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Note: To assist Tru-line Beauty Consultants Pte Ltd. (Borrower) in purchasing hair products, United Overseas Bank Limited (Lender) established a S$450,000 trust receipt facility, an overdraft account of up to S$90,000 and an irrevocable commercial LC in favor of Davines SPA (Seller/Beneficiary) for EUREUR 26,565.42. By virtue of the facilities, Borrower's Guarantors agreed to indemnify Lender.

When Seller/Beneficiary presented discrepant documents, Lender sent a "Collection Notice" via telefax to Borrower informing it of discrepancies. The Collection Notice "referred to two discrepancies: (1) the L/C had expired; and (2) the invoice showed that the product was free of charge."

The opinion stated that:

"On 26 May 2009, 9 June 2009 and 10 June 2009, [Lender] had sent SWIFT messages to [Seller/ Beneficiary's] negotiating bank to inform it that the documents remained refused and that [Lender] was holding the documents until it received 'a waiver from [Borrower] and agree[d] to accept it, or receive[d] further instructions from [Beneficiary's negotiating bank], prior to agreeing to accept a waiver'." ...

"On 3 August 2009, [Lender] sent a letter to the Borrower to inform it that ... EUR[EUR ]26,565.42 under the L/C would be due on 18 August 2009 ("the Term Bill Notice"). The Term Bill Notice stated:

PLEASE ADVISE US ON YOUR PREFERRED SETTLEMENT MODE BY SELECTING THE OPTIONS BELOW:

( ) WE HAVE BOOKED EXCHANGE RATE AT ____ UNDER CONTRACT NO: ____.

( ) PLEASE DEBIT MY SINGAPORE/ FOREIGN CURRENCY ACCOUNT NO. ____ WITH YOU ON DUE DATE.

( ) WE REQUIRE TRUST RECEIPT FOR THE BALANCE OF 30 DAYS OF TRUST RECEIPT PERIOD AVAILABLE TO US. PLEASE INDICATE CURRENCY OF TR (FOREIGN OR SINGAPORE).

The Borrower replied on 7 August 2009, selecting the third option."

"On 14 August 2009, [Lender] sent a SWIFT message to [Beneficiary]'s negotiating bank to inform it that [Lender] was returning the full set of discrepant documents ... on that day. On 17 August 2009, [Lender] sent a Debit Advice to the Borrower informing the Borrower that [Lender] had deducted the sum of S$170.00 from the Borrower's account as cancellation charges under the L/C."

On or about 24 August 2009, Lender sent Borrower a letter demanding payment for several outstanding debts. In this letter, Lender alleged, among other things, that Borrower had failed to make payments on: " (2) Letter of Credit facility, such that the amount found due and owing by you to our clients as at 17 August 2009 amount to EUR[EUR ] 26,565.42 with further interest continuing to accrue from 18 August 2009 until the date of full settlement ... ." However, on 23 September 2009, Lender reduced the total amount owed by Borrower by EUREUR 26,565.42 to account for the cancellation of the LC.

When Borrower failed to repay this loan and other outstanding amounts, Lender sued Borrower and its Guarantors for the outstanding debt and Borrower counterclaimed. Lender moved to strike some of the counterclaims. The Assistant Registrar granted summary judgment for Lender on its claims and allowed Borrower to pursue its counterclaims. On appeal, the High Court, Woo Bih Li, J., affirmed both decisions.

In its "Defence and Counterclaim", Borrower alleged "that [Lender] had wrongfully ... terminated the L/C which had been issued to [Seller/Beneficiary] in payment of the goods purchased by the Borrower]from [Seller/Beneficiary] and that this had caused [Seller/Beneficiary] to decide not to renew or extend the Borrower's exclusive distribution agreement with [Seller/Beneficiary], thereby occasioning loss to the Borrower." Borrower sought to stay a judgment in favor of Lender so that its counterclaims against Lender could be set-off against Lender 's claims to diminish or eliminate Lender's claims altogether. Lender responded that it was entitled "to terminate the whole of the Banking Facilities, including the L/C." Lender also presented testimony to the effect that Borrower had requested Lender to reject Beneficiary's documents, while Borrower maintained that it had instructed Lender to accept the discrepancies and requested a Trust Receipt to finance this payment.

The Judge stated that:

"The L/C was an irrevocable documentary credit. An irrevocable credit constitutes an independent contract between an issuing bank and the beneficiary which, in the absence of fraud, is not affected by any irregularities in the underlying contract in pursuance of which the credit was issued (see Brody, White and Co Inc v Chemet Handel Trading (S) Pte Ltd [1992] 3 SLR(R) 146 at [19]). The principle of autonomy of credit, excepting fraud, is sacrosanct in the law of letter of credit and any inroad into the principle will undermine and annihilate the trust and confidence in the use of documentary credits in international trade. As such, the contractual relationship between the issuing bank and the applicant for the credit cannot affect the relationship between the issuing bank and the beneficiary (Agritrade International Pte Ltd v Industrial and Commercial Bank of China [1998] 1 SLR(R) 322 at [21] and [22]). [Lender]'s pleaded defence to the counterclaim, ie, that it was entitled to recall all banking facilities granted to the Borrower (including the L/C), was irrelevant to the issue whether it ought to pay on the L/C."

It was argued that "Borrower had positively responded to [Lender's] inquiry (in the Collection Notice) whether to accept the discrepancies ... and that consequently [Lender] was obliged to pay on the L/C." However, the Judge declared that "nonpayment by [Lender] under the L/C was not the true cause for [Beneficiary's] termination of the distributorship agreement."

Finally, the Judge ruled that "[a]lthough the Borrower's claim was in respect of [Lender]'s cancellation of the L/C and the L/C was issued pursuant to one of the Banking Facilities and [Lender] was claiming for sums due and payable to it under the Banking Facilities, I was of the view that this did not give rise to a sufficient degree of proximity to raise a set-off. The claim by [Lender] did not include any sum in respect of the L/C. The Borrower's claim in respect of the L/C was separate from [Lender]'s claim."

Comment:

The statement of the court to the effect that Lender was obligated "to pay on the LC" when Borrower responded favorably to its request for waiver requires some qualification. In the context, the statement is not problematic since Lender elected to waive and, accordingly, was entitled to claim reimbursement. Strictly speaking though, the decision of whether or not to waive discrepancies is that of the issuer and the applicant's waiver does not "obligate" the issuer to pay.

[JEB/sws]

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