Article

Factual Summary: Seller of porcelain sanitary products undertook to provide acceptance financing to Buyer backed by a standby letter of credit for NLG2,000,000 in favor of Seller's financing unit. The standby provided for a drawing in either of two situations or both, I) where the goods were tendered but not accepted; and ii) where there was an acceptance of a bill of exchange but non payment at its maturity.

In what the opinion described as "circumstances of obvious haste," Beneficiary made presentation through a local Hong Kong Correspondent Bank on the expiry date. Correspondent's cover letter indicated that drawings were being made under both situations contemplated in the standby, totaling NLG 1,667,225.50, and was accompanied by four documents.

One of the documents, a statement by Beneficiary, indicated that three separate amounts were sought. Two clearly related to unpaid acceptances, while the third sum, NLG 420,215.50, related to the refusal to accept a tendered delivery. Another document that contained the required statement by the officers relating to the failure to accept delivery of the goods did not state the amount being sought but referred to an "attached" pro forma invoice. There was a pro forma invoice included in the documents presented (although not attached to this document), but it indicated that the amount due was NLG 419,689.20. This amount did not correspond with the amount indicated as being due in the cover letter from Correspondent Bank.

The documents were received on a Thursday, began to be checked on Friday, a final list of discrepancies was prepared on Monday (Saturday and Sunday not being regarded as banking days), and it was claimed by Issuer that a decision was made to reject on Tuesday with the notice of refusal being sent by SWIFT on Wednesday. Meanwhile, the credit expired on Thursday. Apparently, there was also a call from Issuer to Presenting Bank as a result of which Beneficiary sent a letter that was received on Tuesday (after the expiration of the credit) that was taken into account in the Wednesday notice of refusal.

Various reasons were given for refusal of the claim related to the unpaid acceptances. The reason stated for refusal of the claim related to the goods that had been refused was that "'Beneficiary's certificate does not state amount claimed.'" Claiming wrongful dishonor, Beneficiary sued Issuer. After a trial, the court dismissed Beneficiary's claim against Issuer.

Legal Analysis:

1. Discrepancies; UCP500 Article 13(a); Inconsistency: While conceding that the documents relating to the unpaid acceptances were discrepant, Beneficiary claimed that the documents relating to the refused goods complied with the terms and conditions of the credit. It claimed that the LC did not require that the Beneficiary's Certificate state the amount claimed, and therefore Beneficiary should be entitled to the NLG 419,689.20 indicated in the Pro Forma invoice to which the certificate referred. Issuer's counsel countered that there was no Pro Forma Invoice "attached" as indicated, and that even if the LC "did not require the Certificate to state on its face the amount claimed, the Certificate in this case purported to state the amount by reference to another document, which thus imported into the Certificate the vice of attempting to locate outside the Certificate the actual amount intended to be so certified. . . ." Counsel also noted that there was no means by which it could be determined to what the sum of NLG 420,25.50 referred. The court noted that this amount could not be reconciled with any combination of the various figures presented under the credit. Faced with either ignoring this amount in the beneficiary's document or concluding that it was relevant, the court concluded that the figures were inconsistent under UCP500 Article 13(a). "Where the defendant bank was, as here, presented with documentation that on its face raised an uncertainty, it was entitled to raise a discrepancy and to consider the presentation a bad tender."

2. Discrepancies; UCP500 Article 14(d)(ii); Refusal; Statement of Discrepancies: Beneficiary contended that Issuer was precluded from basing its refusal on inconsistencies or the inclusion of a figure that was not explained because the refusal stated only that "'Beneficiary's Certificate does not state amount claimed.'" The court rejected this reasoning, stating that:

"[i]t is true that the discrepancy within item 4 is tersely expressed in what is no more than shorthand, and it is also true that, as [Issuer's Witness] indeed accepted, the discrepancy might have been worded better... . In the circumstances [Issuer] stated the nature of the complaint in the manner in which it did, which shortly indicated the nature of the difficulty that was perceived. Other formulations may well have been better, but it is established that it is not necessary for an advice as to discrepancies to be treated like a pleading. . . ."

3. Reasonable Time; UCP500 Article 13; UCP500 Article 14, Preclusion: Beneficiary claimed that Issuer was "precluded from relying on its Notice of Discrepancies by reason of exceeding a reasonable time for the examination, determination, and notification of the decision to [Beneficiary's Bank]."

Issuer contended that the preclusion effect of Article 14(e) was limited to the breach of Article 14 and as a consequence, the "only timing issue that could trigger the preclusion within Article 14e is the failure, where a decision has been made to reject the presentation, to give notice of that decision in accordance with Article 14[d][ I], that is 'without delay but no later than the close of the seventh banking day following the day of receipt of the documents.'"

The court, while citing concerns with the lack of authority on point, determined that "the effect of Article 14[e] is confined to the operation of that Article, and thus that the preclusionary effect of delay has a narrower focus, namely, not the time taken for examination or in arriving at a decision, but only, as per Article 14[d][I] , the period between decision and notification." The court also addressed the issue in the alternative, stating that even "[i]f I be wrong in this conclusion, I should in any event have been prepared to find that in the very particular circumstances of this presentation the overall examination/decision/notification process was compliant with the 'reasonable time' specified in Article 13[b]."

4. UCP500 Article 14, "Without Delay": Beneficiary's counsel contended that the preclusionary effect of Article 14(e) should be applied in this case because "once a decision has been made to refuse the documents, the drafting and transmission of a notice to that effect ought to be relatively straightforward. . . ." Beneficiary's counsel cited Seaconsar v. Bank Markazi [Ct. App. Civ. Div, 30 July, 1998 [England], abstracted at 1999 Annual Survey 381], for the proposition that "'it will ordinarily be a fairly simple task to give notice to the beneficiary,'" yet Issuer in the instant case did not provide notice until the fourth banking day after the day of presentation.

The court disagreed with Beneficiary's proposition, and stated that:

It is clear that the process of checking commenced on Friday. . . when a handwritten checklist was prepared bearing that date; this appears to have been initialled [sic] by three checkers. After his subordinates' work on the checklists,

[Issuer's Witness] himself considered the position and prepared his own handwritten document divided into two parts: the claim under 'condition A' and that under 'condition B'. This was intended to be the final list of discrepancies, and he said, was probably created on [the following] Monday. . . . [Issuer's Witness] went on to say that after he had produced this final list he began the process of deciding whether to reject the presentation, and that this decision was made late on the following day, that is, on Tuesday. . . . A draft rejection notice was produced at about 6pm on that day, but this was not sent; the evening 'cut off' time for sending SWIFT messages had passed, and in any event [Issuer] had received from [Beneficiary] a letter [on Tuesday] purporting to remedy certain discrepancies. The background to this was that on Monday. . . [Issuer] had telephoned [Correspondent/ Presenting Bank] with the information that the documents presented contained a number of discrepancies, in turn [Correspondent/Presenting Bank] had faxed this information to [Beneficiary], and this letter had sought to correct the position.

On Wednesday. . . a new draft notice of discrepancies was produced around midday, and following request for a test key the final version was sent at 4.23 hours on that day.

The court accepted "that the rejection decision was made on the evening of Tuesday. . . ."The court noted that "in this connection that a draft SWIFT, which sought to elicit clarification from [Beneficiary] on the 'route A' and 'route B' elements of the presentation, appears to have been prepared about 4.35pm on Tuesday." The court further accepted Issuer's Witness's "evidence that ultimately this was not sent because, as discrepancies existed under either route, it would have been pointless to have inquired further, and thus his decision to reject came, or became crystallized, shortly thereafter."

The court concluded that "[i]n the circumstances of this case a rejection notification of two days, in my judgment, does not fall foul of the contractual requirement to act 'without delay', whilst of course [Issuer] was well within the overall time limit of 'no later than the close of the seventh banking day of receipt of the documents.'"

Comments:

1. Inconsistencies: The court concluded that the presence of two figures in the documents that could not be reconciled resulted in an inconsistency between the documents that rose to the level of inconsistency. The problem is not the presence of an extraneous figure. It could be, for example, that there was an additional amount due with respect to unpaid acceptances that was simply not covered by the credit and the beneficiary included it in order to preserve its rights. Under ISP98 Rule 4.03 (Examination for Inconsistency) and 3.08 (Partial Drawing and Multiple Presentations; Amount of Drawings), for example, a different result might obtain. The court's decision resulted from the fact that it concluded that the issuer could not determine what amount was being sought. If correct, such a basis would justify refusal.

2. Statement of Basis for Refusal: The court is quite correct in stating that the standard for clarity of refusals is not the highest standard. The world would end if LC bankers had to have lawyers draft their notices of refusal, assuming that lawyers could achieve clarity. The court expresses the standard as being whether the statement indicates the nature of the perceived difficulty. Assuming that this expression means that the reason given would enable an average member of the LC users community to understand what was wrong so as to know what to do to remedy the problem, this formula is acceptable.

Here, the question is closer than the court suggests. The reason given was "Beneficiary's Certificate does not state amount claimed." It is silly to suggest that it was not apparent to which invoice the certificate referred. That it was not attached physically is not a valid basis for refusal. "Attached" is a term that can be used to mean "enclosed". The Pro Forma Invoice was enclosed and stated the amount. Accordingly, the Certificate did, by reference, indicate the amount claimed. The reason for refusal, as indicated by the court was either that the documents were inconsistent or that it was not possible to determine the amount being claimed.

Taking the basis given for refusal, a beneficiary would have revised the statement, including in it the amount sought. Would this correction have cured the claimed discrepancy? There would not be any uncertainty as to what amount was sought with respect to the certificate. There would still, however, be an inconsistency with the other certificate. Based on the court's concern about the floating amount of NLG 420,215.50, it is not clear that this correction would suffice. Indeed, one suspects that this court would conclude that the documents still would not comply. The problem lies in the existence of a figure which appears to be inconsistent with the figure in the attached Pro Forma Invoice. It is doubtful that the statement of the discrepancy would enable a beneficiary to identify that problem and correct it.

3. Reasonable Time: The court is wrong in its conclusion that the reasonable time referred to in UCP500 Article 14(e) does not include the time within which documents must be examined. Here is another instance where a literal analysis of the text of UCP500 as if it were a statute written by legal draftsmen will yield an incorrect result. There never has been any doubt whatsoever in the letter of credit community that a bank has a reasonable time within which to examine documents, as stated in UCP500 Article 13(b) and that the reference to "the provisions of this Article" in UCP500 Article 14(e) also includes the cross reference to the time for examination in Article 13. As the court observed about bank statements of refusal, the proposition could have been expressed more clearly but it is universally understood and stated in ICC Opinions to refer to the time for examination. Indeed, under the court's reading there would be up to seven banking days to get out the notice of refusal after having examined the documents, a result which would make a mockery of banking practice and render the phrase "without delay" nonsense. While "without delay" does not mean "immediately", it does not mean "up to seven days later" either. In this case, the delay to the next day should not have been problematic as the telecommunication facilities were closed in any event at the end of the day. Having so stated, the court is correct in its determination that a determination to refuse by the third day and notice by the fourth does not justify use of the preclusion rule.

4. What Was the Refusal?: Where the court's analysis and perhaps that of the attorneys is problematic is with respect to what constituted the notice of refusal. The court notes in passing that there was a telephonic communication from the issuer to the presenter on Monday as a result of which the beneficiary attempted to cure the documents by some writing that was presented on Tuesday. The court makes this reference to explain why it thought that the extra time in formulating the written notice was justified.

What is confusing is why this telephonic notice was not regarded as a notice of refusal. It is clear that the beneficiary so regarded it because it rapidly, if belatedly, moved to cure the presentation.

The question, then, should be whether this telecommunication satisfied the requirements of UCP500 Article 14. For reasons unexplained, the court does not even recognize the issue much less address it. As to the notice after the re-presentation, it is too late. The credit has expired. As a result, there is no need to give notice of refusal since the credit has ceased to be operative.

[JEB/fkd]

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