Article

A rejection notice under Article 14 of UCP 500

by King-Tak Fung

In a recent Hong Kong case, Total Energy Asia Limited v Standard Chartered Bank (Hong Kong) Limited [2006], the plaintiff ("Total Energy"), was the middleman of a back-toback L/C transaction that involved purchase of coal from China and sale of the same to India.

The crux of this case was whether, in all circumstances, there was a valid rejection notice given by the defendant confirming bank ("SCB") of the master L/C to the presenting bank, Credit Agricole Indosuez ("CAI"), pursuant to the provisions of sub-article 14(d) of UCP 500. If not, SCB would have been precluded from rejecting the presented documents under UCP 500 sub-article 14(e).

Facts and disputes

This case involved local presentation of documents by CAI to SCB in Hong Kong. SCB sent its rejection notices to CAI in respect of the 1st presentation and 2nd presentation (for revised documents) by fax.

There was no dispute that the presented documents (including the revised ones) were discrepant. CAI's covering letters stipulated that if discrepancies were found, SCB was instructed to telex the master L/C to the issuing bank for acceptance of the discrepancies.

Total Energy, being the beneficiary of the master L/C, argued that the refusal notice of the second presentation only listed the discrepancies and failed to communicate any rejection of the presented documents, i.e., it did not expressly state that the documents were rejected or use any words to that effect. Accordingly, it followed that SCB was in violation of UCP 500 sub-article 14(d) and should be precluded from rejecting the documents under sub-article 14(e).

SCB argued that its checker, after sending the discrepancy advice by fax, called a member of CAI's staff on the same day and informed him, among other things, that the documents in the 2nd presentation would also be rejected on the basis of the discrepancies found.

CAI contended that in the relevant telephone conversation, SCB's checker only asked for document disposal instructions without mentioning any rejection of documents. However, in cross-examination, CAI's staff member admitted that in the conversation with SCB's checker, it was his clear understanding that SCB was holding the documents at the disposal of CAI.

Approach and decision

Given the conflicting oral evidence presented by SCB's and CAI's witnesses, neither of whom were able to recall with certainty the details of what transpired in undocumented telephone calls occurring well over seven years ago, the judge made the following statements:

"51. Against this backdrop, it seems to me that the appropriate approach for this court to adopt in an attempt to discern that which occurred is to place reliance upon such contemporary documentation as exists, and further to evaluate such evidence on the basis of the intrinsic commercial probabilities in light of the objectively- known, and undisputed, facts."

"79. It seems to me that the overwhelming probability - not least against the background of the non-disputed rejection of the 1st presentation - is that Mr Wong [SCB's checker] made it clear, with the words, or words to the effect that he says he used, that these documents once again were rejected upon the occasion of this second presentation, and that these words not only were uttered, but were understood at the time by Mr Law [CAI's staff] as evincing a clear and unequivocal rejection of the presentation, and that the documents were being retained by SCB at the disposal of the presenter."

Issues to note

Without going into details of the disputed facts, the following may be noteworthy for trade finance practitioners:

1. May a rejection notice be given by telephone? Does telecommunication include telephone as prescribed in sub-article 14(d)? In Hing Yip Hing Fat Co. Ltd. v. The Daiwa Bank Ltd. [1991], the Hong Kong court held that telecommunication includes telephone calls, though it might be hard to prove. The judge held the view that if telecommunication, whether by phone, fax or telex is possible, then this means of communication ought to be used so that the beneficiary knows of the discrepancies as soon as possible. Accordingly, the judge suggested that a telephone call could have been used to notify the discrepancies and be followed up with a written notice.

2. How about notifying the discrepancies by fax and following up with a telephone call, as happened in this case? In the present case, the judge decided that the combination of the faxed advice plus the telephone call was sufficient, as a matter of law, to constitute a valid notice of rejection pursuant to the requirements of article 14 of UCP 500, and thus in the present instance there was a valid notice of rejection.

The judge agreed with CAI's comments that SCB's practice ran an obvious commercial (and evidentiary) risk. However, this did not mean that the mode of notice of rejection adopted by SCB was necessarily invalid and of no effect. It appeared that SCB, though it won the case, also paid a price, as this litigation lasted for seven years, a cost and time-consuming exercise.

What is the spirit of UCP 500 article 14? In the writer's view, it is to ensure that an issuing/confirming bank acts diligently and efficiently to protect the interests of the beneficiary. The beneficiary is entitled to know, within a reasonable time, why the documents are rejected, what the discrepancies are and where the documents are so that it may decide whether to amend the documents or otherwise to dispose of the cargo without delay.

In the present case, the key duty of the confirming bank was to advise the presenting bank of the relevant discrepancies so that the beneficiary could amend the documents accordingly. Furthermore, it is clear that the confirming bank was not prepared to accept the documents by sending the discrepancies list followed by a phone call. Otherwise, it should have effected payment instead of advising and taking all the subsequent actions visà- vis the presenting bank.

Since the presenting bank already provided the documents disposal instructions in its covering letters, the confirming bank was therefore not required to address this issue in its rejection notice. ICC Banking Commission Opinion (R 427) generally appears to hold a similar view: "By sending the fax message and instigating the subsequent telephone conversation, the confirming bank has met the requirement of sub-Article 14(d)(i) in advising the discrepancy(ies) by telecommunication."

Sub-article 14(d) states that if the issuing bank and/or confirming bank decides to refuse the documents, it must give notice to that effect by telecommunication. Accordingly, in the writer's view, if the presenting bank clearly understands from the issuing/confirming bank that the documents are discrepant and the issuing/confirming bank is holding documents at the disposal of the presenting bank instead of effecting payment, as admitted by CAI's staff in cross examination, it is inconceivable how Total Energy could argue that such actions could be interpreted as an acceptance of the presented documents instead of a rejection. The highly technical argument advanced by Total Energy was obviously against the spirit of article 14 as well as common sense.

Prudent practice

In this case, two of the witnesses of fact, the document checkers of CAI and SCB, were no longer working at their respective banks and were subpoenaed to give evidence. Neither of them could recall with certainty the details of their conversations. The potential for confusion was compounded by the fact that telephone calls between checkers at their respective banks occurred frequently in the normal course of their daily professional routines.

The lesson is that it is prudent for banks to ensure that (i) messages between banks should, to the extent possible, be sent in writing by telex or SWIFT showing the word "reject" or "refuse", etc., and (ii) verbal communications between banks/clients should be properly documented so that in the event of dispute, these can be produced as evidence in court.

Other remedies

It is not entirely clear how the buyer in India was able to obtain delivery of the cargo absent production of any original bills of lading, which were held by the beneficiary at all times. There are several possibilities:

- The buyer's banker could have issued a shipping guarantee undertaking to indemnify the carrier for releasing the cargo without production of any original bill of lading. If that were the case, Total Energy could have lodged a claim against the carrier for misdelivery of cargo. The carrier could then claim on the buyer's banker under the shipping guarantee.

- Assuming the relevant bills of lading were issued by the shipowner, who released the cargo to the buyer without production of any original bill of lading nor obtaining any shipping guarantee from the buyer's banker, Total Energy could have claimed against the shipowner for misdelivery of cargo and could have also considered arresting the vessel as security for the claims of misdelivery of cargo.

- The relevant bills of lading could have been issued by the charterer who, of course, would not need the bills of lading issued by itself for obtaining delivery of the cargo. In that case, Total Energy could have only claimed against the charterer, which may or may not be a company with substance.

Total Energy was undoubtedly entitled to claim against the buyer in India for its having obtained the cargo without payment. There is no indication in the judgement whether Total Energy sued the buyer in India. However, it is not always an easy task to litigate in a foreign country, and it can take years to complete the legal proceedings. This might explain why Total Energy decided to claim against the confirming bank in Hong Kong on highly technical grounds.

The writer holds the view that the court's decision is not only reasonable but makes commercial sense. Accordingly, parties may have to think twice before instituting legal proceedings on purely technical grounds.

King-Tak Fung is a banking partner of DLA Piper specializing in international trade law and practice, a member of the ICC Consulting Group on the UCP 500 revision and author of Leading Court Cases on Letters of Credit published by ICC Publishing (see below).

His email is kingtak.fung@dlapiper.com