Article

Factual Summary: Seller agreed to deliver TFT panels to Buyer's Agent in Hong Kong whereupon Buyer's Agent would provide a delivery receipt that could be presented under the LC issued on behalf of Buyer by Issuer. Apparently, the delivery receipt was to be sent directly to the Nominated Bank. The opinion suggests that the Buyer's Agent was the applicant for the LC. The LC authorized the Nominated Bank to negotiate documents. In addition, the LC provided that Buyer's Agent was "to indemnify [Issuer] 'irrespective of any alleged discrepancies in the presented documents and/or any fraud that may be alleged at any time'." In addition, the opinion stated that "[w]hen opening the L/C, [Applicant] had provided [Issuer] with a specimen copy of its authorised signature and chop. At the time [Applicant] instructed [Issuer] that the signature and chop on any Cargo Receipt used to operate the L/C had to be verified against the specimen. The advising bank was to be (and [Nominated Bank] was so) advised by [Issuer]. The specimen gave [Applicant]'s Chinese name in traditional Chinese characters. The chop imprint on the 3rd Cargo Receipt, in contrast, gave [Applicant]'s name in simplified Chinese characters". It does not appear from the opinion that there was any reference in the LC to the specimen signature.

Subsequently, an official of Buyer asked its agent to send the 1st Cargo Receipt to Nominated Bank but "to describe the relevant goods in the 1st Cargo Receipt as 'STN' (not 'TFT')". As explained in the opinion, "[a]lthough he did not know then whether [Buyer] had actually received any goods from [Seller], [Employee of Buyer's Agent] realised that the 1st Cargo Receipt was non-compliant (since the goods were there wrongly described as 'STN' rather than 'TFT'). He rightly believed that [Seller] would not be able to obtain payment under the L/C through presentation of the 1st Cargo Receipt". A 2nd Cargo Receipt was sent to Nominated Bank under similar circumstances. Because of the incorrect description of the goods, neither document complied.

As described in the opinion, "by the time of receipt [of the 2nd Cargo Receipt] [Nominated Bank] had had already paid [Seller], albeit subject to an indemnity". Subsequently, Nominated Bank received a 3rd Cargo Receipt. There was uncontradicted evidence that the employee of Buyer's Agent had not sent or been requested to send the 3rd Cargo Receipt. The opinion states that it was "mysteriously received" by Nominated Bank. "The 1st and 2nd Cargo Receipts correctly state [Applicant]'s address as 'Unit 058'. The signature chops on both those documents bear [Applicant]'s name in traditional characters. The DHL documents evidencing the delivery of the 1st and 2nd Cargo Receipts to [Nominated Bank] all bear [Applicant]'s DHL account number. The DHL documentation for the 3rd Cargo Receipt does not have [Applicant]'s DHL account number". It was subsequently determined in judicial proceedings against Seller that the 3rd Cargo Receipt was false.

Afterwards, Nominated Bank forwarded the documents to Issuer including the 3rd Cargo Receipt. Alleging fraud by Seller, Buyer's Agent obtained an injunction prohibiting Issuer from paying Nominated Bank which it did not. Issuer did not send a notice of refusal to Nominated Bank. Nominated Bank claimed reimbursement notwithstanding the fraud and Issuer claimed against Buyer's Agent for indemnification in the event that it was obligated to reimburse Nominated Bank. The trial court ruled that Issuer was not obligated to reimburse Nominated Bank and that Buyer's Agent was not obligated to indemnify Issuer.

Legal Analysis:

1. Negotiation; Cure; UCP600 Article 7(c); UCP600 Article 2 (Honor). Does negotiation apply to cured documents especially where they are not yet presented? Applicant did not press the issue of forgery but rested its position on the argument that Nominated Bank's presentation of the 3rd cargo A different address in the same country for the applicant on a cargo receipt does not justify refusal. receipt instead of the 1st cargo receipt was not "valid", thereby not entitling Nominated Bank to reimbursement. The Judge agreed. He referenced UCP600 Article 7(c) (Issuing Bank Undertaking) for the proposition that the undertaking of the issuer is to reimburse a nominated bank for a complying presentation and UCP600 Article 2 for the definition of "negotiation" as the purchase of documents "under a complying presentation". Noting that Nominated Bank paid Beneficiary on the first presentation of the cargo receipt, the Judge concluded that there was no negotiation within the meaning of UCP600. He stated that UCP600 Article 7(c) requires that "the documents presented by a nominated bank have to be the complying set of documents which the beneficiary actually presented to the nominated bank and against which the nominated bank actually released payment to the beneficiary". On this basis, the Judge ruled that the Nominated Bank's presentation was invalid and Issuer had no obligation to reimburse.

Nominated Bank argued that there is no link in UCP600 Article 7(c) between the beneficiary's presentation to the nominated bank and the nominated bank's presentation to the issuer. The Judge stated "that reading is untenable in light of the actual wording of Art. 7(c). When Art. 7(c) refers to the nominated bank having 'forwarded the documents' to the issuing bank, it plainly means having 'forwarded the documents which the nominated bank purchased upon a beneficiary's complying presentation'".

2. Sample Signatures, Comparison Against; UCP600 Article 1; Variation; Modification; Compliance, Signature. As indicated, Applicant had instructed Issuer that "the signature and chop on any Cargo Receipt used to operate the L/C had to be verified against the specimen". The Judge noted that the specimen of the chop imprint was in traditional Chinese characters whereas that on the 3rd cargo receipt was in new simplified Chinese characters. Applicant insisted that it was not obligated to reimburse issuer on the basis of this difference. The Judge concluded that there was a "material" discrepancy. He noted that UCP600 Article 1 (Application of UCP) permits variation of the UCP. While he does identify what was varied, presumably it is the principle that credits involve documents and not facts, that documents are to be examined on their face, and the UCP600 disclaimers of genuineness. He states that "[h]ere the L/C was subject to [Applicant]'s express instruction that the signature and chop on any Cargo Receipt presented were to be verified against the specimen provided". The opinion also states that Nominated Bank was "so advised" by Issuer.

3. Compliance: Address of Applicant; UCP600 Article 14(j). Applicant urged that it was not obligated to reimburse Issuer because of the address in the letterhead on the 3rd cargo receipt was "Unit 05B" instead of "Unit 058". Relying on UCP600 Article 14(j) which provides that the address of applicant on a document need not be the same as that in the credit or any other document provided that they are all in the same country, the Judge stated that he was "not persuaded" that the different address was "a material irregularity", a difference that he also described as a "minor discrepancy".

4. Indemnification by Applicant. Issuer claimed that were it liable to reimburse Nominated Bank, it would be entitled to reimbursement from Applicant due to provisions said to be in the LC "to indemnify [Issuer] 'irrespective of any alleged discrepancies in the presented documents and/or any fraud that may be alleged at any time'". While noting that he was not required to decide this issue, the Judge recorded his "doubt as to whether, on their true construction, the clauses relied on have the effect for which [Counsel for Issuer] contends".

5. Notice of Refusal where Injunction; Preclusion; UCP600 Article 16(f). Nominated Bank argued that Issuer was precluded under UCP600 Article 16(f) from failing to honor because it did not give any notice of refusal. The Judge stated that the argument is moot given his conclusion that presentation of the 3rd cargo receipt was not "valid". He noted, however, his "doubt that Art.16 is applicable in the manner suggested by [Nominated Bank's Counsel]. The commercial reality is that [Issuer] was precluded from paying out to [Nominated Bank] (despite [Issuer]'s announced intention of doing so) by the injunction obtained by [Applicant]. [Issuer] informed [Nominated Bank] of the injunction. [Applicant]'s reasons for contending that the 3rd Cargo Receipt was non-compliant should have been apparent to [Nominated Bank] by around then. It would have been obvious to [Nominated Bank] that, if [Applicant] was right, [Issuer] would in turn be raising the same grounds for rejecting [Nominated Bank]'s tender".

Comments:

1. UCP600 and Its Use by Courts. In effect, the rule of China New Era is that a nominated bank's claim to reimbursement rests on the documents that it purchased and not subsequent re-presented documents that may have been cured. This interpretation of UCP600 Article 7(c), while not incorrect from a literal perspective, could not be more incorrect from the perspective of LC practice. This decision ranks in a long line of really bad LC court decisions misinterpreting the UCP. That such decisions regularly occur says something about the drafting of the UCP, namely that it was not drafted to be literal-minded judge proof. It also says something about the courts, namely that they desperately need to hear from LC experts. The access to expert testimony in some jurisdictions is reasonably unrestricted. Hong Kong, however, is not one of them. For whatever reason, the ability of experts to testify about practice is so constrained as to be practically meaningless while the barristers are free to opine about practice although they have no real knowledge about what they are talking about other than what they have quickly grasped from books or rules. Hence, silly results emanate from such courts.

2. Obligation to Reimburse. The obligation of the issuer is to reimburse a nominated bank whose presentation of documents is not timely and adequately refused. Since the documents that were forwarded complied, Issuer was not able to refuse to reimburse. The argument that the documents forwarded were not the documents negotiated will leave all LC bankers numb. Technically, the negotiating bank could have returned the documents, charged back the payment on its books, and then gone through the same process on the two cures. To make it do so places form over substance. The beneficiary is entitled to effect a cure until the expiration of the credit. The negotiating bank is entitled to act on a cure and to substitute documents cured for those originally negotiated. Doing so does not lessen the issuer's obligation to reimburse or the negotiating bank's right to be reimbursed and any interpretation of UCP600 that concludes otherwise is mistaken.

3. "Complying Documents" and UCP600. The drafters of UCP600 may have been too ambitious in attempting to utilize the notion of "complying documents" to the extent that they did. While the approach is attractive in that it saves words, it has pitfalls that are well illustrated in this case. The obligation of the issuer (or confirmer, for that matter) is not, strictly speaking only to reimburse a nominated bank for "complying documents". While it is obligated to reimburse for negotiation or payment against such documents, it is also obligated to reimburse for any presentation as to which it is precluded from asserting that the documents are not in compliance under UCP600 Article 16(f). This provision demonstrates that the provisions of UCP600 Article 7(c) are not a comprehensive statement of the issuer's reimbursement obligation.

4. Other Potential Fallout of the Decision. This decision will also impact claims as to whether a bank has "negotiated" if the documents are forged or fraudulent. While Applicant abandoned that claim, it should not have in light of the Judge's ruling. The Nominated Bank would not have "negotiated" as to the forged documents and, accordingly, would not be entitled to reimbursement under the UCP600 disclaimers or the nominated person exception to the fraud defense.

5. Applicant's Right to Insist on Strict Compliance. There seems to be an assumption in the opinion that the standard of compliance applicable to the applicant's obligation to reimburse the issuer is the same as the standard that can be asserted by the issuer against the nominated bank. The applicant is not obligated on the LC but on its contractual relationship with the issuer. It would be surprising if the standard were the same. Where the issuer exercises its judgment regarding discrepancies or is negligent but without thereby causing material harm to the goods, most reimbursement agreements provide that the applicant is obligated to reimburse the issuer.

6. Sample Signatures. The other troublesome aspect of this case is the practice of providing a sample signature. The Judge simply assumes that this practice is an acceptable variation of the UCP. Is it? It is difficult from the text of the opinion to understand what the LC provided. The opinion could be read to state that the provision about signatures was not within the four corners of the LC itself but a collateral instruction. There are, therefore, three questions. 1. What if the LC itself so provided? 2. If it did not, what effect would an instruction have on the nominated bank? 3. What about the obligation of the applicant to reimburse where this instruction was not followed?

Making honor of a required document subject to a hidden term, namely that certain signatures comply with a sample not stated in the credit is not merely troublesome; it is offensive to fundamental principles of LC practice and law. And it lends itself to abuse. The Applicant or its principal, the Buyer, clearly are not above misconduct. They deliberately rigged the first two versions of the cargo receipt so that they would not be complying due to a misdescription of the goods. There is no reason that they could not have themselves provided a chop on the cargo receipt that differed from the sample. In such a situation, the beneficiary would have no way of knowing and would part with control of the goods without having a complying document.

If, as is possible, the requirement is not stated in the LC itself, the defense cannot be raised against the beneficiary unless the issuer is able to prove LC fraud. As to a nominated paying or negotiating bank, the same principle would apply although the instruction might add complications. Can such an instruction vary the terms of a credit? A different result, however, should obtain where a bank acts on a nomination to confirm.

Of course, if the Issuer was foolish enough to bind itself to such a term in its separate agreement with the applicant, it is so bound, but that agreement cannot protect it from the beneficiary and a nominated bank that has acted pursuant to its nomination.

7. Indemnification. One wonders at the Issuer's reliance on a term in the LC for indemnification from the applicant. Such provisions should be detailed in the LC application.

8. Preclusion. Another troublesome aspect of this decision is its cavalier treatment of the doctrine of preclusion. The Judge decided that the claim of preclusion was moot because there was no "valid" presentation. Whatever that notion may mean to the Judge, there was a "presentation" whether from the beneficiary via the nominated bank or from the nominated bank, thereby requiring timely examination and notice of refusal. The existence of an injunction does not excuse this obligation unless the injunction expressly so states. The Judge suggests that the Nominated Bank could assume from the injunction claim to which it was not a party that the Issuer would raise the "same grounds" for refusal. Since the only grounds for an injunction were LC fraud and that claim had been abandoned by the time of the trial, it is difficult to know to what grounds the Judge referred. If it were to the address and the difference between the signature in the cargo receipt and the sample, the first is not valid and the second has no basis in UCP600. Therefore, Issuer was precluded from asserting that the documents did not comply under the clear terms of UCP600 Article 16(f), and the Judge should have so concluded. Indeed, the question arises as to where the discrepancies that were discovered in the opinion were raised.

[JEB/jdc]

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