Parties

Initiator: Bank S

Respondent 1: Bank C

Respondent 2: Bank H

Background and transaction

On 25 October 2011, Respondent 1 issued a letter of credit ("L/C") via SWIFT MT700 for an amount of USD 2,358,922.00 and advised it through Respondent 2 for advising to the beneficiary located in City M, Country I. The L/C was available by negotiation with any bank in Country I against drafts drawn at 90 days from the B/L date for 100 per cent of invoice value. The L/C was subject to UCP 600 with an expiration date of 11 December 2011 in Country I. The L/C required the following documents to be presented:

1. Manually signed commercial invoice in 3 originals and 3 copies indicating this L/C no. and contract no. ABC/123;

2. Full set (included 3 originals and 3 non-negotiable copies) of clean on board ocean bills of lading made out to order and blank endorsed marked "freight prepaid" and notifying the applicant and Bank B, S Branch;

3. Full set (included 1 original and 2 copies) of insurance policy/certificate for 110 per cent of the invoice value showing claims payable in Country C, in currency of the draft, blank endorsed, covering ocean marine transportation all risk (CIC) and war risks;

4. Weight memo/packing list in 3 originals and 3 copies issued by the beneficiary indicating quantity/gross and net weights of each package and packing conditions;

5. Certificate of quantity/weight in 3 originals and 3 copies issued by the beneficiary indicating the actual surveyed quantity/weight of shipped goods as well as the packing condition;

6. Certificate of quality in 3 originals and 3 copies issued by beneficiary;

7. Beneficiary's certified copy of fax/telex dispatched to issuing bank within 7 days after shipment advising name of vessel, date, quantity, weight and value of shipment;

8. Certificate of origin in 1 original and 2 copies issued by chamber of commerce;

9. Phytosanitary certificate issued by competent authority;

10. Declaration of non-wood packing materials in 3 originals and 1 copy issued by beneficiary;

11. Certificate issued by carrier certifying that 14 days free destination time has been arranged; and

12. Registration certificate of overseas supplier enterprise for import cotton issued by Inspection and Quarantine of Country C.

Field 45A (description of goods) of the L/C stated: "Growth: Indian Origin Raw Cotton 2011-2012 Quality: S-6, Staple Length: 1-5/32", MIC: 3.6 - 4.9NCL, Strength: Min 29GPT, Grade: Middling, Trash: Less than 3pct, Moisture: Less than 9pct

Quantity: 1,000MT (2,204,600.00LBS)

Unit Price: USD1.07/LB

Price Term: CIF City Q, Country C

Goods Origin: Country I"

According to the Initiator in its Request, before the L/C was issued, the marketing team of Respondent 2 had approached the beneficiary and advised its willingness to make available finance in US dollars under the L/C against acceptance of the bills by Respondent 1. Representatives of the beneficiary and Respondent 2 approached the Initiator, requesting the routing of the documents under the said L/C through Respondent 2. This was confirmed in an e-mail from Respondent 2 dated 15 September 2011. The Initiator advised Respondent 2 that this could only be done if Respondent 1 agreed to the arrangement.

After the L/C was issued and advised, a letter dated 14 November 2011, purportedly signed by a manager of Respondent 1, was provided to the Initiator by Respondent 2 and the beneficiary, requesting that the documents under the aforesaid L/C be routed through Respondent 2.

• On 16 November 2011, the beneficiary presented the first set of documents under the L/C for an amount of USD1,161,491.72, which was due for payment on 13 February 2012. The Initiator effected a discount on the same day and sent the documents to Respondent 2 on a collection basis. Respondent 2 acknowledged receipt of the documents on 19 November 2011 and forwarded them to Respondent 1 on 21 November 2011 by courier service.

• On 21 November 2011, the beneficiary presented a second set of documents under the L/C for an amount of USD1,154,487.09, which was also due for payment on 13 February 2012. The Initiator again effected a discount on the same day and forwarded the documents to Respondent 2 on a collection basis. Respondent 2 acknowledged receipt of the documents on 26 November 2011 and forwarded them to Respondent 1 on 28 November 2011 by courier service.

• On 2 January 2012, the Initiator received both sets of documents from Respondent 2 owing to the documents having already been refused and now returned by Respondent 1. A further SWIFT message dated 26 December 2011 from Respondent 1 was attached with the returned documents. It stated: "PLS KINDLY BE INFORMED THAT A/M 2 SETS OF DOCS WERE REFUSED ON 111201 AND 111208, THE DISPOSAL OF BOTH DOCS WAS THAT WE ARE RETURNING THE DOCS. PLS CONTACT BENE DIRECTLY TO EXPEDITE THE SETTLEMENT OF THIS DISPUTE WITH APPL. TKS FOR YR COOPERATION. WE ARE SORRY FOR IN CONVENIENCE [SIC] CAUSED. OUR CABLE CHG FOR USD23.76 SHALL BE DEDUCTED." The Initiator informed the beneficiary accordingly. The beneficiary informed the Initiator in its letter dated 3 January 2012 that the refusals were due to a quota problem of the import licence, and the applicant had assured that payment would be effected on the due date.

• On 7 January 2012, the Initiator sent a SWIFT message to Respondent 1 claiming that the documents were submitted as per the L/C terms. Respondent 1 was requested to honour the documents and confirm its payment on the due date.

• On 24 April 2012, the Initiator sent another SWIFT message to Respondent 1, as there had been no response and no payment had been made on the due date.

• On 25 April 2012, in response to the message from the Initiator of 24 April 2012, Respondent 1 replied that it had not received the aforesaid documents and requested the courier details. The Initiator replied on the same day, claiming that the documents submitted were negotiated and discounted by the Initiator and the documents were in compliance with the L/C terms.

• On 26 April 2012, Respondent 1 confirmed receipt of two sets of documents from Respondent 2 and that both sets were refused due to discrepancies noted by Respondent 1 and returned to Respondent 2 on 1 and 8 December 2011 respectively. Respondent 1 also claimed that its undertaking was released as the L/C had expired. According to the Initiator, in its Request, this was the first time the Initiator was informed by Respondent 1 that both sets of documents had been refused and returned to Respondent 2 due to discrepancies.

• The Initiator subsequently took up the matter with its Financial Institutional Group (the "FIG"), which specialized in relationships with foreign banks. The FIG was requested to instruct Respondent 1 to honour its L/C commitment.

• On 15 June 2012, Respondent 1 sent an email to the FIG stating that the discrepancies in the documents were listed in its notices of refusal dated 1 and 8 December 2011 respectively and sent via SWIFT message. Respondent 1 confirmed that the refusal notices were sent to Respondent 2 on the said two dates.

• On 20 June 2012, Respondent 1 enquired about the nature of the deal between the Initiator and Respondent 2. FIG advised Respondent 1 that the documents were routed through Respondent 2 based on the letter sent by it dated 14 November 2011. In reply, Respondent 1 advised that the letter purportedly signed by one of their managers was a fake and that the person who signed the letter was not an employee of the bank. The Initiator was requested to check with Respondent 2 for the two notices of refusal.

After taking up the matter with Respondent 2, Respondent 2 claimed that the notices of refusal from Respondent 1 were sent by fax to the Initiator on 5 December 2011.

Issues

The Initiator claimed that Respondent 2 had received the documents in two sets, one on 16 November 2011 and the other on 26 November 2011, from the Initiator. Respondent 2 confirmed that it had sent the documents by courier to Respondent 1 on 21 and 28 November 2011 respectively. Respondent 1 acknowledged receipt of the documents on 24 November 2011 and 1 December 2011 respectively.

Though Respondent 2 claimed that it had transmitted, by fax, the notices of refusal from Respondent 1 on 5 and 8 December 2011 respectively to the Initiator, the Initiator claimed that it had never received these messages.

Questions

1. What is the liability of Respondent 1 in failing to indicate to the Initiator the discrepancies in the documents, within the stipulated period under article 14 and also failing to issue a notice of refusal as stipulated under sub-article 16 (c)?

2. What is the liability of Respondent 2 in failing to indicate to the Initiator the discrepancies in the documents, within the stipulated period under article 14 and also failing to issue a notice of refusal as stipulated under sub-article 16 (c)?

Documents submitted by the parties

Documents submitted by Initiator

(i) Letter of Authority from the Initiator to the law firm;

(ii) Photocopies of letters dated 25 October 2011 and 28 October 2011 from Respondent 2 to the beneficiary - L/C Advice;

(iii) Photocopy of email dated 15 September 2011 from Respondent 2 to Initiator and the beneficiary;

(iv) Photocopy of letter dated 14 November 2011 purportedly from Respondent 1 to Initiator;

(v) Photocopies of letters dated 16 November 2011 and 21 November 2011 (without enclosures) from the Initiator to Respondent 2;

(vi) Photocopies of two letters both dated 30 December 2011 from Respondent 2 to the Initiator;

(vii) Photocopy of letter dated 3 January 2012 from the beneficiary to the Initiator;

(viii) Photocopy of SWIFT message dated 7 January 2012 from the Initiator to Respondent 1;

(ix) Photocopy of SWIFT message dated 24 April from the Initiator to Respondent 1;

(x) Photocopy of SWIFT message dated 25 April 2012 from Respondent 1 to Initiator;

(xi) Photocopies of SWIFT messages dated 25 April 2012 from the Initiator to Respondent 1 and 26 April 2012 from Respondent 1 to the Initiator;

(xii) Photocopies of mails/correspondence forwarded by FIG to the Initiator;

(xiii) Photocopies of email from Respondent 2 to the Initiator and email from the Initiator to Respondent 2, both dated 7 August 2012; and

(xiv) Photocopies of documents forwarded to the Initiator by Respondent 2 with its covering letter dated 8 August 2012.

Documents submitted by Respondents 1 and 2

No documents were received from the Respondents. However, Respondent 1 submitted Answers and formally requested a DOCDEX Decision ("Decision").

Analysis

Question 1

What is the liability of Respondent 1 in failing to indicate to the Initiator the discrepancies in the documents within the stipulated period under article 14 and also failing to issue a notice of refusal as stipulated under sub-article 16 (c)?

The L/C issued by Respondent 1 and advised by Respondent 2 was available by negotiation with any bank in Country I. Before the L/C was issued, the beneficiary had arranged with the Initiator for a packing loan in INR for its export shipment to City Q. Respondent 2 had agreed to make available financing in USD once the documents presented under the L/C were duly accepted by Respondent 1. Respondent 2 requested that the documents drawn under the L/C be presented through them on collection basis for its onward transmission to Respondent 1.

After the L/C was issued, and before the documents were presented, and at the request of the Initiator, a letter purportedly issued by Respondent 1 was produced to the Initiator requesting that the documents be routed through Respondent 2. The letter was not an amendment to the L/C.

The Initiator received two sets of documents presented under the L/C by the beneficiary on 16 and 21 November 2011 respectively before the L/C expired. Respondent 2 acknowledged receipt of the documents on 19 and 26 November 2011 respectively on a collection basis. Respondent 1 received the documents on 24 November 2011 and 1 December 2011 respectively.

Respondent 1 sent two notices of refusal by SWIFT messages dated 1 and 8 December 2011 due to discrepancies in the two sets of documents. These messages were sent to Respondent 2, as the documents were received from it. In both SWIFT messages, under field 77J (Discrepancies), the discrepancies were listed and under field 77B (Disposal of Documents), "/RETURN/" was stated.

UCP 600 sub-article 14 (b) states: "A nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation".

UCP 600 article 16 states:

"a. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank determines that a presentation does not comply, it may refuse to honour or negotiate.

b. When an issuing bank determines that a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. This does not, however, extend the period mentioned in sub-article 14 (b).

c. When a nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter.

The notice must state:

i. that the bank is refusing to honour or negotiate; and

ii. each discrepancy in respect of which the bank refuses to honour or negotiate; and

iii. a) that the bank is holding the documents pending further instructions from the presenter; or b) that the issuing bank is holding the documents until it receives a waiver from the applicant and agrees to accept it, or receives further instructions from the presenter prior to agreeing to accept a waiver; or c) that the bank is returning the documents; or d) that the bank is acting in accordance with instructions previously received from the presenter.

d. The notice required in sub-article 16 (c) must be given by telecommunication or, if that is not possible, by other expeditious means no later than the close of the fifth banking day following the day of presentation.

e. A nominated bank acting on its nomination, a confirming bank, if any, or the issuing bank may, after providing notice required by sub-article 16 (c) (iii) (a) or (b), return the documents to the presenter at any time.

f. If an issuing bank or a confirming bank fails to act in accordance with the provisions of this article, it shall be precluded from claiming that the documents do not constitute a complying presentation.

g. When an issuing bank refuses to honour or a confirming bank refuses to honour or negotiate and has given notice to that effect in accordance with this article, it shall then be entitled to claim a refund, with interest, of any reimbursement made".

As Respondent 1 received the first set of documents on 24 November 2011 and sent its notice of refusal on 1 December 2011 by SWIFT, and received the second set of documents on 1 December 2011 and sent its notice of refusal on 8 December 2011 by SWIFT, both notices of refusal were sent no later than the close of the fifth banking day following the day of presentation. The days of presentation were 24 November 2011 and 1 December 2011. Under UCP 600 article 2 "presentation" means either the delivery of documents under a credit to the issuing bank or nominated bank or the documents so delivered.

In its notices of refusal, Respondent 1 also complied with the provisions in UCP 600 sub-article 16 (c). It had refused the documents, listed the discrepancies and provided disposal instruction for the documents. As Respondent 1 received both sets of documents from Respondent 2, Respondent 1 is justified (and required under UCP 600 sub-article 16 (c)) to send its notices of refusal to Respondent 2.

Question 2

What is the liability of Respondent 2 in failing to indicate to the Initiator the discrepancies in the documents, within the stipulated period under article 14 and also failing to issue a notice of refusal as stipulated under sub-article 16 (c)?

The Initiator forwarded the documents to Respondent 2 on a collection basis as per their agreement, outside the L/C, even though the L/C was available with any bank in Country I by negotiation. The letter purportedly issued by Respondent 1 requesting that the documents be forwarded through Respondent 2 was not an amendment to the L/C. As Respondent 2 received the documents from the Initiator on a collection basis, it was not clear whether the collection was subject to any rule or URC 522.

After receipt of the documents from the Initiator, Respondent 2 sent both sets of documents by courier to Respondent 1 within two days from the date of receipt of each set of documents from the Initiator. As the documents were forwarded to Respondent 2 on a collection basis, Respondent 2 did not act as a nominated bank either to honour or negotiate. It simply acted as an intermediary bank and forwarded the documents to Respondent 1 for collection as instructed by the Initiator.

UCP 600 sub-article 12 (c) states: "Receipt or examination and forwarding of documents by a nominated bank that is not a confirming bank does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or negotiation".

Upon receipt of the notices of refusal from Respondent 1, Respondent 2 claimed that it had relayed the contents to Initiator by fax. However, the Initiator claimed that it had never received the fax messages from Respondent 2. Fax is a form of telecommunication and expeditious means of communication acceptable under UCP 600 sub-article 16 (d). It is not required to be authenticated, as it is not an instruction but simply a message that the sender wishes to convey to the recipient.

The returned documents were subsequently received by Respondent 2 and returned to Initiator by them.

As Respondent 2 was requested to forward the documents on a collection basis, it was not obliged to examine the documents before it forwarded them to Respondent 1. It acted only as an intermediary bank, and it would only relay the messages that it received to the Initiator and/or Respondent 1.

Decision

In conclusion, Respondent 1 has acted appropriately under UCP 600, as it examined the documents and refused them by sending two SWIFT refusal messages to the presenter, Respondent 2, within five banking days following the day of presentation.

Respondent 2 forwarded the documents received from the Initiator to Respondent 1 and returned them to the Initiator when received from it. In between, it is stated that Respondent 2 also advised the Initiator of the content of the refusal messages by separate fax messages. As Respondent 2 was instructed to forward documents on a collection basis, it was not required to examine them to determine if they were complying. It was also not responsible for the documents being refused and subsequently returned by Respondent 1.

The Decision is unanimous.