Article

Factual Summary: To pay for containerized scrap, Issuer issued five commercial LCs in favor of Beneficiary. When Beneficiary made presentations over a 20-22 day period, Issuer refused, sending SWIFT messages corresponding to UCP600 Article 16(c)(iii) "return" and "hold" notifications. Confirming Bank protested the refusal to honor stating, "We insist that you hold the documents at your counters and that you effect payment as per L/C terms", and later asked Issuer to return all the presented documentation. Issuer however, failed to return documents for between 89 and 104 days after "return" notifications were issued, and failed to return documents for 34 days after it was instructed to do so with respect to those documents purportedly held at the disposal of the presenter.

- Drawings under LCs #1, 2, 3, & 4 were rejected between the 4th and 19th of November 2008, accompanied by SWIFT messages stating 'RETURN,' and such notices were mostly dated the 4th of November 2008 but some were dated the 11th, 15th, or 19th of November 2008.

- Following the 4th and 11th of November rejections, Confirming Bank responded urging Issuer not to return the documents with a message stating, 'Document must not be returned, but must be paid without further delay' and another message stating, 'We insist that you hold the documents at your counters and that you effect payment as per L/C terms.'

- On the 21st of November 2008, Confirming Bank sent another umbrella message related to all of the rejections through the 19th of November and presentations that were currently under review, which stated, '[i]n any event you must continue to hold the documents at your counter. They must not be returned to us, or released to any party, without our further explicit instructions.'

- On the 26th of November 2008, Issuer rejected the presentations under consideration and sent a notice which stated 'HOLD'.

- On the 23rd of December 2008, Issuer stated it had been working to gain the applicant's acceptance of the documents and suggested that Confirming Bank use its 'good offices' to resolve the matter.

- On the 1st of January 2009, Issuer requested Confirming Bank to instruct beneficiary to 'do the needful to protect their interest in respect of the merchandise shipped under the contract LCs in question'.

- On the 13th of January 2009, Confirming Bank requested that the bills of lading be endorsed and returned in an urgent manner.

- On the 19th of January 2009, Confirming Bank requested Issuer to '[p]lease urgently confirm that you have acted in accordance with said instruction to endorse bills of lading to our order and return all documents to our counters'.

- On the 2nd of February 2009, the claim form was received by Issuer.

- On the 9th of February 2009, Issuer replied that, '[w]e are not in position to endorse the bills of lading to your order in the absence of written authority to this effect from the shipper/ beneficiary of LC we continue to hold the documents at your risk and responsibility.' This was the first indication to Confirming Bank that there was a problem with the bills of lading or their return.

- On the 9th and 11th of February 2009, Confirming Bank informed Issuer that "its failure to return the documents constituted an affirmation of the presentations as complying presentations in accordance with art 16(f) [Discrepant Documents, Waiver and Notice] and accordingly that it had no further interest in the documents."

- On the 16th of February 2009, Issuer returned the unendorsed documents.

The above dates and communications indicate two significant periods of delay. The first period immediately followed the early November RETURN notices and the second corresponded to both the Return and Hold notices sent after the 13th of January 2009.

Expert Testimony:

Mr. Gary Collyer and Mr. Roger Jones, experts for Confirming Bank and Issuer respectfully, testified about banking best practices. They agreed that following a 'Return' notice, the documents should be returned either immediately, in one expert's opinion, or at the latest the next day or possibly two. The experts also agreed that the UCP generally aims to capture banking practices, and, while they diverged sharply on the subject of whether document disposal and preclusion articles changed when UCP500 was updated to UCP600, they did not suggest a reason to justify a major change in practice from the previous versions.1 The Judge stated that Confirming Bank's expert opined that the omission of the reference to return of the documents "did not reflect any change in international banking practice", pointing to the absence of any identification of substantive change in the Draft Group's commentary and being due to "the general aim of UCP 600 to reduce and simplify the text of UCP and that the omitted words would have been 'unwieldy' had they been retained and revised in view of the addition of the two further options added in [article] 16(c)(iii)(b) and (d) of UCP 600." Issuer's expert regarded the failure to return the documents as being "outside the ambit of UCP 600". The Judge stated that rival arguments can be summarized as the materiality of the omission of text. Confirming Bank claims that the intent has not changed and therefore UCP600 should reflect the intentions of the banking community, while Issuer's assertion is that the drafters intentionally removed instructions concerning the disposition of the documents after providing notification.

Legal Analysis:

1. UCP600 Commentary; Rules of Practice (UCP600), Construction and Implication where incorporated into LC; UCP600, Intent of Draftpersons; ICC Bank Commission Opinions:

The Judge cited with approval the opinion of Bingham MR in Glencore Int'l AG v. Bank of China to the effect that courts should take into account "international consequences." (41)

Confirming Bank urged that the UCP600 Drafting Group's commentary on UCP600 should be admitted in construing UCP600, analogizing it to travaux préparatoires, drafts or records of discussion, etc. pertaining to treaties or legislation under consideration. The Judge stated, "I am not sure that that is an apt analogy bearing in mind that the Commentary is not an official document or record, not was it produced before the publication of UPC 600. Further, it is by no means clear that the limited conditions under which travaux prépatoires may be used to aid interpretation are satisfied here: see Fothergill v. Monarch Airlines Ltd. [1980] 2 All ER 969 at 703, [1981] AC 251 at 278 per Lord Wilberforce. The Commentary is a discussion of UCP 600 provided by those involved in its drafting. The comments made are of interest, but I do not consider that they have an evidential status."

Confirmer offered testimony of the UCP600 Draft Group regarding the intention of the drafters. The Judge regarded this testimony as inadmissible. He stated "I have objectively to construe the wording as adopted in UCP600 without regard to what may or may not have been subjectively intended by its draftsman."

The Judge noted that opinions of the ICC Banking Commission were "of persuasive weight." (46).

2. UCP600 Article 16; Preclusion; Duty to Return Documents: The Judge stated that the issue before him was whether UCP600 Article 16 "imposes an obligation on the issuing bank to act in accordance with the disposal statement and in its Art. 16(c)(iii) notice". The Judge reasoned that the subarticle "speaks to the future." He noted that "a statement that a party will do something is generally understood as involving an undertaking to do it." He also reasoned that:

(1) It would undermine the clear and detailed contractual scheme requiring it to be stated exactly what is to be done with the documents if the issuing bank was under no obligation actually to do what it said it would do. If it could say one thing and do another then the purpose of the required making of the statement would be frustrated. (2) Article 16 is clearly concerned with what is to happen after the refusal notice has been given. This is borne out by the requirement to state that the documents will be held "pending further instructions", or until it receives "a waiver" or "further instructions". (3) It is further borne out by Article 16(e) which gives the issuing bank the discretion to return the documents it has stated it will hold under 16(c)(iii) (a) or (b). Further, there would be no need so to provide if the issuing bank was not otherwise obliged to act in accordance with 16(c)(iii) (a) or (b). If this was not a matter of obligation it could return them anyway if it so wished and there would be no need to confer the right to do so. (4) A contractual requirement to state that documents are being held in accordance with or pending instructions necessarily involves an undertaking to comply with those instructions since that is the self evident purpose of being required so to state. The same can be said of the requirement to make a disposal statement.

The Judge also took note of the reasonable expectations of the presenting bank that the documents would be returned, that no good reason was identified why an issuer should not act in accordance with its statement, and the fact that returning the documents constitutes "best practice." The Judge concluded that "the proper construction of Art. 16 is that it does not impose an obligation on the issuing bank to act in accordance with the disposal statement it has made in its Article 16(c)(iii) notice." Alternatively, the Judge stated his opinion that it must be implied that there was a duty to return the documents. In this regard, he listed considerations taken from Lord Simon of Glaisdale in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, in which Lord Simon articulated five considerations, namely:

(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying' (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

Reviewing these factors, the Judge concluded that they supported the implication. He rejected the argument that market practice is only relevant if a custom can be proven. Asking what UCP600 Article 16(c)(iii) would mean when "relevant background would be reasonable understood to mean, the answer is that it would be understood to require not merely that the issuing bank should make a disposal statement, but that is should also act in accordance with the statement it has made."

3. Timely Return; UCP600 Article 16; Force Majeure; UCP600 Article 36: The Judge noted that it was necessary to determine within what time the documents must be returned. Confirmer argued that they must be returned "with reasonable promptness." The Judge concluded that "timeous performance is clearly an important consideration both in relation to documentary credits and the UCP generally, and to Art. 16 in particular." He ruled that when a time for performance has not been expressed, it must be performed within a reasonable period of time. He further concluded that with respect to the return of the documents, "a reasonable time in this context means with reasonable promptness." He also opined that action with reasonable promptness "may take into account the particular circumstances facing the issuing bank in question" and observed that "in so far as performance is prevented by circumstances beyond the issuing bank's control the force majeure provision in UCP 600, Art. 36 could be relied upon."

7. Warranty of Truthfulness; UCP600 Article 16: The judge recognized "force" in the argument that "the statement made involves a representation of present intention and, if in fact the issuing bank has no intention of acting in accordance with its disposal statement at the time that it was made, then it is a false statement and an invalid notice." He concluded, however, that the evidence did not bear out any falsity, and rejected the argument that the notices were "untrue" if the issuer is not returning the documents when the notice is given. He also rejected the argument that the "hold notices" entail a representation that the issuer has agreed to any future instruction to return the documents promptly.

[JEB/tss/jds]

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