Article

Factual Summary: Pursuant to a contract for the sale of oil between Seller and Buyer, Buyer (Issuer) issued an "irrevocable payment undertaking" (IPU) on its own behalf addressed to Seller's Bank for credit to Seller's account. The contract provided that "[p]ayment shall be secured by an original payment undertaking issued by the Buyer to Seller's nominated bank in a format acceptable to Seller...."

The contract was part of an ongoing commercial relationship whereby Issuer would purchase oil from Seller and subsequently, in an onward sale contract, resell the oil to Chinese Subsidiary of Seller because "in China a company is not allowed to import fuel oil until it has obtained an import licence from the Government. Since neither [Seller] nor [Chinese Subsidiary] held an import licence, they apparently required the assistance of a company with an import licence, such as [Issuer], to import fuel into China, with [Issuer] playing the role, it was said, of an import agent."

A supplementary agreement was entered into between Issuer and Chinese Subsidiary, similar in terms to the agreement between Seller and Issuer in regards to "quantity, quality and pricing mechanism." The supplementary agreement also included two clauses "whereby if [Chinese Subsidiary] failed to pay [Issuer] according to the time set out in its contract with [Issuer], [Issuer] was entitled to extend its time under which it was obliged to pay [Seller]" and "that if [Chinese Subsidiary] failed to pay [Issuer], [Issuer] 'is not responsible to make any payment for the cargo in USD to [Seller].'"

The court noted that Issuer "printed out the IPU on [Issuer]'s letterhead and sent it to [Bank] .... It is addressed to [Bank] and copied to [Seller]." The IPU provided for a fluctuating price term per metric ton based on Platt's Asia Pacific/Arab Gulf Marketscan plus a US$18.00 premium. It also provided that "[w]e ... hereby irrevocably undertake that upon presentation of Seller's commercial invoice and shipping documents or letter of indemnity in lieu of shipping documents ..., we will pay without discount, deduction, set-off or counterclaim ...." The full text as quoted in the opinion appears as a textual appendix immediately following this abstract.

The oil was delivered by Seller to Issuer who then delivered it to Chinese Subsidiary. Subsequently, under a URC522 collection which identified the drawer as Seller and the drawee as Issuer, Bank presented Seller's commercial invoice and a letter of indemnity from Seller as allowed under the terms of the IPU. Issuer did not pay the claim by the time it was due. Several days later Chinese Subsidiary informed Issuer that it "would be unable to make payment because of its and [Seller]'s business losses and ... sent a request for an extension of time for payment." Bank then sent a second letter of collection along with "a notice of assignment of the funds due ... and sent a notice of assignment of the document sent ...." Issuer responded that under the sale contract assignments were not possible without its consent. Bank then replied "that the IPU was given in favour of [Bank]" and that Bank was claiming under it.

When the claim was not paid by Issuer, Bank sued Issuer in the UK. On its motion for summary judgment the court awarded in Bank's favor.


Legal Analysis:

1. Agency: Issuer "contends that ... the IPU gives rise to an obligation distinct from the obligation in the sale contract ... the obviously independent obligation to which the IPU admittedly gives rise is owed only to the seller ...and not to the bank ..., because [Bank] was acting merely as agent for the disclosed principal (namely [Seller]) and so cannot itself enforce the obligation." The court, however, found that "[t]he fact that [Bank], in acting as collecting bank, may, in presenting the documents to obtain payment, have been acting as an agent in making that presentation does not, in my judgment, prevent [Bank] from having an independent status as principal under the terms of the IPU."

2. Consideration: Issuer also contended "that [Bank] has no right as principal to enforce the obligation, [Issuer] contends that [Bank] has given no consideration for any promise that it should be paid." The court, however, found that "[i]n a commercial transaction the courts will be loath to find that an agreement which gives every impression of being a contractual undertaking fails for want of consideration. There are a number of ways of approaching the issue of consideration. One way is to say that the offer was an offer by [Issuer] to the bank that, if presentation of the documents were made, the payment would be made by [Issuer] and that, effectively, the consideration was provided by [Bank]'s presentation of the documents. Alternatively, the consideration may be said to be provided by the recognised financial role of the bank in the transaction in making funds available."

3. Use: Issuer argued that the court should consider the purpose and context of IPUs in the oil trade to interpret whether Issuer intended the IPU to be separate from the sale contract. The court summarized this argument by stating "[Issuer] emphasised that the function of such IPUs, and in particular the words 'without any offset, deduction or counterclaim whatsoever', were to provide security to the seller to prevent the buyer from arguing that there were quality disputes on the underlying contract, so as to justify refusal of payment", relying on Totsa Total Oil Trading Sa v Bharat, [2005] EWHC 1641 (Comm). The court rejected this argument, stating "I do not accept [Issuer's] submission that ... the function of such IPUs in the oil trade in the Totsa case provide any answer to the question of construction in this case.... here it is clear that ... the parties are agreeing that payment will be made immediately to a designated account of [Bank]."

4. Independence: Issuer also argued "that it would be wholly inconsistent with [the circumstances of the underlying contract] if [Bank] were none the less to be given a right to payment in the event of nonpayment by [Chinese Subsidiary] under the onward sale contract." The court, however, found that "the IPU was an independent free-standing obligation given by [Issuer] to [Bank]. ... If, as the [Issuer] contends, the obligation to give the irrevocable payment undertaking was only an obligation that was enforceable by the seller, it is difficult to see what the point was of making the issuance of such IPU a condition precedent to the seller's obligation to perform because it already had the benefit of the payment obligation ...."

Comments by Professor James E. BYRNE:

1. This product is intriguing. Were the litigation to have been brought under US Revised UCC Article 5, it would have been asked whether or not it was a letter of credit. The question would have been decided under the rubric of definiteness or whether the undertaking was intended to be solely documentary. Under this approach, a serious argument can be made that it was an independent undertaking within the scope of Revised UCC Article 5 (Letters of Credit).

2. Under English law, the classification may not matter since the court was prepared to take it at its face value. Courts in other systems may be less inclined to ignore contextual issues.

3. The most interesting question will be how this decision affects the practice. Since it seems to be driven by the financing banks of the sellers, the best bet is that, having been enforced, the IPUs will continue in the same form. That is a bad choice for all. The fact that litigation was required reveals that the form is inadequate. Had it been clear that it was an independent undertaking, there would not have been any serious basis for a challenge short of LC Fraud. [LHD/bain]

Textual Appendix:

The following document was printed on Issuer's letterhead and addressed and sent to Bank, with a copy to Seller.

'IRREVOCABLE PAYMENT UNDERTAKING

. . .

We, China Marine Bunker (Petrochina) Co Ltd, have entered into an agreement with Sinostar Energy Pte Ltd to purchase directly the following commodity covering shipment of:
TYPE OF PRODUCT: HSFO 18OCST
QUANTITY: 23,000.000-24,000.000 MTS at seller's option
UNIT PRICE:
1) Basis on Bill(s) of Lading at loadport.
2) The unit price CIF Zhuhai, China basis in US dollars per metric ton shall be the arithmetic average of the mean quotations published in Platt's Asia Pacific/Arab Gulf Marketscan for HSFO 18OCST under the heading 'Singapore' effective for the period from 1 May 2005 to 31 May 2005 (both dates inclusive) plus a premium of USD 18.00/MT (US dollars eighteen point zero zero only per metric ton).
3) Any published correction to any of the relevant quotations shall be taken into account. The final price shall be calculated to three decimal places (with rounding up where the next decimal place is 'five' or greater).
ESTD TOTAL AMOUNT: US dollars 6,576,000.00
ESTD DELIVERY DATE: 23,000.000-24,000.00 MTS to Zhuhai, China during 24-31 May 2005
NAME OF VESSEL: MT XIN HAI SHUN FA/SUB
PAYMENT: T/T 60 days from Bill of Lading date (B/L date as Day One)
We, China Marine Bunker (Petrochina) Co Ltd, hereby irrevocably undertake that upon presentation of Seller's commercial invoice and shipping documents or letter of indemnity in lieu of shipping documents from Sinostar Energy Pte Ltd, we will pay without discount, deduction, set-off or counterclaim in United Stated dollars currency by tele-graphic transfer of immediately available funds to the Chase Manhattan Bank NA, New York A/c No: 001-1-019015 CHIPS UID: 373362 for account of Raiffeissen Zentralbank Osterreich AG, Singapore branch for credit to Sinostar Energy Pte Ltd Account No: 602276 in full settlement of their invoice for the above purchase.
This undertaking shall be governed by and construed in accordance with English law. The exclusive place for jurisdiction shall be the High Court in London.'

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