Parties

Initiator: Bank Z (nominated bank)

Respondent: Bank A (issuing bank)

Background and transaction

The issuing bank opened two irrevocable letters of credit ("credit") via MT700s. The beneficiaries of the credit were located in Hong Kong and England respectively. Both credits were subject to UCP 600. The first credit was available with any bank in Country C by negotiation, and the second credit was available with any bank by negotiation. Under field 42C of the MT700s, the issuing bank called for 90 days sight drafts drawn on the issuing bank.

The beneficiaries presented documents including drafts at 90 days after sight to the nominated bank. The nominated bank found the presentations to be in order and forwarded the documents and drafts to the issuing bank for acceptance on 15 August 2008 and 22 September 2008 respectively. Following dispatch of the documents to the issuing bank, and prior to receipt of the issuing bank's acceptance advices, the nominated bank negotiated both presentations by advancing funds to the beneficiaries on 18 August 2008 and 23 September 2008 respectively. On 21 August 2008 and 24 September 2008, the issuing bank advised the nominated bank by MT799 that it had accepted the drafts to mature on 17 November 2008 and 22 December 2008 respectively.

For the accepted draft maturing on 17 November 2008, the issuing bank sent an MT799 to the nominated bank on 17 November 2008, stating that the warehouse warrants presented under the presentation were the same as the ones held by other banks. Therefore, the issuing bank would settle the transaction only after it had completed its investigation on the duplicate warehouse warrants. The issuing bank did not raise any allegation of fraud nor did it advise the nominated bank that it was enjoined from honouring its acceptance based on a court order or injunction. Despite the nominated bank's repeated demands, the issuing bank has not, to date, effected payment of its acceptance.

For the accepted draft maturing on 22 December 2008, the issuing bank advised the nominated bank on 4 December 2008 that the L/C applicant had applied for an injunction enjoining the issuing bank from effecting payment under the presentation. The basis of the injunction application was that the same warehouse warrants presented by the beneficiary were also presented for drawings under letters of credit issued by other Country C banks. It was based on this reason the issuing bank has not effected payment of its acceptance to date.

Issues to be determined

1. Was the nominated bank a negotiating bank of the disputed L/Cs under UCP 600?

2. Were the proceeds advanced by the nominated bank to the beneficiaries, proceeds of discounting, export loans or forfaiting facilities?

3. Would the silent confirmation/without recourse arrangements (including the without recourse financing with respect to the payment risk of the issuing banks) entered into between the nominated bank and the beneficiaries prejudice the reimbursement right of the nominated bank (as the negotiating bank) against the issuing bank?

4. Was the nominated bank, being a nominated negotiating bank, under a duty to check whether the warehouse warrants presented under the disputed L/Cs had been re-issued or split by the warehouseman?

5. Was the nominated bank, being a nominated negotiating bank, under a duty to verify whether the applicants and beneficiaries were controlled by the same shareholders?

6. Is it a UCP 600 requirement that the negotiation proceeds must come from the nominated bank's own funding? Would the nominated bank's internal funding arrangements prejudice the nominated bank's negotiating bank status?

7. Is it a violation of UCP 600 if the negotiation proceeds are paid to the beneficiaries by the nominated bank before the issuing bank accepts the presented drafts and/or documents?

8. Is it a UCP 600 requirement that the documents called for under an L/C must be prepared and presented by the beneficiaries only?

9. To the extent that the disputed L/Cs called for copy documents (i.e., not original), can the nominated bank accept copy documents sent to it by fax?

10. When a nominated negotiating bank has in fact negotiated the documents, is it a violation of UCP 600 if the nominated negotiating bank has not expressly stipulated on its document remittance schedules that it has done so? Would the absence of such indication on the remittance schedules discharge the issuing bank's payment obligations under the disputed L/Cs or disqualify the nominated bank from being the negotiating bank?

11. Did the authenticated SWIFT acceptances issued by the issuing bank constitute its acceptance of the presented documents and its undertaking to effect payments to the nominated bank on the relevant due dates under UCP 600?

Analysis

1. Was the nominated bank a negotiating bank of the disputed L/Cs under UCP 600? UCP600 Article 2 contains the following definitions:

"Negotiation means the purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying presentation, by advancing or agreeing to advance funds to the beneficiary on or before the banking day on which reimbursement is due to the nominated bank.
Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank. .
Complying presentation means a presentation that is in accordance with the terms and conditions of the credit, the applicable provisions of these rules and international standard banking practice."

The nominated bank was a negotiating bank of the disputed L/Cs under UCP600 for the following reasons:

- the credit was freely negotiable, and as such the nominated bank was the nominated bank under the disputed L/Cs;
- the nominated bank advanced funds to both beneficiaries against term drafts drawn on the issuing bank and before reimbursement was due to the nominated bank, i.e. before the maturity dates of the accepted drafts
- the nominated bank presented a complying presentation under each L/C, as the issuing bank never notified the nominated bank of any discrepancies found in the presentations.

2. Were the proceeds advanced by the nominated bank to the beneficiaries, proceeds of discounting, export loans or forfaiting facilities?

Based on the payment advices issued by the nominated bank to the beneficiaries, the proceeds advanced were proceeds of negotiations. A negotiation fee was charged under each presentation.

3. Would the silent confirmation/without recourse arrangements (including the without recourse financing with respect to the payment risk of the issuing banks) entered into between the nominated bank and the beneficiaries prejudice the reimbursement right of the nominated bank (as the negotiating bank) against the issuing bank?

The silent confirmation/without recourse arrangements entered into between the nominated bank and the beneficiaries were arrangements made outside of the terms of the credit, and they do not affect or change in any way the issuing bank's reimbursement obligation to the nominated bank which has negotiated the credit.

4. Was the nominated bank, being a nominated negotiating bank, under a duty to check whether the warehouse warrants presented under the disputed L/Cs had been re-issued or split by the warehouseman?

As per article 14 of UCP 600, a nominated bank acting on its nomination must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. Accordingly, the nominated bank did not have a duty to check whether the warehouse warrants had been re-issued or split by the warehouseman.

5. Was the nominated bank, being a nominated negotiating bank, under a duty to verify whether the applicants and beneficiaries are controlled by the same shareholders?There is no requirement under UCP for a negotiating bank to verify the relationship between an applicant and a beneficiary.

6. Is it a UCP 600 requirement that the negotiation proceeds must come from the nominated bank's own funding? Would the nominated bank's internal funding arrangements prejudice the nominated bank's negotiating bank status?

There is no requirement under UCP 600 that the negotiation proceeds must come from the nominated bank's own funding. The nominated bank's internal funding arrangement does not prejudice the nominated bank's negotiating bank status.

7. Is it a violation of UCP 600 if the negotiation proceeds are paid to the beneficiaries by a nominated bank before an issuing bank accepts the presented drafts and/or documents?

No. Under a tenor L/C, a negotiating bank may advance funds to a beneficiary before or after the issuing bank accepts the presented drafts and/or documents. However, the negotiating bank can only acquire negotiating bank status if the advances are made to the beneficiaries before reimbursement is received from the issuing bank.

8. Is it a UCP 600 requirement that the documents called for under an L/C must be prepared and presented by the beneficiaries only?

There is no such requirement under UCP 600. It is not uncommon for beneficiaries to enlist the service of a freight forwarder to prepare and/or present documents called for under an L/C. Article 2 of UCP 600 defines a presenter as a beneficiary, bank or other party that makes a presentation. Accordingly, documents called for under an L/C do not need to be prepared or presented by the beneficiaries only.

9. To the extent that the disputed L/Cs called for copies (i.e. not original) documents, can the nominated bank accept copy documents sent to it by fax?

The nominated bank may accept copy documents sent to it by fax if the disputed L/Cs called for copies instead of original documents because:

- the disputed L/Cs do not prohibit presentation by fax;

- the ICC Policy Statement on "The determination of an "Original" document in the context of UCP 500 sub-article 20 (b)" (ICC Document No. 470/871 Rev. dated July 29, 1999) states under item 4 that a document is not an original if it (i) appears to be produced on a telefax machine … ." The Policy Statement remains valid under UCP 600. In any event, this issue is not relevant for the cases in dispute, as the presentations were not refused by the issuing bank in accordance with article 16 of UCP 600.

10. When a nominated negotiating bank has in fact negotiated the documents, is it a violation of UCP 600 if the nominated negotiating bank has not expressly stipulated on its document remittance schedules that it has done so? Would the absence of such indication on the document remittance schedules discharge the issuing bank's payment obligations under the disputed L/Cs or disqualify the nominated bank from being the negotiating bank?

A nominated bank that has negotiated a complying presentation should expressly indicate on its document remittance schedule that it has negotiated the documents. However, the absence of such indication does not violate UCP 600. The omission of the nominated bank's indication that it had negotiated the disputed L/Cs on its document remittance schedules does not affect the nominated bank's status as negotiating bank, nor does it discharge the issuing bank's payment obligations as long as the nominated bank confirms its negotiation to the issuing bank.

11. Did the authenticated SWIFT acceptances issued by the issuing bank constitute its acceptance of the presented documents and its undertaking to effect payments to the nominated bank on the relevant due dates under UCP 600?

The authenticated SWIFT acceptance advices issued by the issuing bank constitute the issuing bank's acceptance of the presented documents under the disputed L/Cs and the issuing bank's undertaking to effect payments to the nominated bank on the relevant due dates. The obligation of the issuing bank is affirmed by sub-article 7 (c) of UCP 600 which states: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank ...".

Conclusion

Unless the issuing bank is enjoined from honouring its payment obligations under the L/Cs in dispute, it is obligated to pay the nominated bank the drawing amounts plus applicable interest from the maturity dates to the date of its payments

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