Factual Summary: Trading Company (Seller) financed its exporting business though a short term export credit facility with Bank. The facility was secured by "assigning" to Bank commercial LCs issued in its favor as Seller/Beneficiary. Hong Kong branch of Korean bank (Issuer) issued four commercial LCs to Seller/Beneficiary subject to UCP500. The LCs nominated any bank in the Philippines to negotiate drafts or documents. Seller/ Beneficiary presented documents to Bank at its Manila offices which sent the documents to Issuer in Hong Kong by courier in 13 October 1995 and claimed reimbursement. The opinion states that the documents were "prepared and executed without the participation of [Nominated Bank] who received them from [Seller/Beneficiary] in the regular course of business and in the normal sequence of a letter of credit transaction."

The opinion indicates that the documents were forwarded to Buyer/Applicant to enable it to take delivery on arrival of the goods in Hong Kong. In June 1996, Issuing Bank communicated with Nominated Bank stating that the documents were "unclean" and that waiver had not yet been obtained from the Buyer/ Applicant.

Nominated Bank then sued Issuer and the Korean corporate entity which owned it in the Philippines for wrongful dishonor. After various motions, appeals, and remands, the trial court entered judgment for Nominated Bank. On appeal, affirmed.

Legal Analysis:

1. Preclusion. Nominated Bank called the courts' attention to UCP500 Articles 13 (Standard for Examination of Documents) and 14 (Discrepant Documents and Notice) and, in particular, the preclusion rule. The appellate opinion set forth the portion of the compliant containing the text of these rules with approval.

2. Branches of a Bank in Different Countries. The corporate entity asserted that it was not liable under the provision of UCP500 Article 2 Meaning of Credit) that states that "[f]or the purposes of these Articles, branches of a bank in different countries are considered another bank." The appellate court noted with approval the ruling of the trial court that the Hong Kong Branch and the corporate entity "are but one and the same juridical person". The appellate court described the position of the corporate entity on this point as "mangl[ing] Section 2 of UCP500 out of context in order to avoid a just and valid obligation" and ruled that this provision "is never intended to shield a corporation from the legal responsibilities of its branch office."

In explaining its conclusion, the appellate court cited various authorities including the ICC Guide to Documentary Credit Operations for UCP500 (1994), ICC Opinions R 250 (1997) and R 249 (1977), quoting extensively from them.

The appellate opinion noted with approval the position of the Nominated Bank on this issue to the effect that "one should not lose sight that [UCP500] is not a law. Rather it is a mere aggrupation of customs and practices and therefore yields to the express provisions of the law."

3. Exemplary Damages. The appellate court awarded Nominated Bank the sum of PHP 1 million "as and for exemplary damages". Exemplary or punitive damages are a means of punishing a party for wilful conduct virtually unheard of in a letter of credit case. The opinion suggest that this extremely rare award was caused by the apparently repeated failures of the Issuer or corporate entity to respond, file pleadings, or take depositions even though they had been scheduled as well as the markedly weak defense asserted.


Apart from the tardiness of the attempted refusal (7 months delay) and the inadequacy of the statement of discrepancies ("unclean" hardly explains anything), the appellate court overlooked an even more telling problem with the Issuer's case regarding its obligations on the credits, namely that it apparently released the documents to the applicant/buyer to enable it to obtain the goods from the carrier. On that basis alone, it should be precluded from asserting that the documents do not comply.



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.