Article

by Haluk Erdemol

I refer to the "The UCP in court" article in DCInsight's July-September 2008 issue in which Chang-Soon Thomas Song from South Korea discussed "Court decisions and standard banking practice" with reference to the famous Santander case from 1999. Mr Song concluded his discussion by a clear implication that the Korean Supreme Court decision on a similar litigation was more tenable than that of the English court, because the Korean one has demonstrated a closer approach to the best practices in the field.

I am unable to agree with Mr Song's opinions, and I will express mine by pointing out the issues with which I disagree.

Best practices

In cases of discounting/negotiating, the issue of whether a nominated/confirming bank should be protected from beneficiary fraud is not directed by best market practices; it is governed by the UCP itself to which the credits are subject, the UCP being the rules most applicable to credits due to their incorporation in the credits.

Authorization to negotiate

In UCP 500, discounting/negotiating is "the giving of value". Sub-article 10 (b) (ii) of UCP 500 states: "Negotiation means the giving of value for draft(s) and/or document(s) by the bank authorized to negotiate [emphasis added]."

Were the nominated banks mentioned in both court decisions authorized to negotiate? They were not.

Two types of credits

Mr Song states that "from its inception the deferred payment credit was an acceptance credit" and resumes his discussion by considering both types of credit to be one with respect to discounting/ negotiation. I do not agree. The deferred payment credit is "a creature of relatively new invention", as noted in the Santander decision.

In the case of an acceptance credit, the draft, once accepted by the issuing or confirming bank (the latter's acceptance is not mentioned in Mr Song's article), becomes isolated from the shipping documents and the underlying credit and is treated on its own as a negotiable instrument that may circulate in the acceptance market or elsewhere, free from any concern regarding fraud by the beneficiary of the credit. In fact, that is why the last paragraph of the English court decision states: "If a confirming bank in the position of Santander wishes to be free to give value for documents when it accepts documents, it can do so either by insisting on the use of an acceptance credit...".

Therefore, analyzing the question of discounting under a deferred payment credit by taking an acceptance credit as an equivalent would be incorrect. For that reason, the sentence in the last paragraph of Mr Song's article, reading "despite the presence or absence of the bill of exchange" is not justified, because of the difference between these types of credits.

Accepting bank as debtor

Mr Song states that "... once the bill of exchange was accepted by the issuing bank [again, it may be the confirming bank] it is as good as gold [this depends, of course, on the creditworthiness of the accepting bank] since the accepting bank guaranteed its payment at maturity [my insertions]." But the accepting bank is not the guarantor, it is the debtor.

Article 15

Mr Song refers to the article 15 of UCP 500 and states that the negotiating bank negotiating a forged bill of lading should be protected by this article, which was applicable at the time of the Santander case. This implies that the English court did not take the article into consideration when issuing its verdict. In my opinion, article 15 was/is applicable only when a nominated/confirming bank acts in accordance with its nomination by the issuing bank whereas, in this case, the nomination was not strictly adhered to.

Conclusion

Finally, I suggest that the gist of the matter is that a bank nominated to negotiate is, by the definition of "negotiation", a bank authorized to give value for, or to purchase, a draft and/or documents under a complying presentation, and that Santander was not authorized to do so. This issue may not have been taken into consideration in the Korean court case, and its decision may have been issued based on the best local practices.

However, during the lifetime of UCP 500, in the absence of any governing UCP rule, relying on such "best practices" - that might vary from one country to another - would not be to the benefit of all those concerned. It is contrary to the aim of the UCP, which is to create uniformity of customs and practice.

Haluk Erdemol's e-mail is herdemol@yahoo.com