Article

Factual Summary:To finance a purchase of coal, Applicant obtained a commercial LC for US$ 1,278,532.50 (the "import" LC) in favor of Beneficiary, a mining company. Issuer of the LC also negotiated an LC of which Applicant was the beneficiary (the "export" LC), which represented the resale of the coal to a buyer in Thailand. After the coal was delivered to the ultimate buyer in Thailand, Beneficiary tendered documents required by the import LC to Issuer.

Subsequently, Issuer sent a SWIFT message to Advising Bank entitled "Advice of Refusal" which the court described as follows:

1. L/C amt overdrawn by USD18,722.56

2. Cert of sampling and analysis show shipper's address which differ fm LC

3. Inv and cert of qly, under gross calorific value omitted 'kcal/kg'

4. Cert of qly on initial deformation temp omitted 'min'

5. Mate's Receipt - A) Not faxed to G. Premjee Ltd, Bangkok and G. Premjee Tdg Spore. B) Signing capacity not clear, that is, as master or as agent.

6. Cert of sampling n analysis under chlorine show 'kcal/kg' i/o 'min' and under gross calorific value omitted 'kcal/kg min'.

The message went on to state that it 'constitutes our refusal of documents and is sent in accordance with article 14 of the UCP for documentary credits (ICC pub no. 500)'. However, the advice of refusal also stated that:

Nevertheless, we have referred the above matter to the applicant and await their response of acceptance of discrepancy/ies or otherwise. Meanwhile documents are held at your risks.

The following day, Issuer communicated with Applicant requesting "acceptance and settlement instructions" with regard to the discrepancies. The notice indicated that "(a)ll terms and conditions of the L/C have been complied with". A day later, Applicant sent notice to both Issuer and Beneficiary accepting any noted discrepancies. That same day, Applicant was placed under "interim judicial management" for insolvency. Even though it had been advised of payment under the export LC later in the same day, Issuer sent an amended arrival notice to Applicant. The original words "All terms and conditions of the L/C have been complied with" were crossed out and replaced with the typewritten words "We have noted the following discrepancies". Issuer claimed that a temporary staff member had clicked an errant button in generating the original message, and that both of the signing bank officers had overlooked the error.

One week later, after Advising Bank inquired via SWIFT about the status of the waiver, Issuer reiterated its advice of refusal and notice of discrepancies and stated its intention to return all documents to Advising Bank. The following week, the solicitors for the judicial managers of Applicant reaffirmed the prior waiver of the discrepancies. Issuer responded that, notwithstanding Applicant's waiver, it was not bound to accept the documents and effect payment.

In the meantime, Issuer had received payment under the export LC that it negotiated for Applicant. Instead of applying the funds to payment of the import LC, Issuer used the funds to set off other outstanding debts owed to it by Applicant.

After it refused payment under the import LC, Beneficiary sued Issuer for wrongful dishonor. After a trial, judgment was entered in favor of Beneficiary.

Legal Analysis:

1. Back-to-Back Credits: Beneficiary claimed that the import LC was a back-to-back credit with the export LC. Therefore, it asserted that when payment was received under the export LC, Issuer could not refuse payment of the import LC. While the court noted some evidence supporting this claim, namely the Issuer's requirement that Applicant's import LCs be supported by matching export LCs that were lodged with Issuer, it indicated that it was more likely that there were two separate transactions and two separate LCs. Even though the goods involved in both transactions were the same and the substance and nature of the documents required by INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE 104 both LCs were the same, the court noted that the documents required "simply did not match even if one set contained the copies while the other contained the originals" and that receipt of payment under the export LC did not trigger an obligation by Issuer to pay under the import LC. The Issuer was "not merely a conduit for the payments," and would have been independently liable for payment to Beneficiary even if payment was never received under the export LC.

2. Discrepancies; Draw in Excess of LC Amount; Course of Dealing; UCP500 Article 37; UCP500 Article 39: Beneficiary asserted that its drawing, which exceeded the LC amount by US$18,722.56, was not discrepant because it was based on a price adjustment formula to which Issuer had acceded in the past. The tonnage of coal called for in the LC had a 5% margin of difference, and the delivered quantity was within that range. Beneficiary argued that the LC had a price adjustment formula that permitted a drawing on the basis of the price as adjusted by the 5% margin of error. Furthermore, it noted that the same price adjustment formula was employed in the export LC, which was in fact overdrawn by US$ 105,226.50 and paid despite the overdraw. In two prior dealings between Issuer and Beneficiary, Issuer had prepared bills of exchange for the full amount of Beneficiary's draw despite overdraw discrepancies. Issuer argued, and the court agreed, that the invoiced amount could be different from the amount stated in the LC, but was still subject to the cap imposed by the LC. Looking to Articles 37(b) and 39(b) of UCP500, the court noted that banks may refuse commercial invoices for amounts in excess of the amount permitted by the LC and that while +/- 5% quantity tolerances are permitted, the amount of the drawing may not exceed that of the LC. The court indicated that the discrepancy was material, regardless of the amount of the overdraw, and did not address Beneficiary's argument with respect to course of dealing.

3. Discrepancies; Units of Measurement; Technical Terms; Typographical Errors; Responsibility of Document Checkers: Where the certificate of sampling and analysis had omitted a unit of measurement next to one number and erroneously placed the unit of measurement next to another, unrelated number and the certificate of quality had omitted a unit of measurement, the court noted that these typographical errors and slight omissions constituted material discrepancies. "(T)he unit of measurement, and not merely the numbers, ought to have been stated clearly in the test results of the respective certificates. A bank could not be expected to assume a number next to a quality tested must necessarily have used the same unit of measurement as stated in the L/C." Discrepancies also arose where numbers were misaligned on the documents and meant to refer to words on another line or in other columns. Similarly, misspellings of technical words were also error: "Banks are not expected to know detailed trade customs or the jargon used so as to be able to form an opinion whether particular words in a document have the same meaning as the terms used in a L/C. . . . The (Issuer's) officers were not expected to know the jargon and measurements in the coal trade even if some of them should gain some familiarity over the course of time. Similarly, it would be foolhardy of them to assume that certain numbers have been misaligned on the documents and were meant to refer to words on another line in another column or that certain technical words have been misspelt."

4. Discrepancies; Beneficiary's Address: Issuer alleged a discrepancy in the certificate of sampling and analysis, which listed Beneficiary's address as "Jl. Jend. Sudirman kav. 29-31", instead of the address listed on the LC, "Jl. Jend. Sudirman kav. 31". All other particulars of the address were the same in both documents and the court noted that the discrepancy "bordered very closely on nitpicking".

5. Estoppel; Waiver of Discrepancies; Amendment of Notice: Although Issuer asserted at least one valid discrepancy, the court determined that Issuer was estopped from refusing payment to Beneficiary, because Issuer had notified Beneficiary that it would check with Applicant for a waiver of discrepancies which Applicant thereafter granted. According to the court, Applicant's acceptance of discrepancies was known to and relied on by Beneficiary, who, consequently, did not take steps to correct the discrepant documents. Therefore, the court concluded that Issuer could not decline payment because the documents were discrepant.

As to the amended arrival notice, the court was of the impression that it "was clearly an afterthought" which was created by Issuer only after it "got wind" of Applicant being placed under interim judicial management. "They decided to set off the funds received (under the export LC) against the outstanding debts of [Applicant] ... To achieve that, they had to avoid payment on the (import) LC and they sought to do that by feigning an error in their arrival notice, knowing that [Applicant] was in no position to contend with them in the matter." The court indicated that even if Issuer had been entitled to alter its arrival notice, Applicant had already accepted the discrepancies at that point and informed Beneficiary in writing and by that time, ostensibly, any amendment would have had no effect. The court characterized the alteration of this nature by Issuer as "unconscionable."

Comment:

1. Without seeing the terms of the LC, it is not possible to assess the claimed discrepancies. Based on the court's discussion, however, it appears that the excess drawing would constitute a discrepancy under standard international LC practice.

2. Accordingly, it is necessary to determine whether or not the notice of refusal was sufficient. The court found no fault directly with the notice. There can be no doubt that it indicated refusal of the presentation. Nor is there any doubt that it indicated discrepancies on which the refusal was based. The question must then be whether it indicated that the documents were being held at the disposal of the beneficiary.

3. Although the court does not so state, it is clear that it did not regard the recital of the issuer as sufficient. The flaw was its indication that it was seeking applicant waiver and awaiting their response. From this statement, the court concluded that the beneficiary was justified in relying on applicant waiver and the issuer was estopped from asserting the discrepancies once the applicant had waived the discrepancies.

4. It is not clear whether the court believes that inquiry to the applicant alone would produce that result. If so, it is wrong. If not, the result followed from the communication contained in the notice of refusal: "Nevertheless, we have referred the above matter to the applicant and await their response of acceptance of discrepancy (ies) or otherwise. Meanwhile, documents are held at your risks." In addition, the court gave some emphasis to the statement in the communication to the applicant that indicated that "All conditions and terms of the LC have been complied with."

5. At the least, it can be reiterated that banks assume considerable risk when they tamper with the scheme of UCP500 Article 14 as did this bank. While the terms could be worded more artfully, one must wonder whether any phrase would overcome the inherent contradiction between a refusal with the inherent admission that the documents are being held for the beneficiary and the express statement to the effect that the bank is holding the documents for the applicant's approval and, in effect, at its disposal.

6. Is this estoppel? Probably not. But it could be failure to provide a proper notice of refusal.

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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.