Article

Factual Summary: In connection with a purchase of controlling shares of a company that owned land, installment payments owed by Buyer/Applicant were assured by a standby LC issued by Bank/Issuer. Seller/Beneficiary promised to transfer the shares, which it did, and make various warranties regarding the property and company. The contract required Buyer/Applicant to "provide to the Seller a Guarantee by an internationally recognised Bank in a form reasonably acceptable to the Seller unconditionally guaranteeing the due payment to the Seller of each installment of the Deferred Payments together with agreed interest.

As issued, the standby LC required presentation of an "[a]uthenticated swift msg and tested telex addressed to beneficiary's bank through advising bank issued by us i.e. Dubai Bank of Kenya Limited confirming the beneficiary's fulfillment of their commitments towards the Colonial Homes (Europe) Limited." From the testimony quoted by the court, it appeared that "there is no dispute that the bank has not received instructions from... [Applicant] to issue a telex such as contemplated in condition 3 and no dispute that [Applicant], through its solicitors, informed the bank that [Beneficiary] had not fulfilled his obligations to [Applicant] and that a mediation of the dispute has been unsuccessful. For its part the bank does not contend that [Beneficiary] has in fact failed to fulfill his obligations or commitments." Because Bank/Issuer did not receive instructions from Buyer/Applicant requiring the issuance of a telex, it declined to do so. Buyer/Applicant's solicitors informed Seller/Beneficiary that he had failed to fulfill his obligation.

Claiming that the condition was either nondocumentary or that the Issuer should be compelled to issue the telex, Seller/Beneficiary brought an action for appropriate relief which was denied.

Legal Analysis:

1. Interpretation of the LC: Seller/Beneficiary argued that the "commitment" whose fulfillment was to be confirmed by the telex was only to transfer shares, something that had been already done. Issuer argued that because Seller/Beneficiary had approved a draft of the LC terms, they should be interpreted against the Beneficiary. The judge did not accept this proposition "as an aid to construction." The court also stated that the "ordinary and natural meaning of the word 'commitments' does not justify such a restricted interpretation" but, especially given that it is plural, would encompass the warranties as well.

Seller/Beneficiary also argued that "the parties should be taken to be referring to commitments of such a kind that the bank could readily judge whether or not [Seller/Beneficiary] had fulfilled them." The court noted that these arguments were not sufficient to convince it to accept an interpretation different than the "ordinary and natural meaning" of the LC terms.

2. Independence; UCP500 Article 3(a): Seller/Beneficiary argued that the condition requiring presentation of a document to be provided by Issuing Bank should be disregarded because it violated the independence principle. Specifically, Seller/ Beneficiary argued that the condition "requires the bank to be concerned with the share sale agreement and so offends that principle." Noting that the court's interpretation of the clause as applying to more than the physical transfer of the shares, Seller/Beneficiary argued that the condition "also puts the bank under an obligation to consider and decide whether it should issue the telex and to issue it if it decides that it should do so." While recognizing the force of this argument, the court observed that it does not establish that the condition "offends [UCP500] article 3." It stated that the significance of that provision was that "the fact that the contractual rights and obligations of the applicant have been breached does not relieve the bank of its payment obligation or any other obligation." The court noted that the Issuing Bank did not seek to exercise its refusal to issue the telex on claims or defenses of the applicant.

3. Non Documentary Conditions; UCP500 Article 13(c): Seller/Beneficiary also argued that the condition based on presentation of a telex by Issuing Bank offended UCP500 Article 13(c). The court observed that "[i]t is the essential nature of a documentary credit or standby letter of credit that payment (or acceptance or instructions to another bank) is made 'against stipulated document(s), provided that the terms and conditions of the Credit are complied with': see article 2. Hence article 13c provides that if a condition does not state the relevant 'stipulated documents', it is to be disregarded." However, the court concluded that UCP500 Article 13 had no "application in this case" since it "is concerned with an attempt to make a payment (or equivalent) obligation conditional upon something other than a documentary condition in a letter of credit. The letter of credit in this case does not lay down any condition for payment other than that is to be made against the draft (properly marked), the certificate and the telex referred to in condition 3." The court stated that "[t]he express terms of the letter of credit do not make, or purport to make, the obligation to pay conditional upon anything other than a documentary condition. (If they did, then the court might have to consider whether the general words that incorporate the UCP into the letter of credit should prevail over the parties' express stipulation in condition 3: see Jack, Documentary Credits, 3rd Ed. (2001) para 8.18; and do so recognising that, [counsel for Issuer] points out that, article 1 of the UCP provides that it applies to standby letters of credit 'to the extent to which they may be applicable'.) It is said that condition 3 imports an implied obligation to issue the telex in some circumstances, and indeed [counsel for Issuer] on behalf of the bank did not contend otherwise. However, the basis for any such implication would be that it is necessary in order to give business efficacy to condition 3, and no obligation can be said to be implicit in condition 3 if the effect of implying the term is that condition 3 is to be disregarded and so given no business efficacy."

4. Duty to Issue, Issuer Controlled Condition: Seller/Beneficiary argued that it is entitled to an order that the Issuer send the required telex. The court expressed doubt whether the Issuer had any obligation regarding sending the telex other than to act in good faith.

Comment:

Generally, provisions that Beneficiary cannot fulfill without the cooperation of Applicant are to be avoided, but where present in an LC, should be enforced. It may be wondered whether the same principle applies to conditions requiring action by Issuing Bank.

If present, such conditions should be objective, not allowing the bank any discretion as with respect to a deposit being made to an account in the bank. Where there is discretion, there is a potential conflict of interest. Indeed, in such a situation, one may wonder whether the undertaking is a LC.

Here, it is unclear whether there is discretion. It may be that the bank would only act on instructions from the Applicant. In that case, the Issuer was to determine whether shares had been passed and, as the court interpreted the LC, whether warranties had been fulfilled. While the dispute was over the latter term, the court noted that "I do not accept that the bank could necessarily judge readily whether [Beneficiary] had fulfilled his obligation for the transfer of the shares: for example, if they had been transferred after 4 August 2006 there might be a dispute about whether [Real Party of Interest] has acquiesced in the delay." One wonders about the independence of the LC although it may be difficult to distinguish such a circumstance from an Applicant controlled condition.

On the other hand if there is discretion and the bank has attempted in good faith to determine whether Beneficiary was entitled to be paid, at this point it has become a surety and not the issuer of an independent undertaking. While the telex, as such, is documentary, the decision to issue it is not and because it is Issuing Bank that must make the subjective decision, the undertaking is not independent unless the condition is disregarded.

It is not enough, as the court suggests, that Issuer did not raise Applicant defenses. The flaw here is that Issuer's undertaking is not independent of a determination of facts outside the scope of its business. Whether that determination by it is primary (a non-documentary condition in the LC) or secondary (a fact that applicant fulfilled its warranty promised which leads to issuance of a telex) is irrelevant.

[JEB/jlb]

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