Article

Factual Summary: In order to avoid jeopardizing its relations with Buyer/Applicant and desirous of obtaining a banking license in Saudi Arabia, Bank (Issuer) issued two letters of credit in favor of Broker/

Beneficiary for approximately US$ 25,000,000 each "for the purchase of approximately 28,000 fine ounces of large 12.5 KG gold bars," [¶ 13]. To assure reimbursement, Guarantor/ Second Defendant, founder of Buyer/Applicant, guaranteed Buyer/ Applicant's reimbursement obligation.

When Beneficiary presented documents to Confirming Bank, including drafts drawn on it, the Confirming Bank accepted the bills of exchange and paid Beneficiary at maturity. Confirming Bank then forwarded all the documents except the accepted bills of exchange to Issuer for reimbursement. Issuer informed Confirming Bank that the documents complied and forwarded the documents to Applicant. Issuer reimbursed Confirming Bank and then sought reimbursement from Applicant.

Applicant refused to reimburse Issuer, stating that "the Saad Group was facing a massive short term liquidity crisis because of a misconception that the Saad Group was in some way responsible for the operations of the Algosaibi Group. He stated that the Saad Group's intention was to treat all creditors equally or pari passu and as a result the First Defendant would not be able to repay the letters of credit the next day. All obligations would however be met in due course." [¶ 23].

Issuer then sought reimbursement from Guarantor, but Guarantor also refused. Issuer then sued Applicant and Guarantor for reimbursement of US$ 49,138,545.44. The trial court entered judgment for Issuer against Applicant and Guarantor.

Legal Analysis:

1. Reimbursement; Standard of Compliance, Reimbursement: Applicant argued that clause 2(v) of the reimbursement agreement between Applicant and Issuer should not be construed as imposing liability to indemnify Issuer because the clause was inconsistent with the LCs. Clause 2(v) of the reimbursement agreement states that "if Issuer opens an LC through a confirming correspondent, Applicant will indemnify Issuer against all liabilities to such correspondent under or in respect of such LC." Applicant further argued that clause 1(i) stated that the terms of LCs would govern the transaction over the terms in the Facility, and since there was no indemnity clause in the LC, Issuer should not be indemnified.

The Judge disagreed with this assessment. The Judge ruled that the obligation of Applicant to indemnify the Issuer with respect to its liability under the LC is contained in the reimbursement agreement, Schedule 1 clause 2 (iv)-(vi). He noted that clause 2(iv) authorizes Issuer to debit Applicant for payments to be made in accordance to the LC, clause 2(v) was referred to above, and clause 2(vi) states that any action taken by Issuer in good faith regarding the LC shall be binding on Applicant.

The Judge noted that UCP600 contains no obligation by the Applicant to indemnify Issuer but that the obligation is found in the reimbursement agreement. Moreover, the Judge ruled that the absence in the LC of a statement about indemnity does not place the LC at odds with the reimbursement agreement, but is evidence suggesting there is no inconsistency between the two. He observed that no inconsistency between the two means both can be used jointly and it therefore follows that Applicant is liable to indemnify claimant pursuant to clause 2(v) of the reimbursement agreement.

2. Bills of Exchange, Forwarding; Confirmer; Forwarded Bills of Exchange; "Honour" ; "Present"; "Forward"; UCP 600 Article 2; UCP 600 Article 7(a), (c); 8(a), (c): Issuer's expert testified that it was consistent with international letter of credit practice for a confirming bank to retain accepted bills of exchange drawn out. He also opined that Issuer had separate obligation to examine documents forwarded to Issuer by Confirming Bank.

Comparing UCP600 Article 7 & 8(a) with 7 & 8(c), the Judge noted that there was a distinction between presenting and forwarding. The Judge concluded that, giving the definition of "Honour" in UCP600 Article 2 regard, an undertaking to accept, that the confirmer was the one obligated to honour whereas the Issuer was obligated to reimburse if Confirmer had honored a complete presentation. The Judge concluded that,

These distinctions between presenting and forwarding and between honouring and reimbursing suggest that UCP600 Articles 14- 16 apply to an issuing bank when documents are presented to it so that it may determine whether to honour them but do not apply to an issuing bank when documents are forwarded to it so that it may determine whether to reimburse a confirming bank which has honoured them. For example Article 15 provides that an issuing bank which determines that a presentation is complying must honour. It does not provide that an issuing bank to whom documents have been forwarded by a confirming bank seeking reimbursement must reimburse the confirming bank if the issuing bank determines that the documents comply. Similarly, Article 16 provides that an issuing bank which determines that a presentation does not comply may refuse to honour or negotiate. It does not provide that an issuing bank to whom documents are forwarded by a confirming bank (which has honoured or negotiated a presentation) and then determines that the documents do not comply may refuse to reimburse the confirming bank. [¶ 41]

The Judge noted, however, that his views "do not appear to be the way in which UCP600 has been understood by others." [¶ 42]

The Judge stated, "I accept...that UCP600 distinguishes between presentation, leading to a decision to honour or not, and forwarding, leading to a decision to reimburse or not." [¶ 43]

The Judge also recognized that,

the issuing bank will still require to examine the documents which have been forwarded to it by the confirming bank to satisfy itself that they comply with the letter of credit. That is why the documents must be forwarded to the issuing bank by the confirming bank. If the documents are not compliant the issuing bank will not be obliged to indemnify the confirming bank pursuant to Article 7(c). The issuing bank is not bound by the view of the confirming bank that the documents are compliant. [¶ 44]

Given this interpretation, the Judge concluded UCP600 Article 7(c) required "the confirming bank to forward to the issuing bank the documents which had been presented to the confirming bank. There seems to be no reason why "the documents" to be forwarded should not be the documents presented to the confirming bank. Indeed field [SWIFT] 72 in the letters of credit expressly required all documents to be forwarded." [¶ 45]

The Judge noted that Issuer's expert disagreed with this view, testifying as to the normal practice of retaining drafts. The Judge, however, stated,

in my judgment, where the drafts are included in the letter of credit in the list of documents to be presented by the beneficiary to the confirming bank and are so presented, the duty of the confirming bank on the true construction of UCP 600, and in particular of Article 7(c), is to forward them to the issuing bank. The language of Article 7(c) does not permit any exception. Further, to permit NAB a discretion to decide not to forward a listed document because it would appear to serve no useful purpose seems to me to be contrary to the principle of strict compliance which permeates the law of documentary letters of credit.... [¶ 46]

Notwithstanding this opinion, the Judge concluded that where the drafts presented to Confirmer complied, Applicant would have no basis to refuse to indemnify Issuer: "The object of the Claimant in examining the documents forwarded to it is to check that the documents presented by the beneficiary to the confirming bank were in order and compliant. That seems to me clear from the structure of UCP 600 and the nature of the relationship between the issuing and the confirming bank." [¶ 47]

Alternatively, the Judge concluded that even if Applicant was liable to reimburse Issuer under UCP600, the good faith reimbursement of Confirmer under the reimbursement agreement bound Applicant.

3. Guarantee, Characterization: Issuer argued that Guarantor was liable on its obligation since his obligation was a "performance bond" rendering Guarantor liable even if Applicant was not liable to Issuer. The Judge stated that the claim turned on "the clause in the Guarantee which provided that a certificate signed by an officer of the Claimant was to be conclusive evidence of the amount due and payable by the First Defendant to the Claimant." [¶ 61] The Judge noted that Issuer had failed to allege that such a certification had been made and created.

Comments:

1. UCP600 and Reimbursement of Nominated Banks. The court is correct in its notion that UCP600 does not contain an exhaustive treatment of reimbursement of nominated banks acting pursuant to their nominations by issuers. On the other hand, its treatment of reimbursement in UCP600 Article 7(c) (Issuing Bank Undertaking) is more extensive than any prior revision. While the formula refers to a "complying presentation", an issuer is also obligated to reimburse a nominated bank where it is precluded from asserting that the documents are not in compliance with the terms and conditions of the LC under UCP600 Article 16(f) (Discrepant Documents, Waiver and Notice).

2. Reimbursement Agreements. That the decision reading the liability of the applicant was based on both the UCP and the reimbursement agreement is not surprising. It is not clear under UCP600 that an issuer is entitled to reimbursement from the applicant for reimbursing a nominated bank that has itself acted on a non complying presentation. At most, UCP600 indicates what are the obligations of the issuer. It is to the reimbursement agreement that an issuer must look with respect to the applicant's reimbursement obligations. Typically, the standard for reimbursement in this agreement differs considerably from the standard for compliance in UCP600. An issuer or confirmer are only obligated to honor if the presentation complies or if it is precluded. An applicant is typically obligated to reimburse if the applicant has taken up the documents, has received and accepted the goods to which the documents relate, or has not timely objected to any alleged discrepancies. In addition, many such agreements provide that the applicant can only raise "material discrepancies", that is discrepancies that go to defects in the quality or quantity of the goods or their delivery. Technical discrepancies are not favored in these agreements because the applicant will be unjustly enriched if it can avoid its obligation. If it made a bad bargain with its counter party, it should not be able to assert a technical discrepancy to avoid reimbursing the issuer.

3. No Discrepancy: Retaining the Accepted Drafts. It is no surprise that the Judge in Societe General was at sea about the failure of the confirmer to forward the accepted bills of exchange (drafts). The UCP has always been problematic about drafts and their treatment, mostly maintaining silence. Indeed, it is not even clear that a draft is a "document" under the UCP. The reason for that doubt is that the draft is a document traditionally required by the bank and not the applicant. It is a banking document, an order to the drawee to pay. Accordingly, the draft was always held by the bank on whom it was drawn. Where there is an acceptance of the draft, there is even more reason for the draft not to be forwarded. The accepted draft is the property of the beneficiary and not the bank that accepts it. Under current practice, the accepting bank holds the accepted draft (and, indeed, often the draft is not actually signed by that bank which merely sends a SWIFT message indicating that it has accepted) until maturity and the payee/ drawer/LC beneficiary accedes to this practice because it ensures that the draft will be in the hands of the accepting bank at maturity. In such a situation, the confimer has no obligation to forward the accepted draft with the other documents to the issuer. While the UCP does not articulate this practice, it is standard international letter of credit practice on which the UCP is based. Therefore, there is no discrepancy. While the court ultimately reaches this conclusion, it does so by a series of awkward steps that should have been unnecessary. The Judge should have simply given effect to the practice. Unfortunately, UCP600 diminishes the role of standard international letter of credit practice as opposed to UCP500. The reference in UCP600 Article 14(d) relates to reading data in a document and not interpreting the UCP itself in light of "international standard banking practice".

4. The Judge properly treated the guarantee as a suretyship or accessory undertaking. While one could assure reimbursement by an applicant by issuance of a letter of credit in favor of the issuer, the undertaking in this case had the earmarks of a traditional suretyship undertaking.

Text:

The provisions in the Facility regarding the LC provided,

Letters of Credit

(i) The Customer may request SG to issue or confirm Letters of Credit. Unless otherwise agreed between the Customer and SG, the Uniform Customs and Practice for Documentary Credits of the International Chamber of Commerce (ICC Publication UCP No600)(as amended from time to time) shall apply to Letters of Credit opened by SG.

(ii) Letters of Credit may be opened by SG at the written request of the Customer up to a maximum aggregate amount (taking into account any outstanding Transactions) as detailed in paragraph (4) of the Facility Letter.

(iii) The Customer irrevocably authorises SG to accept and pay for its account all drafts drawn under and tendered or negotiated pursuant to any Letter of Credit.

(iv) The Customer irrevocably authorises SG in respect of all payments made by SG under any Letter of Credit (including any "red clause" Letter of Credit) to forthwith debit any such amount paid to the account of the Customer with SG. Unless otherwise provided in the Facility letter or specifically agreed, the Customer undertakes to ensure that it shall maintain a credit balance on its account sufficient to cover any payment due under any Letter of Credit as and when such amounts may be due. In the event that SG receives any amount in relation to the transaction underlying the Letter of Credit whether through assignment of any contract, assignment of any Letter of Credit or otherwise prior to the date of payment by SG under such Letter of Credit, unless otherwise specifically agreed, the Customer hereby instructs SG to transfer such amount, pending such payment, to an account opened by SG in its own name and identified as "compte de gage-espèces".

(v) If SG opens a Letter of Credit through a confirming correspondent, the Customer will indemnify SG against all liabilities to such correspondent under or in respect of such Letter of Credit.

(vi) The Customer agrees that any action taken by SG or by any of its correspondents or agents under or in connection with any Letter of credit or the relevant drafts, instruments or demands, documents or goods, or in action or omission thereof, if taken in good faith, shall be binding on the Customer and shall not put SG or its correspondents or agents under any resulting liability to the Customer.

(vii) Without prejudice to any other right which SG may have under any other Facility Document, until the Customer or any other Obligor makes due payment to SG of all moneys due and payable to SG from the Customer or any other Obligor in respect of any Letter of Credit or any Facility Document, (a) all documents received by SG or its agents under any Letter of Credit and the goods represented thereby shall be held by SG as security and (b) the Customer hereby irrevocably authorises SG to give all such orders as to shipment destination and delivery of any such goods as the Customer could give and to make any direct arrangement with the sellers or shippers or carriers as SG may, at its discretion think fit, including the variation or discharge of any contract, without any liability on the part of SG for any loss arising out of any such order or arrangement as aforesaid."

The guarantee stated,

FOR VALUE RECEIVED and in consideration of Société Générale ("SG") entering into any and all Transactions with SAAD TRADING, CONTRACTING AND FINANCIAL SERVICES COMPANY, a limited partnership organised under the laws of the Kingdom of Saudi of Arabia with Commercial Registration number 2051014862 dated 20/12/1411H (corresponding to 2 July 1991) and issued in Al-Khobar, Kingdom of Saudi Arabia, having its principal place of business at Salahudeen Al Ayoubi Street Al Khobar, Kingdom of Saudi Arabia (the "Customer") in accordance with an uncommitted trade finance facility subject to the terms and conditions of a letter dated 29 January 2009 (the "Facility Letter"), I, Mr. Maan Abdulwahid Abdulmajeed Al-Sanea, having my home address at Salahuddin St., Khobar, Kingdom of Saudi Arabia (the "Guarantor") hereby unconditionally and irrevocably guarantee, as primary obligor and not merely as surety, the full and prompt payment when due (whether upon maturity, acceleration or otherwise) to SG of any and all Obligations (as defined herein). In this Guarantee, "Transactions" has the meaning given to it in the Facility Letter and "Obligations" means all obligations or liabilities of any kind of the Customer from time to time to pay monies, express or implied, present, future or contingent, joint or several or incurred as principal or surety, incurred under or in connection with any of the Facility Documents, up to a maximum total aggregate amount of USD50,000,000.00 plus any related commission, fees and expenses and "Facility Documents" means (i) the Facility Letter, (ii) the Standard Terms referred to therein, (iii) each Transaction issued, executed or entered into by SG with or at the request of the Customer pursuant to the Facility Letter and (iv) all documents executed by the Customer and granting security to SG or guaranteeing the obligations of the Customer to SG under any of (i), (ii), or (iii) above, in each case as such documents are amended, restated, extended or replaced from time to time.

The initial term of the Guarantee in relation to the Facility Letter shall be twelve (12) Months from the date of this Guarantee. The term of the Guarantee shall be automatically renewed in its entirety for consecutive twelve (12) Month terms unless the Guarantor notifies SG at least 90 days prior to the expiry of the initial or renewed term that the Guarantor does not agree to the renewal of the Guarantee. The Guarantor agrees that its obligations under this Guarantee shall remain in full force and effect following such notification to SG until such time as the Obligations which are outstanding on the last day of the notice period have been satisfied in full.

I hereby guarantee to pay all such amounts as are or may become due in respect of the Obligations forthwith on your first written demand, without set-off or counterclaim and free and clear of any deductions or withholdings and without requiring SG to take any action against the Customer or any other person or obtain any judgment nor file any claim before enforcing this Guarantee.

A certificate signed by an officer of SG shall, in the absence of manifest error, be conclusive evidence of the amount due and payable by the Customer to SG.

.........

The Guarantor hereby, unconditionally and irrevocably, as its own independent, separate and continuing primary obligation undertakes to indemnify SG on first demand against all losses, claims or costs suffered or incurred by SG should the Customer fails to perform any of its Obligations duly and punctually or should the amounts due from the Customer under the Facility Documents not be recoverable, for any reason whatsoever including (but not limited to) the Facility Documents or the Obligations being or becoming void, voidable or unenforceable in part or in whole."

The Letters of Credit provided,

The letters of credit were issued on 16 February 2009 and confirmed by NAB on 18 February 2009. They contained the following terms numbered as "fields":

41A: Available With.....By....[NAB] BY ACCEPTANCE

42C: Drafts at...99 DAYS AFTER DATE OF AIRWAY BILL

45A: Descriptions of Goods and/or Services: FOR THE PURCHASE OF APPROXIMATELY 28,000 FINE OZ'S OF LARGE 12.5 KG GOLD BARS 99.5 PEFRCENT PURITY LONDON GOOD DELIVERY BARS WITH A TOLERANCE OF +/-10 PERCENT CIP LONDON.......

46a: Documents Required:

1. SIGNED COMMERCIAL INVOICE MADE OUT IN THE NAME OF APPLICANT FOR 100 PER CENT VALUE OF GOODS SHIPPED

2. COPY OF PACKING LIST AND/OR WEIGHT LIST AND/OR BAR LISTING.

3. COPY AIRWAY BILL CONSIGNED TO STANDARD BANK PLC, C/O JP MORGAN CHASE......INDICATING THIS L/C NO. AND MARKED FREIGHT PREPAID. AIRWAY BILL MUST CONTAIN A SPECIFIC NOTATION OF THE ACTUAL FLIGHT DATE AND NUMBER.

4. COPY OF LETTER FROM AGR MATTHEY STATING THAT THE SHIPMENT IS INSURED UNDER BLANKET INSURANCE POLICY QUOTING POLICY NUMBER.

5. DRAFTS FOR 100 PERCENT OF THE INVOICE VALUE.

48: Period for Presentation: DOCUMENTS TO BE PRESENTED WITHIN 21 DAYS FROM DATE OF SHIPMENT

78: Instructions to the Paying/Accepting/ Negotiating Bank: AFTER RECEIPT YOUR CLAIM BY SWIFT CONFIRMING YOU HAVE RECEIVED DOCUMENTS IN COMPLIANCE WITH CREDIT TERMS AND UCP600 WE WILL COVER YOU AT MATURITY DATE AS PER YOUR INSTRUCTIONS. THIS CREDIT IS ISSUED SUBJECT TO ICC PUBLICATION 600.

72: Sender to Receiver Information: ALL DOCUMENTS ARE TO FORWARDED TO SOCIETE GENERALE .....PARIS ....BY COURIER.

[JEB/ahg]

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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.