Article

Factual Summary: To pay for a cargo of oil which had been bought and sold in a series of "chain transactions" while still aboard the carrier vessel, Bank issued an LC in the amount of US$1,672,700.64,subject to UCP500 and available with any bank by negotiation. The LC required presentation of a sight draft, an original BL, and a set of commercial invoices. SWIFT MT700 Field 47A, however, provided that if these documents were not available at the time of negotiation, "then payment will be effected against commercial invoice and beneficiary's Letter of Indemnity."

Beneficiary presented the commercial invoice and an LOI to Negotiating Bank seeking partial payment of US$500,000. The LOI was from Beneficiary to Applicant. The court summarized its terms, indicating that if Beneficiary

was unable to provide [Applicant] with the three original bills of lading relating to the sale of the oil, [Beneficiary] expressly warranted that it had clean title to the oil and the right to effect delivery, and that it agreed to exercise 'utmost efforts' to obtain and surrender to [Applicant] the original bills of lading and further agreed to hold [Applicant] harmless against any claims or demands to the oil made by a holder or transferee of the original bills, or by any third party claiming an interest in the cargo or its proceeds. The Letter of Indemnity provided that it was subject to English law, and would automatically expire up on the tender to [Applicant] of the three original bills of lading.

Negotiating Bank examined the documents and, finding them to be compliant, paid Beneficiary. When Negotiating Bank sought reimbursement from Issuer, however, Issuer refused the documents, alleging discrepancies. Applicant had become bankrupt less than a week before Issuer's rejection. After Negotiating Bank and Issuer exchanged SWIFT messages disputing the alleged discrepancies, Negotiating Bank exercised its right of recourse against Beneficiary.

Beneficiary then submitted the case to ICCDOCDEX, and the panel ruled unanimously that "that the documents presented were not discrepant, and that the issuing bank had no reason to refuse the documents and not to make payment under the credit." It was noted that Issuer made no submission to the ICC and refused to recognize the decision. Beneficiary then sued Issuer in Hong Kong and moved for summary judgment, which was granted in its favor.

Legal Analysis:

1. Discrepancy; Interpretation, against Issuer: Although Issuer had asserted many discrepancies in its notice of refusal, it relied on only one before the court. It claimed that since Field 47A of the LC required "... price shall be based on Bill of Lading (B/L) Quantity ..." and no BL was presented here, but instead only a commercial invoice and LOI, "it follows therefore that the documents presented were discrepant in not containing information as to price 'based...on Bill of Lading Quantity', nor could the quantity stated on the commercial invoice be compared or referred to any bill of lading quantity."

The court, however, disagreed and rejected this argument. It stated

Field 47A of the credit, which is the [Issuer]'s document, expressly provided that in the event that bills of lading are unavailable at the time of negotiation, then payment will be effected against commercial invoice and beneficiary's Letter of Indemnity. Accordingly, I fail to understand why, if provision specifically is made for such documentary presentation as was anticipated by amendment to the credit (on 6 October 2003), and as in fact occurred, that this should entitle the bank to raise the argument that it now seeks to press upon this court.

2. Documents, disposition; Privity: Issuer claimed that because Beneficiary presented documents to Negotiating Bank and not to Issuer directly "it had not founded its cause of action against" Issuer and there is no privity between them. The court rejected this argument and also noted that "the documents[Issuer] says should have been tendered by[Beneficiary] actually remain in the possession of[Issuer] ... in a SWIFT message ... [Issuer]confirmed that they were holding the rejected documents 'at your risk and disposal'."

3. Fraud, Notice of Refusal: Issuer argued that it should be given additional time to develop a fraud argument as evidence came to light, and not be restricted by the terms of the notice of rejection sent shortly after presentation. The court did not address this point, having concluded that there was no viable argument that fraud existed.

4. Fraud, standard of: Beneficiary's counsel urged the court to reject the allegation of fraud unless at the time of the hearing or application for summary judgment there is "a real prospect of proving that the only realistic inference is that the beneficiary was guilty of fraud."

The court indicated that it was prepared to accept" this formulation or the alternative rubric whereby there must be a 'real prospect of success' for the bank in establishing that the demand was fraudulent even if it had no clear evidence of fraud at the time of the demand." Indeed the court noted it did:

not consider that there is much practical difference between these formulations. An allegation of fraud is a serious matter and, under our system at least, not one that is lightly made; equally, when made it must be clear to the tribunal that there is a real likelihood of getting home on the point at trial before leave to defend is given on this basis. In this regard, it is not easy, indeed perhaps not advisable, to say a great deal more about the appropriate benchmark, which is often easier to recognize than to describe.

5. Fraud: The Issuer noted that the LOI stated that Beneficiary would "exercise our utmost efforts to obtain and surrender only to you, as soon as possible the 3/3 original Bills of Lading". It argued that Beneficiary had also issued an LOI to Carrier that contained a conflicting undertaking by Beneficiary that "as soon as all original Bills of Lading for the above cargo have come into our possession to deliver the same to you whereupon our liability hereunder shall cease". Issuer further argued that Beneficiary never intended to or tried to provide the BLs to either Issuer or Applicant, but had already given them to Carrier. The court summarized Issuer's point, stating

if the promise in the [LOI] to [Issuer] was a statement of intention it was never truly held and was false, as evidenced by the pre-existing letter given to [Carrier], that accordingly there was no doubt in the circumstances that the [LOI] in this case was a 'dishonest document' utilized to obtain payment by means of the documentary credit, and that [Issuer] had known of the misrepresentation before it had rejected the documents because a copy of the similar [LOI]had been obtained from [Carrier] ... prior to the bank having stated in its telex to [Negotiating Bank] ... that non-acceptance of the documents was due, inter alia , to 'fraud by dual issuance of LOI'.

Issuer claimed that the fraud exception defense should apply in this situation.

Beneficiary argued that the LOI issued to Carrier by Beneficiary as charterer had terminated prior to the LOI to Issuer, that Issuer had previously honored an LC in which a similar LOI was issued, and that it was common in the oil trade for an LOI to be issued in favor of the carrier, absent a bill of lading, where there were purchases afloat, and that this process was in accord with common commercial practice, so that there was no evidence of dishonesty on the part of Beneficiary. Counsel argued that:

It was very common in the oil trade ... that a quick turnaround of a vessel in port was expected, it was not easy to store bulk oil shipments to the order of the carrier, and in transactions such as this, involving purchase afloat, it was often the the shipowner absent presentation of the relevant bill of lading. In this regard, he cited the decisions of Borealis AB v. Stargas Ltd [2002] 2 AC 205,at 229, in which Lord Hobhouse expounded on 'the relatively common situation' in which the vessel and cargo arrived at the destination 'before the bills of lading have completed their journey down the chain of banks and buyers', and that the situation is dealt with commercially by means of delivery against a letter of indemnity, and further the observations of this court to similar effect in Abu Dhabi National Tanker Co. v. South View Holdings Ltd , (unrep), HCCL 135of 1998, judgment dated 21 September 1998.

The court agreed with Beneficiary, stating that it was

unable to see why a Letter of Indemnity in like terms as given to [Carrier] should enable the conclusion to be drawn that there has been a fraudulent misrepresentation by [Beneficiary]either to [Applicant], or to the [Issuer], or at all, nor for that matter do I grasp, when the Letter of Indemnity in question undoubtedly was compliant in form for the purpose of the negotiation of the credit, why the defendant bank should now, absent clear and cogent evidence of fraud, be in a position to delve into the circumstances of the underlying transaction for the avowed purpose of vitiating its otherwise clear obligation under its own credit to pay against presentation of compliant documents. ... I do not accept that this was a 'dishonest document' enabling invocation of the 'fraud exception' to the principle of the autonomy of the credit.

6. Fraud: The court stated that the only reason it had given any credence to the arguments that raised the fraud defense was the late introduction of a letter from Applicant to Beneficiary. "The instinctive reaction of the court to the merit of this proposed' fraud' defence was to some extent buttressed by the eleventh hour production, by [Beneficiary], of a copy of an undated letter obtained by [Issuer] from its customer, [Applicant]." The letter read as follows:

With reference to the above-mentioned contract,[Applicant] hereby agrees that if [Beneficiary]chooses to negotiate the relevant L/C with L.O.I(LETTER OF INDEMNITY), then [Applicant]agree and authorize [Beneficiary] to return the relevant original bills of lading and other shipping documents directly to the Owners of the Vessel.

The L.O.I. (LETTER OF INDEMNITY) shall expire automatically and simultaneously upon [Beneficiary's] returning of the original bills of lading and other shipping documents to the Owners of the Vessel.

Issuer argued that it had reasonable grounds to believe that the letter had been signed for buyer by its own employee without approval. The court dismissed this argument and the letter as "little more than a sideshow."

Comments by James E. BYRNE:

1. This judgment is useful formulation of the standard of proof necessary to interfere with the Issuer's obligation to honor a timely presentation of complying documents.

2. The business of formulating this standard is difficult, as the court recognizes. There are a variety of formulations extant. One does better to identify the elements that must be established without placing too much emphasis on a precise formulation.

[JEB/lHd]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.