Article

Factual Summary: Five contracts for the sale of containerized scrap provided that "payment was 100% by sight L/C by a first class bank acceptable to [Seller], opened in workable form and received in London with the advising bank nominated as Fortis' Aldermanbury Square branch". Accordingly Buyer and Applicant had five letters of credit issued, totaling US$ 8,265,000.00 by Issuer payable to Seller/ Beneficiary. These contracts were facilitated by Applicant, an Indian government owned company. Field 72 of the letters of credit requested Advisor to advise the LCs, which it did. Field 49 (CONFIRMATION INSTRUCTIONS) stated that Advisor "MAY ADD" its confirmation. [M1]. Advisor/Confirmer added its confirmation at the request of the Seller/Beneficiary to three of the five letters of credit. When Seller/Beneficiary made drawings under each letter of credit, Advisor/ Confirmer negotiated and honoured the three LCs it had confirmed, and forwarded the remaining two drawings to Issuer.

When Issuer rejected the documents and refused to authorize reimbursement of Advisor/Confirmer and payment to Seller/Beneficiary, they sued Issuer for wrongful dishonor and applied for summary judgment. The trial court ruled that only one alleged discrepancy was valid and reserved judgment as to the availability of preclusion.

Legal Analysis:

1. Strict Compliance; Compliance; Examination, Standard for; ISBP (2007) ¶2; Ambiguity

Issuer argued that the standard by which discrepancies were to be measured was that of strict compliance. While not disputing the standard, Advisor/ Confirmer and Beneficary stressed that the doctrine was subject to "qualifications," namely 1) that the applicant bears the risk of ambiguity as provided in ISBP (2007) ¶2. Citing Crédit Agricole Indosuez v. Muslim Commercial Bank Ltd, [2000] 1 Lloyd's Rep. 275 at 280 (per Sir Christopher Staughton) and 281 (per Peter Gibson LJ), the Judge stated that "[w]here instructions are ambiguous a confirming bank which acts upon a reasonable construction of those instructions is still entitled in law to reimbursement, even if the court were ultimately to conclude that that was a wrong construction"; 2) that it does not apply to "trivial discrepancies"; and 3) "The question of compliance should be considered intelligently rather than mechanically and may involve the exercise of judgment", citing Evans LJ in Krediet Bank Antwerp v Midland Bank, [1999] CLC 1108 at para. 12. The Judge suggested that the scope of trivial discrepancies is "limited".

Issuer claimed four discrepancies: 1) Invoice and other related documents not prepared in the name of Buyer, 2) Bill of lading not made out to the Buyer, 3) Port name on commercial invoices contrary to LC terms, and 4) Statement on consolidated certificate contrary to LC terms.

2. Discrepancies: Name of Buyer in Invoice, Certificate of Quality, & Beneficiary's Certificate; UCP600 Article 18(ii).

Issue's notice of refusal stated that "INVOICE AND OTHER RELATED DOCUMENTS EXCEPT BILL OF LADING ARE NOT PREPARED IN THE NAME OF BUYER. ROLE OF [Facilitator] IS LIMITED TO THAT OF FACILITATOR. PLEASE REFER TO FIELD 47A, CLAUSE 7" All documents other that the bill of lading referenced a sale between Seller/Beneficiary and Facilitator, namely as the consignee in the invoice, applicant for certificate of quality, and addressee of the beneficiary's certificate. Issuer argued that "this is inconsistent with the true commercial facts, which were that the L/Cs were issued in relation to a [Seller]/ [Buyer] transaction and with [Facilitator's] defined role (as facilitator) within the L/C" It also pointed out that the contract details were contained in Field 46A and that Field 47A stated that "MTSC WILL ACT AS FACILITATOR".

The Judge ruled that "what matters is not the "true commercial facts" but the documentary requirements of the L/Cs. The L/C does not stipulate the name of the person to whom the documents are to be addressed and does not identify the name of any "buyer". The only parties identified in the letters of credit are the "APPLICANT" (MSTC) and the "BENEFICIARY" (Stemcor). Although clause 7 of field 47A of L/C1 stated, as an "ADDITIONAL CONDITION", that "MSTC WILL ACT AS FACILITATOR", it does not follow that documents issued in the name of [Facilitator] rather than an unnamed "buyer", do not comply with the documentary requirements in the L/C." The Judge also noted that UCP600 Article 18(ii) (Commercial Invoice) required that a commercial invoice be made out in the applicant's name. The Judge concluded that if the UCP so provided for the invoice, "there can be nothing wrong (in the absence of clear instructions to the contrary) in preparing "other related documents" in [Facilitator's] name." In the alternative, the Judge concluded that any instructions were ambiguous. A similar argument was made and rejected on the same basis regarding a bill of lading with the added comment that the LC expressly so required.

3. Discrepancy: Bill of Lading not consigned to Buyer

Issuer's notice of refusal stated "ALL DOCUMENTS EXCEPT THE CERTIFICATE OF ORIGIN WERE REQUIRED TO BE PREPARED IN THE NAME OF THE BUYER VIZ. SESA INTERNATIONAL LTD, 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA-700017, WHICH HAS NOT BEEN DONE, THUS NON COMPLIANCE OF CLAUSE 7 OF FIELD 47A. B/L IS NOT IN CONFIRMITY [sic] WITH CLAUSE 7 OF FIELD 47A". Issuer noted that Clause 7 of Field 47A stated "ALL DOCUMENTS EXCEPT FOR CERTIFICATE OF ORIGIN TO BE PREPARED IN THE NAME OF THE BUYER VIZ. SESA INTERNATIONAL LTD, 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA 700017".

As presented, the bills of lading "were made out in the terms required by clause 2 of field 46A, namely: '2. FULL SET OF 3/3 ORIGINAL SHIPPED ON BOARD BILLS OF LADING STAMPED, SIGNED MARKET FREIGHT PREPAID CONSIGNED TO ORDER OF INDIAN OVERSEAS BANK, INTERNATIONAL BUSINESS BRANCH, 2, WOOD STREET, KOLKATA-700016, INDIA AND NOTIFY THE APPLICANT BANK AND SESA INTERNATIONAL LTD., 31, SHAKESPEARE SARANI, JASMINE TOWER, 6TH FLOOR, KOLKATA 700017, INDIA.'"

Issuer objected that Buyer was only named as second notify party under the section of the bill of lading labeled "Description of Packages and Goods". The Judge rejected this argument, stating "I am satisfied that this constitutes compliance with the L/ C requirements. [Buyer] is clearly not a 'package'. It is, as expressly stated on the Bills of Lading, a 'notify party'. Considering the matter intelligently rather than mechanically, that plain statement is not undermined or made unclear by its position within the Bills of Lading."

4. Discrepancy: Virgules; Price Term; Conflicts; UCP600 Article 18 Invoice

Field 45 A of the 4th LC contained the following: "USD 600.00 NET PMT, CFR CY, HALDIA/ KOLKATA, INDIA". However, the invoice presented stated "USD 600.00 NET PMT, CFR CY, HALDIA, INDIA". Issuer's notice of refusal stated "COMMODITY AND SPECIFICATION: THE COMMERCIAL INVOICES DO NOT COMPLY THE PRICE TERM OF THE LC: THE PRICE TERM, IE, 'USD 600.00 NET PMT CFR CY HALDIA, INDIA' DOES NOT CORRESPOND WITH THAT APPEARING IN THE CREDIT AS PER FIELD 45A".

The Judge rejected this argument, stating "I agree with [Issuer] that the [Beneficiary's and Advisor/ Confirmer's] assertion that as a matter of fact Haldia is a port in Kolkata (which is disputed) is no answer. However, I accept the [Beneficiary's and Advisor/ Confirmer's] case that Haldia and Kolkata were being referred to in the price term as alternatives and that a reference to Haldia alone is appropriate or at least suffices in circumstances where the goods were shipped under the Haldia Bills of Lading."

Alternatively, the Judge noted that "the price term in Field 45A of L/C4 was not a documentary requirement so that the documents would be compliant provided that there was no inconsistency with it. There is no inconsistency in circumstances where Haldia is one of the named ports and in the event is the relevant Bill of Lading port." He also observed that the instruction were ambiguous.

5. Discrepancy: Costs

Field 46A Clause 7D of the LCs required "7. BENEFICIARY'S CONSOLIDATED CERTIFICATE CERTIFYING AS FOLLOWS: WE HEREBY CERTIFY THE FOLLOWING . . . D) THAT THE NEGOTIATING BANK HAS BEEN ADVISED TO DESPATCH ORIGINAL SHIPPING DOCUMENTS ONLY BY AIR COURIER SERVICE TO THE LC OPENING BANK AT OUR COST . . .".

The consolidated certificate presented stated "WE HEREBY CERTIFY THE FOLLOWING: . . . D) THAT THE NEGOTIATING BANK HAS BEEN ADVISED TO DESPATCH ORIGINAL SHIPPING DOCUMENTS ONLY BY AIR COURIER SERVICE TO THE LC OPENING BANK AT [Issuer's] COST."

Issuer's notice of refusal stated "BENEFICIARY'S CONSOLIDATED CERTIFICATE IS CONTRARY TO THE LC TERMS. REFER FIELD 46A CLAUSE 7D".

Beneficiary and Advisor/Confirmer argued that "is materially ambiguous because the reference to "OUR" cost can reasonably be interpreted as a reference either to (a) [Seller/Beneficiary's] cost (as issuer of the certificate) or (b) [Issuer's] cost (as the issuer of the L/C)."

The Judge, however, ruled that this discrepancy justified refusal, stating, "there is no ambiguity. The words in clause 7D "WE HEREBY CERTIFY THE FOLLOWING ..." make it plain that (i) the wording of the L/C sets out a pro forma certificate which is to be issued by [Seller/Beneficiary] and (ii) "OUR" is to be identified with "WE" - i.e. the person giving the certificate - namely [Seller/Beneficiary]". He also rejected the argument that this discrepancy was "legally trivial" because it would be known that Issuer was not charged for dispatch of the documents. The Judge observed "this involves the documentary checker having to investigate the facts rather than merely examine the documents. In this connection I do not accept that a distinction is to be drawn between facts which may be within the knowledge of the bank and other facts, or facts relating to the transaction and other facts. It is the documents alone that fall to be considered and no factual inquiry or investigation should be required. In any event, I do not accept that [Issuer] would have known that it was not going to be charged for the despatch of the documents. On the face of the documents it was going to be so charged regardless of whether or not it had yet been charged."

6. Confirming Bank; UCP600 Article 7/8

Issuer's contention that Advisor/Confirmer added its confirmations without issuer's "authorization" as required by UCP 600 Article 2 was dismissed by the Judge. Issuer expressly stated to the nominated bank (Fortis) that it "MAY ADD" its confirmation. The Judge found that "[b]y agreeing that [Fortis] 'MAY' do so [Issuer was] authorising that to be done."

Advisor/Confirmer's contention that even if it was not an authorised confirming bank, that it still would have an indisputable claim against Issuer as the 'nominated bank' was also valid. UCP600 sub-Article 7(c) states: "An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing banks. Reimbursement for the amount of a complying presentation... is due at maturity..." Despite doubts whether Advisor/Confirmer did negotiate the documents so as to come within sub- Article 7(c), the Judge found that "Advisor/Confirmer did negotiate what on their case was a complying presentation and did forward the documents to [Issuer]. What matter[ed was] the fact of honouring or negotiating a complying presentation."

7. Preclusion

Beneficiary and Advisor/Confirmer's claim that Issuer failed to return the documents presented in a "reasonable time" resulted in waiver of the discrepancies was not sufficiently proven by Beneficiary and Advisor/Confirmer to be dealt with summarily. The Judge deferred ruling on this matter until further evidence or material was presented by Issuer on the matter of implied terms of reasonability under UCP600 Article 16.

8. Re-presentation more than 21 Days after Bill of Lading Date

In relation to one of the letters of credit, Issuer's contention was that, the presentation was noncompliant because the re-presentation of documents occurred more than 21 days after the bill of lading date. The Judge ruled that the presentation was within 21 days of the date of issue of the bill of lading, and that it was that date, and not the date of shipment, which was relevant.

Comment(s):

1. "Strict Compliance". The explanations of counsel for Advisor/Confirmer and Beneficiary of the "qualifications" of the so-called doctrine of "strict compliance" (a term not used in the UCP) ring very true. They are ambiguity in the LC provisions (with reference to ISBP 2007 ¶ 2), "trivial" discrepancies, and the use of common sense in the context of the documents and the transaction reflected in them. While not clearly articulated in UCP600 nor consistently applied in ICC Banking Commission opinions, these corollaries to the standard for the examination of documents are insightful and represent constructive LC thinking.

2. Ambiguity. The oblique provision in ISBP (2007) ¶ does not exactly provide that the risk of ambiguity rests with the issuer. The paragraph lays it on the applicant where it probably will rest ultimately. But, as between the issuer and anyone acting under the credit, including the beneficiary and a nominated bank, the issuer bears the risk of ambiguity in its LC as this decision rightfully concludes with respect to the virgule, the phrase "prepared in the name of", and the name of the applicant who was only a surety and not the buyer. That the applicant, buyer, and issuer expected the name of the buyer to appear makes no difference. The LC said "applicant" and the beneficiary properly listed the name of the applicant. Indeed, had it listed the name of the buyer, it would have exposed itself to refusal for not listing the applicant stated in the LC.

3. Applicant. This case illustrates the increasing complexity in the use of sureties and correspondent banks in the issuance of credits. Where these names once did not commonly appear in the text of LCs, they are increasingly used and listed as the applicant with corresponding complexity with respect to commercial documents. There is no ready solution to this situation other than vigilance in the issuance of LCs and the preparation of documents.

4. Preclusion. While the court delayed ruling on the question of whether the refusal was timely, it should also have considered whether the notice was adequate at lest with respect to the costs. The Judge concluded that the certificate was discrepant because it stated that the cost was for the issuer as opposed to the beneficiary as the Judge correctly interpreted the LC to require. But the notice of refusal did not say "costs for beneficiary instead of issuer" or something to that effect. Instead, it stated that the certificate was "contrary to LC Terms and referred beneficiary to the terms. Such a notice does not inform the beneficiary of the discrepancy and only by surmise from looking at the LC terms can one guess in what sense the document is discrepant. Such a vague reference is not an adequate notice of refusal.

[JEB/mcb]

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.