Factual Summary: Seller and Buyer contracted for the sale of 45,000 WMT (+/- 10% at Seller's option) in iron ore fines at the price of USD 183 per DMT. Payment was to be made by a commercial LC, payable at sight. Prior to issuing the LC, two bills of lading evidenced that 23,947 WMT and 20,553 WMT of iron ore were loaded onto a ship in two Indian ports. The combined weight amounted to 44,550 WMT, as permitted by the sales contract, and the shipment was valued at USD 7,185,105.43.

At Buyer/Applicant's request, Issuer issued a commercial LC subject to UCP600 for USD 8,235,000 in favor of Seller. The LC provided that both the drawing amount and commodity quantity were to be "+/- 10%". It was conceded that the value of the shipment was outside the tolerance limit stipulated in the LC because the LC required that the minimum amount of the shipment be 40,500 DMT valued at USD 7,411,500. Even though the terms of the LC differed from the terms of the sales contract, no amendment was made to the LC to reconcile its terms with the agreed amount and permitted quantity shipped. When the shipment arrived in China, it was discharged.

Seller/Beneficiary presented documents to Negotiating Bank for negotiation under the LC and requested that it notify Seller/Beneficiary of any discrepancies. Negotiating Bank neither negotiated nor mentioned any discrepancies, instead forwarding the documents to Issuer on behalf of Seller/ Beneficiary with a cover letter stating: "We hereby certify that we have duly endorsed the amount of this drawing on the reverse of the original credit instrument and that all terms and conditions of this credit have been fully complied with."

The LC also provided for reimbursement through the Reimbursing Bank and stated that, upon receipt of the complying LC documents, Issuer would reimburse for the amount drawn.

Issuer received the documents on 6 August 2008. On 11 August 2008, Issuer authorized reimbursement in a telecommunication to Negotiating Bank for the amount of USD 7,184,950.43 to Seller. The electronic notice stated, "PLS CLAIM REIMB. AT SIGHT BASIS AS PER CREDIT TERMS. T/T REIM ALLOWED. PLS ADVISE THE [Reimbursing Bank] OF LC NO NAME OF COMMODITY, LOADING AND UNLOADING PORT AND DAT OF SHIPMENT."

On 12 August 2008, the fifth banking day after receipt of the documents, Issuer attempted to revoke its prior message and claimed that its prior authorization was null because of the following discrepancies between the shipment's quantity/ value and the terms of the LC: (1) the amount, USD 7,185,105.43, exceeded the 10% minimum tolerance specified in the LC, (2) the shipment quantity of 44,500 WMTs, equivalent to 40,017.5 DMTs, was not within the minimum quantity of 40,500 DMTs to be a full shipment, and (3) adjustments to the value of the cargo based on iron content also remained outside the +/-10% tolerance.

During this time, the value of iron ore had dropped dramatically and Seller/Beneficiary and Buyer/Applicant negotiated to reduce the price of the cargo from USD 183 per DMT to USD 128 per DMT. The cargo's value was reduced to USD 5,122,240 and Negotiating Bank instructed Issuer to pay Seller/ Beneficiary the reduced sum. Issuer authorized payment of this amount to Seller/Beneficiary per the reduced price.

Seller/Beneficiary sued Issuer for USD 2,192,424.77, the difference in the value of the documents initially presented and the payment received from the Issuer. The Judge awarded USD 2,192,424.77 with interest to Seller/Beneficiary.

Legal Analysis:

1. Incorrect Refusal To Honor by Issuer: Seller/Beneficiary asserted that, prior to its rejection of the initial drawing on the LC by Seller/Beneficiary, Issuer had given notice to Negotiating Bank that it could claim reimbursement after having received the documents. Having given this notice, Seller/ Beneficiary contended that Issuer could not change its mind and reject the documents. Seller/Beneficiary also asserted that Issuer failed to comply with Article 16(c)(i-iii) of UCP600, requiring Issuer to state: (i) that it was refusing to honor or negotiate, (ii) each discrepancy for which Issuer refuses to honor or negotiate, and (iii) that Issuer is holding the documents pending further instruction from the presenter. Because it failed to comply, Issuer "shall be precluded from claiming that the documents do not constitute a complying presentation" per Article 16(f) of UCP600.

2. Certificate of Compliance: Issuer stated it had not examined the Negotiating Bank's certificate of compliance before it sent its first electronic notice. It also stated that Condition 20 of the LC stating, "Upon receipt of complying presentation the issuing bank will send reimbursement authorization to [Reimbursing Bank] and authorize the negotiating bank to claim reimbursement from [Reimbursing Bank]", led Issuer to believe that a certificate of compliance was required for the reimbursement. Because of this interpretation and the standard practice for bank-to-bank reimbursement giving reimbursing banks one to two days to make arrangements for reimbursement, Issuer argued that its first electronic message was sent prematurely and was void. The Judge observed that had Issuer examined the documents prior to the deadline for the authorization to reimburse, its first electronic message would have stated the discrepancies as required by UCP600 Article 16.

3. Presentation Documents as Minimal Requirement: The Judge stated that the presented documents were all that was required in order for reimbursement authorization to be given by Issuer to the Reimbursing Bank. Because Issuer gave notice that it had received all required presentation documents that complied with the terms of the credit, and because Issuer neither stated it had not examined the documents nor stated that it refused to accept the documents due to discrepancy in its first notice, the Judge concluded that Issuer was precluded from alleging that the presentation documents were noncomplying in its subsequent notices. Lastly, the Issuer could have reworded Condition 20 of the LC to require a certificate of compliance but it did not. This rewording could have required that the certification given by Negotiating Bank would have had to note discrepancies between the sales contract and the LC. In this case, however, no certificate of compliance was required for the Seller/Beneficiary to draw on the LC.


The Judge asked why banks make statements such as the following when they do not actually negotiate:

"We hereby certify that we have duly endorsed the amount of this drawing on the reverse of the original credit instrument and that all terms and conditions of this credit have been fully complied with".



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.