Article

Factual Summary:

Beneficiary, Banco Santander Rio S.A., provided a credit facility to an Argentine company, Sipex S.R.L., which was involved in the construction of a cold store including packing station in Argentina.

Applicant supplied Beneficiary with a standby LC securing the performance of Sipex S.R.L. towards Banco Santander Rio S.A. under the credit facility.

The LC contained the following clause that Applicant instructed Issuer to insert into the LC:

"All payments to be made by [Issuer] ...hereunder shall be made free and clear of any costs, duties or levies that may arise as a result of any change in law, degree, rule or regulation of the Central Bank of Argentina or other fiscal or monetary authority of the Republic of Argentina. The sum payable by ... [Issuer] ... shall be increased to the extent necessary to ensure that the beneficiary receive[s] a net sum equal to the sum it would have received had no such costs, duties or levies ... being imposed".

Beneficiary presented a demand for a principal amount of US$230,000 and a surcharge of US$12,326. A few days later, Beneficiary presented a second demand for a principal amount of US$250,000 and a surcharge of US$21,390.

The documents [Swift messages] presented contained the following statement:

"We, [Beneficiary], claim payment under your standby letter of credit ... and hereby certify that [Manufacturer] has failed to comply with their payment obligation of credit facility dated ... granted by us to them, which remain unpaid ...Credit the sum of ... plus ... related with the clause inserted in lines 45 to 53 of your original [standby LC] (all payments to be made ... duties or levies has been imposed)".

Issuer deemed the presentation complied and paid the principal amount and surcharges of S$33,716 to Beneficiary and debited the Applicant's account accordingly.

Applicant accepted that Issuer was obliged to pay the principal sum of US$480,000, but challenged that Issuer was also obliged to pay surcharges of US$33,716. Applicant sued Issuer for repayment of surcharges.

Legal Analysis:

1. Duty of Care:

Applicant argued that Issuer breached its duty of care by failing to inform Applicant about the possible consequences of the clause.

The Court of Appeal held that the meaning of the clause is sufficiently clear both according to objective criteria, such as the linguistic meaning of the wording, as well as the meaning which both Applicant and Issuer could have reasonably attributed to the clause at time of issuance of the LC.

The Court of Appeal held that it follows clearly from the wording of the clause that any possible surcharges that were incurred due to any change in law, degree, rule, or regulation of the Central Bank of Argentina or other fiscal or monetary authority of the Republic of Argentina, were not included in Issuer's obligation to pay the principal sum under the LC.

Instead, surcharges that Issuer was held to pay to Beneficiary was an independent and separate obligation that could be claimed in excess of the maximum principal amount.

The Court of Appeal pointed out that Applicant is an international trading company operating in, among other places, South America, and that that Applicant himself provided the wording of the clause to Issuer. Issuer could, under these circumstances, assume that Applicant understood and accepted the meaning and possible consequences of the clause. Consequently, Issuer did not breach a duty of care.

2. Fraud:

Applicant argued that Beneficiary committed fraud. In support of its allegation Applicant submitted to the Court of Appeal, among other things, a legal opinion of an Argentine lawyer stating that there had not been any change in law, degree, rule, or regulation of the Central Bank of Argentina or other fiscal or monetary authority of the Republic of Argentina.

Therefore, the claims for surcharges were, according to Applicant, fraudulent and the Issuer was obliged to refuse to honour the LC.

The Court of Appeal confirmed that fraud may give rise to an exception to the principle of strict compliance. The Court of Appeal held that Issuer was obliged to determine on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. It did not follow from the documents, nor was Issuer on the date of the examination of the documents aware from any other source, that Beneficiary had committed fraud. There is no additional obligation on Issuer to investigate whether the Beneficiary's claim is legally valid in the relation between the Applicant and Beneficiary.

The Court of Appeal held that Issuer correctly considered Beneficiary's presentation credit complying. Under UCP600 Article 15(a), Issuer was obliged to pay the principal amount as well as the surcharge.

* Alexander VAN VEEN is an Attorney, Van Traa Advocaten N.V. (Rotterdam, Netherlands)

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