by King-Tak Fung

It is not uncommon for an L/C to provide for T.T. (telegraphic transfer) reimbursement of the entire drawing amount while a presenting bank may authorize the issuing bank to release the presented documents to the applicant against payment of a reduced dollar amount.

In a recent Hong Kong case, the beneficiary sued the issuing bank on two major grounds:

1. By issuing an MT752 message to the presenting bank authorizing the latter to claim reimbursement from the reimbursing bank in New York, the beneficiary said the issuing back was deemed to have accepted the presented documents, which precluded the issuing bank from cancelling such a reimbursement authorization and its subsequent rejection of the documents by way of an MT743.

2. The beneficiary also claimed that the presenting bank's authorization to the issuing bank to release the presented documents at a lesser dollar amount was only given to mitigate the loss of the beneficiary, which should not preclude the beneficiary from subsequently recovering the shortfall from the issuing bank.

The plaintiff obtained a summary judgment against the issuing bank in the Court of First Instance. The issuing bank then appealed for leave to defend. In this short article, the author will only focus on the second issue (which was the crux of this case at the Court of Appeal) and explore how to mitigate the relevant risks.


On 22 September 2008, the presenting bank sent the following FIN 799 Free Format Message to the issuing bank via SWIFT:

"We received instructions from the beneficiary [as] follows: 'The value of the bill has been reduced to USD 5,122,240.00 instead of USD 7,185,105.43. Kindly release the documents to the applicant upon receipt of USD 5,122,240.00 only.' Upon payment, please remit the proceeds to our account with Deutsche Bank Trust Company Americas New York as per our covering schedule dated August 4, 2008.' Regards"

The lower court judge's decision was summarized by the Court of Appeal as follows: "

The [lower court] judge came to the conclusion that, in the light of the MT752, the defendant was obliged to honour the letter of credit either by paying at sight or by authorising the Bank of America to accept bills of exchange drawn on it by the beneficiary. In doing so the judge held that the MT734 could not be taken out of context and read in isolation. He held that it contradicted the MT752 and that the defendant was attempting to countermand the MT752 by issuing the MT799. Under Article 15a of UCP 600, once the bank had represented that it would honour the presentation as being compliant it was bound to do so. He held that MT752 was a 'binding outward manifestation by the bank that it has determined a presentation to be compliant'.

It was also argued that the message sent on 22 September 2008 that the bill had been reduced, had led the defendant to believe that the amount claimed by the plaintiff from the defendant under the letter of credit had likewise been reduced. The judge rejected that argument on the basis that the defendant had paid a lesser amount to the plaintiff as a result of the plaintiff agreeing, in mitigation of its loss, to accept a lower rate of payment from its purchasing customer. The judge said that the defendant paying a lower amount could not amount to any variation of the contract between the defendant and the plaintiff evidenced by the letter of credit. The judge continued that he could not see that the message of 22 September 2008 was some sort of representation that the plaintiff would not later sue the defendant for failure to comply with its obligation under the letter of credit and UCP 600. Furthermore, the judge was unable to read the 22 September message as such a representation whether one read the reference in the message to the 'bill' as referring to the bill of exchange presented by the plaintiff or simply as a reference to the 'invoice bill for the cargo'."

Key issues

1. What does the word "bill" refer to - L/C drawing amount or invoice amount?

There are two possible interpretations of the word "bill". One refers to the bill of exchange drawn under the L/C (i.e., the L/C drawing amount), while the other refers to the invoice bill for the cargo payable by the buyer. The latter interpretation was favoured by the lower court judge.

In the author's view, it is not advisable to use the word "bill" alone, as this would be highly confusing. In order to better understand the meaning of the word "bill", one has to put it back into the context of the covering schedule of the presenting bank. The covering schedule states:

"We forward the following documentary bill drawn under your L/C...

Bill Amount : USD 7,185,105.43...

Usance bill payable at sight basis...

This bill is subject to UCP 600 ... ."

All of the above references to the word "bill" point to the single conclusion that the word "bill" used in the message dated 22 September 2008 must have referred to the L/C drawing amount, but nothing else. Obviously, it would be ideal if the presenting bank could simply have stated the "drawing amount" or the "bill of exchange presented under the L/C", which also specified the exact drawing amount. If the bank had done so, this time-consuming and costly litigation could have been easily avoided.

2. Waiver and estoppel

The beneficiary contended that the presenting bank's authorization to the issuing bank to release the documents to the applicant at a reduced dollar amount was only given to mitigate its loss, which should not preclude it from subsequently recovering the shortfall from the issuing bank. The beneficiary also produced a final invoice addressed to the applicant, which stated that the invoice was issued for loss mitigation purposes and without prejudice to its rights. However, the issuing bank argued that it was neither privy to the negotiations between the beneficiary and the applicant, nor was it informed of the basis upon which the beneficiary had agreed to accept the reduced sum.

Admittedly, it is a common practice for an issuing bank to rely on the authorization of the presenting bank in disposing of the presented documents, especially when the beneficiary and applicant have agreed to a price reduction. The crux of this case was whether the message dated 22 September 2008 constituted a waiver on the part of the beneficiary to demand the full drawing amount, or an estoppel which would prevent the beneficiary from going back on its promise to accept a reduced sum.

To establish estoppel, the issuing bank must prove the following three elements1:

- that there was a representation to the issuing bank from the beneficiary that the latter had duly authorized the release of documents at a reduced dollar amount;

- that the issuing bank relied upon this representation; and

- detriment, i.e., that the issuing bank suffered damages by relying on the representation.

It appears that all three elements were present in the case. The beneficiary, through the presenting bank, did expressly authorize the issuing bank to release the documents to the applicant for USD 5,122,240.00 only. The issuing bank did act upon such an express instruction and did release the documents against the payment of USD 5,122,240.00 by the applicant. It then suffered damages as the beneficiary subsequently claimed against it for the shortfall.

Accordingly, the three judges at Court of Appeal unanimously held that the message of 22 September did convey to the issuing bank the idea that the beneficiary was prepared to accept only USD 5,122,240 in satisfaction of its claim. The judges unanimously decided that by effecting payment of the reduced sum and releasing the documents to the applicant at the beneficiary's specific request, the issuing bank had at least arguably acted to its detriment, which should discharge it from all liabilities under the L/C. Leave was therefore granted to the issuing bank to defend its case.

Ways forward

To avoid similar problems, before acting upon any payment reduction instructions, the issuing bank should consider demanding that the instructing party expressly state in its authorization that the reduced payment to be effected under the L/C will constitute a full and final settlement of all indebtedness owing by the issuing bank to the relevant parties under the L/C and that it will discharge and release the issuing bank from all claims under the L/C. More prudent bankers can further insist on a confirmation that payment of such a reduced sum will also constitute a full and final settlement under the sales contract between the beneficiary and applicant2.

King Tak FUNG is a Banking Partner of Eversheds Hong Kong, a member of the ICC Consulting Group on the UCP 500 revision and author of Leading Court Cases on Letters of Credit ( and UCP 600 - Legal Analysis and Case Studies ( His e-mail is

1. Fung King Tak, Leading Court Cases on Letters of Credit, p. 53.

2. Readers should consult their legal counsel on the exact wording of the authorization.