Note: To facilitate the delivery of 255,000 MT of tin ingots, Mining & Smelting Ltd. (Applicant) obtained a US$1,320,900 Commercial LC in favor of Frebevia S.A. (Beneficiary) and subject to UCP500.

Beneficiary's presentation complied with the terms of the LC and United Bank of Switzerland (Confirming Bank) negotiated the document and paid Beneficiary on 6 April 1998. By agreement with the Issuing Bank on 21 August 1998, Confirming Bank agreed to an extension of the maturity date of the LC from 23 September 1998 to 21 March 1999.

Subsequently, State Bank of Patiala (Issuing Bank) notified Confirming Bank that Beneficiary was engaging in commodities fraud as part of the Solo Industries debacle (no goods were being shipped) and ordered Confirming Bank not to pay Beneficiary.

Confirming Bank maintained its entitlement to reimbursement from Issuing Bank on 21 March 1999, the extended maturation date of the LC. When Issuing Bank refused to reimburse, Confirming Bank sued Issuing Bank in the High Court of Judicature at Bombay. The High Court denied Confirming Bank's motion for summary judgment and granted unconditional leave for the Issuing Bank to defend, ruling that there were triable issues. On Beneficiary's appeal, the Supreme Court of India, B.P. Sing and Altamas Kabir, JJ., in an opinion by Altamas Kabir, J. reversed the High Court decision and revoked the unconditional leave to defend granted to Issuing Bank.

Confirming Bank argued that it did not have notice of Beneficiary fraud when it honored a facially complying presentation and that Issuing Bank could not, therefore, properly refuse to reimburse Confirming Bank. Furthermore, Confirming Bank asserted that under UCP500 Article 14(a), which states that the Issuing Bank's obligation is to reimburse a Confirming Bank that honors a facially complying Presentation, there were no triable issues.

The opinion stated:

[N]o triable issue can be raised which would warrant grant of unconditional leave to the [Issuing Bank] to defend the suit filed by the [Confirming Bank]. International commerce operates on trust and relies to a large extent on arrangements between banks on behalf of their respective clients, giving rise to 'UCP 500' which governs the Letter of Credit involved in the instant case. Prior to 3rd February, 1999, when the advocate for the [Issuing Bank] wrote to the [Confirming Bank] there is nothing on record to suggest that any fraud had been perpetrated by the applicant and the beneficiary or that the [Confirming Bank] had been requested not to negotiate the documents to be presented by the beneficiary. In fact, four and a half months after 6th April, 1998, when the Letter of Credit had already been negotiated, the [Issuing Bank] requested the [Confirming Bank] to extend the maturity date of the Letter of Credit from 23rd September, 1998 to 21st March, 1999. . . . If the fraud had been detected earlier and the [Confirming Bank] had been informed of such fraud and put on caution prior to making payment, the [Issuing Bank] may have had a triable issue to go to trial. That is not so in these three cases. In these cases, the fraud was detected after the Letters of Credit had been negotiated and hence such fraud alleged to have been committed by the Constituent of the Issuing Bank cannot be set up even as a plausible defence in the suit filed by the [Confirming Bank].

The Supreme Court rejected Issuer's argument that the LC did not permit Confirming Bank to discount stating, "[t]he Letter of Credit itself shows that the same was to be negotiated as had been done by the [Confirming Bank]."

Comment: This decision is eminently correct, and even though the LC was subject to UCP500, it avoided the unnecessary foolishness that followed decisions such as the Banco Santander decision which caused such chaos. It should be noted, however, that the confirmer would still be entitled to reimbursement even if it had received "notice" (a mere allegation), provided it honored in good faith.



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.