Article

Factual Summary: To pay for purchase of TFT panels, Applicant, acting as import agent for Buyer, opened a commercial LC subject to UCP600 through Issuer in favor of Beneficiary and available for negotiation with any bank. The LC required presentation of various documents, including a cargo receipt stamped with Applicant's authorized signature and chop in order to receive payment. The LC also authorized Nominated Bank to negotiate documents for payment.

When Beneficiary presented documents to Nominated bank and "requested the [Nominated Bank] to negotiate/discount the drafts drawn by [Beneficiary] on the [Issuer] to the order of the [Nominated Bank] and 'relative documents even if they bear discrepancy(ies)' against an indemnity", Nominated Bank paid Beneficiary with recourse.

The cargo receipt, referred to the goods as 'STN' instead of 'TFT', making it discrepant. Beneficiary re-presented (second presentation) the cargo receipt, but the second presentation was also discrepant. A third re-presentation corrected the discrepancy and appeared on its face to comply. The opinion indicates that it was unclear from the evidence whether payment was made on the first presentation or second re-presentation, but it was made before the third representation.

Nominated Bank did not, however, forward the documents to Issuer until after the third representation. When it did so, claiming reimbursement, Issuer determined that Nominated Bank's presentation complied, and, therefore, did not give a notice of refusal to honor. Alleging fraud by Beneficiary, Applicant obtained an injunction enjoining Issuer from making payment. When Nominated Bank sued Issuer for reimbursement, the trial court ruled in favor of Issuer and enjoined payment. On appeal, reversed.

Legal Analysis:

1. Negotiation; Compliant Presentation; UCP600 Article 7(c): The trial court had ruled that Issuer had no obligation to reimburse Nominated Bank under UCP600 Article 7(c) (Issuing Bank Undertaking) because Nominated Bank had not negotiated the presentation within the meaning of the UCP600 Article 2 definition of "Negotiation". UCP600 Article 7(c) provides that an issuer is obligated to reimburse a Nominated Bank that has "negotiated a complying presentation" and the definition of "Negotiation" under UCP600 Article 2 is the purchase of documents under a complying presentation. The trial court had concluded that these provisions required that the documents be complying at the time of the purchase.

Le Pichon stated that "A party who successfully negotiates becomes the contracting party to the letter of credit. The purchaser does so by acquiring documents or a sufficient interest in them that would enable the purchaser to present them, in its own right, to the issuing bank for payment as principal and to sue if the undertaking to pay contained in the credit is not honoured. Thus, the essence of negotiation is accurately summarized as 'the purchase of documents and their presentation under the credit in the purchaser's own right.'" The Judge referred to Stone J in Cooperatieve Centrale Raiffeisen- Boerenleenbank BA v Bank of China [2004] 3 HKLRD 477 at § 82.

In interpreting UCP600 Article 7(c), Le Pichon noted the "unfortunate" linkage between "purchase" and compliance, concluding that even if the presentation does not comply, there must be reimbursement where the Issuer is precluded from asserting that the documents are discrepant.

Le Pichon also noted that "no time frame is expressed in the definition of 'negotiation'. It is clear from art 16 that the 'complying presentation' is to be viewed from the perspective of the issuing bank at the time the presentation is made to the issuing bank".

Issuer argued that even were there preclusion, it would have no effect because compliance is to be determined at the time that the nominated bank advances payment or agrees to do so.

Expressing "conceptual difficulties" with this interpretation, Le Pichon noted:

Neither article 7c. nor the definition of 'negotiation' mentions, expressly, any time line. As earlier noted, from the perspective of the issuing bank, the material time has to be the time of presentation for payment as that is when the obligation to pay is triggered. From the perspective of the negotiation bank, when it 'negotiates', it is acquiring documents that, ultimately, will entitle it to make a presentation to the issuing bank. If one of the documents happens to be discrepant or is missing at the time of the advance, the negotiation bank would run the risk of eventually not being in a position to make a presentation to the issuing bank, or, if such presentation purportedly is made, of obtaining no reimbursement. But it has a choice whether or not it is willing to negotiate. However, I can discern no reason (much less a valid reason) why, if the missing or discrepant document is subsequently supplied or is made compliant before the negotiation bank actually makes the presentation, the presentation would not be a 'complying presentation'. Logically, a 'complying presentation' has to have the same meaning for articles 7(c) and 16

By ruling that a subsequent cure after payment has been made would entitle Nominated Bank to the status of a protected bank under UCP600 Article 7(c), Le Pichon opined that "complying presentation is to be viewed from the perspective of the issuing bank at the time the presentation is made to the issuing bank", rather than "to be ascertained at the time the negotiation bank makes the advance or agrees to make such an advance." As the Issuer accepted the documents as compliant when Nominated Bank presented them, it is obligated to reimburse Nominated Bank.

Le Pichon rejected the Issuer's contention that payment against non-compliant documents does not constitute negotiation and thus does not entitle Nominated Bank to reimbursement by stating that, "there is no necessary relationship" between negotiation and complying presentation, citing Prof. James Byrne, The Comparison of UCP600 and UCP500, (IIBLP 2007) that "while it may be expected that the documents that are the subject of the negotiation would be complying documents, whether or not they comply has no bearing on whether or not there is negotiation."

2. Modification of UCP600; Variation of UCP600; UCP600 Article 1: Le Pichon noted that even if its interpretation of Article 7(c) was held to be wrong, the Issuer still must reimburse Nominated Bank because the LC provided "UPON RECEIPT OF COMPLIANT DOCUMENTS AT OUR COUNTER, WE SHALL ACCEPT THE RELEVANT PRESENTATION AND EFFECT PAYMENT IN ACCORDANCE WITH THE PRESENTER'S INSTRUCTIONS".

The Judge observed that this provision varied UCP600 Article 7(c) if it required the documents to comply at the time of purchase by Nominated Bank. The Judge quoted with approval Mustill LJ in Royal Bank of Scotland PLC v Cassa di Risparmio delle Provincie Lombarde, The FT 21 January 1992, (Transcript:Association) [U.K. 1992]: "...the obvious place to start, when searching for a contractual term material to a particular obligation, is the express agreement between the parties. If it is found that the parties have explicitly agreed to such a term, then the search meet go no further, since any contrary provision in UCP must yield to the parties' expressed intention. If on the other hand the agreement is silent in the material respect, then recourse must be had to UCP, and if a relevant term is found there, that term will govern the case."

Article 1 of UCP600 states that "[the rule] are binding on all parties thereto unless expressly modified or excluded by the credit", and the express provision of the LC so stipulated.

3. Preclusion; UCP600 Article 16(f): Le Pichon stated that the presentation by Nominated Bank to Issuer was compliant because Issuer accepted that there was a complying presentation and, "in any event, it is precluded from contending otherwise by reason of article 16(f). Article 16 requires an issuing bank to whom a presentation is made to give notice to the presenter (in the present case the [Nominated Bank]) specifying each discrepancy and how the documents are to be dealt with within 5 banking days after the date of presentation if it decides to refuse to honour. . . . The consequence of preclusion is that it is not open to the issuing bank to contend other than that the presentation is a 'complying presentation' and, as night follows day, it then must honour the credit".

Comment:

This thoughtful decision and the opinions explaining it are an instance of outstanding LC jurisprudence. The judges have attempted to fill in the gaps in the UCP600 drafting in a manner which respects the spirit of the UCP and allows for its nonlegal drafting. Le Pichon, for example, observed that "it is difficult to see how that construction would facilitate international trade finance. It is likely to have the opposite effect in that negotiation banks would be wary of negotiating documentary credits".

While the problem does not arise in this case since the documents were cured by the time that they reached the issuer, it may be asked whether the same rule would apply had they not been cured but where the issuer failed to give a timely or adequate notice of refusal. The operation of the preclusion rule would surely require a gloss in the definition of "complying presentation" for an instance where the issuer or confirmer is precluded from asserting that the documents do not comply with the terms and conditions of the letter of credit.

Note: The excellent concurring opinion by Stone, J., is reproduced here in its entirety, indicating the paragraph numbers from the opinion.

48. At bottom, the argument mounted by [Issuer], amounted to the bald proposition that a nominated bank is unable validly to make payment under a credit which it has accepted for negotiation until the stage at which all requisite documents compliant with the terms of that credit have been presented to it.

49. If correct, this would lead to the equally surprising proposition that although - as in the instant case - there is no issue but that the documents as forwarded to [Issuer] as issuing bank indeed were compliant, under the UCP 600 the issuing bank is under no obligation to reimburse the negotiating bank unless - to use the words of the learned judge at paragraph 33 of his extemporary judgment (quoted in full by Le Pichon JA at paragraph 13 above) - payment was "actually released" to the beneficiary against such complying set of documents.

50. With respect, I am unable to construe Article 7c. in this restrictive manner.

51. The short point, it seems to me, is that as a matter of interpretation there is within Article 7c. no stipulation to the effect that payment cannot be made to the beneficiary by the negotiating bank until there is a fully compliant presentation, and not before.

52. The precise manner of negotiation of the documents must be a matter for the negotiating bank; hence if it wishes to make payment under the credit in anticipation (as in the instant case) of submission of a compliant document in lieu of one that is not compliant (vide the two initially discrepant cargo receipts) it does so at its own commercial risk, such risk often being covered by a beneficiary's indemnity that if ultimately a "complying presentation" cannot be achieved, then such payment as made will be returned to the paying bank.

53. However, such discrete commercial arrangement - to which of course the issuing bank is not privy - does not affect the cardinal principal that, under Article 7c., the issuing bank undertakes to reimburse the nominated bank that has honoured or negotiated a "complying presentation", and thereafter has forwarded the documents constituting such compliant presentation to the issuing bank.

54. Thus, if the documents as forwarded are found not to be compliant, there will be no obligation so to reimburse; conversely, if such documents are accepted as compliant, the unequivocal obligation arises upon the issuing bank to make reimbursement to the negotiating bank of the payment as earlier made to the beneficiary (or assignee thereof) by that bank.

55. In my judgment there is, and can be, no remit for the argument - which is precisely that advanced in the present appeal by [Issuer] - that qua issuing bank its reimbursement obligation is therefore effectively dependent upon not one but two distinct factors: first, the fact of a "complying presentation", with the documents comprising such presentation being forwarded by the bank which has taken up the documents and has effected payment under the credit, plus a second factor, namely that the issuing bank is entitled to decline reimbursement, notwithstanding full documentary compliance with the terms of the credit, because at the time of payment by the nominated bank, such a "complying presentation" had not been effected.

56. If this interpretation of Article 7c.were correct, which clearly it is not, the surprising (and wholly unintended) result would enure that prior to effecting reimbursement, in addition to ensuring that the documents as forwarded to it indeed constituted a "complying presentation", the obligation of the issuing bank so to reimburse will not crystallize until it also be established that such payment as was effected by the nominated bank did not antedate an ultimately compliant presentation.

57. In my view, the argument that the issuing bank therefore is entitled to 'vet' or oversee the manner of negotiation by the bank which has made payment under the credit, and thereafter to justify its refusal to reimburse in face of a compliant presentation, possesses neither merit nor commercial justification, and I suspect that this is the very reason that leading counsel on either side apparently have been unable to locate any authority on the point.

[JEB/sdc]

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.