Article

Note: McMillan Enterprises Co. Ltd. (Applicant) instructed Taipei Business Bank (Issuer) to open an LC for RM 194,800 in favor of Ching Suit Fee (Beneficiary). Beneficiary subsequently received the LC and nominated the Malayan Banking Berhad (Negotiating Bank) to negotiate. Thereafter, Negotiating Bank assured HSBC (Reimbursement Bank) that the LC and accompanying documents were complete and that the LC's terms and conditions had been complied with and claimed reimbursement. Issuer instructed Reimbursement Bank to pay Negotiating Bank, which credited Beneficiary's account.

Negotiating Bank also forwarded documents to Issuer, which informed Negotiating Bank that the documents contained discrepancies. Negotiating Bank then demanded that Beneficiary refund payment, along with accrued interest. Beneficiary refused Negotiating Bank's demands, arguing that the goods had been shipped and all terms of the LC had been complied with. Beneficiary subsequently submitted rectified documents per Negotiating Bank's request and repeated that Negotiating Bank should withhold a refund. Nevertheless, Negotiating Bank debited Beneficiary's account for RM 196,528 and refunded Reimbursement Bank. Negotiating Bank then informed Issuer that it was unable to refund it, since Issuer had authorized payment and Beneficiary had received payment.

Beneficiary subsequently sued Negotiating Bank for wrongfully debiting its account. The Federal Court at Putrajaya, Zulkefli Ahmad Makinudin, C.J.M, dismissed Negotiating Bank's appeal of the High Court's judgment rendered in favor of Beneficiary.

The Judge stated that "we are of the view that upon the presentation of an irrevocable letter of credit to the issuing bank (TBB), it is a mandatory requirement that payment is to be effected upon sight of the said document by the issuing bank. The contract pursuant to the said letter of credit is considered by then to have been fully realised."

The Judge based this ruling on UCP400 Article 10(a)(iv) which states "If the credit provides for negotiation - to pay without recourse to drawers and/or bona fide holders, draft(s) drawn by the beneficiary, at sight or at tenor, on the applicant for the credit or on any other drawee stipulated in the credit other than the issuing bank itself, or to provide for negotiation by another bank and to pay, as above, if such negotiation is not effected."

Based on this interpretation, the Judge stated that "[Issuer] had no right to seek the return of the monies it had paid to [Negotiating Bank] as payment was upon sight of the documents. [Issuer] is estopped from seeking the return of the monies that it had lawfully remitted to [Beneficiary] through [Negotiating Bank] as the negotiating bank."

The Judge also noted that "[t]he right of recourse does not arise in the present case because [Issuer] as the issuing bank did honour the letter of credit at the first instance. Telegraphic transfer and the remittance of the payment RM 194,605.00 into [Beneficiary's] account was made on 22.7.1993 upon deduction of bank commission and charges. It was only on the 24.7.1993 that [Issuer], citing discrepancies in the letter of credit sought a refund from [Negotiating Bank]. The legitimacy of [Issuer's] request for a refund at that point of time was never questioned by [Negotiating Bank] at all."

Negotiating Bank also claimed a right of recourse by way of letter of indemnity. However, the Judge upheld the trial court's ruling that the indemnity's authenticity and relation to the LC transaction remained doubtful.

Finally, Negotiating Bank argued that its deduction of Beneficiary's account was proper under Contract Act 1950 (the "Act") § 73. The Act stipulates that payments made in mistake must be returned. The Judge rejected this theory of recovery, because the mistakes defined in the Act refer to payments neither properly due nor enforceable. In this case, payment was due under the LC, and no equitable basis for a refund existed. The Judge concluded that Negotiating Bank was estopped from seeking a refund.

Comment: The court has confused the role of the issuer and reimbursement bank, and, accordingly, reached the wrong result. The credit apparently provided for bank-to-bank reimbursement under which Negotiating Bank claimed reimbursement which was authorized by Issuer. Negotiating Bank then forwarded to Issuer which examined them, determined that they did not comply, and dishonoured. Authorizing a reimbursement bank to reimburse the negotiating bank cannot be final payment under the credit where the issuer has not even seen the documents presented.

Reimbursement obligations are treated in UCP400 Article 21. This rule is a summary of bank-to-bank reimbursement practice and assumes that the reimbursement is separate from the obligation of the issuer to examine and honour a complying presentation.

The opinion relies on the provisions of UCP400 Article 10 regarding the obligations of an issuer that undertakes to negotiate. That obligation is to negotiate without recourse. The obligation of the issuer in this case, however, is not to negotiate. Issuer nominated Negotiating Bank to negotiate. The obligation of the issuer is to reimburse the negotiating bank for a complying presentation. Where the presentation does not comply, an issuer that gives timely and adequate notice of refusal has no obligation to reimburse. A bank-to-bank reimbursement claim does not alter this alignment.

Of more interest is the question of whether or not the Negotiating Bank that purchased the documents from the Beneficiary did so without recourse. The UCP does not so provide, although some banks take that position.

[JEB/so]

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