Article

* Dr. Alan DAVIDSON is Senior Lecturer TC Beirne School of Law University of Queensland, Australia. This summary was submitted by Dr. DAVIDSON. The facts have been reformatted and rearranged by the IIBLP staff to correspond with the formatting used in this volume but the legal analysis and comments are those of the author. 1. The Malaysian Court structure has a threefold superior court structure; the High Court, appeals to the Court of Appeal and then to the highest court, the Federal Court, also known as the Supreme Court.

Arifin Zakaria CJ (Malaya), Richard Malanjum CJ (Sabah & Sarawak) & James Foong FCJ

Topics: Letter of credit; Strict compliance; Charter Party Bill of Lading; Bill of Lading, Agent's Signature (for Master); Bill of Lading, Master's Signature; UCP500 Article 23(a)(i)&(vi) & Article 25(a)(ii)

Parties: Applicant/2nd Defendant/Buyer Global Exim Sdn. Bhd

Beneficiary/Respondent/Plaintiff/Supplier Dharani Sugars & Chemical Ltd

Issuing Bank/Appellant/1st Defendant HSBC Bank Malaysia Bhd

Counsel for the Appellant: Mr. Robert Lazar

Solicitors for the Appellant: Messrs Shearn Delamore & Co.

Counsel for the Respondent: Mr. Nagarajah Muttiah (M. Kalaichelvan with him)

Solicitors for the Respondent: Messrs Abdul Halim Ushah & Associates

Type of Lawsuit: Beneficiary sued Issuer for wrongful dishonour of commercial LC.

Facts: The Beneficiary, an India manufacture of White Crystal Sugar agreed to supply the Applicant (the Buyer) 3500 tonnes of Indian White Crystal sugar FOB for US$784,000.00, payment by a 100% irrevocable Letter of Credit drawn at sight on the Issuing Bank against the presentation of inter alia:-

- Signed Commercial Invoices in triplicate;

- Full set of original clean 'on board' (3 originals plus 3 non-negotiable copies) bills of lading marked 'freight collect' made out to the order notify the applicant;

- Certificate of Origin Issued and signed by the Chamber of Commerce;

- Quality and analysis certificate issued by Geo-Chem

- Laboratories P. Ltd in triplicate to show actual at the time of loading;

- Health certificate in duplicate issued by the concerned government authority certifying that the produces were checked and found fit for human consumption;

- Packing list.

Under the FOB contract, the Applicant/Buyer was required to nominate and send a vessel to the port of shipment being Tuticorin, India for the Beneficiary to load the cargo. The Applicant/Buyer as charterers for the carriage of the cargo entered into a Charterparty Agreement on 1 October 2002 with one M/S Vallibel Lanka (Pvt) Ltd as owners of a vessel MV Badulu Valley and one M/S Corporate Shipping Agency (LCC) as commercial managers. The owner's agents were M/S Unicorn Maritimes (India) Pvt Ltd.

By a SWIFT transmission dated 3 October 2002, the Issuing Bank informed the State Bank of India, (the Negotiating Bank) of the issue of the irrevocable letter of credit for the amount of US$784,000.00. The goods were shipped. On 17 October 2002 the Beneficiary presented the following documents to the Negotiating Bank for negotiation:

- Full set of three copies of Bills of Lading No. 001 and No. 002 both dated 15 October 2002 and for the amount US$448,000.00 and US$336,000.00 respectively;

- Certificate of Indian Origin No. 225 dated 15 October 2002;

- Quality and Analysis Certificate issued by M/S Geo-Chem Laboratories Pte. Ltd in triplicate;

- Beneficiary's Certificate stating that a set of nonnegotiable documents have been faxed and couriered directly to applicant within 5 working days after shipment;

- Health Certificate in duplicate certifying that the products were checked and found fit for human consumption;

- Packing List in triplicate certifying that goods are packed in 50kg Polylined PP Bags and showing number of packages and the contents;

- A certificate in duplicate issued by the Beneficiary;

- Exchange Control copy of Shipping Bill No. 1128592 dated 9 October 2002

The Issuing Bank raised the following discrepancies:

(i) 'CHARTER PARTY B/L NOT ALLOWED'

(ii) 'MASTER NOT INDICATED ON B/L'.

Questions before the court

(i) Whether an Issuer of a Letter of Credit which calls for a full set of "Original clean on board bills of lading" is obliged to accept a bill of lading that carries an indication that it is subject to a charter party; or conversely whether the Issuer can refuse payment on the ground that the bill of lading is subject to a charter-party"; and

(ii) Whether an Issuer of a Letter of Credit is obliged to accept a bill of lading (whether subject to a charter party or otherwise), where the agent who indicates that is signing on behalf of the master does not indicate the name of the master on whose behalf that agent is acting.

Before the Court of Appeal

Question (i)

Unanimous decision of the Court of Appeal, concurring with the court at first instance that the Letter of Credit calls for or permits Charter Party Bills of Lading since it was issued pursuant to the terms of the contract, premised on an express FOB term. It held that Articles 23 and 25 of UCP500 did not apply, stating that an issuing bank is entitled to rely on Article 23(vi) if and only if the letter of credit required the production of a bill of lading or other document of title covering a port-to-port shipment which is not subject to a charter party. The Court of Appeal erroneously and narrowly interpreted this requirement to circumstances where the LC specifically makes the statement that the BL was not subject to a chapter party.

Question (ii)

The Court of Appeal did not address the failure to indicate in the Bills of Lading the name and the capacity of the party on whose behalf the agent was acting for (the second discrepancy).

Before The Federal Court (appeal from the Court of Appeal)

Question (i)

The Federal Court held:

(W)e take as a fact that the Bills of Lading in issue are charter party bills of lading as ordinarily understood in the shipping and banking business. This view is enhanced in that it is not in dispute that the Bills of Lading covered the shipment of the Cargo on the Vessel, being a chartered vessel. And the Bills of Lading in 'Congebill form' have these words clearly stated: "BILL OF LADING to be used with charterparties", thereby indicating that they fall within the category of charter party bill of lading.

- Strict Compliance

The Court reiterated that it is "imperative" for the Issuing bank to ensure strict compliance with the terms of the LC, describing it as "a prudent banking practice requirement" and that "there is good reason for it". The Court observed that the bill of lading is usually security for the issuing and as such the issuer would "not want anything that could reduce the value of the security as for instance a bill of lading subject to charter party and which the issuer had no prior knowledge when granting the credit. As such there may be a lien over the cargo on board by the shipowner for unpaid freight or other charges owed by the charterer."

- Article 23

Applying "strict compliance practice" the Federal Court applied Article 23(a)(vi)(Marine/Ocean Bill of Lading) of UCP500 which on a "plain reading" states, that before a bank accepts the bill of lading the following conditions have to be present:

i. the letter of credit calls for a bill of lading covering a port to-port shipment; and

ii. the bill of lading contains no indication that it is subject to a charter party.

On the facts of the case if there is indication in the bill of lading that it is subject to charter party the issuing bank can rely on Article 23(a)(vi) to reject it on account of discrepancy. The Federal Court stated that the Court of Appeal had erred in finding that the Bills of Lading had fulfilled the terms of the Letter of Credit when they had not done so. "(I)mportance should have been given to the fact that the Bills of Lading were subject to charter party and that the Letter of Credit did not provide acceptance for such type of bills of lading."

Question (ii)

In the Bills of Lading in the space for signature are the words: "For UNICORN MARITIMES (INDIA) PVE LTD", followed by a signature and below it the words: "AS AGENTS". Do the words 'As Agent' comply with Article 23(a)(i) and Article 25(a)(ii) UCP500?

UCP500 Article 23(a)(i)(Marine/Ocean Bill of Lading) provides:

"(a) If a Credit calls for a bill of lading covering a port-to-port shipment, banks will, unless otherwise stipulated in the Credit, accept a document, however named, which:

(i) appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by:

- the carrier or a named agent for or on behalf of the carrier, or

- the master or a named agent for or on behalf of the master

Any signature or authentication of the carrier or master must be identified as carrier or master, as the case may be. An agent signing or authenticating for the carrier or master must also indicate the name and the capacity of the party, i.e. carrier or master, on whose behalf that agent is acting."

UCP500 Article 25(a)(ii)(Charter Party Bill of Lading) provides:

'If a Credit calls for or permits a charter party bill of lading, banks will, unless stipulated in the Credit, accept a document, however named, which:...

ii. appears on its face to have been signed or otherwise authenticated by:

- the master or a named agent for or on behalf of the master, or

- The owner or a named agent for on behalf of the owner.

Any signature or authentication of the master or owner must be identified as master or owner as the case may be. An agent signing or authenticating for the master or owner must also indicate the name and the capacity of the party i.e. master or owner, on whose behalf that agent is acting.'

Whether the Bills of Lading are subject to charter party or not, the signatures of the agent do not indicate on whose behalf he is acting for. In other words there is nothing which appears on the face of the Bills of Lading to indicate the name and the capacity of the party on whose behalf the agent was acting for. It is also not indicated in the Letter of Credit that such omission is allowed or permitted. There was therefore a failure to comply with Article 23 (a)(i) and Article 25 (a) (ii) UCP500.

The Federal Court referred to Southland Rubber Co Ltd v Bank of China (1997) HKC 569; [1997] HKLRD 1300. In that case it was due to the absence of the word 'carrier' while in the present case it is the absence of the name and capacity of the party on whose behalf the agent was acting. The Federal Court agreed "entirely" with the passage of the Hong Kong court:

'The overriding concern in the minds of the panel of experts must be that the institution that has been presented with the bill of lading must not be placed in a position whereby they had to speculate or to make an educated guess of the identity of the carrier. The key words are "the name of the carrier must appear as such" so that in my view, anything short of using the actual word "carrier" to identify the party acting as carrier would not have complied with the provisions of Article 23(a)(i) of the UCP. I consider one of the fundamental principles in any transaction involving documentary credit to be that of certainty of the identity of the parties involved in the contract of carriage. The approach by this court in the construction of the article is therefore not inconsistent with the views expressed by Lord Diplock in The Antaios', [1985] AC 191.

The discrepancies are valid and the Issuing Bank is not obligated to honour the presentation.

Comment by IIBLP:

While the decision is correct, the circumstances are most troublesome. The LC did not reflect the underlying agreement. According to the opinion, the contract required the buyer to arrange for carriage and it arranged for a charter. Therefore, it comes as no surprise that the carrier issued a charter party bill. If the charter party bill did not comply with the terms and conditions of the LC, it is because the LC failed to reflect the agreement of the parties.

In such a situation, the LC issuer would not be liable but the applicant should be liable for breach of its contractual obligations to pay for the goods and to provide a letter of credit. Where the applicant is solvent, the seller's only loss is delay and aggravation. Where the applicant is insolvent, the seller is denied a remedy and, if as is common, the value of the goods has declined, the seller will incur a loss.

In such a situation, there should be an incentive for a court to take a more liberal view of the LC terms to see if they could be interpreted to encompass a charter bill. It should be noted that UCP500's transport articles do not contain a hierarchy of bills of lading or a default rule. The defining feature of a UCP500 Article 23 (Marine/Ocean Bill of Lading) is port to port shipment. From the text of the LC reproduced in the opinion, it is not clear that what is required is a port to port transport document. Given the failure of the LC to identify which marine transport article is intended, there is no reason to conclude that a UCP500 Article 25 (Charter Party Bill of Lading) would comply. That article relates to a credit that "calls for or permits" a charter party BL.

While the analysis would differ under UCP600 Article 20 (Bill of Lading) and might produce a different result, this credit was subject to UCP500. There is, therefore, something serious to be said for the approach of the Court of Appeal.

Njh

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