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Copyright © International Chamber of Commerce (ICC). All rights reserved.
( Source of the document: ICC Digital Library )
by King-tak Fung
A bank in Hong Kong issued a transferable L/C to the first beneficiary in Singapore. The L/C was available by negotiation with the transferring bank in Singapore and expired in Singapore on 6 February 2006. It was transferred to the second beneficiary in South Korea. The transferred L/C was also available by negotiation with the transferring bank in Singapore and expired in Singapore on 25 January 2006. The second beneficiary presented the documents that complied with the presentation and expiry date requirements of the transferred L/C to the transferring bank in Singapore on 18 January 2006.
The first beneficiary refused to substitute any documents, and the transferring bank also refused to pass the secondary beneficiary's documents to the issuing bank for payment. (Note: as the second beneficiary failed to arrange the goods inspection as per the sales contract, both the first beneficiary and the applicant suspected it was a fraudulent transaction. The first beneficiary and applicant subsequently confirmed with the surveying company that the inspection certificates presented by the second beneficiary were forged documents.)
The transferring bank returned the documents to the presenting bank in South Korea without giving any reason, but suggested that the presenting bank present the documents directly to the issuing bank in Hong Kong.
The issuing bank received the documents from the presenting bank in South Korea on 2 February 2006 and rejected them on 3 February 2006 on the ground of discrepancies and returned the documents to the presenting bank. On 6 February 2006 (i.e., the expiry date of the master L/C), the presenting bank advised the issuing bank that it had received the revised documents in South Korea and alleged that the relevant presentation was therefore complying.
When the transferring bank refused to handle the documents presented by the second beneficiary on 20 January 2006, where and when would have the transferred L/C expired?
i. in Singapore on 25 January 2006 (i.e., the expiry place and date of the transferred L/C)?
ii. in South Korea on 25 January 2006?
iii. in Hong Kong on 25 January 2006?
iv. in South Korea on 6 February 2006?
v. in Hong Kong on 6 February 2006 (i.e., the expiry place and date of the master L/C)?
Under UCP 500 and UCP 600, an L/C is available with both the issuing bank and the nominated bank. Accordingly, if the nominated bank refused to accept the nomination, the relevant L/C would be available with the issuing bank, which is obligated to effect payment under the L/C provided it received compliant documents on or before the latest presentation date or expiry date of the transferred L/C, whichever is earlier.
In this case, as the transferring bank refused to accept its nomination and to present the documents for the second beneficiary to the issuing bank, the transferred L/C therefore became available with the issuing bank in Hong Kong and expired in Hong Kong on 25 January 2006 (i.e., the expiry date of the transferred L/C). Since the first presentation was only received by the issuing bank in Hong Kong on 1 February 2006, seven days after the expiry date of the transferred L/C, the issuing bank was therefore entitled to refuse the presentation on the ground of late presentation. Consequently, the L/C expired.
The only possible exception to the above scenario would have occurred had the first beneficiary transferred the date and place of the expiry of the L/C from Singapore to South Korea as provided in sub-article 48 (j) of UCP 500. In that case, the transferred credit would have expired in South Korea on 25 January 2006. However, since the transferring bank did not transfer the date and place of expiry to South Korea, the transferred L/C expired in Hong Kong on 25 January 2006. Accordingly, the presentation of revised documents by the second beneficiary to its banker in South Korea on 6 February 2006 was non-complying, as it clearly went beyond the latest presentation and expiry date (i.e., 25 January 2006) of the transferred L/C. The position under UCP 600 (sub-article 38 (j)) would have been the same.
Is it arguable whether the transferred L/C expired on 6 February 2006 in Hong Kong (i.e., the same expiry date of the master L/C)? It is well settled that a second beneficiary is only entitled to the rights or interests transferred to it under the transferred L/C, nothing more.
Consequently, if the first beneficiary had decided not to substitute documents, the second beneficiary would only have been entitled to the transferred L/C dollar amount but not the full L/C amount (sub-article 48 (i) of UCP 500). It follows that the second beneficiary was not entitled to any rights or interests that had not been transferred to it under the transferred L/C, including the L/C amount and the expiry date. The position under UCP 600 (sub-article 38 (i)) would have been the same.
This is further supported by the fact that a second beneficiary generally has no knowledge of the terms of the master L/C, while the issuing bank can obtain the details of the transferred L/C from the transferring bank. It would obviously constitute a double standard if the second beneficiary were entitled to utilize the expiry date stipulated in the master L/C, but not the full amount of the L/C.
Reaction to forgeries
What should the transferring bank and issuing bank have done when the first beneficiary and applicant informed them respectively that the inspection certificates presented by the second beneficiary were forged documents? The banks should have asked their respective clients to produce the relevant evidence of fraud. If there is clear and obvious evidence to support a fraud allegation, it is a good practice for banks to alert other related parties in order to stop the alleged fraud before it is too late. For example, it would have been advisable for the transferring bank to inform the issuing and presenting banks that, based on the letters issued by the surveying company, the first beneficiary suspected the inspection certificates were fraudulent. This could have prevented the presenting bank from being deceived by the second beneficiary and also stopped the presenting bank from claiming that it had negotiated the documents in good faith and without notice of fraud.
Note that under UCP 600 a nominated bank that has effected a negotiation, prepayment, purchase or payment in good faith and without notice of fraud at the time of payment is protected and is entitled to seek reimbursement from the issuing bank, even if the presented documents are subsequently proved to be forgeries.
So long as there is clear and obvious evidence of fraud and the notice to other banks is carefully drafted, the risk of defamation will be minimal. In any event, if it turned out that the inspection certificates were forged documents, there would have been no defamation issue at all.
Could the documents be negotiated?
Could the presenting bank have negotiated the documents presented by the second beneficiary and sought reimbursement from the issuing bank in its own name? Since the transferred L/C was available with the transferring bank in Singapore by negotiation, the presenting bank in South Korea had no right to negotiate the documents presented by the second beneficiary under the L/C. Of course, it could have made a separate loan to the second beneficiary, but this would not have given the presenting bank any status or right to claim reimbursement from the issuing bank in its own name under the transferred L/C.
The presenting bank subsequently assigned the transferred L/C rights and benefits to an export insurance company in South Korea. Would the export insurance company obtain a better title than the presenting bank in lodging its claim against the issuing bank?
Although article 49 of UCP 500 permits assignment of L/C proceeds, it is well settled in English and Hong Kong law that an assignment of interest is subject to equity (i.e., an assignee cannot recover more than the assignor, and the defences of the debtor against the assignor are also available against the assignee.)
Accordingly, in the present case, the issuing bank was not obligated to reimburse the presenting bank, because there were discrepant documents, a late presentation and an expired L/C. These valid grounds of refusal, therefore, were also available against the assignee1. As a result, even if the assignment between the presenting bank and the export credit insurance company had been valid, the export credit insurance company would not have been entitled to claim payment or reimbursement from the issuing bank. This is because it cannot recover more than the presenting bank, which, as explained above, was not entitled to any payment under the transferred L/C.
The above views were, in the main, endorsed by the ICC DOCDEX experts (DOCDEX Decision No. 272) and the District Court of Seoul. Accordingly, the legal actions taken by the export insurance company against the issuing bank in South Korea failed. The presenting bank was ordered by the court to refund the credit insurance company
King-tak FUNG is a Banking Partner of Eversheds Hong Kong, a member of the ICC Consulting Groups on the UCP 500 revision and Forfaiting and author of Leading Court Cases on Letters of Credit (www.iccbooks.com) and UCP 600 - Legal Analysis and Case Studies (www.peer.com.hk). His e-mail is email@example.com
1Banco Santander SA v Banque Paribas  Lloyd's Rep. Bank 165 (England).