Article

Factual Summary: Seller contracted with Buyer to sell yellow soya beans. The parties agreed that payment would be made by a letter of credit with payment 180 days after issuance. The LC was issued on 24 February 2012, which meant that payment under the LC would mature on 22 August 2012. The expiry date of the LC was 26 March 2012. Nominated Bank also acted as Advising Bank and informed Seller/Beneficiary that the LC had been issued and, subsequently, that two amendments were proposed to increase the amount available. In advising the credit and amendments, the Nominated Bank stated that it was not confirming the credit.

Desiring to receive payment earlier than the maturity date, Seller/Beneficiary entered into discussions with Nominated Bank to “negotiate by discounting” the LC before the LC had even been issued. Beneficiary claimed that an oral agreement had been reached with Nominated Bank, under which the Nominated Bank agreed to negotiate the documents. Nominated Bank denied having made such an agreement, and stated that it would not have even considered such an arrangement until Seller/Beneficiary opened an account with it, which never occurred. Over the next month, Seller/Beneficiary made repeated requests for Nominated Bank to discount the LC, all of which were either ignored or refused.

Seller/Beneficiary submitted the required documents to Nominated Bank through its agent on 21 March 2012. On 18 April 2012, Nominated Bank forwarded the presented documents to Issuing Bank. The next day, Issuing Bank sent an “Advise of Refusal” message to Nominated Bank which stated, “Late negotiation. LC expired on 120326.”

When Nominated Bank failed to make payment on the LC, Beneficiary sued both Nominated Bank and Issuer for wrongful dishonor.

The trial court dismissed Beneficiary’s claims against Nominated Bank, but allowed Seller/Beneficiary’s claims against Issuer to proceed. The court also dismissed Issuer’s counterclaim against Nominated Bank.

In dismissing Seller/Beneficiary’s claim against Nominated Bank, the court determined that: 1) Beneficiary failed to prove that Nominated Bank orally agreed to confirm, honor, or negotiate the credit; 2) Nominated Bank had not prejudiced the Issuer by failing to inform Issuer that it had refused to be the confirming or negotiating bank; 3) Issuer was obligated to honor the LC pursuant to UCP600 Art. 7(a)(iv) (Issuing Bank Undertaking) so long as a timely presentation was made to either the Issuer or a nominated bank, which did in fact occur; and 4) Issuer’s liability to Beneficiary depended on a complying presentation, and not on Nominated Bank acting on its nomination. The court also dismissed Issuer’s counterclaim because, since Nominated Bank did not act upon or accept its nomination, there was no duty for Nominated Bank to act.

Issuer appealed the lower court decision on the grounds that a valid presentation was not made and that if the court did find a valid presentation to be made, then it was entitled to indemnification from Nominated Bank. Seller/Beneficiary also appealed the lower court decision on the grounds that Nominated Bank agreed to negotiate the LC and that it should be awarded prejudgment interest and a Sanderson/Bullock order in its favor against Issuer.

On appeal, the Court of Appeal of Singapore, (hereinafter “Appellate Court”) affirmed the lower court’s ruling in favor of Beneficiary’s claim against Issuer reversed the lower court’s decision not to award Beneficiary prejudgment interest, and upheld the lower court’s ruling in favor of Nominated Bank against Issuer and Beneficiary.

Legal Analysis:

1. Was there a valid presentation?

The first issue the Appellate Court considered was whether there was a valid presentation. Issuer argued that Seller/Beneficiary made an invalid presentation since Issuer did not receive the documents until after the LC had expired. Seller/Beneficiary disputed this interpretation, arguing that a complying presentation was made when it presented the documents to Nominated Bank before the expiry date.

The Appellate Court noted that there was no dispute that Seller/Beneficiary transmitted the required documents to Nominated Bank before the LC expired nor that Nominated Bank did not forward the documents to Issuer until after the LC expired. As to whether the presentation to Nominated Bank was a valid presentation, the Appellate Court stated that “once the beneficiary makes a complying, timely presentation to the nominated bank, the issuing bank’s liability to honour to credit at its maturity is triggered if the nominated bank does not itself make payment.” Furthermore, the Appellate Court stated, treating a presentation to Nominated Bank as timely makes the Issuer liable to honor the credit at maturity. The Appellate Court noted that the parties expressly chose for the LC to be subject to UCP600, and that: “[U]nder the terms of that relationship, the issuing bank undertakes a liability on the terms of the letter of credit. If the issuing bank nominates a bank in accordance with UCP 600, then as between the beneficiary and the issuing bank, Art 7(a) of UCP 600 provides that the latter’s liability is engaged as long as the beneficiary makes a valid and complying presentation to the nominated bank. For this purpose, it is immaterial whether the nominated bank has expressly agreed to honour the credit or to act on its nomination.” The Appellate Court, in addressing Issuer’s counterclaim, determined that the late submission of the documents by Nominated Bank is immaterial to Issuer’s duty to Seller/Beneficiary.

Issuer also argued that the presentation was not valid because of the purpose for which Seller/Beneficiary delivered the documents to Nominated Bank. According to Issuer, the interactions between Beneficiary and Nominated Bank occurred outside the LC, because, though Nominated Bank was authorized in the LC to “accept” the draft when Seller/Beneficiary approached Nominated Bank it was to negotiate the LC. Thus, Nominated Bank was not acting as an agent of Issuer, but of its own volition, and, therefore, it assumed the risk of having to present the documents to Issuer.

The Appellate Court disagreed with Issuer’s interpretation of the transaction. The Appellate Court determined that, becuase Beneficiary approached Nominated Bank to negotiate the LC, that does not preclude the fact that the documents could also have been presented to Nominated Bank in their capacity as a nominated bank. This determination was bolstered by the fact that Beneficiary instructed its agent to make a “presentation of documents” on its behalf to Nominated Bank, and the agent did in fact forward the documents to Nominated Bank via SWIFT, stating that “this presentation is subject to [UCP600].”

Next, Issuer argued that the instructions to “hold on to the documents” from Seller/Beneficiary to Nominated Bank was evidence that there was no valid presentation. The Appellate Court rejected this argument, determining that, when looked at in the proper context, this statement was related to an attempt to negotiate the LC which, as previously stated, is a completely separate issue from whether or not there was a valid presentation.

Issuer further argued that it should not be held liable to honor the LC, because Seller/Beneficiary never opened an account with Nominated Bank as required under their purported arrangement and so, the presentation was invalid and Beneficiary should have presented the documents directly to Issuer. Issuer further argued that the submission of the documents did not qualify as a presentation under UCP600 because Nominated Bank was acting as a collecting bank for Beneficiary, and not as a nominated bank for Issuer. Furthermore, because Seller/Beneficiary never opened an account with Nominated Bank, Nominated Bank was not acting as Beneficiary’s agent when they forwarded the documents to Issuer.

The Appellate Court also rejected these arguments, finding no evidence to support either contention. The Appellate Court concluded that, because Nominated Bank would not negotiate the LC until Seller/Beneficiary had an account with them, which does not indicate it would also refuse to act upon their nomination. The Appellate Court also reasoned that Seller/Beneficiary did not engage Nominated Bank in the capacity as a collecting bank, who would be Seller/Beneficiary’s agent and not a party to the transaction, since Seller/Beneficiary already had an agent working on its behalf and, as discussed above, that agent made a presentation to Nominated Bank in that capacity.

The Appellate Court ruled that there was a valid presentation and it affirmed the trial court ruling that Issuer was liable to honor the LC at maturity.

2. Is Issuer entitled to indemnification from Nominated Bank?

Issuer argued that Nominated Bank, as its agent, owed an implied duty to Issuer to act with reasonable care and to not act to Issuer’s detriment and, therefore, Issuer was entitled to indemnification from Nominated Bank. In analyzing this issue, the Appellate Court determined that to succeed Issuer must prove that: 1) Nominated Bank was an agent of Issuer, 2) Nominated Bank failed to act with reasonable care towards Issuer, and 3) Nominated Bank’s failure to act with reasonable care entitled Issuer to indemnification in relation to its liability to Beneficiary. The Trial Court had ruled that Nominated Bank had not acted upon its nomination and therefore did not owe a duty to Issuer.

a. Is Nominated Bank an agent of Issuer?

The Appellate Court first noted that a nominated bank can be an agent of the issuer when the nominated bank accepts the authority of the issuer to interact with the beneficiary on its behalf, because, in so accepting this authority, the nominated bank has the ability to impact the issuer’s rights and liabilities with respect to the beneficiary. The Appellate Court stated that “[a]n agency relationship will be found when a nominated bank acts on the issuing bank’s mandate because when it does so, it has the power to affect the issuing bank’s rights and liabilities as against the beneficiary on matters so authorized.” The Appellate Court concluded that “a nominated bank authorized to accept a presentation of documents becomes the issuing bank’s agent for that purpose when it acts on the nomination or otherwise accepts the appointment.”

Nominated Bank argued that it had no contractual relationship with Issuer, and could not be bound by a unilaterally imposed obligation. Nominated Bank further argued that it rejected its nomination by making it clear that it would not engage with Seller/Beneficiary until Beneficiary had an account with it. The Appellate Court rejected both of these arguments. While the Appellate Court acknowledged that consent is required to form an agency relationship, it determined that the facts demonstrated that such consent had been conferred. The Appellate Court pointed out that, while Nominated Bank imposed conditions to Seller/Beneficiary before they could have a relationship, these conditions were not conveyed to Issuer. Nominated Bank knew it had been nominated in the LC, and it accepted a presentation pursuant to that nomination. Had Nominated Bank decided to not act on its nomination, it should have refused the presentation, informed Issuer, and informed Beneficiary that the documents should be presented directly to Issuer. Therefore, the Appellate Court determined that “[b]y receiving the documents, which [Beneficiary] presented “subject to [UCP600]” and then holding onto them, and participating in active discussions with [Seller/Beneficiary] to negotiate the Letter of Credit, we are satisfied [Nominated Bank] had acted on its nomination and so had accepted the nomination.”

The Appellate Court also found unpersuasive Nominated Bank’s arguments that it informed Seller/Beneficiary that “it would not incur any liability” each time it advised Beneficiary of an amendment, as these communications were only between Nominated Bank and Beneficiary and did not include Issuer. Furthermore, the Appellate Court did not agree that the conditions Nominated Bank imposed on Seller/Beneficiary before it would negotiate the LC had any effect on whether an agency agreement as negotiating and receiving documents are two distinct issues.

The Appellate Court therefore concluded that, for the purpose of receiving the documents, Nominated Bank was an agent of Issuer.

b. Did Nominated Bank fail to act with reasonable care towards Issuer?

Issuer also argued that Nominated Bank failed to exercise reasonable skill, care, and diligence in performing the duties owed to Issuer as its agent. The Appellate Court noted that there are both express and implied duties imparted on Nominated Bank to forward the documents when a complying presentation has been made and to inform Issuer if it will be unable to comply within a reasonable time. The Appellate Court referenced Fortis Bank v. Indian Overseas Bank (See 2012 Annual Review of International Banking Law & Practice at 419 and 2010 Annual Review of International Banking Law & Practice at 491) for the proposition “that requiring a bank to act in accordance with “normal, expected and long-established required [sic] international banking practice is unlikely to lead to difficulty or uncertainty.” This is another way of postulating that no uncertainty can arise from giving effect to the normal expectations of parties to a transaction.”

The Appellate Court next turned its analysis to the UCP. The Appellate Court first noted that UCP600 Art. 14(b) (Standards for Examination of Documents) states that a “nominated bank acting on its nomination . . . have five banking days following the day of presentation to determine if a presentation is complying”. Then the Appellate Court looked at UCP600 Art. 15 (Complying Presentation). Relying on UCP600: An Analytical Commentary by James E. Byrne with Vincent M. Maulella, Soh Chee Seng, and Alexander Zelenov (Analytical Commentary) as authority, the Appellate Court agrees that UCP600 Art. 15(c) compels a nominated bank to promptly forward a complying presentation that it honors or negotiates, which is by the end of the business day after a determination of compliance has been made. The Appellate Court determined that the phrase “honours or negotiates” in UCP600 Art. 15(c) must be understood to refer to a decision by a nominated bank to act upon its nomination by accepting a presentation of documents. Therefore, the Appellate Court concluded that a nominated bank “would then be obliged to forward documents with reasonable promptness to the issuing bank whatever course it should decide to take in relation to the credit by virtue of its having accepted its nomination.” (emphasis supplied).

The Appellate Court also examined the duties of Nominated Bank under the common law principles of agency. Under the common law, a nominated bank has a duty to forward the documents once it becomes an agent of the issuer as an agent obligated to act in a way that would not be detrimental to its principal.

The Appellate Court ruled that Nominated Bank was an agent of Issuer for the purpose of receiving documents and that, once the documents were received, it had five banking days to determine if there was a complying presentation and to decide if it would honor or negotiate the credit, and that once Nominated decided not to honor or negotiate the credit it owed a duty to Issuer to promptly forward the documents to Issuer.

However, the Appellate Court did not decide whether Nominated Bank in fact breached its duty to Issuer, because Issuer did not plead a claim for damages arising from a breach of duty by Nominated Bank. The basis for Issuer’s claim for breach of duty against Nominated Bank was the argument that Issuer was harmed with respect to Seller/Beneficiary because of Nominated Bank’s breach. The Appellate Court, however, noted that Issuer’s liability to Beneficiary arose from UCP600 Art. 7(a), and was thus completely independent from the agency relationship between Issuer and Nominated Bank. Issuer failed to plead an independent loss caused by Nominated Bank and Issuer’s present appeal was focused exclusively on being indemnified for the liability it owed to Beneficiary. Therefore, any relief the Appellate Court granted Issuer, assuming a breach of duty was established, would be improper declaratory relief.

3. Did Nominated Bank negotiate the LC?

The Appellate Court next turned to Seller/Beneficiary’s argument that Nominated Bank negotiated the LC. Beneficiary claimed that they had reached an oral agreement with Nominated Bank. The Appellate Court was not persuaded by Seller/Beneficiary’s argument, and found that Nominated Bank had not negotiated the LC, affirming the finding of the trial court.

The Appellate Court found it significant that the conversations between Seller/Beneficiary and Nominated Bank regarding negotiation had occurred when a different bank was set to issue the LC. The identity of the issuing bank, according to the Appellate Court, “could have been reasonably material” to the decision of whether or not to negotiate the LC. In addition, the Appellate Court found no proof that Nominated Bank had in fact agreed to negotiate the LC. The emails offered as evidence all contained language that would only be used if an agreement had yet to be reached. Finally, the Court returned to fact that Nominated Bank had made it clear that they would not consider negotiating the LC until Beneficiary had an account with it, which Seller/Beneficiary never did.

4. Is Beneficiary entitled to pre-judgment interest and/or a Sanderson/Bullock order from Issuer?

Seller/Beneficiary contended that it is entitled prejudgment interest and a Sanderson/Bullock order if the Court found that Issuer was liable to it under the LC.

a. Prejudgment Interest

The Appellate Court set forth a general rule that in Singapore pre-judgment interest should be awarded from the time the loss was accrued unless a mitigating factor is present, such as: the claimant was unnecessarily delayed in bringing the claim, the claimant was compensated for the loss by a third party, the debt was paid immediately after court proceedings commenced, the claimant is awarded damages which include compensation for the loss of money, or the parties agree that pre-judgment interest was not recoverable.

In the present case, the Appellate Court determined that the lower court had erroneously denied Beneficiary prejudgment interest as Seller/Beneficiary was wrongly deprived of money it was due and none of the mitigating factors were present. Accordingly, the Court awarded the default interest rate of 5.33%, as set forth in ¶5 of the Supreme Court Practice Direction No. 1 of 2007, running from 23 August 2012, the date that Issuer was liable to make payment under the LC, until the date of the Court of Appeal judgment.

b. Sanderson/Bullock Order

Seller/Beneficiary, having been successful in its suit against Issuer but unsuccessful against Nominated Bank, sought a Bullock order which would allow it to re-coup the costs it would owe Nominated Bank from Issuer. Beneficiary also sought a Sanderson order which would require Nominated Bank to recover the costs owed to it by Seller/Beneficiary directly from Issuer.

The Appellate Court denied Beneficiary’s request for both orders, finding that Beneficiary’s actions against Issuer and Nominated Bank were two very distinct issues. Beneficiary sued Nominated Bank regarding whether or not Nominated Bank negotiated the LC. This is an issue that Issuer knew nothing about and was not a party to. The Appellate Court determined that it would be unfair to make Issuer bear the costs of this action.

5. Concurring Opinion

Senior Judge Chan Sek Keong issued a concurring opinion. In it, the Concurring Judge noted that a nominated bank is an agent of the issuing bank to the extent of the authority granted to the nominated bank by the issuing bank. The Concurring Judge was skeptical that a nominated bank is an agent of the issuing bank. For the proposition that a nominated bank is not an agent the Concurring Judge relied heavily on the Analytical Commentary, quoting a passage that states: “[U]nder standard international letter of credit practice, nomination does not confer a general agency status on the nominated bank with respect to the issuer or confirmer even if it elects to act pursuant to the nomination unless otherwise expressly provided.” (See Analytical Commentary p. 181, ¶ 25).

The Concurring Judge agreed with the majority opinion’s conclusion that Nominated Bank was not liable to Issuer but disagreed with its analysis that there was an agency relationship because Nominated Bank acted on its nomination. The Concurring Judge instead agreed with the lower court ruling that Nominated Bank did not act on its nomination because it did not accept Seller/Beneficiary’s draft.

The Judge then looked to the obligations of a nominated bank. The Judge disagreed with the majority’s implication that a nominated bank must forward the presented documents to the issuing bank, even if it does not act on its nomination. To support this argument, the Judge cited the Analytical Commentary, which states that, “strictly speaking, there is no legal obligation for a nominated bank to forward the documents to anyone even if it has acted pursuant to its nomination.” (See Analytical Commentary, p. 714). The Judge also noted what he terms the “Byrne Expectation” whereby a nominated bank that elects not to act will still be expected to forward the documents to the issuer or confirmer and that this expectation eliminates the necessity for Court to imply a term in the UCP600. The Judge differentiated this from the Fortis decision, which stated that an issuing bank is legally obligated to return rejected documents, since it must give notice under UCP Art. 16 (Discrepant Documents, Waiver and Notice) because the requirement under Fortis legal obligation while the Byrne Expectation, which is applicable in this instance, is not.

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