Article

Factual Summary: This was an action by Beneficiary against Advising Bank for breach of their contract. The underlying transaction was for a shipment of waste-paper from Australia to India. The letter of credit permitted any bank in Australia, including Advising Bank, to "negotiate the credit".

Beneficiary approached Advising Bank to "silently confirm" the letter of credit. Advising Bank did so, on the terms contained in a letter, referred to as the "Agreement".

The District Court of South Australia, Costello, J., noted the following as facts. Advising Bank undertook to "silently confirm" the letter of credit. Advising Bank undertook to "honour the drawings" subject to the UCP600. Beneficiary agreed to assist Advising Bank to take all steps necessary to achieve payment including proceedings to enforce recovery from Issuing Bank. Beneficiary assigned and subrogated its rights under the letter of credit against Issuing Bank to Advising Bank. Advising Bank charged a fee for agreeing to "silently confirm". Advising Bank retained the right to "effect recourse" to Beneficiary in the event of any delay, default or loss occurring as a result of a dispute in relation to Beneficiary's contract of sale of the waste-paper.

In May 2008, Advising Bank received the documents and credited Beneficiary's account with the sum of USD 40,354.07. At that time, Issuing Bank informed Advising Bank that it had received the documents and would, in 180 days, the period stipulated in the letter of credit, remit to Advising Bank the amount Advising Bank paid to Beneficiary. Applicant then received the waste-paper and raised concerns as to its quality, and in August 2008 sought and obtained a temporary injunction in Nagpur, India restraining Beneficiary from "encashing" the letter of credit. Issuing Bank then sought recourse from Beneficiary relying on the terms of the Agreement and in January 2009 debited Beneficiary's account with the sum of USD 41,939.60, inclusive of interest, stating:

As previously advised in our meeting and stated in our offer of silent confirmation dated 18th April 2008 the Bank retains the right to effect recourse to the beneficiary where any delay/default/loss occurs resulting from a dispute in relation to the commercial contract.

Beneficiary commenced this action against Advising Bank for breach of contract claiming:

- The entity named in the injunction proceedings was not Beneficiary;

- As the Indian Court had no jurisdiction over Beneficiary, Advising Bank should be pursuing all avenues to force Issuing Bank to honour its letter of credit;

- The injunction did not by its terms restrain Issuing Bank;

- Advising Bank acted inappropriately by not demanding payment from Issuing Bank;

- The letter of credit is a guarantee between Issuing Bank and Beneficiary; and

- Beneficiary had not breached the Agreement in a way which would permit recourse.

Legal Analysis:

1. Nature and Effect of the Letter of Credit: Judge Costello examined the nature and effect of a letter of credit noting the comments of Lord Diplock that it "is more than a method of payment" and that it "creates a direct liability upon the banker independent of the contract of sale, and is an undertaking by the banker that if the seller presents the required documents in the required time he will receive payment of the contract price" (Ian Stack Ltd v. Baker Bosley Ltd (1958) 2 QB 130, 139); and "[t] he whole commercial purpose for which the system of confirmed irrevocable documentary credits has been developed in international trade is to give to the seller an assured right, to be paid before he parts with control of the goods, that does not permit of any dispute with the buyer as to the performance of the contract of sale being used as a ground for nonpayment or reduction or deferment of payment." Accordingly, Judge Costello noted that when the beneficiary provided the required documents to Issuing Bank, it was entitled to expect that, regardless of any dispute related to its contract of sale (save for fraud), it would receive payment.

2. Silent Confirmation: Judge Costello stated that there does not "appear to be any universal understanding or acceptance as to the precise meaning of the term 'silent confirmation'". However, His Honour noted that the practice of providing a separate engagement based on the primary letter of credit continues. His Honour added that there "has been a reluctance on the part of the issuing banks in some countries to request confirmation from the bank of a foreign country for various reasons, including inter alia local regulations, exchange control and poor standing of the foreign bank." Judge Costello stated that "a practice has arisen whereby that bank still provides its 'silent confirmation' to the seller."

Referring to Law of Bank Payments, Brindle and Cox, 4th Edition and Fung King-tak, "The Legality of Silent Confirmation of Letters of Credit", Documentary Credits Insight, Vol 7, No 1 Winter 2001, Judge Costello stated that it had been suggested that "the beneficiary would have the same rights against the confirming bank as if the credit had been confirmed pursuant to the instructions of the issuing bank." However, Judge Costello considered that as a statement of the law, it is arguably too wide. His Honour pointed out that a confirming bank may provide confirmation subject to stipulations which seek to limit its liability.

In accepting the practice, Judge Costello considered that in addition to any obligation on Issuing Bank to pay pursuant to the terms of the letter of credit, Advising Bank was, without the knowledge of Issuing Bank, "agreeing to add its undertaking to pay". The additional undertaking was a different obligation to that of Issuing Bank, because Advising Bank introduced conditions on its undertaking over and above the mere satisfactory presentation, in appropriate form, of the documents stipulated in the letter of credit.

3. Incorporation of UCP600 Provisions in the Agreement: Judge Costello construed the Agreement as an undertaking to "honour drawings on presentation of the documents required", effectively taking on the obligations of the issuing bank. This was reinforced by the incorporation into the Agreement of the UCP. The beneficiary was entitled to expect that Advising Bank would honour its obligations regardless of any underlying dispute arising, that is, as provided for by UCP600. However, Judge Costello commented that the express provision for "recourse" stood in "stark contrast" to "the unconditional undertaking inherent in a confirmation, silent or otherwise". In relation to this inherent inconsistency, Judge Costello affirmed that the proper approach is to disregard incorporated terms that conflict with the expressly agreed terms. Hence the express "recourse clause" must prevail over the incorporated provisions of the UCP. The beneficiary agreed to recourse, to assist Advising Bank to take whatever steps were necessary, and to subrogate any rights it has against Issuing Bank.

4. Breach - Implied Terms: However, the court questioned whether the right to recourse was unqualified. Judge Costello accepted that there was an implied term in the Agreement that the beneficiary would "take all steps necessary to achieve payment in the event of a default by the issuing bank". The judge considered that this term should be implied because it is clearly reasonable and equitable for Advising Bank to take reasonable steps to require Issuing Bank to honour its obligations and to give business efficacy to the Agreement. Judge Costello determined that Advising Bank did not take reasonable steps, which included: to state to Issuing Bank that it was bound to honour; take steps to persuade Issuing Bank to make payment; threaten the institution of proceedings against Issuing Bank; institute proceedings seeking the recovery of the monies; and/or communicate with the Indian Court or seek to participate in that Court's proceedings. Consequently, Advising Bank was in breach and had no right of recourse. The court ordered the funds be returned with interest.

Comments by Professor Alan Davidson:

An arrangement between an advising bank and the beneficiary may take on one of several functions. Whether or not it is described as a silent confirmation is not necessarily the determining factor. The arrangement may be properly construed as an undertaking which is a parallel and perhaps identical obligation to that of the issuing bank, however, without the protection of the UCP with respect to bank to bank reimbursement. It may be a form or guarantee or suretyship which must be assessed on its terms. It may be a contractual agreement. In this case, notwithstanding the use of the expression "silent confirmation", the court construed the additional terms, inconsistent with confirmation, as prevailing. In the right circumstances, this agreement would permit recourse against the beneficiary.

The court did not deal with any right to reimbursement between the banks because the case was limited to the rights between the beneficiary and the advising bank.

Text of Agreement:

"At your request and subject to acceptance of this offer, the Commonwealth Bank of Australia will silently confirm the above Documentary Credit.

The Bank undertakes to honour drawings on presentation of the documents required under Documentary Credit to the Commonwealth Bank of Australia in accordance with the terms and conditions of the Credit and subject to the provisions of the Uniform Customs and Practice for Documentary Credits, International Commerce Publication No. 600 (2007 Revision).

This offer has been made based on the format of the Documentary Credit as it was initially advised by the Issuing Bank. Any Amendment/s will require the separate approval of the Bank in writing.

By accepting this offer, the company agrees to:

- Assist the Bank and take all steps necessary to achieve payment as the bank may require in the event of default, including the initial proceedings to enforce recovery.

- Assign and subrogate all rights and proceeds to which you are entitled or will become entitled under the relevant Documentary Credit to Commonwealth Bank of Australia, including (but not limited to) your rights against the Issuing Bank, all title and interest in the documents under the Credit and goods to which the documents relate and all proceeds of sale of the goods.

This offer is personal to you and is not transferable.

The Bank retains the right to withdraw this offer prior to your acceptance, should we perceive any change in circumstances warrant so (sic).

Our silent confirmation is conditional upon receipt by the Bank of the Original Credit and all amendments any payment of our fee (sic).

Any alteration to this document renders our offer null and void.

The Bank retains the right to effect recourse to the beneficiary where any delay/default/loss occurs resulting from a dispute in relation to the commercial contract.

Please sign below indicating your acceptance/ rejection and return all pages by fax."

[AD/pt]

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