Article

Factual Summary: To pay for the purchase of Sarawak round logs, Ultimate Buyer caused bank to issue a commercial LC in the amount of $1.4 million in favor of Intermediate Seller. As stated in the opinion, the LC was "'available with...by...any bank by negotiation' of drafts at 45 days sight for 100% of the invoice value marked as drawn under the L/C." The LC included instructions to any paying, accepting, or negotiating bank that the documents be sent to Issuer's Zhejiang branch in China, and that "'all drafts drawn under and in compliance with the terms of this L/C will be duly accepted on presentation at this office and paid at maturity.'" Among the required documents was a "'Certificate of Origin in triplicate issued by Chamber of Commerce in Malaysia.'"

When Intermediate Seller was advised of the LC, it arranged for its bank, Plaintiff Bank, to issue a "back-to-back" LC in the amount of US$1.315 million, plus or minus 5%, in favor of the Ultimate Seller of the logs in Malaysia. Plaintiff Bank informed the Issuer of the first LC that the LC had been assigned to it "'as continuing security for the payment of all amounts' due from [Intermediate Seller] to [Plaintiff Bank], and that the assignment included all the beneficiary's 'rights, title, benefit, and interest both present and future with regard to the said credit.'"

Subsequently, the Ultimate Seller presented documents under the back-to-back credit through an advising bank which stated that it had negotiated documents under the credit. The Intermediate Seller's instructions were that Plaintiff Bank should "'negotiate the above bill and pay our import bill under [the back-to-back LC] for US$1,316,404.63.'"

Subsequently, Intermediate Seller gave Plaintiff Bank a "Collection Order" accompanied by other documents including a bill of exchange drawn in favor of Plaintiff Bank together with "'[f]urther [i]nstructions,'" which requested that Plaintiff Bank "negotiate the above bill and pay our import bill" under its back-to-back LC.

Plaintiff Bank then forwarded the documents together with the bill of exchange which was drawn on Issuer. In an accompanying form letter, Plaintiff Bank stated that "'[w]e have today negotiated the above bill and endorsed the amount on the reverse of the original credit,'" and requested the funds be remitted to a stipulated account in New York at maturity.

Seven calendar days after it received the documents, Plaintiff Bank remitted payment on its back-to-back LC to the Malaysian bank that had negotiated the documents.

On that same day, Plaintiff Bank also sent Beneficiary/Intermediate Seller a "Credit Advice" and a "Debit Advice". The Credit Advice read:

Our ref EBP91714 for USDl,401,495.42 Your ref No: INV990018 under Bank of China, Zhejiang Branch L/C No.LC9101152/99

We have today negotiated the above bill for USD1,316,404.63 and T/T remitted to Shin Yang Trading Sdn. Bhd. Malaysia as per your instruction.

The Debit Advice read:

In accordance with details shown below, we have today debited your Advance Account - Import Loan with us :

Amount of Advance Account : USD***1,316.404.63
Value Date : 19 Nov 99
Interest Rate : 7.625%

On the fifth banking day following presentation, Issuer sent a notice of rejection to Plaintiff Bank, claiming that the "'Certificate of Origin [was] not issued by [the] Chamber of Commerce [of Malaysia] as per L/C requirements.'" Regarding the disposal of the documents, the notice stated that Issuer would "hold the does [sic] at your risks and responsibilities. PIs [sic] advise us your disposal instructions, if any. However, we will release the docs to applicant against payment/acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance ... .'" Communications between the two banks made it clear that the basis for the rejection was that while the Certificate had been both certified and signed by the Chamber of Commerce, it had not been issued by the Chamber of Commerce.

Subsequently, Issuer informed Plaintiff Bank that it had "'received an injunction dated [two days prior] from the local court, forbidding us to pay the proceeds of the [aforementioned] docs to your bank. The injunction has become effective since [one day prior].'"

This communication referred to a "property preservation order" issued by the People's Intermediate Court of Wuhu City, Anhui Province, under a PRC statute. It attached all documents under the LC and ordered that payment be withheld. The court concluded that this action related to the Beneficiary/Intermediate Seller and a third party related to "an entirely separate sale and purchase transaction." After appeals by the Plaintiff Bank and the Beneficiary were rejected, the logs were ordered to be sold at auction. In the meantime, Plaintiff Bank brought an action in Hong Kong against Issuer for reimbursement as a negotiation bank, claiming that it had been wrongfully refused. Finding the Plaintiff Bank did not qualify as a negotiating bank, the court dismissed its claim.

Subsequent to this action, a query was made to the ICC Banking Commission. It issued a preliminary opinion, changed its mind on further application and information, and concluded that on the basis of the information that the certificate was not discrepant.

Legal Analysis:

1. Certificate of Origin, "Issued"; Discrepancy: The document presented to fulfill the LC requirement of "'a Certificate of Origin in triplicate issued by Chamber of Commerce in Malaysia'" was an exporter's declaration "signed and chopped by the shipper" on which had been superimposed "two chops of the Chinese Chamber of Commerce, Miri, Sarawak (one of which contains within it handwritten initials or signature), and, more important, a chop signed by the Executive Secretary, The Chinese Chamber of Commerce, Miri, Sarawak, Malaysia which bears the legend: 'Certified to the best of our knowledge and belief to be correct and without prejudice.'"

Issuer maintained this was "not a chop 'issued' by a Chamber of Commerce." Experts testified on behalf of each party. Issuer's expert witness took exception to the reservation accompanying the chop, concluding that "in circumstances wherein such qualifying wording was used, such a document could not be regarded as fulfilling the independent verification function required of a Certificate of Origin." The court noted its "difficulty" in accepting this position. The court stated that

[I]t is no part of the duty of a document checker within the import bills department of a bank to undertake any such qualitative assessment of the language used in a document of this type, and to conclude, in effect, that the language employed within that document is couched in sufficiently qualifying terms such that it must be regarded as failing to discharge a function of independent verification. In my view such an approach would be to introduce into this process an unacceptable level of uncertainty.

The court indicated that it was not "greatly influenced by the ICC's ultimate stance on the point. In light of the diametrically opposite positions as were taken, this was not the ICC's finest hour ... ."

The court accepted the evidence of Plaintiff Bank's expert and the argument of Plaintiff Bank's counsel, that the document represent both "an underlying exporter's certificate and a superimposed certificate of a Chamber of Commerce in Malaysia" and "the fact that this document, to which the Chamber of Commerce so evidently had given its imprimatur, did not bear on its face the letterhead or title of the Chinese Chamber of Commerce was substantively nothing to the point." The court stated that:

In my view the form of this document did not make it a document which had not been 'issued' by this Chamber of Commerce, and on the evidence before the court this seems unlikely to be the type of point which normally would be taken or regarded as a 'discrepancy' either by a bill checker or by that checker's supervisor. As earlier noted, in inter-bank correspondence the plaintiff bank had pointed out to the defendant that a certificate in this form had been accepted by the defendant in previous transactions, although clearly this was not the usual situation, as the existence of the collateral Chinese legal proceedings involving an allegation of fraud against [Intermediate Seller] would tend to indicate.

The Court disagreed with suggestion that the language of the verification be subject to "qualitative assessment," stating that:

[S]uch an approach would be to introduce into this process an unacceptable level of uncertainty. Had, for example, this certificate been presented under a Chamber of Commerce letterhead, rather than being in the form of a chop upon an existing declaration, it is difficult to believe that the niceties of the language employed therein would have resulted in the assertion that the Certificate had not been 'issued' by a Chamber of Commerce, as per the unambiguous requirement within this letter of credit.

The Court concluded that "in the circumstances this alleged 'discrepancy' did not constitute a good reason for [Issuer] to reject the documentary presentation."

2. Notice of Rejection; Conditional Statement of Disposition: In what the court described as "essentially ... a 'back-up' argument," Plaintiff Bank argued that the first notice of rejection was inadequate under UCP500 Article 14 because it was conditional, indicating that the documents would be released to the applicant under certain circumstances. The court indicates its views on this issue although "strictly [ ] not required" because of its earlier decision that there was no discrepancy.

Plaintiff Bank argued that the conditional nature of the statement, that the documents will be "'release[d] ... to applicant against payment/ acceptance without further notice to you unless your advice to the contrary received by us prior to the payment/acceptance'" rendered the notice inadequate. It cited the English decision in Credit Industriel et Commercial v. China Merchants Bank [2002] 2 All ER 427 (Comm) [England] [abstracted at 2003 Annual Survey 175], in which a similar rejection notice was declared in violation of UCP500 Article 14(d).

In that decision, the notice was, according to the court in the case at bar, "not saved by the potential for acceptance of contrary instructions prior to payment, particularly where no notice was to be given, and thus the message in question constituted a continuing threat of conversion of the claimant's documents."

Issuer responded that Credit Industriel was wrongly decided, that "prevailing regional practice" made the language acceptable under Article 14(d), and, in any event, any non compliance was "cured" by a second notice of rejection sent the following day.

The court rejected these arguments. It stated that

[T]he crucial consideration within an Article 14(d)(ii) notice is that it should communicate that the rejected documents are being held at the disposal of the sellers, and that such statement should not be glossed with any conditional element. In this connection [Issuer's counsel] commented that the first rejection notice was, in essence, "self executing", but this, with respect, seems to me to be the intrinsic flaw. In my view that which the first notice has sought to do, to use an evidential analogy, is essentially to reverse the burden - instead of holding the documents at the seller's disposal and awaiting the seller's instructions, the bank is here saying that in circumstances of payment/acceptance the documents will be released unless contrary advice is received prior to this (doubtless often welcome) eventuality, thereby raising the possibility of such release in the interim between such communication and the seller's response. Whilst this may well be intended to be an helpful approach to dealing with a potential impasse between the parties to the underlying transaction, the short point is that this form of response goes above and beyond the necessarily unambiguous requirement laid down within Article 14(d)(ii): either the documents are held at the seller's disposal, or they are not.

3. Banking Practice; Notice of Refusal; Conditional Statement of Disposition: As to the argument that a regional banking practice overrode the requirements of UCP500, the court expressed doubts as to the existence of such a practice, noting that this argument "appears to depend entirely upon an impressionistic view of the situations taken by [Issuer's] expert." The court indicated that "[w]hilst [Issuer's expert] is no doubt a banker of eminence and expertise, with respect I decline to elevate his impressions/recollections of that which certain banks were or may have been in the habit of doing into the status of a concluded 'banking practice' which has the effect of cutting across the specific requirement of Article 14(d)(ii) as laid down within the current UCP 500." Moreover, the court stated that "in any event, I fail to see how 'banking practice' can override the contractual incorporation within this credit of the provisions of the UCP 500."

4. Notice of Refusal; Notice of Refusal, Second Notice: With respect to the allegedly "curative" second notice, the court stated that:

[T]he essence of a notice of rejection is that it should be both certain and precise and, most important, should accurately reflect the discrepancies which form the basis of the communicated rejection. In principle therefore (and subject perhaps to technical problems in communication, wherein a garbled message may have to be retransmitted/clarified) I do not consider it is open to [Issuer's counsel] to say, as he persuasively did, that in effect the second notice 'superseded' the first, which for this purpose simply could be ignored. In the same way as it is established that the rejecting bank has only one opportunity under the UCP 500 to frame its discrepancies as the basis for rejection of the documentary rejection [sic], and cannot return for a second 'bite of the cherry', it seems to me that in principle a like approach should be adopted in terms of notifying the presenting bank of the fact that the documents are being held at its disposal. Precision and certainty have not ceased to be benchmarks within modern letter of credit transactions.

5. Reasonable Time: Moreover, the court noted that this second notice "came too late" since it came on the 7th banking day, the outer limit of time permitted by UCP500.

6. Negotiation; Negotiating Bank; Collecting Bank; "For Value"; UCP500 Article 10(b)(ii): Issuer argued that Plaintiff Bank, while pleading its case as if it were a negotiating bank, was in fact only a collecting bank. The court stated that in this case:

The "master L/C" as issued by [Issuer] was specifically expressed to be a negotiation credit, and in what would be the usually accepted course of negotiation the [Plaintiff Bank] would have purchased the documents under that credit, and thereafter would have credited [Intermediate Seller's] account with the negotiated amount, which would have been the face value of the credit less a discount for accelerated payment to reflect the fact that [Intermediate Seller] was getting its money under the credit sooner than the 85 day tenor of the bill drawn thereunder. Having thus been paid, [Intermediate Seller] would have dropped out of the picture, and at this stage [Plaintiff Bank], having thus negotiated the credit, would be standing firmly in [Intermediate Seller's] shoes qua principal, and thus would have assumed the risk of inability to recover under the "backing credit" whilst remaining under the obligation to pay out, upon compliant presentation, under the credit it had itself issued ... . It is common ground that this sequence of events did not take place in the instant case.

The court noted that, instead, a "Collection Order" was received by Plaintiff Bank from Intermediate Seller with instructions to "'negotiate the [LC] and pay our import bill [for the back-toback LC]," with further instructions to credit the proceeds to Intermediate Seller's account with Plaintiff Bank. The court concluded that actual negotiation had not been established by Plaintiff Bank, noting that:

Notwithstanding liberal use of the term "negotiate" within various documents put forward by [Plaintiff Bank], such "negotiation" as is asserted to have taken place does not appear to have been negotiated in the true sense - the essence of which is the purchase of the documents and their presentation under the credit in the purchaser's own right - and is fundamentally inconsistent with the contemporary documents, in particular the Collection Order ... issued by [Intermediate Seller] to [Plaintiff Bank], and the Debit Advice ... issued to [Intermediate Seller] by [Plaintiff Bank] upon the payment made to [Negotiating Bank for back-to-back LC] under [Plaintiff Bank's] letter of credit.

...

What did not happen, in my view, is a true negotiation for value by the plaintiff of the documents presented by [Intermediate Seller] under the "master credit", with [Intermediate Seller] being put in funds in terms of a discounted sum and [Plaintiff Bank] thereby assuming the personal risk of non-payment by [Issuer] absent recourse, in such eventuality, to [Intermediate Seller]. In other words, [Plaintiff Bank] lent to [Intermediate Seller] against the security of [Issuer's] credit without stepping into [Intermediate Seller's] shoes as beneficiary thereunder, and I do not construe this as "the giving of value" within the meaning of Article 10(b)(ii) of the UCP 500, although as a matter of commercial reality prospective collection under [Issuer's] credit doubtless provided comfort to [Plaintiff Bank] in advancing monies to [Intermediate Seller] to issue its own credit in favor of [Beneficiary of back-to-back LC].

7. Illegality; Choice of Law: Issuer alleged that due to the attachment order of the Chinese Court making payment on the LC would subject it to criminal liability under Chinese law which was the law of the place of performance. It asserted that the place of performance is judged by where the LC was issued. Issuer further noted that the LC included instructions to any Paying/Accepting/Negotiating Bank that stated all documents must be sent in one lot to the Zhejiang, China branch of Issuer's bank, where if compliant they would be accepted on presentation at that office.

Plaintiff Bank countered that Hong Kong law should be applied as either "proper law or the law of the place of performance," due to the presentation of the documents in Hong King, and the notation in the LC that Hong Kong was the place of expiry for the LC. Plaintiff Bank further asserted in an amended pleading that New York law should govern as the law of the place of performance, since Plaintiff Bank had instructed Issuer to remit payment to its account in New York.

In rejecting Plaintiff Bank's contention that New York law should apply, the Court stated that "[t]he place of payment must designate the place where, as a matter or [sic] contract, a party is bound to perform, and in this instance [Issuer's] obligation under the credit was to make payment in Zhejiang [China]. It is difficult to see how a random payment instruction can or should unilaterally alter the applicable law to be discerned from the place of primary contractual obligation ... ." The Court went on to discuss a similar case cited by Issuer from the Singapore Court of Appeal: Sinotani Pacific Pte Ltd v. Agricultural Bank of China [1999] 4 SLR 34 [abstracted at 2000 Annual Survey 365], where the proper law of the LC contract was found to be Chinese law due to its issuance in China. The Court concluded by stating that in this instance "the place of performance under this credit is Zhejiang, China, and thus the lex loci solutionis is Chinese law," and "the defense of illegality under the law of the place of performance must succeed ... ."

The court also indicated that "it is significant in my view that this credit was not confirmed in Hong Kong, and that under the terms of the credit there need not have been any negotiation in Hong Kong, the credit merely providing ... that [it] is 'available with ... by ... any bank by negotiation." The court continued by stating that "[i]t strikes me as highly significant that no obligation under the credit was owed in Hong Kong, in contrast to Zhejiang, wherein by virtue of the location of the issuing bank, a payment obligation was owed at the outset, and [where] ... presentation of the documents would occur, which is the factor underpinning the finding of this court that Rabobank v. Bank of China con't 276 the place of performance under this credit was Zhejiang."

Comments:

1. Discrepancy. The court properly concluded that the certificate complied with the terms of the credit. The real issue in this case is whether one document can have a certificate of origin superimposed on it. There is no doubt that the certification was issued by the appropriate issuer. The question that should have been raised was whether or not it could be merged with another document. ISBP Paragraph 44 is anything but clear on this point. However, it is generally understood that a certificate of origin is often superimposed on another document.

2. ICC Opinion. In what has become a not infrequent event, the ICC has given an opinion, made it public, and then reversed itself.

On 22 November 2000, the ICC Banking Commission issued a formal opinion on the issue: R448 in ICC Banking Commission Collected Opinions 1995-2001, titled "Criteria for a certificate of origin to be 'issued' by a Chamber of Commerce." In the opinion, the commission concluded that this certificate was compliant, and listed the following criteria to determine whether a Certificate of Origin has been issued by a Chamber of Commerce:

1) The condition is satisfied if' [sic] the document is issued by a Chamber of Commerce i.e. on their letterhead or specified form.- even though the detail(s) may have been completed by the beneficiary and the Chamber merely signs.

2) Another acceptable alternative to this would be where the document is 'neutral' i.e. no headed paper but where within the body there is evidence of completion and/or signature of a Chamber of Commerce.

3) A document issued on the letterhead of the beneficiary or any other parry [sic] (that is not a Chamber of Commerce) would not be seen to comply with a requirement of 'issued' by a Chamber of Commerce ... While it is desirable to get things correct, the solution may be to wait longer and let decisions settle rather than rushing them to publication. In any event, the attitude of the court should serve as a warning to the Banking Commission.

3. Order of Analysis: Preclusion Renders Discrepancy Unnecessary. The court's view of preclusion should make it apparent to any banker that an attempt to tamper with UCP500 Article 14(e) in the notice of refusal will not be received favorably by courts. Even in the text of the credit, such terminology comes close to what might be regarded as conversion. The court could have saved itself the trouble of answering the discrepancy question had it begun with the preclusion issue. When precluded, the issuer is unable to assert that the documents are not in compliance with the terms and conditions of the credit.

4. Notion of Practice and Its Role. The court properly notes that what banks may be in the habit of doing is not necessarily a banking practice.

5. Negotiation. If negotiation did not occur under these circumstances, it may be wondered whether it can occur at all under a back-to-back credit. What is the risk to the bank issuing the back-to-back credit? It is both non payment under its credit and non payment by the issuer of the master credit. Having a security interest in the logs at the same time as it retains a right of recourse against the Intermediate Seller does not mean that the Plaintiff Bank has no risk, merely that it has lessened its risk. Nor does it follow that there has been no negotiation. Negotiation can and does take place with or without recourse and with or without other security arrangements. Would there have been a difference in the result if Plaintiff Bank had first made payment on the backto- back credit and then paid again on the other credit? Is this just a matter of bookkeeping?

[JEB/fkd]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.