by Jim Barnes

A New York court recently held that the Banco Santander case was effectively undone by the revisions introduced in UCP 600. The case, Fortis Bank (Nederland) N.V. v. Abu Dhabi Islamic Bank 1, is of interest to L/C bankers for its discussion of the effect of UCP 600 on Banco Santander. It is also of interest because it is among the few reported cases involving a "synthetic" or "structured" L/C transaction in which an exporter's or importer's access to 360-day L/C financing is re-directed to a bank.

The confirmation

The defendant bank ("ADIB") advised and confirmed a USD 40 million L/C issued by Bank Awal on the application of Bank Awal's parent company group (the Saad Group). ADIB sent its L/C confirmation to Fortis Bank by SWIFT MT 710. It included a description of goods and permitted places of shipment and destination. It also required presentation of copies of commercial documents (no originals) and included additional conditions that essentially waived all discrepancies other than credit amount and credit expiry. It entitled Fortis Bank to reimbursement at maturity (360 days after acceptance of time drafts drawn by the beneficiary, Bunge, on Fortis Bank) against Fortis Bank's authenticated SWIFT message to ADIB that Fortis Bank had received a complying presentation and forwarded the documents to the issuing bank (not to ADIB). Fortis Bank advised the confirmed L/C, collected ADIB's USD 500,000 confirmation fee, and exchanged SWIFT messages with ADIB as to its negotiation of a complying presentation and reimbursement at maturity.

The fraud defence

Before maturity, it appeared that the Saad group, including the applicant and issuing bank, were in deep financial and other difficulties. At maturity, ADIB refused to reimburse Fortis Bank. ADIB claimed that it had been defrauded by the issuing bank and by the beneficiary and by Fortis Bank as well, because the L/C-financed "synthetic" (or "structured") underlying obligations that had no nexus to any actual export commodity transaction. There was evidence that the L/C might have provided finance to Bank Awal (or its affiliated applicant) and might not have financed the export-import transaction evidenced by the copy documents required by the L/C. Two well-known experts, Pottengal Mukundun and Vincent O'Brien, testified as to the peculiarity of the L/C and its apparent use to raise liquidity rather than to finance the export-import transactions referenced in the L/C.

The court opinion quotes extensively from Mr O'Brien's testimony. He said that, based on his experience, it was probable that Fortis Bank discounted its 360-day acceptance, and Bunge transferred the discounted funds it received from Fortis Bank to Bank Awal, with the ultimate effect of providing 360-day financing to Bank Awal (or its affiliated applicant) on terms indirectly supported by ADIB's L/C confirmation. (Presumably, such financing was related to an in-transit purchase and resale of the goods that Bunge arranged with Bank Awal or its affiliated applicant.) He concluded that such financing is "dressed up" as trade finance because of the generally lower-risk nature of trade finance and its simplicity (e.g., in the documentation of inter-bank obligations).

ADIB also argued that, even if Fortis Bank was not itself engaged in fraud, it could not avoid ADIB's fraud defence. ADIB relied on Banco Santander SA v. Banque Paribas2, in which a confirming bank that incurred and then discounted its own deferred payment undertaking was held to bear the risk of beneficiary fraud established thereafter, but before the maturity date.

The New York court's decision

The court specifically stated that ADIB's reliance on Banco Santander was misplaced in light of changes made in UCP 600. In the Banco Santander case, the English court concluded that under UCP 500 a bank nominated to incur a deferred payment undertaking was not authorized to prepay it. In the New York case, the L/C and confirmation nominating Fortis Bank3 were subject to UCP 600. UCP 600 subarticle 12 (b) added such a right of prepayment that was missing in UCP 500. Accordingly, the New York court concluded that "Because of such revisions, [Banco Santander] has no binding authority." The court also rejected ADIB's fraud defence, essentially on the ground that ADIB should have understood the unusual nature of the L/C and its reimbursement obligation as confirming bank, based on the text of the confirmed L/C, and from its pre-issuance correspondence with the beneficiary and Fortis Bank.

This case was decided on summary judgment. Essentially, the court determined that Bank Awal's sole defence of fraud could not be established as against Fortis Bank, that there was no basis for allowing Bank Awal to discover what Fortis Bank knew about the underlying transactions or even to obtain copies of the documents received and forwarded by Fortis Bank, and that there was no reason to delay ordering Bank Awal to honour its confirmation.

The decision is important and welcome in its application of the fraud exception and UCP 600 on the independence of a nominated bank's reimbursement rights.

Regulatory issues

The court's opinion is focused on the enforceability of a confirming bank's obligations under letter of credit law and practice and does not discuss any possible regulatory issues associated with an L/C confirmation that obscures the nature of the underlying obligation to be satisfied by honour. Regulators might question, for example, whether this or similarly structured L/C obligations qualify as trade finance, Islamic finance or insurable commodity export finance. Regulatory questions either would not arise, or would arise differently, if the L/C and L/C confirmation were drafted as an ISP98 confirmed standby calling for a beneficiary's statement that the applicant was obligated to pay the beneficiary the amount demanded, with or without further identification of the underlying obligation. That confirmed standby structure would clarify and simplify the regulatory, as well as enforceability issues.

James G. Barnes is senior counsel at Baker & McKenzie LLP,
Chicago, Illinois, His e-mail is

1Index No. 601948/09 (N.Y. Sup.Ct. Aug. 26, 2010). The papers e-filed in the case are available at FCASMain under Case Index No. 601948-2009. The critical opinion in the case is Document #80. The confirmation is reproduced as an exhibit in Document #58-2. (Many of the other papers concern Fortis Bank's efforts to attach ADIB assets in New York and ADIB's efforts to discover documents from Fortis Bank.)

21 All E.R. 776 (Com. Ct. C.A. 2000).

3ADIB's confirmation called for time drafts to be drawn on Fortis Bank, but also stated that the credit was available by negotiation, and the parties to the litigation frequently refer to Fortis Bank as a negotiating bank that negotiated a complying presentation. The court's opinion focuses solely on the fact that UCP 600 mooted Banco Santander and does not consider the possibility that Banco Santander by its terms applies to a bank that has incurred a deferred payment undertaking and not to an accepting or negotiating bank.