Article

Factual Summary: Korean Bank issued its LC for purchase of gas oil payable to Singaporean seller. At the request of Issuer, Singaporean bank confirmed. The face amount of the LC was not stated in the opinion. The LC required presentation of B/Ls and a commercial invoice which were presented to Confirmer which honoured them, paying US$1,715,699.15, and forwarded them to Issuer for reimbursement.

Issuer refused the documents, claiming that the amount of the credit was overdrawn and that there was no on board date on the B/L. When Confirmer disputed the refusal, on the basis of an oil fluctuation clause, Issuer began an action in Korea for a declaration that it was not liable. Confirmer also commenced proceedings against Issuer in this action in Singapore against Issuer, who applied for a stay of the proceedings in Singapore claiming that Korea was the more appropriate forum. The Assistant Registrar dismissed the application. On appeal, the dismissal was affirmed.

Legal Analysis:

1. Conflicts of law, Forum: The appellate court stated that there was discretion in deciding whether to grant a stay. It noted that the applicable test in determining whether or not to stay proceedings in favour of another forum is that set out by the House of Lords in The Spiliada [1987] 1 Lloyd's Rep 1. The burden lies on the applicant (in this case, the Issuing Bank) to show that Singapore is not the natural or appropriate forum and that South Korea is a clearly more appropriate forum for the trial of the action. The court observed that a court will first look to see what factors there are which point in the direction of another forum. These factors include convenience or expense (such as availability of witnesses) and factors such as governing law of the transaction and the parties' places of business.

2. Issuer, law governing Reimbursement; Confirmation, Law governing Reimbursement; Reimbursement, Obligation of Issuer to Reimburse Confirmer, Governing Law: Issuing Bank argued that the contract between the Issuer and Confirmer is governed by South Korean law. The appellate opinion stated that, under English and Singapore conflict of laws rules, the applicable law is that of the place where the confirming bank carries on its business unless otherwise provided. (See European Asian Bank AG v Punjab and Sind Bank Ltd [1981] 2 Lloyd's Rep 651 and Kredeitbank NV v Sinotani Pacific Pte Ltd [1999] 3 SLR 288]). Since Confirmer's place of business is Singapore, the appellate court concluded that the governing law of the contract in question is Singapore law.

The appellate court also noted that Issuing Bank had not shown that there was any material difference between Singapore and South Korean law with respect of the dispute, in particular since UCP 500, "which is intended to produce a uniform result in national courts and reduce discrepancies resulting from the application of national laws", governs the credit in question.

3. 'Connecting factors' pointing to an alternative jursidiction: Issuing Bank argued that various connecting factors pointed in favour of South Korea, namely that (a) South Korea is the place of issuance of the credit; (b) place of payment under the credit is South Korea; (c) the witnesses to be called by the Issuing Bank reside in South Korea.

The appellate court declined to accord significant weight to these "connecting factors". It noted that each party has a connection with a particular forum, a fact which does not favour one or the other. Since the issue of compliance turns on documentary evidence in light of UCP500 rather than witnesses, the court discounted the importance of witnesses residing in South Korea.

The appellate court further noted that while Issuer's witnesses may be in South Korea, Confirming Bank's witnesses were in Singapore which was the place where the documents were presented and the LC was honoured. Accordingly, the appellate court stated "it cannot even be said that it would be more convenient for the witnesses if the case was heard by the South Korea courts."

4. Oil Fluctuation Clauses: Issuer argued witnesses were required to show that the LC did not permit an overdrawing. It cited Credit Agricole Indosuez v Banque Nationale de Paris [2001] 2 SLR 1 where the court noted that where the meaning of a letter of credit is not clear or where an attempt is made to show that a term therein has a special meaning, the surrounding circumstances relating to the issuance of the letter of credit may be looked at. The appellate court distinguished this case, noting that Issuer had not argued that the LC was ambiguous or that its terms had any special meaning. The appellate court stated "In short, both parties merely took different views regarding the construction of the terms of the letter of [credit]."

In explaining the arguments about whether the credit was overdrawn, the appellate court explained the contentions of the parties:

[T]he clauses in the letter of credit that need to be construed or reconciled are cll 32B, 39A, 45A and special condition D, which, strangely enough, appears in identical terms in special condition N. Clause 32B provides that the currency amount for the letter of credit is US$ 1.4m. Clause 39A adds that there is a 5% credit amount tolerance. Clause 45A describes the agreed cargo as 8,200 kl of gas oil "+/- 5%". Clause 47A makes it clear that the price of the gas oil is to be the average of the mean of Platt's quotation for gas oil for a stated period. Finally, special conditions D and N, which are crucial in this case, stipulate as follows:

The amount of this letter of credit shall automatically fluctuate to cover any increase/ decrease according to the price clause without further amendment to this credit.

11 Relying on the above-mentioned terms of the letter of credit, [Issuer] asserted that regardless of fluctuations in the price of the cargo of gas oil, the letter of credit was only intended to cover an amount that was not more than US$ 1.4m plus 5%. As such, the amount claimed by [Confirmer] exceeded the letter of credit value. On the other hand, [Confirmer] contended that the letter of credit was not overdrawn because the price for the agreed cargo of gas oil, as determined in accordance with the formula in cl 47A, amounted to around US$ 1.7m. In their view, the question of overdrawing did not arise because special conditions D and N provided that the amount of the letter of credit should automatically fluctuate to cover the increased amount according to the price clause without further amendment.

5. Concurrent proceedings in South Korea: Issuing Bank relied on the fact that proceedings concerning substantially similar issues had been commenced against Confirming Bank in South Korea. This argument was a lis alibi pendens argument. The appellate court observed that that the South Korean proceedings were "initiated for the sole purpose of obtaining a declaration that [Issuer] was not liable to [Confirmer] under the letter of credit in question." The appellate court quoted with approval from The Volox Hollandia [1988] 2 Lloyd's Rep 361: 'such negative declarations 'must be viewed with great caution is all situations involving possible conflicts of jurisdictions since they obviously lend themselves to improper attempts at forum shopping.'"

Comments by Ian TEO:

Letter of credit disputes are often suitable for summary determination without the need for a trial. This is particularly so where the issue is purely one of construction of the terms and conditions in the letter of credit (and the UCP, if incorporated). Most if not all claimants wish to enforce their claims and obtain recovery with minimal costs and time. A claimant in a jurisdiction where letter of credit disputes are amenable to such summary procedure should take comfort in the possibility of having its dispute summarily determined.

On the other hand, a common feature in letter of credit litigation is the existence of international elements. Common examples include the issuing bank and applicant residing in one country, the negotiating bank and beneficiary in another country. International elements in these transactions afford a defendant some basis to seek a stay of proceedings in favour of another jurisdiction or to "forum shop".

The stay of proceedings in favour of another jurisdiction, may prevent a claimant bank from a speedy recovery in its home jurisdiction. Legal proceedings may move at a slower pace in that foreign jurisdiction. There may not be summary procedures under the system of law in that foreign jurisdiction. The claimant may be dragged into a foreign jurisdiction where costs of litigation are much higher. The claimant may simply be reluctant to litigate in that foreign jurisdiction due to a perceived risk of bias or unfamiliarity with the judicial system.

This decision demonstrates a degree of pragmatism which should be welcomed by claimants under a letter of credit.

The court noted that there is little scope for witness evidence in a dispute involving the construction of a contractual document. This reduces the scope for contending that another jurisdiction is better suited for the "trial" of the dispute. The significance of the locations of the witnesses and documents is hence reduced. Such observations are likely to be apposite in many letters of credit disputes.

The significance of national laws is also to some extent eroded by the observation the UCP500 is intended to produce a uniformity in national courts with regards to a letter of credit dispute.

Concurrent or parallel foreign proceedings are often relied upon to urge a court to decline jurisdiction over the same subject matter. Often-cited reasons are the risk of conflicting decisions and the undesirability of a subsequent court assuming jurisdiction over a matter which is also the subject of foreign proceedings.

In this case, the parallel proceedings relied on were proceedings for a "negative declaration". In coming to its decision, the Singapore High Court appears to recognize that such concurrent proceedings is in substance a pre-emptive action commenced by a defendant for a declaration that it is not liable to the claimant. The main motivation for such proceedings appears to be a pre-emptive effort to ensure that the litigation takes place in a jurisdiction perceived as friendly to the defendant. It is noteworthy that the fact that the Korean proceedings were commenced prior to the Singapore proceedings was not accorded significance by the Singapore High Court.

The "connecting factors" relied on by the Issuing Bank are the usual factors cited by an applicant for a stay. The treatment of these connecting factors in this case demonstrates the court's cognizance of the reality in most letter of credit disputes involving construction of terms. This decision should go some way in ensuring that a right to be paid under a letter of credit is not thwarted or unduly inconvenienced in time and costs by unmeritorious jurisdictional challenges.

Comments by DCW:

1. The court's conclusion that there is no particular advantage that would make the issuer's forum any more suitable than the confirmer's is correct. As it perceived, the issue turns on the meaning to be accorded to the terms and conditions of the LC. With respect to this issue, the subjective understanding of those involved with the credit should be resisted as it was in this case. The LC is not a contract in the sense that Issuer and Confirmer agreed to its terms. The controlling question is how the terms that were used would be understood in international letter of credit practice. If a bank issues an LC and uses terminology, it should expect that terminology to take the meaning it is given in the LC field and not any subjective meaning that it may intend. Any other approach would undermine the integrity of the LC as an instrument of commerce and finance.

2. Of particular interest is the Singapore decision that the law of the confirmer controls the reimbursement undertaking. This conclusion corresponds with alignment of the banks at least as to issues of compliance of the documents. The issuer has nominated the confirmer to honor. Unless otherwise stated, it should be entitled to do so under its own law and the issuer should be obligated to reimburse it pursuant to that law. The risk of local law problems should rest with the issuer and ultimately the applicant rather than with the confirmer.

3. The oil fluctuation clauses that have been inspired by the recent rise in the price of oil has already lead to considerable difficulty, including at least two court cases and three Docdex proceedings. The SWIFT formats used have presented problems and are being used by some issuers to claim that they are not obligated beyond the face amount of the credit, as can be seen in this case.

[JEB/IT]

* Ian TEO is a Senior Associate with Rajah & Tann, Singapore. He specialises in shipping practice, including B/L and charterparty claims, trade and documentary disputes. His practice covers North and South-east Asia, including Singapore, Malaysia, China and South Korea. Ian Teo was educated in the National University of Singapore and the University of Cambridge. In 2003, he obtained the LLM (Commercial Law) from the University of Cambridge. He can be reached at (Tel)+65 6232 0605, (Fax) +65 6720 8660.

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