Parties to the query

Claimant: Advising and Transferring Bank

Respondent 1: Issuing Entity

Respondent 2: First relay institution

Respondent 3: Second relay institution

Respondent 4: Advising Bank

Detailed description

The credit, before being advised to the 2nd Beneficiary, passed through a number of banks and parties. Main reasons for this were that the SWIFT keys were not exchanged between the relevant parties, and that one bank refused to advise a credit issued by a non-bank.

It appears that each version of the credit stated the applicable rules as ‘OTHR/UCP Latest Version’.

The version received by the advising bank stated in Field 47A of the MT710, “THIS DOCUMENTARY CREDIT IS SUBJECT TO THE TERMS AND OTHER CONDITIONS GOVERNING THE ISSUANCE OF THIS CREDIT, CREDIT NORMS OF THE ISSUING INSTITUTION AND UCP 600, IN THE EVENT OF ANY CONFLICT, CONTRADICTION OR INCONSISTENCY BETWEEN THE ISSUING TERMS OF THIS DOCUMENTARY CREDIT AND UCP 600/ISBP681 (AS APPLICABLE), THE ISSUING 14B OF UCP600 SHALL NOT BE APPLICABLE.”

The Claimant was the Advising and Transferring Bank of the non-bank issued documentary credit. The credit included a provision to the effect that Respondent 1 would only effect payment when payment was received from the applicant. Although discrepancies were waived by the applicant, and an acceptance message was given by Respondent 1, payment was not effected at maturity.

The key questions raised were whether such a credit could be covered by the UCP 600, whether a non-bank could use the SWIFT MT700 format, whether Respondent 1 was obligated to honour the presentation at maturity.

Furthermore, bearing in mind the terms and conditions of the credit, whether there was a need to examine the submitted documents, whether an advising bank created a breach in terms of its responsibilities in respect of the "apparent authenticity of the credit" when not advising both Respondent 1 and beneficiary of such clauses in the credit, whether the credit could be negotiated, and whether the Claimant had any obligation to pay the second beneficiary without having received funds from the Respondent 1.

Analysis

It was stated that as the meaning of the capitalised statement (refer above “detailed description”) was not entirely clear, any party should take care in accepting a credit which included the wording “credit norms of the issuing institution”, on the basis that such phrase was not defined in UCP 600. Furthermore, excluding the UCP 600 sub-article 14 (b) without replacement created ambiguity and uncertainty in the credit.

In addition, the reimbursement instructions stated that the credit would only be honoured when payment was received from the applicant. This was highlighted as very unusual practice which should be discouraged, with such a clause going against the very nature of a documentary credit instrument, and contrary to international standard banking practice.

Although the credit stated that it was available by negotiation, this was impossible as payment was conditional upon receipt of funds from the applicant.

The reimbursement instructions made the undertaking of Respondent 1 dependent on the payment from the applicant. This is seen as a modification of the UCP 600 article 7.

It was also pointed out that all the numerous parties connected with this credit should have paid close attention to the ISBP 745 Preliminary Considerations (v) and (vii).

The transfer of the credit stated that payment would be effected after receipt of funds from Respondent 1. By not including the original reimbursement clause, and including this new reimbursement clause, the second beneficiary may have been left with the impression that this is a “normal” documentary credit, in the sense that Respondent 1 was obligated to honour a complying presentation.

This, however, was not the case, as any payment would have depended on payment from the applicant. On the basis of this conclusion, the Claimant, as transferring bank, had failed to comply with the UCP 600 sub-article 38 (g).

Decision

It was decided that the UCP 600 could be the basis for such a credit, that there was nothing to prohibit a non-bank from using the SWIFT MT700 format and that, on the basis of their acceptance message, Respondent 1 was obligated to honour.

For this particular credit, the status of the documents (i.e. discrepant or complying) had no bearing on the undertaking of the issuing bank. So, from that perspective, there appeared to be no need to examine the documents.

However, it was also stated that there could be other reasons, for example that the willingness of the applicant to pay would depend on the nature of the discrepancies.

It was not considered possible to determine if the advising bank had created a breach in terms of its responsibilities in respect of "apparent authenticity”.

Whilst there was a nominated bank mentioned in the credit, given the reimbursement instructions it was considered very unlikely that this credit could have been negotiated by a nominated bank.

Under this credit (with reference to the reimbursement instructions), the fact alone that the applicant had accepted the discrepancies did not obligate Respondent 1 to honour at maturity, though this created an impression that the applicant would, or might have, effected payment to Respondent 1. However, the fact that Respondent 1 undertook to settle the payment at maturity without explicit reservation, does so.

Pursuant to the terms of the transferred credit, the Claimant was only obligated to effect payment to the second beneficiary upon receipt of funds from the Respondent 1.

However, the Claimant failed to include the original reimbursement instruction into the transferred credit. Therefore the Claimant failed to comply with the UCP 600 sub-article 38 (g).

The consequence of this omission was not regulated by the UCP 600, but would be an issue for a court to decide if the second beneficiary had suffered any loss or damages caused by the missing information.