Parties

Initiator: Company Q (transferee)

Respondent 1: Bank B (transferring bank)

Respondent 2: Bank C (advising bank for transferee)

Background and transaction

This is a complex transaction involving a transferable L/C with multiple parties in multiple countries. A transferable L/C subject to UCP 500 was issued by Company L, ABC in Country S, also referred to in their L/C as L ABC, but no relation to a bank based in Europe that bears the same name and acronym. The L/C text appears to have been formatted into a SWIFT message and relayed by Bank U, Country U via SWIFT MT 7981 as an envelope to an MT7102 and sent to Respondent 1. The L/C applicant was located in Country C, shipment was to be to St. Petersburg, Russia and, among the documents to be presented, were a full set of B/Ls consigned to a party other than the issuer or the applicant, and a pro forma invoice signed by the first beneficiary and by another party, a named software company in City M. The L/C covered the shipment of almost half a million dollars of fruit, available by deferred payment payable at 60 days from the B/L date.

At the request of the first beneficiary, Respondent 1 transferred the L/C to the Initiator via a SWIFT MT 7203 to Respondent 2. The Initiator effected five shipments, and made four presentations under the transferred L/C. The first beneficiary substituted invoices and drafts, and Respondent 1 sent documents to Company L, ABC for payment. We are unable to determine if the presentation was made complying with the L/C terms due to the lack of a complete set of documents being submitted. Two payments totalling USD75,906 were received by the Initiator, and a balance of USD372,717.16 remains unpaid. The Initiator maintains that the Respondents "grossly misled" them and holds the Respondents responsible for its loss.

Issue(s)

Whether the transferring bank, Respondent 1, and the advising bank, Respondent 2, grossly misled the Initiator and are subsequently liable for such misleading

Initiator's claim:

1. that Respondent 1 failed to (a) accurately transfer the subject L/C regarding the name of the issuer and (b) indicate its limited role in the transferred L/C, depriving the Initiator of making an informed decision as to whether or not to accept the transferred L/C;

2. that Respondent 1 altered the terms and conditions of the L/C regarding Field 52D, (Issuing Bank), and field 41D, (Available With/By), thereby grossly misleading the Initiator into believing that the L/C issuer was a bank and that Respondent 1 might negotiate its documents;

3. that Respondents 1 and 2, should have known that Company L, ABC was a non-bank and should have so advised the Initiator in accordance with an ICC Opinion/Policy Statement4.

Respondent's reply:

1. that documents presented by the Initiator were all forwarded to Company L, ABC after substitution of drafts and invoices by the first beneficiary;

2. that as the L/C was not confirmed by Respondent 1, the bank was under no obligation to honour or negotiate the drafts and documents presented;

3. that Respondent 1 admits an error on the transmitted SWIFT message but disclaims liability under article 16 of UCP 500 to which the L/C was subject;

4. that The Initiator continued to ship even after notice that the issuer was a non-bank entity.

Documents submitted by the parties

Documents submitted by the Initiator

(i) transferred L/C No. 12345;

(ii) notification of documentary credit issued by Respondent 2;

(iii) the first shipment amounted to USD106,700.00;

(iv) the second shipment amounted to USD21,780.00 (part);

(v) the second shipment amounted to USD85,360.00 (part);

(vi) notification of amendment;

(vii) item 52D in the notification of amendment;

(viii) the third shipment amounted to USD106,700.00;

(ix) the last shipment amounted to USD128,040.00;

(x) the certificate of remitting USD54, 082.84 and USD21,780 by Respondent 1;

(xi) the original L/C received by the first beneficiary;

(xii) the first beneficiary's application for transferring this L/C.

Documents submitted by the Respondent

(i) L/C advised to first beneficiary, 27 April 2007;

(ii) first beneficiary application to transfer L/C to Initiator;

(iii) Respondent 1 outgoing SWIFT message to Respondent 2;

(iv) notification of amendment 1 by Respondent 1 to first beneficiary;

(v) notification of transfer by Respondent 2 to Initiator;

(vi) first beneficiary application to transfer amendment;

(vii) First beneficiary application to transfer amendment, Respondent 1 outgoing SWIFT message to Respondent 2 and notification of amendment by Respondent 2;

(viii) Initiator cover letter and letter of indemnity for presentation 1 covering documents USD 106,700.00;

(ix) Respondent 1 sent SWIFT MT799 free format message advising Initiator name of issuer;

(x) Initiator cover letter and letter of indemnity for presentation 2 covering documents USD 107,140.00;

(xi) Initiator cover letter and letter of indemnity for presentation 3 covering documents USD 106.700.00;

(xii) Initiator cover letter and letter of indemnity for presentation 4 covering documents USD 128,040.00;

(xiii) Respondent 1 SWIFT MT799 to Bank U requesting it to trace payment to issuer;

(xiv) relay of message from issuer by Bank U in response to Respondent 1 tracer for payment and advice to Initiator;

(xv) Respondent 1 tracers to issuer via Bank U.

Analysis

Did Respondent 1 mis-advise the transferred L/C?

First, we find that Respondent 1 properly advised the L/C relayed by Bank U to the first beneficiary, which identified the issuer as Company L, ABC Country S. As this was a transferable L/C, it is presumed that the Initiator had a commercial contract with the first beneficiary regarding payment. The first beneficiary had the correct advice of the L/C showing Company L, ABC as the issuer, accepted it and requested a transfer under it. The first beneficiary was not dissuaded by the issuer.

We also note that Bank U, which is not a party to this DOCDEX case, did not follow SWIFT SR20065 regarding SWIFT's revision to the MT710 (changes effective 18 November 2006). That message type was specifically revised in 2006 to address non-bank issuance and the ICC Opinion/Policy Statement. Among the changes: (a) the title of the MT was changed from "Advice of a Third Bank's Documentary Credit" to "Advice of a Third Bank's or Non-Bank's Documentary Credit"; the scope of the message was changed to include issuance by a non-bank, and a field 50B named "non-bank issuer" was added to accommodate and highlight issuance by a non-bank, as field 52a 'Issuing bank' was retained as an optional field. Had that revision been followed, the respective field in the MT710 message sent to Respondent 1 would have been field 50B entitled "Non-Bank Issuer" instead of field 52A entitled "Issuing Bank". Accordingly, Bank U's advice, if it was an advice, might have "affirmatively disclose[d] the non-bank status of the issuer". Alternatively, if it was only a relayed message, it would have used the current SWIFT MT710 and indicated Company L, ABC in field 50B, as non-bank issuer. Apparently it was Bank U which had the relationship with Company L, ABC and not Respondent 1, so that Bank U would have known the status, bank or non-bank, of Company L, ABC. We further note that in the text of the L/C, in field 78, point 2, Company L, ABC refers to itself as "[Company L] ABC" further confusing the name of their institution with that of a bank based in Europe.

It was only after some investigation that the Panel believes that Company L, ABC is not a bank registered in Country S and has no relationship with the bank in Europe.

Respondent 1's exhibit C is a copy of its outgoing SWIFT message to Respondent 2. The field for Issuing Bank of the original L/C shows the BIC (Bank Identification Code) of Bank U and the name and address of Company L, ABC. We are uncertain how that could have happened, as SWIFT should not have accepted both A and D entries for that field. Be that as it may, Respondent 2 advised the transfer on 30 April 2007, showing Bank U as the issuing bank and that was a mis-advice.

Respondent 1 and Respondent 2 subsequently corrected the name of the issuer, but the Initiator did not take any action to stop shipment or otherwise mitigate control of the merchandise.

We do not agree with Respondent 1 that article 16 of UCP 500 applies in this instance. This was not the type of error, i.e., mutilation or other cause in transmission contemplated by the UCP.

Respondent 1 is responsible for checking the apparent authentication (which is not an issue in this case) and the accuracy of its advice, and it initially mis-advised the advice of transfer.

The Panel further finds that even when there is a mis-advice, the liability of the advising bank is not absolute and, in this case, the Initiator, after notification of the error, did nothing to mitigate a potential loss and continued to ship and present documents.

In addition, we find that Respondent 1 is not solely responsible for this error. It appears that several parties may have contributed to this mis-advice. Clearly, the issuer (Company L, ABC), the relay bank (Bank U) and the first beneficiary may have some role in the mis-advice, and they are not parties to this DOCDEX case.

Did Respondents 1 and 2 mislead the Initiator by failing to indicate their limited roles in the transferred L/C?

Respondent 1's cover letter advising the L/C to the first beneficiary clearly states in the remarks: "PLEASE NOTE THAT THIS ADVICE DOES NOT CONSTITUTE OUR CONFIRMATION OF THE ABOVE L/C NOR DOES IT CONVEY ANY ENGAGEMENT OR OBLIGATION ON OUR PART."

Respondent 2's cover letter advising the advice of transfer issued by Respondent 1 clearly states in remarks: "PLEASE NOTE THAT THIS ADVICE DOES NOT CONSTITUTE OUR CONFIRMATION OF THE ABOVE L/C NOR DOES IT CONVEY ENGAGEMENT OR OBLIGATION ON OUR PART."

The transfer of the documentary credit issued by Respondent 1 clearly states in field 40B (Form of Documentary Credit) "Irrevocable Without our confirmation".

Field 47A point 4 states: "This letter of transfer does not constitute our confirmation of the original L/C or any engagement on the part of [Respondent 1]."

Further, field 49 (Confirmation) states: Without.

We find that neither the transfer nor the advice of transfer are ambiguous or in any way imply any engagement from either Respondent office to negotiate under this L/C or to incur a deferred payment undertaking.

Did Respondent 1 mis-advise the transfer regarding issuing bank, field 52D, and availability, field 41B?

We have already addressed the mis-advice as to issuer in the analysis. Regarding "availability with and by", we note that a transferring bank "shall be under no obligation to effect such transfer except to the extent and in the manner expressly consented to by such bank". 6

Perhaps unknown to the Initiator, the L/C in favour of the first beneficiary was amended on 27 April to nominate Respondent 1 as the transferring bank. This amendment was necessary to conform the original L/C with UCP 500 sub-article 48(a), which requires that when a credit is freely negotiable and transferable, it must specifically authorize a transferring bank.

In addition, as the first beneficiary indicated that it would substitute documents to protect the first beneficiary's rights, the transferring bank required presentation of transferee documents to itself, hence available with Respondent 1. Respondent 1 further provided in its advice of transfer, field 47A, a warning that the transferee documents must be presented to it to avoid possible consequences, if any, of depriving the first beneficiary of the ability to substitute its documents.

Respondent 1 modified the available with/by field from "available with any bank in beneficiary country by Deferred Payment" to "available with Respondent 1, by negotiation". As stated above, the issuer amended the L/C to specifically nominate Respondent 1 as the transferring bank. By so doing, Respondent 1 restricted the presentation of documents to itself. While this practice is not specifically provided for in UCP 500, it is not inconsistent with bank practice and is supported by ICC Opinion R.4837 which reads in part: " ... whilst an issuing bank can nominate a bank to transfer a credit, that transferring bank must also be a nominated bank for the handling and payment of documents." Accordingly, we do not see that as a material change to the terms of the L/C. In addition, while the "by" was changed from deferred payment to negotiation, the L/C remained available with the issuer by deferred payment, and Respondent 1 merely offered, but did not engage, to possibly negotiate complying documents. We do not find that change to have materially altered how payment was to be effected or as to the engagement of Respondent 1.

Accordingly, we find that neither Respondent 1 nor Respondent 2 grossly misled the Initiator regarding available with/by.

Should Respondent 1 and Respondent 2 have known that Company L, ABC was not a bank and so advised the Initiator? If there was a failure to do so, the Initiator's conclusion point 3 states that "pursuant to ICC's Official Opinion on non-bank issuance ... both Respondents shall assume liability of any misleading and undertake to compensate all our loss and damages."

The ICC Opinion is based in large measure on the non-bank issuer being the corporate [the applicant] or the finance arm of the corporate [the applicant] and not a bank.

The Opinion further states: "In the case of the corporate L/C as we understand it, the guarantee of payment is not normally by an independent third party and, as such, the credit risk is that of the corporate entity issuing the credit. Similarly, when documents are presented under the L/C for negotiation, that negotiation, if any, is based on the risk of the issuing entity, i.e., is corporate, not bank risk." This assumes that one can tell from the name of the issuer that there is a relationship between the issuer and the applicant. In this case, there is no such nexus or obvious connection between the named applicant [Company T, Country C] and Company L, ABC the issuer.

The ICC Opinion goes on to say: "Of course, where the manner of issuance misleads the beneficiary into believing that the issuer is a bank, the advising bank may expose itself to liability [emphasis added]. Ultimately, however, the decision as to whether or not to accept the risks associated with a non-bank issuance rests with the beneficiary." As noted in the analysis above, the first beneficiary knowingly accepted and requested transfer of the L/C as issued.

The ICC Opinion concludes: "It does not 'violate' the UCP for a non-bank to issue a credit subject to the UCP even though such issuance is not contemplated in the rules. The UCP does not specifically provide for bank advice of non-bank issued letters of credit. Such an advice should accurately identify the issuer and indicate the advising bank's limited role. If the form of advice refers to the 'issuer' as 'issuing bank' or otherwise gives the impression that it is a bank, it is recommended that the advice affirmatively disclose the non-bank status of the issuer in order to correct any mistaken impression caused by such reference." We note that the message sent by Bank U incorporated a SWIFT MT710 (Advice of a Third Bank's or Non-Bank's Documentary Credit) and entered in field 52D entitled Issuing Bank, the name of Company L, ABC.

The Initiator's claim is based on the presumption that Respondent 1 and Respondent 2 knew or should have known that Company L, ABC was not a bank. It appears that Respondent 1 did not maintain a correspondent relationship with Company L, ABC and so relied on an authenticated SWIFT Message from Bank U. As that message indicated the issuer in field 52D, Issuing Bank, and not in field 50B, Non-Bank Issuer, there was no express indication to signal that the issuer was a non-bank. Even when Respondent 1 corrected the name of the issuer, it did not qualify it as a non-bank but merely corrected the name, leaving it to the transferee to decide whether the issuer was acceptable, regardless of its status.

Finally, the Panel notes that a SWIFT broadcast message was sent by the bank in Europe on 19 December 2007, some eight months after the issuance and advice of this subject L/C which reads as follows:

WE HAVE RECEIVED A NUMBER OF MESSAGES FROM BANKS AND OTHER PARTIES THAT SEEM TO CONCERN DOCUMENTARY CREDIT TRANSACTIONS APPARENTLY INVOLVING AN ENTITY CALLED [COMPANY L,ABC] LOCATED IN COUNTRY S (SOMETIMES IT APPEARS TO BE SHORTENED AS L, ABC). PLEASE NOTE THAT WE DO NOT HAVE ANY CONNECTION OF ANY KIND WITH AN ENTITY BY THIS NAME AND NOR DO WE HAVE AN OFFICE IN COUNTRY S EITHER. THEREFORE WE ARE NOT IN A POSITION TO RELAY ANY MESSAGES NOR TO PROVIDE ANY OTHER FORM OF ASSISTANCE RELATED TO ANY ENQUIRIES OR TRANSACTIONS INVOLVING THIS ENTITY.

Even this message does not presume to comment on the legal status of Company L, ABC but only to alert the banking community and to disclaim any relationship between the bank in Europe and Company L, ABC.

Conclusion

1. We find that while Respondent 1 correctly advised the L/C to the first beneficiary, it initially mis-advised the advice of transfer to the Initiator regarding the name and status of the issuer. It appears that knowing the name of the issuer did not deter the first beneficiary, and whether the Initiator was grossly misled is not a matter that this Panel can determine based on the documents presented.

2. We do not find that either Respondent 1 or Respondent 2 failed in defining their limited roles in their respective advices of transfer. Therefore, as their respective roles were clearly and expressly stated, we do not find that the Initiator could have been grossly misled.

3. We find that the modification Respondent 1 made to the "available with/by" terms of the L/C did not materially change the terms and conditions of this L/C. We note that while this is not specifically addressed in UCP 500, it is not inconsistent with bank practice, and supported by an ICC Opinion stating that a transferring bank requires presentation of documents to itself and might well be considered "to the extent and manner expressly consented to by such bank" (UCP 500, sub-article 48 (c)). We are not certain of how making the L/C available by negotiation with Respondent 1 instead of available by deferred payment with Respondent 1 would mislead the transferee. Whether the L/C was available with Respondent 1 by deferred payment or by negotiation, as the L/C was not confirmed by Respondent 1, it had no obligation to incur a deferred payment obligation or to negotiate. We do not find any evidence presented by the Initiator indicating that any of these changes constituted a mis-advice which operated to its detriment.

4. We do not find that Respondent 1 or Respondent 2 knew or necessarily should have known the non-bank status of the issuer at the time of their advice.

5. The Panel agrees with the ICC Opinion/Policy Statement: "the advising bank may expose itself to liability" by misleading the beneficiary into believing the issuer is a bank, but finds that in this case that there is no direct evidence to show that the Initiator was misled due solely to the mis-advice of Respondent 1. Due to the complexity of the transaction and the number of parties involved that are not part of this DOCDEX case and that may share responsibility, such a determination is beyond the scope and mandate of this Panel and would be for a court to determine.

6. The Panel is unanimous in this Decision.

1 SWIFT MT798 is a Proprietary Message for Documentary Credits. Per SWIFT, this message may only be sent and received after prior arrangements between the sender and the receiver. The "Scope" of this message states in part: "This message type is used by financial institutions, with their own offices, and/or with other financial institutions with which they have established bilateral agreements. It is used as an envelope for a specified message included in it."

2 SWIFT MT710 is a message titled Advice of a Third Bank's or a Non-Bank's Documentary Credit. The "Scope" of this message states: "This message is sent by an advising bank, which has received a documentary credit from the issuing bank or the non-bank issuer, to the bank advising the beneficiary or another advising bank. It is used to advise the Receiver about the terms and conditions of a documentary credit."

3 SWIFT MT720 is a message titled Transfer of a Documentary Credit. The "Scope" of this message states: "When a beneficiary has requested the transfer of a documentary credit - originally issued by a bank or a non-bank - to a second beneficiary, this message is sent by the bank authorised to advise the transfer of the documentary credit, to the bank advising the second beneficiary. It is used to advise the Receiver about the terms and conditions of the transferred documentary credit, or part thereof."

4 ICC Opinion/Policy Statement October 2002, attached.

5 SWIFTStandardsFIN, Category 7 Documentary Credits and Guarantees, November 2006 Standards Release, Standards Release Guide February 2006.

6 UCP 500, sub-article 48(c).

7 ICC Opinion R 483, attached.

ATTACHMENT TO DOCDEX Decision 275

ICC Banking Commission Official Opinion R 483 - 2000/01

From UCP 500. - Sub-Article 48(a)

When an issuing bank nominates a bank to transfer a credit, must that transferring bank also be a nominated bank for the handling and payment of documents?

QUERY

When an issuing bank nominates a bank to transfer a credit, must that transferring bank also be a nominated bank for the handling and payment of documents?

Our question refers to Article 48 UCP 500. In order to be able to transfer a credit a bank must have been "authorised to pay, incur a deferred payment undertaking, accept or negotiate" (sub-Article 48(a)) or be "the bank specifically authorised in the Credit as a Transferring Bank". So the documentary credit may only be transferred by the bank where the credit has been made available. Otherwise, the bank is just an advising bank and is not allowed to effect a transfer. It seems that there are banks in our country that issue documentary credits that are transferable but available at the counters of the issuing bank and they pretend that the advising bank transfers the credit.

The bank which has received the credit (and which is only the advising bank) is then requested by the beneficiary to transfer the credit. The bank argues with the beneficiary that it cannot transfer such a credit. The beneficiary contacts the issuing bank in order to amend the availability, but the issuing bank often states that there is no need to make the credit available at the counters of the advising bank in order for that bank to be able to transfer the credit.

We have been asked to issue a paper placing our position in writing and before we issue such a paper, I prefer it first to be forwarded to you so as to request your support.

ANALYSIS/CONCLUSION

Sub-article 48(a) states: "A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorised to pay, incur a deferred payment undertaking, accept or negotiate (the "Transferring Bank"), or in the case of a freely negotiable Credit, the bank specifically authorised in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more other Beneficiary(ies) (Second Beneficiary(ies)). "

It can be seen from the above sub-article that whilst an issuing bank can nominate a bank to transfer a credit, that transferring bank must also be a nominated bank for the handling and payment of documents. If a letter of credit is issued as being available at the issuing bank's counters (i.e. the issuing bank is also the nominated bank), the only bank that can effect the transfer is the issuing bank.