Article

Factual Summary: Buyer/Applicant obtained a commercial letter of credit, payable within 180 days, in favor of Seller/Beneficiary for Rs. 43,86,411 to pay for 2000 MT of Syrian Rock Phosphate. Seller/ Beneficiary presented documents through Negotiating Bank, which forwarded them to Issuer.

When Issuer received documents, it gave timely notice of discrepancies, namely the failure of Negotiating Bank to certify that all the terms of credit have been furnished, "neither the description of goods nor the quantity or weight matched with each other in the above documents" (¶ 8), and that the certificate of Syrian origin was "not issued by Chamber of Commerce" as required by an amendment. Unsuccessful correspondence between Negotiating Bank and the Issuer ensued.

Seller/Beneficiary then sued Issuer and Advising Bank for Rs. 43,86,411 and Rs. 19,87,945 in interest. Issuer defended on the grounds that the certificate of origin issued by the Chamber of Commerce was not satisfactory, that the description of the quantity and quality of the goods was unsatisfactory, and that Issuer retained the documents at the request of Negotiating Bank solely for collection. The trial court ruled that Issuer properly dishonored the documents forwarded by Negotiating. The trial court further ruled that Seller/Beneficiary "accepted the encashment of bill and document on collection basis." (¶ 11).

On appeal the High Court reversed the ruling of the trial court and ruled that Seller/Beneficiary had made a complying presentation. However, the High Court did not address whether Seller/Beneficiary accepted that discrepant documents would be handled on a collection basis. On appeal, the Supreme Court remanded.

Legal Analysis:

2. Collection, Subject to; Discrepancies, treatment of: Issuer argued that based on the terms of the LC, the documents should have been handled on a collection basis on its determination that they were discrepant. The LC (set forth in detail below) stated "Discrepant documents to be sent strictly on collection basis." (¶ 3).

Seller/Beneficiary argued that, since the High Court had ruled that the documents complied, the compliance theory was immaterial since Issuer was obligated to honor the letter of credit. However, the Supreme Court disagreed and concluded that the trial court's conclusion that Seller/Beneficiary accepted the encashment of the bill of lading and other documentation on a collection basis had a bearing on the final outcome on the case. Consequently, the Supreme Court found that the High Court had erred in reversing the trial court decision because, "where the first appellate court reverses the judgment of the trial court, it is required to consider all the issues of law and fact." Code Civ. Proc. § 96 (1908).

Comment(s):

A provision in a UCP commercial letter of credit that provides that discrepant documents should be treated as a bank collection should be narrowly construed. The beneficiary may be able to timely cure the discrepancies. Moreover, the clause should not be given effect where a court subsequently determines that the dishonor was wrongful in that there were no discrepancies.

Text:

"This Documentary Credit which is a available by negotiation of: Your draft at 180 days from dispatch [sic] drawn for 100% of invoice value on Unialkem Fertilizers Ltd, E-5 Plot No. 4 Ravi Shankar Nagar, Bhopal, 462 016 bearing the clause 'Drawn under Documentary Credit No. 0192097 LC000087 of State Bank of India, Industrial Finance Branch, Gr Floor, L.H.O. Premises, Hoshangabad Road, Bhopal - 462 011 (India)' accompanied by (Documents listed in attached sheet(s)

Evidencing dispatch of goods as per (attached sheet)

For list of required documents, merchandise description and other instructions, pleas [sic] see the attached continuation sheets which form an integral part of this credit.

Shipment from :Syria to Kandla, India

Shipment term :CIF

Partial shipment: allowed

Transshipment : Not allowed

Introduction to the Advising Bank

- All bank charges (other than issuing bank charges) are for beneficiary'sa/c.

- Discrepant documents to be sent strictly on collection basis.

- All document to indicate LC No.0192097 LC000087 and date 18 Jun 97

- Negotiation under this Credit are restricted to State Bank of India, New Delhi, Main Branch, 11 Sansad Marg, Post Box No. 430 New Delhi

- 110 001

- Except in so far as otherwise expressly stated, this documentary credit is subject to the Uniform Customs and Practices and Documentary Credits (UCP) (1993 Revision) of the International Chambers of Commerce (Publication No. 500).

- We hereby engage with drawers and/or bonafide holders that draft drawn and negotiated in conformity with the terms of the credit will be duly honoured on presentation and that drafts accepted within the terms of this credit will be duly honoured at maturity. The amount of each draft must be endorsed on the reverse of this Credit by the Negotiation Bank. (¶ 3).

[JEB/tg]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.