Article

Factual Summary: To finance a resale of steel, Reseller arranged for a bank-to-bank LC. Ultimate Buyer/Applicant obtained a transferable LC in favor of Reseller in the amount of US$5,426,630, naming Transferring Bank. Reseller then directed Transferring Bank, to transfer US$4,955,500 of the LC to Ultimate Seller/Transferee Beneficiary.

Ultimate Seller/Transferee Beneficiary shipped the steel to Reseller, and presented the invoice and bills of lading to Transferring Bank. Transferring Bank substituted Reseller's invoice for that of Ultimate Seller/Transferee Beneficiary and forwarded the documents to Issuer. Dissatisfied with the quality of the steel, Ultimate Buyer/Applicant refused to take possession of the shipment and temporarily initiated proceedings attempting to enjoin Issuer from paying on the LC, which were voluntarily dismissed. Citing documentary discrepancies, Issuer refused payment.

Ultimate Seller/Transferee Beneficiary resold the steel for a lower price and then sued Issuer and Transferring Bank for damages. The Ontario Superior Court of Justice, Hoy, J., granted summary judgment to Beneficiary on its claim against Issuer, but dismissed its claim against Transferring Bank. The Judge also ordered Issuer to pay costs to Ultimate Seller/Transferee Beneficiary in the amount of US$175,000 and to Transferring Bank in the amount of US$117,996. The appeal was dismissed.

Legal Analysis

1. Transfer; UCP500 Article 48(a) & (h); Transferring Bank; Notice of Transfer

On appeal, Issuer argued that the trial court erred in concluding that Transferee Beneficiary had a direct cause of action against it because the transfer of the LC was invalid since First Beneficiary/Reseller did not direct its request for a transfer to the Issuer and because a notice of transfer required by the terms of the credit was not given to Issuer by Transferring Bank.

The LC named Transferring Bank which was also the advising bank as the transferring bank. It provided that

THIS LETTER OF CREDIT IS TRANSFERABLE. TRANSFER REQUEST(S), IF ANY, ARE RESTRICTED TO THE ADVISING BANK HEREIN DESIGNATED THE TRANSFERRING BANK AND ANY TRANSFER REQUEST(S) MUST BE ACCOMPANIED BY THE ORIGINAL CREDIT, AND A NOTATION OF THE TRANSFER MUST BE DULY MADE ON THE REVERSE OF THE ORIGINAL CREDIT BY THE TRANSFERRING BANK.

The appellate court rejected the argument that the First Beneficiary's request for transfer had to be directed to Issuer. It looked to UCP500 Article 48(a) which it pointed out did not limit requests for transfer to the Issuer but instead permitted them to be made directly to the transferring bank. Rouleau, J.A., stated "By incorporating the UCP 500 into the letter of credit and designating [Advising Bank] as the transferring bank, [Issuer] vested [Advising Bank] with the authority to accept and execute requests for transfers from [First Beneficiary]"

Issuer also argued that the transfer was invalid because the required notice of transfer was not given to it before the expiry date of the credit. The transfer clause of the LC provided:

NOTICE OF ANY TRANSFER, INCLUDING THE NAME AND COUNTRY OF THE TRANSFERREE, MUST BE SENT TO US BY EITHER THE TRANSFERRING BANK AT THE TIME OF TRANSFER OR THE NEGOTIATING/PRESENTING BANK MUST CERTIFY THAT DOCUMENTS PRESENTED ARE FROM THE TRANSERREE AND NO SUBSTITUTION OF DOCUMENTS FROM THE FIRST BENEFICIARY IS REQUIRED. UNTIL SUCH NOTIFICATION IS RECEIVED BY US, WE WILL NOT PAY AGAINST ANY DRAFT(S)/INVOICE(S) ISSUED BY A PARTY OTHER THAN THE NAMED BENEFICIARY OF THE CREDIT.

The opinion also rejected this argument. The Judge stated that the transferability provision "does not, in my view, impose as a condition on the transfer of the letter of credit that [Transferring Bank] give notice to [Issuer] before a transfer of the letter of credit becomes effective." "In other words, the last portion of the condition, the portion requiring notice of the transfer, is not a prerequisite to making the transfer effective. Notice (or the specified certification by the presenting bank) is required only if [Issuer] is being called upon to pay on presentation of a draft or invoice other than an invoice from [First Beneficiary]." (Emphasis in opinion.) He observed that "[o]nce the transfer was validly effected, [First Beneficiary]'s rights under the letter of credit accrued to [Ultimate Seller/Transferee Beneficiary], to the extent provided in [Transferring Bank]'s "transfer of a documentary credit.""

The opinion also noted uncontradicted expert testimony that notice of a transfer is not regularly required and that the provision in the LC did not require notice where, as in the facts of this case, the drafts and invoices of the first beneficiary were substituted for those of the transferee beneficiary. It noted the reason for this practice: "This allows the first beneficiary's bank to present the first beneficiary`s documents for payment without disclosing the identity of the second beneficiary. The beneficiary of the letter of credit can thus avoid revealing the source and cost of the goods to the purchaser, preventing the purchaser and supplier from doing business directly".

2. Strict Compliance; Independence.

Since Issuer also asserted that the documents did not comply on their face with the terms and conditions of the credit, the opinion reviewed the principles of autonomy and independence. It noted that "letters of credit are obtained to provide the beneficiary with a secure source of payment that cannot be held up or otherwise delayed because of disputes concerning the underlying subject matter of the transaction. If a demand for payment is made that complies with the terms of the letter of credit, the issuing bank is, subject to limited exceptions, required to honour the credit." It noted, however, a limitation on the principle of strict compliance as set forth in Canadian case law in Angelica-Whitewear Ltd. v. Bank of Nova Scotia (1987), [1987] 1 S.C.R. 59, 1987 CarswellQue 24, 1987 CarswellQue 91, 73 N.R. 158, 6 Q.A.C. 1, 36 D.L.R. (4th) 161, 36 B.L.R. 140 (S.C.C.), which it cited for the proposition that "there "must be some latitude for minor variations or discrepancies that are not sufficiently material to justify a refusal of payment."" Issuer argued that the trial judge had taken "too broad a view" which led her to misunderstand the seriousness of the discrepancies.

3. Description of Goods, Invoice; Invoice's Description of Goods; UCP500 Article 37(c); "Correspondence"

Issuer rejected this invoice because it failed to recite "Merchandise described on purchase order". Rouleau, J.A., rejected this argument, concluding that "[t]he omitted words do not constitute a part of the description of the goods. Rather, they are mere surplusage. They simply indicate that the merchandise is to be described by reference to purchase orders. What followed in both the letter of credit and the invoices presented by [Transferring Bank] was the same: "steel coils" as well as the listing of the same two purchase orders and the price."

1. The Number of Originals Presented; UCP500 Article 28(b); Full Set

The LC required presentation of "2/3 set plus one non-negotiable copy" of inland water transport documents. The opinion noted that in view of the unavailability at trial of the documents presented, the parties had agreed that "at least" three documents were presented and one was marked as a nonnegotiable copy. The documents, however, failed to indicate the number of originals.

Relying on UCP500 Article 28(b) which provides that the transport documents presented are deemed to constitute a full set, Issuer argued that the presentation of a full set instead of 2/3 constituted a discrepancy.

While regarding the failure to note the presentation of 2/3 of the transport documents a discrepancy, the opinion concluded that it was not material due in large part to the fact that the inland waterway transport documents were straight and that the goods could only be claimed by the named consignee. The opinion noted that "in some cases, original transport documents can be used to control title to the goods. In such circumstances, it is important for the issuing bank to know, before being called upon to pay, where the originals are and to what uses they have been put." However, it recognized that such a concern is not reflected in UCP500 Article 28 with respect to inland waterway transport documents: it "signals a lack of concern as to the potential misuse of one set of originals. In a sense, because the UCP 500 deems [Transferring Bank] to have presented the full set of originals, [Transferring Bank] has not only met but in fact exceeded the 2/3 requirement set out in the letter of credit." The opinion also noted that Issuer's expert could identify no practical implication of the presentation of such documents without indicating the number of originals.

2. Agency Signature; UCP500 Article 28(a)(i)

According to the opinion, the inland waterway transport document was issued "on the letterhead of the "American Commercial Barge Line Company LLC"". The opinion stated that "C-River Logistics Inc. signed it "C-River Logistics Inc. (agent)", next to the word "per" on the signature line directly below the words "American Commercial Barge Line (carrier)"".

Issuer argued that the document was discrepant because the agent did not indicate on whose behalf it was signing, citing UCP500 Article 28(a)(i) which provides that the document must appear "to have been signed ...by the carrier or a named agent for or on behalf of the carrier. ... An agent signing ... for the carrier must also indicate the name and capacity of the party, i.e. carrier, on whose behalf that agent is acting...."

The appellate court rejected this argument. "From the relative position of the signature below the name of the carrier, it is apparent that the agent, C-River Logistics Inc., was acting as agent on behalf of the carrier named above the signature. Because the word "(carrier)" appears immediately following "American Commercial Barge Line", it is abundantly clear that American Commercial Barge Line was the carrier. Therefore C-River Logistics Inc. is clearly signing as agent for American Commercial Barge Line Company and American Commercial Barge Line Company is the carrier. The alleged discrepancy does not justify a refusal of payment."

Comment

1. Variation of UCP500 Article 48(a) Definition of Transferring Bank. While the opinion does not provide the full text of the credit, it appears that the Transferring Bank was nominated to advise. It is not clear whether it was also nominated as confirmer but it is clear from the opinion that it did not act as confirmer. The text of the transfer clause expressly names the advising bank as a Transferring Bank, thus varying UCP500 Article 48(a) and expressly naming a bank that was not nominated as a transferring bank. Such variations are permitted under UCP500 Article 1.

2. Commercial Jurisprudence. Regardless of whether one agrees with the discrete conclusions of the opinion, it is impressive that it seeks to understand the commercial purposes of the rules and practices with which it is dealing. Its openness to expert testimony no doubt aided it in this task.

3. Refusal to Honor Complying Presentation Due to Failure by Transferring Bank. It is seriously doubtful that the issuer could refuse to reimburse the transferee beneficiary because of the failure of the transferring bank to give a notice after the transfer was effected. Indeed, the clause does not even purport to give it such a right. It merely indicates that no payment will be made until such notice is given, a reasonable approach since it would otherwise be paying a stranger other than the named beneficiary.

4. Description of the Goods. The appellate opinion did not explain its rationale regarding the invoice in any detail. The fact that the description in the invoice was that contained in the purchase order is irrelevant in an independent undertaking. There is no doubt that the issuer and applicant are entitled to have a recital that the goods listed are those described in the purchase order. The question is whether the text in the LC amounted to such a requirement.

There is no principle for answering this question in UCP500. It is compounded by the common use of the SWIFT format. Although the opinion does not indicate if the LC was advised via SWIFT, it appears that the provisions were those that would be contained in Field 45A. The problem is that many credits contain provisions in this field that are not, strictly speaking, part of the description of the goods. One approach would be to require that everything in that field be replicated in the invoice. If not, then the principle by which what is and is not a part of the description is difficult to ascertain and admits to differences between banks.

There is another basis for the conclusion that the opinion reached, namely that the description itself referenced the "P.O. NO." and gave the two numbers. In light of this fact, the reference to merchandise described on purchase order does appear to be surplusage not because it is the same as in the purchase orders but because there is a reference to the purchase orders by number in the invoice. As indicated in ISBP (2003) ¶ 62, a mirror image is not required.

5. Unfull Set of Originals. The opinion seems to intuit but not fully express the fact that the default rule of UCP500 Article 28(b) is inapt with respect to the problem raised in a credit that does not require a full set but only 2/3. UCP500 does not require a transport document to state the number of originals nor, in all likelihood, did the LC. They assumed that it would. The real questions to be asked are whether the credit identifies what is to happen to the 1/3 original and who should bear the risk of the failure of an inland waterway transport document to state the number of originals. The presentation of 2 originals actually seems to suggest that, were there three, only two were presented. If there were only two, then one is left to wonder what effect the absence of the third may have. In light of the lack of any identifiable reason for the requirement, it is difficult to quarrel with the opinion in its conclusion that the discrepancy-if there was one-was immaterial.

6. Agency Signatures. One of the most obscure aspects of international letter of credit practice is the mystery surrounding how bankers treat agents. Whatever the depths of the mystery, however, it is difficult to conclude that the agent does not disclose its agency and its principal based on the description of the signature in the opinion. The carrier is disclosed. "Per" indicates the relationship between the disclosed agent and the party designated as carrier on the line above.

[JEB/gdb]

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