Article

Factual Summary: Ultimate Seller/Transferee Beneficiary contracted to supply Broker/First Beneficiary with 230,000 kg of processed natural rubber. Ultimate Buyer/Applicant located in Ningbo, China then entered into a contract with Broker/First Beneficiary to purchase the processed natural rubber. To pay, Ultimate Buyer/Applicant applied to Chinese Issuer for a transferable commerial LC in favor of Broker/First Beneficiary for USD 284,544. Malaysian Transferring Bank transfered the LC for USD 248,820 to Ultimate Seller/Transferee Beneficiary. When Malaysian Ultimate Seller/Transferee Beneficiary presented documents to Transferring Bank, Tranferring Bank rejected the documents, alleging discrepancies. Ultimate Seller/Transferee Beneficiary cured the discrepancies and re-presented the documents to Transferring Bank. Transferring Bank then forwarded the documents to Issuer. Issuer rejected documents in a telex (reprinted from the opininon in ¶4 of this abstract). Original LC expired before documents could again be re-presented to Issuer, and the Ultimate Buyer refused to waive the alleged discrepancies.

Ultimate Seller/Transferee Beneficiary sued Broker/First Beneficiary and Transferring Bank for wrongful dishonor. The claims were dismissed. On appeal, affirmed.

Legal Analysis:

1. Compliance; Waiver; UCP500 Article 14(c): The appellate opinion noted that documents must strictly comply with the LC and not the underlying contract. "The issuing bank of a Letter of Credit has the right to refuse payment upon any discrepancy appearing on the face of documents submitted, or any departure from the terms of a Letter of Credit as it would risk dispute and non-indemnification by the buyer." It also noted that "[t]he issuing bank exercises sole discretion whether to seek the buyer's acceptance of any discrepancy so as to make payment or to reject the discrepant documents and refuse to make payment", citing UCP500 Article 14(c) (Discrepant Documents and Notice).

2. Role of Transferring Bank: Transferee Beneficiary argued that the Transferring Bank was liable. The advice of the transfer stated,

"WITHOUT ANY RESPONSIBILITY ON OUR PART AND AS INSTRUCTED BY [BROKER/FIRST BENEFICIARY] ON 29.5.97 THAT HE/THEY HAS/HAVE IRREVOCABLY TRANSFERRED TO YOU A PART OF HIS/THEIR RIGHTS IN THE [ORIGINAL LC] DATED 20.5.97 ISSUED BY BANK OF CHINA HANGZHOU AND WE HEREBY NOTIFIED YOU OF THE FOLLOWING DOCUMENTS PRESENTED UNDER THIS LETTER OF TRANSFER WILL BE ASSOCIATED WITH TRANSFEROR'S DOCUMENTS FOR SENDING TO THE LC ISSUING BANK FOR PAYMENT. UPON RECEIPT OF PAYMENT FROM THE ISSUING BANK AND CREDITED TO OUR ACCOUNT WITH DEPOSITORY BANK WE SHALL EFFECT [PAYMENT] TO YOU AS INSTRUCTED. PLEASE NOTE THAT THIS LC...IS SOLELY AN ADVICE AND CONVEYS NO ENGAGEMENT BY US AND ALSO NOTE THAT ANY AMENDMENTS TO THIS CREDIT SHALL BE ADVISED TO YOU ONLY UPON AND IN ACCORDANCE WITH THE INSTRUCTIONS WHICH WE RECEIVE FROM THE ORIGINAL BENEFICIARY."

The appellate court stated that "[i]n forwarding the required documents of the [Broker/First Beneficiary] to obtain payment under the [Original LC], the [Transferring Bank] acted as advising bank only". Ultimate Seller/Transferee Beneficiary argued that Transferring Bank should not have examined the documents on the first presentation if its role was only that of advising bank because the delay "misled the [Ultimate Seller/Transferee Beneficiary] to believe that the documents are in order and prevented the [Ultimate Seller/Transferee Beneficiary] from being able to present rectified documents to [Issuer] within the expiry date of [the Original LC]". The appellate court also stated that since the Broker/First Beneficiary did not receive payment, "the [Ultimate Seller/Transferee Beneficiary] was not entitled to payment". The appellate court observed that the Transferring Bank was entitled to examine the documents presented to it:

"[Transferring Bank] became an issuing bank for the [Broker/First Beneficiary] when upon its application the [Transferring Bank] issued the [Transferred] LC to the [Ultimate Seller/Transferee Beneficiary] . . . . When the [Transferring Bank] examined the documents submitted to it by the [Ultimate Seller/Transferee Beneficiary] on 20/6/97, it was for the purpose of the [Transferred] LC and was within its rights to notify the [Ultimate Seller/Transferee Beneficiary] on 23/6/97 the discrepancies it found, and which was corrected by the [Ultimate Seller/Transferee Beneficiary]. Having done so, the [Transferring Bank] cannot have a second bite by relying on discrepancies identified by the [Issuing Bank]".

The appellate court noted that

"[i]f the China buyer did obtain access to the goods, then it is for the [Broker/First Beneficiary] to pursue its claim against the [Issuing Bank] or alternatively the China buyer. Be that as it may, the decision to reject the documents was made by the [Issuing Bank] and not the [Transferring Bank]".

The appellate court stated that

"[t]he [Transferring Bank's] obligation to pay the [Ultimate Seller/Transferee Beneficiary] is under the [Transferred] LC, where it undertook to pay the amount stated therein to the [Ultimate Seller/Transferee Beneficiary] only upon receipt of the amount under the [Original LC] and on instruction of the [Broker/First Beneficiary]. Since no payment was made by the [Issuing Bank] thereunder and there is no evidence before the Court to the contrary, no obligation had emerged under the [Transferred] LC to require the [Transferring Bank] to make payment to the [Ultimate Seller/Transferee Beneficiary]".

3. Estoppel; Preclusion: Transferee Beneficiary argued that since the Transferring Bank had noted three discrepancies, Issuer was "estopped . . . from raising new discrepancies later since an issuing bank has only one bite at the cherry". Transferee Beneficiary also noted that "the [Original LC] issuing bank telex of 8/7/97 should have been rejected by the [Transferring Bank] under Article 14d(i) of UCP500 as it was later than 7 days and after 7 days Article 14e precludes an issuing bank from claiming that documents are not in order".

The appellate opinion rejected these arguments, stating that the claim against the Original LC "can only be made by the [Broker/First Beneficiary] who was the beneficiary. What was assigned to the [Ultimate Seller/Transferee Beneficiary] was not the [Original LC] but part of the proceeds from it. In forwarding the documents received from the [Broker/First Beneficiary], the [Transferring Bank] acted as the advising bank of the [Original LC] issuing bank". The appellate opinion explained that the role of the Transferring Bank was "as the advising bank, to inform the [Broker/First Beneficiary] of the Letter of Credit that was issued. It is the advising bank of the [Original LC] issuing bank, not of the [Broker/First Beneficiary] and certainly not of the [Ultimate Seller/Transferee Beneficiary]". The appellate court concluded that the Broker/First Beneficiary should have responded to the Issuer's rejection but that this point is not material.

4. Refusal; Cure: After Broker/First Beneficiary submitted its documents and forwarded the presentation via Transferring Bank to Issuer, Issuer sent the following Notice of Refusal:

"WITH REFERENCE TO THE CAPTIONED ITEM DOCS RECEIVED AND FOUND THE FOLLOWING DISCREPANCIES:

1. CONTRACT NO. SHOWN ON STANDARD MALAYSIAN RUBBER CERTIFICATE DIFFER FROM OTHER DOCUMENTS

2. STANDARD MALAYSIAN RUBBER CERTIFICATE PRESENTED I/O QUALITY CERTIFICATE

3. TOTAL QUANTITY SHOWN ON STANDARD MALAYSIAN RUBBER CERTIFICATE AND INVOICE IS DIFFERENT

HOLDING DOCS AT YR DISPOSAL

SHOULD THE DISCREPANCIES BE ACCEPTED BY APPL AND WE HAVE NOT RECEIVED YR CONTRARY INSTRUCTION PAYMENT WILL BE EFFECTED AT MATURITY AS PER YR ORIGINAL INSTRUCTIONS STP".

The appellate court recognized the argument that "the discrepancies may be explainable on the basis that the [Ultimate Seller/Transferree Beneficiary]'s documents to the [Transferring Bank] under the [Transferred] LC may differ from that of the [Broker/First Beneficiary] to the [Issuing Bank], and therefore not relevant to the examination of the required documents submitted under the [Original LC]". The Transferee Beneficiary argued that the telex message "HOLDING DOCS AT YR DISPOSAL" was improper. While describing this message as "cryptic", the appellate court stated that it is "refined language expressing clear and unequivocal rejection of the documents".

The Transferee Beneficiary argued that the trial judge erred in relying on six discrepancies since three of the discrepancies had been corrected. The appellate opinion agreed that "[o]nly 3 discrepancies remained but these were raised by the [Issuer] on 8/7/97 based on the [Original LC]". However, the appellate court noted that one discrepancy is sufficient to justify refusal.

5. Transferred LC; Role of Issuer and First Beneficiary: The appellate opinion ruled that since the Transferee Beneficiary was not a party to the Original LC, its claim was based only on the Transferred LC. The appellate court opined that it was the place of the Broker/First Beneficiary to respond to Issuer's refusal of the presentation and not Transferring Bank or Ultimate Seller/Transferee Beneficiary "for it is the [Broker/First Beneficiary] who was seeking payment". Moreover, the appellate court stated that "if the term of the [Transferred] LC that the [Transferring Bank] must first receive the funds of the [Broker/First Beneficiary] means that the [Ultimate Seller/Transferee Beneficiary] cannot obtain timely payment, that issue is with the [Broker/First Beneficiary] under the sale and purchase between the [Ultimate Seller/Transferee Beneficiary] and the [Broker/First Beneficiary] and not the [Transferring Bank] under the [Transferred] LC".

The appellate court also opined that Ultimate Seller/Transferee Beneficiary could not proceed against Ultimate Buyer or Issuer because of lack of privity and that its only recourse was against Broker/First Beneficiary and Transferring Bank. However, subsequently, the appellate court stated, "If the [Issuing Bank] or the buyer in China acted wrongly, it is the [Broker/First Beneficiary] who has a cause of action against the [Issuing Bank] and that buyer, not the [Ultimate Seller/Transferee Beneficiary] against the [Transferring Bank] whose role is an advising bank in respect of the [Original LC]".

6. Goods, Possession of: It appears that the Ultimate Buyer/Applicant obtained the goods. Broker/First Beneficiary informed Ultimate Seller/Transferee Beneficiary that Ultimate Seller/Transferee Beneficiary's goods were shipped and the bill of lading was issued in three originals, and the Ultimate Buyer/ Applicant used one original to obtain the goods. "We have been confirmed (sic) by our customer, [Ultimate Seller/Transferee Beneficiary] that their client in China, [Ultimate Buyer/Applicant], has accepted the trade documents (even though with discrepancies) and successfully accessed to the merchandise". Ultimate Seller/Transferee Beneficiary called the attention of the appellate court to the fact that the Chinese Ultimate Buyer/Applicant (not a party to this action) had obtained the goods and urged that in such a situation the Ultimate Seller/Transferee Beneficiary should be paid. The appellate court stated, "the bank is not concerned with the trade and goods it cannot be expected to be familiar with. It is not concerned with disputes between the buyer and the seller of the goods. It is only concerned with strict compliance by production of the documents specified in the Letter of Credit before it releases payment for if it does not it risks not being indemnified or reimbursed by the buyer".

Comments:

1. Compliance. It appears that the Transferring Bank was of the opinion that the documents complied with both the Transferred LC and the Original LC. If the documents presented by the Ultimate Seller/Transferee Beneficiary complied with the Transferred LC but not with the Original LC, the Ultimate Seller/Transferee Beneficiary is entitled to relief. If they do not comply because the documents substituted by the First Beneficiary/Broker did not comply, then the Issuer is liable on the Transferred LC. If they did not comply because the Transferring Bank misadvised the Transferred LC, then it may be liable. If they did not comply and the Transferring Bank missed a discrepancy or reached a different conclusion, it is not liable to the Ultimate Seller/Transferee Beneficiary because it had no obligation to examine the documents.

2. Privity. If the documents presented complied with the Transferred LC, if the notice of refusal was inadequate, or if the Issuer facilitated release of the goods or documents to the Ultimate Buyer, the appellate court is correct: the Transferring Bank would have no obligation, but the appellate court is wrong regarding the liability of the Issuer to the Transferee Beneficiary, and, in particular, its statement that there is "no privity" between the Issuer and Ultimate Seller/Transferee Beneficiary. By issuing a transferable credit and authorizing another bank to effect a transfer, the Issuer is obligated not only to the first beneficiary but also to a transferee beneficiary that makes a presentation that complies with the terms of a duly transferred LC.

3. Notice of Refusal; Delay. The parties disputed whether Ultimate Seller/Transferee Beneficiary could assert that Issuer had failed to make a timely refusal under UCP500. Apart from whether the issue was timely raised in the appeal, the appellate court stated that the issue was not material because the telex was addressed to the Broker/First Beneficiary and could not be raised by the Ultimate Seller/Transferee Beneficiary. The notice on its face raises questions about whether it was adequate regarding the alleged discrepancies and whether it indicated refusal.

4. Transferring Bank: "Issuer" or "Advisor"? The appellate opinion describes the Transferring Bank in two ways: as an "advisor" and as an "issuer" of the transferred credit. The former description is correct, but the latter is not. The latter is inconsistent with the appellate decision, which ruled that the Transferring Bank was not liable on the transferred credit and, therefore, was not its issuer. Although the advised transferred credit differed from the credit issued, the changes requested by the terms of the first credit and UCP500 (to which the LC was subject) were inherent in the credit as issued, and the Issuer was liable for the transferred credit as well.

5. What Went Wrong? In addressing the question of what went wrong, the appellate court stated:

"In accepting the [Transferred] LC the [Ultimate Seller/Transferee Beneficiary] abandoned its safe payment model for business through a middleman and exposed itself to having to wait for payment to be first made by the [Issuing Bank] in China to the [Broker/First Beneficiary] before being able to receive its payment. In doing so, not only the [Ultimate Seller/Transferee Beneficiary] placed itself in the hands of the [Broker/First Beneficiary] being able to obtain payment under the [LC] from the [Issuing Bank], it also accepted that the documents it submitted to the [Transferring Bank] would be forwarded to the [Issuing Bank].

The key to success in the use of letters of credit is to keep the terms of compliance to the absolute minimum necessary and as simple as possible. One should not open oneself, after the goods have been shipped, to needing the agreement of the buyer to accept discrepancies, because business conditions may change and an eager buyer may regret his purchase or want to take the opportunity to obtain further discount."

[JEB/ds/mkg]

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.