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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by Roger Fayers
by Roger Fayers
The decision in Fortis Bank SA v Indian Overseas Bank1 should be of interest to most DCInsight readers. It has something of nearly everything - UCP 600, DOCDEX rulings, Opinions of the ICC Banking Commission and banking practice.
Once again this was a case that arose as a preliminary issue before the court. Fortis Bank SA (Fortis) and Stemcor UK Ltd (Stemcor) were claimants in an application for summary judgment under five L/Cs issued by the Indian Overseas Bank (IOB). Judgment had been given in previous proceedings2 against IOB, and the present proceedings related to one of the bank's defences that the earlier court had held should be determined at trial as a separate issue, viz what was called the "preclusion point".
Stemcor sold scrap metal under five contracts to a purchaser in India. IOB issued five L/Cs, each of which was made available by negotiation with Fortis' London branch. Each of the L/Cs incorporated UCP 600. Pursuant to requests by Stemcor, Fortis added its confirmation to three of the L/Cs (Nos 1-3). Stemcor made drawings under all five credits. The documents under Nos 1-3 were negotiated and honoured by Fortis and then forwarded to IOB. Those presented in respect of Nos 4-5 were also forwarded to IOB. In most cases IOB rejected the documents and, in all cases, refused to authorize reimbursement of Fortis. Accordingly, Fortis applied for summary judgment under L/Cs 1-3 as confirming bank (alternatively nominated bank), and Stemcor applied for summary judgment as beneficiary under L/Cs 4-5 (which were not confirmed) issued by IOB. In turn, IOB disputed the two claimants' entitlement to judgment.
The preclusion point
This point arises out of sub-article 16 (f) of UCP 600, more specifically, in the present case, to the situation in which an issuing bank determines that a presentation does not comply, and in its sub-article 16 (c) notice states either (pursuant to sub-paragraph (iii) (c)) that it is returning the documents (a "return " notice), but then fails to arrange the reasonably prompt return of the documents to the presenter - or states (pursuant to subparagraph (iii) (a)) that it is holding the documents pending further instructions from the presenter (a "hold notice") - but then fails to arrange the reasonably prompt return of the documents when so instructed by the presenter.
In either or both of these cases, the question that arose was whether IOB had failed to act in accordance with the provisions of article 16 so as that under sub-article (f) to preclude it "from claiming that the documents in question [did] not constitute a complying presentation".
The bank's treatment of the documents
Only a brief flavour of the various notices, messages and instructions that passed between the two banks can be given here. IOB rejected some of the drawings under L/Cs 1-3, accompanying them with SWIFT messages stating "RETURN" - the code word that equates to the option under sub-article 16 (c) (iii) (c). To the earliest of these, Fortis responded urging IOB not to return the documents but to accept and pay.
In other messages between the banks, Fortis instructed IOB to continue to hold the documents and not to return them. IOB, in turn, rejected other presentations and served a notice stating "HOLD" - the code word that equates to the option under sub-article 16 (c) (iii) (a). IOB also stated that it was trying to obtain the applicant's acceptance of the documents.
Subsequently, Fortis requested that the bills of lading be endorsed to Fortis' order and returned to its office urgently. Despite Fortis' further requesting confirmation of IOB's endorsement and return of the bills, nothing was heard from IOB until IOB replied to the effect that it had had no authority to do so from the shipper/beneficiary, and that it continued to hold the documents at Fortis' risk and responsibility. On receipt of this, Fortis told IOB that its failure to return the documents constituted an affirmation of the presentation as complying in accordance with sub-article 16 (f) and, accordingly, that it had no further interest in them.
Two particular periods of delay by IOB in returning the documents were relied on by the claimants: (1) the period immediately following IOB's rejection of those drawings in respect of which IOB had issued "return" notices (amounting to between 89 and 104 days); and (2) the delay followed Fortis' request for IOB's endorsement and return of the documents (amounting to 34 days).
Issues and arguments
The claimants' general point was that IOB, having given a refusal notice in which it stated that it was returning the documents, must then act in accordance with the option it has selected. This meant that it had to act in accordance with what it had stated it would do, and it had to do so with reasonable promptness. IOB's delay in doing this meant that it had failed to act in accordance with the provisions of article 16 and was therefore now precluded from rejecting the documents.
IOB's contention was that the express wording of article 16 imposed no requirement upon an issuing bank to act in accordance with the notice it had given, and that the claimants' argument necessarily involved implying terms into the article that were not there. However, the implication of such a term, it was argued, would involve an insuperable difficulty in terms of establishing presumed intention, especially since the implication was being sought as an addition to an established trade code such as UCP.
Furthermore, the difficulty was particularly enhanced when (as happened between UCP 500 and UCP 600) the code had been amended to remove a similar (but less extreme) provision than that contended for by the claimants. In any event, IOB submitted, the implication contended for was not necessary to give business efficacy to the contract.
Construction and implication of terms
The court favoured an approach looking at the drafters' intent behind the UCP article so as to reflect "the best practice and reasonable expectations of experienced market practitioners". It did not, however, accept that there was an apt analogy between the UCP 600 Drafting Group's Commentary on UCP 600 (in which incidentally Gary Collyer had been involved) and the travaux préparatoires for an international treaty or convention which are, to a limited extent anyway, admissible in English courts as an aid to interpretation. Neither did the court consider admissible the evidence of Mr Collyer as to what was intended by the replacement of article 14 of UCP 500 by article 16 of UCP 600, and why it was written as it was. On the contrary, an objective approach was called for without regard to what may or may not have been subjectively intended by the draftsmen.
On the other hand, the court agreed with both parties that the Opinions of the ICC Banking Commission, whilst not being legally binding as a matter of English law, were to be regarded as having persuasive weight.
As regards implication, the court did not agree with IOB's submission that a court should be wary of implying terms into an international code. Earlier cases had shown that this was something English courts had been prepared to do, applying English law principles.
In its decision, the court found that the proper construction of article 16 was that it did impose an obligation upon an issuing bank to act in accordance with the disposal statement it had made in its sub-article 16 (c) (iii) notice. Such a construction reflected both "best practice" and the "reasonable expectations of experienced market practitioners". The court added that if that was a conclusion which could only be arrived at by implication, it was satisfied that such implication must be made.
"Acting with reasonable promptness"
Having decided (whether as a matter of construction or by implication) that article 16 required IOB to make a disposal statement and then to act in accordance with the statement it had made, it remained to determine whether it had acted promptly enough and for the claimants to prove their case on the facts.
What, then, was IOB's obligation with respect to returning the documents? The court first noted that timely performance was clearly an important consideration in relation to documentary credits, to UCP generally and article 16 in particular. Citing ICC DOCDEX Decision No. 242 on UCP 500, it concluded that the same analysis applied in relation to the comparable obligation under UCP 600. Accordingly, the obligation for IOB to act in accordance with the disposal statement it had made involved an obligation to return the documents "with reasonable promptness". IOB's delay in doing so for a number of weeks following its notice constituted a failure to do so in accordance with article 16, and hence the preclusion under sub-article (f) of that article applied.
What was IOB's obligation with respect to Fortis' instructions that it endorse the bills of lading and urgently return them? The court concluded (distinguishing ICC Opinion R 214) that since Fortis had negotiated the documents under the L/Cs, it was thereby the owner of them and was entitled to request IOB's endorsement. The notice was a valid instruction within article 16 that could not be ignored. IOB should either have returned the documents promptly, or at least queried the instruction and explained why it was unable to do so. By remaining silent and not responding to Fortis' requests for some weeks, IOB had failed to comply with reasonable promptness so that the preclusion under sub-article (f) applied.
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1  EWHC 84 (Comm).
2  EWHC 2303 (Comm).