Type of Lawsuit: Confirmer sued issuer for reimbursement.

Parties: Plaintiff/Issuer- Credit Agricole Indosuez (Counsel: Steven Chong SC, Rajah & Tann) Defendant/Confirmer/Adviser- Banque Nationale de Paris (Counsel: Choi Yok Hung, Bih Li & Lee). Applicant- Solo Industries Ltd Beneficiary- Amerorient

Underlying Transaction: Silent as to underlying transaction.

LC: Deferred Payment LC for US$ 1,333,600. Subject to UCP500.

Decision: The Appellate Court of Singapore, Chao Hick Tin, JA, reversed the judgment of the High Court in favor of the confirmer.

Rationale: The appellate court found the confirmer did not prove the LC was a negotiation credit, but rather a deferred payment credit. Thus confirmer had no right to reimbursement.

Factual Summary: Bank issued LC for up to U.S.$1,333,600 that was "available against presentation of drafts at 180 days from the date of negotiation by deferred payment." The LC provided "negotiations under reserve or guarantee not acceptable without prior reference to us." When beneficiary presented complying documents, confirmer honored and forwarded documents to issuer with two covering schedules. Issuer subsequently informed the applicant of receipt of the documents and stated, "Tenor: 180 days from date of negotiation." Issuer then informed confirmer that the documents were to mature for payment on 21 September 1999. One month later, issuer concluded that beneficiary had conspired with applicant to defraud the banks through LCs. Issuer then notified confirmer that "by reason of a serious fraud suspicion," confirmer should not make any payment to beneficiary under the LC until further notice from issuer. Confirmer was warned that if they made any payment in spite of this notification, then they would be doing so under their "own and exclusive responsibility." The next day, confirmer responded that they had confirmed and negotiated documents in strict compliance with the LC terms and they expected payment on the maturity date. On the due date, issuer refused to reimburse, and confirmer sued. The trial court found that the LC was a negotiation credit, and held that issuer owed confirmer reimbursement. On appeal the judgment was reversed.

Legal Analysis:

1.Deferred Payment Undertaking: Impact of Fraud: Without discussion, the appellate court stated that confirmer "can succeed on their claim only if it is established that the credit is a negotiation credit," based on the proposition that "under a deferred payment credit, the beneficiary of the credit would only be entitled to be paid at maturity: Banco Santander SA v. Bayfern Ltd. (1999) 2 Lloyd's Rep. 239." The appellate court contrasted the consequences of fraud on a negotiation credit, indicating, "the negotiating bank will then be entitled in its own right to present the document and drafts to the issuer and obtain payment at maturity. This right of the negotiating bank to obtain payment is not defeated by any fraudulent conduct of the applicant, the beneficiary or any third party, provided that the negotiating bank takes the documents in good faith and is not privy to, or has knowledge of, the fraud: see art. 14(a) of UCP 1993."

2. Negotiation Credit; Deferred Payment Undertaking; Classification: The confirmer argued that the terms of the availability clause.21 2001 LC CASE SUMMARIES permitted negotiation because it expressly called for negotiation. The confirmer attempted to explain the reference to deferred payment as meaning, "payment is to be made at a later date and not immediately upon presentation of documents or drafts." Moreover, confirmer argued that "the use of the term 'deferred payment' does not preclude negotiation." The court stated that the confirmer's actions indicated otherwise. It pointed out that the confirmer had forwarded a copy of the LC to the beneficiary and endorsed on it the term "non-negotiable", as well as sent a telex to the issuer describing the LC as "available by deferred payment."

3. Construction of LC Terms; Extrinsic Evidence: In determining how to consider the terms of the LC, the appellate court noted that, "in construing an LC one should normally only examine the provisions of the document in the light of the applicable UCP rules. However, where the meaning of the LC is not clear or where it is sought to show that a term therein has a special meaning, then the surrounding circumstances relating to the issues of the LC, namely, the factual matrix, may be looked into for assistance."

4. Recovery via Agency Relationship; Duty to Inquire: Confirmer argued that an agency relationship existed between it and the issuer, thereby enabling the confirmer to be reimbursed. Under the facts, the appellate court did not find that an agency relationship existed between issuer and confirmer. The appellate court found that a reasonable banker-agent would have sought specific clarification from the issuer as to what type of credit, negotiable or straight, existed prior to honoring.

5. Estoppel: Confirmer argued that issuing bank should be estopped from claiming the LC was not a negotiation credit. The court pointed out that for the issuer to be estopped, the confirmer needed to prove that issuer made a representation that the LC was a negotiation credit and that confirmer relied on said misrepresentation. The appellate court found that there was no representation by the issuer and that the confirmer had not relied on any such representation.

6. Negotiable Instruments: The confirmer argued it should recover as a holder in due course of the drafts. The appellate court found that the drafts were not valid bills of exchange as they were contingent upon an uncertain event. Moreover, it noted that the confirming bank could not be a holder in due course of the drafts as they were the payee of the bills. RE Jones Ltd. V. Waring and Gillow Ltd. (1926) AC 670.

Comment: This decision, sadly, applies the erroneous Santander rule, thus linking Singapore to England's black hole of LC law yet further. By rigidly linking LC law to that of bills of exchange (a law thwarted centuries ago by English courts of the same bent until Parliament overruled them), these narrow-minded jurists have foreclosed the possibility of judicial evolution of LC law aligned with LC practice, making statutory reform necessary. Perhaps such a development is inevitable, in any event, since the English courts have hopelessly confused LC law as it relates to fraud. In a country such as Singapore that rightfully prides itself on its e-commerce law, it is unfortunate that the deferred payment undertaking - the only viable vehicle for trade finance of e-LCs - is cut short by this unfortunate decision.


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.