Parties to the query

Claimant: Nominated Bank

Respondent: Issuing Bank

Detailed description

A credit issued subject to the UCP 600 included a clause in the additional conditions referring to an underlying contract, and the requirements thereunder, without providing indication of any required document for compliance with such condition.

Shortly after issuance, the Respondent informed the Claimant that the beneficiary wished to cancel the credit and that the file should be closed by the Claimant. This action was based upon apparent non-compliance by the beneficiary with the above-mentioned condition regarding the underlying contract.

Nevertheless, prior to maturity of the credit, the Claimant submitted credit-complying documents to the Respondent. In response, the Respondent returned the documents as they regarded the credit as cancelled.

The question was raised as to whether the Respondent was obligated to pay the Claimant for the presentation of documents, despite the request for cancellation being sent by the Respondent prior to presentation of documents.

Analysis

As stated in the UCP 600 article 3, a credit is irrevocable. As such, it constitutes a definite undertaking of the issuing bank.

Although the credit contained a condition referencing a contract, the UCP 600 sub-article 4 (a) clearly states that a credit by its nature is a separate transaction from the contract on which it may be based, with the consequence that banks are in no way concerned with or bound by such contract, even if the credit so references.

In addition, the credit made no reference to the type of document that would indicate compliance with the stated condition. In such circumstances, the UCP 600 sub-article 14 (h) applies in that if a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it.

In respect of the Respondent unilaterally cancelling the credit, reference is made to the UCP 600 sub-article 10 (a), wherein it is stated that a credit cannot be cancelled without the agreement of the beneficiary. A statement from the Respondent that the beneficiary wished to cancel the credit does not mean that the beneficiary has accepted such cancellation.

In view of the fact that the beneficiary presented documents to the Claimant, this clearly indicated that the request for cancellation by the Respondent had been rejected by the beneficiary.

The message sent by the Respondent to the Claimant, after receipt of the documents, did not constitute a valid notice of refusal according to the UCP 600 sub-article 16 (c). As such, the Respondent was precluded from claiming the documents did not constitute a complying presentation in accordance with sub-article 16 (f).

Decision

It was decided that the clause in the additional conditions of the credit was non- documentary and, therefore, to be disregarded. The credit could not be cancelled without the beneficiary’s consent.

The Respondent did not provide a valid notice of refusal of documents to the Claimant in accordance with the UCP 600 sub-articles 16 (a), (c), and (d). As such, the Respondent was precluded from claiming that the documents were non-compliant as per the UCP 600 sub-article 16 (f), and, in their capacity as Issuing Bank, they were obliged to reimburse in accordance with the UCP 600 article 7.

Any dispute between contractual parties in respect to the underlying agreement was outside the scope of the UCP 600.