Parties

Initiator 1: Company O (Beneficiary)

Initiator 2: Bank H (Advising Bank)

Respondent: Bank T (Issuing Bank)

Notes

Respondent had not filed an answer.

The appointed experts requested on three occasions that 'Supplements' be submitted as per articles 4 and 7.3 of the DOCDEX Rules.

Although Initiator 2 submitted the request on behalf of Initiator 1, the appointed experts considered that both Initiators were involved due to the fact that the first supplemental submission, provided solely by Initiator 2, resulted in a complete request for a DOCDEX Decision.

Issues

1. Letter of Credit No. 123 issued by the Respondent. Respondent did not refuse two sets of documents as required by UCP 600 article 16. Consequently, the Respondent should have paid 80% of the invoice value of these presentations but failed to do so.

2. Letter of Credit No. 123 and Letter of Credit No. 456 issued by the Respondent. Respondent failed to pay the remaining 20% of all presentations made under these credits, although Initiator 1 maintained that all contractual obligations had been fulfilled.

3. Performance Bonds for USD 211,766.89 and USD 79,972.00 issued by a bank other than the Respondent at the request of Initiator 2 on instructions of Initiator 1. The beneficiary of the performance bonds made a claim under each of the guarantees. The bank that issued the performance bonds honoured the claims and subsequently claimed payment under the counter-guarantees. Initiator 2 honoured the claims under the counter-guarantees although the claims were said by Initiator 1 to have been unjustified, as all contractual obligations had been fulfilled.

Background and transaction

Issue 1, Letter of Credit No. 123:

Initiator 1 received Letter of Credit no. 123 that had been issued in his favour by the Respondent subject to UCP 600 and advised through Initiator 2. Under this Letter of Credit, 80% of the invoice value of two presentations had not been paid.

The first presentation, totalling USD 384,096.00 and consisting of two invoices for USD 252,096.00 and USD 132,000.00, was sent to the Respondent on 29 August 2012. The second presentation, in the amount of USD 367,626.60, was sent to the Respondent on 30 August 2012. Both presentations were made "subject to the applicable UCP Rules (issued by the ICC) as stipulated in the credit" and requested remittance of the proceeds. Both presentations were within the validity of the Letter of Credit. It appears that presentation was not, however, made within the number of days after the shipment date as required by the Credit (16 days) according to Respondent's notes on their internal Check-Lists.

The Respondent apparently disposed of the documents on 9 September 2012 by sending them to the applicant of the credit. However, payment for 80% of the invoice value had not been effected to Initiator 2. On 9 October 2012, the Respondent replied to Initiator 2 in respect of two tracers for the payment by stating "[W]e forwarded your above mts [message types] to the applicants and we shall revert upon their approval".

Issue 2, Letter of Credit No. 123:

The credit contained the following wording in relation to the payment of the remaining 20% of the invoice value(s): "20 Pct is payable upon your receipt of applicants written instructions during the validity of the credit subject to applicants sole discretion. In the event our instructions are not received by you within the validity of the credit, applicants payment instructions reported by [name of Respondent]."

The credit further stated "Our undertaking for the remaining balance under this letter of credit, being the retention amount, is payable after receipt by us of the applicant's instructions, subject to their complete discretion, during the validity of the credit. In the event such instructions are not received within the validity of the credit, then we are relieved from our obligations in this respect."

The initial wording quoted above was later amended to read: "20 Pct through[t] L/C upon actual delivery of materials CIF [name of port and country] and acceptance thereof and receiving the original shipping documents from the bank. A certificate will be issued by the applicants confirming receipt and acceptance of the shipment CIF [name of port and country]."

Issue 2, Letter of Credit No. 456

The credit contained the following wording in relation to the payment of the remaining 20% of the invoice value(s): "20 pct being the retention money out of value of each shipment is payable upon receipt of written instruction from applicants during the validity of the L/C and we will cover you then. In the event that applicants instructions are not received by us within the validity of the L/C, then we will be relieved from our obligations towards the beneficiaries under this L/C."

This was later amended to read: "Twenty percent (20PCT) through L/C upon actual delivery of materials CIF [name of port and country] and acceptance thereof and receiving the original shipping documents from the bank. A certificate will be the employer confirming the receipt and acceptance of the shipment CIF [name of port and country]."

Issue 2, Letter of Credit Nos. 123 & 456:

Under both letters of credit, it appeared that the beneficiary (Initiator 1) did not receive any document from the applicant of the credits. It also appeared that the Respondent did not receive any requested document or payment authorization from the applicant. On the contrary, the Respondent advised the Initiator 2 "to suspend" payment, although Initiator 2 never had an authorization to effect such a payment.

Issue 3, Performance Bonds

Initiator 2, on the instructions of Initiator 1, requested a bank other than the Respondent to issue two guarantees (performance bonds) in favour of the applicant of the two letters of credit in favour of Initiator 1.

Guarantee in the amount of USD 211,766.89: Initiator 2 on instructions of Initiator 1 requested a bank other than the Respondent to issue the guarantee (performance bond) "in your standard format" and quoted, as applicable rules, "OTHR/Country "I" Laws". The counter-guarantee of Initiator 2 appeared to have been made subject to the laws of country "I".

Guarantee in the amount of USD 79,972.00: Initiator 2 on instructions of Initiator 1 requested a bank other than the Respondent to issue the guarantee (performance bond) "as per your standard format" and thus subject to the law in the country of that bank (Country "I" Law). The counter-guarantee of Initiator 2 was made subject to ICC URDG (URDG 758).

Claims had been made under both the guarantees (performance bonds) and the counter-guarantees, which were subsequently honoured by the guarantor and Initiator 2 respectively, whilst Initiator 1 tried to convince Initiator 2 that the beneficiary of the guarantees (performance bonds) were not entitled to a claim as contractual obligations had been fulfilled.

Documents submitted by initiator

Issue 1

A copy of Letter of Credit No. 123 and 3 amendments issued by Respondent.

A copy of Letter of Credit No. 456 and 2 amendments issued by Respondent.

A copy of the remittance schedule prepared by Initiator 2 dated 29 August 2012 for an amount of USD 384,096.00.

A copy of the remittance schedule prepared by Initiator 2 dated 30 August 2012 for an amount of USD 367,626.60.

A copy of Respondent's SWIFT message dated 9 October 2012, addressed to Initiator 2.

A copy of a translation of a letter prepared by the Respondent on 9 September 2012 disposing of the documents received from Initiator 1, i.e. sending the documents to the applicant of the credit.

Issue 2

A copy of two messages dated 05.02.13 (LC No. 123) and 30.01.13 (LC No. 456) from the Respondent advising Initiator 2 that, at the request of the applicant, Initiator 2 is requested to "please suspend payment final payment of (20) pct for shipping documents for (value) till further instructions from them reported by us."It is to be assumed that Respondent had sent messages in the same sense covering all presentations to Initiator 2.

Issue 3

A copy of the electronic instructions from Initiator 2 to a bank other than the Respondent to issue a performance bond for USD 211,766.89.

A copy of an MT 760 sent by Initiator 2 to a bank other than the Respondent to issue a performance bond for USD 79,972.00.

Surrounding document submitted

The entire documentation consisted of a copy of all presentations made under the two letters of credit at issue, a copy of the contracts between Initiator 1 and the applicant to the letters of credit, a copy of correspondence in relation to the claims under the performance bonds and the corresponding payments. The entire documentation consisted of roughly 500 pages.

Analysis

Issue 1

According to UCP 600 sub-article 14 (a), "[A] nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank 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." According to sub-article 14 (b), each of the bank(s) shall: "have a maximum of five banking days following the day of presentation to determine if a presentation is complying".

According to UCP 600 sub-article 16 (c) if a bank: "decides to refuse to honour or negotiate, it must give a single notice to that effect to the presenter". Such notice must be in the form required by that sub-article and it must contain first of all a statement that it is refusing to honour or negotiate. It must also state each discrepancy in respect of which the bank refuses to honour or negotiate and it must indicate what the bank is doing in respect of the documents received.

According to the first message that had been sent by Respondent to Initiator 2 on 9 November 2012 (i.e. more than one month after the documents had been received and after having received at least two tracers asking whereabouts of the payment), the Respondent responded: "[W]e forwarded your above mts [Message types] to the applicants and we shall revert upon their approval.".

Furthermore, according to the Respondent's letter dated 9 September 2012, the Respondent disposed of the documents received from Initiator 2 by having sent the documents to the applicant of the credit.

Therefore, it is to be acknowledged that Respondent did not act in accordance with the requirements of UCP 600 articles 14 and 16. No notice of refusal had been sent by Respondent and therefore, as provided by UCP 600 sub-article 16 (f), the Respondent was precluded from claiming that the documents did not constitute a complying presentation. Consequently, the Respondent was obliged to honour the presentations for 80 Percent of the invoice value and to pay interest.

ICC official opinion R694 (TA602rev) given in relation to a Query under UCP 500, but still valid under UCP 600, stated that: "the issuing bank has not provided a notice of refusal of the documents. As such, it is the issuing bank that is precluded from asserting that the documents are discrepant, and it must effect settlement for the value thereof". It furthermore stated that: "[T]he release of the documents to the applicant, without providing settlement for the full value or seeking authorization to accept a lesser amount before releasing such documents, is clearly a breach of the fundamental principle of holding documents [at the disposal of the presenter]".

The Respondent released documents without payment (or any authorization from Initiator 2), which was also a breach of the provisions of UCP 600 sub-article 16. The Respondent failed to comply with the requirements of UCP 600 article 16 and thus was obliged to effect payments of 80 percent of the respective invoice values plus interest. The panel also pointed out that interest should be paid for the lapse of time in question.

Issue 2

The wording of the Letter of Credits in relation to the payment of the remaining 20% of the invoice value did not provide for such payment to be effected against a presentation by the beneficiary of one or more specific documents. Nor did it provide for the payment to be effected on a specific latest date for payment in case no document would have been presented.

The wording of these credits is unfortunately not uncommon in many countries. It results in a situation where the beneficiary cannot trigger the payment as it is at the mercy of the applicant to the credit acting in accordance with it's contractual obligations and authorizing the issuing bank to effect such payment.

Therefore, the panel could not but stress that parties to a credit have to carefully assess the consequences of any wording in the credit. The message(s) given by the Respondent to Initiator 2 also indicated that the implications of such wordings were not clearly understood. The Respondent advised Initiator 2 "to suspend payment" whilst that party never had any obligation or authorization to effect such payment.

If Initiator 1 was of the opinion that the payments of all the outstanding 20 percent of the invoices were due in respect of the underlying contract, it should have considered other courses of action. The scope of this issue is outside of the ICC Rules be it UCP 600 or DOCDEX.

In this respect, it is to be pointed out that UCP 600 sub-article 4 (a) states that: "[A] credit by its nature is a separate transaction from the sale or other contract on which it may be based. Banks are in no way concerned with or bound by such contract, even if any reference whatsoever to it is included in the credit."

Issue 3

The first guarantee (performance bond) in the amount of USD 211,766.89: This guarantee and the corresponding counter-guarantee had not been issued subject to any ICC Rules. Therefore, the ICC DOCDEX Rules cannot be applied to this transaction and no Decision can be rendered. If Initiator 1 considers the claims as non-complying or unjustified, it could pursue this argument through an appropriate venue under the governing law.

The second guarantee (performance bond) in the amount of USD 79,972.00: The guarantee (performance bond) that was requested to be issued in country "I" was to be "as per your standard format" and thus, logically, in accordance with the Laws of country "I". The counter-guarantee given by the Initiator 2 was made subject to ICC URDG (758). The fact that the guarantee and the counter-guarantee were subject to different laws and/or rules poses considerable problems.

In this respect, it is to be observed that URDG 758 sub-article 15 (c) requires that the counter-guarantee would have to contain express wording to the effect that: "[T]he supporting statement under sub-Article 15 [(a)] [(b)] is excluded.", otherwise the requirement of sub-article 15 (b) always applies, i.e., "a demand under the counter-guarantee shall in any event be supported by a statement, by the party to whom the counter-guarantee was issued, indicating that such party has received a complying demand under the guarantee or counter-guarantee issued by that party."

From the documents submitted, it was clear that the counter-guarantee did not contain express wording that the requirement for the supporting statement, as mentioned above, was excluded. The claim received by Initiator 2 contained an ambiguous statement that combined parts of the requirements of URDG 758 sub-article 15 (b) and sub-article 15 (a). Initiator 2 honoured the claim.

If Initiator 1 believed that the claim was unjustified in respect of the underlying contract, it's possible legal actions would have to be made through an appropriate venue under the governing law.

This is supported by UDG 758 sub-article 5 (b) which states that: "[A] counter-guarantee is by its nature independent of the guarantee, the underlying relationship, the application and any other counter-guarantee to which it relates, and the counter guarantor is in no way concerned with or bound by such relationship. A reference in the counter-guarantee to the underlying relationship for the purpose of identifying it does not change the independent nature of the counter-guarantee. The undertaking of a counter guarantor to pay under the counter-guarantee is not subject to claims or defences arising from any relationship other than a relationship between the counter guarantor and the guarantor or other counter guarantor to whom the counter-guarantee is issued".

Conclusion

Issue 1

Respondent failed to act in accordance with the requirements of UCP 600 article 16, disposed of the documents and therefore is bound to honour 80% of the value of the two presentations with interest.

Issue 2

Respondent acted in accordance with the terms of the credit. Any action by the Initiators is to be done outside the Letter of Credit through an appropriate venue under governing law.

Issue 3

The first guarantee (performance bond) in the amount of USD 211,766.89:No DOCDEX Decision could be rendered as neither the guarantee nor the counter-guarantee had been subject to any ICC Rules. This was a matter for an appropriate venue under the governing law to decide.

The second guarantee (performance bond) in the amount of USD 79,972.00:The claim under the counter-guarantee had been honoured. The payment was final. If the Initiator 1 felt that the claim was unjustified in respect of the underlying contract, it's possible legal actions should have been through an appropriate venue under the governing law.

The above conclusions were unanimous.