Article

Factual Summary: Buyer contracted for the purchase of crude palm oil from Seller. The sales contract provided “Payment shall be by Irrevocable & Confirmed Letter of Credit (“LC”) At Sight for 100% of the Unit Price, to be issued by a First Class State Bank and branch that is acceptable to Seller, to Seller’s nominated bank 10 days before the nominated vessel’s arrival at the load port in favour of the LC is to allow for TT reimbursement at the Buyer’s costs.” In accordance with the sales contract, Buyer obtained an LC subject to UCP600 from Issuer for the benefit of Seller, Seller loaded the cargo onto the designated ship, issued two commercial invoices and 10 bills of lading, and presented the documents to Issuer. No notice of refusal was sent. In the meantime, the LC was negotiated by a bank.

Buyer sought to enjoin honor of the LC on the basis that the ship hired by Seller was not seaworthy, had been delayed in reaching port, and that faults with the ship had prevented delivery of the palm oil. The trial court enjoined Issuer from honoring the LC until further hearings could be had on the matter. On appeal, the Appellate Judge reversed and dismissed the injunction, enabling Issuer to honor the LC.

Legal Analysis:

1. Independence; Injunction; Fraud

The Appellate Judge noted that the scope of judicial interference to prevent honor of a LC is very limited because contractual disputes between parties are separate from disputes regarding the honor of a LC. He referred to a number of Indian cases in line with the proposition that a court can enjoin a bank from honoring a LC only when the bank knows that the demand for payment has already been made and is clearly fraudulent.

The Judge ruled that an LC is an independent contract that is unaffected by performance of the underlying sales contract. A bank’s only obligation is to “look into the correctness and appropriateness of the documents and if the same are found to be in order, the other consideration of the main underlying contact does not affect the encashment of the letter of the [sic] credit.”

The Judge further noted that UCP 600 substantiated his ruling, stating “The Courts have given primacy to the UCP norms over the underlying agreement as the letter of credit is governed by UCP norms.” Citing UCP600 Articles 4 ‘Credits v. Contracts’ and 5 ‘Documents v. Goods Services or Performance’, the Judge ruled that if the documents presented to the Issuing bank are compliant, then the bank is “required to perform their obligations under the [LC].” He also stated that an issuer is “relieved from any responsibility about the disputes arising out of the main contract between the seller and the buyer.” Because the documents presented to the bank in this matter were LC compliant, the Judge concluded that Issuer was obligated to make payment in compliance with the terms of the LC.

Comments:

  1. Negotiating Bank. The decision refers to negotiation obliquely:

“The appellant being the beneficiary bank to the BOB LC had confirmed, negotiated and discounted the said letter of credit by paying the respondent No.3 on 14th July, 2014 upon presentation of compliant documents by respondent No.3 in accordance to the terms of the LC issued by BOB. According to the terms of the LC, which is 180 days after Bill of Lading date, the payment due date of this LC is 19th December, 2014. The appellant by way of a Swift Message dated 21st August, 2014 called upon the respondent No.2 to make the payments in lieu of the LC as no discrepancies was pointed out by it within the specified time frame. The respondent No.2 categorically admitted that all documents were received and that due payments were required to be made.”

If there was a negotiating bank, the reasons for denying the injunction are present. A bank that has duly negotiated complying documents is protected, that is, entitled to be reimbursed, if it acted in good faith

TEXT OF CONTRACT [PARAGRAPH 11 OF OPINION]

1.1.1. Payment shall be by Irrevocable & Confirmed Letter of Credit (“LC”) At Sight for 100% of the Unit Price, to be issued by a First Class State Bank and branch that is acceptable to Seller, to Seller’s nominated bank 10 days before the nominated vessel’s arrival at the load port in favour of the LC is to allow for TT reimbursement at the Buyer’s costs.”

[MJS/ZTS]

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 the ICC or Coastline Solutions.