Article

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 were served, evidencing 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 40,017.5 DMT shipment, USD 7,185,105.43, was below 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 under the contract. 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, on receipt of complying LC documents, Issuer would reimburse for the amount drawn.

Issuer received the documents on Wednesday, 6 August 2008. On Monday, 11 August 2008, Issuer authorized reimbursement in a telecommunication to Negotiating Bank for the amount of USD 7,184,950.43 to Seller ("First SWIFT Message"). 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 Tuesday, 12 August 2008, the fifth banking day after receipt of the documents, Issuer attempted to revoke its prior message ("Second SWIFT Message"), and in a separate communication on the same day ("Third SWIFT Message"), claimed that the First SWIFT Message 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 trial court, Bharwaney, J., awarded USD 2,192,424.77 with interest to Seller/Beneficiary. The trial court found that Issuer was not obligated to honor under UCP600 Article 15(a) (Complying Presentation) because Issuer had not determined at that time it issued the First Swift Message whether the presentation was complying. However, the trial court accepted Seller/Beneficiary's construction of Field 47A condition 20 in the LC and ruled that the First SWIFT Message contained a representation that Issuer had received complying documents. It also found that because Issuer sent two notices of refusal instead of one-the Second SWIFT Message containing an implied notice and the Third SWIFT Message containing an express statement of refusal listing discrepancies relied upon-the third message was not a valid notice under UCP600 Article 16(f) (Discrepant Documents, Waiver and Notice). Issuer filed a Notice of Appeal. The appellate court required that Issuer amend the notice so as not to raise a new argument-that Seller/Beneficiary's conduct was unconscionable-that Issuer had failed to argue previously. Issuer amended and refilled its Notice of Appeal. On appeal, reversed.

Legal Analysis:

Meaning and Effect of Issuer's First SWIFT Message: Issuer argued on appeal that the trial court incorrectly construed Field 47A condition 20 literally, instead of giving it a "practical, business sense meaning", as required if detailed semantic and syntactical analysis of words in commercial contracts will lead to a conclusion that flouts business commonsense. Issuer argued that had this approach been adopted, the trial court would have construed the requirement for a "complying presentation" to be part of the instructions for bank-to-bank reimbursement.

Issuer also criticized the trial court's reliance on the heading of the SWIFT Form 752 ("Authorization to Pay, Accept or Negotiate") that Issuer used for its First Swift Message, rather than the operative entries in Field 23 ("Reimburse") and Field 72 ("Pls claim reimb. At sight basis as per credit terms. T/T reim. allowed."). According to Issuer, the message had no bearing on honoring the terms of the LC after examination of the documents because no examination occurred. Rather, Issuer argued, the message was merely an authority to Negotiating Bank to obtain reimbursement under UCP600.

The appellate court focused on the wording of Issuer's first message, finding that the meaning of "upon receipt of complying presentation" in Field 47A condition 20 of the LC was clear. UCP600 Article 2 (Definitions) defines "Complying Presentation" as "presentation that is in accordance with the terms and conditions of the credit", and cannot be construed to mean, per Issuer's argument, "certificate of compliance with the terms and conditions of the credit" as referred to in UCP600 Article 13(b)(ii) (Bank-to-Bank Reimbursement Arrangements).

Citing Benjamin's Sale of Goods (8th ed.) §23- 180 and other authorities on notice of refusal, Seller/ Beneficiary argued that in the interests of clarity and certainty in interpretation of the terms of the LC, a bank should only have one opportunity to state its view of the documents and cannot approbate and reprobate. The appellate court, while attracted by the argument, rejected the contention that UCP600 Article 15(a) (Complying Presentation) triggers an obligation on an issuing bank to honor, where it has represented, but not actually determined itself, that the presentation is complying.

Meaning and Effect of Issuer's Second SWIFT Message: In support of its arguments, Issuer cited Credit Agricole Indosuez v. Credit Suisse First Boston (Zurich) [2001] 1 All ER (Comm.) 1088. In that case, which involved a second message from an issuer revoking a payment order to a confirming bank and subsequent notice of refusal listing discrepancies in the documents, the court noted that "there is an obvious difference between countermanding an order to pay, which was what the first Swift message was about, and the rejection of documents on the grounds of discrepancies after inspection, which was the substance of the second Swift message".

The appellate court rejected Issuer's submission that the effect of Issuer's Second SWIFT Message was similar to that in Credit Agricole because the wording and effect of the two messages differed. In Credit Agricole, by the time the second message was sent, the issuer had discovered the discrepancies and decided not to honor the credit.

Whether Issuer's Third SWIFT Message Was a Valid Refusal to Honor: The appellate court reaffirmed the trial court ruling. The double notice by Issuer rendered the Third SWIFT Message invalid as a notice of refusal under UCP600 Article 16(f) (Discrepant Documents, Waiver and Notice).

Whether There was Compromise of a Disputed Claim Giving Rise to Accord and Satisfaction: Issuer raised the defense that its payment to Seller/ Beneficiary constituted a compromise between the parties of a disputed claim gave rise to accord and satisfaction. Seller/Beneficiary argued that Issuer could not rely on accord and satisfaction as a defense because it had not pleaded so previously. While it is advisable that the defense be specifically pleaded, the appellate court allowed Issuer to rely on it because it was canvassed as a line of defense even at the application for summary judgment.

In its ruling, the trial court had concluded that in paying Seller/Beneficiary USD 5,122,240, Issuer had relied on a September message sent by Seller/ Beneficiary which contained a clear and unequivocal representation that it would not claim any shortfall between that amount and what was owed under the LC. However, the court ruled that satisfaction was not established because: (1) it found that Issuer had not given up its right to argue or reject the documents on the grounds they were discrepant; and (2) in releasing the documents to Buyer/Applicant, Issuer had no security interest in the documents to give up that could constitute consideration, as according to its third message it was holding them to the order of the presenter.

On appeal, the court rejected the trial court's first line of reasoning because there was no evidence that Issuer had asserted that it was right to reject the documents after having paid Seller/Beneficiary but prior to the commencement of the lawsuit. Secondly, the court ruled that while release of documents did not constitute consideration, the USD 5,122,240 paid to Seller/Beneficiary constituted satisfaction between the parties. Because the parties had compromised, the court held that Issuer succeeded in resisting liability to pay the balance of the account on the LC.

Comment: The question should have been one of finality. If the issuing bank had documents and then authorized reimbursement to the negotiating bank, that should be equal to a final payment.

[KCM]

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