Parties

Initiator: Company W

Respondent: Bank K

Background and transaction

1. In July 2010, the Initiator entered into a contract ("the Underlying Contract") with the XYZ Program Administration of Country S ("XYZ" "the applicant") to supply to XYZ an Aerostat System ("the commodity").

2. We are informed (by the respective law firms representing the Initiator and the Respondent) that, pursuant to the Underlying Contract, XYZ applied to the Respondent to issue a letter of credit in the amount of USD 6,150,000.00 (being the contract price under the Underlying Contract). It is common ground between the parties that:

(i) a letter of credit ("the L/C") was issued on 3 August 2010, by the Respondent, through a SWIFT transmission;

(ii) the L/C stated that it was issued with the applicable rules being "UCP latest version", which is currently UCP 600; and

(iii) the L/C was notified by the Respondent to the Initiator (as beneficiary) through Bank J ("the advising bank").

3. The L/C description of goods and/or services was stated as follows in field 45A of the SWIFT transmission:

"ONE AEROSTAT SYSTEM (INCLUDING EQUIPMETNT, TOTAL SPARES, ACCESSORIES, TEST EQUIPMENT, INSTALLATION, SERVICES AND TRAINING)"

(note: We assume that the word "EQUIPMETNT" is a mis-spelling of the word "equipment". )

4. A payment schedule of four instalments was stated in the L/C. The first instalment of USD 1,230,000.00 was paid by the Respondent after the Initiator presented documents on 18 October 2010 (through the advising bank).

5. On 27 December 2010, the instalment schedule was amended by the Respondent, via amendment No. 1, to provide for only two payments, in lieu of four, as follows:

"PART I FOR THE FIRST PAYMENT SCHEDULE IN THE FIELD 47A .7

1) ONE (1) ORIGINAL AND FOUR (4) COPIES OF BENEFICIARY'S SIGNED COMMERCIAL INVOICE

2) ONE (1) ORIGINAL AND FOUR (4) COPIES REPAYMENT GUARANTEE

3) ONE (1) ORIGINAL AND FOUR (4) COPIES PERFORMANCE BOND

PART II FOR THE SECOND PAYMENT SCHEDULE 47A .7

1) ONE (1) ORIGINAL AND FOUR (4) COPIES OF BENEFICIARY'S SIGNED CERTIFICATE OF SITE ACCEPTANCE TEST (SAT)

2) ONE (1) ORIGINAL AND FOUR (4) COPIES OF BENEFICIARY'S SIGNED CERTIFICATE OF COMPLETION OF TRAINING

3) ONE (1) ORIGINAL AND FOUR (4) COPIES OF BENEFICIARY'S SIGNED COMMERCIAL INVOICE

4) ONE (1) ORIGINAL AND FOUR (4) COPIES OF BILL OF LADING AND/OR AIRWAY BILL FOR AEROSTAT SYSTEM TO COUNTRY S. I/O PREVIOUS."

6. At the same time, field 47A (additional conditions), of the L/C was also amended by the Respondent, via amendment No.1, to specify as follows:

"1) FIRST PAYMENT: 20 PCT OF THE TOTAL AMOUNT (USD 1,230,000.00) SHALL BE PAID UPON PRESENTATION REQUIRED DOCUMENTS (46A PART I) AFTER ESTABLISHMENT OF PERFORMANCE BOND AND REPAYMENT GUARANTEE.

2) FINAL PAYMENT: 80 PCT OF THE TOTAL AMOUNT (USD 4,920,000.00) SHALL BE PAID UPON PRESENTATION REQUIRED DOCUMENTS (46A PART II) AFTER SAT COMPLETION. I/O PREVIOUS" (emphasis added)

7. On 7 February 2012, the L/C was further amended by the Respondent, via amendment No.2, to extend the latest shipment date as follows:

"44C : LATEST DATE OF SHIPMENT : 120212".

8. On 17 February 2012, the advising bank, on behalf of the Initiator, presented documents to the Respondent to draw the final payment under the L/C. Apart from the covering letter from the Initiator dated 9 February 2012, these documents were:

1) certificate of completion of site acceptance test (SAT) signed by the Initiator's representative and dated 3 February 2012 (hereinafter referred to as "the SAT Certificate");

2) certificate of completion of training signed by the Initiator's representative and dated 3 February 2012 (hereinafter referred to as "the training certificate");

3) commercial invoice signed by the Initiator's representative and dated 9 February 2012 (hereinafter referred to as "the commercial invoice");

4) bill of lading issued by a carrier in respect of the shipment of the commodity from Los Angeles (the port of loading) to City B (the port of discharge) with the place and date of issue stated as "Norfolk, Feb. 03, 2012" and dated as of that same date (hereinafter referred to as "the bill of lading");

5) draft drawn by the Initiator on the Respondent for USD 4,920,000.00 dated 9 February 2012 (hereinafter referred to as "the 9 February 2012 Draft").

9. On 22 February 2012, the Respondent notified the Initiator, through the advising bank, that it was refusing the documents. The discrepancies were stated as being:

"SAT IS INCOMPLETION. (SEE 47A. 7.2))

PERFORMANCE BOND WAS NOT EXTENDED AND WAS NOT PRESENTED. "

10. On behalf of the Initiator, the advising bank informed the Respondent that the Initiator was contesting the noted discrepancies.

Issue

Whether the Respondent, as issuing bank of the L/C, was justified in refusing the documents presented to it on 17 February 2012 on account of the foregoing stated discrepancies.

A. Initiator's claim

1. The Initiator, through its lawyers, has asserted that the Respondent, as the issuing bank, is obliged to honour a documentary credit where the stipulated documents are presented and they constitute a complying presentation, citing UCP 600 sub-article 7 (a). The Initiator also asserts that the Respondent, as issuing bank, is not entitled to go behind the documents presented, nor can it look to any related contract between the Initiator (as beneficiary) and XYZ (as applicant) so as to refuse payment, citing UCP 600 sub-articles 4 (a) and 14 (a). It further asserts that where a documentary credit refers to a condition without specifying a document required to satisfy that condition, that condition will be disregarded, citing UCP 600 sub-article 14 (h).

2. The Initiator further asserts that the documents presented (i.e., the SAT Certificate, the training certificate, the commercial invoice and the bill of lading) on their face constitute a complying presentation.

B. Respondent's reply

The Respondent, through its lawyers, has asserted that the SAT Certificate is a forged document insofar as the SAT is the procedure established under the Underlying Contract and needs to be conducted by the Initiator and certified by inspectors designated by the end-user, the Country S Army. The Respondent asserts that it was clear that no SAT was conducted in accordance with the Underlying Contract. It is further asserted that whereas the SAT Certificate stated that the SAT was completed as of 3 February 2012, this could not have been so, as the commodity's delivery was not completed until later in February 2012, and concluded that the SAT Certificate was a patently false document.

Documents submitted by the parties

A. Documents submitted by the Initiator

1. Copy of SWIFT MT700 received by the advising bank on 3 August 2010 containing the L/C (seven-pages), copy of amendment No.1 to the L/C received by the advising bank on 4 January 2011 (two-pages) and copy of amendment No. 2 to the L/C received by the advising bank on 7 February 2011 (one-page);

2. The Underlying Contract;

3. Initiator's letter dated 9 February 2012 enclosing documents presented to the Respondent for the unpaid balance under the L/C;

4. Respondent's SWIFT message dated 22 February 2012 received by the advising bank refusing the documents presented and stating discrepancies;

5. Respondent's SWIFT message dated 23 February 2012 received by the advising bank stating that the guarantee (performance bond) had expired and stating that it should be extended;

6. Advising bank's SWIFT message dated 23 February 2012, stating that it was contesting the discrepancies noted in the Respondent's notification dated 22 February 2012;

7. Respondent's SWIFT message dated 27 February 2012 received by the advising bank referencing the Underlying Contract and alleging non-compliance therewith by the Initiator in failing to extend the guarantee (performance bond);

8. Respondent's SWIFT message dated 29 February 2012 received by the advising bank relaying the applicant's allegation that the commodity had arrived in City P port and City I airport and was currently undergoing customs clearance and that the submitted certificate of completion of SAT by the Initiator was a "false document";

9. Advising bank's SWIFT message dated 1 March 2012, conveying Initiator's statement that the performance bond is not a required document for payment;

10. Letter from Initiator's lawyers dated 12 March 2012 addressed to the Respondent, stating that the Respondent was obliged to honour the second payment under the L/C on the basis of the documents presented to it on 17 February 2012;

11. Respondent's SWIFT message dated 21 March 2012 addressed to the Initiator, stating that the Respondent had received a legal decision for an injunction from a court and refusing the Initiator's documents;

12. Letter from Initiator's lawyers dated 28 March 2012 addressed to the Respondent, stating that no injunction had been granted in respect of the matter (contrary to the Respondent's SWIFT message dated 21 March 2012) and reiterating that the Respondent had no legal basis to decline to honour the L/C;

13. Letter from Initiator's lawyers dated 30 March 2012 addressed to the Respondent, stating that they would be submitting a request for a DOCDEX ruling under the DOCDEX Rules on behalf of the Initiator unless payment was received by 3 April 2012;

14. The SAT Certificate;

15. The training certificate;

16. The commercial invoice;

17. The bill of lading and the 9 February 2012 draft.

B. No documents were submitted by the Respondent

Analysis

1. The L/C was issued by the Respondent subject to UCP 600 and named the Initiator as the beneficiary thereunder. As the initial payment of 20% of the L/C amount was made without dispute, the issue before us relates solely to the presentation made by the advising bank on 17 February 2012 on behalf of the Initiator, and whether the Respondent was justified in refusing the documents on the two grounds as set out in its SWIFT message of 22 February 2012 to the advising bank.

2. We note that the Initiator does not question the formal correctness of the Respondent's refusal dated 22 February 2012, nor whether it was sent in time.

A. First discrepancy

1. The first discrepancy stated in the Respondent's SWIFT message of 22 February 2012 was stated to be:

"SAT IS INCOMPLETION. (SEE 47A. 7.2) ".

2. Although grammatically incorrect, the meaning of "SAT IS INCOMPLETION" is clear, more so in view of its association in the same sentence with the reference "SEE 47A. 7.2", which unequivocally points to the requirement for completion of SAT prior to presentation of the documents required under the L/C as set out at field 47A (additional conditions), paragraph 7, item 2 in the L/C (as amended via amendment No.1, referred to above), which reads as follows: "Final payment 80 pct of the total amount (USD 4,920,000.00) shall be paid upon presentation required documents (46A part II) after SAT completion" (emphasis added).

3. Our decision as the Appointed Experts in respect of the first discrepancy is as follows:

(i) Pursuant to UCP 600 sub-article 4 (a), we affirm that a documentary credit is a separate transaction from the Underlying Contract. Hence, a determination as to whether there is a complying presentation is to be based on the terms of the documentary credit, international standard banking practice and the UCP. We, therefore, do not think that any reference to the Underlying Contract is relevant.

(ii) Determination as to whether or not the documents presented to the Respondent were false or fraudulent falls outside the jurisdiction of the Appointed Experts. Consequently, we do not make any finding in that regard.

(iii) Upon presentation of documents, the relevant bank is to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation: UCP 600 sub-article 14 (a).

(iv) Looking at the documents presented on behalf of the Initiator on 17 February 2012, we note that:

- the SAT Certificate states that the SAT was completed by 3 February 2012;

- the training certificate states that the training was completed by 3 February 2012; and

- the bill of lading states that the commodity was shipped on board on the same day, 3 February 2012, at Los Angeles (the port of loading) for City B (the port of discharge).

(v) We find that the data on the SAT Certificate and the training certificate contravene UCP 600 sub-article 14 (d), which states: "Data in a document, when read in the context of the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit."), with regard to:

- as read in the context of the L/C, both the SAT Certificate and the training certificate presented conflicted with the L/C terms (as amended) which required "FINAL PAYMENT: 80 PCT OF THE TOTAL AMOUNT (USD 4,920,000.00) SHALL BE PAID UPON PRESENTATION REQUIRED DOCUMENTS (46A PART II) AFTER SAT COMPLETION." (emphasis added).

- it was materially impossible for the SAT to have been completed on or prior to 3 February 2012, as stated in the SAT Certificate presented, given that the bill of lading showed that the commodity was shipped on board the carrying vessel on that very same date. Nor would it have been possible for the "TEST EQUIPMENT", "INSTALLATION" and "TRAINING" (required under the description of the commodity in the L/C) to have been completed on that date. Accordingly, the commodity would necessarily have to arrive in the country of destination for the SAT to be completed, and the commodity could not have arrived on the date it was stated to have been shipped.

(vi) Therefore, we find that the conflicting data amounted to a discrepancy which justified the Respondent's rejection of the documents on account of the first discrepancy.

B. The second discrepancy

1. The second discrepancy stated in the Respondent's SWIFT message of 22 February 2012 was stated to be:

"PERFORMANCE BOND WAS NOT EXTENDED AND WAS NOT PRESENTED

2. The Initiator asserts that the validity or otherwise of the performance bond required under the Underlying Contract is not relevant to the Respondent's obligations under the L/C.

3. Our decision, as the Appointed Experts, in respect of the second discrepancy is as follows:

(i) The only reference to the performance bond in the L/C (as amended by Amendment 01) related to the first payment under the L/C. That reference is not relevant to the second payment which is the subject of this request.

(ii) Whatever the merits, or lack of merit, of arguments that the performance bond needed to be extended under the terms of the Underlying Contract, we find (pursuant to UCP 600 sub-article 4 (a)) that they are not relevant to determining whether the Respondent is obliged to consider the 17 February 2012 presentation as a complying presentation.

(iii) Further, (pursuant to UCP 600 sub-article 14 (h)), provided that a credit contains a condition without stipulating the document to indicate compliance therewith, banks are to deem such condition as not stated and to disregard it.

(iv) Accordingly, we find that the second discrepancy was not valid.

Conclusion

We find that the first discrepancy asserted by the Respondent justifies its decision to treat the Initiator's 17 February 2012 presentation as a non-complying presentation. We do not find the second discrepancy asserted by the Respondent to be valid. Nevertheless, the validity of the first discrepancy justifies the Respondent's position.

The Appointed Experts reached a unanimous Decision.