Legal Case Summaries

Article

Factual Summary: To facilitate an international sale of goods, Laheq (Applicant) requested its bank, Suisse Bank PLC (Applicant Bank) to issue a commercial letter of credit in favor of Yuchai Dongte Special Purpose Automobile Co. Ltd. (Beneficiary), a Chinese company. Applicant Bank, as well as Suisse Bank Offshore Ltd. (Second Applicant Bank), were subsidiaries of Suisse Bank Group (Parent Company). Applicant Bank, however, did not issue the letter of credit but instead forwarded a “draft” letter of credit to Suisse Credit Capital (2009) Ltd. (Defendant), a non-bank SWIFT member providing trade-related financial services. Under prior agreements, Defendant would send SWIFT messages on the instructions of Parent Company and its subsidiaries. Using the draft LC provided by Applicant Bank, Defendant sent Bank of Ruifeng (Advising Bank), a Chinese bank, a SWIFT MT700 message which incorporated the draft LC and provided in Field 72 (Sender to Receiver Information): “no our responsibility for payment” (the Disclaimer). Advising Bank advised the USD 7,000,000 LC to Beneficiary including a statement that Defendant had issued the LC. Subsequently, Beneficiary presented documents to Bank of China, Hubei Branch (Presenting Bank) which forwarded the documents to Applicant Bank, which the LC described as “reimbursing bank/drawee bank”. Defendant, at the instruction of Applicant Bank, messaged Presenting Bank that Applicant Bank was dishonoring based on discrepancies. Defendant included the Disclaimer in the refusal message.

At this point, Beneficiary and Parent Company began negotiations regarding a second LC. In the meantime, however, Applicant Bank, through Defendant, informed Presenting Bank that it intended to cancel the credit on the basis that Applicant and Beneficiary had agreed for payment to occur “outside” the first LC. In messages between Beneficiary and Parent Company, Beneficiary requested that the documents presented under the first LC be retained by Parent Company for presentation under the second LC. Moreover, there was evidence that Beneficiary obtained a second certificate of origin under “questionable circumstances” for use under the second LC and there were discussions within Parent Company expressing concern that the second LC would not be used to facilitate a sale of goods.

After Parent Company drafted the second LC, Defendant sent a SWIFT MT700 message, incorporating the second LC, to the Rural Commercial Bank of Zhangjiagang (Second Advising Bank), which advised the message to Beneficiary. The “covering form” indicated that Defendant was the LC issuer. The LC included the Disclaimer in Field 72 and Field 41D (Available with…by…) provided that the LC was “available with [Second Applicant Bank] by negotiation”.¹ Later, Presenting Bank forwarded documents to Second Applicant Bank. The next day, Presenting Bank sent Defendant a SWIFT MT999 message stating that complying documents had been “negotiated” the day before and claimed payment of USD 3,000,000. Defendant’s response included the Disclaimer and stated that it relayed the message to Second Applicant Bank. Months later, Presenting Bank again requested that Defendant forward its claim for payment under the second LC to Second Applicant Bank. Previously, however, Second Applicant Bank was sold and renamed Asia Capital Development Bank. Defendant responded to Presenting Bank stating that Defendant no longer had any relationship with Second Applicant Bank, included the Disclaimer and refused to pay. Subsequently, Beneficiary sued Defendant for wrongful dishonor claiming that, as the issuer of the second LC, Defendant was liable to it for USD 3,000,000. The High Court of Justice, Queen’s Bench Division, Commercial Court, Hancock, J., granted judgment in favor of Beneficiary.

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Legal Analysis:

Legal Analysis.

1. Issuer. The opinion focused on the proper construction of the second LC. Defendant denied that it was the issuer and, in any event, had effectively excluded its liability as a UCP600 issuer by way of the Disclaimer. In arguing whether Defendant was the LC issuer, the parties disagreed on the admissibility of extrinsic evidence, i.e. whether evidence outside of the terms and conditions stated in the LC could be used to explain the true understanding of the terms therein. Both parties agreed, however, that a SWIFT MT700 was the correct form for issuance of an LC, whereas the proper form for advising an LC was an MT710. Beneficiary primarily argued that the use of the MT700 form was dispositive regarding whether Defendant was the issuer. Defendant noted that Beneficiary had discussed with Parent Company about issuing the second LC and that a “holistic reading” of the LC given the contradictions regarding which bank was the applicant bank as well as the presence of the Disclaimer suggested that the wrong message form was used and that Second Applicant Bank alone was undertaking responsibility for payment. Looking to UCP600 Article 4 (Credits v. Contracts) and UCP600 Article 5 (Documents v. Goods, Services or Performance), the Judge also emphasized the importance of the autonomy (or independence) principle of LCs. On the issue of extrinsic evidence, the Judge noted that while such evidence could be relevant in construing the terms of an LC, the Judge declined to do so in this case and stated that “[i]t is against this background that the actual terms of LC2 fall to be construed, as they would appear to a reasonable reader, with the background knowledge available to the parties, and with a reasonable technical knowledge of SWIFT.” The Judge placed considerable weight on the SWIFT messaging forms and standards and the importance of such messages being “read in the same way across the world, and in the context of an industry that utilises mechanisation to a large extent”. (para 55). Thus, the Judge concluded that Defendant was “indeed the issuer of LC2.” Additionally, regarding the role of Second Applicant Bank, the Judge noted that “the terms of the letter of credit are much more consistent with it being a nominated bank.” (para.56).

2. Disclaiming Liability. Defendant argued that, even if it were deemed issuer of the second LC, it had disclaimed its liability under UCP600 Article 7 (Issuing Bank Undertaking) through the terms present in Fields 78 and 72 of the MT700 sent to Second Advising Bank. Beneficiary argued that the text in Field 72 was “directed to precisely the situation envisaged by [UCP600] Article 37(c) [Disclaimer for Acts of an Instructed Party].” Thus, the Disclaimer merely indicated that the recipient bank’s charges would be for the account of Beneficiary and not issuer. Additionally, Beneficiary argued that even if Defendant did not wish to be liable as issuer of the LC, English law, applying UCP600 Article 1 (Application of UCP), requires that an “express provision…excludes” a particular UCP600 rule. Defendant noted that Beneficiary had sued claiming Defendant breached UCP600 Article 7(a)(iii) regarding when an issuer must honor a complying presentation to a nominated bank that does not incur a deferred payment undertaking or fails to otherwise pay at maturity. Defendant argued that because the LC stated that it was available by negotiation, Beneficiary’s claim was improper. Moreover, Defendant also argued that even if it were the issuer and Second Applicant Bank had received documents as a nominated bank, Second Applicant Bank’s decision to waive discrepancies could not “effect” Defendant’s liability; thus, Defendant argued that “the risk that [Beneficiary’s] presentation was non-conforming…has materialised.” (para.69(3)).

The Judge rejected Defendant’s argument that Beneficiary had improperly pled its case and noted that, even if necessary, permission to amend the pleadings would have been forthcoming. After reviewing the text of the UCP, the Judge noted that “Article 7…contemplates a series of situations where, if compliant documents are presented, the issuing bank must pay”, and that “equally, if non-compliant documents are presented but any such non-compliance is waived in a way that serves to bind the issuing bank, then Article 7 would apply.” Ultimately, the Judge agreed with Beneficiary, noting that there was “no question” that Defendant had failed to expressly limit its obligations as an issuer under UCP600. Even though the second LC stated that payment would be made by Second Applicant Bank by acceptance of drafts drawn on Second Applicant Bank, the Judge concluded that a “reasonable third party would construe this credit” as having not used the “technical meaning” of negotiation as provided under UCP600 Article 2 (Definitions). The Judge also rejected Defendant’s argument that Second Applicant Bank, as the nominated bank, could not bind Defendant by waiving discrepancies. The Judge applied an agency rationale (citing Jack on Documentary Credits 6.21), stating that “the waiver by [Second Applicant Bank] of the discrepancies in the documents bound the Defendant, who thereby became liable to pay if the nominated bank – ie [Second Applicant Bank] – did not.” (para.82).

3. Estoppel. Finally, Defendant argued that there was a shared assumption between it and Beneficiary whereby Beneficiary must have known that Defendant believed it was not the issuer of the second LC, and moreover, that Defendant acted in reliance on that assumption to its detriment. The estoppel arguments failed as there was no shared assumption between the parties that Defendant was the issuer of the second letter of credit nor was there any correspondence that unambiguously limited Defendant’s role under the second LC. The Judge concluded that “[t]he evidence is thus that the Defendant’s objective conduct in sending the MT 700 message would be understood by a reasonable observer as indicating that the Defendant was the issuer. It would not convey that the Defendant did not regard itself as issuer.” (para 95(2)).

Comment: The suggestion that Article 7 supports the proposition that a nominated bank may waive discrepancies and so bind the issuer is strange. Article 7 makes no mention of discrepancies or wavier and, importantly, states that an “issuing bank’s undertaking to reimburse a nominated bank is independent of the issuing bank’s undertaking to the beneficiary.” In UCP600: An Analytical Commentary, Professor James E. Byrne wrote:

Under standard international letter of credit practice, nomination does not confer a general agency status on the nominated bank with respect to the issuer even if it elects to act pursuant to the nomination unless otherwise expressly provided. …Under the UCP, a nominated bank is independent of the applicant, issuer, or another nominated bank. It acts, if it acts, on its own behalf and in its own interest…More importantly, a nominated bank cannot in any way bind the issuing bank with the exception of where it decides to take up a commercial invoice in an amount greater than that available under the credit. This right is specifically addressed in UCP600 Article 18(b) (Commercial Invoice) as an exception to the general rule that the issuer is not bound by the act of a nominated bank and is stated without any of the terminology that would be typical of agency. (p.377).

Additionally, UCP600 Article 16(b) (Discrepant Documents, Waiver and Notice) provides that, “[w]hen an issuing bank determines that a presentation does not comply, it may in its sole judgment approach the applicant for a waiver of the discrepancies.” (Emphasis added). The UCP does not afford any discretion to a nominated (or confirming) bank to so approach the applicant. Moreover, the issuer’s customer is the applicant and any discrepancy waiver would contemplate prior applicant approval lest an issuer risk its right to reimbursement.

[MJK]

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