Parties to the query

Claimant: Beneficiary

Respondent 1: Issuing Bank (under merger)

Respondent 2: Issuing Bank

Detailed description

Respondent 1 (under merger with Respondent 2) issued a credit subject to the UCP 600 in favour of the Claimant.

A penalty clause was included in the credit which stated that in case of late shipment, a penalty of 10 percent of the invoice value for a delay of 1 or more days, and an additional penalty of 1 percent of invoice value per delayed day from the second day, would be deducted from the payment.

The documents were presented to Respondent 1 by a presenting bank on behalf of the Claimant. Consequently, Respondent 1 issued a notice of refusal by SWIFT MT734 to the presenting bank citing several discrepancies, including credit expired, late shipment, and late presentation.

In due course, the applicant provided a waiver of discrepancies. As a result, Respondent 1 informed the presenting bank that no amount was payable due to the penalty clause stated in the credit.

In response, the Claimant maintained that the penalty clause was non-documentary and was to be disregarded as per the UCP 600 sub-article 14 (h). In addition, the Claimant stated that after sending the refusal notice, Respondent 1 should have obtained the beneficiary’s prior approval before deducting any penalty deduction from the payment.

It was queried whether a penalty clause appearing as a condition in field 47A (Additional Conditions) of the credit was a non-documentary condition, and whether, after having sent a notice of refusal based on an expired credit, Respondent 1 was under any obligation to obtain the beneficiary’s prior approval before making a deduction as per the aforesaid penalty clause in field 47A.

Analysis

The ICC Opinion R326 was stated by the Claimant to be a parallel with this particular DOCDEX case. However, it was determined that in comparison with the case referred to in the aforementioned Opinion, and considering the penalty clause stipulated in the credit referenced by this DOCDEX case, both the Claimant and the presenting bank were already on notice and as such, Opinion R326 did not apply.

The UCP 600 sub-article 14 (h) states 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. Additionally, the “Commentary on UCP 600” (ICC Publication no. 680) states that the issues covered by sub-article 14 (h) can be easily resolved by ensuring that any term or condition stated in the documentary credit is clearly linked to a stipulated document.

The ICC Opinion R212 states that a condition is not deemed to be non-documentary if the condition can be clearly linked to a document stipulated in the credit. Since the credit in Opinion R212 stipulated a marine bill of lading, there was, in fact, a document called for to which the condition could be clearly linked.

Based on the aforesaid extracts from the “Commentary on UCP 600” read with Opinion R212, it was mentioned that the penalty clause in the credit was linked to the failure of the Claimant to ship goods within the latest date of shipment.

As the latest shipment date was mentioned in the credit, it was possible to calculate the penalty amount from the shipped on board date and hence the condition was not non-documentary as it had a linkage to the date of shipment which could be verified from the date of shipment, which was a documentary requirement of the credit.

When documents are presented under a credit subject to the UCP 600, an Issuing Bank, in accordance with sub-article 14 (a), must examine the presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation.

If an issuing bank determines that a presentation does not comply, then in accordance with provisions of the UCP 600 article 16, it may refuse to honour and must give a single notice to that effect to the presenter stating each discrepancy in respect of which the bank refuses to honour. The action of Respondent 1 in sending its refusal notice via SWIFT MT734 met the requirements of the UCP 600.

As the credit stipulated a latest date for shipment and the bill of lading indicated a much later date of shipment, there was a significant delay in shipment and the penalty clause for delayed shipment applied.

Due to the expiry of the credit, Respondent 1 could have either refused to examine the documents or could have refused the documents in accordance with the UCP 600 sub-articles 16 (b) and 16 (c) stating discrepancies. In this respect, the action of Respondent 1 met with the requirements of the UCP 600.

In respect of the question of whether Respondent 1 could apply the penalty clause and deduct any amount from the payment without the approval of the Claimant, various ICC Opinions were cited, specifically R214, R726, R744 / TA699rev and DOCDEX Decision Number 271.

Decision

It was decided that the penalty clause was not non-documentary due to its linkage to shipment date on the bill of lading.

Furthermore, as the penalty condition applied, the approval of the Claimant was not required, and no instructions from the presenting bank were received prior to the Respondent agreeing to the applicant’s waiver of discrepancies as per the UCP 600 sub-article 16 (c) (iii) (b).