Article

Factual Summary: Middleman entered into back-to-back contracts. In the first contract, Middleman agreed to buy Chinese coal from Seller and in the second contract Middleman agreed to resell the Chinese coal to Buyer. Middleman paid for its purchase of coal from Seller with a US$1,254,000 commercial LC (LC1) issued by Presenting Bank of which it was applicant. Buyer then paid for its purchase of coal from Middleman with a US$1,296,750 commercial LC (LC2) issued by Bank (Issuer) of which it was beneficiary.

When it drew on LC1, Seller presented discrepant documents but Middleman/Applicant of LC1 chose to waive what the court described as "minor discrepancies." However, when it forwarded those discrepant documents to Confirming Bank via Presenting Bank under LC2 of which it was the beneficiary, Confirming Bank rejected the presentation.

Subsequently, Middleman/Beneficiary of LC2 represented revised documents via Presenting Bank. Confirming Bank responded by faxing a list containing document discrepancies to Presenting Bank. One of Confirming Bank's bill checkers then called one of Presenting Bank's bill checkers to discuss the presentation. Although the contents of this conversation were disputed, the court found that the Confirming Bank's bill checker informed the Presenting Bank's bill checker that Confirming Bank was refusing the presentation and asking Presenting Bank for instructions on dealing with the documents. Confirming Bank had also followed this procedure for the first presentation.

Middleman relied on Buyer to waive the discrepancies which Buyer then indicated to Seller that it would accept. Although Buyer instructed Issuer to authorize Confirming Bank to accept the discrepancies, Issuer ultimately declined to make such an authorization, and the LC expired.

Middleman/Beneficiary of LC2 then sued Confirming Bank for failing timely to communicate an adequate rejection of Presenting Bank's representation of documents as required by UCP500 Article 14(d). After a trial, the court found for Confirming Bank and dismissed the suit.

This case revolved around the factual issue regarding what was said in the conversation between the Presenting and Confirming Banks' bill checkers, both of whom testified, about the re-presentation. In addition, a supervisor from Confirmer's Bill Department testified regarding standard practice and procedure. The court also noted that Buyer had somehow obtained the coal without the bill of lading, leaving Middleman without coal or payment.

In assessing the evidence of the bill checkers, the court observed "there is an air of unreality surrounding the evidence, which is perpetrated by the quaint notion that these two worthy gentlemen, neither of whom presently is attached to the institutions in which they were employed at the time of these events, are able to recall with any certainty (or, I suspect, with any clarity whatever) the detail of that which transpired, in undocumented telephone calls occurring well over 7 years ago...." The court also noted "these types of calls, between bill checkers at their respective banks, no doubt occurred extremely frequently in the normal course of their daily professional routines, so that it may well be difficult to isolate/recall one call from another even on a contemporary basis, let alone years hence, and further when it is borne in mind that these witnesses did not attend this trial voluntarily, but that each did so under compulsion of subpoena." In weighing this evidence, the court decided to approach the decision by attempting "to discern that which occurred is to place reliance upon such contemporary documentation as exists, and further to evaluate such evidence on the basis of the intrinsic commercial probabilities in light of the objectively-known, and undisputed, facts."

While the court ultimately found the Confirming Bank bill checker's testimony to be credible, it noted that "this is not so much a case about credibility as reliability, and falls to be decided primarily on the basis of the inherent commercial probabilities arising in this context, as opposed to any view that in their oral evidence either of these witnesses was seeking to perpetrate deliberate untruths."

In reviewing the testimony, the court found that Presenter's Bill Examiner understood from their conversation that Confirmer was holding not returning the documents and that they were being rejected. "It seems to me that the overwhelming probability - not least against the background of the non-disputed rejection of the 1st presentation - is that [Confirmer's bill checker] made it clear, with the words, or words to the effect that he says he used, that these documents once again were rejected upon the occasion of this second presentation, and that these words not only were uttered, but were understood at the time by [Presenter's bill checker] as evincing a clear and unequivocal rejection of the presentation, and that the documents were being retained by [Confirmer] at the disposal of the presenter."

Legal Analysis:

1. Expert Testimony: In commenting on our proffered expert witness reports and testimony, the court noted that "the sole task of an expert witness is to educate and not to persuade."

2. Notice of Refusal; UCP500 Article 14(d): I n considering UCP500 Article 14(d), the court stated that "It is clear on the face of Article 14(d) that there is a requirement that the notice should state that the documents are being refused, that such notice must state all discrepancies in respect of which the bank refuses the documents, and also whether the bank is holding the documents at the disposal of, or is returning them to, the presenter...."

3. Notice of Refusal; Strict Compliance; UCP500 Article 14(d): The court stated that "It is also clear from the established authorities that these requirements must be complied with strictly, and that certain things must be expressly stated; absent such compliance, the right to reject is lost....", citing Seaconsar Far East Ltd v. Bank Markazi [1999] 1 Lloyd's Rep 36, at 39; Bankers Trust Co. v. State Bank of India [1991] 1 Lloyd's Rep 587, at 601; Cooperatieve Centrale Raiffeisen- Boerenleenbank BA v. Bank of China [2004] 3 HKC 119, at 131-134.

4. Refusal; Notice of Refusal; UCP500 Article 14(d); Refusal, Interconnected Modes: Beneficiary stated, and the court agreed, "that on a plain and natural reading of [UCP500] Article 14(1) there can be but one notice of rejection, and that one notice must state (a) all the discrepancies relied on by the bank to refuse the documents; and (b) whether the bank is holding the documents at the disposal of, or is returning them to the presenter."

At the outset, Beneficiary contended that an oral communication could not supplement the faxed list of discrepancies. Since neither the fax nor telephone call could satisfy both of these requirements individually, Beneficiary argued that neither one constituted a valid notice of rejection. As it evolved, Beneficiary's argument was that "whilst conceptually it was possible for a notice of rejection to comprise, as was here asserted, the 2nd Advice taken together with the telephone conversation between [Confirmer's bill checker] and [Presenter's bill checker] on 5 February 1999, then, by analogy to the situation of documents which cross-reference the one to the other, this was acceptable only if the one, the conversation, unequivocally referred to and incorporated the other, that is, the faxed 2nd Advice."

The court found that it was possible for notification of refusal to be given by more than one communication so long as one of the communications "unequivocally referred to and incorporated the other." Since it was the customary practice at Confirming Bank to always send a fax followed by a phone call when rejecting a presentation, the court concluded that "the combination of faxed advice plus telephone call is sufficient, as a matter of law, to constitute a valid notice of rejection pursuant to the requirements of Article 14 of the UCP, and thus that in the present instance there was such a valid notice of rejection." The court ruled "I hold that the combination of fax and telephone call did not fail to comply with the requirements of Article 14 of the UCP 500".

5. UCP500 Article 14(b), (c); Waiver: Beneficiary also claimed that, during the telephone conversation, Confirming Bank injected the notion of waiver of the discrepancies which made the subsequent documentary rejection conditional, violating the UCP500 Article 14 requirement of an unequivocal rejection. The court rephrased Beneficiary's counsel's argument to be that the question of applicant waiver "constituted a 'virus' which infected the purported rejection of the 2nd presentation so as to render any such rejection (which is in itself denied) conditional only, and accordingly insufficient to meet the requirement of unequivocal rejection as laid down within the framework of the UCP 500."

In construing UCP500 Article 14(c), the court rejected the suggestion that the provision should be interpreted to include a request for waiver by the confirmer. "[I]t is clear that on its face Article 14(c) makes no mention of whether a Confirming Bank can seek a waiver of any discrepancies.... Article 14(c) specifies, and specifies only, the Issuing Bank in the context of applicant waiver, and as a matter of construction this sub-article cannot sensibly be read in any other way; it certainly cannot be read as if the phrase 'the Issuing Bank' can be interpolated to mean 'the Issuing or Confirming Bank'."

The court noted, however, that there was nothing to prevent confirmer from agreeing to seek waiver. The court reasoned that were a confirmer to seek or to agree to seek a pre refusal waiver without first rejecting the documents, thus discharging its obligation on the presentation, then Beneficiary's argument had "potential force". The court noted in this case the question was whether it had done so, and if so, "whether in so doing it is rendering equivocal its refusal of the discrepant documents.

In reviewing the facts of the case, the court, however, stated that "I am unprepared, however, to find the presence of such conditionality on the specific facts of this case. To the contrary, it seems to me to be tolerably clear, and I so find, that [Confirming Bank] through [Confirmer's bill checkers], and via the medium of the fax and telephone conversation of 5 February 1999, indicated unequivocally that the documents were rejected and that the bank was holding the documents at the disposal of the presenter." Indeed, the court stated that even had applicant waiver been discussed in the conversation "in itself does not have the effect of infusing an otherwise clear documentary rejection with conditionality and equivocation, and does not serve to invalidate [the] documentary rejection ...."

However, the court stated that "I take the view that as a matter of commercial probability...that it is unlikely that in these circumstances any rational confirming bank would seek pre-refusal waiver, and thus that there is no real possibility of [Presenting Bank] either having expected or seriously believed that any such pre-refusal waiver (it its accepted sense) indeed was being sought."

As to the possibility of post refusal waiver, the court observed that it was not an issue in the case since it had concluded that the refusal was unequivocal. The court, however, accepted the submissions of Confirmer's counsel and expert that post refusal waiver "does not operate under the shadow of the preclusion rule of UCP 500 Article 14(e)...." The court also noted that subsequent SWIFT messages sent to the issuer seeking authority to negotiate notwithstanding the discrepancies did not establish "any agreement not to reject, but instead to seek an applicant waiver...."

6. UCP500 Article 14(d); Disposition of the Documents; Refusal: Beneficiary argued that the words "Pls let us have your instructions" in Confirmer's faxed list of discrepancies regarding the re-presentation "were themselves ambiguous" and failed to meet the requirement that the disposition of the documents be stated. The court considered the fax "together with the subsequent telephone call" and stated that "I have no doubt that [Presenting Bank], in the person of [its bill chcker], fully appreciated the situation and well knew that [Confirming Bank], whilst not actively returning them, were holding the documents at their disposal. In my judgment, to use the words of Steel J in Credit Industriel, op cit, there thus was no 'continuing threat of conversion' of the [Beneficary's] documents."

[JEB/cbw]

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