QUERY

QUOTE

We would like to request an ICC opinion on an issue that we received from one of our member banks, as follows:

We would like to clarify our position in relation to two letters of credit, both subject to identical circumstances, parties and documentation. The letters of credit were issued subject to UCP 600, containing an explicit reference to such in the terms of the letters of credit.

We entered into a forfaiting agreement, following which the negotiating bank duly assigned all of its rights under the letters of credit to us. The issuing bank accepted the documents presented under the letters of credit. However, due to an injunction being granted by the courts of [Country B], at the request of the applicant, on the basis of a claim it is bringing with regard to the underlying transaction (i.e., the sales contract between the applicant and beneficiary), the issuing bank has refused to make the payments due to us on the respective maturity dates. It should be noted that the injunction was not granted on the grounds of fraud or illegality.

The following payments were due to be paid to us by the issuing bank on the corresponding maturity dates:

USD 146,637.44 - 10 August 2017; USD 145,757.96 - 30 August 2017;

USD 143,164.88 - 5 September 2017; USD 348,100.56 - 5 September 2017;

USD 309,546.05 - 13 September 2017; USD 274,005.92 - 20 September 2017.

Despite numerous communications with the issuing bank, and extensive efforts to resolve the matter, we have not received any of the above payments, which are now significantly overdue.

Opinion requested from ICC:

As the issuing bank issued the letters of credit subject to UCP 600, we request the ICC to confirm the applicability of UCP 600 sub-article 4 (a), article 5, and sub-article 7 (b), and thereby the independent nature of documentary credit transactions from any underlying contracts, documents and/or goods, and the obligation of the issuing bank to honour its commitments under the letters of credit and make payment accordingly. In addition, we request the ICC to confirm that once the issuing bank has accepted the documents, it is obligated to make payment at maturity in accordance with UCP 600 sub-article 15 (a).

We also request the ICC to opine on the extent to which the UCP 600, as incorporated in the letters of credit, would prevail over an injunction imposed by a local court in the jurisdiction of the issuing bank.

UNQUOTE

ANALYSIS

In accordance with UCP 600 sub-article 7 (b), an issuing bank is irrevocably bound to honour as of the time it issues a credit. As stated in sub-article 7 (a), such honour is to be made against a complying presentation. This is reinforced by sub-article 15 (a), which states that when an issuing bank determines that a presentation is complying, it must honour.

Underlying this premise, and in accordance with UCP 600 article 5, is that banks deal with documents and not with goods, services or performance to which the documents may relate.

Furthermore, UCP 600 sub-article 4 (a) states that: “A credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit. Consequently, the undertaking of a bank to honour, to negotiate or to fulfil any other obligation under the credit is not subject to claims or defences by the applicant resulting from its relationships with the issuing bank or the beneficiary.”

Disputes in respect of the underlying sales contract are outside the scope of UCP 600 and several opinions have been published in the past in respect of court injunctions issued in such circumstances.

As highlighted in Opinion R779 (TA736rev), an issuing bank cannot ignore the fact that an injunction has been granted that prevents its payment, but it should be cognisant that the documents did comply, did not require any further instructions from the applicant as to their settlement, and that it should approach the court for the removal of that order.

The general principle, as stated in the Analysis and Conclusion to ICC Opinion R519 (TA556), is that local law will prevail over the transaction. This Opinion additionally states that: “There are no guidelines on this in the UCP, and the expectation is that the issuing bank will seek to uphold the principles outlined in the UCP and preserve the relationship that exists between the banks. This is part of the correspondent banking relationship between the banks”.

Opinion R629 (TA672rev) also states that an issuing bank cannot ignore a court injunction, and its defence for not reimbursing will be based upon the terms of the injunction. However, in the event that the basis for the injunction being issued is related to the quality of the goods, a nominated bank that acted in good faith should be protected. Such issues should not affect the right of the nominated bank to receive reimbursement from the issuing bank. In this respect, reference should also be made to UCP 600 sub-article 4 (a) and article 5.

The query mentions that the negotiating bank has assigned all rights under the credit to another party. It should be noted that UCP 600 article 39 only addresses the right of the beneficiary to assign the rights to any proceeds to which it may become entitled under the credit. Any assignment beyond that is outside the scope of the UCP 600.

CONCLUSION

As mentioned in the above analysis, an issuing bank cannot ignore a court injunction. However, it should seek to resist the imposition of such an injunction or, if an injunction has already been obtained, seek to have it lifted.