ cannot be recognized as effected even if the giving of value takes place, and such view equally applies to a deferred payment Credit.

[5] The Credit of this case did not specifically designate the nominated bank which incurs a payment undertaking or negotiates shipping documents, and explicit authorization for free negotiation did not appear on its face, and in the contrary, we found explicit expressions on its face such as that the payment of Credit amount is available only by the issuing bank (Field 41D : available with … at our counters) and shipping documents shall be presented in Paris, and Paris where the issuing bank is located shall be a point of reference in determining the validity period of Credit, so we concluded that the issuing bank did not nominate or authorize another bank which may incur a payment undertaking under the Credit of this case or negotiate shipping documents.