Parties

Initiator: Company A (Second Beneficiary)

Respondents: Bank F (Respondent 1) (Issuing Bank)

Bank E (Respondent 2)

Statement

Documents related to this decision have been submitted only by the Initiator. This Decision is rendered without the participation of Respondents 1 or 2.

Background

• Documentary credit subject to UCP 600, transferable and issued on 1August2008 by Respondent 1, authorizing Bank D, Country G (transferring bank) to transfer;

• Applicant: Company F, Country F;

• Beneficiary: Company C, Country G;

• Amount: EUR 4,451,500.00 +/- 10 %;

• Goods: Coils;

• Available with: transferring bank by deferred payment;

• Tenor: 60 days after transport document date;

• Place and date of expiry: Country G, 21 October 2008;

• Latest date of shipment: 30 September 2008;

• Period for presentation: 21 days;

• Confirmation instructions: "without".

Sumary of the case

On 7 August 2008, the transferring bank transferred the credit to the Initiator (second beneficiary). The advice was made through the Initiator's bank. The transferred credit is as follows.

•Amount: EUR 3,765,000 (+/- 10%) subsequently amended to EUR3,124,900 (+/- 10%);

• Available with the transferring bank by deferred payment;

• Tenor: 45 days after date of transport document, subsequently amended to 60 days;

• Place and date of expiry: 16 October 2008, Country G;

• Latest date of shipment: 30 September 2008;

• Period of presentation: 16 days;

• In field 78 of the transferred credit, the transferring bank advises: "After the receipt of the full set of credit conform documents at our counters we will remit proceeds to you at maturity, but not until we will have received the same."

• On 12 September, the Initiator shipped the goods.

• On 13 September, the original amount of the transferred credit was amended to EUR3,124,900 (+/- 10 %).

• On 22 September, the Initiator's bankers sent the documents to the transferring bank by DHL The drawing was made up of three shipments on the same vessel with the same on board date (12 September) totalling EUR 3,399,121.74 (within the amended credit amount of EUR 3,124,900+10%).

• On 24 September, the documents were received by the transferring bank according to a DHL report submitted by the Initiator. The substitution of invoices was duly made by the transferring bank. In the light of what has become clear afterwards, the Initiator reports that the first beneficiary substituted one of its invoices showing a unit price higher than that agreed in the contract with the buyer (Company F).

• On 10 October, the Initiator's bank forwarded to the Initiator a message received from the transferring bank stating: "Documents have been taken up by opening bank: due date: 11.11.2008. We will [not] effect payment until we have received proceeds from opening bank." No other message was received by the Initiator.

• On 30 October, the vessel arrived and the goods were delivered to the applicant.

• On 5 November, upon application of Company F, the Country F court enjoined Respondent 2, and not Respondent 1, from effecting payment under the master L/C.

• On 11 November, the Initiator did not receive any payment due to the court injunction.

Questions asked by the Initiator

1. Which is the issuing bank of the master L/C? Is it Respondent 1 or Respondent2? If Respondent 1 is the issuing bank and it receives no court order to stop payment, is it obligated to immediately effect payment under the master L/C?

2. Does the issuing bank have a direct contractual relationship with the Initiator?

3. Would any defect or fraud solely contributed by Company C's (first beneficiary) documents automatically affect the Initiator's entitlement under the transferred L/C?

4. Even if it is proved that there was fraud in Company C's invoice, which had nothing to do with the Initiator, is the Initiator entitled to be paid for its drawing under the transferred L/C?

5. In a normal transferred L/C, would a second beneficiary have knowledge or control of the first beneficiary's documents?

6. If the Initiator took no issue with Company C's substituted documents under sub-article 38 (i), does it mean that Company C's presentation shall be deemed to be the Initiator's presentation so that Company C's fraud, if any, shall be deemed to be the Initiator's fraud?

7. Would the contractual dispute between the applicant and first beneficiary affect the Initiator's entitlement under the transferred L/C?

8. Will the contractual dispute between the applicant and the first beneficiary with regard to another second beneficiary's goods affect the Initiator's entitlement under its transferred L/C?

9. Is a proper and commercial practice for the applicant (Company F) to first accept the documents (with full knowledge of the alleged fraud), take delivery of the goods and then apply for a court order to stop payment under the master L/C?

Analysis

Country F court ruling

As per Article 1.1 of "ICC Rules for Documentary Instruments Dispute Resolution Expertise", the DOCDEX service "is available in connection with any dispute related to: a documentary credit incorporating the ICC Uniform Customs and Practice for Documentary Credits (UCP), and the application of the UCP and/or the ICC Uniform Rules for Bank-to-Bank Reimbursement under Documentary Credits (URR) [...]. Its objective is to provide an independent, impartial and prompt expert decision (DOCDEX Decision) on how the dispute should be resolved on the basis of the terms and conditions of the documentary credit [...] and the applicable ICC Rules [...]."

Therefore, this Panel cannot make any comment on the case currently pending before the court and will restrict itself to responding to the questions raised only with a view to explaining or clarifying specific items of documentary credit practice. This expertise cannot interfere with the principle of the court's independence of judgement.

This Panel would also point out, as a general statement, that a fraud, if established, means that the entire relationship is lacking of the essential requisite of good faith, whose absence, as a principle, nullifies any agreement. When a charge of fraud is pending, even the rights arising from side relationships (i.e., the documentary credit which is functional to the underlying commercial transaction) may be affected and stopped by the effects of the fraud, if it is established. However, it is for a court to make such a determination on a case-by-case basis.

This position affects all the opinions given in this expertise.

Question 1

The first page of attachment no. 1 shows the issuing bank's name in the beginning of the SWIFT MT700 as that of Respondent 1. The first page of attachment no. 8 is a confirmation letter to the applicant sent by the issuing bank of the master credit. It is headed with the name of Respondent 2 and is signed as part of a banking group. The four amendment messages in the same attachment no. 8 are signed in the same manner and mention the issuing bank in the transferred L/C as in attachment S1. It appears that Respondent 2 (full name appearing at the bottom of each page of the amendments) is part of a bank group which includes Respondent 1. In this situation, the relationship among banks which are part of the same group depends on the local law and the general agreement which covers the constitution of the group.

It is up to the court to state whether the injunction addressed to a bank is to be considered as extended to the other after an examination of their administrative and substantial relationship. Similarly, it is up to the court to state how much the fraud affects Respondent 1, if the fraud is established, even if Respondent 1 is stated to be a different entity.

Question 2.

The master or original credit is issued by the issuing bank on the basis of a commercial relationship existing between the applicant and the seller. Therefore, the issuing bank gives an undertaking towards the first beneficiary. By issuing a transferable credit, the issuing bank accepts the possibility that the first beneficiary will transfer all or some of its rights to one or more second beneficiary(ies) under its own responsibility, with the agreement and assistance of the transferring bank (See UCP 600 sub-article 38 (b)).

At the request of the first beneficiary, Bank D, the bank authorized to effect the transfer, transferred the credit according to the instructions of the first beneficiary based on the first beneficiary's contractual relationship with the Initiator.

The issuing bank's obligation undertaken under the master L/C remains toward the first beneficiary as per the L/C terms and the provisions of UCP 600. However, this is subject to the first beneficiary providing substitute documents for those of a second beneficiary. In the event of no substitution, failure of the first beneficiary to substitute or failure of the first beneficiary to correct discrepant substituted documents, and the transferring bank's decision to use the documents of a second beneficiary, the undertaking of the issuing bank will then extend to that second beneficiary.

In this particular case, the transferred credit was not confirmed, and UCP 600 sub-article 38 (j) did not apply i.e., the first beneficiary does not appear to have requested the transferring bank that honour or negotiation was to be effected to the second beneficiary at the place to which the credit was transferred. The Initiator relied upon a complying presentation including substituted documents of the first beneficiary being made to the issuing bank and the payment obligation that would arise as a result.

Given the facts of this transaction, the issuing bank has no direct relationship with the second beneficiary. Such a direct relationship is not a question of principle, but a situation arising from the analysis of each individual credit.

Finally, as the first beneficiary substituted the Initiator's invoice, and the transferring bank had not undertaken any commitment to honour or negotiate the documents presented by the second beneficiary, the situation provided for by UCP600sub-article 38 (i) does not allow the issuing bank to deal directly with or pay the Initiator.

Even if documents of the Initiator were presented and accepted, occurring one or both of the cases provided for under the aforesaid article of UCP 600, the issuing bank still has no direct relationship with the Initiator. Even if it knew that the transfer was effected, the issuing bank had been given no information about the amount and other clauses affecting the transfer agreed between the transferring bank and the first beneficiary, and will forward any payment to the transferring bank which is entitled to process the subsequent payments according to transfer requests.

Bearing this in mind, the actual situation was that the first beneficiary presented its invoices in substitution of those presented by the Initiator, and hence the issuing bank could not have processed the Initiator's documents even if they were in accordance with the L/C terms and conditions.

Statement of the chair

The answer to question 2 is given as a majority view of the Panel. This answer does not affect the conclusion.

Question 3

Pending a charge of fraud it is up to the court to determine (see above).

Question 4

Same answer as in 3 above.

Question 5

In a normal transferred L/C, the second beneficiary has no knowledge of the content or control of the documents substituted by the first beneficiary. Although from a commercial point of view, it is expected that such substitution will be made fully in line with the terms and conditions of the contract between the first beneficiary and the applicant, a bank has no duty of care to ensure the conformity of the substituted documents with the terms and conditions of the commercial contract between such parties, as the contractual relationship they have with the applicant and beneficiary is separate from the underlying contract. (See the wording of UCP 600 sub-article 4(a)).

Any substitution not in line with the underlying contract is the entire responsibility of the first beneficiary. Moreover, the entire set of documents should be compliant with the terms and conditions of the master credit in order to allow payment by the issuing bank.

In this case, the master credit and the transferred credit are both available with Bank D (the nominated and transferring bank), and therefore both presentations are to be compliant respectively with the master credit (after any substitution) and the transferred credit (before any substitution).

Question 6

This question is out of the scope of the DOCDEX service as per Article 1 of the ICC DOCDEX Rules.

Question 7

In principle, disputes between parties concerning their commercial contract do not affect any entitlement of one or both parties under a documentary credit, which is a separate transaction. UCP 600 sub-article 4 (a) applies. However, the allegation of fraud freezes everything. See answer to question 3.

Question 8

See above.

Question 9

This question is out of the scope of the DOCDEX service, see # 6.

The documentary credit operation

• Transfer.
The transferred credit contains, in the third page of attachment S1, advice in field no. 78: "After receipt of the full set of credit conform documents at our counters we will remit proceeds to you at maturity, but not until we will have received same." The nominated/transferring bank has indicated that it opts not to act in the capacity of a nominated bank, even under a complying presentation, and will not undertake to make any payment to the second beneficiary unless already received. This option is allowed because a nomination "does not impose any obligation on that nominated bank to honour or negotiate" (see UCP 600 sub-article 12 (a)), and the nominated bank clearly confirmed its course of action to the second beneficiary, notwithstanding the supporting wording of the UCP.

• Amendments.
For the four amendments made to the credit there were no acceptance or refusal messages submitted. This means that they are deemed as accepted if the beneficiary presents documents conforming to those amendments, which appears to have happened (see UCP 600 sub-article 10 (c)).

• Presentation.
Based on the acceptance message of the issuing bank, the presentation was made in accordance with the terms and condition of the credit. Three separate invoices for the total amount of EUR 3,399,121.74 were within the amended credit amount (EUR 3,124,900 plus 10%). Three sets of B/Ls were presented with the same issuance date and on board notation date (12 September). Three packing lists, certificates of origin, declaration confirmations were also presented. The substituted documents have not been submitted. In any case, the compliance of the presentation was stated by the subsequent acceptance message of the issuing bank.

• Acceptance
No document or question was submitted concerning the acceptance or refusal of documents within five banking days following the day of receipt of the presentation, on the part of the issuing bank (see UCP 600 sub-article 14 (b)). Documents were received by the issuing bank on 24 September (according to the submitted DHL report), but the acceptance message was received by the transferring bank on 10 October. UCP 600 sub-article 16 (f) would apply. Therefore, the issuing bank is deemed to have accepted the documents on 30 September (27 and 28 September were Saturday and Sunday) and not on 10 October. However, the determination of the due date for the deferred payment is not affected as it relates to the transport document date (12 September).

Conclusion

From a documentary credit perspective, this Panel holds that the issuing bank is obliged to pay the complying presentation by remitting EUR 3,399,121.74 to the transferring bank, which will be responsible for processing the payments according to the terms and conditions of the transfer. Having accepted the documents to mature for payment on 11 November 2008, the issuing bank must honour its commitment to pay the presenting bank. However, as reported, at the moment the issuing bank is prevented from doing so by a court injunction. The issuing bank is expected to honour its undertaking by effecting payment as soon as the injunction is lifted.

Statement of the Chair

This Decision is rendered unanimously.