Article

by Roger Fayers

In Oliver v Dubai Bank Kenya Ltd1 the commercial court was concerned with a standby letter of credit which incorporated the UCP, and it raised the question of whether one of the documents against presentation of which payment was to be made could be disregarded as a nondocumentary condition. The so-called "disregard NDC rules" are contained in sub-article 13 (c) of UCP 500 and now in a slightly altered form in sub-article 14 (h) of UCP 600. In this article I will explain how (what was then) sub-article 13 (c) of UCP 500 was analyzed by the court. The truth of the matter is that it was not a "nondocumentary" case at all; it was a case about "documentary" conditions.

Mr Oliver's arrangement with the bank

The facts are quite commonplace. Mr and Mrs Oliver wished to sell their company and, in respect of the deferred portion of the purchase price, the purchasers arranged to provide them with a standby letter of credit incorporating UCP 500. Since the real purpose of the deal was the acquisition of property and a business, Mr Oliver was required to give certain warranties2, and the letter was conditioned to be payable against certain documents. One of these (condition 3) was a telex to be issued by the bank itself confirming Mr Oliver's "fulfilment of [his] commitments towards [the purchasers]".

There was a dispute whether the Mr Oliver was in breach of warranty, and the purchasers accordingly gave no instructions to the bank to issue the telex and so this confirmation was never issued. The letter was due to expire within a few days, and Mr Oliver sought immediate relief from the court. He requested either that the court make a declaration that condition 3 be disregarded pursuant to sub-article 13 (c) or issue an order that, since the bank was in breach of its obligation to issue the telex, it do so. In the alternative, he requested that the court itself issue the required telex3.

Step-by-step

This sort of case is approached a step at a time. The first is the incorporation of UCP. This is not necessarily a foregone conclusion, but I need say no more about it because it was incorporated by reference into the Dubai bank's credit. I do need to say something about the second step, which is the English court's general approach to the application of its articles when it is so incorporated.

The UCP is not treated as a statutory code whose articles will automatically apply in toto. Rather, it is looked upon as a convenient formulation of customs and practices which the parties can use. This being so, "the obvious place to start, when searching for a contractual term material to a particular obligation, is the express agreement between the parties. If it is found that the parties have explicitly agreed such a term, then the search need go no further, since any contrary provision in UCP must yield to the parties' expressed intention. If on the other hand the agreement is silent in the material respect, then recourse must be had to UCP, and if a relevant term is found there, that term will govern the case4."

The material contractual term here was condition 3, and the relevant UCP provision was sub-article 13 (c). But before one deals with resolving any clash between these provisions it has to be considered whether the article applies at all. So, there is preliminary question: is the particular condition a non-documentary one? In the Oliver case, was condition 3 a NDC? If not, there is nothing for sub-article 13 (c) to "disregard".

A brief word about sub-article 13 (c) itself. It was introduced into UCP 500 to preserve the first rule of documentary credits, that the parties deal in documents, not facts. Cases had arisen in which conditions required a state of fact to exist, but which seemingly required the bank to determine the existence of that fact without calling for a specific document, the examination of which the bank could make that determination5. Various solutions were considered by ICC as a means of dealing with these types of cases, and the one adopted was that expressed in sub-article 13 (c).

The judgment in Oliver

On behalf of Mr Oliver, arguments were raised as to the meaning of condition 3 and as to whether it should be disregarded because of article 3 and sub-article 13(c). A number of questions arose.

1. What was the correct interpretation of condition 3?

What was the meaning of the phrase in condition 3 "[Mr Oliver's] commitments towards [the purchasers]"? For Mr Oliver it was contended that it referred only to his obligation to transfer the shares. The bank, on the other hand, contended that it referred to all his commitments, in particular to his obligation to fulfil the warranties. The judge concluded that the ordinary and natural meaning of the words "commitments" did not justify Mr Oliver's restrictive interpretation, the more so because the plural "commitments" was used after the singular "obligation" in the preceding condition. Accordingly, had the telex been issued, it would have had to certify fulfilment of both these obligations.

2. Should condition 3 be disregarded because of sub-article 3 (a)?

For Mr Oliver it was contended that condition 3 should be disregarded because of sub-article 3 (a). It contravened the autonomy principle embodied in that article and in article 4 that the performance of the contract giving rise to the credit is independent of the performance of the credit. The argument was that the condition required the bank to be concerned with the share sale agreement, and this was the more obviously so if it were to be read (as indeed it was) as also covering Mr Oliver's contractual obligations, because not only did it require the bank to pay against the presentation of the telex, but also to put the bank under an obligation to consider and decide whether it should issue the telex and then to issue it if it did decide that it should to do. The judge disagreed. In his words: "None of this seems to me to make out the argument that condition 3 offends article 3[a] of the UCP. Article 3[a] stipulates that the fact that the contractual rights and obligations of the applicant have been breached does not relieve the bank of its payment obligation ... But the bank does not seek to rely upon any claims or defences that [the purchasers] or the applicant might have - either to answer a case that it is in breach of its obligation to pay or to answer an allegation of breach of some obligation concerning issuing the contemplated telex."

3. Should condition 3 be disregarded because of sub-article 13 (c)?

The judge observed that article 13 was directed to the bank's examination of documents stipulated in the credit, and that the essential nature of a standby credit was that payment be made against stipulated documents. Paragraph c was concerned to deal with the case where an attempt was made to make a payment (or equivalent) obligation conditional upon something other than a documentary condition. Hence, it provided that if a condition does not state the relevant "stipulated document", it is to be disregarded. The argument here on behalf of Mr Oliver was that because condition 3 imposed on the bank an obligation to issue the telex, it did give rise to a "condition without stating the document( s) to be presented herewith" and so should be disregarded pursuant to that paragraph.

But the letter of credit in this case did state the documents to be presented, viz: the draft (properly marked), the certificate and the telex referred to in condition 3. As the judge put it: "The express terms of the letter of credit do not make, or purport to make, the obligation to pay conditional on anything other than a documentary condition." Accordingly, sub-article 13 (c) had no application, and condition 3 could not be disregarded.

Postscript

Many argue that banks should keep out of the business of having to determine facts, and it may well be that there are sound policy reasons for them "ignoring NDCs". But business is business, as they say, and this of itself can be no reason for changing a bargain that parties have deliberately made and for altering the wording of a special term they have agreed upon from one that clearly says one thing into one that says nothing at all. The reality in this case was that, between them, Mr Oliver, the purchasers of his company and their bank, the Dubai Bank Kenya Ltd, had negotiated a financial arrangement that involved an undertaking that included condition 3. Justice Andrew Smith had to resolve the dispute that arose under that contract. This is just what he did.

From the previous article, it is clear that the Oliver case would be differently analyzed and decided in the United States under revised UCC Article 5. Since in some states (most notably New York), there is, I understand, an opt-out provision from the UCC for letters of credit made subject to the UCP, an interesting question arises, viz: would a New York court come to the same conclusion as did the commercial court on a letter of credit issued in the same terms as that issued to Mr Oliver?

Roger Fayers' e-mail is r.fayers@ntlworld.com

1. [2007] EWHC 2165 (Comm).

2. Such warranties related to the accounts of the company, its business activities and its employees.

3. There is power to order this under section 39 of the Supreme Court Act 1981; see Astro Exito SA v Southland Enterprise Ltd [1983] 2 AC 787.

4. Per Mustill LJ in Royal bank of Scotland v Cassa Di Risparmio delle Provincie Lombard [1992] 1 Bank LR 251 at page 256.

5. For an example of a NDC which could now be "disregarded", see Banque Indochine v JH Rayner Ltd [1983] QB 711, a pre-UCP 500 case.