Parties to the query

Claimant: Confirming Bank

Respondent: Issuing Bank

Detailed description

The Respondent issued a credit, subject to the UCP 600, initially available for payment at the Claimant’s counters in France.

The credit was subsequently amended to be available with, and confirmed by, the Claimant’s Milan branch.

29 presentations were made under the credit and, despite no formal response being received from the Respondent to the SWIFT MT754 sent by the Claimant for each drawing, all documents were paid on time.

For the 30th document presentation, the usual SWIFT MT 754 was sent to the Respondent by the Claimant.

In response, the Respondent stated that following a judicial order, applicant assets were frozen and any money transfer abroad in the frame of applicant's business activity was banned.

As such, the Respondent was prevented from reimbursing the Claimant despite a complying presentations. There was no indication that the documents had been rejected in accordance with the UCP 600 Article 16.

It was queried as to whether the judicial order regarding freezing of the assets of the applicant prevented the Respondent from honouring the credit. Furthermore, clarification was sought on whether the Respondent was obligated to reimburse the Claimant without delay despite the judicial order.

Analysis

The UCP 600 sub-article 4 (a) states that a credit is a separate transaction from the sale or other contract on which it is based. The undertaking of a bank to honour is not subject to claims or defences by the applicant resulting from its relationship with the issuing bank or beneficiary.

The UCP 600 sub-article 7 (c) states that an issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank.

It was highlighted that these articles made it clear that the obligation of the Respondent to honour a credit was independent of the applicant, or any relationship between the applicant and itself, or the applicant and the beneficiary.

The UCP 600 article 16 outlines the actions available to an issuing bank when it determines that a presentation does not comply.

Under sub-article 16 (f), it is stated that if an issuing bank fails to act in accordance with the provisions of the article, then it is precluded from claiming the presentation is not compliant.

There was no indication in the provided documents that the Respondent considered that any of the presentations were non-compliant with the credit terms.

The message sent by the Respondent to the Claimant indicated that they had received a judicial order freezing the accounts of the applicant, whilst also stating that such order froze any international transfer by the client in the frame of its activities.

Within this message, the Respondent asked the Claimant to temporarily defer any utilisation under the credit, and to invite the beneficiary to stop any shipment and/or utilisation of the credit, pending the situation being resolved.

There was no indication that the judicial order prevented any performance under the credit or instructed the Respondent not to honour its obligations under the credit.

A similar situation had been addressed in the ICC Opinion TA906rev, which stated that If the judicial decision was limited to freezing the applicant’s account(s) maintained with the issuing bank, the issuing bank remained obligated to honour the presentation, even if it could not debit the applicant’s account. The Opinion went on to state that there was no indication that the judicial decision was preventing the issuing bank from honouring under its credit. This being the case, the issuing bank must honour without any further delay by reimbursing the nominated bank which had acted upon its nomination and honoured in good faith. In its conclusion, the Opinion stated that the approach of the issuing bank was not in line with international standard banking practice and was, therefore, considered bad practice.

In this case, the Respondent’s message indicated that the judicial order was related to investigations in respect of whitewashing and over invoicing by the applicant. Whilst this indicated a financial crime may have taken place, there was no other communication that made reference to any financial crime aspect.

It was mentioned that whilst different jurisdictions may have their owns laws and/or regulations in this respect, there was no indication in the message, or any subsequent message, that any judicial order, law or regulation prevented the Respondent from honouring its obligations as an issuing bank under a credit.

Decision

It was decided that the Respondent must settle its obligations and reimburse the Claimant.

The type of action it took to recover funds from the applicant or any other party was seen as a matter for local law and was not covered by the UCP 600.

The actions of the Respondent did not adhere to the UCP 600, standard banking practices or ICC Official Opinions, and was considered as bad practice.