Article

Factual Summary: To pay for purchase of toluene under purchase agreement, Applicant caused its bank to issue one pre-paid/confirmed LC in favor of Beneficiary in the amount of RUÔ3,600,000. The conditions of the LC specified that payment was to be made against presentation of the rail waybill (with the stamp of departing station confirming acceptance of goods for shipment), commercial invoice, and certificate on goods. According to available facts of the case, the LC did not specify whether these documents must be copies or originals. Beneficiary presented all of the required documents under LC to the Confirming Bank. Upon checking the presented documents and discovering no discrepancies, Confirming Bank executed payment in the full amount of RUÔ3,600,000. Although Beneficiary presented a rail waybill confirming that goods had been accepted for shipment by the carrier, Applicant never received the goods. Opinion does not state whether criminal proceedings were filed against Beneficiary. Court involved Beneficiary in the case as a third party although Beneficiary did not appear at any of the hearings.

Applicant filed a claim against Issuing and Confirming/Executing Banks for reimbursement of the pre-paid LC amount plus expenses for opening the LC (total of RUÔ3,000,130), alleging that payment was executed in violation of conditions stipulated by the LC. Arbitration Court of First Instance granted a judgment in favor of the Applicant. Confirming Bank then appealed to the Arbitration Court of Appeals, which affirmed the decision of the Court of First Instance. Both courts based their decisions on the proof of facts that Confirming Bank's payment under the LC was made in accordance with the conditions of the LC, specifically that it was made upon presentation of rail waybill's copy instead of the original waybill. Thus, the claim for reimbursement of payment made under the LC (in amount of RUÔ3,600,000) was to be satisfied at the expense of Confirming Bank and telegraph expenses for LC operation in amount of RUÔ130 were to be paid by Issuing Bank.

Unsatisfied with the decision of Court of Appeals, Confirming Bank petitioned the Federal Arbitration Court of Volgo-Vyatski District to reverse the decisions of lower courts and to release it from the duty to reimburse the Applicant. The Confirming Bank argued that Beneficiary presented an original railway bill (with the stamp of departing station confirming that goods were accepted for shipment) as required in the LC. The Federal Arbitration Court refuted the arguments of Confirming Bank on the grounds that to be an original, the presented waybill had to bear an additional stamp confirming the delivery of goods to its destination (in accordance with the "Rules of Completion of Railway Transport Documents" issued by Russian Ministry of Railway Transport).

Legal Analysis:

1. Conditions for Honor: According to Article 870 of the Civil Code of Russian Federation, in order to claim a payment under the LC, the Beneficiary must present to bank all required documents in accordance with the conditions stated in the LC. In the case where at least one of such conditions is not met, the demand under the LC shall not be honored. The Confirming Bank contends that Beneficiary presented all of the required documents as indicated by LC conditions, including a rail waybill (with the stamp of departing station confirming that goods were accepted for shipment). The conditions for payment, stated in the LC, did not specify whether the documents had to be issued in their original form. Case opinion provides (in two separate instances) that the LC required "presentation of rail waybill (with the stamp of departing station confirming acceptance of goods for shipment), commercial invoice, and certificate on goods." It was undisputed by all parties that Beneficiary presented all the required documents. It is not clear, however, why the Court interpreted the conditions of the LC as requiring an original rail waybill, rather than any form of rail waybill.

2. Documentary Requirements Outside LC Conditions: To the court's argument that the rail waybill was to be presented in its original form, the document checker of the Confirming Bank testified that Beneficiary did in fact present an original waybill (with the stamp of departing station confirming that goods were accepted for shipment, just as provided in the LC conditions) and that LC did not require any other stamps on the waybill. Court refuted this argument, indicating that rail waybill, presented to Confirming Bank, could not possibly qualify for an original under the applicable law. According to section 1.4 of "Rules of Completion of Railway Transport Documents," issued by the Order No. 2C of Russian Ministry of Railway Transport effective as of January 19, 2000, the original rail waybill is always retained by the carrier and accompanies goods to the station of final destination where it is given to the consignee. Thus, to be an original, the waybill must carry two stamps - one confirming that the goods have been accepted for shipment and the other confirming that the goods have been delivered. Since presented waybill contained only the former stamp, for goods accepted, the Court concluded that the waybill presented to Confirming Bank was non-original, and therefore, payment executed upon presentation of these documents was made in violation of LC conditions. On these grounds and in accordance with Article 872.3 of the Russian Civil Code (Bank's Liability for Breaking the Terms of a Letter of Credit) the Court placed full liability on the Executing Bank for reimbursement of the Applicant.

3. Impact of Changes in the Secondary Legislation on LCs: Confirming Bank reasonably claimed that its payment to Beneficiary was made in strict compliance with the LC conditions. The LC did not specify whether presented documents should be copies or originals, thus allowing Bank to accept either. Furthermore, since the LC only required one stamp, for goods accepted, Bank's responsibility was to make sure that the presented waybill contained such a stamp. Upon verifying the documents against the conditions of LC, and not finding any discrepancies, Confirming Bank executed the payment to Beneficiary. According to Court, the Executing Bank had to be aware of the requirement for two stamps in rail waybill issued by Ministry of Railway Transport. The case opinion did not explicitly say, but implied that it was Executing Banks' obligation to know and keep up with the ever-changing secondary rules and regulations issued by the Russian legislation.

4. Independence/Autonomy of LC: As a result of the autonomy of the LC (as the most important characteristic of LC), Paying Bank, nominated by the bank that issues the LC, undertakes to honor presentation if Beneficiary of the LC complies with the requirements for payment under the LC. This means that the terms and conditions under the sales and purchase contract between the seller and buyer have no effect on the payment by the bank under the LC. In accordance with the principle of independence, Executing Bank argued that it was under no obligation to determine whether the waybill conformed to the contract between Applicant and Beneficiary and "it was not its duty to follow the progress of good's transportation to their final destination." Bank was concerned only with the documents presented by Beneficiary. If the documents complied with the conditions stated in the LC, then Bank was absolutely bound to make the payment under the LC, irrespective of whether it knew, or had reason to believe, that the waybill did not conform to the contract.

Comments by Mariya D. VARAVVA: Choice of Law: according to Russian Civil Code's official commentary, articles 867-873 (dedicated to letter of credit) are based on UCP500.

Comments by DCW: This decision unfortunately circumscribes the independence doctrine, limiting it to the relationship between the applicant and the beneficiary and the applicant and the issuer. The same principle informs the creation and effect of the documents. This principle is captured in the UCP500 disclaimers in Articles 15 (Disclaimer on Effectiveness of Documents) and 16 (Disclaimer on Transmission of Messages). Under them, a bank is not liable or responsible for the technical terms of a given trade outside of banking. In determining that a bill of lading is an original on its face, a bank should not be expected to examine the document in the manner that a carrier or a government official would but merely to determine whether it appears to be authenticated in an appropriate manner. If the parties require more, they must so state in their application. Moreover, this may be the only case on record in which an applicant has been able to recover against a confirming bank. The two are not in privity. If the applicant does not have a right to recovery against the issuer, it should not be able to recover against the confirmer.

[MDV/jmf]

* Abstracted by Mariya D. VARAVVA, LLM candidate at the University of Arizona, James E. Rogers College of Law

1 The translation of the relevant Russian Civil Code provided in the ICC publication 633, Rolf A. Schutze and Gabriele Fontane, Documentary Credit Law throughout the world, at 103 (2001) incorrectly states that “the payer (applicant) shall be liable to the executing bank” whereas the correct translation would be that “the executing bank may be liable to the payer.”

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.