Article

Factual Summary: To assure payment for fulfillment of book orders to Internet Retailer's customers, Retailer/Applicant obtained a standby LC subject to UCP500 in favor of Book Wholesaler/ Beneficiary for £ 250,000. The standby (whose full text follows) required presentation of (1) a signed statement asserting that Applicant failed to make payments within 14 days of the settlement date, (2) a copy of the invoice evidencing the value of the goods delivered, (3) a copy of the transport document, and (4) a signed and dated statement by the Beneficiary/ Wholesaler confirming that there is no dispute as to the conformity of the goods to the agreement between Applicant and Beneficiary.

When Applicant failed to pay Beneficiary for thousands of books supplied to Applicant's customers over a three-month period of time, Beneficiary drew on the standby LC. However, Issuer refused, stating the documents did not specify that they related to the sale of books, and that a "declaration in lieu of an oath" was insufficient evidence of delivery. When Beneficiary re-presented documents, Issuer rejected the second presentation because the documents were denominated in Euros, while the LC was denominated in UK Pounds Sterling, the invoice showed items other than books, and there was a discrepancy between the number of items in the invoice (10,927) and in the transport documentation (11,748).

With the LC expiry date approaching, Beneficiary made a third re-presentation, submitting three new documents. Beneficiary submitted (1) a revised version of the invoice, (2) a letter from their courier (in German) along with a translation furnished by Beneficiary and a spreadsheet of packages, and (3) a new statement of conformity. For this presentation, Beneficiary relied on the prior document asserting that Applicant failed to make payments within 14 days from its previous presentation. Issuer accepted the final submission by Beneficiary and paid draw £ 231,081.49, and deducted the same amount from the Applicant's account.

After these events, Applicant entered Creditor's Voluntary Liquidation. In doing so, Applicant's CEO submitted a Statement of Affairs, wherein Applicant's Debt to Beneficiary was reduced by £ 231,081.49. In the same Balance Sheet, Applicant recorded an asset entry in the amount of £ 231,000.00, described as a "claim against bank".

Applicant then sued Issuer for wrongful honor of the standby LC, alleging that the documents presented to the Issuer by Beneficiary were not consistent with the terms of the standby LC. The trial court granted judgment for Applicant, ruling that the documents did not comply and that Applicant was not obliged to reimburse Issuer.

Legal Analysis:

1. Transport Documents; UCP500 Article 29; Courier Receipt; Packing List; Inconsistency

The LC required presentation of "CERTIFIED TRUE AND CORRECT COPY TRANSPORT DOCUMENT."

Beneficiary submitted a letter (in German) from courier DHL with a translation by the Beneficiary, which was also identical to their previous submission but with the number of packages changed, as well as the date. To this letter, a spreadsheet of packages titled "Packing List" was added and referenced in the letter.

While recognizing that there was no specification of the type of transport documents and that there was no such category in UCP500, the Judge stated that "the nature and type of document required is well established." [¶18] The Judge then quoted JACK: DOCUMENTARY CREDITS 4TH ED (2009) to the effect that a transport document serves as a receipt, contract of carriage, and in some cases a document of Title. Looking to UCP500, the Judge noted that Article 29 addresses courier documents and that the ICC Guide to Documentary Credit Operations contained a specimen DHL courier receipt.

The Judge stated:

There can be no doubt, in my judgment, that the reference to transport document in the Credit is a reference to these type of documents and that the Bank should have required such a document or documents under the Credit. It is noteworthy that the Bank's standard form application for a Credit, used by the Claimant in this case, refers to "Certified true and correct copy transport document, evidencing shipment of the goods .... (e.g. Bills of Lading, AWB, CMR)". [¶19]

The Judge stated that the document was:

no more than confirmation, in May 2009, that 10,641 packages had been passed by [Beneficiary] to DHL, that those packages were despatched [sic] by DHL and that there were no complaints concerning those consignments. DHL does not provide any details as to the date or place of consignment nor as to the consignee. All further details are said to be "according to [Beneficiary]", as set out in the attached "packing list from 3rd December 2007 to 22nd February 2008". It is also only "according to [Beneficiary]" that the deliveries were "accomplished on behalf of [Applicant] Limited to their end customers". [¶20]

The Judge also noted that the invoice contained the transport document number and delivery note number.

Although Issuer argued that "no particular type of document was specified" [¶22], the Judge observed that Issuer's expert "had never seen a transport document like this one before, although he stressed that that did not stop it from being a transport document". [¶22]

The Judge also did not accept Issuer's submissions that the "Packing List" which set out details was to be treated as part of the HDL confirmation letter.

Issuer also argued that:

it would have been uncommercial for the Bank to have demanded presentation of thousands of individual delivery documents for the books in question, particularly when it became clear from the evidence of Mr Ramon Gray, the Claimant's former director, that DHL delivery documents were transmitted electronically. [¶24]

The Judge observed, however:

Whilst that may well be true, all that it demonstrates is that the terms of the Credit may not have been suitable for Libri's purposes given the nature of the trading relationship. It is part of the autonomy principle which governs letters of credit that the Bank cannot take account of the underlying trading relationship between the parties. [¶24]

Issuer also argued that the LC referred to "transport document" but the Judge observed:

the plain meaning of the Credit is that Libri should supply a transport document for each consignment for which it was claiming. It was clear that multiple consignments might be claimed for, not least because partial drawings were permitted. I see nothing in the use of the term "transport document" which would justify the view that Libri could submit a summary document rather than copies of the originals issued by the carrier. [¶25]

The Judge also observed that use of a composite transport document was inconsistent with the invoice, which referred to multiple transport documents in violation of UCP500 Article 13.

2. Invoice; UCP500 Article 37; Invoice, when reissued; ISBP (2003) ¶ 64

The LC required "A CERTIFIED TRUE AND CORRECT COPY INVOICE EVIDENCING THE VALUE OF THE GOODS DELIVERED".

Beneficiary submitted a document labeled "invoice for books." The document's cover letter described it as a "partial summary invoice", explaining that it was "partial" because it omitted any non-book items, and a "summary" because it summarized all sales within a given date range. This document was identical to its previously submitted "partial summary invoice", but with an altered date range, the words "CD", "DVD", and the like removed, and total sale price expressed in UK£ instead of Euros.

Applicant argued that the invoice should have been issued contemporaneously with the shipment in order to evidence a transaction. It contended that the invoice submitted was discrepant because it was not a copy of the original trading invoice and had been "concocted solely for the purpose of presentation to the Bank". [¶29] The Judge rejected Applicant's argument, acknowledging that although the invoice presented by Beneficiary was unusual, there is no requirement in UCP500 or elsewhere relating to when an invoice must be issued.

Applicant argued that the invoice was discrepant because Issuer had rejected the invoice as previously presented on the grounds that it had referred to items other than books. Applicant asserted that it was "apparent on the face of the documents before the bank that the revised invoices contained the same items as had previously been regarded as discrepant, but simply changed the way they were described". [¶31] The Judge also rejected this argument, noting that Issuer had stated that it had rejected the previous invoice in error, because the other items contained therein fall under the generic description of "book" and therefore are covered by the credit. The Judge also noted that Issuer is entitled to consider the representation as it would consider any new presentation.

Applicant also argued that the invoice merely applied a recent exchange rate to the grand total, denominated in Euros, to represent the price in UK£. "[Applicant] referred to paragraph 64 of the guidance in the International Standard Banking Practice (2003) for the Examination of Documents under Documentary Credits (ISBP), which states: "An invoice must evidence the value of the goods shipped. Unit price(s), if any, and currency shown in the invoice must agree with that shown in the credit"." [¶33]

Issuer argued that UCP500 Article 15 makes clear that an Issuer is unconcerned with the accuracy of the value of goods represented in an invoice. The Judge, however, agreed with Applicant that Issuer erred in accepting an invoice whose value results from the application of an arbitrary exchange rate. Issuer further argued that all parties to the LC were aware that they were trading in Euros while the credit was denominated in sterling. However the Judge stated that an Issuer is not entitled to take such matters into account. The Judge further stated that:

the purpose of requiring a copy of an invoice is to provide evidence of precisely what sum is due to the beneficiary. The reason why the invoice and its constituent elements are required to be in the currency of the Credit (and was previously rejected by the Bank in this case) is because there will otherwise be uncertainty as to the sum to be paid under the Credit, there being no basis on which to decide which exchange rate to apply and as at what date. A unilateral conversion by the beneficiary or the Bank could lead to too much being paid. [¶35]

The Judge concluded that the invoice was discrepant, because of the exchange rate issue.

3. Ratification

Issuer argued that Retailer/Applicant had ratified the payment by reducing its liability to the Wholesaler/ Beneficiary by that amount in its formal statement of its affairs in connection with the insolvency proceeding. While recognizing that ratification can occur by unequivocal words or conduct, the Judge concluded that this reduction was not unequivocal since the financial statement also noted a claim against issuer as an asset. At most, the Judge observed that there was "an inconsistency" between the two entries.

4. Unjust Enrichment

Issuer claimed that Retailer/Applicant was unjustly enriched by the payments that it received and retained from its retail customers. The Judge rejected this argument on the theory that the payment to Wholesaler/Beneficiary was "without authority" because it was based on non-conforming documents. Issuer argued that it would be unconscionable to allow Issuer to recover from Issuer. The Judge, however, rejected this argument noting that the payment without authority did not discharge the Retailer/Applicant's debt to Wholesaler/Beneficiary.

5. Reimbursement Agreement

The decision notes the existence of a Reimbursement Agreement which "expressly authorised the Bank to pay any demand made by [Wholesaler/Beneficiary] under or purportedly under the Credit and provided that payment by the Bank was conclusive evidence of its liability to make such payment." [¶55] When Applicant/Retailer claimed that this clause violated the UK Unfair Contract Terms Acts 1977, however, Issuer did not rely on this provision at trial. The Judge stated that "the resulting position is that there are provisions in the contract between the parties which would, on their face, prevent the [Retailer/Applicant] recovering from the Bank in this very situation, but the Bank has simply elected not to rely on those provisions. In my judgment the Bank cannot elect not to rely on contract terms and then simply assert that recovery by the [Retailer/Applicant] which would be prohibited by those terms would be unjust." [¶55]

6. Mistake

The Judge also noted that Issuer's "recognition that its payment to [Wholesaler/Beneficiary] was by mistake demonstrates that it could have protected its position by joining [Wholesaler/Beneficiary] in these proceedings" [¶56] giving rise to a claim for an equitable remedy. The Judge, however, indicated that any remedy for which the Issuer may hope lies in an action against Wholesaler/Beneficiary.

Comments:

This decision raises many difficult issues. More importantly, it demonstrates why a standby subject to the UCP is a dangerous animal. The Judge observes that the standby was not suited to the transaction. Perhaps, but the matter is not so simple. In applying the UCP, the Judge overlooks that copies and not originals are required to the beneficiary, rendering all of the references to the UCP transport articles irrelevant. Not only are some of the observations in the opinion impractical, some are simply contrary to practice.

Shocking is the bank's failure to insist on the terms of its reimbursement agreement with the applicant which received the funds from thousands of books but was not required to reimburse the bank for paying the wholesaler. Even more shocking is the Judge's suggestion that payment under a letter of credit by its issuer could be set aside on the ground of mistake.

Text:

DEAR SIRS,

OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO.: G111377

WE HEREBY ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT NO. G111377 IN YOUR FAVOUR FOR ACCOUNT OF SWOTBOOKS.COM LIMITED, OFFICE SUITE2, 4 BRIDGE STREET, MILLS, BRIDGE STREET, WHITNEY, OXFORD OX28,1FX FOR GBP250,000 (SAY GBP TWO HUNDERED FIFTY THOUSNAD) 00/100 VALID IN LEEDS UNTIL 31 MAY.

AVAILABLE FOR PAYMENT AT SIGHT AT THE COUNTERS OF ROYAL BANK OF SCOTLAND PLC, BONDS & GUARANTEES CENTRE LEED, 1 VICTORIA PLACE, HOLBECK, LEEES LS11 5AR U.K ON PRESENTATION OF THE FOLLOWING DOCUMENTS:-

A) YOUR SIGNED STATEMENT (SIGNATURES APPEARING THEREON TO BE AUTHENTICATED BY YOUR BANKERS) THAT SWOTBOOKS.COM LIMITED HAS FAILED TO MAKE PAYMENT TO YOU WITHIN 14 DAYS FROM SETTLEMENT DATE

B) CERTIFIED TRUE AND CORRECT COPY INVOICE EVIDENCING THE VALUE OF THE GOODS DELIVERED.

C) CERTIFIED TRUE AND CORRECT COPY TRANSPORT DOCUMENT.

D) YOUR SIGNED AND DATED STATEMENT CONFIRMING THAT THERE IS NO DISPUTE PENDING BETWEEN YOU AND SWOTBOOKS.COM LIMITED REGARDING CONFORMITY OF THE GOODS TO THE SPECIFICATION AGREED BETWEEN YOU AND SWOTBOOKS.COM LIMITED.

COVERING PROVISION OF BOOKS

PARTIAL DRAWINGS ALLOWED

ALL BANK CHARGES OTHER THAN THOSE OF THE ISSUING BANK ARE FOR YOUR ACCOUNT

EXCEPT SO FAR AS OTHERWISE EXPRESSLY STATED AND EXCEPT ARTICLE 43 THIS IRREVOCABLE STANDY LETTER OF CREDIT IS SUBJECT TO UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993) REVISION INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO.500.

YOURS FAITHFULLY

AUTHRORISED SIGNATORY

[JEB/jes/rhw]

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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.