Parties

Initiator: Bank S (Negotiating Bank)

Respondent 1: Bank A (Issuing Bank)

Respondent 2: Company C (Applicant)

Respondent 3: Company N (Beneficiary)

Background and transaction

On September 6, 2007, Respondent 1 issued an irrevocable documentary credit at the request of Respondent 2 in favour of Respondent 3. The credit was available with any bank by negotiation and was subject to the UCP (1993 Revision), ICC Publication No. 500.

The goods were described as 'Iron Ore Fines originating from India'. The credit called for FE content to be at 61 percent basis, 60 percent minimum. There was also an additional condition in the credit that Respondent 2 should have the option to reject the cargo if the FE content was below 60 percent.

On December 31, 2007, the Initiator forwarded documents drawn under the credit to Respondent 1 stating that it had negotiated the documents and requested payment for US$1,049,296.25.

On January 14, 2008, Respondent 1 sent a SWIFT message to the Initiator advising that documents received from the Initiator were not acceptable due to several discrepancies. One of the discrepancies cited being: "FE content appearing on the invoice was below 60 percent". The Respondent 1 further stated that it was holding the documents at the disposal of the Initiator.

On January 22, 2008, the Initiator sent a SWIFT message to Respondent 1 requesting that the documents be returned to the Initiator so that the goods could be sold to another party. The Initiator also asked Respondent 1 to confirm either the return of the documents or release of payment.

On January 23, 2008, a Court issued an order as follows:

A. Approve Respondent 2's request for a Court order;

B. Order a freeze of the Iron Ore Fines being unloaded at a port in country of Respondent 2;

C. Order Respondent 3 to provide a guarantee of US$800,000 to the Court or to Respondent 2. Respondent 3 may also negotiate with the Respondent 2 for an agreed form and sum of the guarantee;

D. Respondent 2 shall initiate litigation or arbitration within 15 days of receipt of the Court order. If such litigation or arbitration is not carried out within such period, the Court will release the freezing of the Iron Ore Fines.

On January 24, 2008, Respondent 1 sent a SWIFT message to the Initiator advising that it could not return the documents to the Initiator because a Court had frozen the documents after Respondent 2 impleaded Respondent 3. Respondent 1 further stated that it was holding the documents pending receipt of further instructions from the Court.

On February 4, 2008, the Initiator sent a SWIFT message to Respondent 1 stating that they were dealing with documents only as per the UCP and that any disputes between Respondent 2 and Respondent 3 must be dealt with outside of the terms of the credit. Once again, the Initiator requested Respondent 1 to either return the documents to them or make payment.

The Initiator followed up the matter with Respondent 1 by SWIFT on different occasions but did not receive any payment or response.

Issues

1. Was the Initiator entitled to the return of the documents by Respondent 1?

2. Given the court order dated January 23, 2008, was it justified for Respondent 1 to withhold the documents and not to return them to the Initiator as requested?

3. Is Respondent 1 obligated to pay the Initiator the drawing amount of the credit?

Analysis

1. Respondent 1 advised the Initiator in a SWIFT message of January 14, 2008 that the documents were discrepant and that Respondent 1 was holding the documents at the disposal of the Initiator. In response to Respondent 1's refusal notice, the Initiator responded by SWIFT requesting Respondent 1 to return the documents or make payment.

Article 14e of UCP 500 states the following: "If the Issuing Bank and/or Confirming Bank, if any, fails to act in accordance with the provisions of this Article and/or fails to hold the documents at the disposal of, or return them to the presenter, the Issuing Bank and/or the Confirming Bank, if any, shall be precluded from claiming that the documents are not in compliance with the terms and conditions of the Credit."

Since the Initiator had requested the return of the documents unless Respondent 1 made payment, and Respondent 1 did not pay, the Initiator was entitled to the return of the documents.

2. Respondent 1 was not a party to the court order, and was not mentioned anywhere in the court order. Furthermore, the court order did not place any restrictions on the documents and did not order Respondent 1 to freeze the documents as advised by Respondent 1 to the Initiator. Upon rejection of the presented documents, Respondent 1 had no ground not to return the documents to the Initiator. Accordingly, Respondent 1's action was not justified.

3. Based on UCP 500 sub-article 14 (e), failure to return the documents to the Initiator precludes Respondent 1 to claim that the documents were not in compliance with the terms and conditions of the credit. Accordingly, Respondent 1 was obligated to honour the relevant drawing plus any applicable delayed payment interest and costs.

Conclusion

Given that the court order did not enforce Respondent 1 to withhold the documents, Respondent 1 was obliged to return the documents to the Initiator under UCP; failing that, Respondent 1 must honour the drawing.

This decision was a unanimous decision by the panel of experts.