Article

Factual Summary:Bank issued an LC for US$ 1,134,956.63 for the purchase of approximately 10,000 cbm, of logs with a 10 percent tolerance. The logs were loaded in Owendo, Gabon, and sent via vessel to Zhangjiagang, China, under two bills of lading.

As amended, SWIFT Field 46A required: 1) manually signed commercial invoice in three original and three copies, 2) packing list in triplicate, 3) certificate of quantity in three copies issued by beneficiary, 4) certificate of origin in one copy, and 5) certificate of quality in three copies issued by Beneficiary. Documents were to be in English. SWIFT Field 41D provided that the LC was available at "[a]ny bank in France by negotiation" and Field 78A provided that "[u]pon receipt of the documents in compliance with the terms and conditions of this credit, we [Issuer] will accept the draft and reimburse negotiation bank as per our instructions." The LC was payable 90 days from the bill of lading date.

Prior to the expiry date, Negotiating Bank presented documents, negotiated, and forwarded to Issuer. Two banking days later, Issuer sent this communication by SWIFT:

"Please be advised that the following discrepancies found:

- Beneficiary's draft not made in English

- Irregular L/C No shown on P/L

- Original of P/L Cert of Quantity and Cert of Quality not submitted

- Under invoice No 1062 percentage of grade shown on invoice not complied with P/L

We refuse the documents according to Art 14 UCP no 500. Should the disc being accepted by the Applicant, we shall release the docs to them without further notice to you unless yr instructions to the contrary received prior to our payment. Documents held at yr risk for yr disposal."

During this time, the vessel sank with all its cargo lost. When the draft matured, Negotiating Bank did not receive payment. Meanwhile, Issuer sought advice via query to the ICC Banking Commission regarding the discrepancies. On all the questions raised, the Banking Commission gave unfavorable answers. As the court stated: "Surprisingly, this response appears to have fortified [Issuer's] view that they were entitled to reject the documents." Following receipt of the response from the ICC, Issuer informed Negotiating Bank that Applicant refused to accept the discrepant documents submitted. Shortly afterwards, a representative from Negotiating Bank traveled to China in an attempt to resolve the dispute and retrieve the documents.

Issuer refused to return the documents to Negotiating Bank's representative, stating that the documents should be returned by courier in the manner that they had arrived. The documents were returned to Negotiating Bank via courier several days later after Negotiating Bank sent a telecommunication requesting their return. Negotiating Bank then sued Issuer for reimbursement.

Legal Analysis:

1. Discrepancy, LC Number in Packing List: The packing list referred to the LC number as "926400800215" whereas the correct number was "9926400800215". The court stated that Negotiating Bank's argument that this was "an unduly technical approach" that "some merit" although it noted that Issuer had dropped the claimed discrepancy.

2. Nature of Refund and Clarity:Issuer argued that the percentages of grades of logs shown on the invoice differed from the percentage shown on the packing list. The SWIFT message stated "Under Invoice No 1062 percentage of grade shown on invoice not complied with P/L". Negotiating Bank argued that it was not sufficiently clear. Noting that Negotiating Bank's response to the claimed discrepancy indicated that it understood the point, the court rejected this argument.

3. Discrepancy; Inconsistency; Reasonable Care; Mathematical Calculations:In considering the claimed discrepancy, the court reviewed the standards of UCP500 Articles 13(a) (Standard for Examination of Documents) and 21 (Unspecified Issuers or Contents of Documents) and concluded:

"i) The obligation on the bank is to exercise reasonable care, as determined in accordance with international standard banking practice.

ii) The obligation is a passive one, in the sense of 19 using reasonable care to assess the absence of any apparent inconsistency on the face of the documents as opposed to an active obligation to establish the existence of complete consistency on the basis of the material contained on the face of the document.

It follows in my judgment, that the checker of the documents was not required, in the exercise of reasonable care, to embark on the calculations relied upon. It is common ground that, absent those calculations, there was no inconsistency between the packing list, the commercial invoice and the L/C."

The court "unhesitatingly" rejected the claimed discrepancy. Moreover, the court noted in stating its conclusion:

"In any event, the commercial invoice complied with the terms of art 37(c) ... .

This it did. The description in the commercial invoice expressly matched that in the letter of credit. The packing list set out the exact number and volume of logs shipped, matching the totals in the Bills of Lading. There was no percentage grade shown on the face of the packing list and no requirement that there should be. Absent further calculations, there was thus no inconsistency."

4. Mathematical Calculations: The court noted that its conclusion was "fortified" by an ICC Opinion of 6 Sept 1999 to the effect that:

"If totals are declared on documents, then these should be in agreement with those shown on other documents presented. If the Credit did not specify the manner in which packing details were to be expressed, the packing list may show the individual or collective information of the packages shipped, subject to any totals agreeing with those shown on other documents."

The court rejected Issuer's argument that it was: "[E]ntitled to perform the calculations if such was their own practice and then to rely on any inconsistency thus unearthed. I reject this submission. The issue of discrepancy cannot depend upon the degree of inquisitiveness within the bank. The identification of any inconsistency must flow from a consistency of approach, ie steps that no reasonable bank would fail to take."

5. Discrepancy; Inconsistency:The court noted that in any event the percentages were within the 10% tolerance in the LC which the court interpreted to apply to each grade of logs as well as the total.

6. Drafts; Discrepancy, Drafts; Language; Local Law: Issuer claimed that the drafts were discrepant because they were in French rather than English. The LC required that "All documents must be English". In response to an inquiry on this point, the Banking Commission had opined that "[i]n principle drafts are included in documents to be checked ... . A discrepancy involving a draft is of no concern of the Applicant not one on which they should arbitrate as to whether to accept or not."

The court failed to find a discrepancy in the French language drafts presented by Negotiating Bank to Issuing Bank. The court found the documents that were required to be in English as required in Field 47A were only the documents required for negotiation listed in Field 46A. The court noted that in Field 78 Issuer stated that on receipt of documents, it would accept the draft, thus signaling a distinction between the two. The court also stated that:

"This approach reflects the function of the drafts. They were not part of the commercial documentation, which, following negotiation, was to be passed on to the Applicant Jiangsu. They were simply part of the process whereby [Issuer's] obligations to pay could be put in a form in which they could be readily discounted."

Since the drafts had nothing to do with the quality or value of the logs, but were for the "exclusive benefit of the negotiating bank", it was consistent for the draft to be in French on a French form especially since the credit stipulated that the negotiating bank was to be "any bank in France."

7. Originals; Discrepancy, Original: Issuer contended the "Original of P/L Cert. Of Quantity and Cert. of Quality not submitted". The court set out the text of one of the documents presented. It stated that:

"Beneath the place and date, [Beneficiary's] name, address and telephone number had been apparently stamped and, thereunder, an ink signature applied. There was no evidence as to the manner in which the documents had in fact been prepared prior to stamping and signature. As regards appearances:

a) The documents did not appear to have been produced on a conventional type writer,

b) The documents may have been photocopied or may have been produced by a computer controlled printer.

c) The documents may not have been wholly produced at one time: the body of the document may have been inserted on a document already containing the details of name, address and so on beneath the pecked line."

Describing the issue before it, the court stated: "In short, the documents demonstrate all the difficulties of grappling with the definition and identification of original, as opposed to copy, documents in the modern era with its word processors, laser printers, colour printers, scanner and so on. So ubiquitous has this machinery become that it must be rare indeed that any document is produced by some process other than a form of 'reprographic, automated or computerised' system."

At the outset, the court observed that "the documents demonstrate all the difficulties of grappling with the definition and identification of original, as opposed to copy, documents in the modern era with its word processors, laser printers... . So ubiquitous has this machinery become that it must be rare indeed that any documents is produced by some process other than a form of 'reprographic, automated or computerised' system."

The court reviewed Glencore v. Bank of China [1996] 1 Lloyd's Rep, 135 and Kredietbank Antwerp v. Midland Bank Plc [1999] 1 Lloyd's Rep Bank 219. It stated:

"There is no dispute that these two decisions, both of which are binding on me sent sequential ripples of unease through the banking community. Views were divided between those concerned that Glencore, in the interests of certainty, required an unduly inflexible routine against the background of modern printing techniques and those concerned that Kredietbank, in the interests of flexibility, established an unworkable distinction between documents produced by electronic means which were obviously original and those which were not.

In commenting on these cases, the court noted that "[n]otably, as already observed, there was evidence before the court in both those cases as to how the relevant documents had been produced. In the present case, there is no such evidence. Indeed it might be arguable that such evidence is inadmissible since the standards of care imposed on the bank is to exercise reasonable care to ascertain compliance 'on the face' of the document. It would be a rare case where a checker will have knowledge as to how a document was prepared or any source for extracting information in that regard. Somewhat surprisingly, the relevance of evidence as to how the document was in fact created was not an issue in either decision."

The court also noted the ICC Decision on Originals and reviewed the process by which it was issued. Issuer contended that the Decision did effectively amend UCP500 Article 20(b) and did not reflect past practice. The court rejected this argument. It stated:

"b) It is entirely legitimate for the ICC to seek to resolve any ambiguities in, or difficulties of interpretation of, the code.

c) The decision in 1999 involved discussion with local banking commissions throughout the world (to which all banks, including [Negotiating Bank] and [Issuer] were able to contribute).

d) When applied to the facts of the present case, the outcome of the consultation is not inconsistent with the decision on Glencore or Kredietbank, at least if my earlier analysis is correct.

e) The decision expressly states that it reflects international standard banking practice: at the least, no bank in following the decision could be said to be acting without reasonable care.

f) The consultation exercise began in earnest some 9 months prior to the presentation of the documents in the present case and the decision was promulgated some 2 months prior.

This conclusion is consistent with the commercially beneficial aim of reinforcing standard banking practice in regard to the 'appearance' of documents and consequent reduction in the risk of inconsistent decisions, all in a field crying out for international consistency."

The court also took note of the decision in Voest- Alpine Trading USA Corp. v. Bank of China, 167 F.Supp. 2d 940 (FD text 2000) where the court regarded the policy statement as determinative.

8. Refusal; Notice of Refusal; UCP500 Article 14: Negotiating Bank contended that the communication from Issuer was not a proper refusal of the presentation pursuant to UCP500 Article 14. The court concluded that it did not conform with UCP500 Article 14(d) and that Issuer "cannot rely on any discrepancies."

The court focused on the final sentence of the communication, concluding that:

"It follows that the documents were not to be returned to [Negotiating Bank] or held to their order. They were to be released to the Applicant, within some indefinite period, in the event of the Applicant accepting the discrepancies, without any notice to [Negotiating Bank]. The conditional nature of this rejection is not saved by the potential for acceptance of contrary instructions prior to payment, particularly where no notice is to be given. In short, the message constitutes a continuing threat of conversion of [Negotiating Bank's] documents."

The court indicated that Negotiating Bank's argument was "fortified" by three points. First, the court cited the ICC Commission on Banking Technique and Practice paper produced in November 2000. The paper addressed the steps and prescribed examination, waiver, and notice requirements necessary under the UCP. Specifically, the court quoted relevant sections from "Banking practices outside the scope of the UCP" such as "[o]nce documents are presented to the bank, those documents belong to the presenter until the documents are taken up. Should the presenter choose to dispose of the documents through other means once refusal is received and the issuing bank release the documents it may place itself at risk since the documents belong to the presenter."

The second ground was that a similar notice was tendered in Voest-Alpine. The court noted that the U.S. courts ruled the notice to be inadequate based on expert testimony.

Third, the court concluded that Issuer's own expert had testified that the notice of refusal was "contrary to the letter of the article [14(d)(ii)]."

9. Conversion; Return; Preclusion; UCP500 Article 14(c):Negotiating Bank also contended that Issuer had wrongfully refused to return the documents to its representative. At the time, was stated that Issuer was required to return the documents by the same method as they were delivered. In testimony, Issuer's representative stated that the "unexpressed

justification for the refusal was that there was some uncertainty about {Representative's] authority in that 8 June message was a type 999 message, thus unauthenticated. It is clear that such is not a legitimate point. The later message of 19 June requiring the return of the documents to which [Issuer] did at least respond was also a 999 type."

The court then concluded that Issuer was also precluded on this ground.

Comments: 1. Perhaps the most significant aspect of this altogether remarkable opinion is the extent to which it was influenced by pronouncements of the ICC Banking Commission. While the influence is subtle and indirect, the Originals Decision appeared to have had an impact on the reluctance of the court to reach the same result as cases by which it was bound. In the polite forms of English judicial decisions, the implied criticism of these results as a basis on which to formulate LC law is apparent. On other issues, the court notes the Banking Commission opinions and, in particular, the deference given them by U.S. courts.

2. The court correctly refuses to permit the issuer to refuse payment on the basis of inconsistencies arising from gratuitous mathematical calculations. Its characterization of the issuer's behavior as exceeding reasonable care is interesting. It is a healthy check to the willingness of some banks to graft overly technical behavior onto the standard of compliance.

3. The court's comments on the draft are also welcome. The draft has always been unique. In some senses, it is just another document. With respect to technical matters, however, refusal based on the draft must be scrutinized skeptically.

4. The most interesting aspect of the decision is its application of the preclusion rule. It quite rightly applied that rule to the refusal to return the documents. Whether the message constituted a notice of refusal is a more difficult question. The communication in this case differs from that in the Voest case to which it refers. In Voest, it was not possible to determine whether the communication was a refusal. This communication expressed its intent to refuse the documents. The trouble here was the attempt to postpone consultation with the applicant until after giving the notice of refusal and to conditionally retain the documents toward this end while supposedly holding them at the disposal of the beneficiary. For more than a year, attorneys have been attempting to craft terminology that will achieve both ends, either in the credit or the notice of refusal. This decision serves as a warning that such efforts are likely to be met with judicious skepticism.

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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.