Parties

Initiator: Bank H (acting in the capacity of Negotiating Bank)

Respondent: Bank G (acting in the capacity of Issuing Bank)

Summary of credit

Type of credit - irrevocable negotiation credit issued subject to UCP 500

- Issuing bank - Bank G

- Advising bank - Bank S

- Negotiating bank - Bank H

- Availability - at sight

Expiry - at the counters of any bank until January 21, 1998

Circumstances leading to the dispute

The Bank G (hereinafter referred to as "the Respondent") issued an irrevocable documentary letter of credit #ABC1234 dated November 3, 1997 on behalf of Company S (applicant) in favour of Company N (beneficiary):

The letter of credit was for USD 881,800 expiring 21 January 1998 and valid for negotiation by any bank in Country H and available against the beneficiary's drafts accompanied by documents evidencing shipment not later than December 31, 1997 of:

1) Commodity: PB16 Carburetor Assy
Quantity: 21,000 pcs
Unit Price: USD16.00/pc CFR City S, Country C

2) Commodity: Outer Assy Primary Clutch
Quantity: 18,000 pcs
Unit Price: USD16.50/pc CFR City S, Country C

3) Commodity: Friction Plate
Quantity: 72,000 pcs
Unit Price: USD 0.90/pc CFR City S, Country C

4) Commodity: Plate Assy Primary Driven
Quantity: 18,000 pcs
Amount: USD 184,000.00 CFR City S, Country C

The letter of credit required the following documentation to accompany the beneficiary's drafts:

- Signed commercial invoices in 4 copies indicating contract number and letter of credit number;

- Full set of clean on board ocean bills of lading made out to order and blank endorsed marked "Freight Prepaid" notifying the applicant;

- Packing list/weight memo in 3 copies showing quantity/gross and net weight for each package and packing conditions.

Bank H (hereinafter referred to as "Initiator") negotiated the set of documents presented by the beneficiary on the full amount of the letter of credit and presented them to the Respondent as issuing bank on 24 February 1998.

The Respondent notified the Initiator by telex on 2 March 1998 that the documents were rejected for discrepancies, the reason being that the description of goods Item 2 in the bill of lading should be: "Outer Assy Primary Clutch" i/o "Outer Assy Primary Clutoh".

Summary of the Initiator's Request

The Initiator contends that the discrepancy raised by the Respondent is not a valid discrepancy.

The Initiator makes reference to sub-Article 37(c) of UCP 500 and asserts that the description of the goods as "clutoh" in the bill of lading is not in general terms inconsistent with the description of the goods in the letter of credit. The Initiator asserts that the misspelling of the word "clutch" as "clutoh" is an obvious typographical error and that there is no danger of the error leading to any confusion or suspicion in respect of the bill of lading.

The Initiator also asserts that the bill of lading correctly described the goods in all other respects and could be plainly linked to the other documents presented and pointed out that no discrepancies had been raised against any of those other documents.

The Initiator refers to the following decisions and opinions in support of their claim:

Opinion No. R209 in ICC publication no. 565 (in respect to a typographical error);

Case decision No. 23 in ICC publication no. 535 and Opinion No. R251 in ICC publication no. 596, as well as the English court judgment in the case of Banque de L'Indochine v. Rayner (in respect to the linkage between documents as to compliance and consistency with the description of goods under a letter of credit).

Summary of the Respondent's Answer

The Respondent maintains that the letter of credit, which stipulated that documents must be "in full compliance with the terms and conditions of the credit" requires documents presented thereunder to be in strict compliance, particularly in respect of the description of the goods.

Further, the Respondent asserted that the Initiator had not satisfied its duty to examine the documents with reasonable care as required under sub-Article 13(a) of UCP 500.

The Respondent also furnished a lengthy "Expert's Report" which alluded to fraud, professional negligence, the doctrine of full compliance, additional discrepancies and many other issues which were well outside our scope of reference as the DOCDEX Appointed Experts under the DOCDEX Rules.

Decision

We note that the letter of credit was issued subject to UCP 500. While it appears that there may be many other factors raised in the "Expert's Report" furnished by the Respondent, such as the suggested non-existence of the shipping company issuing the bill of lading, the beneficiary and the cargo, the fact remains that in documentary credit operations, banks deal in documents (see Article 4 of UCP 500), and other external factors should not be considered in the absence of exceptional circumstances, e.g., where one or more banks are, at the relevant time, aware of fraudulent activities.

Accordingly, the central issue for our determination is whether the Respondent was entitled to reject the documents presented by the Initiator for the reason given in its rejection notice dated March 2, 1998. We now address this issue.

The Respondent has repeatedly emphasized that the documents presented must be "in full compliance" with the terms and conditions of the letter of credit and has suggested that must mean that a "strict compliance" standard applies in determining whether the documents were compliant. However, the letter of credit states categorically that it is issued subject to UCP 500, the Articles of which we must rely upon as the Appointed Experts in arriving at our decision.

Article 13 of UCP 500 states the standard for examination of documents and it is clear that banks must examine all documents stipulated in the credit with reasonable care to ascertain whether the documents appear on their face to be in compliance with the terms and conditions of the credit. It also states that documents which appear inconsistent with one another will be considered as not appearing on their face to be in compliance with the credit. It must also be noted that the compliance standard under Article 13 is to "be determined by international standard banking practice". There is no reference in UCP 500 to the "strict compliance" standard.

We acknowledge that in some circumstances a typographical error in a document presented under a letter of credit may constitute a discrepancy and as such may adversely affect the correct settlement of the transaction. We refer to the examples given in ICC Opinion No. R209 in ICC publication no. 565. However, in this case, it is extremely unlikely that a typographical error of the nature of that included in the bill of lading (the misspelling of the word "clutch" as "clutoh") would have any material bearing.

Accordingly, with respect to the perceived discrepancy in the wording on the bill of lading in this case, we are of the opinion that it was an obvious typographical error which should not be considered a discrepancy under Sub-Article 13(a) of UCP 500.

Furthermore, we are of the opinion that the bill of lading (notwithstanding the aforesaid error) is so clearly linked with the other documents presented that they are a consistent set of documents and are not inconsistent with one another. We also consider that the Initiator acted with reasonable care in the examination of the documents, as is also required under the same sub-Article.

As to the allegations by the "Expert's Report" furnished by the Respondent that the bill of lading was a forgery, we do not think the allegations relevant unless the Initiator was aware of this fraudulent situation at the time of negotiation of documents under the letter of credit or at the time of presentation to the Respondent. In this connection, we refer to Article 15 of UCP 500 and the decision by the ICC Banking Commission in their Opinion R76 of 9 December 1980 as appearing in Publication No. 399.

We note that the "Expert's Report" furnished by the Respondent also raises the issue of professional negligence on the part of the Initiator. We agree that banks always have a duty of care in the undertaking of transactions on behalf of their principals or customers, but we do not see in the documentation supplied to us any evidence that the Initiator has not acted honestly or without good faith and reasonable care in discharging its obligations in the ordinary course of business.

Various other documentary discrepancies are suggested by the "Expert's Report" furnished by the Respondent. We do not think the Respondent can rely on them to resist the Initiator's claim. None of these alleged discrepancies was raised in the Respondent's rejection notice dated March 2, 1998. Article 14 of UCP 500 prescribes exactly how issuing banks are to proceed if they wish to refuse documents presented to them - they must state all discrepancies they wish to rely on and they must give the notice stating those discrepancies no later than the seventh banking day following the day they received the documents. Banks which do not follow Article 14 are precluded from claiming that documents are not in compliance with the terms and conditions of the credit (see Sub-Article 14(e)).

We should add that, based on the documentation supplied to us, we must assume that the original expiry date of 21 January 1998 in the letter of credit was amended to allow for presentation of documents on 24 February 1998, as there is no mention of late presentation of documents by either the Initiator or the Respondent.

For the aforesaid reasons, we are of the view that the Initiator in this case is entitled to full reimbursement from the Respondent on the letter of credit. This decision is the unanimous decision of the Appointed Experts.