Article

Factual Summary:

1. The Commercial LC

To assure prompt payment for the delivery of specialized machinery, Buyer obtained a commercial letter of credit (Commercial LC) issued by Commercial Issuer in favor of Seller. The Commercial LC required "clean on board ocean bills of lading made out to order of [Buyer]" and provided that transport documents "must be presented within 20 days after the date of shipment but within [Commercial LC] expiry date".

On Friday, 4 December 2009, after a conflict arose between Seller and Buyer over alleged delays in shipment, Seller presented documents for payment under the Commercial LC to Nominated Bank. They included a bill of lading stating "Received by the Carrier in apparent good order and condition unless otherwise indicated hereon [sic] the Container(s) and/or good hereinafter mentioned to be transported and/ or otherwise forwarded from the Place of Receipt to the intended Delivery upon and subject to all the terms and conditions appearing on the face and back of this Bill of Lading." Nominated Bank forwarded the documents to Commercial Issuer on Monday, 7 December 2009, and the documents were received by Commercial Issuer on Thursday, 10 December 2009. On Thursday, 17 December 2009, Commercial Issuer refused to honor the Commercial LC. One of the grounds given for refusal was that the bill of lading was non-conforming because it was a "received b/l [bill of lading] without on board notation." On Thursday, 24 December 2009, Seller re-presented documents that did include a bill of lading with on board notation and a listed shipping date of 27 November 2009 to Commercial Issuer, but these were rejected by Commercial Issuer on Thursday, 29 December 2009 because of late presentation.

2. The Standby LC

As required by the contract, Seller also obtained a standby letter of credit issued by Standby Issuer in favor of Buyer that could be drawn if Buyer required a refund. The standby "specified that [Buyer] could only draw on [the standby] between January 1, 2010 and January 21, 2010" and provided that it "will be canceled upon . . . [presentation of] copy of original bill of lading submitted by [Seller] issued to the order of [Buyer] . . . dated not later than November 30, 2009".

On 2 December 2009, Seller sent documents, including the bill of lading presented in the first presentation, to Standby Issuer, requesting that Standby Issuer cancel the standby pursuant to its terms. On 8 December 2009, Standby Issuer notified Buyer/Standby Beneficiary that it had cancelled the standby. Buyer/Standby Beneficiary disputed the cancellation and on 4 January 2010 attempted to draw on the standby. Standby Issuer refused to honor the standby on the grounds that it had been cancelled.

3. The Litigation

Both the Commercial LC and the Standby were by their terms subject to UCP600.

Seller sued Commercial Issuer and Buyer for wrongful dishonor of the commercial LC, and Buyer impleaded Standby Issuer for wrongful cancellation of the standby. Seller and Commercial Issuer each moved for summary judgment against the other, Buyer moved for summary judgment against Standby Issuer, and Standby Issuer moved to dismiss Buyer's complaint. The trial court granted Commercial Issuer's motion for summary judgment, but denied Seller's and Buyer's motions for summary judgment, as well as Standby Issuer's motion to dismiss.

Legal Analysis:

1. Presentation; Notice of Refusal, Time;Preclusion; UCP600 Article 14(b): Seller/Commercial LC Beneficiary argued that Commercial LC Issuer was precluded from dishonoring the Commercial LC because Commercial LC Issuer did not respond to Seller's presentation within five days of the delivery the documents to Nominated Bank. However, the Judge interpreted UCP600 Article 14(b) as allowing an Issuer a maximum of five banking days from the date it receives the presentation and not from the date that the beneficiary presents documents to a Nominated bank, and noted that Commercial LC Issuer had rejected Seller's presentation within this timeframe.

2. Clean On Board Bill of Lading; On Board Bill of Lading; Received Bill of Lading; UCP600 Article 20: Commercial LC Issuer dishonored Seller/Commercial LC Beneficiary's first presentation because the bill of lading presented by Commercial LC Beneficiary lacked an on board notation. The Judge noted that the Commercial LC required presentation of a "clean on board ocean bill of lading" and observed that the bill of lading presented was a "received bill of lading". He commented that such a bill of lading "does not indicate that the shipment was placed on a ship, but rather that it was placed in the care of a freight company that would load the shipment on to a ship." Commercial LC Beneficiary argued that the bill of lading it originally presented to Commercial LC Issuer complied because its date was deemed to be the date of shipment under UCP600 Article 20(a)(ii): "The date of issuance of the bill of lading will be deemed to be the date of shipment unless the bill of lading contains an on board notation indicating the date of shipment". Since the bill of lading did not contain any other indication that the goods had been laden on board, the Judge ruled that "in situations where there is an on board notation, but the on board notation is not accompanied by a specific date, the date of the bill of lading will be construed as the on board date. It does not eliminate the need for an on board notation altogether."

Furthermore, the Judge stated that even if the lack of an on board notation were not determinative on its own, a clean on board bill of lading requires "specific confirmation that the goods had been received on the ship in good condition." The Judge ruled that the first presentation did not comply because the "presented bill of lading simply [did] not provide that information."

3. Latest Date for Presentation; Cure; Representation; Effect of Expiry: After Commercial LC Issuer refused to honor Seller/Commercial LC Beneficiary's first presentation of documents because the documents were nonconforming, Commercial LC Beneficiary re-presented documents. However, between the first and second presentations, the 20 day deadline for presenting the transport documents in the LC had passed. Commercial LC Beneficiary argued that it should have been permitted to cure its defective presentation after the deadline, but the Judge ruled that a beneficiary may not cure a defective presentation after the deadline for presentation has passed.

4. Whether UCP600 Article 20 Applies to Bills of Lading Presented as Part of Cancellation of Standby LCs: In Standby LC Beneficiary/Buyer's action against Standby LC Issuer for wrongful cancellation of the Standby, Standby LC Issuer argued that the UCP600 Article 20 requirement that all bills of lading contain an on board notation applied only to presentations for payment and not presentations for cancellation. Noting that under Standby LC Issuer's interpretation of UCP600 "a document that merely contained the words 'Bill of Lading' at the top would suffice", the Judge ruled that UCP600 Article 20 applies to presentations for cancellation as well as payment.

5. Notice of Refusal; Preclusion; UCP600 Article 14(a); UCP600 Article 16(c); Cancellation; Estoppel: In its action against Standby LC Issuer, Standby LC Beneficiary claimed that the bill of lading on which Standby LC Issuer based its notice of cancellation was non-conforming because it lacked an on-board notation. Standby LC Issuer argued that, even if cancellation of the standby based on the bill of lading that was originally presented was wrongful, Seller (Standby LC Applicant) presented a second bill of lading that did contain on board notation which justified cancellation after Standby LC Issuer sent Standby LC Beneficiary the notice of cancellation but before Standby LC Beneficiary attempted to draw on the standby. However, Standby LC Beneficiary argued that Standby LC Issuer "is estopped from relying on the second bill of lading because it did not rely on it until these court proceedings as a ground for cancellation."

In ruling that the Standby LC Issuer was not estopped from asserting grounds for refusal that it did not assert in its initial notice of refusal, the Judge observed that UCP600 Articles 14(a) and 16(c) emphasize that an issuer may not subsequently rely on documentary discrepancies that the issuer could have included in its first notice of refusal, but that "[Standby LC Issuer] did not dishonor [Standby LC Beneficiary's presentation] because of a problem with the underlying documentation. Rather, [Standby LC Issuer] dishonored because the l/c itself had been cancelled."

6. UCP600 Article 10; Cancellation, Automatic; Automatic Cancellation; Consent; Pre-consent: Standby LC Beneficiary/Buyer argued that Standby LC Issuer wrongfully cancelled the Standby because Standby LC Beneficiary did not consent to the cancellation. UCP600 Article 10 provides that a standby "can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary." However, the Judge ruled that Article 10 was satisfied because "[a]lthough [Standby LC Beneficiary] did not consent to [Standby LC Issuer's] cancellation . . . it consented to a term that provided for automatic cancellation of the [standby] upon [Standby LC Applicant's] providing a conforming bill of lading to [Standby LC Issuer]."

7. Fraud; Fraud, Duty to Check for; Good Faith: Standby LC Beneficiary/Buyer argued that Standby LC Issuer wrongfully cancelled the Standby because Seller (Standby LC Applicant) presented Standby LC Issuer with an obviously fraudulent bill of lading. Noting that an issuer has no duty to verify the legitimacy of presented documents but must act in good faith, the Judge ruled that Standby LC Beneficiary's allegations were sufficient to survive Standby LC Issuer's motion to dismiss but insufficient to support Standby LC Beneficiary's motion for summary judgment.

Comments:

1. The Judge's conclusion that the documents presented under a UCP600 standby must be examined in accordance with the specific provisions of UCP600 is correct. Interestingly, in this case, application of UCP600 may even accord with the intentions of the parties. The seller posted the standby in favor of the buyer who wanted to protect its right to a refund in the event that the seller did not perform. Presentation of any document other than one that met the requirements of the parallel commercial letter of credit should not have resulted in cancellation under these circumstances. It is impossible to pick and choose when to apply the UCP600 provisions to a standby. If the standby is subject to UCP600, it should be applied unless expressly limited in the LC.

2. The argument that an issuer is precluded from cancelling a letter of credit under the provisions of the UCP preclusion rule where a correct basis for cancellation was not stated in its first notice of cancellation misses the point. Since the bill of lading did not satisfy the requirements of UCP600 Article 20, the basis for cancellation was incorrect. The subsequent re-presentation containing the corrected bill of lading was a different basis for determining whether cancellation was appropriate. The opinion uses the term "estoppel" rather than preclusion. The former term is a legal concept that protects persons who act in reasonable reliance on information given to them. The latter is a mercantile concept that operates automatically in order to protect the letter of credit refusal process.

3. There is no basis for applying the doctrine of preclusion to cancellation of a letter of credit. The cancellation is either correct or not. It is like an automatic amendment in this regard. There is no requirement that the issuer explain why the credit is cancelled in a notice unless so required by the credit. Even then, it is not a UCP600 Article 16 notice to which the preclusion rule applies. On the other hand, there may be situations where application of the doctrine of estoppel may be appropriate where the applicant reasonably relies to its detriment on the mistaken notice of cancellation. In this regard, it should be noted that the court referred to the wrong UCP600 article. It cited UCP600 Article 14(b) but the preclusion rule only operates with respect to the provisions of Article 16 and would be triggered, for example, were the issuer to send an inadequate or untimely notice of refusal or to exercise domination over the documents wrongfully.

4. Strangely, the court states that where a clean on board bill of lading is required, the bill of lading must contain "a specific confirmation that the goods [have] been received on the ship in good condition." This statement is not correct with respect to letters of credit. Where there is a requirement of a clean bill of lading, there need be no "confirmation" that the goods are received in good condition. The requirement is that the bill of lading be unclaused, that is, not contain any clause indicating that the goods have not been received in good order, as provided in UCP600 Article 27 (Clean Transport Document). Here, silence is golden.

5. The standby contained a provision providing for automatic cancellation on presentation of a specific document. Such provisions operate like automatic extension provisions or automatic increases/reductions in the amount available under the standby, namely, on the occurrence of the event and without amendment or the need for consent from the beneficiary. The Judge properly rejected the argument that the beneficiary's consent was necessary for such a cancellation, suggesting that the insertion of such a term in the credit "fulfills the requirement" of beneficiary consent. Where there is a term in the credit providing for automatic changes in the terms of the credit on the presentation of a document, an amendment is not in question, making UCP600 Article 10 (Amendment) irrelevant.

[JEB/pbl]

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.