Parties

Initiator: Bank M (nominated bank)

Respondent: Bank A (issuing bank)

Background and transaction

The issuing bank opened an irrevocable letter of credit ("credit") via MT700 in favour of a beneficiary in Country T. The credit was subject to UCP 600 and available with any bank by negotiation. Under field 42C of the MT700, the issuing bank called for drafts at sight drawn on the issuing bank. The credit was subsequently amended to call for drafts at 30 days after sight. Both the credit and amendment were advised to the beneficiary by the nominated bank.

The beneficiary presented documents, including drafts at 30 days after sight, to the nominated bank. The nominated bank found the presentation to be in order and forwarded the documents and drafts to the issuing bank for acceptance. The issuing bank examined the drafts and documents and found them to be not in compliance with the terms and conditions of the credit. The issuing bank sent a notice of refusal to the nominated bank via MT799 within the timeframe required by UCP citing the following discrepancies:

(1)Beneficiary's copy of fax not showing contract number;

(2)Insurance policy/certificate not indicating the settling agent; and

(3)Amendment on draft not authenticated by the drawer.

The issuing bank indicated on the MT799 that it was holding the documents at the risk and disposal of the nominated bank.

Following receipt of the issuing bank's refusal notice, the nominated bank forwarded revised documents to the issuing bank within the period for presentation. The revised documents included the beneficiary's copy of fax, insurance document and new drafts. Upon receipt of the revised documents and within the timeframe required by UCP, the issuing bank sent another refusal notice via MT799 to the nominated bank citing the following discrepancy: (1) Amendment (correction) on the second draft not authenticated by the drawer.

The issuing bank indicated on the MT799 that it was holding the documents at the risk and disposal of the nominated bank.

The revised drafts presented to the issuing bank were made out in duplicate, i.e., First of Exchange and Second of Exchange. The drafts were made out in accordance with the terms of the credit, and the bill of lading date was shown on both drafts, although not required by the terms of the credit. Both drafts were signed by a person named [Mr X] who acted as the authorized signer of the beneficiary.

Based on a copy of the drafts submitted by the initiator, there was a correction made to the bill of lading date on the Second of Exchange and a small round chop bearing the word "correction" with a signature shown next to the correction. The signature associated with the correction chop is the same as that of [Mr X], the person who signed the drafts as authorized signer of the beneficiary. There was no correction made on the First of Exchange.

The issuing bank contended that the correction made on the Second of Exchange was not authenticated as per international standard banking practice. Specifically, the issuing bank claimed that there was no evidence that the correction was authenticated by the beneficiary (i.e., drawer of the drafts) as required under paragraphs 9 and 55 of ISBP ICC Publication No. 681. The nominated bank disagreed with the issuing bank's interpretation of the ISBP. It also found the issuing bank's refusal not justified, because the issuing bank could accept the First of Exchange, which showed no correction and disregarded the Second of Exchange, which serves no purpose given that there was a First of Exchange.

Since the issuing bank insisted on its position, the nominated bank sent yet another set of drafts to the issuing bank. The issuing bank refused the 3rd set of drafts for the reason that they were presented beyond the period for presentation.

Issues to be determined

1. Did the issuing bank have a duty to examine drafts drawn by the beneficiary to ensure that they were in compliance with the terms of the credit?

2. Was authentication required for the correction shown on the Second of Exchange of the revised drafts?

3. If authentication was required, would the signature of [Mr X] placed next to the correction satisfy the requirement for authentication, or must the authentication have included the name of the party who issued the drafts (i.e., the beneficiary)?

4. Was the issuing bank justified in refusing the presentation?

Analysis

Issue No. 1:

The issuing bank had a duty to examine drafts drawn by the beneficiary to ensure that they were in compliance with the terms of the credit, for example that the tenor was in accordance with the terms of the credit.

Issue No. 2:

Paragraph 55 of ISBP ICC Publication 681 states: "Corrections and alterations on a draft, if any, must appear to have been authenticated by the drawer."

Based on the above, authentication by the drawer is required on any corrections made on a draft. However, since drafts were drawn in duplicate and there was no correction made on the First of Exchange, the Second of Exchange would not serve any purpose in this case, and consequently authentication on the Second of Exchange was not necessary.

Issue No. 3:

Authentication of corrections made on drafts must include a signature or initial and the name of the party who issued the drafts. However, since drafts drawn by the beneficiary (drawer) were signed by the person named [Mr X] as authorized signer of the beneficiary, and the correction on the Second of Exchange was also authenticated by [Mr X], it is clear that the correction was authenticated by the drawer. Accordingly, in this particular case, there was no need for the beneficiary's name to be stated with the signature of [Mr X] for the correction.

Issue No. 4:

The issuing bank was not justified in refusing the presentation, because the First of Exchange was in order and bears no correction; hence, the Second of Exchange serves no purpose in this particular case. Even if the Second of Exchange was required, authentication of the correction made on the Second of Exchange was in accordance with international standard banking practice as explained under Issue No.3.

Conclusion

The draft in question is not discrepant and the Issuing Bank must honor its obligation by accepting the drafts and effecting payment to the beneficiary through the Nominated Bank with any applicable past due interest.

This decision is a unanimous decision by the DOCDEX Panel of Experts.